FF EAI Robotics Ecosystem Inc.: Form 10-Q for the period ended Jun 30, 2023

The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the audited financial statements and notes thereto as of and for the twelve months ended December 31, 2022, which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 2, 2023, as amended by Amendment No. 1 filed with the SEC on July 7, 2023 ( the “2022 Annual Report.) As used in this Quarterly Report, unless the context suggests otherwise, “we,” “us,” “our,” or “Qualigen” refer to Qualigen Therapeutics, Inc. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report contains forward-looking statements by the Company that involve risks and uncertainties and reflect the Company’s judgment as of the date of this Report. These statements generally relate to future events or the Company’s future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” or “continue” or the negative of these words or other similar terms or expressions that concern the Company’s expectations, strategy, plans or intentions. Such forward-looking statements may relate to, among other things, potential future development, testing and launch of products and product candidates. Actual events or results may differ from our expectations.

Some of the factors that we believe could cause actual results to differ from those anticipated or predicted include:

• there can be no assurance that we will successfully develop any drugs or therapeutic devices;
• there can be no assurance that preclinical or clinical development of our candidate drugs or therapeutic devices will be successful;
• there can be no assurance that clinical trials will be approved to begin by or will actually begin by or will proceed as contemplated by any projected timeline;
• there can be no assurance that clinical trials will complete enrollment as contemplated by any projected timeline;
• there can be no assurance that future clinical trial data will be favorable or that such trials will confirm any improvements over other products or lack negative impacts;
• there can be no assurance that any of our candidate drugs or therapeutic devices will receive the required regulatory approvals or that they will be commercially successful;
• there can be no assurance that we will be able to procure or earn sufficient working capital to complete the development, testing and launch of our prospective candidate drugs therapeutic products;
• there can be no assurance that patents will issue on our owned and in-licensed patent applications;
• there can be no assurance that such patents, if any, and our current owned and in-licensed patents would prevent competition;

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent in some future periods with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in other future periods.

Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

Overview

We are a diversified life sciences company focused on developing treatments for adult and pediatric cancers with potential for Orphan Drug designation.

Our cancer therapeutics pipeline includes QN-302, RAS and QN-247.

Our lead oncology therapeutics program, QN-302, is an investigational small molecule G4-selective transcription inhibitor with strong binding affinity to G4s prevalent in cancer cells. Such binding could, by stabilizing the G4s against DNA “unwinding,” help inhibit cancer cell proliferation. QN-302 is currently undergoing Good Laboratory Practice (GLP) toxicology studies.

Our Pan-RAS portfolio consists of a family of RAS oncogene protein-protein interaction inhibitor small molecules believed to inhibit or block mutated RAS genes’ proteins from binding to their effector proteins. Preventing this binding could stop tumor growth, especially in RAS-driven tumors such as pancreatic, colorectal and lung cancers.

Our investigational QN-247 compound binds nucleolin, a key multi-functional regulatory phosphoprotein that is overexpressed in cancer cells. Such binding could inhibit the cancer cells’ proliferation. The foundational aptamer of QN-247 is QN-165 (formerly referred to as AS1411), which the Company has deprioritized as a drug candidate for treating COVID-19 and other viral-based infectious diseases.

On November 23, 2022, we effected a 1-for-10, as determined by our board of directors, reverse stock split of our outstanding shares of common stock (the “Reverse Stock Split”). The Reverse Stock Split reduced our shares of outstanding common stock, stock options, and warrants to purchase shares of our common stock. Fractional shares of common stock that would have otherwise resulted from the Reverse Stock Split were rounded down to the nearest whole share and cash in lieu of fractional shares was paid to stockholders. All share and per share data for all periods presented in this section and the accompanying financial statements and related disclosures have been adjusted retrospectively to reflect the Reverse Stock Split. The number of authorized shares of common stock and the par value per share remains unchanged.

On May 26, 2022, we acquired 2,232,861 shares of Series A-1 Preferred Stock of NanoSynex Ltd. (“NanoSynex”) from Alpha Capital Anstalt (“Alpha Capital”) in exchange for 350,000 shares of our common stock and a prefunded warrant to purchase 331,464 shares of our common stock at an exercise price of $0.001 per share. These warrants were subsequently exercised on September 13, 2022. Concurrently with this transaction, we also purchased 381,786 shares of Series B preferred stock from NanoSynex for a total purchase price of $600,000. The transactions resulted in our acquiring a 52.8% interest in NanoSynex (the “NanoSynex Acquisition”). NanoSynex is a micro-biologics diagnostics company domiciled in Israel.

We do not expect to be profitable before products from our therapeutics pipeline are commercialized. To experience losses while therapeutic products are still under development is, of course, typical for biotechnology companies.

Recent Developments

FDA Clearance of IND Application for QN-302

On August 1, 2023, the Company announced that the U.S. Food and Drug Administration has cleared the Company’s investigational new drug (IND) application for QN-302, allowing us to commence our Phase 1 clinical trial for QN-302.

Sale of FastPack™ Diagnostics Business

On July 20, 2023, we sold all of the issued and outstanding shares of common stock of our wholly-owned subsidiary, Qualigen, Inc., which was the legal entity operating our FastPack™ diagnostics business, to Chembio Diagnostics, Inc. (“Chembio”), a wholly-owned subsidiary of Biosynex, S.A. (the “Transaction”). The aggregate net purchase price paid to us for the shares was $5.2 million in cash, based on a base purchase price of $5.8 million, subject to certain post-closing adjustments, upward or downward, as applicable. Of the $5.2 million, $450,000 is being held in escrow to satisfy certain indemnification obligations. Any amounts remaining in the Indemnity Escrow that have not been offset or reserved for claims will be released to us within five business days following the date that is 18 months after the closing. Following the consummation of the Transaction, Qualigen, Inc. became a wholly-owned subsidiary of Chembio.

Amendment and Settlement Agreement with NanoSynex Ltd.

On July 20, 2023, we entered into an Amendment and Settlement Agreement with Nanosynex (the “NanoSynex Amendment”), which amended the Master Funding Agreement for the Operational and Technology Funding of NanoSynex Ltd. (the “NanoSynex Funding Agreement”) with NanoSynex and our payment obligations to NanoSynex under such agreement. See “Contractual Obligations and Commitments” below.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements do not separate our diagnostics-related activities from our therapeutics-related activities. Although to date all of our reported revenue is diagnostics-related, our reported expenses represent the total of our diagnostics-related and therapeutics-related expenses.

This discussion and analysis is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to impairment of goodwill and other intangible assets, fair value of warrant liabilities, stock-based compensation, amortization and depreciation, inventory reserves, allowances for doubtful accounts and returns, and warranty costs. We base our estimates on historical experience, known trends and events and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 1 - Organization And Summary Of Significant Accounting Policies And Estimates to our unaudited condensed consolidated financial statements appearing in “Item 1. Condensed Consolidated Financial Statements (Unaudited),” we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations:

• Convertible debt
• Research and development
• Revenue recognition
• Allowance for doubtful accounts and returns
• Inventory
• Impairment of long-lived assets
• Business combination
• Goodwill
• In Process R&D
• Derivative financial instruments and warrant liabilities
• Stock-based compensation
• Income taxes

Warrant Liabilities

In 2004, Qualigen, Inc. issued Series C preferred stock warrants to investors and brokers in connection with a private placement. These warrants were subsequently extended and survived the May 2020 Ritter reverse recapitalization transaction and are now exercisable for Qualigen Therapeutics common stock. These warrants contain a provision that if we issue shares (except in certain defined scenarios) at a price below the warrants’ exercise price, the exercise price will be re-set to such new price and the number of shares underlying the warrants will be increased in the same proportion as the exercise price decrease. For accounting purposes, such warrants give rise to warrant liabilities. The operation of the “double-ratchet” provisions in these warrants in connection with the NanoSynex Acquisition and the convertible debenture financing transaction in December 2022 now allow the holders to exercise for a significantly higher number of shares than before. Accounting principles generally accepted in the United States of America (“U.S. GAAP”) require us to recognize the fair value of these warrants as warrant liabilities on our condensed consolidated balance sheets and to reflect period-to-period changes in the fair value of the warrant liabilities on our condensed consolidated Statements of Operations. The estimated fair value of these warrant liabilities was $0.1 million and $0.8 million at June 30, 2023 and December 31, 2022, respectively. There were 1,349,571 of these warrants outstanding at June 30, 2023 and December 31, 2022.

On December 22, 2022, as part of the convertible debenture financing, the Company issued to Alpha Capital a common stock warrant for 2,500,000 shares of common stock of the Company (the “Alpha Warrant”). The exercise price of the Alpha Warrant is $1.65. The Alpha Warrant may be exercised by Alpha Capital, in whole or in part, at any time on or after June 22, 2023 and before June 22, 2028. U.S. GAAP requires us to recognize the fair value of this warrant as a warrant liability on our condensed consolidated balance sheets and to reflect period-to-period changes in the fair value of the warrant liability on our condensed consolidated statements of operations. The estimated fair value of this warrant liability was $2.0 million and $2.8 million at June 30, 2023 and December 31, 2022, respectively.

Because the fair value of the above liability classified warrants will be determined each quarter on a “mark-to-market” basis, it could result in significant variability in our future quarterly and annual consolidated statement of operations and consolidated balance sheets based on changes in our public market common stock price. Pursuant to U.S. GAAP, a quarter-to-quarter increase in our stock price would result in an increase (possibly quite large) in the fair value of the warrant liabilities and a quarter-to-quarter decrease in our stock price would result in a decrease (possibly quite large) in the fair value of the warrant liabilities.

Results of Operations

Comparison of the Three Months Ended June 30, 2023 and 2022

The following table summarizes our results of operations for the three months ended June 30, 2023 and 2022:

Revenues

Net product sales

Net product sales are primarily generated from sales of diagnostic tests. Net product sales during the three-month periods ended June 30, 2023 and 2022 were approximately $1.6 million and $1.4 million, respectively, representing an increase of approximately $0.2 million, or 14%. This increase was primarily due to growth in sales volumes and higher average unit selling prices.

Expenses

Cost of Product Sales

Cost of product sales decreased during the three months ended June 30, 2023, to $1.0 million, or 62% of net product sales, compared to approximately $1.1 million, or 77% of net product sales, during the three months ended June 30, 2022. This decrease of $0.1 million, and decrease as a percentage of sales was primarily due to a reduction in force implemented in January 2023.

General and Administrative Expenses

General and administrative expenses remained the same at $2.7 million, for the three months ended June 30, 2023 and 2022.

Research and Development Costs

Research and development costs include therapeutic and diagnostic research and product development costs. Research and development costs decreased from $1.5 million for the three months ended June 30, 2022 to $1.3 million for the three months ended June 30, 2023. Of the $1.3 million of research and development costs for the three months ended June 30, 2023, approximately $1.2 million (89%) was attributable to therapeutics and $0.2 million (11%) was attributable to diagnostics. Of the $1.5 million of research and development costs for the three months ended June 30, 2022, $1.1 million (73%) was attributable to therapeutics and $0.4 million (27%) was attributable to diagnostics.

The $0.1 million increase in therapeutics research and development costs during the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was primarily due to an increase of $0.5 million in preclinical research costs for QN-302, offset by a decrease of $0.4 million in preclinical research costs for QN-247.

The $0.2 million decrease in diagnostics research and development costs during the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was primarily due to a $0.2 million decrease in stock-based compensation expense and a $0.1 million decrease in payroll expenses related to FastPack due to the January 2023 reduction in force, offset by an increase of $0.1 million in research and development expenses for NanoSynex.

For the future, we expect our therapeutic research and development costs to be relatively lower in periods when we are focusing on preclinical activities and meaningfully higher in periods when we are provisioning for and conducting clinical trials, if any.

Sales and Marketing Expenses

Sales and marketing expenses were approximately $0.2 million for the three months ended June 30, 2023, a decrease of $0.1 million or 45%, from the three months ended June 30, 2022. This decrease was primarily due to reduced payroll expenses related to the January 2023 reduction in force.

Other Income (Expense), Net

Change in Fair Value of Warrant Liabilities

During three months ended June 30, 2023 we experienced a $0.4 million gain on change in fair value of warrant liabilities arising from our liability classified warrants described above. The estimated fair value of these warrants decreased to $2.1 million as of June 30, 2023 from $3.6 million as of December 31, 2022, primarily due to a reduction in our stock price and shorter remaining outstanding life of the warrants.

Because the fair value of the warrant liabilities will be determined each quarter on a “mark-to-market” basis, this item is likely to continue to result in significant variability in our future quarterly and annual consolidated statements of operations based on unpredictable changes in our public market common stock price and the number of warrants outstanding at the end of each quarter.

Interest Expense (Income), Net

Interest expense, net during the three months ended June 30, 2023 was approximately $377,000 due to accrued interest on the convertible debt, as compared to interest income, net of approximately $5,000 during the three months ended June 30, 2022.

Loss on Disposal of Equipment Held for Lease

Loss on disposal of equipment held for lease during the three months ended June 30, 2023 was $63,000, compared to $0 during the three months ended June 30, 2022. This increase of $63,000 was due to a write off of discontinued FastPack analyzers that were acquired from Sekisui.

Other Income, Net

Other income was immaterial during the three months ended June 30, 2023 and 2022.

Comparison of the Six Months Ended June 30, 2023 and 2022

The following table summarizes our results of operations for the six months ended June 30, 2023 and 2022:

37

Revenues

Net product sales

Net product sales are primarily generated from sales of diagnostic tests. Net product sales during the six-month periods ended June 30, 2023 and 2022 were approximately $3.2 million and $2.2 million, respectively, representing an increase of approximately $1.0 million, or 50%. This increase was primarily due to the expiration of the Sekisui Distribution Agreement on March 31, 2022, at which time the distribution services previously provided by Sekisui reverted to us, which resulted in our recognizing 100% of the revenue from sales of our FastPack diagnostic test kits and instruments beginning in the second quarter of 2022.

Expenses

Cost of Product Sales

Cost of product sales increased during the six months ended June 30, 2023 to $2.3 million, or 71% of net product sales, compared to approximately $1.9 million, or 90% of net product sales, during the six months ended June 30, 2022. This increase of $0.4 million, and decrease as a percentage of sales was relative to the increase in sales volumes and higher average unit selling prices due to the termination of the Sekisui agreement on March 31, 2022 as well as a reduction in force implemented in January 2023.

General and Administrative Expenses

General and administrative expenses decreased from $5.6 million, during the six months ended June 30, 2022 to approximately $4.4 million during the six months ended June 30, 2023, a decrease of $1.2 million or 21%. This decrease was primarily due to a $1.5 million decrease in stock-based compensation expense due to the January 2023 reduction in force, partially offset by an increase in accounting fees of $0.3 million.

Research and Development Costs

Research and development costs include therapeutic and diagnostic research and product development costs. Research and development costs remained approximately the same at $3.4 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Of the $3.4 million of research and development costs for the six months ended June 30, 2023, $2.4 million (71%) was attributable to therapeutics and $1.0 million (29%) was attributable to diagnostics. Of the $3.4 million of research and development costs for the six months ended June 30, 2022, $2.7 million (80%) was attributable to therapeutics and $0.7 million (20%) was attributable to diagnostics.

The $0.3 million decrease in therapeutics research and development costs during the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to a decrease of $0.9 million of preclinical research costs for our QN-247 program, a decrease of $0.1 million in RAS preclinical research costs, a $0.2 million decrease in payroll-related expenses, and a $0.1 million decrease in preclinical research costs for QN-165, offset by an increase of $1.0 million in preclinical research costs for QN-302.

The $0.3 million increase in diagnostics research and developments costs during the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was due to an increase of $0.8 million in research and development expenses for NanoSynex, offset by a reduction of offset by a reduction of $0.5 million in FastPack research and development expenses due to the January 2023 reduction in force.

For the future, we expect our therapeutic research and development costs to be relatively lower in periods when we are focusing on preclinical activities and meaningfully higher in periods when we are provisioning for and conducting clinical trials, if any.

Sales and Marketing Expenses

Sales and marketing expenses were approximately $0.4 million for the six months ended June 30, 2023, a decrease of $0.1 million or 17% from the six months ended June 30, 2022. This decrease was primarily due to lower payroll costs as a result of the January 2023 reduction in force.

Other Income (Expense), Net

Change in Fair Value of Warrant Liabilities

During six months ended June 30, 2023 we experienced a $1.5 million gain on change in fair value of warrant liabilities arising from our liability classified warrants described above. The estimated fair value of these warrants decreased to $2.1 million as of June 30, 2023 from $3.6 million as of December 31, 2022, primarily due to a reduction in our stock price and shorter remaining outstanding life of the warrants.

Because the fair value of the warrant liabilities will be determined each quarter on a “mark-to-market” basis, this item is likely to continue to result in significant variability in our future quarterly and annual statements of operations based on unpredictable changes in our public market common stock price and the number of liability classified warrants outstanding at the end of each quarter.

Interest Expense (Income), Net

Interest expense, net during the six months ended June 30, 2023 was approximately $921,000 due to accrued interest on the convertible debt, as compared to interest income, net of approximately $11,000 during the six months ended June 30, 2022.

Loss on Voluntary Conversion of Convertible Debt

During the six months ended June 30, 2023, we recognized a $1.1 million loss due to a voluntary conversion by Alpha Capital of approximately $1.1 million of convertible debt into 841,726 shares of common stock (see Note 10 - Convertible Debt - Related Party to our condensed consolidated financial statements). We did not have any outstanding convertible debt for the six months ended June 30, 2022.

Loss on Disposal of Equipment Held for Lease

Loss on disposal of equipment held for lease during the six months ended June 30, 2023, was $63,000, compared to $0 during the six months ended June 30, 2022. This increase of $63,000 was due to a write off of discontinued FastPack analyzers that were acquired from Sekisui.

Other Income, Net

Other income was immaterial during the six months ended June 30, 2023 and 2022.

Liquidity and Capital Resources

As of June 30, 2023, we had approximately $1.3 million in cash and an accumulated deficit of $110.7 million. For the six months ended June 30, 2023 and the year ended December 31, 2022, we used cash of $5.6 million and $13.2 million, respectively, in operations.

On July 25, 2023, we received a cash payment of $4.7 million from Chembio for all of the outstanding shares of common stock of Qualigen, Inc., which payment is subject to post-closing adjustments, upward or downward, as applicable, for: (i) cash held by the Subsidiary as of the closing of the Transaction; (ii) net working capital of the Subsidiary as of the closing of the Transaction, (iii) certain indebtedness of the Subsidiary as of the closing of the Transaction, and (iv) certain Transaction expenses as of the closing of the Transaction. An additional $450,000 is being held in an escrow account to satisfy certain indemnification obligations. Any amounts remaining in the Indemnity Escrow that have not been offset or reserved for claims will be released to us within five business days following the date that is 18 months after the closing of the Transaction.

On July 20, 2023, we entered into the NanoSynex Amendment with NanoSynex, which amended the NanoSynex Funding Agreement. See “Contractual Obligations and Commitments” below.

The Company’s cash balances as of the date that the accompanying financial statements were issued along with the proceeds from the above sale to Chembio, without additional financing, are expected to fund operations into the first quarter of 2024. The Company expects to continue to have net losses and negative cash flow from operations, which over time will challenge its liquidity. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the one-year period following the date that these financial statements were issued.

There is no assurance that profitable operations will ever be achieved, or, if achieved, could be sustained on a continuing basis. In order to fully execute our business plan, we will require significant additional funding for planned research and development activities, capital expenditures, clinical testing for our QN-302 clinical trials, preclinical development of RAS and QN-247, as well as commercialization activities.

Historically, our principal sources of cash have included proceeds from the issuance of common and preferred equity and proceeds from the issuance of debt. In December 2022 we raised $3.0 million from the sale of a convertible debt instrument (see Note 10-Convertible Debt - Related Party to our unaudited condensed consolidated financial statements). There can be no assurance that further financing will be obtained on favorable terms, or at all. If we are unable to obtain funding, we could be required to delay, reduce or eliminate research and development programs, product portfolio expansion or future commercialization efforts, which could adversely affect our business prospects.

The accompanying financial statements have been prepared assuming that we will continue as a going concern. The financial statements do not include any adjustments that would be necessary should we be unable to continue as a going concern, and therefore, be required to liquidate our assets and discharge our liabilities in other than the normal course of business and at amounts that may differ from those reflected in the accompanying financial statements.

Our condensed consolidated balance sheet at June 30, 2023 includes $2.1 million of warrant liabilities. We do not consider the warrant liabilities to constrain our liquidity, as a practical matter. Our current liabilities at June 30, 2023 include $1.8 million of accounts payable, $2.0 million of accrued expenses and other current liabilities, a $0.2 million R&D grant liability, $0.3 million of accrued vacation, $1.8 million in short term debt and convertible debt to a related party.

Contractual Obligations and Commitments

We have no material contractual obligations that are not fully recorded on our condensed consolidated balance sheets or fully disclosed in the notes to the unaudited condensed consolidated financial statements.

Lease Agreement with Bond Ranch LP

On December 15, 2021, our wholly-owned subsidiary Qualigen, Inc. entered into a Second Amendment to Lease with Bond Ranch LP. This Amendment extended our triple-net leasehold on our existing 22,624-square-foot headquarters/manufacturing facility at 2042 Corte del Nogal, Carlsbad, California for the 61-month period of November 1, 2022 to November 30, 2027. Over the 61 months, the base rent payable will total $1,950,710; however, the base rent for the first 12 months of the 61-month period will be only $335,966. Additionally, Qualigen, Inc. was entitled to a $339,360 tenant improvement allowance. On July 20, 2023, the Company entered into a Purchase Agreement with Chembio, Biosynex, S.A. (“Biosynex”), and Qualigen, Inc., a wholly-owned subsidiary of the Company. Pursuant to the Purchase Agreement, the Company agreed to sell to Chembio all of the issued and outstanding shares of common stock of Qualigen, Inc. The lease commitments described above transferred to Chembio upon the closing of this transaction. See Note 12 - Commitments and Contingencies and Note 16 - Subsequent Events: Stock Purchase Agreement with Chembio Diagnostics, Inc. and Biosynex, S.A. to our unaudited condensed consolidated financial statements for additional details.

License and Sponsored Research Agreements

We have obligations under various license and sponsored research agreements to make future payments to third parties that become due and payable on the achievement of certain development, regulatory and commercial milestones (such as the start of a clinical trial, filing for product approval with the FDA or other regulatory agencies, product approval by the FDA or other regulatory agencies, product launch or product sales) or on the sublicense of our rights to another party. We have not included these commitments on our balance sheet because the achievement and timing of these events is not determinable. Certain milestones are in advance of receipt of revenue from the sale of products and, therefore, we may require additional debt or equity capital to make such payments.

We have multiple license and sponsored research agreements with ULRF. Under these agreements, we have taken over development, regulatory approval and commercialization of various drug compounds from ULRF and are responsible for maintenance of the related intellectual property portfolio. For example, we agreed to reimburse ULRF for sponsored research expenses of up to $2.7 million and prior patent costs of up to $112,000 for RAS. As of June 30, 2023, there was approximately $239,000 remaining due to ULRF under this sponsored research agreement for RAS. We also agreed to reimburse ULRF for sponsored research expenses of up to $830,000 and prior patent costs of up to $200,000 for QN-247. As of June 30, 2023, there were no remaining un-expensed amounts due to ULRF under this sponsored research agreement for QN-247 and the agreement was terminated effective August 31, 2022. Under the terms of these agreements, we are required to make patent maintenance payments and payments based upon development, regulatory and commercial milestones for any products covered by the in-licensed intellectual property. The maximum aggregate milestone payments we may be obligated to make per product are $5 million. We will also be required to pay a royalty on net sales of products covered by the in-licensed intellectual property in the low single digits. The royalty is subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. We have the right to sublicense our rights under these agreements, and we will be required to pay a percentage of any sublicense income.

On January 13, 2022, we entered into a License Agreement with UCL Business Limited to obtain an exclusive worldwide in-license of a genomic quadruplex (G4)-selective transcription inhibitor drug development program which had been developed at University College London, including lead and back-up compounds, preclinical data and a patent estate. (UCL Business Limited is the commercialization company for University College London.) The program’s lead compound is being developed by us under the name QN-302 as a candidate for treatment of pancreatic ductal adenocarcinoma (PDAC), which represents the vast majority of pancreatic cancers. The Agreement requires (if and when applicable) tiered royalty payments in the low to mid-single digits, clinical/regulatory/sales milestone payments, and a percentage of any non-royalty sublicensing consideration paid to the Company.

Technology Transfer Agreement with Yi Xin

Through our wholly-owned diagnostics subsidiary Qualigen, Inc., we entered into a Technology Transfer Agreement, dated as of October 7, 2020, with Yi Xin of Suzhou, China, which authorizes Yi Xin to develop, manufacture and sell new generations of diagnostic test systems based on our core FastPack technology. In addition, the Technology Transfer Agreement authorizes Yi Xin to manufacture and sell our current generations of FastPack System diagnostic products (1.0, IP and PRO) in China. We have provided technology transfer and patent/know-how license rights to facilitate Yi Xin’s development and commercialization.

Under the terms of the Technology Transfer Agreement, we have provided Yi Xin the exclusive rights for China, which is a market we have not otherwise entered, both for Yi Xin’s new generations of FastPack-based products and for Yi Xin-manufactured versions of our existing FastPack product lines. Yi Xin has the right to sell its new generations of FastPack-based diagnostic test systems throughout the world (but not to or toward current customers of our existing generations of FastPack products); provided that any non-China sales would, until March 31, 2022, need to be through Sekisui. As of April 1, 2022, Yi Xin has right to sell Yi Xin-manufactured versions of existing FastPack 1.0, IP and PRO product lines worldwide (other than in the United States and other than to or toward current non-US customers of those products). Yi Xin also has the right, as of April 1, 2022, to buy Qualigen-manufactured FastPack 1.0, IP and PRO products from us at distributor prices for resale in and for the United States (but not to or toward current U.S. customers of those products). We did not license Yi Xin to sell in the United States market any Yi Xin-manufactured versions of those legacy FastPack product lines, even after March 31, 2022. We agreed in the Technology Transfer Agreement that we would not, after March 31, 2022, seek new FastPack customers outside the United States, European Union, Canada, and Mexico.

Under the Technology Transfer Agreement, during the fiscal year ended December 31, 2021 we recognized revenues of approximately $670,000. There were no revenues under this agreement for the six months ended June 30, 2023, and the six months ended June 30, 2022. We will receive low- to mid-single-digit royalties on any future new-generations and current-generations product sales by Yi Xin.

Yi Xin is a newly-formed company and is subject to many risks. There can be no assurance that Yi Xin will successfully commercialize any products or that we will receive any royalties from Yi Xin.

On July 20, 2023, the Company entered into a Purchase Agreement with Chembio, Biosynex, S.A. (“Biosynex”), and Qualigen, Inc., a wholly-owned subsidiary of the Company. Pursuant to the Purchase Agreement, the Company agreed to sell to Chembio all of the issued and outstanding shares of common stock of Qualigen, Inc. The Technology Transfer Agreement with Yi Xin described above transferred to Chembio upon the closing of this transaction. See Note 16 - Subsequent Events: Stock Purchase Agreement with Chembio Diagnostics, Inc. and Biosynex, S.A. to our unaudited condensed consolidated financial statements for additional details.

Alpha Convertible Debt

On December 22, 2022, we issued an 8% Senior Convertible Debenture in the aggregate principal amount of $3,300,000 (“the Debenture”) to Alpha Capital for a purchase price of $3,000,000 pursuant to the terms of a Securities Purchase Agreement, dated December 21, 2022. The Debenture is convertible, at any time, and from time to time, at Alpha Capital’s option, into shares of our common stock, at a price equal to $1.32 per share, subject to adjustment as described in the Debenture and other terms and conditions described in the Debenture, including the Company’s receipt of the necessary stockholder approvals, which were obtained at our 2023 annual meeting of stockholders.

In January 2023 Alpha Capital converted $1,111,078 of the Debenture principal into 841,726 shares of common stock at a conversion price of $1.32 per share.

Commencing June 1, 2023 and continuing on the first day of each month thereafter until the earlier of (i) December 22, 2025 and (ii) the full redemption of the Debenture (each such date, a “Monthly Redemption Date”), we must redeem $110,000 plus accrued but unpaid interest, liquidated damages and any amounts then owing under the Debenture (the “Monthly Redemption Amount”). The Monthly Redemption Amount must be paid in cash; provided that after the first two monthly redemptions, we may elect to pay all or a portion of a Monthly Redemption Amount in shares of common stock, based on a conversion price equal to the lesser of (i) the then applicable conversion price of the Debenture and (ii) 85% of the average of the VWAPs (as defined in the Debenture) for the five consecutive trading days ending on the trading day that is immediately prior to the applicable Monthly Redemption Date. We may also redeem some or all of the then outstanding principal amount of the Debenture at any time for cash in an amount equal to 105% of the then outstanding principal amount of the Debenture being redeemed plus accrued but unpaid interest, liquidated damages and any amounts then owing under the Debenture. Our election to pay monthly redemptions in shares of common stock or to effect an optional redemption is subject to the satisfaction of the Equity Conditions (as defined in the Debenture), including our receipt of the necessary stockholder approvals, which we obtained at our 2023 annual meeting of stockholders.

The Debenture accrues interest at the rate of 8% per annum, which does not begin accruing until December 1, 2023, and will be payable on a quarterly basis. Interest may be paid in cash or shares of common stock of the Company or a combination thereof at the option of the Company; provided that interest may only be paid in shares if the Equity Conditions have been satisfied, including our receipt of the necessary stockholder approvals, which we obtained at our 2023 annual meeting of stockholders.

During the three and six months ended June 30, 2023, we recognized an extinguishment loss on voluntary conversion of convertible debt of $0 and approximately $1.1 million, respectively, and recorded accrued interest of approximately $383,000 and $945,000, respectively (of which approximately $364,000 and $898,000 was a reduction to the discount, respectively) in other expenses in the condensed consolidated statements of operations. In June 2023 we paid the first Monthly Redemption Amount of $110,000 in cash, and as of June 30, 2023 the remaining Debenture principal balance was approximately $2.1 million, the remaining discount was approximately $1.3 million, the fair value of the Alpha Warrant was approximately $2.0 million, and the fair value of the suite of bifurcated embedded derivative features was $0.

NanoSynex Funding Agreement

As a condition to the NanoSynex Acquisition, we entered into the Funding Agreement with NanoSynex, pursuant to which we agreed to fund NanoSynex up to an aggregate of approximately $10.4 million over a three year period, subject to NanoSynex’s achievement of certain performance milestones specified in the NanoSynex Funding Agreement and the satisfaction of other terms and conditions described in the NanoSynex Funding Agreement.

These funding commitments were to be made in the form of convertible promissory notes to be issued to us with a face value equal to the amount paid by us to NanoSynex upon satisfaction of the applicable performance milestone, bearing interest at the rate of 9% per annum on the principal balance from time to time outstanding under the particular promissory note, convertible at our option into additional shares of NanoSynex in order for us to maintain at least a 50.1% controlling ownership interest in NanoSynex, should NanoSynex issue additional shares. During the year ended December 31, 2022, a total of approximately $2.4 million was funded to NanoSynex, and for the six months ended June 30, 2023 an additional $0.5 million was funded to NanoSynex under the Funding Agreement.

On July 20, 2023, we entered into the NanoSynex Amendment with NanoSynex, which amended the NanoSynex Funding Agreement and our payment obligations under such agreement. Pursuant to the terms of the Nanosynex Amendment, we will make an initial payment of $380,000 to NanoSynex by surrendering the Preferred B shares of NanoSynex held by us, resulting in our ownership in NanoSynex being reduced from approximately 52.8% to approximately 49.97% of the issued and outstanding voting equity of NanoSynex. In addition, we also agreed to (i) advance $560,000 to NanoSynex on or before November 30, 2023 (the “First Advance”), against which NanoSynex will issue a promissory note to us with a face value in the amount of such funding, and (ii) advance $670,000 to NanoSynex on or before March 31, 2024 (the “Second Advance,” and, together with the First Advance, the “New Advances”), against which NanoSynex will issue a promissory note to us with a face value in the amount of such funding. In addition, $2,880,000 in promissory notes delivered by NanoSynex to us for advances previously made by us to NanoSynex under the NanoSynex Funding Agreement were canceled.In the event we fail to make the New Advances, we have agreed to forfeit additional shares in a number that will be equal to a fraction, the numerator of which is the amount of the default (i.e., the amount that we should have, but failed, to advance to NanoSynex pursuant to the terms of the NanoSynex Amendment), and the denominator of which shall be the price per share that we originally paid in consideration for our Preferred A-1 shares of NanoSynex to the previous holder thereof, being $1.5716 per share.

The NanoSynex Amendment supersedes any payments contemplated by the NanoSynex Funding Agreement, such that except as described in the NanoSynex Amendment, we will have no further payment obligations to NanoSynex under the NanoSynex Funding Agreement or otherwise (including by way of equity investment, loan financing or credit lines), and NanoSynex will have no further payment obligations to us for advances previously received under the NanoSynex Funding Agreement.

Other Service Agreements

We enter into contracts in the normal course of business, including with clinical sites, contract research organizations, and other professional service providers for the conduct of clinical trials, contract manufacturers for the production of our product candidates, contract research service providers for preclinical research studies, professional consultants for expert advice and vendors for the sourcing of clinical and laboratory supplies and materials. These contracts generally provide for termination on notice, and therefore are cancelable contracts.

Cash Flows

The following table sets forth the significant sources and uses of cash for the periods set forth below:

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Net Cash Used in Operating Activities

During the six months ended June 30, 2023, operating activities used $5.6 million of cash, primarily resulting from a net loss of $7.6 million. Cash flows from operating activities (as opposed to net loss) for the six months ended June 30, 2023 were positively impacted by adjustments for a $1.1 million non cash loss on voluntary conversion of convertible debt, accretion of discount of $0.8 million on convertible debt, $0.9 million in stock-based compensation expense, a $0.9 million increase in accounts payable, a $0.4 million increase in accrued expenses and other current liabilities, a $0.4 million decrease in prepaid expenses and other assets, and depreciation and amortization of $0.2 million. Cash flows from operating activities (as opposed to net loss) for the six months ended June 30, 2023 were negatively impacted by adjustments for a $1.5 million decrease in fair value of warrant liabilities, a $0.2 million decrease in accounts receivable and inventory reserves and allowances, a $0.6 million decrease in R&D grant liability, a $0.2 million decrease in deferred tax liability, and a $0.1 million decrease in operating lease liability.

During the six months ended June 30, 2022, operating activities used $7.8 million of cash, primarily resulting from a net loss of $8.4 million. Cash flows from operating activities (as opposed to net loss) for the six months ended June 30, 2022 benefitted from $2.7 million in stock-based compensation expense, a $0.2 million decrease in net accounts receivable, and depreciation and amortization of $0.2 million. Cash flows from operating activities (as opposed to net loss) for the six months ended June 30, 2022 were negatively impacted by a $0.8 million decrease in accrued expenses and other current liabilities, a $0.6 million increase in prepaid expenses and other assets, $0.3 million increase in net inventory, a $0.7 million decrease in fair value of warrant liabilities and a $0.1 million decrease in operating lease liability.

Net Cash Provided by (Used in) Investing Activities

During the six months ended June 30, 2023, net cash used in investing activities was approximately $0.2 million, due to the purchase of property and equipment.

During the six months ended June 30, 2022, net cash provided by investing activities was approximately $0.1 million, primarily due to $0.7 million in cash acquired in the NanoSynex transaction, offset by the $0.6 million purchase of NanoSynex stock.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2023 was $0.

Net cash provided by financing activities for the six months ended June 30, 2022 was approximately $4,000, due to net proceeds from exercise of warrants.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023, the end of the period covered by this Quarterly Report.

Based on this evaluation, our principal executive officer and principal financial officer have concluded that, due to the material weakness described below, our disclosure controls and procedures as of June 30, 2023 were not effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act’), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. We believe that a disclosure controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the disclosure controls system are met, and no evaluation of disclosure controls can provide absolute assurance that all disclosure control issues, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. As of December 31, 2022, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2022, our internal control over financial reporting was not effective because of a material weakness in our internal control over financial reporting related to the lack of accounting department resources and/or policies and procedures to ensure recording and disclosure of items in compliance with generally accepted accounting principles. We have taken and continue to take steps to remediate the material weakness, including implementing additional procedures and utilizing external consulting resources with experience and expertise in U.S. GAAP and public company accounting and reporting requirements to assist management with its accounting and reporting of complex and/or non-recurring transactions and related disclosures.

Notwithstanding the identified material weakness, our management believes that the condensed consolidated financial statements included in this Quarterly Report fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP. Nonetheless, we also believe that an internal control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the internal control system are met, and no evaluation of internal control can provide absolute assurance that all internal control issues and instances of fraud, if any, within a company are detected.

The Company’s business, reputation, results of operations and financial condition, as well as the price of its stock, can be affected by a number of factors, whether currently known or unknown, including those described in Part I, Item 1A of the Company’s 2022 Annual Report under the heading “Risk Factors.” When any one or more of these risks materialize, the Company’s business, reputation, results of operations and financial condition, as well as the price of its stock, can be materially and adversely affected. Except as described below, there have been no material changes to the Company’s risk factors since the 2022 Annual Report.

We may be classified as a transient investment company.

We are not engaged in the business of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being engaged in those activities. Under the Investment Company Act, however, a company may be deemed an investment company under Section 3(a)(1)(C) of the Investment Company Act if the value of its investment securities is more than 40% of its total assets (exclusive of government securities and cash items) on an unconsolidated basis.

We have recently divested certain shares of NanoSynex Ltd. (“NanoSynex”) which has resulted in our ownership in NanoSynex being reduced from approximately 52.8% to approximately 49.97% of the issued and outstanding voting equity of NanoSynex. Since we no longer hold a controlling interest in NanoSynex, the investment securities we hold, including our minority interest in NanoSynex, could exceed 40% of our total assets, exclusive of government securities cash items, on an unconsolidated basis, and, accordingly, we could determine that we have become a transient investment company.

A transient investment company can avoid being classified as an investment company if it can rely on one of the exclusions under the Investment Company Act. One such exclusion, Rule 3a-2 under the Investment Company Act, allows a transient investment company a grace period of one year from the earlier of (a) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the issuer’s total assets on either a consolidated or unconsolidated basis and (b) the date on which an issuer owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government securities and cash items) on an unconsolidated basis. We are in the process of performing a valuation of our minority investment in Nanosynex to determine whether we need to invoke the grace period. We may take actions to cause the investment securities held by us to be less than 40% of our total assets, which may include acquiring assets with our cash on hand or liquidating our investment securities.

As Rule 3a-2 is available to a company no more than once every three years, and assuming no other exclusion were available to us, we would have to keep within the 40% limit for at least three years after we cease being a transient investment company. This may limit our ability to make certain investments or enter into joint ventures that could otherwise have a positive impact on our earnings. In any event, we do not intend to become an investment company engaged in the business of investing and trading securities.

Classification as an investment company under the Investment Company Act requires registration with the SEC. If an investment company fails to register, it would have to stop doing almost all business, and its contracts would become voidable. Registration is time consuming and restrictive and would require a restructuring of our operations, and we would be very constrained in the kind of business we could do as a registered investment company. Further, we would become subject to substantial regulation concerning management, operations, transactions with affiliated persons and portfolio composition, and would need to file reports under the Investment Company Act regime. The cost of such compliance would result in our incurring substantial additional expenses, and the failure to register if required would have a materially adverse impact to conduct our operations.