UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



FORM 10-Q



(Mark One)



|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2012



OR



|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|---- |  | ----------------------------------------------------------------------------------------

For the transition
period from ___________________________ to ___________________________



Commission file number:000-52062



|Q
    HOLDINGS, INC.                                  
|------------------------------------------------------
|(Exact Name of Registrant as Specified in Its Charter)







|Delaware                                         |  | 20-3708500                             
|------------------------------------------------ |  | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or |  | (I.R.S. Employer Identification Number)
|Organization)                                    |  |                                        
|                                                 |  |                                        
|615 Arapeen Drive, Suite 102                     |  |                                        
|Salt Lake City, UT                               |  | 84108                                  
|(Address of Principal Executive Offices)         |  | (Zip Code)                             



(801) 582-5400

(Registrant’s Telephone Number,
Including Area Code)



|N/A                                                                               
|----------------------------------------------------------------------------------
|(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)



Copies to:

Virginia K. Sourlis, Esq.

The Sourlis Law Firm

The Courts of Red Bank

130 Maple Avenue, Suite 9B2

Red Bank, New Jersey 07701

T: (732) 530-9007

F: (732) 530-9008

Virginia@SourlisLaw.com

www.SourlisLaw.com



Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]



Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



|Large accelerated filer | [ ]                                               | Accelerated filer         | [ ]
|----------------------- | ------------------------------------------------- | ------------------------- | ---
|Non-accelerated filer   | [ ] (Do not check if a smaller reporting company) | Smaller reporting company | [X]



Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]



As of August 9, 2012, there
were 24,681,749 shares of Common Stock, $0.0001 par value per share, issued and outstanding.


















TABLE OF CONTENTS



|                               |                                                                                       |  | Page
|------------------------------ | ------------------------------------------------------------------------------------- |  | ----
|PART I - FINANCIAL INFORMATION |                                                                                       | 
|Item 1.                        | Financial Statements (Unaudited)                                                      |  | 3   
|Item 2.                        | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 17  
|Item 3.                        | Quantitative and Qualitative Disclosures About Market Risk                            |  | 25  
|Item 4.                        | Controls and Procedures                                                               |  | 25  
|                               |                                                                                       |  | 25  
|PART II - OTHER INFORMATION    |                                                                                       | 
|Item 1.                        | Legal Proceedings                                                                     |  | 25  
|Item 1A.                       | Risk Factors                                                                          |  | 25  
|Item 2.                        | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 25  
|Item 3.                        | Defaults Upon Senior Securities                                                       |  | 25  
|Item 4.                        | Submission of Matters to a Vote of Security Holders                                   |  | 25  
|Item 5.                        | Other Information                                                                     |  | 25  
|Item 6.                        | Exhibits                                                                              |  | 26  
|                               |                                                                                       |  |     
|SIGNATURES                     |                                                                                       |  | 27  



2







PART I - Financial Information



Item 1. Financial Statements
(Unaudited)



Q Holdings, Inc. and Subsidiaries

(A Development Stage Company)

Condensed Consolidated Balance
Sheets (Unaudited)



|                                                                                                                                                                                |  | June 30, |             |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ----------- | - | ------------ | -
|                                                                                                                                                                                |  | 2012     |             |   | 2011         |  
|Assets                                                                                                                                                                          |  |          |             |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Current assets:                                                                                                                                                                 |  |          |             |   |              |  
|Cash                                                                                                                                                                            |  | $        | 1,894,848   |   |              | $
|Other receivable, net of allowance
    for doubtful accounts of $0 and $2,282, as of June 30, 2012 and December 31, 2011, respectively                                          |  |          | 28,215      |   |              |  
|Prepaid expenses and other                                                                                                                                                      |  |          | 740         |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Total current assets                                                                                                                                                            |  |          | 1,923,803   |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Property and equipment, net                                                                                                                                                     |  |          | 24,575      |   |              |  
|Other assets                                                                                                                                                                    |  |          | 7,513       |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Total assets                                                                                                                                                                    |  | $        | 1,955,891   |   |              | $
|                                                                                                                                                                                |  |          |             |   |              |  
|Liabilities and Stockholders’ Equity                                                                                                                                            |  |          |             |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Current liabilities:                                                                                                                                                            |  |          |             |   |              |  
|Accounts payable                                                                                                                                                                |  | $        | 49,377      |   |              | $
|Accrued liabilities                                                                                                                                                             |  |          | 207,489     |   |              |  
|Notes payable                                                                                                                                                                   |  |          | -           |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Total current liabilities                                                                                                                                                       |  |          | 256,866     |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Note Payable                                                                                                                                                                    |  |          | 108,224     |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Total liabilities                                                                                                                                                               |  |          | 365,090     |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Commitments and contingencies                                                                                                                                                   |  |          |             |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Stockholders’ equity:                                                                                                                                                           |  |          |             |   |              |  
|Common stock; $0.0001 par value: 100,000,000 shares authorized; 24,682,632 and 24,582,632 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively |  |          | 2,470       |   |              |  
|Additional paid-in capital                                                                                                                                                      |  |          | 20,228,392  |   |              |  
|Deficit
    accumulated     during the development stage                                                                                                                        |  |          | (18,640,061 | ) |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Total stockholders’ equity                                                                                                                                                      |  |          | 1,590,801   |   |              |  
|                                                                                                                                                                                |  |          |             |   |              |  
|Total liabilities and stockholders’ equity                                                                                                                                      |  | $        | 1,955,891   |   |              | $



See
accompanying notes to condensed consolidated financial statements.



3







Q Holdings, Inc. and Subsidiaries

(A Development Stage Company)

Condensed Consolidated Statements
of Operations (Unaudited)



Three and Six Months Ended June
30, 2012 and 2011 and the

Period from March 28, 2002 (date
of inception) to June 30, 2012



|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  | From March 28, |          
|---------------------------------------------------------------------------- |  | -------------------- | ---------- | - | ------------------ | - | --------- | ------------------ |  | - | ---------- | - |  | -------------- | ---------
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  | 2002 (date of  |          
|                                                                             |  | For the Three Months |            |   | For the Six Months |   |           | inception) through | 
|                                                                             |  | Ended June 30,       |            |   | Ended June 30,     |   |           | June 30,           | 
|                                                                             |  | 2012                 |            |   | 2011               |   |           | 2012               |  |   | 2011       |   |  | 2012           |          
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Grant revenue                                                                |  | $                    | 7,229      |   |                    | $ | 10,173    |                    |  | $ | 7,229      |   |  | $              | 10,173   
|License fee and other revenues                                               |  |                      | -          |   |                    |   | 9,600     |                    |  |   | -          |   |  |                | 14,400   
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Total revenues                                                               |  |                      | 7,229      |   |                    |   | 19,773    |                    |  |   | 7,229      |   |  |                | 24,573   
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Operating expenses:                                                          |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Research and development                                                     |  |                      | 257,463    |   |                    |   | 158,763   |                    |  |   | 481,670    |   |  |                | 277,430  
|General and administrative                                                   |  |                      | 345,554    |   |                    |   | 126,633   |                    |  |   | 731,288    |   |  |                | 340,673  
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Total operating expenses                                                     |  |                      | 603,017    |   |                    |   | 285,396   |                    |  |   | 1,212,958  |   |  |                | 618,103  
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Operating loss                                                               |  |                      | (595,788   | ) |                    |   | (265,623  | )                  |  |   | (1,205,729 | ) |  |                | (593,530 
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Other income (expense):                                                      |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Interest income                                                              |  |                      | 1,748      |   |                    |   | -         |                    |  |   | 2,189      |   |  |                | -        
|Interest expense                                                             |  |                      | (1,424     | ) |                    |   | -         |                    |  |   | (3,444     | ) |  |                | (1,691   
|Other income                                                                 |  |                      | 755        |   |                    |   | 98        |                    |  |   | 1,361      |   |  |                | 1,588    
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Total other
    income (expense), net                                        |  |                      | 1,079      |   |                    |   | 98        |                    |  |   | 106        |   |  |                | (103     
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Loss before provision for income taxes                                       |  |                      | (594,709   | ) |                    |   | (265,525  | )                  |  |   | (1,205,623 | ) |  |                | (593,633 
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Provision for income taxes                                                   |  |                      | -          |   |                    |   | -         |                    |  |   | -          |   |  |                | -        
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Net loss                                                                     |  | $                    | (594,709   | ) |                    | $ | (265,525  | )                  |  | $ | (1,205,623 | ) |  | $              | (593,633 
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Weighted average
    number of common shares outstanding - basic and diluted |  |                      | 24,675,874 |   |                    |   | 4,193,203 |                    |  |   | 24,675,874 |   |  |                | 4,193,203
|                                                                             |  |                      |            |   |                    |   |           |                    |  |   |            |   |  |                |          
|Net loss per common share - basic and diluted                                |  | $                    | (0.02      | ) |                    | $ | (0.06     | )                  |  | $ | (0.05      | ) |  | $              | (0.14    



See
accompanying notes to condensed consolidated financial statements.



4







Q Holdings, Inc. and Subsidiaries

(A Development Stage Company)

Statement of Stockholder’s Equity

Six Months ended June 30, 2012



|                                                             |  |              |            |   |         |   |       |             |  |   | Deficit       |  |  |        |            
|------------------------------------------------------------ |  | ------------ | ---------- | - | ------- | - | ----- | ----------- |  | - | ------------- |  |  | ------ | -----------
|                                                             |  |              |            |   |         |   |       |             |  |   | Accumulated   |  |  |        |            
|                                                             |  |              |            |   |         |   |       | Additional  |  |   | During        |  |  | Total  |            
|                                                             |  | Common Stock |            |   | Paid-in |   |       | Development |  |   | Stockholders’ | 
|                                                             |  | Shares       |            |   | Amount  |   |       | Capital     |  |   | Stage         |  |  | Equity |            
|                                                             |  |              |            |   |         |   |       |             |  |   |               |  |  |        |            
|Balance, January 1, 2012                                     |  |              | 24,582,632 |   |         | $ | 2,458 |             |  | $ | 19,972,937    |  |  | $      | (17,434,438
|                                                             |  |              |            |   |         |   |       |             |  |   |               |  |  |        |            
|Stock-based compensation expense                             |  |              | -          |   |         |   | -     |             |  |   | 55,467        |  |  |        | -          
|                                                             |  |              |            |   |         |   |       |             |  |   |               |  |  |        |            
|Common stock issued for cash ($1.00 per share)               |  |              | 190,000    |   |         |   | 19    |             |  |   | 189,981       |  |  |        | -          
|Common stock issued for asset purchase ($1.00 per
    share) |  |              | 10,000     |   |         |   | 1     |             |  |   | 9,999         |  |  |        | -          
|Common stock forfeited for loan default                      |  |              | (100,000   | ) |         |   | (8    | )           |  |   | 8             |  |  |        | -          
|                                                             |  |              |            |   |         |   |       |             |  |   |               |  |  |        |            
|Net loss                                                     |  |              | -          |   |         |   | -     |             |  |   | -             |  |  |        | (1,205,623 
|                                                             |  |              |            |   |         |   |       |             |  |   |               |  |  |        |            
|Balance, June 30, 2012                                       |  |              | 24,682,632 |   |         | $ | 2,470 |             |  | $ | 20,228,392    |  |  | $      | (18,640,061



See
accompanying notes to condensed consolidated financial statements.



5







Q Holdings, Inc. and Subsidiaries

(A Development Stage Company)

Consolidated Statements of Cash
Flows (Unaudited)



Six Months Ended June 30, 2012
and 2011

and the Period from
March 28, 2002 (date of inception) to June 30, 2012



|                                                                            |  |                    |            |   |                    |   |          | From March 28, | 
|--------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ------------------ | - | -------- | -------------- | 
|                                                                            |  |                    |            |   |                    |   |          | 2002 (date of  | 
|                                                                            |  | For the Six Months |            |   | inception) through |  
|                                                                            |  | Ended June 30,     |            |   | June 30,           |  
|                                                                            |  | 2012               |            |   | 2011               |   |          | 2012           | 
|                                                                            |  |                    |            |   |                    |   |          |                | 
|Cash flows used in operating activities:                                    |  |                    |            |   |                    |   |          |                | 
|Net loss                                                                    |  | $                  | (1,205,623 | ) |                    | $ | (593,633 | )              | 
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                    |            |   |                    |   |          |                | 
|Depreciation and amortization                                               |  |                    | 9,711      |   |                    |   | 16,829   |                | 
|Original debt discount                                                      |  |                    | -          |   |                    |   | -        |                | 
|Accretion of debt costs and beneficial conversion feature                   |  |                    | -          |   |                    |   | -        |                | 
|Stock-based compensation                                                    |  |                    | 55,467     |   |                    |   | 14,541   |                | 
|Common stock issued for services                                            |  |                    | 10,000     |   |                    |   | 44,750   |                | 
|Convertible debt issued for expenses                                        |  |                    | -          |   |                    |   | -        |                | 
|Bad debt expense                                                            |  |                    | (2,282     | ) |                    |   | -        |                | 
|Decrease (increase) in:                                                     |  |                    |            |   |                    |   |          |                | 
|Grants and other receivables                                                |  |                    | 27,863     |   |                    |   | 80,322   |                | 
|Prepaid expenses and other assets                                           |  |                    | (740       | ) |                    |   | -        |                | 
|Increase (decrease) in:                                                     |  |                    |            |   |                    |   |          |                | 
|Accounts payable and notes payable                                          |  |                    | 80,420     |   |                    |   | 64,268   |                | 
|Accrued liabilities                                                         |  |                    | 5,876      |   |                    |   | 7,679    |                | 
|                                                                            |  |                    |            |   |                    |   |          |                | 
|Net cash used in operating activities                                       |  |                    | (1,019,308 | ) |                    |   | (365,244 | )              | 
|                                                                            |  |                    |            |   |                    |   |          |                | 
|Cash flows used in investing activities:                                    |  |                    |            |   |                    |   |          |                | 
|Purchase of property and equipment                                          |  |                    | (2,363     | ) |                    |   | (5,628   | )              | 
|                                                                            |  |                    |            |   |                    |   |          |                | 
|Cash flows from financing activities:                                       |  |                    |            |   |                    |   |          |                | 
|Proceeds from issuance of notes payable                                     |  |                    | -          |   |                    |   | -        |                | 
|Principal payments on notes
    payable                                     |  |                    | (15,000    | ) |                    |   | -        |                | 
|Issuance of preferred stock for cash                                        |  |                    | -          |   |                    |   | -        |                | 
|Issuance of common stock for cash                                           |  |                    | 190,000    |   |                    |   | -        |                | 
|Proceeds from exercise of common stock options                              |  |                    | -          |   |                    |   | -        |                | 
|Proceeds from exercise of preferred stock warrants                          |  |                    | -          |   |                    |   | -        |                | 
|                                                                            |  |                    |            |   |                    |   |          |                | 
|Net cash provided by financing activities                                   |  |                    | 175,000    |   |                    |   | -        |                | 
|                                                                            |  |                    |            |   |                    |   |          |                | 
|Net change in cash                                                          |  |                    | (846,671   | ) |                    |   | (370,872 | )              | 
|                                                                            |  |                    |            |   |                    |   |          |                | 
|Cash, beginning of the period                                               |  |                    | 2,741,519  |   |                    |   | 422,198  |                | 
|                                                                            |  |                    |            |   |                    |   |          |                | 
|Cash, end of the period                                                     |  | $                  | 1,894,848  |   |                    | $ | 51,326   |                | 
|                                                                            |  |                    |            |   |                    |   |          |                | 
|Supplemental disclosure of cash flow information:                           |  |                    |            |   |                    |   |          |                | 
|                                                                            |  |                    |            |   |                    |   |          |                | 
|Cash paid for interest                                                      |  | $                  | -          |   |                    | $ | -        |                | 



See
accompanying notes to condensed consolidated financial statements.



6







Q
HOLDINGS, INC. AND SUBSIDIARIES

(A
Development Stage Company)

Condensed
Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30, 2012
and 2011

and
the Period from March 28, 2002 (Date of Inception) to June 30, 2012

Continued



Supplemental
disclosure of noncash investing and financing activities:



For
the period from March 28, 2002 (date of inception) through June 30, 2012:





|● |  | The Company issued 219,658 shares of common stock in exchange for technology valued at $220.                                                                                                                          
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|● |  | The Company converted
    $1,050,000 of notes payable and $29,691 of accrued interest to 482,008 shares of Series A2 preferred stock.                                                                                 
|● |  | The Company converted $3,740,000 of notes payable and $370,346 of accrued interest to 1,787,104 shares of Series B preferred stock.                                                                                   
|● |  | The Company issued 19,457 shares of Series B preferred stock in exchange for $44,750 of research and development services provided.                                                                                   
|● |  | The Company issued $360,000 of convertible bridge notes payable with an original debt discount of $360,000. The discount was accreted as interest expense over the term of the note.                                  
|● |  | The Company issued $90,000 in convertible bridge notes payable for professional services provided, with an original debt discount of $90,000. The discount was accreted as interest expense over the term of the note.
|● |  | The Company converted $900,000 of bridge notes payable and $16,644 of accrued interest to 916,644 shares of common stock.                                                                                             
|● |  | The Company converted 250,000 shares of Series A1 preferred stock, 2,022,190 shares of Series A2 preferred stock, and 4,102,654 shares of Series B preferred stock into 13,791,231 shares of common stock.            
|● |  | The Company issued
    10,000 shares of common stock in exchange for licensing $10,000 of research and development assets.                                                                                            
|● |  | The Company financed
    certain payables in connection with an agreement for the purchase of services to assist in an Investigational New Drug
    application to the U.S. Food and Drug Administration.             



See
accompanying notes to condensed consolidated financial statements.



7







Q
HOLDINGS, INC. AND SUBSIDIARIES

(A
Development Stage Company)

Notes
to Condensed Consolidated Financial Statements







|1. | Organization
and Summary of Significant Accounting Policies |  | Organization
        Q
        Holdings, Inc. (“the Company”) (formerly known as Grace 2, Inc.) was incorporated on October 27, 2005 as a Delaware corporation.
        
        On
        October 13, 2011, Grace 2, Inc. entered into an Agreement and Plan of Merger (“Agreement”) with Q Acquisition,
        Inc., a Delaware         corporation and wholly owned subsidiary (“Merger Sub”), and Q Therapeutics, Inc. Q
        Therapeutics, Inc. was         incorporated on March 28, 2002 as a Delaware corporation. Pursuant to the Agreement, Merger
        Sub merged with and into Q         Therapeutics, Inc. with Q Therapeutics, Inc. being the surviving corporation. Upon the
        consummation of the merger, Grace 2, Inc. acquired 100% of Q Therapeutics, Inc. by issuing 2.1633835 shares of
        common stock for each outstanding equity         instrument of Q Therapeutics, Inc. After the effective date of the
        transaction, the former Q Therapeutics, Inc. stockholders         owned 89.7% of the issued and outstanding common shares of
        Grace 2, Inc. Also, at the time of the transaction Grace 2,         Inc. was renamed Q Holdings, Inc. The transaction was
        accounted for as a reverse acquisition with Q Therapeutics, Inc.         as the accounting acquirer. The condensed
        consolidated financial statements include the activity of Q Therapeutics, Inc.         from inception (March 28, 2002)
        through June 30, 2012, and the activity of Q Holdings, Inc. and Q Therapeutics, Inc. from         the date of acquisition
        (October 13, 2011) forward.
        
        The
        Company is a development stage company in the process of developing products to treat debilitating and fatal diseases
        of the central nervous system.
        
        Basis
        of Presentation
        The
        accompanying unaudited condensed consolidated financial statements include the accounts of Q Holdings, Inc. and its wholly
        owned subsidiary, Q Therapeutics, Inc. and Q Therapeutics, Inc.’s majority owned subsidiary, NeuroQ Research, Inc.
        (collectively, “the Company”). All significant intercompany amounts have been eliminated. There has been no
        activity in         NeuroQ Research, Inc. since NeuroQ Research, Inc. was formed; therefore, no non-controlling interest is
        presented. The         unaudited condensed consolidated financial statements have been prepared by the Company pursuant to
        the rules and regulations         of the Securities and Exchange Commission (“SEC”) on a basis consistent with
        the Company’s annual financial statements         and, in the opinion of management, reflect all adjustments,
        consisting only of normal recurring adjustments, necessary         to present fairly the financial information set forth
        therein. Certain information and note disclosures normally included         in financial statements prepared in accordance
        with U.S. generally accepted accounting principles have been condensed         or omitted pursuant to SEC rules and
        regulations, although the Company         believes that the following disclosures, when read in conjunction with the annual
        financial statements and the notes thereto         as included in the Company’s annual report on Form 10-K for the
        year ended December 31, 2011, are         adequate to         make         the         information         presented not
        misleading.         Operating         results for the         three and six months         ended June         30,
        2012, are not         necessarily         indicative of the                results that may be expected for         the year
        ending                 December 31,               2012.
|-- | ----------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



8







Q
HOLDINGS, INC. AND SUBSIDIARIES

(A
Development Stage Company)

Notes
to Condensed Consolidated Financial Statements

Continued





|1. | Organization
    and Summary of Significant Accounting PoliciesContinued |  | Development
                                                                                     Stage and Liquidity
        For
        the period from March 28, 2002 (date of inception) through June 30, 2012, the Company has not generated significant revenues
        and has been developing its products. Therefore, the Company is considered to be in the development stage in accordance with
        the provisions of Accounting Standards Codification (“ASC”) Topic 915, Development Stage Entities.
        Cumulative amounts have been presented for the period from March 28, 2002 (date of inception) through June 30,
        2012.Historically, the Company has been dependent on government grants and debt and equity raised from
        individual investors to sustain its operations. The Company’s products have not been approved by the FDA for
        commercial         sale; therefore, the Company has not generated revenues from commercial product sales. The Company has
        incurred losses and         used cash in operating activities since inception. As of June 30, 2012, the Company had a
        deficit         accumulated during the development stage of         $18,640,061. From October 13, 2011 through June 30, 2012,
        the Company         raised         $4,018,047 in a private placement of the         Company’s common stock. Although
        there can be no         assurance, management         believes that the Company has sufficient         resources to fund the
        Company’s         operations through at least June 30,         2013.
|-- | ------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                          |  | Use
                                                                                     of Estimates
        The
        preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management
        to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ
        from those estimates. Key estimates include useful lives for property and equipment, valuation allowances for net deferred
        income tax assets, and values of stock-based compensation awards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



| |  |  | Stock-Based Compensation
        The Company calculates the estimated
fair value of its stock options and warrants on the grant date using the Black-Scholes option-pricing model and recognizes the
estimated fair value as compensation expense on a straight-line basis over the vesting period. The volatility assumption used
in the Black-Scholes option-pricing model is based on the volatility of publicly traded companies in the same industry as the
Company. The expected terms of the options and warrants granted represent the period of time that the options granted are expected
to be outstanding. The risk free rate for periods within the contractual lives of the option and warrant is based on the U.S. treasury
securities constant maturity rate that corresponds to the expected terms in effect at the time of grant.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  | Net Loss Per Common Share
        Basic net income or loss per common
share (“Basic EPS”) is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted
net income or loss per common share (“Diluted EPS”) is computed by dividing net income or loss by the sum of the weighted average
number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential dilutive common
share equivalents consist of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock.                                                                                                                                                                                                                                  
| |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  | Due to the fact that
    for all periods presented, the Company has incurred net losses, potential dilutive common share equivalents of 15,830,505 and
    8,311,561 for the six months ended June 30, 2012 and 2011, respectively, are not included in the calculation of Diluted EPS
    because they are anti-dilutive. Therefore, basic loss per common share is the same as diluted loss per common share for the
    three and six months ended June 30, 2012 and 2011.                                                                                                                                                                                                                                                                                                                                                                      



9







Q
HOLDINGS, INC. AND SUBSIDIARIES

(A
Development Stage Company)

Notes
to Condensed Consolidated Financial Statements

Continued



|2. | Private Placement Memorandum |  | Between October 13, 2011 and June
30, 2012, the Company was conducting a private placement of its securities solely to accredited investors. The offering is being
conducted on a best efforts basis, whereby the Company is offering for sale a minimum of 3,000,000 and a maximum of 6,000,000
Units, each Unit consisting of one share of common stock, one 7-year common stock purchase warrant exercisable at $1.00 per share,
and one 7-year common stock purchase warrant exercisable at $2.00 per share. Units sold totaled 4,018,047 through June 30, 2012.
The Company has raised an aggregate of $3,820,318 after paying issuance costs of $197,729.
|-- | ---------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|3. | Stock
Options and Warrants |  | Stock
                                                                                           Options
        The
Q Therapeutics, Inc. stock option plan, originally approved on April 10, 2002 and subsequently amended (the “2002 Plan”),
provides for the grant of incentive options, nonqualified options, and shares of restricted stock. Under the terms of the 2002
Plan, there are 4,586,373 common shares available for grant to employees, officers, directors and consultants. The Board of Directors
determines the terms of each grant. Generally, the options have a vesting period of 4 years with 25% vesting after the first year
of service and monthly thereafter, and have a 10-year contractual life. Certain stock options have provisions to accelerate vesting
upon the occurrence of certain events. The 2002 Plan converted to a Q Holdings, Inc. plan in connection with the merger discussed
in Note 1. As of October 13, 2011, there were 228,472 common shares available to be issued under the 2002 Plan.
|-- | -------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                            |  | On
October 13, 2011, the 2011 Stock Option Plan for Q Holdings, Inc. (the “2011 Plan”) was adopted, authorizing 1,500,000
common shares available for grant to employees, officers, directors and consultants. On October 13, 2011, a majority of stockholders
approved the 2011 Plan adopted by the Board of Directors and approved a total of 1,728,472 shares for issuance under the 2011
Plan with the remaining 228,472 shares previously available under the 2002 Plan made available for issuance under the 2011 Plan.
As of June 30, 2012, there were 878,472 shares available for option grants under the 2011 Plan.                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                            |  | Stock-based
compensation for the three months ended June 30, 2012 and 2011 was $26,159 and $7,213, respectively. Stock-based compensation
for the six months ended June 30, 2012 and 2011 was $55,467 and $14,541, respectively. As of June 30, 2012, the Company had $311,193
of unrecognized stock-based compensation expense related to non-vested awards that will be recognized over a weighted-average
period of 3.35 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                            |  | In
conjunction with the 2011 reverse merger, the options to purchase preferred stock in Q Therapeutics, Inc. were exchanged for options
to purchase common stock in Q Holdings, Inc. Each option in Q Therapeutics, Inc. was exchanged for 2.1633835 options in Q Holdings,
Inc. with the exercise price adjusted down by the same factor, and all other terms remained unchanged.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



10







Q
HOLDINGS, INC. AND SUBSIDIARIES

(A
Development Stage Company)

Notes
to Condensed Consolidated Financial Statements

Continued



|3. | Stock Options and Warrants Continued |  | The following sets forth the outstanding common stock options and related activity for the six months ended June 30, 2012:
|-- | ------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------



|                                    |  |  | Number ofOptions |           |   | WeightedAverage
ExercisePrice Per
Share |  
|----------------------------------- |  |  | ---------------- | --------- | - | --------------------------------------- | -
|                                    |  |  |                  |           |   |                                         |  
|Outstanding as of December 31, 2011 |  |  |                  | 3,156,948 |   |                                         | $
|Granted                             |  |  |                  | 850,000   |   |                                         |  
|Exercised                           |  |  |                  | -         |   |                                         |  
|Forfeited                           |  |  |                  | -         |   |                                         |  
|                                    |  |  |                  |           |   |                                         |  
|Outstanding as of March 31, 2012    |  |  |                  | 4,006,948 |   |                                         |  
|Granted                             |  |  |                  | -         |   |                                         |  
|Exercised                           |  |  |                  | -         |   |                                         |  
|Forfeited                           |  |  |                  | (149,057  | ) |                                         |  
|                                    |  |  |                  |           |   |                                         |  
|Outstanding as of June 30, 2012     |  |  |                  | 3,857,891 |   |                                         |  





| |  |  | The aggregate intrinsic value of outstanding stock options as of June 30, 2012 was approximately $2,580,000.
| |  |  | ------------------------------------------------------------------------------------------------------------







| |  |  | The fair value of each stock-based compensation award granted during the six months ended June 30, 2012, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Risk-free interest rate         |  | 2.61 - 3.36%    | 
|------------------------------- |  | --------------- | 
|Expected stock price volatility |  | 62.19%          | 
|Expected dividend yield         |  | 0%              | 
|Expected life of options        |  | 5.5 – 6.5 years | 



| |  |  | The following summarizes information about stock options outstanding as of June 30, 2012:
| |  |  | -----------------------------------------------------------------------------------------





|Exercise
Price |             |  | Number of
Options
Outstanding |  |           | WeightedAverageRemainingContractualLife (Years) |  |  | WeightedAverageExercisePrice |  |  | Number
of Options
Exercisable |      |  | Weighted
Average
Exercise
Price | 
|-------------- | ----------- |  | ----------------------------- |  | --------- | ----------------------------------------------- |  |  | ---------------------------- |  |  | ----------------------------- | ---- |  | ------------------------------- | 
|               |             |  |                               |  |           |                                                 |  |  |                              |  |  |                               |      |  |                                 | 
|$              | 0.06 – 0.08 |  |                               |  | 935,051   |                                                 |  |  | 7.52                         |  |  | $                             | 0.08 |  |                                 | 
|$              | 0.15 – 0.19 |  |                               |  | 2,072,840 |                                                 |  |  | 6.75                         |  |  |                               | 0.17 |  |                                 | 
|$              | 1.00        |  |                               |  | 850,000   |                                                 |  |  | 9.51                         |  |  |                               | 1.00 |  |                                 | 
|               |             |  |                               |  |           |                                                 |  |  |                              |  |  |                               |      |  |                                 | 
|               |             |  |                               |  | 3,857,891 |                                                 |  |  | 7.54                         |  |  |                               | 0.33 |  |                                 | 



11







Q
HOLDINGS, INC. AND SUBSIDIARIES

(A
Development Stage Company)

Notes
to Condensed Consolidated Financial Statements

Continued



|3. | Stock
Options and Warrants Continued |  | Warrants
        In
        conjunction with the reverse merger, the warrants to purchase preferred stock in Q Therapeutics, Inc. were exchanged for
        warrants to purchase common stock in Q Holdings, Inc. Each warrant in Q Therapeutics, Inc. was exchanged for 2.1633835
        warrants in Q Holdings, Inc. and the exercise price was adjusted down by the same factor. All other terms remained
        unchanged.         Warrants were issued in 2012 and 2011 related to the bridge funding and private placement.
|-- | ------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                      |  | In
    connection with certain stock offerings and debt issuances, the Company has issued warrants to purchase common stock. The
    following     summarizes information about stock warrants as of June 30, 2012, all of which are exercisable:                                                                                                                                                                                                                                                                                   



|Warrants                                                              |  | Year ofExpiration |      |  | Number ofShares |  |           | ExercisePrice | 
|--------------------------------------------------------------------- |  | ----------------- | ---- |  | --------------- |  | --------- | ------------- | 
|                                                                      |  |                   |      |  |                 |  |           |               | 
|Common stock warrants issued for previously issued Series A2 warrants |  |                   | 2015 |  |                 |  | 132,797   |               | 
|                                                                      |  |                   |      |  |                 |  |           |               | 
|Common stock warrants issued for previously issued Series B warrants  |  |                   | 2015 |  |                 |  | 823,347   |               | 
|                                                                      |  |                   |      |  |                 |  |           |               | 
|Common stock warrants issued for previously issued Series B warrants  |  |                   | 2017 |  |                 |  | 192,242   |               | 
|                                                                      |  |                   |      |  |                 |  |           |               | 
|Warrants issued in conjunction with bridge notes (August 31, 2011)    |  |                   | 2018 |  |                 |  | 1,816,644 |               | 
|                                                                      |  |                   |      |  |                 |  |           |               | 
|Warrants issued in conjunction with bridge notes (August 31, 2011)    |  |                   | 2018 |  |                 |  | 916,644   |               | 



12







Q
HOLDINGS, INC. AND SUBSIDIARIES

(A
Development Stage Company)

Notes
to Condensed Consolidated Financial Statements

Continued



|3. | Stock Options and Warrants Continued |  | 
|-- | ------------------------------------ |  | 



|                                                                                               |  | Year of    |      |  | Number of |  |            | Exercise | 
|---------------------------------------------------------------------------------------------- |  | ---------- | ---- |  | --------- |  | ---------- | -------- | 
|Warrants                                                                                       |  | Expiration |      |  | Shares    |  |            | Price    | 
|                                                                                               |  |            |      |  |           |  |            |          | 
|Warrants issued in conjunction with private placement (October 13 and December 30, 2011)       |  |            | 2018 |  |           |  | 3,828,047  |          | 
|                                                                                               |  |            |      |  |           |  |            |          | 
|Warrants issued in conjunction with private placement (October 13 and December 30, 2011)       |  |            | 2018 |  |           |  | 3,828,047  |          | 
|                                                                                               |  |            |      |  |           |  |            |          | 
|Warrants issued for fees in conjunction with reverse merger (October 13 and December 30, 2011) |  |            | 2018 |  |           |  | 22,750     |          | 
|                                                                                               |  |            |      |  |           |  |            |          | 
|Warrants issued in conjunction with private placement (February 2 and March 30, 2012)          |  |            | 2019 |  |           |  | 190,000    |          | 
|                                                                                               |  |            |      |  |           |  |            |          | 
|Warrants issued in conjunction with private placement (February 2 and March 30, 2012)          |  |            | 2019 |  |           |  | 190,000    |          | 
|                                                                                               |  |            |      |  |           |  |            |          | 
|Warrants issued for fees in conjunction with private placement (February 2 and March 30, 2012) |  |            | 2019 |  |           |  | 19,000     |          | 
|                                                                                               |  |            |      |  |           |  |            |          | 
|Warrants issued in conjunction with asset purchase agreement (April 9, 2012)                   |  |            | 2019 |  |           |  | 10,000     |          | 
|                                                                                               |  |            |      |  |           |  |            |          | 
|Warrants issued in conjunction with asset purchase agreement (April 9, 2012)                   |  |            | 2019 |  |           |  | 10,000     |          | 
|                                                                                               |  |            |      |  |           |  |            |          | 
|                                                                                               |  |            |      |  |           |  | 11,979,518 |          | 



| |  | Each
warrant with an exercise price of $1.00 or $2.00 per share may be redeemed by the Company at a price of $0.001 per share in the
event (i) the closing sales price of the Company’s common stock is at least $1.50 for the $1.00 warrants or $3.00 for the
$2.00 warrants for ten consecutive trading days and (ii) there is an effective public registration statement covering the resale
of the common stock issuable upon the exercise of the warrants.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13







Q
HOLDINGS, INC. AND SUBSIDIARIES

(A
Development Stage Company)

Notes
to Condensed Consolidated Financial Statements

Continued



|4. | Commitments and Contingencies |  | License
                                                                                           and Royalty Agreements
        The
Company has entered into an exclusive license agreement with a university, where the Company has obtained certain intellectual
property from the university to commercialize, produce, manufacture, use and sell the patent rights. The Company is required to
pay the university a contractual dollar amount for each new investigational drug application filed with the Food and Drug Administration
(“FDA”) using the licensed intellectual property. Should the Company receive cash payments from licensing revenue
during human trial research, the Company is required to pay 10% of all net licensing revenue (but not including payments for product
development activities or equity purchases) to the university up to a certain maximum amount. The Company is also required to
pay an amount upon New Drug Application (“NDA”) approval. The NDA approval occurs when the FDA has approved all prior
drug testing and allows a new drug to go to the market. Once the Company has an NDA, the Company must pay the university a royalty
of 2% of net sales up to a certain dollar amount and 2.5% of net sales in excess of that amount of human therapeutics and must
pay the university a royalty of 5% of net sales on any services. If the Company sublicenses the intellectual property, then the
Company must pay the university in accordance with the provisions of the agreement.
|-- | ----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                               |  | The
Company has a product development agreement with an entity, whereby the Company has granted the entity a non-exclusive right to
certain intellectual property owned by the Company and the entity has granted to the Company a non-exclusive right to use certain
intellectual property owned by the entity in order to develop new products (“Products”) to be sold primarily by the
Company or its designees to the research market. The Company has agreed to pay the entity certain amounts for product development
in the form of the Company’s common stock. In addition, the Company has agreed to pay the entity royalty payments of 10%
of net sales of the Company to third parties for Products developed using the entity’s intellectual property. If the Company
agrees that the entity can also sell Products to third parties and if the entity has sales to a third party of Products using
the Company’s intellectual property, then the entity will pay the Company a royalty payment of 10% of net sales. However,
if the Products sold by the entity are covered solely by the Company’s patents and know-how, then a 50-50 financial sharing
arrangement between the entity and the Company will apply to such Products.                                                                                                                                                                                                                                                                                             
|   |                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                               |  | Right of First Negotiation

Pursuant to an agreement
(“Agreement”) the Company has irrevocably granted a stockholder with a right of first negotiation to license
certain technology of the Company related to Q-Cells®. The term of the Agreement is for a period of the later of (i)
3 years from the effective date of the Agreement (October 6, 2011) or (ii) 6 months after the date of completion of certain
dosing of the technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



|
|



14







Q
HOLDINGS, INC. AND SUBSIDIARIES

(A
Development Stage Company)

Notes
to Condensed Consolidated Financial Statements

Continued



|4. | Commitments
and Contingencies Continued |  | Asset
                                                                                           Purchase Agreement
        On
March 26, 2012, Q Holdings, Inc., Q Therapeutics, Inc. and NeuroQ Research, Inc. executed an agreement to acquire certain intellectual
property and technology. The agreement is milestone based and, if the milestones are achieved in 2012, it will provide the Company
with manufacturing protocols for several types of neural cells. The Company will issue payment in the form of common stock and
warrants as intellectual property and technology is delivered to the Company in 2012. In April 2012, the Company issued 10,000
units of common stock and warrants as initial payment for transfer of intellectual property.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | --------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                         |  | Research
                                                                               Agreement
        On
        March 27, 2012, the Company executed an agreement for outside research study services. The total contract price is $237,400
        and the Company is required to make certain payments under the agreement as milestones are met. A separate agreement with the
        services provider allows the Company to pay 25% of the invoiced amount in cash and allows the balance to be financed and
        recorded as a loan to be paid over the following 36-60 months. Originally, the agreement had a provision that allowed the
        holder to convert the balance into Q Therapeutics, Inc. series B  preferred stock. The Company currently is in negotiations
        to revise this agreement to allow conversion to Q Holding, Inc.’s common stock. Interest is being recorded at 8%
        annually. The total amount invoiced to date is $142,400 and payments of $35,600 were made in May 2012. As of June 30, 2012,
        the balance outstanding is $108,000, of which $106,800 relates to principal and $1,424 relates to accrued interest. The
        agreement is expected to conclude in 2012.
|   |                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                         |  | Placement
                                                                               Agent Agreement
        On
June 27, 2012, the Company entered into an agreement with a placement agent in connection with the private placement. Under the
agreement, a fee of $5,000 was paid in June. For any securities purchased by certain purchasers, the placement agent will receive
a cash placement fee equal to 8% and warrants equal to 10%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                         |  | Secured
                                                                               Promissory Note
        The
Company entered into an agreement with two shareholders whereby the loan amount of $31,967 plus interest is to be repaid to the
Company by December 31, 2012. For each month of non-payment, 1/12 of a combined 200,000 common shares are forfeited. As of June
30, 2012, total payments received were $7,988 and total shares forfeited for loan default were 100,000. The Company believes
the full amount of the note will be collected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                         |  | Operating
                                                                               Leases
        The
        Company leases its office and lab facility under a non-cancelable operating lease. The current lease was renewed effective
        April 1, 2011 and expires March 2013. The minimum future lease payments under this operating lease as of June 30, 2012
        is $55,442 due during the year ending December 31, 2012 and $27,721 due during the year ending December 31, 2013.
        
        Lease
        expense under operating leases was $27,721 and $26,913 for the three months ended June 30, 2012 and 2011, respectively.
        Lease expense under operating leases was $54,634 and $53,043 for the six months ended June 30, 2012 and 2011,
        respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                   



15







Q
HOLDINGS, INC. AND SUBSIDIARIES

(A
Development Stage Company)

Notes
to Condensed Consolidated Financial Statements

Continued



|5. | Related-Party Transactions |  | On January 9, 2010, the Company entered into an unsecured note payable agreement with a stockholder for $15,000 with an annual interest rate of 6% and a maturity date of December 31, 2010. The note was repaid on February 29, 2012.
|-- | -------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





16







Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.



MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS



The following
discussion and analysis of the Company as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 should
be read in conjunction with the condensed consolidated financial statements and accompanying notes included herein, as well as
the Company’s financial statements for the year ended December 31, 2011 filed with its Annual Report on Form 10-K on March
23, 2012.



Forward-Looking
Statements



Some of the
information in this section contains forward-looking statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,”
“believe,” “estimate” and “continue,” or similar words. You should read statements that contain
these words carefully because they:



|● |  | discuss our future expectations;
|- |  | --------------------------------

|● |  | contain projections of our future results of operations or of our financial condition;
and
|- |  | ------------------------------------------------------------------------------------------

|● |  | state other “forward-looking” information.
|- |  | ------------------------------------------



We believe
it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately
predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those
anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors,”
“Business” and elsewhere in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed
with the Securities Exchange Commission (“SEC”) on March 23, 2012.



Company Overview



As discussed
throughout this Quarterly Report, Q Holdings, Inc. (hereinafter “Q Holdings” or the “Company”) conducts
its business and operations through its wholly owned subsidiary, Q Therapeutics, Inc. (hereinafter “Q Therapeutics”
or “Q”). Q Therapeutics is a Salt Lake City, Utah-based biopharmaceutical company that is developing human cell-based
therapies intended to treat degenerative diseases of the brain and spinal cord, the primary components of the central nervous system
(“CNS”). Q Therapeutics was incorporated in the state of Delaware in March 2002.



The technology
upon which these therapies are based was developed by Q’s co-founder Mahendra Rao, M.D., Ph.D., a global leader in glial
stem cell biology, during Dr. Rao’s tenure as a Professor at the University of Utah and as Head of the Stem Cell Section
at the National Institutes of Health. Q is managed by an experienced team of biotechnology executives with demonstrated start-up
success and advised by leaders in the neurology and stem cell therapeutics fields.



Every year,
hundreds of thousands of people suffer with debilitating neurodegenerative diseases such as Amyotrophic Lateral Sclerosis (“ALS”
or “Lou Gehrig’s Disease”), Multiple Sclerosis (“MS”), Transverse Myelitis (“TM”) and
Spinal Cord Injury (“SCI”). Traditional drugs tend to fail to treat the nerve damage caused by these diseases due to
the multifactorial nature of these diseases and the inability of most drugs to address all of these factors. Q Therapeutics is
developing a new and nontraditional approach targeted to improve the health of people suffering from neurodegenerative diseases:
a human cell based product called Q-Cells®.



Q-Cells®
are healthy human glial cells. The role of glial cells in the brain and spine is to support and protect neurons, the signal transmission
lines of the nervous system. Glial cells perform many functions including forming an insulating “myelin sheath” around
neurons, providing the necessary growth factors needed to maintain a healthy nervous system, and removing compounds that are toxic
to neurons. Many neurodegenerative diseases arise when glial cells are damaged or destroyed, causing neurons to malfunction and
eventually die. Q-Cells® technology aims to treat neurodegenerative diseases by supplementing the damaged or missing glia in
the CNS with new, healthy cells that can help maintain and/or restore neuron function to a more robust state.



The diseases
targeted by Q Therapeutics’ products are not well treated with current drug therapies. At best, patients suffering from these
diseases can, in some cases, only hope to slow their inexorable progression and the associated disabilities. A handful of companies
are exploring the possibility of harnessing the power of stem cells to treat these conditions, though no clear leader has emerged.
In addition to utilizing its proprietary cellular products as therapeutic products, Q may evaluate novel ways to utilize these
cells to screen for new drugs (such as small molecule compounds) that could also provide treatments for neurological diseases.



17







Q Therapeutics
believes that a worldwide market measured in the tens of billions of dollars exists for those companies whose cell-based treatments
become commercial products. Q Therapeutics’ patent protected technology represents an opportunity to build on the recent
advancements in the stem cell field and bring to market a therapeutic approach that will change the way medicine is practiced in
treating many disabling and fatal conditions of the CNS.



Q Holdings
is raising capital to enable Q Therapeutics to complete preparations necessary to move into and initiate human clinical trials,
initially treating patients that suffer from the always-fatal ALS. Future trials are anticipated in other neurodegenerative diseases,
such as MS and SCI.



Corporate History



Q Therapeutics was
incorporated in the state of Delaware on March 28, 2002. Grace 2 was incorporated in the state of Delaware on October 27,
2005. On October 13, 2011, Grace 2 and its wholly owned subsidiary, Q Acquisition, Inc., a Delaware corporation
(“Merger Sub”), entered into an Agreement and Plan of Merger (“Merger Agreement”) with Q
Therapeutics. Pursuant to the Merger Agreement, Merger Sub merged with and into Q Therapeutics with Q Therapeutics being the
surviving corporation (the “Merger”). Upon the consummation of the Merger, the Company acquired 100% of Q
Therapeutics by issuing 2.1633835 shares of Common Stock for each then outstanding equity instrument of Q Therapeutics. After
the effective date of the transaction, the former stockholders of Q Therapeutics owned approximately 89.7% of the issued and
outstanding Common Stock of Grace 2. Effective November 2, 2011, Grace 2 changed its name to Q Holdings, Inc. The transaction
was accounted for as a “reverse acquisition” with Q Therapeutics as the accounting acquirer.



Prior to the consummation of the Merger,
Grace 2 was a “shell” company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)). Grace 2 voluntarily registered its Common Stock under Section 12(g) of the Exchange Act on a Form 10-SB (File No.:
000-52062) filed with the SEC on June 19, 2006 and which went effective by operation of law 60 days thereafter. Upon the effectiveness
of the Form 10-SB, Grace 2 became a fully reporting company obligated to file annual, quarterly and other periodic reports required
by the Exchange Act with the Commission. Upon the consummation of the Merger on October 13, 2011, Q Holdings assumed Grace 2’s
SEC reporting obligations and the Company ceased being a “shell” company. On October 18, 2011, the Company filed a
Form 8-K with the Commission disclosing the terms of the Merger and containing “Form 10” information.



On June 29, 2012, the
Company filed a Registration Statement on Form S-1 (File No: 333-182447) (the “Registration Statement”) with
the Commission therein registering under the Securities Act, an aggregate of 15,978,447 shares of Common Stock for resale by
the selling stockholders named in the Registration Statement. The Commission declared the Registration Effective on July
17, 2012. Subsequently, aFINRA-registered broker-dealer filed a Form 211 application withFINRA
on Q Holdings’ behalf in an effort to have the Company’s Common Stock quoted on the OTC Bulletin Board (OTCBB).
As of the date of this Quarterly Report, the Form 211 application is under review by FINRA. There can be no assurance that
the broker-dealer’s application to FINRA will be successful. If our Common Stock is not
quoted on the OTCBB, we intend to have our Common Stock listed on the OTC Pink Sheets.



Q’s Semi-Virtual Business
Model



Q Therapeutics uses a semi-virtual business
model to develop its products. Q believes this type of business model to be capital efficient while allowing it to augment its
own expertise and capabilities with those of its development partners at the time that outside resources are needed. Q’s
semi-virtual business model includes utilizing third parties for certain functions and outsourced services. For example, Q utilizes
outside collaborators and contractors to:



|● |  | Leverage its research and development resources by forming collaborations with outside
scientists specialized in our areas of interest;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|● |  | Contract Good Laboratory Practice (“GLP”) and Good Manufacturing Practice
(“GMP”) manufacturing to facilities specialized in such production;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|● |  | Utilize experienced regulatory consultants to work with the Food and Drug Administration
(“FDA”);
|- |  | -------------------------------------------------------------------------------------------------

|● |  | Contract safety/toxicology studies to qualified GLP labs;
|- |  | ---------------------------------------------------------

|● |  | Conduct the clinical trials with physicians and institutions with relevant experience;
|- |  | --------------------------------------------------------------------------------------

|● |  | Enter into pharmaceutical company collaborations to maximize product sales.
|- |  | ---------------------------------------------------------------------------



Cell-Based Therapeutic Approach
to Treatment of Degenerative Conditions of the Central Nervous System



Q Therapeutics was founded in
2002 to further the development and commercialization of the pioneering work of Mahendra Rao, M.D., Ph.D., conducted at the University
of Utah and National Institutes of Health (“NIH”). Dr. Rao, a global leader in the development of stem cells as therapeutics,
was one of the first to identify and seek patent coverage on stem cells and their progeny cells found in the CNS. After licensing
Dr. Rao’s technology from the University of Utah / NIH and raising capital, Q commenced operations in the spring of 2004
to develop cell-based therapeutic products that can be sold as “off-the-shelf” pharmaceuticals. That work continues
to advance Dr. Rao’s initial findings toward a commercial product.



18







Objectives of Q Therapeutics



Q Therapeutics aims to change
the way medicine is practiced in the treatment of many debilitating and often fatal diseases of the brain and spinal cord. Q intends
to bring its initial product, Q-Cells® to the market to treat ALS, and eventually other indications, potentially including
MS, SCI, Parkinson’s disease and Alzheimer’s disease.



Initially, Q is targeting orphan
diseases, where the FDA allows applying for fast track approvals and market exclusivity, and for which smaller, less expensive
clinical trials may be warranted. This approach can result in accelerated commercialization efforts while maintaining a financing
approach focused on capital efficiency.



Q’s Approach to the
Problem



Q Therapeutics believes it has
taken a novel path to developing treatments for debilitating and sometimes fatal diseases of the CNS for which there are currently
no long-term effective treatments. Traditional drugs have seen little success as long-term treatments for many neurodegenerative
diseases, primarily due to the complex nature of those diseases and the difficulty of replacing damaged nerve cells, or neurons.



The majority of cells in the brain
and spinal cord are glial cells that serve to support the health of the neurons. Without healthy and properly functioning glial
cells, neurons cannot function properly and will eventually die. In many neurodegenerative diseases, damage to glial cells causes
or accelerates loss of function and death of neurons. Q’s approach takes advantage of the normal support and repair mechanisms
present in the healthy nervous system whereby supplementation of damaged glial cells with healthy glial cells in patients suffering
from neurodegenerative diseases is intended to enable the return to healthy neuron function and/or prevent additional degeneration,
thereby ameliorating the negative effects of the disease.



2010 Summary



In 2010, Q Therapeutics continued
its work on development of Q-Cells® including with its collaborators, with the focus on development for ALS as the initial
clinical indication in collaboration with Dr. Nicholas Maragakis’ laboratory at Johns Hopkins University. Q furthered manufacturing
activities of Q-Cells® with increased production yields, resulting in filing of new patent applications. Q was awarded a grant
from the federal government through the Patient Protection and Affordable Care Act for its ALS product development activities in
2009.



Q continued its work on defining
and characterizing Q-Cells® and its ability to myelinate in animal models, including publication in peer reviewed journals
(Sandrock et al, RegenMed5 , 381-394; 2010). Q also carried out research activities under an SBIR grant for development
of an astrocyte cell product.



Q continued to prosecute and maintain
its IP portfolio, resulting in issuance of one new patent in 2010:



U.S. Patent 7,795,021 issued September
14, 2010 and has claims drawn to an isolated population of mammalian CNS glial restricted precursor cells which generate oligodendrocytes
and at least two distinct populations of astrocytes, but not neurons, said population of mammalian CNS glial restricted precursor
cells being isolated from a mixture of cells by positive immunoselection with an A2B5 antibody.



Q employed a semi-virtual business
model as described in the “Company Overview”, continuing to utilize outside collaborators and contractors to augment
product development activities without needing to build up internal infrastructure for many of these activities, such as manufacturing
and GLP animal safety studies. Some of these activities were partially paid for by grant funding, reducing Q’s need for outside
financing.



2011 Summary



In 2011, Q Therapeutics focused
on developing Q-Cells® for ALS and continued studies on safety and efficacy in animal models (collaboration with Dr. Maragakis’
laboratory, Lepore et al, PLoS One 6(10): e25968). This work documented the safety, survival and differentiation of Q-Cells®
in the SOD1 mouse. In preparation for IND-enabling animal GLP safety studies, Q worked closely with its clinical collaborators
on defining the clinical protocol and with regulatory consultants and the FDA on the design of preclinical studies to support the
anticipated Phase I study after IND filing. Q also continued to work with its contractors on improvements on the manufacturing
process in anticipation of GMP manufacturing for clinical trials, and continued work internally to further characterize its Q-Cells®.
Q submitted information to the FDA in preparation for a January 2012, pre-IND meeting for use of Q-Cells® to treat ALS.



To further define potential applications
of Q-Cells®, Q furthered work with collaborators on use of Q-Cells® in animal models of SCI, both for inflammatory
injury as well as mechanical injury. Recently published studies with Dr. Itzhak Fischer’s laboratory at Drexel University
in an athymic rat model of thoracic contusion, SCI documented safety and statistically significant, reproducible, disease modifying
activity of Q-Cells transplanted into the injury site (Jin et al., J Neurotrauma 28(4), 579-94; 2011). Walczak et al (Glia 59,
499-510; 2011), in collaboration with Q, demonstrated safety and benefits of Q-Cells® in a model of focal inflammatory SCI.



19







Q continued to prosecute and maintain
its IP portfolio.



In 2011,
Q Therapeutics established a subsidiary, NeuroQ Research, Inc., a Delaware corporation (“NeuroQ Research”), with offices
in Utah and California, which is intended to carry out activities utilizing Q Therapeutics’ intellectual property to develop
products for the research market. Q entered into a development and non-exclusive license agreement with xCell Science LLC, to develop
products using Q’s IP for ultimate sale to the research market, and into a non-exclusive license agreement with Molecular
Transfer, Inc, for manufacturing and sale of such products.NeuroQ Research is majority owned by Q Therapeutics.



Q continues to employ a semi-virtual
business model, utilizing outside collaborators and contractors to achieve product development activities without needing to build
up internal infrastructure for many of these activities, especially such as manufacturing and GLP animal safety studies. Some of
these activities are partially paid for by grant funding, reducing Q’s need for outside financing. Q works closely with the
collaborators and contractors.



Q Therapeutics anticipates that
development activities and costs will increase going forward as we conduct the work necessary to include in our future IND submission.
This includes GLP animal safety studies, injection device studies, manufacturing activities and working with clinical and regulatory
consultants as well as other activities and costs. We may also increase research and development activities to evaluate use of
our proprietary products in other disease indications, including working with outside collaborators. The Company’s general
and administrative (“G&A”) expenses will increase going forward, including additional legal, officer salary and
administration expenses needed to comply with SEC and FDA regulations, added costs such as insurance costs as we progress from
a pre-clinical to a clinical company, as well as additional personnel costs.



Q1 2012 Summary



Q continued its development activities
with Q-Cells® for treatment of ALS, and conducted its pre-IND meeting with the FDA in January. The meeting was positive and
Q is continuing with its plans to carry out the remaining pre-clinical studies to support an IND submission for treatment of ALS
targeted for 2013. Q is working with MPI Research to carry out GLP animal safety studies in rodents in support of the IND submission.



Q completed a manufacturing services
agreement with the University of Utah Cell Therapy Facility (“CTF”) and continued to work with CTF on production of
Q-Cells® for the animal safety studies.



Q and its collaborators at Johns
Hopkins (Nicholas Maragakis laboratory) continued studies further characterizing the activity of Q-Cells® in support of future
testing in patients with ALS.



Q entered into an agreement with
xCell Science LLC under which xCell will perform certain activities for Q to achieve manufacturing protocols owned by Q for several
types of neural cells, derived from pluripotent cell sources (e.g., induced pluripotent stem cells, iPSC). Q will provide to xCell
stock and warrants in Q Holdings as payment.



Q continued to prosecute its intellectual
property portfolio in the US and internationally.



Q2 2012 Summary



Q commenced the pilot studies with
MPI Research to conduct GLP animal safety studies in support of an IND submission for use of Q-Cells® treatment of ALS. Q and
its collaborators at Johns Hopkins University continued the preclinical studies and characterization of Q-Cells® in support
of future clinical testing in ALS, as well as demyelinating diseases including multiple sclerosis (MS), and with Drexel University
(Itzhak Fischer lab) for treatment of traumatic spinal cord injury. A manuscript in collaboration with the Jeff Bulte lab describing
the beneficial immunomodulatory effects of Q-Cells® in the mouse EAE model of MS was published in Glia 60: 1117-1129 (2012),
entitled “ICV-Transplanted Human Glial Precursor Cells Are Short-Lived Yet Exert Immunomodulatory Effects in Mice with EAE”.
Q continued to manufacture its Q-Cells® with Goodwin Biotechnology and the University of Utah Cell Therapy Facility.

Q continued to build its intellectual
property portfolio, with two new patents issued under Q’s license agreement with the University of Utah: US Patent No. 8,168,174,
entitled “Method of Isolating Human Neuroepithelial Precursor Cells from Human Fetal Tissue,” and Canadian Patent No.
2,473,749, entitled “Pure Populations of Astrocyte Restricted Precursor Cells and Methods for Isolation and Use Thereof.”



Results of Operations for the Three Months Ended
June 30, 2012 compared to the Three Months Ended June 30, 2011



For the period from March 28,
2002 (date of inception) through June 30, 2012, the Company has not generated significant revenues and has been developing its
products for commercial sale. Therefore, the Company is considered to be in the development stage.



20







Since entering the development
stage, the Company has not generated revenues in excess of expenses and has been dependent on government grants and debt and equity
raised from individual investors to sustain its operations. The Company’s products have not yet been approved by the FDA
for commercial sale; therefore, the Company has not generated any revenues from commercial product sales. The Company has incurred
losses and used cash in operating activities since inception. As of June 30, 2012, the Company had an accumulated deficit of $18,640,061.



|                                       |  | For the Three Months Ended June 30, |          |   |      |   |          |        | 
|-------------------------------------- |  | ----------------------------------- | -------- | - | ---- | - | -------- | ------ | 
|                                       |  | 2012                                |          |   | 2011 |   |          | Change | 
|                                       |  |                                     |          |   |      |   |          |        | 
|Grant revenues                         |  | $                                   | 7,229    |   |      | $ | 10,173   |        | 
|                                       |  |                                     |          |   |      |   |          |        | 
|License fees and other revenues        |  |                                     | -        |   |      |   | 9,600    |        | 
|Total revenues                         |  |                                     | 7,229    |   |      |   | 19,773   |        | 
|                                       |  |                                     |          |   |      |   |          |        | 
|Research and development expense       |  |                                     | 257,463  |   |      |   | 158,763  |        | 
|                                       |  |                                     |          |   |      |   |          |        | 
|General and administrative expense     |  |                                     | 345,554  |   |      |   | 126,633  |        | 
|Total operating expenses               |  |                                     | 603,017  |   |      |   | 285,386  |        | 
|                                       |  |                                     |          |   |      |   |          |        | 
|Loss from operations                   |  |                                     | (595,788 | ) |      |   | (265,623 | )      | 
|                                       |  |                                     |          |   |      |   |          |        | 
|Other income, net                      |  |                                     | 1,079    |   |      |   | 98       |        | 
|Loss before provision for income taxes |  |                                     | (594,709 | ) |      |   | (265,525 | )      | 
|                                       |  |                                     |          |   |      |   |          |        | 
|Provision for income taxes             |  |                                     | -        |   |      |   | -        |        | 
|                                       |  |                                     |          |   |      |   |          |        | 
|Net loss                               |  | $                                   | (594,709 | ) |      | $ | (265,525 | )      | 



Grant Revenues



Grant revenues for the three months
ended June 30, 2012 were $7,229, a decrease of $2,944, or 28.9%, from $10,173 for the three months June 30, 2011. Grant revenues
decreased due to fewer billings during the second quarter 2012.



License Fees and Other Revenues



License fees and other
revenues for the three months ended June 30, 2012 were $0, a decrease of $9,600, or 100%, from $9,600 for the three months
ended June 30, 2011. The decrease was attributable to no sales of Q-cells® to product development partners and
collaborators during the three months ended June 30, 2012.



Research and Development Expense



Total research
and development expense for the three months ended June 30, 2012 was $257,463, an increase of $98,700, or 62.2%, from
$158,763 for the three months ended June 30, 2011. The increase in research and development expense was primarily
attributable to increases in research activities and the associated reagents, outside study fees, and salaries and
benefits.



General and Administrative
Expense



The following table details the
general and administrative expenses incurred by the Company:



|                         |  | For the Three Months Ended June 30, |         |  |      |   |         |        | 
|------------------------ |  | ----------------------------------- | ------- |  | ---- | - | ------- | ------ | 
|                         |  | 2012                                |         |  | 2011 |   |         | Change | 
|                         |  |                                     |         |  |      |   |         |        | 
|Salaries and benefits    |  | $                                   | 147,467 |  |      | $ | 39,668  |        | 
|Professional fees        |  |                                     | 127,025 |  |      |   | 30,215  |        | 
|Stock-based compensation |  |                                     | 26,159  |  |      |   | 7,213   |        | 
|Rent                     |  |                                     | 18,692  |  |      |   | 17,896  |        | 
|Insurance                |  |                                     | 9,773   |  |      |   | 6,635   |        | 
|Other                    |  |                                     | 16,438  |  |      |   | 25,006  |        | 
|Total                    |  | $                                   | 345,554 |  |      | $ | 126,633 |        | 



21







The increase in general
and administrative expense was principally due to increases in professional fees related to costs associated with public
reporting requirements as well as fundraising activities, stock-based compensation, salaries and benefits, and conference fees
(included in other).



Results of Operations for the Six Months Ended June
30, 2012 compared to the Six Months Ended June 30, 2011



|                                       |  | For the Six MonthsEndedJune 30, |            |   |      |   |          |        | 
|-------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | -------- | ------ | 
|                                       |  | 2012                            |            |   | 2011 |   |          | Change | 
|                                       |  |                                 |            |   |      |   |          |        | 
|Grant revenues                         |  | $                               | 7,229      |   |      | $ | 10,173   |        | 
|                                       |  |                                 |            |   |      |   |          |        | 
|License fees and other revenues        |  |                                 | -          |   |      |   | 14,400   |        | 
|Total revenues                         |  |                                 | 7,229      |   |      |   | 24,573   |        | 
|                                       |  |                                 |            |   |      |   |          |        | 
|Research and development expense       |  |                                 | 481,670    |   |      |   | 277,430  |        | 
|                                       |  |                                 |            |   |      |   |          |        | 
|General and administrative expense     |  |                                 | 731,288    |   |      |   | 340,673  |        | 
|Total operating expenses               |  |                                 | 1,212,958  |   |      |   | 618,103  |        | 
|                                       |  |                                 |            |   |      |   |          |        | 
|Loss from operations                   |  |                                 | (1,205,729 | ) |      |   | (593,530 | )      | 
|                                       |  |                                 |            |   |      |   |          |        | 
|Other income (expense), net            |  |                                 | 106        |   |      |   | (103     | )      | 
|Loss before provision for income taxes |  |                                 | (1,205,623 | ) |      |   | (593,633 | )      | 
|                                       |  |                                 |            |   |      |   |          |        | 
|Provision for income taxes             |  |                                 | -          |   |      |   | -        |        | 
|                                       |  |                                 |            |   |      |   |          |        | 
|Net loss                               |  | $                               | (1,205,623 | ) |      | $ | (593,633 | )      | 



Grant Revenues



Grant revenues for the six
months ended June 30, 2012 were $7,229, a decrease of $2,944, or 28.9%, from $10,173 for the six months ended June 30, 2011.
Grant revenues decreased due to fewer billings during 2012.



License Fees and Other Revenues



License fees and other revenues
for the six months ended June 30, 2012 were $0, a decrease of $14,400, or 100%, from $14,400 for the six months ended June 30,
2011. The decrease was attributable to no sales of Q-cells® to product development partners and collaborators during the six
months ended June 30, 2012.



Research and Development Expense



Total research and development expense
for the six months ended June 30, 2012 was $481,670, an increase of $204,240 or 73.6%, from $277,430 for the six months ended June
30, 2011. The increase in research and development expense was primarily attributable to increases in research activities and the
associated reagents, outside study fees, and salaries and benefits.



22







General and Administrative
Expense



The following table details the
general and administrative expenses incurred by the Company:



|                         |  | For the Six Months Ended June 30, |         |  |      |   |         |        | 
|------------------------ |  | --------------------------------- | ------- |  | ---- | - | ------- | ------ | 
|                         |  | 2012                              |         |  | 2011 |   |         | Change | 
|                         |  |                                   |         |  |      |   |         |        | 
|Salaries and benefits    |  | $                                 | 294,302 |  |      | $ | 149,671 |        | 
|Professional fees        |  |                                   | 262,580 |  |      |   | 76,113  |        | 
|Stock-based compensation |  |                                   | 55,467  |  |      |   | 14,541  |        | 
|Rent                     |  |                                   | 37,881  |  |      |   | 37,162  |        | 
|Insurance                |  |                                   | 23,248  |  |      |   | 14,498  |        | 
|Other                    |  |                                   | 57,810  |  |      |   | 48,688  |        | 
|Total                    |  | $                                 | 731,288 |  |      | $ | 340,673 |        | 



The increase in general
and administrative expense was principally due to increases in professional fees related to costs associated with public
reporting requirements as well as fundraising activities, stock-based compensation, and salaries and benefits.



Liquidity and Capital Resources



As of June 30, 2012, we had
$1,894,848 of cash on hand, compared to $2,741,519 as of December 31, 2011.



Between October 13, 2011 and
December 31, 2011, the Company raised $3,828,047, before issuance costs of $197,729, in a private placement offering to nine
“accredited investors” (as that term is defined under Rule 501(a) of Regulation D promulgated under the
Securities Act) of an aggregate of 3,828,047 Units for $1.00 per Unit, each Unit consisting of (i) one share of Common Stock,
(ii) one Seven-Year Common Stock Purchase Warrant to purchase one share of the Company’s Common Stock for $1.00,
subject to adjustment in certain circumstances (“Series A Warrants”), and (iii) one Seven-Year Common Stock
Purchase Warrant to purchase one share of the Company’s Common Stock for $2.00, subject to adjustment in certain
circumstances (the “Series B Warrants,” and together with the Series A Warrants, the “Warrants”).



During the six months ended June
30, 2012, the Company sold 190,000 additional Units to three “accredited investors” and four non-U.S. persons (as defined
in Regulation S promulgated under the Securities Act) for aggregate proceeds of $190,000. In total, the Company sold an aggregate
of 4,018,047 Units in the offering for gross proceeds of $4,018,047, before deducting $197,729 in expenses.



The following summarizes the key
sources and uses of cash for the six months ended June 30, 2012 and 2011:



|                                          |  | For the Six Months Ended June 30, |           
|----------------------------------------- |  | --------------------------------- | ----------
|                                          |  | 2012                              |           
|Net cash used in operating activities     |  | $                                 | (1,019,308
|Net cash used in investing activities     |  |                                   | (2,363    
|Net cash provided by financing activities |  |                                   | 175,000   
|Net decrease in cash                      |  | $                                 | (846,671  



For the six months ended June 30,
2012, net cash used in operating activities totaled $1,019,308, compared to $365,244 for the six months ended June 30, 2011. During
the six months ended June 30, 2012, cash was used in operating activities for research activities, outside study fees, salaries
and professional fees.



For the six months ended June 30,
2012 and 2011, net cash used in investing activities was $2,363 and $5,628 for purchases of property and equipment.



Net cash provided by financing activities
was $175,000 for the six months ended June 30, 2012, compared to $0 for the six months ended June 30, 2011. The Company raised
$190,000 from a private placement of its securities during the six months ended June 30, 2012, which was partially offset by the
Company paying off a $15,000 note payable.



On June 29, 2012, the
Company filed a Registration Statement on Form S-1 (File No: 333-182447) (the “Registration Statement”) with the
SEC therein registering under the Securities Act, an aggregate of 15,978,447 shares of Common Stock for resale by
the selling stockholders named in the Registration Statement (the “Selling Stockholders”). On July 17, 2012, the
SEC declared the Registrant on Statement effective under the Securities Act. We have arbitrarily set an offering price of
$1.00 per share of Common Stock offered by the Selling Stockholders through the prospectus included in the Registration
Statement and we are paying the expenses of registering the shares, estimated to be $43,832. The 15,978,447 shares of Common
Stock included in the Registration Statement include an aggregate of 4,944,691 shares of Common Stock issuable upon the
exercise of Series A Warrants and an aggregate of 4,944,691 shares of Common Stock issuable upon the exercise of Series B
Warrants. We will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. We will receive,
however, gross proceeds of $14,834,073 in the event all of the Series A Warrants and Series B Warrants are exercised. We
intend to use any proceeds from the exercise of the Warrants for general working capital purposes. Notwithstanding, there can
be no assurances that any of the selling stockholders will exercise any of their Warrants.



Below is a chart summarizing the anticipated
gross proceeds from the exercise of the Series A Warrants and Series B Warrants by the Selling Stockholders named in the Registration
Statement:



23







|Warrants(1):      |  | Exercise Price: |  |  | Shares IssuableUpon Exercise |  |  |   | AnticipatedGross Proceeds | 
|----------------- |  | --------------- |  |  | ---------------------------- |  |  | - | ------------------------- | 
|Series A Warrants |  | $1.00/Share     |  |  | 4,944,691                    |  |  | $ | 4,944,691                 | 
|Series B Warrants |  | $2.00/Share     |  |  | 4,944,691                    |  |  |   | 9,889,382                 | 
|Total:            |  |                 |  |  | 9,889,382                    |  |  | $ | 14,834,073                | 



|(1) |  | The number of shares issuable upon the exercise of the Series A Warrants and the Series B Warrants and their respective exercise prices are subject to adjustment upon the occurrence of certain events as described in the Series A Warrant and Series B Warrant Agreements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We believe that our current levels
of cash, when combined with expected cash flows from equity financing transactions will be sufficient to meet our liquidity needs
through at least June 30, 2013. However, we will most likely require additional cash resources in the future, as we anticipate
changed business conditions and other developments in the Company’s progress. We will need additional cash resources in the
future if we pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. To satisfy future
cash requirements, we expect to seek funding through the issuance of debt or equity securities and the obtaining of a credit facility.
Any future issuance of equity securities would cause dilution for our stockholders. Any incurrence of indebtedness will increase
our debt service obligations and may cause us to be subject to restrictive operating and financial covenants. It is possible that
financing may be available to us in amounts or on terms that are not favorable to the Company or not available at all.



Recent Accounting Pronouncements



As of the date of this report, there
are no accounting pronouncements that had not yet been adopted by the Company that we believe would have a material impact on our
financial statements.



Quantitative and Qualitative
Disclosures about Market Risks



None



Off-Balance Sheet Arrangements



We do not have any off-balance sheet
arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose
entities” (SPEs).



Significant Accounting Policies



Our discussion and analysis of financial
condition and results of operations are based upon the condensed consolidated financial statements included herein, which have
been prepared in accordance with U.S. generally accepted accounting principles and the requirements and regulations of the Securities
and Exchange Commission. The preparation of these financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting policies
and areas where substantial judgments are made by management include:



Stock-Based Compensation -
Q Holdings calculates the estimated fair value of its stock options and warrants on the grant date using the Black-Scholes option-pricing
model and recognizes the estimated fair value as compensation expense on a straight-line basis over the vesting period. The volatility
assumption used in the Black-Scholes option-pricing model is based on the volatility of publicly traded companies in the same industry
as Q Holdings. The expected term of the options and warrants granted represent the period of time that the options granted are
expected to be outstanding. The risk free rate for periods within the contractual life of the option and warrant is based on the
U.S. treasury securities constant maturity rate that corresponds to the expected term in effect on the date of grant.



Grants Receivable-
Q Holdings applies for research grants generally as a sub-recipient to grants funded by government agencies through research universities.
Q Holdings records grants receivable in accordance with the provisions of the grant agreement. A grant receivable is considered
past due when payment has not been received within 30 days of the invoice date. The amounts of the specific reserves are estimated
by management based on various assumptions including the age of the grant receivable, as well as changes in payment schedules and
histories. Grants receivable balances are charged off against the allowance for doubtful accounts when the potential for recovery
is remote. Recoveries of receivables previously charged off are recorded when payment is received.



Income Taxes - Q Holdings recognizes
deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial
statements or tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial
and income tax bases of assets and liabilities using enacted tax rates expected to apply when differences are expected to be settled.



24







Net Loss Per Common Share-Basic net income or loss per common share (Basic EPS) is computed by dividing net income or loss by the weighted average number
of common shares outstanding. Diluted net income or loss per common share (Diluted EPS) is computed by dividing net income or loss
by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then
outstanding. Potential dilutive common share equivalents consist of shares issuable upon the exercise of outstanding stock options
and warrants to acquire common stock.



Item 3. Quantitative and Qualitative Disclosures about
Market Risk



N/A.



Item 4. Controls and
Procedures.



Evaluation of Disclosure Controls and Procedures.



We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded,
processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated
and communicated to our executive officers to allow timely decisions regarding required disclosure. As of June 30, 2012, our Chief
Executive Officer, who acts in the capacity of principal executive officer and our Vice President, Chief Financial Officer, who
acts in the capacity of principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and the Vice President,
Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2012, based
on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.



Changes in Internal Controls.



During the quarter ended June 30,
2012, the Company hired an additional financial member to the Company’s accounting staff with experience in designing, implementing,
monitoring, and testing internal controls to begin addressing and correcting concerns regarding the lack of segregation of incompatible
duties cited as one of the material weaknesses in the Company’s internal control over financial reporting in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2011.



PART II - Other Information



Item 1. Legal
Proceedings.



The Company is not a party to any pending legal proceedings
and no such action against the Company has been threatened.



Item 1A. Risk
Factors.



N/A.



Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds.



On April 9, 2012, the Company
issued 10,000 Units to xCell Sciences LLC (“xCell Sciences”) in consideration for acquiring intellectual property
and technology pursuant to a Collaboration and Asset Purchase Agreement, dated March 26, 2012, between the Company and xCell
Sciences. Each Unit consisted of (a) one share of the Company’s Common Stock, (b) one Series A Warrant and (c) one
Series B Warrant. The Company issued the Units and underlying securities pursuant to the exemption from the registration
requirements of the Securities Act provided by Section 4(2) promulgated thereunder due to the fact that the issuance was
isolated and did not involve a public offering of securities.



Item 3. Defaults Upon Senior Securities.



N/A



Item 4. Submission of
Matters to a Vote of Security Holders.



N/A



Item 5. Other
Information.



None



25







Subsequent Event:



On
July 17, 2012, the SEC declared the Company’sRegistration Statement on Form S-1 (File No: 333-182447) (the
“Registration Statement”) effective under the Securities Act. The Company had filed the Registration Statement
with the SEC on June 29, 2012, therein registering under the Securities Act, an aggregate of 15,978,447 shares of Common
Stock for resale by the selling stockholders named in the Registration Statement.  Subsequently, aFINRA-registered broker-dealer filed a Form 211 application withFINRA on the Company’s behalf in an effort to
have the Company’s Common Stock quoted on the OTC Bulletin Board (OTCBB). As of the date of this Quarterly Report, the
Form 211 application is under review by FINRA.



Item 6.Exhibits.



|Exhibit No: |  | Description:                                                                                                                                                                  
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1(1)      |  | Form of Series A Warrant (Corrected)                                                                                                                                          
|            |  |                                                                                                                                                                               
|4.2(2)      |  | Form of Series B Warrant                                                                                                                                                      
|            |  |                                                                                                                                                                               
|31.1(3)     |  | Certification of the Company’s Principal
        Executive Officer pursuant to 15d-15(e), under the Securities and Exchange Act of 1934, as amended                           
|            |  |                                                                                                                                                                               
|31.2(3)     |  | Certification of the Company’s Principal Financial and Principal Accounting Officer pursuant to 15d-15(e), under the Securities and Exchange Act of 1934, as amended          
|            |  |                                                                                                                                                                               
|32.1(3)     |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer).                         
|            |  |                                                                                                                                                                               
|32.2(3)     |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Financial and Principal Accounting Officer).
|            |  |                                                                                                                                                                               
|101.INS(4)  |  | XBRL Instance Document                                                                                                                                                        
|            |  |                                                                                                                                                                               
|101.SCH(4)  |  | XBRL Taxonomy Extension Schema                                                                                                                                                
|            |  |                                                                                                                                                                               
|101.CAL(4)  |  | XBRL Taxonomy Extension Calculation Linkbase                                                                                                                                  
|            |  |                                                                                                                                                                               
|101.DEF(4)  |  | XBRL Taxonomy Extension Definition Linkbase                                                                                                                                   
|            |  |                                                                                                                                                                               
|101.LAB(4)  |  | XBRL Taxonomy Extension Label Linkbase                                                                                                                                        
|            |  |                                                                                                                                                                               
|101.PRE(4)  |  | XBRL Taxonomy Presentation Linkbase                                                                                                                                           



(1) The Company is re-filing this
exhibit to correct the document filed as an exhibit to the Company’s S-1 (File No.: 333-182447) filed with the Commission
on June 29, 2012.

(2) Filed as an exhibit to the
Company’s S-1 (File No.: 333-182447) filed with the Commission on June 29, 2012 and incorporated by reference herein.

(3) Filed herewith.

(4) Pursuant to Rule 406T of Regulation
S-T, these interactive data files are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise
are not subject to liability under those sections.



26







SIGNATURES



In accordance with
the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.



|Date: August 9, 2012 | By:    | /s/ DEBORAH A. EPPSTEIN           
|-------------------- | ------ | ----------------------------------
|                     | Name:  | Deborah A. Eppstein, PhD          
|                     | Title: | Chief Executive Officer, President
|                     |        | (Principal Executive Officer)     



|Date: August 9, 2012 | By:    | /s/ STEVEN J. BORST                    
|-------------------- | ------ | ---------------------------------------
|                     | Name:  | Steven J. Borst                        
|                     | Title: | Vice President, Chief Financial Officer
|                     |        | (Principal Financial Officer           
|                     |        | and Principal Accounting Officer)      



27