Item 7. Management’s Discussion and Analysis
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.
28
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.
29
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
30
On January 1, 2021, t he
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.
31
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 o f
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 progra m.
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.
32
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 C ompany’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 F DA 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.