AIxCrypto Holdings, Inc. 10-K

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. Unless otherwise indicated, all information in this Annual Report on Form 10-K gives effect to a 1-for-10 reverse stock split of our common stock that became effective on November 23, 2022, and all references to shares of common stock outstanding and per share amounts give effect to the reverse stock split. Overview We are a diversified life sciences company focused on developing treatments for adult and pediatric cancers with potential for Orphan Drug designation, while also commercializing diagnostics. Our cancer therapeutics pipeline includes QN-302, RAS and QN-247. 28 Our lead oncology therapeutics program, QN-302, is an investigational small molecule G4-selective transcription inhibitor with strong binding affinity to G4s prevalent in cancer cells. Such binding could, by stabilizing the G4s against DNA “unwinding,” help inhibit cancer cell proliferation. QN-302 is currently undergoing Good Laboratory Practice (GLP) toxicology studies. Our RAS portfolio consists of a family of RAS oncogene protein-protein interaction inhibitor small molecules believed to inhibit or block mutated RAS genes’ proteins from binding to their effector proteins. Preventing this binding could stop tumor growth, especially in RAS-driven tumors such as pancreatic, colorectal and lung cancers. Our investigational QN-247 compound binds nucleolin, a key multi-functional regulatory phosphoprotein that is overexpressed in cancer cells. Such binding could inhibit the cancer cells’ proliferation. The foundational aptamer of QN-247 is QN-165 (formerly referred to as AS1411), which the Company has deprioritized as a drug candidate for treating COVID-19 and other viral-based infectious diseases. On May 26, 2022, we acquired 2,232,861 shares of Series A-1 Preferred Stock of NanoSynex from Alpha in exchange for 3,500,000 shares of our common stock and a prefunded warrant to purchase 3,314,641 shares of our common stock at an exercise price of $0.001 per share. These warrants were subsequently exercised on September 13, 2022 and the shares of our common stock were subsequently subject to a 1 for 10 reverse split on November 23, 2022. Concurrently with this transaction, we also purchased 381,786 shares of Series B preferred stock from NanoSynex for a total purchase price of $600,000. The transactions resulted in our acquiring a 52.8% interest in NanoSynex. NanoSynex is a micro-biologics diagnostics company domiciled in Israel. Because our therapeutic candidates are all still in the pre-clinical development stage, our only products that are currently commercially available are the for sale FastPack System diagnostic instruments and test kits. Our FastPack System diagnostic instruments and test kits are sold commercially primarily in the United States, as well as certain European countries. The FastPack System menu includes a rapid, highly accurate immunoassay diagnostic testing system for cancer, men’s health, hormone function, and vitamin D status. We provide analyzers to our customers (physician offices, clinics and small hospitals) at low cost in order to increase sales volumes of higher-margin test kits. We have always utilized a “razor and blades” pricing strategy, providing analyzers to our customers (physician offices, clinics and small hospitals) at low cost in order to increase sales volumes of higher-margin test kits. Through the first quarter of 2022, we relied on our diagnostics distribution partner, Sekisui, for most FastPack distribution worldwide pursuant to a distribution agreement. We maintained direct distribution for certain house accounts, including selling our total testosterone test kits to Low T, the largest men’s health group in the United States, with 40 locations. The Distribution Agreement with Sekisui expired on March 31, 2022, and after that date the activities previously provided by Sekisui have reverted back to us and we have recognized 100% of the revenue from the sales of our FastPack diagnostic instruments and test kits. We have licensed and technology-transferred our FastPack System technology to Yi Xin Zhen Duan Jishu (Suzhou) Ltd. for the China diagnostics market. We do not expect to be profitable before products from our therapeutics pipeline are commercialized, because we foresee that research and development expenses on the therapeutics programs will significantly exceed the profits, if any, that we will generate from our diagnostics products. To experience losses while therapeutic products are still under development is, of course, typical for biotechnology companies. Our consolidated financial statements do not separate our diagnostics-related activities from our therapeutics-related activities. Although to date all of our reported revenue is diagnostics-related, our reported expenses represent the total of our diagnostics-related and therapeutics-related expenses Reverse Stock Split On November 23, 2022, we effected a 1-for-10, as determined by our board of directors, reverse stock split of our outstanding shares of common stock (the “Reverse Stock Split”). The Reverse Stock Split reduced our shares of outstanding common stock, stock options, and warrants to purchase shares of our common stock. Fractional shares of common stock that would have otherwise resulted from the Reverse Stock Split were rounded down to the nearest whole share and cash in lieu of payments were made to stockholders. All share and per share data for all periods presented in this section and the accompanying financial statements and related disclosures have been adjusted retrospectively to reflect the Reverse Stock Split. The number of authorized shares of common stock and the par value per share remains unchanged. 29 Impact of COVID-19 Pandemic The COVID-19 pandemic had, and it or similar pandemics, epidemics or infectious disease outbreaks may, in the future, have, adverse impacts on the U.S. and world economy, health care systems, personnel availability, supply chains, social and political assumptions, and capital markets. The impacts from the pandemic were particularly serious for smaller companies such as ours. Sales of our diagnostic products fell significantly during 2020 as deferral of patients’ non-emergency visits to physician offices, clinics and small hospitals sharply reduced demand for our FastPack tests. While our FastPack sales began to rebound in 2021, the extent to which the COVID-19 pandemic, or similar pandemics, epidemic or infectious disease outbreak, could impact us in the future will depend on numerous evolving factors and future developments that we are unable to predict at this time, including: the timing, extent, trajectory and duration of the pandemic; the emergence of new variants; the development, availability, distribution and effectiveness of vaccines and treatments; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for our products and services. We could again experience adverse impacts to our business as a result of any related economic recession that may occur in the future from COVID-19 or other similar global pandemic, epidemic or infectious disease outbreak. Critical Accounting Policies and Estimates This discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to impairment of goodwill and other intangible assets, fair value of warrant liabilities, stock-based compensation, amortization and depreciation, inventory reserves, allowances for doubtful accounts and returns, and warranty costs. We base our estimates on historical experience, known trends and events and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 30 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: ● Convertible debt ● Research and development ● Revenue recognition ● Allowance for doubtful accounts and returns ● Inventory ● Impairment of long-lived assets ● Business combination ● Goodwill ● In Process R&D ● Derivative financial instruments and warrant liabilities ● Stock-based compensation ● Income taxes Warrant Liabilities In 2004, Qualigen, Inc. issued Series C preferred stock warrants to investors and brokers in connection with a private placement. These warrants were subsequently extended and survived the May 2020 Ritter reverse recapitalization transaction and are now exercisable for Qualigen Therapeutics common stock. These warrants contain a provision that if Qualigen, Inc. issues shares (except in certain defined scenarios) at a price below the warrants’ exercise price, the exercise price will be re-set to such new price and the number of shares underlying the warrants will be increased in the same proportion as the exercise price decrease. For accounting purposes, such warrants give rise to warrant liabilities. The operation of the “double-ratchet” provisions in these warrants in connection with the NanoSynex acquisition and the convertible debenture financing transaction in 2022 now allow the holders to exercise for a significantly higher number of shares than before. Accounting principles generally accepted in the United States of America (“U.S. GAAP”) require us to recognize the fair value of these warrants as warrant liabilities on our 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 estimated fair value of these warrant liabilities was $0.8 million and $1.7 million at December 31, 2022 and 2021, respectively. There were 1,349,571 of these warrants outstanding at December 31, 2022 and 248,162 of these warrants outstanding at December 31, 2021. On December 22, 2022, as part of the convertible debenture financing, the Company issued to Alpha a common stock warrant to purchase a number of shares of the common stock of the Company equal to the number of Conversion Shares issuable upon conversion of the Debenture as of the closing date. The exercise price of the warrant is $1.65 (equal to 125% of the Conversion Price of the Debenture on the closing date). The warrant entitles Alpha to purchase up to 2,500,000 shares of common stock of the Company and may be exercised by Alpha, in whole or in part, at any time on or after June 22, 2023 and before June 22, 2028. U.S. GAAP requires us to recognize the fair value of 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 estimated fair value of this warrant liability was $2.8 million and $0 at December 31, 2022 and 2021, respectively. Because the fair value of the above liability classified warrants will be determined each quarter on a “mark-to-market” basis , it could result in significant variability in our future quarterly and annual Consolidated Statement of Operations and Consolidated Balance Sheets based on changes in our public market common stock price. Pursuant to U.S. GAAP, a quarter-to-quarter increase in our stock price would result in an increase (possibly quite large) in the fair value of the warrant liabilities and a quarter-to-quarter decrease in our stock price would result in a decrease (possibly quite large) in the fair value of the warrant liabilities. 31 Results of Operations Comparison of the Years Ended December 31, 2022 and 2021 For the Years Ended December 31, 2022 2021 REVENUES Net product sales $ 4,983,556 $ 5,021,721 License revenue — 632,004 Total revenues 4,983,556 5,653,725 EXPENSES Cost of product sales 4,302,755 4,332,485 General and administrative 10,835,647 11,724,964 Research and development 6,837,133 11,716,718 Sales and marketing 950,420 542,594 Goodwill and fixed asset impairment 4,239,000 — Total expenses 27,164,955 28,316,761 LOSS FROM OPERATIONS (22,181,399 ) (22,663,036 ) OTHER EXPENSE (INCOME), NET (Gain) loss on change in fair value of warrant liabilities (907,203 ) (4,723,187 ) Interest (income) expense, net 26,646 (42,693 ) Other income, net (1,125 ) (5,446 ) Total other expense (income), net (881,682 ) (4,771,326 ) LOSS BEFORE (BENEFIT) PROVISION FOR INCOME TAXES (21,299,717 ) (17,891,710 ) (BENEFIT) PROVISION FOR INCOME TAXES (265,074 ) 5,427 NET LOSS (21,034,643 ) (17,897,137 ) Net loss attributable to noncontrolling interest (2,394,100 ) — Net loss attributable to Qualigen Therapeutics, Inc. $ (18,640,543 ) $ (17,897,137 ) Other comprehensive loss, net of tax Net loss $ (21,034,643 ) $ (17,897,137 ) Foreign currency translation adjustment 50,721 — Other comprehensive loss (20,983,923 ) (17,897,137 ) Comprehensive loss attributable to noncontrolling interest (2,394,100 ) — Comprehensive loss attributable to Qualigen Therapeutics, Inc. $ (18,589,823 ) $ (17,897,137 ) Revenues Our operating revenues are primarily generated from sales of our FastPack diagnostic tests. Revenues for the year ended December 31, 2022 were approximately $5.0 million compared to approximately $5.7 million for the year ended December 31, 2021, a decrease of $0.7 million. This decrease was primarily due to the recognition of approximately $0.6 million in license revenue from Yi Xin under the Technology Transfer Agreement for the year ended December 31, 2021, compared with no license revenue for the year ended December 31, 2022. Net product sales Net product sales are primarily generated from sales of our diagnostic tests. Net product sales for the year ended December 31, 2022 were $5.0 million, which remained largely consistent with $5.0 million for the year ended December 31, 2021. 32 License Revenue License revenue for the year ended December 31, 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 year ended December 31, 2022. Expenses Cost of Product Sales Cost of product sales for the year ended December 31, 2022 were $4.3 million, which remained largely consistent with $4.3 million for the year ended December 31, 2021. General and Administrative Expenses General and administrative expenses decreased from $11.7 million for the year ended December 31, 2021 to $10.8 million the year ended December 31, 2022. This decrease was due to a $0.3 million decrease in professional fees, a $0.3 million decrease in payroll-related expenses, a $0.3 million decrease in insurance expenses, and a $0.3 million decrease in investor relations expenses, offset by increases of $0.2 million in legal expenses and $0.1 million in rent. Research and Development Costs Research and development costs include therapeutics and diagnostics research and product development costs. Research and development costs decreased from $11.7 million for the year ended December 31, 2021 to $6.8 million for the year ended December 31, 2022. Of the $6.8 million of research and development costs for year ended December 31, 2022, $4.5 million (66%) was attributable to therapeutics and $2.3 million (34%) was attributable to diagnostics. Of the $11.7 million of research and development costs for the year ended December 31, 2021, $10.3 million (88%) was attributable to therapeutics and $1.4 million (12%) was attributable to diagnostics. The increase in diagnostic research and development costs was primarily due to $0.9 million in R&D expenses assumed in connection with the acquisition of NanoSynex. The decrease in therapeutics research and development costs was primarily due to a decrease of $6.4 million in expenses related to the potential application of QN-165 for the treatment of COVID-19 ($4.6 million in drug compound manufacturing costs, and $1.8 million in other pre-clinical research costs), as well as pre-clinical research and development cost decreases of $0.2 million for QN-247, a decrease in legal expenses of $0.3 million, a decrease of $0.3 million in payroll-related expenses, offset by an increase in QN-302 spending of $1.1 million and an increase in RAS expenses of $0.3 million. 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 the year ended December 31, 2022 increased to $1.0 million as compared to $0.5 million for the year ended December 31, 2021, primarily due to an increase in payroll-related expenses as a result of the termination of the Sekisui distribution agreement. Goodwill and Fixed Asset Impairment As a result of annual goodwill impairment testing, we recognized a $4.2 million non-cash goodwill and fixed asset impairment charge in the valuation of our business acquisition of NanoSynex for the year ended December 31, 2022. For more information, refer to Note 1 - Organization and Summary of Significant Accounting Policies and Estimates and Note 7 - Goodwill, IPR&D and other Intangibles of the consolidated financial statements. 33 Other Expense (Income) Change in Fair Value of Warrant Liabilities During the year ended December 31, 2022 we experienced (primarily due to a decrease in our stock price during the period) a $0.9 million gain in other income because of the change in fair value of the warrant liabilities arising from our liability classified warrants described above. The estimated fair value of these warrants increased to $3.6 million as of December 31, 2022 from $1.7 million as of December 31, 2021 primarily due to the issuance of a new warrant as part of the convertible debt-related party financing transaction, offset by a reduction in fair value of the other liability classified warrants. For the year ended December 31, 2021, the gain on change in fair value of warrant liabilities was $4.7 million due to an associated decrease 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. Interest (Income) Expense, Net There was $27,000 in net interest expense during the year ended December 31, 2022 compared to net interest income of $43,000 during the year ended December 31, 2021. During the year ended December 31, 2022, we issued convertible debt which resulted in an increase of $47,000 in interest expense offset by a reduction of $20,000 in interest income compared to the year ended December 31, 2021, primarily due to lower interest bearing cash balances. Other Income, Net Other income was immaterial during the years ended December 31, 2022 and 2021. Liquidity and Going Concern As of December 31, 2022, we had approximately $7.0 million in cash. We have incurred recurring losses from operations and have an accumulated deficit of $103.4 million at December 31, 2022. We expect to continue to incur losses subsequent to the consolidated balance sheet date of December 31, 2022. For the years ended December 31, 2022 and 2021, we used cash of $13.2 million and $14.7 million, respectively, in operations. We currently expect our cash balances to fund operations into the third quarter of 2023. As a pre-clinical development-stage therapeutics biotechnology company, we expect to continue to have net losses and negative cash flow from operations, which over time will challenge our liquidity. These factors raise substantial doubt regarding our ability to continue as a going concern for the one-year period following the date that these financial statements were issued. There is no assurance that we will ever achieve profitable operations, or, if achieved, could be sustained on a continuing basis. In order to fully execute our business plan, we will require significant additional financing for planned research and development activities, capital expenditures, clinical and pre-clinical testing for QN-302 clinical trials, to continue preclinical development of RAS, and to continue funding the NanoSynex operations (See Note 3-Acquisition), as well as commercialization activities. Historically, our principal sources of cash have, in addition to revenue from FastPack product sales and license revenues, included proceeds from the issuance of common and preferred equity and proceeds from the issuance of debt. In December 2021, we raised $8.8 million from the issuance of common stock to several institutional investors, and in December 2022 we raised approximately $3.0 million from the sale of a convertible debenture to Alpha. 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. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, commercialization, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. In addition, any future financing (depending on the terms and conditions) may be subject to the approval of Alpha under the terms of the Debenture and/or trigger certain adjustments to the Debenture or warrants held by Alpha. As a condition to the NanoSynex closing, the Company agreed to provide NanoSynex with up to $10.4 million of future funding based on NanoSynex’s achievement of certain future development milestones and subject to other terms and conditions described in the Master Agreement for the Operational and Technological Funding of NanoSynex (the “Funding Agreement”) entered into with NanoSynex. These funding commitments are in the form of convertible promissory notes to be issued to the Company with a face value equal to the amount paid by the Company to NanoSynex upon satisfaction of the applicable performance milestone, bearing interest at the rate of 9% per annum on the principal balance from time to time outstanding under the particular promissory note, convertible at the option of the Company into additional shares of NanoSynex in order for the Company to maintain at least a 50.1% controlling ownership interest in NanoSynex, should NanoSynex issue additional shares. The principal of the convertible notes are due and payable upon the sooner to occur of: i) five years from the date of issuance of the particular promissory note; ii) the acquisition by any person or entity of all or substantially all of the share capital of NanoSynex, through share purchase, issuance or shares or merger of NanoSynex, or the purchase of all or substantially all of the assets of NanoSynex; or iii) the initial public offering of NanoSynex. The Company provided funding to NanoSynex of $2.4 million during 2022 and an additional $0.5 million in February 2023 pursuant to this agreement. The Company may terminate the Funding Agreement upon 120 days’ notice, but would still be liable for any payments due for milestones achieved prior to termination. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The financial statements do not include any adjustments that would be necessary should the Company be unable to continue as a going concern, and therefore, be required to liquidate its assets and discharge its liabilities in other than the normal course of business and at amounts that may differ from those reflected in the accompanying financial statements. 34 Our consolidated balance sheet at December 31, 2022 includes $3.6 million of current warrant liabilities. We do not consider the warrant liabilities to constrain our liquidity, as a practical matter. Our current liabilities at December 31, 2022 also include $0.9 million of accounts payable, $0.5 million of accrued vacation pay, $1.5 million of accrued expenses and other current liabilities, a $0.8 million R&D grant liability, $0.2 million in operating lease liabilities, $0.1 million of notes payable (convertible debt to a related party), and $1.0 million in short term debt to a related party. Contractual Obligations and Commitments We have no material contractual obligations that are not fully recorded on our consolidated balance sheets or fully disclosed in the notes to the financial statements. Lease Agreement with Bond Ranch LP On December 15, 2021, our wholly-owned subsidiary Qualigen, Inc. entered into a Second Amendment to Lease with Bond Ranch LP. This Amendment extended 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. was entitled to a $339,360 tenant improvement allowance. See Note 13-Commitments and Contingencies of the consolidated financial statements for additional details. License and Sponsored Research Agreements We have obligations under various license and sponsored research agreements to make future payments to third parties that become due and payable on the achievement of certain development, regulatory and commercial milestones (such as the start of a clinical trial, filing for product approval with the FDA or other regulatory agencies, product approval by the FDA or other regulatory agencies, product launch or product sales) or on the sublicense of our rights to another party. We have not included these commitments on our balance sheet because the achievement and timing of these events is not determinable. Certain milestones are in advance of receipt of revenue from the sale of products and, therefore, we may require additional debt or equity capital to make such payments. We have multiple license and sponsored research agreements with UofL Research Foundation (“ULRF”). Under these agreements, we have taken over development, regulatory approval and commercialization of various drug compounds from ULRF and are responsible for maintenance of the related intellectual property portfolio. We agreed to reimburse ULRF for sponsored research expenses of up to $2.7 million and prior patent costs of up to $112,000 for RAS. As of December 31, 2022 we had up to $748,000 remaining due under this sponsored research agreement for RAS. We also agreed to reimburse ULRF for sponsored research expenses of up to $830,000 and prior patent costs of up to $200,000 for QN-247. As of December 31, 2022, there were no remaining un-expensed amounts under this sponsored research agreement for QN-247 and the agreement was terminated effective August 31, 2022. We also agreed to reimburse ULRF for sponsored research expenses of up to $430,000 and prior patent costs of up to $24,000 for QN-165. As of December 31, 2022 we had no remaining un-expensed amounts under this sponsored research agreement for QN-165, and the agreement was terminated effective November 30, 2021. Under the terms of these agreements, we are required to make patent maintenance payments and payments based upon development, regulatory and commercial milestones for any products covered by the in-licensed intellectual property. The maximum aggregate milestone payments we may be obligated to make per product are $5 million. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. We have the right to sublicense our rights under these agreements, and we will be required to pay a percentage of any sublicense income. On January 13, 2022, we entered into a License Agreement with UCL Business Limited to obtain an exclusive worldwide in-license of a genomic quadruplex (G4)-selective transcription inhibitor drug development program which had been developed at University College London, including lead and back-up compounds, preclinical data and a patent estate. (UCL Business Limited is the commercialization company for University College London.) The program’s lead compound will be further developed at Qualigen under the name QN-302 as a candidate for treatment of pancreatic ductal adenocarcinoma (PDAC), which represents the vast majority of pancreatic cancers. The Agreement requires (if and when applicable) tiered royalty payments in the low to mid-single digits, clinical/regulatory/sales milestone payments, and a percentage of any non-royalty sublicensing consideration paid to Qualigen. Termination of Sekisui Distribution Agreement Following the expiration of the Sekisui Distribution Agreement on March 31, 2022, the Company has a commitment to purchase leased FastPack rental systems back from Sekisui at its net book value, in the amount of $154,000 which is included in equipment held for lease and accrued expenses and other current liabilities on the consolidated balance sheet. Technology Transfer Agreement with Yi Xin Through our wholly-owned diagnostics subsidiary Qualigen, Inc., we entered into a Technology Transfer Agreement dated as of October 7, 2020, with Yi Xin, of Suzhou, China, which authorizes Yi Xin to develop, manufacture and sell new generations of diagnostic test systems based on our core FastPack technology. In addition, the Technology Transfer Agreement authorizes Yi Xin to manufacture and sell our current generations of FastPack System diagnostic products (1.0, IP and PRO) in China. We have provided technology transfer and patent/know-how license rights to facilitate Yi Xin’s development and commercialization. 35 Under the terms of the Technology Transfer Agreement, we have provided Yi Xin the exclusive rights for China – which is a market we have not otherwise entered – both for Yi Xin’s new generations of FastPack-based products and for Yi Xin-manufactured versions of our existing FastPack product lines. Yi Xin has the right to sell its new generations of FastPack-based diagnostic test systems throughout the world (but not to or toward current customers of our existing generations of FastPack products); provided that any non-China sales would, until March 31, 2022, need to be through Sekisui. As of April 1, 2022, Yi Xin has right to sell Yi Xin-manufactured versions of existing FastPack 1.0, IP and PRO product lines worldwide (other than in the United States and other than to or toward current non-US customers of those products). Yi Xin also has the right, as of April 1, 2022, to buy Qualigen-manufactured FastPack 1.0, IP and PRO products from us at distributor prices for resale in and for the United States (but not to or toward current U.S. customers of those products). We did not license Yi Xin to sell in the United States market any Yi Xin-manufactured versions of those legacy FastPack product lines, even after March 31, 2022. We agreed in the Technology Transfer Agreement that we would not, after March 31, 2022, seek new FastPack customers outside the United States. Under the Technology Transfer Agreement, we have received total net cash payments of approximately $670,000, of which approximately $632,000 was 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. There were no revenues under this agreement for the fiscal year ended December 31, 2022. We will receive low- to mid-single-digit royalties on any future new-generations and current-generations product sales by Yi Xin. Yi Xin is a newly-formed company and is subject to many risks. There can be no assurance that Yi Xin will successfully commercialize any products or that we will receive any royalties from Yi Xin. Alpha Convertible Debt On December 22, 2022, we issued an 8% Senior Convertible Debenture in the aggregate principal amount of $3,300,000 to Alpha for a purchase price of $3,000,000 pursuant to the terms of a Securities Purchase Agreement, dated December 21, 2022 (the “Alpha Purchase Agreement”). The Debenture is convertible, at any time, and from time to time, at Alpha’s option, into shares of our common stock (the “Conversion Shares”), at a price equal to $1.32 per share, subject to adjustment as described in the Debenture (the “Conversion Price”) and other terms and conditions described in the Debenture, including the Company’s receipt of the requisite stockholder approvals. Commencing June 1, 2023 and continuing on the first day of each month thereafter until the earlier of (i) December 22, 2025 and (ii) the full redemption of the Debenture, we must redeem $110,000 plus accrued but unpaid interest, liquidated damages and any amounts then owing under the Debenture. The Monthly Redemption Amount must be paid in cash; provided that after the first two monthly redemptions, we may elect to pay all or a portion of a Monthly Redemption Amount in shares of our common stock, based on a conversion price equal to the lesser of (i) the then applicable conversion price of the Debenture and (ii) 85% of the average of the VWAPs (as defined in the Debenture) for the five consecutive trading days ending on the trading day that is immediately prior to the applicable Monthly Redemption Date. We may also redeem some or all of the then outstanding principal amount of the Debenture at any time for cash in an amount equal to 105% of the then outstanding principal amount of the Debenture being redeemed plus accrued but unpaid interest, liquidated damages and any amounts then owing under the Debenture. These monthly redemption and optional redemptions are subject to the satisfaction of the Equity Conditions (as defined in the Debenture), which includes a condition that we have obtained stockholder approval for such share issuances. The Debenture accrues interest at the rate of 8% per annum, which does not begin accruing until December 1, 2023, and will be payable on a quarterly basis. Interest may be paid in cash or shares of common stock of the Company or a combination thereof at the option of the Company; provided that interest may only be paid in shares if the Equity Conditions have been satisfied, including the stockholder approval condition as described above. Nanosynex Funding Agreement As a condition to the NanoSynex acquisition, we entered into a Master Agreement for the Operational and Technological Funding of NanoSynex (the “Funding Agreement”), on May 26, 2022, pursuant to which we have agreed to fund NanoSynex up to an aggregate of approximately $10.4 million over the next three years, subject to NanoSynex’s achievement of certain performance milestones specified in the Funding Agreement and the satisfaction of other terms and conditions described in the Funding Agreement. 36 We will receive in exchange for any payment made to NanoSynex under the Funding Agreement one or more promissory notes (which may contain convertible features) with a face value equal to the amount paid by the Company to NanoSynex upon satisfaction of the applicable performance milestones. Any promissory notes issued to us by NanoSynex under the Funding Agreement will bear interest at a rate of 9.00% per annum on the principal balance from time to time outstanding under the promissory note. The principal and interest under any promissory note issued to us under the Funding Agreement will be due and payable upon the sooner to occur of: (i) five years from the date of the particular promissory note; (ii) the acquisition by any person or entity of all or substantially all of the share capital of NanoSynex, through share purchase, issuance of shares or merger of NanoSynex or the purchase of all or substantially all of the assets of NanoSynex; or (iii) the initial public offering of NanoSynex. If at any time, our ownership of the share capital of NanoSynex on an issued and outstanding basis falls or is reasonably expected to fall below 50.1%, solely as a result of the exercise of existing or future options (or an equivalent instrument) or as a result of issuance of restricted, shares, restricted stock units (or an equivalent instruments), we, in our sole discretion, may elect to convert all or any portion of the outstanding principal amount of any promissory note into shares of NanoSynex’s most senior class of preferred shares existing immediately prior to such conversion, subject to the terms and conditions described in the promissory notes so that, following such conversion, we will regain 50.1% ownership of NanoSynex’s issued and outstanding share capital. During the year ended December 31, 2022 a total of approximately $2.4 million was funded and in February 2023 and additional $0.5 million was funded to NanoSynex under the Funding Agreement. Other Service Agreements We enter into contracts in the normal course of business, including with clinical sites, contract research organizations, and other professional service providers for the conduct of clinical trials, contract manufacturers for the production of our product candidates, contract research service providers for preclinical research studies, professional consultants for expert advice and vendors for the sourcing of clinical and laboratory supplies and materials. These contracts generally provide for termination on notice, and therefore are cancelable contracts. Cash Flows The following table sets forth the significant sources and uses of cash for the periods set forth below: For the Years Ended December 31, 2022 2021 Net cash (used in) provided by: Operating activities $ (13,247,540 ) $ (14,730,742 ) Investing activities (183,763 ) (141,364 ) Financing activities 2,910,515 8,433,808 Effect of exchange rate on cash 22,639 — Net decrease in cash and restricted cash $ (10,498,149 ) $ (6,438,298 ) Net Cash Used in Operating Activities During the year ended December 31, 2022, operating activities used $13.2 million of cash, primarily resulting from a net loss of $21.0 million. Cash flows from operating activities (as opposed to net loss) for the year ended December 31, 2022 were positively impacted by adjustments for $5.4 million in non cash stock-based compensation expense, a $4.2 million non cash goodwill impairment charge related to the acquisition of Nanosynex, $0.1 million in depreciation and amortization, as well as $0.4 million decrease in accounts receivable. Cash flows from operating activities (as opposed to net loss) for the year ended December 31, 2022 were negatively impacted by a $1.0 million gain on change in fair value of warrant liabilities (as described above), a $0.6 million increase in inventory and equipment held for lease, a $0.5 million decrease in R&D grant liability which was offset against NanoSynex R&D expenses, a $0.3 million decrease in deferred tax liability, a $0.1 million increase in prepaid expenses and other assets, and a $0.1 million decrease in accounts payable and accrued expenses. 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 positively impacted by adjustments for $5.6 million in non cash stock-based compensation expenses, 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. Net Cash Used in Investing Activities During the year ended December 31, 2022, net cash used in investing activities was approximately $0.2 million, due to capital expenditures offset by cash acquired in the NanoSynex acquisition. During the year ended December 31, 2021, net cash used in investing activities was approximately $0.1 million, primarily related to the purchase of property and equipment. Net Cash Provided by Financing Activities Net cash provided by financing activities for the year ended December 31, 2022, was approximately $2.9 million, due to the issuance of convertible debt to Alpha. Net cash provided by financing activities for the year ended December 31, 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.