Full Press Release Details
242330247997803278032P3Y4846605670930335465079965266
QUOIN PHARMACEUTICALS LTD.
| Pag e | |
| Condensed Consolidated Financial Statements (Unaudited) | |
| Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 | 3 |
| Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 | 4 |
| Consolidated Statements of Shareholders' Equity for the three and nine months ended September 30, 2022 and 2021 | 5 |
| Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 | 6 |
| Notes to Consolidated Financial Statements | 7 - 22 |
QUOIN PHARMACEUTICALS LTD.
Consolidated Balance Sheets
| September 30, | December 31, | |||||
| 2022 | 2021 | |||||
| (Unaudited) | (Audited) | |||||
| ASSETS | ||||||
| Current assets: | ||||||
| Cash | $ | 5,249,832 | $ | 7,482,773 | ||
| Investments | 9,911,200 | |||||
| Prepaid expenses | 496,686 | 1,015,474 | ||||
| Total current assets | 15,657,718 | 8,498,247 | ||||
| Intangible assets, net | 730,572 | 808,604 | ||||
| Deferred loan costs | 50,000 | 50,000 | ||||
| Total assets | $ | 16,438,290 | $ | 9,356,851 | ||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
| Current liabilities: | ||||||
| Accounts payable | $ | 280,698 | $ | 923,239 | ||
| Accrued expenses | 1,569,920 | 1,685,409 | ||||
| Accrued license acquisition | 250,000 | |||||
| Accrued interest and financing expense | 1,146,251 | 743,840 | ||||
| Due to officers short term | 600,000 | 600,000 | ||||
| Warrant liability | 373,599 | |||||
| Total current liabilities | 3,596,869 | 4,576,087 | ||||
| Due to officers long term | 3,673,733 | 4,123,732 | ||||
| Total liabilities | $ | 7,270,602 | $ | 8,699,819 | ||
| Commitments and contingencies | ||||||
| Shareholders' equity: | ||||||
| Ordinary shares, no par value per share, 50,000,000,000 ordinary shares authorized 24,233,024,799 ( 4,846,605 AD S's) ordinary shares issued and outstanding at September 30, 2022 and 3,354,650,799 ( 670,930 AD S's) at December 31, 2021 | $ | $ | ||||
| Treasury Stock, 2,641,693 ordinary shares | ( 2,932,000 ) | ( 2,932,000 ) | ||||
| Additional paid in capital | 47,615,475 | 31,659,017 | ||||
| Accumulated deficit | ( 35,515,787 ) | ( 28,069,985 ) | ||||
| Total shareholders' equity | 9,167,688 | 657,032 | ||||
| Total liabilities and shareholders' equity | $ | 16,438,290 | $ | 9,356,851 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements
QUOIN PHARMACEUTICALS LTD.
Consolidated Statements of Operations (Unaudited)
| Nine months ended September 30, | Three months ended September 30, | |||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
| Operating expenses | ||||||||||||
| General and administrative | $ | 5,112,002 | $ | 2,525,366 | $ | 1,582,059 | $ | 1,042,783 | ||||
| Research and development | 2,059,769 | 556,064 | 745,506 | 259,996 | ||||||||
| Total operating expenses | 7,171,771 | 3,081,430 | 2,327,565 | 1,302,779 | ||||||||
| Other (income) and expenses | ||||||||||||
| Forgiveness of accounts payable | ( 416,000 ) | |||||||||||
| Fair value adjustment to convertible notes payable | 1,250,000 | |||||||||||
| Change in fair value of warrant liability | ( 77,237 ) | 4,522,844 | ( 146,808 ) | |||||||||
| Financing expense | 275,000 | |||||||||||
| Unrealized loss | 3,053 | 3,053 | ||||||||||
| Interest income | ( 15,132 ) | ( 15,132 ) | ||||||||||
| Interest and financing expense | 714,081 | 516,276 | 714,081 | 248,165 | ||||||||
| Total other expense | 208,765 | 6,564,120 | 702,002 | 101,357 | ||||||||
| Net loss | $ | ( 7,380,536 ) | $ | ( 9,645,550 ) | $ | ( 3,029,567 ) | $ | ( 1,404,136 ) | ||||
| Deemed dividend on warrant modification | ( 65,266 ) | ( 65,266 ) | ||||||||||
| Net loss attributable to shareholders | $ | ( 7,445,802 ) | $ | ( 9,645,550 ) | $ | ( 3,094,833 ) | $ | ( 1,404,136 ) | ||||
| Loss per ADS | ||||||||||||
| Loss per ADS | ||||||||||||
| Basic | $ | ( 4.65 ) | $ | ( 40.14 ) | $ | ( 0.94 ) | $ | ( 5.84 ) | ||||
| Fully-diluted | $ | ( 4.65 ) | $ | ( 40.14 ) | $ | ( 0.94 ) | $ | ( 5.84 ) | ||||
| Weighted average number of ADS's outstanding | ||||||||||||
| Basic | 1,601,396 | 240,292 | 3,291,806 | 240,292 | ||||||||
| Fully-diluted | 1,601,396 | 240,292 | 3,291,806 | 240,292 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements
QUOIN PHARMACEUTICALS LTD.
Consolidated Statements of Shareholders' Equity (Unaudited)
Three and Nine months ended September 30, 2021
| No | Additional | |||||||||||||||||
| Ordinary | Par | Treasury | Paid in | Accumulated | ||||||||||||||
| Shares | ADS's | Value | Stock | Capital | Deficit | Total | ||||||||||||
| Balance at December 31, 2020 | 1,201,460,800 | 240,292 | $ | $ | 100 | $ | ( 6,607,397 ) | $ | ( 6,607,297 ) | |||||||||
| Net loss | ( 3,903,871 ) | ( 3,903,871 ) | ||||||||||||||||
| Balance at March 31, 2021 | 1,201,460,800 | 240,292 | $ | $ | 100 | $ | ( 10,511,268 ) | $ | ( 10,511,168 ) | |||||||||
| Net loss | ( 4,337,543 ) | ( 4,337,543 ) | ||||||||||||||||
| Balance at June 30, 2021 | 1,201,460,800 | 240,292 | $ | $ | 100 | $ | ( 14,848,811 ) | $ | ( 14,848,711 ) | |||||||||
| Net loss | ( 1,404,136 ) | ( 1,404,136 ) | ||||||||||||||||
| Balance at September 30, 2021 | 1,201,460,800 | 240,292 | $ | $ | 100 | $ | ( 16,252,947 ) | $ | ( 16,252,847 ) |
Three and Nine months ended September 30, 2022
| No | Additional | |||||||||||||||||
| Ordinary | Par | Treasury | Paid in | Accumulated | ||||||||||||||
| Shares | ADS's | Value | Stock | Capital | Deficit | Total | ||||||||||||
| Balance at December 31, 2021 | 3,354,650,799 | 670,930 | $ | ( 2,932,000 ) | $ | 31,659,017 | $ | ( 28,069,985 ) | $ | 657,032 | ||||||||
| Net loss | ( 1,682,802 ) | ( 1,682,802 ) | ||||||||||||||||
| Cashless exercise of warrants | 3,200 | 1 | ||||||||||||||||
| Reclassification of warrant liability upon issuance of Exchange warrant | 296,362 | 296,362 | ||||||||||||||||
| Balance at March 31, 2022 | 3,354,653,999 | 670,931 | $ | ( 2,932,000 ) | $ | 31,955,379 | $ | ( 29,752,787 ) | $ | ( 729,408 ) | ||||||||
| Net loss | ( 2,668,167 ) | ( 2,668,167 ) | ||||||||||||||||
| Stock based compensation | 229,441 | 229,441 | ||||||||||||||||
| Cashless exercise of warrants | 1,710,500,800 | 342,100 | ||||||||||||||||
| Balance at June 30, 2022 | 5,065,154,799 | 1,013,031 | $ | ( 2,932,000 ) | $ | 32,184,820 | $ | ( 32,420,954 ) | $ | ( 3,168,134 ) | ||||||||
| Net loss | ( 3,029,567 ) | ( 3,029,567 ) | ||||||||||||||||
| Stock based compensation | 267,283 | 267,283 | ||||||||||||||||
| Issuance of ADS and Pre-Funded Warrants, net | 16,800,000,000 | 3,360,000 | 14,904,569 | 14,904,569 | ||||||||||||||
| Cashless exercise of warrants | 2,146,935,000 | 429,387 | ||||||||||||||||
| Settlement of accrued expenses | 220,935,000 | 44,187 | 193,537 | 193,537 | ||||||||||||||
| Deemed dividend on warrant modification | 65,266 | ( 65,266 ) | ||||||||||||||||
| Balance at September 30, 2022 | 24,233,024,799 | 4,846,605 | $ | ( 2,932,000 ) | $ | 47,615,475 | $ | ( 35,515,787 ) | $ | 9,167,688 |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements
QUOIN PHARMACEUTICALS LTD.
Quoin Pharmaceuticals Ltd
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30,
| 2022 | 2021 | |||||
| Cash flows provided by (used in) operating activities | ||||||
| Net loss | $ | ( 7,380,536 ) | $ | ( 9,645,550 ) | ||
| Fair value adjustment to convertible notes payable | 1,250,000 | |||||
| Change in fair value of warrant liability | ( 77,237 ) | 4,522,844 | ||||
| Stock based compensation | 496,724 | |||||
| Forgiveness of trade payable | ( 416,000 ) | |||||
| Financing expense | 275,000 | |||||
| Amortization of intangibles | 78,032 | 78,032 | ||||
| Increase in accrued interest and financing expense | 402,411 | 516,276 | ||||
| Unrealized gain on investments | ( 12,079 ) | |||||
| Changes in assets and liabilities: | ||||||
| Increase (decrease) in accounts payable and accrued expenses | ( 148,493 ) | 462,117 | ||||
| Decrease in prepaid expenses | 518,788 | |||||
| Net cash used in operating activities | $ | ( 6,538,390 ) | $ | ( 2,541,281 ) | ||
| Cash flows used in investing activities | ||||||
| Purchase of investments | ( 9,899,121 ) | |||||
| Payment for license acquisition | ( 250,000 ) | ( 375,000 ) | ||||
| Net cash used in investing activities | $ | ( 10,149,121 ) | $ | ( 375,000 ) | ||
| Cash flows provided by financing activities: | ||||||
| Payments of offering costs | ( 164,578 ) | |||||
| Payments of deferred loan costs | ( 50,000 ) | |||||
| Increase in due to officers | 139,285 | |||||
| Payment of amounts due to officers | ( 449,999 ) | ( 154,466 ) | ||||
| Proceeds from issuance of Bridge Notes , net | 3,475,000 | |||||
| Proceeds from sale of equity securities, net | 14,904,569 | |||||
| Net cash provided by financing activities | $ | 14,454,570 | $ | 3,245,241 | ||
| Net change in cash | ( 2,232,941 ) | 328,960 | ||||
| Cash - beginning of period | 7,482,773 | 323,832 | ||||
| Cash - end of period | $ | 5,249,832 | $ | 652,792 | ||
| Supplemental information - Non cash items: | ||||||
| Reclassification of warrant liability to equity upon issuance of Exchange warrants | $ | 296,362 | $ | |||
| Deemed dividend on warrant modification | $ | 65,266 | $ | |||
| Offering expenses associated with warrant modification | $ | 491,601 | $ | |||
| Settlement of accrued expenses | $ | 193,537 | $ |
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
NOTE 1 ORGANIZATION AND BUSINESS
Quoin Pharmaceuticals Ltd. ( Quoin Ltd., or the Company ), formerly known as Cellect Biotechnology Ltd. ( Cellect ), is the holding company for Quoin Pharmaceuticals, Inc., a Delaware corporation ( Quoin Inc. ). On October 28, 2021, Cellect completed the business combination with Quoin Inc., in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of March 24, 2021 (the Merger Agreement ), by and among Cellect, Quoin Inc. and CellMSC, Inc., a Delaware corporation and wholly-owned subsidiary of Cellect ( Merger Sub ), pursuant to which Merger Sub merged with and into Quoin Inc., with Quoin Inc. surviving as a wholly-owned subsidiary of Cellect (the Merger ). Immediately after completion of the Merger, Cellect changed its name to Quoin Pharmaceuticals Ltd. Because Quoin Inc. was the accounting acquirer, its historical financial statements became the Company's historical financial statements and such assets and liabilities continued to be recorded at their historical carrying values. The impact of the recapitalization has been retroactively applied to all periods presented.
Effective August 1, 2022, the ratio of American Depositary Shares ( ADSs ) evidencing ordinary shares changed from 1 ADS representing four hundred (400) ordinary shares to 1 ADS representing five thousand (5,000) ordinary shares, which resulted in a one for 12.5 reverse split of the issued and outstanding ADSs (the Ratio Change ). All ADSs and related option and warrant information presented in these financial statements and accompanying footnotes has been retroactively adjusted to reflect the reduced number of ADSs resulting from the Ratio Change.
Quoin Inc. was incorporated in Delaware on March 5, 2018. Quoin Inc. is a specialty pharmaceutical company focused on developing and commercializing therapeutic products that treat rare and orphan diseases. The first lead product is QRX003, a once daily, topical lotion comprised of a broad-spectrum serine protease inhibitor, formulated with the proprietary Invisicare technology, to treat Netherton Syndrome (NS). QRX003, is currently in clinical development in the United States under an open IND application with the U.S. Food and Drug Administration ( FDA ). The ongoing study is a randomized, double blinded assessment of two different doses of QRX003 versus a placebo vehicle in NS patients. The Company commenced opening of clinical sites in July 2022. In addition, the Company intends to pursue the clinical development of QRX003 in additional rare dermatological diseases, including Peeling Skin Syndrome, SAM Syndrome and Palmoplantar Keratoderma. To date, no products have been commercialized and revenue has not been generated.
NOTE 2 - LIQUIDITY RISKS AND OTHER UNCERTAINTIES
The Company has incurred net losses every year since inception and has an accumulated deficit of approximately $35.5 million at September 30, 2022. The Company has historically funded its operations through debt and equity financings. On August 9, 2022, the Company completed an offering (the Offering ) of ordinary shares represented by ADSs and pre-funded warrants to purchase ordinary shares represented by ADSs with each ADS and pre-funded warrant accompanied by an ordinary warrant, for aggregate gross proceeds of $16.8 million, resulting in net proceeds of approximately $14.9 million (see Note 14). As a result of the completion of the Offering, the Company believes that it has sufficient resources to effect its business plan for at least one year from the issuance of these unaudited condensed consolidated financial statements.
Additional financing will still be required to complete the research and development of the Company's therapeutic targets and its other operating requirements until it achieves commercial profitability, if ever. Such financing may not be available at acceptable terms, if at all. If the Company is unable to obtain additional funding when it becomes necessary, the development of its product candidates will be impacted and the Company would likely be forced to delay, reduce, or terminate some or all of its development programs, all of which could have a material adverse effect on the Company's business, results of operations and financial condition.
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
Other risks and uncertainties:
The Company is subject to risks common to development stage biopharmaceutical companies including, but not limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, product liability, pre-clinical and clinical trial outcome risks, regulatory approval risks, uncertainty of market acceptance and additional financing requirements.
The Company's products require approval or clearance from the FDA prior to commencing commercial sales in the United States. There can be no assurance that the Company's products will receive all of the required approvals or clearances. Approvals or clearances are also required in foreign jurisdictions in which the Company may license or sell its products.
There can be no assurance that the Company's products, if approved, will be accepted in the marketplace, nor can there be any assurance that any future products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed.
The Company is also dependent on several third party suppliers, in some cases single-source suppliers which include the supplier of the active pharmaceutical ingredient (API), as well as the contract manufacturer of the drug substance for the expected clinical development.
Coronavirus ( COVID-19 ) created a global pandemic, which commenced in 2020. The Company's operations, to date, have not been dramatically affected by COVID-19. However, the extent of any future impact on the Company's operational and financial performance will depend on the possibility of a resurgence and resulting severity with respect to the Company's access to API and drug product for clinical testing, as well as the Company's ability to safely and efficiently conduct planned clinical trials.
On April 22, 2022, the Company received a letter from the Listing Qualifications staff (the Staff ) of The Nasdaq Stock Market, LLC ( Nasdaq ) notifying the Company that it is no longer in compliance with Nasdaq Listing Rule 5550(b)(1) requiring minimum stockholders' equity of at least $2.5 million for continued listing on The Nasdaq Capital Market. Based on the Company's Form 6-K, dated August 10, 2022, the Staff has determined that the Company complies with the minimum stockholder's equity requirement, and the Company evidences continued compliance with these financial statements for the quarter ended September 30, 2022.
On June 10, 2022, the Company received a letter from the Staff notifying the Company that the closing bid price per ADS was below the required minimum of $1.00 for a period of 30 consecutive business days and that the Company did not meet the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2). Since then, the Staff has determined that the closing bid price of the Company's ADSs has been at $1.00 per ADS or greater, and the Company has regained compliance with the minimum bid price requirement.
There can be no assurance that the Company will be able to maintain compliance with Nasdaq's minimum stockholders' equity requirement or minimum bid-price requirement for continued listing. If the Company's ADSs are delisted from Nasdaq, it will have material negative impacts on the actual and potential liquidity of the Company's securities, as well as material negative impacts on the Company's ability to raise future capital.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ( U.S. GAAP ) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, reflecting the operations of Quoin Inc. since inception and include the accounts of Quoin Ltd. since the date of the Merger. In the opinion of management, such statements
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of September 30, 2022 and for the three and nine months then ended. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the operating results for the year or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related disclosures as of December 31, 2021 and for the year then ended which are included in the Company's Annual Report on Form 20- F, filed with the SEC on April 14, 2022, as updated in the Company's Form 6-K furnished to the SEC on August 11, 2022. The Company operates in one segment.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates.
Certain 2021 amounts were reclassified to conform to the current year presentation. The amount reclassified included the short term portion from long term portion due to officers.
Cash and cash equivalents:
The Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents. The Company, from time to time during the periods presented, has had bank account balances in excess of federally insured limits where substantially all cash is held in the United States. The Company has not experienced losses in such accounts. The Company believes that it is not subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) provided that such contracts are indexed to the Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company's control) or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
The Company assesses classification of its warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between assets, liabilities and equity is required. The Company evaluated the warrants to assess their proper classification using the applicable criteria enumerated under U.S. GAAP and determined that such warrants meet the criteria for equity classification in the accompanying balance sheets as of September 30, 2022.
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
Investments as of September 30, 2022 consist of U.S. Treasury Bills, which are classified as trading securities, totaling $9.9 million. The Company determines the appropriate balance sheet classification of its investments at the time of purchase and evaluates the classification at each balance sheet date. All of the Company's U.S. Treasury Bills mature within the subsequent six months from the date of purchase. As of September 30, 2022, the carrying value of the Company's U.S. Treasury Bills approximates their fair value due to their short-term maturities.
Long-lived assets are comprised of acquired technology and licensed rights to use technology, which are considered platform technology with alternative future uses beyond the current products in development. Such intangible assets are being amortized on a straight-line basis over their expected useful life of 10 years.
The Company assesses the impairment for long-lived assets whenever events or circumstances indicate the carrying value may not be recoverable. Factors the Company considers that could trigger an impairment review include the following:
The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. During the three and nine months ended September 30, 2022 and 2021, there were no impairment indicators which required an impairment loss measurement.
Research and development:
Research and development costs are expensed as incurred. Research and development expenses include personnel costs associated with research and development activities, including third-party contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. The Company accrues for costs incurred by external service providers, including contract research organizations and clinical investigators, based on its estimates of service performed and costs incurred. These estimates include the level of services performed by third parties, patient enrollment in clinical trials when applicable, administrative costs incurred by third parties, and other indicators of the services completed. Based on the timing of amounts invoiced by service providers, the Company may also record payments made to those providers as prepaid expenses that will be recognized as expense in future periods as the related services are rendered.
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
Stock based compensation:
The Company recognizes compensation costs resulting from the issuance of stock-based awards to employees, non-employees and directors as an expense in the consolidated statements of operations over the requisite service period based on a measurement of fair value for each stock-based award. The fair value of each option grant to employees, non-employees and directors is estimated as of the date of grant using the Black-Scholes option-pricing model, net of actual forfeitures. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally the vesting period.
The Company's expected stock volatility is based on the historical data regarding the volatility of a publicly traded set of peer companies, since it has limited history of trading as a public company. The Company utilizes the simplified method to estimate the expected term. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield was assumed to be zero as the Company has not paid and dividends since its inception and does not anticipate paying dividends in the foreseeable future.
Fair value of financial instruments:
The Company considers its cash, investments, accounts payable, and accrued expenses to meet the definition of financial instruments. The carrying amounts of the remaining financial instruments approximated their fair values due to the short maturities.
The Company measures fair value as required by ASC Topic 820, Fair Value Measurements and Disclosures ( ASC Topic 820 ). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements.
Earnings (loss) per share:
The Company reports loss per share in accordance with ASC 260-10, Earnings Per Share, which provides for calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation of diluted net earnings (loss) per share gives effect to ordinary shares equivalents; however, potential common shares are excluded if their effect is anti-dilutive.
For the three and nine months ended September 30, 2022, the number of shares excluded from the diluted net earnings (loss) per share included outstanding options and warrants to purchase 309,114 ADSs and 3,368,820 ADSs, respectively. For the three and nine months ended September 30, 2021, the 5,183 ADS's issuable upon the conversion of both the Convertible Notes Payable (as defined below) and the 40,247 ADSs issuable upon conversion of the Bridge Notes (as defined below) as well as the warrants issued in connection with both of these convertible instruments are not included in the denominator since their inclusion would be anti-dilutive.
NOTE 4 CONVERTIBLE NOTES AND WARRANTS
On October 2, 2020, Quoin Inc. commenced an offering of promissory notes (the 2020 Notes or Convertible Notes Payable ) and warrants. Based upon the terms agreed to in March 2021 in the Primary Financing (see Note 5), the 2020 Notes were mandatorily convertible into 5,183 ADSs in the Primary Financing, subject to adjustment.
The holders of the 2020 Notes (the 2020 Noteholders ) also received warrants exercisable at any time after the issuance date for 29,388 ADSs at an initial exercise price of $49.75 per ADS. At the time of grant, the Company determined that these warrants met the criteria to be recorded as a liability instrument. Effective March 13, 2022, each holder agreed to exchange these warrants for warrants on the substantially same terms as the Investor Exchange Warrants (See Note 5) with the same number of shares issuable upon the exercise of an Exchange Warrant as upon the exercise of the original warrant and the same exercise price with a contractual term of 5 years (the Noteholder Warrants ).
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
The Noteholder Warrants have been determined to have equity classification. The change in the fair value of the warrants through the exchange date was included in other income (expense) in the accompanying statement of operations, and then reclassified from liability to additional paid in capital. On July 14, 2022, as a result of the Altium Agreement (see Note 5), the exercise price of the Noteholder Warrants was reduced to $0 and the 2020 Noteholders subsequently exercised all of their warrants. The change in the exercise price of the Noteholder Warrants resulted in a deemed dividend of approximately $65,000 recorded during the three and nine months ended September 30, 2022.
The ADSs issued to the 2020 Noteholders did not account for accrued interest which was estimated to be approximately $744,000 at December 31, 2021, and included in accrued interest and financing expense in the accompanying consolidated balance sheet. Approximately $312,000 was paid to two of the five 2020 Noteholders during the nine months ended September 30, 2022. Based on the terms of the cash settlement with these two 2020 Noteholders, the Company's estimate of the liability to the remaining three 2020 Noteholders was increased to $1,146,000 as of September 30, 2022. The Company expects to settle the remaining liability in 2022 or early 2023.
NOTE 5 BRIDGE FINANCING AND PRIMARY FINANCING
In connection with the Merger Agreement and the Securities Purchase Agreement (described below), Quoin Inc. entered into a Bridge Purchase Agreement on March 24, 2021 with the Investor, pursuant to which the Investor agreed to purchase notes (the Bridge Notes ) in the aggregate principal amount of up to $5,000,000 in exchange for an aggregate purchase price of up to $3,800,000 together with warrants. The Bridge Notes were purchased in three closings: (i) the first purchase of $2,000,000 on March 25, 2021 (proceeds of $1,500,000); (ii) the second purchase of $1,700,000 in April 2021 (proceeds of $1,250,000); and (iii) a third purchase of $1,300,000 in May 2021 (proceeds of $1,000,000).
The Bridge Notes were issued with a 25% original issue discount, at an interest rate of 15% per annum and had a maturity date of the earliest to occur of: (i) December 25, 2021, (ii) the date on which Quoin Inc.'s equity is registered under the Exchange Act or is exchanged for equity so registered or (iii) immediately prior to the closing of the Merger.
The Investor and Quoin Inc. agreed that if the Primary Financing is consummated, the Investor may, at its election, offset the purchase price related to the Primary Financing, by an amount equal to the outstanding amount under this Bridge Note, and, upon such set-off, the portion of this Bridge Note shall be deemed to have been paid in its entirety and all obligations thereunder shall be deemed to be fully satisfied.
The Bridge Notes were offset against the purchase price under the Securities Purchase Agreement related to the Primary Financing and converted into 100,618 ADSs upon the closing of the Primary Financing in October 2021. Interest expense, at the stated interest rate, recognized in the three and nine months ended September 30, 2022 and 2021 was $0 and $187,000 and $0 and $334,000, respectively.
Upon the funding of each Bridge Note tranches described above, the Investor received warrants (the Bridge Warrants ) to purchase a number of shares of Quoin Inc.'s common stock equal to the aggregate principal amount of the Bridge Notes. The Bridge Warrants had a term of five years from the date all of the shares underlying the Bridge Warrants are freely tradable. Quoin Inc. issued a total of 99,074 Bridge Warrants in the year ended December 31, 2021.
Following the closing date of the Merger, on each of the tenth trading day, the forty-fifth day, the ninetieth day, and the one hundred thirty-fifth day thereafter (each, a Reset Date ), if the initial exercise price of the Bridge Warrants is greater than the arithmetic average of 85% of the three lowest weighted average prices of the post-Merger ordinary shares of the combined company during the ten trading day period immediately preceding the applicable Reset Date (the Reset Price ), the exercise price of the Bridge Warrants will be reset
QUOIN PHARMACEUTICALS LTD.
Notes to Consolidated Financial Statements
September 30, 2022 and 2021
to the Reset Price. Furthermore, the number of shares underlying Bridge Warrants will be adjusted such that the aggregate number of shares of common stock of Quoin Inc. issuable to the Investor reflects the Reset Price instead of the initial exercise price. Adjustments to the exercise price and number of warrant shares are available to the Investor until the second anniversary of the Registration Date, as defined in the Bridge Warrants. Upon the occurrence of a Fundamental transaction, as defined in the Bridge Warrants, the warrant holder has the right to elect a cash settlement for the value of the warrant based on the Black Scholes options pricing model.
The Company determined that the warrants met the criteria to be recorded as a liability instrument through the exchange date on the closing of the Primary Financing. The fair value of warrants was determined by a MonteCarlo simulation model to be approximately $1.6 million at the date of issuance of the 39,630 warrants in connection with the first closing and $2.2 million at the date of issuance of the 59,444 warrants in connection with the second and third closing of the Bridge Notes.