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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2021

 

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. ☒ 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). ☒ 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 Smaller reporting company
    Emerging growth company

 

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

 

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

 

As of August 12, 2021, there were 28,998,831 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 June 30, 2021 and December 31, 2020   1
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020   2
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020   3
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020   4
  Notes to Condensed Consolidated Financial Statements   5
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   24
Item 3. Quantitative and Qualitative Disclosures About Market Risk   33
Item 4. Controls and Procedures   33
       
PART II. Other Information   34
       
Item 1. Legal Proceedings   34
Item 1A. Risk Factors   34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   34
Item 3. Defaults Upon Senior Securities   35
Item 4. Mine Safety Disclosures   35
Item 5. Other Information   35
Item 6. Exhibits   35

 

 
 

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   June 30, 2021   December 31, 2020 
ASSETS          
Current assets          
Cash and cash equivalents  $15,232,402   $23,976,570 
Accounts receivable, net   766,911    615,757 
Inventory, net   1,073,335    953,458 
Prepaid expenses and other current assets   2,033,857    2,678,894 
Total current assets   19,106,505    28,224,679 
Right-of-use assets   321,076    430,795 
Property and equipment, net   253,261    247,323 
Equipment held for lease, net   5,821    17,947 
Intangible assets, net   183,933    187,694 
Other assets   18,334    18,334 
Total Assets  $19,888,930   $29,126,772 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable  $784,474   $500,768 
Accrued expenses and other current liabilities   1,923,708    746,738 
Notes payable, current portion       131,766 
Deferred revenue, current portion   325,988    486,031 
Operating lease liability, current portion   270,640    254,739 
Warrant liabilities   4,112,100    8,310,100 
Total current liabilities   7,416,910    10,430,142 
Notes payable, net of current portion       6,973 
Operating lease liability, net of current portion   98,145    236,826 
Deferred revenue, net of current portion   112,057    158,271 
Total liabilities   7,627,112    10,832,212 
           
Stockholders’ equity          
Series Alpha convertible preferred stock, $0.001 par value; 7,000 shares authorized; 180 shares issued and outstanding as of June 30, 2021 and December 31, 2020   1    1 
Common stock, $0.001 par value; 225,000,000 shares authorized; 28,902,188 and 27,296,061 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively   28,902    27,296 
Additional paid-in capital   88,058,267    85,114,755 
Accumulated deficit   (75,825,352)   (66,847,492)
Total stockholders’ equity   12,261,818    18,294,560 
Total Liabilities and Stockholders’ Equity  $19,888,930   $29,126,772 

 

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 June 30,
   For the Six Months
Ended June 30,
 
   2021   2020   2021   2020 
REVENUES                    
Net product sales  $1,117,935   $904,067   $2,538,776   $2,315,823 
License revenue           478,654     
Collaborative research revenue               45,000 
Total revenues   1,117,935    904,067    3,017,430    2,360,823 
                     
EXPENSES                    
Cost of product sales   916,624    807,922    2,119,103    1,799,574 
General and administrative   2,952,100    1,979,614    5,826,038    2,897,993 
Research and development   4,508,466    597,345    8,007,840    835,403 
Sales and marketing   135,543    88,844    272,129    181,106 
Total expenses   8,512,733    3,473,725    16,225,110    5,714,076 
                     
LOSS FROM OPERATIONS   (7,394,798)   (2,569,658)   (13,207,680)   (3,353,253)
                     
OTHER (INCOME) EXPENSE, NET                    
Loss (gain) on change in fair value of warrant liabilities   (2,075,100)   16,201,400    (4,198,000)   16,201,400 
Interest (income) expense, net   (12,718)   57,364    (30,061)   148,121 
Other (income), net   (2,352)   (250,114)   (2,894)   (251,272)
Total other (income) expense, net   (2,090,170)   16,008,650    (4,230,955)   16,098,249 
                     
LOSS BEFORE PROVISION FOR INCOME TAXES   (5,304,628)   (18,578,308)   (8,976,725)   (19,451,502)
                     
PROVISION (BENEFIT) FOR INCOME TAXES   605    597    1,135    (22)
                     
NET LOSS  $(5,305,233)  $(18,578,905)  $(8,977,860)  $(19,451,480)
                     
Net loss per common share, basic and diluted  $(0.18)  $(2.12)  $(0.31)  $(2.71)
Weighted—average number of shares outstanding, basic and diluted   28,850,451    8,746,250    28,510,014    7,174,233 

 

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’ EQUITY

(Unaudited)

 

   Shares      Shares      Shares      Shares      Shares      Shares   Amount $   Shares   Amount $   Capital   Deficit   Total 
   Series A Convertible   Series B Convertible   Series C Convertible   Series D Convertible   Series D-1 Convertible   Series Alpha Convertible           Additional         
   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Paid-In   Accumulated     
   Shares   Amount $   Shares   Amount $   Shares   Amount $   Shares   Amount $   Shares   Amount $   Shares   Amount $   Shares   Amount $   Capital   Deficit   Total 
Balance at December 31, 2020      $       $       $       $       $    180   $1    27,296,061   $27,296   $85,114,755   $(66,847,492)  $18,294,560
Stock issued upon cash-exercise of warrants                                                   1,319,625    1,320    243,261        244,581 
Stock issued upon net-exercise of warrants                                                   192,373    192    (192)         
Stock issued for professional services      $       $       $       $       $           25,000   25   101,725      101,750
Fair value of shares issued to advisor upon closing of private placement                                                                                     
Fair value of warrants issued to advisor upon closing of private placement                                                                                     
Stock-based compensation                                                 1,262,123        1,262,123 
Net Loss                                                               (3,672,627)   (3,672,627)
Balance at March 31, 2021                                           180    1    28,833,059    28,833    86,721,672    (70,520,119)   16,230,387 
Stock issued upon cash-exercise of warrants                                                   69,129    69    49,669        49,738 
Stock-based compensation                                                           1,286,926        1,286,926 
Net Loss                                                               (5,305,233)   (5,305,233)
Balance at June 30, 2021                                           180    $1    28,902,188    $28,902    $88,058,267   $(75,825,352)   $12,261,818

  

   Series A Convertible   Series B Convertible   Series C Convertible   Series D Convertible   Series D-1 Convertible   Series Alpha Convertible           Additional         
   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Paid-In   Accumulated     
   Shares   Amount $   Shares   Amount $   Shares   Amount $   Shares   Amount $   Shares   Amount $   Shares   Amount $   Shares   Amount $   Capital   Deficit   Total 
                                                                     
Balance at December 31, 2019   2,412,887   $24,129    7,707,736   $77,077    3,300,715   $33,007    1,508,305   $15,083    643,511   $6,435       $    5,602,214   $56,026   $45,153,733   $(46,428,550)  $(1,063,060)
Stock-based compensation                                                           7,866        7,866 
Net Loss                                                               (872,576)   (872,576)
Balance at March 31, 2020   2,412,887   $24,129    7,707,736   $77,077    3,300,715   $33,007    1,508,305   $15,083    643,511   $6,435       $    5,602,214   $56,026   $45,161,599   $(47,301,126)  $(1,927,770)
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 
Issuance of Series Alpha preferred shares upon closing of private placement                                           5,010    5    -    4,009,995            4,010,000 
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)

 

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 June 30,
 
   2021   2020 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(8,977,860)  $(19,451,480)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   53,736    82,833 
Amortization of right-of-use assets   109,719    50,318 
Accounts receivable reserves and allowances   3,645    19,951 
Inventory reserves   40,644    (2,828)
Stock-based compensation   2,549,049    366,491 
Change in fair value of warrant liabilities   (4,198,000)   16,201,400 
           
Changes in operating assets and liabilities:          
Accounts receivable   (154,799)   798,585 
Inventory and equipment held for lease   (89,617)   20,236 
Prepaid expenses and other assets   746,787    (1,016,203)
Accounts payable   283,706    188,840 
Accrued expenses and other current liabilities   1,176,970    1,072,220 
Lease liability   (122,780)   (54,775)
Deferred revenue   (206,257)   (57,668)
Net cash used in operating activities   (8,785,057)   (1,782,080)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of property and equipment   (107,798)   (110,427)
Payments for patents and licenses   (6,893)   (382,732)
Net cash used in investing activities   (114,691)   (493,159)
           
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       1,682,661 
Proceeds from warrant exercises   294,319     
Principal payments on notes payable   (138,739)   (1,164,000)
Net cash provided by financing activities   155,580    4,528,661 
           
Net change in cash and cash equivalents   (8,744,168)   2,253,422 
           
CASH AND CASH EQUIVALENTS – beginning of period   23,976,570    128,696 
CASH AND CASH EQUIVALENTS – end of period  $15,232,402   $2,382,118 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for:          
Interest  $1,683   $25,487 
Taxes  $2,200   $3,014 

 

NONCASH FINANCING AND INVESTING ACTIVITIES:

          
Issuance of common stock for professional services  $101,750   $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  $   $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 
Initial measurement of operating lease right-of-use assets  $   $663,110 
Net transfers to inventory from equipment held for lease  $1,304   $ 

 

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 AND ESTIMATES

 

Organization

 

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

 

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

 

Basis of Presentation

 

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

 

Principles of Consolidation

 

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

 

Accounting Estimates

 

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

 

Cash and Cash Equivalents

 

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

 

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

 

5
 

 

Inventory, Net

 

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

 

Long-Lived Assets

 

The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that assets may not be recoverable. An impairment loss would be recognized when the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets. The amount of impairment loss, if any, will generally be measured as the difference between the net book value of the assets and their estimated fair values. During the three months and six months periods ended June 30, 2021 and 2020, no such impairment losses have been recorded. All long-lived assets of the Company are located in the U.S.

 

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 creditworthiness 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:

 

   June 30, 2021   December 31, 2020 
Accounts Receivable  $784,429   $629,630 
Less Allowance   (17,517)   (13,873)
Accounts receivable, net  $766,911   $615,757 

 

Research and Development

 

The Company expenses research and development costs as incurred.

 

Shipping and Handling Costs

 

The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound and outbound freight are generally recorded in cost of sales which totaled approximately $28,000 and $26,000, respectively, for the three months ended June 30, 2021 and 2020, and approximately $58,000 and $56,000, respectively, for the six months ended June 30, 2021 and 2020. Other shipping and handling costs included in general and administrative, research and development, and sales and marketing expenses totaled approximately $4,000 and $6,000 for the three months ended June 30. 2021 and 2020, respectively, and approximately $5,000 and $6,000 for the six months ended June 30, 2021 and 2020, respectively.

 

Revenue from Contracts with Customers

 

Effective April 1, 2020, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), 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 the adoption date 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.

 

6
 

 

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

 

Product Sales

 

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

 

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

 

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

 

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

 

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

 

License Revenue

 

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

 

If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from nonrefundable upfront fees allocated to the license when the license is transferred to the customer and the customer can benefit from the license. For licenses that are bundled with other performance obligations, management uses judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable upfront fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of progress and related revenue recognition. During the three months ended June 30, 2021 and 2020, the Company recognized license revenue of $0 and $0, respectively, and during the six months ended June 30, 2021 and 2020, the Company recognized license revenue of $479,000 and $0, respectively.

 

7
 

 

Collaborative Research Revenue

 

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

 

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

 

Collaborative research revenue is recognized as research services are performed over the development periods for each agreement. During the three months ended June 30, 2021 and 2020, the Company recognized collaborative research revenue of $0 and $0, respectively, and during the six months ended June 30, 2021 and 2020, the Company recognized collaborative research revenue of $0 and $45,000, respectively.

 

Contract Balances

 

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

 

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

 

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

 

8
 

 

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

 

During the three months ended June 30, 2021 and 2020, product sales are stated net of an allowance for estimated returns of approximately $0 and $12,000, respectively. During the six months ended June 30, 2021 and 2020, product sales are stated net of an allowance for estimated returns of approximately $0 and $24,000 respectively.

 

Deferred Revenue

 

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

 

Operating Leases

 

The Company adopted ASC Topic 842, Leases (“Topic 842”) in the nine-months transition period ended December 31, 2020. In accordance with the guidance in Topic 842, the Company recognizes lease liabilities and corresponding right-of-use-assets for all leases with terms of greater than 12 months. Leases with a term of 12 months or less will be accounted for in a manner similar to the guidance for operating leases prior to the adoption of Topic 842. Refer to Recent Accounting Pronouncements below and Note 8 for more information.

 

Property and Equipment, Net

 

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

 

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

 

9
 

 

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

 

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

 

Intangible Assets, Net

 

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

 

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

 

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

 

The carrying value of the patents of approximately $168,000 and $169,000 at June 30, 2021 and December 31, 2020, respectively, are stated net of accumulated amortization of approximately $311,000 and $303,000, respectively. Amortization of patents charged to operations for the three months ended June 30, 2021 and 2020 was approximately $3,000 for each period, and for the six months ended June 30, 2021 and 2020 was approximately $6,000 for each period. Total future estimated amortization of patent costs for the five succeeding years is approximately $8,000 for the remaining six months in the year ending December 31, 2021, approximately $15,000 for each of the years ending December 31, 2022 through 2023, approximately $11,000 for year 2024, approximately $11,000 for year 2025 and approximately $108,000 thereafter.

 

The carrying value of the in-licenses of approximately $16,000 and $19,000 at June 30, 2021 and December 31, 2020 are stated net of accumulated amortization of approximately $403,000 and $400,000, respectively. Amortization of licenses charged to operations for the three months ended June 30, 2021 and 2020 was approximately $2,000, and for the six months ended June 30, 2021 and 2020 was approximately $4,000 and $3,000, respectively. Total future estimated amortization of license costs is approximately $4,000 for the remaining six months in the year ending December 31, 2021, approximately $7,000 for the year ending December 31, 2022 and approximately $5,000 for the year ending December 31, 2023.

 

Derivative Financial Instruments and Warrant Liabilities

 

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. Depending on the features of the derivative financial instrument, the Company uses either the Black-Scholes option-pricing model or a Monte Carlo simulation to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period (see Note 7).

 

10
 

 

Fair Value Measurements

 

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

 

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

 

Fair Value of Financial Instruments

 

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

 

Stock-Based Compensation

 

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

 

Income Taxes

 

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

 

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

 

Sales and Excise Taxes

 

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

 

11
 

 

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 $48,000 and $25,000, respectively, for the periods ended June 30, 2021 and December 31, 2020 and are included in accrued expenses and other current liabilities on the balance sheets. Warranty costs were approximately $20,000 and $31,000 for the three months ended June 30, 2021 and 2020, respectively, and approximately $41,000 and $58,000 for the six months ended June 30, 2021 and 2020, respectively, and are included in cost of product sales in the statements of operations.

 

Net Loss Per Share

 

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, stock options, employee stock purchase plan rights, restricted stock units, and warrants, and convertible preferred stock are considered to be common stock equivalents but are not included in the calculations of diluted net loss per share for the periods presented as their effect would be anti-dilutive. The Company incurred net losses for all periods presented and there were no reconciling items for potentially dilutive securities. More specifically, at June 30, 2021 and 2020, stock options, warrants, and convertible preferred stock exercisable or convertible for approximately 13.9 million shares and 16.5 million shares, respectively, were excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive. Comprehensive loss is the same as net loss for all periods presented.

 

Recent Accounting Pronouncements

 

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

 

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

 

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 prior 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.

 

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.

 

12
 

 

NOTE 2 — LIQUIDITY

 

The Company has incurred recurring losses from operations and has an accumulated deficit at June 30, 2021, and the Company expects to continue to incur losses subsequent to the balance sheet date of June 30, 2021. The Company’s reverse recapitalization transaction with Ritter closed in May 2020 together with an associated new equity capital raise of approximately $4.0 million, and approximately $1.9 million in convertible notes payable were converted into shares of the Company’s capital stock. In July, August and December 2020, the Company raised an additional $30.0 million through three Securities Purchase Agreements with a single institutional investor (see Note 10). Based on the Company’s current cash position, currently planned expenditures and level of operations, the Company believes it has sufficient capital to fund operations for the 12-month period subsequent to the issuance of the interim financial information. However, there is no assurance that profitable operations will ever be achieved, or if achieved, could be sustained on a continuing basis. Also, beyond such 12-month period, planned research and development activities, capital expenditures, clinical and pre-clinical testing, and commercialization activities of the Company’s products are expected to require significant additional financing. Additional financing may not be available on acceptable terms or at all.

 

NOTE 3 — INVENTORY, NET

 

Inventory, net consisted of the following at June 30, 2021 and December 31, 2020:

 

   June 30, 2021   December 31, 2020 
Raw materials  $779,936   $579,765 
Work in process   241,677    309,826 
Finished goods   51,722    63,867 
Inventory net  $1,073,335   $953,458 

 

As of June 30, 2021 and December 31, 2020, total inventory is recorded net of inventory reserves of $149,000 and $108,000, respectively.

 

NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of the following at June 30, 2021 and December 31, 2020:

 

   June 30, 2021   December 31, 2020 
Prepaid insurance  $1,916,387   $1,307,864 
Prepaid manufacturing expenses   49,617    1,181,029 
Prepaid investor relations expenses   49,127    150,000 
Other prepaid expenses   18,726    40,001 
Prepaid expenses and other current assets  $2,033,857   $2,678,894 

 

NOTE 5 — PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following at June 30, 2021 and December 31, 2020:

 

   June 30, 2021   December 31, 2020 
Machinery and equipment  $2,409,946   $2,401,470 
Construction in progress–equipment   94,717    104,400 
Computer equipment   472,094    443,865 
Leasehold improvements   327,894    321,033 
Molds and tooling   260,002    260,002 
Office furniture and equipment   143,013    138,699 
Property and equipment, gross   3,707,666    3,669,469 
Less Accumulated depreciation   (3,454,405)   (3,422,146)
Property and equipment, net  $253,261   $247,323 

 

13
 

 

Depreciation expense relating to property and equipment was approximately $17,000 and $9,000 for the three months ended June 30, 2021 and 2020, respectively, and $32,000 and $18,000 for the six months ended June 30, 2021 and 2020, respectively.

 

NOTE 6 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consisted of the following at June 30, 2021 and December 31, 2020:

 

   June 30, 2021   December 31, 2020 
Board compensation  $50,776   $15,091 
Vacation   290,587    230,457 
Royalties   1,078    491 
Research and development   744,640    237,504 
Professional fees   271,377    58,261 
Warranty costs   47,854    24,871 
Payroll   176,275    4,566 
Patent and license fees       7,204 
Franchise, sales and use taxes   21,130    30,353 
Income taxes   2,261    3,326 
Other   317,730    134,614 
Accrued expenses and other current liabilities  $1,923,708   $746,738 

 

NOTE 7 – 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 June 30, 2021, the warrants received in exchange for the Series C Warrants have remaining terms ranging from 2.4 to 3.0 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 June 30, 2021:

 

  

Common Stock Warrants (received in exchange for the

Series C Warrants)

 
   Shares  

Weighted–

Average

Exercise

Price

  

Range of Exercise

Price

  

Weighted–

Average

Remaining
Life (Years)

 
Total outstanding – December 31, 2020   3,378,596   $0.72           
Common stock warrants received in exchange for Series C preferred stock warrants upon reverse recapitalization   -    -           
Exercised   (542,737)   0.72           
Forfeited   (36,097)   0.72           
Expired                  
Granted                  
Total outstanding – June 30, 2021   2,799,762   $0.72           
Exercisable   2,799,762   $0.72   $0.72    2.5 

 

Of the 542,737 shares issued upon the exercise of warrants (previously received in exchange for the Series C Warrants) during the six months ended June 30, 2021, 156,861 shares were issued upon net-exercises rather than upon exercises for cash.

 

The following table summarizes the activity in the warrants received in exchange for the Series C Warrants activity for the six months ended June 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 – December 31, 2019      $           
Common stock warrants received in exchange for Series C preferred stock warrants upon reverse recapitalization   4,713,490    0.72           
Forfeited                  
Expired