Filed pursuant to Rule
424(b)(3)
SEC File No. 333-264305
PROSPECTUS SUPPLEMENT NO. 7
(to Prospectus dated April 22, 2022)
6,435,548,000
Ordinary Shares
Represented
by 1,287,110 American Depositary Shares
This
prospectus supplement updates, amends and supplements the prospectus contained in our Registration Statement on Form F-1, effective
as of April 22, 2022 (as supplemented or amended from time to time, the “Prospectus”) (Registration No. 333-264305). Capitalized
terms used in this prospectus supplement and not otherwise defined herein have the meanings specified in the Prospectus.
Effective
August 1, 2022, the ratio of American Depositary Shares (ADSs) evidencing our ordinary shares changed from 1 ADS representing four hundred
(400) ordinary shares to 1 ADS representing five thousand (5,000) ordinary shares, which resulted in a one for 12.5 reverse split of the
issued and outstanding ADSs. All ADS and related information presented in this prospectus supplement, including our financial statements
and accompanying footnotes, has been retroactively adjusted to reflect the reduced number of ADSs resulting from this ratio change.
This
prospectus supplement is being filed to update, amend and supplement the information included in the Prospectus with the information contained
in our Form 6-K dated August 10, 2022, which is set forth below.
This
prospectus supplement is not complete without the Prospectus. This prospectus supplement should be read in conjunction with the Prospectus,
which is to be delivered with this prospectus supplement, and is qualified by reference thereto, except to the extent that the information
in this prospectus supplement updates or supersedes the information contained in the Prospectus. Please keep this prospectus supplement
with your Prospectus for future reference.
Our
ADSs are listed on the Nasdaq Capital Market under the symbol “QNRX”. On August 9, 2022, the closing price for our ADSs on
the Nasdaq Capital Market was $5.10 per ADS.
Investing
in our securities involves a high degree of risk. Before deciding whether to invest in our securities, you should consider carefully the
risks and uncertainties under the heading “Risk Factors” beginning on page 9 of the Prospectus.
Neither
the SEC nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of
the Prospectus or this prospectus supplement. Any representation to the contrary is a criminal offense.
The
date of this prospectus supplement is August 10, 2022.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of August 2022 (No. 1)
Commission File Number 001-37846
QUOIN PHARMACEUTICALS
LTD.
(Translation of registrant’s name into English)
Azrieli Center, Round Tower, 30th
Floor
132 Menachem Begin Blvd
Tel Aviv, 6701101
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will
file annual reports under cover Form 20-F or Form 40-F.
Form 20-F x
Form 40-F ¨
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(1): ________
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(7): ________
EXPLANATORY NOTE
Public Offering
On August 5, 2022, Quoin Pharmaceuticals
Ltd. (the “Company”) announced the pricing of its “reasonable best efforts” public offering (the “Offering”)
of 11,050,000,000 ordinary shares represented by 2,210,000 American Depositary Shares (“ADSs”) at a purchase price of $5.00
per ADS and pre-funded warrants (the “Pre-Funded Warrants”) to purchase 5,750,000,000 ordinary shares represented by 1,150,000
ADSs at a per pre-funded warrant price of $4.9999, with each ADS and Pre-Funded Warrant accompanied by an ordinary warrant (the “Common
Warrant”), for aggregate gross proceeds of $16.8 million.
The Offering
was made pursuant to the Company’s effective registration statement on Form F-1, as amended (Registration No. 333-266476)
and accompanying prospectus filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities
Act”).
On August 9, 2022 (the “Closing
Date”), the Company completed the Offering resulting in net proceeds of approximately $15.0 million, after deducting the placement
agent’s fees and estimated offering expenses payable by the Company, and excluding the proceeds, if any, from the subsequent exercise
of the Common Warrants. Each Common Warrant has an exercise price of $5.00 per ADS and expires on the fifth anniversary of the Closing
Date. On the Closing Date, the holder of Pre-Funded Warrants sold in the Offering exercised its Pre-Funded Warrants in full.
The Company intends to use
the net proceeds of this Offering for general corporate purposes, which may include operating expenses, research and development, including
clinical and pre-clinical testing of product candidates, working capital, future acquisitions and general capital expenditures. The Company
has not determined the amount of net proceeds to be used specifically for any of such purposes.
In connection with the Offering,
the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors.
The Purchase Agreement provided that for a period of 180 days following the closing of the Offering, the Company will not effect or enter
into an agreement to effect a “variable rate transaction” as defined in the Purchase Agreement. Further, the Company has agreed
in the Purchase Agreement not to issue, enter into any agreement to issue or announce the issuance or proposed issuance of any ADSs or
ordinary shares or their equivalents, subject to certain exceptions, for a period of 90 days after the closing of the Offering. The Purchase
Agreement also contained representations, warranties, indemnification and other provisions customary for transactions of this nature.
In connection with the Offering,
the Company paid A.G.P./Alliance Global Partners (the “Placement Agent”) a cash placement fee equal to 7.0% of the aggregate
proceeds raised in the Offering (provided, however, that with respect to the purchase price paid by a certain investor at the closing
of the Offering, the Placement Agent’s cash fee was reduced to 3.5% for proceeds received from such investor) and a non-accountable
expense allowance equal to 1% of the gross proceeds raised in this Offering. The Company also reimbursed the Placement Agent for certain
of its offering-related expenses.
The forms of the Purchase
Agreement, the Pre-Funded Warrant and Common Warrant are filed as Exhibits 10.1, 4.1 and 4.2, respectively, to this report and are incorporated
herein by reference. The provisions of the Purchase Agreement, including the representations and warranties contained therein, are not
for the benefit of any party other than the parties to such agreement and are not intended as documents for investors and the public to
obtain factual information about the current state of affairs of the parties to those documents and agreements.
Nasdaq Listing
The
Company previously reported that, on April 22, 2022, the Company received a letter from the Listing Qualifications staff of The Nasdaq
Stock Market, LLC (“Nasdaq”) notifying it that the Company was no longer in compliance with the minimum stockholders’
equity requirement for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain
stockholders’ equity of at least $2.5 million. In addition, as of April 21, 2022, the Company did not meet the alternative continued
listing requirements based on market value of listed securities or net income from continuing operations. In accordance with Nasdaq Listing
Rule 5810(c)(2)(A), within 45 calendar days of receiving this notice, the Company submitted a plan to regain compliance to Nasdaq. This
plan was accepted, and Nasdaq granted an extension to the Company until October 19, 2022, to evidence compliance.
As of the date of this report,
the Company believes that its stockholders’ equity exceeds $2.5 million due to the completion of the Offering. The Company is awaiting
confirmation of compliance with the stockholders’ equity requirement from Nasdaq. Following such compliance determination, Nasdaq
will continue to monitor the Company’s ongoing compliance with the stockholders’ equity requirement and, if at the time of
its next report disclosing quarterly financial information the Company does not evidence compliance, it may be subject to delisting. In
the event of a new delisting determination, the Company would be entitled to a hearing before a Nasdaq Panel, and a hearing request would
stay any suspension or delisting action pending the conclusion of the hearings process.
The Company also previously
reported that, on June 10, 2022, the Company received a letter from the Nasdaq Listing Qualifications staff notifying it that the closing
bid price per ADS was below the required minimum of $1.00 for a period of 30 consecutive business days and that the Company did not meet
the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2). Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company
has a period of one hundred eighty (180) calendar days, or until December 7, 2022 (the “Compliance Period”), to regain compliance
with Nasdaq’s minimum bid price requirement. If at any time during the Compliance Period, the closing bid price per ADS is at least
$1.00 for a minimum of ten (10) consecutive business days (Nasdaq has discretion to monitor for as long as twenty (20) consecutive business
days), Nasdaq will provide a written confirmation of compliance to the Company and the matter will be closed. As of the date of this report,
the Company’s closing bid price per ADS has exceeded $1.00 for eight consecutive business days. In the event the Company does not
regain compliance by December 7, 2022, it may be eligible for an additional 180 calendar day grace period. To qualify, the Company will
be required to meet the continued listing requirement for market value of publicly held ADSs and all other initial listing standards for
The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to
cure the deficiency during the second compliance period within the next 180 calendar days.
Business Update – Recent Developments
ADS Ratio Change
The Company previously announced
that, on July 12, 2022, its Board of Directors approved the change in the ratio of ADS evidencing ordinary shares from 1 ADS representing
four hundred (400) ordinary shares to 1 ADS representing five thousand (5,000) ordinary shares, which resulted in a one for 12.5 reverse
split of the issued and outstanding ADSs (the “Ratio Change”). The Ratio Change was effective August 1, 2022. All ADS and
related option and warrant information presented in Exhibits 99.3, 99.4 and 99.5 to this Form 6-K has been retroactively adjusted to reflect
the reduced number of ADSs resulting from the Ratio Change.
Agreements with Altium Growth Fund, LP and
Noteholder Warrants
The Company previously reported
that, on July 14, 2022, the Company, its wholly-owned subsidiary, Quoin Pharmaceuticals Inc. (“Quoin Inc.”), and Altium Growth
Fund, LP (“Altium”) entered into an agreement, pursuant to which the parties agreed to, among other things, (i) amend certain
terms of the Series A Warrant and Investor Exchange Warrants previously issued to Altium to, among other things, reduce the exercise price
to $0.00 per ADS with respect to a total of 399,999 ADS, (ii) cancel the Series C Warrant and a portion of the Series A Warrant previously
issued to Altium, and (iii) terminate the Securities Purchase Agreements, pursuant to which the warrants were previously issued to Altium.
As of August 2, 2022, Altium exercised all of its warrants outstanding and the Company issued a total of 399,999 ADSs to Altium.
The Company previously reported
that, in March 2022, it issued warrants (the “Noteholder Warrants”) to five holders of promissory notes issued by Quoin Inc.
in October 2020, including the Company’s directors, Messrs. Langer and Culverwell. Effective as of July 14, 2022, in connection
with the Company’s agreement with Altium, pursuant to which the exercise price of the Series A Warrant and Investor Exchange Warrants
was reduced to $0.00 per ADS, the exercise price of the Noteholder Warrants was also reduced to $0.00 per ADS in accordance with the adjustment
provisions of such warrants.
Going Concern Qualification
The Company expected to receive
additional funding through the mandatory exercise provision of the Series C Warrant that was canceled on July 14, 2022, which would have
resulted in proceeds of approximately $9.5 million. In the event the requirements of the mandatory exercise provision of such warrant
were not met, the Company expected Altium to act on its written commitment to provide funding equal to the $9.5 million expected upon
exercise of the Series C Warrant, at prevailing market rates, and thus the Company believed that the Company had sufficient resources
to implement our business plan for at least one year from the issuance of our consolidated financial statements as of and for the year
ended December 31, 2021, as well as of and for the three months ended March 31, 2022 as of the respective dates of the issuance of these
financial statements. Following the cancellation of the Series C Warrant on July 14, 2022, the Company no longer expected to receive such
proceeds from Altium. This raised substantial doubt about its ability to continue as a going concern. Other than if one or more of the
Company’s product candidates are accepted into Early Access Programs in certain countries, the Company does not expect to generate
revenue from product sales unless and until the Company successfully completes development and obtains marketing approval for one or more
of its product candidates which the Company expects will take a number of years and is subject to significant uncertainty.
Following the completion of
the Offering described in this report, the Company believes its going concern qualification will be modified in connection with its next
quarterly filing.
Clinical Development
Quoin’s lead asset,
QRX003, is currently in clinical development in the United States under an open IND application with the FDA. The ongoing study is a randomized,
double blinded assessment of two different doses of QRX003 versus a placebo vehicle in Netherton patients. The test materials will be
applied once daily, over a twelve-week period, to pre-selected areas of the patient’s body. Based on discussions with the FDA, a
number of different clinical endpoints are being assessed in the study, including but not limited to, an Investigators Global Assessment
(IGA), Patient’s Global Assessment (PaGA) and Pruritis. The trial will be conducted in up to six clinical sites in the United States.
The first clinical site was open in July 2022 and the opening of additional sites is in process, as is patient recruitment into the study.
Cautionary Note Regarding Forward-Looking Statements
Certain information included
in this report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995 and other securities laws. Forward-looking statements are often characterized by the use of forward-looking terminology such
as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue,”
“believe,” “should,” “intend,” “project” or other similar words, but are not the only
way these statements are identified. Unless context indicates or suggests otherwise, “we”, “our”, “us”,
“Quoin Ltd.” in this section refers to the consolidated operations of Quoin Pharmaceuticals Ltd.
These forward-looking statements
may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections
of results of operations or of financial condition, expected capital needs and expenses, statements relating to the research, development,
completion and use of our products, and all statements (other than statements of historical facts) that address activities, events or
developments that we intend, expect, project, believe or anticipate will or may occur in the future.
Forward-looking statements
are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on
assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions,
expected future developments and other factors they believe to be appropriate.
Important factors that could
cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements
include, among other things:
|
● |
our history of losses and needs
for additional capital to fund our operations and our expected use of net proceeds of the Offering; |
|
● |
our limited operating history and
the difficulties encountered by a small developing company; |
|
● |
our lack of revenue generated from
product sales since inception, and potential inability to be profitable; |
|
● |
uncertainties of cash flows and
inability to meet working capital needs; |
|
● |
our ability to comply with the applicable
continued listing requirements of Nasdaq; |
|
● |
our ability to obtain regulatory
approvals; |
|
● |
our ability to obtain favorable
pre-clinical and clinical trial results; |
|
● |
our ability to identify and develop
potential product candidates; |
|
● |
additional costs or delays associated
with unsuccessful clinical trials; |
|
● |
the inability to predict the timing
of revenue from a future product; |
|
● |
the extensive regulatory requirements and future developmental and regulatory challenges we will still face
even if we obtain approval for a product candidate; |
|
● |
our ability to obtain or maintain
orphan drug designation or exclusivity for our product candidates; |
|
● |
our ability to obtain Rare Pediatric
Disease designation for our product candidates; |
|
● |
the potential oversight of programs
or product candidates that may be more profitable or more successful; |
|
● |
our technology may not be validated
and our methods may not be accepted by the scientific community; |
|
● |
the ability to conduct clinical
trials, because of difficulties enrolling patients or other reasons; |
|
● |
the requirements of being publicly
traded may strain our resources; |
|
● |
potential adverse effects resulting
from failure to maintain effective internal controls; |
|
● |
our obligations and governance practices as a “foreign private issuer” being different from those
of U.S. domestic reporting companies may result in less protection for investors; |
|
● |
the potential negative impact on our securities price and trading volume if securities or industry analysts
do not publish reports about us or if they adversely change their recommendations about our business; |
|
● |
the potential volatility of the
market price for our ADSs; |
|
● |
the potential dilution of our shareholders’
ownership due to the Offering and future issuances of share capital; |
|
● |
the requirement for holders of ADSs
to act through the depositary to exercise their rights; |
|
● |
the potential limitations on ADS
holders with respect to the transfer of their ADSs |
|
● |
the risks of securities class action
litigation; and |
|
● |
other factors referred to in section “Risk Factors” in our Annual Report on Form 20-F for the
year ended December 31, 2021 and other SEC filings. |
All forward-looking statements
contained in this report speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements
included in this report. We do not undertake to update or revise forward-looking statements to reflect events or circumstances that arise
after the date on which such statements are made or to reflect the occurrence of unanticipated events, except as required by law. In evaluating
forward-looking statements, you should consider these risks and uncertainties and not place undue reliance on our forward-looking statements.
The information in this Form 6-K, including
the exhibits hereto, shall be incorporated by reference into the Company’s registration statements on Form S-8 (Registration Nos.
333-214817, 333-220015, 333-225003 and 333-232230) and on Form F-3 (Registration Nos. 333-219614 and 333-229083).
EXHIBIT INDEX
Exhibit |
Description of Exhibit |
|
|
4.1 |
Form of Pre-Funded Warrant (incorporated by reference to Exhibit
4.12 of the Form F-1 filed with the Securities and Exchange Commission on August 3, 2022) |
|
|
4.2 |
Form of Common Warrant (incorporated by reference to Exhibit
4.13 of the Form F-1 filed with the Securities and Exchange Commission on August 3, 2022) |
|
|
10.1 |
Form of Securities Purchase Agreement dated August 5, 2022 (incorporated
by reference to Exhibit 4.11 of the Form F-1/A filed with the Securities and Exchange Commission on August 4, 2022) |
|
|
23.1 |
Consent of Friedman LLP, Certified Public Accountants |
|
|
99.1 |
Press Release issued on August 5, 2022 |
|
|
99.2 |
Press Release issued on August 9, 2022 |
|
|
99.3 |
Consolidated Unaudited Financial Statements as of, and for the period ended, March 31, 2022 |
|
|
99.4 |
Consolidated Audited Financial Statements as of, and for the period ended, December 31, 2021 |
|
|
99.5 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations as of, and for the periods ended, March 31,
2022 and December 31, 2021 |
|
|
SIGNATURE
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: August 10, 2022 |
QUOIN PHARMACEUTICALS LTD. |
|
|
|
|
|
By: |
/s/ Gordon Dunn |
|
Name: |
Gordon Dunn |
|
Title: |
Chief Financial Officer |
|
Exhibit 23.1 |
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We hereby consent to the incorporation by reference
in Registration Statements on Form S-8 (Registration Nos. 333-214817, 333-220015, 333-225003 and 333-232230) and on Form F-3 (Registration
Nos. 333-219614 and 333-229083) of Quoin Pharmaceuticals Ltd. (the “Company”) of our report dated April 13, 2022 (except for
Notes 2 and 17 as to which the date is August 2, 2022), which includes an emphasis of a matter regarding the Company’s ability to
continue as a going concern, relating to the consolidated financial statements of the Company as of December 31, 2021 and 2020 and for
the years then ended, which appears in the Company’s report on Form 6-K, dated August 10, 2022.
/s/ Friedman LLP
East Hanover, New Jersey
August 10, 2022
Exhibit 99.1
Quoin Pharmaceuticals Announces Pricing of $16.8
Million Upsized Public Offering
ASHBURN, Va., August 5, 2022 (GLOBE NEWSWIRE)
-- Quoin Pharmaceuticals Ltd. (NASDAQ: QNRX) (the “Company” or “Quoin”), a clinical stage, specialty pharmaceutical
company focused on rare and orphan diseases, today announced the pricing of its "reasonable best efforts" public offering of
11,050,000,000 ordinary shares represented by 2,210,000 American Depositary Shares at a purchase price of $5.00 per ADS and pre-funded
warrants to purchase 5,750,000,000 ordinary shares represented by 1,150,000 American Depositary Shares at a per pre-funded warrant price
of $4.9999 (with each ADS and pre-funded warrant accompanied by an ordinary warrant) for an aggregate gross proceeds of $16.8 million.
The closing of the offering is expected to occur
on or about August 9, 2022, subject to the satisfaction of customary closing conditions. The Company intends to use the net proceeds from
the offering for general corporate purposes.
A.G.P./Alliance Global Partners is acting
as the sole placement agent for the offering.
A registration
statement on Form F-1, as amended (No. 333-266476) relating to the offering was filed with the Securities and Exchange Commission (“SEC”),
and it was declared effective on August 5, 2022. The offering is being made only by means of a prospectus forming part of the effective
registration statement. Copies of the preliminary prospectus and, when available, copies of the final prospectus, relating to the offering
may be obtained on the SEC’s website located at http://www.sec.gov. Electronic copies of the final prospectus relating to the offering
may be obtained, when available, from A.G.P./Alliance Global Partners, 590 Madison Avenue, 28th Floor, New York, NY 10022, or by telephone
at (212) 624-2060, or by email at prospectus@allianceg.com.
This press
release shall not constitute an offer to sell or the solicitation of an offer to buy these securities, nor shall there be any sale of
these securities in any state or other jurisdiction in which such offer, solicitation, or sale would be unlawful prior to the registration
or qualification under the securities laws of any such state or other jurisdiction.
About Quoin Pharmaceuticals Ltd.
Quoin Pharmaceuticals Ltd. is a clinical stage
specialty pharmaceutical company focused on developing and commercializing therapeutic products that treat rare and orphan diseases. We
are committed to addressing unmet medical needs for patients, their families, communities and care teams. Quoin’s innovative pipeline
comprises four products in development that collectively have the potential to target a broad number of rare and orphan indications, including
Netherton Syndrome, Peeling Skin Syndrome, Palmoplantar Keratoderma, Scleroderma, Epidermolysis Bullosa and others. For more information,
visit: www.quoinpharma.com or LinkedIn for updates.
Cautionary Note Regarding Forward Looking Statements
The Company cautions that statements in this press
release that are not a description of historical facts, including, but not limited to, statements regarding the offering, the expected
gross proceeds and the expected closing of the offering, are forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements may be identified by the use of words referencing future events or circumstances such as
"expect," "intend," "plan," "anticipate," "believe," and "will," among others.
Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by
such forward-looking statements. These forward-looking statements are based upon the Company’s current expectations and involve
assumptions that may never materialize or may prove to be incorrect. Actual results and the timing of events could differ materially from
those anticipated in such forward-looking statements as a result of various risks and uncertainties. More detailed information about the
risks and uncertainties affecting the Company is contained under the heading "Risk Factors" included in the Company’s
Annual Report on Form 20-F filed with the SEC on April 14, 2022, and in other filings the Company has made and may make with the SEC in
the future. One should not place undue reliance on these forward-looking statements, which speak only as of the date on which they were
made. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied
by such forward-looking statements. The Company undertakes no obligation to update such statements to reflect events that occur or circumstances
that exist after the date on which they were made, except as may be required by law.
For further information, contact:
Investor Relations
PCG Advisory
Stephanie Prince
sprince@pcgadvisory.com
(646) 863-6341
Exhibit 99.2
Quoin Pharmaceuticals Announces Closing of $16.8
Million Public Offering
ASHBURN, Va., August 9, 2022 (GLOBE NEWSWIRE)
-- Quoin Pharmaceuticals Ltd. (NASDAQ: QNRX) (the “Company” or “Quoin”), a clinical stage, specialty pharmaceutical
company focused on rare and orphan diseases, today announced the closing of its previously announced public offering of 11,050,000,000
ordinary shares represented by 2,210,000 American Depositary Shares at a purchase price of $5.00 per ADS and pre-funded warrants to purchase
5,750,000,000 ordinary shares represented by 1,150,000 American Depositary Shares at a per pre-funded warrant price of $4.9999 (with each
ADS and pre-funded warrant accompanied by an ordinary warrant) for an aggregate gross proceeds of $16.8 million.
The Company intends to use the net proceeds from
the offering for general corporate purposes.
A.G.P./Alliance Global Partners acted as
the sole placement agent for the offering.
A registration
statement on Form F-1, as amended (No. 333-266476) relating to the offering was declared effective by the Securities and Exchange Commission
(“SEC”) on August 5, 2022. A final prospectus relating to the offering has been filed and is available on the SEC’s
website at https://www.sec.gov. The offering was made only by means of a prospectus. Electronic copies of the final prospectus
may be obtained from A.G.P./Alliance Global Partners, 590 Madison Avenue, 28th Floor, New York, NY 10022, or by telephone at (212) 624-2060,
or by email at prospectus@allianceg.com.
This press
release shall not constitute an offer to sell or the solicitation of an offer to buy these securities, nor shall there be any sale of
these securities in any state or other jurisdiction in which such offer, solicitation, or sale would be unlawful prior to the registration
or qualification under the securities laws of any such state or other jurisdiction.
About Quoin Pharmaceuticals Ltd.
Quoin Pharmaceuticals Ltd. is a clinical stage
specialty pharmaceutical company focused on developing and commercializing therapeutic products that treat rare and orphan diseases. We
are committed to addressing unmet medical needs for patients, their families, communities and care teams. Quoin’s innovative pipeline
comprises four products in development that collectively have the potential to target a broad number of rare and orphan indications, including
Netherton Syndrome, Peeling Skin Syndrome, Palmoplantar Keratoderma, Scleroderma, Epidermolysis Bullosa and others. For more information,
visit: www.quoinpharma.com or LinkedIn for updates.
Cautionary Note Regarding Forward Looking Statements
The Company cautions that statements in this press
release that are not a description of historical facts, including, but not limited to, statements regarding the expected use of proceeds,
are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by the use of words referencing future events or circumstances such as "expect," "intend," "plan,"
"anticipate," "believe," and "will," among others. Because such statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or implied by such forward-looking statements. These forward-looking statements
are based upon the Company’s current expectations and involve assumptions that may never materialize or may prove to be incorrect.
Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result
of various risks and uncertainties. More detailed information about the risks and uncertainties affecting the Company is contained under
the heading "Risk Factors" included in the Company’s Annual Report on Form 20-F filed with the SEC on April 14, 2022,
and in other filings the Company has made and may make with the SEC in the future. One should not place undue reliance on these forward-looking
statements, which speak only as of the date on which they were made. Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-looking statements. The Company undertakes no obligation
to update such statements to reflect events that occur or circumstances that exist after the date on which they were made, except as may
be required by law.
For further information, contact:
Investor Relations
PCG Advisory
Stephanie Prince
sprince@pcgadvisory.com
(646) 863-6341
Exhibit 99.3
QUOIN PHARMACEUTICALS
LTD.
Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
2022 |
|
December 31, |
|
|
(unaudited) |
|
2021 |
ASSETS |
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
Cash |
|
$ |
5,189,215 |
|
$ |
7,482,773 |
Prepaid
expenses |
|
|
809,466 |
|
|
1,015,474 |
Total
current assets |
|
|
5,998,681 |
|
|
8,498,247 |
|
|
|
|
|
|
|
Intangible
assets, net |
|
|
782,594 |
|
|
808,604 |
Other
assets |
|
|
50,000 |
|
|
50,000 |
Total
assets |
|
|
6,831,275 |
|
$ |
9,356,851 |
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' DEFICIT |
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
Accounts
payable |
|
$ |
214,684 |
|
$ |
923,239 |
Accrued
expenses |
|
|
2,140,096 |
|
|
1,685,409 |
Accrued
license acquisition |
|
|
200,000 |
|
|
250,000 |
Accrued
interest |
|
|
432,170 |
|
|
743,840 |
Due
to officers – short term |
|
|
600,000 |
|
|
600,000 |
Warrant
liability |
|
|
— |
|
|
373,599 |
Total
current liabilities |
|
|
3,586,950 |
|
|
8,699,819 |
Due
to officers – long term |
|
|
3,973,733 |
|
|
4,123,732 |
Total
liabilities |
|
|
7,560,683 |
|
|
8,699,819 |
|
|
|
|
|
|
|
Commitments
and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity (deficit): |
|
|
|
|
|
|
Ordinary
shares, no par value per share, 12,500,000,000 ordinary shares authorized; 3,354,653,999 (670,931 ADSs) ordinary shares issued and outstanding
at March 31, 2022 and 3,354,650,799 (670,930 ADSs) at December 31, 2021 |
|
$ |
— |
|
$ |
— |
Treasury
Stock, 2,641,693 ordinary shares |
|
|
(2,932,000) |
|
|
(2,932,000) |
Additional
paid in capital |
|
|
31,955,379 |
|
|
31,659,017 |
Accumulated
deficit |
|
|
(29,752,787) |
|
|
(28,069,985) |
Total
shareholders' equity (deficit) |
|
|
(729,408) |
|
|
657,032 |
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity (deficit) |
|
$ |
6,831,275 |
|
$ |
9,356,851 |
The
accompanying footnotes are an integral part of these statements
QUOIN PHARMACEUTICALS
LTD.
Consolidated Statements
of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
Three
months ended March 31, |
|
|
2022 |
|
2021 |
Operating expenses |
|
|
|
|
|
|
General and administrative |
|
$ |
1,588,470 |
|
$ |
744,973 |
Research and development |
|
|
587,569 |
|
|
56,788 |
Total operating expenses |
|
|
2,176,039 |
|
|
801,761 |
|
|
|
|
|
|
|
Other expenses (income) |
|
|
|
|
|
|
Forgiveness of trade payable |
|
|
(416,000) |
|
|
— |
Fair value adjustment to convertible notes
payable |
|
|
— |
|
|
500,000 |
Change in fair value of warrant liability |
|
|
(77,237) |
|
|
2,446,513 |
Financing expense |
|
|
— |
|
|
90,000 |
Interest expense |
|
|
— |
|
|
65,597 |
Total other expense (income) |
|
|
(493,237) |
|
|
3,102,110 |
Net loss |
|
$ |
(1,682,802) |
|
$ |
(3,903,871) |
|
|
|
|
|
|
|
Loss per ADS and ordinary
share |
|
|
|
|
|
|
Loss per ADS |
|
|
|
|
|
|
Basic |
|
$ |
(2.51) |
|
$ |
(16.25) |
Fully-diluted |
|
$ |
(2.51) |
|
$ |
(16.25) |
|
|
|
|
|
|
|
Weighted average number of ADSs outstanding |
|
|
|
|
|
|
Basic |
|
|
670,930 |
|
|
240,292 |
Fully-diluted |
|
|
670,930 |
|
|
240,292 |
|
|
|
|
|
|
|
Loss per ordinary share |
|
|
|
|
|
|
Basic |
|
$ |
(0.00) |
|
$ |
(0.00) |
Fully-diluted |
|
$ |
(0.00) |
|
$ |
(0.00) |
|
|
|
|
|
|
|
Weighted average number of ordinary shares outstanding |
|
|
|
|
|
|
Basic |
|
|
3,354,651,784 |
|
|
1,201,460,800 |
Fully-diluted |
|
|
3,354,651,784 |
|
|
1,201,460,800 |
The
accompanying footnotes are an integral part of these statements
QUOIN PHARMACEUTICALS
LTD.
Consolidated
Statements of Shareholders’ Deficit (unaudited)
Three months ended March 31,
2022 and 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No |
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
Ordinary |
|
|
|
Par |
|
Treasury |
|
Paid in |
|
Accumulated |
|
|
|
|
|
Shares |
|
ADSs |
|
Value |
|
Stock |
|
Capital |
|
Deficit |
|
Total |
Balance
at December 31, 2020 |
|
1,201,460,800 |
|
240,292 |
|
— |
|
|
— |
|
$ |
100.00 |
|
$ |
(6,607,397) |
|
$ |
(6,607,297) |
Net loss |
|
— |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(3,903,871) |
|
|
(3,903,871) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2021 |
|
1,201,460,800 |
|
240,292 |
|
— |
|
$ |
— |
|
$ |
100 |
|
$ |
(10,511,268) |
|
$ |
(10,511,168) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2021 |
|
3,354,650,799 |
|
670,930 |
|
— |
|
$ |
(2,932,000) |
|
$ |
31,659,017 |
|
$ |
(28,069,986) |
|
$ |
657,032 |
Net loss |
|
— |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
(1,682,802) |
|
|
(1,682,802) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless warrant
exercise |
|
3,200 |
|
1 |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
Reclassification
of warrant liability upon issuance of Exchange warrant |
|
— |
|
— |
|
|
|
|
— |
|
|
296,362 |
|
|
— |
|
|
296,362 |
Balance
at March 31, 2022 |
|
3,354,653,999 |
|
670,931 |
|
— |
|
$ |
(2,932,00) |
|
$ |
31,955,379 |
|
$ |
(29,752,787) |
|
$ |
(729,408) |
The
accompanying footnotes are an integral part of these statements
QUOIN PHARMACEUTICALS
LTD.
Consolidated Statements
of Cash Flows (unaudited)
|
|
|
|
|
|
|
|
|
Three
months ended March 31, |
|
|
2022 |
|
2021 |
Cash flows provided by (used in) operating activities |
|
|
|
|
|
|
Net loss |
|
$ |
(1,682,802) |
|
$ |
(3,903,871) |
Fair value adjustment to convertible notes
payable |
|
|
— |
|
|
500,000 |
Change in fair value of warrant liability |
|
|
(77,237) |
|
|
2,446,513 |
Forgiveness of trade payable |
|
|
(416,000) |
|
|
— |
Financing expense |
|
|
— |
|
|
90,000 |
Amortization of intangibles |
|
|
26,010 |
|
|
26,011 |
Changes in assets and liabilities: |
|
|
|
|
|
|
Increase in accounts payable and accrued
expenses |
|
|
162,133 |
|
|
410,533 |
Decrease in accrued interest |
|
|
(311,670) |
|
|
(48,510) |
Increase in prepaid expenses |
|
|
206,008 |
|
|
65,598 |
Net cash used in operating activities |
|
|
(2,093,588) |
|
|
(413,726) |
|
|
|
|
|
|
|
Cash flows used in investing activities |
|
|
|
|
|
|
Payment for license acquisition |
|
|
(50,000) |
|
|
(142,500) |
Net cash used in investing activities |
|
|
(50,000) |
|
|
(142,500) |
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities: |
|
|
|
|
|
|
Decrease in deferred offering costs |
|
|
— |
|
|
(104,309) |
Increase in due to officers |
|
|
— |
|
|
139,286 |
Payments of amounts due to officers |
|
|
(150,000) |
|
|
(135,000) |
Proceeds from issuance of “Bridge
Notes”, net |
|
|
— |
|
|
1,410,000 |
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
(150,000) |
|
|
1,309,977 |
|
|
|
|
|
|
|
Net change in cash |
|
|
(2,293,558) |
|
|
753,751 |
Cash - beginning of period |
|
|
7,482,773 |
|
|
323,832 |
Cash - end of period |
|
$ |
5,189,215 |
|
$ |
1,077,583 |
|
|
|
|
|
|
|
Supplemental information: |
|
|
|
|
|
|
Reclassification of warrant liability
to equity upon issuance of “Exchange Warrants” |
|
$ |
296,362 |
|
|
— |
The
accompanying footnotes are an integral part of these statements
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
NOTE 1 –
ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Quoin Pharmaceuticals
Ltd. (“Quoin Ltd.,” the “Company,” “we,” “us,” “our”), formerly known as Cellect
Biotechnology Ltd. (“Cellect”), is the holding company for Quoin Pharmaceuticals, Inc., a Delaware corporation (“Quoin
Inc.”). On October 28, 2021, Cellect completed the business combination with Quoin Inc., in accordance with the terms of the
Agreement and Plan of Merger and Reorganization, dated as of March 24, 2021 (the “Merger Agreement”), by and among Cellect,
Quoin Inc. and CellMSC, Inc., a Delaware corporation and wholly-owned subsidiary of Cellect (“Merger Sub”), pursuant
to which Merger Sub merged with and into Quoin Inc., with Quoin Inc. surviving as a wholly-owned subsidiary of Cellect (the “Merger”).
Immediately after completion of the Merger, Cellect changed its name to “Quoin Pharmaceuticals Ltd.” The Company has accounted
for the transaction as a reverse recapitalization with Quoin Inc. as the accounting acquirer. Because Quoin Inc. is the accounting acquirer,
its historical financial statements became the Company’s historical financial statements and such assets and liabilities continued
to be recorded at their historical carrying values. The impact of the recapitalization has been retroactively applied to all periods presented.
Immediately after the closing of the Merger, there were approximately 8,386,627 American Depositary Shares (“ADSs”) issued
and outstanding, with one ADS representing 5,000 (as amended – See Note 16) ordinary shares of the Company. The former holders of
common stock of Quoin Inc. (including shares delivered to the Investor and the escrow account for the Investor) owned, in the aggregate,
approximately 88% of the ordinary shares, with Cellect’s shareholders immediately prior to the Merger owning approximately 12% of
ordinary shares.
Quoin Inc. was incorporated
in Delaware on March 5, 2018. Quoin Inc. is a specialty pharmaceutical company focused on developing and commercializing therapeutic
products that treat rare and orphan diseases. The first lead product is QRX003, a once daily, topical lotion comprised of a broad-spectrum
serine protease inhibitor, formulated with the proprietary Invisicare® technology, to treat Netherton Syndrome (NS). In addition,
the Company. intends to pursue the clinical development of QRX003 in additional rare dermatological diseases, including Peeling Skin Syndrome,
SAM Syndrome and Palmoplantar Keratoderma. To date, no products have been commercialized and revenue has not been generated. The majority
of the operating expenses since inception have been associated with completing due diligence on various technologies, asset technology
acquisitions, negotiating and finalizing potential funding agreements, costs related to the Merger and building the pipeline of preclinical
product candidates. The founders of Quoin Inc. funded all related expenditures through September 2020.
On October 28,
2021, Cellect sold the entire share capital of its subsidiary, Cellect Biotherapeutics Ltd., which essentially included all of Cellect’s
then existing net assets, to EnCellX Inc. (“EnCellX”), a newly formed U.S. privately held company based in San Diego, CA (the
“Share Transfer”), pursuant to an Amended and Restated Share Transfer Agreement. Quoin Ltd. has no interests in EnCellX subsequent
to the closing of the Merger. See Note 12.
On October 28, 2021, the Company
completed the private placement transaction with an investor (the “Investor”) for an aggregate purchase price of approximately
$17.0 million (comprised of the set off of approximately $5 million of senior secured notes issued in connection with the bridge loan
that the Investor previously made to Quoin Inc. and approximately $12 million in cash from the Investor) (the “Primary Financing”).
See Note 5.
NOTE 2 -
LIQUIDITY RISKS AND UNCERTAINTIES AND GOING CONCERN
The Company has incurred net losses
every year since inception and had an accumulated deficit of approximately $30.5 million at March 31, 2022. The Company funded its
operations through the issuance of the 2020 Notes (as defined below) and the Bridge Financing (as defined below) prior to the Merger and
the Primary Financing completed on October 28, 2021, whereby the Company received funding of approximately $12 million ($10.1 million
after offering costs) at the closing of the Merger. The Company expected to receive additional funding through the mandatory exercise
provision of the Series C Warrant issued to the Investor effective as of March 13, 2022 which would have resulted in proceeds
of approximately $9.5 million. In the event the requirements of the mandatory exercise provision of such warrant were not met (see Note
5), the Company received a written commitment from the Investor to provide funding equal to the $9.5 million expected upon exercise of
the Series C Warrant, at prevailing market rates. However, on July 14, 2022, the Company and Altium entered into an agreement, pursuant
to which the parties agreed to, among other things, cancel the Series C Warrant and a portion of the Series A Warrant previously issued
to Altium, – See Note 16. Following the cancellation of the Series C Warrant on July 14, 2022, the Company no longer expects to
receive such proceeds from Altium, and the
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
Company does not have sufficient resources
to implement its business plan for at least one year from the issuance of these consolidated financial statements. This raises substantial
doubt about the Company’s ability to continue as a going concern.
Additional financing will be required
to complete the research and development of the Company’s therapeutic targets and its other operating requirements, which may not
be available at acceptable terms, if at all. The Company has filed a registration statement on Form F-1 related to an offering of its
securities on a “reasonable best efforts” basis, however there is no assurance of the successful consummation of such offering.
The Company is also in the process of discussing a line of credit with a bank which has not yet been closed as of the financial statement
filing date and is likely to be conditional on additional equity funding. If the Company is unable to obtain the additional funding when
it becomes necessary, the development of its product candidates will be impacted and the Company would likely be forced to delay, reduce,
or terminate some or all of its development programs, all of which could have a material adverse effect on the Company’s business,
results of operations and financial condition.
NOTE 3 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation:
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information
and footnotes required by U.S. GAAP for complete financial statements, reflecting the operations of Quoin Inc. since inception and include
the accounts of Quoin Ltd. since the date of the Merger. In the opinion of management, such statements include all adjustments (consisting
only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial
statements of the Company as of March 31, 2022 and for the three months then ended. The results of operations for the three months
ended March 31, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022 or any
other period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements
and related disclosures as of December 31, 2021 and for the year then ended which are included in the Company’s Annual Report
on Form 20-F for the year ended December 31, 2021. The Company operates in one segment.
Use of estimates:
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors
in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in
the preparation of these financial statements. In addition, other factors may affect estimates, including: expected business and operational
changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected
to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate
future outcomes and management must select an amount that falls within that range of reasonable estimates.
Reclassifications:
Certain 2021 amounts
were reclassified to conform to the current year presentation. The amount reclassified was $600,000 to separate out short term
portion from long term portion for due to officers.
Other risks
and uncertainties:
The Company is subject
to risks common to development stage biopharmaceutical companies including, but not limited to, new technological innovations, dependence
on key personnel, protection of proprietary technology, compliance with government regulations, product liability, pre-clinical and clinical
trial outcome risks, regulatory approval risks, uncertainty of market acceptance and additional financing requirements.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
The Company’s
products require approval or clearance from the U.S. Food and Drug Administration (“FDA”) prior to commencing commercial sales
in the United States. There can be no assurance that the Company’s products will receive all of the required approvals or clearances.
Approvals or clearances are also required in foreign jurisdictions in which the Company may license or sell its products.
There can be no assurance
that the Company’s products, if approved, will be accepted in the marketplace, nor can there be any assurance that any future products
can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be
successfully marketed.
The Company is also
dependent on several third-party suppliers, in some cases single-source suppliers which include the supplier of the active pharmaceutical
ingredient (API) as well as the contract manufacturer of the drug substance for the expected clinical development.
A novel strain of coronavirus
(“COVID-19”) created a global pandemic, which commenced in 2020. The Company’s operations, to date, have not been dramatically
affected by COVID-19. However, the extent of any future impact on the Company’s operational and financial performance will depend
on the possibility of a resurgence and resulting severity of COVID-19 with respect to the Company’s access to API and drug product
for clinical testing, as well as our ability to safely and efficiently conduct planned clinical trials.
Cash:
The Company considers
all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents.
The Company, from time to time during the periods presented, has had bank account balances in excess of federally insured limits where
substantially all cash is held in the United States. The Company has not experienced losses in such accounts. The Company believes that
it is not subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Long-lived
assets:
Long-lived assets are
comprised of acquired technology and licensed rights to use technology, which are considered platform technology with alternative future
uses beyond the current products in development. Such intangible assets are being amortized on a straight-line basis over their expected
useful life of 10 years.
The Company assesses
the impairment for long-lived assets whenever events or circumstances indicate the carrying value may not be recoverable. Factors we consider
that could trigger an impairment review include the following:
|
● |
Significant
changes in the manner of our use of the acquired assets or the strategy for our overall business, |
|
● |
Significant
underperformance relative to expected historical or projected development milestones, |
|
● |
Significant
negative regulatory or economic trends, and |
|
● |
Significant
technological changes which could render the platform technology obsolete. |
The Company recognizes
impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses,
if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. During the three months ended
March 31, 2022 and 2021, there were no impairment indicators which required an impairment loss measurement.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
Research
and development:
Research and development
costs are expensed as incurred. Research and development expenses include personnel costs associated with research and development activities,
including third-party contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. The Company
accrues for costs incurred by external service providers, including contract research organizations and clinical investigators, based
on its estimates of service performed and costs incurred. These estimates include the level of services performed by third parties, patient
enrollment in clinical trials when applicable, administrative costs incurred by third parties, and other indicators of the services completed.
Based on the timing of amounts invoiced by service providers, the Company may also record payments made to those providers as prepaid
expenses that will be recognized as expense in future periods as the related services are rendered.
Income taxes:
The Company accounts
for its income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company maintains a full valuation allowance on its existing deferred tax assets.
The Company also accounts
for uncertain tax positions using the more-likely-than-not threshold for financial statement recognition and measurement of a tax position
taken in the Company’s income tax returns. As of March 31, 2022 and December 31, 2021, the Company had no uncertain tax
positions which affected its financial position and its results of operations or its cash flows and will continue to evaluate for uncertain
tax positions in the future. If at any time the Company should record interest and penalties in connection with income taxes, the interest
and the penalties will be expensed within the interest and general and administrative expenses, respectively.
Fair value
of financial instruments:
The Company considers
its cash, accounts payable, accrued expenses and the convertible and bridge notes payable to meet the definition of financial instruments.
The convertible and bridge notes payable and related warrants are recorded at fair value, see Notes 4, 5 and 6. The carrying amounts
of the remaining financial instruments approximated their fair values due to the short maturities.
The Company measures
fair value as required by ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines
fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about
fair value measurements. ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants.
Earnings
(loss) per share:
The Company reports
loss per share in accordance with ASC 260-10, Earnings Per Share, which provides for calculation of “basic” and “diluted”
earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders
by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities
that could share in the earnings of an entity. The calculation of diluted net earnings (loss) per share gives effect to ordinary shares
equivalents; however, potential common shares are excluded if their effect is anti-dilutive.
For the three months
ended March 31, 2022 and 2021, the number of shares excluded from the diluted net earnings (loss) per share included outstanding
options and warrants to purchase 1,399,660 ADSs and 63,669 ADSs, respectively. For the three months ended March 31, 2021, the 5,183
ADS’s issuable upon the conversion of both the Convertible Notes Payable (as defined below) and the 40,247 ADSs issuable upon conversion
of the Bridge Notes (as defined below) as well as the warrants issued in connection with both of these convertible instruments are not
included in the denominator since their inclusion would be anti-dilutive.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
NOTE
4 – CONVERTIBLE NOTES PAYABLE
On October 2, 2020,
Quoin Inc. commenced an offering of promissory notes (the “2020 Notes” or “Convertible Notes Payable”) and warrants.
The 2020 Notes were issued at a 25% original issue discount and bear interest at a rate of 20% per annum. The 2020 Notes are due one year
from their respective dates of issuance. In October through December 2020, Quoin Inc. received an aggregate of approximately
$910,000 pursuant to this offering, resulting in the issuance of 2020 Notes with an aggregate face value of $1,213,313 and an original
issue discount of $303,333. Approximately 23% of such financing was received from parties who are related to or affiliated with members
of Quoin Inc.’s board of directors.
Based upon the terms
agreed to in March 2021 in the Primary Financing (see Note 5), the 2020 Notes were mandatorily convertible into 5,183 ADSs in the
Primary Financing, subject to adjustment.
The Company elected
to account for the Convertible Notes Payable using the fair value model due to the short maturity and likely conversion at the date of
the Merger. The fair value of the Convertible Notes Payable was estimated to be approximately $1.2 million at the date of issuance and
there was no material change in the fair value from issuance until the conversion to equity on the closing of the Merger or the “Merger
date”. At the closing of the Merger, 5,183 ADSs were issued upon the conversion of the principle of the Convertible Notes Payable.
The noteholders also
received warrants exercisable at any time after the issuance date for a number of shares of Quoin Inc.’s common stock that equates
to 100% of the “as if converted” shares as if the 2020 Notes principal and interest were convertible at the lowest price any
securities are sold, convertible, or exercisable into in the Primary Financing or the next round of financing (whichever is lower). The
terms of the warrants became measurable and were exercisable for 29,388 ADSs at an initial exercise price of $49.75 per ADS. The Company
determined that these warrants met the criteria to be recorded as a liability instrument. Each holder agreed to exchange its warrant for
warrants on substantially the same terms as the Investor Exchange Warrants (See Note 5) with the same number of shares issuable upon the
exercise of an Exchange Warrant as upon the exercise of the original warrant and the same exercise price as under the original warrant
and have a contractual term of 5 years.
Effective March 13,
2022, the Company exchanged the noteholders’ warrants for on the same terms as the Investor Exchange Warrants, exercisable for 29,388
ADSs, in the aggregate, at the exercise price of $49.75 per ADS. The Exchange Warrants have been determined to have equity classification.
The change in the fair value of the warrants through the exchange date was included in other income (expense) in the accompanying statement
of operations, and then reclassified from liability to additional paid in capital.
In December 2021,
the Company concluded that the calculation of ADSs due to the 2020 Noteholders did not account for accrued interest due when the ADSs
were issued. The Company’s estimated amount required to settle these obligations was determined to be approximately $744,000 at
December 31, 2021, included in Accrued Interest. A total of $312,000 was paid to two of the five 2020 Noteholders during the three
months ended March 31, 2022, and the remaining liability is $432,000 as of March 31, 2022. The Company expects to settle the
remaining liability during 2022.
Interest expense, at the stated interest
rate, recognized in the three months ended March 31, 2022 and 2021 was approximately $0 and $66,000, respectively.
NOTE
5 – BRIDGE FINANCING AND SECURITIES PURCHASE AGREEMENT (PRIMARY FINANCING)
Bridge
Financing
In connection with the
Merger Agreement and the Securities Purchase Agreement (described below), Quoin Inc. entered into a “Bridge Purchase Agreement”
on March 24, 2021 with the Investor, pursuant to which the Investor agreed to purchase, and Quoin Inc. agreed to issue notes (the
“Bridge Notes”) in the aggregate principal amount of up to $5,000,000 in exchange for an aggregate purchase price of up to
$3,800,000 together with warrants. The Bridge Notes were purchased in three closings: (i) the first purchase of $2,000,000 on March 25,
2021 (Quoin Inc. received proceeds of $1,500,000 less fees of $90,000); (ii) the second purchase of $1,700,000 in April 2021
(Quoin Inc. received proceeds of $1,250,000) ; and (iii) a third purchase of $1,300,000 in May 2021 (Quoin Inc. received proceeds
of $1,000,000 less fees of $185,000).
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
The Bridge Notes were
issued with a 25% original issue discount, at an interest rate of 15% per annum and had a maturity date of the earliest to occur of: (i) December 25,
2021, (ii) the date on which Quoin Inc.’s equity is registered under the Exchange Act or is exchanged for equity so registered
or (iii) immediately prior to the closing of the Merger.
The Investor and Quoin
Inc. agreed that if the Primary Financing is consummated, the Investor may, at its election, offset the purchase price otherwise payable
by Investor to Quoin Inc. pursuant to the Securities Purchase Agreement related to the Primary Financing, by an amount equal to the outstanding
amount under this Bridge Note, and, upon such set-off, the portion of this Bridge Note shall be deemed to have been paid in its entirety
and all obligations thereunder shall be deemed to be fully satisfied without any further obligations on, or liability to, Quoin Inc.
The Company elected
to account for the Bridge Notes using the fair value model due to the short maturity and likely conversion at the closing of the Merger.
The cumulative fair value of the Bridge Notes was estimated to be approximately $5,000,000 at the date of issuances. The Bridge Notes
were offset against the purchase price under the Securities Purchase Agreement related to the Primary Financing and converted into 100,618
ADSs (including shares held in escrow for the benefit of the Investor) upon the closing of the Primary Financing. The accrued interest,
amounting to $393,611, was paid in cash at the Merger date. Interest expense, at the stated interest rate, recognized in the three months
ended March 31, 2022 and 2021 was $0 and $4,900, respectively.
Bridge
Warrants
Upon the funding of
each Bridge Note tranches described above, the Investor received warrants (the “Bridge Warrants”) to purchase a number of
shares of Quoin Inc.’s common stock equal to the aggregate principal amount of the Bridge Notes. The Bridge Warrants had a term
of five years from the date all of the shares underlying the Bridge Warrants are freely tradable. Quoin Inc. issued a total of 99,074ADSs
Bridge Warrants in the year ended December 31, 2021.
Following the closing
date of the Merger, on each of the tenth trading day, the forty-fifth day, the ninetieth day, and the one hundred thirty-fifth day thereafter
(each, a “Reset Date”), if the initial exercise price of the Bridge Warrants is greater than the arithmetic average of 85%
of the three lowest weighted average prices of the post-Merger ordinary shares of the combined company during the ten trading day period
immediately preceding the applicable Reset Date (the “Reset Price”), the exercise price of the Bridge Warrants will be reset
to the Reset Price. Furthermore, the number of shares underlying Bridge Warrants will be adjusted such that the aggregate number of shares
of common stock issuable to the Investor reflects the Reset Price instead of the initial exercise price. Adjustments to the exercise price
and number of warrant shares are available to the Investor until the second anniversary of the Registration Date, as defined in the Bridge
Warrants. Upon the occurrence of a Fundamental transaction, as defined in the Bridge Warrants, the warrant holder has the right to elect
a cash settlement for the value of the warrant based on the Black Scholes options pricing model.
The Company determined
that the warrants met the criteria to be recorded as a liability instrument through the exchange date on the closing of the Primary Financing.
The fair value of warrants was determined by a MonteCarlo simulation model to be approximately $1.6 million at the date of issuance of
the 39,630 warrants in connection with the first closing and $2.2 million at the date of issuance of the 59,444 (post exchange ratio)
in connection with the second and third closing of the Bridge Notes. See Note 6.
Upon the closing of
the Primary Financing, the Bridge Warrants were exchanged for warrants to purchase 99,074 ADSs at a fixed per share exercise price of
$49.75 (“Investor Exchange Warrants”), as amended, which replaced the reset provisions and modified the fundamental transaction
requirements of the Bridge Warrants. The Investor Exchange Warrants and ordinary shares underlying the Investor Exchange Warrants were
registered with the SEC on the Registration Statement on Form F-4.
Primary
Financing
On October 28, 2021, the Company
completed the private placement transaction with the Investor for an aggregate purchase price of approximately $17.0 million (comprised
of (x) the set off of approximately $5 million of Bridge Notes, and (y) approximately $12 million in cash from the Investor)
(the “Primary Financing”), and the Investor paid the Company approximately $11,504,000, which was net of $393,611 in accrued
interest on the Bridge Notes. The Company incurred an additional approximate $1.4 million in costs
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
associated with the Primary Financing,
which resulted in the net proceeds of approximately $10.1 million. The Company issued 342,100 ADSs to the Investor.
Quoin Ltd. also was required to issue
to the Investor, effective as of March 13, 2022, the 136th day following the consummation of the Merger (i) Series A Warrant
to purchase 342,100 ADSs (the “Series A Warrant”) (ii) Series B Warrant to purchase 342,100 ADSs (the “Series B
Warrant”) and (iii) Series C Warrant to purchase 191,174 ADSs (“Series C Warrant” and, together with
the Series A Warrant and Series B Warrant, the “Investor Warrants”). The exercise price for the Investor Warrants
is $49,75 per ADS, with Series A Warrant having a five-year maturity, and Series B Warrant and Series C Warrant having
a two-year maturity. The Company has the right to require the mandatory exercise of the Series C Warrant, subject to an effective
registration statement being in place for the resale of the shares underlying such warrants and the satisfaction of equity market conditions,
as defined in the Series C Warrant. As of the financial statement filing date, the registration statement was declared effective
by the Securities and Exchange Commission, but not all of the market related conditions were met. Upon the exercise of the Series C
Warrant in full, the Investor would also be granted an additional Series A Warrant to purchase 191,174 ADSs and an additional Series B
Warrant to purchase 191,174 ADSs at an exercise price of $49.75 per ADS.
NOTE
6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company applies
fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring
basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities the Company
considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that
market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions
and credit risk. For certain instruments, including cash and cash equivalents, accounts payable, and accrued expenses, it was estimated
that the carrying amount approximated fair value because of the short maturities of these instruments.
Fair value is estimated
using various valuation models, which utilize certain inputs and assumptions that market participants would use in pricing the asset or
liability. The inputs and assumptions used in valuation models are classified in the fair value hierarchy as follows:
Level
1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value
hierarchy gives the highest priority to Level 1 inputs.
Level
2: Quoted market prices for similar instruments in an active market; quoted prices for identical or similar assets and liabilities in
markets that are not active; and model-derived valuations inputs of which are observable and can be corroborated by market data.
Level
3: Unobservable inputs and assumptions that are supported by little or no market activity and that are significant to the fair value of
the asset and liability. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining the appropriate
hierarchy levels, the Company analyzes the assets and liabilities that are subject to fair value disclosure. Financial assets and liabilities
are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
The significant estimates used in
the determining the fair value of the 2020 Notes warrants (Note 4) were as follows:
|
|
|
|
|
|
|
|
|
|
03/13/2022 |
|
12/31/2021 |
|
Stock price |
|
$ |
18.50 |
|
$ |
22.75 |
|
Initial exercise
price |
|
$ |
49.75 |
|
$ |
49.75 |
|
Contractual
Term |
|
|
5.0 |
|
|
5.0 |
|
Volatility |
|
|
91.5 |
% |
|
89.2 |
% |
Discount rate |
|
|
1.94 |
% |
|
1.26 |
% |
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
The following table presents the
Company’s assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy at December 31,
2021 (none at March 31, 2022):
|
|
|
|
|
|
|
|
|
|
|
December
31, 2021 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
2020 Notes warrants |
|
— |
|
— |
|
$ |
373,599 |
|
$ |
373,599 |
Total Warrant
Liability |
|
— |
|
— |
|
$ |
373,599 |
|
$ |
373,599 |
The following shows the movement
of the warrant liability balance during 2021 and the three months ended March 31, 2022.
|
|
|
|
|
|
|
|
|
Bridge |
|
|
|
|
|
Financing |
|
2020 Note |
|
|
Warrants |
|
Warrants |
Beginning Balance
January 1, 2021 |
|
$ |
— |
|
$ |
— |
Warrant value
at issuance (recorded as warrant liability expense) |
|
|
3,783,079 |
|
|
894,113 |
Change in Fair
value of warrants |
|
|
8,627,651 |
|
|
(520,514) |
Reclassification
of warrant liability to an equity instrument |
|
|
(12,410,730) |
|
|
— |
Ending Balance
December 31, 2021 |
|
$ |
— |
|
$ |
373,599 |
|
|
|
|
|
|
|
Change in Fair
value of warrants |
|
|
— |
|
|
(77,237) |
Reclassification
of warrant liability to an equity instrument |
|
|
— |
|
|
(296,362) |
Ending Balance
March 31, 2022 |
|
$ |
— |
|
$ |
— |
The Investor Exchange Warrant issued
to the Investor on the Merger date was determined to be an equity-classified instrument, and accordingly the warrant liability on such
date of $12,410,730 was reclassified to additional paid in capital. The Exchange Warrants issued to the 2020 Noteholders effective as
of March 13, 2022 were determined to be an equity-classified instrument, and accordingly the warrant liability on such date of $296,262
was reclassified to additional paid in capital on that date.
NOTE 7 –
PREPAID EXPENSES
Prepaid expenses are as follows:
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2022 |
|
2021 |
Prepaid R&D
costs |
|
$ |
329,033 |
|
$ |
329,033 |
Prepaid insurance |
|
|
478,933 |
|
|
684,191 |
Prepaid other
expenses |
|
|
1,500 |
|
|
2,250 |
Total |
|
$ |
809,466 |
|
$ |
1,015,474 |
NOTE 8 -
ACCRUED EXPENSES
Accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2022 |
|
2021 |
Professional
fees |
|
$ |
467,167 |
|
$ |
144,377 |
Investor Relation
firm fees (note 12) |
|
|
168,000 |
|
|
584,000 |
Payroll taxes
(note 11) |
|
|
168,075 |
|
|
199,582 |
Payroll (note
11) |
|
|
776,802 |
|
|
557,937 |
Research contract
expenses (note 12) |
|
|
486,853 |
|
|
193,537 |
Other expenses |
|
|
73,198 |
|
|
5,976 |
Total |
|
$ |
2,140,095 |
|
$ |
1,685,409 |
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
NOTE
9 – ASSET ACQUISITION AND IN-LICENSED TECHNOLOGY
Polytherapeutics
On March 24, 2018,
Quoin Inc. entered into a securities purchase agreement (the “Acquisition Agreement”), in which it agreed to acquire all of
the equity interests in Polytherapeutics, Inc. (the “Seller” or “Polytherapeutics”) for $40,833 and future
royalties provided Quoin Inc. commercializes products using the technology developed by the Seller. The terms of any royalty payments
to the Seller are 4.0% of the net revenue of royalty products, as defined in the Acquisition Agreement, received by Quoin Inc. during
the ten (10) year period commencing from the date of first sale of a royalty product. If a generic product is introduced by a third
party to the market, during the royalty period, the royalty fees shall be reduced from 4% to 2%. If, during the royalty period, two or
more generic products are introduced, the royalty fees shall be reduced from 2% to 0%.
The Seller had the option
to repurchase the intellectual property for $100,000 if there were no products in clinical development using such technology. The repurchase
option was not exercised and has lapsed.
Quoin Inc. also entered
into a research and consulting agreement which commits Quoin Inc. to pay the Seller for additional research and development consulting
services (See Notes 12 and 15).
Skinvisible:
On October 17,
2019, Quoin Inc. entered into an exclusive license agreement with Skinvisible Inc. (“Skinvisible”), pursuant to which
Skinvisible granted a license to use certain patented technology for the development of products for commercial sale in the orphan rare
skin disease field, and for the use of a proprietary polymer deliver system technology. This technology is currently being used in the
development of QRX003. In exchange for the license, Quoin Inc. agreed to pay Skinvisible $1,000,000, as well as development and sales
milestone payments and a single digit royalty on all net sales, as defined.
The development milestones
originally required payments upon achieving development milestones for the first Rare Skin Disease drug product developed using the licensed
technology and the first two Ketamine products, as defined. Payments were originally due upon successful completions of certain clinical
milestones ($7.5 million) and obtaining US and EU regulatory approval ($15 million). The sales milestones required for every licensed
product commercialized by Quoin Inc. are $10 million upon achievement of $100 million in sales being achieved in the annual period; $25
million upon achievement of $250 million in sales and $50 million upon the achievement of $400 million in sales in an annual period. On
January 27, 2021, Quoin Inc. and Skinvisible entered into an amendment which modified the clinical milestone payment requirements
such that $750,000 would be payable to Skinvisible upon achievement of specified clinical milestones, and $21.75 million upon regulatory
approval in the U.S. and EU respectively. No development milestones, sales milestones or royalty payments were due through March 31,
2022.
The agreement has a
termination clause that is triggered if no product has commenced clinical testing 12 months after the date of the agreement or the latest
subsequent amendment.
On April 19, 2021,
Quoin Inc. and Skinvisible entered into another amendment which established the development deadline as December 31, 2022. Should
the Company not commence clinical testing as defined by the development deadline, the license agreement will terminate immediately except
in certain circumstances as specified in the agreement.
The license fee was
originally due in two equal installments of $500,000 payable no later than December 31, 2019 and June 30, 2020, which were not
paid. The agreement was subsequently amended several times to extend the payment due dates. On June 21, 2021, the parties entered
into the most recent amendment which modified the payment terms and required a payment of $107,500 on June 26, 2021, a payment of
$250,000 within 10 days of the Primary Financing, and the remaining $250,000 upon the earlier of approval of an Investigatory New
Drug application by the FDA or December 31, 2021. This amendment also eliminated the $750,000 clinical milestone payments described
above and reduced the milestone payment upon regulatory approval of the product containing the Skinvisible technology in either the U.S.
or E.U., whichever happens first to a total of $5,000,000.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
At March 31, 2022 and December 31,
2021, the license acquisition liability due was $200,000 and $250,000, respectively. The $200,000 license acquisition liability was paid
in May 2022.
NOTE
10 - INTANGIBLE ASSETS
Intangible assets are as follows:
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2022 |
|
2021 |
Acquired technology
– Polytherapeutics |
|
$ |
40,433 |
|
$ |
40,433 |
Technology license
– Skinvisible |
|
|
1,000,000 |
|
|
1,000,000 |
Total cost |
|
|
1,040,433 |
|
|
1,040,433 |
Accumulated
amortization |
|
|
(257,839) |
|
|
(231,829) |
Net
book value |
|
$ |
782,594 |
|
$ |
808,604 |
The Company recorded amortization
expense of approximately $26,010 for all three months ended March 31, 2022 and 2021, respectively. Amortization expense for each
of the next 5 years is expected to be approximately $104,000, and then approximately $288,000 thereafter.
NOTE
11 - RELATED PARTY TRANSACTIONS
Employment
Agreements and Due to Officers/Founders:
In March 2018,
Quoin Inc. executed employment agreements with both of its officers who are also co-founders of Quoin Inc. The employment agreements for
both officers/founders allow for a onetime expense that covers the salaries they would have otherwise been paid for efforts they undertook
in the periods since inception. The salaries and benefits allowances provided for under the employment agreements began to accrue as the
services were being provided by the officers/founders and are included in Due to Officers on the accompanying balance sheet.
Amounts due to the officers/founders
consist of amounts specified in the employment agreements since inception through March 31, 2022 as well as reimbursable travel expenses
and other amounts paid by them to third parties on behalf of Quoin Inc. The Company repaid $150,000 and $135,000 of such amounts due to
officers/founders in the three months ended March 31, 2022 and 2021, respectively. Since the Merger closing, the Company has been
repaying amounts due to officers/founders at a rate of $25,000 each per month.
Amounts due to officers at March 31,
2022 and December 31, 2021 consisted of the following:
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2022 |
|
2021 |
Salaries and
allowances |
|
$ |
4,108,500 |
|
|
4,108,500 |
Invoices paid
on behalf of the Company |
|
|
465,232 |
|
|
615,232 |
Total |
|
|
4,573,732 |
|
|
4,723,732 |
Less: Short-term
portion |
|
|
(600,000) |
|
|
(600,000) |
Long-term portion |
|
$ |
3,973,732 |
|
$ |
4,123,732 |
For the three months
ended March 31, 2022, the Company incurred $12,000 of research and development expense to a related party.
See Note 4 for related party debt
and Note 12 for employment agreements.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
NOTE
12 – RESEARCH, CONSULTING AGREEMENTS AND COMMITMENTS
Research
and consulting agreement:
Quoin Inc. entered into
a research and consulting agreement (the “Research Agreement”) which commits it to pay the former owner of Polytherapeutics
(the “Consultant” or “Seller”) to transfer the technical know-how of Polytherapeutics with respect to (i) good
manufacturing practices (“GMP”), clinical and commercial manufacturing of the Company’s PolyDur polymer and (ii) formulation
development of products utilizing the Company’s PharmaDur polymer (See Note 9). The agreement required monthly consulting
payments of $20,833 beginning on July 31, 2018 and ending February 28, 2021 (the “Post-Closing Period”) for a total
of $666,667 over the consulting period. Pursuant to an amendment, the Post-Closing Period was revised to terminate on December 31,
2020.
Through March 31,
2022 and the financial statement issuance date, the Company has not made any payments, the Consultant has not performed any services and
the Company has not incurred or accrued for any expenses. See Note 15 for Consultant’s notification of breach of contract.
Other
research consulting agreements:
Quoin Inc. entered into
three consulting agreements with Axella Research LLC (“Axella”) to provide regulatory and pre- clinical/clinical services
to the Company with respect to QRX003 and QRX004. The combined fees of the three agreements are approximately $270,000, payable as milestones
under the three agreements are met. Quoin Inc. has also engaged Axella for additional services pursuant to separate work orders. Further,
Quoin Inc. has two options to pay the milestones due 1) one half in equity of Quoin Inc. (at a pre-negotiated valuation) and one-half
in cash or 2) entirely in cash, in which case a discount of approximately 20% would be applicable. The Company incurred no research and
development expenses, in connection with these agreements, for both of the three months ended March 31, 2022 and 2021, as no services
were provided. However, the Company has accrued expenses of $193,537 at both March 31, 2022 and December 31, 2021.
In November 2020,
Quoin Inc. entered into a Master Service Agreement for an initial term of three years with Therapeutics Inc. for managing preclinical
and clinical development for new products in the field of dermatology. The agreement required the execution of individual work orders.
Quoin Inc. may terminate any work order for any reason with 90 days written notice subject to costs incurred through termination
and a defined termination fee, unless there is a material breach by Therapeutics Inc. The first work order was entered into in late
2020 for a clinical study at an expected estimated cost of approximately $3.5 million and expected timing through the first quarter of
2023. For the three months ended March 31, 2022, and March 31, 2021, the Company incurred a research and development expense
under this agreement of approximately $185,000 and $0, respectively.
In November 2021,
the Company entered into a commitment for research related services associated with Netherton Syndrome of approximately $250,000 for an
expected period of eighteen months. For the three months ended March 31, 2022, the Company did not incur any research and
development costs related to this agreement.
Consulting
agreement:
Quoin Inc. entered into
a consulting agreement with an Investor Relations (IR) firm, which provides for a monthly fee of $14,000. The agreement had an automatic
annual renewal clause and has been in effect since November 2017. The Company owed the IR firm $584,000 as of December 31, 2021,
which was included in accrued expenses in the accompanying balance sheet. In March 2022, the Company entered into a settlement agreement
with the IR firm reducing the liability to $168,000, and recognized $416,000 as other income in the consolidated statement of operations.
Employment
agreements:
The employment agreements entered
into by Quoin Inc. with its two founders/officers provide for a combined base salary, including monthly allowances, of $996,000 per
annum, a discretionary bonus and certain allowances and benefits. In the event of
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
termination of the two founders/officers
for reason other than cause, as defined in the employment agreements, the founders shall be entitled to two years of based salary
and bonus.
In November 2021,
the Company appointed and entered into an employment agreement with its Chief Financial Officer which provides for a base salary of $360,000
per annum, a discretionary bonus and certain allowances and benefits.
In November 2021,
the Board of Directors of the Company approved amendments to the employment agreements increasing base level compensation by 10% for the
two founders and increasing the annual target discretionary bonus to less than 45% of base salary for the two founders and the Chief Financial
Officer. Further a transaction bonus related to the closing of the Merger and private placements aggregating approximately $324,000 was
paid to the two founders in November 2021. See Note 16 describing subsequent shareholder approval of the employment agreements of
the two founders/officers.
Performance
milestones and Royalties:
See Note 9 for asset
and in-licensed technology commitments.
Merger
agreement commitment:
In consideration for the Share Transfer
disclosed in Note 1, the pre-closing Cellect shareholders received a contingent value right (“CVR”) entitling the holders
to earnouts during the Payment Period (as such term is defined in the Share Transfer Agreement), comprised mainly of payments upon sale,
milestone payments, license fees and exit fees realized by EnCellX. In order to secure such right, shares constituting 40% of EnCellX
share capital are held in escrow. In connection with the Share Transfer, Cellect entered into a CVR Agreement with Mr. Eyal Leibovitz,
in the capacity of Representative for the holders of CVRs, and Computershare Trust Company, N.A., a federally chartered trust company
(the “Rights Agent”). Under the terms of the CVR Agreement, the holders of the Cellect ADSs immediately prior to the Merger
had the right to receive, through their ownership of CVRs, their pro-rata share of the net Share Transfer consideration, making such holders
of CVRs the indirect beneficiaries of the net payments under the Share Transfer. CVRs were recorded in a register administered by the
Rights Agent but were not certificated. Since the Company will not receive any net proceeds from the CVR’s, there is no asset or
liability recorded in the consolidated financial statements.
NOTE
13 – SHAREHOLDERS’ EQUITY AND SHARE OWNERSHIP AND RIGHTS
Quoin
Inc.
Quoin Inc.’s authorized
capital stock consisted of 10,000 shares of common stock. On March 5, 2018, in connection with the incorporation as a Delaware corporation,
Quoin Inc. issued 100 shares for a consideration of $100 split equally between the two founders and officers of Quoin Inc. In connection
with the Merger transaction, the two founders exchanged their shares in Quoin Inc. for 240,292 ADSs in Quoin Ltd., which was subsequently
reduced to 224,388 shares in May 2022 following the determination of the number of shares held in escrow allocated to certain former
shareholders of Cellect. All share and per share amounts have been adjusted to reflect this recapitalization.
Quoin
Ltd.
The Company held a Special
General Meeting on February 28, 2022, at which the Company’s shareholders adopted the Amended and Restated Articles of Association
of the Company.
As of March 31,
2022, Quoin Ltd.’s authorized share capital consisted of 50,000,000,000 ordinary shares from 12,500,000,000, no par value (see Note
16 for subsequent increase in authorized share capital). These ordinary shares are not redeemable and do not have any preemptive rights.
However, the Investor has certain approval rights in connection with the issuance of additional shares. Holders of our ordinary shares
have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholders meeting. The board of
directors shall determine and provide a record date for each shareholders meeting and all shareholders at such record date may vote. Unless
stipulated differently in the Companies Law or in the articles of association, all shareholders’ resolutions shall be approved by
a simple majority vote.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
Under Israeli law, the
Company may declare and pay dividends only if, upon the determination of our board of directors, there is no reasonable concern that the
distribution will prevent us from being able to meet the terms of our existing and foreseeable obligations as they become due. Under the
Companies Law, the distribution amount is further limited to the greater of retained earnings or earnings generated over the two most
recent years legally available for distribution according to our then last reviewed or audited financial statements, provided that
the date of the financial statements is not more than six months prior to the date of distribution. In the event that the Company
does not have retained earnings or earnings generated over the two most recent years legally available for distribution, the Company
may seek the approval of the court in order to distribute a dividend. The court may approve our request if it determines that there is
no reasonable concern that the payment of a dividend will prevent the Company from satisfying our existing and foreseeable obligations
as they become due.
The Bank of New York
Mellon, as depositary, has registered and delivered American Depositary Shares, also referred to as ADSs. Each ADS represents 5,000 (as
amended- See Note 16) ordinary shares (or a right to receive 5,000 ordinary shares). Each ADS will also represent any other securities,
cash or other property which may be held by the depositary. ADSs may be held either (a) directly (1) by having an American Depositary
Receipt, also referred to as an ADR, which is a certificate evidencing a specific number of ADSs or (2) by having uncertificated
ADSs, or (b) indirectly by holding a security entitlement in ADSs through a broker or other financial institution that is a direct
or indirect participant in The Depository Trust Company, also called DTC.
Warrants
and Options.
The following table summarizes warrant
activities (excluding Cellect options, see Note 1 below) during the year ended December 31, 2021 and the three months ended March 31,
2022:
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
ADSs |
|
Average |
|
|
Underlying |
|
Exercise |
|
|
Warrants |
|
Price |
Outstanding
at December 31, 2020 |
|
— |
|
|
— |
Granted |
|
128,463 |
|
$ |
49.75 |
Assumed as part
of Merger |
|
13,477 |
|
|
137.50 |
Exercised |
|
— |
|
|
— |
Forfeited/cancelled |
|
— |
|
|
— |
Outstanding
at December 31, 2021 |
|
141,940 |
|
|
55.39 |
Granted |
|
1,257,721 |
|
|
49.75 |
Exercised –
cashless |
|
(1) |
|
|
— |
Forfeited/cancelled |
|
— |
|
|
— |
Outstanding
at March 31, 2022 |
|
1,399,660 |
|
$ |
50.30 |
The following vested stock options
and warrants were outstanding at March 31, 2022, exercisable into ADSs:
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Year of |
|
|
ADSs |
|
Price |
|
maturity |
Warrants held
by 2020 noteholders |
|
29,388 |
|
$ |
49.75 |
|
2027 |
Exchange warrant
held by Investor |
|
99,074 |
|
$ |
49.75 |
|
2026 |
Warrants held
by former Cellect warrantholders |
|
8,820 |
|
$ |
137.50 |
|
2024 |
Options held
by former Cellect optionholders |
|
4,655 |
|
$ |
222.19 |
|
2022 |
Series A warrants
held by Investor (2)(4) |
|
533,274 |
|
$ |
49.75 |
|
2027 |
Series B warrants
held by Investor (2)(3)(4) |
|
533,274 |
|
$ |
49.75 |
|
2024 |
Series C warrants
held by Investor (2) |
|
191,175 |
|
$ |
49.75 |
|
2024 |
Total |
|
1,399,660 |
|
|
|
|
|
1) |
The
options held by former Cellect optionholders fully vested at the closing of the Merger and expire between April and October 2022. The
incremental fair value of the stock options at the closing of the Merger was not significant. The options were issued under the Cellect
Ltd. Employee Shares Incentive Plan (the “2014 Plan”). During the quarter ended March 31, 2022, 1,088 |
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
|
options
expired unexercised. The 2014 Plan was amended and restated and initial grants were made to Company officers and directors, approved at
the Company Annual General Meeting held on April 12, 2022. See Note 16. |
2) |
Equity-classified
warrants issued effective as of March 13, 2022 pursuant to the Primary Financing requirements. |
3) |
The
Series B Warrant provides for alternate cashless exercise pursuant to which the Investor has the sole option as elected by the Investor
to receive 1.0 ADS for each warrant share being exercised in such cashless exercise (see Note 16). |
4) |
The
Company expects to issue additional Series A and Series B Warrants, each to purchase 191,173 ADSs to the Investor upon exercise of the
Series C Warrant, which are included in the totals in the table above. |
The
intrinsic value of outstanding warrants and options at March 31, 2022 was negligible.
In March 2022, the board of
directors of the Company approved the Amended and Restated Equity Incentive Plan (the “Amended Plan”) which increased the
number of ordinary shares reserved for issuance under such equity incentive plan to 15% of the Company’s outstanding ordinary shares
on a fully-diluted basis, or 1,826,991,616 ordinary shares, represented by 365,398 ADSs as of March 31, 2022. The board of directors
further approved the award of options to Officers and Directors in aggregate to purchase 316,571 ADSs and under the Amended Plan, and
an annual discretionary bonuses for Officers of $472,500 in aggregate. The Amended Plan and certain individual option grants and bonuses
were subject to shareholder approval at our Annual General Meeting, as described in Note 16
NOTE
14 – CONTINGENCIES
From time to time, the
Company may become involved in various legal matters arising in the ordinary course of business. Management is unaware of any matters
requiring accrual for related losses in the financial statements.
In February 2020, the seller
of the equity interests in Polytherapeutics and party to the Research Agreement communicated with Quoin Inc. threatening litigation for
non-payment and related breach of contract and immediate payment of all monthly payments in the amount of $666,667. See Notes 9
and 12. The Consultant has not provided any services and has not complied with other technical requirements under the Research Agreement,
and therefore is considered to be in breach of contract. The Company and the Consultant have had communications with respect to the duration,
commencement date and payment of the consulting services, but a revised agreement has not been reached. No lawsuits have been filed as
of the financial statement issuance date. Should a formal claim or lawsuit be filed, the Company believes it has meritorious defenses.
NOTE
15 – LICENSE AGREEMENTS
In November and December 2021,
the Company entered into three license and supply agreements, whereby the Company is entitled to a royalty or other proceeds from the
specified product revenues in select non-US markets from the licensee, if and when the underlying products are approved and commercialized.
During three months ended March 31, 2022, the Company entered into four license and supply agreements, whereby the Company will receive
a royalty or other proceeds from the specified product revenues in select non-US markets from the licensor, if and when the underlying
products are approved and commercialized. No royalty revenues have been received through March 31, 2022 under any of these agreements.
NOTE
16 - SUBSEQUENT EVENTS
The Company held its
Annual General Meeting on April 12, 2022, and which the Company’s shareholders approved, among other items, the following:
|
● |
The
increase in authorized share capital from 12.5 billion to 50 billion ordinary shares. |
|
● |
Modification
of the annual compensation of the two founders to a combined base salary of $990,000 and to increase the annual discretionary bonus to
not less than 45% of the annual base salary. |
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
|
● |
Repayment
of amounts due to officers/founders at a rate of $25,000 each per month. |
|
● |
The
grant of an option to purchase up to 85,714 ADSs to each of the two founders under the Amended Plan, at an exercise price per ADS of $17.50,
to vest over a four-year period. |
|
● |
The
grant of an option to purchase 12,857 ADSs to each of the five non-employee directors under the Amended Plan at an exercise price per
ADS of $17.50, to vest over a three-year period, and (as an annual grant for 2022) an option to an officer to purchase 71,429 ADSs at
an exercise price per ADS of $17.50, to vest over a four-year period. |
ADS
Ratio Change
On July 12, 2022, our
Board of Directors approved the change in the ratio of ADS evidencing ordinary shares from 1 ADS representing four hundred (400) ordinary
shares to 1 ADS representing five thousand (5,000) ordinary shares, which will result in a one for 12.5 reverse split of the issued and
outstanding ADSs (the “Ratio Change”). The Ratio Change was effective August 1, 2022. All ADS and related option and warrant
information presented in these financial statements and accompanying footnotes has been retroactively adjusted to reflect the reduced
number of ADSs resulting from the Ratio Change.
Nasdaq
Listing
On April 22, 2022, we
received a letter from the Listing Qualifications staff of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying us that we are
no longer in compliance with the minimum stockholders’ equity requirement for continued listing on The Nasdaq Capital Market. Nasdaq
Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2.5 million. In addition, as of April 21,
2022, we did not meet the alternative continued listing requirements based on market value of listed securities or net income from continuing
operations. In accordance with Nasdaq Rule 5810(c)(2)(A), within 45 calendar days of receiving this notice, we submitted a plan to regain
compliance to Nasdaq. This plan was accepted, and Nasdaq has granted us an extension until October 19, 2022 to evidence compliance.
On June 10, 2022, we
received a letter from The Nasdaq Listing Qualifications staff notifying us that the closing bid price per ADS was below the required
minimum of $1.00 for a period of 30 consecutive business days and that we did not meet the minimum bid price requirements set forth in
Nasdaq Rule 5550(a)(2). Pursuant to Nasdaq Rule 5810(c)(3)(A), we have a period of one hundred eighty (180) calendar days, or until December
7, 2022 (the “Compliance Period”), to regain compliance with Nasdaq’s minimum bid price requirement. If at any time
during the Compliance Period, the closing bid price per ADS is at least $1.00 for a minimum of ten (10) consecutive business days, Nasdaq
will provide us a written confirmation of compliance and the matter will be closed. In the event we do not regain compliance by December
7, 2022, we may be eligible for an additional 180 calendar day grace period. To qualify, we will be required to meet the continued listing
requirement for market value of publicly held ADSs and all other initial listing standards for The Nasdaq Capital Market, with the exception
of the bid price requirement, and will need to provide written notice of our intention to cure the deficiency during the second compliance
period.
Although
there is no assurance, we expect that the offering that is being registered on the registration statement on Form F-1, which includes
these financial statements and accompanying notes, will enable us to regain compliance with Nasdaq’s minimum stockholders’
equity requirement and the Ratio Change will help us to regain compliance with the minimum bid-price requirement for continued listing
on The Nasdaq Capital Market. Although Nasdaq notification letters described above have no immediate effect on our listing on The Nasdaq
Capital Market, and we are working on implementing plans to regain compliance with Nasdaq listing standards, there
can be no assurance that we will be able to regain compliance with Nasdaq’s minimum stockholders’ equity requirement or minimum
bid-price requirement for continued listing. If our ADSs are delisted from Nasdaq, it will have material negative impacts on the
actual and potential liquidity of our securities, as well as material negative impacts on our ability to raise future capital.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
March 31, 2022 and 2021
Agreements
with Altium Growth Fund, LP and Altium Warrant Exercises
During the second quarter
of 2022, Altium exercised the Series B Warrant in full pursuant to the alternate cashless exercise right of such warrant, under which
Altium had an option to receive 1 ADS for each ADS underlying the warrant being exercised in such cashless exercise, resulting in the
issuance of a total of 342,100 ADSs to Altium.
On
July 14, 2022, we, Quoin Inc. and Altium entered into an agreement (the “Altium Agreement”), pursuant to which the parties
agreed to, among other things, (i) amend certain terms of the Series A Warrant and Investor Exchange Warrants previously issued to Altium
to, among other things, reduce the exercise price to $0.00 per ADS with respect to a total of 399,999 ADSs, (ii) cancel the Series C Warrant
and a portion of the Series A Warrant previously issued to Altium, and (iii) terminate the Purchase Agreements, pursuant to which the
warrants were previously issued to Altium. As of August 2, 2022, Altium exercised all of its outstanding warrants and we issued a total
of 399,999 ADSs to Altium.
The exercise price of
the 2020 noteholder warrants was reduced to $0.00 as of July 14, 2022 as a result of the Altium Agreement described below. As of August
2, 2022, 23,040 2020 Noteholder Warrants had been exercised.
As a result of the Altium and Noteholder
warrant exercises and the Altium Agreement, the warrants outstanding as of August 2, 2022 are set out below, exercisable into ADS:
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Year of |
|
|
ADSs |
|
Price |
|
maturity |
Warrants held
by 2020 noteholders |
|
6,348 |
|
$ |
0 |
|
2027 |
Warrants held
by former Cellect warrant holders |
|
8,820 |
|
$ |
137.5 |
|
2024 |
Total |
|
15,168 |
|
|
|
|
|
Exhibit 99.4
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and the Board of Directors of Quoin Pharmaceuticals Ltd.
Opinion
on the Financial Statements
We have audited the
accompanying balance sheets of Quoin Pharmaceuticals Ltd. (the “Company”) as of December 31, 2021 and 2020, the
related statements of operations, and shareholders’ equity (deficit), and cash flows for the years then ended, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and
its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States
of America.
Consideration
of the Company’s Ability to Continue as a Going Concern
The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements,
the Company has a working capital deficiency, an accumulated deficit, has incurred significant losses and cash outflows from operations.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Basis for
Opinion
These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits
in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for
our opinion.
Critical
Audit Matters
The critical audit matters
communicated below are matters arising from the current period audit of the financial statements that was communicated or required to
be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements
and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does
not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters
below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment
of the measurement of fair value of Warrants:
As discussed in Notes 4
and 5 to the financial statements, the Company issued warrants in connection with the Convertible Notes Payable and the Bridge Financing.
The warrants were initially classified as liabilities. The warrants estimated fair value upon their dates of issuance, as well as from
those issuance dates to either the warrant exchange on October 28, 2021 or December 31, 2021, as applicable, was $12.8 million
and recorded on the statement of operations as warrant liability expense. The Company utilizes a Monte Carlo simulation model to estimate
the fair value.
Assessment
of the measurement of fair value of Warrants (continued):
We identified the assessment
of the measurement of warrant fair value as a critical audit matter that is challenging due to the high degree of judgment, including
the involvement of professionals with specialized skills and knowledge, as well as the complex valuation methodology that incorporates
assumptions to estimate the fair value.
The primary procedures
we performed to address this critical audit matter included evaluating the design of the internal control related to the Company’s
process to measure the fair value and testing the valuation methodology and corresponding inputs used by the valuation professionals with
specialized skills including:
|
● |
Evaluating
the model and methodology used to calculate the fair value of the warrants |
|
● |
Evaluating
and comparing the expected price volatility against a volatility range that was independently developed using peer group volatility information,
and |
|
● |
Independently
developed a range of the fair value of the warrants |
Contracted
Research & Development Cost Recognition:
As discussed in Note 3
to the financial statements, the Company records costs for clinical trial activities based upon estimates of costs incurred through the
balance sheet date for services performed by contract research organizations, clinical study sites and other vendors.
Auditing the recognition
of pre-clinical and clinical trial costs associated with contracted organizations is challenging due to the significant judgment required
to determine the nature and level of services that have been received, including determining the progress to completion of specific tasks
and activities conducted in relation to what has been invoiced and recorded.
The primary procedures
we performed to address this critical audit matter included:
|
● |
Obtained
an understanding of the design and operating effectiveness of internal controls for pre-clinical and clinical cost recognition |
|
● |
Tested
the completeness and accuracy of the underlying data used in the estimates including, but not limited to, the estimated costs per project
milestone and duration |
|
● |
Assessed
the reasonableness of the significant assumptions, corroborated the progress of the pre-clinical and clinical trials with the Company’s
operations personnel and to information obtained by the Company directly from third parties, and to information in contracts or statements
of work including costs for those activities and project duration |
|
● |
Examined
subsequent invoicing received from such third parties |
/s/ Friedman LLP
PCAOB ID 711
We have served as the Company’s auditor since
2020.
East Hanover, New Jersey
April 13, 2022, except for Notes
2 and 17, as to which the date is August 2, 2022
QUOIN PHARMACEUTICALS
LTD.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2021 |
|
2020 |
ASSETS |
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
Cash |
|
$ |
7,482,773 |
|
$ |
323,832 |
Prepaid
expenses |
|
|
1,015,474 |
|
|
— |
Deferred
offering costs |
|
|
— |
|
|
141,338 |
Total
current assets |
|
|
8,498,247 |
|
|
465,170 |
|
|
|
|
|
|
|
Intangible
assets, net |
|
|
808,604 |
|
|
912,648 |
Other
assets |
|
|
50,000 |
|
|
— |
Total
assets |
|
$ |
9,356,851 |
|
$ |
1,377,818 |
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT |
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
Accounts
payable |
|
$ |
923,239 |
|
$ |
— |
Accrued
expenses |
|
|
1,685,409 |
|
|
960,848 |
Accrued
license acquisition |
|
|
250,000 |
|
|
875,000 |
Accrued
interest and amounts due under convertible notes payable |
|
|
743,840 |
|
|
47,041 |
Due
to officers |
|
|
4,723,732 |
|
|
4,888,913 |
Convertible
notes payable |
|
|
— |
|
|
1,213,313 |
Warrant
liability |
|
|
373,599 |
|
|
— |
Total
liabilities |
|
|
8,699,819 |
|
|
7,985,115 |
|
|
|
|
|
|
|
Commitments
and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity (deficit): |
|
|
|
|
|
|
Ordinary
shares, no par value, 12,000,000,000 ordinary shares authorized – 3,354,650,799 and 1,201,460,800 (670,930 and 240,292 ADSs) ordinary
shares issued and outstanding at December 31, 2021 and 2020, respectively |
|
|
— |
|
|
— |
Treasury
Stock, 2,641,693 ordinary shares, at cost |
|
|
(2,932,000) |
|
|
— |
Additional
paid in capital |
|
|
31,659,017 |
|
|
100 |
Accumulated
deficit |
|
|
(28,069,985) |
|
|
(6,607,397) |
Total
shareholders’ equity (deficit) |
|
|
657,032 |
|
|
(6,607,297) |
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity (deficit) |
|
$ |
9,356,851 |
|
$ |
1,377,818 |
The accompanying footnotes
are an integral part of these statements
QUOIN PHARMACEUTICALS
LTD.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31, |
|
|
2021 |
|
2020 |
|
2019 |
Revenue |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
General
and administrative |
|
|
4,499,923 |
|
|
1,425,855 |
|
|
1,514,751 |
Research
and development |
|
|
1,562,927 |
|
|
244,155 |
|
|
45,650 |
Total
operating expenses |
|
|
6,062,850 |
|
|
1,670,010 |
|
|
1,560,401 |
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
|
|
|
|
|
|
|
Fair
value adjustment to convertible notes payable |
|
|
1,250,000 |
|
|
378,333 |
|
|
— |
Warrant
liability expense |
|
|
12,784,329 |
|
|
— |
|
|
— |
Financing
expense |
|
|
275,000 |
|
|
— |
|
|
— |
Interest
expense |
|
|
1,090,409 |
|
|
47,021 |
|
|
— |
Total
other expense |
|
|
15,399,738 |
|
|
425,354 |
|
|
— |
Net
loss |
|
$ |
(21,462,588) |
|
$ |
(2,095,364) |
|
$ |
(1,560,401) |
|
|
|
|
|
|
|
|
|
|
Loss
per ADS and ordinary share |
|
|
|
|
|
|
|
|
|
Loss per ADS |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(67.96) |
|
$ |
(8.72) |
|
$ |
(6.49) |
Fully-diluted |
|
$ |
(67.96) |
|
$ |
(8.72) |
|
$ |
(6.49) |
|
|
|
|
|
|
|
|
|
|
Weighted average
number of ADSs outstanding |
|
|
|
|
|
|
|
|
|
Basic |
|
|
315,801 |
|
|
240,292 |
|
|
240,292 |
Fully-diluted |
|
|
315,801 |
|
|
240,292 |
|
|
240,292 |
|
|
|
|
|
|
|
|
|
|
Loss per ordinary
share |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01) |
|
$ |
(0.70) |
|
$ |
(0.52) |
Fully-diluted |
|
$ |
(0.01) |
|
$ |
(0.70) |
|
$ |
(0.52) |
|
|
|
|
|
|
|
|
|
|
Weighted average
number of ordinary shares outstanding |
|
|
|
|
|
|
|
|
|
Basic |
|
|
1,579,006,444 |
|
|
1,201,460,800 |
|
|
1,201,460,800 |
Fully-diluted |
|
|
1,579,006,444 |
|
|
1,201,460,800 |
|
|
1,201,460,800 |
The accompanying footnotes
are an integral part of these statements
QUOIN PHARMACEUTICALS
LTD.
Consolidated
Statements of Shareholders’ Equity (Deficit)
Years ended December 31, 2021,
2020 and 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Ordinary |
|
No Par |
|
|
|
|
Treasury |
|
Paid
in |
|
|
Accumulated |
|
|
|
|
|
Shares |
|
Value |
|
ADSs
|
|
Stock |
|
Capital |
|
Deficit |
|
Total |
Balance
at December 31, 2018 |
|
1,201,460,800 |
|
$ |
— |
|
|
240,292 |
|
|
|
|
$ |
100 |
|
$ |
(2,951,632) |
|
$ |
(2,951,532) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,560,401) |
|
|
(1,560,401) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2019 |
|
1,201,460,800 |
|
|
— |
|
|
240,292 |
|
|
|
|
|
100 |
|
|
(4,512,033) |
|
|
(4,511,933) |
Net loss |
|
|
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
(2,095,364) |
|
|
(2,095,364) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2020 |
|
1,201,460,800 |
|
|
— |
|
|
240,292 |
|
|
|
|
|
100 |
|
|
(6,607,397) |
|
|
(6,607,297) |
Net loss |
|
|
|
|
— |
|
|
— |
|
|
|
|
|
— |
|
|
(21,462,588) |
|
|
(21,462,588) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
“2020 Notes” into ordinary shares |
|
25,913,600 |
|
|
|
|
|
5,183 |
|
|
|
|
|
1,213,313 |
|
|
|
|
|
1,213,313 |
Sale of equity
securities, including conversion of “Bridge Notes” |
|
1,710,500,800 |
|
|
|
|
|
342,100 |
|
|
|
|
|
17,000,000 |
|
|
|
|
|
17,000,000 |
Costs associated
with sale of equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,897,126) |
|
|
|
|
|
(1,897,126) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger recapitalization
of Cellect |
|
416,775,599 |
|
|
|
|
|
83,355 |
|
|
(2,932,000) |
|
|
2,932,000 |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of warrants upon issuance of exchange warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,410,730 |
|
|
|
|
|
12,410,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2021 |
|
3,354,650,799 |
|
$ |
— |
|
|
670,930 |
|
|
(2,932,000) |
|
$ |
31,659,017 |
|
$ |
(28,069,985) |
|
$ |
657,032 |
The accompanying footnotes
are an integral part of these statements
QUOIN PHARMACEUTICALS
LTD.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31, |
|
|
2021 |
|
2020 |
|
2019 |
Cash flows provided
by (used in) operating activities |
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(21,462,588) |
|
$ |
(2,095,364) |
|
$ |
(1,560,401) |
Fair
value adjustment to convertible notes payable |
|
|
1,250,000 |
|
|
378,333 |
|
|
— |
Warrant
liability expense |
|
|
12,784,329 |
|
|
— |
|
|
— |
Financing
expense |
|
|
275,000 |
|
|
— |
|
|
— |
Amortization
of intangibles |
|
|
104,043 |
|
|
104,043 |
|
|
20,710 |
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
|
|
Increase
in accounts payable and accrued expenses |
|
|
1,347,801 |
|
|
227,313 |
|
|
240,833 |
Increase
in accrued interest |
|
|
696,799 |
|
|
47,042 |
|
|
— |
Increase
in prepaid expenses |
|
|
(715,474) |
|
|
— |
|
|
— |
Net
cash used in operating activities |
|
|
(5,720,090) |
|
|
(1,338,633) |
|
|
(1,298,858) |
|
|
|
|
|
|
|
|
|
|
Cash flows used
in investing activities |
|
|
|
|
|
|
|
|
|
Payment for
license acquisition |
|
|
(625,000) |
|
|
(125,000) |
|
|
— |
Net
cash used in investing activities |
|
|
(625,000) |
|
|
(125,000) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Cash flows provided
by financing activities: |
|
|
|
|
|
|
|
|
|
Increase
(decrease) in deferred offering costs |
|
|
141,338 |
|
|
(141,338) |
|
|
— |
Increase
in other assets |
|
|
(50,000) |
|
|
— |
|
|
— |
Increase
in due to officers |
|
|
139,285 |
|
|
1,068,823 |
|
|
1,298,818 |
Payments
of amounts due to officers |
|
|
(304,466) |
|
|
(50,000) |
|
|
— |
Proceeds
from issuance of “Bridge Notes”, net |
|
|
3,475,000 |
|
|
909,980 |
|
|
— |
Proceeds
from sale of equity securities, net |
|
|
10,102,874 |
|
|
— |
|
|
— |
Net
cash provided by financing activities |
|
|
13,504,031 |
|
|
1,787,465 |
|
|
1,298,818 |
|
|
|
|
|
|
|
|
|
|
Net change in
cash |
|
|
7,158,941 |
|
|
323,832 |
|
|
(40) |
Cash - beginning
of year |
|
|
323,832 |
|
|
— |
|
|
40 |
Cash - end of
year |
|
$ |
7,482,773 |
|
$ |
323,832 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Supplemental
information: |
|
|
|
|
|
|
|
|
|
License
acquisition payable |
|
$ |
— |
|
$ |
— |
|
$ |
1,000,000 |
Interest
paid |
|
|
393,611 |
|
|
|
|
|
|
Exchange
of “2020 Notes” for Ordinary shares |
|
$ |
1,213,313 |
|
|
|
|
|
|
Exchange
of “Bridge Notes” for Ordinary shares |
|
$ |
5,000,000 |
|
|
|
|
|
|
Reclassification
of warrant liability to equity upon issuance of “Exchange Warrants” |
|
$ |
12,410,730 |
|
|
|
|
|
|
The accompanying footnotes
are an integral part of these statements
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
NOTE 1 –
ORGANIZATION, BUSINESS AND BASIS
OF PRESENTATION
Quoin
Pharmaceuticals Ltd. (“Quoin Ltd.”or the “Company”or”we,” “us,” “our”), formerly
known as Cellect Biotechnology Ltd. (“Cellect”), is the holding company for Quoin Pharmaceuticals, Inc., a Delaware corporation
(“Quoin Inc.”). On October 28, 2021, Cellect completed the business combination with Quoin Inc., in accordance with the terms
of the Agreement and Plan of Merger and Reorganization, dated as of March 24, 2021 (the “Merger Agreement”), by and among
Cellect, Quoin Inc. and CellMSC, Inc., a Delaware corporation and wholly-owned subsidiary of Cellect (“Merger Sub”), pursuant
to which Merger Sub merged with and into Quoin Inc., with Quoin Inc. surviving as a wholly-owned subsidiary of Cellect (the “Merger”).
Immediately after completion of the Merger, Cellect changed its name to “Quoin Pharmaceuticals Ltd.” The Company has accounted
for the transaction as a reverse recapitalization with Quoin Inc. as the accounting acquirer. Because Quoin Inc. is the accounting acquirer,
its historical financial statements became the Company’s historical financial statements and such assets and liabilities continued
to be recorded at their historical carrying values. The impact of the recapitalization has been retroactively applied to all periods presented.
All equity related disclosures are presented in American Depositary Shares (“ADSs”), unless the context indicates otherwise.
One ADS represents 5,000 ordinary shares of the Company.
Quoin Inc. was incorporated
in Delaware on March 5, 2018. Quoin Inc. is a specialty pharmaceutical company focused on developing and commercializing therapeutic products
that treat rare and orphan diseases. The first lead product is QRX003, a once daily, topical lotion comprised of a broad-spectrum serine
protease inhibitor, formulated with the proprietary Invisicare® technology, to treat Netherton Syndrome (NS). In addition, the Company.
intends to pursue the clinical development of QRX003 in additional rare dermatological diseases, including Peeling Skin Syndrome, SAM
Syndrome and Palmoplantar Keratoderma.
To date, no products
have been commercialized and revenue has not been generated. The majority of the operating expenses since inception have been associated
with completing due diligence on various technologies, asset technology acquisitions, negotiating and finalizing potential funding agreements,
costs related to the Merger and building the pipeline of preclinical product candidates. The founders of Quoin Inc. funded all related
expenditures through September 2020.
On October 28, 2021,
Cellect sold the entire share capital of its subsidiary, Cellect Biotherapeutics Ltd., which essentially included all of Cellect’s
then existing net assets, to EnCellX Inc. (“EnCellX”), a newly formed U.S. privately held company based in San Diego, CA (the
“Share Transfer”), pursuant to an Amended and Restated Share Transfer Agreement. Quoin Ltd. has no interests in EnCellX subsequent
to the closing of the Merger. See Note 12.
On October 28, 2021,
the Company completed the private placement transaction with an investor (the Investor”) for an aggregate purchase price of approximately
$17.0 million (comprised of the set off of approximately $5 million of senior secured notes issued in connection with the bridge
loan that the Investor previously made to Quoin Inc. and approximately $12 million in cash from the Investor (the “Primary
Financing”). See Note 5.
Immediately after the closing of
the Merger, there were approximately 670,930 ADSs issued and outstanding. The former holders of common stock of Quoin Inc. (including
shares delivered to the Investor and the escrow account for the Investor) owned, in the aggregate, approximately 88% of the ordinary shares,
with Cellect’s shareholders immediately prior to the Merger owning approximately 12% of ordinary shares.
NOTE 2 - LIQUIDITY
RISKS AND UNCERTAINTIES AND GOING CONCERN
The
Company has incurred net losses every year since inception and had an accumulated deficit of approximately $28.1 million at December 31,
2021. The Company funded its operations through the issuance of the 2020 Notes (as defined below) and the Bridge Financing (as defined
below) prior to the Merger and the Primary Financing completed on October 28, 2021, whereby the Company received funding of approximately
$12 million ($10.1 million after offering costs) at the closing of the Merger. The Company expected to receive additional funding through
the mandatory exercise provision of the Series C Warrant issued to the Investor in March 2022 which would have resulted in proceeds of
approximately $9.5 million. In the event the requirements of the mandatory exercise provision of such warrant were not met (see Note 5),
the Company received a written commitment from the Investor to provide funding equal to the $9.5 million expected upon exercise of the
Series C Warrant, at prevailing market rates. However, on July 14, 2022, the Company and Altium entered into an agreement, pursuant to
which the parties agreed to, among other things, cancel the Series C Warrant and a portion of the Series A Warrant previously issued to
Altium (see Note 17). Following the cancellation of
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
the
Series C Warrant on July 14, 2022, the Company no longer expects to receive such proceeds from Altium, and the Company does not have sufficient
resources to implement its business plan for at least one year from the issuance of these consolidated financial statements. This raises
substantial doubt about the Company’s ability to continue as a going concern.
Additional financing will be required
to complete the research and development of the Company’s therapeutic targets and its other operating requirements, which may not
be available at acceptable terms, if at all. The Company has filed a registration statement on Form F-1 related to an offering of its
securities on a “reasonable best efforts” basis, however there is no assurance of the successful consummation of such offering.
The Company is also in the process of discussing a line of credit with a bank which has not yet been closed as of the financial statement
filing date and is likely to be conditional on additional equity funding. If the Company is unable to obtain the additional funding when
it becomes necessary, the development of its product candidates will be impacted and the Company would likely be forced to delay, reduce,
or terminate some or all of its development programs, all of which could have a material adverse effect on the Company’s business,
results of operations and financial condition.
NOTE 3 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.
GAAP”), which have been consistently applied, reflecting the operations of Quoin Inc. since inception and include the accounts of
Quoin Ltd. since the date of the Merger.
Use of estimates:
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors
in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in
the preparation of these financial statements. In addition, other factors may affect estimates, including: expected business and operational
changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected
to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate
future outcomes and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following
areas, among others: settlement of debt or other obligations, fair value of debt instruments and
warrants, research and development expense recognition, intangible asset estimated useful lives and impairment assessments, allowances
of deferred tax assets, contingency recognition, and cash flow assumptions regarding going concern considerations.
Other risks and uncertainties:
The Company is subject
to risks common to development stage biopharmaceutical companies including, but not limited to, new technological innovations, dependence
on key personnel, protection of proprietary technology, compliance with government regulations, product liability, pre-clinical and clinical
trial outcome risks, regulatory approval risks, uncertainty of market acceptance and additional financing requirements.
The Company’s
products require approval or clearance from the U.S. Food and Drug Administration (“FDA”) prior to commencing commercial sales
in the United States. There can be no assurance that the Company’s products will receive all of the required approvals or clearances.
Approvals or clearances are also required in foreign jurisdictions in which the Company may license or sell its products.
There can be no assurance
that the Company’s products, if approved, will be accepted in the marketplace, nor can there be any assurance that any future products
can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be
successfully marketed.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
The Company is also
dependent on several third party suppliers, in some cases single-source suppliers which include the supplier of the active pharmaceutical
ingredient (API) as well as the contract manufacturer of the drug substance for the expected clinical development.
A novel strain of coronavirus
(“COVID-19”) created a global pandemic, which commenced in 2020. The Company’s operations, to date, have not been dramatically
affected by COVID-19. However, the extent of any future impact on the Company’s operational and financial performance will depend
on the possibility of a resurgence and resulting severity of COVID-19 with respect to the Company’s access to API and drug substance,
the potential disruption in global freight networks, as well as our ability to safely and efficiently conduct planned clinical trials.
Cash and cash equivalents:
The Company considers
all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents.
The Company, from time to time during the periods presented, has had bank account balances in excess of federally insured limits where
substantially all cash is held in the United States. The Company has not experienced losses in such accounts. The Company believes that
it is not subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Long-lived assets:
Long-lived assets are
comprised of acquired technology and licensed rights to use technology, which are considered platform technology with alternative future
uses beyond the current products in development. Such intangible assets are being amortized on a straight-line basis over their expected
useful life of 10 years.
The Company assesses
the impairment for long-lived assets whenever events or circumstances indicate the carrying value may not be recoverable. Factors we consider
that could trigger an impairment review include the following:
|
● |
Significant
changes in the manner of our use of the acquired assets or the strategy for our overall business, |
|
● |
Significant
underperformance relative to expected historical or projected development milestones, |
|
● |
Significant
negative regulatory or economic trends, and |
|
● |
Significant
technological changes which could render the platform technology obsolete. |
The Company recognizes
impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses,
if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. During the years ended December 31,
2021, 2020 and 2019, there were no impairment indicators which required an impairment loss measurement.
Deferred Offering Costs:
Deferred offering costs
are expenses directly related to the Primary Financing. These costs consisted of legal, accounting, printing, and filing fees that the
Company capitalized which were offset against the proceeds upon completion of the Primary Financing.
Research and development:
Research and development costs are
expensed as incurred. Research and development expenses include personnel costs associated with research and development activities, including
third-party contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. The Company accrues
for costs incurred by external service providers, including contract research organizations and clinical investigators, based on its estimates
of service performed and costs incurred. These estimates include the level of services performed by third parties, patient enrollment
in clinical trials when applicable, administrative costs
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
incurred by third parties, and other
indicators of the services completed. Based on the timing of amounts invoiced by service providers, the Company may also record payments
made to those providers as prepaid expenses that will be recognized as expense in future periods as the related services are rendered.
Income taxes:
The Company accounts
for its income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company maintains a full valuation allowance on its existing deferred tax assets.
The Company also accounts
for uncertain tax positions using the more-likely-than-not threshold for financial statement recognition and measurement of a tax position
taken in the Company’s income tax returns. As of December 31, 2021 and 2020, the Company had no uncertain tax positions which
affected its financial position and its results of operations or its cash flows and will continue to evaluate for uncertain tax positions
in the future. If at any time the Company should record interest and penalties in connection with income taxes, the interest and the penalties
will be expensed within the interest and general and administrative expenses, respectively.
Fair value of financial
instruments:
The Company considers
its cash, accounts payable, accrued expenses and the convertible and bridge notes payable to meet the definition of financial instruments.
The convertible and bridge notes payable are recorded at fair value, see Notes 4, 5 and 6. The warrants are recorded at fair value,
see Notes 4, 5 and 6. The carrying amounts of the remaining financial instruments approximated their fair values due to the short
maturities.
The Company measures
fair value as required by ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”).
ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and
expands disclosures about fair value measurements. ASC Topic 820 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
Earnings (loss) per
share:
The Company reports
loss per share in accordance with ASC 260-10, Earnings Per Share, which provides for calculation of
“basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing
net income or loss available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings
per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation of diluted net earnings
(loss) per share gives effect to ordinary shares equivalents; however, potential common shares are excluded if their effect is anti-dilutive.
For the year ended December
31, 2021, the number of shares excluded from the diluted net earnings (loss) per share included outstanding warrants to purchase 143,028
ADS or 715,137,600 Ordinary Shares and warrants to purchase 1,257,722 ADS or 6,288,605,600 Ordinary Shares issuable pursuant to Primary
Financing.
For the year ended December
31, 2020, the number of shares issuable upon the conversion of both the Convertible Notes Payable (as defined below) and the Bridge Notes
(as defined below) as well as the warrants issued in connection with both of these convertible instruments are not included in the denominator
since their inclusion would be anti-dilutive.
New accounting pronouncements:
The Company has evaluated
all recent accounting pronouncements and believes that none of them will have a material effect on the Company’s financial position,
results of operations or cash flows except as discussed below.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
Debt with Conversion
and Other Options and Derivatives and Hedging
The FASB recently issued
ASU 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, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity.
The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the
existing guidance that requires entities to account for beneficial conversion features and cash conversion features in equity, separately
from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded
conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments
revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that
are both indexed to the issuer’s own stock and classified in shareholders’ equity, by removing certain criteria required for
equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification
(and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract.
The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require
entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities
must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments
in ASU 2020-06 are effective for public entities, excluding smaller reporting companies as defined, for fiscal years beginning after December
15, 2021. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted,
but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact this standard will
have on its financial statements.
Earnings Per Share
In May 2021, the FASB
issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic
470-50), Compensation-Stock Compensation (Topic 718), and Derivatives
and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU addresses issuer’s
accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective
for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption
is permitted. The Company does not believe the impact of the adoption of this pronouncement is significant to the consolidated financial
statements.
Recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated
financial statement presentation or disclosures.
NOTE 4 –
CONVERTIBLE NOTES PAYABLE
On
October 2, 2020, Quoin Inc. commenced an offering of promissory notes (the “2020 Notes” or “Convertible Notes Payable”)
and warrants. The 2020 Notes were issued at a 25% original issue discount and bear interest at a rate of 20% per annum. The 2020 Notes
are due one year from their respective dates of issuance. In October through December 2020, Quoin Inc. received an aggregate of approximately
$910,000 pursuant to this offering, resulting in the issuance of 2020 Notes with an aggregate face value of $1,213,313 and an original
issue discount of $303,333. Approximately 23% of such financing was received from parties who are related to or affiliated with members
of Quoin Inc.’s board of directors. No additional funding from the 2020 Notes was received in the year ended December 31, 2021.
Based upon the terms
agreed to in March 2021 in the Primary Financing (see Note 5), the 2020 Notes were mandatorily convertible into 5,183 ADSs in the Primary
Financing, subject to adjustment.
The
Company elected to account for the Convertible Notes Payable using the fair value model due to the short maturity and likely conversion
at the date of the Merger. The fair value of the Convertible Notes Payable was estimated to be approximately $1.2 million at the date
of issuance, resulting in a $378,000 expense recognized in the fourth quarter of 2020. There was no material change in the fair value
from issuance until the conversion to equity on the Merger date.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
The
noteholders also were entitled to receive warrants exercisable at any time after the issuance date for a number of shares of Quoin Inc.’s
common stock that equates to 100% of the “as if converted” shares as if the 2020 Notes principal and interest were convertible
at the lowest price any securities are sold, convertible, or exercisable into in the Primary Financing or the next round of financing
(whichever is lower). The exercise price was based on a valuation equal to the next financing round and since the number of shares issuable
upon the exercise of the warrants and exercise price were not knowable at the time of the financing and as of December 31, 2020 they were
not recognized. After entering into the Merger Agreement in March 2021, the terms of the warrants became measurable and were exercisable
for 29,388 ADSs at an initial exercise price of $49.75 per ADS.
The
Company determined that these warrants met the criteria to be recorded as a liability instrument. Each holder agreed to exchange its warrant
for warrants on substantially the same terms as the Investor Exchange Warrants (See Note 5) with the same number of shares issuable upon
the exercise of an Exchange Warrant as upon the exercise of the original warrant and the same exercise price as under the original warrant
and have a contractual term of 5 years
At
the closing of the Merger, 5,183 ADSs were issued upon the conversion of the principle of the Convertible Notes Payable. In addition,
effective as of March 13, 2022, the Company exchanged noteholders’ warrants for warrants on substantially the same terms as the
Investor Exchange Warrants (See Note 5), exercisable for 29,388 ADSs, in the aggregate, at the exercise price of $49.75 per ADS. The Exchange
Warrants have been determined to warrant equity classification and, as such, the fair value change through the exchange date will be included
in warrant liability expense in the accompanying statement of operations.
In December 2021, the
Company concluded that the calculation of ADSs due to the 2020 Noteholders did not account for accrued interest due when the ADSs were
issued. The Company reached cash settlements with, and plans to issue additional ADSs to, the 2020 Noteholders to account for this. The
estimated amount required to settle these obligations was determined to be approximately $744,000 at December 31, 2021 and is included
in accrued liabilities in the accompanying consolidated balance sheet and in interest expense in the accompanying consolidated statement
of operations.
Interest
expense, at the stated interest rate, recognized in the year ended December 31, 2021, 2020 and 2019 was approximately $202,000, $47,000,
and $0, respectively. Accrued interest and estimated settlement costs at December 31, 2021, 2020 and 2019 was approximately $744,000,
$47,000, and $0, respectively, of which $697,000 was recognized in the year ended December 31, 2021.
NOTE 5 –
BRIDGE FINANCING AND SECURITIES PURCHASE AGREEMENT (Primary Financing)
Bridge
Financing
In connection with the
Merger Agreement and the Securities Purchase Agreement (described below), Quoin Inc. entered into a “Bridge Purchase Agreement”
on March 24, 2021 with the Investor, pursuant to which the Investor agreed to purchase, and Quoin Inc. agreed to issue notes (the “Bridge
Notes”) in the aggregate principal amount of up to $5.0 million in exchange for an aggregate purchase price of up to $3.8 million
together with warrants. The Bridge Notes were purchased in three closings: (i) the first purchase of $2.0 million on March 25, 2021 (Quoin
Inc. received proceeds of $1.5 million less fees of $90,000); (ii) the second purchase of $1.7 million in April 2021 (Quoin Inc. received
proceeds of $1.25 million) ; and (iii) a third purchase of $1.3 million in May 2021 (Quoin Inc. received proceeds of $1.0 million less
fees of $185,000). The Bridge Notes were secured by a lien on Quoin Inc.’s current and future assets, were senior to all other outstanding
and future indebtedness of Quoin Inc. and included covenants limiting future indebtedness, among others.
The Bridge Notes were
issued with a 25% original issue discount, at an interest rate of 15% per annum and had a maturity date of the earliest to occur of: (i)
December 25, 2021, (ii) the date on which Quoin Inc.’s equity is registered under the Exchange Act or is exchanged for equity so
registered or (iii) immediately prior to the closing of the Merger
The Investor and Quoin
Inc. agreed that if the Primary Financing is consummated, the Investor may, at its election, offset the purchase price otherwise payable
by Investor to Quoin Inc. pursuant to the Securities Purchase Agreement related to the Primary Financing, by an amount equal to the outstanding
amount under this Bridge Note, and, upon such set-off, the portion of this Bridge Note shall be deemed to have been paid in its entirety
and all obligations thereunder shall be deemed to be fully satisfied without any further obligations on, or liability to, Quoin Inc.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
The
Company elected to account for the Bridge Notes using the fair value model due to the short maturity and likely conversion at the closing
of the Merger. The cumulative fair value of the Bridge Notes was estimated to be approximately $5.0 million at the date of issuances,
resulting in an increase in the fair value of approximately $1,250,000, which was recognized in the statement of operations for the year
ended December 31, 2021. The fair value adjustments also included $275,000 of debt issuance costs which was also immediately recognized
as a component of other expense. Management has estimated that the fair value had not significantly changed from issuance to the Merger
date. See Note 6.
The
Bridge Notes were offset against the purchase price under the Securities Purchase Agreement related to the Primary Financing and converted
into 100,618 ADSs (including shares held in escrow for the benefit of the Investor) upon the closing of the Primary Financing. The accrued
interest amounting to $393,611 was paid in cash. Interest expense, at the stated interest rate, recognized in the year ended December
31, 2021 was $393,611.
Warrants
Upon
the funding of each Bridge Note tranches described above, the Investor received warrants (the “Bridge Warrants”) to purchase
a number of shares of Quoin Inc.’s common stock equal to the aggregate principal amount of the Bridge Notes. The Bridge Warrants
have a term of five years from the date all of the shares underlying the Bridge Warrants are freely tradable. The Bridge Warrants also
contain certain rights with regard to asset distributions and fundamental transactions. Quoin Inc. issued a total of 99,074 Bridge Warrants
in the year ended December 31, 2021.
Following the closing
date of the Merger, on each of the tenth trading day, the forty-fifth day, the ninetieth day, and the one hundred thirty-fifth day thereafter
(each, a “Reset Date”), if the initial exercise price of the Bridge Warrants is greater than the arithmetic average of 85%
of the three lowest weighted average prices of the post-Merger ordinary shares of the combined company during the ten trading day period
immediately preceding the applicable Reset Date (the “Reset Price”), the exercise price of the Bridge Warrants will be reset
to the Reset Price. Furthermore, the number of shares underlying Bridge Warrants will be adjusted such that the aggregate number of shares
of common stock issuable to the Investor reflects the Reset Price instead of the initial exercise price. Adjustments to the exercise price
and number of warrant shares are available to the Investor until the second anniversary of the Registration Date, as defined in the Bridge
Warrants. Upon the occurrence of a Fundamental transaction, as defined in the Bridge Warrants, the warrant holder has the right to elect
a cash settlement for the value of the warrant base on the Black Scholes options pricing model.
The
Company determined that the warrants met the criteria to be recorded as a liability instrument through the exchange date upon the closing
of the Primary Financing. The fair value of warrants was determined by a MonteCarlo simulation model to be approximately $1.6 million
at the date of issuance of the 39,630 warrants in connection with the first closing and $2.2 million at the date of issuance of the 59,444
(post exchange ratio) in connection with the second and third closing of the Bridge Notes See Note 6.
Upon
the closing of the Primary Financing, the Bridge Warrants were exchanged for warrants to purchase 99,074 ADSs at a fixed per share exercise
price of $49.75 (“Investor Exchange Warrants”), as amended, which replaced the reset provisions and modified the fundamental
transaction requirements of the Bridge Warrants. The Investor Exchange Warrants and ordinary shares underlying the Investor Exchange Warrants
were registered with the SEC on the Registration Statement on Form F-4. An amendment to the Investor Exchange Warrants was entered into
in September 2021, which replaced the reset provisions with a fixed number of shares and exercise price.
Primary
Financing
On October 28, 2021,
the Company completed the private placement transaction with the Investor for an aggregate purchase price of approximately $17.0 million
(comprised of (x) the set off of approximately $5 million of Bridge Notes, and (y) approximately $12 million in cash from the Investor)
(the “Primary Financing”), and the Investor paid the Company approximately $11,504,000, which was net of $393,611 in accrued
interest on the Bridge Notes. The Company incurred an additional approximate $1.4 million in costs associated with the Primary Financing,
which resulted in the net proceeds of approximately $10.1 million. The Company issued 342,100 ADSs to the Investor, consisting of 66,702
delivered to the Investor on or after the Merger closing and 275,398 initially held in an escrow account for the benefit of the Investor
as per the terms of the Securities Purchase Agreement. All such escrow shares were released to the Investor prior to December 31, 2021.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
Quoin Ltd. also was required to issue
to the Investor, effective as of March 13, 2022, the 136th day following the consummation of the Merger (i) Series A Warrant to purchase
342,100 ADSs (the “Series A Warrant”) (ii) Series B Warrant to purchase 342,100 ADSs (the “Series B Warrant”)
and (iii) Series C Warrant to purchase 191,174 ADSs (“Series C Warrant” and, together with the Series A Warrant and Series
B Warrant, the “Investor Warrants”). The exercise price for the Investor Warrants is $49.75 per ADS, with Series A Warrant
having a five-year maturity, and Series B Warrant and Series C Warrant having a two-year maturity. The Company has the right to require
the mandatory exercise of the Series C Warrant, subject to an effective registration statement being in place for the resale of the shares
underlying such warrants and the satisfaction of equity market conditions, as defined in the Series C Warrant. As of the financial statement
filing date, not all of the market related conditions were met. Upon the exercise of the Series C Warrant in full, the Investor would
also be granted an additional Series A Warrant to purchase 191,174 ADSs and an additional Series B Warrant to purchase 191,174 ADSs at
an exercise price of $49.75 per ADS.
NOTE 6 - FAIR VALUE
OF FINANCIAL INSTRUMENTS
The Company applies
fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring
basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities the Company
considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that
market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions
and credit risk. For certain instruments, including cash and cash equivalents, accounts payable, and accrued expenses, it was estimated
that the carrying amount approximated fair value because of the short maturities of these instruments.
Fair value is estimated
using various valuation models, which utilize certain inputs and assumptions that market participants would use in pricing the asset or
liability. The inputs and assumptions used in valuation models are classified in the fair value hierarchy as follows:
Level
1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value
hierarchy gives the highest priority to Level 1 inputs.
Level
2: Quoted market prices for similar instruments in an active market; quoted prices for identical or similar assets and liabilities in
markets that are not active; and model-derived valuations inputs of which are observable and can be corroborated by market data.
Level
3: Unobservable inputs and assumptions that are supported by little or no market activity and that are significant to the fair value of
the asset and liability. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining the appropriate
hierarchy levels, the Company analyzes the assets and liabilities that are subject to fair value disclosure. Financial assets and liabilities
are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
The significant estimates used in
the determining the fair value of the 2020 Notes warrants (Note 4) were as follows:
|
|
|
|
|
|
|
|
|
|
12/31/2021
(1) |
|
12/31/2020 |
|
Stock
price |
|
$ |
22.75 |
|
$ |
49.75 |
|
Initial
exercise price |
|
$ |
49.75 |
|
$ |
49.75 |
|
Contractual
Term |
|
|
5.0 |
|
|
5.0 |
|
Volatility |
|
|
89.2 |
% |
|
98 |
% |
Discount
rate |
|
|
1.26 |
% |
|
0.81 |
% |
(1) |
The
warrants issued during 2020 were not exchanged for fixed term warrants until 2022, therefore the existing warrants were still considered
outstanding at December 31, 2021 and classified as a liability instrument. |
|
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
The significant estimates used in
such calculation of the fair value of the warrants issued in connection with the Bridge Financing (Note 5) were as follows:
|
|
|
|
|
|
|
|
|
|
Transaction Date |
|
Merger Date |
|
|
|
March - May 2021 |
|
10/28/2021 |
|
Stock
price |
|
$ |
49.75 (post exchange
ratio) |
|
$ |
11.64 (post exchange
ratio) |
|
Initial
exercise price |
|
$ |
49.75 (post exchange
ratio) |
|
$ |
49.75 (post exchange
ratio) |
|
Contractual
Term |
|
|
5.0 |
|
|
5.0 |
|
Volatility |
|
|
92 |
% |
|
89.2 |
% |
Discount
rate |
|
|
0.98 |
% |
|
1.18 |
% |
The following table
presents the Company’s assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy at December 31,
2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
2020 Notes warrants |
|
— |
|
— |
|
$ |
373,599 |
|
$ |
373,599 |
Total Warrant Liability |
|
— |
|
— |
|
$ |
373,599 |
|
$ |
373,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
2020 Notes payable |
|
$ |
— |
|
$ |
— |
|
$ |
1,213,333 |
|
$ |
1,213,333 |
Total Liabilities |
|
$ |
— |
|
|
— |
|
$ |
1,213,333 |
|
$ |
1,213,333 |
The fair value of the
convertible notes payable issued in 2020 was determined to be $1,213,333, resulting in a charge to operations of $378,333 during 2020.
The fair value adjustment from December 31, 2020 to their conversion to ADSs at the Merger date was not material. The initial fair
value of the Bridge Notes issued in 2021 was determined to be approximately $5,000,000, resulting in a charge to operations of $1,250,000
during 2021. The fair value adjustment from the Bridge Notes issuances to their conversion to ADSs upon the Merger date was not significant.
The Bridge Notes and 2020 Notes were converted into ADSs at the Merger date. See Notes 4 and 5.
The following shows the movement
of the warrant liability balance during 2021.
|
|
|
|
|
|
|
|
|
Bridge
Financing |
|
2020
Notes |
|
|
Warrants |
|
Warrants |
Beginning
Balance |
|
$ |
— |
|
$ |
— |
Warrant
value at issuance (recorded as warrant liability expense) |
|
|
3,783,079 |
|
|
894,113 |
Change
in Fair value of warrants |
|
|
8,627,651 |
|
|
(520,514) |
Reclassification
of warrant liability to an equity instrument |
|
|
(12,410,730) |
|
|
— |
Ending
Balance |
|
$ |
— |
|
$ |
373,599 |
The
change in fair value of the Bridge Note warrants are included in other expense in the accompanying consolidated financial statements from
the issuance date to the Merger Date. The Exchange warrants issued to the Investor on the Merger date was determined to be an equity-classified
instrument, and accordingly the warrant liability on such date of $12,410,730 was reclassified to additional paid in capital on that date.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
NOTE 7 –
PREPAID EXPENSES
Prepaid expenses are as follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2021 |
|
2020 |
Prepaid R&D costs |
|
$ |
329,033 |
|
$ |
— |
Prepaid insurance |
|
|
684,191 |
|
|
— |
Prepaid other expenses |
|
|
2,250 |
|
|
— |
Total |
|
$ |
1,015,474 |
|
$ |
— |
NOTE 8 –
ACCRUED EXPENSES
Accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2021 |
|
2020 |
Professional fees |
|
$ |
144,377 |
|
$ |
173,095 |
Investor Relations fees |
|
|
584,000 |
|
|
528,000 |
Payroll taxes |
|
|
199,582 |
|
|
148,899 |
Payroll |
|
|
557,937 |
|
|
— |
Research contract expenses |
|
|
193,537 |
|
|
105,052 |
Other expenses |
|
|
5,976 |
|
|
5,802 |
Total |
|
$ |
1,685,409 |
|
$ |
960,848 |
NOTE 9 –
ASSET ACQUISITION AND IN-LICENSED TECHNOLOGY
Polytherapeutics
On March 24, 2018,
Quoin Inc. entered into a securities purchase agreement (the “Acquisition Agreement”), in which it agreed to acquire all of
the equity interests in Polytherapeutics, Inc. (the “Seller” or “Polytherapeutics”) for $40,833 and future
royalties provided Quoin Inc. commercializes products using the technology developed by the Seller. The terms of any royalty payments
to the Seller are 4.0% of the net revenue of royalty products, as defined in the Acquisition Agreement, received by Quoin Inc. during
the ten (10) year period commencing from the date of first sale of a royalty product. If a generic product is introduced by a third
party to the market, during the royalty period, the royalty fees shall be reduced from 4% to 2%. If, during the royalty period, two or
more generic products are introduced, the royalty fees shall be reduced from 2% to 0%.
The Seller had the option
to repurchase the intellectual property for $100,000 if there were no products in clinical development using such technology.
The repurchase option was not exercised and has lapsed.
Quoin Inc. also entered
into a research and consulting agreement which commits Quoin Inc. to pay the Seller for additional research and development consulting
services (See Notes 12 and 15).
Skinvisible
On October 17,
2019, Quoin Inc. entered into an exclusive license agreement with Skinvisible Inc. (“Skinvisible”), pursuant to which
Skinvisible granted a license to use certain patented technology for the development of products for commercial sale in the orphan rare
skin disease field, and for the use of a proprietary polymer deliver system technology. This technology is currently being used in the
development of QRX003. In exchange for the license, Quoin Inc. agreed to pay Skinvisible $1,000,000, as well as development and sales
milestone payments and a single digit royalty on all net sales, as defined.
The development milestones originally
required payments upon achieving development milestones for the first Rare Skin Disease drug product developed using the licensed technology
and the first two Ketamine products, as defined. Payments were originally due
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
upon
successful completions of certain clinical milestones ($7.5 million) and obtaining US and EU regulatory approval ($15 million). The sales
milestones required for every licensed product commercialized by Quoin Inc. are $10 million upon achievement of $100 million in sales
being achieved in the annual period; $25 million upon achievement of $250 million in sales and $50 million upon the achievement of $400
million in sales in an annual period. On January 27, 2021, Quoin Inc. and Skinvisible entered into an amendment which modified the
clinical milestone payment requirements such that $750,000 would be payable to Skinvisible upon achievement of specified clinical milestones,
and $21.75 million upon regulatory approval in the U.S. and EU respectively. No development
milestones, sales milestones or royalty payments were due through in 2019, 2020 or 2021.
The agreement has a
termination clause that is triggered if no product has commenced clinical testing 12 months after the date of the agreement or the latest
subsequent amendment. On April 19, 2021, Quoin Inc. and Skinvisible entered into another amendment which established the development deadline
as December 31, 2022. Should the Company not commence clinical testing as defined by the development deadline, the license agreement will
terminate immediately except in certain circumstances as specified in the agreement.
The license fee was
originally due in two equal installments of $500,000 payable no later than December 31, 2019 and June 30, 2020, which were not paid. The
agreement was subsequently amended for payment due on July 31, 2020. On July 31, 2020, the agreement was amended to further extend the
payment until September 30, 2020. On September 30, 2020, the agreement was again amended, requiring payment of the license fee only when
outside financing is received, as defined in the agreement. On June 21, 2021, the parties entered into an additional amendment which
modified the payment terms and required a payment of $107,500 on June 26, 2021, a payment of $250,000 within 10 days of the
Primary Financing, and the remaining $250,000 upon the earlier of approval of an Investigatory New Drug application by the FDA or December 31,
2021. This amendment also eliminated the $750,000 clinical milestone payments described above and reduced the milestone payment upon regulatory
approval of the product containing the Skinvisible technology in either the U.S. or E.U., whichever happens first to a total of $5,000,000.
At December 31, 2021 and December 31,
2020, the license acquisition liability due was $250,000 and $875,000 respectively. In March 2022, the Company paid $50,000 against this
liability. The remaining license acquisition liability has not been paid in accordance with the terms but has not impaired the Company’s
rights to the technology as the Company is in the process of renegotiating this payment with Skinvisible.
NOTE 10 -
INTANGIBLE ASSETS
Intangible assets are as follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2021 |
|
2020 |
Acquired technology – Polytherapeutics |
|
$ |
40,433 |
|
$ |
40,433 |
Technology license – Skinvisible |
|
|
1,000,000 |
|
|
1,000,000 |
Total cost |
|
|
1,040,433 |
|
|
1,040,433 |
Accumulated amortization |
|
|
(231,829) |
|
|
(127,785) |
Net book
value |
|
$ |
808,604 |
|
$ |
912,648 |
The Company recorded
amortization expense of approximately $104,000, $104,000, and $21,000 in the years ended December 31, 2021, 2020 and 2019, respectively.
Amortization expense for each of the next 5 years is expected to be approximately $104,000, and then approximately $288,000 thereafter.
NOTE 11 –
RELATED PARTY TRANSACTIONS
Employment Agreements
and Due to Officers/Founders
In March 2018, Quoin Inc. executed
employment agreements with both of its officers who are also co-founders of Quoin Inc. The employment agreements for both officers/founders
allow for a onetime expense that covers the salaries they would have otherwise been paid for efforts they undertook in the periods since
inception. The salaries and benefits allowances provided for under the
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
employment agreements began to accrue
as the services were being provided by the officers/founders and are included in Due to Officers on the accompanying balance sheet.
Amounts due to the officers/founders
consist of amounts specified in the employment agreements since inception through December 31, 2021 as well as reimbursable travel
expenses and other amounts paid by them to third parties on behalf of Quoin Inc. The Company repaid $304,466, $50,000, and $0 of such
amounts due to officers/founders in the year ended December 31, 2021, 2020 and 2019, respectively. Since the Merger closing,
the Company has been repaying amounts due to officers/founders at a rate of $25,000 each per month (See Note 17).
Amounts due to officers at December 31,
2021 and 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2021 |
|
2020 |
Salaries and allowances |
|
$ |
4,108,500 |
|
$ |
3,984,000 |
Invoices paid on behalf of the Company |
|
|
615,232 |
|
|
904,913 |
Total |
|
$ |
4,723,732 |
|
$ |
4,888,913 |
During 2021, the Company
incurred $108,000 of consulting expense from related parties, primarily from a related party company controlled by a member of the Board
of Directors.
See Note 4 for related party
debt and Note 12 for employment agreements.
NOTE 12 –
RESEARCH, CONSULTING AGREEMENTS AND COMMITMENTS
Research and consulting
agreement
Quoin Inc. entered into
a research and consulting agreement (the “Research Agreement”) which commits it to pay the former owner of Polytherapeutics
(the “Consultant” or “Seller”) to transfer the technical know-how of Polytherapeutics with respect to (i) good
manufacturing practices (“GMP”), clinical and commercial manufacturing of the Company’s PolyDur polymer and (ii) formulation
development of products utilizing the Company’s PharmaDur polymer (See Note 9). The agreement required monthly consulting
payments of $20,833 beginning on July 31, 2018 and ending February 28, 2021 (the “Post-Closing Period”) for a total
of $666,667 over the consulting period. Pursuant to an amendment, the Post-Closing Period was revised to terminate on December 31,
2020.
Through December 31,
2021 and the financial statement issuance date, the Company has not made any payments, the Consultant has not performed any services and
the Company has not incurred or accrued for any expenses. See Note 15 for Consultant’s notification of breach of contract.
Other research consulting
agreements
Quoin Inc. entered into
three consulting agreements with Axella Research LLC (“Axella”) to provide regulatory and pre- clinical/clinical services
to the Company with respect to QRX003 and QRX004. The combined fees of the three agreements are approximately $270,000, payable as milestones
under the three agreements are met. Quoin Inc. has also engaged Axella for additional services pursuant to separate work orders. Further,
Quoin Inc. has two options to pay the milestones due 1) one half in equity of Quoin Inc. (at a pre-negotiated valuation) and one-half
in cash or 2) entirely in cash, in which case a discount of approximately 20% would be applicable. The Company recognized research and
development expenses for services provided and milestones met of approximately $247,000, $50,000 and $25,000 for the years ended
December 31, 2021, 2020 and 2019, respectively and has accrued expenses of $193,537, $105,052 and $24,940 at December 31, 2021,
2020 and 2019, respectively.
In November 2020, Quoin Inc.
entered into a Master Service Agreement for an initial term of three years with Therapeutics Inc. for managing preclinical and clinical
development for new products in the field of dermatology. The agreement required the execution of individual work orders. Quoin Inc. may
terminate any work order for any reason with 90 days written notice subject to costs incurred through termination and a defined termination
fee, unless there is a material breach by Therapeutics Inc. The first work order
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
was entered into in late 2020 for a clinical
study at an expected estimated cost of approximately $3.5 million and expected timing through the first quarter of 2023. For the year
ended December 31, 2021, the Company incurred approximately $340,000 of research and development costs related to this agreement.
In November 2021,
the Company entered into a commitment for research related services associated with Netherton Syndrome of approximately $250,000 for an
expected period of eighteen months, of which an initial $25,000 expense was incurred in 2021.
Employment agreements
The employment agreements
entered into by Quoin Inc. with its two founders/officers provide for a combined base salary, including monthly allowances, of $996,000
per annum, a discretionary bonus and certain allowances and benefits. In the event of termination of the two founders/officers for reason
other than cause, as defined in the employment agreements, the founders shall be entitled to two years of based salary and bonus.
In November 2021,
the Company appointed and entered into an employment agreement with its Chief Financial Officer which provides for a base salary of $360,000
per annum, a discretionary bonus and certain allowances and benefits.
In November 2021, the
Board of Directors of the Company approved amendments to the employment agreements increasing base level compensation by 10% for the two
founders and increasing the annual target discretionary bonus to not less than 45% of base salary for the two founders and the Chief Financial
Officer. Further a transaction bonus related to the closing of the Merger and private placements aggregating approximately $324,000 was
paid to the two founders in November 2021. See Note 17 describing subsequent shareholder approval of the employment agreements of the
two founders/officers.
Performance milestones
and Royalties
See Note 9 for
asset and in-licensed technology commitments.
Merger
agreement commitment
In consideration for
the Share Transfer disclosed in Note 1, the pre-closing Cellect shareholders received a contingent value right (“CVR”) entitling
the holders to earnouts during the Payment Period (as such term is defined in the Share Transfer Agreement), comprised mainly of payments
upon sale, milestone payments, license fees and exit fees realized by EnCellX. In order to secure such right, shares constituting 40%
of EnCellX share capital are held in escrow by Altshuler Shaham Trusts Ltd.
In connection with the
Share Transfer, Cellect entered into a CVR Agreement with Mr. Eyal Leibovitz, in the capacity of Representative for the holders of CVRs,
and Computershare Trust Company, N.A., a federally chartered trust company (the “Rights Agent”). Under the terms of the CVR
Agreement, the holders of the Cellect ADSs immediately prior to the Merger had the right to receive, through their ownership of CVRs,
their pro-rata share of the net Share Transfer consideration, making such holders of CVRs the indirect beneficiaries of the net payments
under the Share Transfer. CVRs were recorded in a register administered by the Rights Agent but were not certificated.
Since the Company will not receive
any net proceeds from the CVR’s, there is no asset or liability recorded in the consolidated financial statements.
NOTE 13 –
SHAREHOLDERS’ EQUITY AND SHARE OWNERSHIP AND RIGHTS
Quoin
Inc.
Quoin Inc.’s authorized capital
stock consisted of 10,000 shares of common stock. On March 5, 2018, in connection with the incorporation as a Delaware corporation,
Quoin Inc. issued 100 shares for a consideration of $100 split equally between the two founders and officers of Quoin Inc. In connection
with the Merger transaction, the two founders exchanged their shares in Quoin Inc. for 240,292 ADSs in Quoin Ltd., which was subsequently
reduced to 224,388 ADSs in May 2022 following the determination of the
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
number of shares held in escrow allocated
to certain former shareholders of Cellect. All share and per share amounts have been adjusted to reflect this recapitalization.
Quoin
Ltd.
As of December 31,
2021, Quoin Ltd.’s authorized share capital consisted of 12,000,000,000 ordinary shares, no par value. These ordinary shares are
not redeemable and do not have any preemptive rights. However, the Investor has certain approval rights in connection with the issuance
of additional shares. Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of
shareholders at a shareholders meeting. Shareholders may vote at shareholders meetings either in person, by proxy or by written ballot.
Israeli law does not allow public companies to adopt shareholder resolutions by means of written consent in lieu of a shareholders meeting.
The board of directors shall determine and provide a record date for each shareholders meeting and all shareholders at such record date
may vote. Unless stipulated differently in the Companies Law or in the articles of association, all shareholders’ resolutions shall
be approved by a simple majority vote.
Under Israeli law, the
Company may declare and pay dividends only if, upon the determination of our board of directors, there is no reasonable concern that the
distribution will prevent us from being able to meet the terms of our existing and foreseeable obligations as they become due. Under the
Companies Law, the distribution amount is further limited to the greater of retained earnings or earnings generated over the two most
recent years legally available for distribution according to our then last reviewed or audited financial statements, provided that
the date of the financial statements is not more than six months prior to the date of distribution. In the event that the Company
does not have retained earnings or earnings generated over the two most recent years legally available for distribution, the Company
may seek the approval of the court in order to distribute a dividend. The court may approve our request if it determines that there is
no reasonable concern that the payment of a dividend will prevent the Company from satisfying our existing and foreseeable obligations
as they become due.
The Bank of New York
Mellon, as depositary, has registered and delivered American Depositary Shares, also referred to as ADSs. Post August 1, 2022 change in
ADS ratio, each ADS represents (5,000) ordinary shares (or a right to receive five thousand (5,000) ordinary shares). Each ADS will also
represent any other securities, cash or other property which may be held by the depositary. ADSs may be held either (a) directly
(1) by having an American Depositary Receipt, also referred to as an ADR, which is a certificate evidencing a specific number of
ADSs or (2) by having uncertificated ADSs, or (b) indirectly by holding a security entitlement in ADSs through a broker or other
financial institution that is a direct or indirect participant in The Depository Trust Company, also called DTC.
Warrants
and Options
The following vested stock options
and warrants were outstanding at December 31, 2021, exercisable into ADSs:
|
|
|
|
|
|
|
|
|
|
ADSs |
|
Exercise Price |
|
Year of maturity |
Warrants
held by 2020 noteholders |
|
29,388 |
|
$ |
49.75 |
|
2026 |
Warrants
held by Investor |
|
99,074 |
|
$ |
49.75 |
|
2026 |
Options
held by former Cellect optionholders |
|
5,746 |
|
|
636.75 |
|
2022 |
Warrants
held by former Cellect warrantholders |
|
8,820 |
|
$ |
137.50 |
|
2022-2024 |
Total |
|
143,028 |
|
|
|
|
|
1) |
The
options held by former Cellect optionholders fully vested at the closing of the Merger and expire between January and October 2022. The
incremental fair value of the stock options at the closing of the Merger was not significant. The options were issued under the Cellect
Ltd. Employee Shares Incentive Plan (the “2014 Plan”). The 2014 Plan was amended and restated and initial grants were made
to Company officers and directors, approved at the Company Annual General Meeting held on April 12, 2022. See Note 17. |
|
The intrinsic value
of the above stock options and warrants at December 31, 2021 was negligible.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
Effective as of March 13, 2022, the
Company issued warrants to the Investor under the terms of the Primary Financing, exercisable into ADSs in the following aggregate amounts.
See Note 17.
|
|
|
|
|
|
|
|
ADSs |
|
Exercise Price |
Series A warrants (1) |
|
533,274 |
|
$ |
49.75 |
Series B warrants
(1) |
|
533,274 |
|
$ |
49.75 |
Series C warrants
(1) |
|
191,174 |
|
$ |
49.75 |
Total |
|
1,257,722 |
|
|
|
(1) |
The
Company expects to issue each of 191,174 additional Series A and Series B Warrants to the Investor upon exercise of the Series C Warrant,
which are assumed to be exercised and, therefore, are included in the totals of the Series A and B warrants in the table above. |
|
NOTE 14 –
INCOME TAXES
The Company’s
deferred tax assets relate primarily to its net operating loss carryforwards and other balance sheet basis differences. The Company maintains
a valuation allowance to fully offset the gross deferred tax asset because it is not more likely than not that the Company will realize
future benefits associated with these deferred tax assets at December 31, 2021 and 2020. The valuation allowance increased by approximately
$2,178,000 and $515,000 for the years ended December 31, 2021 and 2020, respectively.
Significant components of the Company’s
deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2021 |
|
2020 |
Deferred tax assets: |
|
|
|
|
|
|
Net operating losses carryforward |
|
$ |
1,945,000 |
|
$ |
355,000 |
Due to officers |
|
|
1,411,000 |
|
|
1,467,000 |
Accrued expenses and other |
|
|
212,000 |
|
|
44,000 |
R&D credit carryforward |
|
|
102,000 |
|
|
— |
Debt related attributes |
|
|
375,000 |
|
|
— |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
4,045,000 |
|
|
1,866,000 |
Valuation allowance |
|
|
(4,045,000) |
|
|
(1,866,000) |
|
|
|
|
|
|
|
Deferred tax asset, net of valuation
allowance |
|
$ |
— |
|
$ |
— |
At December 31,
2021 and 2020, the Company had U.S. federal and state income tax net operating loss (“NOL”) carryforward of approximately
$6,482,000 and $1,180,000, respectively, that may be used to offset future taxable income. The Internal Revenue Code (the “IRC”)
contains limitations on the use of net operating loss carryforwards after the occurrence of a substantial ownership change as defined
by IRC Section 382. The Company has not performed a detailed analysis, however utilization of such net operating loss carryforwards
will likely be significantly limited due to the shares issued in the Primary Financing and the Merger. At December 31, 2021, the
Company had approximately $102,000 of federal research and development (“R&D”) tax credit carryforwards. If not utilized,
the federal R&D credits will begin to expire in 2038.
The income tax benefit
for the years ended December 31, 2021 and 2020 differed from the amounts computed by applying the US federal income tax rate
of 21% primarily because of the increase in the valuation allowance and the tax impact of fair value adjustments and other permanent items,
which resulted in an effective tax rate of zero for both years.
On March 27, 2020, the United
States enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act is an emergency economic
stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail
the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant
provisions which are expected to impact the Company’s financial
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
statements include removal of certain
limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing
the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. The Company
has concluded that the CARES Act did not have a material impact on its financial position, results of operations, or cash flows.
On December 27, 2020, the United
States enacted the Consolidated Appropriations Act which extended many of the benefits of the CARES Act that were scheduled to expire.
The Company evaluated the impact of the Consolidated Appropriations Act on its consolidated financial statements and related disclosures
and concluded that the impact is immaterial.
NOTE 15 -
CONTINGENCIES
From time to time, the
Company may become involved in various legal matters arising in the ordinary course of business. Management is unaware of any matters
requiring accrual for related losses in the financial statements.
In February 2020, the seller
of the equity interests in Polytherapeutics and party to the Research Agreement communicated with Quoin Inc. threatening litigation for
non-payment and related breach of contract and immediate payment of all monthly payments in the amount of $666,667. See Notes 9
and 12. The Consultant has not provided any services and has not complied with other technical requirements under the Research Agreement,
and therefore is considered to be in breach of contract. The Company and the Consultant have had communications with respect to the duration,
commencement date and payment of the consulting services, but a revised agreement has not been reached. No lawsuits have been filed as
of the financial statement issuance date. Should a formal claim or lawsuit be filed, the Company believes it has meritorious defenses.
NOTE 16 –
LICENSE AGREEMENTS
In November and December 2021, the
Company entered into three license and supply agreements, whereby the Company is entitled to a royalty or other proceeds from the specified
product revenues in select non-US markets from the licensee, if and when the underlying products are approved and commercialized. No royalty
revenues were received in 2021.
NOTE
17 - SUBSEQUENT EVENTS
In March 2022, the Company
paid an aggregate of $311,670 to two out of five 2020 noteholders in settlement of the amounts included in accrued interest payable at
the closing of the Merger. See Note 4.
In the first quarter
of 2022, the Company entered into four license and supply agreements, whereby the Company will receive a royalty or other proceeds from
the specified product revenues in select non-US markets from the licensor, if and when the underlying products are approved and commercialized.
Effective as of March
13, 2022, the Company issued warrants to purchase ADSs as follows:
|
● |
Exchanged
the existing warrants of 2020 noteholders (Note 4) for warrants on substantially the same terms as the Investor Exchange Warrant (See
Note 5), exercisable for 29,388 ADSs, in the aggregate, at the exercise price of $49.75 per ADS. The exercise price was reduced to $0.00
as of July 14, 2022 as a result of the Altium Agreement described below. |
|
|
● |
Issued
Series A Warrant, Series B Warrant and Series C Warrant to purchase 342,100 ADSs, 342,100 ADSs and 191,174 ADSs, respectively, at the
exercise price of $49.75 per ADS, based on the terms of the Primary Financing. These warrants were amended as of July 14, 2022 under the
Altium Agreement described below. |
|
The Company held a Special
General Meeting on February 28, 2022, at which the Company’s shareholders adopted the Amended and Restated Articles of Association
of the Company.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
Amended
and Restated Equity Incentive Plan and Annual Meeting of Shareholders
In March 2022, our board
of directors approved the Amended and Restated Equity Incentive Plan (the “Amended Plan”), which increased the number of ordinary
shares reserved for issuance under such equity incentive plan to 15% of our outstanding ordinary shares on a fully-diluted basis, or 1,826,991,616
ordinary shares, represented by 365,398 ADSs as of March 31, 2022. The board of directors further approved the award of options to our
officers and directors to purchase, in the aggregate, 316,571 ADSs under the Amended Plan, and annual discretionary bonuses for officers
of $472,500 in aggregate.
We held our Annual General
Meeting on April 12, 2022, at which our shareholders approved, among other items, the following:
|
● |
The
increase in authorized share capital from 12.5 billion to 50 billion ordinary shares. |
|
● |
Modification
of the annual compensation of the two founders to a combined base salary of $990,000 and to increase the annual discretionary bonus to
not less than 45% of the annual base salary. |
|
● |
Repayment
of amounts due to the two founders at a rate of $25,000 each per month. |
|
● |
The
grant of an option to purchase up to 85,714 ADSs to each of the two founders under the Amended Plan, at an exercise price per ADS of $17.50,
to vest over a four-year period. |
|
● |
The
grant of an option to purchase 12,857 ADSs to each of the five non-employee director under the Amended Plan at an exercise price per ADS
of $17.50, to vest over a three-year period, and (as an annual grant for 2022) an option to an officer to purchase 71,429 ADSs at
an exercise price per ADS of $17.50, to vest over a four-year period. |
ADS
Ratio Change
On July 12, 2022, our
Board of Directors approved the change in the ratio of ADS evidencing ordinary shares from 1 ADS representing four hundred (400) ordinary
shares to 1 ADS representing five thousand (5,000) ordinary shares, which will result in a one for 12.5 reverse split of the issued and
outstanding ADSs (the “Ratio Change”). The Ratio Change was effective August 1, 2022. All ADS and related option and warrant
information presented in these financial statements and accompanying footnotes has been retroactively adjusted to reflect the reduced
number of ADSs resulting from the Ratio Change.
Nasdaq
Listing
On April 22, 2022, we
received a letter from the Listing Qualifications staff of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying us that we are
no longer in compliance with the minimum stockholders’ equity requirement for continued listing on The Nasdaq Capital Market. Nasdaq
Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2.5 million. In addition, as of April 21,
2022, we did not meet the alternative continued listing requirements based on market value of listed securities or net income from continuing
operations. In accordance with Nasdaq Rule 5810(c)(2)(A), within 45 calendar days of receiving this notice, we submitted a plan to regain
compliance to Nasdaq. This plan was accepted, and Nasdaq has granted us an extension until October 19, 2022 to evidence compliance.
On June 10, 2022, we
received a letter from The Nasdaq Listing Qualifications staff notifying us that the closing bid price per ADS was below the required
minimum of $1.00 for a period of 30 consecutive business days and that we did not meet the minimum bid price requirements set forth in
Nasdaq Rule 5550(a)(2). Pursuant to Nasdaq Rule 5810(c)(3)(A), we have a period of one hundred eighty (180) calendar days, or until December
7, 2022 (the “Compliance Period”), to regain compliance with Nasdaq’s minimum bid price requirement. If at any time
during the Compliance Period, the closing bid price per ADS is at least $1.00 for a minimum of ten (10) consecutive business days, Nasdaq
will provide us a written confirmation of compliance and the matter will be closed. In the event we do not regain compliance by December
7, 2022, we may be eligible for an additional 180 calendar day grace period. To qualify, we will be required to meet the continued listing
requirement for market value of publicly held ADSs and all other initial listing standards for The Nasdaq Capital Market, with the exception
of the bid price requirement, and will need to provide written notice of our intention to cure the deficiency during the second compliance
period.
QUOIN PHARMACEUTICALS
LTD.
Notes to Consolidated
Financial Statements
December
31, 2021, 2020 and 2019
Although
there is no assurance, we expect that the offering that is being registered on the registration statement on Form F-1, which includes
these financial statements and accompanying notes, will enable us to regain compliance with Nasdaq’s minimum stockholders’
equity requirement and the Ratio Change will help us to regain compliance with the minimum bid-price requirement for continued listing
on The Nasdaq Capital Market. Although Nasdaq notification letters described above have no immediate effect on our listing on The Nasdaq
Capital Market, and we are working on implementing plans to regain compliance with Nasdaq listing standards, there can be no assurance
that we will be able to regain compliance with Nasdaq’s minimum stockholders’ equity requirement or minimum bid-price requirement
for continued listing. If our ADSs are delisted from Nasdaq, it will have material negative impacts on the actual and potential liquidity
of our securities, as well as material negative impacts on our ability to raise future capital.
Agreements
with Altium Growth Fund, LP and Altium Warrant Exercises
During the second quarter
of 2022, Altium exercised the Series B Warrant in full pursuant to the alternate cashless exercise right of such warrant, under which
Altium had an option to receive 1 ADS for each ADS underlying the warrant being exercised in such cashless exercise, resulting in the
issuance of a total of 342,100 ADSs to Altium.
On
July 14, 2022, we, Quoin Inc. and Altium entered into an agreement (the “Altium Agreement”), pursuant to which the parties
agreed to, among other things, (i) amend certain terms of the Series A Warrant and Investor Exchange Warrants previously issued to Altium
to, among other things, reduce the exercise price to $0.00 per ADS with respect to a total of 399,999 ADSs, (ii) cancel the Series C Warrant
and a portion of the Series A Warrant previously issued to Altium, and (iii) terminate the Purchase Agreements, pursuant to which the
warrants were previously issued to Altium. As of August 2, 2022, Altium exercised all of its warrants outstanding and we issued a total
of 399,999 ADSs to Altium.
The exercise price of
the 2020 noteholder warrants was reduced to $0.00 as of July 14, 2022 as a result of the Altium Agreement described below. As of August
2, 2022, 23,040 noteholder warrants had been exercised.
As a result of the Altium and noteholder
warrant exercises and the Altium Agreement, the warrants outstanding as of August 2, 2022 are set out below, exercisable into ADS:
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Year of |
|
|
ADSs |
|
Price |
|
maturity |
Warrants held
by 2020 noteholders |
|
6,348 |
|
$ |
0 |
|
2027 |
Warrants held
by former Cellect warrant holders |
|
8,820 |
|
$ |
137.5 |
|
2024 |
Total |
|
15,168 |
|
|
|
|
|
Exhibit 99.5
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion together with the consolidated financial statements and related notes included elsewhere in this
report. This discussion contains forward-looking statements regarding our expectations regarding our future performance, liquidity and
capital resources, as well as other non-historical statements. These forward-looking statements are subject to numerous risks and uncertainties,
including, but not limited to, the risks and uncertainties described in “Cautionary Note Regarding Forward-Looking Statements.”
Our actual results may differ materially from those contained in or implied by any forward-looking statements. Our consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”),
reflect the operations of Quoin Pharmaceuticals Inc. (“Quoin Inc.”) since inception and include the accounts of Quoin
Ltd. since the closing of the Merger (as defined below). Unless context indicates or suggests otherwise, “we”, “our”,
“us”, “Quoin Ltd.” and the “Company” in this section refers to the consolidated operations of Quoin
Pharmaceuticals Ltd.
Operating
Results
Overview
We are a clinical stage,
emerging specialty pharmaceutical company dedicated to the development and commercialization of therapeutic products that help treat rare
and orphan diseases for which there are currently no approved treatments or cures. Our initial focus is on the development of products,
using our proprietary owned and in-licensed technology, that could help address rare skin diseases for which there are currently no approved
treatments or cures. Our first lead product is QRX003, a once daily, topical lotion comprised of a broad-spectrum serine protease inhibitor,
formulated with the proprietary Invisicare® technology, to treat Netherton Syndrome. Clinical testing of QRX003, under an open Investigational
New Drug (IND) application with the Food and Drug Administration, or “FDA,” has commenced in the US. In addition, we intend
to pursue the clinical development of QRX003 in other rare dermatological diseases, including Peeling Skin Syndrome, SAM Syndrome, and
Palmoplantar Keratoderma. Our three other pipeline products in development are also targeting rare skin diseases, including Epidermolysis
Bullosa, Netherton Syndrome and Scleroderma.
Our objective is to
develop and commercialize proprietary therapeutic drug products. To this effect, we intend to develop and seek marketing approvals from
the FDA and other worldwide regulatory bodies for rare and orphan diseases. To achieve these objectives, we plan to:
|
● |
seek
the necessary regulatory approvals to complete the clinical development of QRX003 and, if successful, file for marketing approval in the
United States and other territories; |
|
● |
prepare
to commercialize QRX003 by establishing our own sales infrastructure in the U.S. and Europe and entering into distribution partnerships
in other territories such those currently established for Canada, Australia/New Zealand, the Middle East, China, Hong Kong, Taiwan, Latin
America, Central and Eastern Europe, Turkey; and |
|
● |
pursue
business development activities by seeking partnering, licensing, merger and acquisition opportunities or other transactions to further
expand our pipeline and drug-development capabilities and which take advantage of our financial resources for the benefit of increasing
stockholder value. |
A novel strain of coronavirus
(“COVID-19”) created a global pandemic, which commenced in 2020. Our operations, to date, have not been dramatically affected
by COVID-19. However, the extent of any future impact on our operational and financial performance will depend on the possibility of a
resurgence and resulting severity of COVID-19 impact with respect to our access to API and drugproduct for clinical testing, as well as
our ability to safely and efficiently conduct planned clinical trials.
We
do not expect to generate revenue from product sales unless and until we successfully complete development and obtain marketing approval
for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. Accordingly,
we will need to raise additional capital prior to the commercialization of QRX003 or any other product candidate. Until such time, if
ever, as we can generate substantial revenue from product sales, we expect to finance our operating activities through a combination of
equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements
and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter
into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements
as and when needed would have a negative impact on our financial condition and our ability to continue our operations. See “—Key
Recent Events and Developments—Going Concern Qualification.”
Key
Recent Events and Developments
Merger
On October 28, 2021,
Cellect completed the business combination with Quoin Inc. in accordance with the terms of the Merger Agreement, by and among Cellect,
Quoin Inc. and Merger Sub, which was a wholly-owned subsidiary of Cellect, pursuant to which Merger Sub merged with and into Quoin Inc.,
with Quoin Inc. surviving as a wholly-owned subsidiary of Cellect (the “Merger”). Immediately after completion of the Merger,
Cellect changed its name to “Quoin Pharmaceuticals, Ltd.”
We have accounted for
the transaction as a reverse recapitalization with Quoin Inc. as the accounting acquirer. Because Quoin Inc. is the accounting acquirer,
its historical financial statements became our historical financial statements and such assets and liabilities continued to be recorded
at their historical carrying values. The impact of the recapitalization has been retroactively applied to all periods presented.
In addition, on October
28, 2021, Cellect sold the entire share capital of its subsidiary, Cellect Biotherapeutics Ltd., which essentially included all of Cellect’s
then existing net assets, to EnCellX Inc. (“EnCellX”), a newly formed U.S. privately held company based in San Diego, CA (the
“Share Transfer”), pursuant to an Amended and Restated Share Transfer Agreement. We have no interests in EnCellX subsequent
to the closing of the Merger.
Amended
and Restated Equity Incentive Plan and Annual Meeting of Shareholders
In
March 2022, our board of directors approved the Amended and Restated Equity Incentive Plan (the “Amended Plan”), which increased
the number of ordinary shares reserved for issuance under such equity incentive plan to 15% of our outstanding ordinary shares on a fully-diluted
basis, or 1,826,991,616 ordinary shares, represented by 365,398 ADSs as of March 31, 2022. The board of directors further approved the
award of options to our officers and directors to purchase, in the aggregate, 316,571 ADSs under the Amended Plan, and annual discretionary
bonuses for officers of $472,500 in aggregate.
We
held our Annual General Meeting on April 12, 2022, at which our shareholders approved, among other items, the following:
|
● |
The
increase in authorized share capital from 12.5 billion to 50 billion ordinary shares. |
|
● |
Modification
of the annual compensation of the two founders to a combined base salary of $990,000 and to increase the annual discretionary bonus to
not less than 45% of the annual base salary. |
|
● |
Repayment
of amounts due to the two founders at a rate of $25,000 each per month. |
|
● |
The
grant of an option to purchase up to 85,714 ADSs to each of the two founders under the Amended Plan, at an exercise price per ADS of $17.50,
to vest over a four-year period. |
|
● |
The
grant of an option to purchase 12,857 ADSs to each of the five non-employee director under the Amended Plan at an exercise price per ADS
of $17.50, to vest over a three-year period, and (as an annual grant for 2022) an option to an officer to purchase 71,429 ADSs at an exercise
price per ADS of $17.50, to vest over a three-year period. |
ADS
Ratio Change
On
July 12, 2022, our Board of Directors approved the change in the ratio of ADS evidencing ordinary shares from 1 ADS representing four
hundred (400) ordinary shares to 1 ADS representing five thousand (5,000) ordinary shares, which will result in a one for 12.5 reverse
split of the issued and outstanding ADSs (the “Ratio Change”). The Ratio Change was effective August 1, 2022. All ADS and
related option and warrant information presented in this report, including our financial statements and accompanying footnotes, has been
retroactively adjusted to reflect the reduced number of ADSs resulting from the Ratio Change.
Nasdaq
Listing
On April
22, 2022, we received a letter from the Listing Qualifications staff of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying
us that we are no longer in compliance with the minimum stockholders’ equity requirement for continued listing on The Nasdaq Capital
Market. Nasdaq Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2.5 million. In
addition, as of April 21, 2022, we did
not meet the alternative continued listing requirements based on market value of listed securities or net income from continuing operations.
In accordance with Nasdaq Rule 5810(c)(2)(A), within 45 calendar days of receiving this notice, we submitted
a plan to regain compliance to Nasdaq. This plan was accepted, and Nasdaq has granted us an extension until October 19, 2022 to
evidence compliance.
On
June 10, 2022, we received a letter from The Nasdaq Listing Qualifications staff notifying us that the closing bid price per ADS was below
the required minimum of $1.00 for a period of 30 consecutive business days and that we did not meet the minimum bid price requirements
set forth in Nasdaq Rule 5550(a)(2). Pursuant to Nasdaq Rule 5810(c)(3)(A), we have a period of one hundred eighty (180) calendar days,
or until December 7, 2022 (the “Compliance Period”), to regain compliance with Nasdaq’s minimum bid price requirement.
If at any time during the Compliance Period, the closing bid price per ADS is at least $1.00 for a minimum of ten (10) consecutive business
days, Nasdaq will provide us a written confirmation of compliance and the matter will be closed. In the event we do not regain compliance
by December 7, 2022, we may be eligible for an additional 180 calendar day grace period. To qualify, we will be required to meet the continued
listing requirement for market value of publicly held ADSs and all other initial listing standards for The Nasdaq Capital Market, with
the exception of the bid price requirement, and will need to provide written notice of our intention to cure the deficiency during the
second compliance period.
Although
there is no assurance, we expect that this offering will enable us to regain compliance with Nasdaq’s minimum stockholders’
equity requirement and the Ratio Change will help us to regain compliance with the minimum bid-price requirement for continued listing
on The Nasdaq Capital Market. Although Nasdaq notification letters described above have no immediate
effect on our listing on The Nasdaq Capital Market, and we are working on implementing plans to regain compliance with Nasdaq listing
standards, there can be no assurance that we will be able to regain compliance with Nasdaq’s
minimum stockholders’ equity requirement or minimum bid-price requirement for continued listing. If our ADSs are delisted
from Nasdaq, it will have material negative impacts on the actual and potential liquidity of our securities, as well as material negative
impacts on our ability to raise future capital.
Agreements
with Altium Growth Fund, LP
On October 28, 2021,
Cellect and Quoin Inc. completed the private placement transaction with Altium Growth Fund, LP (“Altium”) for an aggregate
purchase price of approximately $17.0 million (comprised of (x) the set off of approximately $5 million of senior secured notes issued
in connection with the bridge loan (“Bridge Financing”) that Altium made to Quoin Inc. at the time of the execution of the
Merger Agreement, and (y) approximately $12.0 million in cash from Altium whereby Quoin Inc. issued to Altium (i) common stock of Quoin
Inc. immediately prior to the Merger (the “Primary Financing”), pursuant to the Securities Purchase Agreement, entered into
as of March 24, 2021, by and among Cellect, Quoin Inc. and Altium, as amended (the “Primary Financing Agreement”), and (ii)
warrants to purchase 99,074 ADSs (the “Investor Exchange Warrants”) in exchange for warrants issued in connection with the
Bridge Financing pursuant to the Securities Purchase Agreement, entered into as of March 31, 2021, by and between Quoin Inc. and Altium,
as amended (the “Bridge Agreement” and together with the Primary Financing Agreement, the “Purchase Agreements”).
In
addition, under the Primary Financing Agreement, Quoin Ltd. issued to Altium as of March 13, 2022 (the one hundred thirty sixth (136th)
day following the consummation of the Merger): (i) Series A Warrant to purchase 342,100 ADSs (the “Series A Warrant”) (ii)
Series B Warrant to purchase 342,100 ADSs (the “Series B Warrant”) and (iii) Series C Warrant to purchase 191,174 ADSs (“Series
C Warrant” and, together with the Series A Warrant and Series B Warrant, the “Initial Investor Warrants”), each at an
exercise price of $49.75 per ADS. Under the Primary Financing Agreement, upon the exercise of the Series C Warrant in full, Quoin Ltd.
was obligated to issue to Altium: (i) an additional Series A Warrant to purchase 191,174 ADSs and (ii) an additional Series B Warrant
to purchase 191,174 ADSs (“Additional Investor Warrants” and together with Initial Investor Warrants, the “Investor
Warrants”). During the second quarter of 2022, Altium exercised the Series B Warrant in full pursuant to the alternate cashless
exercise right of such warrant, under which Altium had an option to receive 1 ADS for each ADS underlying the warrant being exercised
in such cashless exercise, resulting in the issuance of a total of 342,100 ADSs to Altium.
On
July 14, 2022, we, Quoin Inc. and Altium entered into an agreement, pursuant to which the parties agreed to, among other things, (i) amend
certain terms of the Series A Warrant and Investor Exchange Warrants previously issued to Altium to, among other things, reduce the exercise
price to $0.00 per ADS with respect to a total of 399,999 ADSs, (ii) cancel the Series C Warrant and a portion of the Series A Warrant
previously issued to Altium, and (iii) terminate the Purchase Agreements, pursuant to which the warrants were previously issued to Altium.
As of August 2. 2022, Altium exercised all of its outstanding warrants and we issued a total of 399,999 ADSs to Altium.
Going
Concern Qualification
We
expected to receive additional funding through the mandatory exercise provision of the Series C Warrant that was canceled on July 14,
2022, which would have resulted in proceeds of approximately $9.5 million. In the event the requirements of the mandatory exercise provision
of such warrant were not met, we expected Altium to act on its written commitment to provide funding equal to the $9.5 million expected
upon exercise of the Series C Warrant, at prevailing market rates, and thus we believed that we had sufficient resources to implement
our business plan for at least one year from the issuance of our consolidated financial statements as of and for the year ended December
31, 2021, as well as of and for the three months ended March 31, 2022 as of the respective dates of the issuance of these financial statements.
Following the cancellation of the Series C Warrant on July 14, 2022, we no longer expect to receive such proceeds from Altium, and we
do not have sufficient resources to implement our business plan for at least one year from August 2, 2022. This raises substantial
doubt about our ability to continue as a going concern.
Unless one or more of
our product candidates are accepted into Early Access Programs in certain countries, we do not expect to generate revenue from product
sales unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which
we expect will take a number of years and is subject to significant uncertainty. Additional financing
will be required to complete the research and development of our therapeutic targets and our other operating requirements, which may not
be available at acceptable terms, if at all. We have filed a registration statement on Form F-1 related to an offering of securities on
a “reasonable best efforts” basis, as described in this report. However there is no assurance of the successful consummation
of such offering. If we are unable to obtain additional funding when it becomes necessary, the development of our product candidates will
be impacted and we would likely be forced to delay, reduce, or terminate some or all of our development programs, all of which could have
a material adverse effect on our business, results of operations and financial condition.
Noteholder
Warrants
Commencing
in October 2020, Quoin Inc. issued promissory notes (the “2020 Notes”) to five noteholders, including our directors, Messrs.
Langer and Culverwell (collectively, “2020 Noteholders”). The 2020 Notes were issued at a 25% original issue discount with
an aggregate face value of $1,213,313 with an interest at a rate of 20% per annum. The 2020 Notes were mandatorily convertible into ADSs
based on the valuation negotiated in the Primary Financing. The 2020 Noteholders also received warrants exercisable at any time after
the issuance date for a number of shares of Quoin Inc.’s common stock equal to 100% of the “as if converted” shares
as if the 2020 Notes principal and interest were convertible at the lowest price any securities are sold, convertible, or exercisable
into in the Primary Financing or the next round of financing (whichever is lower). At the closing of the Merger, ADSs were issued to the
2020 Noteholders upon the conversion of the principal of the 2020 Notes. In addition, effective as of March 13, 2022, Quoin Ltd. exchanged
Quoin Inc. warrants held by the 2020 Noteholders for warrants on substantially the same terms as the Investor Exchange Warrants, exercisable
for 29,388 ADSs, in the aggregate, at the exercise price of $49.75 per ADS (the “Noteholder Warrants”). The Noteholder Warrants
became exercisable immediately upon issuance and will expire five years from March 13, 2022. Effective as of July 14, 2022, in connection
with our agreement with Altium, pursuant to which the exercise price of the Series A Warrant and Investor Exchange Warrants was reduced
to $0.00 per ADS, the exercise price of the Noteholder Warrants was also reduced to $0.00 per ADS in accordance with the adjustment provisions
of such warrants. As of August 2, 2022, 23,040 2020 Noteholder Warrants had been exercised.
License
and Distribution Agreements, Supply Agreements and Research Agreements
On
June 14, 2022, Quoin Inc. entered into a License and Distribution Agreement with WinHealth Investment (HK) Limited (“WinHealth”).
Under the terms of the License Agreement, WinHealth has the exclusive rights to commercialize, upon the receipt of applicable regulatory
approvals, pharmaceutical products QRX003 and QRX004 (in finished dosage form for human use) in Greater China, including Hong Kong, Macau
and Taiwan.
On
July 14, 2022, Quoin Inc. entered into (i) a License and Distribution Agreement with Endo Ventures Limited (“Endo”), and (ii)
a Supply Agreement with Endo. Under the terms of the License Agreement, Endo has the exclusive rights to commercialize, upon the receipt
of applicable regulatory approvals, pharmaceutical product QRX003 (in finished dosage form for human use) in Canada. Under the terms of
the Supply Agreement, Quoin agreed to manufacture and supply (or have manufactured and supplied) to Endo the foregoing pharmaceutical
product QRX003 for sale in Canada.
Effective as of May
20, 2022, Quoin Inc. entered into a Research Agreement with Queensland University of Technology, Australia, to collaborate on the project
related to the selection of a lead VLA-4 inhibitor for entry into a Scleroderma clinical development program.
Clinical
Development
Quoin’s lead asset,
QRX003, is currently in clinical development in the United States under an open IND application with the FDA. The ongoing study is a randomized,
double blinded assessment of two different doses of QRX003 versus a placebo vehicle in Netherton patients. The test materials will be
applied once daily, over a twelve-week period, to pre-selected areas of the patient’s body. Based on discussions with the FDA, a
number of different clinical endpoints are being assessed in the study, including but not limited to, an Investigators Global Assessment
(IGA), Patient’s Global Assessment (PaGA) and Pruritis. The trial will be conducted in up to six clinical sites in the US. The first
clinical site was open in July 2022 and the opening of additional sites is in process.
Components
of Our Results of Operations
Operating
Expenses
Our current operating
expenses consist of two components – research and development expenses, and general and administrative expenses.
Research
and Development Expenses
Research and development
costs are expensed as incurred. Research and development expenses include personnel costs associated with research and development activities,
including third-party contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. We utilize
outside consultants and third parties to conduct the majority of our research and development, under the supervision of our management
team.
Future research and
development expenses may include:
|
● |
employee-related
expenses, such as salaries, bonuses and benefits, consultant-related expenses, share-based compensation, overhead related expenses and
travel related expenses for our research and development personnel; |
|
● |
expenses
incurred under agreements with CROs, as well as consultants that support the implementation of the clinical studies described above; |
|
● |
manufacturing
and packaging costs in connection with conducting clinical trials and for stability and other studies required to support the NDA filing
as well as manufacturing drug product for commercial launch; |
|
● |
formulation,
research and development expenses related to QRX003; and other products we may choose to develop; and |
|
● |
costs
for sponsored research. |
Research and development
activities will continue to be central to our business plan. Products in later stages of clinical development generally have higher development
costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.
We expect our research and development expenses to be significant over the next several years as personnel and compensation costs increase
and we conduct late-stage clinical studies and prepare to seek regulatory approval for QRX003 and our other pipeline products.
The duration, costs
and timing of clinical trials of QRX003 and our other pipeline products will depend on a variety of factors that include, but are not
limited to:
|
● |
the
number of trials required for approval; |
|
● |
the
per patient trial costs; |
|
● |
the
number of patients that participate in the trials; |
|
● |
the
number of sites included in the trials; |
|
● |
the
countries in which the trial is conducted; |
|
● |
the
length of time required to enroll eligible patients; |
|
● |
the
number of doses that patients receive; |
|
● |
the
drop-out or discontinuation rates of patients; |
|
● |
the
potential additional safety monitoring or other studies requested by regulatory agencies; |
|
● |
the
duration of patient follow-up; |
|
● |
the
timing and receipt of regulatory approvals; and |
|
● |
the
efficacy and safety profile of our product candidates. |
General
and Administrative Expenses
General and administrative
expenses consist primarily of compensation for the founders and executive officers, professional fees and other corporate expenses, including
significant costs incurred in 2021 in connection with the Merger and associated regulatory filings.
We anticipate that our
general and administrative expenses will increase in the future to support our continued research and development activities. These increases
will likely include increased costs related to the hiring of personnel, including compensation and employee-related expenses, and fees
to outside consultants, lawyers and accountants. Additionally, we anticipate increased costs associated with being a public company, including
compliance with The Nasdaq Capital Market and SEC requirements, insurance and investor relations costs.
Other Expenses
Other
expenses consist primarily of non-cash costs associated with the financing arrangements entered into during 2020 and 2021, including fair
value adjustments to notes payable and warrants and interest expense associated with debt instruments. The majority of such costs will
cease upon conversion of the debt instruments and exchange of the warrants, most of which occurred at the Merger date.
Comparison
of Period-to-Period Results of Operations
The following table sets forth our
results of operations for the three months ended March 31, 2022, compared to the three months ended March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
2022 |
|
2021 |
|
Change |
Operating
Expenses |
|
|
|
|
|
|
|
|
|
General
and administrative |
|
$ |
1,588,470 |
|
$ |
744,973 |
|
$ |
843,497 |
Research
and development |
|
|
587,569 |
|
|
56,788 |
|
|
530,781 |
Total operating
expenses |
|
|
2,176,039 |
|
|
801,761 |
|
|
1,374,278 |
Other
Expenses |
|
|
|
|
|
|
|
|
|
Settlements
of accounts payable |
|
|
(416,000) |
|
|
— |
|
|
(416,000) |
Fair
value adjustments to debt |
|
|
— |
|
|
500,000 |
|
|
(500,000) |
Warrant
liability expense (income) |
|
|
(77,237) |
|
|
2,446,513 |
|
|
(2,523,750) |
Financing
expense |
|
|
— |
|
|
90,000 |
|
|
(90,000) |
Interest
expense |
|
|
— |
|
|
65,597 |
|
|
(65,597) |
Total other
expenses (income) |
|
|
(493,237) |
|
|
3,102,110 |
|
|
(3,595,347) |
Net
loss |
|
$ |
(1,682,802) |
|
$ |
(3,903,871) |
|
$ |
(2,221,069) |
The following table presents consolidated
statement of operations data for the years ended December 31, 2021, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
2019 |
Operating
Expenses |
|
|
|
|
|
|
|
|
|
General
and administrative |
|
$ |
4,499,923 |
|
$ |
1,425,855 |
|
$ |
1,514,752 |
Research
and development |
|
|
1,562,927 |
|
|
244,155 |
|
|
45,650 |
Total operating
expenses |
|
|
6,062,850 |
|
|
1,670,010 |
|
|
1,560,402 |
Other
Expenses |
|
|
|
|
|
|
|
|
|
Fair
value adjustments to debt |
|
|
1,250,000 |
|
|
378,333 |
|
|
— |
Warrant
liability expense |
|
|
12,784,329 |
|
|
— |
|
|
— |
Financing
expense |
|
|
275,000 |
|
|
— |
|
|
— |
Interest
expense |
|
|
1,090,409 |
|
|
47,021 |
|
|
— |
Total other
expenses |
|
|
15,399,738 |
|
|
425,354 |
|
|
— |
Net
loss |
|
$ |
(21,462,588) |
|
$ |
(2,095,364) |
|
$ |
(1,560,402) |
Three
months ended March 31, 2022 compared to three months ended March 31, 2021
General
and Administrative Expenses
General and administrative
expenses were approximately $1,600,000 and $700,000, in the three months ended March 31, 2022 and 2021, respectively, representing an
increase of $800,000, or 113%. The increase was primarily due to the build up of the company infrastructure post the Merger and the increased
costs of becoming a public company.
Research
and Development Expenses
Our research and development
expenses during the three months ended March 31, 2022 and 2021 were approximately $590,000 and $57,000, respectively, representing an
increase of $530,000, or approximately 935%. The increase was primary due to increased expenditures on our development programs following
the completion of our financings in October 2021, including work related to the filing of our IND for QRX003 in March 2022. Also, included
in the 2022 expenses were approximately $113,000 of compensation costs related to managing the development programs. We expect to significantly
increase our research and development efforts by conducting the remaining studies necessary for the development and approval of QRX003,
see “Components of Our Results of Operations – Research and Development Expenses” above.
We amortize licensed
or acquired intellectual property over its expected useful life, included in research and development expenses set out above. The license
from Skinvisible was obtained in October 2019, see “Research and Development, Patents and Licenses." Amortization of intangible
assets was $26,000 in each of the three months ended March 31, 2022 and 2021.
Other Expenses:
Interest
Expense
In the fourth quarter
of 2020, we issued convertible promissory notes in an initial bridge financing with an aggregate face value of $1,213,333 (the “2020
Notes”) with a 20% coupon interest. In 2021, we issued additional convertible promissory notes in a subsequent Bridge Financing
(the “Bridge Notes”) with an aggregate face value of $5,000,000 with a 15% coupon interest.
Interest expense was
$0 and $66,000 in the three months ended March 31, 2022 and 2021 respectively. Interest on the Bridge Notes was paid in October 2021 upon
closing of the Primary Financing, and interest on the 2020 Notes did not accrue after October 2021 but remained unpaid and included as
a liability on our consolidated balance sheet as of December 31, 2021 a portion of which was paid in the three months ended March 31,
2022. See “—Liquidity and Capital Resources.”
Fair value
adjustment to convertible notes payable
We elected to value
the 2020 Notes and the Bridge Notes at fair value, which was remeasured at each reporting period. In the three months ended March 31,
2021 we incurred a fair value adjustment of $500,000 related to the Bridge Notes. The Bridge Notes and 2020 Notes were converted into
equity in October 2021 on the closing of the Primary Financing.
Warrant
liability expense
We record our warrants
determined to require liability treatment at fair value, which was remeasured at each reporting period. In the three months ended March
31, 2022, and March 31, 2021 we incurred a fair value gain of ($77,000) related to the warrants associated with the 2020 Notes, and expense
of $2,400,000 related to the warrants associated with the 2020 Notes and the Bridge Notes, respectively. The Bridge Note warrants which
were exchanged for the Investor Exchange Warrant (as defined below) with a fixed exercise price of $49.75 per share and reclassified as
an equity instrument in October 2021 upon closing of the Primary Financing. The 2020 Note warrants were exchanged for warrants on the
same terms as the Investor Exchange Warrant and reclassified as an equity instrument in March 2022.
Forgiveness
of Trade Payable
In our balance sheet
as of December 31, 2021 we had a liability of $584,000 representing amounts due to an investor relations firm for services commencing
in 2017. In May 2022 we entered into a settlement with such firm to decrease the liability to $168,000 which resulted in $416,000 of income
recognized in the three months ended March 31, 2022.
Net Loss
We recorded a net loss
of approximately $1,700,000 in for the three months ended March 31, 2022, as compared to a net loss of $3,900,000 for the three months
ended March 31, 2021, representing an decrease of approximately of $2,200,000. The decrease was primarily due to financing related charges
aggregating $3,100,000, including warrant expense of $2,400,000, in the three months ended March 31, 2021 compared to other income of
$80,000 in the three months ended March 31, 2021, as well as other income recognized in the settlement of accounts payable in the three
months ended March 31, 2022, partially offset by increases in research and development expense and general and administrative expense
in the three months ended March 31, 2022 as the Company used more resources to develop and implement its business plan.
Equity-Based
Compensation Expense
Quoin Inc. did not have
a share incentive plan from inception up to March 31, 2022. Upon closing of the Merger in October 2021, options held by former Cellect
option holders under Cellect Ltd. Employee Shares Incentive Plan (the “2014 Plan”) fully vested and expire between January
and October 2022. The 2014 Plan was amended and restated and initial grants were made to our Company officers and directors, approved
at our Company Annual General Meeting of shareholders held on April 12, 2022.
Income
Taxes
For the three months
ended March 31, 2022 and 2021, no income tax expense or benefit was recognized. Our deferred tax assets are comprised primarily of net
operating loss carryforwards. We maintain a full valuation allowance on our deferred tax assets since we have not yet achieved sustained
profitable operations. As a result, we have not recorded any income tax benefit since our inception.
Year
ended December 31, 2021 compared to the year ended December 31, 2020
The following table
sets forth our results of operations for the year ended December 31, 2021, compared to the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
Change |
Operating
Expenses |
|
|
|
|
|
|
|
|
|
General
and administrative |
|
$ |
4,499,923 |
|
$ |
1,425,855 |
|
$ |
3,074,068 |
Research
and development |
|
|
1,562,927 |
|
|
244,155 |
|
|
1,318,772 |
Total operating
expenses |
|
|
6,062,850 |
|
|
1,670,010 |
|
|
4,392,840 |
Other
Expenses |
|
|
|
|
|
|
|
|
|
Fair
value adjustments to debt |
|
|
1,250,000 |
|
|
378,333 |
|
|
871,667 |
Warrant
liability expense |
|
|
12,784,329 |
|
|
— |
|
|
12,784,329 |
Financing
expense |
|
|
275,000 |
|
|
— |
|
|
275,000 |
Interest
expense |
|
|
1,090,409 |
|
|
47,021 |
|
|
1,043,388 |
Total other
expenses |
|
|
15,399,738 |
|
|
425,354 |
|
|
15,611,663 |
Net
loss |
|
$ |
(21,462,588) |
|
$ |
(2,095,364) |
|
$ |
(20,004,503) |
General
and Administrative Expenses
General and administrative
expenses were approximately $4.5 million and $1.4 million, in the years ended December 31, 2021 and 2020, respectively, representing an
increase of $3.1 million, or 216%. Approximately $1.5 million of the increase related to professional fees associated with the Merger
and costs of becoming a public company. In addition, there were increases in wages associated with the hiring of our CFO and bonuses paid
to executives associated with completion of the Merger.
Research
and Development Expenses
Our research and development
expenses during the years ended December 31, 2021 and 2020 were approximately $1.6 million and $244,000, respectively, representing an
increase of $1.3 million, or approximately 640%. The increase was primary due to increased expenditures on our development programs following
the completion of financings in late 2020 and 2021. Also, included in the 2021 expenses were approximately $555,000 of compensation costs
related to managing the development programs. We expect to significantly increase our research and development efforts by conducting the
remaining studies necessary for the development and approval of QRX003, see “Components of Our Results of Operations – Research
and Development Expenses” above.
We
amortize licensed or acquired intellectual property over its expected useful life, included in research and development expenses set out
above. The license from Skinvisible was obtained in October 2019, see “—Research and Development, Patents and Licenses."
Amortization of intangible assets was $104,000 in each of the years ended December 31, 2021 and 2020.
Other Expenses:
Interest
Expense
In
the fourth quarter of 2020, we issued convertible promissory notes in an initial bridge financing with an aggregate face value of $1,213,333
(the “2020 Notes”) with a 20% coupon interest. In 2021, we issued additional convertible promissory notes in a subsequent
Bridge Financing (the “Bridge Notes”) with an aggregate face value of $5,000,000 with a 15% coupon interest.
Interest
expense was $1,090,000 and $47,000 in the years ended December 31, 2021, 2020 respectively. Interest on the Bridge Notes was paid in October
2021 upon closing of the Primary Financing, and interest on the 2020 Notes remained unpaid and included as a liability on our consolidated
balance sheet as of December 31, 2021. We recorded $697,000 in the year ended December 31, 2021 in connection with the estimated settlement
of amounts due under the 2020 Notes. See “—Liquidity and Capital Resources.”
Fair value
adjustment to convertible notes payable
We
elected to value the 2020 Notes and the Bridge Notes at fair value, which was remeasured at each reporting period. In the year ended December
31, 2021 we incurred a fair value adjustment of $1,250,000 related to the Bridge Notes and in the year ended December 31, 2020 we incurred
a fair value adjustment of $378,000 related to the 2020 Notes. The Bridge Notes and 2020 Notes were converted into equity in October 2021
on the closing of the Primary Financing.
Warrant
liability expense
We
record our warrants at fair value, which was remeasured at each reporting period. In year ended December 31, 2021, we incurred a fair
value adjustment of $0.4 million related to the warrants associated with the 2020 Notes and $12.4 million related to warrants associated
with the Bridge Notes. The Bridge Note warrants which were exchanged for the Investor Exchange Warrants (as defined below) with a fixed
exercise price of $49.75 per share and reclassified as an equity instrument in October 2021 upon closing of the Primary Financing. We
did not have any such expense in the year ended December 31, 2020.
Net Loss
We
recorded a net loss of $21.5 million in for the year ended December 31, 2021, as compared to a net loss of $2.1 million for the year ended
December 31, 2020, representing an increase of approximately $20.0 million. The increase was primarily due to financing related charges
aggregating $15.4 million, including warrant expense of $12.8 million, in the year ended December 31, 2021 compared to $425,000 in the
year ended December 20, 2020, as well increases in research and development expense and general and administrative expense as the Company
used more resources to develop and implement its business plan.
Equity-Based
Compensation Expense
Quoin
Inc. did not have a share incentive plan from inception up to the year ended December 31, 2021. Upon closing of the Merger in October
2021, options held by former Cellect option holders under Cellect Ltd. Employee Shares Incentive Plan (the “2014 Plan”) fully
vested and expire between January and October 2022. The incremental value of the stock options at the closing of the Merger was not significant
and no expense incurred in the year ended December 31, 2021. The 2014 Plan was amended and restated and initial grants were made to Company
officers and directors, approved at the Company Annual General Meeting held on April 12, 2022.
Income
Taxes
For the years ended
December 31, 2021and 2020, no income tax expense or benefit was recognized. Our deferred tax assets are comprised primarily of net operating
loss carryforwards. We maintain a full valuation allowance on our deferred tax assets since we have not yet achieved sustained profitable
operations. As a result, we have not recorded any income tax benefit since our inception.
Year
ended December 31, 2020 compared to the year ended December 31, 2019
The following table
sets forth our results of operations for the year ended December 31, 2020, compared to the year ended December 31,
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Change |
|
Operating
Expenses |
|
|
|
|
|
|
|
|
|
|
General
and administrative |
|
$ |
1,425,855 |
|
$ |
1,514,752 |
|
$ |
(88,897) |
|
Research
and development |
|
|
244,155 |
|
|
45,650 |
|
|
198,505 |
|
Total operating
expenses |
|
|
1,670,010 |
|
|
1,560,402 |
|
|
109,608 |
|
Other
Expenses |
|
|
|
|
|
|
|
|
|
|
Fair value adjustment
to bridge note payable |
|
|
378,333 |
|
|
— |
|
|
378,333 |
|
Financing expense |
|
|
— |
|
|
— |
|
|
— |
|
Interest
expense |
|
|
47,021 |
|
|
— |
|
|
47,021 |
|
Total other
expenses |
|
|
425,354 |
|
|
— |
|
|
425,354 |
|
Net
loss |
|
$ |
(2,095,364) |
|
$ |
(1,560,402) |
|
$ |
(534,962) |
|
General
and Administrative Expenses
General and administrative
expenses were $1.4 million and $1.5 million, in the years ended December 31, 2020 and December 31, 2019, respectively, representing a
decrease of $89,000. The decrease was primarily due to reduced travel and conference related expenditures as a result of the COVID-19
pandemic.
Research
and Development Expenses
Our research and development
expenses during the years ended December 31, 2020 and 2019 were approximately $244,000 and $46,000, respectively representing an increase
of $199,000 or approximately 535%. The increase was primary due to increased expenditures on our development programs, and increased amortization
of intangible assets described below.
We
amortize licensed or acquired intellectual property over its expected useful life, included in research and development expenses set out
above. The license from Skinvisible was obtained in October 2019, see “—Research and Development, Patents and Licenses."
Amortization of intangible assets was $104,000 in the year ended December 31, 2020, and $21,000 in the year ended December 31, 2019, representing
an increase of $83,000 or almost 400% in the year ended December 31, 2020. The reason for such increase was a full year of expense in
2020 as compared to three months in 2019.
Other
expenses:
Interest
Expense
In
the fourth quarter of 2020, we issued the 2020 Notes convertible promissory notes in an initial bridge financing with an aggregate face
value of $1,213,333 with a 20% coupon interest. Interest expense was $47,000 in the year ended December 31, 2020. We did not have any
interest expense in the year ended December 31, 2019. See “—Liquidity and Capital Resources.”
Fair
value adjustment to convertible notes payable
We
elected to value the 2020 Notes and the Bridge Notes at fair value, which was remeasured at each reporting period. In the year ended December
31, 2020 we incurred a fair value adjustment of $378,000 related to the 2020 Notes. We did not have any such expense in the year ended
December 31, 2019.
Income
Taxes
For the years ended
December 31, 2020 and 2019, no income tax expense or benefit was recognized. Our deferred tax assets are comprised primarily of net operating
loss carryforwards. We maintain a full valuation allowance on our deferred tax assets since we have not yet achieved sustained profitable
operations. As a result, we have not recorded any income tax benefit since our inception.
Net
Loss
We recorded a net loss
of $2.1 million in for the year ended December 31, 2020, as compared to a net loss of $1.6 million for the year ended December 31, 2019,
representing an increase of $0.53 million or approximately 34%. The increase in net loss was primarily due to increases in interest expense,
the fair value adjustment to the 2020 Notes and a modest increase in operating expenses.
Critical
Accounting Policies and Use of Estimates
The preparation of our
consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities
and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to accrued expenses, valuation allowance on deferred tax assets and valuation of intangible assets. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results
may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and
judgments are regularly reviewed by management on an ongoing basis at the end of each quarter prior to the public release of our financial
results.
Critical accounting
policies are those that, in management’s view, are most important to the portrayal of a company’s financial condition and
results of operations and most demanding on their calls on judgment, often as a result of the need to make estimates about the effect
of matters that are inherently uncertain and may change in subsequent periods. We believe our most critical accounting policies and estimates
relate to:
Use
of estimates
The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors
in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in
the preparation of these financial statements. In addition, other factors may affect estimates, including: expected business and operational
changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected
to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate
future outcomes and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following
areas, among others: settlement of debt or other obligations, fair value of debt instruments and warrants, research and development expense
recognition, intangible asset estimated useful lives and impairment assessments, allowances of deferred tax assets, contingency recognition,
and cash flow assumptions regarding going concern considerations.
Long-lived
assets
Long-lived assets are
comprised of acquired technology and licensed rights to use technology, which are considered platform technology with alternative future
uses beyond the current products in development. Such intangible assets are being amortized on a straight-line basis over their expected
useful life of 10 years.
The Company assesses
the impairment for long-lived assets whenever events or circumstances indicate the carrying value may not be recoverable. Factors we consider
that could trigger an impairment review include the following:
|
● |
Significant
changes in the manner of our use of the acquired assets or the strategy for our overall business, |
|
● |
Significant
underperformance relative to expected historical or projected development milestones, |
|
● |
Significant
negative regulatory or economic trends, and |
|
● |
Significant
technological changes which could render the platform technology obsolete. |
The Company recognizes
impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses,
if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. During the three months ended March
31, 2022 and 2021 and the years ended December 31, 2021, 2020 and 2019, there were no impairment indicators which required an impairment
loss measurement.
Research
and development
Research and development
costs are expensed as incurred. Research and development expenses include personnel costs associated with research and development activities,
including third-party contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. The Company
accrues for costs incurred by external service providers, including contract research organizations and clinical investigators, based
on its estimates of service performed and costs incurred. These estimates include the level of services performed by third parties, patient
enrollment in clinical trials when applicable, administrative costs incurred by third parties, and other indicators of the services completed.
Based on the timing of amounts invoiced by service providers, the Company may also record payments made to those providers as prepaid
expenses that will be recognized as expense in future periods as the related services are rendered.
Fair
value of financial instruments
The Company considers
its cash, accounts payable, accrued expenses and the convertible and bridge notes payable to meet the definition of financial instruments.
The convertible and bridge notes payable are recorded at fair value and the warrants are recorded at fair value. The carrying amounts
of the remaining financial instruments approximated their fair values due to the short maturities.
The Company measures fair value as required by ASC Topic 820, Fair Value Measurements and Disclosures
(“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used
for measuring fair value, and expands disclosures about fair value measurements. ASC Topic 820 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants.
The significant estimates used in
the determining the fair value of the 2020 Notes warrants were as follows:
|
|
|
|
|
|
|
|
|
|
03/13/2022 (1) |
|
12/31/2021(1) |
|
Stock price |
|
$ |
18.50 |
|
$ |
22.75 |
|
Initial exercise
price |
|
$ |
49.75 |
|
$ |
49.75 |
|
Contractual
Term |
|
|
5.0 |
|
|
5.0 |
|
Volatility |
|
|
91.5 |
% |
|
89.2 |
% |
Discount rate |
|
|
1.94 |
% |
|
1.26 |
% |
(1) |
The
warrants issued during 2020 were not exchanged for fixed term warrants until March 13, 2022, therefore the existing warrants were still
considered outstanding at December 31, 2021 and classified as a liability instrument up to the exchange date. |
The significant estimates
used in such calculation of the fair value of the warrants issued in connection with the Bridge Financing were as follows:
|
|
|
|
|
|
|
|
|
|
Transaction Date |
|
Merger Date |
|
|
|
March - May 2021 |
|
10/28/2021 |
|
Stock price |
|
$ |
49.75 |
|
$ |
145.50 |
|
Initial exercise
price |
|
$ |
49.75 |
|
$ |
49.75 |
|
Contractual
Term |
|
|
5.0 |
|
|
5.0 |
|
Volatility |
|
|
92 |
% |
|
89.2 |
% |
Discount rate |
|
|
0.98 |
% |
|
1.18 |
% |
The following shows the movement
of the warrant liability balance during 2021 and the three months ended March 31, 2022.
|
|
|
|
|
|
|
|
|
Bridge Financing |
|
2020 Note |
|
|
Warrants |
|
Warrants |
Beginning Balance
January 1, 2021 |
|
$ |
— |
|
$ |
— |
Warrant value
at issuance (recorded as warrant liability expense) |
|
|
3,783,079 |
|
|
894,113 |
Change in Fair
value of warrants |
|
|
8,627,651 |
|
|
(520,514) |
Reclassification
of warrant liability to an equity instrument |
|
|
(12,410,730) |
|
|
— |
Ending Balance
December 31, 2021 |
|
$ |
— |
|
$ |
373,599 |
|
|
|
|
|
|
|
Change in Fair
value of warrants |
|
|
— |
|
|
(77,237) |
Reclassification
of warrant liability to an equity instrument |
|
|
— |
|
|
(296,362) |
Ending Balance
March 31, 2022 |
|
$ |
— |
|
$ |
— |
The Investor Exchange
Warrant issued to the Investor on the Merger date was determined to be an equity-classified instrument, and accordingly the warrant liability
on such date of $12,410,730 was reclassified to additional paid in capital. The Exchange Warrants issued to the 2020 Noteholders effective
as of March 13, 2022 were determined to be an equity-classified instrument, and accordingly the warrant liability on such date of $296,262
was reclassified to additional paid in capital on that date.
New
accounting pronouncements
The Company has evaluated
all recent accounting pronouncements and believes that none of them will have a material effect on the Company’s financial position,
results of operations or cash flows except as discussed below.
Debt with
Conversion and Other Options and Derivatives and Hedging
The FASB recently issued
ASU 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, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities
and equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by
removing the existing guidance that requires entities to account for beneficial conversion features and cash conversion features in equity,
separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which
the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition,
the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded
features that are both indexed to the issuer’s own stock and classified in shareholders’ equity, by removing certain criteria
required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for
equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting
from the host contract. The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities
to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must
presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in
ASU 2020-06 are effective for public entities, excluding smaller reporting companies as defined, for fiscal years beginning after
December 15, 2021. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023.
Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating
the impact this standard will have on its financial statements.
Earnings
Per Share
In May 2021, the
FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock
Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU addresses
issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment
is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.
Early adoption is permitted. The Company does not believe the impact of the adoption of this pronouncement is significant to the consolidated
financial statements.
Recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated
financial statement presentation or disclosures.
Liquidity
and Capital Resources
We expect to continue
to incur significant and increasing operating losses at least for the foreseeable future. We do not expect to generate product revenue
unless and until we successfully complete development of and obtain regulatory approval for QRX003, or any other future products. Our
net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of planned clinical trials and
our expenditures on other research and development activities. We anticipate that our expenses will continue to increase substantially
throughout 2022 as we advance the clinical development of QRX003 and begin to operate as a publicly traded company.
Future
Funding Requirements
We expected to receive additional
funding through the mandatory exercise provision of the Series C Warrant that was canceled on July 14, 2022, which would have resulted
in proceeds of approximately $9.5 million. In the event the requirements of the mandatory exercise provision of such warrant were not
met, we expected Altium to act on its written commitment to provide funding equal to the $9.5 million expected upon exercise of the Series
C Warrant, at prevailing market rates, and thus we believed that we had sufficient resources to implement our business plan for at least
one year from the issuance of our consolidated financial statements as of and for the year ended December 31, 2021, as well as of and
for the three months ended March 31, 2022 as of the respective dates of the
issuance
of these financial statements. Following the cancellation of the Series C Warrant on July 14, 2022, we no longer expect to receive such
proceeds from Altium, and we do not have sufficient resources to implement our business plan for at least one year from August 2, 2022.
This raises substantial doubt about our ability to continue as a going concern.
We
do not expect to generate revenue from product sales unless and until we successfully complete development and obtain marketing approval
for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. Additional
financing will be required to complete the research and development of our therapeutic targets and our other operating requirements, which
may not be available at acceptable terms, if at all. We have filed a registration statement on Form F-1 related to an offering of securities
on a “reasonable best efforts” basis, as described in this report. However there is no assurance of the successful consummation
of such offering. If we are unable to obtain additional funding when it becomes necessary, the development of our product candidates will
be impacted and we would likely be forced to delay, reduce, or terminate some or all of our development programs, all of which could have
a material adverse effect on our business, results of operations and financial condition.
We will need to obtain
further funding through public or private offerings of our capital stock, debt financing, collaboration and licensing arrangements or
other sources, the requirements for which will depend on many factors, including:
|
● |
the
scope, timing, rate of progress and costs of our drug development efforts, preclinical development activities, the timing of laboratory
testing and clinical trials for our product candidates; |
|
● |
the
number and scope of clinical programs we decide to pursue; |
|
● |
the
cost, timing and outcome of preparing for and undergoing regulatory review of our product candidates; |
|
● |
the
scope and costs of development and commercial manufacturing activities; |
|
● |
the
cost and timing associated with commercializing our product candidates, if they receive marketing approval; |
|
● |
the
extent to which we acquire or in-license other product candidates and technologies; |
|
● |
the
costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims; |
|
● |
our
ability to establish and maintain collaborations on favorable terms, if at all; |
|
● |
our
efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support
the development of our product candidates and, ultimately, the sale of our products, following FDA approval; |
|
● |
our
implementation of operational, financial and management systems; and |
|
● |
the
costs associated with being a public company. |
Adequate
additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital in sufficient amounts
or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of QRX003,
any future product, or potentially discontinue operations.
To the extent that we
raise additional capital through the sale of our equity or convertible debt securities, and pursuant to the exercise of warrants issued
to our investors in connection with the 2020 Notes, the Bridge Financing and the Primary Financing, the ownership interest of our equity
holders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights
of our equity holders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting
or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If we raise additional funds through
collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish
valuable rights to our technologies, future revenue streams, research programs or
proposed products, or to grant licenses
on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we
may be required to delay, limit, reduce or terminate our drug development or future commercialization efforts or grant rights to develop
and market any future product that we would otherwise prefer to develop and market ourselves.
Summary
Statement of Cash Flows for the Three Months Ended March 31, 2022 and 2021
As of March 31, 2022,
we had approximately $5,200,000 in cash.
The table below presents
our cash flows for the three months ended March 31, 2022 and 2021:
|
|
|
|
|
|
|
|
|
Three months ended March 31. |
|
|
2021 |
|
2022 |
Net cash used
in operating activities |
|
$ |
(413,726) |
|
$ |
(2,093,588) |
|
|
|
|
|
|
|
Net cash used
in investing activities |
|
|
(142,500) |
|
|
(50,000) |
|
|
|
|
|
|
|
Net cash provided
by (used in) financing activities |
|
|
1,309,977 |
|
|
(150,000) |
|
|
|
|
|
|
|
Net increase
(decrease) in cash |
|
$ |
753,751 |
|
$ |
(2,293,558) |
Operating
Activities
Net
cash used in operating activities was approximately $2,100,000 and $400,000 for the three months ended March 31, 2022 and 2021, respectively.
The increase in 2022 was primarily due to the increase in research and development and general and administrative expenses, including
significant expenses incurred in connection with becoming a public company and increased compensation costs, as well as a pay-down of
accounts payable from 2021 and partial pay-down of accrued interest on the 2020 Notes.
Investing
Activities
Net
cash used by investing activities was $50,000 and $143,000 in the three months ended March 31, 2022 and 2021, respectively, each representing
payments under the Skinvisible license agreement.
Financing
Activities
Net
cash (used by) financing activities was $150,000 for the three months ended March 31, 2022 representing repayments of amounts due to officers
at the aggregate rate of $50,000 per month. Net cash from financing activities in the three months ended March 31, 2021 was $1,300,000,
primarily representing net proceeds received from the Bridge Financing.
Summary
Statement of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
As of December 31, 2021,
we had approximately $7.5 million in cash.
The table below presents
our cash flows for the years ended December 31, 2021, 2020 and 2019 ($000):
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
2020 |
|
2021 |
|
|
|
|
|
|
|
|
|
|
Net cash used
in operating activities |
|
$ |
(1,299) |
|
$ |
(1,339) |
|
$ |
(5,720) |
|
|
|
|
|
|
|
|
|
|
Net cash used
in investing activities |
|
|
— |
|
|
(125) |
|
|
(625) |
|
|
|
|
|
|
|
|
|
|
Net cash provided
by financing activities |
|
|
1,299 |
|
|
1,787 |
|
|
13,504 |
|
|
|
|
|
|
|
|
|
|
Net increase
in cash and cash equivalents |
|
$ |
— |
|
$ |
324 |
|
$ |
7,159 |
Operating
Activities
Net
cash used in operating activities was $5.7 million, $1.3 million and $1.3 million for the years ended December 31, 2021, 2020 and 2019,
respectively. The increase in 2021 was primarily due to the increase in research and development and general and administrative expenses,
including significant expenses incurred in connection with the Merger and associated regulatory filings and increased compensation costs.
Investing
Activities
Net cash used by investing
activities was $625,000 and $125,000 in the years ended December 31, 2021 and 2020, respectively, each representing payments under the
Skinvisible license agreement (see “—Research and Development, Patents and Licenses"). We did not have any cash flows
from investing activities for the year ended December 31, 2019.
Financing
Activities
Net
cash from financing activities was $13.5 million, $1.8 million and $1.3 million during the years ended December 31, 2021, 2020 and 2019,
respectively. Prior to the initial 2020 Note financing commencing October 2020, all expenditures of the Company were paid for by Company
officers. For 2020, financing activities primarily represented net proceeds received from the 2020 Notes and net increase of amounts due
to Company officers. For 2021, such amounts primarily represented net proceeds received from the Bridge Financing and Primary Financing.
Since the closing of the Primary Financing in October 2021, the Company has been repaying amounts due to officers at the aggregate rate
of $50,000 per month.
2020
Notes
On October 2, 2020,
Quoin Inc. commenced an offering of promissory notes (the “2020 Notes” or “Convertible Notes Payable”) and warrants.
The 2020 Notes were issued at a 25% original issue discount and bear interest at a rate of 20% per annum. The 2020 Notes are due one year
from their respective dates of issuance. In October through December 2020, Quoin Inc. received an aggregate of approximately $910,000
pursuant to this offering, resulting in the issuance of 2020 Notes with an aggregate face value of $1,213,313 and an original issue discount
of $303,333. Approximately 23% of such financing was received from parties who are related to or affiliated with members of Quoin Inc.’s
board of directors. No additional funding from the 2020 Notes was received in the year ended December 31, 2021.
Based
upon the terms agreed to in March 2021 in the Primary Financing, the 2020 Notes were mandatorily convertible into 5,180 ADSs in connection
with the Primary Financing, subject to adjustment. The noteholders also were entitled to receive warrants exercisable at any time after
the issuance date for a number of shares of Quoin Inc.’s common stock that equates to 100% of the “as if converted”
shares as if the 2020 Notes principal and interest were convertible at the lowest price any securities are sold, convertible, or exercisable
into in the Primary Financing or the next round of financing (whichever is lower).
After entering into
the Merger Agreement in March 2021, the terms of the warrants became measurable and were exercisable for 29,388 ADSs at an initial exercise
price of $49.75 per share. The Company determined that these warrants met the criteria to be recorded as a liability instrument. Each
holder agreed to exchange its warrant for the warrant (an “Exchange Warrant”) with substantially the same terms as an Investor
Exchange Warrant and with a number of shares issuable upon the exercise of an Exchange Warrant as upon the exercise of the original warrant
and the same exercise price as under the original warrant and a contractual term of 5 years. The Exchange Warrants have been determined
to warrant equity classification and, as such only the fair value change through the exchange date is included in warrant liability expense
in the Company’s statement of operations.
At the closing of the
Merger, 64,784 ADSs were issued upon the conversion of the principle of the Convertible Notes Payable. In addition, effective as of March
13, 2022, the Company exchanged noteholders’ warrants for warrants on the same terms as the Investor Exchange Warrants exercisable
for 29,388 ADSs, in the aggregate, at the exercise price of $49.75 per ADS.
In December 2021, the
Company concluded that the calculation of ADSs due to the 2020 Noteholders did not account for accrued interest due when the ADSs were
issued. The Company reached cash settlements with, and plans to issue additional ADSs to, the 2020 Noteholders to account for this. The
estimated amount required to settle these obligations was determined to be approximately $744,000 at December 31, 2021 and is included
in accrued liabilities in the consolidated balance sheet. A total of $312,000 was paid to two of the five 2020 Noteholders during the
three months ended March 31, 2022, and the remaining liability of $432,000 is included in Accrued Interest in the Company’s consolidated
balance sheet as of March 31, 2022.
Interest expense, at
the stated interest rate, recognized in the three months ended March 31, 2022 and 2021 was approximately $0 and $66,000, respectively.
Bridge
Financing
In connection with the
Merger Agreement and the Securities Purchase Agreement (described below), Quoin Inc. entered into a “Bridge Purchase Agreement”
on March 24, 2021 with the Investor, pursuant to which the Investor agreed to purchase, and Quoin Inc. agreed to issue notes (the “Bridge
Notes”) in the aggregate principal amount of up to $5,000,000 in exchange for an aggregate purchase price of up to $3,800,000 together
with warrants. The Bridge Notes were purchased in three closings: (i) the first purchase of $2,000,000 on March 25, 2021 (Quoin Inc. received
proceeds of $1,500,000 less fees of $90,000); (ii) the second purchase of $1,700,000 in April 2021 (Quoin Inc. received proceeds of $1,250,000);
and (iii) a third purchase of $1,300,000 in May 2021 (Quoin Inc. received proceeds of $1,000,000 less fees of $185,000). The Bridge Notes
were secured by a lien on Quoin Inc.’s current and future assets, were senior to all other outstanding and future indebtedness of
Quoin Inc. and included covenants limiting future indebtedness, among others.
The Bridge Notes were
issued with a 25% original issue discount, at an interest rate of 15% per annum and had a maturity date of the earliest to occur of: (i)
December 25, 2021, (ii) the date on which Quoin Inc.’s equity is registered under the Exchange Act or is exchanged for equity so
registered or (iii) immediately prior to the closing of the Merger.
The Bridge Notes were
offset against the purchase price under the Securities Purchase Agreement related to the Primary Financing and converted into 100,620
ADSs (including shares held in escrow for the benefit of the Investor) upon the closing of the Primary Financing. The accrued interest
amounting to $393,611 was paid in cash. Interest expense, at the stated interest rate, recognized in the year ended December 31, 2021
was $393,611. Interest expense, at the stated interest rate, recognized in the three months ended March 31, 2022 and 2021 was $0 and $4,900,
respectively.
Upon the funding of
each Bridge Note tranches described above, the Investor received warrants (the “Bridge Warrants”) to purchase a number of
shares of Quoin Inc.’s common stock equal to the aggregate principal amount of the Bridge Notes. Upon the closing of the Primary
Financing, the Bridge Warrants were exchanged for the Investor Exchange Warrant as described below.
Primary
Financing
On October 28, 2021,
the Company completed the private placement transaction with the Investor for an aggregate purchase price of approximately $17,000,000
(comprised of (x) the set off of approximately $5,000,000 of Bridge Notes, and (y) approximately $12,000,000 in cash from the Investor)
(the “Primary Financing”), and the Investor paid the Company approximately $11,504,000, which was net of $393,611 in accrued
interest on the Bridge Notes. The Company incurred an additional approximate $1,000,000 in costs associated with the Primary Financing,
which resulted in the net proceeds of approximately $10,100,000. The Company issued 342,100 ADSs to the Investor, consisting of 85,525
delivered to the Investor on or after the Merger closing and 256,575 initially held in an escrow account for the benefit of the Investor
as per the terms of the Securities Purchase Agreement. All such escrow shares were released to the Investor prior to December 31, 2021.
In addition, pursuant
to the terms of the Securities Purchase Agreement related to the Primary Financing, Quoin Ltd. issued to the Investor warrants to purchase
99,074 ADSs (the “Investor Exchange Warrant”) at an exercise price of $49.75 per ADS, in exchange for Bridge Warrants. The
Investor Exchange Warrant and ordinary shares represented by ADSs underlying the Investor Exchange Warrant were registered with the SEC
on the Registration Statement on Form F-4. An amendment to the Investor Exchange Warrant was entered into in September 2021, which replaced
reset provisions with a fixed number of shares and exercise price.
Quoin Ltd. also issued to the Investor,
effective as of March 13, 2022, the 136th trading day following the consummation of the Merger (i) Series A Warrant to purchase 342,100
ADSs (the “Series A Warrant”) (ii) Series B Warrant to purchase 342,100 ADSs (the “Series B Warrant”) and (iii)
Series C Warrant to purchase 191,174 ADSs (“Series C Warrant” and, together with the Series A Warrant and Series B Warrant,
the “Investor Warrants”). The exercise price for the Investor Warrants is $49.75 per ADS, with Series A Warrant having a five-year
maturity and Series B Warrant and Series C Warrant having a two-year maturity. The Company had the right to require the mandatory exercise
of the Series C Warrant, subject to an effective registration statement being in place for the resale of the shares underlying such warrants
and the satisfaction of equity market conditions as defined in the Series C Warrant. As of the financial statement filing date, such registration
statement on Form F-1was declared effective by the SEC, but not all of the market related conditions were met. Upon the exercise of the
Series C Warrant in full, the Investor had the right to be granted an additional
Series A Warrant to purchase 191,174
ADSs and an additional Series B Warrant to purchase 191,174 ADSs at an exercise price of $49.75 per ADS.
Research
and Development, Patents and Licenses
We devote substantial
research and development resources to developing new products.
Skinvisible:
On October 17, 2019,
Quoin Inc. entered into an exclusive license agreement with Skinvisible Inc. (“Skinvisible”), pursuant to which Skinvisible
granted a license to use certain patented technology for the development of products for commercial sale in the orphan rare skin disease
field, and for the use of a proprietary polymer deliver system technology. This technology is currently being used in the development
of QRX003. In exchange for the license, Quoin Inc. agreed to pay Skinvisible $1,000,000, as well as development and sales milestone payments
and a single digit royalty on all net sales, as defined.
The development milestones
required payments upon achieving development milestones for the first Rare Skin Disease drug product developed using the licensed technology
and the first two Ketamine products, as defined. Payments were originally due upon successful completions of certain clinical milestones
($7,500,000) and obtaining US and EU regulatory approval ($15,000,000). The sales milestones required for every licensed product commercialized
by Quoin Inc. are $10,000,000 upon achievement of $100,000,000 in sales being achieved in the annual period; $25,000,000 upon achievement
of $250,000,000 in sales and $50,000,000 upon the achievement of $400,000,000 in sales in an annual period. On January 27, 2021, Quoin
Inc. and Skinvisible entered into an amendment which modified the clinical milestone payment requirements such that $750,000 would be
payable to Skinvisible upon achievement of specified clinical milestones, and $21,750,000 upon regulatory approval in the U.S. and EU
respectively. No development milestones, sales milestones or royalty payments were due through March 2022.
The agreement has a
termination clause that is triggered if no product has commenced clinical testing 12 months after the date of the agreement or the latest
subsequent amendment. On April 19, 2021, Quoin Inc. and Skinvisible entered into another amendment which established the development deadline
as December 31, 2022. Should the Company not commence clinical testing as defined by the development deadline, the license agreement will
terminate immediately except in certain circumstances as specified in the agreement. This requirement has been met with the initiation
of the clinical study for QRX003 in Netherton Syndrome patients.
The license fee was
originally due in two equal installments of $500,000 payable no later than December 31, 2019 and June 30, 2020, which were not paid. The
agreement was subsequently amended for payment due on July 31, 2020. On July 31, 2020, the agreement was amended to further extend the
payment until September 30, 2020. On September 30, 2020, the agreement was again amended, requiring payment of the license fee only when
outside financing is received, as defined in the agreement. On June 21, 2021, the parties entered into an additional amendment which modified
the payment terms and required a payment of $107,500 on June 26, 2021, a payment of $250,000 within 10 days of the Primary Financing,
and the remaining $250,000 upon the earlier of approval of an Investigatory New Drug application by the FDA or December 31, 2021. This
amendment also eliminated the $750,000 clinical milestone payments described above and reduced the milestone payment upon regulatory approval
of the product containing the Skinvisible technology in either the U.S. or E.U., whichever happens first to a total of $5,000,000. At
March 31, 2022, the license acquisition liability due was $200,000 which was paid in full in May 2022.
The major
research and development vendors utilized by the Company include the following:
Quoin
Inc. entered into three consulting agreements with Axella Research LLC (“Axella”) to provide regulatory and pre- clinical/clinical
services with respect to QRX003 and QRX004. The combined fees of the three agreements are approximately $270,000, payable as milestones
under the three agreements are met. Quoin Inc. has also engaged Axella for additional services pursuant to separate work orders. Further,
Quoin Inc. has two options to pay the milestones due 1) one half in equity (at a pre-negotiated valuation) and one-half in cash or 2)
entirely in cash, in which case a discount of approximately 20% would be applicable. We recognized research and development expenses for
services provided and milestones met of approximately $247,000, $50,000 and $25,000 for the years ended December 31, 2021, 2020 and 2019,
respectively, and have accrued expenses of $193,537, $105,052 and $24,940 at December 31, 2021, 2020 and 2019, respectively. We did not
incur any expense for services provided or milestones met in the three months ended March 31, 2022 or 2021, and we have accrued expenses
of $193,537 at March 31, 2022.
In November 2020, Quoin Inc. entered
into a Master Service Agreement for an initial term of three years with Therapeutics Inc. for managing preclinical and clinical development
for new products in the field of dermatology. The agreement required the execution
of
individual work orders. Quoin Inc. may terminate any work order for any reason with 90 days written notice subject to costs incurred through
termination and a defined termination fee, unless there is a material breach by Therapeutics Inc. The first work order was entered into
in late 2020 for a clinical study at an expected estimated cost of approximately $3,500,000 and expected timing through the first quarter
of 2023. For the year ended December 31, 2021, we incurred approximately $340,000 of research and development costs related to this agreement.
For the three months ended March 31, 2022, and March 31, 2021, the Company incurred a research and development expense under this agreement
of approximately $185,000 and $0, respectively.
In November 2021, we
entered into a commitment with Queensland University of Technology for research related services associated with Netherton Syndrome of
approximately $250,000 for an expected period of eighteen months, of which an initial $25,000 expense was incurred in 2021. We did not
incur any expense for the three months ended March 31, 2022.
Quantitative
and Qualitative Disclosures about Market Risk
We
are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in financial market prices and rates, including interest rates and
foreign exchange rates, of financial instruments. However, our exposure to market risk for changes in interest rates is not significant
as we have no outstanding interest-bearing debt instruments, and we do not hold any interest-generating securities. See “Liquidity
and Capital Resources” above.
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