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)
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(Commission File Number) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| The
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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
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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 |
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As of November 11, 2021, there were shares of the registrant’s common stock, par value $0.001 per share, outstanding.
TABLE OF CONTENTS
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUALIGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | |||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Right-of-use assets | ||||||||
| Property and equipment, net | ||||||||
| Equipment held for lease, net | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Notes payable, current portion | ||||||||
| Deferred revenue, current portion | ||||||||
| Operating lease liability, current portion | ||||||||
| Warrant liabilities | ||||||||
| Total current liabilities | ||||||||
| Notes payable, net of current portion | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Series Alpha convertible preferred stock, $ par value; shares authorized; shares issued and outstanding as of September 30, 2021 and December 31, 2020 | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total Liabilities & Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
QUALIGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUES | ||||||||||||||||
| Net product sales | $ | $ | $ | $ | ||||||||||||
| License revenue | ||||||||||||||||
| Collaborative research revenue | ||||||||||||||||
| Total revenues | ||||||||||||||||
| EXPENSES | ||||||||||||||||
| Cost of product sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Total expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER (INCOME) EXPENSE, NET | ||||||||||||||||
| Loss (gain) on change in fair value of warrant liabilities | ( | ) | ( | ) | ||||||||||||
| Interest (income) expense, net | ( | ) | ( | ) | ||||||||||||
| Other (income) expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other (income) expense, net | ( | ) | ( | ) | ||||||||||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted—average number of shares outstanding, basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
QUALIGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Series Alpha Convertible | Additional | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-In | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount $ | Shares | Amount $ | Capital | Deficit | Total | |||||||||||||||||||||||||
| 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.
| 3 |
| Series A Convertible | Series B Convertible | Series C Convertible | Series D Convertible | Series D-1 Convertible | Series Alpha Convertible | Additional | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-In | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | | $ | | $ | | $ | | $ | | $ | $ | | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of preferred stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of notes payable and accrued interest | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series Alpha preferred shares upon closing of private placement | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effect of reverse recapitalization | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series Alpha preferred stock for conversion of notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares and warrants issued to advisor upon closing of private placement | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of shares issued to advisor upon closing of private placement | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of warrants issued to advisor upon closing of private placement | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for professional services | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of preferred stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares and (exercised) warrants issued pursuant to Securities Purchase Agreements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commission and offering costs of Securities Purchase Agreements | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
QUALIGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by 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 | ( | ) | ||||||
| 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 used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of Series Alpha preferred shares upon closing of private placement | ||||||||
| Proceeds from issuance of shares and warrants to investor upon closing of Securities Purchase Agreement | ||||||||
| Commission and offering costs of Securities Purchase Agreements | ( | ) | ||||||
| Net proceeds from the issuance of notes payable | ||||||||
| Net proceeds from warrant exercises | ||||||||
| Principal payments on notes payable | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS - beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS - end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | $ | ||||||
| Taxes | $ | $ | ||||||
| NONCASH FINANCING AND INVESTING ACTIVITIES: | ||||||||
| Issuance of common stock for professional services | $ | $ | ||||||
| Issuance of common stock for conversion of debt | $ | $ | ||||||
| Issuance of common stock for conversion of accrued interest | $ | $ | ||||||
| Issuance of common stock for conversion of preferred stock | $ | $ | ||||||
| Issuance of preferred stock for conversion of debt | $ | $ | ||||||
| Fair value of shares issued to advisor upon closing of private placement | $ | $ | ||||||
| Fair value of warrants issued to advisor upon closing of private placement | $ | $ | ||||||
| Effect of reverse recapitalization | $ | $ | ||||||
| Initial measurement of operating lease right-of-use assets | $ | $ | ||||||
| Fair value of shares issued for cashless warrant exercises | $ | $ | ||||||
| Net transfers to inventory from equipment held for lease | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
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 point-of-care quantitative immunoassay diagnostic products for use in physician offices and other point-of-care settings worldwide, and was reincorporated in Delaware in 1999. Qualigen Therapeutics, Inc. (the “Company”) operates in one business segment. 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, Inc. was determined to be the accounting acquirer in a reverse recapitalization based upon the terms of the merger and other factors. All references to financial figures of the Company presented in the accompanying condensed consolidated financial statements and in these Notes through May 22, 2020 are to those of Qualigen, Inc. All references to financial figures after May 22, 2020 are to those of Qualigen Therapeutics, Inc. and Qualigen, Inc.
Basis of Presentation
The accompanying 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 Transition Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on March 31, 2021. 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 Transition Report on Form 10-K have been omitted. The accompanying condensed consolidated balance sheet at December 31, 2020 has been derived from the audited balance sheet at December 31, 2020 contained in such Form 10-K.
Principles of Consolidation
The Company’s unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. 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.
Accounting Estimates
Management uses estimates and assumptions in preparing its condensed consolidated financial statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The most significant estimates relate to the estimated fair value of warrant liabilities, stock-based compensation, amortization and depreciation, inventory reserves, allowances for doubtful accounts and returns, and warranty reserve. Actual results could vary from the estimates that were used.
Cash and Cash Equivalents
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.
The Company maintains its cash and cash equivalents in bank deposits which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on cash and cash equivalents.
| 6 |
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 specific reserves for identified items.
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, 2021 and 2020,
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 creditworthiness 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 provides an allowance for doubtful accounts and returns equal to the estimated uncollectible amounts or expected returns. The Company’s estimates are based on historical collections and returns and a review of the current status of trade accounts receivable.
Accounts receivable is comprised of the following at:
| September 30, 2021 | December 31, 2020 | |||||||
| Accounts Receivable | $ | $ | ||||||
| Less Allowances | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Research and Development
The Company expenses research and development costs as incurred.
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
Effective April 1, 2020, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective approach. The adoption of ASC 606 did not have a material impact on the measurement or on the recognition of revenue of contracts for which all revenue had not been recognized as of the adoption date of April 1, 2020. Therefore, no cumulative adjustment has been made to the opening balance of accumulated deficit at April 1, 2020. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the periods presented.
The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
| 7 |
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 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, 2021 and 2020, the Company recognized
license revenue of $ and $, respectively, and during the nine months ended September 30, 2021 and 2020, the Company recognized license
revenue of $
Collaborative Research Revenue
Prior to the adoption of ASC 606, the Company recognized research revenue over the term of various agreements, as negotiated contracted amounts were earned or reimbursable costs were incurred related to those agreements. Negotiated contracted amounts were earned in relative proportion to the performance required under the applicable contracts. Any amounts received prior to satisfying these revenue recognition criteria were recorded as deferred revenue.
To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies the relevant performance obligations.
Collaborative
research revenue is recognized as research services are performed over the development periods for each agreement. During the three months
ended September 30, 2021 and 2020, the Company recognized collaborative research revenue of $ and $, respectively, and during the nine
months ended September 30, 2021 and 2020, the Company recognized collaborative research revenue of $ and $
| 8 |
Contract 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 provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.
Prior to the adoption of ASC 606 effective April 1, 2020 (using the modified retrospective approach), the Company accounted for its revenue arrangements under ASC 605, Revenue Recognition (“ASC 605”). Under ASC 605, revenue arrangements with multiple deliverables were evaluated for proper accounting treatment. In these arrangements, the Company recorded revenue as separate units of accounting if the delivered items have value to the customer on a stand-alone basis, if the arrangement includes a general right of return relative to the delivered items, and if delivery or performance of the undelivered items is considered probable and substantially within the Company’s control.
Under ASC 605, revenues from product sales which included both the analyzer and various immunoassay products (“reagents”) were generally recognized upon shipment, as no significant continuing performance obligations remained post shipment. Cash payments received in advance were classified as deferred revenue and recorded as a liability. The Company was generally not contractually obligated to accept returns, except for defective products. Revenue was recorded net of an allowance for estimated returns.
Multiple element arrangements included contracts that combined both the Company’s analyzer and a customer’s future reagent purchases under a single contract. In some sales contracts, the Company provided analyzers at no charge to customers. Title to the analyzer was maintained by the Company and the analyzer was returned by the customer to the Company at the end of the purchase agreement.
During
the three months ended September 30, 2021 and 2020, product sales are stated net of an allowance for estimated returns of approximately
$
Deferred Revenue
Prior to the adoption of ASC 606, payments received in advance from customers pursuant to certain collaborative research and license agreements, deposits against future product sales, multiple element arrangements and extended warranties are recorded as a current or non-current deferred revenue liability based on the time from the balance sheet date to the future date of revenue recognition. The adoption of ASC 606 had no material effect on deferred revenue.
Operating Leases
The Company adopted ASC Topic 842, Leases (“Topic 842”) in the nine-months transition period ended December 31, 2020. 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. Refer to Recent Accounting Pronouncements below and Note 8 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 includes the cost of construction and other direct costs attributable to the construction, are capitalized as construction in progress. No provision for depreciation is made on construction in progress until the relevant assets are completed and placed in service.
| 9 |
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.
Intangible Assets, Net
Intangibles consist of patent-related costs and costs for in-license agreements. Management reviews the carrying value of 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 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
The
carrying value of the patents of approximately $
The
carrying value of the in-licenses of approximately $
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. 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 7).
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. |
| 10 |
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and debt 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-issued stock options could change significantly. Higher volatility 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. The components of the deferred tax asset and liability are individually classified as current and noncurrent based on their characteristics.
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 balance sheet as cash is collected from customers and remitted to the tax authority.
Warranty Reserve
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 $
Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, stock options, employee stock purchase plan rights, restricted stock units, and warrants, and convertible preferred stock are considered to be common stock equivalents but are not included in the calculations of diluted net loss per share for the periods presented as their effect would be anti-dilutive. The Company incurred net losses for all periods presented and there were no reconciling items for potentially dilutive securities. More specifically, at September 30, 2021 and 2020, stock options, warrants, and convertible preferred stock exercisable or convertible for approximately million shares and million shares, respectively, were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive. Comprehensive loss is the same as net loss for all periods presented.
| 11 |
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 the 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 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 consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,” an amendment to the accounting guidance on fair value measurements. The guidance modifies the disclosure requirements on fair value measurements, including the removal of disclosures of the amount of and reasons for transfers between Level 1 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The guidance also adds certain disclosure requirements related to Level 3 fair value measurements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU No. 2018-13 on April 1, 2020 and the adoption of this guidance did not have a material impact on its financial statements.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under prior U.S. GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s annual fiscal year. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
Other accounting standard updates are either not applicable to the Company or are not expected to have a material impact on the Company’s condensed consolidated financial statements.
NOTE 2 — LIQUIDITY
The
Company has incurred recurring losses from operations and has an accumulated deficit at September 30, 2021, and the Company expects to
continue to incur losses subsequent to the balance sheet date of September 30, 2021. The Company’s reverse recapitalization transaction
with Ritter closed in May 2020 together with an associated new equity capital raise of approximately $
| 12 |
NOTE 3 — INVENTORY, NET
Inventory, net consisted of the following at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
As
of September 30, 2021 and December 31, 2020, total inventory is recorded net of inventory reserves of $
NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid manufacturing expenses | ||||||||
| Prepaid investor relations expenses | ||||||||
| Other prepaid expenses | ||||||||
| $ | $ | |||||||
NOTE 5 — PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Construction in progress–equipment | ||||||||
| Computer equipment | ||||||||
| Leasehold improvements | ||||||||
| Molds and tooling | ||||||||
| Furniture and fixtures | ||||||||
| Less Accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Depreciation
expense relating to property and equipment was approximately $
| 13 |
NOTE 6 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Board compensation | $ | $ | ||||||
| Bonus | ||||||||
| Consulting | ||||||||
| Franchise, sales and use taxes | ||||||||
| Income taxes | ||||||||
| Patent and license fees | ||||||||
| Payroll | ||||||||
| Professional fees | ||||||||
| Research and development | ||||||||
| Royalties | ||||||||
| Vacation | ||||||||
| Warranty costs | ||||||||
| Other | ||||||||
| $ | $ | |||||||
NOTE 7 – 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. The Series C Warrants were classified as liabilities, but had minimal fair value prior to the merger with Ritter.
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 warrants received in exchange for the Series C Warrants 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 (Years) | |||||||||||||
| Total outstanding – December 31, 2020 | $ | |||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Granted | ||||||||||||||||
| Total outstanding – September 30, 2021 | $ | | ||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
Of
the
| 14 |
| Common Stock Warrants (received in exchange for the Series C Warrants) | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Lifevv (Years) | |||||||||||||
| Total outstanding – December 31, 2019 | $ | |||||||||||||||
| Series C preferred stock warrants exchanged for common stock warrants upon reverse recapitalization | | |||||||||||||||
| Forfeited | ||||||||||||||||
| Expired | ||||||||||||||||
| Granted | ||||||||||||||||
| Total outstanding – September 30, 2020 | $ | |||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
The following table presents the Company’s fair value hierarchy for its warrant liabilities (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, 2021:
| Warrant liabilities | Quoted Market Prices for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Change in fair value of warrant liabilities | ( | ) | ( | ) | ||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | ||||||||||||
There were no transfers of financial assets or liabilities between category levels for the three and nine months ended September 30, 2021.
During
the nine months ended September 30, 2021 the Company recorded $
The value of the warrant liabilities was based on a valuation received from an independent valuation firm determined using a Monte-Carlo simulation. For volatility, the Company considers comparable public companies as a basis for its expected volatility to calculate the fair value of common stock warrants and transitions to its own volatility as the Company develops sufficient appropriate history as a public company. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected term of the common stock warrant. The Company uses an expected dividend yield of zero based on the fact that the Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future. Any significant changes in the inputs may result in significantly higher or lower fair value measurements.
The following table shows the range of assumptions used in estimating the fair value of warrant liabilities as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Range | ||||||||
| Risk-free interest rate | % | % | ||||||
| Expected volatility (peer group) | % | % | ||||||
| Term of warrants (in years) | ||||||||
| Expected dividend yield | % | % | ||||||
| 15 |
NOTE 8 — LEASES
The Company leases its facilities under a long-term operating lease agreement expiring in October 2022. The tables below show the operating lease right-of-use assets and operating lease liabilities as of December 31, 2020 and September 30, 2021, including the changes during the periods:
Operating lease right-of-use assets | ||||
| Net right-of-use assets at December 31, 2020 | $ | |||
| Less amortization of operating lease right-of-use assets | ( | ) | ||
| Operating lease right-of-use assets at September 30, 2021 | $ | |||
Operating lease liabilities | ||||
| Lease liabilities arising from obtaining right-of-use assets at April 1, 2020: | $ | |||
| Less principal payments on operating lease liabilities | ( | ) | ||
| Lease liabilities at September 30, 2021 | ||||
| Less non-current portion | ( | ) | ||
| Current portion at September 30, 2021 | $ | |||
As
of September 30, 2021, the Company’s operating leases have a weighted-average remaining lease term of
As of September 30, 2021, future minimum payments during the next five fiscal years and thereafter are as follows:
| Year Ending December 31, | Amount | |||
| 2021 (nine months) | $ | |||
| 2022 | ||||
| 2023 | ||||
| Total | ||||
| Less present value discount | ( | ) | ||
| Operating lease liabilities | $ | |||
Total
lease expense was approximately $
NOTE 9 — RESEARCH AND LICENSE AGREEMENTS
The University of Louisville Research Foundation
Between
June 2018 and September 2020, the Company entered into license and sponsored research agreements with the University of Louisville Research
Foundation (“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 $
| 16 |
Sponsored
research expenses related to these agreements for the three months ended September 30, 2021 and 2020 were approximately $
In
March 2019, the Company entered into a sponsored research agreement and an option for a license agreement with ULRF for development of
several small-molecule RAS interaction inhibitor drug candidates. Under the terms of this agreement, the Company will reimburse ULRF
for sponsored research expenses of up to $693,000 for this program. In February 2021, the Company extended the term of this agreement
for an additional 18 months (expires July 2022) and increased the amount that the Company will reimburse ULRF for sponsored research
expenses from $
Sponsored
research expenses related to these agreements for the three months ended September 30, 2021 and 2020 were approximately $
In
June 2020, the Company entered into an exclusive license agreement with ULRF for its intellectual property in the use of QN-165 as a
treatment for COVID-19. Under the agreement, the Company will take 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 $
| 17 |
Sponsored
research expenses related to these agreements for the three months ended September 30, 2021 and 2020 were approximately $
Advanced Cancer Therapeutics
In
December 2018,
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 point-of-care market. The Company recognizes development revenue and product sales over the performance
period of the contract. For the three months ended September 30, 2021 and 2020 there was $ for each period, and for the nine months
ended September 30, 2021 and 2020, there was $ and $
Sekisui Diagnostics
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 is currently set to expire on March 31, 2022. The agreement contains a right of first refusal for Sekisui against any potential acquisition of the Company; the right of first refusal is currently set to expire on March 31, 2022.
There
were product sales to Sekisui of approximately $
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.
Under
the Technology Transfer Agreement, the Company received net cash payments of $
| 18 |
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); any such non-China sales would, until March 31, 2022, need to be through Sekisui. In addition, after March 31, 2022, Yi Xin will have the right to sell Yi Xin-manufactured versions of existing FastPack 1.0, IP and PRO product lines worldwide (other than in the United States and other than to or toward current non-US customers of those products). Also, after March 31, 2022, Yi Xin will have 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 US customers of those products); the Company did not license Yi Xin to sell in the United States market any Yi Xin-manufactured versions of those legacy FastPack 1.0, IP and PRO product lines, even after March 31, 2022. In the Technology Transfer Agreement, the Company confirmed that it would not, after March 31, 2022, seek new FastPack customers outside the United States. All of the March 31, 2022 dates in this paragraph are as established by an August 2021 amendment of the Technology Transfer Agreement.
STA Pharmaceutical
In
November 2020, the Company entered into a contract with STA Pharmaceutical Co., Ltd., a subsidiary of WuXi AppTec, for GMP production
of QN-165, the Company’s lead drug candidate for the treatment of COVID-19 and other viral diseases, for potential clinical trials
in 2021. In connection with this agreement, the Company paid an upfront deposit of approximately $
Research
and development expenses related to this agreement for the three months ended September 30, 2021 and 2020 were approximately $
NOTE 10 — STOCKHOLDERS’ EQUITY
As of September 30, 2021 and December 31, 2020, the Company had two classes of 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, 2021 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, 2021, the Company has reserved shares of authorized but unissued common stock for possible future issuance. At September 30, 2021, shares were reserved in connection with the following:
| Exercise of outstanding stock options | ||||
| Exercise of outstanding stock warrants | ||||
| Conversion of outstanding Series Alpha preferred stock | ||||
| Total |
Series Alpha Preferred Stock
In the nine-month period ended September 30, 2021, no shares of Series Alpha convertible preferred stock were converted into shares of the Company’s common stock, and there were shares of Series Alpha preferred stock outstanding at September 30, 2021 and December 31, 2020.
| 19 |
Alpha Securities Purchase Agreements
On
July 10, 2020, the Company closed a Securities Purchase Agreement (dated July 8, 2020) with a single institutional investor for the purchase
and sale for $
On
August 4, 2020, the Company closed a Securities Purchase Agreement (dated August 2, 2020) with a single institutional investor for the
purchase and sale for $
On
December 18, 2020, the Company closed a Securities Purchase Agreement (dated December 16, 2020) with a single institutional investor
for the purchase and sale for $
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 nonstatutory common stock options to qualified employees, officers, directors, consultants and other service providers. At September 30, 2021 and December 31, 2020 there were and outstanding options respectively under the 2020 Plan and on those dates there were and unused 2020 Plan shares available, respectively, for future grant. The shares available for future grant at September 30, 2021 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, 2020 | $ | $ | — | |||||||||||||
| Granted | ||||||||||||||||
| Expired | — | |||||||||||||||
| Forfeited | ( | ) | — | |||||||||||||
| Total outstanding – September 30, 2021 | $ | $ | — | |||||||||||||
| Exercisable (vested) | $ | $ | | |||||||||||||
| Non-Exercisable (non-vested) | $ | | $ | | | |||||||||||
There was approximately $ million and $ million of compensation cost related to outstanding options for the three months ended September 30, 2021 and 2020, respectively, and approximately $ million and $ million of compensation cost related to outstanding options for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, 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.
stock options were exercised during the nine months ended September 30, 2021.
| 20 |
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, 2021 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, 2021 | For the nine months ended September 30, 2020 | |||||||
| Expected dividend yield | % | % | ||||||
| Expected stock-price volatility | % | % | ||||||
| Risk-free interest rate | % — | % | % — | % | ||||
| Expected average term of options | ||||||||
| Stock price | $ | $ — | ||||||
| For the nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| General and administrative | $ | $ | ||||||
| Research and development | ||||||||
| Total | $ | $ | ||||||
Equity Classified Compensatory Warrants
In
connection with the $
| 21 |
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
No compensatory warrants were issued during the nine months ended September 30, 2021.
The following table summarizes the activity in the common stock equity classified compensatory warrants received in exchange for the Series C convertible preferred stock equity classified compensatory warrants for the nine months ended September 30, 2021:
| Common Stock | ||||||||||||||||
| Weighted– Average |
Range of | Weighted– Average Remaining |
||||||||||||||
| Exercise | Exercise | Life | ||||||||||||||
| Shares | Price | Price | (Years) | |||||||||||||
| Total outstanding – December 31, 2020 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( |
) | ||||||||||||||
| Total outstanding – September 30, 2021 | $ | |||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
| Non-Exercisable | $ | $ | ||||||||||||||
Of the shares issued upon the exercise of equity classified compensatory warrants during the nine months ended September 30, 2021, shares were issued upon net-exercises rather than upon exercises for cash.
The following table summarizes the activity in the common stock equity classified compensatory warrants received in exchange for the Series C convertible preferred stock equity classified compensatory warrants for the nine months ended September 30, 2020:
| Common Stock | ||||||||||||||||
| Weighted– Average | Range of | Weighted– Average | ||||||||||||||
| Exercise | Exercise | Remaining | ||||||||||||||
| Shares | Price | Price | Life (Years) | |||||||||||||
| Total outstanding – December 31, 2019 | $ | |||||||||||||||
| Common stock warrants received in exchange for Series C preferred stock warrants upon reverse recapitalization | ||||||||||||||||
| Granted to advisor and its designees | ||||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Total outstanding – September 30, 2020 | $ | |||||||||||||||
| Exercisable | $ | $ | | |||||||||||||
| Non-Exercisable | $ | $ | | |||||||||||||
There were compensation cost related to outstanding equity classified compensatory warrants for the nine months ended September 30, 2021 and approximately $ for the nine months ended September 30, 2020. As of September 30, 2021 and 2020, there was unrecognized compensation cost related to nonvested equity classified compensatory warrants.
| 22 |
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
The following table summarizes the noncompensatory equity classified warrant activity for the nine months ended September 30, 2021:
| Common Stock | ||||||||||||||||
| Weighted– Average | Range of | Weighted– Average Remaining | ||||||||||||||
| Exercise | Exercise | Life | ||||||||||||||
| Shares | Price | Price | (Years) | |||||||||||||
| Total outstanding – December 31, 2020 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Total outstanding – September 30, 2021 | $ | |||||||||||||||
| Exercisable | $ | $ | | |||||||||||||
| Non-Exercisable | $ | — | ||||||||||||||
NOTE 11 — RELATED PARTY TRANSACTIONS
In October 2017, Sekisui purchased all outstanding shares of the Company’s Series D and Series D-1 preferred stock from Gen-Probe Incorporated. As such, Sekisui became a related party as of October 2017. These Series D and Series D-1 preferred stock shares were converted into shares of the Company’s common stock in connection with the reverse recapitalization transaction in May 2020. During the nine-months transition period ended December 31, 2020, Sekisui ceased to be a related party as to the Company. In the attached financial statements, information for 2020 periods is presented without distinct “related party” treatment for items pertaining to Sekisui.
NOTE 12 — SUBSEQUENT EVENTS
Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855, Subsequent Events, from the balance sheet date through the date the financial statements were available to be issued, and has determined that there are no material subsequent events that require disclosure in these financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited financial statements and notes thereto as of and for the nine-months transition period ended December 31, 2020, which are contained in our Transition Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2021. As used in this Quarterly Report, unless the context suggests otherwise, “we,” “us,” “our,” or “Qualigen” refer to Qualigen Therapeutics, Inc. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.
Cautionary Note Regarding Forward Looking Statements
This Quarterly Report contains forward-looking statements by the Company that involve risks and uncertainties and reflect the Company’s judgment as of the date of this Report. These statements generally relate to future events or the Company’s future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” or “continue” or the negative of these words or other similar terms or expressions that concern the Company’s expectations, strategy, plans or intentions. Such forward-looking statements may relate to, among other things, potential future development, testing and launch of products and product candidates. Actual events or results may differ from our expectations.
Some of the factors that we believe could cause actual results to differ from those anticipated or predicted include:
| ● | there can be no assurance that we will successfully develop any drugs or therapeutic devices; | |
| ● | there can be no assurance that preclinical or clinical development of our candidate drugs or therapeutic devices will be successful; | |
| ● | there can be no assurance that clinical trials will be approved to begin by or will actually begin by or will proceed as contemplated by any projected timeline; | |
| ● | there can be no assurance that clinical trials will complete enrollment as contemplated by any projected timeline; | |
| ● | there can be no assurance that future clinical trial data will be favorable or that such trials will confirm any improvements over other products or lack negative impacts; | |
| ● | there can be no assurance that any drugs or therapeutic devices will receive required regulatory approvals or that they will be commercially successful; | |
| ● | there can be no assurance that we will be able to procure or earn sufficient working capital to complete the development, testing and launch of our prospective therapeutic products; | |
| ● | there can be no assurance that patents will issue on our owned and in-licensed patent applications; | |
| ● | there can be no assurance that such patents, if any, and our current owned and in-licensed patents would prevent competition; | |
| ● | there can be no assurance that we will be able to maintain or expand market demand and/or market share for our diagnostic products generally, particularly in view of COVID-19-related deferral of patients’ physician-office visits and in view of FastPack reimbursement pricing challenges; | |
| ● | there can be no assurance that adoption and placement of FastPack PRO System analyzers will be widespread; and | |
| ● | there can be no assurance that we will be able to manufacture our FastPack PRO System analyzers successfully. |
Our stock price could be harmed if any of the events or trends contemplated by the forward-looking statements fails to occur or is delayed or if any actual future event otherwise differs from expectations. Additional information concerning these and other risk factors affecting our business (including events beyond our control, such as epidemics and resulting changes) can be found in our prior filings with the SEC (including our Transition Report on Form 10-K for the nine-months transition period ended December 31, 2020), available at www.sec.gov. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of this Quarterly Report, and we disclaim any intent or obligation to update these forward-looking statements beyond the date of this Quarterly Report, except as required by law. This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
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By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent in some future periods with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in other future periods.
Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.
Overview
We are a biotechnology company focused on developing novel therapeutics for the treatment of cancer and infectious diseases, as well as operating our core FDA-approved FastPack® System, which has been used successfully in diagnostics for 20 years. Our cancer therapeutics pipeline includes QN-247, RAS-F and STARS. QN-247 (formerly referred to as ALAN or AS1411-GNP) is a DNA coated gold nanoparticle cancer drug candidate that has the potential to target various types of cancer with minimal side effects; the nanoparticle coating technology is similar to the core nanoparticle coating technology used in our blood-testing diagnostic products. The foundational aptamer of QN-247, QN-165 (formerly referred to as AS1411), is also a drug candidate for treating viral-based infectious diseases. RAS-F 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 pancreatic, colorectal and lung cancers. STARS is a DNA/RNA-based treatment device candidate for removal from circulating blood of precisely targeted tumor-produced and viral compounds.
On July 13, 2021, we filed an Investigational New Drug (IND) application with the FDA to seek approval to commence Phase 1b/2a clinical studies with QN-165 in hospitalized COVID-19 patients, but on August 11, 2021 the FDA informed us that additional preclinical studies would be required in order for such application to be cleared. There can be no assurance when (if ever) the FDA would clear this IND application or any other IND application we may file. We have since decided to deprioritize this QN-165 program.
Because our therapeutic candidates are still in the development stage, our only products that are currently commercially available are the FastPack System diagnostic instruments and test kits. The FastPack System menu includes rapid point-of-care diagnostic tests for cancer, men’s health, hormone function and vitamin D status. Since inception, our sales of FastPack products have exceeded $100 million. We have always utilized a “razor and blades” pricing strategy, providing analyzers to our customers (physician offices, clinics and small hospitals) at low cost in order to increase sales volumes of higher-margin test kits. Pursuant to a distribution agreement, we are required to rely on our diagnostics distribution partner Sekisui Diagnostics, LLC (“Sekisui”) for most FastPack distribution worldwide until March 31, 2022. We maintain 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 US, with 41 locations. We have licensed and technology-transferred our FastPack System technology to Yi Xin Zhen Duan Jishu (Suzhou) Ltd., for the China diagnostics market.
We do not expect to be profitable before products from our therapeutics pipeline are commercialized, because we foresee that research and development expenses on the therapeutics programs will significantly exceed the profits, if any, that we might have from our diagnostics products. To experience losses while therapeutic products are still under development is, of course, typical for biotechnology companies.
Our condensed consolidated financial statements do not separate 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.
Completion of Reverse Recapitalization Transaction with Ritter
On May 22, 2020, we completed a “reverse recapitalization” transaction with Qualigen, Inc. (not to be confused with the Company); the Company’s merger subsidiary merged with and into Qualigen, Inc. with Qualigen, Inc. surviving as a wholly owned subsidiary of the Company. The Company, which had previously been known as Ritter Pharmaceuticals, Inc., was renamed Qualigen Therapeutics, Inc., and the former stockholders of Qualigen, Inc. acquired, via the recapitalization, a substantial majority of the shares of the Company. Ritter/Qualigen Therapeutics common stock, which was previously traded on the Nasdaq Capital Market under the ticker symbol “RTTR,” commenced trading on Nasdaq, on a post-reverse-stock-split adjusted basis, under the ticker symbol “QLGN” on May 26, 2020.
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Because Qualigen, Inc. was the accounting acquirer in the reverse recapitalization transaction, all references to financial figures of “the Company” presented in the accompanying condensed consolidated financial statements and Notes are those of Qualigen, Inc.; the corresponding figures of Ritter Pharmaceuticals, Inc. have been disregarded. Moreover, references in this Quarterly Report to “our” pre-May 22, 2020-merger history, securities and agreements are references to the pre-May 22, 2020-merger history, securities and agreements of Qualigen, Inc., except where otherwise expressly specified.
We are no longer pursuing the gastrointestinal disease treatment business on which Ritter Pharmaceuticals, Inc. had focused before the reverse recapitalization transaction.
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 “Distribution Agreement”) with Sekisui. Under the Distribution Agreement, Sekisui serves as the exclusive worldwide distributor for FastPack products (although we retain certain specific accounts for direct transactions). Sekisui’s exclusive distribution arrangements are effective until March 31, 2022.
Under the Distribution Agreement, we began development of a proposed “FastPack 2.0” product line, 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.
Under this program, we developed a FastPack 2.0 diagnostic test for a new whole blood vitamin D assay, and we then conducted a clinical trial of it in March 2019. We determined in May 2019 that it was uncertain whether the results of the trial would enable the test to receive FDA approval, and our FastPack 2.0 project with Sekisui was discontinued. 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.
We became obligated to pay Sekisui $0.9 million for $0.5 million in research and development costs advanced by Sekisui to us and for the reimbursement of $0.4 million in certain out-of-pocket development and preclinical study expenses incurred by Sekisui. We satisfied these amounts (plus interest) by payment in full on July 21, 2020.
Our expectation is that upon regaining FastPack distribution rights from Sekisui, we would be able to improve the profitability of our diagnostics business. However, we also expect that in the first quarter of 2022, Sekisui will taper down its purchases of our diagnostic products, because Sekisui will want to minimize its inventory of our products which it owns on March 31, 2022, when the Sekisui distribution arrangement will end. We expect this one-off factor will adversely affect our net product sales, gross profit margin and net income (loss) for the first quarter of 2022.
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 net cash payments of $250,000 in the final quarter of calendar 2020, classified as deferred revenue as of the balance sheet date of December 31, 2020, and a cash payment of $420,000 during the first quarter of 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. Of these amounts, we recognized approximately $38,000 in product sales and $479,000 in license revenue included in the statement of operations for the nine months ended September 30, 2021, but none in the three 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 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 our existing generations of FastPack products); any such non-China sales would, until March 31, 2022, need to be through Sekisui. In addition, after March 31, 2022, Yi Xin will have the right to sell Yi Xin-manufactured versions of existing FastPack 1.0, IP and PRO product lines worldwide (other than in the United States and other than to or toward current non-US customers of those products). Also, after March 31, 2022, Yi Xin will have 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 US 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 March 31, 2022, the expiration of the Sekisui Distribution Agreement, seek new FastPack customers outside the United States.
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Yi Xin is a newly-formed company and is subject to many risks. There can be no assurance that Yi Xin will successfully commercialize any products or that we will receive any royalties from Yi Xin.
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 Ritter reverse recapitalization transaction and are now exercisable for Qualigen Therapeutics common stock. These warrants were so-called “exploding warrants” – they contained a provision that if Qualigen, Inc. issued shares (except in certain defined scenarios) at a price below the warrants’ exercise price, the exercise price would be re-set to such new price and the number of shares underlying the warrants would be increased in the same proportion as the exercise price decrease. For accounting purposes, such “exploding warrants” give 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). Although the fair value of the warrants was immaterial at March 31, 2020, the operation of the “double-ratchet” provisions in these “exploding warrants” in connection with the reverse-recapitalization transaction now allow the holders to exercise for a significantly higher number of shares than before and at a significantly lower price than the current market price of our shares. 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 balance sheets and to reflect period-to-period changes in the fair value of the warrant liabilities on our statements of operations. The size of these warrant liabilities at September 30, 2021 was quite large ($2.2 million) and caused a significant distortion of our balance sheet at September 30, 2021 and our results of operations for the three and nine months ended September 30, 2021. Because this 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 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. Approximately 44% of these “exploding warrants” were exercised or forfeited after the May 2020 Ritter reverse recapitalization transaction through September 30, 2021, which will tend to reduce the amplitude of this variability. (There were 2,619,881 and 3,378,596 of these “exploding warrants” outstanding at September 30, 2021 and December 31, 2020, respectively.) We will continue to encourage the holders of these warrants to exercise them, and if the number of outstanding “exploding warrants” is further reduced the potential amplitude of the changes in the warrant liabilities will correspondingly be further reduced.
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Results of Operations
Comparison of the Three Months Ended September 30, 2021 and 2020
The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020:
| For the Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| REVENUES | ||||||||
| Net product sales | $ | 1,155,065 | $ | 837,714 | ||||
| License revenue | — | — | ||||||
| Collaborative research revenue | — | — | ||||||
| Total revenues | 1,155,065 | 837,714 | ||||||
| EXPENSES | ||||||||
| Cost of product sales | 993,120 | 921,475 | ||||||
| General and administrative | 2,756,323 | 2,664,658 | ||||||
| Research and development | 2,083,315 | 870,876 | ||||||
| Sales and marketing | 130,217 | 98,045 | ||||||
| Total expenses | 5,962,975 | 4,555,054 | ||||||
| LOSS FROM OPERATIONS | (4,807,910 | ) | (3,717,340 | ) | ||||
| OTHER EXPENSE (INCOME), NET | ||||||||
| Loss (gain) on change in fair value of warrant liabilities | (1,942,900 | ) | 4,395,300 | |||||
| Interest (income) expense, net | (6,801 | ) | 715 | |||||
| Other (income), net | (702 | ) | (2,447 | ) | ||||
| Total other expense (income), net | (1,950,403 | ) | 4,393,568 | |||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (2,857,507 | ) | (8,110,908 | ) | ||||
| PROVISION FOR INCOME TAXES | 1,011 | 2,305 | ||||||
| NET LOSS | $ | (2,858,518 | ) | $ | (8,113,213 | ) | ||
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, 2021 and 2020 were approximately $1.2 million and $0.8 million, respectively, representing an increase of approximately $0.3 million, or 38%. This improvement was due to a recovery from the effects of the COVID-19 pandemic experienced during the prior year.
During the third quarter of 2021, our year-over-year increase in quarterly net product sales was restrained to a degree by sporadic problems with our manufacturing equipment which affected our ability to supply.
Expenses
Cost of Product Sales
Cost of product sales increased during the three months ended September 30, 2021, to $1.0 million, or 86% of net product sales, versus approximately $0.9 million, or 110% of net product sales, during the three months ended September 30, 2020. This increase of $0.1 million was primarily due to higher unit volumes of product sales, and our improvement in gross margin percentage was due primarily to economies of scale.
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General and Administrative Expenses
General and administrative expenses increased slightly from $2.7 million, during the three months ended September 30, 2020, to $2.8 million during the three months ended September 30, 2021. This increase was primarily due to an increase of $0.3 million in payroll and employee/director stock-based compensation expense, offset by a $0.2 million decrease in legal, accounting and consulting expenses.
Research and Development Costs
Research and development costs include therapeutic and diagnostic research and product development costs. We have shifted our focus in this category toward therapeutics. Research and development costs increased from $0.9 million for the three months ended September 30, 2020 to $2.1 million for the three months ended September 30, 2021. Of the $0.9 million of research and development costs for the three months ended September 30, 2020, $0.6 million (67%) was attributable to therapeutics and $0.3 million (33%) 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 increase in therapeutics research and development costs (during the three months ended September 30, 2021 compared to the three months ended September 30, 2020) was primarily due to an increase of $0.5 million in pre-clinical research costs for QN-247, an increase of $0.3 million in pre-clinical research costs for our RAS program, an increase of about $0.2 million in payroll related expenses, and a $0.1 million increase in pre-clinical research costs related to the potential application of QN-165 to treatment of COVID-19. On August 11, 2021 the FDA informed us that additional pre-clinical studies would be required in order for the FDA to clear the Investigational New Drug (IND) application that we filed on July 13, 2021 for clinical studies of QN-165 for the treatment of COVID-19 in hospitalized patients. We have since decided to deprioritize this QN-165 program.
For the future, we expect our therapeutic research and development costs to significantly outweigh our diagnostic research and development costs, and to be relatively lower in periods when we are focusing on pre-clinical activities and meaningfully higher in periods when we are provisioning for and conducting clinical trials, if any.
Sales and Marketing Expenses
Sales and marketing expenses during the three months ended September 30, 2021 increased to approximately $130,000 as compared to approximately $98,000 during the three months ended September 30, 2020, primarily due to an increase in payroll expenses related to our diagnostics business.
Other Expense (Income)
Change in Fair Value of Warrant Liabilities
During the three months ended September 30, 2021 we experienced (primarily due to a decrease in our stock price during the period) a $1.9 million gain on change in the fair value of the warrant liabilities arising from our “exploding warrants” series (containing a “double-ratchet” provision) issued by Qualigen, Inc. many years ago to brokers and investors in connection with a 2004 private placement. By contrast, for the three months ended September 30, 2020, we experienced a $4.4 million loss on change in fair value of warrant liabilities, due to the reverse recapitalization transaction and an associated increase in the market price of our common stock. Typically a decline in our stock price would result in a decline in the fair value of our warrant liabilities, generating an item of income, 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 warrants outstanding at the end of each quarter.
Interest (Income) Expense, Net
There was approximately $7,000 in net interest income during the three months ended September 30, 2021 versus net interest expense of approximately $1,000 during the three months ended September 30, 2020. During the second quarter of 2021 we paid off our Equipment Financing Agreements which eliminated all of our outstanding notes payable.
Other (Income), Net
Other income was immaterial during the three months ended September 30, 2021 and 2020.
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Comparison of the Nine Months Ended September 30, 2021 and 2020
The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020:
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| REVENUES | ||||||||
| Net product sales | $ | 3,693,842 | $ | 3,153,536 | ||||
| License revenue | 478,654 | — | ||||||
| Collaborative research revenue | — | 45,000 | ||||||
| Total revenues | 4,172,496 | 3,198,536 | ||||||
| EXPENSES | ||||||||
| Cost of product sales | 3,112,224 | 2,721,049 | ||||||
| General and administrative | 8,582,362 | 5,562,650 | ||||||
| Research and development | 10,091,155 | 1,706,280 | ||||||
| Sales and marketing | 402,347 | 279,151 | ||||||
| Total expenses | 22,188,087 | 10,269,130 | ||||||
| LOSS FROM OPERATIONS | (18,015,591 | ) | (7,070,594 | ) | ||||
| OTHER EXPENSE (INCOME), NET | ||||||||
| Loss (gain) on change in fair value of warrant liabilities | (6,140,900 | ) | 20,596,700 | |||||
| Interest (income) expense, net | (36,862 | ) | 148,836 | |||||
| Other (income), net | (3,596 | ) | (253,719 | ) | ||||
| Total other expense (income), net | (6,181,358 | ) | 20,491,817 | |||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (11,834,233 | ) | (27,562,411 | ) | ||||
| PROVISION FOR INCOME TAXES | 2,146 | 2,283 | ||||||
| NET LOSS | $ | (11,836,378 | ) | $ | (27,564,694 | ) | ||
Revenues
Our operating revenues are primarily generated from sales of diagnostic tests. Revenues during the nine months ended September 30, 2021 were $4.2 million compared to $3.2 million during the nine months ended September 30, 2020, an increase of $1.0 million. This increase was primarily due to recognition of about $0.5 million in license revenue from Yi Xin under the Technology Transfer Agreement, an item which had no counterpart in the nine months ended September 30, 2020, as well as an increase of about $0.5 million in diagnostic product sales.
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, 2021 and 2020 were approximately $3.7 million and $3.2 million, respectively, representing an increase of approximately $0.5 million, or 17%. This improvement was due to a recovery from the effects of the COVID-19 pandemic during the prior year.
During the second and third quarters of 2021, our year-over-year increase in net product sales was restrained to a degree by sporadic problems with our manufacturing equipment which affected our ability to supply.
License revenue
License revenue during the nine months ended September 30, 2021 was $479,000, due to the recognition of revenue from Yi Xin under the Technology Transfer Agreement in the first quarter of 2021. There was no license revenue during the nine months ended September 30, 2020.
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Collaborative research revenue
Collaborative research revenue is recognized as research services are performed over the development period for each agreement. There was no collaborative research revenue during the nine months ended September 30, 2021, as compared to $45,000 during the nine months ended September 30, 2020, which arose from our development work toward a cellular fibronectin assay for Prediction BioSciences SAS.
Expenses
Cost of Product Sales
Cost of product sales increased during the nine months ended September 30, 2021, to $3.1 million, or 84% of net product sales, versus approximately $2.7 million, or 86% of net product sales, during the nine months ended September 30, 2020. This increase of $0.4 million was primarily due to increased unit sales of product.
General and Administrative Expenses
General and administrative expenses increased sharply from $5.6 million, during the nine months ended September 30, 2020, to $8.6 million during the nine months ended September 30, 2021. This increase was primarily due to a $2.0 million increase in employee/director stock-based compensation expense, a $0.5 million increase in insurance expenses, and a $0.5 million increase in payroll expenses, all primarily related to our public-company status during the nine months ended September 30, 2021 in contrast to our private-company status during much of the nine months ended September 30, 2020.
Research and Development Costs
Research and development costs include therapeutic and diagnostic research and product development costs. We have shifted our focus in this category toward therapeutics. Research and development costs increased from $1.7 million for the nine months ended September 30, 2020 to $10.1 million for the nine months ended September 30, 2021. Of the $1.7 million of research and development costs for the nine months ended September 30, 2020, $1.1 million (64%) was attributable to therapeutics and $0.6 million (36%) 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 increase in diagnostic research and development costs was primarily due to increased stock-based compensation expense ($0.3 million) related to our public-company status, and wind-down costs related to the withdrawn COVID-19 antibody diagnostic test during the nine months ended September 30, 2021. The increase in therapeutics research and development costs was primarily due to an increase of $6.0 million in expenses related to the potential application of QN-165 to treatment of COVID-19 ($4.6 million in drug compound manufacturing costs, and a $1.4 million increase in other pre-clinical research costs), as well as pre-clinical research and development cost increases of about $0.8 million for QN-247, about $0.4 million for RAS, and an increase of approximately $0.6 million in payroll and $0.2 million in increased professional fees for the nine months ended September 30, 2021, all as compared to the nine months ended September 30, 2020). On August 11, 2021 the FDA informed us that additional pre-clinical studies would be required in order for the FDA to clear the Investigational New Drug (IND) application that we filed on July 13, 2021 for clinical studies of QN-165 for the treatment of COVID-19 in hospitalized patients. We have since decided to deprioritize this QN-165 program.
For the future, we expect our therapeutic research and development costs to continue to significantly outweigh our diagnostic research and development costs, and to be relatively lower in periods when we are focusing on pre-clinical activities and meaningfully higher in periods when we are provisioning for and conducting clinical trials, if any.
Sales and Marketing Expenses
Sales and marketing expenses during the nine months ended September 30, 2021 increased to approximately $402,000 as compared to $279,000 during the nine months ended September 30, 2020, primarily due to an increase in payroll and recruiting expenses.
Other Expense (Income)
Change in Fair Value of Warrant Liabilities
During the nine months ended September 30, 2021 we experienced (primarily due to a decrease in our stock price during the period) $6.1 million in other income because the fair value of the warrant liabilities arising from our “exploding warrants” series (containing a “double-ratchet” provision) issued by Qualigen, Inc. many years ago to brokers and investors in connection with a 2004 private placement declined to $2.2 million as of September 30, 2021 from $8.3 million as of December 30, 2020. For the nine months ended September 30, 2020, loss on change in fair value of warrant liabilities was $20.6 million due to the reverse recapitalization transaction and an associated increase in the market price of our common stock. Typically a decline in our stock price would result in a decline in the fair value of our warrant liabilities, generating an item of income, while an increase in our stock price would result in an increase in the fair value of our warrant liabilities, generating a loss.
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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 warrants outstanding at the end of each quarter.
Interest (Income) Expense, Net
There was $37,000 in net interest income during the nine months ended September 30, 2021 versus net interest expense of $149,000 during the nine months ended September 30, 2020. Interest on $1.7 million principal amount of convertible notes payable ceased to accrue when they automatically converted in May 2020 upon the closing of the reverse recapitalization transaction. In addition, between April 1, 2020 and December 31, 2020 we paid off our revolving factoring line of credit facility and repaid approximately $0.9 million to Sekisui. During the second quarter of 2021 we paid off our Equipment Financing Agreements which eliminated all of our notes payable.
Other (Income), Net
There was an immaterial amount of other income during the nine months ended September 30, 2021, and approximately $254,000 in other income during the first nine months of 2020, of which $250,000 resulted from a license option fee for our FastPack 2.0 technology.
Liquidity and Capital Resources
As of September 30, 2021, we had $12.3 million of cash and cash equivalents. However, we have suffered recurring losses from operations and expect to continue to do so. Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent to the date of this Quarterly Report.
As a 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, including full clinical trials of therapeutic drug candidates, we will require additional financing. 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.
Our balance sheet at September 30, 2021 included $2.2 million of warrant liabilities. We do not consider that the warrant liabilities constrain our liquidity, as a practical matter. Our current liabilities at September 30, 2021 included $0.9 million of accounts payable and $1.8 million of accrued expenses and other current liabilities.
Cash Flows
The following table sets forth the significant sources and uses of cash and cash equivalents for the periods set forth below:
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (11,817,410 | ) | $ | (6,298,355 | ) | ||
| Investing activities | (124,356 | ) | (680,135 | ) | ||||
| Financing activities | 285,005 | 21,315,335 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | (11,656,761 | ) | $ | 14,336,844 | |||
Net Cash Used in Operating Activities
During the nine months ended September 30, 2021, operating activities used $11.8 million of cash, primarily resulting from a net loss of $11.8 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 $6.1 million decrease in fair value of warrant liabilities and a $0.3 million decrease in deferred revenue.
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During the nine months ended September 30, 2020, operating activities used $6.3 million of cash, primarily resulting from a net loss of $27.6 million. Cash flows from operating activities (as opposed to net loss) for the nine months ended September 30, 2020 benefitted from a $20.6 million increase in fair value of warrant liabilities due to the reverse-recapitalization and an associated increase in the market price of our common stock, a $1.6 million increase in employee/director stock-based compensation expense, and a $0.8 million decrease in accounts receivable. Cash flows from operating activities (as opposed to net loss) for the nine months ended September 30, 2020 were negatively impacted by a $0.6 million increase in prepaid expenses, primarily due to prepaid director and officer liability insurance policies purchased in connection with the reverse-recapitalization transaction, a $0.5 million decrease in accrued expenses and other current liabilities, a $0.3 million decrease in accounts payable, a $0.2 million increase in inventory, and a $0.2 million decrease in deferred revenue.
Net Cash Used in Investing Activities
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.
During the nine months ended September 30, 2020, net cash used in investing activities was approximately $0.7 million, primarily related to payments for patents and licenses, as well as 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, 2021 was approximately $0.3 million, due to about $0.4 million of net proceeds from exercise of warrants, offset by approximately $0.1 million in principal payments on notes payable.
Net cash provided by financing activities for the nine months ended September 30, 2020 was $21.3 million, primarily due to $21.1 million of net proceeds from a reverse-recapitalization-time equity capital raise and later sales of equity securities in two registered-direct offerings to an institutional investor, and $1.7 million in proceeds from the issuance of notes payable, offset by $1.5 million in principal payments on notes payable.
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Smaller reporting companies are not required to respond to this Item.
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021, 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, 2021 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, 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 Securities Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. As of December 31, 2020, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was not effective because of a material weakness in our internal control over financial reporting related to the lack of accounting department resources and/or policies and procedures to ensure recording and disclosure of items in compliance with generally accepted accounting principles. We have taken and are taking steps to remediate the material weakness, including implementing additional procedures and utilizing external consulting resources with experience and expertise in U.S. GAAP and public company accounting and reporting requirements to assist management with its accounting and reporting of complex and/or non-recurring transactions and related disclosures.
We believe that during the quarter ended June 30, 2021 and the quarter ended September 30, 2021 the remediation steps described above had a positive effect and have materially improved 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. Nonetheless, we also believe that an internal control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the internal control system are met, and no evaluation of internal control can provide absolute assurance that all internal control issues and instances of fraud, if any, within a company are detected.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any legal matters. From time to time, we could become involved in disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters.
ITEM 1A. RISK FACTORS
Smaller reporting companies are not required to respond to this Item.
Please refer to the Risk Factors section of our Transition Report on Form 10-K for the nine-months transition period ended December 31, 2020.
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
| 101.INS# | Inline XBRL Instance Document. | |
| 101.SCH# | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL# | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF# | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB# | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE# | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
# XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| November 15, 2021 | QUALIGEN THERAPEUTICS, INC. | |
| By: | /s/ Michael S. Poirier | |
| Name: | Michael S. Poirier | |
| Title: | Chief Executive Officer | |
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