10-Q 1 form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Qualigen Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

Delaware

001-37428

26-3474527

(State or other jurisdiction

of incorporation)

(Commission

File Number)

(I.R.S. Employer

Identification No.)

2042 Corte Del Nogal, Carlsbad, California 92011

(Address of principal executive offices) (Zip Code)

(760) 918-9165

(Registrant’s telephone number, including area code)

n/a

(Former name or former address, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.001 per

QLGN

The Nasdaq Capital Market of The Nasdaq

Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer	[X]	Smaller reporting company	[X]
		Emerging growth company	[ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

As of May 7, 2021, there were 28,833,059 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

TABLE OF CONTENTS

		Page
PART I.	Financial Information	1

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020	2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020	4
	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

PART II.	Other Information	32

Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	33

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31, 2021			December 31, 2020
ASSETS
Current assets
Cash and cash equivalents	$	21,947,912		$	23,976,570
Accounts receivable, net		862,235			615,757
Inventory, net		885,855			953,458
Prepaid expenses and other current assets		1,219,759			2,678,894
Total current assets		24,915,761			28,224,679
Right-of-use assets		376,616			430,795
Property and equipment, net		224,932			247,323
Equipment held for lease, net		10,687			17,947
Intangible assets, net		189,294			187,694
Other assets		18,334			18,334
Total Assets	$	25,735,624		$	29,126,772

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	485,551		$	500,768
Accrued expenses and other current liabilities		1,869,424			746,738
Notes payable, current portion		10,683			131,766
Deferred revenue, current portion		381,366			486,031
Lease liability, current portion		262,601			254,739
Warrant liabilities		6,187,200			8,310,100
Total current liabilities		9,196,825			10,430,142
Notes payable, net of current portion		4,923			6,973
Lease liability, net of current portion		168,254			236,826
Deferred revenue, net of current portion		135,235			158,271
Total liabilities		9,505,237			10,832,212

Stockholders’ equity
Series Alpha convertible preferred stock, $0.001 par value; 7,000 shares authorized; 180 shares issued and outstanding as of March 31, 2021 and December 31, 2020		1			1
Common stock, $0.001 par value; 225,000,000 shares authorized; 28,833,059 shares and 27,296,061 shares issued and outstanding as of March 31, 2021 and December 31, 2020		28,833			27,296
Additional paid-in capital		86,721,672			85,114,755
Accumulated deficit		(70,520,119	)		(66,847,492	)
Total stockholders’ equity		16,230,387			18,294,560
Total Liabilities and Stockholders’ Equity	$	25,735,624		$	29,126,772

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended March 31,
	2021			2020
REVENUES
Net product sales	$	1,420,842		$	1,411,755
License revenue		478,654			—
Collaborative research revenue		—			45,000
Total revenues		1,899,496			1,456,755

EXPENSES
Cost of product sales		1,202,479			991,651
General and administrative		2,873,939			918,379
Research and development		3,499,373			238,059
Sales and marketing		136,587			92,262
Total expenses		7,712,378			2,240,351

LOSS FROM OPERATIONS		(5,812,882	)		(783,596	)

OTHER (INCOME) EXPENSE, NET
Gain on change in fair value of warrant liabilities		(2,122,900	)		—
Interest (income) expense, net		(17,343	)		90,757
Other income, net		(542	)		(1,158	)
Total other (income) expense, net		(2,140,785	)		89,599

LOSS BEFORE PROVISION FOR INCOME TAXES		(3,672,097	)		(873,195	)

PROVISION FOR INCOME TAXES		530			(619	)

NET LOSS		(3,672,627	)		(872,576	)

Net loss per common share, basic and diluted	$	(0.13	)	$	(0.16	)
Weighted—average number of shares outstanding, basic and diluted		28,165,796			5,602,214

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

	Series Alpha Convertible
	Preferred Stock				Common Stock				Additional
	Shares		Amount $		Shares		Amount $		Paid-In Capital			Accumulated Deficit			Total
Balance at December 31, 2020		180	$	1		27,296,061	$	27,296	$	85,114,755		$	(66,847,492	)	$	(18,294,560	)
Stock issued upon cash-exercise of warrants		—		—		1,319,625		1,320		243,261			—			244,581
Stock issued upon net-exercise of warrants		—		—		192,373		192		(192	)		—			—
Stock issued for professional services		—		—		25,000		25		101,725			—			101,750
Stock-based compensation		—		—		—		—		1,262,123			—			1,262,123
Net Loss		—		—		—		—		—			(3,672,627	)		(3,672,627	)
Balance at March 31, 2021		180	$	1		28,833,059	$	28,833	$	86,721,672		$	(70,520,119	)	$	16,230,387

	Series A Convertible				Series B Convertible				Series C Convertible				Series D Convertible				Series D-1 Convertible				Series Alpha Convertible
	Preferred Stock				Preferred Stock				Preferred Stock				Preferred Stock				Preferred Stock				Preferred Stock				Common Stock				Additional
	Shares		Amount $		Shares		Amount $		Shares		Amount $		Shares		Amount $		Shares		Amount $		Shares		Amount $		Shares		Amount $		Paid-In Capital		Accumulated Deficit			Total
Balance at December 31, 2019		2,412,887	$	24,129		7,707,736	$	77,077		3,300,715	$	33,007		1,508,305	$	15,083		643,511	$	6,435		—	$	—		5,602,214	$	56,026	$	45,153,733	$	(46,428,550	)	$	(1,063,060	)
Stock-based compensation		—		—		—		—		—		—		—		—		—		—		—		—		—		—		7,866		—			7,866
Net Loss		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		(872,576	)		(872,576	)
Balance at March 31, 2020		2,412,887	$	24,129		7,707,736	$	77,077		3,300,715	$	33,007		1,508,305	$	15,083		643,511	$	6,435		—	$	—		5,602,214	$	56,026	$	45,161,599	$	(47,301,126	)	$	(1,927,770	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Three Months Ended March 31,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,672,627	)	$	(872,576	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		27,453			50,269
Amortization of right-of-use assets		54,179			—
Accounts receivable reserves and allowances		8,490			7,329
Inventory reserves		29,615			25,960
Common stock issued for professional services		101,750			—
Stock-based compensation		1,262,123			7,866
Gain on change in fair value of warrant liabilities		(2,122,900	)		—
Changes in operating assets and liabilities:
Accounts receivable		(254,968	)		441,369
Inventory and equipment held for lease		107,588			(28,430	)
Prepaid expenses and other assets		1,459,135			4,136
Accounts payable		(15,217	)		175,922
Accrued expenses and other current liabilities		1,122,686			618,597
Lease liability		(60,710	)		—
Deferred revenue		(127,701	)		(22,728	)
Net cash (used in) provided by operating activities		(2,081,104	)		407,714

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(62,265	)		(1,729	)
Payments for patents and licenses		(6,737	)		(93,732	)
Net cash used in investing activities		(69,002	)		(95,461	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of notes payable		—			290,198
Proceeds from warrant exercises		244,581			—
Principal payments on notes payable		(123,133	)		(578,026	)
Net cash provided by (used in) financing activities		121,448			(287,828	)

Net change in cash and cash equivalents		(2,028,658	)		24,425

CASH AND CASH EQUIVALENTS – beginning of period		23,976,570			128,696
CASH AND CASH EQUIVALENTS – end of period	$	21,947,912		$	153,121

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	831		$	19,473
Taxes	$	100		$	500
NONCASH FINANCING AND INVESTING ACTIVITIES:
Net transfers to inventory from equipment held for lease	$	—		$	5,439

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

QUALIGEN THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

Organization

Qualigen, Inc., now a subsidiary of Qualigen Therapeutics, Inc., was incorporated in Minnesota in 1996 to design, develop, manufacture and sell point-of-care quantitative immunoassay diagnostic products for use in physician offices and other point-of-care settings worldwide, and was reincorporated in Delaware in 1999. Qualigen Therapeutics, Inc. (the “Company”) operates in one business segment. In May 2020, Qualigen, Inc. completed a reverse recapitalization transaction with Ritter Pharmaceuticals, Inc. (“Ritter”) and Ritter was renamed Qualigen Therapeutics, Inc., recognized as a reverse recapitalization. All shares of Qualigen, Inc.’s capital stock were exchanged for Qualigen Therapeutics, Inc.’s capital stock in the merger. Ritter/Qualigen Therapeutics common stock, which was previously traded on the Nasdaq Capital Market under the ticker symbol “RTTR,” commenced trading on the Nasdaq Capital Market, on a post-reverse-stock-split adjusted basis, under the trading symbol “QLGN” on May 26, 2020.

Qualigen, Inc. was determined to be the accounting acquirer in a reverse recapitalization based upon the terms of the merger and other factors. All references to financial figures of the Company presented in the accompanying condensed consolidated financial statements and in these Notes through May 22, 2020 are to those of Qualigen, Inc. All references to financial figures after May 22, 2020 are to those of Qualigen Therapeutics, Inc. and Qualigen, Inc.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim reports of companies filing as a smaller reporting company. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Transition Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on March 31, 2021. In the opinion of management, the accompanying condensed consolidated interim financial statements include all adjustments necessary in order to make the financial statements not misleading. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or any other future period. Certain notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Company’s Transition Report on Form 10-K have been omitted. The accompanying condensed consolidated balance sheet at March 31, 2021 has been derived from the audited balance sheet at December 31, 2020 contained in such Form 10-K.

Principles of Consolidation

The Company’s unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation. Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP. The Company views its operations and manages its business in one operating segment. All long-lived assets of the Company reside in the US.

Accounting Estimates

Management uses estimates and assumptions in preparing its condensed consolidated financial statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The most significant estimates relate to the estimated fair value of warrant liabilities, stock-based compensation, write-off of patents and licenses, amortization and depreciation, inventory reserves, allowances for doubtful accounts and returns, and warranty costs. Actual results could vary from the estimates that were used.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an initial maturity of 90 days or less and money market funds to be cash equivalents.

The Company maintains its cash and cash equivalents in bank deposits which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on cash and cash equivalents.

Inventory, Net

Inventory is recorded at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The Company reviews the components of its inventory on a periodic basis for excess or obsolete inventory, and records specific reserves for identified items.

Long-Lived Assets

The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that assets may not be recoverable. An impairment loss would be recognized when the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets. The amount of impairment loss, if any, will generally be measured as the difference between the net book value of the assets and their estimated fair values. During the three months ended March 31, 2021 and 2020, no such impairment losses have been recorded.

Accounts Receivable, Net

The Company grants credit to domestic physicians, clinics, and distributors. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. Customers can purchase certain products through a financing agreement that the Company has with an outside leasing company. Under the agreement, the leasing company evaluates the credit worthiness of the customer. Upon acceptance of the product by the customer, the leasing company remits payment to the Company at a discount. This financing arrangement is without recourse to the Company.

The Company provides an allowance for doubtful accounts and returns equal to the estimated uncollectible amounts or expected returns. The Company’s estimates are based on historical collections and returns and a review of the current status of trade accounts receivable.

Accounts receivable is comprised of the following at:

	March 31, 2021			December 31, 2020
Accounts Receivable	$	867,617		$	629,630
Less Allowance		(5,382	)		(13,873	)
	$	862,235		$	615,757

Research and Development

The Company expenses research and development costs as incurred.

Shipping and Handling Costs

The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound and outbound freight are generally recorded in cost of sales which totaled approximately $30,000 and $31,000, respectively, for the three months ended March 31, 2021 and 2020. Other shipping and handling costs included in general and administrative, research and development, and sales and marketing expenses totaled approximately $1,000 and $2,000 for the three months ended March 31, 2021 and 2020, respectively.

Revenue from Contracts with Customers

Effective April 1, 2020, the Company adopted Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”), Revenue from Contracts with Customers, using the modified retrospective approach. The adoption of ASC 606 did not have a material impact on the measurement or on the recognition of revenue of contracts for which all revenue had not been recognized as of April 1, 2020. Therefore, no cumulative adjustment has been made to the opening balance of accumulated deficit at April 1, 2020. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the periods presented.

The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

Product Sales

The Company generates revenue from selling FastPack System analyzers, accessories and disposable products used with the FastPack System. Disposable products include reagent packs which are diagnostic tests for PSA, testosterone, thyroid disorders, pregnancy, and Vitamin D.

The Company provides disposable products and equipment in exchange for consideration, which occurs when a customer submits a purchase order and the Company provides disposable products and equipment at the agreed upon prices in the invoice. Generally, customers purchase disposable products using separate purchase orders after the equipment (“analyzer”) has been provided to the customer. The initial delivery of the equipment and reagent packs represents a single performance obligation and is completed upon receipt by the customer. The delivery of each subsequent individual reagent pack represents a separate performance obligation because the reagent packs are standardized, are not interrelated in any way, and the customer can benefit from each reagent pack without any other product. There are no significant discounts, rebates, returns or other forms of variable consideration. Customers are generally required to pay within 30 days.

The performance obligation arising from the delivery of the equipment is satisfied upon the delivery of the equipment to the customer. The disposable products are shipped Free on Board (“FOB”) shipping point. For disposable products that are shipped FOB shipping point, the customer has the significant risks and rewards of ownership and legal title to the assets when the disposable products leave the Company’s shipping facilities, thus the customer obtains control and revenue is recognized at that point in time.

The Company has elected the practical expedient and accounting policy election to account for the shipping and handling as activities to fulfil the promise to transfer the disposable products and not as a separate performance obligation.

The Company’s contracts with customers generally have an expected duration of one year or less, and therefore the Company has elected the practical expedient in ASC 606 to not disclose information about its remaining performance obligations. Any incremental costs to obtain contracts are recorded as selling, general and administrative expense as incurred due to the short duration of the Company’s contracts.

License Revenue

The Company enters into out-license agreements with counterparties to develop and/or commercialize its products in exchange for nonrefundable upfront license fees and/or sales-based royalties.

If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from nonrefundable upfront fees allocated to the license when the license is transferred to the customer and the customer can benefit from the license. For licenses that are bundled with other performance obligations, management uses judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable upfront fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of progress and related revenue recognition. During the three months ended March 31, 2021 and 2020, the Company recognized license revenue of $479,000 and $0, respectively.

Collaborative Research Revenue

Prior to the adoption of ASC 606, the Company recognized research revenue over the term of various agreements, as negotiated contracted amounts were earned or reimbursable costs were incurred related to those agreements. Negotiated contracted amounts were earned in relative proportion to the performance required under the applicable contracts. Any amounts received prior to satisfying these revenue recognition criteria were recorded as deferred revenue.

To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies the relevant performance obligations.

Collaborative research revenue is recognized as research services are performed over the development periods for each agreement. During the three months ended March 31, 2021 and 2020, the Company recognized collaborative research revenue of $0 and $45,000, respectively.

Contract Balances

The timing of the Company’s revenue recognition may differ from the timing of payment by the Company’s customers. The Company records a receivable when revenue is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.

Prior to the adoption of ASC 606 effective April 1, 2020 (using the modified retrospective approach), the Company accounted for its revenue arrangements under ASC 605, Revenue Recognition (“ASC 605”). Under ASC 605, revenue arrangements with multiple deliverables were evaluated for proper accounting treatment. In these arrangements, the Company recorded revenue as separate units of accounting if the delivered items have value to the customer on a stand-alone basis, if the arrangement includes a general right of return relative to the delivered items, and if delivery or performance of the undelivered items is considered probable and substantially within the Company’s control.

Under ASC 605, revenues from product sales which included both the analyzer and various immunoassay products (“reagents”) were generally recognized upon shipment, as no significant continuing performance obligations remained post shipment. Cash payments received in advance were classified as deferred revenue and recorded as a liability. The Company was generally not contractually obligated to accept returns, except for defective products. Revenue was recorded net of an allowance for estimated returns.

Multiple element arrangements included contracts that combined both the Company’s analyzer and a customer’s future reagent purchases under a single contract. In some sales contracts, the Company provided analyzers at no charge to customers. Title to the analyzer was maintained by the Company and the analyzer was returned by the customer to the Company at the end of the purchase agreement.

During the three months ended March 31, 2021 and 2020, product sales are stated net of an allowance for estimated returns of approximately $0 and $12,000, respectively.

Deferred Revenue

Prior to the adoption of ASC 606, payments received in advance from customers pursuant to certain collaborative research and license agreements, deposits against future product sales, multiple element arrangements and extended warranties are recorded as a current or non-current deferred revenue liability based on the time from the balance sheet date to the future date of revenue recognition. The adoption of ASC 606 had no material effect on deferred revenue.

Operating Leases

The Company adopted ASC Topic 842, Leases (“Topic 842”) in the nine-months transition period ended December 31, 2020. In accordance with the guidance in Topic 842, the Company recognizes lease liabilities and corresponding right-of-use-assets for all leases with terms of greater than 12 months. Leases with a term of 12 months or less will be accounted for in a manner similar to the guidance for operating leases prior to the adoption of Topic 842. Refer to Recent Accounting Pronouncements below and Note 9, Leases for more information.

Property and Equipment, Net

Property and equipment are stated at cost and are presented net of accumulated depreciation. Depreciation is provided for on a straight-line basis over the estimated useful lives of the related assets as follows:

Machinery and equipment	5 years
Computer equipment	3 years
Molds and tooling	5 years
Office furniture and equipment	5 years

Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or their estimated useful lives. The Company occasionally designs and builds its own machinery. The costs of these projects, which includes the cost of construction and other direct costs attributable to the construction, are capitalized as construction in progress. No provision for depreciation is made on construction in progress until the relevant assets are completed and placed in service.

The Company’s policy is to evaluate the remaining lives and recoverability of long-term assets on at least an annual basis or when conditions are present that indicate impairment.

Intangible Assets, Net

Intangibles consist of patent-related costs and costs for in-license agreements. Management reviews the carrying value of intangible assets that are being amortized on an annual basis or sooner when there is evidence that events or changes in circumstances may indicate that impairment exists. The Company considers relevant cash flow and profitability information, including estimated future operating results, trends and other available information, in assessing whether the carrying value of intangible assets being amortized can be recovered.

If the Company determines that the carrying value of intangible assets will not be recovered from the undiscounted future cash flows expected to result from the use and eventual disposition of the underlying assets, the Company considers the carrying value of such intangible assets as impaired and reduces them by a charge to operations in the amount of the impairment.

Costs related to acquiring patents and licenses are capitalized and amortized over their estimated useful lives, which is generally 5 to 17 years, using the straight-line method. Amortization of patents and licenses commences once final approval of the patent has been obtained. Patent and licenses costs are charged to operations if it is determined that the patent will not be obtained.

The carrying value of the patents of approximately $172,000 and $169,000 at March 31, 2021 and December 31, 2020, respectively, are stated net of accumulated amortization of approximately $307,000 and $303,000, respectively. Amortization of patents charged to operations for the three months ended March 31, 2021 and 2020 were approximately $3,000 for each period. Total future estimated amortization of patent costs for the five succeeding years is approximately $11,000 for the remaining nine months in the year ending December 31, 2021, approximately $15,000 for each of the years ending December 31, 2022 through 2023, approximately $14,000 for year 2024, approximately $11,000 for year 2025 and approximately $106,000 thereafter.

The carrying value of the in-licenses of approximately $17,000 and $19,000 at March 31, 2021 and December 31, 2020 are stated net of accumulated amortization of approximately $402,000 and $400,000, respectively. Amortization of licenses charged to operations for each of the three month periods ended March 31, 2021 and 2020 was approximately $2,000. Total future estimated amortization of license costs is approximately $5,000 for the remaining nine months in the year ending December 31, 2021, approximately $7,000 for the year ending December 31, 2022 and approximately $5,000 for the year ending December 31, 2023.

Derivative Financial Instruments and Warrant Liabilities

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. Depending on the features of the derivative financial instrument, the Company uses either the Black-Scholes option-pricing model or a Monte Carlo simulation to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period (see Note 8).

Fair Value Measurements

The Company determines the fair value measurements of applicable assets and liabilities based on a three-tier fair value hierarchy established by accounting guidance and prioritizes the inputs used in measuring fair value. The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

	●	Level 1 - Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
	●	Level 2 - Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs in markets that are not considered to be active; and
	●	Level 3 - Inputs that are unobservable.

Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and debt are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.

Stock-Based Compensation

Stock-based compensation cost for equity awards granted to employees and non-employees is measured at the grant date based on the calculated fair value of the award using the Black-Scholes option-pricing model, and is recognized as an expense, under the straight-line method, over the requisite service period (generally the vesting period of the equity grant). If the Company determines that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for the Company-issued stock options could change significantly. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense to employees and non-employees determined at the date of grant.

Income Taxes

Deferred income taxes are recognized for temporary differences in the basis of assets and liabilities for financial statement and income tax reporting that arise due to net operating loss carry forwards, research and development credit carry forwards and from using different methods and periods to calculate depreciation and amortization, allowance for doubtful accounts, accrued vacation, research and development expenses, and state taxes. A provision has been made for income taxes due on taxable income and for the deferred taxes on the temporary differences. The components of the deferred tax asset and liability are individually classified as current and noncurrent based on their characteristics.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Realization of the deferred income tax asset is dependent on generating sufficient taxable income in future years.

Sales and Excise Taxes

Sales and other taxes collected from customers and subsequently remitted to government authorities are recorded as accounts receivable with corresponding tax payable. These balances are removed from the balance sheet as cash is collected from customers and remitted to the tax authority.

Warranty Costs

The Company’s warranty policy generally provides for one year of coverage against defects and nonperformance within published specifications for sold analyzers and for the term of the contract for equipment held for lease. The Company accrues for estimated warranty costs in the period in which the revenue is recognized based on historical data and the Company’s best estimates of analyzer failure rates and costs to repair.

Accrued warranty liabilities were approximately $51,000 and $25,000, respectively, at March 31, 2021 and December 31, 2020 and are included in accrued expenses and other current liabilities on the balance sheets. Warranty costs were approximately $25,000 and $27,000 for the three months ended March 31, 2021 and 2020, respectively, and are included in cost of product sales in the statements of operations.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), which extends the effective date of Topic 326 for certain companies until fiscal years beginning after December 15, 2022. The new standard will be effective for the Company in the first quarter of fiscal year beginning January 1, 2023, and early adoption is permitted. The Company has not completed its review of the impact of this standard on its consolidated financial statements. However, based on the Company’s history of immaterial credit losses from trade receivables, management does not expect that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the beginning of the Company’s annual fiscal year. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”). The guidance in Topic 606 provides that an entity should recognize revenue to depict the transfer of goods or services provided and establishes the following steps to be applied by an entity: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies the performance obligation. Topic 606 was effective for fiscal years beginning after December 15, 2019 for the Company, based on the issuance of ASU 2020-05, which provided deferral of the effective date for an additional one year in response to the coronavirus (COVID-19) pandemic. The Company adopted the new revenue standard as of April 1, 2020 using the modified retrospective approach. The adoption of ASU 2014-09/Topic 606 did not have a material impact on its financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718, Compensation—Stock Compensation, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU No. 2018-07 supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. The amendments in ASU No. 2018-07 are effective beginning in 2020, with early adoption permitted, but no earlier than a company’s adoption date of Topic 606 Revenue from Contracts with Customers. The Company elected to adopt ASU 2018-07 as of April 1, 2020. The adoption did not require the Company to restate previously reported results.

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842) Targeted Improvements (“Topic 842”), which provides for an alternative transition method by allowing companies to continue to use the legacy guidance in Topic 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption of the new leases standard and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented. The Company adopted the standard as of April 1, 2020 and the most significant impact was the recognition of a right-of-use asset and lease liability for the Company’s sole operating lease—the Company had no finance leases. Adoption of Topic 842 did not require the Company to restate previously reported results as it elected to apply a modified retrospective approach at the beginning of the period of adoption rather than at the beginning of the earliest comparative period presented.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement,” an amendment to the accounting guidance on fair value measurements. The guidance modifies the disclosure requirements on fair value measurements, including the removal of disclosures of the amount of and reasons for transfers between Level 1 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The guidance also adds certain disclosure requirements related to Level 3 fair value measurements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU No. 2018-13 on April 1, 2020 and the adoption of this guidance did not have a material impact on its financial statements.

Other accounting standard updates are either not applicable to the Company or are not expected to have a material impact on the Company’s condensed consolidated financial statements.

NOTE 2 — LIQUIDITY

The Company has incurred recurring losses from operations and has an accumulated deficit at March 31, 2021, and the Company expects to continue to incur losses subsequent to the balance sheet date of March 31, 2021. The Company’s reverse recapitalization transaction with Ritter closed in May 2020 together with an associated new equity capital raise of approximately $4.0 million, and approximately $1.9 million in convertible notes payable were converted into shares of the Company’s capital stock. In July, August and December 2020, the Company raised an additional $30.0 million through three Securities Purchase Agreements with a single institutional investor (see Note 11). Based on the Company’s current cash position, currently planned expenditures and level of operations, the Company believes it has sufficient capital to fund operations for the 12-month period subsequent to the issuance of the interim financial information. However, there is no assurance that profitable operations will ever be achieved, or if achieved, could be sustained on a continuing basis. Also, beyond such 12-month period, planned research and development activities, capital expenditures, clinical and pre-clinical testing, and commercialization activities of the Company’s products are expected to require significant additional financing. Additional financing may not be available on acceptable terms or at all.

NOTE 3 — INVENTORY, NET

Inventory, net consisted of the following at March 31, 2021 and December 31, 2020:

	March 31, 2021		December 31, 2020
Raw materials	$	614,926	$	579,765
Work in process		182,550		309,826
Finished goods		88,379		63,867
	$	885,855	$	953,458

NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following at March 31, 2021 and December 31, 2020:

	March 31, 2021		December 31, 2020
Prepaid insurance	$	955,019	$	1,307,864
Prepaid manufacturing expenses		57,117		1,181,029
Prepaid investor relations expenses		133,501		150,000
Other prepaid expenses		74,122		40,001
	$	1,219,759	$	2,678,894

NOTE 5 — PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following at March 31, 2021 and December 31, 2020:

	March 31, 2021			December 31, 2020
Machinery and equipment	$	2,401,470		$	2,401,470
Construction in progress–equipment		89,122			104,400
Computer equipment		451,808			443,865
Leasehold improvements		321,033			321,033
Molds and tooling		260,002			260,002
Office furniture and equipment		138,699			138,699
		3,662,134			3,669,469
Less Accumulated depreciation		(3,437,202	)		(3,422,146	)
	$	224,932		$	247,323

Depreciation expense relating to property and equipment was approximately $15,000 and $10,000 for the three months ended March 31, 2021 and 2020, respectively.

NOTE 6 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following at March 31, 2021 and December 31, 2020:

	March 31, 2021		December 31, 2020
Board compensation	$	15,833	$	15,091
Vacation		248,071		230,457
Royalties		17,193		491
Research and development		882,040		237,504
Professional fees		181,636		58,261
Warranty costs		51,487		24,871
Payroll		69,358		4,566
Patent and license fees		—		7,204
Franchise, Sales and use taxes		139,257		30,353
Income taxes		6,256		3,326
Interest		—		—
Other		258,293		134,614
	$	1,869,424	$	746,738

NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at March 31, 2021 and December 31, 2020:

	March 31, 2021			December 31, 2020
Insurance Financing Agreement with a finance company, monthly payments of $119,943 including interest of 4.54% per annum; secured by an insurance policy; paid January 2021	$	—		$	119,491
Equipment Financing Agreement with a bank, monthly payments of $720 including imputed interest at 6.95% per annum; secured by laboratory equipment; due October 2022		12,913			14,826
Equipment Financing Agreement with a bank, monthly payments of $596 including imputed interest at 6.59% per annum; secured by manufacturing equipment; due July 2021		2.693			4,422
		15,606			138,739
Less current portion		(10,683	)		(131,766	)
Notes Payable, net of current portion	$	4,923		$	6,973

Future maturities of notes payable are as follows as of March 31, 2021:

Year Ending December 31,	Amount
2021 (nine months)	$	8,633
2022		6,973
Total balance	$	15,606

NOTE 8 – WARRANT LIABILITIES

In 2004, the Company issued warrants to various investors and brokers for the purchase of Series C preferred stock in connection with a private placement (the “Series C Warrants”). The Series C Warrants were subsequently extended and, upon closing of the reverse recapitalization transaction with Ritter, exchanged for warrants to purchase common stock of the Company, pursuant to the Series C Warrant terms as adjusted. The Series C Warrants were classified as liabilities, but had minimal fair value prior to the merger with Ritter.

In exchange for the Series C Warrants, upon closing of the merger with Ritter, the holders received warrants to purchase an aggregate of 4,713,490 shares of the Company’s common stock at $0.72 per share, subject to adjustment. As of March 31, 2021, the warrants received in exchange for the Series C Warrants have remaining terms ranging from 2.7 to 3.2 years. The warrants were determined to be liability-classified pursuant to the guidance in ASC 480 and ASC 815-40, resulting from inclusion of a leveraged ratchet provision for subsequent dilutive issuances.

The following table summarizes the activity in the warrants received in exchange for the Series C Warrants for the three months ended March 31, 2021:

	Common Stock Warrants (received in exchange for the Series C Warrants)
	Shares			Weighted– Average Exercise Price		Range of Exercise Price		Weighted– Average Remaining Life (Years)
Total outstanding – December 31, 2020		3,378,596		$	0.72
Exercised		(473,608	)		0.72
Forfeited		(36,097	)		0.72
Expired		—			—
Granted		—			—
Total outstanding – March 31, 2021		2,868,891		$	0.72
Exercisable		2,868,891		$	0.72	$	0.72		2.75

Of the 473,608 shares issued upon the exercise of warrants during the three months ended March 31, 2021, 192,373 shares were issued upon net-exercises rather than upon exercises for cash.

The following table summarizes the Series C Warrants activity for the three months ended March 31, 2020:

	Series C Preferred Stock Warrants
	Shares		Weighted– Average Exercise Price		Range of Exercise Price		Weighted– Average Remaining Life (Years)
Total outstanding – December 31, 2019		1,441,180	$	2.35
Forfeited		—		—
Expired		—		—
Granted		—		—
Total outstanding – March 31, 2020		1,441,180	$	2.35
Exercisable		1,441,180	$	2.35	$	2.25 – 2.70		4.85

The following table presents the Company’s fair value hierarchy for its warrant liabilities (all of which arise under the warrants received in exchange for the Series C Warrants) measured at fair value on a recurring basis using Level 3 inputs as of March 31, 2021:

Quoted

Market

Significant

Prices for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Warrant liabilities

(Level 1)

(Level 2)

(Level 3)

Total

Balance as of March 31, 2021

—

6,187,200

There were no transfers of financial assets or liabilities between category levels for the three months ended March 31, 2021.

During the three months ended March 31, 2021 the Company experienced $2.1 million in other income because the fair value of the warrant liabilities declined to $6.2 million from $8.3 million at December 31, 2020, primarily due to warrant exercises. For the three months ended March 31, 2020, change in fair value of warrant liabilities was $0 because the fair value was immaterial at both the beginning and the end of the three months ended March 31, 2020.

The value of the warrant liabilities was based on a valuation received from an independent valuation firm determined using a Monte-Carlo simulation. For volatility, the Company considers comparable public companies as a basis for its expected volatility to calculate the fair value of common stock warrants and transitions to its own volatility as the Company develops sufficient appropriate history as a public company. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected term of the common stock warrant. The Company uses an expected dividend yield of zero based on the fact that the Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future. Any significant changes in the inputs may result in significantly higher or lower fair value measurements.

The following are the weighted average and the range of assumptions used in estimating the fair value of warrant liabilities (weighted average calculated based on the number of outstanding warrants on each issuance) as of March 31, 2021:

	March 31, 2021
	Range			Weighted Average
Risk-free interest rate		0.28% — 0.42	%		0.30	%
Expected volatility (peer group)		81.00 — 84.00	%		83.52	%
Term of warrants (in years)		2.65 — 3.24			2.75
Expected dividend yield		0.00	%		0.00	%

NOTE 9 — LEASES

The Company leases its facilities under a long-term operating lease agreement expiring in October 2022. The tables below show the operating lease right-of-use assets and operating lease liabilities as of December 31, 2020 and the balances as of March 31, 2021, including the changes during the periods:

	Operating lease right-of-use assets
Net right-of-use assets at December 31, 2020		430,795
Less amortization of operating lease right-of-use assets		(54,179	)
Operating lease right-of-use assets at March 31, 2021	$	376,616

	Operating lease liabilities
At December 31, 2020	$	491,565
Less principal payments on operating lease liabilities		(60,710	)
Operating lease liabilities at March 31, 2021		430,855
Less non-current portion		(168,254	)
Current portion at March 31, 2021	$	262,601

As of March 31, 2021, the Company’s operating leases have a weighted-average remaining lease term of 1.6 years and a weighted-average discount rate of 8.9%.

As of March 31, 2021, future minimum payments during the next five fiscal years and thereafter are as follows:

Year Ending December 31,	Amount
2021 (nine months)	$	217,156
2022		246,650
Total		463,806
Less present value discount		(32,951	)
Operating lease liabilities	$	430,855

Total lease expense was approximately $86,000 and $84,000, respectively, for the three month periods ended March 31, 2021 and 2020. Lease expense was recorded in cost of product sales, general and administrative expenses, research and development and sales and marketing expenses.

NOTE 10 — RESEARCH AND LICENSE AGREEMENTS

The University of Louisville Research Foundation

Between June 2018 and September 2020, the Company entered into license and sponsored research agreements with the University of Louisville Research Foundation (“ULRF”) for QN-247, a novel aptamer-based compound that has shown promise as an anticancer drug. Under the agreements, the Company will take over development, regulatory approval and commercialization of the compound from ULRF and is responsible for maintenance of the related intellectual property portfolio. In return, ULRF received a $50,000 convertible promissory note in payment of an upfront license fee, which was subsequently converted into the Company’s common stock, and the Company agreed to reimburse ULRF for sponsored research expenses of up to $805,000 and prior patent costs of up to $200,000. In addition, the Company agreed to pay ULRF (i) royalties, on patent-covered net sales associated with the commercialization of anti-nucleolin agent-conjugated nanoparticles, of 4% (on net sales up to a cumulative $250,000,000) or 5% (on net sales above a cumulative $250,000,000), until expiration of the last to expire of the licensed patents, (ii) 30% to 50% of any non-royalty sublicensee income received (50% for sublicenses granted in the first two years of the ULRF license agreement, 40% for sublicenses granted in the third or fourth years of the ULRF license agreement, and 30% for sublicenses granted in the fifth year of the ULRF license agreement or thereafter), (iii) reimbursements for ongoing costs associated with the preparation, filing, prosecution and maintenance of licensed patents, incurred prior to June 2018, and (iv) payments ranging from $100,000 to $5,000,000 upon the achievement of certain regulatory and commercial milestones. Milestone payments for the first therapeutic indication would be $100,000 for first dosing in a Phase 1 clinical trial, $200,000 for first dosing in a Phase 2 clinical trial, $350,000 for first dosing in a Phase 3 clinical trial, $500,000 for regulatory marketing approval and $5,000,000 upon achieving a cumulative $500,000,000 of Licensed Product sales; the Company would also pay another $500,000 milestone payment for any additional regulatory marketing approval for each additional therapeutic (or diagnostic) indication. The Company also must pay ULRF shortfall payments if the total amounts actually paid with respect to royalties and non-royalty sublicensee income for any year is less than the applicable annual minimum (ranging from $10,000 to $50,000) for such year.

There was approximately $62,000 and $0 in sponsored research expenses related to these agreements for the three months ended March 31, 2021 and 2020, respectively, and these amounts are recorded in research and development expenses in the statements of operations. Minimum annual royalties of $0 and $10,000 related to these agreements are included in research and development expenses in the statements of operations for the three months ended March 31, 2021 and 2020, respectively. License costs were approximately $36,000 and $0 related to these agreements for the three months ended March 31, 2021 and 2020, respectively, and are included in research and development expenses in the statements of operations.

In March 2019, the Company entered into a sponsored research agreement and an option for a license agreement with ULRF for development of several small-molecule RAS interaction inhibitor drug candidates. Under the terms of this agreement, the Company will reimburse ULRF for sponsored research expenses of up to $693,000 for this program. In February 2021, the Company extended the term of this agreement for an additional 18 months (expires July 2022) and increased the amount that the Company will reimburse ULRF for sponsored research expenses from $693,000 to approximately $1.4 million. In July 2020, the Company entered into an exclusive license agreement with ULRF for RAS interaction inhibitor drug candidates. Under the agreement, the Company will take over development, regulatory approval and commercialization of the candidates from ULRF and is responsible for maintenance of the related intellectual property portfolio. In return, ULRF received approximately $112,000 for an upfront license fee and reimbursement of prior patent costs. In addition, the Company has agreed to pay ULRF (i) royalties, on patent-covered net sales associated with the commercialization, of 4% (on net sales up to a cumulative $250,000,000) or 5% (on net sales above a cumulative $250,000,000), until expiration of the licensed patent, and 2.5% (on net sales for any sales not covered by Licensed Patents), (ii) 30% to 50% of any non-royalty sublicensee income received (50% for sublicenses granted in the first two years of the ULRF license agreement, 40% for sublicenses granted in the third or fourth years of the ULRF license agreement, and 30% for sublicenses granted in the fifth year of the ULRF license agreement or thereafter), (iii) reimbursements for ongoing costs associated with the preparation, filing, prosecution and maintenance of licensed patents, incurred prior to July 2020, and (iv) payments ranging from $50,000 to $5,000,000 upon the achievement of certain regulatory and commercial milestones. Milestone payments for the first therapeutic indication would be $50,000 for first dosing in a Phase 1 clinical trial, $100,000 for first dosing in a Phase 2 clinical trial, $150,000 for first dosing in a Phase 3 clinical trial, $300,000 for regulatory marketing approval and $5,000,000 upon achieving a cumulative $500,000,000 of Licensed Product sales. The Company also must pay ULRF shortfall payments if the total amounts actually paid with respect to royalties and non-royalty sublicensee income for any year is less than the applicable annual minimum (ranging from $20,000 to $100,000) for such year.

Sponsored research expenses related to these agreements for the three months ended March 31, 2021 and 2020 were approximately $107,000 and $108,000, respectively, and are recorded in research and development expenses in the statements of operations. License costs related to these agreements for the three months ended March 31, 2021 and 2020 were approximately $46,000 and $0, respectively, and are included in research and development expenses in the statements of operations.

In June 2020, the Company entered into an exclusive license agreement with ULRF for its intellectual property in the use of QN-165 as a treatment for COVID-19. Under the agreement, the Company will take over development, regulatory approval and commercialization of the compound (for such use) from ULRF and is responsible for maintenance of the related intellectual property portfolio. In return, ULRF received approximately $24,000 for an upfront license fee and reimbursement of prior patent costs. In addition, the Company was required to enter into a separate sponsored research agreement with ULRF (for QN-165 as a treatment for COVID-19) for at least $250,000. In November 2020, the Company executed a sponsored research agreement with ULRF (for QN-165 as a treatment for COVID-19) supporting up to approximately $430,000 in research which satisfied this requirement.

In addition, the Company has agreed to pay ULRF (i) royalties, on patent-covered net sales associated with the commercialization of QN-165 as a treatment for COVID-19, of 4% (on net sales up to a cumulative $250,000,000) or 5% (on net sales above a cumulative $250,000,000), until expiration of the licensed patents, and 2.5% (on net sales for any sales not covered by Licensed Patents), (ii) 30% to 50% of any non-royalty sublicensee income received (50% for sublicenses granted in the first two years of the ULRF license agreement, 40% for sublicenses granted in the third or fourth years of the ULRF license agreement, and 30% for sublicenses granted in the fifth year of the ULRF license agreement or thereafter), (iii) reimbursements for ongoing costs associated with the preparation, filing, prosecution and maintenance of licensed patents, incurred prior to June 2020, and (iv) payments ranging from $50,000 to $5,000,000 upon the achievement of certain regulatory and commercial milestones. Milestone payments would be $50,000 for first dosing in a Phase 1 clinical trial, $100,000 for first dosing in a Phase 2 clinical trial, $150,000 for first dosing in a Phase 3 clinical trial, $300,000 for regulatory marketing approval and $5,000,000 upon achieving a cumulative $500,000,000 of Licensed Product sales. The Company also must pay ULRF shortfall payments if the total amounts actually paid with respect to royalties and non-royalty sublicensee income for any year is less than the applicable annual minimum (ranging from $5,000 to $50,000) for such year.

Sponsored research expenses related to these agreements for the three months ended March 31, 2021 and 2020 were approximately $69,000 and $0, respectively, and are recorded in research and development expenses in the statements of operations. License costs related to these agreements for the three months ended March 31, 2021 and 2020 were $0 for each period.

Advanced Cancer Therapeutics

In December 2018, the Company entered into a license agreement with Advanced Cancer Therapeutics, LLC (“ACT”), granting the Company exclusive rights to develop and commercialize QN-165, an aptamer-based drug candidate. In return, ACT received a $25,000 convertible promissory note in payment of an upfront license fee, which was subsequently converted into the Company’s common stock. In addition, the Company agreed to pay ACT (i) royalties, on net sales associated with the commercialization of QN-165, of 2% (only if patent-covered and only on net sales above a cumulative $3,000,000) or 1% (if not patent-covered, but only on net sales above a cumulative $3,000,000), until the 15th anniversary of the ACT license agreement and (ii) milestone payments of $100,000 for the Company raising a cumulative total of $2,000,000 in new equity financing after the date of the ACT license agreement, $100,000 upon any first QN-165-based licensed product receiving the CE Mark or similar FDA status, and $500,000 upon cumulative worldwide QN-165-based licensed product net sales reaching $3,000,000. For the three months ended March 31, 2021 and 2020, license costs of approximately $2,000 and $0 related to this agreement, respectively, are included in research and development expenses in the statements of operations.

Prediction Biosciences

In November 2015, the Company entered into a long-term development and supply agreement with Prediction Biosciences SAS to develop and manufacture diagnostic tests for use in the stroke point-of-care market. The Company recognizes development revenue and product sales over the performance period of the contract. For the three months ended March 31, 2021 and 2020, there was $0 and $45,000, respectively, in collaborative research revenue related to this agreement.

Sekisui Diagnostics

During the year ended March 31, 2018, the Company extended a strategic partnership entered into in May 2016 with Sekisui Diagnostics, LLC (“Sekisui”) until May 2022. The Company appointed Sekisui as its diagnostics commercial partner and exclusive worldwide distributor with the exception of certain customer accounts retained by Qualigen. The agreement contains a right of first refusal for Sekisui against any potential acquisition of the Company until May 2022.

There were product sales to Sekisui of approximately $1.0 million for both of the three month periods ended March 31, 2021 and 2020, related to this agreement.

Yi Xin

In October 2020, the Company entered into a Technology Transfer Agreement with Yi Xin Zhen Duan Jishu (Suzhou) Ltd. (“Yi Xin”), of Suzhou, China, for Yi Xin to develop, manufacture and sell new generations of diagnostic test systems based on the Company’s core FastPack technology. In addition, the Technology Transfer Agreement authorized Yi Xin to manufacture and sell the Company’s current generations of FastPack System diagnostic products (1.0, IP and PRO) in China.

Under the Technology Transfer Agreement, the Company received net cash payments of $250,000 in the final quarter of the year ended December 31, 2020, classified as deferred revenue on the December 31, 2020 balance sheet, and a cash payment of $420,000 during the three months ended March 31, 2021. The Company will also receive low- to mid-single-digit royalties on any future new-generations and current-generations product sales by Yi Xin. Of these amounts, the Company recognized approximately $38,000 in product sales and $479,000 in license revenue included in the statement of operations for the three months ended March 31, 2021. The Company provided technology transfer and patent/know-how license rights to facilitate Yi Xin’s development and commercialization.

The Company gave Yi Xin the exclusive rights for China – which is a market the Company has not otherwise entered – both for Yi Xin’s new generations of FastPack-based products and for Yi Xin-manufactured versions of the Company’s existing FastPack product lines. Yi Xin will also have the right to sell its new generations of FastPack-based diagnostic test systems throughout the world (but not to or toward current customers of the Company’s existing generations of FastPack products); any such non-China sales would, until May 1, 2022, need to be through Sekisui. In addition, after May 1, 2022, Yi Xin will have the right to sell Yi Xin-manufactured versions of existing FastPack 1.0, IP and PRO product lines worldwide (other than in the United States and other than to or toward current non-US customers of those products). Also, after May 1, 2022, Yi Xin will have the right to buy Company-manufactured FastPack 1.0, IP and PRO products from the Company at distributor prices for resale in and for the United States (but not to or toward current US customers of those products); the Company did not license Yi Xin to sell in the United States market any Yi Xin-manufactured versions of those legacy FastPack 1.0, IP and PRO product lines, even after May 1, 2022. In the Technology Transfer Agreement, the Company confirmed that it would not, after May 1, 2022, seek new FastPack customers outside the United States.

STA Pharmaceutical

In November 2020, the Company entered into a contract with STA Pharmaceutical Co., Ltd., a subsidiary of WuXi AppTec, for GMP production of QN-165, the Company’s lead drug candidate for the treatment of COVID-19 and other viral diseases, for potential clinical trials in 2021. In connection with this agreement, the Company paid an upfront deposit of approximately $1.1 million which was classified as prepaid expenses on the December 31, 2020 balance sheet date, and all of which was included in research and development expenses in the statement of operations for the three months ended March 31, 2021.

NOTE 11 — STOCKHOLDERS’ EQUITY

As of March 31, 2021 and December 31, 2020, the Company had two classes of capital stock: common stock and Series Alpha convertible preferred stock.

Common Stock

Holders of common stock generally vote as a class with the holders of the preferred stock and are entitled to one vote for each share held. Subject to the rights of the holders of the preferred stock to receive preferential dividends, the holders of common stock are entitled to receive dividends when and if declared by the Board of Directors. Following payment of the liquidation preference of the preferred stock, as of March 31, 2021 any remaining assets would be distributed ratably among the holders of the common stock and, on an as-if-converted basis, the holders of Series Alpha convertible preferred stock upon liquidation, dissolution or winding up of the affairs of the Company. The holders of common stock have no preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions.

At March 31, 2021, the Company has reserved 13,886,590 shares of authorized but unissued common stock for possible future issuance. At March 31, 2021, shares were reserved in connection with the following:

Exercise of outstanding stock options and future grants of stock options			4,033,856
Exercise of outstanding stock warrants			9,609,316
Conversion of outstanding Series Alpha preferred stock			243,418
Total			13,886,590

Series Alpha Preferred Stock

In the three-month period ended March 31, 2021, no shares of Series Alpha convertible preferred stock were converted into shares of the Company’s common stock, and there were 180 shares of Series Alpha preferred stock outstanding at March 31, 2021.

Alpha Securities Purchase Agreements

On July 10, 2020, the Company closed a Securities Purchase Agreement (dated July 8, 2020) with a single institutional investor for the purchase and sale for $8.0 million for (i) 1,140,570 shares of Company common stock, (ii) 780,198 pre-funded warrants (i.e., warrants to purchase shares of Company common stock, for which the exercise price is almost entirely prepaid) and (iii) 1,920,768 two-year warrants to purchase shares of Company common stock for an exercise price of $5.25 per share. Both sets of warrants included a 9.99% beneficial-ownership blocker provision. The 780,198 pre-funded warrants were then exercised on July 21 and 22, 2020.

On August 4, 2020, the Company closed a Securities Purchase Agreement (dated August 2, 2020) with a single institutional investor for the purchase and sale for $10.0 million for (i) 1,717,106 shares of Company common stock, and (ii) 1,287,829 two-year warrants to purchase shares of Company common stock for an exercise price of $6.00 per share. The warrants included a 9.99% beneficial-ownership blocker provision.

On December 18, 2020, the Company closed a Securities Purchase Agreement (dated December 16, 2020) with a single institutional investor for the purchase and sale for $12,000,000 of (i) 2,370,786 shares of Company common stock, (ii) 1,000,000 pre-funded warrants (i.e., warrants to purchase shares of Company common stock, for which the exercise price is almost entirely prepaid) (iii) 1,348,314 two-year warrants to purchase shares of Company common stock for an exercise price of $4.07 per share, and (iv) 842,696 warrants (first exercisable 6 months after issuance, and with an expiration date 30 months after issuance) to purchase shares of Company common stock for an exercise price of $4.07 per share. The warrants included a 9.99% beneficial-ownership blocker provision. The 1,000,000 pre-funded warrants were exercised on February 4, 2021.

Stock Options and Warrants

The Company recognizes all compensatory share-based payments as compensation expense over the service period, which is generally the vesting period.

In April 2020, the Company adopted the 2020 Stock Incentive Plan (the “2020 Plan”) which provides for the granting of incentive or nonstatutory common stock options to qualified employees, officers, directors, consultants and other service providers. At March 31, 2021 and 2020 there were 3,940,000 and 0 outstanding options respectively under the 2020 Plan and there were 117,157 and 0 options available respectively for future grant.

The following represents a summary of the options granted (under the 2020 Plan and otherwise) to employees and non-employee service providers that are outstanding at March 31, 2021, and changes during the three-month period then ended:

	Shares			Weighted– Average Exercise Price		Range of Exercise Price		Weighted– Average Remaining Life (Years)
Total outstanding – December 31, 2020		4,011,356		$	7.05	$	3.52—1,465.75		9.29
Granted		27,000			3.29		3.29		9.91
Expired		—			—		—		—
Forfeited		(4,500	)		3.68		3.52—4.97		9.78
Total outstanding – March 31, 2021		4,033,856		$	7.03	$	3.29—1,465.75		9.04
Exercisable (vested)		108,856		$	81.38	$	4.97—1,465.75		2.26
Non-Exercisable (non-vested)		3,925,000		$	4.96	$	3.29—5.13		9.23

There was approximately $1.3 million and $0 of compensation costs related to outstanding options for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, there was approximately $11.4 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 2.22 years.

No stock options were exercised during the three months ended March 31, 2021 and 2020.

The exercise price for an option issued under the 2020 Plan is determined by the Board of Directors, but will be (i) in the case of an incentive stock option (A) granted to an employee who, at the time of grant of such option, is a 10% stockholder, no less than 110% of the fair market value per share on the date of grant; or (B) granted to any other employee, no less than 100% of the fair market value per share on the date of grant; and (ii) in the case of a non-statutory stock option, no less than 100% of the fair market value per share on the date of grant. The options awarded under the 2020 Plan will vest as determined by the Board of Directors but will not exceed a ten-year period. The weighted average grant date fair value per share of options granted during the three months ended March 31, 2021 was $3.29.

Fair Value of Equity Awards

The Company utilizes the Black-Scholes option pricing model to value awards under its Plans. Key valuation assumptions include:

●	Expected dividend yield. The expected dividend is assumed to be zero, as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock.

●	Expected stock-price volatility. The Company’s expected volatility is derived from the average historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term.

●	Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.

●	Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

The material factors incorporated in the Black-Scholes model in estimating the fair value of the options granted for the periods presented were as follows:

SEC Form 10-Q filed by Qualigen Therapeutics, Inc.