Cellect(QNRX) - 2023 Q1 - Quarterly Report

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This section outlines the inherent risks and uncertainties associated with the Company's forward-looking statements regarding its strategy and future financial performance - This Form 10-Q contains forward-looking statements about the Company's strategy, future financial condition, operations, projected costs, prospects, plans, objectives, and expected market growth, which involve substantial risks and uncertainties[5] - The Company cannot guarantee that future results, levels of activity, performance, or events will be achieved, as forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially[6] PART I – FINANCIAL INFORMATION Item 1. Financial Statements. This section presents Quoin Pharmaceuticals Ltd.'s unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and 2022, including balance sheets, statements of operations, statements of shareholders' equity, and statements of cash flows, along with comprehensive notes detailing accounting policies, liquidity risks, and specific financial instrument disclosures Condensed Consolidated Balance Sheets Presents the company's financial position, assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheets (March 31, 2023 vs. December 31, 2022) | Metric | March 31, 2023 (unaudited) | December 31, 2022 | | :-------------------------- | :------------------------- | :------------------ | | Cash and cash equivalents | $3,371,854 | $2,860,628 | | Investments | $13,618,026 | $9,992,900 | | Total current assets | $17,388,786 | $13,370,112 | | Total assets | $18,450,726 | $14,458,063 | | Total current liabilities | $4,162,550 | $3,527,556 | | Total liabilities | $7,536,283 | $7,051,289 | | Total shareholders' equity | $10,914,443 | $7,406,774 | Condensed Consolidated Statements of Operations (Unaudited) Details the company's revenues, expenses, and net loss for the specified interim periods Condensed Consolidated Statements of Operations (Three months ended March 31, 2023 vs. 2022) | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | General and administrative | $1,683,817 | $1,588,470 | | Research and development | $1,091,733 | $587,569 | | Total operating expenses | $2,775,550 | $2,176,039 | | Total other (income) and expenses | $(172,481) | $(493,237) | | Net loss | $(2,603,069) | $(1,682,802) | | Loss per ADS (Basic) | $(0.34) | $(2.51) | | Loss per ADS (Fully-diluted)| $(0.34) | $(2.51) | Condensed Consolidated Statements of Shareholders' Equity (Unaudited) Outlines changes in the company's equity components over the reporting periods Shareholders' Equity Changes (Three months ended March 31, 2023) | Metric | January 1, 2023 | Net Loss | Issuance of ADS and Pre-Funded Warrants, net | Stock based compensation | March 31, 2023 | | :-------------------------- | :-------------- | :------------ | :------------------------------------------- | :----------------------- | :------------- | | Additional Paid in Capital | $47,855,521 | — | $5,849,266 | $261,472 | $53,966,259 | | Accumulated Deficit | $(37,516,747) | $(2,603,069) | — | — | $(40,119,816) | | Total Shareholders' Equity | $7,406,774 | $(2,603,069) | $5,849,266 | $261,472 | $10,914,443 | Shareholders' Equity Changes (Three months ended March 31, 2022) | Metric | January 1, 2022 | Net Loss | Reclassification of warrant liability | March 31, 2022 | | :-------------------------- | :-------------- | :------------ | :------------------------------------ | :------------- | | Additional Paid in Capital | $31,659,017 | — | $296,362 | $31,955,379 | | Accumulated Deficit | $(28,069,985) | $(1,682,802) | — | $(29,752,787) | | Total Shareholders' Equity | $657,032 | $(1,682,802) | $296,362 | $(729,408) | Condensed Consolidated Statements of Cash Flows (unaudited) Summarizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Three months ended March 31, 2023 vs. 2022) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(1,746,535) | $(2,093,558) | | Net cash used in investing activities | $(3,491,505) | $(50,000) | | Net cash provided by (used in) financing activities | $5,749,266 | $(150,000) | | Net change in cash and cash equivalents | $511,226 | $(2,293,558) | | Cash and cash equivalents - end of period | $3,371,854 | $5,189,215 | Notes to Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements NOTE 1 – ORGANIZATION AND BUSINESS Describes the company's core business, focus on rare diseases, and lead product development status - Quoin Pharmaceuticals Ltd. is a clinical-stage specialty pharmaceutical company focused on developing and commercializing therapeutic products for rare and orphan diseases, particularly rare skin diseases[16] - The Company's lead product, QRX003, is a topical lotion for Netherton Syndrome (NS) and is currently in two clinical studies in the U.S. Dosing of patients has commenced for both studies[16] - Other pipeline products include QRX004 for Recessive Dystrophic Epidermolysis Bullosa (RDEB), and options for global licenses to QRX007 (NS) and QRX008 (scleroderma) through research agreements with Queensland University of Technology[16] NOTE 2 - LIQUIDITY RISKS AND OTHER UNCERTAINTIES Highlights the company's accumulated losses, cash flow challenges, and future financing requirements - The Company has incurred net losses since inception, with an accumulated deficit of approximately $40.1 million at March 31, 2023, and negative cash flows from operations of $1.8 million for the three months ended March 31, 2023[17] - Despite having $3.4 million in cash and $13.6 million in investments at March 31, 2023, the Company will require additional financing to complete R&D and achieve commercial profitability, which may not be available on acceptable terms[17][18] - Key risks include dependence on third-party suppliers (some single-source), regulatory approval uncertainties (FDA and foreign jurisdictions), and market acceptance risks for future products[19][20][22] NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines the key accounting principles and estimation methods used in preparing the financial statements - The financial statements are prepared in accordance with U.S. GAAP for interim financial information, relying on management estimates for areas like stock-based compensation, R&D expense recognition, intangible asset impairment, and deferred tax assets[24][25] - Cash equivalents include highly liquid investments with original maturities of three months or less, and the Company classifies warrants as equity if they require physical or net-share settlement, or if the Company has a choice of settlement[26][27][29] - Investments consist of U.S. Treasury Bills classified as trading securities, and long-lived intangible assets (acquired technology and licensed rights) are amortized over a 10-year useful life, with impairment assessed when circumstances indicate carrying value may not be recoverable[30][31][32] - Research and development costs are expensed as incurred, including personnel costs and third-party contractor expenses for clinical trials and drug manufacturing[33] - The Company uses the asset and liability method for income taxes, maintaining a full valuation allowance on existing deferred tax assets, and accounts for stock-based compensation using the Black-Scholes option-pricing model[35][37] NOTE 4 – CONVERTIBLE NOTES PAYABLE Details the company's liability for accrued interest on mandatorily convertible promissory notes - The Company had an estimated liability of $1,146,000 as of March 31, 2023, and December 31, 2022, to the remaining three 2020 Noteholders for accrued interest from promissory notes that were mandatorily convertible into ADSs[45] - No interest expense was recognized for the three months ended March 31, 2023, or 2022, related to these convertible notes[46] NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS Explains the valuation methods and classification of financial assets and liabilities at fair value - The Company measures financial assets and liabilities at fair value, classifying them into a hierarchy (Level 1, 2, or 3) based on the observability of inputs[47][48][49] Fair Value of US Treasury Bills (March 31, 2023 vs. December 31, 2022) | Asset | March 31, 2023 | December 31, 2022 | | :--------------- | :------------- | :---------------- | | US Treasury Bills| $13,618,026 | $9,992,900 | | Classification | Level 1 | Level 1 | NOTE 6 – STOCK BASED COMPENSATION Details the company's equity incentive plan, stock option activity, and related compensation expense - The Amended and Restated Equity Incentive Plan, approved in April 2022, increased the ordinary shares reserved for issuance to 15% of outstanding shares, or 16,891,925,220 ordinary shares (3,378,385 ADSs) as of March 31, 2023[52] Stock Option Activity (Three months ended March 31, 2023) | Metric | ADSs Underlying Options | Weighted Average Exercise Price | | :------------------------------ | :---------------------- | :------------------------------ | | Outstanding at December 31, 2022| 307,142 | $17.50 | | Outstanding at March 31, 2023 | 307,142 | $17.50 | | Exercisable options at March 31, 2023 | — | — | - Stock-based compensation expense for the three months ended March 31, 2023, was approximately $261,000 ($34,000 in R&D, $227,000 in G&A), with no such expense in the prior year period[54] - Total unrecognized compensation expense related to non-vested options was approximately $2,944,000 at March 31, 2023, expected to be recognized over an average of 2.83 years[55] NOTE 7 – PREPAID EXPENSES Provides a breakdown of the company's prepaid expenses, distinguishing between short-term and long-term portions Prepaid Expenses (March 31, 2023 vs. December 31, 2022) | Prepaid Expense Category | March 31, 2023 | December 31, 2022 | | :----------------------- | :------------- | :---------------- | | Prepaid R&D costs | $383,390 | $383,390 | | Prepaid insurance | $355,156 | $508,084 | | Other Prepaid expense | $43,750 | $8,500 | | Total | $782,296 | $899,974 | | Less: Short-term portion | $(398,906) | $(516,584) | | Long-term portion | $383,390 | $383,390 | NOTE 8 - ACCRUED EXPENSES Details the various categories of accrued expenses, including research contracts, payroll, and professional fees Accrued Expenses (March 31, 2023 vs. December 31, 2022) | Accrued Expense Category | March 31, 2023 | December 31, 2022 | | :----------------------- | :------------- | :---------------- | | Research contract expenses | $483,830 | $105,071 | | Payroll | $976,306 | $788,169 | | Payroll taxes | $153,552 | $159,593 | | Professional fees | $346,891 | $44,278 | | Other Expenses | $124,626 | $78,594 | | Total | $2,085,205 | $1,175,705 | NOTE 9 – IN-LICENSED TECHNOLOGY Describes agreements for acquired technology and exclusive royalty-bearing licenses for product development - The Company acquired Polytherapeutics, Inc. for $40,833 and agreed to future royalties of 4.0% of net revenue for 10 years, with reductions if generic products are introduced[58] - An exclusive royalty-bearing license with Skinvisible Pharmaceuticals, Inc. for QRX003 and QRX004 involved a $1 million license fee, single-digit royalties on net sales, 25% of sublicense royalties, and a $5 million payment upon first drug product approval in the U.S. or EU[59] NOTE 10 - INTANGIBLE ASSETS Presents the cost, accumulated amortization, and net book value of the company's intangible assets Intangible Assets (March 31, 2023 vs. December 31, 2022) | Intangible Asset Category | March 31, 2023 | December 31, 2022 | | :------------------------ | :------------- | :---------------- | | 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 | $(361,883) | $(335,872) | | Net book value | $678,550 | $704,561 | - Amortization expense was approximately $26,000 for both three-month periods ended March 31, 2023 and 2022[61] - Expected annual amortization expense for existing intangible assets is $78,000 for 2023, $104,000 for 2024-2026, and $288,000 thereafter[61] NOTE 11 - RELATED PARTY TRANSACTIONS Details amounts due to officers for compensation and expense reimbursements, and consulting services - The Company owes approximately $2,184,000 to Dr. Myers and $1,840,000 to Ms. Carter as of March 31, 2023, for accrued compensation and expense reimbursements, with monthly repayments of $25,000 to each[62] Amounts Due to Officers (March 31, 2023 vs. December 31, 2022) | Category | March 31, 2023 | December 31, 2022 | | :------------------------------ | :------------- | :---------------- | | Salaries and other compensation | $4,023,732 | $4,108,500 | | Invoices paid on behalf of the Company | — | $15,232 | | Total | $4,023,732 | $4,123,732 | | Less: Short-term portion | $(650,000) | $(600,000) | | Long-term portion | $3,373,733 | $3,523,733 | - Research and development expenses of $12,000 were paid to the CEO's son for consulting services during the three months ended March 31, 2023 and 2022, but these services ceased as of March 31, 2023[64] NOTE 12 – RESEARCH, CONSULTING AGREEMENTS AND COMMITMENTS Outlines significant agreements for preclinical and clinical development, research collaborations, and consulting services - The Company has a Master Service Agreement with Therapeutics Inc. for preclinical and clinical development, with work orders for QRX003 clinical studies estimated at $4.4 million (first study) and $830,000 (second study) through 2024[66] - R&D expenses under these agreements were approximately $599,000 for Q1 2023, a significant increase from $185,000 in Q1 2022[66] - Research agreements with Queensland University of Technology for Netherton Syndrome ($250,000 commitment) and Scleroderma ($610,000 commitment) resulted in R&D costs of $50,000 and $88,000, respectively, for Q1 2023[67][68] - A consulting agreement with an Investor Relations firm was settled in March 2022, reducing a $584,000 liability to $168,000 and recognizing $416,000 as other income[69] NOTE 13 – SHAREHOLDERS' EQUITY Details changes in authorized share capital, ADS ratio, public offerings, and warrant activity - Shareholders approved increases to authorized share capital, reaching 500,000,000,000 ordinary shares from 12,500,000,000 in 2022[71] - Effective August 1, 2022, the ADS ratio changed from 1 ADS representing 400 ordinary shares to 1 ADS representing 5,000 ordinary shares, resulting in a 1-for-12.5 reverse split of ADSs[74] - In February 2023, the Company completed an offering of 4,950,000 ADSs and pre-funded warrants for 2,050,000 ADSs, generating aggregate gross proceeds of $7.0 million and net proceeds of approximately $5.8 million[78] - In connection with the February Offering, the exercise price of Common Warrants from the August 2022 Offering for 2,830,000 ADSs was reduced from $5.00 to $1.10, and their term extended to February 24, 2028, resulting in an incremental fair value of approximately $238,000 accounted for as an offering expense[80] Warrant Activity (Three months ended March 31, 2023) | Metric | ADSs Underlying Warrants | Weighted Average Exercise Price Per ADS | | :------------------------------ | :----------------------- | :-------------------------------------- | | Outstanding at December 31, 2022| 3,368,820 | $5.35 | | Granted Common and Pre-Funded Warrants | 9,050,000 | $0.77 | | Exercised Pre-Funded Warrants | (2,050,000) | $0.00 | | Outstanding and exercisable at March 31, 2023 | 10,368,820 | $1.35 | NOTE 14 – CONTINGENCIES States that management is unaware of any material legal or administrative proceedings requiring financial accrual - Management is unaware of any material legal or administrative proceedings requiring accrual for related losses in the financial statements[83] NOTE 15 – LICENSE AGREEMENTS Describes the company's non-U.S. license and supply agreements and the expectation of future royalty revenues - As of March 31, 2023, the Company has eight license and supply agreements for non-U.S. markets, under which it expects to receive royalties or other proceeds upon product approval and commercialization[84] - No royalty revenues have been received through March 31, 2023, under any of these agreements[84] NOTE 16 - SUBSEQUENT EVENTS Reports Nasdaq's non-compliance notification regarding minimum bid price and potential delisting implications - On April 5, 2023, Nasdaq notified the Company of non-compliance with the minimum $1.00 bid price requirement for 30 consecutive business days[85] - The Company has until October 2, 2023, to regain compliance by maintaining a closing bid price of at least $1.00 for ten consecutive business days, with potential eligibility for an additional 180-day grace period[85] - Delisting from Nasdaq would negatively impact the liquidity of the Company's securities and its ability to raise future capital[85] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This section provides management's perspective on the Company's financial condition and operational results for the three months ended March 31, 2023, compared to the same period in 2022, highlighting key events, expense components, and liquidity challenges Overview Introduces Quoin Pharmaceuticals as a clinical-stage company focused on rare diseases and its strategic objectives - Quoin Pharmaceuticals is a clinical-stage specialty pharmaceutical company focused on rare and orphan diseases, particularly rare skin diseases, with lead product QRX003 for Netherton Syndrome in late-stage clinical development[87] - The Company aims to complete QRX003 clinical testing, seek marketing approvals, establish sales infrastructure in the U.S. and Europe, and pursue business development opportunities[88] - No revenue from product sales is expected until successful development and marketing approval, necessitating additional capital through equity offerings, debt financings, or collaborations[88] Key Events Summarizes significant corporate and clinical development milestones during the reporting period - QRX003 is in late-stage clinical development for Netherton Syndrome, with two concurrent clinical studies initiated in the U.S. and patient dosing commenced[89][90] - The Company completed a public offering on February 24, 2023, raising $7.0 million in gross proceeds ($5.8 million net) from the sale of ADSs and pre-funded warrants[91] - In connection with the February Offering, the exercise price of certain common warrants from the August 2022 Offering was reduced to $1.10, and their term extended to February 24, 2028[93] - On April 5, 2023, Nasdaq notified the Company of non-compliance with the minimum $1.00 bid price requirement, granting a compliance period until October 2, 2023[94][96] Components of Our Results of Operations Explains the primary categories of operating and other expenses impacting the company's financial performance - Operating expenses consist of research and development (R&D) and general and administrative (G&A) expenses[97] - R&D costs are expensed as incurred, including personnel, third-party contractors for clinical trials, manufacturing, and sponsored research, and are expected to be significant as QRX003 advances[98][99] - G&A expenses primarily include compensation, professional fees, and other corporate expenses, anticipated to increase in 2023 to support R&D activities[103][104] - Other expenses include non-cash costs related to financing arrangements, such as fair value adjustments of warrants, forgiveness of trade payable, interest income, and unrealized gains on investments[105] Results of Operations – Three months ended March 31, 2023 compared to the three months ended March 31, 2022 Compares the company's financial performance, including expenses and net loss, between the two reporting periods Results of Operations Summary (Three months ended March 31, 2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :-------------------------- | :------------ | :------------ | :------------ | | General and administrative | $1,683,817 | $1,588,470 | $95,347 | | Research and development | $1,091,733 | $587,569 | $504,164 | | Total operating expenses | $2,775,550 | $2,176,039 | $599,511 | | Total other (income) and expenses | $(172,481) | $(493,237) | $320,756 | | Net loss | $(2,603,069) | $(1,682,802) | $(920,267) | - General and administrative expenses increased by $95,000 (6.0%) primarily due to a $58,000 increase in travel expenses and $227,000 in non-cash stock-based compensation, partially offset by a $196,000 reduction in public company costs[107] - Research and development expenses increased by $504,000 (85.8%) due to increased expenditures on QRX003 clinical studies and research collaborations with Queensland University of Technology, including $34,000 in non-cash stock-based compensation[108] - Other income and expenses shifted, with $152,000 in interest income and $20,000 in unrealized gain in 2023, compared to a $77,000 warrant liability gain and $416,000 forgiveness of trade payable income in 2022[110][113][114] Liquidity and Capital Resources Assesses the company's ability to meet short-term and long-term obligations, including funding requirements and cash flow analysis - The Company has an accumulated deficit of approximately $40.1 million at March 31, 2023, and incurred a net loss of $2.6 million with negative cash flows from operations of $1.8 million for the three months ended March 31, 2023[115] - Cash and cash equivalents totaled $3.4 million and investments $13.6 million at March 31, 2023, providing sufficient liquidity for at least one year, but additional financing is required for long-term R&D and commercialization[115] - Future funding requirements depend on the scope and timing of drug development, clinical trials, regulatory review, manufacturing, commercialization, and intellectual property costs[117] - Failure to secure adequate additional funding could lead to delays, scaling back, or termination of development programs, and equity financing may dilute existing shareholders[119][120] Summary Statement of Cash Flows (Three months ended March 31, 2023 vs. 2022) | Cash Flow Activity | 2023 | 2022 | | :-------------------------- | :------------ | :------------ | | Net cash used in operating activities | $(1,746,535) | $(2,093,558) | | Net cash used in investing activities | $(3,491,505) | $(50,000) | | Net cash provided by (used in) financing activities | $5,749,266 | $(150,000) | | Net increase (decrease) in cash and cash equivalents | $511,226 | $(2,293,558) | - Net cash used in operating activities decreased in 2023 due to increased accounts payable and accrued expenses, offset by decreased prepaid expenses[123] - Net cash used in investing activities increased significantly in 2023 to $3.49 million, primarily due to net purchases of U.S. Treasury Bills from the February Offering proceeds[124] - Net cash provided by financing activities was $5.75 million in 2023, driven by $5.85 million net proceeds from the February Offering, partially offset by $100,000 in repayments to officers[125] - Research and development commitments include a $5 million payment to Skinvisible upon U.S. or EU approval of the first licensed drug product, and estimated costs of $4.4 million and $830,000 for QRX003 clinical studies through 2024[126][127] Critical Accounting Policies and Use of Estimates Confirms no material changes to the company's critical accounting policies and estimates from the prior annual report - There have been no material changes to the Company's critical accounting policies and estimates from those reported in the Annual Report on Form 10-K for the year ended December 31, 2022[130] Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, Quoin Pharmaceuticals Ltd. is not required to provide quantitative and qualitative disclosures about market risk - The Company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[131] Item 4. Controls and Procedures. This section details the evaluation of the Company's disclosure controls and procedures and confirms no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures Confirms the effectiveness of the company's disclosure controls and procedures as evaluated by management - As of March 31, 2023, management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective[132] - Disclosure controls are designed to ensure timely recording, processing, summarizing, and reporting of information required under the Exchange Act[132] Changes in Internal Control over Financial Reporting States that no material changes occurred in internal control over financial reporting during the quarter - There were no changes in internal control over financial reporting during the quarter ended March 31, 2023, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[133] PART II – OTHER INFORMATION Item 1. Legal Proceedings. The Company is not currently a party to any material legal or administrative proceedings and is unaware of any pending or threatened material proceedings - The Company is not currently a party to any material legal or administrative proceedings and is not aware of any pending or threatened material legal or administrative proceedings against it[135] Item 1A. Risk Factors. There have been no material changes to the Company's risk factors from those previously reported in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes in the Company's risk factors from those previously reported in Part 1, Item 1A, 'Risk Factors' of its Form 10-K[136] - Readers should carefully consider the factors discussed in the Form 10-K, as additional unknown or immaterial risks may also adversely affect the business[136] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The Company reported no unregistered sales of equity securities or use of proceeds during the period - None[137] Item 3. Defaults Upon Senior Securities. The Company reported no defaults upon senior securities during the period - None[138] Item 4. Mine Safety Disclosures. This item is not applicable to the Company - Not applicable[139] Item 5. Other Information. The Company reported no other information for the period - None[140] Item 6. Exhibits. This section lists all exhibits included in or incorporated by reference into the Form 10-Q, such as amendments to articles of association, warrant forms, agreements, and certifications - Exhibits include amendments to the Amended and Restated Articles of Association (3.1, 3.2, 3.3), forms of warrant (4.1, 4.2, 4.3), the Securities Purchase Agreement (10.1), and the Placement Agency Agreement (10.2)[141] - Certifications from the Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32.1, 32.2) are filed herewith, along with XBRL formatted financial information (101) and the Cover Page Interactive Data File (104)[141] SIGNATURES Confirms the official signing and submission of the report by the company's authorized financial officer - The report was duly signed on behalf of Quoin Pharmaceuticals Ltd. by Gordon Dunn, Chief Financial Officer, on May 9, 2023[143]