The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – NATURE OF THE ORGANIZATION
AND BUSINESS
Pasithea Therapeutics Corp. (“Pasithea”
or the “Company”) was incorporated in the State of Delaware on May 12, 2020. The Company is a biotechnology company focused
on the research and discovery of new and effective treatments for psychiatric and neurological disorders. The Company’s primary
biotech operations will focus on developing drugs that target the pathophysiology underlying such disorders rather than symptomatic treatments,
with the goal of developing new pharmacological agents that display significant advantages over conventional therapies with respect to
efficacy and tolerability.
The Company’s secondary operations are
focused on providing business support services to anti-depression clinics in the UK and in the United States. Its operations in the UK
will involve providing business support services to registered healthcare providers who will assess patients and, if appropriate, administer
intravenous infusions of ketamine. Its operations in the United States will involve providing business support services to entities that
furnish similar services to patients who personally pay for those services. Operations are expected to initially take place across the
United States and the UK through partnerships with healthcare companies.
The Company is located in Miami Beach, Florida
USA.
On September 17, 2021, the Company sold 4,800,000
Units in an Initial Public Offering (the “Initial Public Offering”) at a price of $5.00 per Unit for a total of $24,000,000.
The Company incurred offering costs of $3,445,200, consisting of $2,137,800 of underwriting fees and expenses and $1,307,400 of costs
related to the Initial Public Offering.
Throughout this report, the terms “our,”
“we,” “us,” and the “Company” refer to Pasithea Therapeutics Corp. and its subsidiaries, Pasithea
Therapeutics Limited (UK) and Pasithea Clinics Inc. Pasithea Therapeutics Limited (UK) is a private limited Company, registered in the
United Kingdom (UK). Pasithea Clinics Inc. is incorporated in Delaware.
COVID-19 Pandemic
In March 2020, the World Health Organization
(the “WHO”) characterized the outbreak of the novel strain of coronavirus, specifically identified as COVID-19, as a global
pandemic. This has resulted in governments enacting emergency measures to combat the spread of the virus. These measures, which include
the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to business,
resulting in a global economic slowdown. Equity markets have experienced significant volatility and weakness and the governments and
central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.
The current challenging economic climate may
lead to adverse changes in cash flows, working capital levels and/or debt balances, which may also have a direct impact on the Company’s
operating results and financial position in the future. The ultimate duration and magnitude of the impact and the efficacy of government
interventions on the economy and the financial effect on the Company is not known at this time. The extent of such impact will depend
on future developments, which are highly uncertain and not in the Company’s control, including new information which may emerge
concerning the spread and severity of COVID-19, or any of its variants, and actions taken to address its impact, among others. The repercussions
of this health crisis could have a material adverse effect on the Company’s business, financial condition, liquidity and operating
results.
In response to COVID-19, the Company has implemented
working practices to address potential impacts to its operations, employees and customers, and will take further measures in the future
if and as required. At present, we do not believe there has been any appreciable impact on the Company specifically associated with COVID-19.
Liquidity and Capital Resources
As of September 30, 2021, the Company had $20,565,319
in its operating bank account and working capital of $20,538,283. The Company’s liquidity needs prior to the consummation of the
Initial Public Offering had been satisfied through proceeds from the issuance of common stock in private placements. Subsequent to the
consummation of the Initial Public Offering, the Company’s liquidity will be satisfied through the net proceeds from the consummation
of the Initial Public Offering. Based on the foregoing, management believes that the Company will have sufficient working capital to
meet its needs through twelve months from the date of these financial statements.
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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”) for interim financial information and are unaudited. Certain information and disclosures normally
included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The condensed consolidated
balance sheet as of December 31, 2020 was derived from our audited financial statements but does not include all disclosures required
by U.S. GAAP. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s
audited consolidated financial statements and related notes included in its Form S-1 Registration Statement, as filed with the Securities
and Exchange Commission on April 13, 2021, as amended. The results of operations for the three and nine months ended September 30, 2021
are not necessarily indicative of the results for the year ending December 31, 2021 or for any future period.
Principles of Consolidation
The Company evaluates the need to consolidate
affiliates based on standards set forth in ASC 810, “Consolidation,” (“ASC 810”). The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries, Pasithea Therapeutics Limited (UK) and Pasithea Clinics
Inc. All significant consolidated transactions and balances have been eliminated in consolidation.
These condensed consolidated financial statements
are presented in U.S. Dollars.
Emerging Growth Company
The Company is an “emerging growth company,”
as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”),
and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that
are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports
and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and approval
of any golden parachute payments not previously approved. Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies
from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not
had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act)
are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt
out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election
to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard
is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company,
can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the
Company’s unaudited consolidated financial statements with another public company which is neither an emerging growth company nor
an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential
differences in accounting standards used.
Use of Estimates
The preparation of financial statement in conformity
with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues
and expenses during the reporting period.
Making estimates requires management to exercise
significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances
that existed at the date of the financial statement, which management considered in formulating its estimate, could change in the near
term due to one or more future confirming events. One of the more significant accounting estimates included in these condensed consolidated
financial statements is the determination of the fair value of the warrant liabilities. Accordingly, the actual results could differ
significantly from those estimates.
Cash and cash equivalents
The Company considers all short-term investments
with an original maturity of three months or less when purchased to be cash equivalents.
Offering Costs
Offering costs consist of professional fees,
filing, regulatory and other costs incurred through the balance sheet date that are directly related to the Initial Public Offering.
In September 2021, the Company recognized offering costs of $3,445,200, consisting of $2,137,800 of underwriting fees and expenses
and $1,307,400 of costs related to the Initial Public Offering. Offering costs are allocated to the separable financial instruments
issued in the Initial Public Offering based on the relative fair value basis, compared to total proceeds received.
Warrant Liability
The Company accounts for its Public and Representative
Warrants (each, the “Public Warrants” and “Representative Warrants” and, collectively, the “Warrants”)
in accordance with the guidance contained in ASC 815 under which the Warrants do not meet the criteria for equity treatment and must
be recorded as derivative liabilities. Accordingly, the Company classifies the Warrants as liabilities at their fair value and adjusts
the Warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the
Warrants are exercised or expire, and any change in fair value is recognized in the Company’s statement of operations. The fair
value of the Public and Representative Warrants was initially and subsequently measured at the end of each reporting period, using a
Black-Scholes option pricing model.
Income Taxes
The Company follows the asset and liability method
of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. 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 included the enactment date. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC 740 prescribes a recognition threshold and
a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax
return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized
tax benefits and no amounts accrued for interest and penalties as of September 30, 2021. The Company is currently not aware of any issues
under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income
tax examinations by major taxing authorities since inception.
Concentration of Credit Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist of a cash account in a financial institution, which, at times, may exceed the Federal
Depository Insurance Coverage of $250,000. As of September 30, 2021, the Company has not experienced losses on this account and management
believes the Company is not exposed to significant risks on such account.
Fair Value of Financial Instruments
The fair value of the Company’s assets
and liabilities, which qualify as financial instruments under ASC 820, “Fair Value Measurements and Disclosures,” approximates
the carrying amounts represented in the accompanying balance sheet, primarily due to their short-term nature.
Fair Value Measurements
Fair value is defined as the price that would
be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement
date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and
the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
|
●
|
Level 1, defined as observable inputs such
as quoted prices (unadjusted) for identical instruments in active markets;
|
|
●
|
Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly observable such as quoted
prices for similar instruments in active markets or quoted prices for identical or similar
instruments in markets that are not active; and
|
|
●
|
Level 3, defined as unobservable inputs
in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable.
|
The following table presents information about
the Company’s assets that are measured at fair value on a recurring basis at September 30, 2021 and indicates the fair value hierarchy
of the valuation inputs the Company utilized to determine such fair value:
|
|
|
|
|
Fair value measurements at reporting
date using:
|
|
Description
|
|
Fair Value
|
|
|
Quoted prices
in
active markets
for identical
liabilities
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, September
30, 2021
|
|
$
|
20,565,319
|
|
|
$
|
20,565,319
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities, September 30, 2021
|
|
$
|
4,039,200
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,039,200
|
|
In some circumstances, the inputs used to measure
fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is
categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
Net Loss Per Share
Net loss per share is computed by dividing net
loss by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed
similar to basic earnings per share, except the weighted average number of common shares outstanding are increased to include additional
shares from the assumed exercise of share options, if dilutive. There are no outstanding dilutive or potentially dilutive instruments.
Foreign Currency Translations
The Company’s functional and reporting
currency is the U.S. dollar. All transactions initiated in other currencies are translated into U.S. dollars using the exchange rate
prevailing on the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the U.S.
dollar at the rate of exchange in effect at the balance sheet date. Unrealized exchange gains and losses arising from such transactions
are deferred until realization and are included as a separate component of stockholders’ equity (deficit) as a component of comprehensive
income or loss. Upon realization, the amount deferred is recognized in income in the period when it is realized.
Translation of Foreign Operations
The financial results and position of foreign
operations whose functional currency is different from the Company’s presentation currency are translated as follows:
|
●
|
assets and liabilities are translated at
period-end exchange rates prevailing at that reporting date;
|
|
●
|
equity is translated at historical exchange
rates; and
|
|
●
|
income and expenses are translated at average
exchange rates for the period.
|
Exchange differences arising on translation of
foreign operations are transferred directly to the Company’s accumulated other comprehensive loss in the consolidated financial
statements. Transaction gains and losses arising from exchange rate fluctuation on transactions denominated in a currency other than
the functional currency are included in the consolidated statements of operations.
The relevant translation rates are as follows:
|
|
September
30,
2021
|
|
|
|
|
|
Closing rate, British Pound (GBP) to US$ as of September 30, 2021
|
|
|
1.348
|
|
Average rate, GBP to US$ for the period ended September 30, 2021
|
|
|
1.387
|
|
Comprehensive Income (Loss)
FASB Topic No. 220, “Comprehensive Income,”
establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial
statements. As of September 30, 2021, the Company had no material items of other comprehensive income except for the foreign currency
translation adjustment.
Recent Accounting Pronouncements
Management does not believe that any recently
issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s financial
statements.
NOTE 3 – INITIAL PUBLIC OFFERING
Pursuant to the Initial Public Offering, on September
17, 2021, the Company sold 4,800,000 Units at a price of $5.00 per Unit for a total of $24,000,000. The Company incurred offering costs
of $3,445,200, consisting of $2,137,800 of underwriting fees and expenses and $1,307,400 of costs related to the Initial Public Offering.
Each Unit consisted of one share of common stock
and one Public Warrant. Each redeemable Public Warrant entitles the holder to purchase one share of common stock at a price of $6.25
per share will be exercisable upon issuance and will expire five years from issuance. The Company classifies each warrant as a liability at its fair value and the warrants were allocated a portion of
the proceeds from the issuance of the Units equal to its fair value determined by the Black-Scholes Model.
NOTE 4 – COMMITMENTS AND CONTINGENCIES
Collaboration Agreement – Zen Baker
Street Clinic (UK)
On August 4, 2021, the Company entered into an
Amended and Restated Collaboration Agreement with Portman Health Ltd (“Portman”), whereby both parties have agreed to collaborate
on the provision of ketamine infusion treatments and any other treatments agreed to by the parties from time to time (the “Treatments”)
at Portman’s London based clinic. The Company has agreed, among other things, market the Treatments to the extent permitted under
law, arrange and pay for the fit-out of the consulting room, provide equipment necessary for the Treatments, develop, operate and maintain
a booking website for the Treatments, make bookings and take payments, and employ or engage customer services advisers to liaise with
clinical staff and pay certain staff costs. Portman has agreed provide consulting and treatment rooms, apply for and maintain CQC registrations,
employ or engage licensed and qualified staff, assess patient and, if appropriate, administer the Treatments, maintain equipment and
provide all ketamine and other pharmaceuticals necessary for the Treatments. All revenues from such Treatments (less certain staff costs)
shall be allocated 30% to the Company and 70% to Portman.
Collaboration Agreement – Zen Knightsbridge
Clinic (UK)
On August 4, 2021, the Company entered into an
Amended and Restated Collaboration Agreement with Purecare Limited (“Purecare”), whereby both parties have agreed to collaborate
on the provision of Treatments at Purecare’s London based clinic. The Company has agreed, among other things, market the Treatments
to the extent permitted under law, arrange and pay for the fit-out of the consulting room, provide equipment necessary for the Treatments,
develop, operate and maintain a booking website for the Treatments, make bookings and take payments, and employ or engage customer services
advisers to liaise with clinical staff and pay certain staff costs. Purecare has agreed provide consulting and treatment rooms, apply
for and maintain CQC registrations, employ or engage licensed and qualified staff, assess patient and, if appropriate, administer the
Treatments, maintain equipment and provide all ketamine and other pharmaceuticals necessary for the Treatments. All revenues from such
Treatments (less certain staff costs) shall be allocated 30% to the Company and 70% to Purecare.
Business Support Services Subcontract –
The IV Doc
On April 9, 2021, Pasithea Clinics Corp. (“Pasithea
Clinics”), an affiliate of the Company, entered into a Business Support Services Subcontract (the “Subcontract”) with
The IV Doc, pursuant to which The IV Doc will provide certain non-clinical administrative, back office, and other business support services
to one or more professional medical practices in the State of New York. During the term of the Subcontract, which shall be effective
for 15 years from the effective date, Pasithea Clinics will pay The IV Doc monthly subcontract fees in consideration of the subcontract
services rendered by The IV Doc. The subcontract fees, which are equal to $22,500 per month, will represent fair market value for the
subcontract services and are commensurate with the subcontract services to be provided, and will not constitute an illegal fee-splitting
or impermissible profit-sharing arrangement in violation of any applicable laws. In addition to the subcontract fees, Pasithea Clinics
will reimburse The IV Doc for all reasonable expenses, including travel, meals and lodging expenses, incurred by The IV Doc in connection
with the provision of the subcontract services, provided that such expenses are otherwise commercially reasonable and necessary.
Employment Agreement – Dr. Tiago Reis
Marques
On July 13, 2020, we entered into an employment
agreement with Dr. Tiago Reis Marques to serve as our Chief Executive Officer. The initial term of Dr. Marques’ employment commenced
on the closing of our initial business combination and ends on the first anniversary of the commencement date. After the initial term,
the employment agreement will automatically renew for additional one-year periods, unless the Company or Dr. Marques provides the other
party with at least 60 days’ prior written notice of its desire not to renew. The employment agreement shall automatically terminate
without any action on the part of any person and be void ab initio if a business combination agreement to be entered
into between us and a prospective target Agreement is terminated in accordance with its terms, and neither the Company nor any other
person shall have any liability to Dr. Marques under the employment agreement if the closing does not occur. Pursuant to the employment
agreement, we agreed to pay Dr. Marques an annual base salary of $120,000. Upon the completion of the next qualified financing of over
$5,000,000, the terms of the employment agreement will be renegotiated. Dr. Marques will also be eligible to receive equity awards, benefits
including but not limited to health insurance, retirement, and fringe benefits of the Company, and 20 vacation days per year. We have
also agreed to reimburse Dr. Marques for all expenses associated with the Company’s business.
NOTE 5 – STOCKHOLDERS’ EQUITY
The Company is authorized to issue an aggregate
of 500,000,000 shares. The authorized capital stock is divided into: (i) 495,000,000 shares of common stock having a par value of $0.0001
per share and (ii) 5,000,000 shares of preferred stock having a par value of $0.0001 per share.
Effective April 8, 2021, we amended our certificate
of incorporation to effect a 1-for-20 reverse stock split of our outstanding shares of Common Stock. No fractional shares were issued
as a result of the reverse stock split. Any fractional shares resulting from the reverse stock split were paid in cash. The reverse stock
split did not otherwise affect any of the rights currently accruing to holders of our common stock. All share information presented in
these financial statements has been retroactively adjusted to reflect the reduced number of shares outstanding.
From
inception, May 12, 2020, through December 31, 2020, the Company issued 7,300,000 shares of common stock at a price of $0.002 per share
for cash proceeds of $14,600. Additionally, the Company issued 156,250 shares of common stock at a price of $1.60 per share for cash
proceeds of approximately of $247,139, net of share issuance costs of $2,861, with gross proceeds of $33,000 received as of September
30, 2020 for an aggregate of 20,625 shares, and the remaining net proceeds of $214,139 received during the three months ended December
31, 2020.
In 2020, several investors advanced funds totaling
approximately $20,600 to the Company with no specific terms of repayment, interest or maturity, subsequent to which the parties executed
conversion documents to convert the funds into common shares. As the fair value of the equity instruments was equal to the funds advanced,
there was no gain or loss on the transaction when on December 30, 2020, the Company issued 12,875 shares of common stock at a price of
$0.08 per share to the respective investors.
During the first quarter of 2021, the Company
entered into various subscription agreements in connection with a private placement seeking to raise up to $1 million through the sale
of 625,000 shares of the Company’s common stock, at a price of $1.60 per share, with a closing date for accepted subscriptions
of January 31, 2021. During the first quarter of 2021, the Company issued a total of 395,625 shares for aggregate proceeds received of
approximately $633,000 related to such private placement.
In 2021, the Company entered into various subscription
agreements in connection with a second private placement seeking to raise up to $5 million through the sale of 2,083,333 shares of the
Company’s common stock, at a price of $2.40 per share, with a closing date for accepted subscriptions of March 31, 2021. During
the first quarter of 2021, the Company issued a total of 239,969 shares for aggregate proceeds received of approximately $576,000 related
to such second private placement.
During the nine months ended September 30, 2021,
the Company issued an additional 153,652 shares of common stock to existing investors related to an administrative correction, with no
significant effect on the Company’s financial statements.
Brio Financial Group
On April 13, 2021, the Company entered into an
agreement with Brio Financial Group, LLC (“Brio”) pursuant to which Brio will provide Stanley M. Gloss to serve as the Chief
Financial Officer of the Company and also provide certain other specified financial and accounting services typically provided by a Chief
Financial Officer (the “Brio Agreement”), which are described more fully in the Brio Agreement (the “CFO Services”).
The term of the Brio Agreement will run through March 31, 2022, unless terminated by either party upon 10 days prior written notice to
the other party, pursuant to the terms of the Brio Agreement. The Company will pay a monthly fixed fee of $7,500 for the CFO Services
during the term of the Brio Agreement. In addition, 25,000 restricted shares of the Company’s common stock were issued to Brio
fully vesting over the 1 year term of the Brio Agreement. Furthermore, the Company issued Stanley M. Gloss stock options to purchase
up to 100,000 shares of the Company’s Common Stock, which options vested fully upon execution of the Brio Agreement and shall be
exercisable at a price equal to the public price of the Company’s Common Stock sold in its Initial Public Offering.
The fair value of the 25,000 restricted shares
of common stock granted of approximately $60,000 is being amortized over the 1 year term of the Brio Agreement. The total compensation
expense was $30,000 for the nine months ended September 30, 2021, with unamortized expense remaining of $30,000 as of September 30, 2021.
The fair value of the 100,000 fully-vested stock
options granted of approximately $284,665 was expensed in full during the nine months ended September 30, 2021. The fair value of was
determined by the Black-Scholes Pricing Model with the following assumptions: dividend yield of 0%, term of 10 years, volatility of 47.07%,
and risk-free rate of 1.29%.
Services Agreement
On September 18, 2021, the Company entered into
a services agreement with TraDigital Marketing Group (“TraDigital”) pursuant to which TraDigital will provide consulting
services from September 18, 2021 through December 17, 2021 (the “Services Agreement”). The Services Agreement includes a
prepaid cash consulting fee of $394,000, payable and paid upon the agreement date, of which the Company expensed a total of $32,533 as
selling, general and administrative expense for the three and nine months ended September 30, 2021, with the remaining unamortized amount
of $361,467 included in prepaid expenses as of September 30, 2021.
The Services Agreement also includes 150,000
common shares of the Company due and earned upon the agreement date of September 18, 2021. The aggregate fair value of the 150,000
common shares of $750,000 and was recorded as shares issued for services, which is included in selling, general and administrative
expense for the three and nine months ended September 30, 2021.
NOTE 6 – WARRANT LIABILITIES
On September 17, 2021, the Company consummated
its Initial Public Offering of 4,800,000 Units at a price of $5.00 per Unit, generating gross proceeds of $24,000,000, with each Unit
consisting of one share of common stock, $0.0001 par value, and one redeemable Public Warrant. Each redeemable Public Warrant entitles
the holder to purchase one share of common stock, at a price of $6.25 per share, which will expire five years from issuance.
Simultaneously with the consummation of the closing
of the Initial Public Offering, the Company issued the underwriters a total of 240,000 Representative Warrants that are exercisable for
six months from the date of its Initial Public Offering at an exercise price of $6.25 with a five year expiration term.
The Company evaluated the Public and Representative
Warrants (collectively, the “Warrants”) as either equity-classified or liability-classified instruments based on an assessment
of the warrants’ specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815,
Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments
pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for
equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock, among other
conditions for equity classification. Pursuant to such evaluation, the Company further evaluated the Warrants under ASC 815-40, Derivatives
and Hedging — Contracts in Entity’s Own Equity, and concluded that the Warrants do not meet the criteria to be classified
in stockholders’ equity.
Certain adjustments to the settlement amount
of the Warrants are based on a variable that is not an input to the fair value of an option as defined under ASC 815 — 40, and
thus the Warrants are not considered indexed to the Company’s own stock and not eligible for an exception from derivative accounting.
The accounting treatment of derivative financial instruments requires that the Company record a derivative liability upon issuance of
the Warrants at the closing of the Initial Public Offering. Accordingly, the Company classifies each Warrant as a liability at its fair
value, with subsequent changes in their respective fair values recognized in the statement of operations and comprehensive income (loss)
at each reporting date.
As of September 30, 2021, the fair value of the
Public Warrants was approximately $0.80 per Public Warrant which was determined using the Black-Scholes option pricing model with the
following assumptions: exercise price of $6.25, dividend yield of 0%, term of 5 years, volatility of 52.6%, and risk-free rate of 0.97%.
The fair value of the Representatives’ Warrants was approximately $0.83 per Representative Warrant which was determined using the
Black-Scholes option pricing model with the following assumptions: exercise price of $6.00, dividend yield of 0%, term of 5 years, volatility
of 52.6%, and risk-free rate of 0.97%.
NOTE 7 – SUBSEQUENT EVENTS
The Company has evaluated events and transactions
subsequent to September 30, 2021, through the date these condensed consolidated financial statements were included in this Quarterly
Report on Form 10-Q and filed with the SEC. Other than the below, there are no subsequent events identified that would require disclosure
in these condensed consolidated financial statements.
In
connection with the Initial Public Offering, we granted the underwriters an option for a period of 45 days to purchase up to an additional
720,000 shares of Common Stock and/or Warrants to purchase up to 720,000 shares of Common Stock at $5.00 per Unit less the underwriting
discounts and commissions. On October 29, 2021, the underwriters’ option lapsed without exercise.