UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

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

For the transition period from ___________ to __________

Commission file number: 001-37846

QUOIN PHARMACEUTICALS LTD.

(Exact name of registrant as specified in its charter)


State of Israel		92-2593104
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


42127 Pleasant Forest Court
Ashburn, VA		20148-7349
(Address of principal executive offices)		(Zip Code)

(703) 980-4182

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
American Depositary Shares, each representing five thousand (5,000) Ordinary Shares, no par value per share	QNRX	The Nasdaq Stock Market LLC
Ordinary Shares, no par value per share*		N/A

*	Not for trading, but only in connection with the registration of the American Depositary Shares (“ADSs”) pursuant to requirements of the Securities and Exchange Commission.

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, 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 May 8, 2023, there were 59,233,024,799 ordinary shares, no par value per share, of the registrant outstanding, and 11,846,532 ADSs of the registrant outstanding, with each ADS representing 5,000 ordinary shares.

Table of Contents

QUOIN PHARMACEUTICALS LTD.

INDEX

	Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	1

PART I-FINANCIAL INFORMATION	2

Item 1. Financial Statements.	2

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	17

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	25

Item 4. Controls and Procedures.	25

PART II-OTHER INFORMATION	26

Item 1. Legal Proceedings.	26

Item 1A. Risk Factors.	26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	26

Item 3. Defaults Upon Senior Securities.	26

Item 4. Mine Safety Disclosures.	26

Item 5. Other Information.	26

Item 6. Exhibits.	27

SIGNATURES	28

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Form 10-Q, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “positioned,” “potential,” “predict,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.

Although we believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. Forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those indicated (both favorably and unfavorably). These risks and uncertainties include, but are not limited to, those described in Part I – Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022 (“Form 10-K”), as well as our subsequent reports filed with the Securities and Exchange Commission (“SEC”). Caution should be taken not to place undue reliance on any such forward-looking statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

You should read this Form 10-Q and the documents that we reference in this Form 10-Q and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of the forward-looking statements in this Form 10-Q by these cautionary statements.

Unless otherwise indicated or the context otherwise requires, all references in this Form 10-Q to the terms “Quoin,” “Quoin Ltd.,” the “Company,” “us,” “we”, and “our” refer to Quoin Pharmaceuticals Ltd. and its consolidated subsidiaries.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

QUOIN PHARMACEUTICALS LTD.

Condensed Consolidated Balance Sheets


	March 31,		December 31,
	2023		2022
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,371,854	$	2,860,628
Investments		13,618,026		9,992,900
Prepaid expenses		398,906		516,584
Total current assets		17,388,786		13,370,112

Prepaid expenses - long term		383,390		383,390
Intangible assets, net		678,550		704,561
Total assets	$	18,450,726	$	14,458,063

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		281,094	$	605,600
Accrued expenses		2,085,205		1,175,705
Accrued interest and financing expense		1,146,251		1,146,251
Due to officers – short term		650,000		600,000
Total current liabilities		4,162,550		3,527,556

Due to officers – long term		3,373,733		3,523,733
Total liabilities	$	7,536,283	$	7,051,289

Commitments and contingencies

Shareholders’ equity:
Ordinary shares, no par value per share, 500,000,000,000 ordinary shares authorized – 59,233,024,799 (11,846,532 ADS's) ordinary shares issued and outstanding at March 31, 2023 and 24,233,024,799 (4,846,605 ADS's) at December 31, 2022	$	—	$	—
Treasury stock, 2,641,693, ordinary shares		(2,932,000)		(2,932,000)
Additional paid in capital		53,966,259		47,855,521
Accumulated deficit		(40,119,816)		(37,516,747)
Total shareholders’ equity		10,914,443		7,406,774

Total liabilities and shareholders’ equity	$	18,450,726	$	14,458,063

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

Table of Contents

QUOIN PHARMACEUTICALS LTD.

Condensed Consolidated Statements of Operations (Unaudited)


	Three months ended March 31,
	2023		2022
Operating expenses
General and administrative	$	1,683,817	$	1,588,470
Research and development		1,091,733		587,569

Total operating expenses		2,775,550		2,176,039

Other (income) and expenses
Forgiveness of accounts payable		—		(416,000)
Warrant liability (income) expense		—		(77,237)
Unrealized gain		(20,427)		—
Interest income		(152,054)		—
Total other (income) and expenses		(172,481)		(493,237)
Net loss	$	(2,603,069)	$	(1,682,802)

Loss per ADS
Loss per ADS
Basic	$	(0.34)	$	(2.51)
Fully-diluted	$	(0.34)	$	(2.51)

Weighted average number of ADS's outstanding
Basic		7,646,605		670,930
Fully-diluted		7,646,605		670,930

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

Table of Contents

QUOIN PHARMACEUTICALS LTD.

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

Three months ended March 31, 2022


			No			Additional
	Ordinary		Par	Treasury		Paid in		Accumulated
	Shares	ADS’s	Value	Stock		Capital		Deficit		Total
Balance at January 1, 2022	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)

Three months ended March 31, 2023


			No			Additional
	Ordinary		Par	Treasury		Paid in		Accumulated
	Shares	ADS’s	Value	Stock		Capital		Deficit		Total
Balance at January 1, 2023	24,233,024,799	4,846,605	—	$	(2,932,000)	$	47,855,521	$	(37,516,747)	$	7,406,774

Net loss	—	—	—		—		—		(2,603,069)		(2,603,069)
Issuance of ADS and Pre-Funded Warrants, net	35,000,000,000	7,000,000	—		—		5,849,266		—		5,849,266
Stock based compensation	—	—	—		—		261,472		—		261,472

Balance at March 31, 2023	59,233,024,799	11,846,605	—	$	(2,932,000)	$	53,966,259	$	(40,119,816)	$	10,914,443

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

Table of Contents

QUOIN PHARMACEUTICALS LTD.

Condensed Consolidated Statements of Cash Flows (unaudited)


	Three Months Ended March 31,
	2023		2022
Cash flows used in operating activities:
Net loss	$	(2,603,069)	$	(1,682,802)
Change in fair value of warrant liability		—		(77,237)
Stock based compensation		261,472		—
Forgiveness of trade payable		—		(416,000)
Amortization of intangibles		26,011		26,010
Increase in accrued interest and financing expense		—		(311,670)
Unrealized gain and accrued interest on investments		(133,621)		—
Changes in assets and liabilities:
Increase in accounts payable and accrued expenses		584,994		162,133
Decrease in prepaid expenses & other assets		117,678		206,008
Net cash used in operating activities	$	(1,746,535)	$	(2,093,558)

Cash flows used in investing activities:
Purchase of investments		(13,491,505)	$	—
Proceeds from maturity of investments		10,000,000		—
Payment for license acquisition		—		(50,000)
Net cash used in investing activities	$	(3,491,505)	$	(50,000)

Cash flows provided by (used in) financing activities:
Payment of amounts due to officers		(100,000)		(150,000)
Proceeds from sale of equity securities, net		5,849,266		—
Net cash provided by (used in) financing activities	$	5,749,266	$	(150,000)

Net change in cash and cash equivalents:		511,226		(2,293,558)
Cash and cash equivalents - beginning of period		2,860,628		7,482,773
Cash and cash equivalents - end of period	$	3,371,854	$	5,189,215

Supplemental information - Non cash items:
Reclassification of warrant liability to equity upon issuance of “Exchange warrants”	$	—	$	296,362
Offering expenses associated with warrant modification	$	238,231	$	—

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

Table of Contents

QUOIN PHARMACEUTICALS LTD.

Notes to Consolidated Financial Statements

March 31, 2023 and 2022

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., 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.”

Quoin Inc. was incorporated in Delaware on March 5, 2018. Quoin Inc. is clinical stage specialty pharmaceutical company dedicated to the development and commercialization of therapeutic products that treat rare and orphan diseases for which there are currently no approved treatments or cures. The Company’s initial focus is on the development of products, using proprietary owned and in-licensed drug delivery technologies, that could help address rare skin diseases. The Company’s first lead product is QRX003, a once daily, topical lotion comprised of a broad-spectrum serine protease inhibitor, formulated with the proprietary in-licensed Invisicare® technology, is under development as a potential treatment for Netherton Syndrome (“NS”), a rare hereditary genetic disease. QRX003 is currently being tested in two clinical studies in the United States (“U.S.”) under an open Investigational New Drug (“IND”) application with the Food and Drug Administration (“FDA”). Dosing of patients has commenced for both studies. The Company is also developing QRX004 as a potential treatment for Recessive Dystrophic Epidermolysis Bullosa (“RDEB”). In addition, the Company has entered into Research Agreements with the Queensland University of Technology (“QUT”), which include an option for global licenses to QRX007 for the potential treatment of NS and QRX008 for the potential treatment of scleroderma. To date, no products have been commercialized and revenue has not been generated.

NOTE 2 - LIQUIDITY RISKS AND OTHER UNCERTAINTIES

The unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”), which contemplates continuation of the Company as a going concern. The Company has incurred net losses every year since inception and has an accumulated deficit of approximately $40.1 million at March 31, 2023. The Company has limited operating history and has historically funded its operations through debt and equity financings. The Company incurred net losses of approximately $2.6 million, and negative cash flows from operations of $1.8 million for the three months ended March 31, 2023. At March 31, 2023, the Company had cash balances totaling $3.4 million and investments of $13.6 million. The Company has determined that it has sufficient cash and liquidity 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 and financial condition.

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.

Table of Contents

QUOIN PHARMACEUTICALS LTD.

Notes to Consolidated Financial Statements

March 31, 2023 and 2022

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 a single-source supplier which includes the supplier of the active pharmaceutical ingredient (API), as well as the contract manufacturer of the drug substance for the expected clinical development.

See Note 16, Subsequent Events.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with 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. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of March 31, 2023 and for the three months then ended. The results of operations for the three months ended March 31, 2023 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, 2022 and for the year then ended which are included in the Company’s Annual Report on Form 10- K, filed with the SEC on March 15, 2023. The Company operates in one segment.

Use of estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in developing the estimates and assumptions that are used in the preparation of these financial statements including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following areas, among others: stock-based compensation and warrants, research and development expense recognition, intangible asset estimated useful lives and impairment assessments, allowances of deferred tax assets, and cash flow assumptions regarding going concern considerations.

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.

Warrants:

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

Table of Contents

QUOIN PHARMACEUTICALS LTD.

Notes to Consolidated Financial Statements

March 31, 2023 and 2022

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 unaudited condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022, respectively.

Investments:

Investments as of March 31, 2023 and December 31, 2022 consist of U.S. Treasury Bills, which are classified as trading securities, totaling $13.6 million and $10.0 million, respectively. 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.

Long-lived assets:

Long-lived assets are comprised of acquired technology and licensed rights to use technology, which are considered platform technology with alternative future uses beyond the current products in development. Such intangible assets are being amortized on a straight-line basis over their expected useful life of 10 years.

The Company assesses the impairment for long-lived assets whenever events or circumstances indicate the carrying value may not be recoverable. Factors we consider that could trigger an impairment review include the following:

●

Significant changes in the manner of the Company’s use of the acquired assets or the strategy for its overall business,

●

Significant underperformance relative to expected historical or projected development milestones,

●

Significant negative regulatory or economic trends, and

●

Significant technological changes which could render the platform technology obsolete.

The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. During the three months ended March 31, 2023, 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 expenses in future periods as the related services are rendered.

Income taxes:

Table of Contents

QUOIN PHARMACEUTICALS LTD.

Notes to Consolidated Financial Statements

March 31, 2023 and 2022

The Company accounts for its income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company maintains a full valuation allowance on its existing deferred tax assets.

The Company also accounts for uncertain tax positions using the more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the Company’s income tax returns. As of March 31, 2023 and December 31, 2022, the Company had no uncertain tax positions which affected its financial position and its results of operations or its cash flows and will continue to evaluate for uncertain tax positions in the future. If at any time the Company should record interest and penalties in connection with income taxes, the interest and the penalties will be expensed within the interest and general and administrative expenses, respectively.

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 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 a 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 and cash equivalents, investments, accounts payable, accrued expenses to meet the definition of financial instruments. The carrying amounts of these financial instruments approximated their fair values due to the short maturities.

The Company measures fair value as required by ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Earnings (loss) per share:

The Company reports loss per share in accordance with ASC 260-10, Earnings Per Share, which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation of diluted net earnings (loss) per share gives effect to ordinary shares equivalents; however, potential common shares are excluded if their effect is anti-dilutive.

For the three months ended March 31, 2023 and 2022, the number of shares excluded from the diluted net earnings (loss) per share included outstanding warrants to purchase 10,368,820 ADS and outstanding stock options to purchase 307,142 ADS, and outstanding warrants to purchase 1,395,005 ADS and outstanding stock options to purchase 4,655 ADS, respectively, as their inclusion in the denominator would be anti-dilutive.

Table of Contents

QUOIN PHARMACEUTICALS LTD.

Notes to Consolidated Financial Statements

March 31, 2023 and 2022

NOTE 4 – CONVERTIBLE NOTES PAYABLE

On October 2, 2020, Quoin Inc. commenced an offering of promissory notes (the “2020 Notes”) and warrants to certain investors (“2020 Noteholders”). 2020 Notes were mandatorily convertible into 5,183 ADSs in 2021.

The ADSs issued to the 2020 Noteholders did not include the accrued interest which was estimated to be approximately $744,000 at December 31, 2021 of which $312,000 was paid to two of the five 2020 Noteholders during the year ended December 31, 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 $1,146,000 as of March 31, 2023 and December 31, 2022.

There was no interest expense recognized in both the three month periods ended March 31, 2023 and 2022.

NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. For certain instruments, including cash and cash equivalents, accounts payable, and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments.

Fair value is estimated using various valuation models, which utilize certain inputs and assumptions that market participants would use in pricing the asset or liability. The inputs and assumptions used in valuation models are classified in the fair value hierarchy as follows:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Quoted market prices for similar instruments in an active market; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations inputs of which are observable and can be corroborated by market data.

Level 3: Unobservable inputs and assumptions that are supported by little or no market activity and that are significant to the fair value of the asset and liability. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining the appropriate hierarchy levels, the Company analyzes the assets and liabilities that are subject to fair value disclosure. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy at March 31, 2023 and December 31, 2022:


March 31, 2023		Level 1		Level 2	Level 3		Total
US Treasury Bills	$	13,618,026	$	—	$	—	$	13,618,026
Total US Treasury Bills Asset	$	13,618,026	$	—	$	—	$	13,618,026


December 31, 2022	Level 1		Level 2		Level 3		Total
US Treasury Bills	$	9,992,900	$	—	$	—	$	9,992,900
Total US Treasury Bills Asset	$	9,992,900	$	—	$	—	$	9,992,900

Table of Contents

QUOIN PHARMACEUTICALS LTD.

Notes to Consolidated Financial Statements

March 31, 2023 and 2022

NOTE 6 – STOCK BASED COMPENSATION

In March 2022, the Board of Directors of the Company approved the Amended and Restated Equity Incentive Plan (the “Amended Plan”), which was approved by the shareholders at the Company’s Annual General Meeting of Shareholders held on April 12, 2022. The Amended Plan increased the number of ordinary shares reserved for issuance under such equity incentive plan to 15% of the Company’s outstanding ordinary shares on a fully-diluted basis, or 16,891,925,220 ordinary shares represented by 3,378,385 ADSs as of March 31, 2023. Under the Amended Plan, the Company may grant options to its directors, officers, employees, consultants, advisers and service providers. As of March 31, 2023, 3,071,243 ADSs remained available for grant under the Amended Plan.

The following table summarizes stock-based activities under the Amended Plan:


		Weighted		Weighted
		Average		Average
	ADS Underlying	Exercise		Contractual
	Options	Price		Terms
Outstanding at December 31, 2022	307,142	$	17.50	9.28
Granted	—	$	—
Forfeited/Cancelled	—	$	—
Outstanding at March 31, 2023	307,142	$	17.50	9.03

Exercisable options at March 31, 2023	—	$	—	—

The intrinsic value of outstanding options at March 31, 2023 was $0.

Stock based compensation expense was approximately $261,000 ($34,000 included in research and development expense and $227,000 included in general and administrative expenses) in the three months ended March 31, 2023. There was no stock-based compensation in the three months ended March 31, 2022.

At March 31, 2023, the total unrecognized compensation expense related to non-vested options was approximately $2,944,000 and is expected to be recognized over the remaining weighted average service period of approximately 2.83 years.

NOTE 7 – PREPAID EXPENSES

Prepaid expenses are as follows:

SEC Form 10-Q filed by Quoin Pharmaceuticals Ltd.