QUALIS INNOVATIONS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

August 10, 2022 at 01:17 am IST

Forward Looking Statement Notice

Certain statements made in this Quarterly Report on Form 10-Q are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Goliath Film and Media Holdings, ("we", "us", "our" or the "Company") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance the forward-looking statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.





Description of Business



Background.

Qualis Innovations, Inc. (the "Company" or "Qualis"), formerly known as Hoopsoft Development Corp., Yellowstone Mining, Inc. and Sky Digital Holding Corp. was incorporated in the state of Nevada on March 23, 2006 under the name Hoopsoft Development Corp ("Hoopsoft"). On January 12, 2007, the Company entered into an agreement and plan of merger ("Agreement and Plan of Merger") with Yellowcake Mining, Inc. ("Yellowcake"), a Nevada corporation and wholly-owned subsidiary of Hoopsoft Development Corp., incorporated for the sole purpose of effecting the merger. Pursuant to the terms of the Agreement and Plan of Merger, Yellowcake merged with and into Hoopsoft, with Hoopsoft carrying on as the surviving corporation under the name "Yellowcake Mining, Inc."

On April 6, 2011, Yellowcake restated its articles of incorporation and changed its name to Sky Digital Stores Corp ("SKYC"). On May 5, 2011, the Company entered into a Share Exchange Agreement ("Exchange Agreement") by and among SKYC and Hong Kong First Digital Holding Ltd. ("First Digital"), and the shareholders of First Digital (the "FDH Shareholders") entered into a Share "FDH"), and the shareholders of FDH (the "FDH Shareholders"). The closing of the transaction (the "Closing") took place on May 5, 2011 (the "Closing Date"). On the Closing Date, pursuant to the terms of the Exchange Agreement, the Company acquired all of the outstanding shares (the "Shares") of FDH from the FDH Shareholders; and FDH Shareholders transferred and contributed all of their Shares to us. In exchange, the Company issued to the FDH Shareholders, their designees or assigns, an aggregate of 23,716,035 shares (the "Shares Component") or 97.56% of the shares of common stock of the Company issued and outstanding after the Closing (the "Share Exchange"), at $0.20 per share.

Mr. Lin Xiangfeng planned, organized and executed the Share Exchange. Prior to the Share Exchange, Mr. Lin Xiangfeng was the largest shareholder and sole officer of FDH. He was also the CEO of SKYC but did not own any shares of the Company. The parties involved in the Share Exchange Agreement are SKYC, FDH and all FDH Shareholders. Mr. Lin Jinshui, an FDH Shareholder, is the father of Mr. Lin Xiangfeng and Mr. Lin Xiuzi, an FDH Shareholder, is the brother of Mr. Lin Xiangfeng. Other than Mr. Lin Xiangfeng, no third party played a substantial role in the agreement.

FDH owned (i) 100% of the issued and outstanding capital stock of Shenzhen Dong Sen Mobile Communication Technology Co., Ltd (also known and doing business as Shenzhen Donxon Mobile Communication Technology Co., Ltd, "Donxon"), a company organized under the laws of the People's Republic of China ("China" or the "PRC"); and (ii) 100% of the issued and outstanding capital stock of Shenzhen Xing Tian Kong Digital Company Limited ("XTK"), a PRC company. XTK was the holder of 100% of the issued and outstanding capital stock of Shenzhen Da Sheng Communication Technology Company Limited (also known and do business as Shenzhen Dasen Communication Technology Company Limited, "Dasen"), a PRC company. Dasen is the holder of 70% of the issued and outstanding capital stock of Foshan Da Sheng Communication Chain Service Company Limited (also known and do business as Foshan Dasen Communication Chain Service Co. Ltd, "FDSC"), a PRC company. Pursuant to the Exchange Agreement, FDH became a wholly-owned subsidiary of the Company, and the Company owned 100% of Donxon, 100% of XKT, 100% of Dasen and 70% of FDSC indirectly through FDH.

On February 13, 2018, a change of control occurred, and new officers and directors of the Company were appointed. The name change of 'Sky Digital Stores Corp.' (SKYC) to Qualis Innovations, Inc. and the 1 - 1,000 reverse split was announced on FINRA's Daily List. Echo Resources LLLP took over control of Qualis owning 232,689 of the 396,650 common shares outstanding. Since that event Qualis did not have any business operations or any assets or liabilities.

In July, 2019, John Ballard and a Charles Achoa, formed a new company named EMF Medical Devices Inc. for the development, maintenance, marketing and sale of an electronic device for the treatment of pain that would make use of certain intellectual property interests held by LCMD. In May 2021 the Company changed its name to mPathix Health Inc. Presently, John Ballard is the Chief Financial Officer and Charles Achoa does not participate in any management or board position.

On June 28, 2021, the Company entered into a Share Exchange Agreement ("Exchange Agreement") by and among mPathix Health, Inc. (formerly EMF Medical Devices, Inc., a Delaware corporation) ("mPathix") and Qualis. The closing of the transaction (the "Closing") took place on June 29, 2021 (the "Closing Date"). On the Closing Date, pursuant to the terms of the Exchange Agreement, the Company acquired all of the outstanding shares (the "Shares") of mPathix. In exchange, the Company issued to the mPathix shareholder's, their designees or assigns, an aggregate of 6,988,300 shares of Company common stock (the "Shares Component") or 93.36% of the shares of common stock of the Company issued and outstanding after the Closing (the "Share Exchange"), at a valuation of $0.50 per share, and the Company issued warrants to purchase an additional 1,098,830 shares (698,830 warrants issued to the Company's previous CEO and 400,000 to CreoMed which is beneficially owned by Dr. Joseph Pergolizzi, the Company's acting CEO and chairman of the board) of the Company's common stock, exercisable for 10 years at a $0.50 per share exercise price, subject to adjustment. In connection with the closing of the mPathix acquisition, the officers and directors of mPathix were appointed as the officers and directors of the Company. On June 29, 2021, the Company issued 496,650 common shares for the recapitalization of Qualis in conjunction with the reverse acquisition for a net book value of $0.

The acquisition was accounted for as a "reverse merger'' and recapitalization since the stockholders of mPathix prior to the acquisition acquired a majority of the outstanding shares of the common stock immediately following the completion of the transaction. mPathix was deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of mPathix. As a result, Qualis is considered to be the continuation of the predecessor mPathix. Accordingly, the assets and liabilities and the historical operations that are reflected in the consolidated financial statements are those of mPathix and are recorded at the historical cost basis of mPathix. Qualis's assets, liabilities and results of operations were consolidated with the assets, liabilities and results of operations of mPathix after consummation of the acquisition.

The Company is now the holding company under which mPathix operates. mPathix is a clinical stage company focused on the development, production, and distribution of pain management and other central nervous system (CNS) based solutions.

We are developing a product designed to address the unmet needs of patients who seek alternatives to traditional pain medications and interventions or adjunctive therapies to their current treatment regimen. We believe that our product will provide clinicians and patients with new and differentiated set of pain management tools to meet the diversity of patient needs.

A key element to the Company's growth strategy is to acquire the rights to or develop existing devices. Large device companies have increased the minimum market opportunity they require in order to commit marketing resources to their products. As a result, there are many products that are unsupported by such companies and are currently scheduled to be phased out or "sunsetted." Qualis Innovations believes that it can create significant value by developing or acquiring rights to a portfolio of such products, expanding their therapeutic uses and/or markets, improving or enhancing such products and dedicating the appropriate amount of marketing and other resources to maximize the value of the Company's portfolio.

There are several key criteria the Company uses when evaluating product opportunities:





  ? The disease or condition largely has been ignored due to lack of interest by
    other, larger companies and, as a result, overall competition in the space is
    limited.
  ? The device is not selling well for various reasons (including, among other
    things, poor management, poor reimbursement, improper or no available billing
    codes, inaccurate pricing, and limited and/or poor clinical outcomes) which,
    Qualis would attempt to eliminate, thereby increasing product revenues.
  ? The device should be easy to manufacture, thereby avoiding the need for costly
    investment by the Company develop products and complicated manufacturing
    facilities.




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  ? There should be a large, underserved patient population. The device should
    have clear regulatory and reimbursement paths with the FDA and CMS,
    respectively (or already be approved).
  ? The device should be relatively easy to distribute/dispense and administer.
    Most importantly, the product must have a history of limited adverse events to
    patients.

Our planned product, which is our sole product and is in the development pipeline, is SOLACE, a non-invasive medical device that uses electromagnetic induction to generate deep heat below the surface of the skin to reduce and relieve pain. SOLACE™ delivers radio frequency (RF) energy continuously and thereby delivers thermal effects to the tissue and utilizes several differentiated features vs other radio frequency devices currently on the market. We have not yet finalized development of the planned SOLACE device and have not generated any cash flows from operations in connection with the planned device.

The SOLACE device is based on proprietary high-frequency magnetic induction technology, which we refer to as Electromagnetic Induction ("EMI"). Electromagnetic or magnetic induction is the use of electric currents or a derivative of a current in the form of a sound or an acoustic wave or an electromagnetic energy wave. Administered electric currents or their derivatives have two attributes: (1) pain relief and (2) regeneration of tissues.

Magnetic fields are induced beneath the skin surface to create localized, planar heat in the dermis and deeper muscle, while selectively avoiding sensitive structures in the epidermis and fat layers. By comparison, our SOLACE device creates currents in discreet planes beneath the tissue surface rather than directing energy through the planes and penetrating the epidermis. Therefore, our EMI technology may provide for shorter duration of treatments and a more comfortable patient experience vs. other energy-based technologies

SOLACE™ delivers RF energy via a user-friendly hand-held applicator that allows for targeted and ergonomic application of RF energy to discrete areas of concern. In contrast, competitor diathermy devices utilize a large drum applicator wherein the RF energy is emitted across a large surface area. Diathermy is the controlled production of deep heating beneath the skin in the subcutaneous tissue, deep muscles and joints for therapeutic purposes. There are two types of diathermy devices on the market today: radio or high frequency and microwave. The drum applicator design limits the tissue targeting to larger joints, while smaller joints or tissue areas (e.g. acromion of the shoulder, plantar aspect of foot, neck) are largely unaddressed. The hand-held applicator from the SOLACE™ device provides a small surface area (approx. 3 cm2) which is coated in Teflon® that can easily be positioned to target smaller body parts providing a differentiation compared to large drum-type radio frequency devices fail to adequately treat.

Presently, the Company is simultaneously in the process of preparing the documents necessary to submit an application to the FDA for clearance of planned device along with testing and finalization of such device. We plan on also filing a provisional patent for the changes and new development of our device over our previous licensed device from LCMD, The Company has an accumulated deficit of $3,310,374. It is anticipated that the total expected financial outlay to complete the development and FDA application is approximately $250,000, combined with operating expenses the Company may not be able to have enough cash flow to support the Company's daily operations resulting in substantial doubt about the Company's ability to continue as a going concern as determined by the management.

We anticipate that our SOLACE device will be cleared by the FDA via the 510k process and that it will be deemed to be substantially equivalent to the identified predicate device called the Bebe device, The Bebe device was originally cleared by the FDA in 2014 by the Marchitto Entities and subsequently sold to LCMD via an Asset Purchase Agreement and an Intellectual Property License Agreement. The Bebe device is indicated for use in the treatment of selected medical conditions such as pain relief, muscle spasms, and joint contractures, but not for the treatment of malignancies.





Overview.

Qualis Innovations Inc. (hereinafter the "Company," "We," "Qualis") "Qualis") was incorporated in the state of Nevada on March 23, 2006. On June 28, 2021, the Company entered into a Share Exchange Agreement by and among mPathix Health, Inc. (formerly known as EMF Medical Devices, Inc.), a Delaware corporation ("mPathix"), pursuant to which mPathix was acquired by the Company. Qualis is now the holding company under which mPathix operates. mPathix is a clinical stage company focused on the development, production, and distribution of pain management and other central nervous system (CNS) based solutions.





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Manufacturing

We will use Shanghai Zhiting Intelligent Technology Co., Ltd ("SZIT") as our CMO to manufacture the SOLACE device, and to warehouse our product in their facilities in the San Francisco. SZIT is ISO 13482:2016 certified. We also intend to identify a back-up manufacture to ensure the integrity of our product supply chain in case of natural disaster or political uncertainty.

We plan use Kanban inventory management by which our SOLACE inventory will be held by Supertech Medical Devices Inc.("Supertech") at their warehouse until customer orders are received. Devices will be shipped from Supertech's warehouse.





Product Distribution

We plan to initially offer our SOLACE device via a purchase or leasing model and we will generate demand with a combination of direct and independent sales representatives in the United States. Field sales representatives will be engaged to sell in predefined geographic markets and will be compensated based on a commission amount of the revenues generated by the medical device. The focus will be to market our device to a target audience of professionals who specialize in the use of multi-modal, or multi-disciplinary, pain management techniques.

Our target audience includes chiropractors, physical therapists, and pain management specialists. However, our sales and promotional effort will be focused on using an account-based approach to further segment the market which will allow us to promote the SOLACE device in the most efficient manner. Our primary promotional targets will be multi-practitioner clinics and high throughput, solo-practitioner offices. We also intend to have a Corporate Accounts team to target large national and regional chiropractic and physical therapy chains. Examples of corporate accounts targets include The Joint, a national chiropractic franchise with over 500 locations, and ATI Physical Therapy with 900 locations across the US.

At launch, we will sell our SOLACE™ device directly to customers who will be able to either buy it outright or lease it via a third-party financing partner, Coastal Capital Group. If the device is to be leased, mPathix will be paid 50% of the purchase price upon leasing signing and 50% upon device delivery to the customer.

Although we plan to sell or lease the SOLACE™ device to target accounts at launch, we are also developing a proprietary method of revenue sharing that will allow for greater utilization of our device with customers, and thus expanding our market penetration into a broader subset of customers for whom purchasing or leasing the SOLACE device is not practical. Based on this approach, we may be able to accelerate the number of devices placed based on a greatly reduced acquisition cost for our customer. Further, it may be possible for mPathix to have real-time revenue recognition, which could lead to significantly lower days sales outstanding.

mPathix is also evaluating unique distribution models to fully maximize our reach with our target audience. Potential distribution models include "device sharing" or "on-demand" availability of the SOLACE™ device, allowing even the lowest patient throughput practices to access our technology. Such distribution models will be test marketed prior to any potential national implementation.

Regardless of which distribution model, or combination of models, is utilized, each account that accesses the SOLACE device will incorporate a monthly fee for device calibration and maintenance.





Reimbursement

Based on our target market (i.e., chiropractors and physical therapists), we believe many, if not most, patients will pay out of pocket for treatment with the SOLACE™ device. However, there will be certain practitioners, including medical doctors, who will treat patients with medical insurance plans and attempt get reimbursement for their service. In this revenue stream, revenue will be derived from patients with insurance plans held by private health insurance carriers, typically known as HMOs or PPOs, who pay on behalf of their insureds and worker's compensation claims. This will continue to create revenue which will become recurring as patients are treated on a regular basis.

The Current Procedural Terminology (CPT) code 97024, as maintained by American Medical Association, is a medical procedural code under the category of Supervised Physical Medicine and Rehabilitation Modalities. CPT 97024 includes the application of a modality to 1 or more areas; Diathermy (e.g., microwave). This is the code healthcare professionals may be able to use for billing and reimbursement, in addition to the ICD-10 diagnosis code, for payment by insurers. The provider fee for 97024 is assumed to about $30.





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Employees

As of the date of this 10Q, we have no full-time employees, one full-time contracted consultant, John Ballard, our current chief financial officer (CFO), and four part-time contracted consultants. None of our employees is subject to a collective bargaining agreement. We believe our relations with our current employee is satisfactory.

Where You Can Find our Reports

Any person or entity may read and copy our reports with the Commission at the Commission's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Room by calling the Commission toll free at 1-800-SEC-0330. The Commission also maintains an Internet site at http://www.sec.gov where reports, proxies and other disclosure statements on public companies may be viewed by the public.





Recent Developments

We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP").





Financing Transactions

Financing Engagement Agreement

On August 2, 2022 the Company entered into an Engagement Agreement with CIM Securities ("CIM") in connection with a best efforts REG D 506c general solicitation equity offering of up to $4 million gross proceeds structured as a 8% Convertible Note financing. According to the contract, there may be multiple closings for the transaction and there is no minimum amount for any closing. The exclusivity period shall expire after the first three (3) months ("Term") from the date of this fully executed Engagement Agreement. After the exclusive Term, this Engagement Agreement shall become non-exclusive and continue on a "month-to-month" basis until either party cancels this Engagement Agreement in writing giving 10 days written notice to either Party. CIM shall receive a cash fee equal to 7% and an additional 3% to outside placement agents of the gross proceeds from the sale of Shares by the Placement Agent, and a five-year warrant to purchase for $1.00 per share of Common Stock, exercisable on a cashless basis, that number of shares of Common Stock that is equal to 7% of the number of Shares sold by the Placement Agent. Shares may be purchased by (a) registered broker-dealers, including the Placement Agent and other selling agents, which persons will receive commission, fees, warrants and/or other compensation from such sales and (b) officers, directors, employees and affiliates of the Company, which persons may not receive cash fees or other compensation, or gain based on the success of the Offering.





Acquisition of mPathix

The acquisition was accounted for as a "reverse merger" and recapitalization since the stockholders of mPathix prior to the acquisition acquired a majority of the outstanding shares of the common stock of the Company immediately following the completion of the transaction. mPathix was deemed to be the accounting acquirer in the transaction, and, consequently, the transaction was treated as a recapitalization of mPathix. As a result, the Company is considered to be the continuation of the predecessor, mPathix. Accordingly, the assets and liabilities and the historical operations that are reflected in the Company's consolidated financial statements are those of mPathix and are recorded at the historical cost basis of mPathix. The Company's assets, liabilities and results of operations were consolidated with the assets, liabilities and results of operations of mPathix after consummation of the acquisition.





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Stock Based Compensation



Employment Agreement

On March 1, 2021, Mr. Ahmet Demir Bingol, the Company's CEO entered into an Employment Agreement with the Company, with an effective date of March 16, 2021, in which he receives an annual base salary of $250,000, plus bonus compensation not to exceed 80% of base salary. In addition, Mr. Bingol was granted 698,830 warrants to purchase 698,830 of the Company's common stock, valued at $165,378 (based on the Black Scholes valuation model on the date of grant). The warrants are exercisable for a period of ten years at $0.50 per share in whole or in part, as either a cash exercise or as a cashless exercise, and fully vest at grant date. Mr. Bingol's employment also provides for medical insurance, disability benefits and one year of severance pay if his employment is terminated without cause or due to a change in control. Mr. Bingol's compensation was approved by the Company's Board of Directors on March 1, 2021.

On September 9, 2021, the Board of Directors approved a modified Employment Agreement for Mr. Bingol which was subsequently signed on October 1, 2021. The modification resulted in changing Mr. Bingol's position from CEO to President and in reducing Mr. Bingol's base salary from $250,000 to $150,000 per year. In addition, his bonus plan was reset with a target bonus at fifty percent (50%) of Executive's Base Salary, based upon the actual achievement of financial and other targets as established in the annual budget approved by the Board, in its sole and absolute discretion. Further, on October 1, 2021, Mr. Bingol's previously issued warrants were modified such that he received 300,000 warrants that vest immediately at an exercise price of $0.50 and 398,830 warrants that vest over a period of three years with an exercise price of $0.50. As a result, in accordance with ASC 718-20-35-2A and 718-20-35-3, immediately prior to the modification, the Company calculated the fair value of the warrants and determined that there was no change to the fair value. Subsequent to the modification, the Company recognized a loss of $9,155 over the remaining three year vesting period.

On February 24, 2022, Mr. Bingol entered into a separation agreement whereby he terminated his employment effective April 15, 2022. He received no severance payment and there were no disagreements between Mr. Bingol and the Company. A total of 300,000 warrants have vested with the remaining 398,830 unvested warrants expired. As a result of Mr. Bingol's termination, the Company reversed the remaining unvested warrant modification balance of $94,101 during the six months ended June 30, 2022.





Consulting Agreement

On May 1, 2021, the Company entered into a consulting agreement with a related party to provide advisory services to the Company. The consulting agreement terminates July 31, 2022. Under this consulting agreement, the related party will be entitled to a monthly consulting fee of $10,000 and a total of 300,000 common shares to be issued 200,000 common shares based on the closing of reverse acquisition transaction, 50,000 common shares on the delivery of two Company's medical devices and 50,000 common shares on the delivery of ten Company's medical devices. The Company issued 250,000 common shares during the year ended December 31, 2021, for the fair value of $125,000 and 50,000 common shares shall be issued on delivery of an additional eight devices at a fair value estimated to be $25,000. The agreement has been extended through July 31, 2023 with a 90 day cancellation clause.

On January 27, 2022 the Company hired an engineering consultant to assist in completing the design history file, updating new software, system design, pre 510(k) preparation, and testing of the SOLACE device. This work is expected to be completed by the end of September 2022 and the cost of the contract is $77,850.





Prior License

We previously licensed from Life Care Medical Devices a number of patents in connection with the Prior Device, the predicate device which was marketed as the "BeBe" device, and which received 510(k) clearance from the FDA in March 2014. The granted indication for the BeBe device was "to generate deep heat within body tissues for the treatment of medical conditions such as relief of pain, muscle spasms and joint contractures."

On August 28, 2019, our subsidiary, mPathix, entered into a Preliminary License Agreement with LCMD, licensing from LCMD certain patents, know how, trade secrets, 510(k) clearances and other property (the "Property") previously transferred to LCMD by the Marchitto Entities (defined below) in accordance with an Asset Purchase Agreement and a separate Intellectual Property License Agreement dated November 10, 2015. Jim Holt who served as the sole officer and director of LCMD, is also one of our directors. mPathix had an exclusive license to reproduce, distribute, sell, lease, display and perform and otherwise use the Property (including the SOLACE medical device) for use in pain management as of the August 28, 2019 agreement. In consideration, mPathix issued 2,000,000 shares of its common stock (1,878,955 shares issued to LCMD and 121,045 shares issued to an affiliate of LCMD) and paid $110,000 in cash to LCMD on or about on September 9, 2019, and mPathix was to pay continuing royalties to LCMD, with an initial royalty payment of 6.0% of the net revenues from pain application sales in each of the first twelve months, and lesser royalties thereafter based on annual device sales. No royalty payments have been made to or earned by LCMD since no revenues from medical device sales were generated.

On June 3, 2021, a Definitive License Agreement was signed by LCMD and mPathix in order to finalize the terms of the August 28, 2019 Preliminary License Agreement. The terms of the license with LCMD were contingent upon successful fulfilment of a court ordered resolution between LCMD and the original owners of the underlying intellectual property (the "Marchitto Entities"). LCMD was obligated to pay to the Marchitto Entities the sum of $2,400,000 on or before April 24, 2022, which has not occurred. Accordingly, we consider the license agreement to be expired, and we do not intend to renew the license agreement with LCMD or otherwise reacquire the intellectual property from the Marchitto Entities.

ASC 730-10-25-2(c), Intangible Assets Purchased From Others, requires a company to evaluate the technology acquired, and the applicable guidance for the determination of alternative future uses. mPathix determined, at the date of the acquisition of the technology, that it was acquiring an asset that represented a research and development (R&D) project that was still in the process of experimentation. The technology has additional potential future benefits including hyperhidrosis, stress bladder incontinence, and cosmetic indications. Therefore, the acquisition represented an asset by the Company.

Based on the Company's analysis of the SOLACE medical device, as of December 31, 2021, the Company reassessed the value of the Preliminary License Agreement with LCMD. Related to this assessment, management determined that the intellectual property used in the SOLACE device is different from the intellectual property in the Preliminary License Agreement with LCMD. Therefore, the Company recorded an impairment of intangible assets of $143,226 for the year ended December 31, 2021 and was classified in other expenses in the consolidated Statement of Operations reducing the intangible asset to zero as of December 31, 2021.





Common Stock

On July 20, 2022, the Company issued 200,000 common shares to an affiliate for aggregate gross proceeds of $100,000.

In July 2021, the Company issued 250,000 common shares to a related party valued at $125,000 (based on the estimated fair value of the stock on the date of grant) for services rendered.

In July 2021, the Company issued 5,000 common shares to a third party valued at $2,500 (based on the estimated fair value of the stock on the date of grant) for services rendered.

In June 2021, the Company issued 300,000 common shares to a third party for aggregate gross proceeds of $150,000.

In June 2021, the Company issued 200,000 common shares to a related party for aggregate gross proceeds of $100,000.

The acquisition was accounted for as a "reverse merger'' and recapitalization since the stockholders of mPathix own a majority of the outstanding shares of the common stock immediately following the completion of the transaction assuming that holders of 10% of the Public Shares exercise their conversion rights. mPathix was deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of mPathix. As a result, Qualis is considered to be the continuation of the predecessor mPathix. Accordingly, the assets and liabilities and the historical operations that are reflected in the consolidated financial statements are those of mPathix and are recorded at the historical cost basis of mPathix. Qualis's assets, liabilities and results of operations were consolidated with the assets, liabilities and results of operations of mPathix after consummation of the acquisition.

On June 29, 2021, the Company issued 900,000 common shares to Echo Resources LLP in conjunction with share agreement.

On June 29, 2021, the Company issued 496,650 common shares for the recapitalization of Qualis in conjunction with the reverse acquisition.

On February 14, 2021, the Company issued a total of 30,000 restricted common shares to members of its Board of Directors, valued at $15,000 (based on the estimated fair value of the stock on the date of grant) for services to be rendered in FY 2021.

On February 11, 2021, the Company issued 2,000,000 common shares to third parties for aggregate gross proceeds of $1,000,000.





Warrants

On February 14, 2021, the Company granted 400,000 warrants to purchase 400,000 shares of the Company's common stock to a CreoMed (controlled by Dr. Joseph Pergolizzi, Acting CEO and Chairman of the Board) for consulting services, valued at $109,512 (based on the Black Scholes valuation model on the date of grant). The warrants are exercisable for a period of seven years at $0.50 per share in whole or in part, as either a cash exercise or as a cashless exercise, and fully vest at grant date.

On March 16, 2021, the Company granted 698,830 warrants to purchase 698,830 shares of the Company's common stock to Ahmet Demir Bingol, valued at $165,378 (based on the Black Scholes valuation model on the date of grant), pursuant to his Employment Agreement. The warrants are exercisable for a period of ten years at $0.50 per share in whole or in part, as either a cash exercise or as a cashless exercise, and fully vest at grant date.

On June 29, 2021, the Qualis Innovations, Inc. cancelled previous warrants agreement and regranted warrants to purchase an additional 1,098,830 shares (698,830 warrants issued to the Ahmet Demir Bingol, Company's previous CEO and 400,000 to CreoMed which is beneficially owned by Dr. Joseph Pergolizzi, the Company's acting CEO and chairman of the board) of the Company's common stock, exercisable for 10 years at a $0.50 per share exercise price, subject to adjustment in conjunction with the share exchange agreement.

On September 9, 2021, the Board of Directors approved a modified Employment Agreement for Mr. Bingol which was subsequently signed on October 1, 2021. The modification resulted in changing Mr. Bingol's position from CEO to President. Further, on October 1, 2021, Mr. Bingol's previously issued warrants were modified such that he received 300,000 warrants that vest immediately at an exercise price of $0.50 and 398,830 warrants that vest over a period of three years with an exercise price of $0.50. As a result, in accordance with ASC 718-20-35-2A and 718-20-35-3, immediately prior to the modification, the Company calculated the fair value of the warrants and determined that there was no change to the fair value. Subsequent to the modification, the Company recognized a loss of $9,155 over the remaining three-year vesting period.

On February 1, 2022, the Company granted 30,000 warrants to purchase 30,000 of the Company's common stock to a third party for consulting services, valued at $13,547 (based on the Black Scholes valuation model on the date of grant). The options are exercisable for a period of three years at $1.00 per share in whole or in part.

On March 29, 2022, the Board of Directors approved the granting of 400,000 warrants, with effect from April 1, 2022, convertible to the Company's common shares with an exercise price of $1.10, valued at $290,276 (based on the Black Scholes valuation model on the date of grant), to our acting CEO and Chairman Joseph V. Pergolizzi Jr., MD through his company, CreoMed, Inc. with an expiration period of 10 years. These warrants were issued as compensation for the first quarter to Joseph V. Pergolizzi Jr., MD.

On August 1, 2022, the Company granted 30,000 warrants to purchase 30,000 of the Company's common stock to a third party for consulting services as per the consulting agreement dated February 1, 2022.





Options

In July 2021, the Company granted a total of 100,000 options to purchase 100,000 shares of the Company's common stock to third parties for consulting services, valued at $25,077 (based on the Black Scholes valuation model on the date of grant).

The options are exercisable for a period of five years at $0.50 per share in whole or in part and vest 50% in six months and the remaining 50% in twelve months from the grant date.

On June 7, 2021, the Company granted 20,000 options to purchase 20,000 shares of the Company's common stock to a third party for consulting services, valued at $5,040 (based on the Black Scholes valuation model on the date of grant). The options are exercisable for a period of five years at $0.50 per share in whole or in part and vest 50% in six months and the remaining 50% in twelve months from the grant date.

Impairment of Intangible Assets

Based on the Company's analysis of the Solace medical device, as of December 31, 2021, the Company reassessed the value of the Preliminary License Agreement with LCMD. Related to this assessment, management determined that the intellectual property used in the SOLACE device is different from the intellectual property in the Preliminary License Agreement with LCMD. Therefore, the Company recorded an impairment of intangible assets of $143,226 for the year ended December 31, 2021 and was classified in other expenses in the consolidated Statement of Operations. The impairment reduced the intangible asset to zero as of December 31, 2021.

Limited Operating History; Need for Additional Capital

There is limited historical financial information about us on which to base an evaluation of our performance. We have not finalized development of our planned SOLACE device, nor have we generated any cash flow from operations. The Company's cash position may not be sufficient to support the Company's daily operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, and possible cost overruns due to increases in the cost of services. To become profitable and competitive, we must receive additional capital. We have no assurance that future financing will materialize. If that financing is not available, we may be unable to continue operations.





Overview of Presentation

The following Management's Discussion and Analysis ("MD&A") or Plan of Operations includes the following sections:





  ? Results of Operations

  ? Liquidity and Capital Resources

  ? Capital Expenditures

  ? Going Concern

  ? Critical Accounting Policies

  ? Off-Balance Sheet Arrangements

General and administrative expenses consist primarily of personnel costs and professional fees required to support our operations and growth.

Depending on the extent of our future growth, we may experience significant strain on our management, personnel, and information systems. We will need to implement and improve operational, financial, and management information systems. In addition, we are implementing new information systems that will provide better record-keeping. However, there can be no assurance that our management resources or information systems will be sufficient to manage any future growth in our business, and the failure to do so could have a material adverse effect on our business, results of operations and financial condition.





29







Results of Operations

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

The following discussion represents a comparison of our results of operations for the three months ended June 30, 2022 and 2021. The results of operations for the periods shown in our unaudited condensed consolidated financial statements are not necessarily indicative of operating results for the entire period. In the opinion of management, the unaudited condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state our financial position, results of operations and cash flows for the periods presented.





                               Three Months Ended      Three Months Ended
                                    June 30,                June 30,
                                      2022                    2021

Net revenues                   $                 -     $                 -
Cost of sales                                    -                       -
Gross Profit                                     -                       -
Operating expenses                         510,529                 622,777
Other income                                     -                       -
Net loss before income taxes   $          (510,529 )   $          (622,777 )




Revenues

For the three months ended June 30, 2022 and 2021, we had no revenues.





Cost of Sales

For the three months ended June 30, 2022 and 2021, we had no cost of sales.





Operating expenses

Operating expenses decreased by $112,248, or 18.0%, to $510,529 for three months ended June 30, 2022 from $622,777 for the three months ended June 30, 2021 primarily due to decreases in compensation costs of $109,945, research and development costs of $83,061, stock based compensation - related party of 165,378, and travel costs of $757, offset partially by professional fees of $14,912, consulting fees of $176,039, and general and administration costs of $55,942. In March 2021, the Company hired its CEO resulting in compensation costs and stock based compensation. Effective April 15, 2022, the Company entered into a separation agreement with its CEO whereby he was terminated resulting in decreased compensation costs. In addition, the Company has incurred an increase in professional fees (primarily legal and audit fees) and has increased consulting fees (primarily the fair value of common stock and options issued for services), as a result of the Company filing its S-1 and 10Q. Amortization of the Company's Intellectual Property License Agreement decreased in the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

For the three months ended June 30, 2022, we had research and development costs of $45,418 and general and administrative expenses of $465,111 primarily due to professional fees of $62,009, compensation costs of $8,394, depreciation costs of $4,275, consulting fees of $331,228, and general and administration costs of $59,205. Amortization of the Company's Intellectual Property License Agreement decreased in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. Research and development costs consist of $45,418 to a third party for an evaluation of our product.

For the three months ended June 30, 2021, we had research and development costs of $128,479, stock based compensation - related party of 165,378, and general and administrative expenses of $328,920 primarily due to consulting fees of $155,189, compensation costs of $118,339, depreciation costs of $4,275, professional fees of $47,097, travel costs of $757, and general and administration costs of $3,263, as a result of adding administrative infrastructure for our anticipated business development. In March 2021, the Company hired its CEO resulting in compensation costs and stock based compensation. Research and development costs consist of $107,419 for the amortization of the Company's Intellectual Property License Agreement, and $21,060 to a third party for an evaluation of our product.





Other Income

Other expense for the three months ended June 30, 2022 and 2021 was none.





Net loss before income taxes

Net loss before income for three months ended June 30, 2022 totaled $510,529 primarily due to (increases/decreases) in research and development costs, compensation costs, professional fees, consulting fees, depreciation and amortization, and general and administration costs compared to a loss of $622,777 for three months ended June 30, 2021 primarily due to (increases/decreases) in research and development costs, compensation costs, consulting fees, professional fees, stock based compensation - related party, depreciation and amortization, travel costs, and general and administration costs.





30







Assets and Liabilities

Assets were $402,437 as of June 30, 2022. Assets consisted primarily of cash of $226,287, inventory of $60,275, deposits of $54,000, other current assets of $14,066, and property and equipment of $47,809. Liabilities were $20,438 as of June 30, 2022. Liabilities consisted primarily of accounts payable and accrued expenses.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

The following discussion represents a comparison of our results of operations for the six months ended June 30, 2022 and 2021. The results of operations for the periods shown in our unaudited condensed consolidated financial statements are not necessarily indicative of operating results for the entire period. In the opinion of management, the unaudited condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state our financial position, results of operations and cash flows for the periods presented.





                                Six Months Ended       Six Months Ended
                                    June 30,               June 30,
                                      2022                   2021

Net revenues                   $                -     $                -
Cost of sales                                   -                      -
Gross Profit                                    -                      -
Operating expenses                        605,602                826,808
Other income                                    -                      -

Net loss before income taxes $ (605,602 ) $ (826,808 )






Revenues

For the six months ended June 30, 2022 and 2021, we had no revenues.





Cost of Sales

For the six months ended June 30, 2022 and 2021, we had no cost of sales.





Operating expenses

Operating expenses decreased by $221,206, or 26.8%, to $605,602 for six months ended June 30, 2022 from $826,808 for the six months ended June 30, 2021 primarily due to decreases in compensation costs of $94,826, research and development costs of $196,314, stock based compensation - related party of 165,378, and travel costs of $4,145, offset partially by professional fees of $41,944, consulting fees of $97,014, depreciation costs of $149, and general and administration costs of $100,350. In March 2021, the Company hired its CEO resulting in compensation costs and stock based compensation. Effective April 15, 2022, the Company entered into a separation agreement with its CEO whereby he was terminated resulting in decreased compensation costs. In addition, the Company has incurred an increase in professional fees (primarily legal and audit fees) and has increased consulting fees (primarily the fair value of common stock and options issued for services), as a result of the Company filing its S-1 and 10Q. Amortization of the Company's Intellectual Property License Agreement decreased in the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

For the six months ended June 30, 2022, we had research and development costs of $57,585 and general and administrative expenses of $548,017 primarily due to professional fees of $96,540, compensation costs of $42,806, depreciation costs of $8,551, consulting fees of $292,203, travel costs of $95, and general and administration costs of $107,822. Research and development costs consist of $57,585 to a third party for an evaluation of our product.

For the six months ended June 30, 2021, we had research and development costs of $253,899, stock based compensation - related party of $165,378, and general and administrative expenses of $407,531 primarily due to consulting fees of $195,189, compensation costs of $137,632, depreciation costs of $8,402, professional fees of $54,596, travel costs of $4,240, and general and administration costs of $7,472, as a result of adding administrative infrastructure for our anticipated business development. In March 2021, the Company hired its CEO resulting in compensation costs and stock based compensation. Research and development costs consist of $214,839 for the amortization of the Company's Intellectual Property License Agreement, and $39,060 to a third party for an evaluation of our product.





31







Other Income

Other expense for the three months ended June 30, 2022 and 2021 was none.





Net loss before income taxes

Net loss before income for six months ended June 30, 2022 totaled $605,602 primarily due to (increases/decreases) in research and development costs, compensation costs, professional fees, consulting fees, depreciation and amortization, travel costs, and general and administration costs compared to a loss of $826,808 for six months ended June 30, 2021 primarily due to (increases/decreases) in research and development costs, compensation costs, consulting fees, professional fees, stock based compensation - related party, depreciation and amortization, travel costs, and general and administration costs.

Liquidity and Capital Resources

General - Overall, we had a decrease in cash flows for six months ended June 30, 2022 of $301,997 resulting from cash used in operating activities of $301,997.

The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities during the periods indicated:





                                   Six Months Ended       Six Months Ended
                                       June 30,               June 30,
                                         2022                   2021

Net cash provided by (used in):
Operating activities              $         (301,997 )   $         (259,220 )
Investing activities                               -                 (1,787 )
Financing activities                               -              1,250,000
                                  $         (301,997 )   $          988,993

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

Cash Flows from Operating Activities - For the six months ended June 30, 2022, net cash used in operations was $301,997 compared to net cash used in operations of $259,220 for the six months ended June 30, 2021. Net cash used in operations was primarily due to a net loss of $605,602 for the six months ended June 30, 2022 and the changes in operating assets and liabilities of $77,868, primarily due to other current assets of $87,078 and accounts payable and accrued expenses of $2,190, offset partially by other current liabilities of $11,400. In addition, net cash used in operating activities includes adjustments to reconcile net profit from depreciation expense of $8,551, warrants issued for services of $303,823, options issued for services of $7,464, and warrants forfeited in conjunction with compensation - related parties of $94,101.

Net cash used in operations was primarily due to a net loss of $259,220 for six months ended June 30, 2021 and the changes in operating assets and liabilities of $53,731, primarily due to the changes in accounts payable and accrued expenses of $4,500, other current liabilities of $53,678, and deposits of $9,000, offset partially by other current assets of $13,447. In addition, net cash used in operating activities includes adjustments to reconcile net profit from amortization expense of $214,838, depreciation expense of $8,402, warrants issued for services of $190,512, options issued for services of $727, stock based compensation - related parties of $165,378, and issuance of common stock for services - related parties of $15,000.

Cash Flows from Investing Activities - For the six months ended June 30, 2022, net cash used in investing was none compared to cash flows used in investing activities of $1,787 for six months ended June 30, 2021 due to the purchase of property and equipment.

Cash Flows from Financing Activities - For six months ended June 30, 2022, net cash provided by financing was none. For six months ended June 30, 2021, cash flows provided by financing activities was $1,250,000 due to proceeds from issuance of common stock for cash.

Financing - We expect that our current working capital position, together with our expected future cash flows from operations will be insufficient to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks, and there can be no assurance that we will not require additional funding in the future.

We have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Due to the ongoing global economic crisis, we believe it may be difficult to obtain additional financing if needed. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our shareholders, in the case of equity financing.





Acquisition of mPathix





Stock Based Compensation



Employment Agreement





Consulting Agreement





Prior License

The Company is in the process of finalizing the SOLACE product design and is beginning to compile the data required to complete an application with the FDA. Further, given the substantial changes and modifications that we have identified for our device, the Company will seek to file provisional patents at the earliest possible date.

The Company recorded on intangible asset of $1,110,000 to be amortized on a straight-line basis thru the end of the licensing agreement of April 2022.

Based on the Company's analysis of the Solace medical device, as of December 31, 2021, the Company reassessed the value of the Preliminary License Agreement with LCMD. Related to this assessment, management determined that the intellectual property used in the Solace device is different from the intellectual property in the Preliminary License Agreement with LCMD. Therefore, the Company recorded an impairment of intangible assets of $143,226 for the year ended December 31, 2021 and was classified in other expenses in the consolidated Statement of Operations reducing the intangible asset to zero as of December 31, 2021.





Common Stock