UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2020

 

Or

 

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

 

For the transition period from _____________ to _____________

 

Qualigen Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   001-37428   26-3474527

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

 

2042 Corte Del Nogal, Carlsbad, California 92011

(Address of principal executive offices) (Zip Code)

 

(760) 918-9165

(Registrant’s telephone number, including area code)

 

n/a

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

 

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

 

Title of each class   Trading Symbol   Name of each exchange on which registered

Common Stock, par value $.001 per

share

  QLGN  

The Nasdaq Capital Market of The Nasdaq

Stock Market LLC

 

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

 

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

 

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

 

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

 

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

 

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

 

As of November 5, 2020, there were 23,060,906 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Page
PART I. Financial Information 1
     
Item 1. Condensed Consolidated Financial Statements (Unaudited) 1
  Condensed Consolidated Balance Sheets as of September 30, 2020 and March 31, 2020 1
  Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended September 30, 2020 and 2019 2
  Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the Three and Six Months Ended September 30, 2020 and 2019 3
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2020 and 2019 4
  Notes to Condensed Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
     
PART II. Other Information 35
     
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 5. Other Information 35
Item 6. Exhibits 36

 

 
 

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   September 30, 2020   March 31, 2020 
ASSETS          
Current assets          
Cash and cash equivalents  $14,465,541   $153,121 
Accounts receivable, net   179,870    417,122 
Accounts receivable — related party, net   189,474    290,180 
Inventory, net   805,383    660,138 
Prepaid expenses and other current assets   1,925,446    98,385 
Total current assets   17,565,714    1,618,946 
Right-of-use asset   483,643     
Property and equipment, net   1,565,275    1,447,514 
Equipment held for lease, net   32,726    64,005 
Intangible assets, net   1,009,453    571,270 
Other assets   18,334    18,279 
Total Assets  $20,675,145   $3,720,014 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities          
Accounts payable  $408,254   $879,264 
Accrued expenses and other current liabilities   726,542    1,243,764 
Notes payable, current portion   787,478    1,913,255 
Deferred revenue, current portion   58,773    105,416 
Deferred revenue — related party   95,160    271,206 
Due to related party   176,046    926,385 
Lease liability   247,050     
Warrant liabilities   20,596,700     
Total current liabilities   23,096,003    5,339,290 
Notes payable, net of current portion   159,670    305,805 
Lease liability, net of current portion   303,894     
Deferred revenue, net of current portion   4,219    2,689 
Total liabilities   23,563,786    5,647,784 
           
Stockholders’ deficit          
Series A convertible preferred stock, $0.01 par value; 2,500,000 shares authorized; 0 and 2,412,887 shares issued and outstanding as of September 30, 2020 and March 31, 2020       24,129 
Series B convertible preferred stock, $0.01 par value; 9,000,000 shares authorized; 0 and 7,707,736 shares issued and outstanding as of September 30, 2020 and March 31, 2020       77,077 
Series C convertible preferred stock, $0.01 par value; 5,500,000 shares authorized; 0 and 3,300,715 shares issued and outstanding as of September 30, 2020 and March 31, 2020       33,007 
Series D convertible preferred stock, $0.01 par value; 2,151,816 shares authorized; 0 and 1,508,305 shares issued and outstanding as of September 30, 2020 and March 31, 2020       15,083 
Series D-1 convertible preferred stock, $0.01 par value; 848,184 shares authorized; 0 and 643,511 shares issued and outstanding as of September 30, 2020 and March 31, 2020       6,435 
Series Alpha convertible preferred stock, $0.001 par value; 7,000 shares authorized; 698 shares and 0 shares issued and outstanding as of September 30, 2020 and March 31, 2020   1     
Common stock, post-merger $0.001 par value; 225,000,000 shares authorized; 22,529,905 shares issued and outstanding as of September 30, 2020 and pre-merger $0.01 par value; 40,000,000 shares authorized; 5,602,214 shares issued and outstanding as of March 31, 2020   22,530    56,026 
Additional paid-in capital   71,082,072    45,161,599 
Accumulated deficit   (73,993,244)   (47,301,126)
Total stockholders’ deficit   (2,888,641)   (1,927,770)
Total Liabilities and Stockholders’ Deficit  $20,675,145   $3,720,014 

 

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

 

1
 

 

QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  

For the Three Months Ended

September 30,

  

For the Six Months Ended

September 30,

 
   2020   2019   2020   2019 
REVENUES                    
Net product sales  $361,218   $526,865   $845,641   $1,087,516 
Net product sales—related party   476,496    634,262    896,140    1,584,446 
Collaborative research revenue       40,000        40,000 
Total revenues   837,714    1,201,127    1,741,781    2,711,962 
                     
EXPENSES                    
Cost of product sales   318,460    408,203    673,887    724,716 
Cost of product sales—related party   603,015    603,890    1,055,510    1,265,157 
General and administrative   2,664,658    202,679    4,644,272    471,696 
Research and development   870,876    200,217    1,468,221    347,858 
Research and development—related party       1,193        540,618 
Sales and marketing   98,045    74,518    186,889    176,912 
Total expenses   4,555,054    1,490,700    8,028,779    3,526,957 
                     
LOSS FROM OPERATIONS   (3,717,340)   (289,573)   (6,286,998)   (814,995)
                     
OTHER EXPENSE (INCOME), NET                    
Change in fair value of warrant liabilities   4,395,300        20,596,700     
Interest expense, net   715    65,480    58,079    135,465 
Other income, net   (2,447)   (248)   (252,561)   (1,240)
Total other expense (income), net   4,393,568    65,232    20,402,218    134,225 
                     
LOSS BEFORE PROVISION FOR INCOME TAXES   (8,110,908)   (354,805)   (26,689,216)   (949,220)
                     
PROVISION FOR INCOME TAXES   2,305    1,420    2,902    1,570 
                     
NET LOSS   (8,113,213)   (356,225)   (26,692,118)   (950,790)
                     
Net loss per common share, basic and diluted  $(0.41)  $(0.06)  $(1.87)  $(0.17)
Weighted—average number of shares outstanding, basic and diluted   19,799,468    5,602,214    14,303,058    5,602,214 

 

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

 

2
 

 

QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Unaudited)

 

  

Series A

Convertible

  

Series B

Convertible

  

Series C

Convertible

  

Series D

Convertible

   Series D-1 Convertible   Series Alpha Convertible                     
   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Additional         
   Shares   Amount
$
   Shares   Amount
$
   Shares   Amount
$
   Shares   Amount
$
   Shares   Amount
$
   Shares   Amount
$
   Shares   Amount
$
   Paid-In Capital   Accumulated Deficit   Total 
Balance at March 31, 2020     2,412,887   $24,129    7,707,736   $77,077      3,300,715   $33,007    1,508,305   $15,083    643,511   $6,435   $   $     —    5,602,214   $56,026   $  45,161,599   $  (47,301,126)  $(1,927,770)
Issuance of Series Alpha preferred shares upon closing of private placement                                           5,010    5    —         4,009,995        4,010,000 
Issuance of common stock for conversion of preferred stock   (2,412,887)   (24,129)   (7,707,736)   (77,077)   (3,300,715)   (33,007)   (1,508,305)   (15,083)   (643,511)   (6,435)   (740)   (1)   7,042,660    7,042    148,690         
Issuance of common stock for conversion of notes payable and accrued interest                                                   1,775,096    1,775    1,582,633        1,584,408 
Effect of reverse recapitalization                                                   (2,095,826)   (52,519)   863,405        810,886 
Issuance of Series Alpha preferred stock for conversion of notes payable                                           350                350,000        350,000 
Shares and warrants issued to advisor upon closing of private placement                                                   1,217,147    1,217    1,103,891        1,105,108 
Fair value of shares issued to advisor upon closing of private placement                                                           (902,250)       (902,250)
Fair value of warrants issued to advisor upon closing of private placement                                                           (202,858)       (202,858)
Stock issued for professional services                                                   46,967    47    239,953        240,000 
Stock-based compensation                                                           358,625        358,625 
Net Loss                                                               (18,578,905)   (18,578,905)
Balance at June 30, 2020      $       $       $       $       $    4,620   $4    13,588,258   $13,588   $52,713,683   $(65,880,031)  $  (13,152,756)
                                                                                      
Issuance of common stock for conversion of preferred stock                                           (3,922)   (3)   5,303,773    5,303    (5,300)        
Shares and (exercised) warrants issued pursuant to Securities Purchase Agreements                                                   3,637,874    3,639    17,997,142        18,000,781 
Commission and offering costs of Securities Purchase Agreements                                                           (835,904)       (835,904)
Stock-based compensation                                                           1,212,451        1,212,451 
Net Loss                                                           —     (8,113,213)   (8,113,213)
Balance at September 30, 2020      $       $       $       $       $    698   $1    22,529,905   $22,530   $71,082,072  $(73,993,244)  $(2,888,641)

 

  

Series A

Convertible

  

Series B

Convertible

  

Series C

Convertible

   Series D Convertible   Series D-1 Convertible   Series Alpha Convertible                     
   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Additional         
   Shares   Amount
$
   Shares   Amount
$
   Shares   Amount
$
   Shares   Amount
$
   Shares   Amount
$
   Shares   Amount
$
   Shares   Amount
$
   Paid-In Capital   Accumulated Deficit   Total 
Balance at March 31, 2019   2,412,887   $  24,129    7,707,736   $  77,077    3,300,715   $  33,007    1,508,305   $15,083    643,511   $6,435       $   —    5,602,214   $  56,026   $  45,153,733   $  (45,513,614)  $(148,124)
Net Loss                                                           45,153,733    (594,565)   (594,565)
Balance at June 30, 2019   2,412,887   $24,129    7,707,736   $77,077    3,300,715   $33,007    1,508,305   $15,083    643,511   $6,435       $    5,602,214   $56,026   $   $(46,108,179)  $(742,689) 
                                                                                      
Net Loss                                                               (356,225)   (356,225)
Balance at September 30, 2019   2,412,887   $24,129    7,707,736   $77,077    3,300,715   $33,007    1,508,305   $15,083    643,511   $6,435       $    5,602,214   $56,026   $45,153,733   $(46,464,404)  $  (1,098,914)

 

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

 

3
 

 

QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Six Months Ended September 30, 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(26,692,118)  $(950,790)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
Depreciation and amortization   60,010    110,792 
Amortization of debt issuance costs       20,834 
Amortization of right-of-use assets   101,869     
Accounts receivable reserves and allowances   4,112    (20,069)
Inventory reserves   (127,455)   (32,402)
Stock-based compensation   1,571,076     
Change in fair value of warrant liabilities   20,596,700     
Changes in operating assets and liabilities:          
Accounts receivable   233,140    111,398 
Accounts receivable — related party   100,706    291,710 
Inventory and equipment held for lease   (17,790)   124,970 
Prepaid expenses and other assets   (627,783)   (10,255)
Accounts payable   (471,010)   185,161 
Accrued expenses and other current liabilities   (353,861)   (28,447
Due to related party   (750,339)   392,353 
Lease liability   (112,166)    
Deferred revenue   (221,159)   (14,711)
Net cash (used in) provided by operating activities   (6,706,068)   180,544 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of property and equipment   (136,217)    
Payments for patents and licenses   (448,458)   (92,843)
Net cash used in investing activities   (584,675)   (92,843)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of Series Alpha preferred shares upon closing of private placement   4,010,000     
Net proceeds from the issuance of notes payable   1,392,463    257,654 
Proceeds from issuance of shares and warrants pursuant to Securities Purchase Agreements   18,000,781     
Commission and offering costs of securities purchase agreements   (835,904)    
Payments on capital lease obligations       (15,462)
Principal payments on notes payable   (964,177)   (430,181)
Net cash provided by (used in) financing activities   21,603,163    (187,989)
           
Net change in cash and cash equivalents   14,312,420    (100,288)
           
CASH AND CASH EQUIVALENTS – beginning of period   153,121    125,123 
CASH AND CASH EQUIVALENTS – end of period  $14,465,541   $24,835 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for:          
Interest  $28,256   $48,564 
Taxes  $4,772   $4,763 
NONCASH FINANCING AND INVESTING ACTIVITIES:          
Issuance of common stock for professional services  $240,000   $ 
Issuance of common stock for conversion of debt  $1,350,198   $ 
Issuance of common stock for conversion of accrued interest  $234,210   $ 
Issuance of common stock for conversion of preferred stock before closing of reverse recapitalization  $148,690   $ 
Issuance of preferred stock for conversion of debt  $350,000   $ 
Fair value of shares issued to advisor upon closing of private placement  $902,250   $ 
Fair value of warrants issued to advisor upon closing of private placement  $202,858   $ 
Effect of reverse recapitalization  $810,886   $ 
Issuance of common stock for conversion of preferred stock after closing of reverse recapitalization  $5,300   $ 
Initial measurement of operating lease right-of-use assets  $663,110   $ 
Net transfers to inventory from equipment held for lease  $   $2,352 

 

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

 

4
 

 

QUALIGEN THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

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

 

Qualigen, Inc. was determined to be the accounting acquirer in a reverse recapitalization based upon the terms of the merger and other factors. All references to financial figures of “the Company” presented in the accompanying condensed consolidated financial statements and in these Notes as of March 31, 2020 and for the three and six months periods ended September 30, 2019 are those of Qualigen, Inc.

 

Basis of Presentation

 

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended March 31, 2020 included on Form 8-K/A, as filed with the SEC on June 29, 2020. The accompanying condensed balance sheet at March 31, 2020 has been derived from the audited balance sheet at March 31, 2020 contained in the above referenced Form 8-K/A. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

 

Accounting Estimates

 

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

 

Cash and Cash Equivalents

 

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

 

5
 

 

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

 

Inventory, Net

 

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

 

Long-Lived Assets

 

The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that assets may not be recoverable. An impairment loss would be recognized when the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets. The amount of impairment loss, if any, will generally be measured as the difference between the net book value of the assets and their estimated fair values. During the three and six months ended September 30, 2020 and 2019, no such impairment losses have been recorded.

 

Accounts Receivable, Net

 

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

 

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

 

Accounts receivable is comprised of the following at:

 

   September 30, 2020   March 31, 2020 
Accounts Receivable  $202,299   $443,663 
Less Allowance   (22,429)   (26,541)
   $179,870   $417,122 

 

Research and Development

 

The Company expenses research and development costs as incurred.

 

6
 

 

Shipping and Handling Costs

 

The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound and outbound freight are generally recorded in cost of sales which totaled approximately $29,000 and $28,000, respectively, for the three months ended September 30, 2020 and 2019, and approximately $55,000 and $59,000, respectively, for the six months ended September 30, 2020 and 2019. Other shipping and handling costs included in general and administrative, research and development, and sales and marketing expenses totaled approximately $2,000 and $1,000 for the three months ended September 30, 2020 and 2019, respectively, and approximately $7,000 and $2,000 for the six months ended September 30, 2020 and 2019, respectively.

 

Revenue from Contracts with Customers

 

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

 

The core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

Step 1: Identify the contract with the customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue when the company satisfies a performance obligation

 

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

 

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

 

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

 

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

 

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

 

7
 

 

Contract balances

 

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

 

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

 

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

 

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

 

During the three and six months ended September 30, 2020 and 2019, product sales are stated net of an allowance for estimated returns of approximately $1,000 and $19,000, respectively.

 

Deferred Revenue

 

Prior to the adoption of ASC 606, payments received in advance from customers pursuant to certain collaborative research license agreements, deposits against future product sales, multiple element arrangements and extended warranties are recorded as a current or non-current deferred revenue liability based on the time from the balance sheet date to the future date of revenue recognition.

 

Research and Licenses

 

Prior to the adoption of ASC 606, the Company recognized research revenue over the term of various agreements, as negotiated contracted amounts are earned or reimbursable costs are incurred related to those agreements. Negotiated contracted amounts are earned in relative proportion to the performance required under the applicable contracts. Nonrefundable license fees are recognized over the related performance period or at the time that the Company has satisfied all performance obligations. Any amounts received prior to satisfying these revenue recognition criteria are recorded as deferred revenue.

 

During the three months ended September 30, 2020 and 2019, the Company recognized collaborative research revenue of $0 and $40,000, respectively. During the six months ended September 30, 2020 and 2019, the Company recognized collaborative research revenue of $0 and $40,000, respectively.

 

8
 

 

Operating Leases

 

Effective April 1, 2020, the Company adopted ASU No. 2018-11, Leases (Topic 842) Targeted Improvements (“Topic 842”). The Company determines if a contract contains a lease at inception. The Company’s material operating lease consists of a single office/manufacturing/warehouse/laboratory space. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company used the incremental secured borrowing rate for an existing secured loan corresponding to the maturities of the leases.

 

The Company’s leases typically contain rent escalations over the lease term. The Company recognizes expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce the Company’s right-of-use (“ROU”) asset related to the lease. These are amortized through the ROU asset as reductions of expense over the lease term. The Company’s office/manufacturing/warehouse/laboratory lease agreement does not contain any material residual value guarantees or material restrictive covenants. The Company has no lease agreements with lease and non-lease components.

 

Related to the adoption of Topic 842, the Company’s policy elections were as follows:

 

The Company has availed itself of this practical expedient for under U.S. GAAP, along with the other practical expedients such as grandfathering lease classifications, and treatment of indirect costs;
   
The Company has elected to exclude short-term leases having initial terms of 12 months or less, if any;
   
The Company has elected not to separate non-lease components from its leases to account for them separately;
   
The Company has elected not to avail itself of the practical expedient of using hindsight to determine the lease term; and
   
The Company has elected the alternative transition option, by recognizing a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption (as of April 1, 2020, however, the adoption of the Topic 842 did not have an effect on retained earnings).

 

Property and Equipment, Net

 

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

 

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

 

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

 

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

 

9
 

 

Intangible Assets, Net

 

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

 

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

 

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

 

The carrying value of the patents of approximately $769,000 and $715,000 at September 30, 2020 and March 31, 2020, respectively, are stated net of accumulated amortization of approximately $300,000 and $293,000, respectively. Amortization of patents charged to operations for the three months ended September 30, 2020 and 2019 were approximately $3,000 for each period, and approximately $7,000 and $6,000 for the six months ended September 30, 2020 and 2019, respectively. Total future estimated amortization of patent costs for the five succeeding years is approximately $7,000 for the remaining six months in the year ending March 31, 2021, approximately $14,000 for each of the years ending March 31, 2022 through 2023, approximately $13,000 for year 2024, approximately $9,000 for year 2025 and approximately $412,000 thereafter.

 

The carrying value of the licenses of approximately $939,000 and $544,000 at September 30, 2020 and March 31, 2020 are stated net of accumulated amortization of approximately $398,000 and $395,000, respectively. Amortization of licenses charged to operations for each of the three month periods ended September 30, 2020 and 2019 was approximately $2,000, and approximately $3,000 for each of the six month periods ended September 30, 2020 and 2019. Total future estimated amortization of license costs is approximately $4,000 for the remaining six months in the year ending March 31, 2021, approximately $7,000 for each of the years ending March 31, 2022 through 2023 and approximately $3,000 for year 2024, $0 for year 2025 and approximately $520,000 thereafter.

 

Derivative Financial Instruments and Warrant Liabilities

 

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

 

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

 

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

 

10
 

 

Fair Value of Financial Instruments

 

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

 

Stock-Based Compensation

 

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

 

Income Taxes

 

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

 

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

 

Sales and Excise Taxes

 

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

 

Warranty Costs

 

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

 

Accrued warranty liabilities were approximately $29,000 and $35,000, respectively, at September 30, 2020 and March 31, 2020 and are included in accrued expenses and other current liabilities on the balance sheets. Warranty costs were approximately $28,000 and $27,000 for the three months ended September 30, 2020 and 2019, respectively, and approximately $59,000 and $55,000 for the six months ended September 30, 2020 and 2019, respectively, and are included in cost of product sales in the statements of operations.

 

11
 

 

Recent Accounting Pronouncements

 

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

 

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

 

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

 

NOTE 2 — LIQUIDITY

 

The Company has incurred recurring losses from operations and has a net working capital deficit and an accumulated deficit at September 30, 2020, and the Company continued to incur losses subsequent to the balance sheet date of September 30, 2020. The Company’s reverse recapitalization transaction with Ritter Pharmaceuticals, Inc. (“Ritter”) closed in May 2020 together with an associated new equity capital raise of approximately $4.0 million, and approximately $1.9 million in convertible notes payable were converted into shares of the Company’s capital stock. In July and August 2020, the Company raised an additional $18.0 million through two Securities Purchase Agreements with a single institutional investor (see Note 12). Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent to the issuance of the interim financial information. However, there is no assurance that profitable operations will ever be achieved, or if achieved, could be sustained on a continuing basis. Also, beyond such 12-month period, planned research and development activities, capital expenditures, clinical and pre-clinical testing, and commercialization activities of the Company’s products are expected to require significant additional financing. Additional financing may not be available on acceptable terms or at all.

 

12
 

 

NOTE 3 — INVENTORY, NET

 

Inventory, net consisted of the following at September 30, 2020 and March 31, 2020:

 

   September 30, 2020   March 31, 2020 
Raw materials  $537,502   $457,425 
Work in process   156,679    117,729 
Finished goods   111,202    84,984 
   $805,383   $660,138 

 

NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of the following at September 30, 2020 and March 31, 2020:

 

   September 30, 2020   March 31, 2020 
Prepaid insurance  $1,643,060   $26,981 
Other prepaid expenses and current assets   282,386    71,404 
   $1,925,446   $98,385 

 

NOTE 5 — PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following at September 30, 2020 and March 31, 2020:

 

   September 30, 2020   March 31, 2020 
Machinery and equipment  $2,364,471   $2,355,165 
Construction in progress–equipment   1,480,400    1,376,000 
Computer equipment   431,091    420,552 
Leasehold improvements   317,157    307,539 
Molds and tooling   260,002    260,002 
Office furniture and equipment   137,374    136,275 
    4,990,495    4,855,533 
Less Accumulated depreciation   (3,425,220)   (3,408,019)
   $1,565,275   $1,447,514 

 

Depreciation expense relating to property and equipment was approximately $10,000 and $17,000 for the three months ended September 30, 2020 and 2019, respectively, and approximately $18,000 and $34,000 for the six months ended September 30, 2020 and 2019, respectively.

 

13
 

 

NOTE 6 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consisted of the following at September 30, 2020 and March 31, 2020:

 

   September 30, 2020   March 31, 2020 
Board compensation  $53,809   $ 
Vacation   221,866    160,024 
Royalties   11,361    26,099 
Research and development   152,815    288,184 
Professional fees   101,647    277,900 
Office rent   10,544     
Deferred rent       77,597 
Warranty costs   28,978    30,119 
Payroll   55,031    35,052 
Patent and license fees       51,007 
Sales and use taxes   12,800    16,755 
Income taxes   6,230    8,100 
Interest   1,820    247,569 
Other   69,641    25,358 
   $726,542   $1,243,764 

 

NOTE 7 — NOTES PAYABLE

 

Notes payable consisted of the following at September 30, 2020 and March 31, 2020:

 

   September 30, 2020   March 31, 2020 
Insurance Financing Agreement with a finance company, monthly payments of $119,943 including interest of 4.54% per annum; secured by an insurance policy; due January 2021  $475,269   $ 
An unsecured promissory note with a bank, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act   449,050     
Equipment Financing Agreement with a bank, monthly payments of $720 including imputed interest at 6.95% per annum; secured by laboratory equipment; due October 2022   16,706    20,370 
Equipment Financing Agreement with a bank, monthly payments of $596 including imputed interest at 6.590% per annum; secured by manufacturing equipment; due July 2021   6,123    9,441 
A Factoring and Security Agreement for up to $2,000,000 with a bank, interest at Prime plus 2% of the amount of advances outstanding and a factoring fee of 0.01% per day of the face amount of each invoice for each calendar day that a factored invoice is outstanding       489,051 
An unsecured convertible note with an investor including interest at 10% per annum; due September 2019, which was extended by the noteholder until May 2020       1,000,000 
A series of unsecured convertible bridge notes with investors, including interest of 8% per annum; due between June 2020 and February 2021       410,000 
A series of unsecured convertible bridge notes with investors, including interest of 8% per annum; due between January and February 2022       290,198 
    947,148    2,219,060 
Less current portion, net of debt issuance costs   (787,478)   (1,913,255)
Notes Payable, net of current portion  $159,670   $305,805 

 

14
 

 

Future maturities of notes payable are as follows as of September 30, 2020:

 

Year Ending March 31,  Amount 
2021 (six months)  $668,505 
2022   235,955 
2023   42,688 
Total balance  $947,148 

 

NOTE 8 – WARRANT LIABILITIES

 

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

 

In exchange for the Series C Warrants, upon closing of the merger with Ritter, the holders received warrants to purchase an aggregate of 4,713,490 shares of the Company’s common stock at $0.72 per share, subject to adjustment. As of September 30, 2020, the warrants have received in exchange for the Series C Warrants remaining terms ranging from 2.9 to 5.0 years. The warrants were determined to be liability-classified pursuant to the guidance in ASC 480 and ASC 815-40, resulting from inclusion of a leveraged ratchet provision for subsequent dilutive issuances.

 

The following table summarizes the activity in the warrants received in exchange for the Series C Warrants for the six months ended September 30, 2020:

 

   Common Stock Warrants (received in exchange for the
Series C Warrants)
 
   Shares  

Weighted–

Average

Exercise

Price

  

Range of Exercise

Price

  

Weighted–

Average

Remaining Life (Years)

 
Total outstanding – March 31, 2020      $           
Series C preferred stock warrants exchanged for common stock warrants upon reverse recapitalization   4,713,490    0.72           
Forfeited                  
Expired                  
Granted                  
Total outstanding – September 30, 2020   4,713,490   $0.72           
Exercisable   4,713,490   $0.72   $0.72    3.25 
Non-Exercisable      $   $     

 

15
 

 

The following table summarizes the Series C Warrants activity for the six months ended September 30, 2019:

 

   Series C Preferred Stock Warrants 
   Shares   Weighted– Average Exercise Price   Range of Exercise Price   Weighted– Average Remaining Life (Years) 
Total outstanding – March 31, 2019   1,441,180   $2.35           
Forfeited                  
Expired                  
Granted                  
Total outstanding – September 30, 2019   1,441,180   $2.35           
Exercisable   

1,441,180

   $           2.35    $ 2.25 – $2.70    5.3
Non-Exercisable      $   $     

 

The following table presents the Company’s fair value hierarchy for its warrant liabilities (all of which arise under the warrants received in exchange for the Series C Warrants) measured at fair value on a recurring basis as of September 30, 2020:

 

   Quoted             
   Market   Significant         
   Prices for   Other   Significant     
   Identical   Observable   Unobservable     
   Assets   Inputs   Inputs     
Warrant liabilities  (Level 1)   (Level 2)   (Level 3)   Total 
Balance as of September 30, 2020  $-   $-   $20,596,700   $20,596,700 

 

The following table is a reconciliation for those items measured at fair value on a recurring basis using Level 3 inputs during the six months ended September 30, 2020:

 

Warrant liabilities  As of September 30, 2020 
Balance, March 31, 2020  $ 
Fair value at issuance date    
Change in fair value included in the statement of comprehensive loss   20,596,700 
Balance, September 30, 2020  $20,596,700 

 

The value of the warrant liabilities is based on a valuation received from an independent valuation firm was determined using a Monte-Carlo simulation.

 

The value of the warrant liabilities (all of which arise under the warrants received in exchange for the Series C Warrants), as of the dates set forth in the table above, was based on upon the following assumptions:

 

   September 30, 2020 
Stock price  $4.95 
Exercise price per share  $

0.72

 
Risk-free interest rate   0.16% — 0.28%
Expected volatility (peer group)   82.00% — 85.00 %
Expected life (in years)   2.85 — 5.02 
Expected dividend yield   0.00%
Number outstanding   4,713,490 

 

16
 

 

NOTE 9 — LEASE OBLIGATIONS

 

The tables below show the initial measurement of the operating lease right-of-use assets and liabilities as of April 1, 2020 and the balances as of September 30, 2020, including the changes during the periods:

 

   Operating lease right-of-use assets 
Operating lease right-of-use-assets obtained in exchange for lease obligation at April 1, 2020:  $585,513 
Less amortization of operating lease right-of-use assets   (101,870)
Operating lease right-of-use assets at September 30, 2020  $483,643 

 

 

   Operating lease liabilities 
Lease liabilities arising from obtaining right-of-use assets at April 1, 2020:  $663,110 
Less principal payments on operating lease liabilities   (112,166)
Lease liabilities at September 30, 2020   550,944 
Less non-current portion   303,894 
Current portion at September 30, 2020  $247,050 

 

As of September 30, 2020, the Company’s operating leases have a weighted-average remaining lease term of 2.1 years and a weighted-average discount rate of 8.9%.

 

Total lease expense was approximately $86,000 and $84,000, respectively, for the three month periods ended September 30, 2020 and 2019, and approximately $173,000 for each of the six month periods ended September 30, 2020 and 2019. Lease expense was recorded in cost of product sales, general and administrative expenses, research and development and sales and marketing expenses.

 

NOTE 10 — COMMITMENTS

 

The Company leases its facilities under a long-term operating lease agreement expiring in October 2022. The agreement generally requires the payment of utilities, real estate taxes, insurance, and repairs. Rent expense was approximately $65,000 for the three month periods ended September 30, 2020 and 2019 and approximately $129,000 for each of the six month periods ended September 30, 2020 and 2019.

 

As of September 30, 2020, future minimum payments during the next five fiscal years and thereafter are as follows:

 

Year Ending March 31,  Amount 
2021 (six months)  $142,398 
2022   290,492 
2023   173,315 
Total   606,205 
Less present value discount   (55,261)
Operating lease liabilities  $550,944 

 

17
 

 

NOTE 11 — RESEARCH AND LICENSE AGREEMENTS

 

Between June 2018 and September 2020, the Company entered into license and sponsored research agreements with the University of Louisville Research Foundation (“ULRF”) for ALAN (AS1411-GNP), a novel molecular-based compound that has shown promise as an anticancer drug. Under the agreements, the Company will take over development, regulatory approval and commercialization of the compound from ULRF and is responsible for maintenance of the related intellectual property portfolio. In return, ULRF received a $50,000 convertible promissory note in payment of an upfront license fee, which was subsequently converted into the Company’s common stock, and the Company will reimburse ULRF for sponsored research expenses of up to $805,000 and prior patent costs of up to $200,000. In addition, the Company has agreed to pay ULRF (i) royalties, on patent-covered net sales associated with the commercialization of anti-nucleolin agent-conjugated nanoparticles, of 4% (on net sales up to a cumulative $250,000,000) or 5% (on net sales above a cumulative $250,000,000), until expiration of the last to expire of the licensed patents, (ii) 30% to 50% of any non-royalty sublicensee income received (50% for sublicenses granted in the first two years of the ULRF license agreement, 40% for sublicenses granted in the third or fourth years of the ULRF license agreement, and 30% for sublicenses granted in the fifth year of the ULRF license agreement or thereafter), (iii) reimbursements for ongoing costs associated with the preparation, filing, prosecution and maintenance of licensed patents, incurred prior to June 2018, and (iv) payments ranging from $100,000 to $5,000,000 upon the achievement of certain regulatory and commercial milestones. Milestone payments for the first therapeutic indication would be $100,000 for first dosing in a Phase 1 clinical trial, $200,000 for first dosing in a Phase 2 clinical trial, $350,000 for first dosing in a Phase 3 clinical trial, $500,000 for regulatory marketing approval and $5,000,000 upon achieving a cumulative $500,000,000 of Licensed Product sales; the Company would also pay another $500,000 milestone payment for any additional regulatory marketing approval for each additional therapeutic (or diagnostic) indication. The Company also must pay ULRF shortfall payments if the total amounts actually paid with respect to royalties and non-royalty sublicensee income for any year is less than the applicable annual minimum (ranging from $10,000 to $50,000) for such year.

 

Sponsored research expenses related to these agreements for the three months ended September 30, 2020 and 2019 were approximately $0 and $93,000, and approximately $2,000 and $126,000 for the six months ended September 30, 2020 and 2019, respectively, and are recorded in research and development expenses in the statements of operations. Patent costs related to these agreements for the three months ended September 30, 2020 and 2019 were approximately $17,000 and $6,000 respectively, and approximately $164,000 and $66,000 for the six months ended September 30, 2020 and 2019, respectively. These amounts are included in intangible assets on the balance sheets.

 

In December 2018, the Company entered into a license agreement with Advanced Cancer Therapeutics, LLC (“ACT”), granting the Company exclusive rights to develop and commercialize a novel aptamer-based anticancer technology. In return, ACT received a $25,000 convertible promissory note in payment of an upfront license fee, which was subsequently converted into the Company’s common stock. In addition, the Company agreed to pay ACT (i) royalties, on net sales associated with the commercialization of ACT-GRO-777/AS1411, of 2% (only if patent-covered and only on net sales above a cumulative $3,000,000) or 1% (if not patent-covered, but only on net sales above a cumulative $3,000,000), until the 15th anniversary of the ACT license agreement and (ii) milestone payments of $100,000 for the Company raising a cumulative total of $2,000,000 in new equity financing after the date of the ACT license agreement, $100,000 upon any first AS1411-based licensed product receiving the CE Mark or similar FDA status, and $500,000 upon cumulative worldwide AS1411-based licensed product net sales reaching $3,000,000. In May 2020, the $100,000 milestone payment for the Company raising a cumulative total of $2,000,000 in new equity financing was triggered. This amount is included in intangible assets as of September 30, 2020. Between April and August 2020, the Company purchased drug compounds from ACT for $10,000, and an Investigational New Drug (IND) application from ACT for an additional $100,000. Upon successful recertification of the drug compounds, ACT will receive an additional $50,000. Of these amounts, for the three and six months ended September 30, 2020, $100,000 and $110,000 respectively, are included in research and development expenses in the statements of operations.

 

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

 

18
 

 

Sponsored research expenses related to these agreements for the three months ended September 30, 2020 and 2019 were approximately $50,000 and $39,000, and approximately $189,000 and $59,000 for the six months ended September 30, 2020 and 2019, respectively, and are recorded in research and development expenses in the statements of operations. Patent costs related to these agreements for the three and six months ended September 30, 2020 and 2019 were approximately $112,000 and $14,000, respectively. These amounts are included in intangible assets on the balance sheets.

 

In June 2020, the Company entered into an exclusive license agreement with ULRF for its intellectual property in the use of AS1411 as a treatment for COVID-19. Under the agreement, the Company will take over development, regulatory approval and commercialization of the compound (for such use) from ULRF and is responsible for maintenance of the related intellectual property portfolio. In return, ULRF received approximately $24,000 for an upfront license fee and reimbursement of prior patent costs. For the three and six months ended September 30, 2020, the Company also incurred approximately $490,000 and $678,000 in costs respectively, related to this agreement which are included in research and development expenses in the statement of operations. In addition, the Company was required to enter into a separate sponsored research agreement with ULRF for at least $250,000. In November 2020, the Company executed a sponsored research agreement supporting up to approximately $430,000 in research (see Note 14).

 

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

 

In November 2015, the Company entered into a long-term development and supply agreement with Prediction Biosciences, SAS, an unrelated party, to develop and manufacture diagnostic tests for use in the stroke point-of-care market. The Company recognizes development revenue and product sales over the performance period of the contract. For the three and six months ended September 30, 2020, there was no collaborative research revenue, and for the three and six months ended September 30, 2019, there was $40,000 collaborative research revenue related to this agreement.

 

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

 

There were product sales of approximately $476,000 and $634,000 for the three months ended September 30, 2020 and 2019, and product sales of approximately $896,000 and $1,584,000 for the six months ended September 30, 2020 and 2019, respectively, related to this agreement.

 

19
 

 

NOTE 12 — STOCKHOLDERS’ DEFICIT

 

As of September 30, 2020, the Company had two classes of capital stock: common stock and Series Alpha convertible preferred stock. As of March 31, 2020, the Company had two classes of capital stock with one being divided into five series: common stock and preferred stock (Series A convertible preferred stock, Series B convertible preferred stock, Series C convertible preferred stock, Series D convertible preferred stock and Series D-1 convertible preferred stock).

 

Common Stock

 

Holders of common stock generally vote as a class with the holders of the preferred stock and are entitled to one vote for each share held. Subject to the rights of the holders of the preferred stock to receive preferential dividends, the holders of common stock are entitled to receive dividends when and if declared by the Board of Directors. Following payment of the liquidation preference of the preferred stock, as of March 31, 2020 any remaining assets would be distributed ratably among the holders of the common stock and, on an as-if-converted basis, the holders of Series C convertible preferred stock, Series D convertible preferred stock and Series D-1 convertible preferred stock) upon liquidation, dissolution or winding up of the affairs of the Company. Following payment of the liquidation preference of the preferred stock, as of September 30, 2020 any remaining assets would be distributed ratably among the holders of the common stock and, on an as-if-converted basis, the holders of Series Alpha convertible preferred stock upon liquidation, dissolution or winding up of the affairs of the Company. The holders of common stock have no preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions.

 

At September 30, 2020, the Company has reserved 14,418,983 shares of authorized but unissued common stock for possible future issuance. At September 30, 2020, shares were reserved in connection with the following:

 

Exercise of issued and future grants of stock options   3,723,356 
Exercise of stock warrants   9,751,712 
Conversion of Series Alpha preferred stock   943,915 
Total   14,418,983 

 

Series A, B, C, D, D-1, Alpha Convertible Preferred Stock

 

At March 31, 2020, there were 2,412,887, 7,707,736, 3,300,715, 1,508,305, 643,511 shares of Series A, B, C, D, D-1 convertible preferred stock outstanding respectively. All shares of Series A, B, C, D, D-1 convertible preferred stock were converted into common stock at the time of the May 2020 reverse recapitalization transaction.

 

In the six-month period ended September 30, 2020, the holder of 4,662 shares of Series Alpha preferred stock converted its shares of Series Alpha preferred stock into an aggregate of 6,304,485 shares of the Company’s common stock, and there were 698 shares of Series Alpha preferred stock outstanding at September 30, 2020.

 

Alpha Securities Purchase Agreements

 

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

 

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

 

Stock Options and Warrants

 

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

 

20
 

 

In April 2020, the Company adopted the 2020 Stock Incentive Plan (the “2020 Plan”) which provides for the granting of incentive or nonstatutory common stock options to qualified employees, officers, directors, consultants and other service providers. At September 30, 2020 and 2019 there were 3,629,500 and 0 outstanding options respectively under the 2020 Plan and there were 427,657 and 0 options available respectively for future grant.

 

The Company has in 2017 and earlier also granted equity classified warrants (originally exercisable to purchase Series C convertible preferred stock, and now instead exercisable to purchase common stock) to service providers, as compensation for services. These are to be differentiated from the Series C Warrants described in Note 8.

 

In addition, the Company has granted warrants for purposes other than compensation for services.

 

The following represents a summary of the options granted to employees and non-employee service providers that are outstanding at September 30, 2020, and changes during the six-month period then ended:

 

   Shares   Weighted– Average Exercise Price   Range of Exercise Price   Weighted– Average Remaining Life (Years) 
Total outstanding – March 31, 2020      $           
Legacy Ritter options   95,124    92.80   $5.75—$1,465.75    1.65 
Granted   3,629,500    5.09   $4.70—$5.10    9.70 
Expired   (1,268)   34.54   $15.00 — 562.50       
Forfeited                  
Total outstanding – September 30, 2020   3,723,356   $        7.33   $4.70—$1,465.75         9.49 
Exercisable (vested)   108,856   $2.72   $4.70—$1,465.75    2.76 
Non-Exercisable (non-vested)   3,614,500   $5.09   $4.70—$5.10    9.70 

 

There was approximately $1.2 million and $0 of compensation costs related to outstanding options for the three months ended September 30, 2020 and 2019, and approximately $1.6 million and $0 for the six months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, there was approximately $13.1 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 2.69 years.

 

No stock options were exercised during the three months ended September 30, 2020.

 

The exercise price for an option issued under the 2020 Plan is determined by the Board of Directors, but will be (i) in the case of an incentive stock option (A) granted to an employee who, at the time of grant of such option, is a 10% stockholder, no less than 110% of the fair market value per share on the date of grant; or (B) granted to any other employee, no less than 100% of the fair market value per share on the date of grant; and (ii) in the case of a non-statutory stock option, no less than 100% of the fair market value per share on the date of grant. The options awarded under the 2020 Plan will vest as determined by the Board of Directors but will not exceed a ten-year period. The weighted average grant date fair value per share of options granted during the six months ended September 30, 2020 was $5.09.

 

21
 

 

Fair Value of Equity Awards

 

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

 

Expected dividend yield. The expected dividend is assumed to be zero, as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock.
   
Expected stock-price volatility. The Company’s expected volatility is derived from the average historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term.
   
Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.
   
Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

 

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

 

  

For the six months

ended

September 30, 2020

 
Expected dividend yield   0.00%
Expected stock-price volatility   102%
Risk-free interest rate   0.33% — 0.59 %
Expected average term of options   6.0 
Stock price  $4.70 — 5.13 

 

The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:

 

   For the six months ended September 30, 
   2020   2019 
General and administrative  $1,312,433   $ 
Research and development   258,643     
Total  $1,571,076   $ 

 

Compensatory Warrants

 

In the six months ended September 30, 2020, in connection with the $4.0 million equity capital raise as part of the May 2020 reverse recapitalization transaction, the Company issued common stock warrants to an advisor and its designees for the purchase of 811,431 shares of the Company’s common stock at an exercise price of $1.11 per share. The issuance cost of these warrants was charged to additional paid-in capital, and did not result in expense on the Company’s statements of operations.

 

In addition, various service providers hold equity classified compensatory warrants issued in 2017 and earlier (originally exercisable to purchase Series C convertible preferred stock, and now instead exercisable to purchase common stock) for the purchase of 668,024 shares of Company common stock at a weighted average exercise price of $2.34 per share. These are to be differentiated from the Series C Warrants described in Note 8. No compensatory warrants were issued in the six months ended September 30, 2019.

 

22
 

 

The following table summarizes the equity classified compensatory warrant activity for the six months ended September 30, 2020:

 

   Common Stock 
   Shares  

Weighted–

Average

Exercise Price

   Range of Exercise Price   Weighted–
Average
Remaining
Life (Years)
 
Total outstanding – March 31, 2020      $           
Series C preferred stock compensatory warrants exchanged for common stock warrants upon reverse recapitalization   668,024    2.34           
Granted to advisor and its designees   811,431    1.11           
Expired                  
Forfeited                  
Total outstanding – September 30, 2020   1,479,455   $1.67           
Exercisable   664,428   $2.34   $2.07 —$2.54    3.78 
Non-Exercisable   815,027   $1.11   $1.11 —$2.54    4.65 

 

The following table summarizes the compensatory warrant activity for the six months ended September 30, 2019:

 

   Series C Preferred Stock Warrants 
   Shares   Weighted– Average Exercise Price   Range of Exercise Price   Weighted– Average Remaining Life (Years) 
Total outstanding – March 31, 2019   756,262   $1.99           
Forfeited   (2,000)   2.25           
Expired                  
Granted                  
Total outstanding – September 30, 2019   754,262   $1.99           
Exercisable   746,142   $1.99    $ 1.83 – $2.25    5.09 
Non-Exercisable   8,120   $2.25   $2.25    6.98 

 

There were no compensation costs related to outstanding warrants for the six months ended September 30, 2020 and 2019. As of September 30, 2020 and 2019, there was approximately $0 and $11,000 of unrecognized compensation cost related to nonvested warrants, respectively.

 

Noncompensatory Equity Classified Warrants

 

In the six months ended September 30, 2020, as a commitment fee, the Company issued noncompensatory equity classified warrants to an investor for the purchase of 270,478 shares of Company common stock at an exercise price of $1.11 per share. In addition, in July 2020 the Company issued noncompensatory equity classified warrants to an investor for the purchase of 2,700,966 shares of Company common stock at an exercise price of $5.25 per share, and in August 2020 the Company issued noncompensatory equity classified warrants to such investor for the purchase of 1,287,829 shares of Company common stock at an exercise price of $6.00 per share. No noncompensatory equity classified warrants were issued in the six months ended September 30, 2019.

 

The following table summarizes the noncompensatory equity classified warrant activity for the six months ended September 30, 2020:

 

   Common Stock 
   Shares  

Weighted–

Average

Exercise Price

   Range of Exercise Price   Weighted–
Average
Remaining
Life (Years)
 
Total outstanding – March 31, 2020      $           
Legacy Ritter warrants   81,455    54.04           
Granted   3,478,985    5.21           
Expired   (1,673)   1,562.50           
Forfeited                  
Total outstanding – September 30, 2020   3,558,767   $5.59           
Exercisable