UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements by Qualigen Therapeutics, Inc. that involve risks and uncertainties and reflect our judgment as of the date of this Report. These statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Such forward-looking statements may relate to, among other things, potential future development, testing and launch of products and product candidates. Actual events or results may differ from our expectations due to a number of factors.
These forward-looking statements include, but are not limited to, statements about:
| ● | our ability to successfully develop any drugs or therapeutic devices; | |
| ● | our ability to progress our drug candidates or therapeutic devices through preclinical and clinical development; | |
| ● | our ability to obtain the requisite regulatory approvals for our clinical trials and to begin and complete such trials according to any projected timeline; | |
| ● | our ability to complete enrollment in our clinical trials as contemplated by any projected timeline; | |
| ● | the likelihood that future clinical trial data will be favorable or that such trials will confirm any improvements over other products or lack negative impacts; | |
| ● | our ability to successfully commercialize any drugs or therapeutic devices; | |
| ● | our ability to procure or earn sufficient working capital to complete the development, testing and launch of our prospective therapeutic products; | |
| ● | the likelihood that patents will issue on our owned and in-licensed patent applications; | |
| ● | our ability to protect our intellectual property; | |
| ● | our ability to compete; | |
| ● | our ability to maintain or expand market demand and/or market share for our diagnostic products generally, particularly in light of COVID-19-related deferral of patients’ physician-office visits and in view of FastPack reimbursement pricing challenges; and | |
| ● | our ability to maintain our diagnostic sales and marketing engine without interruption once our distribution agreement with Sekisui expires. |
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. In light of the significant uncertainties in these forward-looking statements, you should not rely upon forward-looking statements as predictions of future events. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Annual 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 Annual 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 Annual Report, they may not be predictive of results or developments in other future periods. Any forward-looking statement that we make in this Annual Report speaks only as of the date of this Annual Report, and we disclaim any intent or obligation to update these forward-looking statements beyond the date of this Annual Report, except as required by law. This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Future filings with the Securities and Exchange Commission (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.
PART I
As used in this Annual Report, unless the context suggests otherwise, “we,” “us,” “our,” “the Company” or “Qualigen” refer to Qualigen Therapeutics, Inc.
Item 1. Business
Overview
We are a diversified life sciences company focused on developing treatments for adult and pediatric cancers with potential for Orphan Drug designation, while also commercializing diagnostics. Our cancer therapeutics pipeline includes QN-302, QN-247 and RAS-F. Our investigational QN-302 compound is a small molecule G4 selective transcription inhibitor with strong binding affinity to G4s prevalent in cancer cells. Such binding could, by stabilizing the G4s against “unwinding,” help inhibit cancer cell proliferation. QN-247 is a DNA coated gold nanoparticle cancer drug candidate that has the potential to target various types of cancer; the nanoparticle conjugate technology is similar to the core nanoparticle coating technology used in our blood-testing diagnostic products. The foundational aptamer of QN-247 is QN-165 (formerly referred to as AS1411), which the Company has deprioritized as a drug candidate for treating COVID-19 and other viral-based infectious diseases. 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 RAS-driven tumors such as pancreatic, colorectal and lung cancers. Although we have no ongoing development efforts for STARS, a DNA/RNA-based therapeutic device product concept for removing precisely targeted tumor-produced and viral compounds from circulating blood, we are currently identifying strategic partnering opportunities.
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Our FastPack System diagnostic instruments and test kits are sold commercially primarily in the United States, as well as certain European countries. The FastPack System menu includes a rapid, highly accurate immunoassay diagnostic testing system for cancer, men’s health, hormone function, and vitamin D status. We provide analyzers to our customers (physician offices, clinics and small hospitals) at low cost in order to increase sales volumes of higher-margin test kits. We currently use our diagnostics distribution partner Sekisui Diagnostics, LLC (“Sekisui”) for most FastPack distribution worldwide pursuant to a distribution agreement, but 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 United States, with 40 locations. The distribution agreement with Sekisui will expire on March 31, 2022, at which time the services currently provided by Sekisui will revert to us and we will recognize 100% of the revenue from the sales of our FastPack diagnostic instruments and test kits. We have licensed and technology-transferred our FastPack System technology to Yi Xin Zhen Duan Jishu (Suzhou) Ltd. for the China diagnostics market.
Completion of Reverse Recapitalization Transaction with Ritter Pharmaceuticals, Inc.
On May 22, 2020, we completed a “reverse recapitalization” transaction with Qualigen, Inc. (not to be confused with the Company); pursuant to which our 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.
We are no longer pursuing the gastrointestinal disease treatment business on which Ritter Pharmaceuticals, Inc. had focused before the reverse recapitalization transaction.
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Product Candidates
Therapeutics and Diagnostics Pipeline
Our lead drug compound QN-302 (formerly SOP1812) is being developed to target regulatory regions of cancer genes that down-regulate gene expression in multiple cancer pathways. Our anticancer drug candidate, QN-247 (formerly referred to as ALAN or AS1411-GNP) is aptamer-based and currently in development to treat a variety of cancer types, including liquid and solid tumors. Our RAS-F portfolio is designed to suppress the interaction of endogenous RAS with c-RAF, upstream of the KRAS, HRAS and NRAS effector pathways.
Our Selective Target Antigen Removal System (STARS) is a therapeutic device product concept, currently in discovery stage, designed to remove circulating tumor cells, viruses, inflammation factors and immune checkpoints.
Our deprioritized, non-core drug candidate QN-165 (formerly referred to as AS1411, thus not featured in the chart above) is a drug candidate for the potential broad-spectrum treatment of infectious diseases such as COVID-19.
QN-302 (formerly referred to as SOP1812)
We exclusively in-licensed the global rights to the G4 selective transcription inhibitor platform from University College London (“UCL”) in January 2022. The licensed technology comprises lead compound QN-302 (formerly SOP1812) and back-up compounds that target regulatory regions of cancer genes that down-regulate gene expression in multiple cancer pathways. Developed by Dr. Stephen Neidle and his group at UCL, the G4 binding concept is derived from over 30 years in nucleic acid research, including that of G4s, which are higher order DNA and RNA structures formed by sequences containing guanine-rich repeats. G4s are overrepresented in telomeres as well as promoter sequences and untranslated regions of many oncogenes. Their prevalence is therefore significantly greater in cancer cells compared to normal human cells.
G4-selective small molecules such as QN-302 and backup compounds target the regulatory regions of those cancer genes which have a high prevalence of enriched G4s in a process that can be predicted by bioinformatics. Stable G4-QN-302 complexes can be impediments to replication, transcription or translation of those cancer genes containing G4s, and the drugs’ binding to G4s stabilize the G4s against possible “unwinding.” G4 binders like QN-302 could be efficacious in a variety of cancer types with a high prevalence of G4s. This has been supported by in-vitro and in-vivo studies that have shown that G4 stabilization by QN-302 results in inhibition of target gene expression and cessation of cell growth in a variety of G4 prevalent cancers, including pancreatic ductal adenocarcinoma (“PDAC”) which represents 98% of pancreatic cancers.
Pancreatic cancer is the tenth most common cancer and fifth deadliest cancer in the United States and has one of the lowest rates of survival of all cancer types, with 98% of those diagnosed dying from the disease and one in four dying within the first month of diagnosis. The chemotherapy drug gemcitabine has been standard of care for patients with metastatic pancreatic cancer for more than 15 years. Numerous clinical trials have tested new drugs, either alone or in combination, with gemcitabine. We believe that QN-302 has the potential to demonstrate superior efficacy and activity against PDAC compared to existing agents, with a distinct mechanism of action and preclinical target profile.
In vitro studies show QN-302 potently inhibits the growth of several PDAC cell lines at low nM concentrations. Likewise, QN-302 shows longer survival duration in a KPC genetic mouse model for pancreatic cancer than gemcitabine has historically shown. Additional preclinical studies suggest activity in gemcitabine resistant PDAC. Data from therapy studies on three patient-derived PDAC xenografts indicated that QN-302 had significant anti-tumor activity in PDAC. Early safety indicators suggest no adverse toxic effects at proposed therapeutic doses in pancreatic cancer in-vivo models.
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We plan to seek to obtain Orphan Drug status for QN-302 for one or more indications, such as PDAC. Orphan Drug status, if obtained, would be expected to confer advantages that may include faster regulatory review and increased market protection.
QN-247 (formerly referred to as ALAN or AS1411-GNP)
QN-247 is an aptamer-based drug candidate that is designed to treat different types of cancer, including liquid and solid tumors. QN-247 inhibits nucleolin, a key multi-functional regulatory protein that is overexpressed in cancer cells; QN-247 may thereby be able to inhibit the cells’ proliferation. QN-247 has shown promise in preclinical studies for the treatment of acute myeloid leukemia (“AML”). This novel technology may have several other potential applications, including enhancement of radiation therapy, enhancement of tumor imaging, and delivery of other anti-cancer compounds directly to tumor cells.
A key component of this drug candidate, DNA aptamer QN-165, has been shown, primarily on a preclinical basis, to have the potential to target and destroy cancer cells. This component has been administered in Phase 1 and Phase 2 clinical trials to over 100 AML or renal cell carcinoma cancer patients and appears to be well tolerated with no evidence of severe side effects, with at least seven patients appearing to have long-lasting clinical responses where their cancers disappeared or shrank substantially. (QN-165 may also be useful against infectious diseases – see below.)
QN-247 is an enhanced version of QN-165 (which in turn was formerly referred to as AS1411) where the DNA aptamer is attached to a gold nanoparticle.
In a Qualigen-sponsored University of Louisville (“UofL”) in-vitro preclinical study involving tumor-associated macrophages, QN-247 was shown to have stronger anti-cancer activity than QN-165 alone did. Tumor-associated macrophages are a class of immune cells present in high numbers around solid tumors and affect most aspects of tumor cell biology; they drive pathological phenomena including tumor cell proliferation, tumor angiogenesis, invasion and metastasis, immunosuppression, and drug resistance. In most cancers, the tumor-associated macrophages have an M2 phenotype, which may inhibit the anti-tumor effects of immune checkpoint inhibitor drugs, such as Merck’s Keytruda (pembrolizumab). We believe that converting these M2 macrophages to the M1 phenotype could enhance the activity of these immune checkpoint inhibitors. In the UofL study, QN-247 increased the conversion of M2 macrophages to the M1 phenotype, while also reducing the overall proliferation of macrophages.
A UofL in-vitro preclinical study with triple negative breast cancer cells (MDA-MB-231) indicated that QN-247, in combination with radiation therapy, resulted in reduced tumor cell colony size (i.e., resulted in increased tumor cell necrosis) compared to radiation alone.
We plan to seek to obtain Orphan Drug status for QN-247 for one or more indications, such as pancreatic cancer, AML and pediatric neuroblastoma. Orphan Drug status, if obtained, would be expected to confer advantages that may include faster regulatory review and increased market protection.
In October 2020, we entered into an amended sponsored research agreement with UofL to advance development of our QN-247 drug candidate. The work being performed under the original sponsored research agreement, entered into in August 2018, comprises animal studies to assess antitumor efficacy and safety of different QN-247 compositions designed to treat pediatric and adult AML. Under the amended sponsored research agreement, UofL is performing preclinical studies on AML and on additional indications including glioblastoma, a malignant brain cancer that is difficult to treat because most drugs cannot pass the blood-brain membrane, and non-small cell lung cancer, which comprises approximately 85% of the 1.6 million global lung cancer cases each year. Additionally, we and UofL will study how QN-247 may inhibit metastasis of cancer cells as a potential adjuvant therapy.
RAS-F
In July 2020, we entered into an exclusive worldwide license agreement with UofL for the intellectual property covering the “RAS-F” family of RAS oncogene protein-protein interaction inhibitor small molecule drug candidates, which would work by blocking RAS mutations directly and thereby inhibiting tumor formation (especially in pancreatic, colorectal and lung cancers). Pursuant to the license agreement, we in-licensed the “RAS-F” compound family of drug candidates and will seek to identify and develop a lead drug candidate from the compound family and, upon commercialization, will pay UofL royalties in the low-to-mid-single-digit percentages on net sales of RAS protein-protein interaction inhibitor licensed products.
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RAS is the most common oncogene in human cancer. Activating mutations in one of the three human RAS gene isoforms (KRAS, HRAS or NRAS) are present in about one-fourth of all cancers. For example, mutant KRAS is found in 98% of pancreatic ductal adenocarcinomas, 52% of colon cancers, and 32% of lung adenocarcinomas. For these three cancer types, cancers with mutant KRAS are diagnosed in more than 170,000 people each year in the United States and cause more than 120,000 deaths. There is currently no FDA-approved direct RAS protein inhibitor available. Drugs that target signaling downstream of RAS are available; however, such drugs have shown disappointing clinical activity because RAS is a “hub” that activates multiple effectors, so drugs that block a single pathway downstream do not account for the many other activated pathways.
In March 2022, we signed an amendment to our active sponsored research agreement with UofL to extend our partnership. Under the revised agreement, the collaboration extends until the first quarter of 2023 and commits additional resources to support ongoing discovery and preclinical efforts for the RAS-F platform.
STARS™
Our FastPack diagnostic system and related core technologies are now the basis for potential blood-filtering therapeutic applications for the treatment of cancer and infectious disease. Our Selective Target Antigen Removal System (“STARS”) therapeutic device concept is intended to utilize core expertise in advanced reagents and coatings to remove disease associated agents, including viruses and tumor-produced compounds, directly from a patient’s blood. The key components of STARS, membranes coated with target capture reagents, will utilize several proprietary processes developed and used in the FastPack product lines. Proprietary STARS cartridges are expected to be designed for use with conventional dialysis or hemofiltration machines to remove immune checkpoints, metastatic cells and inflammation factors from cancer patients’ bloodstreams. We believe STARS may also be able to be developed to treat infectious diseases, by removing circulating viruses sufficiently to facilitate patient stabilization and recovery. Although we have no ongoing development efforts for STARS, we are currently identifying strategic partnering opportunities.
In August 2020, the United States Patent and Trademark Office issued to us patent No. 10,744,258 entitled “Devices and Methods for On-Line Whole Blood Treatment” regarding our STARS technology.
QN-165 (formerly referred to as AS1411)
In June 2020, we entered into an exclusive royalty-bearing license agreement with UofL for UofL’s intellectual property for the use of QN-165 as a drug candidate for the treatment of COVID-19. In September 2020 we and UofL jointly filed a United States provisional patent application, entitled “Methods of inhibiting or treating coronavirus infection, and methods for delivering an anti-nucleolin agent.” The application was filed in conjunction with Drs. Paula J. Bates and Kenneth E. Palmer from UofL, and covers methods for using QN-165 as an antiviral drug candidate to prevent SARS-CoV-2 from entering the body through mucous membranes in the nose, mouth and eyes. As stated in the patent application, we believe that QN-165 could be administered by means of inhalers, nose spray or eye drops to individuals who have recently come in contact with SARS-CoV-2, or are at high risk of contracting the virus.
We believe that the mechanism by which QN-165 is believed to work, by blocking the ability of viruses to replicate in the body, may also make the drug candidate effective against future mutations in COVID-19 as well as against other dangerous viruses including seasonal influenza. Moreover, we believe that in addition to its proposed use as a therapeutic, QN-165 might be able to be used as a protective defense or prophylaxis against COVID-19 and/or other viral-based diseases such as seasonal influenza.
On July 13, 2021, we filed an Investigational New Drug (“IND”) application with the U.S. Food and Drug Administration (“FDA”) to seek approval to commence Phase 1b/2a clinical studies with QN-165 in hospitalized COVID-19 patients. 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 decided to deprioritize the QN-165 program as our therapeutics strategy is focused on oncology.
FastPack®
The FastPack System is a patent-protected rapid, onsite immunoassay testing system consisting of the FastPack Analyzer and the FastPack test pouch, a single-use, disposable, foil packet which includes the FastPack reagent chemistry. Since the initial conception of the system, we have developed successive versions of the analyzer and test pouch, known as “1.0,” “IP” and “PRO”, and have expanded our assay menu to nine tests, including tests for prostate cancer, thyroid function, metabolic disorders, and research applications. We have sold FastPack products in the United States and overseas for over 20 years, and since inception, our sales of FastPack products have exceeded $120 million. We manufacture the FastPack products at our FDA and International Standards Organization (“ISO”) certified Carlsbad, California facility. We maintain direct distribution for certain house accounts, including Low T, but pursuant to a distribution agreement, our diagnostics distribution partner Sekisui holds most FastPack distribution rights until March 31, 2022, after which time we will resume full commercial responsibility.
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In July 2020, we submitted an official notification to the FDA to commence sales in the United States of our FastPack SARS-CoV-2 IgG test for COVID-19 antibodies, which was designed for use with our new FastPack PRO. The test was previously submitted to the FDA for Emergency Use Authorization (“EUA”). In April 2021, we withdrew this EUA. During the nine months during which the EUA was with the FDA, alternative tests and testing practices became widespread and we determined that there was no longer a viable business case for scale-up of the test.
Strategic Partners
As of January 2022, we have entered into a royalty-bearing license agreement with UCL, including intellectual property and know-how covering lead and backup compounds for our G4 selective transcription inhibitor program, QN-302.
We have entered into a royalty-bearing license agreement for key components of QN-247 from UofL and we have commissioned sponsored research from UofL’s development teams in order to optimize and prepare QN-247 for human trials. A separate team at UofL, funded by us under a sponsored research agreement, is developing RAS-F. We have an active royalty-bearing license agreement for the RAS-F program as well.
In 2016, we entered into an agreement with Sekisui, whereby Sekisui distributes our diagnostic product line worldwide. As described above, this distribution agreement will expire on March 31, 2022.
We in-license patents from DIAsource ImmunoAssays S.A. and Future Diagnostics B.V., for reagents that are used in our FastPack Vitamin D assay.
We had exclusive rights to the core QN-165 aptamer from Advanced Cancer Therapeutics, LLC; this agreement terminated on March 1, 2022.
Sales Channels
We
currently sell our FastPack diagnostic product line primarily through our distribution partner Sekisui under a distribution agreement
whereby Sekisui receives a portion of sales revenue. In the United States, Sekisui commercializes the FastPack product line through its
own direct sales force and distribution agreements with McKesson Medical-Surgical, Henry Schein Medical, Medline Industries and National
Distribution & Contracting, the largest distributors of physician office laboratory products in the United States. Outside of the
United States, Sekisui commercializes the FastPack product line through a network of distributors in Europe, Asia, Middle East, and North
Africa. Our distribution agreement with Sekisui will expire on March 31, 2022, at which time the
services currently provided by Sekisui will revert to us and we will recognize 100% of the revenue from the sales of our FastPack diagnostic
instruments and test kits. Once the distribution agreement expires, we do not expect any interruption to our diagnostics sales and marketing
engine as we will continue to leverage established partnerships with our various distributors in both the United States and abroad.
In addition, among our other direct sales accounts, we currently sell FastPack products directly to Low T. Sales to Sekisui accounted for 62% of our total revenues during the fiscal year ended December 31, 2021, and sales to Low T accounted for 22% of our total revenues during this period. The remaining revenue was comprised of warranties and product sales to our other direct sales accounts as well as license revenues.
In October 2020, we entered into an agreement with Yi Xin Zhen Duan Jishu (Suzhou) Ltd (“Yi Xin”), pursuant to which Yi Xin obtained exclusive rights to manufacture and sell new generations of FastPack-based products as well as Yi Xin-manufactured versions of our existing FastPack 1.0, IP and PRO product lines in China. We would be entitled to receive royalties on any such sales. After May 1, 2022, Yi Xin will have the right to sell its new generations of FastPack-based diagnostic test systems throughout the world, other than to our then-current FastPack customers; and on a worldwide basis, except in the United States, Yi Xin will also have the right to sell Yi Xin-manufactured versions of our existing FastPack 1.0, IP and PRO product lines. We would be entitled to receive royalties on any of these sales, as well. After March 31, 2022, Yi Xin will have the right to buy Qualigen FastPack 1.0, IP and PRO products from us at distributor prices for resale in the United States, again excluding resales toward our then-current FastPack customers.
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Manufacturing
We develop, manufacture and assemble our diagnostic products at our approximately 23,000 square feet facility in Carlsbad, California. Our laboratory and manufacturing practices are governed by a series of internally published Standard Operating Procedures, in accordance with FDA and ISO guidelines. While we produce many of our own raw materials and sub-components for diagnostic products, we also purchase certain materials from third-party suppliers such as Thermo Fisher Scientific, Equitech-Bio, Surmodics, OYC Americas, Amcor, 3M, VWR, Gilson, Impact Project Management, Enstrom, Hi-Tech Products, and Hamamatsu.
We do not have in-house manufacturing capability for our therapeutics product candidates.
Research and Development
For research and development of our drug candidates, we are leveraging the scientific and technical resources and laboratory facilities of UofL and UCL, through technology licensing, sponsored research, and other consulting agreements, which are focused on Aptamer technology and applications in the cancer and infectious disease fields. We would engage contract research organizations for any clinical trials of our drug candidates. We intend to focus our internal research and development on continuing support of the FastPack diagnostic line.
Regulatory Matters
We have obtained 17 FDA clearances/approvals and 28 CE Marks for our diagnostic products (FastPack analyzers, immunoassays, control kits, calibration kits and verifications kits) to date. We have not obtained FDA or other regulatory approval for any drug candidate.
Medical Device Regulatory Clearances and Approvals
The medical devices that we manufacture and market are subject to regulation by numerous worldwide regulatory bodies, including the FDA and comparable international regulatory agencies. These agencies require manufacturers of medical devices to comply with applicable laws and regulations governing development, testing, manufacturing, labeling, marketing and distribution. Medical devices are also generally subject to varying levels of regulatory control based on the risk level of the device.
In the United States, unless an exemption applies, before we can commercially distribute medical devices, we must obtain, depending on the type of device, either premarket notification clearance or premarket approval (“PMA”) from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either class I or II, which typically requires the manufacturer to submit to the FDA a premarket notification requesting permission to commercially distribute the device. Some low-risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared device, are placed in class III, generally requiring PMA.
The premarket notification process requires that a premarket notification (510(k)) be made to the FDA to demonstrate that a new device is as safe and effective as, or substantially equivalent to, a legally marketed device (the “predicate” device). This process is generally known as obtaining 510(k) clearance for a new device. Under this process, applicants must submit performance data to establish substantial equivalence. In some instances, data from human clinical trials must also be submitted in support of a 510(k) premarket notification. If so, these data must be collected in a manner that conforms to the applicable Investigational Device Exemption (“IDE”) regulations. The FDA must issue a decision finding substantial equivalence before commercial distribution can occur. Changes to cleared devices that do not significantly affect the safety or effectiveness of the device can generally be made without additional 510(k) premarket notifications; otherwise, a new 510(k) is required.
The PMA approval process requires the submission of a PMA application to the FDA to demonstrate that the new device is safe and effective for its intended use. This approval process applies to most Class III devices and generally requires clinical data to support the safety and effectiveness of the device, obtained in adherence with IDE requirements. The FDA will approve the PMA application if it finds that there is a reasonable assurance that the device is safe and effective for its intended purpose and that the proposed manufacturing is in compliance with the Quality System Regulation (“QSR”). For novel technologies, the FDA may seek input from an advisory panel of medical experts and seek their views on the safety, effectiveness and benefit-risk of the device. The PMA process is generally more detailed, lengthier and more expensive than the 510(k) process.
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In the European Union (“EU”), we are required to comply with the Medical Device Regulation (“MDR” or “EU MDR”), which became effective May 2021, superseding existing Medical Device Directives. Medical devices that have a valid CE Certificate to the prior Directives (issued before May 2021) can continue to be sold until May 2024 or until the CE Certificate expires, whichever comes first, providing there are no significant changes to the design or intended use. The CE Mark, which is required to sell medical devices in the EU is affixed following a Conformity Assessment and either approval from the appointed independent Notified Body or through self-certification by the manufacturer. The selected pathway to CE marking is based on device risk classification. CE marking indicates conformity to the applicable General Safety and Performance Requirements (“GSPRs”) for the MDR. The MDR changes multiple aspects of the regulatory framework for CE marking, such as increased clinical evidence requirements, changes to labelling, and new requirements, including Unique Device Identification (“UDI”), and many new post-market reporting obligations. MDR also modifies and increases the compliance requirements for the medical device industry and will continue to require significant investment over the next few years to transition all products by May 2024. The CE mark continues to be a prerequisite for successful registration in many other global geographies.
We are also required to comply with the regulations of every other country where we commercialize products before we can launch or maintain new products on the market. Regulatory requirements are becoming more stringent, with the China National Medical Product Administration (“NMPA”) recently increasing the regulatory requirements to market and maintain products in China, and the introduction of such regulatory requirements in many countries in the Middle East and Southeast Asia that previously did not have medical device regulations, or had minimal regulations. As a result of the United Kingdom’s departure from the EU, we also expect a U.K. Regulation to be implemented beginning July 2023, with requirements to sell in the U.K. already in place including appointment of a U.K. Responsible Person and device registration with The Medicines and Healthcare products Regulatory Agency (“MHRA”). In addition, other EU countries continue to impose significant local registration requirements despite the implementation of MDR.
The FDA and other worldwide regulatory agencies and competent authorities actively monitor compliance to local laws and regulations through review and inspection of design and manufacturing practices, record-keeping, reporting of adverse events, labeling and promotional practices. The FDA can ban certain medical devices, detain or seize adulterated or misbranded medical devices, order recall or market withdrawal of these devices and require notification of health professionals and others with regard to medical devices that present unreasonable risks of substantial harm to the public health. The FDA may also enjoin and restrain a company for certain violations of the Food, Drug and Cosmetic Act (“FDCA”) and the Safe Medical Devices Act, pertaining to medical devices, or initiate action for criminal prosecution of such violations. Regulatory agencies and authorities in the countries where we do business can halt production in or distribution within their respective country or otherwise take action in accordance with local laws and regulations.
International sales of medical devices manufactured in the United States that are not approved by the FDA for use in the United States, or that are banned or deviate from lawful performance standards, are subject to FDA export requirements. Additionally, exported devices are subject to the regulatory requirements of each country to which the device is exported. Some countries do not have medical device regulations, but in most foreign countries, medical devices are regulated. Frequently, regulatory approval may first be obtained in a foreign country prior to application in the United States due to differing regulatory requirements; however, other countries, such as China, for example, require approval in the country of origin first. Most countries outside of the United States require that product approvals be recertified on a regular basis. The recertification process requires the evaluation of any device changes and any new regulations or standards relevant to the device and, where needed, conduct appropriate testing to document continued compliance. Where recertification applications are required, they must be approved in order to continue selling our products in those countries.
Medical Device Quality Assurance
We are committed to providing high quality products to our customers and the patients they serve. Our quality system starts with the initial product specification and continues through the design of the product, component specification process and the manufacturing, sale and servicing of the product. Our quality system is intended to build in quality and process control and to utilize continuous improvement concepts throughout the product life. Our quality system is also designed to enable us to satisfy various international quality system regulations, including those of the FDA with respect to products sold in the United States. All of our medical device manufacturing facilities and distribution centers are certified under the ISO 13485 quality system standard, established by the ISO for medical devices, which includes requirements for an implemented quality system that applies to component quality, supplier control, product design and manufacturing operations. This certification can be obtained only after a complete audit of a company’s quality system by an independent outside auditor, and maintenance of the certification requires that these facilities undergo periodic re-examination.
United States—FDA Drug Approval Process
The research, development, testing, and manufacture of product candidates are extensively regulated by governmental authorities in the United States and other countries. In the United States, the FDA regulates drugs under the FDCA and its implementing regulations.
The steps required to be completed before a drug may be marketed in the United States include, among others:
| ● | preclinical laboratory tests, animal studies, and formulation studies, all performed in accordance with the FDA’s Good Laboratory Practice (“GLP”) regulations; | |
| ● | submission to the FDA of an IND application for human clinical testing, which must become effective before human clinical trials may begin and for which progress reports must be submitted annually to the FDA; |
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| ● | approval by an independent institutional review board (“IRB”) or Ethics Committee (“EC”) at each clinical trial site before each trial may be initiated; | |
| ● | adequate and well-controlled human clinical trials, conducted in accordance with applicable IND regulations, Good Clinical Practices (“GCP”), and other clinical trial related regulations, to establish the safety and efficacy of the drug for each proposed indication to the FDA’s satisfaction; | |
| ● | submission to the FDA of a New Drug Application (“NDA”) and payment of user fees for FDA review of the NDA (unless a fee waiver applies); | |
| ● | satisfactory completion of an FDA pre-approval inspection of one or more clinical trial site(s) at which the drug was studied in a clinical trial(s) and/or of us as a clinical trial sponsor to assess compliance with GCP regulations; | |
| ● | satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with current GMPs regulations; | |
| ● | agreement with the FDA on the final labeling for the product and the design and implementation of any required Risk Evaluation and Mitigation Strategy (“REMS”); and | |
| ● | FDA review and approval of the NDA, including satisfactory completion of an FDA advisory committee review, if applicable, based on a determination that the drug is safe and effective for the proposed indication(s). |
Preclinical tests include laboratory evaluation of product chemistry, toxicity, and formulation, as well as animal studies. The conduct of the preclinical tests and formulation of the compounds for testing must comply with federal regulations and requirements, including GLP regulations. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND application, which must become effective before human clinical trials may begin. An IND application will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct of the trials as outlined in the IND application, and places the clinical trial(s) on a clinical hold. In such a case, the IND application sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. We cannot be certain that submission of an IND application will result in the FDA allowing clinical trials to begin.
Clinical trials necessary for product approval are typically conducted in three sequential phases, but the Phases may overlap or be combined. The study protocol and informed consent information for study subjects in clinical trials must also be approved by an IRB for each institution where the trials will be conducted, and each IRB must monitor the study until completion. Study subjects must provide informed consent and sign an informed consent form before participating in a clinical trial. Clinical testing also must satisfy the extensive GCP regulations for, among other things, informed consent and privacy of individually identifiable information.
| ● | Phase 1—Phase 1 clinical trials involve initial introduction of the study drug in a limited population of healthy human volunteers or patients with the target disease or condition. These studies are typically designed to test the safety, dosage tolerance, absorption, metabolism and distribution of the study drug in humans, evaluate the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness. | |
| ● | Phase 2—Phase 2 clinical trials typically involve administration of the study drug to a limited patient population with a specified disease or condition to evaluate the preliminary efficacy, optimal dosages and dosing schedule and to identify possible adverse side effects and safety risks. Multiple Phase 2 clinical trials may be conducted to obtain information prior to beginning larger and more expensive Phase 3 clinical trials. | |
| ● | Phase 3—Phase 3 clinical trials typically involve administration of the study drug to an expanded patient population to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety, generally at multiple geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the study drug and to provide an adequate basis for product approval. Generally, two adequate and well-controlled Phase 3 clinical trials are required by the FDA for approval of an NDA. |
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Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after receiving initial marketing approval. These trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication and are commonly intended to generate additional safety data regarding use of the product in a clinical setting. In certain instances, the FDA may mandate the performance of Phase 4 clinical trials as a condition of approval of an NDA or, in certain circumstances, post-approval.
The FDA has various programs, including fast track designation, breakthrough therapy designation, priority review and accelerated approval, which are intended to expedite or simplify the process for the development, and the FDA’s review of drugs (e.g., approving an NDA on the basis of surrogate endpoints subject to post-approval trials). Generally, drugs that may be eligible for one or more of these programs are those intended to treat serious or life-threatening diseases or conditions, those with the potential to address unmet medical needs for those disease or conditions, and/or those that provide a meaningful benefit over existing treatments. For example, a sponsor may be granted FDA designation of a drug candidate as a “breakthrough therapy” if the drug candidate is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. If a drug is designated as breakthrough therapy, the FDA will take actions to help expedite the development and review of such drug. Moreover, if a sponsor submits an NDA for a product intended to treat certain rare pediatric or tropical diseases or for use as a medical countermeasure for a material threat, and that meets other eligibility criteria, upon approval such sponsor may be granted a priority review voucher that can be used for a subsequent NDA. From time to time, we anticipate applying for such programs where we believe we meet the applicable FDA criteria. A company cannot be sure that any of its drugs will qualify for any of these programs, or even if a drug does qualify, that the review time will be reduced.
The results of the preclinical studies and of the clinical studies, together with other detailed information, including information on the manufacture and composition of the drug, are submitted to the FDA in the form of an NDA requesting approval to market the product for one or more proposed indications. The testing and approval process requires substantial time, effort and financial resources. Unless the applicant qualifies for an exemption, the filing of an NDA typically must be accompanied by a substantial “user fee” payment to the FDA. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and efficacy of the product in the proposed patient population to the satisfaction of the FDA. After an NDA is accepted for filing, the FDA substantively reviews the application and may deem it to be inadequate, and companies cannot be sure that any approval will be granted on a timely basis, if at all. The FDA may also refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved, but is not bound by the recommendations of the advisory committee.
Before approving an NDA, the FDA usually will inspect the facility or the facilities at which the drug is manufactured and determine whether the manufacturing and production and testing facilities are in compliance with cGMP regulations. The FDA also may audit the clinical trial sponsor and one or more sites at which clinical trials have been conducted to determine compliance with GCPs and data integrity. If the NDA and the manufacturing facilities are deemed acceptable by the FDA, it may issue an approval letter, and, if not, the Agency may issue a Complete Response Letter (“CRL”). An approval letter authorizes commercial marketing of the drug with specific prescribing information for a specific indication(s). A CRL indicates that the review cycle of the application is complete and the application is not ready for approval. A CRL may require additional clinical data and/or an additional pivotal Phase 3 clinical trial(s), and/or other significant, expensive and time-consuming requirements related to clinical trials, preclinical studies or manufacturing. Even if such additional information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. The FDA could also require, as a condition of NDA approval, post-marketing testing and surveillance to monitor the drug’s safety or efficacy or impose other conditions, or a REMS that may include both special labeling and controls, known as Elements to Assure Safe Use, on the distribution, prescribing, dispensing and use of a drug product. Once issued, the FDA may withdraw product approval if, among other things, ongoing regulatory requirements are not met, certain defects exist in the NDA, or safety or efficacy problems occur after the product reaches the market.
Intellectual Property
We currently maintain a portfolio of 147 issued, allowed, in-licensed or pending patents, patent applications and provisional patent applications covering various aspects of our products and product candidates in the United States, Canada, Mexico, Europe, Japan, China, Korea, Israel, South Africa, and Australia. In addition, we have seven issued and 28 pending trademark registrations in the United States pertaining to our diagnostics and therapeutics businesses. There are currently no contested proceedings or third party claims against any Qualigen intellectual property.
Within our diagnostics patent portfolio, we hold two issued patents covering FastPack 1.0, IP and PRO and 23 issued patents covering FastPack 2.0. In addition, we in-licensed one issued patent covering our Vitamin D assay from DIAsource ImmunoAssays S.A.. We also, with Gen-Probe Incorporated, hold 24 issued joint patents covering FastPack Molecular, an inactive product program. Last, we hold five issued patents and 10 patents-pending covering our development-stage STARS theranostic system.
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Within our therapeutics patent portfolio, we have 43 issued and 11 patents-pending, including patent applications, covering the QN-247 program set to expire 2032-2038. In addition, we have two patent applications covering the QN-165 program and 15 pending patents covering the RAS program. All 71 patents, pending patents and applications covering QN-247, QN-165, and RAS are in-licensed from ULRF. Finally, we exclusively in-licensed 11 patents, two of which are issued, from UCL covering our QN-302 program and set to expire 2030-2033.
Human Capital Management
As of March 25, 2022, we had 46 employees, 39 of whom were full-time employees. None of our employees is represented by a labor union or covered by a collective bargaining agreement.
Employee Engagement, Benefits & Development. We believe that our future success is dependent upon our ability to recruit, hire and retain exceptional employees. We frequently benchmark our compensation practices and benefits programs against those of comparable industries and in the geographic area where our facility is located. We provide our employees with competitive cash compensation, opportunities to own equity, and an employee benefit program that promotes well-being, including healthcare, a 401(k) Plan with matching contributions, and paid time-off. The success of our business is fundamentally connected to the well-being, health and safety of our employees. In an effort to protect the health and safety of our employees, we took proactive action from the earliest signs of the COVID-19 outbreak, which included implementing social distancing policies at our facilities, facilitating remote working arrangements and imposing employee travel restrictions.
Diversity & Inclusion. We value diversity across our workforce and we will continue to focus on diversity and inclusion initiatives. We seek to have an inclusive and positive culture that is centered on our shared corporate mission and values, and that is free from discrimination of any kind, including sexual or other discriminatory harassment. Our employees have multiple avenues available through which inappropriate behavior can be reported. All reports of inappropriate behavior are promptly investigated with appropriate action taken to stop such behavior.
Additional Information
Ritter Pharmaceuticals, Inc. (our predecessor) was formed as a Nevada limited liability company on March 29, 2004 under the name Ritter Natural Sciences, LLC. In September 2008, this company converted into a Delaware corporation under the name Ritter Pharmaceuticals, Inc. On May 22, 2020, upon completing the “reverse recapitalization” transaction with Qualigen, Inc., Ritter Pharmaceuticals, Inc. was renamed Qualigen Therapeutics, Inc. Qualisys Diagnostics, Inc. was formed as a Minnesota corporation in 1996, reincorporated to become a Delaware corporation in 1999, and then changed its name to Qualigen, Inc. in 2000. Qualigen, Inc. is now a wholly-owned subsidiary of the Company.
Our website address is www.qualigeninc.com. We post links to our website to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, information statements, beneficial ownership reports and any amendments to those reports or statements filed or furnished pursuant to Sections 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such filings are available through our website free of charge. However, the information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address in this Annual Report are inactive textual references only.
Item 1A. Risk Factors
An investment in our common stock involves risks. You should carefully consider the risks described below, together with all of the other information included in this Annual Report, as well as in our other filings with the SEC, in evaluating our business. If any of the following risks actually occur, our business, financial condition, operating results and future prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline and you might lose all or part of your investment. The risks described below, which are the risks we judge (rightly or wrongly) to be the most significant to investors, are not the only ones we face. Additional risks that we currently do not judge to be among the “most significant” may also impair our business, financial condition, operating results and prospects.
Certain statements below are forward-looking statements. For additional information, see the section of this Annual Report under the caption “Cautionary Note Regarding Forward-Looking Statements.”
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Risks Related to Our Therapeutics and Diagnostics Pipeline
Our business strategy is high-risk
We are focusing our resources and efforts primarily on development of therapeutic product candidates, which requires extensive cash needs for research and development activities. This is a high-risk strategy because there is no assurance that our products will ever become commercially viable (commercial risk), that we will prevent other companies from depriving us of market share and profit margins by selling products based on our inventions and developments (legal risk), that we will successfully manage a company in a new area of business and on a different scale than we have operated in the past (operational risk), that our product candidates will be able to achieve the desired therapeutic results (scientific risk), or that our cash resources will be adequate to develop our product candidates until we become profitable, if ever (financial risk). This may make our stock an unsuitable investment for many investors.
We do not currently have enough working capital to execute fully our strategic plan.
We have suffered recurring losses from operations, and we will need capital to support our intended development of our therapeutics business. We believe that future financings will be necessary in order for us to properly execute our strategic plan. There can be no assurance that such future financings will be able to be obtained (or, if they can be obtained, that they can be obtained on desirable terms).
We may, in the short and long-term, seek to raise capital through the issuance of equity securities or through other financing sources. To the extent that we seek to raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may include financial and other covenants that could restrict our use of the proceeds from such financing or impose other business and financial restrictions on us. In addition, we may consider alternative approaches such as licensing, joint venture, or partnership arrangements to provide long term capital. Additional funding may not be available to us on acceptable terms, or at all.
Our product candidates are still in the early stages of development. We have not begun clinical trials or obtained regulatory approval for any drug candidate or STARS. We may never obtain approval for any of our drug candidates or STARS.
We are still early in our development efforts and have not yet begun enrollment in any clinical trials evaluating QN-302, QN-247, RAS-F or STARS. There can be no assurance that QN-302, QN-247, RAS-F or STARS will achieve success in their clinical trials or obtain regulatory approval.
Our ability to generate revenues from drug candidates or STARS will depend on the successful development and eventual commercialization of QN-302, QN-247, RAS-F or STARS. The success of these products will depend on several factors, including the following:
| ● | successful completion of preclinical studies and clinical trials; | |
| ● | acceptance of an IND or IDE application by the FDA or other clinical trial or similar applications from foreign regulatory authorities for our future clinical trials for our pipeline; | |
| ● | timely and successful enrollment of patients in, and completion of, clinical trials with favorable results; | |
| ● | demonstration of safety, efficacy and acceptable risk-benefit profiles of our products to the satisfaction of the FDA and foreign regulatory agencies; | |
| ● | receipt and related terms of marketing approvals from applicable regulatory authorities, including the completion of any required post-marketing studies or trials; | |
| ● | obtaining and maintaining patent, trade secret and other intellectual property protection and regulatory exclusivity for our products; | |
| ● | developing and implementing marketing and reimbursement strategies; | |
| ● | establishing sales, marketing and distribution capabilities and launching commercial sales of our products, if and when approved, whether alone or in collaboration with others; | |
| ● | acceptance of our drugs or STARS, if and when approved, by patients, the medical community and third-party payors; | |
| ● | effectively competing with other therapies; | |
| ● | obtaining and maintaining third-party payor coverage and adequate reimbursement; and | |
| ● | maintaining a continued acceptable safety profile of the products following approval. |
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Many of these factors are beyond our control, and it is possible that none of our drug candidates or STARS will ever obtain regulatory approval even if we expend substantial time and resources seeking such approval. If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize our drug candidates or STARS. For example, our business could be harmed if results of the clinical trials of QN-302, QN-247, RAS-F, any other drug candidates or STARS vary adversely from our expectations.
Drug and device development involves a lengthy and expensive process. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of QN-302, QN-247, RAS-F or STARS.
Most drug candidates fail, and taking a medical device from concept through clinical trials and regulatory approval is not easy or guaranteed. We are unable to predict when or if our drug candidates or STARS, our therapeutic medical device concept, will prove effective or safe in humans or will obtain marketing approval. Before obtaining marketing approval from regulatory authorities for the sale of these products, we must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of these products for humans. Clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to the outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and interim or preliminary results of a clinical trial do not necessarily predict final results.
We may experience numerous unforeseen events that could delay or prevent our ability to obtain marketing approval or commercialize our drug candidates or STARS, including:
| ● | regulators or IRBs or ECs may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site; | |
| ● | we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites; | |
| ● | clinical trials for our drug candidates and STARS may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials, delay clinical trials or abandon product development programs; | |
| ● | the number of patients required for clinical trials for our drug candidates and STARS may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, participants may drop out of these clinical trials at a higher rate than we anticipate or the duration of these clinical trials may be longer than we anticipate; | |
| ● | competition for clinical trial participants from investigational and approved therapies may make it more difficult to enroll patients in our clinical trials; | |
| ● | our third-party contractors may fail to meet their contractual obligations to us in a timely manner, or at all, or may fail to comply with regulatory requirements; | |
| ● | we may have to suspend or terminate clinical trials for our drug candidates or STARS for various reasons, including a finding that the participants are being exposed to unacceptable health risks; | |
| ● | our drug candidates or STARS may have undesirable or unexpected side effects or other unexpected characteristics, causing us or our investigators, regulators or IRBs/ECs to suspend or terminate the trials; | |
| ● | the cost of clinical trials for our drug candidates and STARS may be greater than we anticipate; and | |
| ● | the supply or quality of our drug candidates, STARS or other materials necessary to conduct clinical trials may be insufficient or inadequate and result in delays or suspension of our clinical trials. |
Our product development costs will increase if we experience delays in preclinical studies or clinical trials or in obtaining marketing approvals. We do not know whether any of our planned preclinical studies or clinical trials will begin on a timely basis or at all, will need to be restructured or will be completed on schedule, or at all. For example, the FDA may place a partial or full clinical hold on any of our clinical trials for a variety of reasons.
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Significant preclinical or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our drug candidates or STARS or allow our competitors to bring products to market before we do and impair our ability to successfully commercialize our drug candidates or STARS.
Any delays in the commencement or completion, or termination or suspension, of our future clinical trials, if any, could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.
Before we can initiate clinical trials of a drug candidate or STARS, we must submit the results of preclinical studies to the FDA along with other information as part of an IND or IDE application or similar regulatory filing, and the FDA (or corresponding foreign regulatory body) must approve the application. We have not yet submitted our IND application for QN-302 for pancreatic cancer) and we remain in a development stage with respect to STARS and any subsequent IDE. We cannot guarantee the timing for submitting the IND application for QN-302, and we do not know when this IND application (or any other IND or IDE application) would be approved, if ever.
Before obtaining marketing approval from the FDA for the sale of QN-302, QN-247, RAS-F, any other drug candidate or STARS, we must conduct extensive clinical studies to demonstrate safety and efficacy. Clinical testing is expensive, time consuming and uncertain as to outcome. The FDA may require us to conduct additional preclinical studies for any drug candidate or STARS before it allows us to initiate clinical trials under any IND or IDE, which may lead to additional delays and increase the costs of our preclinical development programs.
Any delays in the commencement or completion of our ongoing, planned or future clinical trials could significantly increase our costs, slow down our development and approval process and jeopardize our ability to commence product sales and generate revenues. We do not know whether our planned trials will begin on time or at all, or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:
| ● | the FDA disagreeing as to the design or implementation of our clinical trials or with our recommended dose for any of our pipeline programs; | |
| ● | obtaining FDA authorization to commence a trial or reaching a consensus with the FDA on trial design; | |
| ● | obtaining approval from one or more IRBs/ECs; | |
| ● | IRBs/ECs refusing to approve, suspending or terminating the trial at an investigational site, precluding enrollment of additional subjects, or withdrawing their approval of the trial; | |
| ● | changes to clinical trial protocol; | |
| ● | clinical sites deviating from trial protocol or dropping out of a trial; | |
| ● | failing to manufacture or obtain sufficient quantities of drug candidate, STARS or, if applicable, combination therapies for use in clinical trials; | |
| ● | patients failing to enroll or remain in our trial at the rate we expect, or failing to return for post-treatment follow-up; | |
| ● | patients choosing an alternative treatment, or participating in competing clinical trials; | |
| ● | lack of adequate funding to continue the clinical trial; | |
| ● | patients experiencing severe or unexpected drug-related adverse effects; | |
| ● | occurrence of serious adverse events in trials of the same class of agents conducted by other companies; | |
| ● | selecting or being required to use clinical end points that require prolonged periods of clinical observation or analysis of the resulting data; |
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| ● | a facility manufacturing our drug candidates, STARS or any of their components, including without limitation, our own facilities being ordered by the FDA to temporarily or permanently shut down due to violations of cGMP, regulations or other applicable requirements, or infections or cross-contaminations in the manufacturing process; | |
| ● | lack of stability of our clinical trial material or any quality issues that arise with the clinical trial material; | |
| ● | any changes to our manufacturing process that may be necessary or desired; | |
| ● | Qualigen, or our third-party contractors, not performing data collection or analysis in a timely or accurate manner or improperly disclosing data prematurely or otherwise in violation of a clinical trial protocol; or | |
| ● | any third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or all of the data produced by such contractors in support of our marketing applications. |
We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs/ECs of the institutions in which such trials are being conducted, by a Data Safety Monitoring Board for such trial or by the FDA. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using the product under investigation, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. In addition, changes in regulatory requirements and policies may occur, and we may need to amend clinical trial protocols to comply with these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs/ECs for reexamination, which may impact the costs, timing or successful completion of a clinical trial.
If we experience delays or difficulties in enrolling patients in our ongoing or planned clinical trials, our receipt of necessary regulatory approval could be delayed or prevented.
We may not be able to initiate or continue our ongoing or planned clinical trials for our products if we are unable to identify and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA. In addition, some of our competitors may have ongoing clinical trials for products that would treat the same patients as QN-302, QN-247, RAS-F or STARS, and patients who would otherwise be eligible for our clinical trials may instead enroll in clinical trials of our competitors’ products. In addition, introduction of new drugs or devices to the marketplace may have an effect on the number of patients available or timing of the availability of the patients.
Our inability to enroll a sufficient number of patients for our clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether.
Adverse side effects or other safety risks associated with QN-302, QN-247, RAS-F or STARS product candidates could delay or preclude approval, cause us to suspend or discontinue any clinical trials or abandon further development, limit the commercial profile of an approved label, or result in significant negative consequences following regulatory approval, if any.
Results of our planned clinical trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics. Undesirable side effects caused by our products could result in the delay, suspension or termination of clinical trials by us or the FDA for a number of reasons.
Moreover, if our products are associated with undesirable side effects in clinical trials or have characteristics that are unexpected, we may elect to abandon or limit their development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective, which may limit the commercial expectations for our products, if approved. We may also be required to modify our study plans based on findings in our clinical trials. Many drug candidates that initially showed promise in early stage testing have later been found to cause side effects that prevented further development. In addition, regulatory authorities may draw different conclusions or require additional testing to confirm these determinations.
It is possible that as we test our drug candidates and STARS in larger, longer and more extensive clinical trials, including with different dosing regimens, or as the use of our drug candidates and STARS becomes more widespread following any regulatory approval, illnesses, injuries, discomforts and other adverse events that were observed in earlier trials, as well as conditions that did not occur or went undetected in previous trials, will be reported by patients.
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The development and commercialization of pharmaceutical and device products are subject to extensive regulation, and we may not obtain regulatory approvals for QN-302, QN-247, RAS-F, STARS or any other product candidates, on a timely basis or at all.
The clinical development, manufacturing, labeling, packaging, storage, recordkeeping, advertising, promotion, export, import, marketing, distribution, adverse event reporting, including the submission of safety and other post-marketing information and reports, and other possible activities relating to QN-302, QN-247, RAS-F and STARS, as well as any other product candidate that we may develop in the future, are subject to extensive regulation.
Regulatory approval of drugs in the United States requires the submission of an NDA to the FDA and we are not permitted to market any pharmaceutical product candidate in the United States until we obtain approval from the FDA of the NDA for that product. An NDA must be supported by extensive clinical and preclinical data, as well as extensive information regarding pharmacology, chemistry, manufacturing and controls.
The current anticipated regulatory pathway for STARS in the United States will require the submission of a PMA to the FDA to demonstrate that the device is safe and effective for its intended use. This approval process generally requires clinical data to support the safety and effectiveness of the device.
FDA approval of an NDA or PMA is not guaranteed, and the review and approval process is an expensive and uncertain process that may take several years. The FDA also has substantial discretion in the approval process. The number and types of preclinical studies and clinical trials that will be required for NDA or PMA approval varies depending on the product candidate, the disease or the condition that the product candidate is designed to treat and the regulations applicable to any particular product candidate. Despite the time and expense associated with preclinical studies and clinical trials, failure can occur at any stage. The results of preclinical and any clinical trials of QN-302, QN-247, RAS-F, STARS or any other product candidate may not be predictive of the results of our later-stage clinical trials.
Clinical trial failure may result from a multitude of factors including flaws in trial design, dose selection, placebo effect, patient enrollment criteria and failure to demonstrate favorable safety or efficacy traits, and failure in clinical trials can occur at any stage. Companies in the pharmaceutical and device industry frequently suffer setbacks in the advancement of clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Based upon negative or inconclusive results, we may decide, or regulators may require us, to conduct additional clinical trials or preclinical studies. In addition, data obtained from clinical trials are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may further delay, limit or prevent regulatory approval.
Even if we are able to commercialize any drug candidates, the products may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which would harm our business.
The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our drug candidate to other available therapies. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a drug candidate in a particular country, but then be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues, if any, we are able to generate from the sale of the product in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more drug candidates, even if such drug candidates obtain regulatory approval.
Our ability to commercialize any drug candidates successfully also will depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from third-party payors, including government healthcare programs, private health insurers and other organizations. Third-party payors decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere has been cost containment. Third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Coverage and reimbursement may not be available for any product that we commercialize and, even if these are available, the level of reimbursement may not be satisfactory. Reimbursement may affect the demand for, or the price of, any drug candidate for which we obtain regulatory approval. Obtaining and maintaining coverage and adequate reimbursement for our products may be difficult. We may be required to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level of reimbursement relative to other therapies. If coverage and adequate reimbursement are not available or reimbursement is available only to limited levels, we may not be able to successfully commercialize any drug candidate for which we obtain regulatory approval.
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There may also be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or similar regulatory authorities outside of the United States. Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, intellectual property, manufacture, sale and distribution expenses. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies, but also have their own methods and approval process apart from Medicare determinations.
We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may continue to result in more rigorous coverage criteria and in additional downward pressure on the price that providers receive for any approved therapeutics products of ours. This would adversely affect the prices we receive and could also adversely affect providers’ willingness to prescribe our therapeutics products, if any.
We may not be able to obtain or maintain orphan drug designation or exclusivity for our drug candidates.
Regulatory authorities in some jurisdictions, including the United States, may designate drugs for relatively small patient populations as “orphan drugs.” Under the Orphan Drug Act of 1983, as amended, the FDA may designate a drug candidate as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States, or if the disease or condition affects more than 200,000 individuals in the United States and there is no reasonable expectation that the cost of developing and making a drug product available in the United States for the type of disease or condition will be recovered from sales of the product.
Orphan drug designation entitles a party to financial incentives, such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. Additionally, if a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug exclusivity. This means that the FDA may not approve any other applications to market the same drug or biological product for the same indication for seven years, except in certain circumstances, including proving clinical superiority (i.e., another product is safer, more effective or makes a major contribution to patient care) to the product with orphan exclusivity. Competitors, however, may receive approval of different products for the indication for which the orphan product has exclusivity, or obtain approval for the same product but for a different indication than that for which the orphan product has exclusivity. In addition, exclusive marketing rights in the United States may be limited if we seek approval for an indication broader than the orphan-designated indication or may be lost if the FDA later determines that the request for designation was materially defective.
We intend to seek orphan drug designation in the United States for QN-302, QN-247, and/or RAS-F for one or more indications, such as pancreatic cancer, AML and pediatric neuroblastoma. Orphan drug status does not ensure that we will receive marketing exclusivity in a particular market, and there is no assurance that any application for orphan drug designation will be granted. Orphan drug designation neither shortens the development time or regulatory review time of a drug, nor gives the drug any advantage in the regulatory review or approval process.
We rely, and intend to continue to rely, on third parties to conduct our preclinical studies and clinical trials and perform some of our research and preclinical studies. If these third parties do not satisfactorily carry out their contractual duties, fail to comply with applicable regulatory requirements or do not meet expected deadlines, our development programs may be delayed or subject to increased costs or we may be unable to obtain regulatory approval.
We are dependent on third parties to conduct our planned preclinical studies and clinical trials of QN-302, QN-247, RAS-F and STARS. The timing of the initiation and completion of these trials will therefore be partially controlled by such third parties and may result in delays to our development programs. We have relied heavily, and expect to continue to rely, on UofL for preclinical studies related to QN-247 and RAS-F, and we expect to rely heavily on contract research organizations (“CROs”) and sponsored academic researchers for preclinical studies related to QN-302. As to any clinical trials, we expect to rely on CROs, sponsored academic researchers, clinical investigators and consultants to play a significant role in the conduct of these trials and the subsequent collection and analysis of data. However, we will not be able to control all aspects of their activities. Nevertheless, we are responsible for ensuring that each clinical trial is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, including GCP, requirements, and our reliance on the CROs and other third parties does not relieve us of our regulatory responsibilities.
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There is no guarantee that any such CROs, clinical trial investigators or other third parties on which we rely will devote adequate time and resources to our development activities or perform as contractually required. If any of these third parties fail to meet expected deadlines, adhere to our clinical protocols or meet regulatory requirements, otherwise perform in a substandard manner, or terminate their engagements with us, the timelines for our development programs may be extended or delayed or our development activities may be suspended or terminated. If a Qualigen clinical trial site terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in such clinical trial unless we are able to transfer those subjects to another qualified clinical trial site, which may be difficult or impossible.
If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct clinical trials in accordance with regulatory requirements or our stated protocols, we will not be able to obtain, or may be delayed in obtaining, regulatory approvals for QN-302, QN-247, RAS-F or STARS and will not be able to, or may be delayed in our efforts to, successfully commercialize our products.
Manufacturing pharmaceutical products is complex and subject to product loss for a variety of reasons. We contract with third parties for the manufacture of our product candidates for preclinical testing and clinical trials and expect to continue to do so for commercialization. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts.
We rely, and expect to continue to rely, on third parties for the manufacture of our products for preclinical and any clinical testing, as well as for commercial manufacture if any of our product candidates obtain regulatory approval. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts.
We may be unable to establish any agreements with third-party manufacturers or to do so on favorable terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:
| ● | reliance on the third-party for regulatory, compliance and quality assurance; | |
| ● | operations of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or supplier or the issuance of an FDA Form 483 notice or warning letter; | |
| ● | the possible breach of the manufacturing agreement by the third-party; and | |
| ● | the possible termination or nonrenewal of the agreement by the third-party at a time that is costly or inconvenient for us. |
We do not have manufacturing agreements in place for any of our current drug candidates. We acquire many key materials on a purchase order basis. As a result, we do not have long-term committed arrangements with respect to our product candidates and other materials. If we obtain regulatory approval for any of our product candidates, we will need to establish an agreement for commercial manufacture with a third-party.
Any performance failure on the part of our existing or future manufacturers could delay clinical development or regulatory approval. We do not currently have arrangements in place for redundant supply or a second source for bulk drug substance for QN-302, QN-247 or RAS-F.
We may enter into collaborations with third parties for the development and commercialization of our products. If those collaborations are not successful, we may not be able to capitalize on the market potential of these products. Even if they are successful, they may result in a limitation of our upside potential.
We may in the future seek third-party collaborators for the development and commercialization of some of our products on a selected basis. Our likely collaborators for any collaboration arrangements include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. We face significant competition in seeking appropriate collaborators. Our ability to reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors.
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If we do enter into any such arrangements with any third parties, we will likely have limited control over the amount and timing of resources that such collaborators dedicate to the development or commercialization of our products. Our ability to generate revenues from these arrangements will depend on our collaborators’ abilities and efforts to successfully perform the functions assigned to them in these arrangements.
Any collaboration will necessarily result in a sharing of economics with the collaborator, which might otherwise have been captured by us directly.
Even if any of our product candidates receives regulatory approval, we may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success.
If any of our product candidates receives regulatory approval, we may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. For example, current cancer treatments, such as existing targeted therapies, chemotherapy, and radiation therapy, are well established in the medical community, and doctors may continue to rely on these treatments. If our product candidates do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including:
| ● | the efficacy and potential advantages compared to alternative treatments; | |
| ● | the prevalence and severity of any side effects, in particular compared to alternative treatments; | |
| ● | limitations or warnings contained in the labeling approved for our product candidates by the FDA; | |
| ● | the size of the target patient population; | |
| ● | the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies; | |
| ● | our ability to offer our products for sale at competitive prices; | |
| ● | the convenience and ease of administration compared to alternative treatments; | |
| ● | the strength of marketing and distribution support; | |
| ● | publicity for our product candidates and competing products and treatments; | |
| ● | the existence of distribution and/or use restrictions, such as through a Risk Evaluation and Mitigation Strategy; | |
| ● | the availability of third-party payor coverage and adequate reimbursement and the willingness of patients to pay for our products in the absence of such coverage and adequate reimbursement; | |
| ● | the timing of any marketing approval in relation to other product approvals; | |
| ● | support from patient advocacy groups; and | |
| ● | any restrictions on the use of our products together with other medications. |
We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.
The development and commercialization of pharmaceutical and device therapeutics products is highly competitive. We face competition from major pharmaceutical and device companies, specialty pharmaceutical and device companies and biotechnology companies worldwide. There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of products for the treatment of the disease indications for which we are developing our product candidates and other platform technologies that may be effective in developing therapeutics. Some of these competitive products, therapies and technologies are based on scientific approaches that are similar to our approach, and others are based on entirely different approaches. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.
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We expect that our oncology drug product candidates and our STARS system will face competition from traditional small or large molecule drugs that target specific cancers that are FDA-approved and marketed for the indications that we are pursuing, in addition to off-label use of current therapeutics and therapeutics in development; and from other drugs using targeted approaches to direct payloads to cancerous tumors, as well as newer approaches, such as immuno-oncology, which attempts to harness the patient’s own immune system to fight cancer itself.
Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing and selling approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific, management and sales and marketing personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are approved for broader indications or patient populations, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other marketing approval for their products more rapidly than any approval we may obtain, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products. The key competitive factors affecting the success of QN-302, QN-247, RAS-F and STARS are likely to be efficacy, safety, scope and limitations of marketing approval, and availability of reimbursement.
If we are unable to obtain and maintain sufficient patent protection for our therapeutic product candidates and platform technologies, or if the scope of the patent protection is not sufficiently broad, third parties, including our competitors, could develop and commercialize products similar or identical to ours, and our ability to commercialize our product candidates successfully may be adversely affected.
Our commercial success depends significantly on our ability to protect our proprietary (and exclusively in-licensed) technologies that we believe are important to our business, including pursuing, obtaining and maintaining patent protection in the United States and other countries intended to cover the composition of matter of our product candidates, for example, QN-302, QN-247, RAS-F and STARS, the methods of use, related technologies, and other inventions that are important to our business. In addition to patent protection, we also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. If we do not adequately pursue, obtain, maintain, protect or enforce our intellectual property, third parties, including our competitors and/or collaborators, may be able to erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.
To protect our proprietary position, we file patent applications in the United States and abroad related to our product candidates, their methods of manufacture and use. The patent application and approval process is expensive, time-consuming and complex. We may not be able to prepare, file, prosecute and maintain all necessary or desirable patent applications at a reasonable cost or in a timely manner or in all jurisdictions. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. Moreover, depending on the terms of any future license agreements to which we may become a party, we may not have the right to control the preparation, filing, and prosecution of patent applications, or to maintain or defend the patents, covering technology licensed from third parties. Therefore, these patents and patent applications may not be prosecuted and enforced in a manner consistent with the best interests of our business.
We cannot offer any assurances about which, if any, patents will issue, the breadth of any such patents, whether any issued patents will be found invalid and unenforceable or will be threatened by third parties or whether any issued patents will effectively prevent others from commercializing competing technologies and product candidates. We have not filed patent applications in every jurisdiction, and some filings are only pending in the United States.
Because patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we were the first to file or invent (before March 16, 2013) the invention disclosed in any patent application related to our product candidates or technology.
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Moreover, because the issuance of a patent, although presumptive, is not conclusive as to its inventorship, scope, validity or enforceability, our patents or pending patent applications may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in our patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products or limit the duration of the patent protection of our technology and products. Such challenges also may result in substantial cost and require significant time from our scientists and management, even if the eventual outcome is favorable to us.
Our and our licensors’ pending and future patent applications may not result in patents being issued that protect our product candidates, in whole or in part, or that effectively prevent others from commercializing competitive products. Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors or other third parties from competing with us or otherwise provide us with any competitive advantage. Our competitors and other third parties may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner. Our competitors and other third parties may also seek approval to market their own products similar to or otherwise competitive with our products. Alternatively, our competitors or other third parties may seek to market generic versions of any approved products by submitting abbreviated NDAs to the FDA during which process they may claim that patents owned by us are invalid, unenforceable or not infringed. In these circumstances, we may need to defend or assert our patents, or both, including by filing lawsuits alleging patent infringement. In any of these types of proceedings, a court or other agency with jurisdiction may find our patents invalid or unenforceable, or that our competitors are competing in a non-infringing manner. Thus, even if we have valid and enforceable patents, these patents still may not provide protection against competing products or processes sufficient to achieve our business objectives.
The term of our patents may be inadequate to protect our competitive position on our products.
Given the amount of time required for the development, testing and regulatory review of drug candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. In such an event (and if we are unable to obtain patent term extension or the term of any such extension is less than we request), our competitors and other third parties may be able to obtain approval of competing products following patent expiration and take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case. Generic competition usually results in serious price erosion for the original drug brand.
Risks Related to Our Diagnostics Business
We may face challenges distributing our diagnostic products after our distribution agreement with Sekisui expires.
We currently rely on our diagnostics distribution partner Sekisui for most of our FastPack® distribution worldwide, pursuant to the terms of our distribution agreement with Sekisui. We maintain direct distribution for certain house accounts, including Low T.
Our
distribution agreement with Sekisui expires on March 31, 2022. We will incur costs re-establishing and maintaining a direct sales force,
and we may also face logistical issues and relationship issues with customers during the transition period. In addition, there is the
risk that the direct sales force assembled and used by us will not be as efficient and effective as Sekisui’s distribution efforts.
Our diagnostic products face heavy competition.
Our FastPack system is a mature technology and faces heavy competition from manufacturers of more complex immunoassay systems designed primarily for central laboratory use, but that also are sold to physician offices. Many of our competitors have substantially greater financial, technical, research and other resources and capabilities. We also face competition from companies that have developed or are developing newer blood testing systems for use in physician offices. The FastPack system may not continue to be competitive in light of future technological developments by others.
Our diagnostic products are disadvantaged by reduced Medicare reimbursement and third-party payer pricing.
As noted above, a primary trend in the U.S. healthcare industry and elsewhere is cost containment. Third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medical devices, especially mature ones such as ours. Decreases in Medicare and private-insurer reimbursement for diagnostic tests such as ours in recent years are a negative factor in our attempts to maintain and grow our diagnostics business. This factor constrains the price that we can charge to providers for our diagnostic products. Moreover, if adequate reimbursement is not available or reimbursement is available only to limited levels, some physician offices, clinics and small hospitals may choose not to offer (or to discontinue offering) some or all of our diagnostic products. During the Transition Period, Low T discontinued our Total PSA test for this reason.
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Yi Xin may not meet expectations in its China/overseas business.
We have largely ceded our overseas diagnostics business to Yi Xin. Yi Xin is a new and untested company and there is no assurance that its financial and other capabilities will enable it to succeed in commercializing FastPack-based diagnostic products. We would receive royalties from Yi Xin if and only if Yi Xin achieves sales of FastPack-based diagnostic products.
Risks Related to Employee Matters, Managing Growth, Potential Dilution, Stock Price Variability and Other Risks Related to Our Business
Our future success depends on our ability to retain key employees and to attract, retain and motivate qualified personnel.
We are highly dependent on Michael Poirier, our Chief Executive Officer and Chairman, Christopher Lotz, our Chief Financial Officer and Vice President of Finance, Amy Broidrick, our President and Chief Strategy Officer, Dr. Wajdi Abdul-Ahad, our Chief Scientific Officer and Vice President of Research & Development, Shishir Sinha, our Chief Operating Officer, and Dr. Tariq Arshad, MD, our Chief Medical Officer, as well as other members of scientific, operations and corporate development teams.
Our ability to compete depends upon our ability to attract, retain and motivate highly skilled and experienced personnel with scientific, clinical, regulatory, manufacturing and management skills and experience. We may not be able to attract or retain qualified personnel in the future. Many of the companies against which we compete have greater financial and other resources, different risk profiles and a longer history in the industry than we do. Our competitors may provide higher compensation, more diverse opportunities and/or better opportunities for career advancement. Any or all of these competing factors may limit our ability to continue to attract and retain high quality personnel, which could negatively affect our ability to successfully develop and commercialize our product candidates and to grow our business and operations as currently contemplated.
We expect that we will need to expand our development and regulatory capabilities as our product candidates progress through the clinic, or additional product candidates are developed; if any products are approved, we would have to implement sales, marketing and distribution capabilities, and as a result, we may encounter difficulties in managing growth, which could disrupt our operations.
As of March 25, 2022, we had 46 employees, 39 of whom were full-time employees. Although we outsource many drug development functions and may choose to continue to do so in the future, we expect to experience growth in the number of employees and the scope of our operations, particularly in the areas of clinical development, clinical operations, manufacturing, and regulatory affairs as we progress QN-302, QN-247, RAS-F and STARS through the clinic and develop additional product candidates. In addition, in anticipation of the expiration of our distribution agreement with Sekisui on March 31, 2022, we are currently recruiting direct sales personnel. If any of our therapeutics product candidates receives regulatory approval, we would potentially need to expand into sales, marketing and distribution. To manage anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. We may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert management and business development resources.
We currently rely, and for the foreseeable future will continue to rely, in substantial part, on certain third-party contract research organizations, sponsored academic researchers, advisors and consultants to provide certain services, including assuming substantial responsibilities for the conduct of our clinical trials and the manufacture of QN-302, QN-247, RAS-F, STARS or any of our other current or future product candidates. We cannot assure that the services of such third-party contract research organizations, sponsored academic researchers, advisors and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by our vendors or consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of QN-302, QN-247, RAS-F, STARS or any of our other current or future product candidates or otherwise advance our business. We cannot assure that we will be able to properly manage our existing vendors or consultants or find other competent outside vendors and consultants on economically reasonable terms, or at all.
We may engage in strategic transactions that could impact liquidity, increase expenses and present significant distractions to management.
From time to time, we may consider strategic transactions, such as acquisitions of companies, businesses or assets and out-licensing or in-licensing of products, drug candidates or technologies. Additional potential transactions that we may consider include a variety of different business arrangements, including spin-offs, in-licensing, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase near term or long-term expenditures and may pose significant integration challenges or disrupt management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:
| ● | exposure to unknown liabilities; | |
| ● | disruption of business and diversion of management’s time and attention in order to develop acquired products, drug candidates or technologies; |
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| ● | incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions; | |
| ● | higher than expected acquisition and integration costs; | |
| ● | write-downs of assets or impairment charges; | |
| ● | increased amortization expenses; | |
| ● | difficulty and cost in combining the operations, systems and personnel of any acquired businesses with our operations, systems and personnel; | |
| ● | impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and | |
| ● | inability to retain key employees of any acquired businesses. |
Our reported financial condition and results of operations may fluctuate significantly from quarter to quarter and year to year, which makes them difficult to predict or understand.
We expect our financial condition and results of operations to fluctuate from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. In particular, the warrant liabilities from our issued “exploding warrants” (and change in the fair value of warrant liabilities, over a reporting period) results in distortions and sharp variability in reported periodic results. Accordingly, you should not blindly rely upon the results of any quarterly or annual periods as indications of future operating performance. Other investors may, however, attach undue significance to reported results which are heavily influenced by such distortions and variability, which in turn could cause our stock price to rise or fall despite there being no corresponding change in our prospects or position as a practical matter.
We have a substantial amount of derivative securities outstanding.
As of December 31, 2021 there were 4,841,856 stock options outstanding under our equity incentive plans for service providers. In addition, as of December 31, 2021, we had 9,821,399 outstanding warrants, of which 5,469,994 were held by Alpha Capital Anstalt. Outstanding stock options, warrants and preferred stock can potentially result in dilution to the holders of existing outstanding common stock.
We rely significantly upon information technology, and any failure, inadequacy, interruption or security lapse of that technology, including any cyber security incidents, could harm our ability to operate our business effectively and result in a material disruption of our product development programs.
We could be subject to risks caused by misappropriation, misuse, leakage, falsification or intentional or accidental release or loss of information maintained in the information systems and networks of our company. Outside parties may attempt to penetrate our systems or those of our partners or fraudulently induce our employees or employees of our partners to disclose sensitive information to gain access to our data. Like other companies, we may experience threats to our data and systems, including malicious codes and computer viruses, cyber-attacks or other system failures. Any system failure, accident or security breach that causes interruptions in our operations, for us or our partners, could result in a material disruption of our product development programs and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. For example, the loss of clinical trial data from completed clinical trials could result in delays in our regulatory approval efforts and we could incur significant increases in costs to recover or reproduce the data. The risk of cyber incidents could also be increased by cyberwarfare in connection with the ongoing conflict between Russia and Ukraine, including potential proliferation of malware from the conflict into systems unrelated to the conflict. To the extent that any disruption or security breach results in a loss of, or damage to, our data or applications, or inappropriate public disclosure of confidential or proprietary information, we may incur liabilities and the further development of our product candidates may be delayed.
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The number and complexity of these security threats continue to increase over time. If a breach of our security systems or that of our partners occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose business and our reputation and credibility could be damaged. We could be required to expend significant amounts of money and other resources to repair or replace information systems or networks. Although we develop and maintain systems and controls designed to prevent these events from occurring, and we have a process to identify and mitigate threats, the development and maintenance of these systems, controls and processes is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become more sophisticated. Moreover, despite our efforts, the possibility of these events occurring cannot be eliminated entirely.
COVID-19 has and may continue to adversely affect our business and prospects.
COVID-19 has had, and may continue to have, adverse impacts on the U.S. and world economy, health care systems, personnel availability, supply chains, social and political assumptions, and capital markets. Those impacts may be especially serious for smaller companies such as Qualigen. We could also be impacted by other pandemics, epidemics, or infectious diseases.
Our sales of diagnostic products fell significantly during 2020 (and net loss increased significantly), as deferral of patients’ non-emergency visits to physician offices, clinics and small hospitals sharply reduced demand for FastPack tests. In 2021 we experienced some recovery in demand, but this phenomenon may continue to some extent for the duration of the pandemic, although its degree will probably vary depending on progress toward suppressing the pandemic, lockdowns and similar responses, and personal and societal behavior changes arising from psychological factors. We continue to evaluate the extent to which COVID-19 may impact our business and operations and adjust risk mitigation planning and business continuity activities as needed.
Failures in our IT and storage systems, including as a result of cyber-security breaches, could significantly disrupt our business or force us to expend excessive costs.
We utilize complex IT systems to transmit and store information, including sensitive personal information and proprietary or confidential information, and otherwise to support our business and process. In the future, our systems may prove inadequate to our business needs and necessary upgrades may not operate as designed, which could result in excessive costs or disruptions in portions of our business. In particular, any disruptions, delays or deficiencies from our enterprise resource planning systems could adversely affect our ability to, among other matters, process orders, procure supplies, manufacture and ship products, track inventory, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business.
Our IT and storage systems are potentially vulnerable to physical or electronic break-ins, ransomware attacks, computer viruses and similar disruptive problems. Sustained or repeated system failures that interrupt our ability to generate, maintain or access data could result in a material disruption in our operations. Furthermore, a security breach could be facilitated by ineffective protection measures, employee errors or omissions, and malfeasance. Despite our efforts to protect against cyber-attacks and security breaches, hackers and other cyber criminals are using increasingly sophisticated and constantly evolving techniques, and we may need to expend substantial additional resources to continue to protect against potential security breaches or to remediate problems caused by such attacks or any breach of our safeguards. In addition, a data security breach or ransomware attack could distract management or other key personnel from performing their primary operational duties. If such a breach leads to disclosure of consumer, customer, supplier, partner or employee information (including personally identifiable information or protected health information), it could harm our reputation, compel us to comply with disparate state and foreign breach notification laws and otherwise subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue. The costs of maintaining adequate protection against such threats are significant and are expected to continue to increase in the future and may be material to our financial statements.
Adverse global conditions, including economic uncertainty, may negatively impact our financial results.
Global conditions, disruptions in the financial markets, or inflation could adversely impact our business. In addition, the global macroeconomic environment has been and may continue to be negatively affected by, among other things, instability in global economic markets, increased U.S. trade tariffs and trade disputes with other countries, instability in the global credit markets, supply chain weaknesses, instability in the geopolitical environment as a result of the conflict between Russia and Ukraine, the withdrawal of the United Kingdom from the European Union, and other political tensions, and foreign governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and in global financial markets, which may adversely affect our business.
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We or the third parties upon whom we depend may be adversely affected by natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
We are located in southern California, and are subject to risks posed by natural disasters, including wildfires, earthquakes and severe weather that may interfere with our operations. Extreme weather events and other natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects. If a natural disaster, power outage or other event occurred that prevented Qualigen from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as the manufacturing facilities of our third-party contract manufacturers, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for Qualigen to continue our business for a substantial period of time. Any disaster recovery and business continuity plans we have in place may prove inadequate in the event of a serious disaster or similar event.
If we are unable to remediate the material weakness in our internal controls over financial reporting or if additional material weaknesses are discovered in our internal accounting procedures, the accuracy and timing of our financial reporting may be adversely affected, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
In connection with the audit of our 2021 consolidated financial statements, our management and independent registered public accounting firm noted a material weakness in our controls as discussed in Part 9.A. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
Any failure to develop or maintain effective internal controls over financial reporting or difficulties encountered in implementing or improving our internal controls over financial reporting could harm our operating results and prevent us from meeting our reporting obligations. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly. In addition, investors relying upon this misinformation could make an uninformed investment decision, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities or to stockholder class action securities litigation.
We cannot assure you that measures being taken in order to remediate the material weakness described above will fully remediate such material weakness. We also cannot assure you that we have identified all of our existing control deficiencies or that we will not in the future have additional material weaknesses.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We currently lease an approximately 23,000 square feet all-purpose facility in Carlsbad, California, where we conduct all our operations.
Item 3. Legal Proceedings.
The information set forth in “Litigation and Other Legal Proceedings” in Note 9 to the Consolidated Financial Statements included in this Annual Report is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been listed and traded on the Nasdaq Capital Market under the symbol “QLGN” since May 26, 2020. Before that date, there was no public market for Qualigen, Inc. common stock. As a matter of corporate law we are a continuation of Ritter Pharmaceuticals, Inc. under a different name, although for purposes of securities reporting and applicable accounting principles Qualigen, Inc. was the accounting acquirer in the May 22, 2020 reverse recapitalization. Before May 26, 2020, Ritter Pharmaceuticals, Inc. common stock traded on the Nasdaq Capital Market under the symbol “RTTR.”
Holders
As of March 25, 2022, there were 692 registered holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information relating to our equity compensation plans.
Recent Sales of Unregistered Securities
On December 3, 2021, we issued a common stock warrant (the “Warrant”) to a consultant, entitling the consultant to purchase up to 600,000 of our shares of common stock at an exercise price of $1.32 per share until June 3, 2023. We relied on the exemption from registration provided under Section 4(a)(2) of the Securities Act regarding transactions not involving a public offering.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
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PART II
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Annual Report. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Annual Report. See “Cautionary Note Regarding Forward-Looking Statements” for additional information.
Overview
We are a diversified life sciences company focused on developing treatments for adult and pediatric cancers with potential for Orphan Drug designation, while also commercializing diagnostics. Our cancer therapeutics pipeline includes QN-302, QN-247 and RAS-F. Our investigational QN-302 compound is a small molecule G4 selective transcription inhibitor with strong binding affinity to G4s prevalent in cancer cells. Such binding could, by stabilizing the G4s against “unwinding,” help inhibit cancer cell proliferation. QN-247 is a DNA coated gold nanoparticle cancer drug candidate that has the potential to target various types of cancer; the nanoparticle conjugate 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), which the Company has deprioritized as a drug candidate for treating COVID-19 and other 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 RAS-driven tumors such as pancreatic, colorectal and lung cancers. We are also identifying strategic partnering opportunities for STARS, a DNA/RNA-based therapeutic device product concept for removing precisely targeted tumor-produced and viral compounds from circulating blood.
Because our therapeutic candidates are still in the pre-clinical development stage, our only products that are currently commercially available are the FastPack System diagnostic instruments and test kits. Our FastPack System diagnostic instruments and test kits are sold commercially primarily in the United States, as well as certain European countries. The FastPack System menu includes rapid point-of-care diagnostic tests for cancer, men’s health, hormone function, and vitamin D status. 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. We currently rely on our diagnostics distribution partner Sekisui for most FastPack distribution worldwide pursuant to a distribution agreement, but maintain direct distribution for certain house accounts, including selling our total testosterone test kits to Low T, the largest men’s health group in the United States, with 40 locations. The distribution agreement with Sekisui will expire on March 31, 2022, at which time the services currently provided by Sekisui will revert to us and we will recognize 100% of the revenue from the sales of our FastPack diagnostic instruments and test kits. We have licensed and technology-transferred our FastPack System technology to Yi Xin Zhen Duan Jishu (Suzhou) Ltd. for the China diagnostics market.
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 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 diagnostics-related and therapeutics-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); our 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 financial statements and Notes are those of Qualigen, Inc.; the corresponding figures of Ritter Pharmaceuticals, Inc. have been disregarded. Moreover, references in this Annual 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 currently 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.
The Distribution Agreement with Sekisui is scheduled to expire on March 31, 2022, at which time the services currently provided by Sekisui will revert to us and we will recognize 100% of the revenue from the sales of our FastPack diagnostic instruments and test kits.
Technology Transfer Agreement with Yi Xin
Through our wholly-owned diagnostics subsidiary Qualigen, Inc., we entered into a Technology Transfer Agreement dated as of October 7, 2020 with Yi Xin, of Suzhou, China, which authorizes Yi Xin to develop, manufacture and sell new generations of diagnostic test systems based on our core FastPack technology. In addition, the Technology Transfer Agreement authorizes Yi Xin to manufacture and sell our current generations of FastPack System diagnostic products (1.0, IP and PRO) in China.
Under the Technology Transfer Agreement, we have received total net cash payments of approximately $670,000, of which approximately $632,000 is classified as license revenue, and approximately $38,000 is classified as product sales on the statement of operations for the fiscal year ended December 31, 2021. We will receive low- to mid-single-digit royalties on any future new-generations and current-generations product sales by Yi Xin.
We have provided technology transfer and patent/know-how license rights to facilitate Yi Xin’s development and commercialization.
We have provided Yi Xin the exclusive rights for China – which is a market we have not otherwise entered – both for Yi Xin’s new generations of FastPack-based products and for Yi Xin-manufactured versions of our existing FastPack product lines. Yi Xin 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. 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). Yi Xin will also have the right, after March 31, 2022, to buy Qualigen-manufactured FastPack 1.0, IP and PRO products from us at distributor prices for resale in and for the United States (but not to or toward current U.S. customers of those products). We did not license Yi Xin to sell in the United States market any Yi Xin-manufactured versions of those legacy FastPack product lines, even after March 31, 2022.
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We agreed in the Technology Transfer Agreement that we would not, after March 31, 2022, seek new FastPack customers outside the United States.
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 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” – as 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”. 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 of America (“U.S. GAAP”) require us to recognize the fair value of these warrants as warrant liabilities on our Consolidated Balance Sheets and to reflect period-to-period changes in the fair value of the warrant liabilities on our Consolidated Statements of Operations. The size of these warrant liabilities was quite large ($1.7 million and $8.3 million at December 31, 2021 and 2020 respectively) and caused a significant distortion of our Consolidated Balance Sheets and our results of operations for these periods. Because this fair value will be determined each quarter on a “mark-to-market” basis, this item could result in significant variability in our future quarterly and annual Consolidated Statement of Operations and Consolidated Balance Sheets based on changes in our public market common stock price. Pursuant to U.S. GAAP, a quarter-to-quarter increase in our stock price would result in an increase (possibly quite large) in the fair value of the warrant liabilities and a quarter-to-quarter decrease in our stock price would result in a decrease (possibly quite large) in the fair value of the warrant liabilities. Approximately 53% of these “exploding warrants” have been exercised as of December 31, 2021, which reduced the amplitude of this variability. (There were 2,481,614 of these “exploding warrants” outstanding at December 31, 2021 and 3,378,596 of these “exploding warrants” outstanding at December 31, 2020.) 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.
Impact of COVID-19 Pandemic
COVID-19 has had, and will continue to have, adverse impacts on the U.S. and world economy, health care systems, personnel availability, supply chains, social and political assumptions, and capital markets. Those impacts are expected to be especially serious for smaller companies such as ours. Our sales of diagnostic products fell significantly in the nine months ended December 31, 2020 (and net loss increased significantly), as deferral of patients’ non-emergency visits to physician offices, clinics and small hospitals sharply reduced demand for FastPack tests. A resurgence of the COVID-19 pandemic, or the emergence of new vaccine resistant variants of COVID-19 or some other infectious disease could have a similar impact on our future operations, although the degree of impact will probably depend on the extent of any lockdowns and similar actions taken in response to the pandemic as well as any personal and societal behavior changes arising from psychological factors.
Critical Accounting Policies and Estimates
This discussion and analysis is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to fair value of warrant liabilities, stock-based compensation, amortization and depreciation, inventory reserves, allowances for doubtful accounts and returns, and warranty costs. We base our estimates on historical experience, known trends and events and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements appearing in “Item 8. Financial Statements and Supplementary Data,” we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations:
| ● | Revenue recognition | |
| ● | Allowance for doubtful accounts and returns | |
| ● | Inventory | |
| ● | Research and development | |
| ● | Warrant liabilities and stock-based compensation | |
| ● | Lease accounting | |
| ● | Long lived assets |
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On January 1, 2021, the Company early adopted ASU No. 2021-04 Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) and 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”6, (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.”
During the nine months ended December 31, 2020, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, and Accounting Standards Codification Topic 842, Leases. The application of other existing accounting policies was not changed as of and for the year ended December 31, 2021.
Results of Operations
Comparison of the Twelve-Month Year Ended December 31, 2021 (“Fiscal 2021”) and Nine Months Ended December 31, 2020 (the “Transition Period”)
The following table summarizes our results of operations for Fiscal 2021 and the Transition Period:
| For the Year Ended December 31, | For the Nine Months Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| REVENUES | ||||||||
| Net product sales | $ | 5,021,721 | $ | 2,849,561 | ||||
| License revenue | 632,004 | — | ||||||
| Total revenues | 5,653,725 | 2,849,561 | ||||||
| EXPENSES | ||||||||
| Cost of product sales | 4,332,485 | 2,640,148 | ||||||
| General and administrative | 11,724,964 | 7,105,337 | ||||||
| Research and development | 11,716,718 | 3,316,099 | ||||||
| Sales and marketing | 542,594 | 307,903 | ||||||
| Impairment loss on construction in progress | — | 1,376,000 | ||||||
| Total expenses | 28,316,761 | 14,745,487 | ||||||
| LOSS FROM OPERATIONS | (22,663,036 | ) | (11,895,926 | ) | ||||
| OTHER EXPENSE (INCOME), NET | ||||||||
| (Gain) loss on change in fair value of warrant liabilities | (4,723,187 | ) | 8,310,101 | |||||
| Gain on loan extinguishment | — | (451,345 | ) | |||||
| Interest (income) expense, net | (42,693 | ) | 48,039 | |||||
| Other income, net | (5,446 | ) | (256,354 | ) | ||||
| Total other expense (income), net | (4,771,326 | ) | 7,650,440 | |||||
| LOSS BEFORE PROVISION FOR INCOME TAXES | (17,891,710 | ) | (19,546,366 | ) | ||||
| PROVISION FOR INCOME TAXES | 5,427 | — | ||||||
| NET LOSS | $ | (17,897,137 | ) | $ | (19,546,366 | ) | ||
Revenues
Our operating revenues are primarily generated from sales of diagnostic tests. Revenues for Fiscal 2021 were $5.6 million compared to $2.8 million for the Transition Period, an increase of $2.8 million, or 98%. This increase was primarily due to $2.2 million in increased diagnostic product sales, as well the recognition of approximately $0.6 million in license revenue from Yi Xin under the Technology Transfer Agreement, compared with no license revenue in the Transition Period.
Net product sales
Net product sales are primarily generated from sales of diagnostic tests. Net product sales for Fiscal 2021 and the Transition Period were approximately $5.0 million and $2.8 million, respectively, representing an increase of approximately $2.2 million, or 76%. This improvement was due to a recovery from the effects of COVID-19 pandemic during the prior year as well as the fact that the Transition Period had only nine months versus a full twelve months in Fiscal 2021.
License Revenue
License revenue for Fiscal 2021 was $0.6 million, due to the recognition of revenue from Yi Xin under the Technology Transfer Agreement. There was no license revenue for the Transition Period.
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Expenses
Cost of Product Sales
Cost of product sales increased to $4.3 million for Fiscal 2021, or 86% of net product sales, compared to $2.6 million for the Transition Period, or 93% of net product sales. The increase in dollars (even after recognizing and adjusting for the fact that the Transition Period had only nine months and Fiscal 2021 had twelve months) and decrease in percentage of net product sales were primarily due to increased unit sales of product, which resulted in economies of scale.
General and Administrative Expenses
General and administrative expenses increased sharply from $7.1 million for the Transition Period to $11.7 million for Fiscal 2021. This increase was primarily due to $2.1 million in employee/director stock-based compensation expense, a $0.7 million increase in professional fees (including $0.3 million in stock-based compensation), a $0.6 million increase in insurance expenses, and a $1.2 million increase in payroll expenses, primarily due to the addition of a new President and Chief Strategy Officer position, higher strategic consulting and proxy distribution costs, as well as the fact that the Transition Period had only nine months versus a full twelve months in Fiscal 2021.
Research and Development Costs
Research and development costs include therapeutic and diagnostic research and product development costs. Research and development costs increased sharply from $3.3 million for the Transition Period to $11.7 million for Fiscal 2021. Of the $3.3 million of research and development costs for the Transition Period (nine months), $2.5 million (75%) was attributable to therapeutics and $0.8 million (25%) was attributable to diagnostics. Of the $11.7 million of research and development costs for Fiscal 2021 (twelve months), $10.4 million (88%) was attributable to therapeutics and $1.3 million (12%) was attributable to diagnostics.
The increase in diagnostic research and development costs was primarily due to $0.3 million in increased stock-based compensation expense, and $0.2 million resulting from the fact that the Transition Period had only nine months and Fiscal 2021 had twelve months. The increase in therapeutics research and development costs was primarily due to an increase of $5.6 million in expenses related to the potential application of QN-165 for the treatment of COVID-19 ($4.3 million in drug compound manufacturing costs, and a $1.3 million increase in other pre-clinical research costs), as well as pre-clinical research and development cost increases of approximately $0.7 million for QN-247, $0.5 million for RAS, and an increase of approximately $0.8 million in payroll-related expenses primarily due to the addition of a new Chief Medical Officer position, and $0.3 million in increased patent costs for Fiscal 2021 (twelve months), all as compared to the Transition Period (nine months). On August 11, 2021, the FDA informed us that additional pre-clinical studies would be required in order for the FDA to clear the 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 for Fiscal 2021 increased to approximately $0.5 million as compared to $0.3 million for the Transition Period, primarily due to an increase in payroll-related expenses, and the fact that the Transition Period had only nine months and Fiscal 2021 had twelve months.
Impairment Loss
During the Transition Period, we evaluated the ongoing value of construction in progress related to new FastPack manufacturing equipment. Based on this evaluation, we determined the asset was impaired and wrote it down by $1.4 million to its estimated fair value of $0. There was no impairment loss for Fiscal 2021.
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Other Expense
Change in Fair Value of Warrant Liabilities
During Fiscal 2021 we experienced (primarily due to a decrease in our stock price during the period) a $4.7 million gain in other income because of the change in 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. The estimated fair value of these warrants decreased to $1.7 million as of December 31, 2021 from $8.3 million as of December 30, 2020. For the Transition Period, the loss on change in fair value of warrant liabilities was $8.3 million due to 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 a gain, while an increase in our stock price would result in an increase in the fair value of our warrant liabilities, generating a loss.
Because the fair value of the warrant liabilities will be determined each quarter on a “mark-to-market” basis, this item is likely to continue to result in significant variability in our future quarterly and annual Consolidated Statements of Operations based on unpredictable changes in our public market common stock price and the number of warrants outstanding at the end of each quarter.
Gain on Loan Extinguishment
We recognized a $0.5 million gain on loan extinguishment in the Transition Period when the federal government forgave our CARES Act loan. There was no similar item in Fiscal 2021.
Interest (Income) Expense, Net
There was $43,000 in net interest income during Fiscal 2021 versus net interest expense of $48,000 during the Transition Period. During the Transition Period, 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 Fiscal 2021 we paid off our Equipment Financing Agreements, which eliminated all of our notes payable. Interest income was generated during both periods from cash in interest bearing bank depository accounts.
Other (Income) Expense, Net
There was $5,000 of other income during Fiscal 2021, and approximately $256,000 in other income during the Transition period, of which $250,000 resulted from a license option fee for our FastPack 2.0 technology.
Liquidity and Capital Resources
As of December 31, 2021, we had $17.5 million of cash. 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 Annual Report.
As a pre-clinical development-stage therapeutics biotechnology company, we expect to continue to have net losses and negative cash flow from operations, which over time will challenge our liquidity. There is no assurance that profitable operations will ever be achieved, or, if achieved, could be sustained on a continuing basis. In order to fully execute our business plan, including full clinical trials of therapeutic drug candidates, we will require significant 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 Consolidated Balance Sheet as of December 31, 2021 included $1.7 million of warrant liabilities. We do not consider that the warrant liabilities constrain our liquidity, as a practical matter. Our current liabilities as of December 31, 2021 included $0.9 million of accounts payable and $1.8 million of accrued expenses and other current liabilities.
Contractual Obligations and Commitments
On December 15, 2021, our wholly-owned subsidiary Qualigen, Inc. entered into a Second Amendment to Lease with Bond Ranch LP. This Amendment extended the Company’s triple-net leasehold on its existing 22,624-square-foot headquarters/manufacturing facility at 2042 Corte del Nogal, Carlsbad, California for the 61-month period of November 1, 2022 to November 30, 2027. Over the 61 months, the base rent payable will total $1,950,710; however, the base rent for the first 12 months of the 61-month period will be only $335,966. Additionally, Qualigen, Inc. is entitled to a $339,360 tenant improvement allowance. See Note 9 of the consolidated financial statements for additional details.
We have no material contractual obligations not fully recorded on our Consolidated Balance Sheet or fully disclosed in the notes to the financial statements.
We have obligations under various license and sponsored research agreements to make future payments to third parties that become due and payable on the achievement of certain development, regulatory and commercial milestones (such as the start of a clinical trial, filing for product approval with the FDA or other regulatory agencies, product approval by the FDA or other regulatory agencies, product launch or product sales) or on the sublicense of our rights to another party. We have not included these commitments on our balance sheet because the achievement and timing of these events is not fixed and determinable. Certain milestones are in advance of receipt of revenue from the sale of products and, therefore, we may require additional debt or equity capital to make such payments.
These commitments include multiple license and sponsored research agreements with UofL Research Foundation (“ULRF”). Under these agreements, we will take over development, regulatory approval and commercialization of various drug compounds from ULRF and are responsible for maintenance of the related intellectual property portfolio. We agreed to reimburse ULRF for sponsored research expenses of up to $805,000 and prior patent costs of up to $200,000 for QN-247. As of December 31, 2021 we had up to $136,000 remaining due under this sponsored research agreement for QN-247. We also agreed to reimburse ULRF for sponsored research expenses of up to $1.8 million and prior patent costs of up to $112,000 for RAS. As of December 31, 2021 we had up to $0.7 million remaining due under this sponsored research agreement for RAS. This sponsored research agreement for RAS was subsequently amended in March 2022 (see Note 15). We agreed to reimburse ULRF for sponsored research expenses of up to $430,000 and prior patent costs of up to $24,000 for QN-165. As of December 31, 2021 we had no remaining amounts due under this sponsored research agreement for QN-165. For these agreements we are required to make patent maintenance payments and payments based upon development, regulatory and commercial milestones for any products covered by the in-licensed intellectual property. The maximum aggregate milestone payments we may be obligated to make per product are $5 million. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. We have the right to sublicense our rights under these agreements, and we will be required to pay a percentage of any sublicense income.
We enter into contracts in the normal course of business, including with clinical sites, contract research organizations, and other professional service providers for the conduct of clinical trials, contract manufacturers for the production of our product candidates, contract research service providers for preclinical research studies, professional consultants for expert advice and vendors for the sourcing of clinical and laboratory supplies and materials. These contracts generally provide for termination on notice, and therefore are cancelable contracts.
| 33 |
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 Year Ended | For the Nine Months Ended | |||||||
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | (14,730,742 | ) | $ | (10,162,935 | ) | ||
| Investing activities | (141,364 | ) | (65,094 | ) | ||||
| Financing activities | 8,433,808 | 34,051,478 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | (6,438,298 | ) | $ | 23,823,449 | |||
Net Cash Used in Operating Activities
During the year ended December 31, 2021, operating activities used $14.7 million of cash, primarily resulting from a net loss of $17.9 million. Cash flows from operating activities (as opposed to net loss) for the twelve months ended December 31, 2021 were impacted by a $5.6 million increase in stock-based compensation expense, a $1.3 million decrease in prepaid expenses and other assets, a $1.0 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 reflected in the statements of cash flows from operating activities was primarily due to the expensing during the period of $1.2 million of previous prepayments to STA Pharmaceutical Co., Ltd., a subsidiary of WuXi AppTec, which was our manufacturer of QN-165 drug compounds. Cash flows from operating activities (as opposed to net loss) for the twelve months ended December 31, 2021 were negatively impacted by a $4.7 million gain on change in fair value of warrant liabilities (as described above), and a $0.4 million decrease in deferred revenue primarily resulting from recognition of Yi Xin license revenue.
During the Transition Period, operating activities used $10.2 million of cash, resulting from a net loss of $19.5 million, largely offset by the $8.3 million loss on change in fair value of warrant liabilities. Cash flows from operating activities (as opposed to net loss) for the Transition Period were impacted by the $8.3 million loss on change in fair value of warrant liabilities (as described above), $2.8 million in employee/director stock-based compensation expense, a $1.4 million impairment loss on construction in progress and a $0.4 million write-off of patents and licenses. Cash flows from operating activities (as opposed to net loss) for the Transition Period were negatively impacted by a $1.5 million increase in prepaid expenses, payment of $0.9 million owed to Sekisui, a $0.5 million gain on CARES Act loan extinguishment and a $0.4 million decrease in accounts payable. The increase in prepaid expenses reflected in the statements of cash flows from operating activities was primarily due to $1.2 million of upfront deposits paid to STA Pharmaceutical Co., Ltd., a subsidiary of WuXi AppTec, which was our manufacturer of QN-165 drug compounds.
Net Cash Used in Investing Activities
During Fiscal 2021, net cash used in investing activities was approximately $0.1 million, primarily related to the purchase of property and equipment.
During the Transition Period, net cash used in investing activities was $0.1 million, primarily related to purchase of property and equipment, offset by cash and cash equivalents acquired in the May 2020 reverse recapitalization.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for Fiscal 2021 was approximately $8.4 million, due to $8.8 million of proceeds from sales of equity securities in a registered-direct offering to several institutional investors, and $0.5 million of net proceeds from warrant exercises, offset by $0.7 million in payments for offering costs related to the registered-direct offering and $0.1 million of principal payments on notes payable.
Net cash provided by financing activities for the Transition Period was $34.1 million, due to $34.0 million of proceeds from a reverse-recapitalization-time equity capital raise and later sales of equity securities in three registered-direct offerings to an institutional investor, $1.4 million in proceeds from the issuance of notes payable (including a $0.5 million CARES Act loan that ultimately was forgiven) and $1.3 million of net proceeds from warrant exercises, offset by $1.4 million in payments for offering costs related to the three registered-direct offerings and $1.3 million of principal payment of notes payable.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable to smaller reporting companies.
Item 8. Consolidated Financial Statements and Supplementary Data
| 34 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 23)
To the Board of Directors and Stockholders of Qualigen Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Qualigen Therapeutics, Inc. (the “Company”) as of December 31, 2021 and December 31, 2020, the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2021 and for the nine months ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2021 and for the nine months ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Warrant Liabilities
Critical Audit Matter Description
As described in Note 7 to the consolidated financial statements, the Company’s warrant liability balance was $1.7 million at December 31, 2021. Certain of the warrants for the purchase of shares of common stock issued by the Company require liability classification and are recorded at fair value each reporting period. The Company determines the fair value of the warrants classified as liabilities utilizing a Monte Carlo simulation model.
We identified the warrant liabilities as a critical matter because, auditing the Company’s valuation of its warrant liabilities was especially challenging as the fair value is based on various inputs and significant assumptions used in Monte Carlo simulation models and certain of the assumptions were based on management’s judgement, and therefore are not objectively verifiable.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address the critical audit matter included:
| ● | Obtaining an understanding of the Company’s processes related to the determination of the fair value of the warrants. | |
| ● | Assessing the methodology used by the Company to estimate the fair value by using a valuation specialist to review the Monte Carlo simulation models and assumptions used by the Company for reasonableness. | |
| ● | Testing the accuracy and completeness of the underlying data used by the Company. | |
| ● | Evaluating the reasonableness of management’s inputs by tracing the inputs to contracts and comparing third-party data and analyses. | |
| ● | Analyzing changes in the fair value by comparing to prior periods and performing sensitivity analyses to evaluate the reasonable changes in the Company’s assumptions. |
/s/
We have served as the Company’s auditor since 2018.
March 31, 2022
| 35 |
QUALIGEN THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| 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 | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Stockholders’ equity | ||||||||
| Series Alpha convertible preferred stock, $ par value; shares authorized; and shares issued and outstanding as of December 31, 2021 and December 31, 2020 | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of December 31, 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 consolidated financial statements.
| 36 |
QUALIGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, | For the Nine Months Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| REVENUES | ||||||||
| Net product sales | $ | $ | ||||||
| License revenue | ||||||||
| Total revenues | ||||||||
| EXPENSES | ||||||||
| Cost of product sales | ||||||||
| General and administrative | ||||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| Impairment loss on construction in progress | ||||||||
| Total expenses | ||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ||||
| OTHER (INCOME) EXPENSE, NET | ||||||||
| (Gain) loss on change in fair value of warrant liabilities | ( | ) | ||||||
| Gain on loan extinguishment | ( | ) | ||||||
| Interest (income) expense, net | ( | ) | ||||||
| Other income, 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 consolidated financial statements.
| 37 |
QUALIGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Series A Convertible | Series B Convertible | Series C Convertible | Series D Convertible | Series D-1 Convertible | Series Alpha Convertible | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Additional | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Paid-In Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued upon cash-exercise of warrants | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued upon net-exercise of warrants | — | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of preferred stock | — | — | — | — | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of warrants issued for professional services | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued pursuant to Securities Purchase Agreements | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commission and offering costs of Securities Purchase Agreements | — | — | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of warrant modifications pursuant to Securities Purchase Agreements | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for professional services | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Convertible | Series B Convertible | Series C Convertible | Series D Convertible | Series D-1 Convertible | Series Alpha Convertible | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Additional | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Shares | Amount $ | Paid-In Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series Alpha preferred shares upon closing of private placement | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series Alpha preferred stock for conversion of notes payable | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of preferred stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for conversion of notes payable and accrued interest | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effect of reverse recapitalization | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | — | — | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares and warrants issued pursuant to Securities Purchase Agreements | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commission and offering costs of Securities Purchase Agreements | — | — | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock issued for professional services | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants exercised | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 38 |
QUALIGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Year Ended | For the Nine Months Ended | |||||||
| December 31, 2021 | December 31, 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right-of-use assets | ||||||||
| Impairment loss on construction in progress | ||||||||
| Gain on CARES Act loan extinguishment | ( | ) | ||||||
| Accounts receivable reserves and allowances | ( | ) | ( | ) | ||||
| Inventory reserves | ( | ) | ||||||
| Common stock issued for professional services | ||||||||
| Warrants issued for professional services | ||||||||
| Stock-based compensation | ||||||||
| (Gain) loss on change in fair value of warrant liabilities | ( | ) | ||||||
| Write off of patents and licenses | ||||||||
| 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 | ( | ) | ||||||
| Due to related party | ( | ) | ||||||
| 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 | ( | ) | ( | ) | ||||
| Cash and cash equivalents acquired in reverse recapitalization | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of Series Alpha preferred shares upon closing of private placement | ||||||||
| Net proceeds from warrant exercises | ||||||||
| Net proceeds from the issuance of notes payable | ||||||||
| Proceeds from issuance of shares and warrants pursuant to Securities Purchase Agreements | ||||||||
| Offering costs of Securities Purchase Agreements | ( | ) | ( | ) | ||||
| Principal payments on notes payable | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ||||||
| CASH - beginning of period | ||||||||
| CASH - 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 and accrued interest | $ | $ | ||||||
| Issuance of common stock for conversion of preferred stock before closing of reverse recapitalization | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Issuance of common stock for conversion of preferred stock after closing of reverse recapitalization | $ | $ | ||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
| CARES Act loan interest forgiven | $ | $ | ||||||
| Fair value of shares issued for cashless warrant exercises | $ | $ | ||||||
| Net transfers to inventory from equipment held for lease | $ | $ | ||||||
| Warrant modifications pursuant to Securities Purchase Agreements | $ | $ | ||||||
| Fair value of warrant liabilities on date of exercise | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 39 |
QUALIGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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., recognized as a reverse recapitalization. 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 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 consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), Regulation S-X and rules and regulations of the Securities and Exchange Commission (“SEC”).
Accounting Periods
During 2020, the Company changed its fiscal year end from March 31st to December 31st. In this annual report we show the twelve-month year ended December 31, 2021 (“Fiscal 2021”) and nine months ended December 31, 2020 (the “Transition Period”). All references in this report to the Transition Period are to the nine months ended December 31, 2020; and references to Fiscal 2021 are to the calendar 12-month fiscal year ending December 31, 2021.
Principles of Consolidation
The accompanying 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. All long-lived assets of the Company reside in the US.
Accounting Estimates
Management uses estimates and assumptions in preparing its 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, write-off of patents and licenses, amortization and depreciation, inventory reserves, allowances for doubtful accounts and returns, and warranty costs. Actual results could vary from the estimates that were used.
Cash
The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less and money market funds to be cash equivalents.
The Company maintains its cash in bank deposits which exceed federally insured limits and could potentially be subject to significant concentrations of credit risk on cash. The Company reviews the financial stability of its depository institutions on a regular basis, and has not experienced any losses in such accounts
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Inventory, Net
Inventory is recorded at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The Company reviews the components of its inventory on a periodic basis for excess or obsolete inventory, and records reserves for inventory components identified as excess or obsolete.
Long-Lived Assets
The
Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate
that assets may not be recoverable. An impairment loss would be recognized when the sum of the expected future undiscounted cash flows
is less than the carrying amount of the assets. The amount of impairment loss, if any, will generally be measured as the difference between
the net book value of the assets and their estimated fair values. During the nine months ended December 31, 2020, the Company recognized
$
Accounts Receivable, Net
The Company grants credit to domestic physicians, clinics, and distributors. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. Customers can purchase certain products through a financing agreement that the Company has with an outside leasing company. Under the agreement, the leasing company evaluates the credit worthiness of the customer. Upon acceptance of the product by the customer, the leasing company remits payment to the Company at a discount. This financing arrangement is without recourse to the Company.
The Company records an allowance for doubtful accounts and returns equal to the estimated uncollectible amounts or expected returns. The Company’s estimates are based on historical collections and returns and a review of the current status of trade accounts receivable.
Accounts receivable is comprised of the following at:
| December 31, 2021 | December 31, 2020 | |||||||
| Accounts Receivable | $ | $ | ||||||
| Less Allowances | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Research and Development
The Company expenses research and development costs as incurred including therapeutics license costs.
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; such shipping and handling costs totaled approximately $
Revenue from Contracts with Customers
We apply the following five-step model in accordance with ASC 606, Revenue from Contracts with Customers, in order to determine the revenue: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
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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 year ended December 31, 2021 and the nine months ended December 30,
2020, the Company recognized license revenue of approximately $
Contract Asset and Liability Balances
The timing of the Company’s revenue recognition may differ from the timing of payment by the Company’s customers. The Company records a receivable when revenue is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.
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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 year ended December 31, 2021 and nine months ended December 31, 2020, product sales
are stated net of an allowance for estimated returns of approximately $
Deferred Revenue
Payments received in advance from customers pursuant to certain collaborative research license agreements, deposits against future product sales, multiple element arrangements and extended warranties are recorded as a current or non-current deferred revenue liability based on the time from the Consolidated Balance Sheet date to the future date of revenue recognition.
Research and Development
The Company expenses research and development costs as incurred.
Operating Leases
Effective April 1, 2020, the Company adopted Accounting Standard Update (“ASU”) No. 2018-11, Leases (Topic 842) Targeted Improvements (“Topic 842”). The Company determines if a contract contains a lease at inception. The Company’s material operating lease consists of a single office/manufacturing/warehouse/laboratory space. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company used the incremental secured borrowing rate for an existing secured loan corresponding to the maturities of the leases.
The Company’s leases typically contain rent escalations over the lease term. The Company recognizes rent expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when received and reduce the Company’s right-of-use (“ROU”) asset related to the lease. These are amortized through the ROU asset as reductions of expense over the lease term. The Company’s office/manufacturing/warehouse/laboratory lease agreement does not contain any material residual value guarantees or material restrictive covenants.
Related to the adoption of Topic 842, the Company’s policy elections were as follows:
| ● | The Company has used the practical expedients under U.S. GAAP which allow it to not reassess whether any expired or existing contracts are considered a lease, along with grandfathering lease classifications, and treatment of indirect costs; | |
| ● | The Company has elected to exclude short-term leases having initial terms of 12 months or less; | |
| ● | The Company has elected not to separate non-lease components from its leases to account for them separately; | |
| ● | The Company has elected not to avail itself of the practical expedient of using hindsight to determine the lease term; and | |
| ● | The Company has elected the alternative transition option, by recognizing a cumulative effect adjustment to the opening balance of accumulated deficit in the period of adoption (as of April 1, 2020, the adoption of Topic 842 did not have a material effect on retained earnings). |
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Property and Equipment, Net
Property and equipment are stated at cost and are presented net of accumulated depreciation. Depreciation is provided for on a straight-line basis over the estimated useful lives of the related assets as follows:
| Machinery and equipment | |
| Computer equipment | |
| Molds and tooling | |
| Furniture and fixtures |
Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or their estimated useful lives. The Company occasionally designs and builds its own machinery. The costs of these projects, which includes the cost of construction and other direct costs attributable to the construction, are capitalized as construction in progress. No provision for depreciation is made on construction in progress until the relevant assets are completed and placed in service.
The Company’s policy is to evaluate the remaining lives and recoverability of long-term assets on at least an annual basis or when conditions are present that indicate impairment.
Intangible Assets, Net
Intangibles consist of patent-related costs and costs for 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 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 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).
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Fair value measurements
The Company determines the fair value measurements of applicable assets and liabilities based on a three-tier fair value hierarchy established by accounting guidance and prioritizes the inputs used in measuring fair value. The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:
| ● | Level 1 - Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date; | |
| ● | Level 2 - Inputs other than quoted prices that are observable for the assets or liabilities either directly or indirectly, including inputs in markets that are not considered to be active; and | |
| ● | Level 3 - Inputs that are unobservable. |
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable, accrued liabilities, and debt are carried at amortized cost, which management believes approximates fair value due to the short-term nature of these instruments.
Stock-Based Compensation
Stock-based compensation cost for equity awards granted to employees and non-employees is measured at the grant date based on the calculated fair value of the award using the Black-Scholes option-pricing model, and is recognized as an expense, under the straight-line method, over the requisite service period (generally the vesting period of the equity grant). If the Company determines that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for the Company’s stock options could change significantly. Higher volatility, lower risk free interest rates, and longer expected lives would result in an increase to stock-based compensation expense to employees and non-employees determined at the date of grant.
Income Taxes
Deferred income taxes are recognized for temporary differences in the basis of assets and liabilities for financial statement and income tax reporting that arise due to net operating loss carry forwards, research and development credit carry forwards and from using different methods and periods to calculate depreciation and amortization, allowance for doubtful accounts, accrued vacation, research and development expenses, and state taxes. A provision has been made for income taxes due on taxable income and for the deferred taxes on the temporary differences.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Realization of the deferred income tax asset is dependent on generating sufficient taxable income in future years.
Sales and Excise Taxes
Sales and other taxes collected from customers and subsequently remitted to government authorities are recorded as accounts receivable with corresponding tax payable. These balances are removed from the balance Consolidated Balance Sheet as cash is collected from customers and remitted to the tax authority.
Warranty Costs
The Company’s warranty policy generally provides for one year of coverage against defects and nonperformance within published specifications for sold analyzers and for the term of the contract for equipment held for lease. The Company accrues for estimated warranty costs in the period in which the revenue is recognized based on historical data and the Company’s best estimates of analyzer failure rates and costs to repair.
Accrued
warranty liabilities were approximately $
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Recent Accounting Pronouncements
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), “Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)”: Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force), which contains amendments that clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The amendments set forth in this ASU are effective for all entities for annual periods beginning after December 15, 2021. Early application of the amendments in this ASU is permitted for all entities. The amendments in this ASU should be applied prospectively. The Company early adopted ASU No. 2021-04 on January 1, 2021.
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 current 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 early adopted ASU No. 2020-06 on January 1, 2021.
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 July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842) Targeted Improvements (“Topic 842”), which provides for an alternative transition method by allowing companies to continue to use the legacy guidance in Topic 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption of the new leases standard and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented. The Company adopted the standard as of April 1, 2020 and the most significant impact was the recognition of a ROU asset and lease liability for the Company’s sole operating lease—the Company had no finance leases. Adoption of the Topic 842 did not require the Company to restate previously reported results as it elected to apply a modified retrospective approach at the beginning of the period of adoption rather than at the beginning of the earliest comparative period presented.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), which extends the effective date of Topic 326 for certain companies until fiscal years beginning after December 15, 2022. The new standard will be effective for the Company in the first quarter of fiscal year beginning January 1, 2023, and early adoption is permitted. The Company has not completed its review of the impact of this standard on its 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.
Impact of the COVID-19 Pandemic
Events surrounding the SARS-CoV-2 virus that emerged in late 2019 and the ensuing global pandemic has had a dramatic impact on businesses globally and our business as well. The severity and duration of the pandemic and economic repercussions of the virus and government actions taken in response to the pandemic remain uncertain and will ultimately depend on many factors, including the speed of global dissemination and effectiveness of the vaccination and containment efforts throughout the world, the duration and spread of the virus, as well as seasonality, variants or new outbreaks.
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In the United States, federal, state, and local government directives and policies have been put in place to manage public health concerns and address the economic impacts, including reduced business activity and overall uncertainty presented by this new healthcare challenge. Similar actions have been taken by governments around the world. Our facilities could be required to temporarily curtail production levels or temporarily cease operations based on government mandates or as a result of the pandemic. To mitigate risks, we continue to evaluate the extent to which COVID-19 may impact our business and operations and adjust risk mitigation planning and business continuity activities as needed.
Other accounting standard updates are either not applicable to the Company or are not expected to have a material impact on the Company’s consolidated financial statements.
NOTE 2 — LIQUIDITY
The
Company has incurred recurring losses from operations and has an accumulated deficit at December 31, 2021. The Company expects to continue
to incur losses subsequent to the Consolidated Balance Sheet date of December 31, 2021. The Company’s reverse recapitalization
transaction with Ritter closed in May 2020 together with an associated new equity capital raise of approximately $
NOTE 3 — INVENTORY, NET
Inventory, net consisted of the following at December 31, 2021 and December 31, 2020:
| December 31, 2021 | December 31, 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
NOTE 4 — PREPAID EXPENSES
Prepaid expenses consisted of the following at December 31, 2021 and December 31, 2020:
| December 31, 2021 | December 31, 2020 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Prepaid manufacturing expenses | ||||||||
| Prepaid investor relations expenses | ||||||||
| Other prepaid expenses | ||||||||
| $ | $ | |||||||
| 47 |
NOTE 5 — PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at December 31, 2021 and December 31, 2020:
| December 31, 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 $
NOTE 6 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following at December 31, 2021 and December 31, 2020:
| December 31, 2021 | December 31, 2020 | |||||||
| Board compensation | $ | $ | ||||||
| Franchise, sales and use taxes | ||||||||
| Income taxes | ||||||||
| Patent and license fees | ||||||||
| Payroll | ||||||||
| Professional fees | ||||||||
| Research and development | ||||||||
| Royalties | ||||||||
| Vacation | ||||||||
| Warranty liability | ||||||||
| 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.
In
exchange for the Series C Warrants, upon closing of the merger with Ritter, the holders received warrants to purchase an aggregate of
| 48 |
The following table summarizes the activity in the Common Stock Warrants received in exchange for the Series C Warrants for the year ended December 31, 2021:
Common Stock Warrants (received in exchange for the Series C Warrants) | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2020 | $ | |||||||||||||||
| Series C preferred stock warrants exchanged for common stock warrants upon reverse recapitalization | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Granted | ||||||||||||||||
| Total outstanding – December 31, 2021 | $ | |||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
| Non-Exercisable | $ | $ | ||||||||||||||
The following table presents the Company’s fair value hierarchy for its Common Stock 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 as of December 31, 2021:
| Quoted | ||||||||||||||||
| Market | Significant | |||||||||||||||
| Prices for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| Common Stock Warrant liabilities | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Exercises | — | — | ( | ) | ( | ) | ||||||||||
| Gain on change in fair value of warrant liabilities | ( | ) | ( | ) | ||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ||||||||||||
There were no transfers of financial assets or liabilities between category levels for the year ended December 31, 2021.
The value of the warrant liabilities was based on a valuation received from an independent valuation firm determined using a Monte-Carlo simulation. For volatility, the Company considers comparable public companies as a basis for its expected volatility to calculate the fair value of common stock warrants and transitions to its own volatility as the Company develops sufficient appropriate history as a public company. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected term of the common stock warrant. The Company uses an expected dividend yield of zero based on the fact that the Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future. Any significant changes in the inputs may result in significantly higher or lower fair value measurements.
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The following are the weighted average and the range of assumptions used in estimating the fair value of warrant liabilities (weighted average calculated based on the number of outstanding warrants on each issuance) as of December 31, 2021:
| December 31, 2021 | ||||||||
| Range | Weighted Average | |||||||
| Risk-free interest rate | % | % | ||||||
| Expected volatility (peer group) | % | % | ||||||
| Term of warrants (in years) | ||||||||
| Expected dividend yield | % | % | ||||||
The value of the warrant liabilities is based on a valuation received from an independent valuation firm determined using a Monte-Carlo simulation.
Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted EPS is computed based on the sum of the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of shares issuable from stock options and warrants.
For the Year Ended December 31, | For the Nine Months Ended December 31, | |||||||
| 2021 | 2020 | |||||||
| Net loss used for basic earnings per share | $ | ( | ) | $ | ( | ) | ||
| Basic weighted-average common shares outstanding | ||||||||
| Dilutive potential shares issuable from stock options and warrants | ||||||||
| Diluted weighted-average common shares outstanding | ||||||||
Potentially dilutive common shares excluded from the calculation above represent stock options and warrants because their effect is anti-dilutive.
NOTE 9 — COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases its facilities under a long-term operating lease agreement.
On December 15, 2021, our wholly-owned subsidiary Qualigen, Inc. entered into a Second Amendment to Lease with Bond Ranch LP. This Amendment
extended the Company’s triple-net leasehold on the Company’s existing
| 50 |
The tables below show the operating lease right-of-use assets and operating lease liabilities as of initial measurement at April 1, 2020 and the balances as of December 31, 2021, including the changes during the periods:
| Operating lease right-of-use assets | ||||
| Net right-of-use assets at December 31, 2020 | $ | |||
| Additional operating lease right-of-use assets at December 31, 2021 | ||||
| Less amortization of operating lease right-of-use assets | ( | ) | ||
| Operating lease right-of-use assets at December 31, 2021 | $ | |||
| Operating lease liabilities | ||||
| Lease liabilities arising from obtaining right-of-use assets at April 1, 2020: | $ | |||
| Additional operating lease liabilities at December 31, 2021 | ||||
| Less principal payments on operating lease liabilities | ( | ) | ||
| Lease liabilities at December 31, 2021 | ||||
| Less non-current portion | ( | ) | ||
| Current portion at December 31, 2021 | $ | |||
As
of December 31, 2021, the Company’s operating leases have a weighted-average remaining lease term of
As of December 31, 2021, the maturities of operating lease liabilities are as follows:
| Year Ending December 31, | Amount | |||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | ||||
| Less present value discount | ( | ) | ||
| Operating lease liabilities | $ | |||
Total
lease expense was approximately $
Litigation and Other Legal Proceedings
On November 9th, 2021, the Company was named as a defendant in an action brought by Mediant Communications Inc. (“Mediant”) in the U.S. District Court for the Southern District of New York. The complaint alleges that Qualigen entered into an implied contract with Mediant, whereby Qualigen retained Mediant to distribute proxy materials and subsequently conduct shareholder vote tabulations. The Company believes that the claims from Mediant are without merit and intends to vigorously defend the case. The Company filed a Motion to Dismiss with the District Court and on March 14, 2022 a hearing was held during which the presiding judge ruled in favor of the Motion to Dismiss. The Company and Mediant are currently conducting settlement negotiations.
NOTE 10 — 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 $
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Sponsored
research expenses related to these agreements for the year ended December 31, 2021 and nine months ended December
31, 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 $
Sponsored
research expenses related to these agreements for the year ended December 31, 2021 and nine months ended December
31, 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 $
| 52 |
Sponsored
research expenses related to these agreements for the year ended December 31, 2021 and nine months ended December
31, 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 both the year ended December 31, 2021 and nine months ended December 31, 2020, there was
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, we received net cash payments of $
| 53 |
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-U.S. 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 U.S. 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, which was the Company’s lead drug candidate for the treatment of COVID-19 and other viral diseases. In connection with
this agreement, the Company paid an upfront deposit of approximately $
Research
and development expenses related to this agreement for the year ended December 31, 2021 and the nine months ended 2020 were approximately
$
NOTE 11 — STOCKHOLDERS’ EQUITY
As of December 31, 2021, and 2020 the Company had two classes of capital stock: common stock and Series Alpha convertible preferred stock. As of April 1, 2020 the Company had two classes of capital stock with one being divided into five series: common stock and preferred stock (Series A convertible preferred stock, Series B convertible preferred stock, Series C convertible preferred stock, Series D convertible preferred stock and Series D-1 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 March 31, 2020 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 C convertible preferred stock, Series D convertible preferred stock and Series D-1 convertible preferred stock) upon liquidation, dissolution or winding up of the affairs of the Company. Following payment of the liquidation preference of the preferred stock, as of December 31, 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.
On
December 1, 2021, the Company closed a Securities Purchase Agreement (dated November 29, 2021) with several institutional investors for
the purchase and sale of shares of Company common stock to purchase shares of Company common stock for an exercise price of
$ per share, for aggregate gross proceeds of $
At December 31, 2021, the Company has reserved shares of authorized but unissued common stock for possible future issuance. At December 31, 2021, shares were reserved as follows:
| Exercise of issued and future grants of stock options | ||||
| Exercise of stock warrants | ||||
| Total |
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Series A, B, C, D, D-1, Alpha Convertible Preferred Stock
At December 31, 2021 and 2020, there were no shares of Series A, B, C, D, D-1 convertible preferred stock outstanding. All shares of Series A, B, C, D, D-1 convertible preferred stock were converted into common stock at the time of the May 2020 reverse recapitalization transaction.
At December 31, 2021, there were shares of Series Alpha convertible preferred stock outstanding. During the year ended December 31, 2021, the holder of Series Alpha convertible preferred stock converted of its shares of Series Alpha convertible preferred stock into an aggregate of shares of the Company’s common stock. In the nine months ended December 31, 2020, the holder of Series Alpha convertible preferred stock converted of its shares of Series Alpha convertible preferred stock into an aggregate of shares of the Company’s common stock, and there were shares of Series Alpha convertible preferred stock outstanding at December 31, 2020.
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 Equity Classified Warrants
Stock Options
The Company recognizes all compensatory stock-based payments as compensation expense over the service period, which is generally the vesting period.
In April 2020, the Company adopted the 2020 Stock Incentive Plan (the “2020 Plan”) which provides for the granting of incentive or non-statutory common stock options to qualified employees, officers, directors, consultants and other service providers. At December 31, 2021 and December 31, 2020 there were and outstanding options, respectively, under the 2020 Plan and there were and of Plan shares available, respectively, for future grant. The shares available for future grant at December 31, 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.
| 55 |
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2020 | $ | $— | ||||||||||||||
| Granted | $ — $ | |||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( | ) | $ — $ | |||||||||||||
| Total outstanding – December 31, 2021 | $ | $ — $ | ||||||||||||||
| Exercisable (vested) | $ | $— $ | ||||||||||||||
| Non-Exercisable (non-vested) | $ | $ — $ | ||||||||||||||
The following represents a summary of the options granted (under the 2020 Plan and otherwise) to employees and non-employee service providers that were outstanding at December 30, 2020, and changes during the nine-month period then ended:
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – March 31, 2020 | $ | $ | ||||||||||||||
| Legacy Ritter options | $ | |||||||||||||||
| Granted | $ — $ | |||||||||||||||
| Expired | ( | $ — $ | ||||||||||||||
| Forfeited | ||||||||||||||||
| Total outstanding – December 31, 2020 | $ | $ | — $ | |||||||||||||
| Exercisable (vested) | $ | $ | — $ | |||||||||||||
| Non-Exercisable (non-vested) | $ | $ | — $ | |||||||||||||
There was approximately $ million and $ million of compensation costs related to outstanding options for the year ended December 31, 2021 and nine months ended December 31, 2020, respectively. As of December 31, 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 year ended December 31, 2021 or nine months ended December 31, 2020.
. The options awarded under the 2020 Plan will vest as determined by the Board of Directors but will not exceed a 10-year period. The weighted average grant date fair value per share of the shares underlying options granted during the year ended December 31, 2021 was $ and during the nine months ended December 31, 2020 was $.
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Fair Value of Equity Awards
The Company utilizes the Black-Scholes option pricing model to value awards under the 2020 Plan, and for equity classified compensatory warrants. Key valuation assumptions include:
| ● | Expected dividend yield. The expected dividend is assumed to be zero, as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock. | |
| ● | Expected stock-price volatility. The Company’s expected volatility is derived from the average historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term. | |
| ● | Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term. | |
| ● | Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. |
For the Year Ended December 31, 2021 | ||||
| Expected dividend yield | % | |||
| Expected stock-price volatility | % | |||
| Risk-free interest rate | % — | % | ||
| Expected average term of options (in years) | ||||
| Stock price | — | |||
For the Year Ended December 31, 2021 | For the Nine Months Ended December 31, 2020 | |||||||
| General and administrative | $ | $ | ||||||
| Research and development | ||||||||
| Total | $ | $ | ||||||
Equity Classified Compensatory Warrants
During
the year ended December 31, 2021, the Company issued equity classified compensatory warrants to a service provider for the purchase of
During
the nine months ended December 31, 2020, in connection with the $
In
addition, various service providers hold equity classified compensatory warrants issued in 2017 and earlier (originally exercisable to
purchase Series C convertible preferred stock, and now instead exercisable to purchase common stock) for the purchase of shares
| 57 |
The following table summarizes the equity classified compensatory warrant activity for the year ended December 31, 2021:
| Common Stock | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2020 | $ | |||||||||||||||
| Granted to advisor and its designees | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Total outstanding – December 31, 2021 | ||||||||||||||||
| Exercisable | ||||||||||||||||
| Non-Exercisable | $ | $ | ||||||||||||||
The following table summarizes the compensatory warrant activity for nine months ended December 31, 2020:
| Common Stock | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – March 31, 2020 | $ | |||||||||||||||
| Series C preferred stock compensatory warrants exchanged for common stock warrants upon reverse recapitalization | ||||||||||||||||
| Granted to advisor and its designees | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Total outstanding – December 31, 2020 | $ | |||||||||||||||
| Exercisable | $ | $ | ||||||||||||||
| Non-Exercisable | $ | $ | ||||||||||||||
There was a total of approximately $million of compensation costs related to outstanding warrants for the year ended December 31, 2021 and $for the nine months ended December 31, 2020. As of December 31, 2021 and December 31, 2020, there was unrecognized compensation cost related to nonvested warrants.
Noncompensatory Equity Classified Warrants
No new noncompensatory equity classified warrants were issued during the twelve months ended December 31, 2021.
During
the nine months ended December 31, 2020, as a commitment fee, the Company issued noncompensatory equity classified warrants to an investor
for the purchase of
During
the year ended December 31, 2021, with the exception of the warrants to purchase
| 58 |
The following table summarizes the noncompensatory equity classified warrant activity for the year ended December 31, 2021:
| Common Stock | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – December 31, 2020 | $ | |||||||||||||||
| Legacy Ritter warrants | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Forfeited | ||||||||||||||||
| Total outstanding – December 31, 2021 | ||||||||||||||||
| Exercisable | ||||||||||||||||
| Non-Exercisable | $ | $ | ||||||||||||||
The following table summarizes the noncompensatory equity classified warrant activity for the nine months ended December 31, 2020:
| Common Stock | ||||||||||||||||
| Shares | Weighted– Average Exercise Price | Range of Exercise Price | Weighted– Average Remaining Life (Years) | |||||||||||||
| Total outstanding – March 31, 2020 | $ | |||||||||||||||
| Legacy Ritter warrants | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ( | ) | ||||||||||||||
| Forfeited | ||||||||||||||||
| Total outstanding – December 31, 2020 | ||||||||||||||||
| Exercisable | ||||||||||||||||
| Non-Exercisable | $ | $ | $ | |||||||||||||
NOTE 12 — INCOME TAXES
A reconciliation of the statutory income tax rates and the Company’s effective tax rate is as follows:
| December 31, 2021 | December 31, 2020 | |||||||
| Statutory federal income tax rate | % | % | ||||||
| State taxes, net of federal tax benefit | % | % | ||||||
| Non-deductible expenses | ( | )% | ( | )% | ||||
| NOL Expiration | ( | )% | % | |||||
| Tax Credit | % | ( | )% | |||||
| Change in fair value of warrant liability | % | ( | )% | |||||
| True-up | ( | )% | ( | )% | ||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| Income taxes provision | ( | )% | ( | )% | ||||
| 59 |
Income tax expense for the year ended December 31, 2021 and nine months ended December 31, 2020 consisted of the following:
| December 31, 2021 | December 31, 2020 | |||||||
| Current | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Total current provision | ||||||||
| Deferred | ||||||||
| Federal | ( | ) | ( | ) | ||||
| State | ( | ) | ( | ) | ||||
| Total deferred benefit | ( | ) | ( | ) | ||||
| Change in valuation allowance | ||||||||
| Total provision for income taxes | $ | $ | ||||||
The components of deferred tax assets and liabilities are as follows:
| December 31, 2021 | December 31, 2020 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss | $ | $ | ||||||
| Research and development credits | ||||||||
| Accrued expenses | ||||||||
| Patent | ||||||||
| Impairment loss | ||||||||
| Stock compensation | ||||||||
| Other | ||||||||
| Fixed assets | ||||||||
| Total deferred income tax assets | ||||||||
| Deferred tax liabilities: | ||||||||
| Intangible assets | ( | ) | ( | ) | ||||
| Right-of-use asset | ( | ) | ||||||
| Total deferred income tax liabilities | ( | ) | ( | ) | ||||
| Net deferred income tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax asset, net of allowance | $ | $ | ||||||
Based on the available objective evidence, including the Company’s history of cumulative losses, management believes it is likely that the net deferred tax assets will not be realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at December 31, 2021 and December 31, 2020.
At
December 31, 2021, the Company has federal and state net operating loss carryforwards of approximately $
The
Company also has research and development credit carryforwards for federal and state tax purposes of approximately $
The Company files income tax returns in the U.S. federal jurisdiction and in various states. The Company’s federal income tax returns for the years 2016 and beyond remain subject to examination by the Internal Revenue Service. The Company’s California income tax returns for the years 2015 and beyond remain subject to examination by the California Franchise Tax Board. In addition, all of the net operating losses, research and development credit and other tax credit carryforwards that may be used in future years are still subject to adjustment.
| 60 |
Generally accepted accounting principles clarify the accounting for uncertainty in income taxes recognized in the Company’s financial statements and prescribe thresholds for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provide guidance on de-recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted these provisions effective April 1, 2009.
The
Company did
NOTE 13 — TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain comparative transition period financial information for the year ended December 31, 2021 and the twelve months ended December 31, 2020, respectively.
For the Twelve Months Ended December 31, 2021 | For the Twelve Months Ended December 31, 2020 (unaudited) | |||||||
| Revenues | $ | $ | ||||||
| Gross profit on product sales | $ | $ | ||||||
| Net loss before income taxes | $ | ( | ) | $ | ( | ) | ||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per share – basic and fully diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares used in computing basic and diluted net loss per share | ||||||||
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
In
connection with our year-end financial close process and related preparation of our 2021 Annual Report on Form 10-K, our management
identified an error in the previously issued March 31, 2021, June 30, 2021, and September 30, 2021 unaudited interim
condensed consolidated financial statements in which the fair value of its exercised liability classified warrants had been inadvertently excluded from reclassification
into shareholders’ equity. This error resulted in a $
| For the Quarter Ended March 31, 2021 | ||||||||
| As reported | Corrected | |||||||
| Gain on change in fair value of warrant liabilities | $ | ( | ) | $ | ( | ) | ||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per common share | $ | ( | ) | $ | ( | ) | ||
| For the Quarter Ended June 30, 2021 | For the Six Months Ended June 30, 2021 | |||||||||||||||
| As reported | Corrected | As reported | Corrected | |||||||||||||
| Gain on change in fair value of warrant liabilities | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| For the Quarter Ended September 30, 2021 | For the Nine Months Ended September 30, 2021 | |||||||||||||||
| As reported | Corrected | As reported | Corrected | |||||||||||||
| Gain on change in fair value of warrant liabilities | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
NOTE 15 — SUBSEQUENT EVENTS
On
January 13, 2022, we entered into a License Agreement with UCL Business Limited to obtain an exclusive worldwide in-license of a genomic
quadruplex (G4)-selective transcription inhibitor drug development program which had been developed at University College London, including
lead and back-up compounds, preclinical data and a patent estate. (UCL Business Limited is the commercialization company for University
College London.) The program’s lead compound will be further developed at Qualigen under the name QN-302 as a candidate for treatment
for pancreatic ductal adenocarcinoma (PDAC), which represents the vast majority of pancreatic cancers. The Agreement requires a $
On March 4, 2022, the Company received a letter (the “Notice”) from The Nasdaq Stock Market notifying the Company that, because the closing bid price for its common stock has been below $ per share for 30 consecutive business days, it no longer complies with the minimum bid price requirement for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $ per share (the “Minimum Bid Price Requirement”), and Listing Rule 5810(c)(3)(A) provides that a failure to meet the Minimum Bid Price Requirement exists if the deficiency continues for a period of 30 consecutive business days.
The Notice has no immediate effect on the listing of the Company’s common stock on The Nasdaq Capital Market. Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A), the Company has been provided an initial compliance period of 180 calendar days, or until August 31, 2022 to regain compliance with the Minimum Bid Price Requirement. During the compliance period, the Company’s shares of common stock will continue to be listed and traded on The Nasdaq Capital Market. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $ per share for a minimum of 10 consecutive business days during the 180 calendar day grace period.
In the event the Company is not in compliance with the Minimum Bid Price Requirement by August 31, 2022, the Company may be afforded a second 180 calendar day grace period. To qualify, the Company would be required to meet the continued listing requirements for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement. In addition, the Company would be required to provide written notice of its intention to cure the minimum bid price deficiency during this second 180-day compliance period by effecting a reverse stock split, if necessary.
The Company intends to actively monitor the bid price for its common stock between now and August 31, 2022 and will consider available options to regain compliance with the Minimum Bid Price Requirement.
On
March 7, 2022, the Company extended an amendment to its sponsored research agreement with ULRF for development of several small-molecule
RAS interaction inhibitor drug candidates and increased the amount that the Company will reimburse ULRF for sponsored research expenses
from $
| 61 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. 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 defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2021, the end of the year covered by this Annual Report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2021, our disclosure controls and procedures were not effective due to the newly identified material weakness described below. 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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2021, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on the material weakness described below, our management concluded that as of December 31, 2021, our internal control over financial reporting was not effective.
Description of Material Weakness
In connection with the audit of our financial statements as of and for the year ended December 31, 2021, our management and registered independent public accounting firm identified 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 U.S. GAAP. This material weakness resulted in adjustments to our warrant valuations.
We have evaluated and implemented additional procedures in order to remediate this material weakness, including 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. However, we cannot assure you that these or other measures will fully remediate the material weakness in a timely manner. Notwithstanding the identified material weakness, our management believes that (the indicated adjustments having been made) the consolidated financial statements included in this 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.
In response to this material weakness, we continue to take a number of remediation steps to enhance our internal controls, 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.
Changes in Internal Control over Financial Reporting
Other than as described above, there were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitation on Effectiveness of Controls
In designing and evaluating our controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. 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. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. In addition, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a code of business conduct and ethics, which we refer to as the Code of Ethics. Our Code of Ethics is designed to meet the requirements of Section 406 of Regulation S-K and the rules promulgated thereunder. We will promptly disclose on our website (i) the nature of any amendment to this Code of Ethics that applies to any covered person, and (ii) the nature of any waiver, including an implicit waiver, from a provision of this Code of Ethics that is granted to one of the covered persons. The Code of Ethics is available on our website at www.qualigeninc.com under the Investors section of the website. However, the information contained on or accessed through our website does not constitute part of this Annual Report, and references to our website address in this Annual Report are inactive textual references only.
The other information required by this item will be set forth in the sections of our proxy statement for the 2022 annual meeting of stockholders (the “Proxy Statement”) titled “Board of Directors and Corporate Governance –The Board of Directors in General,” “Executive Officers,” and “Board of Directors and Corporate Governance – Committees of the Board of Directors – Audit Committee” (or similarly titled sections), or an amendment to this Annual Report on Form 10-K (this “Annual Report”), and is incorporated herein by reference. The Proxy Statement will be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2021.
Item 11. Executive Compensation.
The information required by this item will be set forth in the section of our Proxy Statement titled “Executive and Director Compensation” (or a similarly titled section), or in an amendment to this Annual Report, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be set forth in the sections of our Proxy Statement titled “Equity Compensation Plans” and “Ownership of the Company – Security Ownership of Certain Beneficial Owners and Management” (or similarly titled sections), or in an amendment to this Annual Report, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be set forth in the sections of our Proxy Statement titled “Board of Directors and Corporate Governance – Certain Relationships and Related Party Transactions” and “- Director Independence” (or similarly titled sections), or in an amendment to this Annual Report, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this item will be set forth in the section of our Proxy Statement titled “Relationship with Independent Registered Public Accounting Firm – Fees and Services of Baker Tilly US, LLP” (or a similarly titled section), or in an amendment to this Annual Report, and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report:
1. Financial Statements. The following documents are included in Part II, Item 8 of this Annual Report and are incorporated by reference herein:
2. Financial Statement Schedules. Financial statement schedules have been omitted because they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibits. See EXHIBIT INDEX
EXHIBIT INDEX
| 3.6 | Certificate of Merger, filed with the Delaware Secretary of State on May 22, 2020 | 8-K | 001-37428 | 3.3 | 5/29/2020 | |||||
| 3.7 | Certificate of Amendment to the Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on May 22, 2020 | 8-K | 001-37428 | 3.4 | 5/29/2020 | |||||
| 3.8 | Amended and Restated Bylaws of the Company, as of August 10, 2021 | 8-K | 001-37428 | 3.1 | 8/13/2021 | |||||
| 3.9 | Certificate of Designation of Preferences, Rights and Limitations of Series Alpha Preferred Stock of Qualigen, filed with the Delaware Secretary of State on May 22, 2020 | 8-K | 001-37428 | 3.6 | 5/29/2020 | |||||
| 4.1 | Warrant Agency Agreement between Ritter Pharmaceuticals, Inc. and Corporate Stock Transfer, Inc. and Form of Warrant Certificate | 8-K | 001-37428 | 4.1 | 10/4/2017 |
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| 4.15 | Description of Common Stock | 10-K | 001-37428 | 4.7 | 3/31/2020 | |||||
| 10.1+ | Executive Employment Agreement, by and between Qualigen, Inc. and Michael Poirier, dated as of February 1, 2017 and as amended on January 9, 2018 | 8-K | 001-37428 | 10.1 | 5/29/2020 | |||||
| 10.2+ | Executive Employment Agreement, by and between Qualigen, Inc. and Christopher Lotz, dated as of February 1, 2017 and as amended on January 9, 2018 | 8-K | 001-37428 | 10.1 | 5/29/2020 | |||||
| 10.3+ | Executive Employment Agreement, by and between Qualigen, Inc. and Shishir Sinha, dated as of February 1, 2017 and as amended on January 9, 2018 | 8-K | 001-37428 | 10.1 | 5/29/2020 | |||||
| 10.4+ | 2015 Equity Incentive Plan | S-8 | 333-207709 | 99.3 | 10/30/15 |
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| 10.38 | Securities Purchase Agreement between the Company and Alpha Capital Anstalt, dated August 2, 2020 | 8-K | 001-37428 | 10.1 | 8/4/2020 |
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* Filed or furnished herewith.
** Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedules will be furnished to the SEC upon request.
+ Indicates management contract or compensatory plan or arrangement.
# XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
Item 16. Form 10-K Summary
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Qualigen Therapeutics, Inc. | ||
| By: | /s/ Michael S. Poirier | |
| Michael S. Poirier | ||
| Chairman of the Board, Chief Executive Officer and President | ||
| Date: March 31, 2022 | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Michael S. Poirier and Christopher L. Lotz, and each of them individually, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Michael S. Poirier | Chairman of the Board, Chief Executive Officer and President | March 31, 2022 | ||
| Michael S. Poirier | (Principal Executive Officer) | |||
| /s/ Christopher L. Lotz | Vice President of Finance, Chief Financial Officer | March 31, 2022 | ||
| Christopher L. Lotz | (Principal Financial and Accounting Officer) | |||
| /s/ Amy S. Broidrick | Director | March 31, 2022 | ||
| Amy S. Broidrick | ||||
| /s/ Richard A. David | Director | March 31, 2022 | ||
| Richard A. David | ||||
| /s/ Sidney W. Emery, Jr. | Director | March 31, 2022 | ||
| Sidney W. Emery, Jr. | ||||
| /s/ Matthew E. Korenberg | Director | March 31, 2022 | ||
| Matthew E. Korenberg | ||||
| /s/ Kurt H. Kruger | Director | March 31, 2022 | ||
| Kurt H. Kruger | ||||
| /s/ Ira E. Ritter | Director | March 31, 2022 | ||
| Ira E. Ritter |
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