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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
Or
For the transition period from _____________ to _____________
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
n/a
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| The
|
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.
| No ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |||
| Smaller reporting company | ||||
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes ☐ |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of May 11, 2023, there were shares of the registrant’s common stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
| 2 |
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALIGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Restricted cash | ||||||||
| Right-of-use assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued vacation | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| R&D grant liability | ||||||||
| Deferred revenue, current portion | ||||||||
| Operating lease liability, current portion | ||||||||
| Short term debt-related party | ||||||||
| Warrant liabilities | ||||||||
| Warrant liabilities - related party | ||||||||
| Convertible debt - related party | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Deferred tax liability | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 13) | ||||||||
| Stockholders’ equity | ||||||||
| Qualigen Therapeutics, Inc. stockholders’ equity: | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Qualigen Therapeutics, Inc. stockholders’ equity | ||||||||
| Noncontrolling interest | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities & Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
QUALIGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| REVENUES | ||||||||
| Net product sales | $ | $ | ||||||
| Total revenues | ||||||||
| EXPENSES | ||||||||
| Cost of product sales | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| Total expenses | ||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ||||
| OTHER EXPENSE (INCOME), NET | ||||||||
| Gain on change in fair value of warrant liabilities | ( | ) | ( | ) | ||||
| Interest expense (income), net | ( | ) | ||||||
| Loss on voluntary conversion of convertible debt | ||||||||
| Other income, net | ( | ) | ( | ) | ||||
| Loss on fixed asset disposal | ||||||||
| Total other expense (income), net | ( | ) | ||||||
| LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES | ( | ) | ( | ) | ||||
| (BENEFIT) PROVISION FOR INCOME TAXES | ( | ) | ||||||
| NET LOSS | ( | ) | ( | ) | ||||
| Net loss attributable to noncontrolling interest | ( | ) | ||||||
| Net loss attributable to Qualigen Therapeutics, Inc. | $ | ( | ) | $ | ( | ) | ||
| Net loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted—average number of shares outstanding, basic and diluted | ||||||||
| Other comprehensive loss, net of tax | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation adjustment | ||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||
| Comprehensive loss attributable to noncontrolling interest | ( | ) | ||||||
| Comprehensive loss attributable to Qualigen Therapeutics, Inc. | $ | ( | ) | $ | ( | ) | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
QUALIGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Total | ||||||||||||||||||||||||||||||||
| Qualigen | ||||||||||||||||||||||||||||||||
| Accumulated | Therapeutics, | |||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In | Other Comprehensive | Accumulated | Inc. Stockholders’ | Noncontrolling | Total Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Equity | Interest | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Voluntary conversion of convertible debt into common stock | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | |||||||||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Common Stock | Additional | |||||||||||||||||||
| Shares | Amount $ | Paid-In Capital | Accumulated Deficit | Total | ||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock issued upon exercise of warrants | ||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Net Loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
QUALIGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended March 31 | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Accounts receivable reserves and allowances | ( | ) | ( | ) | ||||
| Inventory reserves | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Change in fair value of warrant liabilities | ( | ) | ( | ) | ||||
| Loss on voluntary conversion of convertible debt | ||||||||
| Accretion of discount on convertible debt | ||||||||
| Loss on disposal of fixed assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory and equipment held for lease | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| R&D grant liability | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Deferred tax liability | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net proceeds from warrant exercises | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and restricted cash | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash and restricted cash | ||||||||
| Cash and restricted cash - beginning of period | ||||||||
| Cash and restricted cash - end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | $ | $ | ||||||
| NONCASH FINANCING AND INVESTING ACTIVITIES: | ||||||||
| Net transfers to equipment held for lease from inventory | $ | $ | ||||||
| Fair value of warrant liabilities on date of exercise | $ | $ | ||||||
| Voluntary conversion of convertible debt into common stock | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
QUALIGEN THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Organization
Qualigen, Inc., now a subsidiary of Qualigen Therapeutics, Inc., was incorporated in Minnesota in 1996 to design, develop, manufacture and sell Physician Office Laboratory (“POL”) market quantitative immunoassay diagnostic products for use in physician offices and other point-of-care settings worldwide, and was reincorporated in Delaware in 1999. In May 2020, Qualigen, Inc. completed a reverse recapitalization transaction with Ritter Pharmaceuticals, Inc. (“Ritter”) and Ritter was renamed Qualigen Therapeutics, Inc. All shares of Qualigen, Inc.’s capital stock were exchanged for Qualigen Therapeutics, Inc.’s capital stock in the merger. Ritter/Qualigen Therapeutics common stock, which was previously traded on the Nasdaq Capital Market under the ticker symbol “RTTR,” commenced trading on the Nasdaq Capital Market, on a post-reverse-stock-split adjusted basis, under the trading symbol “QLGN” on May 26, 2020. Qualigen Therapeutics, Inc. (the “Company”) operates in one business segment.
On
May 26, 2022, the Company acquired shares of Series A-1 Preferred Stock of NanoSynex, Ltd. (“NanoSynex”) from Alpha
Capital Anstalt (“Alpha Capital”), a related party, in exchange for reverse split adjusted shares of the Company’s
common stock and a prefunded warrant to purchase
Basis of Presentation
The accompanying condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), Regulation S-X and rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP. The Company views its operations and manages its business in one operating segment. In general, the functional currency of the Company and its subsidiaries is the U.S. dollar, however for NanoSynex, the functional currency is the local currency, New Israeli Shekels (NIS). As such, assets and liabilities for NanoSynex are translated into U.S. dollars and the effects of foreign currency translation adjustments are reflected as a component of accumulated other comprehensive income within the Company’s condensed consolidated statements of changes in stockholders’ equity.
Accounting Estimates
Management uses estimates and assumptions in preparing its condensed consolidated financial statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The most significant estimates relate to the estimated fair value of in-process research and development, goodwill, warrant liabilities, stock-based compensation, amortization and depreciation, inventory reserves, allowances for doubtful accounts and returns, and warranty costs. Actual results could vary from the estimates that were used.
Reverse Stock Split
On November 23, 2022, the Company effected a 1-for-10, as determined by the Company’s board of directors, reverse stock split of its outstanding shares of common stock (the “Reverse Stock Split”). The Reverse Stock Split reduced the Company’s shares of outstanding common stock, stock options, and warrants to purchase shares of our common stock. Fractional shares of common stock that would have otherwise resulted from the Reverse Stock Split were rounded down to the nearest whole share and cash in lieu of fractional shares was paid to stockholders. All share and per share data for all periods presented in the accompanying financial statements and the related disclosures have been adjusted retrospectively to reflect the Reverse Stock Split. The number of authorized shares of common stock and the par value per share remains unchanged.
| 7 |
Cash
The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less and money market funds to be cash equivalents. Restricted cash includes cash that is restricted due to Israeli banking regulations.
The Company maintains the majority of its cash in accounts at banking institutions in the U.S. that are of high quality. Cash held in these accounts often exceed the FDIC insurance limits. If such banking institutions were to fail, the Company could lose all or a portion of amounts held in excess of such insurance limitations. The FDIC recently took control of two such banking institutions, Silicon Valley Bank on March 10, 2023 and Signature Bank on March 12, 2023. While the Company did not have an account at either of these two banks, in the event of failure of any of the financial institutions where the Company maintains its cash and cash equivalents, there can be no assurance that the Company would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position.
Inventory, Net
Inventory is recorded at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The Company reviews the components of its inventory on a periodic basis for excess or obsolete inventory, and records reserves for inventory components identified as excess or obsolete.
Impairment of Long-Lived Assets
The
Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances
indicate that assets may not be recoverable. An impairment loss would be recognized when the sum of the expected future undiscounted
cash flows is less than the carrying amount of the assets. The amount of impairment loss, if any, will generally be measured as the
difference between the net book value of the assets and their estimated fair values. During the fiscal year ended December 31, 2022
the Company recorded a non-cash goodwill and fixed asset impairment loss of $
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and managed its business as one segment operating primarily within the United States and Israel.
Accounts Receivable, Net
The Company grants credit to domestic physicians, clinics, and distributors. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. Customers can purchase certain products through a financing agreement that the Company has with an outside leasing company. Under the agreement, the leasing company evaluates the credit worthiness of the customer. Upon acceptance of the product by the customer, the leasing company remits payment to the Company at a discount. This financing arrangement is without recourse to the Company.
The Company records an allowance for doubtful accounts and returns equal to the estimated uncollectible amounts or expected returns. The Company’s estimates are based on historical collections and returns and a review of the current status of trade accounts receivable.
Accounts receivable is comprised of the following at:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accounts Receivable | $ | $ | ||||||
| Less Reserves and Allowances | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Research and Development
Except for acquired in process research and development (IPR&D), the Company expenses research and development costs as incurred including therapeutics license costs.
| 8 |
R&D Grants
NanoSynex has received R&D grants from Israel Innovation Authority (IIA) and from the European Commission. These grants may provide cash funding to NanoSynex from time to time in advance of the applicable costs being incurred. When such cash funding is received from these grants in advance, the proceeds are recorded as a current or non-current R&D grant liability based on the time from the condensed consolidated balance sheets date to the expected future date of recognition as a reduction to research and development expenses.
Patent Costs
The Company expenses all costs as incurred in connection with patent applications (including direct application fees, and the legal and consulting expenses related to making such applications) and such costs are included in general and administrative expenses in the condensed consolidated statement of operations.
Shipping and Handling Costs
The
Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound and
outbound freight are generally recorded in cost of sales which totaled approximately $
Revenue from Contracts with Customers
The Company applies the following five-step model in accordance with ASC 606, Revenue from Contracts with Customers, in order to determine revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Product Sales
The Company generates revenue from selling FastPack System analyzers, accessories and disposable products used with the FastPack System. Disposable products include reagent packs, which are diagnostic tests for prostate-specific antigen, testosterone, thyroid disorders, pregnancy, and Vitamin D.
The Company provides disposable products and equipment in exchange for consideration, which occurs when a customer submits a purchase order and the Company provides disposable products and equipment at the agreed upon prices in the invoice. Generally, customers purchase disposable products using separate purchase orders after the equipment (“analyzer”) has been provided to the customer. The initial delivery of the equipment and reagent packs represents a single performance obligation and is completed upon receipt by the customer. The delivery of each subsequent individual reagent pack represents a separate performance obligation because the reagent packs are standardized, are not interrelated in any way, and the customer can benefit from each reagent pack without any other product. There are no significant discounts, rebates, returns or other forms of variable consideration. Customers are generally required to pay within 30 days.
The performance obligation arising from the delivery of the equipment is satisfied upon the delivery of the equipment to the customer. The disposable products are shipped Free on Board (“FOB”) shipping point. For disposable products that are shipped FOB shipping point, the customer has the significant risks and rewards of ownership and legal title to the assets when the disposable products leave the Company’s shipping facilities, thus the customer obtains control and revenue is recognized at that point in time.
The Company has elected the practical expedient and accounting policy election to account for the shipping and handling as activities to fulfill the promise to transfer the disposable products and not as a separate performance obligation.
The Company’s contracts with customers generally have an expected duration of one year or less, and therefore the Company has elected the practical expedient in ASC 606 to not disclose information about its remaining performance obligations. Any incremental costs to obtain contracts are recorded as selling, general and administrative expense as incurred due to the short duration of the Company’s contracts.
| 9 |
Contract Asset and Liability Balances
The timing of the Company’s revenue recognition may differ from the timing of payment by the Company’s customers. The Company records a receivable when revenue is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the performance of the related services, the Company records deferred revenue until the performance obligations are satisfied.
Multiple performance obligations include contracts that combine both the Company’s analyzer and a customer’s future reagent purchases under a single contract. In some sales contracts, the Company provides analyzers at no charge to customers. Title to the analyzer is maintained by the Company and the analyzer is returned by the customer to the Company at the end of the purchase agreement.
During
the three months ended March 31, 2023 and 2022, product sales are stated net of an allowance for estimated returns of approximately $
Deferred Revenue
Payments received in advance from customers pursuant to certain collaborative research and license agreements, deposits against future product sales, multiple element arrangements and extended warranties are recorded as a current or non-current deferred revenue liability based on the time from the condensed consolidated balance sheet date to the future date of revenue recognition.
Operating Leases
Effective April 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2018-11, Leases (Topic 842) Targeted Improvements (“Topic 842”). In accordance with the guidance in Topic 842, the Company recognizes lease liabilities and corresponding right-of-use-assets for all leases with terms of greater than 12 months. Leases with a term of 12 months or less will be accounted for in a manner similar to the guidance for operating leases prior to the adoption of Topic 842. (See Note 13 - Commitments and Contingencies).
Property and Equipment, Net
Property and equipment are stated at cost and are presented net of accumulated depreciation. Depreciation is provided for on a straight-line basis over the estimated useful lives of the related assets as follows:
| Machinery and equipment | ||||
| Computer equipment | ||||
| Molds and tooling | ||||
| Furniture and fixtures |
Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or their estimated useful lives. The Company occasionally designs and builds its own machinery. The costs of these projects, which includes the cost of construction and other direct costs attributable to the construction, are capitalized as construction in progress. No provision for depreciation is made on construction in progress until the relevant assets are completed and placed in service.
The Company’s policy is to evaluate the remaining lives and recoverability of long-term assets on at least an annual basis or when conditions are present that indicate impairment.
Business Combinations
The Company accounts for business combinations using the acquisition method pursuant to FASB ASC Topic 805. This method requires, among other things, that results of operations of acquired companies are included in Qualigen’s financial results beginning on the respective acquisition dates, and that assets acquired and liabilities assumed and noncontrolling interests are recognized at fair value as of the acquisition date. Intangible assets acquired in a business combination are recorded at fair value using a discounted cash flow model. We have third-party valuations completed for intangible assets in a business combination using a discounted cash flow analysis, incorporating various assumptions. The discounted cash flow model requires assumptions about the timing and amount of future net cash flows, the cost of capital and terminal values from the perspective of a market participant. Each of these factors can significantly affect the value of the intangible asset. Any excess of the fair value of consideration transferred (the “Purchase Price”) over the fair values of the net assets acquired is recognized as goodwill. The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other acquisition-related costs are expensed when incurred.
| 10 |
Goodwill
Goodwill
represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets
acquired, when accounted for using the purchase method of accounting. Goodwill has an indefinite useful life and is not amortized
but is reviewed for impairment annually and whenever events or changes in circumstances indicate that the carrying value of the
goodwill may not be recoverable. In testing for impairment, the fair value of the reporting unit is compared to the carrying value.
If the net assets assigned to the reporting unit exceed the fair value of the reporting unit, an impairment loss equal to the
difference is recorded. As a result of the annual goodwill impairment analysis, the Company recognized a $
Intangible Assets
In Process R&D
Acquired in process R&D (IPR&D) represents the fair value assigned to the research and development assets that have not reached technological feasibility. The value assigned to IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the net cash flow to present value. The revenue and cost projections used to value acquired IPR&D are, as applicable, reduced based on the probability of success of developing the new product. Additionally, projections consider relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions. The rates utilized to discount the net cash flow to its present value are commensurate with the stage of development of the project and uncertainties in the economic estimates used in the projections. Upon the acquisition of acquired IPR&D, an assessment is completed as to whether the acquisition constitutes an acquisition of a single asset or a group of assets. Multiple factors are considered in this assessment, including the nature of the technology acquired, the presence or absence of separate cash flows, the development process and stage of completion, quantitative significance, and the Company’s rationale for entering into the transaction.
If a business is acquired, as defined under the applicable accounting standards, then the acquired IPR&D is capitalized as an intangible asset. If an asset or group of assets is acquired that do not meet the definition under the applicable accounting standards, then the acquired IPR&D is expensed on its acquisition date. Future costs to develop these assets are recorded to research and development expense in the Company’s condensed consolidated statements of operations and comprehensive loss as they are incurred.
IPR&D is evaluated for impairment annually using the same methodology as described above for calculating fair value. If the carrying value of the acquired IPR&D exceeds the fair value, then the intangible asset is written down to its fair value, with the resulting adjustment recorded as a charge to operations. Changes in estimates and assumptions used in determining the fair value of acquired IPR&D could result in an impairment.
Other Intangible Assets, Net
Other intangible assets consist of patent-related costs and costs for license agreements. Management reviews the carrying value of other intangible assets that are being amortized on an annual basis or sooner when there is evidence that events or changes in circumstances may indicate that impairment exists. The Company considers relevant cash flow and profitability information, including estimated future operating results, trends and other available information, in assessing whether the carrying value of intangible assets being amortized can be recovered.
If the Company determines that the carrying value of other intangible assets will not be recovered from the undiscounted future cash flows expected to result from the use and eventual disposition of the underlying assets, the Company considers the carrying value of such intangible assets as impaired and reduces them by a charge to operations in the amount of the impairment.
| 11 |
Costs
related to acquiring patents and licenses are capitalized and amortized over their estimated useful lives, which is generally
Derivative Financial Instruments and Warrant Liabilities
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations and comprehensive loss. Depending on the features of the derivative financial instrument, the Company uses either the Black-Scholes option-pricing model or a Monte-Carlo simulation to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period (See Note 10 - Warrant Liabilities and Note 11- Convertible Debt - Related Party).
Fair Value Measurements
The Company determines the fair value measurements of applicable assets and liabilities based on a three-tier fair value hierarchy established by accounting guidance and prioritizes the inputs used in measuring fair value. The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:
| ● | Level 1 - Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date; | |
| ● | Level 2 - Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs in markets that are not considered to be active; and | |
| ● | Level 3 - Inputs that are unobservable. |
Fair Value of Financial Instruments
Cash, accounts receivable, prepaids, accounts payable, and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.
Advertising
Advertising expense consists primarily of print and digital media promotional materials for distributors. Advertising costs are expensed as incurred.
Comprehensive Loss
Comprehensive loss consists of net income and foreign currency translation adjustments. Comprehensive gains (losses) have been reflected in the statements of operations and comprehensive loss and as a separate component in the statements of stockholders’ equity for all periods presented.
Stock-Based Compensation
Stock-based compensation cost for equity awards granted to employees and non-employees is measured at the grant date based on the calculated fair value of the award using the Black-Scholes option-pricing model, and is recognized as an expense, under the straight-line method, over the requisite service period (generally the vesting period of the equity grant). If the Company determines that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for the Company’s stock options could change significantly. Higher volatility, lower risk-free interest rates, and longer expected lives would result in an increase to stock-based compensation expense to employees and non-employees determined at the date of grant.
| 12 |
Income Taxes
Deferred income taxes are recognized for temporary differences in the basis of assets and liabilities for financial statement and income tax reporting that arise due to net operating loss carry forwards, research and development credit carry forwards and from using different methods and periods to calculate depreciation and amortization, allowance for doubtful accounts, accrued vacation, research and development expenses, and state taxes. A provision has been made for income taxes due on taxable income and for the deferred taxes on the temporary differences.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Realization of the deferred income tax asset is dependent on generating sufficient taxable income in future years.
Sales and Excise Taxes
Sales and other taxes collected from customers and subsequently remitted to government authorities are recorded as accounts receivable with corresponding tax payable. These balances are removed from the condensed consolidated balance sheet as cash is collected from customers and remitted to the tax authority.
Warranty Costs
The Company’s warranty policy generally provides for one year of coverage against defects and nonperformance within published specifications for sold analyzers and for the term of the contract for equipment held for lease. The Company accrues for estimated warranty costs in the period in which the revenue is recognized based on historical data and the Company’s best estimates of analyzer failure rates and costs to repair.
Accrued
warranty liabilities were approximately $
Foreign Currency Translation
The functional currency for the Company is the U.S. dollar. The functional currency for NanoSynex, the Company’s newly acquired majority owned subsidiary, is the New Israeli Shekel (NIS). The financial statements of NanoSynex are translated into U.S. dollars using exchange rates in effect at each period end for assets and liabilities; using exchange rates in effect during the period for results of operations; and using historical exchange rates for certain equity accounts. The adjustment resulting from translating the financial statements of NanoSynex is reflected as a separate component of other comprehensive income (loss).
Other
comprehensive loss related to the effects of foreign currency translation adjustments attributable to NanoSynex was $
Global Economic Conditions
War in Ukraine
In February 2022, Russia invaded Ukraine. While the Company has no direct exposure in Russia and Ukraine, the Company continues to monitor any broader impact to the global economy, including with respect to inflation, supply chains and fuel prices. The full impact of the conflict on the Company’s business and financial results remains uncertain and will depend on the severity and duration of the conflict and its impact on regional and global economic conditions.
Inflationary Cost Environment
During the year ended 2022 and continuing into the current fiscal year, global commodity and labor markets experienced significant inflationary pressures attributable to ongoing economic recovery and supply chain issues. The Company is subject to inflationary pressures with respect to raw materials, labor and transportation. Accordingly, the Company continues to take actions with its customers and suppliers to mitigate the impact of these inflationary pressures in the future. Actions to mitigate inflationary pressures with suppliers include aggregation of purchase requirements to achieve optimal volume benefits, negotiation of cost-reductions and identification of more cost competitive suppliers. While these actions are designed to offset the impact of inflationary pressures, the Company cannot provide assurance that it will be successful in fully offsetting increased costs resulting from inflationary pressure.
| 13 |
Impact of COVID-19 Pandemic
The COVID-19 pandemic has had a dramatic impact on businesses globally and on the Company’s business as well. During the pandemic sales of diagnostic products decreased significantly and the Company’s net loss increased significantly, as deferral of patients’ non-emergency visits to physician offices, clinics and small hospitals sharply reduced demand for FastPack tests. For 2023 we continue to experience recovery in demand.
Other accounting standard updates are either not applicable to the Company or are not expected to have a material impact on the Company’s condensed consolidated financial statements.
NOTE 2 — LIQUIDITY AND GOING CONCERN
As
of March 31, 2023, we had approximately $
There is no assurance that profitable operations will ever be achieved, or, if achieved, could be sustained on a continuing basis. In order to fully execute its business plan, the Company will require significant additional financing for planned research and development activities, capital expenditures, clinical and pre-clinical testing for its QN-302 clinical trials, preclinical development of RAS and QN-247, and funding for NanoSynex operations (See Note 3 - Acquisition), as well as commercialization activities.
Historically,
the Company’s principal sources of cash have included proceeds from the issuance of common and preferred equity and proceeds
from the issuance of debt. In December 2021, the Company raised $
As
a condition to the NanoSynex closing, the Company agreed to provide NanoSynex with up to $
To the extent that the Company raises additional capital through the sale of equity or convertible debt securities, the ownership interests of its common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If the Company raises additional funds through government or other third-party funding, commercialization, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, it may have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to the Company. Additional funding may not be available to the Company on acceptable terms, or at all. In addition, any future financing (depending on the terms and conditions) may be subject to the approval of Alpha Capital, the holder of the Company’s 8% Senior Convertible Debenture (the “Debenture”), or trigger certain adjustments to the Debenture or warrants held by Alpha Capital.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The financial statements do not include any adjustments that would be necessary should the Company be unable to continue as a going concern, and therefore, be required to liquidate its assets and discharge its liabilities in other than the normal course of business and at amounts that may differ from those reflected in the accompanying financial statements
| 14 |
NOTE 3 — ACQUISITION
Business Combination
The
Company acquired a
The NanoSynex Acquisition was accounted for as a business combination using the acquisition method, in accordance with FASB ASC Topic 805. Identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are recognized and measured as of the acquisition date at fair value. Determining the fair value of assets acquired, liabilities assumed and noncontrolling interest requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items. The Company uses third-party valuations for intangible assets in a business combination using a discounted cash flow analysis, incorporating various assumptions.
A summary of the consideration transferred and fair value of assets acquired and liabilities assumed in the NanoSynex Acquisition is as follows (all shares shown post Reverse Stock Split):
| Consideration transferred, net of cash acquired | ||||
| Cash paid for NanoSynex preferred stock: | $ | |||
| FMV of shares of Qualigen stock issued to Alpha Capital | $ | |||
| FMV of shares of Qualigen stock related to prefunded warrant issued to Alpha Capital (See Note 15) | $ | |||
| Total consideration paid for NanoSynex preferred stock | $ | |||
| FMV of consideration related to repricing of shares of Alpha Capital/Qualigen warrants * | $ | |||
| NanoSynex cash acquired | ( | ) | ||
| Total consideration transferred, net of cash acquired | $ | |||
| * |
| Purchase Price Allocation | ||||
| Accounts receivable | $ | |||
| Property and equipment | ||||
| In process R&D | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses and other payables | ( | ) | ||
| R&D grant liability | ( | ) | ||
| Short term debt | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Noncontrolling interest assumed | ( | ) | ||
| Identifiable net assets acquired | ( | ) | ||
| Goodwill | ||||
| Total consideration transferred, net of cash acquired | $ | |||
| 15 |
During the year ended December 31, 2022, the Company made measurement period
adjustments to the preliminary purchase price allocation, which included: (i) a decrease to noncontrolling interest of $
Company transaction costs, which were immaterial, have been expensed as incurred and charged to the Company’s condensed consolidated statements of operations and comprehensive loss. There was no provision for reimbursement of transaction costs from the Company to NanoSynex.
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired as of the acquisition date. Goodwill represents the value of the future technology to be developed in excess of the identifiable assets as well as the operational synergies of the combined companies to be recognized. Goodwill has an indefinite useful life and is not amortized. None of the Goodwill is expected to be deductible for tax purposes.
As
a condition to the closing, the Company agreed to provide NanoSynex with up to $
The
Company’s condensed consolidated statements of operations and comprehensive loss for three months ended March 31, 2023 and
2022 include approximately $
NOTE 4 — INVENTORY, NET
Inventory, net consisted of the following at March 31, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at March 31, 2023 and December 31, 2022:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid manufacturing expenses | ||||||||
| Other prepaid expenses | ||||||||
| Other current assets | ||||||||
| $ | $ | |||||||
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NOTE 6 — PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at March 31, 2023 and December 31, 2022:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Computer equipment | ||||||||
| Leasehold improvements | ||||||||
| Molds and tooling | ||||||||
| Furniture and fixtures | ||||||||
| Equipment held for lease | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Fixed asset impairment | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
expense relating to property and equipment was approximately $
Upon
termination of the Sekisui Distribution Agreement on March 31, 2022, the Company had a commitment to purchase leased FastPack rental
systems back from Sekisui at Sekisui’s net book value, which was determined to be approximately $
NOTE 7 — GOODWILL, IPR&D AND OTHER INTANGIBLES
| March 31, | December 31, | |||||||||
| 2023 | 2022 | |||||||||
| Estimated Useful Lives | Gross carrying amounts | Gross carrying amounts | ||||||||
| Goodwill | $ | $ | ||||||||
| Finite-lived intangible assets: | ||||||||||
| Developed-product-technology rights | $ | $ | ||||||||
| Licensing rights | ||||||||||
| Less: Accumulated amortization | ( | ) | ( | ) | ||||||
| Total finite-lived intangible assets, net | ||||||||||
| Indefinite-lived intangible assets: | ||||||||||
| In-process research and development | ||||||||||
| Total other intangible assets, net | $ | $ | ||||||||
The
Company periodically reviews goodwill for impairment in accordance with relevant accounting standards. Goodwill is attributable to the
NanoSynex Acquisition. Goodwill and intangible assets are recognized at fair value during the period in which an acquisition is completed,
from updated estimates during the measurement period, or when they are considered to be impaired. These non-recurring fair value measurements,
primarily for goodwill and intangible assets acquired, were based on Level 3 inputs. The Company estimates the fair value of long-lived
assets on a non-recurring basis based on a market valuation approach, engaging independent valuation experts to assist in the determination
of fair value. In the fourth quarter of fiscal 2022, in conjunction with the annual impairment assessment, the Company determined that
the fair value of the reporting unit was less than the carrying value. In addition to continued losses in the reporting unit, the Company
considered macroeconomic conditions including a deterioration in the equity markets evidenced by sustained declines in the Company’s
stock price, peer companies, and major market indices since the acquisition date. The Company engaged independent valuation experts to
assist in determining the fair value of the reporting unit. As a result of this analysis, the Company recorded a $
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The
carrying value of the patents of approximately $
The
carrying value of the in-licenses of approximately $
NOTE 8 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at March 31, 2023 and December 31, 2022:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Board compensation | $ | |||||||
| Equipment held for lease | ||||||||
| Franchise, sales and use taxes | ||||||||
| Income taxes | ||||||||
| Interest (Convertible debt - related party) | ||||||||
| License fees | ||||||||
| Payroll | ||||||||
| Professional fees | ||||||||
| Research and development | ||||||||
| Royalties | ||||||||
| Warranty liability | ||||||||
| Other | ||||||||
| $ | $ | |||||||
NOTE 9 – SHORT TERM DEBT - RELATED PARTY
NanoSynex
has four separate Notes Payable (the “Notes”) outstanding to Alpha Capital, issued between March 26, 2020 and September 2,
2021, aggregating to a total principal outstanding balance of $
NOTE 10 – WARRANT LIABILITIES
In 2004, the Company issued warrants to various investors and brokers for the purchase of Series C preferred stock in connection with a private placement (the “Series C Warrants”). The Series C Warrants were subsequently extended and, upon closing of the reverse recapitalization transaction with Ritter, exchanged for warrants to purchase common stock of the Company, pursuant to the Series C Warrant terms as adjusted.
In
exchange for the Series C Warrants, upon closing of the merger with Ritter,
the holders received warrants to purchase shares of the Company’s common stock at $
| 18 |
Additionally,
on December 22, 2022, in conjunction with the issuance of the Debenture
to Alpha Capital (see Note 11 – Convertible Debt – Related Party), the Company issued to Alpha Capital a warrant to purchase
The following table summarizes the activity in liability classified warrants for the three months ended March 31, 2023:
| Common Stock Warrants | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2022 | $ | $ | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Forfeited | — | — | ||||||||||||||
| Expired | — | — | ||||||||||||||
| Granted | — | — | ||||||||||||||
| Total outstanding – March 31, 2023 | $ | $ | ||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
The following table summarizes the activity in liability classified warrants for the three months ended March 31, 2022:
| Common Stock Warrants | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding –December 31, 2021 | $ | |||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | ||||||||||||||||
| Expired | ||||||||||||||||
| Granted | ||||||||||||||||
| Total outstanding – March 31, 2022 | $ | |||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
The following table presents the Company’s fair value hierarchy for its liabilities measured at fair value on a recurring basis as of March 31, 2023:
| Quoted | ||||||||||||||||
| Market | Significant | |||||||||||||||
| Prices for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Common Stock Warrant liabilities | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Exercises | ||||||||||||||||
| Gain on change in fair value of warrant liabilities | ( | ) | ( | ) | ||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | ||||||||||||
There were no transfers of financial assets or liabilities between category levels for the three months ended March 31, 2023.
| 19 |
The value of the warrant liabilities was based on a valuation received from an independent valuation firm determined using a Monte-Carlo simulation. For volatility, the Company considers comparable public companies as a basis for its expected volatility to calculate the fair value of common stock warrants and transitions to its own volatility as the Company develops sufficient appropriate history as a public company. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected term of the common stock warrant. The Company uses an expected dividend yield of zero based on the fact that the Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future. Any significant changes in the inputs may result in significantly higher or lower fair value measurements.
The following are the weighted average and the range of assumptions used in estimating the fair value of warrant liabilities (weighted average calculated based on the number of outstanding warrants on each issuance) as of March 31, 2023 and March 31, 2022:
| March 31, 2023 | March 31, 2022 | |||||||||||||||
| Range | Weighted Average | Range | Weighted Average | |||||||||||||
| Risk-free interest rate | % | % | % | % | ||||||||||||
| Expected volatility (peer group) | % | % | % | % | ||||||||||||
| Term of warrants (in years) | ||||||||||||||||
| Expected dividend yield | % | % | % | % | ||||||||||||
NOTE 11 — CONVERTIBLE DEBT- RELATED PARTY
On
December 22, 2022, the Company issued to Alpha Capital, an
The proceeds from the transaction will be dedicated to the Company’s efforts of advancing its QN-302 Investigative New Drug candidate towards clinical trials and other working capital purposes.
| 20 |
Commencing
June 1, 2023 and continuing on the first day of each month thereafter until
the earlier of (i) December 22, 2025 and (ii) the full redemption of the Debenture (each such date, a “Monthly Redemption Date”),
the Company will redeem $
The
Debenture accrues interest at the rate of
Both
the Debenture and the Alpha Warrant provide for adjustments to the Conversion
Price and exercise price, respectively, in connection with stock dividends and splits, subsequent equity sales and rights offerings, pro
rata distributions, and certain fundamental transactions. Both the Debenture and the Alpha Warrant include a beneficial ownership blocker
of
The Company filed a registration statement on Form S-3 (No. 333-269088) with the Securities and Exchange Commission on December 30, 2022 registering the resale by Alpha Capital of an aggregate of shares of the Company’s common stock, which may be issuable to Alpha Capital pursuant to the terms of the Debenture and the Alpha Warrant.
The Company evaluated the Debenture and the Alpha Warrant and determined that the Alpha Warrant is a freestanding financial instrument. The Alpha Warrant is not considered indexed to the Company’s own stock, because the settlement amount would not equal the difference between the fair value of a fixed number of the Company’s equity shares and a fixed strike price and all of the adjustment features in Section 3(b) of the warrant agreement are not down round provisions, as defined in ASU 2017-11. Accordingly, the Alpha Warrant is classified as a liability and recognized at fair value, with subsequent changes in fair value recognized in earnings.
The proceeds from the Debenture were allocated to the initial fair value of the Alpha Warrant, with the residual balance allocated to the initial carrying value of the Debenture. The Company has not elected the fair value option for the Debenture. The Debenture was recognized as proceeds received after allocating the proceeds to the Alpha Warrant, and then allocating remaining proceeds to a suite of bifurcated embedded derivative features (conversion option, contingent acceleration upon an Event of Default, and contingent interest upon an Event of Default), with the resulting difference, if any, allocated to the loan host instrument. The suite of derivative features was measured and determined to have no fair value.
The
original issue discount of $
Between
January 9 and 12, 2023, the Company issued
shares of common stock upon Alpha Capital’s partial conversion of the Debenture at $
| 21 |
Convertible debt-related party is comprised of the following as of March 31, 2023 and December 31, 2022:
| March 31, 2023 | December 31, 2022 | |||||||
| Senior secured convertible debenture | $ | $ | ||||||
| Discount on convertible debenture | ( | ) | ( | ) | ||||
| Total convertible debt-related party | $ | $ | ||||||
As of March 31, 2023, there were no events of default or violation of any covenants under our financing obligations.
Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted EPS is computed based on the sum of the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of shares issuable from stock options and warrants as shown below.
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net loss used for basic earnings per share | $ | ( | ) | $ | ( | ) | ||
| Basic weighted-average common shares outstanding | ||||||||
| Dilutive potential shares issuable from stock options and warrants | ||||||||
| Diluted weighted-average common shares outstanding | ||||||||
| As of March 31, | ||||||||
| 2023 | 2022 | |||||||
| Shares of common stock subject to outstanding options | ||||||||
| Shares of common stock subject to outstanding warrants | ||||||||
| Total common stock equivalents | ||||||||
Potentially dilutive common shares excluded from the calculation above represent stock options and warrants because their effect would be anti-dilutive.
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases its facilities under a long-term operating lease agreement. On December 15, 2021, the Company’s wholly-owned subsidiary Qualigen,
Inc. entered into a Second Amendment to Lease with Bond Ranch LP. This Amendment extended the Company’s triple-net leasehold on
the Company’s existing
The tables below show the operating lease right-of-use assets and operating lease liabilities and the balances as of March 31, 2023 and December 31, 2022, including the changes during the periods:
| Operating lease right-of-use assets | ||||
| Net right-of-use assets at December 31, 2022 | $ | |||
| Less amortization of operating lease right-of-use assets | ( | ) | ||
| Operating lease right-of-use assets at March 31, 2023 | $ | |||
| 22 |
| Operating lease liabilities | ||||
| Lease liabilities at December 31, 2022 | $ | |||
| Less principal payments on operating lease liabilities | ( | ) | ||
| Lease liabilities at March 31, 2023 | ||||
| Less non-current portion | ( | ) | ||
| Current portion at March 31, 2023 | $ | |||
As
of March 31, 2023, the Company’s operating leases have a weighted-average remaining lease term of
| Year Ending December 31, | Amount | |||
| 2023 (nine months) | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | ||||
| Less present value discount | ( | ) | ||
| Operating lease liabilities | $ | |||
Total
lease expense was approximately $
Termination of Sekisui Distribution Agreement
Sekisui’s
Distribution Agreement expired on March 31, 2022. As of March 31, 2023, the Company had a commitment to purchase leased FastPack rental systems back
from Sekisui at Sekisui’s net book value in the amount of $
NanoSynex Funding Commitment
As
a condition to the NanoSynex Acquisition, the Company agreed to provide NanoSynex with up to $
Litigation and Other Legal Proceedings
On
November 9, 2021, the Company was named as a defendant in an action brought by Mediant Communications Inc. (“Mediant”) in
the U.S. District Court for the Southern District of New York. The complaint alleged that Qualigen entered into an implied contract with
Mediant, whereby Qualigen retained Mediant to distribute proxy materials and subsequently conduct shareholder vote tabulations. The Company
filed a Motion to Dismiss with the District Court and on March 14, 2022 a hearing was held at which the presiding judge ruled in
favor of the Motion to Dismiss. The Company and Mediant settled the litigation on April 5, 2022 in the amount of $
| 23 |
NOTE 14 — RESEARCH AND LICENSE AGREEMENTS
The University of Louisville Research Foundation
In
March 2019, the Company entered into a sponsored research agreement and
an option for a license agreement with University of Louisville Research Foundation “ULRF” for development of several small-molecule
RAS interaction inhibitor drug candidates. Under the terms of this agreement, the Company was to reimburse ULRF for sponsored research
expenses of up to $
Sponsored
research expenses related to these RAS agreements for the three months ended
March 31, 2023 and 2022 were approximately $
Between
June 2018 and September 2020, the Company entered into license and sponsored
research agreements with the ULRF for QN-247, a novel aptamer-based compound that has shown promise as an anticancer drug. Under the agreements,
the Company took over development, regulatory approval and commercialization of the compound from ULRF and is responsible for maintenance
of the related intellectual property portfolio. In return, ULRF received a $
Sponsored
research expenses related to these QN-247 agreements for the three months ended March 31, 2023 and 2022 were approximately $
In
June 2020, the Company entered into an exclusive license agreement with ULRF for its intellectual property in the use of QN-165 as a
treatment for COVID-19. Under the agreement, the Company took over development, regulatory approval and commercialization of the compound
(for such use) from ULRF and was responsible for maintenance of the related intellectual property portfolio. In return, ULRF received
approximately $
There were no sponsored research expenses or license costs related to these QN-165 agreements for the three months ended March 31, 2023 and 2022.
| 24 |
Yi Xin
In October 2020, through its wholly-owned diagnostics subsidiary Qualigen, Inc., the Company entered into a Technology Transfer Agreement with Yi Xin Zhen Duan Jishu (Suzhou) Ltd. (“Yi Xin”), of Suzhou, China, for Yi Xin to develop, manufacture and sell new generations of diagnostic test systems based on the Company’s core FastPack technology. In addition, the Technology Transfer Agreement authorizes Yi Xin to manufacture and sell the Company’s current generations of FastPack System diagnostic products (1.0, IP and PRO) in China.
The Company will receive low- to mid-single-digit royalties on any future
new-generations and current-generations product sales by Yi Xin. Under the Technology Transfer Agreement, during the fiscal year ended
December 31, 2021 we recognized revenues of approximately $
The Company gave Yi Xin the exclusive rights for China – which is a market it has not otherwise entered – both for Yi Xin’s new generations of FastPack-based products and for Yi Xin-manufactured versions of our existing FastPack product lines. Yi Xin also has the right to sell its new generations of FastPack-based diagnostic test systems throughout the world (but not to or toward current customers of the Company’s existing generations of FastPack products). After March 31, 2022, Yi Xin has the right to sell Yi Xin-manufactured versions of existing FastPack 1.0, IP and PRO product lines worldwide (other than in the United States and other than to or toward current non-US customers of those products), as well as the right to buy Qualigen-manufactured FastPack 1.0, IP and PRO products from us at distributor prices for resale in and for the United States (but not to or toward current U.S. customers of those products). The Company did not license Yi Xin to sell in the U.S. market any Yi Xin-manufactured versions of those legacy FastPack 1.0, IP and PRO product lines. In the Technology Transfer Agreement the Company also confirmed that after March 31, 2022 it would not seek new FastPack customers outside the United States, European Union, Canada and Mexico.
UCL Business Limited
In
January 2022, the Company entered into a License Agreement with UCL Business Limited to obtain an exclusive worldwide in-license of a
genomic quadruplex (G4)-selective transcription inhibitor drug development program which had been developed at University College London,
including lead and back-up compounds, preclinical data and a patent estate. (UCL Business Limited is the commercialization company for
University College London.) The program’s lead compound is now being developed at Qualigen under the name QN-302 as a candidate
for treatment for pancreatic ductal adenocarcinoma (PDAC), which represents the vast majority of pancreatic cancers. The License Agreement
required a $
For
the three months ended March 31, 2023 and 2022, there were license costs of approximately $
Prediction Biosciences
In
November 2015, the Company entered into a long-term development and supply agreement with Prediction Biosciences SAS to develop and manufacture
diagnostic tests for use in the stroke Physician Office Laboratory (POL) market. The Company recognizes development revenue and product
sales over the performance period of the contract. For the three months ended March 31, 2023 and 2022, there was $
| 25 |
NOTE 15 — STOCKHOLDERS’ EQUITY
As of March 31, 2023 and December 31, 2022, the Company had two classes of capital stock: common stock and preferred stock.
Common Stock
Holders of common stock generally vote as a class with the holders of the preferred stock and are entitled to one vote for each share held. Subject to the rights of the holders of the preferred stock to receive preferential dividends, the holders of common stock are entitled to receive dividends when and if declared by the Board of Directors. Following payment of the liquidation preference of the preferred stock, any remaining assets will be distributed ratably among the holders of the common stock and, on an as-if-converted basis, the holders of any preferred stock upon liquidation, dissolution or winding up of the affairs of the Company. The holders of common stock have no preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions.
On
December 22, 2022, the Company issued to Alpha Capital, an
At March 31, 2023, the Company has reserved shares of authorized but unissued common stock for possible future issuance. At March 31, 2023, shares were reserved in connection with the following:
| Exercise of issued and future grants of stock options | ||||
| Exercise of stock warrants | ||||
| Total |
Preferred Stock
At March 31, 2023 and December 31, 2022, there were no shares of preferred stock outstanding. All shares of Series A, B, C, D, D-1 convertible preferred stock were converted into common stock at the time of the May 2020 reverse recapitalization transaction.
Stock Options and Equity Classified Warrants
Stock Options
The Company recognizes all compensatory stock-based payments as compensation expense over the service period, which is generally the vesting period.
In April 2020, the Company adopted the 2020 Stock Incentive Plan (the “2020 Plan”) which provides for the grant of incentive or non-statutory common stock options, restricted stock, stock bonus awards, stock appreciation rights, restricted stock units and performance awards to qualified employees, officers, directors, consultants and other service providers. At March 31, 2023 and December 31, 2022 there were and outstanding stock options, respectively, under the 2020 Plan and there were and of 2020 Plan shares available, respectively, for future grant.
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| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2022 | $ | $ | - $ | |||||||||||||
| Granted | — | — | ||||||||||||||
| Expired | — | — | ||||||||||||||
| Forfeited | ( | ) | - | — | ||||||||||||
| Total outstanding – March 31, 2023 | $ | $ | — $ | |||||||||||||
| Exercisable (vested) | $ | $ | — $ | |||||||||||||
| Non-Exercisable (non-vested) | $ | $ | - $ | |||||||||||||
The following represents a summary of the options granted (under the 2020 Plan and otherwise) to employees and non-employee service providers that were outstanding at March 31, 2022, and changes during the three-month period then ended:
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2021 | $ | $ | — $ | |||||||||||||
| Granted | ||||||||||||||||
| Expired | — | — | ||||||||||||||
| Forfeited | ( | ) | - | — | ||||||||||||
| Total outstanding – March 31, 2022 | $ | $ | — $ | |||||||||||||
| Exercisable (vested) | $ | $ | — $ | |||||||||||||
| Non-Exercisable (non-vested) | $ | $ | — $ | |||||||||||||
There was approximately $ million and $ million of compensation cost related to outstanding options for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, there was approximately $ million of total unrecognized compensation cost related to unvested stock-based compensation arrangements. This cost is expected to be recognized over a weighted average period of year.
stock options were exercised during the three months ended March 31, 2023.
. The options awarded under the 2020 Plan will vest as determined by the Board of Directors but will not exceed a 10-year period.
Fair Value of Equity Awards
The Company utilizes the Black-Scholes option pricing model to value awards under the 2020 Plan, and for equity classified compensatory warrants. Key valuation assumptions include:
| ● | Expected dividend yield.The expected dividend is assumed to be zero, as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock. | |
| ● | Expected stock-price volatility. The Company’s expected volatility is derived from the average historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term. | |
| ● | Risk-free interest rate.The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term. | |
| ● | Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. |
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| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Expected dividend yield | % | % | ||||||
| Expected stock-price volatility | % | |||||||
| Risk-free interest rate | % — | % | ||||||
| Expected average term of options (in years) | — | |||||||
| Stock price | $ | $ | ||||||
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| General and administrative | $ | $ | ||||||
| Research and development | ||||||||
| Total | $ | $ | ||||||
Equity Classified Compensatory Warrants
In
connection with the $
In
addition, various service providers hold equity
classified compensatory warrants issued in 2017 and earlier for the purchase of
During
the year ended December 31, 2021,
the Company issued equity classified compensatory warrants to a service provider for the purchase of
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No compensatory warrants were issued during the three months ended March 31, 2023.
The following table summarizes the equity classified compensatory warrant activity for the three months ended March 31, 2023:
| Common Stock | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2022 | $ | $ | ||||||||||||||
| Granted to advisor and its designees | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Total outstanding – March 31, 2023 | $ | $ | ||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
| Non-Exercisable | $ | $ | — | |||||||||||||
The following table summarizes the equity classified compensatory warrant activity for the three months ended March 31, 2022:
| Common Stock | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2021 | $ | $ | ||||||||||||||
| Granted to advisor and its designees | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Total outstanding – March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
| Non-Exercisable | $ | $ | — | |||||||||||||
There were compensation costs related to outstanding warrants for three months ended March 31, 2023 or the three months ended March 31, 2022. As of March 31, 2023 and 2022, there was no unrecognized compensation cost related to nonvested warrants.
Noncompensatory Equity Classified Warrants
In
May 2020, as a commitment fee, the Company issued noncompensatory equity classified warrants to Alpha Capital (a related party) for the
purchase of
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On
November 29, 2021, with the exception of the warrants to purchase
In conjunction with the NanoSynex Acquisition
(See Note 3 - Acquisition), on April 25, 2022 the exercise price of
No noncompensatory equity classified warrants were issued during the three months ended March 31, 2023.
The following table summarizes the noncompensatory equity classified warrant activity for the three months ended March 31, 2023:
| Common Stock | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2022 | $ | - | ||||||||||||||
| Legacy Ritter warrants | — | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Forfeited | ||||||||||||||||
| Total outstanding – March 31, 2023 | $ | |||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
| Non-Exercisable | $ | $ | — | |||||||||||||
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The following table summarizes the noncompensatory equity classified warrant activity for the three months ended March 31, 2022:
| Common Stock | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2021 | $ | |||||||||||||||
| Legacy Ritter warrants | — | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Total outstanding – March 31, 2022 | $ | |||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
| Non-Exercisable | $ | $ | — | |||||||||||||
NOTE 16 — RELATED PARTY TRANSACTIONS
Convertible Debt
On
December 22, 2022, the Company issued to Alpha Capital, an
Short-Term Debt
NanoSynex
has four separate notes payable outstanding to Alpha Capital, issued between March 26, 2020 and September 2,
2021, aggregating to a total principal outstanding balance of $
Nanosynex Acquisition
The
Company acquired a
NOTE 17 — SUBSEQUENT EVENTS
Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855, Subsequent Events, from the balance sheet date through the date the financial statements were available to be issued, and has determined that there are no material subsequent events that require disclosure in these financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the audited financial statements and notes thereto as of and for the twelve months ended December 31, 2022, which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 2, 2023 (as the “2022 Annual Report.) As used in this Quarterly Report, unless the context suggests otherwise, “we,” “us,” “our,” or “Qualigen” refer to Qualigen Therapeutics, Inc. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.
Cautionary Note Regarding Forward Looking Statements
This Quarterly Report contains forward-looking statements by the Company that involve risks and uncertainties and reflect the Company’s judgment as of the date of this Report. These statements generally relate to future events or the Company’s future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” or “continue” or the negative of these words or other similar terms or expressions that concern the Company’s expectations, strategy, plans or intentions. Such forward-looking statements may relate to, among other things, potential future development, testing and launch of products and product candidates. Actual events or results may differ from our expectations.
Some of the factors that we believe could cause actual results to differ from those anticipated or predicted include:
| ● | there can be no assurance that we will successfully develop any drugs or therapeutic devices; | |
| ● | there can be no assurance that preclinical or clinical development of our candidate drugs or therapeutic devices will be successful; | |
| ● | there can be no assurance that clinical trials will be approved to begin by or will actually begin by or will proceed as contemplated by any projected timeline; | |
| ● | there can be no assurance that clinical trials will complete enrollment as contemplated by any projected timeline; | |
| ● | there can be no assurance that future clinical trial data will be favorable or that such trials will confirm any improvements over other products or lack negative impacts; | |
| ● | there can be no assurance that any drugs or therapeutic devices will receive required regulatory approvals or that they will be commercially successful; | |
| ● | there can be no assurance that we will be able to procure or earn sufficient working capital to complete the development, testing and launch of our prospective therapeutic products; | |
| ● | there can be no assurance that patents will issue on our owned and in-licensed patent applications; | |
| ● | there can be no assurance that such patents, if any, and our current owned and in-licensed patents would prevent competition; and | |
| ● | there can be no assurance that we will be able to maintain or expand market demand and/or market share for our diagnostic products generally, particularly in view of COVID-19-related deferral of patients’ physician-office visits and in view of FastPack reimbursement pricing challenges. |
Our stock price could be harmed if any of the events or trends contemplated by the forward-looking statements fails to occur or is delayed or if any actual future event otherwise differs from expectations. Additional information concerning these and other risk factors affecting our business (including events beyond our control, such as epidemics and resulting changes) can be found in our prior filings with the SEC (including the 2022 Annual Report), available at www.sec.gov. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of this Quarterly Report, and we disclaim any intent or obligation to update these forward-looking statements beyond the date of this Quarterly Report, except as required by law. This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
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By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent in some future periods with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in other future periods.
Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.
Overview
We are a diversified life sciences company focused on developing treatments for adult and pediatric cancers with potential for Orphan Drug designation, while also commercializing diagnostics.
Our cancer therapeutics pipeline includes QN-302, RAS and QN-247.
Our lead oncology therapeutics program, QN-302, is an investigational small molecule G4-selective transcription inhibitor with strong binding affinity to G4s prevalent in cancer cells. Such binding could, by stabilizing the G4s against DNA “unwinding,” help inhibit cancer cell proliferation. QN-302 is currently undergoing Good Laboratory Practice (GLP) toxicology studies.
Our Pan-RAS portfolio consists of a family of RAS oncogene protein-protein interaction inhibitor small molecules believed to inhibit or block mutated RAS genes’ proteins from binding to their effector proteins. Preventing this binding could stop tumor growth, especially in RAS-driven tumors such as pancreatic, colorectal and lung cancers.
Our investigational QN-247 compound binds nucleolin, a key multi-functional regulatory phosphoprotein that is overexpressed in cancer cells. Such binding could inhibit the cancer cells’ proliferation. The foundational aptamer of QN-247 is QN-165 (formerly referred to as AS1411), which the Company has deprioritized as a drug candidate for treating COVID-19 and other viral-based infectious diseases.
On November 23, 2022, we effected a 1-for-10, as determined by our board of directors, reverse stock split of our outstanding shares of common stock (the “Reverse Stock Split”). The Reverse Stock Split reduced our shares of outstanding common stock, stock options, and warrants to purchase shares of our common stock. Fractional shares of common stock that would have otherwise resulted from the Reverse Stock Split were rounded down to the nearest whole share and cash in lieu of fractional shares was paid to stockholders. All share and per share data for all periods presented in this section and the accompanying financial statements and related disclosures have been adjusted retrospectively to reflect the Reverse Stock Split. The number of authorized shares of common stock and the par value per share remains unchanged.
On May 26, 2022, we acquired 2,232,861 shares of Series A-1 Preferred Stock of NanoSynex from Alpha Capital in exchange for 350,000 shares of our common stock and a prefunded warrant to purchase 331,464 shares of our common stock at an exercise price of $0.001 per share. These warrants were subsequently exercised on September 13, 2022. Concurrently with this transaction, we also purchased 381,786 shares of Series B preferred stock from NanoSynex for a total purchase price of $600,000. The transactions resulted in our acquiring a 52.8% interest in NanoSynex. NanoSynex is a micro-biologics diagnostics company domiciled in Israel.
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Because our therapeutic candidates are all still in the pre-clinical development stage, our only products that are currently commercially available for sale are the FastPack System diagnostic instruments and test kits. Our FastPack System diagnostic instruments and test kits are sold commercially primarily in the United States, as well as certain European countries. The FastPack System menu includes a rapid, highly accurate immunoassay diagnostic testing system for cancer, men’s health, hormone function, and vitamin D status. We provide analyzers to our customers (physician offices, clinics and small hospitals) at low cost in order to increase sales volumes of higher-margin test kits.
We have always utilized a “razor and blades” pricing strategy, providing analyzers to our customers (physician offices, clinics and small hospitals) at low cost in order to increase sales volumes of higher-margin test kits. Through the first quarter of 2022, we relied on our diagnostics distribution partner, Sekisui, for most FastPack distribution worldwide pursuant to a distribution agreement. We maintained direct distribution for certain house accounts, including selling our total testosterone test kits to Low T Center, the largest men’s health group in the United States, with 40 locations. The Distribution Agreement with Sekisui expired on March 31, 2022, after which the activities previously provided by Sekisui reverted back to us and we have since recognized 100% of the revenue from the sales of our FastPack diagnostic instruments and test kits. We have licensed and technology-transferred our FastPack System technology to Yi Xin Zhen Duan Jishu (Suzhou) Ltd. for the China diagnostics market.
We do not expect to be profitable before products from our therapeutics pipeline are commercialized, because we expect that research and development expenses associated with our therapeutics programs will significantly exceed the profits, if any, that we will generate from our diagnostics products. To experience losses while therapeutic products are still under development is, of course, typical for biotechnology companies.
Our condensed consolidated financial statements do not separate our diagnostics-related activities from our therapeutics-related activities. Although to date all of our reported revenue is diagnostics-related, our reported expenses represent the total of our diagnostics-related and therapeutics-related expenses
Critical Accounting Policies and Estimates
This discussion and analysis is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to impairment of goodwill and other intangible assets, fair value of warrant liabilities, stock-based compensation, amortization and depreciation, inventory reserves, allowances for doubtful accounts and returns, and warranty costs. We base our estimates on historical experience, known trends and events and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 1 - Organization And Summary Of Significant Accounting Policies And Estimates to our unaudited condensed consolidated financial statements appearing in “Item 1. Condensed Consolidated Financial Statements (Unaudited),” we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations:
| ● | Convertible debt | |
| ● | Research and development | |
| ● | Revenue recognition | |
| ● | Allowance for doubtful accounts and returns | |
| ● | Inventory | |
| ● | Impairment of long-lived assets | |
| ● | Business combination | |
| ● | Goodwill | |
| ● | In Process R&D | |
| ● | Derivative financial instruments and warrant liabilities | |
| ● | Stock-based compensation | |
| ● | Income taxes |
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Warrant Liabilities
In 2004, Qualigen, Inc. issued Series C preferred stock warrants to investors and brokers in connection with a private placement. These warrants were subsequently extended and survived the May 2020 Ritter reverse recapitalization transaction and are now exercisable for Qualigen Therapeutics common stock. These warrants contain a provision that if we issue shares (except in certain defined scenarios) at a price below the warrants’ exercise price, the exercise price will be re-set to such new price and the number of shares underlying the warrants will be increased in the same proportion as the exercise price decrease. For accounting purposes, such warrants give rise to warrant liabilities. The operation of the “double-ratchet” provisions in these warrants in connection with the NanoSynex acquisition and the convertible debenture financing transaction in December 2022 now allow the holders to exercise for a significantly higher number of shares than before. Accounting principles generally accepted in the United States of America (“U.S. GAAP”) require us to recognize the fair value of these warrants as warrant liabilities on our condensed consolidated balance sheets and to reflect period-to-period changes in the fair value of the warrant liabilities on our condensed consolidated Statements of Operations. The estimated fair value of these warrant liabilities was $0.4 million and $0.8 million at March 31, 2023 and December 31, 2022, respectively. There were 1,349,571 of these warrants outstanding at March 31, 2023 and December 31, 2022.
On December 22, 2022, as part of the convertible debenture financing, the Company issued to Alpha Capital a common stock warrant (the “Alpha Warrant”) for 2,500,000 shares of common stock of the Company. The exercise price of the Alpha Warrant is $1.65 (equal to 125% of the Conversion Price of the Debenture on the closing date). The Alpha Warrant may be exercised by Alpha Capital, in whole or in part, at any time on or after June 22, 2023 and before June 22, 2028. U.S. GAAP requires us to recognize the fair value of this warrant as a warrant liability on our condensed consolidated balance sheets and to reflect period-to-period changes in the fair value of the warrant liability on our condensed consolidated statements of operations. The estimated fair value of this warrant liability was $2.2 million and $2.8 million at March 31, 2023 and December 31, 2022, respectively.
Because the fair value of the above liability classified warrants will be determined each quarter on a “mark-to-market” basis , it could result in significant variability in our future quarterly and annual consolidated statement of operations and consolidated balance sheets based on changes in our public market common stock price. Pursuant to U.S. GAAP, a quarter-to-quarter increase in our stock price would result in an increase (possibly quite large) in the fair value of the warrant liabilities and a quarter-to-quarter decrease in our stock price would result in a decrease (possibly quite large) in the fair value of the warrant liabilities.
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Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022:
Revenues
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| REVENUES | ||||||||
| Net product sales | $ | 1,607,170 | $ | 722,029 | ||||
| Total revenues | 1,607,170 | 722,029 | ||||||
| EXPENSES | ||||||||
| Cost of product sales | 1,264,828 | 828,848 | ||||||
| General and administrative | 1,714,434 | 2,898,751 | ||||||
| Research and development | 2,121,551 | 1,864,745 | ||||||
| Sales and marketing | 199,114 | 138,323 | ||||||
| Total expenses | 5,299,927 | 5,730,667 | ||||||
| LOSS FROM OPERATIONS | (3,692,757 | ) | (5,008,638 | ) | ||||
| OTHER EXPENSE (INCOME), NET | ||||||||
| Gain on change in fair value of warrant liabilities | (1,038,673 | ) | (683,242 | ) | ||||
| Interest expense (income), net | 544,236 | (6,309 | ) | |||||
| Loss on voluntary conversion of convertible debt | 1,077,287 | — | ||||||
| Other income, net | (4,881 | ) | (36 | ) | ||||
| Loss on fixed asset disposal | 300 | — | ||||||
| Total other expense (income), net | 578,269 | (689,587 | ) | |||||
| LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES | (4,271,026 | ) | (4,319,051 | ) | ||||
| (BENEFIT) PROVISION FOR INCOME TAXES | (163,777 | ) | 736 | |||||
| NET LOSS | (4,107,249 | ) | (4,319,787 | ) | ||||
| Net loss attributable to noncontrolling interest | (261,028 | ) | — | |||||
| Net loss attributable to Qualigen Therapeutics, Inc. | $ | (3,846,221 | ) | $ | (4,319,787 | ) | ||
| Other comprehensive loss, net of tax | ||||||||
| Net loss | $ | (4,107,249 | ) | $ | (4,319,787 | ) | ||
| Foreign currency translation adjustment | 119,723 | — | ||||||
| Other comprehensive loss | (3,987,526 | ) | (4,319,787 | ) | ||||
| Comprehensive loss attributable to noncontrolling interest | (261,028 | ) | — | |||||
| Comprehensive loss attributable to Qualigen Therapeutics, Inc. | $ | (3,726,498 | ) | $ | (4,319,787 | ) | ||
Net product sales
Net product sales are primarily generated from sales of diagnostic tests. Net product sales during the three month periods ended March 31, 2023 and 2022 were approximately $1.6 million and $0.7 million respectively, representing an increase of approximately $0.9 million, or 123%. This increase was primarily due to the expiration of the Sekisui Distribution Agreement on March 31, 2022, at which time the distribution services previously provided by Sekisui reverted to the Company, which resulted in our recognizing 100% of the revenue from sales of our FastPack diagnostic test kits and instruments beginning in the second quarter of 2022. In addition, net product sales during the three months ended March 31, 2022 were negatively impacted by Sekisui selling off its remaining inventory prior to termination of the agreement.
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Expenses
Cost of Product Sales
Cost of product sales increased during the three months ended March 31, 2023, to $1.3 million, or 79% of net product sales, versus approximately $0.8 million, or 115% of net product sales, during the three months ended March 31, 2022. This increase of $0.4 million was due to the increased sales and manufacturing inefficiencies from material shortages during the current quarter.
General and Administrative Expenses
General and administrative expenses decreased from $2.9 million, during the three months ended March 31, 2022, to $1.7 million during the three months ended March 31, 2023. This decrease was primarily due to decreases in stock-based compensation expense of $0.9 million, insurance expenses of $0.2 million, and legal expenses of $0.3 million, offset by increases in consulting expenses of $0.1 million and other payroll related expenses totaling $0.1 million.
Research and Development Costs
Research and development costs include therapeutic and diagnostic research and product development costs. Research and development costs increased from $1.9 million for the three months ended March 31, 2022 to $2.1 million for the three months ended March 31, 2023. Of the $1.9 million of research and development costs for the three months ended March 31, 2022, $1.6 million (84%) was attributable to therapeutics and $0.3 million (16%) was attributable to diagnostics. Of the $2.1 million of research and development costs for the three months ended March 31, 2023, $1.3 million (60%) was attributable to therapeutics and $0.8 million (40%) was attributable to diagnostics.
The increase in diagnostic research and development costs was primarily due to $0.6 million in R&D expenses assumed in connection with the acquisition of NanoSynex, offset by a reduction of $0.1 million in FastPack R&D expenses. The decrease in therapeutics research and development costs was primarily due to a decrease in pre-clinical research and development costs of $0.6 million for QN-247, a decrease of $0.2 million in stock-based compensation expenses, a decrease in RAS expenses of $0.1 million, offset by an increase in QN-302 pre-clinical research and development costs of $0.5 million.
For the future, we expect our therapeutic research and development costs to significantly outweigh our diagnostic research and development costs, and to be relatively lower in periods when we are focusing on pre-clinical activities and meaningfully higher in periods when we are provisioning for and conducting clinical trials, if any.
Sales and Marketing Expenses
Sales and marketing expenses during the three months ended March 31, 2023 increased to approximately $199,000 as compared to approximately $138,000 during the three months ended March 31, 2022, primarily due to an increase in payroll expenses as a result of the termination of the Sekisui Distribution Agreement.
Other Expense (Income)
Change in Fair Value of Warrant Liabilities
During three months ended March 31, 2023 we experienced a $1.0 million gain in other income because of the change in fair value of the warrant liabilities arising from our liability classified warrants described above. The estimated fair value of these warrants decreased to $2.6 million as of March 31, 2023 from $3.6 million as of December 31, 2022 primarily due to a reduction in the Company’s stock price and outstanding terms of the warrants.
Because the fair value of the warrant liabilities will be determined each quarter on a “mark-to-market” basis, this item is likely to continue to result in significant variability in our future quarterly and annual consolidated statements of operations based on unpredictable changes in our public market common stock price and the number of warrants outstanding at the end of each quarter.
Interest Expense (Income), Net
Interest expense, net during the three months ended March 31, 2023 increased to approximately $544,000 due to accrued interest on the convertible debt, as compared to interest income, net of approximately $6,000 during the three months ended March 31, 2022, primarily due to an increase in accrued interest related to convertible debt.
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Loss on Voluntary Conversion of Convertible Debt
During the three months ended March 31, 2023, we recognized a $1.1 million loss due to a voluntary conversion by Alpha Capital of approximately $1.1 million of convertible debt into 841,726 shares of common stock (see Note 11 - Convertible Debt - Related Party to our condensed consolidated financial statements). We did not have any outstanding convertible debt for the three months ended March 31, 2022.
Other (Income), Net
Other income was immaterial for both the three months ended March 31, 2023 and the three months ended March 31, 2022.
Liquidity and Capital Resources
As of March 31, 2023, we had approximately $4.4 million in cash and an accumulated deficit of $107.2 million. For the three months ended March 31, 2023 and the three months ended March 31, 2022, we used cash of $2.6 million and $3.9 million, respectively, in operations. Our cash balances are expected to fund operations into the third quarter of 2023. As a pre-clinical development-stage therapeutics biotechnology company, we expect to continue to have net losses and negative cash flow from operations, which over time will challenge our liquidity. These factors raise substantial doubt about our ability to continue as a going concern for the one-year period following the date that these financial statements were issued.
There is no assurance that profitable operations will ever be achieved, or, if achieved, could be sustained on a continuing basis. In order to fully execute our business plan, we will require significant additional funding for planned research and development activities, capital expenditures, clinical and pre-clinical testing for our QN-302 clinical trials, preclinical development of RAS and QN-247, and funding for NanoSynex operations (See Note 3-Acquisition to our unaudited condensed consolidated financial statements), as well as commercialization activities.
Historically, our principal sources of cash have included proceeds from the issuance of common and preferred equity and proceeds from the issuance of debt. In December 2022 we raised $3.0 million from the sale of a convertible debt instrument (see Note 11-Convertible Debt - Related Party to our unaudited condensed consolidated financial statements). There can be no assurance that further financing will be obtained on favorable terms, or at all. If we are unable to obtain funding, we could be required to delay, reduce or eliminate research and development programs, product portfolio expansion or future commercialization efforts, which could adversely affect our business prospects.
As a condition to the NanoSynex Acquisition, we agreed to provide NanoSynex with up to $10.4 million of future funding based on NanoSynex’s achievement of certain future development milestones and subject to other terms and conditions described in the Master Agreement for the Operational and Technological Funding of NanoSynex entered into with NanoSynex. These funding commitments are in the form of convertible promissory notes to be issued to the Company with a face value equal to the amount paid by the Company to NanoSynex upon satisfaction of the applicable performance milestone, bearing interest at the rate of 9% per annum on the principal balance from time to time outstanding under the particular promissory note, convertible at the option of the Company into additional shares of NanoSynex in order for the Company to maintain at least a 50.1% controlling ownership interest in NanoSynex, should NanoSynex issue additional shares. The principal of the convertible notes are due and payable upon the sooner to occur of: i) five years from the date of issuance of the particular promissory note; ii) the acquisition by any person or entity of all or substantially all of the share capital of NanoSynex, through share purchase, issuance or shares or merger of NanoSynex, or the purchase of all or substantially all of the assets of NanoSynex; or iii) the initial public offering of NanoSynex. The Company provided funding to NanoSynex of $2.4 million during 2022 and an additional $0.5 million in February 2023 pursuant to this agreement. We may terminate the Funding Agreement upon 120 days’ notice, but would still be liable for any payments due for milestones achieved prior to termination.
The accompanying financial statements have been prepared assuming that we will continue as a going concern. The financial statements do not include any adjustments that would be necessary should we be unable to continue as a going concern, and therefore, be required to liquidate our assets and discharge our liabilities in other than the normal course of business and at amounts that may differ from those reflected in the accompanying financial statements.
Our condensed consolidated balance sheet at March 31, 2023 includes $2.6 million of warrant liabilities. We do not consider the warrant liabilities to constrain our liquidity, as a practical matter. Our current liabilities at March 31, 2023 include $0.9 million of accounts payable, $1.9 million of accrued expenses and other current liabilities, a $0.6 million R&D grant liability, $0.4 million of accrued vacation, and $1.0 million in short term debt to a related party.
Contractual Obligations and Commitments
We have no material contractual obligations that are not fully recorded on our condensed consolidated balance sheets or fully disclosed in the notes to the unaudited condensed consolidated financial statements.
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Lease Agreement with Bond Ranch LP
On December 15, 2021, our wholly-owned subsidiary Qualigen, Inc. entered into a Second Amendment to Lease with Bond Ranch LP. This Amendment extended our triple-net leasehold on our existing 22,624-square-foot headquarters/manufacturing facility at 2042 Corte del Nogal, Carlsbad, California for the 61-month period of November 1, 2022 to November 30, 2027. Over the 61 months, the base rent payable will total $1,950,710; however, the base rent for the first 12 months of the 61-month period will be only $335,966. Additionally, Qualigen, Inc. was entitled to a $339,360 tenant improvement allowance. See Note 13 - Commitments and Contingencies to our unaudited condensed consolidated financial statements for additional details.
License and Sponsored Research Agreements
We have obligations under various license and sponsored research agreements to make future payments to third parties that become due and payable on the achievement of certain development, regulatory and commercial milestones (such as the start of a clinical trial, filing for product approval with the FDA or other regulatory agencies, product approval by the FDA or other regulatory agencies, product launch or product sales) or on the sublicense of our rights to another party. We have not included these commitments on our balance sheet because the achievement and timing of these events is not determinable. Certain milestones are in advance of receipt of revenue from the sale of products and, therefore, we may require additional debt or equity capital to make such payments.
We have multiple license and sponsored research agreements with ULRF. Under these agreements, we have taken over development, regulatory approval and commercialization of various drug compounds from ULRF and are responsible for maintenance of the related intellectual property portfolio. We agreed to reimburse ULRF for sponsored research expenses of up to $2.7 million and prior patent costs of up to $112,000 for RAS. As of March 31, 2023, we had up to $532,000 remaining due under this sponsored research agreement for RAS. We also agreed to reimburse ULRF for sponsored research expenses of up to $830,000 and prior patent costs of up to $200,000 for QN-247. As of March 31, 2023, there were no remaining un-expensed amounts under this sponsored research agreement for QN-247 and the agreement was terminated effective August 31, 2022. We also agreed to reimburse ULRF for sponsored research expenses of up to $430,000 and prior patent costs of up to $24,000 for QN-165. As of March 31, 2023 there were no remaining un-expensed amounts under this sponsored research agreement for QN-165, and the agreement was terminated effective November 30, 2021. Under the terms of these agreements, we are required to make patent maintenance payments and payments based upon development, regulatory and commercial milestones for any products covered by the in-licensed intellectual property. The maximum aggregate milestone payments we may be obligated to make per product are $5 million. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. We have the right to sublicense our rights under these agreements, and we will be required to pay a percentage of any sublicense income.
On January 13, 2022, we entered into a License Agreement with UCL Business Limited to obtain an exclusive worldwide in-license of a genomic quadruplex (G4)-selective transcription inhibitor drug development program which had been developed at University College London, including lead and back-up compounds, preclinical data and a patent estate. (UCL Business Limited is the commercialization company for University College London.) The program’s lead compound is being developed by us under the name QN-302 as a candidate for treatment of pancreatic ductal adenocarcinoma (PDAC), which represents the vast majority of pancreatic cancers. The Agreement requires (if and when applicable) tiered royalty payments in the low to mid-single digits, clinical/regulatory/sales milestone payments, and a percentage of any non-royalty sublicensing consideration paid to Qualigen.
Technology Transfer Agreement with Yi Xin
Through our wholly-owned diagnostics subsidiary Qualigen, Inc., we entered into a Technology Transfer Agreement, dated as of October 7, 2020, with Yi Xin of Suzhou, China, which authorizes Yi Xin to develop, manufacture and sell new generations of diagnostic test systems based on our core FastPack technology. In addition, the Technology Transfer Agreement authorizes Yi Xin to manufacture and sell our current generations of FastPack System diagnostic products (1.0, IP and PRO) in China. We have provided technology transfer and patent/know-how license rights to facilitate Yi Xin’s development and commercialization.
Under the terms of the Technology Transfer Agreement, we have provided Yi Xin the exclusive rights for China – which is a market we have not otherwise entered – both for Yi Xin’s new generations of FastPack-based products and for Yi Xin-manufactured versions of our existing FastPack product lines. Yi Xin has the right to sell its new generations of FastPack-based diagnostic test systems throughout the world (but not to or toward current customers of our existing generations of FastPack products); provided that any non-China sales would, until March 31, 2022, need to be through Sekisui. As of April 1, 2022, Yi Xin has right to sell Yi Xin-manufactured versions of existing FastPack 1.0, IP and PRO product lines worldwide (other than in the United States and other than to or toward current non-US customers of those products). Yi Xin also has the right, as of April 1, 2022, to buy Qualigen-manufactured FastPack 1.0, IP and PRO products from us at distributor prices for resale in and for the United States (but not to or toward current U.S. customers of those products). We did not license Yi Xin to sell in the United States market any Yi Xin-manufactured versions of those legacy FastPack product lines, even after March 31, 2022. We agreed in the Technology Transfer Agreement that we would not, after March 31, 2022, seek new FastPack customers outside the United States, European Union, Canada, and Mexico.
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Under the Technology Transfer Agreement, during the fiscal year ended December 31, 2021 we recognized revenues of approximately $670,000. There were no revenues under this agreement for the three months ended March 31, 2023, and the three months ended March 31, 2022. We will receive low- to mid-single-digit royalties on any future new-generations and current-generations product sales by Yi Xin.
Yi Xin is a newly-formed company and is subject to many risks. There can be no assurance that Yi Xin will successfully commercialize any products or that we will receive any royalties from Yi Xin.
Alpha Convertible Debt
On December 22, 2022, we issued an 8% Senior Convertible Debenture in the aggregate principal amount of $3,300,000 to Alpha Capital for a purchase price of $3,000,000 pursuant to the terms of a Securities Purchase Agreement, dated December 21, 2022. The Debenture is convertible, at any time, and from time to time, at Alpha Capital’s option, into shares of our common stock, at a price equal to $1.32 per share, subject to adjustment as described in the Debenture and other terms and conditions described in the Debenture, including the Company’s receipt of the necessary stockholder approvals.
Between January 9 and 12, 2023 Alpha Capital voluntarily converted $1,111,078 of the Debenture principal into 841,726 shares of common stock at a conversion price of $1.32 per share. During the three months ended March 31, 2023, we recognized an extinguishment loss on voluntary conversion of convertible debt of approximately $1.1 million and recorded accrued interest of approximately $562,000 (of which approximately $533,000 was a reduction to the discount) in other expenses in the condensed consolidated statements of operations. As of March 31, 2023 the remaining Debenture principal balance was approximately $2.2 million, the remaining discount was approximately $1.6 million, the fair value of the Warrant was approximately $2.2 million, and the fair value of the suite of bifurcated embedded derivative features was $0.
Commencing June 1, 2023 and continuing on the first day of each month thereafter until the earlier of (i) December 22, 2025 and (ii) the full redemption of the Debenture, we must redeem $110,000 plus accrued but unpaid interest, liquidated damages and any amounts then owing under the Debenture. The Monthly Redemption Amount must be paid in cash; provided that after the first two monthly redemptions, we may elect to pay all or a portion of a Monthly Redemption Amount in Conversion Shares, based on a Conversion Price equal to the lesser of (i) the then applicable conversion price of the Debenture and (ii) 85% of the average of the VWAPs (as defined in the Debenture) for the five consecutive trading days ending on the trading day that is immediately prior to the applicable Monthly Redemption Date. We may also redeem some or all of the then outstanding principal amount of the Debenture at any time for cash in an amount equal to 105% of the then outstanding principal amount of the Debenture being redeemed plus accrued but unpaid interest, liquidated damages and any amounts then owing under the Debenture. Our election to pay monthly redemptions in Conversion Shares or to effect an optional redemption is subject to the satisfaction of the Equity Conditions (as defined in the Debenture), including our receipt of the necessary stockholder approvals.
The Debenture accrues interest at the rate of 8% per annum, which does not begin accruing until December 1, 2023, and will be payable on a quarterly basis. Interest may be paid in cash or shares of common stock of the Company or a combination thereof at the option of the Company; provided that interest may only be paid in shares if the Equity Conditions have been satisfied, including our receipt of the necessary stockholder approvals.
Nanosynex Funding Agreement
As a condition to the NanoSynex acquisition, we entered into a Master Agreement for the Operational and Technological Funding of NanoSynex, on May 26, 2022, pursuant to which we have agreed to fund NanoSynex up to an aggregate of approximately $10.4 million over a three year period, subject to NanoSynex’s achievement of certain performance milestones specified in the Funding Agreement and the satisfaction of other terms and conditions described in the Funding Agreement.
We will receive in exchange for any payment made to NanoSynex under the Funding Agreement one or more promissory notes (which may contain convertible features) with a face value equal to the amount paid by us to NanoSynex upon satisfaction of the applicable performance milestones. Any promissory notes issued to us by NanoSynex under the Funding Agreement will bear interest at a rate of 9.00% per annum on the principal balance from time to time outstanding under the promissory note. The principal and interest under any promissory note issued to us under the Funding Agreement will be due and payable upon the sooner to occur of: (i) five years from the date of the particular promissory note; (ii) the acquisition by any person or entity of all or substantially all of the share capital of NanoSynex, through share purchase, issuance of shares or merger of NanoSynex or the purchase of all or substantially all of the assets of NanoSynex; or (iii) the initial public offering of NanoSynex. If at any time, our ownership of the share capital of NanoSynex on an issued and outstanding basis falls or is reasonably expected to fall below 50.1%, solely as a result of the exercise of existing or future options (or an equivalent instrument) or as a result of issuance of restricted, shares, restricted stock units (or an equivalent instruments), we, in our sole discretion, may elect to convert all or any portion of the outstanding principal amount of any promissory note into shares of NanoSynex’s most senior class of preferred shares existing immediately prior to such conversion, subject to the terms and conditions described in the promissory notes so that, following such conversion, we will regain 50.1% ownership of NanoSynex’s issued and outstanding share capital. During the year ended December 31, 2022 a total of approximately $2.4 million was funded to NanoSynex, and for the three months ended March 31, 2023 an additional $0.5 million was funded to NanoSynex under the Funding Agreement.
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Other Service Agreements
We enter into contracts in the normal course of business, including with clinical sites, contract research organizations, and other professional service providers for the conduct of clinical trials, contract manufacturers for the production of our product candidates, contract research service providers for preclinical research studies, professional consultants for expert advice and vendors for the sourcing of clinical and laboratory supplies and materials. These contracts generally provide for termination on notice, and therefore are cancelable contracts.
Cash Flows
The following table sets forth the significant sources and uses of cash and cash equivalents for the periods set forth below:
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (2,634,093 | ) | $ | (3,881,611 | ) | ||
| Investing activities | (198,009 | ) | (49,625 | ) | ||||
| Financing activities | — | 3,858 | ||||||
| Effect of exchange rate on cash | 160,320 | — | ||||||
| Net decrease in cash and restricted cash | $ | (2,671,781 | ) | $ | (3,927,378 | ) | ||
Net Cash Used in Operating Activities
During the three months ended March 31, 2023, operating activities used $2.6 million of cash, primarily resulting from a net loss of $4.1 million. Cash flows from operating activities (as opposed to net loss) for the three months ended March 31, 2023 were positively impacted by adjustments for a $1.1 million non cash loss on voluntary conversion of convertible debt, accretion of discount of $0.5 million on convertible debt, $0.2 million in employee/director stock-based compensation expense, depreciation and amortization of $0.1 million, as well as a $0.4 million decrease in prepaid expenses and other assets, a $0.3 million increase in accrued expenses and other current liabilities, a $0.1 million decrease in accounts receivable and related reserves, and a $0.1 million decrease in inventory. Cash flows from operating activities (as opposed to net loss) for the three months ended March 31, 2023 were negatively impacted by a $1.0 million decrease in fair value of warrant liabilities, a $0.2 million decrease in deferred tax liability, and a $0.1 million decrease in R&D grant liability.
During the three months ended March 31, 2022, operating activities used $3.9 million of cash, primarily resulting from a net loss of $4.3 million. Cash flows from operating activities (as opposed to net loss) for the three months ended March 31, 2022 benefited from $1.2 million in employee/director stock-based compensation expense, a $0.3 million decrease in prepaid expenses and other assets, a $0.2 million decrease in accounts receivable, a $0.1 million increase in accounts payable, and depreciation and amortization of $0.1 million. Cash flows from operating activities (as opposed to net loss) for the three months ended March 31, 2022 were negatively impacted by a $0.5 million decrease in accrued expenses and other current liabilities, a $0.3 million increase in inventory, and a $0.7 million decrease in fair value of warrant liabilities.
Net Cash Used in Investing Activities
During the three months ended March 31, 2023, net cash used in investing activities was approximately $0.2 million, primarily related to the purchase of property and equipment.
During the three months ended March 31, 2022, net cash used in investing activities was approximately $50,000, primarily related to the purchase of property and equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2023 was $0.
Net cash provided by financing activities for the three months ended March 31, 2022 was approximately $4,000, due to net proceeds from exercise of warrants.
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3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item.
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023, the end of the period covered by this Quarterly Report.
Based on this evaluation, our principal executive officer and principal financial officer have concluded that , due to the material weakness described below, our disclosure controls and procedures as of March 31, 2023 were not effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. We believe that a disclosure controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the disclosure controls system are met, and no evaluation of disclosure controls can provide absolute assurance that all disclosure control issues, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. As of December 31, 2022, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2022, our internal control over financial reporting was not effective because of a material weakness in our internal control over financial reporting related to the lack of accounting department resources and/or policies and procedures to ensure recording and disclosure of items in compliance with generally accepted accounting principles. We have taken and are taking steps to remediate the material weakness, including implementing additional procedures and utilizing external consulting resources with experience and expertise in U.S. GAAP and public company accounting and reporting requirements to assist management with its accounting and reporting of complex and/or non-recurring transactions and related disclosures.
Notwithstanding the identified material weakness, our management believes that the condensed consolidated financial statements included in this Quarterly Report fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP. Nonetheless, we also believe that an internal control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the internal control system are met, and no evaluation of internal control can provide absolute assurance that all internal control issues and instances of fraud, if any, within a company are detected.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any legal matters. From time to time, we could become involved in disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters.
ITEM 1A. RISK FACTORS
The Company’s business, reputation, results of operations and financial condition, as well as the price of its stock, can be affected by a number of factors, whether currently known or unknown, including those described in Part I, Item 1A of the Company’s 2022 Annual Report under the heading “Risk Factors.” When any one or more of these risks materialize, the Company’s business, reputation, results of operations and financial condition, as well as the price of its stock, can be materially and adversely affected. There have been no material changes to the Company’s risk factors since the 2022 Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
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| 101.INS# | Inline XBRL Instance Document. | |
| 101.SCH# | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL# | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF# | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB# | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE# | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover page Interactive Data File (embedded within the Inline XBRL document) |
# XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| May 15, 2023 | QUALIGEN THERAPEUTICS, INC. | |
| By: | /s/ Michael S. Poirier | |
| Name: | Michael S. Poirier | |
| Title: | Chairman of the Board, Chief Executive Officer | |
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