This
prospectus supplement updates, amends and supplements the prospectus contained in our Registration Statement on Form F-1, effective
as of April 22, 2022 (as supplemented or amended from time to time, the “Prospectus”) (Registration No. 333-264305). Capitalized
terms used in this prospectus supplement and not otherwise defined herein have the meanings specified in the Prospectus.
This
prospectus supplement is being filed to update, amend and supplement the information included in the Prospectus with the information contained
in our Form 6-K furnished with the Securities and Exchange Commission (the “SEC”) on November 10, 2022, which is set forth
below.
This
prospectus supplement is not complete without the Prospectus. This prospectus supplement should be read in conjunction with the Prospectus,
which is to be delivered with this prospectus supplement, and is qualified by reference thereto, except to the extent that the information
in this prospectus supplement updates or supersedes the information contained in the Prospectus. Please keep this prospectus supplement
with your Prospectus for future reference.
Our
ADSs are listed on the Nasdaq Capital Market under the symbol “QNRX”. On November 9, 2022, the closing price for our ADSs
on the Nasdaq Capital Market was $1.64 per ADS.
The
date of this prospectus supplement is November 10, 2022.
NOTE 1 – ORGANIZATION AND BUSINESS
Quoin Pharmaceuticals Ltd. (“Quoin Ltd.,”
or the “Company”), formerly known as Cellect Biotechnology Ltd. (“Cellect”), is the holding company for Quoin
Pharmaceuticals, Inc., a Delaware corporation (“Quoin Inc.”). On October 28, 2021, Cellect completed the business combination
with Quoin Inc., in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of March 24, 2021 (the
“Merger Agreement”), by and among Cellect, Quoin Inc. and CellMSC, Inc., a Delaware corporation and wholly-owned subsidiary
of Cellect (“Merger Sub”), pursuant to which Merger Sub merged with and into Quoin Inc., with Quoin Inc. surviving as a wholly-owned
subsidiary of Cellect (the “Merger”). Immediately after completion of the Merger, Cellect changed its name to “Quoin
Pharmaceuticals Ltd.” Because Quoin Inc. was the accounting acquirer, its historical financial statements became the Company’s
historical financial statements and such assets and liabilities continued to be recorded at their historical carrying values. The impact
of the recapitalization has been retroactively applied to all periods presented.
Effective August 1, 2022, the ratio of American
Depositary Shares (“ADSs”) evidencing ordinary shares changed from 1 ADS representing four hundred (400) ordinary shares to
1 ADS representing five thousand (5,000) ordinary shares, which resulted in a one for 12.5 reverse split of the issued and outstanding
ADSs (the “Ratio Change”). All ADSs and related option and warrant information presented in these financial statements and
accompanying footnotes has been retroactively adjusted to reflect the reduced number of ADSs resulting from the Ratio Change.
Quoin Inc. was incorporated in Delaware on March
5, 2018. Quoin Inc. is a specialty pharmaceutical company focused on developing and commercializing therapeutic products that treat rare
and orphan diseases. The first lead product is QRX003, a once daily, topical lotion comprised of a broad-spectrum serine protease inhibitor,
formulated with the proprietary Invisicare® technology, to treat Netherton Syndrome (NS). QRX003, is currently in clinical development
in the United States under an open IND application with the U.S. Food and Drug Administration (“FDA”). The ongoing study is
a randomized, double blinded assessment of two different doses of QRX003 versus a placebo vehicle in NS patients. The Company commenced
opening of clinical sites in July 2022. In addition, the Company intends to pursue the clinical development of QRX003 in additional rare
dermatological diseases, including Peeling Skin Syndrome, SAM Syndrome and Palmoplantar Keratoderma. To date, no products have been commercialized
and revenue has not been generated.
NOTE 2 - LIQUIDITY RISKS AND OTHER UNCERTAINTIES
The Company has incurred net losses every year
since inception and has an accumulated deficit of approximately $35.5 million at September 30, 2022. The Company has historically funded
its operations through debt and equity financings. On August 9, 2022, the Company completed an offering (the “Offering”) of
ordinary shares represented by ADSs and pre-funded warrants to purchase ordinary shares represented by ADSs with each ADS and pre-funded
warrant accompanied by an ordinary warrant, for aggregate gross proceeds of $16.8 million, resulting in net proceeds of approximately
$14.9 million (see Note 14). As a result of the completion of the Offering, the Company believes that it has sufficient resources to effect
its business plan for at least one year from the issuance of these unaudited condensed consolidated financial statements.
Additional financing will still be required to
complete the research and development of the Company’s therapeutic targets and its other operating requirements until it achieves
commercial profitability, if ever. Such financing may not be available at acceptable terms, if at all. If the Company is unable to obtain
additional funding when it becomes necessary, the development of its product candidates will be impacted and the Company would likely
be forced to delay, reduce, or terminate some or all of its development programs, all of which could have a material adverse effect on
the Company’s business, results of operations and financial condition.
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QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
Other risks and uncertainties:
The Company is subject to risks common to development
stage biopharmaceutical companies including, but not limited to, new technological innovations, dependence on key personnel, protection
of proprietary technology, compliance with government regulations, product liability, pre-clinical and clinical trial outcome risks, regulatory
approval risks, uncertainty of market acceptance and additional financing requirements.
The Company’s products require approval
or clearance from the FDA prior to commencing commercial sales in the United States. There can be no assurance that the Company’s
products will receive all of the required approvals or clearances. Approvals or clearances are also required in foreign jurisdictions
in which the Company may license or sell its products.
There can be no assurance that the Company’s
products, if approved, will be accepted in the marketplace, nor can there be any assurance that any future products can be developed or
manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed.
The Company is also dependent on several third
party suppliers, in some cases single-source suppliers which include the supplier of the active pharmaceutical ingredient (API), as well
as the contract manufacturer of the drug substance for the expected clinical development.
Coronavirus (“COVID-19”) created a
global pandemic, which commenced in 2020. The Company’s operations, to date, have not been dramatically affected by COVID-19. However,
the extent of any future impact on the Company’s operational and financial performance will depend on the possibility of a resurgence
and resulting severity with respect to the Company’s access to API and drug product for clinical testing, as well as the Company’s
ability to safely and efficiently conduct planned clinical trials.
Nasdaq Listing
On April 22, 2022, the Company received a letter
from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company
that it is no longer in compliance with Nasdaq Listing Rule 5550(b)(1) requiring minimum stockholders’ equity of at least $2.5 million
for continued listing on The Nasdaq Capital Market. Based on the Company’s Form 6-K, dated August 10, 2022, the Staff has determined
that the Company complies with the minimum stockholder’s equity requirement, and the Company evidences continued compliance with
these financial statements for the quarter ended September 30, 2022.
On June 10, 2022, the Company received a letter
from the Staff notifying the Company that the closing bid price per ADS was below the required minimum of $1.00 for a period of 30 consecutive
business days and that the Company did not meet the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2). Since
then, the Staff has determined that the closing bid price of the Company’s ADSs has been at $1.00 per ADS or greater, and the Company
has regained compliance with the minimum bid price requirement.
There can be no assurance that the Company will
be able to maintain compliance with Nasdaq’s minimum stockholders’ equity requirement or minimum bid-price requirement for
continued listing. If the Company’s ADSs are delisted from Nasdaq, it will have material negative impacts on the actual and potential
liquidity of the Company’s securities, as well as material negative impacts on the Company’s ability to raise future capital.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S.
GAAP for complete financial statements, reflecting the operations of Quoin Inc. since inception and include the accounts of Quoin Ltd.
since the date of the Merger. In the opinion of management, such statements
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QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
include all adjustments (consisting only of normal
recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of
the Company as of September 30, 2022 and for the three and nine months then ended. The results of operations for the three and nine months
ended September 30, 2022 are not necessarily indicative of the operating results for the year or any other period. These unaudited condensed
consolidated financial statements should be read in conjunction with the audited financial statements and related disclosures as of December
31, 2021 and for the year then ended which are included in the Company’s Annual Report on Form 20- F, filed with the SEC on April
14, 2022, as updated in the Company’s Form 6-K furnished to the SEC on August 11, 2022. The Company operates in one segment.
Use of estimates:
The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in selecting appropriate
financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these
financial statements. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity
and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative
of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and
management must select an amount that falls within that range of reasonable estimates.
Reclassification:
Certain 2021 amounts were reclassified to conform
to the current year presentation. The amount reclassified included the short term portion from long term portion due to officers.
Cash and cash equivalents:
The Company considers all highly liquid investments
and short-term debt instruments with original maturities of three months or less to be cash equivalents. The Company, from time to time
during the periods presented, has had bank account balances in excess of federally insured limits where substantially all cash is held
in the United States. The Company has not experienced losses in such accounts. The Company believes that it is not subject to unusual
credit risk beyond the normal credit risk associated with commercial banking relationships.
Warrants:
The Company classifies as equity any contracts
that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement
in its own shares (physical settlement or net-share settlement) provided that such contracts are indexed to the Company’s own stock.
The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash
settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) give the counterparty a choice
of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
The Company assesses classification of its warrants
and other free-standing derivatives at each reporting date to determine whether a change in classification between assets, liabilities
and equity is required. The Company evaluated the warrants to assess their proper classification using the applicable criteria enumerated
under U.S. GAAP and determined that such warrants meet the criteria for equity classification in the accompanying balance sheets as of
September 30, 2022.
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QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
Investments:
Investments
as of September 30, 2022 consist of U.S. Treasury Bills, which are classified as trading securities, totaling $9.9 million. The Company
determines the appropriate balance sheet classification of its investments at the time of purchase and evaluates the classification at
each balance sheet date. All of the Company’s U.S. Treasury Bills mature within the subsequent six months from the date of purchase.
As of September 30, 2022, the carrying value of the Company’s U.S. Treasury Bills approximates their fair value due to their short-term
maturities.
Long-lived assets:
Long-lived assets are comprised of acquired technology
and licensed rights to use technology, which are considered platform technology with alternative future uses beyond the current products
in development. Such intangible assets are being amortized on a straight-line basis over their expected useful life of 10 years.
The Company assesses the impairment for long-lived
assets whenever events or circumstances indicate the carrying value may not be recoverable. Factors the Company considers that could trigger
an impairment review include the following:
|
● |
Significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, |
|
● |
Significant underperformance relative to expected historical or projected development milestones, |
|
● |
Significant negative regulatory or economic trends, and |
|
● |
Significant technological changes which could render the platform technology obsolete. |
The Company recognizes impairment when the sum
of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured
as the excess of the carrying amount of the asset over its estimated fair value. During the three and nine months ended September 30,
2022 and 2021, there were no impairment indicators which required an impairment loss measurement.
Research and development:
Research and development costs are expensed as
incurred. Research and development expenses include personnel costs associated with research and development activities, including third-party
contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. The Company accrues for costs incurred
by external service providers, including contract research organizations and clinical investigators, based on its estimates of service
performed and costs incurred. These estimates include the level of services performed by third parties, patient enrollment in clinical
trials when applicable, administrative costs incurred by third parties, and other indicators of the services completed. Based on the timing
of amounts invoiced by service providers, the Company may also record payments made to those providers as prepaid expenses that will be
recognized as expense in future periods as the related services are rendered.
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QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
Stock based compensation:
The Company recognizes compensation costs resulting
from the issuance of stock-based awards to employees, non-employees and directors as an expense in the consolidated statements of operations
over the requisite service period based on a measurement of fair value for each stock-based award. The fair value of each option grant
to employees, non-employees and directors is estimated as of the date of grant using the Black-Scholes option-pricing model, net of actual
forfeitures. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards,
which is generally the vesting period.
The Company’s expected stock volatility
is based on the historical data regarding the volatility of a publicly traded set of peer companies, since it has limited history of trading
as a public company. The Company utilizes the simplified method to estimate the expected term. The risk-free interest rate was determined
by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the
expected term of the award. The expected dividend yield was assumed to be zero as the Company has not paid and dividends since its inception
and does not anticipate paying dividends in the foreseeable future.
Fair value of financial instruments:
The Company considers its cash, investments, accounts
payable, and accrued expenses to meet the definition of financial instruments. The carrying amounts of the remaining financial instruments
approximated their fair values due to the short maturities.
The Company measures fair value as required by
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a
framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements.
Earnings (loss) per share:
The Company reports loss per share in accordance
with ASC 260-10, Earnings Per Share, which provides for calculation of “basic” and “diluted” earnings per share.
Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted
average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share
in the earnings of an entity. The calculation of diluted net earnings (loss) per share gives effect to ordinary shares equivalents; however,
potential common shares are excluded if their effect is anti-dilutive.
For the three and nine months ended September
30, 2022, the number of shares excluded from the diluted net earnings (loss) per share included outstanding options and warrants to purchase
309,114 ADSs and 3,368,820 ADSs, respectively. For the three and nine months ended September 30, 2021, the 5,183 ADS’s issuable
upon the conversion of both the Convertible Notes Payable (as defined below) and the 40,247 ADSs issuable upon conversion of the Bridge
Notes (as defined below) as well as the warrants issued in connection with both of these convertible instruments are not included in the
denominator since their inclusion would be anti-dilutive.
NOTE 4 – CONVERTIBLE NOTES AND WARRANTS
On October 2, 2020, Quoin Inc. commenced an offering
of promissory notes (the “2020 Notes” or “Convertible Notes Payable”) and warrants. Based upon the terms agreed
to in March 2021 in the Primary Financing (see Note 5), the 2020 Notes were mandatorily convertible into 5,183 ADSs in the Primary Financing,
subject to adjustment.
The holders of the 2020 Notes (the “2020
Noteholders”) also received warrants exercisable at any time after the issuance date for 29,388 ADSs at an initial exercise price
of $49.75 per ADS. At the time of grant, the Company determined that these warrants met the criteria to be recorded as a liability instrument.
Effective March 13, 2022, each holder agreed to exchange these warrants for warrants on the substantially same terms as the Investor Exchange
Warrants (See Note 5) with the same number of shares issuable upon the exercise of an Exchange Warrant as upon the exercise of the original
warrant and the same exercise price with a contractual term of 5 years (the “Noteholder Warrants”).
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QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
The Noteholder Warrants have been determined to
have equity classification. The change in the fair value of the warrants through the exchange date was included in other income (expense)
in the accompanying statement of operations, and then reclassified from liability to additional paid in capital. On July 14, 2022, as
a result of the Altium Agreement (see Note 5), the exercise price of the Noteholder Warrants was reduced to $0 and the 2020 Noteholders
subsequently exercised all of their warrants. The change in the exercise price of the Noteholder Warrants resulted in a deemed dividend
of approximately $65,000 recorded during the three and nine months ended September 30, 2022.
The ADSs issued to the 2020 Noteholders did not
account for accrued interest which was estimated to be approximately $744,000 at December 31, 2021, and included in accrued interest and
financing expense in the accompanying consolidated balance sheet. Approximately $312,000 was paid to two of the five 2020 Noteholders
during the nine months ended September 30, 2022. Based on the terms of the cash settlement with these two 2020 Noteholders, the Company’s
estimate of the liability to the remaining three 2020 Noteholders was increased to $1,146,000 as of September 30, 2022. The Company expects
to settle the remaining liability in 2022 or early 2023.
NOTE 5 – BRIDGE FINANCING AND PRIMARY FINANCING
Bridge Financing
In connection with the Merger Agreement and the
Securities Purchase Agreement (described below), Quoin Inc. entered into a “Bridge Purchase Agreement” on March 24,
2021 with the Investor, pursuant to which the Investor agreed to purchase notes (the “Bridge Notes”) in the aggregate principal
amount of up to $5,000,000 in exchange for an aggregate purchase price of up to $3,800,000 together with warrants. The Bridge Notes were
purchased in three closings: (i) the first purchase of $2,000,000 on March 25, 2021 (proceeds of $1,500,000); (ii) the
second purchase of $1,700,000 in April 2021 (proceeds of $1,250,000); and (iii) a third purchase of $1,300,000 in May 2021
(proceeds of $1,000,000).
The Bridge Notes were issued with a 25% original
issue discount, at an interest rate of 15% per annum and had a maturity date of the earliest to occur of: (i) December 25, 2021,
(ii) the date on which Quoin Inc.’s equity is registered under the Exchange Act or is exchanged for equity so registered
or (iii) immediately prior to the closing of the Merger.
The Investor and Quoin Inc. agreed that if the
Primary Financing is consummated, the Investor may, at its election, offset the purchase price related to the Primary Financing, by an
amount equal to the outstanding amount under this Bridge Note, and, upon such set-off, the portion of this Bridge Note shall be deemed
to have been paid in its entirety and all obligations thereunder shall be deemed to be fully satisfied.
The Bridge Notes were offset against the purchase
price under the Securities Purchase Agreement related to the Primary Financing and converted into 100,618 ADSs upon the closing of the
Primary Financing in October 2021. Interest expense, at the stated interest rate, recognized in the three and nine months ended September
30, 2022 and 2021 was $0 and $187,000 and $0 and $334,000, respectively.
Bridge Warrants
Upon the funding of each Bridge Note tranches
described above, the Investor received warrants (the “Bridge Warrants”) to purchase a number of shares of Quoin Inc.’s
common stock equal to the aggregate principal amount of the Bridge Notes. The Bridge Warrants had a term of five years from the date
all of the shares underlying the Bridge Warrants are freely tradable. Quoin Inc. issued a total of 99,074 Bridge Warrants in the year
ended December 31, 2021.
Following the closing date of the Merger, on each
of the tenth trading day, the forty-fifth day, the ninetieth day, and the one hundred thirty-fifth day thereafter (each, a “Reset
Date”), if the initial exercise price of the Bridge Warrants is greater than the arithmetic average of 85% of the three lowest weighted
average prices of the post-Merger ordinary shares of the combined company during the ten trading day period immediately preceding the
applicable Reset Date (the “Reset Price”), the exercise price of the Bridge Warrants will be reset
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QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
to the Reset Price. Furthermore, the number of
shares underlying Bridge Warrants will be adjusted such that the aggregate number of shares of common stock of Quoin Inc. issuable to
the Investor reflects the Reset Price instead of the initial exercise price. Adjustments to the exercise price and number of warrant shares
are available to the Investor until the second anniversary of the Registration Date, as defined in the Bridge Warrants. Upon the occurrence
of a Fundamental transaction, as defined in the Bridge Warrants, the warrant holder has the right to elect a cash settlement for the value
of the warrant based on the Black Scholes options pricing model.
The Company determined that the warrants met the
criteria to be recorded as a liability instrument through the exchange date on the closing of the Primary Financing. The fair value of
warrants was determined by a MonteCarlo simulation model to be approximately $1.6 million at the date of issuance of the 39,630 warrants
in connection with the first closing and $2.2 million at the date of issuance of the 59,444 warrants in connection with the second and
third closing of the Bridge Notes.
Upon the closing of the Primary Financing, the
Bridge Warrants were exchanged for warrants to purchase 99,074 ADSs at a fixed per share exercise price of $49.75 (“Investor Exchange
Warrants”), as amended, which replaced the reset provisions and modified the fundamental transaction requirements of the Bridge
Warrants. On July 14, 2022, the Company and the Investor entered into an agreement amending the terms of the Investor Exchange Warrants,
see below agreements with Altium Growth Fund, LP and Warrant Exercises.
Primary Financing
On October 28, 2021, the Company completed the
private placement transaction with the Investor for an aggregate purchase price of approximately $17.0 million (comprised of the set off
of approximately $5.0 million of Bridge Notes, and approximately $12.0 million in cash) (the “Primary Financing”), which resulted
in the net proceeds of approximately $10.1 million. The Company issued 342,100 ADSs to the Investor.
Quoin Ltd. also was required to issue to the Investor,
effective as of March 13, 2022, the 136th day following the consummation of the Merger (i) Series A Warrant to purchase 342,100 ADSs (the
“Series A Warrant”) (ii) Series B Warrant to purchase 342,100 ADSs (the “Series B Warrant”) and (iii) Series C
Warrant to purchase 191,174 ADSs (“Series C Warrant” and, together with the Series A Warrant and Series B Warrant, the “Investor
Warrants”). The exercise price for the Investor Warrants is $49.75 per ADS, with Series A Warrant having a five-year maturity, and
Series B Warrant and Series C Warrant having a two-year maturity.
The Company had the right to require the mandatory
exercise of the Series C Warrant, subject to an effective registration statement being in place for the resale of the shares underlying
such warrants and the satisfaction of equity market conditions, as defined in the Series C Warrant. On April 22, 2022, a registration
statement for the resale of the shares underlying Investor Warrants was declared effective by the Securities and Exchange Commission.
In the period from April 22, 2022 to June 30, 2022, the Investor exercised the Series B Warrant in full pursuant to the alternate cashless
exercise rights of such warrant, which gives the Investor the sole option as elected by the Investor to receive 1.0 ADS for each warrant
ADS underlying such warrant, resulting in the issuance of a total of 342,100 ADSs to the Investor. The market related conditions to require
the mandatory exercise of the Series C Warrant were not met during the period up to July 14, 2022.
Agreements with Altium Growth Fund, LP and Warrant
Exercises
On July 14, 2022, the Company, Quoin Inc. and
Altium entered into an agreement (the “Altium Agreement”), pursuant to which the parties agreed to, among other things, (i)
amend certain terms of the Series A Warrant and Investor Exchange Warrants previously issued to Altium to reduce the exercise price to
$0.00 per ADS with respect to a total of 399,999 ADSs, (ii) cancel the Series C Warrant and the remaining portion of the Series A Warrant
previously issued to Altium, and (iii) terminate the Purchase Agreements, pursuant to which the warrants were previously issued to Altium.
The incremental fair value of the modified warrants was approximately $491,000, which was accounted for as an offering expense as part
of the Offering (see Note 14) as the modification was done in contemplation of the Offering. As of August 2, 2022, Altium exercised all
of its outstanding warrants to purchase ADSs at $0.00 per ADS exercise price and the Company issued a total of 399,999 ADSs to Altium.
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QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
The exercise price of the Noteholder Warrants
was also reduced to $0.00 as of July 14, 2022 as a result of the Altium Agreement. The change in the exercise price of the Noteholder
Warrants resulted in a deemed dividend of approximately $65,000 recorded during the three and nine months ended September 30, 2022. From
July to September 2022, the 2020 Noteholders exercised all their warrants to purchase ADSs at $0.00 per ADS exercise price, and the Company
issued a total of 29,388 ADSs to such noteholders.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company applies fair value accounting for
all assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value
is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value measurements for assets and liabilities the Company considers
the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market
participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit
risk.
Fair value is estimated using various valuation
models, which utilize certain inputs and assumptions that market participants would use in pricing the asset or liability. The inputs
and assumptions used in valuation models are classified in the fair value hierarchy as follows:
Level 1: Quoted prices (unadjusted) in
active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority
to Level 1 inputs.
Level 2: Quoted market prices for similar
instruments in an active market; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived
valuations inputs of which are observable and can be corroborated by market data.
Level 3: Unobservable inputs and assumptions
that are supported by little or no market activity and that are significant to the fair value of the asset and liability. The fair value
hierarchy gives the lowest priority to Level 3 inputs.
In determining the appropriate hierarchy levels,
the Company analyzes the assets and liabilities that are subject to fair value disclosure. Financial assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to their fair value measurement.
The following tables present the Company’s
assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy at December 31, 2021 and September 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
Level 1 |
|
|
Level 2 |
|
Level 3 |
|
Total |
2020 Notes warrants |
|
$ |
— |
|
$ |
— |
|
$ |
373,599 |
|
$ |
373,599 |
Total Warrant Liability |
|
$ |
— |
|
$ |
— |
|
$ |
373,599 |
|
$ |
373,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
US Treasury Bills |
|
$ |
9,911,200 |
|
$ |
— |
|
$ |
— |
|
$ |
9,911,200 |
Total US Treasury Bills Asset |
|
$ |
9,911,200 |
|
$ |
— |
|
$ |
— |
|
$ |
9,911,200 |
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QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
The following shows the movement of the warrant
liability balance during 2021 and the nine months ended September 30, 2022.
|
|
|
|
|
|
|
|
|
Bridge |
|
|
|
|
|
Financing |
|
2020 Note |
|
|
Warrants |
|
Warrants |
Beginning Balance January 1, 2021 |
|
$ |
— |
|
$ |
— |
Warrant value at issuance (recorded as warrant liability expense) |
|
|
3,783,079 |
|
|
894,113 |
Change in fair value of warrants |
|
|
8,627,651 |
|
|
(520,514) |
Reclassification of warrant liability to an equity instrument |
|
|
(12,410,730) |
|
|
— |
Ending balance December 31, 2021 |
|
$ |
— |
|
$ |
373,599 |
|
|
|
|
|
|
|
Change in fair value of warrants |
|
|
— |
|
|
(77,237) |
Reclassification of warrant liability to an equity instrument |
|
|
— |
|
|
(296,362) |
Ending balance September 30, 2022 |
|
$ |
— |
|
$ |
— |
The Investor Exchange Warrant issued to the Investor
on the Merger date was determined to be an equity-classified instrument, and accordingly the warrant liability on such date of approximately
$12.4 million was reclassified to additional paid in capital. The Exchange Warrants issued to the 2020 Noteholders effective as of March 13,
2022 were determined to be an equity-classified instrument, and accordingly the warrant liability on such date of $296,362 was reclassified
to additional paid in capital on that date.
NOTE 7 – STOCK BASED COMPENSATION
In March 2022, the Board of Directors of
the Company approved the Amended and Restated Equity Incentive Plan (the “Amended Plan”) which increased the number of ordinary
shares reserved for issuance under such equity incentive plan to 15% of the Company’s outstanding ordinary shares on a fully-diluted
basis, or 1,826,991,617 ordinary shares, represented by 365,398 ADSs as of September 30, 2022. Under the Amended Plan, the Company
may grant options to its directors, officers, employees, consultants, advisers and service providers. The Amended Plan was approved by
the shareholders at the Company’s Annual General Meeting of Shareholders held on April 12, 2022.
On April 12, 2022, the Company granted options
to acquire 1,535,714,000 ordinary shares, represented by 307,142 ADSs, at $17.50 per share to management, directors and employees and
58,255 shares remained available for issuance. Such options vest over a three or four year period. There were no grants during the
three months ended September 30, 2022.
The following table summarizes stock-based activities
under the Amended Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
Average |
|
Average |
|
|
ADS Underlying |
|
Exercise |
|
Contractual |
|
|
Options |
|
Price |
|
Terms |
Outstanding at December 31, 2021 |
|
5,744 |
|
$ |
636.74 |
|
0.33 |
Granted |
|
307,142 |
|
$ |
17.50 |
|
|
Forfeited/Cancelled |
|
(3,772) |
|
$ |
792.05 |
|
|
Outstanding at September 30, 2022 |
|
309,114 |
|
$ |
19.56 |
|
9.53 |
|
|
|
|
|
|
|
|
Exercisable options at September 30, 2022 |
|
1,972 |
|
$ |
339.80 |
|
0.08 |
15
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
The intrinsic value of outstanding options at
September 30, 2022 was $0.
Stock options granted during the nine months
ended September 30, 2022 were valued using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
September 30, |
|
|
|
2022 |
|
Expected volatility |
|
|
106.0 |
% |
Risk-free interest rate |
|
|
2.7 |
% |
Expected dividend yield |
|
|
0.0 |
% |
Expected life of options in years |
|
|
6.9 |
|
Exercise Price |
|
$ |
17.50 |
|
Fair value of ADS |
|
$ |
15.38 |
|
Estimated fair value of option |
|
$ |
12.92 |
|
Stock based compensation expense was approximately
$267,000 ($35,000 included in research and development expense and $232,000 included in general and administrative expenses) in the three months
ended September 30, 2022 and approximately $497,000 ($65,000 included in research and development expense and $432,000 included in general
and administrative expenses) in the nine months ended September 30, 2022.
At September 30, 2022, the total unrecognized
compensation expense related to non-vested options was approximately $3,472,529 and is expected to be recognized over the remaining weighted
average service period of approximately 3.32 years.
NOTE 8 – PREPAID EXPENSES
Prepaid expenses are as follows:
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2022 |
|
2021 |
Prepaid R&D costs |
|
$ |
414,061 |
|
$ |
329,033 |
Prepaid insurance |
|
|
74,017 |
|
|
684,191 |
Prepaid expense |
|
|
8,608 |
|
|
2,250 |
Total |
|
$ |
496,686 |
|
$ |
1,015,474 |
NOTE 9 - ACCRUED EXPENSES
Accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2022 |
|
2021 |
Research contract expenses (note 13) |
|
$ |
381,862 |
|
$ |
193,537 |
Payroll (note 12) |
|
|
759,833 |
|
|
557,937 |
Payroll taxes (note 12) |
|
|
153,552 |
|
|
199,582 |
Investor Relation firm fees (note 13) |
|
|
98,000 |
|
|
584,000 |
Professional fees |
|
|
115,451 |
|
|
144,377 |
Other Expenses |
|
|
61,222 |
|
|
5,976 |
Total |
|
$ |
1,569,920 |
|
$ |
1,685,409 |
16
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
NOTE 10 – IN-LICENSED TECHNOLOGY
Polytherapeutics:
On March 24, 2018, Quoin Inc. entered
into a securities purchase agreement (the “Acquisition Agreement”), in which it agreed to acquire all of the equity interests
in Polytherapeutics, Inc. (the “Seller” or “Polytherapeutics”) for $40,833 and future royalties provided
Quoin Inc. commercializes products using the technology developed by the Seller. The terms of any royalty payments to the Seller
are 4.0% of the net revenue of royalty products, as defined in the Acquisition Agreement during the ten (10) year period commencing
from the date of first sale of a royalty product. If a generic product is introduced by a third party to the market, during the royalty
period, the royalty fees shall be reduced from 4% to 2%. If, during the royalty period, two or more generic products are introduced, the
royalty fees shall be reduced from 2% to 0%.
Quoin Inc. also entered into a research and
consulting agreement which committed Quoin Inc. to pay the Seller for additional research and development consulting services (See
Notes 13 and 15).
Skinvisible:
On October 17, 2019, Quoin Inc. entered
into an exclusive license agreement with Skinvisible Inc. (“Skinvisible”), pursuant to which Skinvisible granted a license
to use certain patented technology for the development of products for commercial sale in the orphan rare skin disease field, and for
the use of a proprietary polymer deliver system technology. This technology is currently being used in the development of QRX003. In exchange
for the license, Quoin Inc. agreed to pay Skinvisible $1,000,000, as well as development and sales milestone payments and a single
digit royalty on all net sales, as defined.
The development milestones originally required
payments upon achieving development milestones for the first Rare Skin Disease drug product developed using the licensed technology and
the first two Ketamine products, as defined. On January 27, 2021, Quoin Inc. and Skinvisible entered into an amendment which
modified the clinical milestone payment requirements such that $750,000 would be payable to Skinvisible upon achievement of specified
clinical milestones, and $21.75 million upon regulatory approval in the U.S. and EU respectively.
The license fee was originally due in two equal
installments of $500,000 payable no later than December 31, 2019 and June 30, 2020, which were not paid. The agreement was subsequently
amended several times to extend the payment due dates. On June 21, 2021, the parties entered into the most recent amendment which
modified the payment terms and eliminated the $750,000 clinical milestone payments, reduced the milestone payment upon regulatory approval
of the product containing the Skinvisible technology in either the U.S. or E.U., whichever happens first to a total of $5,000,000.
NOTE 11 - INTANGIBLE ASSETS
Intangible assets are as follows:
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2022 |
|
2021 |
Acquired technology – Polytherapeutics |
|
$ |
40,433 |
|
$ |
40,433 |
Technology license – Skinvisible |
|
|
1,000,000 |
|
|
1,000,000 |
Total cost |
|
|
1,040,433 |
|
|
1,040,433 |
Accumulated amortization |
|
|
(309,861) |
|
|
(231,829) |
Net book value |
|
$ |
730,572 |
|
$ |
808,604 |
17
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
The Company recorded amortization expense of approximately
$78,000 for the nine months ended September 30, 2022 and 2021. The Company recorded amortization expense of approximately $26,000
for the three months ended September 30, 2022 and 2021. The annual amortization expense expected to be recorded for existing
intangible assets for the years 2022 through 2026, and thereafter, is approximately $26,000, $104,000, $104,000, $104,000, $104,000,
and $288,000, respectively.
NOTE 12 - RELATED PARTY TRANSACTIONS
Employment Agreements and Due to Officers/Founders:
In March 2018, Quoin Inc. executed employment
agreements with both of its officers who are also co-founders of Quoin Inc. The employment agreements for both officers/founders
allow for a onetime expense that covers the salaries they would have otherwise been paid for efforts they undertook in the periods since
inception. The salaries and benefits allowances provided for under the employment agreements began to accrue as the services were being
provided by the officers/founders and are included in Due to Officers on the accompanying balance sheet.
Since the Merger closing, the Company is approved
to pay and has been repaying amounts due to officers/founders at a rate of $25,000 each per month.
Amounts due to officers at September 30,
2022 and December 31, 2021 consisted of the following:
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2022 |
|
2021 |
Salaries and other compensation |
|
$ |
4,108,500 |
|
$ |
4,108,500 |
Invoices paid on behalf of the Company |
|
|
165,233 |
|
|
615,232 |
Total |
|
|
4,273,733 |
|
|
4,723,732 |
Less: Short-term portion |
|
|
(600,000) |
|
|
(600,000) |
Long-term portion |
|
$ |
3,673,733 |
|
$ |
4,123,732 |
Expenses:
Research and development expense to a related
party, incurred in the three and nine months ended September 30, 2022 and 2021 was approximately $12,000 and $0 and $36,000
and $0, respectively.
For the nine months ended September 30, 2021,
the Company paid a consulting fee of $100,000 to a board member.
NOTE 13 – RESEARCH, CONSULTING AND OTHER COMMITMENTS
Research and consulting agreement:
Quoin Inc. entered into a research and consulting
agreement which commits it to pay the former owner of Polytherapeutics (the “Consultant” or “Seller”) to transfer
the technical know-how of Polytherapeutics with respect to (i) good manufacturing practices (“GMP”), clinical and commercial
manufacturing of the Company’s PolyDur polymer and (ii) formulation development of products utilizing the Company’s PharmaDur
polymer. The agreement required monthly consulting payments of $20,833 beginning on July 31, 2018 and ending February 28,
2021 (the “Post-Closing Period”) for a total of $666,667 over the consulting period. Pursuant to an amendment, the Post-Closing
Period was revised to terminate on December 31, 2020.
Through September 30, 2022 and the financial
statement issuance date, the Company has not made any payments, the Consultant has not performed any services and the Company has not
incurred or accrued for any expenses. See Note 15 for Consultant’s notification of breach of contract.
18
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
Other research consulting agreements:
Quoin Inc. entered into three consulting agreements
with Axella Research LLC (“Axella”) to provide regulatory and pre- clinical/clinical services to the Company with respect
to QRX003 and QRX004. The combined fees of the three agreements are approximately $270,000, payable as milestones were met. The Company
incurred accrued expenses of approximately $194,000 in relation to Axella consulting agreements as of December 31, 2021. In September
2022 the Company issued 44,187 ADS’s to one of Axella’s principals to settle the outstanding liability in full. The Company
incurred no research and development expenses in connection with these agreements, for both of the three and nine months ended September
30, 2022 and 2021, as no services were provided.
In November 2020, Quoin Inc. entered
into a Master Service Agreement for an initial term of three years with Therapeutics Inc. for managing preclinical and clinical
development for new products in the field of dermatology. The agreement required the execution of individual work orders. Quoin Inc.
may terminate any work order for any reason with 90 days written notice subject to costs incurred through termination and a defined
termination fee, unless there is a material breach by Therapeutics Inc. The latest work order was entered into in June 2022
for a clinical study at an expected estimated cost of approximately $4.4 million through the second quarter of 2024. For the three and nine months
ended September 30, 2022 and 2021, the Company incurred a research and development expense under this agreement of approximately
$423,000 and $904,000, and $88,000 and $232,000 respectively.
In November 2021, the Company entered into
a commitment with Queensland University of Technology for research related services associated with Netherton Syndrome of approximately
$250,000 for an expected period of eighteen months. For the three and nine months ended September 30, 2022, the Company
incurred research and development costs related to this agreement of approximately $35,000 and $112,000, respectively.
In May 2022, the Company entered into a commitment
with Queensland University of Technology for research related services associated with Scleroderma of approximately $610,000 for an expected
period of eighteen months. The Company incurred research and development expenses of approximately $138,000 for the three and nine
months ended September 30, 2022. As of September 30, 2022, the Company recorded prepaid research and development costs related to this
agreement of approximately $85,000.
Consulting agreement:
Quoin Inc. entered into a consulting agreement
with an Investor Relations (IR) firm, which provides for a monthly fee of $14,000. The agreement had an automatic annual renewal
clause and has been in effect since November 2017. The Company owed the IR firm $584,000 as of December 31, 2021, which was
included in accrued expenses in the accompanying balance sheet. In March 2022, the Company entered into a settlement agreement with
the IR firm reducing the liability to $168,000, and recognized $416,000 as other income in the accompanying consolidated statement of
operations. As of September 30, 2022, the balance of this liability is $98,000. For the three and nine months ended September 30,
2021, the Company incurred expenses of $42,000 and $42,000, respectively. For the three and nine months ended September 30,
2022, the Company incurred expenses of $42,000 and $70,000, respectively.
Performance milestones and royalties:
See Note 10 for asset and in-licensed technology
commitments.
Merger agreement commitment:
In consideration for the Share Transfer disclosed
in Note 1, the pre-closing Cellect shareholders received a contingent value right (“CVR”) entitling the holders to earnouts
during the Payment Period (as such term is defined in the Share Transfer Agreement), comprised mainly of payments upon sale, milestone
payments, license fees and exit fees realized by EnCellX. In order to secure such right, shares constituting 40% of EnCellX share capital
are held in escrow.
19
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
In connection with the Share Transfer, Cellect
entered into a CVR Agreement with Mr. Eyal Leibovitz, in the capacity of Representative for the holders of CVRs, and Computershare
Trust Company, N.A., a federally chartered trust company (the “Rights Agent”). Under the terms of the CVR Agreement, the holders
of the Cellect ADSs immediately prior to the Merger had the right to receive, through their ownership of CVRs, their pro-rata share of
the net Share Transfer consideration, making such holders of CVRs the indirect beneficiaries of the net payments under the Share Transfer.
CVRs were recorded in a register administered by the Rights Agent but were not certificated. Since the Company will not receive any net
proceeds from the CVR’s, there is no asset or liability recorded in the consolidated financial statements.
NOTE 14 – SHAREHOLDERS’ EQUITY
The Company held a Special General Meeting on
February 28, 2022, at which the Company’s shareholders adopted the Amended and Restated Articles of Association of the Company.
The Company held its Annual General Meeting on April 12, 2022, at which the Company’s shareholders approved an increase to the authorized
share capital to 50,000,000,000 ordinary shares from 12,500,000,000, no par value. The Company held a further Annual General Meeting on
November 3, 2022, at which the Company’s shareholders approved an increase to the authorized share capital to 500,000,000,000 ordinary
shares from 50,000,000,000, no par value (see Note 17). These ordinary shares are not redeemable and do not have any preemptive rights.
Holders of the Company’s ordinary shares
have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholders meeting. The board of
directors shall determine and provide a record date for each shareholders meeting and all shareholders at such record date may vote. Unless
stipulated differently in the Companies Law or in the articles of association, all shareholders’ resolutions shall be approved by
a simple majority vote.
Under Israeli law, the Company may declare and
pay dividends only if, upon the determination of our board of directors, there is no reasonable concern that the distribution will prevent
the Company from being able to meet the terms of our existing and foreseeable obligations as they become due. Under the Companies Law,
the distribution amount is further limited to the greater of retained earnings or earnings generated over the two most recent years
legally available for distribution according to our then last reviewed or audited financial statements, provided that the date of the
financial statements is not more than six months prior to the date of distribution. In the event that the Company does not have retained
earnings or earnings generated over the two most recent years legally available for distribution, the Company may seek the approval
of the court in order to distribute a dividend. The court may approve our request if it determines that there is no reasonable concern
that the payment of a dividend will prevent the Company from satisfying existing and foreseeable obligations as they become due.
The Bank of New York Mellon, as depositary, has
registered and delivered American Depositary Shares, also referred to as ADSs. Following an ADS ratio adjustment effective August 1, 2022,
each ADS represents five thousand (5,000) ordinary shares (or a right to receive five thousand (5,000) ordinary shares). Each ADS will
also represent any other securities, cash or other property which may be held by the depositary. ADSs may be held either (a) directly
(1) by having an American Depositary Receipt, also referred to as an ADR, which is a certificate evidencing a specific number of ADSs
or (2) by having uncertificated ADSs, or (b) indirectly by holding a security entitlement in ADSs through a broker or other financial
institution that is a direct or indirect participant in The Depository Trust Company, also called DTC.
On August 9, 2022 the Company completed an offering
(the “Offering”) of 11,050,000,000 ordinary shares represented by 2,210,000 ADSs at a purchase price of $5.00 per ADS and
pre-funded warrants (the “Pre-Funded Warrants”) to purchase 5,750,000,000 ordinary shares represented by 1,150,000 ADSs at
a per pre-funded warrant price of $4.9999, with each ADS and Pre-Funded Warrant accompanied by an ordinary warrant (the “Common
Warrant”), for aggregate gross proceeds of $16.8 million, resulting in net proceeds of approximately $14.9 million. Each Common
Warrant has an exercise price of $5.00 per ADS and expires on the fifth anniversary of the Closing Date. On the Closing Date, the holder
of Pre-Funded Warrants sold in the Offering exercised its Pre-Funded Warrants in full.
20
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
In connection with the Offering, the Company entered
into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors. The Purchase Agreement
provided that for a period of 180 days following the closing of the Offering, the Company will not effect or enter into an agreement to
effect a “variable rate transaction” as defined in the Purchase Agreement. Further, the Company has agreed in the Purchase
Agreement not to issue, enter into any agreement to issue or announce the issuance or proposed issuance of any ADSs or ordinary shares
or their equivalents, subject to certain exceptions, for a period of 90 days after the closing of the Offering. The Purchase Agreement
also contained representations, warranties, indemnification and other provisions customary for transactions of this nature.
Warrants
The following table summarizes warrant activities
during the year ended December 31, 2021 and the nine months ended September 30, 2022:
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
ADSs |
|
Average |
|
|
Underlying |
|
Exercise Price |
|
|
Warrants |
|
Per Share |
Outstanding at December 31, 2021 |
|
137,282 |
|
$ |
55.39 |
Granted |
|
5,385,374 |
|
|
11.21 |
Terminated |
|
(232,349) |
|
|
49.75 |
Exercised – Cashless and Pre Funded Warrants |
|
(1,921,487) |
|
|
— |
Outstanding and exercisable at September 30, 2022 |
|
3,368,820 |
|
$ |
5.35 |
As of September 30, 2022, outstanding warrants
expire in 2024 and 2027, and have an intrinsic value of $0.
NOTE 15 – CONTINGENCIES
From time to time, the Company may become involved
in various legal matters arising in the ordinary course of business. Management is unaware of any matters requiring accrual for related
losses in the financial statements.
In February 2020, the Seller of the equity interests
in Polytherapeutics and party to the Research Agreement communicated with Quoin Inc. threatening litigation for non-payment and related
breach of contract and immediate payment of all monthly payments in the amount of $666,667. See Notes 10 and 13. The Consultant has not
provided any services and has not complied with other technical requirements under the Research Agreement, and therefore is considered
to be in breach of contract. The Company and the Consultant have had communications with respect to the duration, commencement date and
payment of the consulting services, but a revised agreement has not been reached. No lawsuits have been filed as of the financial statement
issuance date. Should a formal claim or lawsuit be filed, the Company believes it has meritorious defenses.
NOTE 16 – LICENSE AGREEMENTS
In November and December 2021, the Company entered
into three license and supply agreements, whereby the Company is entitled to a royalty or other proceeds from the specified product revenues
in select non-US markets from the licensee, if and when the underlying products are approved and commercialized. During nine months ended
September 30, 2022, the Company entered into six license and supply agreements, whereby the Company will receive a royalty or other proceeds
from the specified product revenues in select non-US markets from the licensor, if and when the underlying products are approved and commercialized.
No royalty revenues have been received through September 30, 2022 under any of these agreements.
21
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
NOTE 17 - SUBSEQUENT EVENTS
On November 3, 2022, the Company held its Annual
General Meeting of Shareholders, at which the Company’s shareholders approved an increase to the authorized share capital to 500,000,000,000
ordinary shares from 50,000,000,000, no par value.
22
Exhibit 99.2
Forward-Looking Statements
Certain information included in this discussion
and analysis of our financial condition and results of operations may be deemed to be “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Forward-looking statements are often characterized
by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,”
“estimate,” “continue,” “believe,” “should,” “intend,” “project”
or other similar words, but are not the only way these statements are identified. These forward-looking statements may include, but are
not limited to, statements relating to our objectives, plans and strategies, statements that contain projections of results of operations
or of financial condition, expected capital needs and expenses, statements relating to the research, development, completion and use of
our products, and all statements (other than statements of historical facts) that address activities, events or developments that we intend,
expect, project, believe or anticipate will or may occur in the future. Forward-looking statements are not guarantees of future performance
and are subject to risks and uncertainties. We have based these forward-looking statements on assumptions and assessments made by our
management in light of their experience and their perception of historical trends, current conditions, expected future developments and
other factors they believe to be appropriate. Important factors that could cause actual results, developments and business decisions to
differ materially from those anticipated in these forward-looking statements include, among other things:
|
● |
our history of losses and needs for additional capital to fund our operations and our expected use of net proceeds of the Offering (as defined below); |
|
● |
our limited operating history and the difficulties encountered by a small developing company; |
|
● |
our lack of revenue generated from product sales since inception, and potential inability to be profitable; |
|
● |
uncertainties of cash flows and inability to meet working capital needs; |
|
● |
our ability to comply with the applicable continued listing requirements of Nasdaq; |
|
● |
our ability to obtain regulatory approvals; |
|
● |
our ability to obtain favorable pre-clinical and clinical trial results; |
|
● |
our ability to identify and develop potential product candidates; |
|
● |
additional costs or delays associated with unsuccessful clinical trials; |
|
● |
the inability to predict the timing of revenue from a future product; |
|
● |
the extensive regulatory requirements and future developmental and regulatory challenges we will still face even if we obtain approval for a product candidate; |
|
● |
our ability to obtain or maintain orphan drug designation or exclusivity for our product candidates; |
|
● |
our ability to obtain Rare Pediatric Disease designation for our product candidates; |
|
● |
the potential oversight of programs or product candidates that may be more profitable or more successful; |
|
● |
our technology may not be validated and our methods may not be accepted by the scientific community; |
|
● |
the ability to conduct clinical trials, because of difficulties enrolling patients or other reasons; |
|
● |
the requirements of being publicly traded may strain our resources; |
|
● |
potential adverse effects resulting from failure to maintain effective internal controls; |
1
|
● |
our obligations and governance practices as a “foreign private issuer” being different from those of U.S. domestic reporting companies may result in less protection for investors; |
|
● |
the potential negative impact on our securities price and trading volume if securities or industry analysts do not publish reports about us or if they adversely change their recommendations about our business; |
|
● |
the potential volatility of the market price for our ADSs (as defined below); |
|
● |
the potential dilution of our shareholders’ potential ownership due to the Offering and future issuances of share capital; |
|
● |
the requirement for holders of ADSs to act through the depositary to exercise their rights; |
|
● |
the potential limitations on ADS holders with respect to the transfer of their ADSs; |
|
● |
the risks of securities class action litigation; and |
|
● |
other factors referred to in section “Risk Factors” in the “Risk Factors” section in Item 3.D. of our Form 20-F and our other filings with the SEC. |
All forward-looking statements contained herein
speak only as of the date of this Form 6-K and are expressly qualified in their entirety by the cautionary statements included in
this section. We do not undertake to update or revise forward-looking statements to reflect events or circumstances that arise after the
date on which such statements are made or to reflect the occurrence of unanticipated events, except as required by law. In evaluating
forward-looking statements, you should consider these risks and uncertainties and not place undue reliance on our forward-looking statements.
Operating Results
Overview
We are a clinical stage, emerging specialty pharmaceutical
company dedicated to the development and commercialization of therapeutic products that help treat rare and orphan diseases for which
there are currently no approved treatments or cures. Our initial focus is on the development of products, using our proprietary owned
and in-licensed technology, that could help address rare skin diseases for which there are currently no approved treatments or cures.
Our first lead product is QRX003, a once daily, topical lotion comprised of a broad-spectrum serine protease inhibitor, formulated with
the proprietary Invisicare® technology, to treat Netherton Syndrome (NS).
Clinical testing of QRX003 is currently in clinical
development in the United States under an open IND application with the U.S. Food and Drug Administration (“FDA”). The ongoing
study is a randomized, double blinded assessment of two different doses of QRX003 versus a placebo vehicle in NS patients. The trial will
be conducted in up to six clinical sites in the United States. The first clinical site was opened in July 2022 and a majority of sites
have now been opened as of the financial statement date, with the remainder expected to open in the fourth quarter of 2022. Patient
recruitment is actively underway and dosing is anticipated to commence in the fourth quarter of 2022. On October 18, 2022, Quoin Ltd.
announced that it plans to run a second clinical study in Netherton patients, under its currently open IND submission with the FDA. The
second study will be an open label study testing QRX003 in approximately ten Netherton patients who are currently receiving systemic therapy,
primarily biologic therapy. It is anticipated that this open label study will run concurrently with Quoin Ltd.’s other study. In
addition, the Company intends to pursue the clinical development of QRX003 in additional rare dermatological diseases, including Peeling
Skin Syndrome, SAM Syndrome and Palmoplantar Keratoderma. To date, no products have been commercialized and revenue has not been generated.
Our objective is to develop and commercialize
proprietary therapeutic drug products. To this effect, we intend to develop and seek marketing approvals from the FDA and other worldwide
regulatory bodies for rare and orphan diseases. To achieve these objectives, we plan to:
|
● |
seek the necessary regulatory approvals to complete the clinical development of QRX003 and, if successful, file for marketing approval in the United States and other territories; |
|
● |
prepare to commercialize QRX003 by establishing our own sales infrastructure in the U.S. and Europe and entering into distribution partnerships in other territories such as those currently established for Canada, Australia/New Zealand, the Middle East, China, Hong Kong, Taiwan, Latin America, Central and Eastern Europe, Turkey; and |
|
● |
pursue business development activities by seeking partnering, licensing, merger and acquisition opportunities or other transactions to further expand our pipeline and drug-development capabilities and which take advantage of our financial resources for the benefit of increasing stockholder value. |
2
COVID-19 created a global pandemic, which commenced
in 2020. Our operations, to date, have not been dramatically affected by COVID-19. However, the extent of any future impact on our operational
and financial performance will depend on the possibility of a resurgence and resulting severity of COVID-19 impact with respect to our
access to API and drug product for clinical testing, as well as our ability to safely and efficiently conduct planned clinical trials.
We do not expect to generate revenue from product
sales unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which
we expect will take a number of years and is subject to significant uncertainty. Accordingly, we will need to raise additional capital
prior to the commercialization of QRX003 or any other product candidate. Until such time, if ever, as we can generate substantial revenue
from product sales, we expect to finance our operating activities through a combination of equity offerings, debt financings, government
or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances
and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable
terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on
our financial condition and our ability to continue our operations. See “Liquidity and Capital Resources”.
Key Recent Events and
Developments
Merger
On October 28, 2021, Cellect completed the
business combination with Quoin Inc. in accordance with the terms of the Merger Agreement, by and among Cellect, Quoin Inc.
and Merger Sub, which was a wholly-owned subsidiary of Cellect, pursuant to which Merger Sub merged with and into Quoin Inc., with
Quoin Inc. surviving as a wholly-owned subsidiary of Cellect (the “Merger”). Immediately after completion of the Merger,
Cellect changed its name to “Quoin Pharmaceuticals, Ltd.”
We have accounted for the transaction as a reverse
recapitalization with Quoin Inc. as the accounting acquirer. Because Quoin Inc. is the accounting acquirer, its historical financial
statements became our historical financial statements and such assets and liabilities continued to be recorded at their historical carrying
values. The impact of the recapitalization has been retroactively applied to all periods presented.
In addition, on October 28, 2021, Cellect
sold the entire share capital of its subsidiary, Cellect Biotherapeutics Ltd., which essentially included all of Cellect’s
then existing net assets, to EnCellX Inc. (“EnCellX”), a newly formed U.S. privately held company based in San Diego,
CA (the “Share Transfer”), pursuant to an Amended and Restated Share Transfer Agreement. We have no interests in EnCellX subsequent
to the closing of the Merger.
ADS Ratio Change
Effective August 1, 2022, the ratio of American
Depositary Shares (“ADSs”) evidencing ordinary shares changed from 1 ADS representing four hundred (400) ordinary shares to
1 ADS representing five thousand (5,000) ordinary shares, which resulted in a one for 12.5 reverse split of the issued and outstanding
ADSs (the “Ratio Change”). All ADS and related option and warrant information presented herein and our financial statements
and accompanying footnotes, has been retroactively adjusted to reflect the reduced number of ADSs resulting from the Ratio Change.
Nasdaq Listing
On April 22, 2022, we received a letter from the
Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying us that we are
no longer in compliance with Nasdaq Listing Rule 5550(b)(1) requiring minimum stockholders’ equity of at least $2.5 million for
continued listing on The Nasdaq Capital Market. Based on our Form 6-K, dated August 10, 2022, the Staff has determined that we comply
with the minimum stockholder’s equity requirement, and we evidence continued compliance with our financial statements for the quarter
ended September 30, 2022.
On June 10, 2022, we received a letter from the
Staff notifying us that the closing bid price per ADS was below the required minimum of $1.00 for a period of 30 consecutive business
days and that we did not meet the minimum bid price requirements set forth in Nasdaq
3
Listing Rule 5550(a)(2). Since then, the Staff
has determined that the closing bid price of our ADSs has been at $1.00 per ADS or greater, and we have regained compliance with the minimum
bid price requirement.
There can be no assurance that we will be able
to maintain compliance with Nasdaq’s minimum stockholders’ equity requirement or minimum bid-price requirement for continued
listing. If our ADSs are delisted from Nasdaq, it will have material negative impacts on the actual and potential liquidity of our securities,
as well as material negative impacts on our ability to raise future capital.
Agreements with Altium Growth Fund, LP and Warrant Exercises
On October 28, 2021, we completed the private
placement transaction with Altium Growth Fund, LP (“Altium” or the “Investor”) for an aggregate purchase price
of approximately $17.0 million (comprised of the set off of approximately $5.0 million of Bridge Notes, and approximately $12.0 million
in cash) (the “Primary Financing”), which resulted in the net proceeds of approximately $10.1 million. We issued 342,100 ADSs
to the Investor.
We also issued to the Investor, effective as of
March 13, 2022, the 136th day following the consummation of the Merger (i) Series A Warrant to purchase 342,100 ADSs (the “Series
A Warrant”) (ii) Series B Warrant to purchase 342,100 ADSs (the “Series B Warrant”) and (iii) Series C Warrant to purchase
191,174 ADSs (“Series C Warrant” and, together with the Series A Warrant and Series B Warrant, the “Investor Warrants”).
The exercise price for the Investor Warrants is $49.75 per ADS, with Series A Warrant having a five-year maturity, and Series B Warrant
and Series C Warrant having a two-year maturity.
We had the right to require the mandatory exercise
of the Series C Warrant, subject to an effective registration statement being in place for the resale of the shares underlying such warrant
and the satisfaction of equity market conditions, as defined in the Series C Warrant. On April 22, 2022, a registration statement for
the resale of the shares underlying Investor Warrants was declared effective by the Securities and Exchange Commission. In the period
from April 22, 2022 to June 30, 2022, the Investor exercised the Series B Warrant in full pursuant to the alternate cashless exercise
rights of such warrant, which gives the Investor the sole option as elected by the Investor to receive 1.0 ADS for each warrant ADS underlying
such warrant, resulting in the issuance of a total of 342,100 ADSs to the Investor. The market related conditions to require the mandatory
exercise of the Series C Warrant were not met during the period up to July 14, 2022.
On July 14, 2022, we entered into an agreement
with Quoin Inc. and Altium (the “Altium Agreement”), pursuant to which the parties agreed to, among other things, (i) amend
certain terms of the Series A Warrant and Investor Exchange Warrants previously issued to Altium to reduce the exercise price to $0.00
per ADS with respect to a total of 399,999 ADSs, (ii) cancel the Series C Warrant and the remaining portion of the Series A Warrant previously
issued to Altium, and (iii) terminate the Purchase Agreements, pursuant to which the warrants were previously issued to Altium. The incremental
fair value of the modified warrants was approximately $491,000, which was charged against the gross proceeds of the Offering (see below).
From July 15, 2022 to August 2, 2022, Altium exercised all of its Series A Warrant to purchase 300,925 ADSs and all of its Investor
Exchange Warrants to purchase 99,074 ADSs at $0.00 per ADS exercise price, and we issued a total of 399,999 ADSs.
Noteholder Warrant Exercises
Commencing in October 2020, Quoin Inc. issued
promissory notes (the “2020 Notes”) to five noteholders, including our directors, Messrs. Langer and Culverwell (collectively,
“2020 Noteholders”). The 2020 Notes were issued at a 25% original issue discount with an aggregate face value of $1,213,313
with an interest at a rate of 20% per annum. The 2020 Notes were mandatorily convertible into ADSs based on the valuation negotiated in
the Primary Financing. The 2020 Noteholders also received warrants exercisable at any time after the issuance date for a number of shares
of Quoin Inc.’s common stock equal to 100% of the “as if converted” shares as if the 2020 Notes principal and interest
were convertible at the lowest price any securities are sold, convertible, or exercisable into in the Primary Financing or the next round
of financing (whichever is lower). At the closing of the Merger, ADSs were issued to the 2020 Noteholders upon the conversion of the principal
of the 2020 Notes. In addition, effective as of March 13, 2022, Quoin Ltd. exchanged Quoin Inc. warrants held by the 2020 Noteholders
for warrants on substantially the same terms as the Investor Exchange Warrants, exercisable for 29,388 ADSs, in the aggregate, at the
exercise price of $49.75 per ADS (the “Noteholder Warrants”). The Noteholder Warrants became exercisable immediately upon
issuance and expire five years from March 13, 2022. The exercise price of the warrants held by the 2020 Noteholders was also reduced to
$0.00 as of July 14, 2022 as a result of the Altium Agreement. The change in the exercise price of the Noteholder Warrants resulted in
a deemed dividend of approximately $65,000. From July to September 2022, the 2020 Noteholders
4
exercised all their warrants to purchase ADSs
at $0.00 per ADS exercise price, and a total of 29,388 ADSs were issued to such noteholders.
Public Offering
On August 9, 2022 (the “Closing Date”),
the Company completed an offering (the “Offering”) of 11,050,000,000 ordinary shares represented by 2,210,000 ADSs at a purchase
price of $5.00 per ADS and a pre-funded warrant (the “Pre-Funded Warrant”) to purchase 5,750,000,000 ordinary shares represented
by 1,150,000 ADSs at a per pre-funded warrant price of $4.9999, with each ADS and Pre-Funded Warrant accompanied by an ordinary warrant
(the “Common Warrant”), for aggregate gross proceeds of $16.8 million, resulting in net proceeds of approximately $14.9 million,
after deducting the placement agent’s fees and estimated offering expenses payable by the Company, and excluding the proceeds, if
any, from the subsequent exercise of the Common Warrants. Each Common Warrant has an exercise price of $5.00 per ADS and expires on the
fifth anniversary of the Closing Date. On the Closing Date, the holder of the Pre-Funded Warrant sold in the Offering exercised its Pre-Funded
Warrant in full.
In connection with the Offering, the Company entered
into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors. The Purchase Agreement provided that
for a period of 180 days following the closing of the Offering, the Company will not effect or enter into an agreement to effect a “variable
rate transaction” as defined in the Purchase Agreement. Further, the Company has agreed in the Purchase Agreement not to issue,
enter into any agreement to issue or announce the issuance or proposed issuance of any ADSs or ordinary shares or their equivalents, subject
to certain exceptions, for a period of 90 days after the closing of the Offering. The Purchase Agreement also contained representations,
warranties, indemnification and other provisions customary for transactions of this nature.
As a result of the Offering and warrant exercises,
as of the financial statement date there were 24,233,024,799 ordinary shares outstanding, 99.99% of which are represented by 4,846,605
ADSs, and warrants outstanding exercisable into 16,844,100,000 ordinary shares represented by 3,368,820 ADSs.
License and Distribution Agreement and Supply Agreement
On July 14, 2022, Quoin Inc. entered into (i)
a License and Distribution Agreement with Endo Ventures Limited (“Endo”), and (ii) a Supply Agreement with Endo. Under the
terms of the License Agreement, Endo has the exclusive rights to commercialize, upon the receipt of applicable regulatory approvals, pharmaceutical
product QRX003 (in finished dosage form for human use) in Canada. Under the terms of the Supply Agreement, Quoin agreed to manufacture
and supply (or have manufactured and supplied) to Endo the foregoing pharmaceutical product QRX003 for sale in Canada.
Clinical Development
Quoin’s lead asset, QRX003, is currently
in clinical development in the United States under an open IND application with the FDA. The ongoing study is a randomized, double blinded
assessment of two different doses of QRX003 versus a placebo vehicle in Netherton patients. The test materials will be applied once daily,
over a twelve-week period, to pre-selected areas of the patient’s body. Based on discussions with the FDA, a number of different
clinical endpoints are being assessed in the study, including but not limited to, an Investigators Global Assessment (IGA), Patient’s
Global Assessment (PaGA) and Pruritis.
The trial will be conducted in up to six clinical
sites in the US. A majority of clinical sites have now been opened with the remainder expected to be opened in the quarter ending
December 31, 2022. Quoin recently announced plans to initiate a second clinical study in Netherton patients who are currently receiving
off-label systemic therapy, primarily systemic biologic therapy. This will be an open-label study in approximately ten patients with no
placebo control.
Components of Our Results of Operations
Operating Expenses
Our current operating expenses consist of two
components – research and development expenses, and general and administrative expenses.
5
Research and Development
Expenses
Research and development costs are expensed as
incurred. Research and development expenses include personnel costs associated with research and development activities, including third-party
contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. We utilize outside consultants and
third parties to conduct the majority of our research and development, under the supervision of our management team.
Future research and development expenses may include:
|
● |
employee-related expenses, such as salaries, bonuses and benefits, consultant-related expenses, share-based compensation, overhead related expenses and travel related expenses for our research and development personnel; |
|
● |
expenses incurred under agreements with CROs, as well as consultants that support the implementation of the clinical studies described above; |
|
● |
manufacturing and packaging costs in connection with conducting clinical trials and for stability and other studies required to support the NDA filing as well as manufacturing drug product for commercial launch; |
|
● |
formulation, research and development expenses related to QRX003; and other products we may choose to develop; and |
|
● |
costs for sponsored research. |
Research and development activities will continue
to be central to our business plan. Products in later stages of clinical development generally have higher development costs than those
in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect
our research and development expenses to be significant over the next several years as personnel and compensation costs increase
and we conduct late-stage clinical studies and prepare to seek regulatory approval for QRX003 and any other future product.
The duration, costs and timing of clinical trials
of QRX003 and any other future product will depend on a variety of factors that include, but are not limited to:
|
● |
the number of trials required for approval; |
|
● |
the per patient trial costs; |
|
● |
the number of patients that participate in the trials; |
|
● |
the number of sites included in the trials; |
|
● |
the countries in which the trial is conducted; |
|
● |
the length of time required to enroll eligible patients; |
|
● |
the number of doses that patients receive; |
|
● |
the drop-out or discontinuation rates of patients; |
|
● |
the potential additional safety monitoring or other studies requested by regulatory agencies; |
|
● |
the duration of patient follow-up; |
6
|
● |
the timing and receipt of regulatory approvals; and |
|
● |
the efficacy and safety profile of our product candidates. |
General and Administrative
Expenses
General and administrative expenses consist primarily
of compensation for the founders and executive officers, professional fees and other corporate expenses, including significant costs incurred
in 2021 in connection with the Merger and associated regulatory filings.
We anticipate that our general and administrative
expenses will increase in the future to support our continued research and development activities. These increases will likely include
increased costs related to the hiring of personnel, including compensation and employee-related expenses, and fees to outside consultants,
lawyers and accountants. Additionally, we anticipate increased costs associated with being a public company, including compliance with
The Nasdaq Capital Market and SEC requirements, insurance and investor relations costs.
Other Expenses
Other expenses consist primarily of non-cash costs
associated with the financing arrangements entered into during 2020 and 2021, including fair value adjustments to notes payable and warrants
and interest expense associated with debt instruments. The majority of such expenses ceased upon conversion of the debt instruments and
exchange of the warrants, most of which occurred at the Merger date.
Results of Operations – Three months ended September
30, 2022 compared to Three months ended September 30, 2021
The following table sets forth our results of
operations for the three months ended September 30, 2022, compared to the three months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
|
|
|
2022 |
|
2021 |
|
Change |
Operating Expenses |
|
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
1,582,059 |
|
$ |
1,042,783 |
|
$ |
539,276 |
Research and development |
|
|
745,506 |
|
|
259,996 |
|
|
485,510 |
Total operating expenses |
|
|
2,327,565 |
|
|
1,302,779 |
|
|
1,024,786 |
Other Expenses |
|
|
|
|
|
|
|
|
|
Warrant liability expense |
|
|
— |
|
|
(146,808) |
|
|
146,808 |
Unrealized loss |
|
|
3,053 |
|
|
— |
|
|
3,053 |
Interest income |
|
|
(15,132) |
|
|
— |
|
|
(15,132) |
Interest expense |
|
|
714,081 |
|
|
248,165 |
|
|
465,916 |
Total other expenses (income) |
|
|
702,002 |
|
|
101,357 |
|
|
600,645 |
Net loss |
|
$ |
(3,029,567) |
|
$ |
(1,404,136) |
|
$ |
(1,625,431) |
General and Administrative
Expenses
General and administrative expenses were approximately
$1,582,000 and $1,043,000, in the three months ended September 30, 2022 and 2021, respectively, representing an increase of approximately
$539,000, or 52%. The increase was primarily due to the build-up of the company infrastructure post the Merger, $305,000 of increased
costs of becoming a public company related to insurance and filing costs and stock-based compensation expense of $232,000 following the
issuance of options under the Amended and Restated Equity Incentive Plan (the “Amended Plan”) in April 2022.
Research and Development
Expenses
Our research and development expenses during the
three months ended September 30, 2022 and 2021 were approximately $746,000 and $260,000, respectively, representing an increase of approximately
$486,000, or 187%. The increase was primary due to increased expenditures on our development programs following the completion of our
financings in October 2021, including work related to
7
commencing the clinical studies for the development
of QRX003 following the FDA clearance of our IND for QRX003 in April 2022. Also, included in the 2022 expenses were approximately $115,000
of compensation costs related to managing the development programs. We expect to significantly increase our research and development efforts
by conducting the remaining studies necessary for the development and approval of QRX003, see “Components of Our Results of Operations
– Research and Development Expenses” above.
Other Expenses:
Interest and financing
expense
In the fourth quarter of 2020, we issued convertible
promissory notes in an initial bridge financing with an aggregate face value of $1,213,333 (the “2020 Notes”) with a 20% coupon
interest. In 2021, we issued additional convertible promissory notes in a subsequent Bridge Financing (the “Bridge Notes”)
with an aggregate face value of $5,000,000 with a 15% coupon interest.
Interest expense was $714,000 and $248,000 in
the three months ended September 30, 2022 and 2021 respectively. Interest on the Bridge Notes was paid in October 2021 upon closing of
the Primary Financing, and interest on the 2020 Notes did not accrue after October 2021 but remained unpaid and included as a liability
on our consolidated balance sheet as of December 31, 2021. Approximately $312,000 was paid to two of the five 2020 Noteholders during
the nine months ended September 30, 2022. Based on the terms of the cash settlement with these two 2020 Noteholders, our estimate
of the liability to the remaining three 2020 Noteholders was increased to $1,146,000 as of September 30, 2022. We expect to settle the
remaining liability in 2022 or early 2023.
Warrant liability expense
We determined our warrants required liability
treatment at fair value, which was remeasured at each reporting period. The Bridge Note warrants which were exchanged for the Investor
Exchange Warrants with a fixed exercise price of $49.75 per ADS and reclassified as an equity instrument in October 2021 upon closing
of the Primary Financing. The 2020 Note warrants were exchanged for warrants on the same terms as the Investor Exchange Warrants and reclassified
as an equity instrument in March 2022. In the three months ended September 30, 2022, and September 30, 2021 we incurred a fair value gain
or expense of $0 and ($147,000) respectively related to the warrants associated with the 2020 Notes and the Bridge Notes.
Results of Operations – Nine months ended September 30,
2022 compared to nine months ended September 30, 2021
The following table sets forth our results of
operations for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
|
|
2022 |
|
2021 |
|
Change |
Operating Expenses |
|
|
|
|
|
|
|
|
|
General and administrative |
|
$ |
5,112,002 |
|
$ |
2,525,366 |
|
$ |
2,586,636 |
Research and development |
|
|
2,059,769 |
|
|
556,064 |
|
|
1,503,705 |
Total operating expenses |
|
|
7,171,771 |
|
|
3,081,430 |
|
|
4,090,341 |
Other Expenses |
|
|
|
|
|
|
|
|
|
Forgiveness of trade payable |
|
|
(416,000) |
|
|
— |
|
|
(416,000) |
Fair value adjustments to debt |
|
|
— |
|
|
1,250,000 |
|
|
(1,250,000) |
Warrant liability expense |
|
|
(77,237) |
|
|
4,522,844 |
|
|
(4,600,081) |
Financing expense |
|
|
— |
|
|
275,000 |
|
|
(275,000) |
Unrealized loss |
|
|
3,053 |
|
|
— |
|
|
3,053 |
Interest income |
|
|
(15,132) |
|
|
— |
|
|
(15,132) |
Interest expense |
|
|
714,081 |
|
|
516,276 |
|
|
197,805 |
Total other expenses (income) |
|
|
208,765 |
|
|
6,564,120 |
|
|
(6,355,355) |
Net loss |
|
$ |
(7,380,536) |
|
$ |
(9,645,550) |
|
$ |
2,265,014 |
8
General and Administrative
Expenses
General and administrative expenses were approximately
$5,112,000 and $2,525,000, in the nine months ended September 30, 2022 and 2021, respectively, representing an increase of $2,587,000,
or 102%. The increase was primarily due to the build-up of the company infrastructure post the Merger which included, $1,248,000 in increased
costs of becoming a public company related to professional services, filing and insurance costs, $601,000 in increased salary and benefits
expenses and stock-based compensation expense of $432,000 following the issuance of options under the Amended and Restated Equity Incentive
Plan (the “Amended Plan”) in April 2022.
Research and Development
Expenses
Our research and development expenses during the
nine months ended September 30, 2022 and 2021 were approximately $2,060,000 and $556,000, respectively, representing an increase of $1,504,000,
or approximately 270%. The increase was primary due to $1,052,000 in increased expenditures on our development programs following the
completion of our financings in October 2021, including work related to the filing of our IND for QRX003 in March 2022, work related to
commencing the clinical studies for the development of QRX003 following the FDA clearance of our IND in April 2022. Also, included in
the 2022 expenses were approximately $353,000 of compensation costs related to managing the development programs. We expect to significantly
increase our research and development efforts by conducting the remaining studies necessary for the development and approval of QRX003,
see “Components of Our Results of Operations – Research and Development Expenses” above.
We amortize licensed or acquired intellectual
property over its expected useful life, included in research and development expenses set out above. The license from Skinvisible was
obtained in October 2019, see “Research and Development, Patents and Licenses.” Amortization of intangible assets was $78,000
in each of the nine months ended September 30, 2022 and 2021.
Other Expenses:
Interest and financing
expense
Interest expense on the 2020 Notes and Bridge
Notes was $714,000 and $516,000 in the nine months ended September 30, 2022 and 2021 respectively. Interest on the Bridge Notes was paid
in October 2021 upon closing of the Primary Financing, and interest on the 2020 Notes did not accrue after October 2021 but remained unpaid
and included as a liability on our consolidated balance sheet as of December 31, 2021 a portion of which was paid in the nine months ended
September 30, 2022. Approximately $312,000 was paid to two of the five 2020 Noteholders during the nine months ended September 30,
2022. Based on the terms of the cash settlement with these two 2020 Noteholders, our estimate of the liability to the remaining
three 2020 Noteholders was increased to $1,146,000 as of September 30, 2022. We expect to settle the remaining liability in 2022 or early
2023.
Fair value adjustment
to convertible notes payable
We elected to value the 2020 Notes and the Bridge
Notes at fair value, which was remeasured at each reporting period. In the nine months ended September 30, 2021 we incurred a fair value
adjustment of $1,250,000 related to the Bridge Notes. The Bridge Notes and 2020 Notes were converted into equity in October 2021 on the
closing of the Primary Financing.
Warrant liability expense
We determined our warrants required liability
treatment at fair value, which was remeasured at each reporting period. In the nine months ended September 30, 2022, and September 30,
2021 we incurred a fair value gain of ($77,000) related to the warrants associated with the 2020 Notes, and expense of $4,523,000 related
to the warrants associated with the 2020 Notes and the Bridge Notes, respectively. The Bridge Note warrants which were exchanged for the
Investor Exchange Warrants with a fixed exercise price of $49.74 per ADS and reclassified as an equity instrument in October 2021 upon
closing of the Primary Financing. The 2020 Note warrants were exchanged for warrants on the same terms as the Investor Exchange Warrants
and reclassified as an equity instrument in March 2022.
9
Forgiveness of Trade
Payable
In our balance sheet as of December 31, 2021 we
had a liability of $584,000 representing amounts due to an investor relations firm for services commencing in 2017. In May 2022, we entered
into a settlement with such firm to decrease the liability to $168,000 which resulted in $416,000 of income recognized in the nine months
ended September 30, 2022.
Liquidity and Capital Resources
We believe that we have sufficient resources to
effect our business plan for at least one year from the issuance of the unaudited consolidated financial statements included in this report.
However, unless one or more of our product candidates are accepted into Early Access Programs in certain countries, we do not expect to
generate revenue from product sales unless and until we successfully complete development and obtain marketing approval for one or more
of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. Additional financing
will be required to complete the research and development of our therapeutic targets and our other operating requirements, which may not
be available at acceptable terms, if at all. If we are unable to obtain additional funding when it becomes necessary, the development
of our product candidates will be impacted and we would likely be forced to delay, reduce, or terminate some or all of our development
programs, all of which could have a material adverse effect on our business, results of operations and financial condition.
Our net losses may fluctuate significantly from
quarter-to-quarter and year-to-year, depending on the timing of planned clinical trials and our expenditures on other research and development
activities. We anticipate that our expenses will continue to increase substantially in 2022 as we advance the clinical development of
QRX003.
Future Funding Requirements
We will need to obtain further funding through
public or private offerings of our capital stock, debt financing, collaboration and licensing arrangements or other sources, the requirements
for which will depend on many factors, including:
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the scope, timing, rate of progress and costs of our drug development efforts, preclinical development activities, the timing of laboratory testing and clinical trials for our product candidates; |
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the number and scope of clinical programs we decide to pursue; |
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the cost, timing and outcome of preparing for and undergoing regulatory review of our product candidates; |
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the scope and costs of development and commercial manufacturing activities; |
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the cost and timing associated with commercializing our product candidates, if they receive marketing approval; |
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the extent to which we acquire or in-license other product candidates and technologies; |
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the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; |
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our ability to establish and maintain collaborations on favorable terms, if at all; |
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our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates and, ultimately, the sale of our products, following FDA approval; |
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our implementation of operational, financial and management systems; and |
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the costs associated with being a public company. |
10
Adequate additional funding may not be available
to us on acceptable terms, or at all. If we are unable to raise capital in sufficient amounts or on terms acceptable to us, we may have
to significantly delay, scale back or discontinue the development or commercialization of QRX003, any future product, or potentially discontinue
operations.
To the extent that we raise additional capital
through the sale of our equity or convertible debt securities, and pursuant to the exercise of warrants issued to our investors in the
Offering, the ownership interest of our equity holders will be diluted, and the terms of these securities may include liquidation or other
preferences that adversely affect the rights of our equity holders. Debt financing and preferred equity 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 collaborations,
strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable
rights to our technologies, future revenue streams, research programs or proposed products, or to grant licenses on terms that may not
be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay,
limit, reduce or terminate our drug development or future commercialization efforts or grant rights to develop and market any future product
that we would otherwise prefer to develop and market ourselves.