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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. ☒
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). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☒
As of November 11, 2022, 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)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| 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 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 | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Deferred tax liability | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Qualigen Therapeutics, Inc. stockholders’ equity: | ||||||||
| Common stock, $par value; shares authorized; and shares issued and outstanding as of September 30, 2022 and December 31, 2021, 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 OTHER COMPREHENSIVE LOSS
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUES | ||||||||||||||||
| Net product sales | $ | $ | $ | $ | ||||||||||||
| License revenue | ||||||||||||||||
| Total revenues | ||||||||||||||||
| EXPENSES | ||||||||||||||||
| Cost of product sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Total expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME, NET | ||||||||||||||||
| Gain on change in fair value of warrant liabilities | ||||||||||||||||
| Interest income, net | ||||||||||||||||
| Other income, net | ||||||||||||||||
| Total other income, net | ||||||||||||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| 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)
| Qualigen | ||||||||||||||||||||||||||||||||
| Common Stock | Additional | Accumulated Other | Therapeutics, Inc. | Total | ||||||||||||||||||||||||||||
| Shares | Amount $ | Paid-In Capital | Comprehensive Income | Accumulated Deficit | Stockholders’ Equity | Noncontrolling Interest | Stockholders’ Equity | |||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Stock issued upon exercise of warrants | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Common stock issued for business acquisition | $ | |||||||||||||||||||||||||||||||
| Prefunded warrants issued for business acquisition | — | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | |||||||||||||||||||||||||||||||
| Fair value of noncontrolling interest related to business acquisition | — | |||||||||||||||||||||||||||||||
| Fair value of warrant modification for business acquisition | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Stock issued upon exercise of warrants | $ | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | |||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 1,409,504 | — | — | 1,409,504 | — | 1,409,504 | ||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
| Series Alpha Convertible | Total Qualigen | |||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional | Accumulated Other | Therapeutics, Inc. | Total | ||||||||||||||||||||||||||||||||||
| Shares | Amount $ | Shares | Amount $ | Paid-In Capital | Comprehensive Income | Accumulated Deficit | Stockholders’ Equity | Noncontrolling Interest | Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | | $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock issued upon cash exercise of warrants | — | |||||||||||||||||||||||||||||||||||||||
| Stock issued upon net-exercise of warrants | — | ( | ) | |||||||||||||||||||||||||||||||||||||
| Stock issued for professional services | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||
| Stock issued upon cash exercise of warrants | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||
| Stock issued upon cash exercise of warrants | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||
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 Nine Months Ended September 30 | ||||||||
| 2022 | 2021 | |||||||
| 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 | ||||||||
| Common stock issued for professional services | ||||||||
| Stock-based compensation | ||||||||
| Change in fair value of warrant liabilities | ( | ) | ( | ) | ||||
| 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 | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Payments for patents and licenses | ( | ) | ||||||
| Net cash acquired in business combination | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net proceeds from warrant exercises | ||||||||
| Principal payments on notes payable | ( | ) | ||||||
| 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 from equipment held for lease to inventory | $ | $ | ||||||
| Fair value of shares issued for cashless warrant exercises | $ | $ | ||||||
| Fair value of warrant liabilities on date of exercise | $ | $ | ||||||
| ACQUISITION: | ||||||||
| Fair value of assets acquired | $ | ( | ) | |||||
| Fair value of liabilities assumed, net of goodwill | ||||||||
| Fair value of Alpha Capital/Qualigen warrants repriced due to acquisition | ||||||||
| Fair value of Qualigen prefunded warrant issued in exchange for NanoSynex stock | ||||||||
| Fair value of Qualigen common stock issued in exchange for NanoSynex stock | ||||||||
| Net cash acquired in business combination (Note 3) | $ | $ | ||||||
| Cash and restricted cash included in the accompanying balance sheet was as follows: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
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”) in exchange for shares of the Company’s common stock and a prefunded warrant
to purchase
Basis of Presentation
The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim reports of companies filing as a smaller reporting company. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the Securities Exchange Commission on March 31, 2022, as amended on April 29, 2022 (the “2021 Annual Report”). In the opinion of management, the accompanying condensed consolidated interim financial statements include all adjustments necessary in order to make the financial statements not misleading. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or any other future period. Certain notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Company’s 2021 Annual Report have been omitted. The accompanying condensed consolidated balance sheet at December 31, 2021 has been derived from the audited balance sheet at December 31, 2021 contained in the 2021 Annual Report.
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 consolidated statements of changes in stockholders’ equity.
Accounting Estimates
Management uses estimates and assumptions in preparing its unaudited condensed 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.
7
Cash, cash equivalents and restricted 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 its cash in bank deposits which exceed federally insured limits and could potentially be subject to significant concentrations of credit risk on cash. The Company reviews the financial stability of its depository institutions on a regular basis, and has not experienced any losses in such accounts.
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.
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 three and nine months ended September 30, 2022 and
2021,
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, net is comprised of the following at:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts Receivable | $ | $ | ||||||
| Less 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.
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.
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
We apply 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.
8
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 (“PSA”), 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.
License Revenue
The Company enters into out-license agreements with counterparties to develop and/or commercialize its products in exchange for nonrefundable upfront license fees and/or sales-based royalties.
If
the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified
in the arrangement, the Company recognizes revenue from nonrefundable upfront fees allocated to the license when the license is transferred
to the customer and the customer can benefit from the license. For licenses that are bundled with other performance obligations, management
uses judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is
satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing
revenue from nonrefundable upfront fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts
the measure of progress and related revenue recognition. During the three months ended September 30, 2022 and 2021, the Company recognized
no license revenue, and during the nine months ended September 30, 2022 and 2021, the Company recognized license revenue of $ and
approximately $
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.
9
During
the three months ended September 30, 2022 and 2021, 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 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 sheets 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 12- Commitments and Contingencies for more information).
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 include 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 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. 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.
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.
10
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 other 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.
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 other 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).
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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.
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.
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).
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Other
comprehensive loss related to the effects of foreign currency translation adjustments attributable to NanoSynex was $
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), which extends the effective date of Topic 326 for certain companies until fiscal years beginning after December 15, 2022. The new standard will be effective for the Company in the first quarter of fiscal year beginning January 1, 2023, and early adoption is permitted. The Company has not completed its review of the impact of this standard on its condensed consolidated financial statements. However, based on the Company’s history of immaterial credit losses from trade receivables, management does not expect that the adoption of this standard will have a material effect on the Company’s condensed consolidated financial statements.
Global Economic Conditions
Russia’s Invasion of Ukraine
In February 2022, Russia invaded Ukraine. While the Company has limited 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 fiscal 2021 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.
Ongoing COVID-19 Pandemic
The COVID-19 pandemic has had a dramatic impact on businesses globally and our business as well. Our sales of diagnostic products fell significantly during 2020 and our net loss increased significantly, as deferral of patients’ non-emergency visits to physician offices, clinics and small hospitals sharply reduced demand for FastPack tests. Since then we have experienced some recovery in demand. To mitigate risks, we continue to evaluate the extent to which COVID-19 may impact our business and operations and adjust risk mitigation planning and business continuity activities as needed.
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Other accounting standard updates are either not applicable to the Company or are not expected to have a material impact on the Company’s unaudited condensed financial statements.
NOTE 2 — LIQUIDITY AND GOING CONCERN
As of September 30, 2022, the Company had approximately $
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. 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 financing for planned research and development activities, capital expenditures, clinical and pre-clinical testing for QN-302 clinical trials, to continue preclinical development of RAS and QN-247, and to continue funding the 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 we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our 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 we raise 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, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
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.
NOTE 3 — ACQUISITION
Business Combination
The
Company acquired a
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The acquisition of the majority interest of NanoSynex was accounted for as a business combination using the acquisition method, in accordance with FASB ASC Topic 805. A summary of the consideration transferred and provisional fair value of assets acquired and liabilities assumed in the NanoSynex acquisition is as follows:
| Consideration transferred, net of cash acquired | ||||
| Cash paid for NanoSynex preferred stock: | $ | |||
| Purchase of NanoSynex preferred stock: | ||||
| Price per share of Qualigen Stock on May 26, 2022 | $ | |||
| FMV of shares of Qualigen stock issued to Alpha Capital Anstalt | $ | |||
| FMV of shares of Qualigen stock related to prefunded warrant issued to Alpha Capital Anstalt | $ | |||
| Total consideration paid for NanoSynex preferred stock | $ | |||
| FMV of consideration related to 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 | $ | |||
The purchase accounting adjustments are preliminary and subject to revision within the measurement period provided by ASC Topic 805. Qualigen transaction costs, which were immaterial, have been expensed as incurred and charged to the Company’s consolidated statements of operations and other comprehensive loss. There was no provision for reimbursement of transaction costs from Qualigen 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.
As
a condition to the closing, the Company agreed to provide NanoSynex with up to $
The
Company’s condensed consolidated statement of operations and other comprehensive loss for three and nine months ended
September 30, 2022 include $
15
The following pro forma information has been prepared as if the NanoSynex acquisition occurred on January 1, 2021. The following unaudited supplemental pro forma consolidated results do not purport to reflect what the combined Company’s results of operations would have been, nor do they project the future results of operations of the combined Company. The unaudited supplemental pro forma consolidated results reflect the historical financial information of Qualigen and NanoSynex, adjusted to give effect to the NanoSynex acquisition as if it had occurred on January 1, 2021, as well as to record NanoSynex stock compensation expense and to record the net loss related to the noncontrolling interest, in accordance with generally accepted accounting principles:
| Consolidated Pro Forma Financial | ||||||||
| Results for the Nine Months Ending | ||||||||
| September 30, | September 30, | |||||||
| 2022 | 2021 | |||||||
| Net revenue | $ | $ | ||||||
| Net loss attributable to Qualigen Therapeutics, Inc. | $ | ( | ) | $ | ( | ) | ||
NOTE 4 — INVENTORY, NET
Inventory, net consisted of the following at September 30, 2022 and December 31, 2021:
September 30, 2022 | December 31, 2021 | |||||||
| 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 September 30, 2022 and December 31, 2021:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid manufacturing expenses | ||||||||
| Other prepaid expenses | ||||||||
| $ | $ | |||||||
NOTE 6 — PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at September 30, 2022 and December 31, 2021:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Computer equipment | ||||||||
| Leasehold improvements | ||||||||
| Molds and tooling | ||||||||
| Furniture and fixtures | ||||||||
| Equipment held for lease, net | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
expense relating to property and equipment was approximately $
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NOTE 7 — GOODWILL, IPR&D AND OTHER INTANGIBLES
| September 30, | December 31, | |||||||||
| 2022 | 2021 | |||||||||
| 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
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 September 30, 2022 and December 31, 2021:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Board compensation | $ | $ | ||||||
| Franchise, sales and use taxes | ||||||||
| Income taxes | ||||||||
| Payroll | ||||||||
| Professional fees | ||||||||
| Research and development | ||||||||
| Royalties | ||||||||
| Vacation | ||||||||
| Warranty liability | ||||||||
| Other | ||||||||
| $ | $ | |||||||
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NOTE 9 – SHORT TERM DEBT-RELATED PARTY
NanoSynex
has four separate Notes Payable (the “Notes”) outstanding to Alpha Capital, dated 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 an aggregate of
The following table summarizes the activity in the Common Stock Warrants (received in exchange for the Series C Warrants) for the nine months ended September 30, 2022:
| Common Stock Warrants (received in exchange for the Series C 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 – September 30, 2022 | $ | |||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
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The following table summarizes the activity in the Common Stock Warrants (received in exchange for the Series C Warrants) activity for the nine months ended September 30, 2021:
| Common Stock Warrants (received in exchange for the Series C Warrants) | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding –December 31, 2020 | $ | | ||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Granted | ||||||||||||||||
| Total outstanding – September 30, 2021 | $ | |||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
The following table presents the Company’s fair value hierarchy for its warrant liabilities and exercises (all of which arise under the warrants received in exchange for the Series C Warrants) measured at fair value on a recurring basis using Level 3 inputs as of September 30, 2022:
| 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, 2021 | $ | $ | $ | $ | ||||||||||||
| Exercises | ( | ) | ( | ) | ||||||||||||
| Gain on change in fair value of warrant liabilities | ( | ) | ( | ) | ||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | ||||||||||||
There were no transfers of financial assets or liabilities between category levels for the three and nine months ended September 30, 2022.
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.
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The following table shows the range of assumptions used in estimating the fair value of warrant liabilities as of September 30, 2022 and 2021:
September 30, 2022 | September 30, 2021 | |||||||||||||||
| Range | Weighted Average | Range | Weighted Average | |||||||||||||
| Risk-free interest rate | % | % | ||||||||||||||
| Expected volatility (peer group) | % | % | ||||||||||||||
| Term of warrants (in years) | ||||||||||||||||
| Expected dividend yield | % | % | % | % | ||||||||||||
Basic loss per share (“EPS”) is computed by dividing net 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.
| For the Three Months Ended September 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| 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 September 30, | As of September 30, | |||||||
| 2022 | 2021 | |||||||
| Shares of common stock subject to outstanding options | ||||||||
| Shares of common stock subject to outstanding warrants | ||||||||
| Shares of common stock subject to conversion of Series Alpha Convertible Preferred Stock | ||||||||
| Total common stock equivalents | ||||||||
NOTE 12 — COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases its facilities under a long-term operating lease agreement. On December 15, 2021, our 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
20
The tables below show the operating lease right-of-use assets and operating lease liabilities as of September 30, 2022, including the changes during the periods:
| Operating lease right-of-use assets | ||||
| Net right-of-use assets at December 31, 2021 | $ | |||
| Less amortization of operating lease right-of-use assets | ( | ) | ||
| Operating lease right-of-use assets at September 30, 2022 | $ |
Operating lease liabilities | ||||
| Lease liabilities at December 31, 2021 | $ | |||
| Less principal payments on operating lease liabilities | ( | ) | ||
| Lease liabilities at September 30, 2022 | ||||
| Less non-current portion | ( | ) | ||
| Current portion at September 30, 2022 | $ |
As
of September 30, 2022, the Company’s operating leases have a weighted-average remaining lease term of
As of September 30, 2022, future minimum payments during the next five fiscal years and thereafter are as follows:
| Year Ending December 31, | Amount | |||
| 2022 (three months) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | ||||
| Less present value discount | ( | ) | ||
| Operating lease liabilities | $ | |||
Total
lease expense was approximately $
Termination of Sekisui Distribution Agreement
In March 2018, the Company extended a strategic partnership entered into in May 2016 with Sekisui Diagnostics, LLC (“Sekisui”). The Company appointed Sekisui as its diagnostics commercial partner and exclusive worldwide distributor with the exception of certain customer accounts retained by Qualigen; Sekisui’s distribution arrangement expired on March 31, 2022. Subsequent to the expiration of the agreement, the Company has a a commitment to purchase leased FastPack rental systems back from Sekisui at Sekisui’s net book value, the amount of which has not yet been determined.
NanoSynex Funding Commitment
As
a condition to the closing, the Company agreed to provide NanoSynex with up to $
21
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 during 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 $
NOTE 13 — 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 agreed to reimburse
ULRF for sponsored research expenses of up to $
22
Sponsored
research expenses related to this agreement for the three months ended September 30, 2022 and 2021 were approximately $
Between June 2018 and April 2022, the Company entered into license and
sponsored research agreements with ULRF for QN-247, a novel aptamer-based
compound that has shown promise as an anticancer drug. Under the agreements, the Company will take 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 this agreement
for the three months ended September 30, 2022 and 2021 were $
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 is responsible for maintenance of the related intellectual property portfolio. In return, ULRF received
approximately $
The license agreement with ULRF for its intellectual property in the use of QN-165 as a treatment for COVID-19 was terminated effective October 31, 2022.
Sponsored
research expenses related to this agreement for the three months ended September 30, 2022 and 2021 were $
Advanced Cancer Therapeutics
In
December 2018, the Company entered into a license agreement with Advanced Cancer Therapeutics, LLC (“ACT”), granting the
Company exclusive rights to develop and commercialize QN-165, an aptamer-based drug candidate. In return, ACT received a $
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 both the three and nine months ended September 30, 2022 and 2021, there was
23
Sekisui Diagnostics
In March 2018, the Company extended a strategic partnership entered into in May 2016 with Sekisui. The Company appointed Sekisui as its diagnostics commercial partner and exclusive worldwide distributor with the exception of certain customer accounts retained by Qualigen. Sekisui’s distribution arrangement expired on March 31, 2022.
Under
the terms of the arrangement, there were product sales to Sekisui of $
Yi Xin
In October 2020, 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 authorized 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.
The Company recognized $
The Company gave Yi Xin the exclusive rights for China – which is a market the Company has not otherwise entered – both for Yi Xin’s new generations of FastPack-based products and for Yi Xin-manufactured versions of the Company’s existing FastPack product lines. Yi Xin will also have 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-U.S. customers of those products), as well as the right to buy Company-manufactured FastPack 1.0, IP and PRO products from the Company 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 it would not, after March 31, 2022, seek new FastPack customers outside the United States.
STA Pharmaceutical
In November 2020, the Company entered into a contract with STA Pharmaceutical Co., Ltd., a subsidiary of WuXi AppTec, for Good Manufacturing Practice production of QN-165, which was the Company’s lead drug candidate for the treatment of COVID-19 and other viral diseases, for potential clinical trials in 2021.
Research
and development expenses related to this agreement for the three months ended September 30, 2022 and 2021 were $
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
both the three months ended September 30, 2022 and 2021, there were license costs of $
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NOTE 14 — STOCKHOLDERS’ EQUITY
As of September 30, 2022 and December 31, 2021, the Company had two classes of authorized capital stock: common stock and Series Alpha convertible 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, as of September 30, 2022 any remaining assets would be distributed ratably among the holders of the common stock and, on an as-if-converted basis, the holders of Series Alpha convertible 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.
At September 30, 2022, the Company has reserved shares of authorized but unissued common stock for possible future issuance.
| Exercise of issued and future grants of stock options | ||||
| Exercise of stock warrants | ||||
| Total |
Series Alpha Convertible Preferred Stock
As of September 30, 2022 and December 31, 2021, there were shares of Series Alpha convertible preferred stock outstanding.
Stock Options and Warrants
The Company recognizes all compensatory share-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 granting of incentive or non-statutory common stock options and other types of awards to qualified employees, officers, directors, consultants and other service providers. At September 30, 2022 and December 31, 2021 there were and outstanding options, respectively, under the 2020 Plan and on such dates there were and shares reserved under the 2020 Plan, respectively, for future grant. The shares available for future grant reflect a 2020 Plan amendment approved by the Company’s stockholders on August 9, 2021 where the number of shares of common stock available for issuance under the 2020 Plan was increased by .
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2021 | $ | $ — $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Expired | ( | ) | - | — | ||||||||||||
| Forfeited | ( | ) | - | — | ||||||||||||
| Total outstanding – September 30, 2022 | $ | $ — $ | ||||||||||||||
| Exercisable (vested) | $ | $ — $ | ||||||||||||||
| Non-Exercisable (non-vested) | $ | $ — $ | ||||||||||||||
There was approximately $ and $ million of compensation cost related to outstanding options for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, 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 years.
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| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2020 | $ | $ - $ | ||||||||||||||
| Granted | — | |||||||||||||||
| Expired | — | |||||||||||||||
| Forfeited | ( | ) | — | — | ||||||||||||
| Total outstanding – September 30, 2021 | $ | $ - $ | ||||||||||||||
| Exercisable (vested) | $ | $— $ | ||||||||||||||
| Non-Exercisable (non-vested) | $ | $ — $ | ||||||||||||||
. The options awarded under the 2020 Plan will vest as determined by the Board of Directors but will not exceed a ten-year period. The weighted average grant date fair value per share of options granted during the nine months ended September 30, 2022 was $.
Fair Value of Equity Awards
The Company utilizes the Black-Scholes option pricing model to value awards under its Plans. 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 Securities and Exchange Commission. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. |
For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Expected dividend yield | % | % | ||||||
| Expected stock-price volatility | % | % | ||||||
| Risk-free interest rate | — | — | ||||||
| Expected average term of options (in years) | ||||||||
| Stock price | $ | $ | ||||||
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| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| 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 (originally exercisable to
purchase Series C convertible preferred stock, and now instead exercisable to purchase common stock) 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
No compensatory warrants were issued during the nine months ended September 30, 2022.
The following table summarizes the activity in the common stock equity classified compensatory warrants for the nine months ended September 30, 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 – September 30, 2022 | $ | $ | ||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
| Non-Exercisable | $ | $ | — | |||||||||||||
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The following table summarizes the activity in the common stock equity classified compensatory warrants for the nine months ended September 30, 2021:
| Common Stock | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2020 | $ | | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Total outstanding – September 30, 2021 | $ | |||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
| Non-Exercisable | ||||||||||||||||
There were $ in compensation costs related to outstanding equity classified compensatory warrants for the nine months ended September 30, 2022 and $ for the nine months ended September 30, 2021.
Noncompensatory Equity Classified Warrants
In
May 2020, as a commitment fee, the Company issued noncompensatory equity classified warrants to an investor for the purchase of
During
the year ended December 31, 2021, with the exception of the warrants to purchase
In
conjunction with the NanoSynex acquisition, on April 25, 2022 the exercise price of
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The following table summarizes the noncompensatory equity classified warrant activity for the nine months ended September 30, 2022:
| Common Stock | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2021 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Total outstanding – September 30, 2022 | ||||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
| Non-Exercisable | $ | $ | ||||||||||||||
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
As disclosed in the 2021 Annual Report, the Company’s management identified an error in the
previously issued March 31, 2021, June 30, 2021 and September 30, 2021 unaudited interim condensed consolidated financial statements
in which the fair value of the Company’s exercised liability classified warrants had been inadvertently excluded from reclassification
into shareholders’ equity. All financial information contained in the accompanying notes to these condensed consolidated financial
statements has been revised to reflect the correction of this error as shown in the table below.
| For the Quarter Ended September 30, 2021 | For the Nine Months Ended September 30, 2021 | |||||||||||||||
| As reported | Corrected | As reported | Corrected | |||||||||||||
| Gain on change in fair value of warrant liabilities | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
NOTE 16 — SUBSEQUENT EVENTS
On October 28, 2022, the Company held its reconvened 2022 annual meeting of stockholders, and the stockholders approved Proposal 4, a proposal to approve an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect a reverse stock split of the outstanding shares of the Company’s common stock, at a ratio within a range of 1-for-5 to 1-for-10, as determined by the Company’s board of directors.
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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, 2021, which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022 (as amended, the “2021 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 that involve risks and uncertainties and reflect our judgment as of the date of this Quarterly Report. These statements generally relate to future events or our 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 our 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 due to a number of factors.
These forward-looking statements include, but are not limited to, statements about:
| ● | our ability to successfully develop any drugs or therapeutic devices; | |
| ● | our ability to progress our drug candidates or therapeutic devices through preclinical and clinical development; | |
| ● | our ability to obtain the requisite regulatory approvals for our clinical trials and to begin and complete such trials according to any projected timeline; | |
| ● | our ability to complete enrollment in our clinical trials as contemplated by any projected timeline; | |
| ● | the likelihood that future clinical trial data will be favorable or that such trials will confirm any improvements over other products or lack negative impacts; | |
| ● | our ability to successfully commercialize any drugs or therapeutic devices; | |
| ● | our ability to procure or earn sufficient working capital to complete the development, testing and launch of our prospective therapeutic products; | |
| ● | the likelihood that patents will issue on our owned and in-licensed patent applications; | |
| ● | our ability to protect our intellectual property; | |
| ● | our ability to compete; | |
| ● | our ability to maintain or expand market demand and/or market share for our diagnostic products generally, particularly in light of COVID-19-related deferral of patients’ physician-office visits and in view of FastPack reimbursement pricing challenges; and | |
| ● | our ability to maintain our diagnostic sales and marketing engine without interruption following the expiration of our distribution agreement with Sekisui Diagnostics, LLC (“Sekisui”). |
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. These risks and uncertainties include risks related to our financial position and our ability to raise additional capital as needed to fund our operations and product development; risks related to the initiation, cost, timing, progress and results of current and future research and development programs, preclinical studies and clinical trials and our ability to obtain and maintain regulatory approvals; risks related to our reliance on third party suppliers and manufacturers; risks related to market acceptance of our products and competition; risks related to the ongoing COVID-19 pandemic and the war in Ukraine, including instability in the global credit markets and supply chain disruptions. In light of the significant uncertainties in these forward-looking statements, you should not rely upon forward-looking statements as predictions of future events. 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. 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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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 (previously called “RAS-F”), and QN-247. Our investigational QN-302 compound is a small molecule G4 selective transcription inhibitor with strong binding affinity to G4s prevalent in cancer cells. Such binding could, by stabilizing the G4s against “unwinding,” help inhibit cancer cell proliferation. RAS is a family of RAS oncogene protein-protein interaction inhibitor small molecules for preventing 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.QN-247 is a DNA coated gold nanoparticle cancer drug candidate that may have the potential to target various types of cancer, including Triple Negative Breast Cancer (TNBC), Acute Myeloid Leukemia (AML) and Glioblastoma (GBM). 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. We are also seeking strategic partnering opportunities for STARS, a DNA/RNA-based therapeutic device product concept for removing precisely targeted tumor-produced and viral compounds from circulating blood.
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. Prior to March 31, 2022, most of our FastPack product sales were through our partner Sekisui pursuant to a distribution agreement, but we maintained direct distribution for certain house accounts, including selling our total testosterone test kits to Low T Center, Inc. (“Low T”), the largest men’s health group in the United States, with 40 locations. The distribution agreement with Sekisui expired on March 31, 2022, at which time the services previously provided by Sekisui reverted to us and as of April 1, 2022 we recognize 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 and other markets outside of the United States in which the Company does not currently sell.
On May 26, 2022, the Company acquired 2,232,861 shares of Series A-1 Preferred Stock of NanoSynex, Ltd. (“NanoSynex”) from Alpha Capital Anstalt (“Alpha Capital”) in exchange for 3,500,000 shares of the Company’s common stock and a prefunded warrant to purchase 3,314,641 shares of the Company’s common stock at an exercise price of $0.001 per share. Concurrently with this transaction, the Company also purchased 381,786 shares of Series B preferred stock from NanoSynex for a total purchase price of $600,000. The transactions resulted in the Company acquiring a 52.8% interest in NanoSynex. The Company envisions future synergies from the integration of its own proprietary results-proven FastPack diagnostics platform with the innovative NanoSynex technology. NanoSynex is a micro-biologics diagnostics company domiciled in Israel.
Our condensed consolidated financial statements do not separate out our diagnostics-related activities and our therapeutics-related activities. Although to date all our reported revenue is diagnostics-related, our reported expenses represent the total of our therapeutics-related and diagnostics-related expenses.
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Distribution and Development Agreement with Sekisui
In May 2016, through our wholly-owned diagnostics subsidiary Qualigen, Inc., we entered into a Distribution and Development Agreement (the “Sekisui Distribution Agreement”) with Sekisui. Under the Sekisui Distribution Agreement, Sekisui served as the exclusive worldwide distributor for FastPack products (although we retained certain specific accounts for direct transactions). Sekisui’s exclusive distribution arrangements expired on March 31, 2022.
Under the Sekisui Distribution Agreement, we began development of a proposed “FastPack 2.0” product line for a new whole blood vitamin D assay, which if successfully introduced by us would have been distributed by Sekisui. Between May 2016 and January 2018, Sekisui paid us a total of approximately $5.5 million upon the achievement of specified development milestones related to this product line.
We conducted a clinical trial of FastPack 2.0 in March 2019, and determined in May 2019 that it was uncertain whether the results of the trial would enable the test to receive FDA approval. As a result, we discontinued our FastPack 2.0 project with Sekisui. Currently, no further FastPack 2.0 analyzer or test development is ongoing, and we have licensed and transferred our FastPack 2.0 technology to Yi Xin Zhen Duan Jishu (Suzhou) Ltd. for them to further develop and commercialize as described below.
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 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 our core FastPack technology. In addition, the Technology Transfer Agreement authorized Yi Xin to manufacture and sell our current generations of FastPack System diagnostic products (1.0, IP and PRO) in China.
Under the Technology Transfer Agreement, we received aggregate net cash payments of $670,000, of which we recognized approximately $38,000 in product sales and $632,000 in license revenue during 2021. In addition, we will receive low- to mid-single-digit royalties on any future new-generations and current-generations product sales by Yi Xin. We recognized no product sales or license revenue for the three months and nine months ended September 30, 2022. We recognized no product sales or license revenue in the three months ended September 30, 2021 and $38,000 in product sales and $479,000 in license revenue in the condensed consolidated statement of operations and other comprehensive loss for the nine months ended September 30, 2021
We provided technology transfer and patent/know-how license rights to facilitate Yi Xin’s development and commercialization.
In the Technology Transfer Agreement (as amended in August 2021), we gave 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 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 our existing generations of FastPack products). In addition, 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-U.S. customers of those products). Also, after March 31, 2022, Yi Xin has 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); 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.
In the Technology Transfer Agreement, we also confirmed that we would not, after the March 31, 2022 expiration of the Sekisui Distribution Agreement, seek new FastPack customers outside the United States.
Yi Xin is a newly-formed company and its operations are 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.
Warrant Liabilities
In 2004, Qualigen, Inc. issued a series of 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 reverse recapitalization transaction and are now exercisable for Qualigen common stock. These warrants contained a provision that if Qualigen, Inc. issues 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, this provision gives rise to “warrant liabilities” (even though there is not any “liability” in the sense that we would be obligated to pay any cash sum to anyone). Accounting principles generally accepted in the United States (“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 and other comprehensive income.
Warrant liabilities were $0.7 million at September 30, 2022 and the change in fair value was $1.0 million for the nine months ended September 30, 2022. Because fair value will be determined each quarter on a “mark-to-market” basis, this item will usually result in significant variability in our future quarterly and annual statements of operations and condensed 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 a (possibly quite large) increase in the fair value of the warrant liabilities and a quarter-to-quarter decrease in our stock price would result in a (possibly quite large) decrease in the fair value of the warrant liabilities. There were 3,468,958 and 2,481,614 of these warrants outstanding at September 30, 2022 and December 31, 2021, respectively.
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Global Economic Conditions
Russia’s Invasion of Ukraine
In February 2022, Russia invaded Ukraine. While the Company has limited 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 fiscal 2021 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.
COVID-19 Update
The COVID-19 pandemic has had a dramatic impact on businesses globally and our business as well. Our sales of diagnostic products fell significantly during 2020 and our net loss increased significantly, as deferral of patients’ non-emergency visits to physician offices, clinics and small hospitals sharply reduced demand for FastPack tests. Since then we have experienced some recovery in demand. To mitigate risks, we continue to evaluate the extent to which COVID-19 may impact our business and operations and adjust risk mitigation planning and business continuity activities as needed.
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Results of Operations
Comparison of the Three Months Ended September 30, 2022 and 2021
The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021:
| For the Three Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES | ||||||||
| Net product sales | $ | 1,441,065 | $ | 1,155,065 | ||||
| License revenue | — | — | ||||||
| Total revenues | 1,441,065 | 1,155,065 | ||||||
| EXPENSES | ||||||||
| Cost of product sales | 1,278,029 | 993,120 | ||||||
| General and administrative | 2,618,021 | 2,756,323 | ||||||
| Research and development | 1,688,096 | 2,083,315 | ||||||
| Sales and marketing | 239,865 | 130,217 | ||||||
| Total expenses | 5,824,011 | 5,962,975 | ||||||
| LOSS FROM OPERATIONS | (4,382,946 | ) | (4,807,910 | ) | ||||
| OTHER INCOME, NET | ||||||||
| Gain on change in fair value of warrant liabilities | 321,300 | 1,763,936 | ||||||
| Interest income, net | 4,631 | 6,801 | ||||||
| Other income, net | 1,139 | 702 | ||||||
| Total other income, net | 327,070 | 1,771,439 | ||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (4,055,876 | ) | (3,036,471 | ) | ||||
| PROVISION FOR INCOME TAXES | — | 1,011 | ||||||
| NET LOSS | (4,055,877 | ) | (3,037,482 | ) | ||||
| Net loss attributable to noncontrolling interest | (230,767 | ) | — | |||||
| Net loss attributable to Qualigen, Inc. | $ | (3,825,109 | ) | $ | (3,037,482 | ) | ||
| Other comprehensive loss, net of tax | ||||||||
| Net loss | $ | (4,055,877 | ) | $ | (3,037,482 | ) | ||
| Foreign currency translation adjustment | 88,523 | — | ||||||
| Other comprehensive loss | (3,967,354 | ) | (3,037,482 | ) | ||||
| Comprehensive loss attributable to noncontrolling interest | (230,767 | ) | — | |||||
| Comprehensive loss attributable to Qualigen Therapeutics, Inc. stockholders | $ | (3,736,587 | ) | $ | (3,037,482 | ) | ||
Revenues
Net product sales
Net product sales are primarily generated from sales of diagnostic tests. Net product sales during the three-month periods ended September 30, 2022 and 2021 were approximately $1.4 million and $1.2 million, respectively, representing an increase of approximately $0.3 million, or 25%. This increase was due to the expiration of the Sekisui Distribution Agreement on March 31, 2022, at which time the services previously provided by Sekisui reverted to the Company, which resulted in the Company recognizing 100% of the revenue from direct sales of our FastPack diagnostic instruments and test kits.
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Expenses
Cost of Product Sales
Cost of product sales increased during the three months ended September 30, 2022, to $1.3 million, or 89% of net product sales, compared to approximately $1.0 million, or 86% of net product sales, during the three months ended September 30, 2021. This increase of $0.3 million, and increase as a percentage of sales, was due primarily to higher instrument repair costs and increases in freight charges.
General and Administrative Expenses
General and administrative expenses decreased 5% from $2.8 million, during the three months ended September 30, 2021, to $2.6 million during the three months ended September 30, 2022. This decrease was primarily due to a $0.2 million decrease in wages/bonuses and related payroll taxes.
Research and Development Costs
Research and development costs include therapeutic and diagnostic research and product development costs. Research and development costs decreased from $2.1 million for the three months ended September 30, 2021 to $1.7 million for the three months ended September 30, 2022. Of the $1.7 million of research and development costs for the three months ended September 30, 2022, $0.9 million (56%) was attributable to therapeutics and $0.8 million (44%) was attributable to diagnostics. Of the $2.1 million of research and development costs for the three months ended September 30, 2021, $1.7 million (83%) was attributable to therapeutics and $0.4 million (17%) was attributable to diagnostics.
The decrease in therapeutics research and development costs during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily due to an increase of $0.4 million in pre-clinical research costs for QN-302, which we acquired in January 2022, offset by a $0.5 million decrease in pre-clinical research costs related to the potential application of QN-165 for the treatment of COVID-19 (which has since been deprioritized to a non-core program), a decrease of $0.4 million in pre-clinical research costs for QN-247, a $0.1 million decrease in legal expenses and a $0.1 decrease in preclinical research costs for RAS.
The increase in diagnostics research and developments costs during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was due primarily to an increase of $0.5 million of research and development expenses related to NanoSynex, offset by a $0.1 million reduction in research and development expenses related to the supply agreement with Prediction Biosciences.
For the future, we expect our therapeutic research and development costs to continue to 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 were approximately $0.2 million for the three months ended September 30, 2022, an increase of $0.1 million, or 84%, from the three months ended September 30, 2021. This increase was primarily due to a $0.1 million increase in payroll expenses related to the assumption of Sekisui sales personnel in the second quarter of 2022.
Other Income (Expense), Net
Change in Fair Value of Warrant Liabilities
During the three months ended September 30, 2022 and 2021, we experienced a gain of approximately $0.3 million and $1.8 million, respectively, on change in fair value of warrant liabilities, primarily due to declines in our stock price and reduction in the remaining terms of the warrants. Typically, a decline in our stock price would result in a decline in the fair value of our warrant liabilities, generating a gain, while an increase in our stock price would result in an increase in the fair value of our warrant liabilities, generating a loss.
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 statements of operations based on unpredictable changes in our public market common stock price and the number of liability classified warrants outstanding at the end of each quarter.
Interest Income, Net
There was approximately $5,000 and $7,000 in interest income during the three months ended September 30, 2022 and 2021, respectively.
Other Income, Net
Other income was immaterial during the three months ended September 30, 2022 and 2021.
Net loss attributable to noncontrolling interest
Net loss attributable to noncontrolling interest was $230,767 and $0 during the three months ended September 30, 2022 and 2021.
Other comprehensive income-foreign currency translation adjustment
Other comprehensive income-foreign currency translation adjustment was $88,523 for the three months ended September 30, 2022 as compared to $0 for the three months ended September 30, 2021. The increase of $88,523 was due to the acquisition of NanoSynex in May 2022 and the translation of their September 30, 2022 financial statements into U.S. dollars from New Israeli Shekels.
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Comparison of the Nine Months Ended September 30, 2022 and 2021
The following table summarizes our results of operations for the nine months ended September 30, 2022 and 2021:
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES | ||||||||
| Net product sales | $ | 3,593,628 | $ | 3,693,842 | ||||
| License revenue | — | 478,654 | ||||||
| Total revenues | 3,593,628 | 4,172,496 | ||||||
| EXPENSES | ||||||||
| Cost of product sales | 3,206,553 | 3,112,224 | ||||||
| General and administrative | 8,177,627 | 8,582,361 | ||||||
| Research and development | 5,059,067 | 10,091,155 | ||||||
| Sales and marketing | 683,291 | 402,347 | ||||||
| Total expenses | 17,126,538 | 22,188,087 | ||||||
| LOSS FROM OPERATIONS | (13,532,910 | ) | (18,015,591 | ) | ||||
| OTHER INCOME, NET | ||||||||
| Gain on change in fair value of warrant liabilities | 1,019,342 | 4,299,000 | ||||||
| Interest income, net | 15,763 | 36,863 | ||||||
| Other income, net | 795 | 3,596 | ||||||
| Total other income, net | 1,035,900 | 4,339,459 | ||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (12,497,010 | ) | (13,676,132 | ) | ||||
| PROVISION FOR INCOME TAXES | 6,173 | 2,146 | ||||||
| NET LOSS | (12,503,183 | ) | (13,678,278 | ) | ||||
| Net loss attributable to noncontrolling interest | (234,883 | ) | — | |||||
| Net loss attributable to Qualigen Therapeutics, Inc. | $ | (12,268,300 | ) | $ | (13,678,278 | ) | ||
| Other comprehensive loss, net of tax | ||||||||
| Net loss | $ | (12,503,183 | ) | $ | (13,678,278 | ) | ||
| Foreign currency translation adjustment | 154,063 | — | ||||||
| Other comprehensive loss | (12,349,120 | ) | (13,678,278 | ) | ||||
| Comprehensive loss attributable to noncontrolling interest | (234,883 | ) | — | |||||
| Comprehensive loss attributable to Qualigen Therapeutics, Inc. stockholders | $ | (12,114,237 | ) | $ | (13,678,278 | ) | ||
Revenues
Net product sales
Net product sales are primarily generated from sales of diagnostic tests. Net product sales during the nine month periods ended September 30, 2022 and 2021 were approximately $3.6 million and $3.7 million, respectively, representing a decrease of approximately $0.1 million, or 3%. This decrease was primarily due to the expiration of the Sekisui Distribution Agreement on March 31, 2022, which caused Sekisui to reduce its purchases from us during the first quarter of 2022, as it sold off its remaining inventory prior to the expiration of the agreement. However, this reduction in Sekisui purchases during the first quarter was partially offset by higher direct sales of FastPack diagnostic instruments and test kits during the second and third quarters of 2022 and the Company recognizing 100% of the revenue from these sales, compared to the second and third quarters of 2021.
License Revenue
There was no license revenue for the nine months ended September 30, 2022. During the nine months ended September 30, 2021 there was approximately $0.5 million, due to the recognition of revenue from Yi Xin under the Technology Transfer Agreement.
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Expenses
Cost of Product Sales
Cost of product sales increased during the nine months ended September 30, 2022, to $3.2 million, or 89% of net product sales, compared to approximately $3.1 million, or 84% of net product sales, during the nine months ended September 30, 2021. This increase of $0.1 million, and increase as a percentage of sales, was due primarily to higher instrument repair costs and increases in freight charges.
General and Administrative Expenses
General and administrative expenses decreased from $8.6 million during the nine months ended September 30, 2021 to approximately $8.2 million during the nine months ended September 30, 2022, a decrease of $0.4 million, or 5%. This decrease was primarily due to a $0.7 million decrease in investor relations, accounting, and consulting expenses, a $0.2 million decrease in insurance expenses, partially offset by a $0.2 million increase in legal fees, a $0.2 million increase in stock based compensation, and a $0.1 million increase in payroll and related expenses.
Research and Development Costs
Research and development costs include therapeutic and diagnostic research and product development costs. Research and development costs decreased from $10.1 million for the nine months ended September 30, 2021 to $5.1 million for the nine months ended September 30, 2022. Of the $5.1 million of research and development costs for the nine months ended September 30, 2022, $3.6 million (72%) was attributable to therapeutics and $1.4 million (28%) was attributable to diagnostics. Of the $10.1 million of research and development costs for the nine months ended September 30, 2021, $9.1 million (90%) was attributable to therapeutics and $1.0 million (10%) was attributable to diagnostics.
The decrease in therapeutics research and development costs during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily due to a $6.5 million decrease in pre-clinical research costs related to the potential application of QN-165 for the treatment of COVID-19 (which has since been deprioritized to a non-core program), a decrease in legal expenses of $0.3 million, offset by an increase of $0.8 million in pre-clinical research costs for QN-302, which we acquired in January 2022, an increase of $0.3 million in pre-clinical research costs for RAS, an increase of $0.1 million in pre-clinical research costs for QN-247, and a $0.1 million increase in payroll and related expenses.
The $0.4 million increase in diagnostics research and development costs during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was due primarily to an increase of $0.5 million of research and development expenses related to NanoSynex, offset by a $0.1 million decrease in supplies and legal expenses.
For the future, we expect our therapeutic research and development costs to continue to 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 were approximately $0.7 million for the nine months ended September 30, 2022, an increase of $0.3 million, or 70%, from the nine months ended September 30, 2021. This increase was primarily due to a $0.2 million increase in payroll expense related to the assumption of Sekisui sales personnel in the current period and also due to increased spending for advertising, conventions and tradeshows of $0.1 million.
Other Income (Expense), Net
Change in Fair Value of Warrant Liabilities
During the nine months ended September 30, 2022 and 2021, we experienced a gain of $1.0 million and $4.3 million, respectively, on change in fair value of warrant liabilities, primarily due to declines in our stock price, reductions in the remaining terms of the warrants during both periods, and warrant exercises during the prior period. Typically, a decline in our stock price would result in a decline in the fair value of our warrant liabilities, generating a gain, while an increase in our stock price would result in an increase in the fair value of our warrant liabilities, generating a loss.
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 statements of operations based on unpredictable changes in our public market common stock price and the number of liability classified warrants outstanding at the end of each quarter.
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Interest Income, Net
There was approximately $16,000 and $37,000 in interest income during the nine months ended September 30, 2022 and 2021, respectively.
Other Income, Net
Other income was immaterial during the nine months ended September 30, 2022 and 2021.
Net loss attributable to noncontrolling interest
Net loss attributable to noncontrolling interest was $234,883 during the nine months ended September 30, 2022, and $0 during the nine months ended September 30, 2021.
Other comprehensive income-foreign currency translation adjustment
Other comprehensive income-foreign currency translation adjustment was $154,063 for the nine months ended September 30, 2022 as compared to $0 for the nine months ended September 30, 2021. The increase of $154,063 was due to the acquisition of NanoSynex in May 2022 and the translation of their September 30, 2022 financial statements into U.S. dollars from New Israeli Shekels.
Liquidity and Capital Resources
As of September 30, 2022, we had approximately $6.6 million in cash. The Company has incurred recurring losses from operations and has an accumulated deficit at September 30, 2022. The Company expects to continue to incur losses subsequent to the condensed consolidated balance sheet date of September 30, 2022. For the nine months ended September 30, 2022 and the year ended December 31, 2021, the Company used cash of $11.0 million and $14.7 million, respectively, in operations. The Company’s cash balances are expected to fund operations into the third quarter of 2023. The Company anticipates that it will continue to incur net losses for the foreseeable future. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the one-year period following the date that these financial statements were issued.
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. 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 financing for planned research and development activities, capital expenditures, clinical and pre-clinical testing for QN-302 clinical trials, to continue preclinical development of RAS and QN-247, and to continue funding the 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 $8.82 million from several institutional investors. There can be no assurance that further financing can 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 closing, the Company 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 (the“Funding Agreement”) 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 $1.5 million on July 5, 2022 pursuant to this agreement. The Company may terminate the Funding Agreement after October 29, 2022 upon 120 days’ notice.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our 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 we raise 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, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
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.
Our condensed consolidated balance sheet at September 30, 2022 includes $0.7 million of warrant liabilities. We do not consider the warrant liabilities to constrain our liquidity, as a practical matter. Our current liabilities at September 30, 2022 include $0.6 million of accounts payable, $1.5 million of accrued expenses and other current liabilities, and $0.9 million in short term debt to a related party.
Contractual Obligations and Commitments
On December 15, 2021, our 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 its 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. is entitled to a $339,360 tenant improvement allowance. See Note 12-Commitments and Contingencies of the consolidated financial statements for additional details.
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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 financial statements.
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 fixed and 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.
License and Sponsored Research Agreements with ULRF
We have multiple license and sponsored research agreements with UofL Research Foundation (“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 $830,000 and prior patent costs of up to $200,000 for QN-247. As of September 30, 2022, there were no remaining un-expensed amounts under this sponsored research agreement for QN-247. We also 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 September 30, 2022 we had up to $993,000 remaining due under this sponsored research agreement for RAS. We 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 September 30, 2022 we had no remaining un-expensed amounts under this sponsored research agreement for QN-165, and the agreement was terminated effective October 31, 2022. 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 will be further developed at Qualigen 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.
Termination of Sekisui Distribution Agreement
Following the expiration of the Sekisui Distribution Agreement, in the fourth quarter of 2022 the Company has a commitment to purchase leased FastPack rental systems back from Sekisui at Sekisui’s net book value, the amount of which has not yet been determined.
Master Agreement for the Operational and Technological Funding of NanoSynex
As a condition to the closing of the NanoSynex transaction on May 26, 2022, the Company entered into a Master Agreement for the Operational and Technological Funding of NanoSynex (the “Funding Agreement”) pursuant to which we agreed to fund NanoSynex up to an aggregate of approximately $10.4 million over the next three years, 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. The Company may terminate the Funding Agreement after October 29, 2022 upon 120 days’ notice.
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.
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Cash Flows
The following table sets forth the significant sources and uses of cash for the periods set forth below:
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (11,009,814 | ) | $ | (11,817,410 | ) | ||
| Investing activities | 60,611 | (124,356 | ) | |||||
| Financing activities | 7,173 | 285,005 | ||||||
| Net decrease in cash | $ | (10,942,030 | ) | $ | (11,656,761 | ) | ||
Net Cash Used in Operating Activities
During the nine months ended September 30, 2022, operating activities used $11.0 million of cash, primarily resulting from a net loss of $12.5 million. Cash flows from operating activities (as opposed to net loss) for the nine months ended September 30, 2022 benefitted from $4.1 million in stock-based compensation expense, a $0.2 million decrease in accounts receivable, and depreciation and amortization of $0.3 million. Cash flows from operating activities (as opposed to net loss) for the nine months ended September 30, 2022 were negatively impacted by a $1.0 million decrease in fair value of warrant liabilities, a $0.5 million decrease in accrued expenses and other current liabilities, a $0.4 million decrease in R&D grant liability, a $0.4 million increase in net inventory, a $0.3 million increase in prepaid expenses and other assets, a $0.3 million decrease in accounts payable, a $0.1 million decrease in operating lease liability, and a $0.1 million decrease in deferred revenue.
During the nine months ended September 30, 2021, operating activities used $11.8 million of cash, primarily resulting from a net loss of $13.7 million. Cash flows from operating activities (as opposed to net loss) for the nine months ended September 30, 2021 benefitted from a $3.9 million increase in employee/director stock-based compensation expense, a $1.1 million decrease in prepaid expenses and other assets, a $1.1 million increase in accrued expenses and other current liabilities and a $0.4 million increase in accounts payable, due to higher costs related to therapeutics research and development. The decrease in prepaid expenses was primarily due to the expensing during the period of $1.1 million of previous prepayments to STA Pharmaceutical Co., Ltd., a subsidiary of WuXi AppTec, our manufacturer of QN-165 for our anticipated clinical trials. Cash flows from operating activities (as opposed to net loss) for the nine months ended September 30, 2021 were negatively impacted by a $4.3 million decrease in fair value of warrant liabilities and a $0.3 million decrease in deferred revenue.
Net Cash Provided by (Used in) Investing Activities
During the nine months ended September 30, 2022, net cash provided by investing activities was approximately $0.1 million, primarily due to $0.7 million in cash acquired in the NanoSynex transaction, offset by the $0.6 million purchase of NanoSynex stock.
During the nine months ended September 30, 2021, net cash used in investing activities was approximately $0.1 million, primarily related to the purchase of property and equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2022 was approximately $7,000, due to net proceeds from the exercise of warrants.
Net cash provided by financing activities for the nine months ended September 30, 2021 was approximately $0.3 million, due to approximately $0.4 million of net proceeds from exercise of warrants, offset by approximately $0.1 million in principal payments on notes payable.
Critical Accounting Estimates
We believe the estimates, assumptions and judgments involved in the accounting policies described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”) are most critical to understanding and evaluating our reported financial results. During the three and nine months ended September 30, 2022, other than the business combinations, IPR&D, and goodwill accounting policies described below, there have been no material changes to the critical accounting policies and estimates as described in Item 7 of our 2021 Annual Report.
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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 the Company’s financial results beginning on the respective acquisition dates, and that assets acquired and liabilities assumed 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. 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.
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 the purchase 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 consolidated statements of income 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required by Item 3.
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 September 30, 2022, 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 our disclosure controls and procedures as of September 30, 2022 were 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 (the “Exchange Act’), 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.
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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 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 condensed consolidated financial statements for external purposes in accordance with U.S. GAAP.
As of December 31, 2021, 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 (the “2013 Framework”). Based on this assessment, our management concluded that, as of December 31, 2021, 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, as further described in our 2021 Annual Report. 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. Nevertheless, 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.
Except as described above, there were no changes to the Company’s internal control over financial reporting made during the quarter ended September 30, 2022 that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in “Litigation and Other Legal Proceedings” in Note 11 to the condensed consolidated financial statements included in this Quarterly Report is incorporated herein by reference.
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 2021 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. Other than the following additional risk factors related to the acquisition of NanoSynex, Ltd., there have been no material changes to the Company’s risk factors since the 2021 Annual Report.
Risks Related to the Acquisition of NanoSynex, Ltd. (“NanoSynex”)
The NanoSynex acquisition may not be successful in achieving its intended benefits and may disrupt our current operations.
We acquired a majority interest in NanoSynex. This acquisition poses a number of potential integration risks that may result in negative consequences to our business, financial condition, and results of operations. These risks include, but are not limited to:
| ● | failure of the business to perform as planned following the acquisition, and to receive the necessary regulatory approvals for its Antimicrobial Susceptibility Testing (AST) platform; | |
| ● | the assimilation and retention of employees, including key employees; | |
| ● | higher than expected costs and/or a need to allocate resources to manage unexpected operating difficulties; | |
| ● | diversion of the attention and resources of management or other disruptions to current operations; | |
| ● | retaining required regulatory approvals, licenses, and permits; | |
| ● | the assumption of liabilities of the acquired business not identified during due diligence; and | |
| ● | other unanticipated issues, expenses, and liabilities. | |
| ● | establishing appropriate internal controls for the management of overseas financial and other resources. |
In addition, while we are based in Carlsbad, California, NanoSynex’ operations are located in Ness Ziona, Israel, which could further stretch our resources and management’s time, and we will need to rely, to a large extent, on the existing executive team of NanoSynex. Failure to adequately integrate our operations and personnel could adversely affect our combined business and our ability to achieve our objectives and strategy. No assurance can be given that we will realize synergies in the areas we currently operate.
Our Master Agreement for the Operational and Technological Funding of NanoSynex obligates us to make milestone payments to NanoSynex.
As a condition to the closing with NanoSynex, we entered into a Master Agreement for the Operational and Technological Funding of NanoSynex (the “Funding Agreement”) with NanoSynex pursuant to which we have agreed to fund NanoSynex up to an aggregate of approximately $10.4 million over the next three years, 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.
The requirement to make any payments under the Funding Agreement will reduce our liquidity. Furthermore, there can be no assurance that we will have the funds necessary to make the required payments to NanoSynex, if required, or be able to raise such funds when needed on terms acceptable to us, or at all. As a result, we may be required to delay our product development or future commercialization efforts. In addition, our inability to make any required payments to NanoSynex could negatively impact NanoSynex’s ability to further its development efforts, which will ultimately have a negative impact on our business and results of operations due to our majority interest in NanoSynex. We may terminate this agreement after October 29, 2022, but only after providing 120 days’ notice.
Under the terms of 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. If NanoSynex is unable to make the required payments of principal or interest under any promissory notes that are issued, our liquidity will be negatively impacted, which may require us to delay our product development or future commercialization efforts.
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Because a significant portion of NanoSynex’s total assets are represented by goodwill, indefinite-lived intangible assets, and definite-lived intangible assets, we could be required to write off some or all of this goodwill and other intangibles, which may adversely affect our financial condition and results of operations.
We used the acquisition method of accounting to account for the acquisition of a majority interest in NanoSynex consummated on May 26, 2022. A portion of the purchase price for this business is allocated to identifiable tangible and intangible assets and assumed liabilities based on estimated fair values at the date of acquisition. Goodwill is measured indirectly as the excess of the sum of (1) the consideration transferred (including contingent consideration, if any) and (2) the fair value of any noncontrolling interest in the acquiree over the net assets acquired and liabilities assumed. The purchase price allocation resulted in a goodwill value of $4.9 million and a value of $5.7 million related to other intangible assets. The carrying value of these assets as of September 30, 2022, was $4.9 million and $5.7 million, respectively. When we perform impairment tests, it is possible that the carrying value of goodwill or other intangible assets could exceed their implied fair value and therefore would require adjustment. Such adjustment would result in a charge to operating income in that period. Once adjusted, there can be no assurance that there will not be further adjustments for impairment in future periods.
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) |
* Filed or furnished herewith.
+ Indicates management contract or compensatory plan or arrangement.
# 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.
| November 14, 2022 | QUALIGEN THERAPEUTICS, INC. | |
| By: | /s/ Michael S. Poirier | |
| Name: | Michael S. Poirier | |
| Title: | Chief Executive Officer | |
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