QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
NOTE 1 – ORGANIZATION AND BUSINESS
Quoin Pharmaceuticals Ltd. (“Quoin Ltd.,”the
“Company,” “we,” “us,” or “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 ordinary shares of the Company. The former holders of common stock of Quoin Inc.
(including shares delivered to Altium Growth Fund, LP (the “Investor” or “Altium”) 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 upon the closing of the transaction.
Effective August 1, 2022, the ratio of ADS
evidencing ordinary shares changed from 1 ADS representing four hundred (400) ordinary shares to 1 ADS representing five thousand (5,000)
ordinary shares, which resulted in a one for 12.5 reverse split of the issued and outstanding ADSs (the “Ratio Change”). All
ADSs and related option and warrant information presented in these financial statements and accompanying footnotes has been retroactively
adjusted to reflect the reduced number of ADSs resulting from the Ratio Change.
Quoin Inc. was incorporated in Delaware on
March 5, 2018. Quoin Inc. is a specialty pharmaceutical company focused on developing and commercializing therapeutic products
that treat rare and orphan diseases. The first lead product is QRX003, a once daily, topical lotion comprised of a broad-spectrum serine
protease inhibitor, formulated with the proprietary Invisicare® technology, to treat Netherton Syndrome (NS). QRX003, is currently
in clinical development in the United States under an open IND application with the FDA. The ongoing study is a randomized, double blinded
assessment of two different doses of QRX003 versus a placebo vehicle in NS patients. The trial will be conducted in up to six clinical
sites in the United States. The first clinical site was open in July 2022. The opening of additional sites is in process, as is patient
recruitment into the study. In addition, the Company. intends to pursue the clinical development of QRX003 in additional rare dermatological
diseases, including Peeling Skin Syndrome, SAM Syndrome and Palmoplantar Keratoderma. To date, no products have been commercialized and
revenue has not been generated.
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 14.
On October 28, 2021, the Company completed
the private placement transaction with the Investor for an aggregate purchase price of approximately $17 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.
7
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
NOTE 2 - LIQUIDITY RISKS AND UNCERTAINTIES
The Company has incurred net losses every year
since inception and had an accumulated deficit of approximately $32.4 million at June 30, 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.
On August 9, 2022, the Company completed
an offering (the “Offering”) of ordinary shares represented by ADSs and pre-funded warrants to purchase ordinary shares represented
by ADSs with each ADS and pre-funded warrant accompanied by an ordinary warrant, for aggregate gross proceeds of $16.8 million, resulting
in net proceeds of approximately $15.0 million, after deducting the placement agent’s fees and estimated offering expenses payable
by the Company (see Note 17). As a result of the completion of the Offering, the Company believes that it has sufficient resources
to effect its business plan for at least one year from the issuance of these consolidated financial statements.
Additional financing will still be required to
complete the research and development of the Company’s therapeutic targets and its other operating requirements until it achieves
commercial profitability, if ever. Such financing may not be available at acceptable terms, if at all. If the Company is unable to obtain
additional funding when it becomes necessary, the development of its product candidates will be impacted and the Company would likely
be forced to delay, reduce, or terminate some or all of its development programs, all of which could have a material adverse effect on
the Company’s business, results of operations and financial condition.
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 June 30, 2022 and for the three and six months then ended. The results of operations for the three and six months
ended June 30, 2022 are not necessarily indicative of the operating results for the year or any other period. These unaudited
condensed consolidated financial statements should be read in conjunction with the audited financial statements and related disclosures
as of December 31, 2021 and for the year then ended which are included in the Company’s Annual Report on Form 20-F
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.
8
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
Reclassification:
Certain 2021 amounts were reclassified to conform
to the current year presentation. The amount reclassified included the short term portion from long term portion due to officers.
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.
The Company is also dependent on several third
party suppliers, in some cases single-source suppliers which include the supplier of the active pharmaceutical ingredient (API) as well
as the contract manufacturer of the drug substance for the expected clinical development.
Coronavirus (“COVID-19”) created a
global pandemic, which commenced in 2020. The Company’s operations, to date, have not been dramatically affected by COVID-19. However,
the extent of any future impact on the Company’s operational and financial performance will depend on the possibility of a resurgence
and resulting severity 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, |
9
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
|
● |
Significant negative regulatory or economic trends, and |
|
● |
Significant technological changes which could render the platform technology obsolete. |
The Company recognizes impairment when the sum
of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured
as the excess of the carrying amount of the asset over its estimated fair value. During the three and six months ended June 30,
2022 and 2021, there were no impairment indicators which required an impairment loss measurement.
Research and development:
Research and development costs are expensed as
incurred. Research and development expenses include personnel costs associated with research and development activities, including third-party
contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. The Company accrues for costs incurred
by external service providers, including contract research organizations and clinical investigators, based on its estimates of service
performed and costs incurred. These estimates include the level of services performed by third parties, patient enrollment in clinical
trials when applicable, administrative costs incurred by third parties, and other indicators of the services completed. Based on the timing
of amounts invoiced by service providers, the Company may also record payments made to those providers as prepaid expenses that will be
recognized as expense in future periods as the related services are rendered.
Stock based compensation:
The Company recognizes compensation costs resulting
from the issuance of stock-based awards to employees, non-employees and directors as an expense in the consolidated statements of operations
over the requisite service period based on a measurement of fair value for each stock-based award. The fair value of each option grant
to employees, non-employees and directors is estimated as of the date of grant using the Black-Scholes option-pricing model, net of actual
forfeitures. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards,
which is generally the vesting period.
The Company’s expected stock volatility
is based on the historical data regarding the volatility of a publicly traded set of peer companies, since it has limited history of trading
as a public company. The Company utilizes the simplified method to estimate the expected term. The risk-free interest rate was determined
by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the
expected term of the award. The expected dividend yield was assumed to be zero as the Company has not paid and dividends since its inception
and does not anticipate paying dividends in the foreseeable future.
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. Tax benefits are recognized
when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely than not that all
or a portion of a deferred tax asset will expire before the Company is able to realize the benefit, or that future deductibility is uncertain.
As of June 30, 2022 and December 31, 2021, the Company maintained a full valuation allowance on its existing deferred tax assets.
10
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
The Company filed U.S. Federal, various state
and international income tax returns. 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 June 30,
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 and six months ended June 30,
2022, the number of shares excluded from the diluted net earnings (loss) per share included outstanding options and warrants to purchase
309,115 ADSs and 1,052,904 ADSs, respectively. For the three and six months ended June 30, 2021, the 5,183 ADS’s issuable
upon the conversion of both the Convertible Notes Payable (as defined below) and the 40,247 ADSs issuable upon conversion of the
Bridge Notes (as defined below) as well as the warrants issued in connection with both of these convertible instruments are not included
in the denominator since their inclusion would be anti-dilutive.
NOTE 4 – CONVERTIBLE NOTES PAYABLE
On October 2, 2020, Quoin Inc. commenced
an offering of promissory notes (the “2020 Notes” or “Convertible Notes Payable”) and warrants. Based upon
the terms agreed to in March 2021 in the Primary Financing (see Note 5), the 2020 Notes were mandatorily convertible into
5,183 ADSs in the Primary Financing, subject to adjustment.
The 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.
11
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
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 in the accompanying consolidated balance sheet. Approximately $312,000 was paid to two of the five 2020 Noteholders
during the three and six months ended June 30, 2022, and the remaining liability is $432,000 as of June 30, 2022. The Company
expects to settle the remaining liability during 2022.
Interest expense, at the stated interest rate,
recognized in the three and six months ended June 30, 2022 and 2021 was approximately $0 and $55,000 and $0 and $121,000, 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 notes (the “Bridge Notes”) in the aggregate principal
amount of up to $5,000,000 in exchange for an aggregate purchase price of up to $3,800,000 together with warrants. The Bridge Notes were
purchased in three closings: (i) the first purchase of $2,000,000 on March 25, 2021 (proceeds of $1,500,000); (ii) the
second purchase of $1,700,000 in April 2021 (proceeds of $1,250,000) ; and (iii) a third purchase of $1,300,000 in May 2021
(proceeds of $1,000,000).
The Bridge Notes were issued with a 25% original
issue discount, at an interest rate of 15% per annum and had a maturity date of the earliest to occur of: (i) December 25, 2021,
(ii) the date on which Quoin Inc.’s equity is registered under the Exchange Act or is exchanged for equity so registered
or (iii) immediately prior to the closing of the Merger.
The Investor and Quoin Inc. agreed that if
the Primary Financing is consummated, the Investor may, at its election, offset the purchase price 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.
12
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
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 and six months ended
June 30, 2022 and 2021 was $0 and $142,100 and $0 and $147,000, respectively.
Bridge Warrants
Upon the funding of each Bridge Note tranches
described above, the Investor received warrants (the “Bridge Warrants”) to purchase a number of shares of Quoin Inc.’s
common stock equal to the aggregate principal amount of the Bridge Notes. The Bridge Warrants had a term of five years from the date
all of the shares underlying the Bridge Warrants are freely tradable. Quoin Inc. issued a total of 99,074 Bridge Warrants in the year
ended December 31, 2021.
Following the closing date of the Merger, on each
of the tenth trading day, the forty-fifth day, the ninetieth day, and the one hundred thirty-fifth day thereafter (each, a “Reset
Date”), if the initial exercise price of the Bridge Warrants is greater than the arithmetic average of 85% of the three lowest weighted
average prices of the post-Merger ordinary shares of the combined company during the ten trading day period immediately preceding the
applicable Reset Date (the “Reset Price”), the exercise price of the Bridge Warrants will be reset 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 in connection with the second and third closing
of the Bridge Notes.
Upon the closing of the Primary Financing, the
Bridge Warrants were exchanged for warrants to purchase 99,074 ADSs at a fixed per share exercise price of $49.75 (“Investor Exchange
Warrants”), as amended, which replaced the reset provisions and modified the fundamental transaction requirements of the Bridge
Warrants. 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. On July 14, 2022 the Company and the Investor entered into an agreement amending the
terms of the Exchange Warrants, see Note 17.
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.
13
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
Quoin Ltd. also was required to issue to
the Investor, effective as of March 13, 2022, the 136th day following the consummation of the Merger (i) Series A Warrant
to purchase 342,100 ADSs (the “Series A Warrant”) (ii) Series B Warrant to purchase 342,100 ADSs (the “Series B
Warrant”) and (iii) Series C Warrant to purchase 191,174 ADSs (“Series C Warrant” and, together with
the Series A Warrant and Series B Warrant, the “Investor Warrants”). The exercise price for the Investor Warrants
is $49.75 per ADS, with Series A Warrant having a five-year maturity, and Series B Warrant and Series C Warrant having
a two-year maturity. The Company had the right to require the mandatory exercise of the Series C Warrant, subject to an effective
registration statement being in place for the resale of the shares underlying such warrants and the satisfaction of equity market conditions,
as defined in the Series C Warrant. On April 22, 2022, the registration statement was declared effective by the Securities and
Exchange Commission, but not all of the market related conditions were met during the period up to July 14, 2022.
On July 14, 2022, the Company and the Investor
entered into an agreement amending the terms of the Series A Warrant and cancelling the Series C Warrant, see Note 17.
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 inputs to the valuation model
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 |
% |
14
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 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
June 30, 2022):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
2020 Notes warrants |
|
— |
|
— |
|
$ |
373,599 |
|
$ |
373,599 |
Total Warrant Liability |
|
— |
|
— |
|
$ |
373,599 |
|
$ |
373,599 |
The following shows the movement of the warrant
liability balance during 2021 and the six months ended June 30, 2022.
|
|
|
|
|
|
|
|
|
Bridge |
|
|
|
|
|
Financing |
|
2020 Note |
|
|
Warrants |
|
Warrants |
Beginning Balance January 1, 2021 |
|
$ |
— |
|
$ |
— |
Warrant value at issuance (recorded as warrant liability expense) |
|
|
3,783,079 |
|
|
894,113 |
Change in fair value of warrants |
|
|
8,627,651 |
|
|
(520,514) |
Reclassification of warrant liability to an equity instrument |
|
|
(12,410,730) |
|
|
— |
Ending balance December 31, 2021 |
|
$ |
— |
|
$ |
373,599 |
|
|
|
|
|
|
|
Change in fair value of warrants |
|
|
— |
|
|
(77,237) |
Reclassification of warrant liability to an equity instrument |
|
|
— |
|
|
(296,362) |
Ending balance June 30, 2022 |
|
$ |
— |
|
$ |
— |
The Investor Exchange Warrant issued to the Investor
on the Merger date was determined to be an equity-classified instrument, and accordingly the warrant liability on such date of $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 $296,362 was reclassified
to additional paid in capital on that date.
NOTE 7 – STOCK BASED COMPENSATION
In March 2022, the board of directors of
the Company approved the Amended and Restated Equity Incentive Plan (the “Amended Plan”) which increased the number of ordinary
shares reserved for issuance under such equity incentive plan to 15% of the Company’s outstanding ordinary shares on a fully-diluted
basis, or 1,826,991,617 ordinary shares, represented by 365,398 ADSs as of June 30, 2022. Under the Amended Plan, the Company may
grant options to its directors, officers, employees, consultants, advisers and service providers. The Amended Plan was approved by the
shareholders at the Company’s Annual General Meeting of Shareholders held on April 12, 2022. The Amended Plan is an amendment
and restatement of the 2014 Global Incentive Option Scheme (the “Scheme”). All options outstanding under the Scheme were fully
vested and had a remaining life of less than one year at the Merger date.
On April 12, 2022, the Company has granted
options to acquire 1,535,714,000 ordinary shares, represented by 307,142 ADSs, at $17.50 per share to founders, directors and employees
and 58,255 shares remained available for issuance. Such options vest over a three or four year period.
15
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
The following table summarizes stock-based activities
under the 2022 Quoin Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
Average |
|
Average |
|
|
ADS Underlying |
|
Exercise |
|
Contractual |
|
|
Options |
|
Price |
|
Terms |
Outstanding at December 31, 2021 |
|
5,744 |
|
$ |
636.74 |
|
0.33 |
Granted |
|
307,142 |
|
$ |
17.50 |
|
9.78 |
Exercised |
|
0 |
|
$ |
0 |
|
0 |
Forfeited/Cancelled |
|
(3,772) |
|
$ |
0 |
|
0 |
Outstanding at June 30, 2022 |
|
309,114 |
|
$ |
19.56 |
|
9.72 |
|
|
|
|
|
|
|
|
Exercisable options at June 30, 2022 |
|
1,972 |
|
$ |
339.80 |
|
0.33 |
The following table summarizes the exercise price
range as of June 30, 2022:
|
|
|
|
|
|
|
Exercise Price |
|
Outstanding Options |
|
Exercisable |
|
|
|
|
|
Options |
$ |
17.50 |
|
307,142 |
|
0 |
$ |
339.80 |
|
1,972 |
|
1,972 |
|
|
|
309,114 |
|
1,972 |
The determination of fair value using the Black-Scholes
model is affected by the Company’s share price as well as assumptions regarding a number of complex and subjective variables, including
expected price volatility, risk-free interest rate and forfeitures.
Stock options granted during the three and six months
ended June 30, 2022 were valued using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
June 30, |
|
|
|
2022 |
|
Expected volatility |
|
|
106.0 |
% |
Risk-free interest rate |
|
|
2.7 |
% |
Expected dividend yield |
|
|
0.0 |
% |
Expected life of options in years |
|
|
6.9 |
|
Exercise Price |
|
$ |
17.50 |
|
Fair value of common stock |
|
$ |
15.38 |
|
Estimated fair value of option |
|
$ |
12.92 |
|
The intrinsic value of outstanding options at
June 30, 2022 was negligible.
Stock based compensation expense was approximately
$229,000 ($30,000 included in research and development expense and $199,000 included in general and administrative expenses) in both the
three and six months ended June 30, 2022. At June 30, 2022, the total unrecognized compensation expense related to non-vested
options was approximately $3,739,529 and is expected to be recognized over the remaining weighted average service period of approximately
3.6 years.
16
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
NOTE 8 – PREPAID EXPENSES
Prepaid expenses are as follows:
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2022 |
|
2021 |
Prepaid R&D costs |
|
$ |
552,159 |
|
$ |
329,033 |
Prepaid insurance |
|
|
273,676 |
|
|
684,191 |
Prepaid other expenses |
|
|
968 |
|
|
2,250 |
Total |
|
$ |
826,803 |
|
$ |
1,015,474 |
NOTE 9 - ACCRUED EXPENSES
Accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2022 |
|
2021 |
Research contract expenses (note 13) |
|
$ |
741,776 |
|
$ |
193,537 |
Payroll |
|
|
573,511 |
|
|
557,937 |
Payroll taxes |
|
|
153,552 |
|
|
199,582 |
Investor relations firm fees (note 13) |
|
|
140,000 |
|
|
584,000 |
Professional fees |
|
|
213,228 |
|
|
144,377 |
Other expenses |
|
|
42,727 |
|
|
5,976 |
Total |
|
$ |
1,864,794 |
|
$ |
1,685,409 |
NOTE 10 – IN-LICENSED TECHNOLOGY
Polytherapeutics
On March 24, 2018, Quoin Inc. entered
into a securities purchase agreement (the “Acquisition Agreement”), in which it agreed to acquire all of the equity interests
in Polytherapeutics, Inc. (the “Seller” or “Polytherapeutics”) for $40,833 and future royalties provided
Quoin Inc. commercializes products using the technology developed by the Seller. The terms of any royalty payments to the Seller
are 4.0% of the net revenue of royalty products, as defined in the Acquisition Agreement, 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 committed Quoin Inc. to pay the Seller for additional research and development consulting services (See
Notes 13 and 15).
17
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
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) as well as sales milestones for every licensed product commercialized
by Quoin Inc.. On January 27, 2021, Quoin Inc. and Skinvisible entered into an amendment which modified the clinical milestone
payment requirements such that $750,000 would be payable to Skinvisible upon achievement of specified clinical milestones, and $21.75
million upon regulatory approval in the U.S. and EU respectively.
The 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, which has been met.
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, 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, the license acquisition
liability due of $250,000 was paid in May 2022.
NOTE 11 - INTANGIBLE ASSETS
Intangible assets are as follows:
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2022 |
|
2021 |
Acquired technology – Polytherapeutics |
|
$ |
40,433 |
|
$ |
40,433 |
Technology license – Skinvisible |
|
|
1,000,000 |
|
|
1,000,000 |
Total cost |
|
|
1,040,433 |
|
|
1,040,433 |
Accumulated amortization |
|
|
(283,850) |
|
|
(231,829) |
Net book value |
|
$ |
756,583 |
|
$ |
808,604 |
The Company recorded amortization expense of approximately
$52,000 ($26,000 per quarter) for both of the six months ended June 30, 2022 and 2021. The Company recorded amortization expense
of approximately $26,000 for both of the three months ended June 30, 2022 and 2021. The annual amortization expense expected
to be recorded for existing intangible assets for the years 2022 through 2026, and thereafter, is approximately $52,000, $104,000,
$104,000, $104,000, $104,000, and $288,000, respectively.
18
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
NOTE 12 - RELATED PARTY TRANSACTIONS
Employment Agreements and Due to Officers/Founders:
In March 2018, Quoin Inc. executed employment
agreements with both of its officers who are also co-founders of Quoin Inc. The employment agreements for both officers/founders
allow for a onetime expense that covers the salaries they would have otherwise been paid for efforts they undertook in the periods since
inception. The salaries and benefits allowances provided for under the employment agreements began to accrue as the services were being
provided by the officers/founders and are included in Due to Officers on the accompanying balance sheet.
Amounts due to the officers/founders consist of
amounts specified in the employment agreements since inception through June 30, 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 $19,466 and $300,000 and $154,466
of such amounts due to officers/founders in the three and six months ended June 30, 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 June 30, 2022
and December 31, 2021 consisted of the following:
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2022 |
|
2021 |
Salaries and allowances |
|
$ |
4,108,500 |
|
|
4,108,500 |
Invoices paid on behalf of the Company |
|
|
315,232 |
|
|
615,232 |
Total |
|
|
4,423,732 |
|
|
4,723,732 |
Less: Short-term portion |
|
|
(600,000) |
|
|
(600,000) |
Long-term portion |
|
$ |
3,823,733 |
|
$ |
4,123,732 |
Expenses
Research and development expense to a related
party, incurred in the three and six months ended June 30, 2022 and 2021 was approximately $12,000 and $0 and $24,000 and $0,
respectively.
See Note 13 for employment agreements.
NOTE 13 – 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 13). 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 June 30, 2022 and the financial statement
issuance date, the Company has not made any payments, the Consultant has not performed any services and the Company has not incurred or
accrued for any expenses. See Note 15 for Consultant’s notification of breach of contract.
19
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
Other research consulting agreements:
Quoin Inc. entered into three consulting
agreements with Axella Research LLC (“Axella”) to provide regulatory and pre- clinical/clinical services to the Company with
respect to QRX003 and QRX004. The combined fees of the three agreements are approximately $270,000, payable as milestones 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 and six months ended June 30, 2022 and 2021, as no services were provided.
In November 2020, Quoin Inc. entered
into a Master Service Agreement for an initial term of three years with Therapeutics Inc. for managing preclinical and clinical
development for new products in the field of dermatology. The agreement required the execution of individual work orders. Quoin Inc.
may terminate any work order for any reason with 90 days written notice subject to costs incurred through termination and a defined
termination fee, unless there is a material breach by Therapeutics Inc. The latest work order was entered into in June 2022
for a clinical study at an expected estimated cost of approximately $4.4 million and expected timing through the second quarter of 2024.
For the three and six months ended June 30, 2022, and June 30, 2021, the Company incurred a research and development
expense under this agreement of approximately $309,000 and $0, and $480,000 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 and six months ended June 30, 2022, the Company incurred research and development costs related to this agreement
of approximately $77,000 and $77,000, respectively.
In May 2022, the Company entered into a commitment
for research related services associated with Scleroderma of approximately $610,000 for an expected period of eighteen months. As
of June 30, 2022, the Company incurred prepaid research and development costs related to this agreement of approximately $220,000.
Consulting agreement:
Quoin Inc. entered into a consulting agreement
with an Investor Relations (IR) firm, which provides for a monthly fee of $14,000. The agreement had an automatic annual renewal
clause and has been in effect since November 2017. The Company owed the IR firm $584,000 as of December 31, 2021, which was
included in accrued expenses in the accompanying balance sheet. In March 2022, the Company entered into a settlement agreement with
the IR firm reducing the liability to $168,000, and recognized $416,000 as other income in the accompanying consolidated statement of
operations. As of June 30, 2022, the balance of this liability is $140,000. For the three and six months ended June 30,
2021, the Company incurred expenses of $42,000 and $42,000, respectively. For the three and six months end June 30, 2022, the
Company incurred expenses of $28,000 and $28,000, respectively.
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.
The Company held its Annual General Meeting on
April 12, 2022, and which the Company’s shareholders approved, a 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.
20
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
Performance milestones and Royalties:
See Note 10 for asset and in-licensed technology
commitments.
Merger agreement commitment:
In consideration for the Share Transfer disclosed
in Note 1, the pre-closing Cellect shareholders received a contingent value right (“CVR”) entitling the holders to earnouts
during the Payment Period (as such term is defined in the Share Transfer Agreement), comprised mainly of payments upon sale, milestone
payments, license fees and exit fees realized by EnCellX. In order to secure such right, shares constituting 40% of EnCellX share capital
are held in escrow.
In connection with the Share Transfer, Cellect
entered into a CVR Agreement with Mr. Eyal Leibovitz, in the capacity of Representative for the holders of CVRs, and Computershare
Trust Company, N.A., a federally chartered trust company (the “Rights Agent”). Under the terms of the CVR Agreement, the holders
of the Cellect ADSs immediately prior to the Merger had the right to receive, through their ownership of CVRs, their pro-rata share of
the net Share Transfer consideration, making such holders of CVRs the indirect beneficiaries of the net payments under the Share Transfer.
CVRs were recorded in a register administered by the Rights Agent but were not certificated. Since the Company will not receive any net
proceeds from the CVR’s, there is no asset or liability recorded in the consolidated financial statements.
NOTE 14 – SHAREHOLDERS’ EQUITY AND SHARE
OWNERSHIP AND RIGHTS
Quoin Inc.
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.
The Company held its Annual General Meeting on April 12, 2022, and which the Company’s shareholders approved an increase to
the authorized share capital to 50,000,000,000 ordinary shares from 12,500,000,000, no par value. These ordinary shares are not redeemable
and do not have any preemptive rights.
The Purchase Agreement (as defined below) 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.
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.
21
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 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. Following an ADS ratio adjustment effective August 1,
2022 (See Note 17), each ADS represents five thousand (5,000) ordinary shares (or a right to receive five thousand (5,000) ordinary
shares). Each ADS will also represent any other securities, cash or other property which may be held by the depositary. ADSs may be held
either (a) directly (1) by having an American Depositary Receipt, also referred to as an ADR, which is a certificate evidencing
a specific number of ADSs or (2) by having uncertificated ADSs, or (b) indirectly by holding a security entitlement in ADSs
through a broker or other financial institution that is a direct or indirect participant in The Depository Trust Company, also called
DTC.
In the three months ended June 30, 2022
the Investor exercised the Series B Warrant pursuant to the alternate cashless exercise rights of such warrant, which gives
the Investor the sole option as elected by the Investor to receive 1.0 ADS for each warrant ADS underlying such warrant, resulting in
the issuance of a total of 342,100 ADSs to the Investor, representing 1,710,500,800 ordinary shares.
Warrants
The following table summarizes warrant activities
during the year ended December 31, 2021 and the six months ended June 30, 2022:
|
|
|
|
|
|
|
|
ADSs |
|
Weighted |
|
|
Underlying |
|
Average |
|
|
Warrants |
|
Exercise Price |
Outstanding at December 31, 2020 |
|
— |
|
|
— |
Granted |
|
128,463 |
|
$ |
49.75 |
Assumed as part of Merger |
|
8,820 |
|
|
137.50 |
Outstanding at December 31, 2021 |
|
137,283 |
|
$ |
55.39 |
Granted |
|
1,257,721 |
|
|
49.75 |
Exercised – cashless |
|
(342,100) |
|
|
— |
Outstanding at June 30, 2022 |
|
1,052,904 |
|
$ |
50.49 |
22
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
The following vested warrants were outstanding
at June 30, 2022, exercisable into ADSs (the Investor Exchange Warrants and Series A Warrant were amended and subsequently exercised
in July and August 2022, and Series C Warrant and the remaining portion of Series A Warrant were cancelled, see Note 17)
:
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Year of |
|
|
ADSs (1) |
|
Price |
|
maturity |
Warrants held by 2020 noteholders |
|
29,388 |
|
$ |
49.75 |
|
2027 |
Exchange warrants held by Investor |
|
99,074 |
|
$ |
49.75 |
|
2026 |
Warrants held by former Cellect warrant holders |
|
8,820 |
|
$ |
137.50 |
|
2024 |
Series A warrant held by Investor (2)(4) |
|
533,274 |
|
$ |
49.75 |
|
2027 |
Series B warrant held by Investor (2)(3)(4) |
|
191,174 |
|
$ |
49.75 |
|
2024 |
Series C warrant held by Investor (2) |
|
191,174 |
|
$ |
49.75 |
|
2024 |
Total |
|
1,052,904 |
|
|
|
|
|
|
1) |
See Note 17 for subsequent amendment |
|
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 |
|
4) |
As of June 30, 2022, the Company expected 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. See Note 17 for subsequent amendment. |
The intrinsic value of outstanding warrants at
June 30, 2022 was negligible.
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 13.
The Consultant has not provided any services and has not complied with other technical requirements under the Research Agreement, and
therefore is considered to be in breach of contract. The Company and the Consultant have had communications with respect to the duration,
commencement date and payment of the consulting services, but a revised agreement has not been reached. No lawsuits have been filed as
of the financial statement issuance date. Should a formal claim or lawsuit be filed, the Company believes it has meritorious defenses.
Nasdaq Listing
On April 22, 2022, we received a letter from
the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying us that we
are no longer in compliance with 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, we did not meet the alternative continued listing requirements based on market value of listed securities
or net income from continuing operations. Based on our Form 6-K, dated August 10, 2022, the Staff has determined that we comply
with the minimum stockholder’s equity requirement. However, if we fail to evidence compliance upon filing our Form 6-K with
23
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
financial statements for the quarter ending September 30,
2022, we may be subject to delisting. At that time, the Staff will provide written notification to us, and we may then appeal the Staff’s
determination to a Hearings Panel.
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 Listing Rule 5550(a)(2).
Since then, the Staff has determined that for the 10 consecutive business days, from August 1 to August 12, 2022, the closing
bid price of our ADSs has been at $1.00 per ADS or greater, and we have regained compliance with the minimum bid price requirement.
As of the date of these consolidated financial
statements, we believe that our stockholders’ equity exceeds $2.5 million due to the completion of the Offering. However, there
can be no assurance that we will be able to maintain compliance with Nasdaq’s minimum stockholders’ equity requirement or
minimum bid-price requirement for continued listing. If our ADSs are delisted from Nasdaq, it will have material negative impacts on the
actual and potential liquidity of our securities, as well as material negative impacts on our ability to raise future capital.
NOTE 16 – LICENSE AGREEMENTS
In November and December 2021, the Company
entered into three license and supply agreements, whereby the Company is entitled to a royalty or other proceeds from the specified product
revenues in select non-US markets from the licensee, if and when the underlying products are approved and commercialized. During six months
ended June 30, 2022, the Company entered into five 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 June 30, 2022 under any of these agreements.
NOTE 17 - SUBSEQUENT EVENTS
Public Offering
On August 9, 2022 the Company completed an
offering (the “Offering”) of 11,050,000,000 ordinary shares represented by 2,210,000 ADSs at a purchase price of $5.00 per
ADS and pre-funded warrants (the “Pre-Funded Warrants”) to purchase 5,750,000,000 ordinary shares represented by 1,150,000
ADSs at a per pre-funded warrant price of $4.9999, with each ADS and Pre-Funded Warrant accompanied by an ordinary warrant (the “Common
Warrant”), for aggregate gross proceeds of $16.8 million, resulting in net proceeds of approximately $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.
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.
24
Table of Contents
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
June 30, 2022 and 2021
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.
Agreements with Altium Growth Fund, LP
and Altium Warrant Exercises
On July 14, 2022, the Company, Quoin Inc.
and Altium entered into an agreement (the “Altium Agreement”), pursuant to which the parties agreed to, among other things,
(i) amend certain terms of the Series A Warrant and Investor Exchange Warrants previously issued to Altium to, 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 the
remaining portion of the Series A Warrant previously issued to Altium, and (iii) terminate the Purchase Agreements, pursuant
to which the warrants were previously issued to Altium. From July 15, 2022 to August 2, 2022, Altium exercised Series A
Warrant to purchase 300,925 ADSs and Investor Exchange Warrants to purchase 99,074 ADSs at $0.00 per ADS exercise price, and we issued
a total of 399,999 ADSs to Altium. As a result of the exercises and cancellation, there are no warrants outstanding to Altium at the financial
statement issuance date.
The exercise price of the warrants held by the
2020 noteholders was also reduced to $0.00 as of July 14, 2022 as a result of the Altium Agreement. From July 15, 2022 to August 10,
2022, the 2020 Noteholders exercised warrants to purchase 26,172 ADSs at $0.00 per ADS exercise price, and we issued a total of 26,172
ADSs to such noteholders. As a result of the exercises, there were 3,216 warrants outstanding at the financial statement issuance date.
Shares and Warrants Outstanding
As a result of the above described events, there
are 23,996,009,799 ordinary shares outstanding as of the financial statement filing date, 99.99% of which are represented by 4,799,129
ADSs.
The warrants outstanding as of the financial statement
filing date are set out below, exercisable into ADSs:
|
|
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Year of |
|
|
ADSs |
|
Price |
|
maturity |
Warrants held by 2020 noteholders |
|
3,216 |
|
$ |
0 |
|
2027 |
Warrants held by former Cellect warrant holders |
|
8,820 |
|
$ |
137.5 |
|
2024 |
Common Warrants issued in the Offering |
|
3,360,000 |
|
$ |
5.00 |
|
2027 |
Total |
|
3,372,036 |
|
|
|
|
|
25
Exhibit 99.2