PART
I — FINANCIAL INFORMATION
Item
1. Financial Statements.
Cingulate
Inc.
Consolidated
Balance Sheets (unaudited)
| |
June
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
Current
assets: | |
| | | |
| | |
Cash
and cash equivalents | |
$ | 8,195,760 | | |
$ | 16,492,745 | |
Short-term
investments | |
| - | | |
| 933 | |
Miscellaneous
receivables | |
| 140,113 | | |
| 690,248 | |
Prepaid
expenses and other current assets | |
| 1,766,279 | | |
| 1,698,353 | |
Total
current assets | |
| 10,102,152 | | |
| 18,882,279 | |
| |
| | | |
| | |
Property
and equipment, net | |
| 2,952,920 | | |
| 3,145,378 | |
Operating
lease right-of-use assets | |
| 748,782 | | |
| 858,600 | |
| |
| | | |
| | |
Total
assets | |
| 13,803,854 | | |
| 22,886,257 | |
| |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Current
liabilities: | |
| | | |
| | |
Accounts
payable | |
| 282,265 | | |
| 264,687 | |
Accrued
expenses | |
| 311,573 | | |
| 601,300 | |
Current
installments of obligations under finance leases | |
| 15,570 | | |
| 15,096 | |
Other
current liabilities | |
| 314,097 | | |
| 295,595 | |
Total
current liabilities | |
| 923,505 | | |
| 1,176,678 | |
| |
| | | |
| | |
Long-term
liabilities: | |
| | | |
| | |
Obligations
under finance leases | |
| 29,633 | | |
| 37,534 | |
Operating
lease liabilities | |
| 665,842 | | |
| 828,503 | |
| |
| | | |
| | |
Total
liabilities | |
| 1,618,980 | | |
| 2,042,715 | |
| |
| | | |
| | |
Stockholders’
Equity | |
| | | |
| | |
Common
Stock, $0.0001 par value; 240,000,000 shares authorized and 11,309,412 shares issued and outstanding as of June 30, 2022 and December
31, 2021 | |
| 1,131 | | |
| 1,131 | |
Preferred
Stock, $0.0001 par value; 10,000,000 shares authorized and 0 shares issued and outstanding as of June 30, 2022 and December 31, 2021 | |
| - | | |
| - | |
Additional
Paid-in-Capital | |
| 72,963,214 | | |
| 72,574,510 | |
Accumulated
other comprehensive income | |
| (3,249 | ) | |
| 165 | |
Accumulated
deficit | |
| (60,776,222 | ) | |
| (51,732,264 | ) |
Total
stockholders’ equity | |
| 12,184,874 | | |
| 20,843,542 | |
| |
| | | |
| | |
Total
liabilities and stockholders’ equity | |
$ | 13,803,854 | | |
$ | 22,886,257 | |
See
notes to consolidated financial statements.
Cingulate
Inc.
Consolidated
Statements of Operations and Comprehensive Loss (unaudited)
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three
Months Ended June 30, | | |
Six
Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Operating
expenses: | |
| | | |
| | | |
| | | |
| | |
Research
and development | |
$ | 2,178,226 | | |
$ | 793,587 | | |
$ | 4,940,510 | | |
$ | 1,356,106 | |
General
and administrative | |
| 1,870,591 | | |
| 629,032 | | |
| 4,117,651 | | |
| 1,396,677 | |
Operating
loss | |
| (4,048,817 | ) | |
| (1,422,619 | ) | |
| (9,058,161 | ) | |
| (2,752,783 | ) |
| |
| | | |
| | | |
| | | |
| | |
Interest
and other income (expense), net | |
| 8,370 | | |
| (9,676 | ) | |
| 14,203 | | |
| (13,435 | ) |
Loss
before income taxes | |
| (4,040,447 | ) | |
| (1,432,295 | ) | |
| (9,043,958 | ) | |
| (2,766,218 | ) |
Income
tax benefit (expense) | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net
loss | |
| (4,040,447 | ) | |
| (1,432,295 | ) | |
| (9,043,958 | ) | |
| (2,766,218 | ) |
Other
comprehensive income (loss): | |
| | | |
| | | |
| | | |
| | |
Change
in unrealized loss on short-term investments | |
| (466 | ) | |
| - | | |
| (3,414 | ) | |
| - | |
Comprehensive
loss | |
$ | (4,040,913 | ) | |
$ | (1,432,295 | ) | |
$ | (9,047,372 | ) | |
$ | (2,766,218 | ) |
Net
loss per share of common stock, basic and diluted | |
$ | (0.36 | ) | |
| - | | |
$ | (0.80 | ) | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Weighted
average number of shares used in computing net loss per share of common stock, basic and diluted | |
| 11,309,412 | | |
| - | | |
| 11,309,412 | | |
| - | |
See
notes to consolidated financial statements.
Cingulate
Inc.
Consolidated
Statements of Stockholders’ Equity (unaudited)
| |
Shares | | |
Amount | | |
Paid-in-Capital | | |
Capital | | |
Deficit | | |
Income | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
Accumulated | | |
| |
| |
Common
Stock | | |
Additional | | |
Members’ | | |
Accumulated | | |
Other
Comprehensive | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Paid-in-Capital | | |
Capital | | |
Deficit | | |
Income | | |
Equity | |
Balance
January 1, 2021 | |
| - | | |
| - | | |
$ | - | | |
| 32,314,441 | | |
$ | (31,022,336 | ) | |
$ | 165 | | |
$ | 1,292,270 | |
Member
contributions | |
| | | |
| | | |
| - | | |
| 1,385,688 | | |
| | | |
| | | |
| 1,385,688 | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| | | |
| (1,333,923 | ) | |
| - | | |
| (1,333,923 | ) |
Balance
March 31, 2021 | |
| - | | |
$ | - | | |
$ | - | | |
$ | 33,700,129 | | |
$ | (32,356,259 | ) | |
$ | 165 | | |
$ | 1,344,035 | |
Activity
for the three months to June 30, 2021: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Member
contributions | |
| - | | |
| - | | |
| - | | |
| 1,987,640 | | |
| - | | |
| - | | |
| 1,987,640 | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,432,295 | ) | |
| - | | |
| (1,432,295 | ) |
Balance
June 30, 2021 | |
| - | | |
$ | - | | |
$ | - | | |
$ | 35,687,769 | | |
$ | (33,788,554 | ) | |
$ | 165 | | |
$ | 1,899,380 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance
January 1, 2022 | |
| 11,309,412 | | |
| 1,131 | | |
$ | 72,574,510 | | |
| - | | |
$ | (51,732,264 | ) | |
$ | 165 | | |
$ | 20,843,542 | |
Activity
for the three months to March 31, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Unrealized
losses on available for sale investments | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,948 | ) | |
| (2,948 | ) |
Stock-based
compensation expense | |
| - | | |
| - | | |
| 181,518 | | |
| - | | |
| - | | |
| - | | |
| 181,518 | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (5,003,511 | ) | |
| - | | |
| (5,003,511 | ) |
Balance
March 31, 2022 | |
| 11,309,412 | | |
$ | 1,131 | | |
$ | 72,756,028 | | |
$ | - | | |
$ | (56,735,775 | ) | |
$ | (2,783 | ) | |
$ | 16,018,601 | |
Activity
for the three months to June 30, 2022: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Unrealized
losses on available for sale investments | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (466 | ) | |
| (466 | ) |
Stock-based
compensation expense | |
| - | | |
| - | | |
| 207,186 | | |
| - | | |
| - | | |
| - | | |
| 207,186 | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4,040,447 | ) | |
| - | | |
| (4,040,447 | ) |
Balance
June 30, 2022 | |
| 11,309,412 | | |
$ | 1,131 | | |
$ | 72,963,214 | | |
$ | - | | |
$ | (60,776,222 | ) | |
$ | (3,249 | ) | |
$ | 12,184,874 | |
See
notes to consolidated financial statements
Cingulate
Inc.
Consolidated
Statements of Cash Flows (unaudited)
| |
2022 | | |
2021 | |
| |
Six
Months Ended June 30, | |
| |
2022 | | |
2021 | |
Operating
activities: | |
| | | |
| | |
Net
loss | |
$ | (9,043,958 | ) | |
$ | (2,766,218 | ) |
Adjustments
to reconcile net loss to net | |
| | | |
| | |
cash
used in operating activities: | |
| | | |
| | |
Adjustments
to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation | |
| 202,858 | | |
| 351,286 | |
Stock-based
compensation | |
| 388,705 | | |
| - | |
Changes
in operating assets and liabilities: | |
| | | |
| | |
Miscellaneous
receivables | |
| 550,135 | | |
| (128,528 | ) |
Prepaid
expenses and other current assets | |
| (67,926 | ) | |
| (1,190,416 | ) |
Operating
lease right-of-use assets | |
| 109,818 | | |
| (1,739 | ) |
Trade
accounts payable and accrued expenses | |
| (272,149 | ) | |
| 541,672 | |
Other
current liabilities | |
| 18,502 | | |
| 46,732 | |
Operating
lease liabilities | |
| (162,661 | ) | |
| (77,501 | ) |
Net
cash used in operating activities | |
| (8,276,676 | ) | |
| (3,224,712 | ) |
| |
| | | |
| | |
Investing
activities: | |
| | | |
| | |
Purchase
of property and equipment | |
| (10,400 | ) | |
| (88,955 | ) |
Proceeds
from sale of short-term investments | |
| 933 | | |
| - | |
Other | |
| (3,415 | ) | |
| - | |
Net
cash used in investing activities | |
| (12,882 | ) | |
| (88,955 | ) |
| |
| | | |
| | |
Financing
Activities: | |
| | | |
| | |
Members’
capital contributions | |
| - | | |
| 3,373,163 | |
Principal
payments on finance lease obligations | |
| (7,427 | ) | |
| (212,853 | ) |
Net
cash provided by (used in) financing activities | |
| (7,427 | ) | |
| 3,160,310 | |
| |
| | | |
| | |
Cash
and cash equivalents: | |
| | | |
| | |
Net
decrease in cash and cash equivalents | |
| (8,296,985 | ) | |
| (153,357 | ) |
Cash
and cash equivalents at beginning of year | |
| 16,492,745 | | |
| 1,197,672 | |
Cash
and cash equivalents at end of year | |
$ | 8,195,760 | | |
$ | 1,044,315 | |
Non-cash
activities | |
| | | |
| | |
Property
and equipment accrued but not yet paid at end of period | |
$ | - | | |
$ | 164,365 | |
Cash
payments: | |
| | | |
| | |
Interest
paid | |
$ | 9,619 | | |
$ | 4,880 | |
See
notes to consolidated financial statements
CINGULATE
INC.
Notes
to Consolidated Financial Statements
(1) |
Nature
of the Business and Liquidity |
Organization
Cingulate
Inc. is a clinical stage biopharmaceutical company focused on the development of products utilizing its drug delivery platform technology
that enables the formulation and manufacture of once-daily tablets of multi-dose therapies, with an initial focus on the treatment of
Attention Deficit/Hyperactivity Disorder (ADHD). The Company is developing two proprietary, first-line stimulant medications, CTx-1301
(dexmethylphenidate) and CTx-1302 (dextroamphetamine), for the treatment of ADHD intended for all patient segments: children, adolescents,
and adults. CTx-1301 and CTx-1302 utilize a flexible core tableting technology with target product profile designed to deliver a rapid
onset and last the entire active day with a controlled descent of plasma drug level and have favorable tolerability. The Company is preparing
to start Phase 3 clinical trials for CTx-1301 in the second half of 2022. In addition, the Company has a third product to treat anxiety,
CTx-2103, in a formulation stage.
On
November 14, 2012, Cingulate Therapeutics LLC (CTx), a Delaware limited liability company, was formed. On May 10, 2021, Cingulate Inc.
(Cingulate, or the Company), a Delaware corporation and wholly-owned subsidiary of CTx, was formed to serve as a holding company, in
anticipation of the Company becoming publicly traded. Through a Reorganization Merger which occurred in the third quarter of 2021, Cingulate
effectively acquired CTx and all outstanding units of CTx were converted into shares of Cingulate common stock. CTx remains the entity
through which the Company conducts operations.
CTx
is the predecessor of Cingulate for financial reporting purposes. The consolidated financial statements and notes for the periods ended
June 30, 2022 and the year ended December 31, 2021 represent the full consolidation of Cingulate and its subsidiaries, including CTx
and all references to the Company represent this full consolidation. For periods prior to the year ended December 31, 2021, the consolidated
financial statements and notes represent the full consolidation of CTx and its subsidiaries.
Liquidity
The
Company has incurred losses and negative cash flows from operations since inception. As a pre-revenue entity, the Company is dependent
on the ability to raise capital to support operations until such time as the product candidates under development are U.S Food and Drug
Administration (FDA) approved, manufactured, commercially available to the marketplace and produce revenues. The IPO, which was completed
in December 2021, provided the Company the ability to continue its research and development activities; however, the Company will need
additional funding for operations and development in order to meet its obligations. Management is evaluating various strategies to obtain
additional funding for operations and development which may include additional offerings of common stock, issuance of debt, potential
strategic research and development partners, and licensing and/or marketing arrangements with pharmaceutical companies. Successful implementation
of these plans involves both the Company’s efforts and factors that are outside its control, such as market factors and FDA approval
of product candidates. The Company can give no assurance that its plans will be effectively implemented in such a way that they will
sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s
ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. The consolidated financial statements do not reflect any adjustments that might result from the outcome
of this uncertainty.
(2) |
Summary
of Significant Accounting Policies |
|
(a) |
Basis
of Presentation and Principles of Consolidation |
The
accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S.
GAAP”). The consolidated financial statements include the accounts of Cingulate and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
|
(b) |
Unaudited
Interim Financial Information |
The
accompanying consolidated balance sheet as of June 30, 2022, the consolidated statements of operations for the three and six-month periods
ended June 30, 2022 and 2021 and, the consolidated statement of stockholders’ equity for the three and six-month periods ended
June 30, 2022 and 2021, the consolidated statements of cash flows for the six months ended June 30, 2022 and 2021, and the related interim
disclosures are unaudited. These unaudited consolidated financial statements include all adjustments necessary, consisting of only normal
recurring adjustments, to fairly state the financial position and the results of operations and cash flows for interim periods in accordance
with U.S. GAAP. Interim period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent
interim period. The accompanying consolidated financial statements should be read in conjunction with the Company’s audited consolidated
financial statements and the notes thereto.
|
(c) |
Concentration
of Credit Risk |
The
Company maintains cash equivalent deposits, which at various times throughout the fiscal year exceeded the amounts insured by the Federal
Deposit Insurance Corporation limit of $250,000 (without regard to reconciling items). Management monitors the soundness of these financial
institutions and does not believe the Company is subject to any material credit risk relative to the uninsured portion of the deposits.
|
(d) |
Miscellaneous
Receivables |
Miscellaneous
receivables consist of payroll tax credits generated from the Company’s 2020 and 2019 federal income tax returns, which have not
yet been received as of June 30, 2022, as well as employee retention tax credits for payroll costs incurred in 2020 and the first three
quarters of 2021. As of June 30, 2022 and December 31, 2021, the Company determined that there was no allowance necessary relating to
these receivables.
|
(e) |
Impairment
of Long-lived Assets |
The
Company assesses the carrying value of its long-lived assets, including property and equipment, as well as lease right of use (ROU) assets,
when events or circumstances indicate that the carrying value of such assets may not be recoverable. These events or changes in circumstances
may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows.
If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future
undiscounted cash flows expected to be generated by the assets. If the sum of the expected future cash flows is less than the carrying
amount, the Company would recognize an impairment loss. An impairment loss would be measured by comparing the amount by which the carrying
value exceeds the fair value of the long-lived asset groups. No impairment was recognized during the three or six-month periods ended
June 30, 2022 or 2021.
|
(f) |
Stock-Based
Compensation |
The
Company measures employee and director stock-based compensation expense for all stock-based awards based on their grant date fair value
using the Black-Scholes option-pricing model. For stock-based awards with service conditions, stock-based compensation expense is recognized
over the requisite service period using the straight-line method. Forfeitures are recognized as they occur. See additional information
in Note 10.
(3) | Fair
Value of Assets and Liabilities |
The
Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent
possible. The Company determines fair values based on assumptions that market participants would use in pricing an asset or liability
in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following
fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level
1—Inputs represent unadjusted quoted prices for identical assets exchanged in active markets.
Level
2—Inputs include directly or indirectly observable inputs other than Level 1 inputs such as quoted prices for similar assets
exchanged in active or inactive markets; quoted prices for identical assets exchanged in inactive markets; other inputs that are considered
in fair value determinations of the assets, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level
3—Inputs include unobservable inputs used in the measurement of assets. Management is required to use its own assumptions regarding
unobservable inputs because there is little, if any, market activity in the assets or related observable inputs that can be corroborated
at the measurement date. Measurements of certain investments carried at fair value are based primarily on valuation models, discounted
cash flow models or other valuation techniques that are believed to be used by market participants. Unobservable inputs require management
to make certain projections and assumptions about the information that would be used by market participants in pricing assets.
The
categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The Company’s policy is to recognize significant transfers between the levels at the actual date of the event. There were no transfers
in or out of Levels 1, 2, or 3 during the three or six-month periods ended June 30, 2022 or June 30, 2021.
The
Company has no Level 2 or Level 3 investments. The cash and short-term investments held by the Company are categorized as Level 1 investments
as quoted market prices are readily available for these investments.
Assets
measured and carried at fair value on a recurring basis are summarized below:
Schedule
of Assets Measured and Carried at Fair Value on Recurring Basis
| |
June
30, 2022 | |
| |
| | |
Gross | | |
Gross | | |
Fair
Value | | |
Fair
Value | | |
Fair
Value | |
| |
Amortized | | |
Unrealized | | |
Unrealized | | |
of
Current | | |
of
Non-Current | | |
of
Total | |
| |
Cost | | |
Gains | | |
Losses | | |
Assets | | |
Assets | | |
Assets | |
Money
Market Fund | |
$ | 7,519,009 | | |
| - | | |
$ | (3,413 | ) | |
$ | 7,515,596 | | |
| - | | |
$ | 7,515,596 | |
| |
| |
| |
December
31, 2021 | |
| |
| | |
Gross | | |
Gross | | |
Fair
Value | | |
Fair
Value | | |
Fair
Value | |
| |
Amortized
| | |
Unrealized
| | |
Unrealized
| | |
of
Current | | |
of
Non-Current | | |
of
Total | |
| |
Cost | | |
Gains | | |
Losses | | |
Assets | | |
Assets | | |
Assets | |
Mutual
Fund | |
$ | 920 | | |
$ | 13 | | |
| | | |
$ | 933 | | |
$ | -
| | |
$ | 933 | |
Prepaid
expenses consisted of the following at June 30, 2022 and December 31, 2021:
Schedule
of Prepaid Expenses
| |
June
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
Insurance | |
$ | 1,137,786 | | |
$ | 761,594 | |
Active
pharmaceutical ingredients | |
| 224,381 | | |
| 264,361 | |
Research
and development | |
| 116,432 | | |
| 643,917 | |
Legal
fees | |
| 154,858 | | |
| - | |
Other | |
| 132,822 | | |
| 28,481 | |
Total | |
$ | 1,766,279 | | |
$ | 1,698,353 | |
| (5) | Property
and Equipment |
Property
and equipment, net consists of the following at June 30, 2022 and December 31, 2021:
Schedule
of Property and Equipment
| |
Estimated | | |
| | |
| |
| |
Useful
Life | | |
June
30, | | |
December
31, | |
| |
(in
years) | | |
2022 | | |
2021 | |
Equipment | |
| 2-7 | | |
$ | 2,509,126 | | |
$ | 2,509,126 | |
Furniture
and fixtures | |
| 7 | | |
| 145,754 | | |
| 145,754 | |
Computer
equipment | |
| 5 | | |
| 41,898 | | |
| 41,898 | |
Leasehold
improvements | |
| 5 | | |
| 471,505 | | |
| 471,505 | |
Construction-in-process | |
| - | | |
| 1,653,550 | | |
| 1,643,150 | |
Property and equipment, gross | |
| | | |
| 4,821,833 | | |
| 4,811,433 | |
Less:
accumulated depreciation | |
| | | |
| (1,868,913 | ) | |
| (1,666,055 | ) |
Property and equipment, net | |
| | | |
$ | 2,952,920 | | |
$ | 3,145,378 | |
Depreciation
expense for the six months ended June 30, 2022 was $202,858 and for the six months ended June 30, 2021 was $351,286. Depreciation expense
for the three months ended June 30, 2022 was $101,429 and for the three months ended June 30, 2021 was $76,853.
(6)
Accrued Expenses
Accrued
expenses consisted of the following at June 30, 2022 and December 31, 2021:
Schedule
of Accrued Expenses
| |
June
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
Professional
and consulting fees | |
$ | 15,000 | | |
$ | 15,000 | |
Research
and development | |
| 250,000 | | |
| 250,000 | |
CIP-
Equipment | |
| - | | |
| 279,730 | |
Other | |
| 46,573 | | |
| 56,570 | |
Total | |
$ | 311,573 | | |
$ | 601,300 | |
Prior
to the Reorganization Merger, the Company had multiple classes of Members’ capital, comprised of Founders Units, Class B, D, E,
F and G Preferred Units, and Class C Profits Interests. Class B, E, F and G Preferred Units had similar rights specifically related to
cash distributions as a return of invested capital. Class D Preferred Units had all the rights of Founders and the other Classes of Preferred
Units plus some additional rights noted below. All classes of Members’ capital had voting rights. The Company maintained capital
accounts for each Member. 3,243,201 Units of Class F and Class G were issued during the year ended December 31, 2021, prior to the Reorganization
Merger. 614,137 Units of Class F and Class G were issued during the three months ended March 31, 2021 and 948,804 units were issued during
the three months ended June 30, 2021.
Class
F Preferred Units
The
CTx Board authorized 6,984,985 Class F Preferred Units in two tranches; all authorized Class F Units were issued prior to the Reorganization
Merger. The Company raised a total of $11.3 million from issuance of Class F Units. The newly created Class F Units as authorized by
the CTx Board and as reflected in the 3rd Amended and Restated Operating Agreement to reflect the creation of the Class F
Units became effective on December 14, 2018.
Class
G Preferred Units
The
CTx Board authorized 12,000,000 Class G Preferred Units; 2,998,184 were issued prior to the Reorganization Merger. The Company raised
a total of $6.7 million from issuance of Class G Units. The newly created Class G Units as authorized by the CTx Board became effective
on February 9, 2021.
Distributions,
if any, from the Company were to be made first to the holders of Class B, D, E, F and G Preferred Units, pro rata in proportion to each
such Member’s unreturned capital contributions. Distributions were then to be made to all Members including Founders Units, pro
rata in proportion to the number of units held by each Member, with consideration given to the applicable distribution thresholds for
Class C Profits Interests at which each was issued and as disclosed in each Profits Interest Unit agreement, as further described in
Note 8.
Costs
associated with issuance of the Units is immaterial. Pursuant to the terms of the Reorganization Merger, all Units were converted into
shares of common stock of Cingulate, as further described in Note 1.
(8)
Profits Interest Plan
During
2017, the CTx Board established and adopted the Cingulate Therapeutics LLC Equity Incentive Plan (the “Plan”) to provide
for issuance of Class C PIU’s to employees, CTx Members, Board members and service providers of the Company, as defined in the
Plan, eligible to receive PIU’s as an incentive under the Plan. PIU’s were granted at the discretion of the Board of Managers
of the Company and in some cases at the discretion of the Chief Executive Officer of the Company based upon Board authorization. The
PIU’s were issued at a Distribution Threshold equal to the pre-money fair market valuation of the Company at the date of issuance.
The Distribution Threshold was the amount by which a cash distribution, made pro rata to all Members, if any, must have been exceeded
in order for a particular PIU holder to participate in the allocated distribution beyond that threshold. Based on the terms of the award,
the Distribution Threshold was treated as a performance condition for purposes of financial statement recognition. The PIU’s vesting
period with respect to the service condition was defined in the PIU award agreement and ranged from 30 days to three years with an average
vesting period for all PIU’s granted of 107 days. As defined in the Company’s Operating Agreement, all PIU’s issued
under the Plan entitled the holder to participate pro rata in the profits, if any, of the Company over the stated Distribution Threshold,
assuming a cash distribution was generally made to all Members, subject to any preference or priorities of the other classes of Units.
The Class C PIU’s also held voting rights on a one-for-one basis.
Immediately
prior to the Reorganization Merger and as of December 31, 2020, the Company had granted and issued 8,500,000 and 8,142,461 PIU’s,
net of forfeitures, respectively. In April 2021, the Company issued the remaining 357,539 PIU’s. The Company accounted for these
awards under FASB ASC Topic 718, Compensation – Stock Compensation, as equity classified awards. No compensation expense
was recorded prior to the Reorganization Merger related to the PIU’s as the future achievement of the thresholds and targets (the
performance condition) to achieve payout was not deemed probable. This assessment was made based on the Company’s history of operating
losses and continued challenges in raising necessary equity capital to fund operations. In connection with the Reorganization Merger,
8.5 million PIU’s were exchanged for 1,158,008 shares of Cingulate common stock. The exchange of PIU’s for common stock created
a modification of the terms, character and rights of the PIU’s and achievement of performance was considered probable. This resulted
in the Company recognizing a noncash modification charge equal to $12.7 million, which charge was calculated based on the Company’s
assessment of the fair value of the shares of Cingulate common stock on the date of the modification. $8.2 million of this charge was
recorded to general and administrative expense and $4.5 million was recorded to research and development expense.
Prior
to the Reorganization Merger, the Company had issued all units available under the Plan and all units had vested based upon the vesting
period as outlined in the PIU agreement.
PIUs
issued and outstanding prior to the Reorganization Merger, which was also the modification date, at the various distribution thresholds
were as follows:
Schedule
of Various Distribution Thresholds
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| |
Distribution Threshold $ (in millions): | | |
| |
Year
Granted | |
$25 | | |
$40 | | |
$75 | | |
$80 | | |
$90 | | |
$120 | | |
$160 | | |
Total | |
2017 | |
| 4,753,000 | | |
| 125,200 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 4,878,200 | |
2018 | |
| - | | |
| 661,525 | | |
| 217,725 | | |
| 22,883 | | |
| - | | |
| - | | |
| - | | |
| 902,133 | |
2019 | |
| - | | |
| - | | |
| - | | |
| - | | |
| 377,524 | | |
| 458,924 | | |
| - | | |
| 836,448 | |
2020 | |
| - | | |
| - | | |
| - | | |
| 1,476,126 | | |
| - | | |
| 49,554 | | |
| - | | |
| 1,525,680 | |
2021 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 357,539 | | |
| 357,539 | |
Total | |
| 4,753,000 | | |
| 786,725 | | |
| 217,725 | | |
| 1,499,009 | | |
| 377,524 | | |
| 508,478 | | |
| 357,539 | | |
| 8,500,000 | |
(9)
Stockholders’ Equity
The
Company has authorized 240,000,000 shares of $0.0001 par value common stock and 10,000,000 shares of $0.0001 par value preferred stock
at June 30, 2022 and December 31, 2021 of which 11,309,412 shares of common stock were issued and outstanding. The Company has not issued
any shares of preferred stock.
7,142,746
shares of common stock issued and outstanding were issued in connection with the Reorganization Merger to convert Units of CTx outstanding
immediately prior to the Reorganization Merger.
4,166,666
shares of common stock were issued at a price to the public of $6.00 per share in connection with the Company’s IPO, which was
completed in December 2021. The Company received net proceeds of approximately $20.4 million, after deducting underwriting discounts
and commissions and other offering expenses.
The
holders of common stock are entitled to one vote for each share of common stock. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, after the payment or provision for payment of all debts and liabilities of the Company, the
holders of common stock shall be entitled to share in the remaining assets of the Company available for distribution, if any. Holders
of the shares of common stock are entitled to dividends when, as and if declared by the Board of Directors.
(10)
Stock-Based Compensation
In
September 2021, the Company’s board of directors and stockholders adopted the 2021 Equity Incentive Plan (the “2021 Plan”),
which provides for the grant of incentive stock options and non-qualified stock options to purchase shares of the Company’s common
stock, stock appreciation rights, restricted stock units, restricted or unrestricted shares of common stock, performance shares, performance
units, incentive bonus awards, other stock-based awards and other cash-based awards. No awards may be made under the 2021 Plan on or
after September 24, 2031, but the 2021 Plan will continue thereafter while previously granted awards remain outstanding.
The
maximum number of shares of common stock available for issuance in connection with options and other awards granted under the 2021 Plan
is 1,927,810 and as of June 30, 2022, 1,044,009 shares of common stock were available for issuance under the 2021 Plan. The number of
shares of common stock available for issuance under the 2021 Plan will automatically increase on January 1st of each year until the expiration
of the 2021 Plan, in an amount equal to 5% percent of the total number of shares of our common stock outstanding on December 31st of
the preceding calendar year, on a fully diluted basis, unless the board of directors takes action prior thereto to provide that there
will not be an increase in the share reserve for such year or that the increase in the share reserve for such year will be of a lesser
number of shares of common stock than would otherwise occur. The shares of common stock underlying any awards that are forfeited, cancelled,
held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, repurchased or are otherwise terminated
by the Company under the 2021 Plan will be added back to the shares of common stock available for issuance under the 2021 Plan.
The
Company recorded stock-based compensation expense of $388,705 during the six months ended June 30, 2022, and $207,189 during the three
months ended June 30, 2022, relating to options issued in 2021 and 2022. As of June 30, 2022 and December 31, 2021, there was $2,669,011
and $2,637,895 of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2021 Plan,
which is expected to be recognized over the next one to four years.
A
summary of option activity under the Plan during the three and six months ended June 30, 2022 is as follows:
Summary
of Option Activity
| |
| | |
Weighted-Average | | |
Weighted-Average | | |
Aggregate | |
| |
Shares | | |
Exercise
Price
per Share | | |
Remaining
Contractual Term | | |
Intrinsic
Value | |
Outstanding
at December 31, 2021 | |
| 523,285 | | |
$ | 6.00 | | |
| 9.94 | | |
| | |
Grants | |
| 342,999 | | |
$ | 1.82 | | |
| 9.91 | | |
| | |
Exercised | |
| — | | |
| | | |
| | | |
| | |
Forfeitures
or expirations | |
| — | | |
| | | |
| | | |
| | |
Outstanding
at March 31, 2022 | |
| 866,284 | | |
$ | 4.35 | | |
| 9.78 | | |
$ | 182,900 | |
Grants | |
| 17,517 | | |
$ | 1.46 | | |
| 10.00 | | |
| | |
Exercised | |
| — | | |
| | | |
| | | |
| | |
Forfeitures
or expirations | |
| — | | |
| | | |
| | | |
| | |
Outstanding
at June 30, 2022 | |
| 883,801 | | |
$ | 4.29 | | |
| 9.49 | | |
$ | 24,800 | |
Options
exercisable as of June 30, 2022 | |
| 11,017 | | |
| | | |
| | | |
| | |
Options
unvested as of June 30, 2022 | |
| 872,784 | | |
| | | |
| | | |
| | |
The
Company’s stock options issued qualify for equity accounting treatment under ASC 718 and are measured at fair value as of
their grant date accordingly. The fair value of the options were estimated using a Black-Scholes model. The assumptions that the
Company used to estimate the grant-date fair value of stock options granted to employees during the six-month period ended June 30,
2022 were as follows; shown on a weighted average basis:
Schedule
of Fair Value Assumption
Risk-free
interest rate | |
| 1.60 | % |
Weighted-average
expected term (in years) | |
| 6.07 | |
Expected
volatility | |
| 1.12 | |
Expected
dividend yield | |
| 0 | % |
Risk-Free
Interest Rate: The Company based the risk-free interest rate over the expected term of the options based on the constant maturity
of U.S. Treasury securities with similar maturities as of the date of grant.
Expected
Term: The expected term represents the period that the options granted are expected to be outstanding and is determined using the
simplified method (based on the mid-point between the vesting dates and the end of the contractual term.)
Expected
Volatility: The Company uses an average historical stock price volatility of comparable public companies within the biotechnology
and pharmaceutical industry that were deemed to be representative of future stock price trends as the Company does not have sufficient
trading history for its common stock. The Company will continue to apply this process until a sufficient amount of historical information
regarding volatility of its own stock price becomes available.
Expected
Dividend Yield: The Company has not paid and does not anticipate paying any dividends in the near future. Therefore, the expected
dividend yield was zero.
The
grant-date fair value of options granted during the year ended December 31, 2021 was $5.09 and the grant date fair value of the options
issued during the three months ended March 31, 2022 ranged from $1.12 to $1.16. The grant date fair value of the options issued during
the three months ended June 30, 2022 ranged from $1.04 to $1.34.
The
aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair
value of the Company’s common stock. The fair value per share of common stock was $1.46 as of June 30, 2022, based upon the closing
price of our common stock on the Nasdaq Capital Market.
(11)
Income Taxes
Cingulate
Inc. is taxed as a C corporation under the Internal Revenue Code. Cingulate Inc. records deferred income taxes to reflect the impact
of temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. CTx is a wholly-owned disregarded entity of Cingulate Inc., and all of the activity for CTx, along
with its wholly-owned subsidiary Cingulate Works Inc., is included in the calculation of the current and deferred tax assets and liabilities
for Cingulate Inc. No deferred income tax benefit or expense was recorded as of June 30, 2022, for federal or state income taxes.
Income
tax expense differed from the expected expense computed by applying the U.S. Federal income tax rate as follows:
Schedule
of Effective Income Tax Rate Reconciliation
| |
Six Months Ended | | |
Three Months Ended | |
| |
June 30, 2022 | | |
June 30, 2022 | |
Federal income tax benefit at statutory rate | |
$ | (1,888,057 | ) | |
$ | (848,475 | ) |
State income tax benefit | |
| (497,189 | ) | |
| (223,432 | ) |
Permanent differences | |
| 8,763 | | |
| 3,098 | |
Change in valuation allowance | |
| 2,439,294 | | |
| 1,077,408 | |
Other | |
| (62,811 | ) | |
| (8,599 | ) |
Total income tax expense | |
$ | - | | |
$ | - | |
Evaluating
the need for, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis
of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require the Company to interpret existing tax law and
other published guidance as applied to its circumstances. As part of this assessment, the Company considers both positive and negative
evidence about its profitability and tax situation. A valuation allowance is provided if, based on available evidence, it is more likely
than not that all or some portion of a deferred tax asset will not be realized. The Company determined that it was more likely than not
that it would not realize its deferred tax assets, based on historical levels of income and future forecasts of taxable income, among
other items. The Company recorded a valuation allowance of its net deferred tax assets totaling $3,285,986 as of June 30, 2022 and $847,269
at December 31, 2021, which was recorded as a component of income tax expense on the accompanying consolidated statements of operations
and other comprehensive loss.
The
Company files income tax returns in the U.S. federal and various state jurisdictions. The Companies are not subject to U.S. federal and
state income tax examinations by tax authorities for years before 2018.
The
Company follows the provisions of FASB ASC 740, Income Taxes, to evaluate uncertain tax positions. This topic prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Company has not identified any material uncertain tax positions requiring recognition in the consolidated
financial statements as of June 30, 2022.
Schedule
of Deferred Tax Assets and Liabilities
| |
June
30, 2022 | | |
December
31, 2021 | |
Deferred
income tax assets: | |
| | | |
| | |
Current: | |
| | | |
| | |
Research
and development costs | |
$ | 962,910 | | |
$ | - | |
Unvested
stock options | |
| 116,786 | | |
| 11,835 | |
Other | |
| - | | |
| 4,050 | |
Non-current: | |
| | | |
| | |
Patents | |
| 102,317 | | |
| 90,480 | |
Net
operating losses | |
| 2,410,153 | | |
| 1,201,974 | |
Other | |
| 74,615 | | |
| 49,606 | |
Gross
deferred income tax assets | |
| 3,666,781 | | |
| 1,357,945 | |
Less:
valuation allowance | |
| (3,285,986 | ) | |
| (847,269 | ) |
Net
deferred income tax asset | |
| 380,795 | | |
| 510,676 | |
| |
| | | |
| | |
Deferred
income tax liabilities: | |
| | | |
| | |
Current: | |
| | | |
| | |
Accrual
to cash | |
| (29,963 | ) | |
| (105,075 | ) |
Non-current | |
| | | |
| | |
Property
and equipment | |
| (350,832 | ) | |
| (405,601 | ) |
Gross
deferred income tax liabilities | |
| (380,795 | ) | |
| (510,676 | ) |
| |
| | | |
| | |
Net
deferred tax asset (liability) | |
$ | - | | |
$ | - | |
(12)
Net Loss Per Share
The
following table sets forth the computation of the basic and diluted net loss per share for the three and six months ended June 30, 2022:
Schedule
of Net Loss Per Share Basic And Diluted
| |
Three
Months Ended June 30,
2022 | | |
Six
Months Ended June 30,
2022 | |
Numerator: | |
| | | |
| | |
Net
loss | |
$ | (4,040,447 | ) | |
$ | (9,043,958 | ) |
Denominator: | |
| | | |
| | |
Weighted
average common shares outstanding | |
| 11,309,412 | | |
| 11,309,412 | |
Net
loss per share, basic and diluted | |
$ | (0.36 | ) | |
$ | (0.80 | ) |
Potentially
dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows
for the three and six-month periods ended June 30, 2022:
Schedule
of Potentially Dilutive Securities
Stock
options issued under the 2021 Equity Incentive Plan |
|
| 883,801 | |
Common
stock purchase warrants outstanding |
|
| 4,999,998 | |
Total |
|
| 5,883,799 | |
(13)
License Agreement
CTx
has a licensing agreement with a company related to the patents and licensed know-how for use in the development of CTx-1301, CTx-1302,
and CTx-2103. CTx will pay the following upon the occurrence of the following milestone events:
| ● | $250,000
Milestone payment upon dosing of first patient in a Phase 3 Clinical Trial for each product
in the field, payable on a per product basis. |
| ● | $250,000
Milestone payment upon licensee filing of new drug application for each product in the field,
payable on a per product basis. |
| ● | $250,000
Milestone payment for CTx-1301 and CTx-1302 and $500,000 Milestone payment for CTx-2103 upon
receipt of first marketing approval from the FDA , payable on a per product basis. |
| ● | $250,000
Milestone payment for CTx-2103 upon receipt of first marketing approval from the EMA (European
Medicines Agency) |
The
Company has accrued the $250,000 milestone for CTx-1301 related to dosing of first patient in a Phase 3 Clinical Trial as management
has deemed this milestone to be probable. The Company has not recorded any expense relating to the other milestones for either product
as it has not deemed them probable of occurring as of June 30, 2022.
(14)
Related Party Transactions
The
general counsel of the Company is a partner with a law firm providing office facilities space that is leased by the Company. Rental expense
incurred by the Company to the law firm was $18,000 for both the six months ended June 30, 2022 and 2021 and $9,000 for both the three
months ended June 30, 2022 and 2021, which approximates fair value. As of June 30, 2022 and December 31, 2021, the Company had no outstanding
amounts payable under this lease.
(15)
Subsequent Events
Management
evaluated events that occurred subsequent to June 30, 2022 through August 11, 2022, which is the date the interim financial statements
were issued.
On
August 10, 2022, the Company received $5.0
million of debt financing from Werth Family Investment Associates LLC (WFIA). Peter Werth, manager of WFIA, is a member of the
Company’s Board of Directors. The promissory note executed in favor of WFIA is unsecured with interest accruing at 15%
per annum. Outstanding
principal and all accrued and unpaid interest is due and payable on August 8, 2025 or 120 days following written demand made by WFIA
during the first five business days of a calendar quarter beginning April 1, 2023. The Company may prepay the note, in whole
or in part, without premium or penalty; provided, that no amount repaid may be reborrowed.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this report. Some of the information contained in this discussion and analysis
or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking
statements that involve risks and uncertainties. You should review the “Risk Factors” section of our Annual Report on Form
10-K for the year ended December 31, 2021 (“Form 10-K”) for a discussion of important factors that could cause actual results
to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion
and analysis.
Overview
We
are a clinical stage biopharmaceutical company using our proprietary Precision Timed ReleaseTM (PTRTM) drug delivery
platform technology to build and advance a pipeline of next-generation pharmaceutical products designed to improve the lives of patients
suffering from frequently diagnosed conditions characterized by burdensome daily dosing regimens and suboptimal treatment outcomes. We
are initially focusing our efforts on the treatment of Attention Deficit/Hyperactivity Disorder (ADHD). Our PTR platform incorporates
a proprietary Erosion Barrier Layer (EBL) designed to allow for the release of drug substance at specific, pre-defined time intervals,
unlocking the potential for once-daily, multi-dose tablets. We believe there remains a significant, unmet need within the current treatment
paradigm for true once-daily ADHD stimulant medications with lasting duration and a superior side effect profile to better serve the
needs of patients throughout their entire active-day.
Since
inception in 2012, our operations have focused on developing our product candidates, organizing and staffing our company, business planning,
raising capital, establishing our intellectual property portfolio and conducting clinical trials. We do not have any product candidates
approved for sale and have not generated any revenue. We have funded our operations through public and private capital raised. Cumulative
capital raised from these sources, was approximately $63.8 million as of June 30, 2022.
We
have incurred significant losses since our inception. Our ability to generate product revenue sufficient to achieve profitability will
depend on the successful development and commercialization of one or more of our product candidates. Our net losses were $4.0 million
and $1.4 million for the three months ended June 30, 2022 and June 30, 2021, respectively and $9.0 million and $2.8 million for the six
months ended June 30, 2022 and June 30, 2021, respectively. As of June 30, 2022, we had an accumulated deficit of $60.8 million.
We
expect to continue to incur significant expenses and increasing operating losses in the near term. We expect our expenses will increase
substantially in connection with our ongoing activities, as we:
|
● |
seek
regulatory approval for CTx-1301; |
|
|
|
|
● |
continue
research and development activities for our existing and new product candidates, primarily for CTx-1301; |
|
|
|
|
● |
manufacture
supplies for our preclinical studies and clinical trials, primarily for CTx-1301; |
|
|
|
|
● |
operate
as a public company; and |
|
|
|
|
● |
establish
or outsource commercial infrastructure to support sales and marketing for our product candidates. |
Our
ability to generate product revenue will depend on the successful development, regulatory approval and eventual commercialization of
one or more of our product candidates. Until such time as we can generate significant revenue from product sales, if ever, we expect
to finance our operations through the sale of equity, debt financings, or other capital sources, including potential collaborations with
other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, or at all. If we fail
to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the
development and commercialization of our product candidates.
Debt
Financing
We
received $5.0 million of debt financing (the “WFIA Debt Financing”) from Werth Family Investment Associates LLC
(“WFIA”). The promissory note, dated August 9, 2022, in favor of WFIA is unsecured with interest accruing at 15% per
annum. Outstanding principal and all accrued and unpaid interest is due and payable on August 8, 2025 unless accelerated due to an
event of default. Beginning April 1, 2023, WFIA has the right during the first five business days of each calendar quarter to demand
payment of all outstanding principal and interest 120 days following notice to us. We may prepay the note, in whole or in part,
without premium or penalty; provided, that no amount repaid may be reborrowed. See
“Liquidity and Capital Resources” below.
WFIA
owns 871,731 shares of our common stock and Peter J. Werth, a member of the Company’s Board of Directors and the manager of
WFIA, owns 21,849 shares of our common stock. Our Audit Committee and Board of Directors reviewed the terms of the WFIA Debt Financing pursuant to our Policy and Procedures
for Related Person Transactions and determined that the WFIA Debt Financing is in our best interest and the best interests of our
stockholders. Due to the WFIA Debt Financing, our Board of Directors determined that Mr. Werth is no longer an independent
director.
CTx-1301:
We have designed our clinical program for CTx-1301 (dexmethylphenidate), our lead investigational asset for the treatment of ADHD,
based on U.S. Food and Drug Administration (FDA) feedback regarding our CTx-1301 initial Pediatric Study Plan (iPSP), and longstanding
guidance on the expedited approval pathway under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act.
We
have commenced study start-up activities for the CTx-1301 Phase 3, fixed-dose, pediatric and adolescent safety and efficacy study,
and anticipate dosing of the first patient in late 2022. We have been experiencing delays in the manufacturing and delivery of
clinical supply for this study due to operational resource issues at our contract manufacturing organization (CMO). Manufacturing of
the final two dosage strengths, which are necessary to dose the first patient, is expected to begin in the second half of this year.
Results from the fixed-dose study are expected in the second half of 2023. In order to meet the pharmacology requirement for the
CTx-1301 New Drug Application (NDA) submission, we plan to complete a food effect study in the fourth quarter of 2022. Assuming we
receive positive clinical results from our Phase 3 trial and food effect study, we still plan to submit the NDA for CTx-1301 in late
2023 under the Section 505(b)(2) pathway.
In
addition to the studies noted above, we plan to initiate an adult dose-optimization study (Phase 3b) to assess the onset and
duration of efficacy in the second half of 2023. This Phase 3b trial is supplementary and is not required for the CTx-1301
NDA submission.
CTx-1302:
We plan to initiate a Phase 1/2 bioavailability study in ADHD patients for CTx-1302 (dextroamphetamine), our second investigational
asset for the treatment of ADHD, in 2023 and, if the results from this study are successful, we plan to initiate pivotal Phase 3 clinical
trials in all patient segments for CTx-1302 in 2024 with results expected in 2025.
CTx-2103:
We have embarked on a program to develop CTx-2103 (buspirone) for the treatment of anxiety, which is the most common mental health
concern in the U.S. Furthermore, this trial extends the potential of the PTR platform where multiple daily doses are required and the
timing, style, and ratio of this medication delivery is paramount. We initiated a human formulation study for CTx-2103 in May 2022 at
BDD Pharma in Glasgow, Scotland, UK. Results from the study are expected by the end of August 2022.
As
of June 30, 2022, we had cash and cash equivalents of $8.2 million. Based on our operating plan and with the proceeds from the
WFIA Debt Financing, we believe that our cash and cash equivalents will enable us to fund our research and development and general and
administrative expenses through the first quarter of 2023. In addition, in order to achieve the filing of our NDA for CTx-1301 in late
2023 for potential FDA approval, we believe that we will need approximately $16.5 million of additional capital. We will also need additional
capital to advance our other programs. We are evaluating alternatives to raise additional capital, including equity and debt financing
and non-dilutive strategic collaborations in the U.S. and abroad. In addition, we continue to evaluate commercial collaborations, which would provide us with more
immediate access to marketing, sales, market access and distribution infrastructure. See “Liquidity and Capital Resources”
below.
Impact
of the COVID-19 Pandemic
We
are continuing to monitor the impact of the COVID-19 pandemic on
our business, the extent of which will depend on a number of factors, including, but not limited to, the extent and severity of the impact
on our service providers, suppliers, contract research organizations and our preclinical and clinical trials, all of which are uncertain
and cannot be predicted.
While
the full impact of the pandemic continues to evolve, the financial markets have been subject to significant volatility that may adversely
impact our ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing initiatives.
The uncertain financial markets, disruptions in supply chains, mobility restraints, and changing priorities as well as volatile asset
values may also affect our ability to enter into collaborations, joint ventures, and license and royalty agreements. The outbreak and
government measures taken in response to the pandemic have also had a significant impact, both direct and indirect, on businesses and
commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand
for certain goods and services, such as medical services and supplies, have spiked, while demand for other goods and services, such as
travel, have fallen. We may face difficulties recruiting or retaining patients in our ongoing and planned preclinical and clinical trials
if patients are affected by the virus or are fearful of traveling to our clinical trial sites. We and our third-party CMOs, clinical
research organizations (CROs), and clinical sites may also face disruptions in procuring items that are essential to our research and
development activities, including, for example, medical and laboratory supplies used in our clinical trials or preclinical studies, in
each case, that are sourced from abroad or for which there are shortages because of ongoing efforts to address the outbreak.
The
extent to which the COVID-19 pandemic may in the future impact our financial condition, liquidity or results of operations is uncertain.
While the pandemic did not materially affect our financial results and business operations in the
quarter ended June 30, 2022, we are unable to predict the impact that COVID-19 may have on our financial position and operating results
in future periods due to numerous uncertainties. Management continues to actively monitor the situation and the possible effects on our
financial condition, operations, suppliers, vendors, our workforce and the overall industry. For additional information about risks and
uncertainties related to the COVID-19 pandemic that may impact our business, our financial condition or our results of operations, see
the “Risk Factors” section in our Form 10-K.
Components
of Operating Results
Revenue
Since
inception, we have not generated any revenue and do not expect to generate any revenue from the sale of products in the near future.
If our development efforts for our product candidates are successful and result in regulatory approval, or if we enter into collaboration
or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from
collaboration of license agreements.
Operating
Expenses
Research
and Development Expenses
Research
and development expenses consist of costs incurred in the discovery and development of our product candidates, and primarily include:
|
● |
expenses
incurred under third party agreements with CROs, and investigative sites, that conducted or will conduct our clinical trials and
a portion of our pre-clinical activities; |
|
|
|
|
● |
costs
of raw materials, as well as manufacturing cost of our materials used in clinical trials and other development testing; |
|
● |
expenses,
including salaries and benefits of employees engaged in research and development activities; |
|
|
|
|
● |
costs
of manufacturing equipment, depreciation and other allocated expenses; and |
|
|
|
|
● |
fees
paid for contracted regulatory services as well as fees paid to regulatory authorities including the FDA for review and approval
of our product candidates. |
We
expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of
the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based
on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our consolidated
financial statements as prepaid or accrued costs.
Research
and development activities are central to our business model. We expect that our research and development expenses will continue to increase
for the foreseeable future as we continue clinical development for our product candidates. As products enter later stages of clinical
development, they will generally have higher development costs than those in earlier stages of clinical development, primarily due to
the increased size and duration of later-stage clinical trials. Historically, our research and development costs have primarily related
to the development of CTx-1301. As we advance CTx-1301, CTx-1302, and CTx-2103, as well as identify any other potential product candidates,
we will continue to allocate our direct external research and development costs to the products. We expect to fund our research and development
expenses from our current cash and cash equivalents and any future equity or debt financings, or other capital sources, including potential
collaborations with other companies or other strategic transactions.
General
and Administrative Expenses
General
and administrative expenses consist primarily of salaries and related costs for our employees in administrative, executive and finance
functions. General and administrative expenses also include professional fees for legal, accounting, audit, tax and consulting services,
insurance, office, and travel expenses.
We
expect that our general and administrative expenses will increase in the future as we increase our general and administrative headcount
to support our growing operations including the potential commercialization of our product candidates. We have experienced increased
expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax compliance services;
director and officer insurance; and investor and public relations costs.
Interest
and other income (expense), net
Interest
and other income (expense), net consists of interest earned on our short-term investments and interest expense. The primary objective
of our investment policy is liquidity and capital preservation.
Interest
expense to date has consisted primarily of interest expense on notes payable to related parties, interest charged by certain vendors,
financing charge on insurance premiums and credit card interest. All related party notes were paid in full in December 2021 with proceeds
from our IPO.
Critical
Accounting Policies and Significant Judgments and Estimates
Our
consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation
of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated
financial statements and the reported amounts of expenses during a reporting period. Actual results could differ from estimates.
While
our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements, we have identified
several accounting policies that are critical to the judgements and estimates used in the preparation of our consolidated financial statements.
These policies relate to research and development costs and stock-based compensation. A discussion of these policies can be found in
the “Critical Accounting Policies and Significant Judgments and Estimates” section of our Form 10-K.
There
have been no changes in our application of critical accounting policies since December 31, 2021.
Results
of Operations
Comparison
of the three months ended June 30, 2022 and June 30, 2021
The
following table summarizes our results of operations for the three months ended June 30, 2022 and June 30, 2021:
| |
Three
Months ended | | |
| | |
% | |
| |
June
30, | | |
Increase | | |
Increase | |
(in
thousands) | |
2022 | | |
2021 | | |
(Decrease) | | |
(Decrease) | |
Operating
Expenses: | |
| | | |
| | | |
| | | |
| | |
Research
and development | |
$ | 2,178 | | |
$ | 794 | | |
$ | 1,384 | | |
| 174.3 | % |
General
and administrative | |
| 1,870 | | |
| 629 | | |
| 1,241 | | |
| 197.3 | % |
Loss
from operations | |
| (4,048 | ) | |
| (1,423 | ) | |
| (2,625 | ) | |
| 184.5 | % |
Interest
and other income (expense), net | |
| 8 | | |
| (9 | ) | |
| 17 | | |
| 188.9 | % |
Net
Loss | |
$ | (4,040 | ) | |
$ | (1,432 | ) | |
$ | (2,608 | ) | |
| 182.1 | % |
Research
and development expenses
The
following table summarizes our research and development expenses for the three months ended June 30, 2022 and June 30, 2021:
| |
Three
Months ended | | |
| | |
% | |
| |
June
30, | | |
Increase | | |
Increase | |
(in
thousands) | |
2022 | | |
2021 | | |
(Decrease) | | |
(Decrease) | |
Clinical
operations | |
$ | 693 | | |
$ | 56 | | |
$ | 637 | | |
| NM | |
Drug
manufacturing and formulation | |
| 801 | | |
| 353 | | |
| 448 | | |
| 126.9 | % |
Personnel
expenses | |
| 654 | | |
| 359 | | |
| 295 | | |
| 82.2 | % |
Regulatory
costs | |
| 30 | | |
| 26 | | |
| 4 | | |
| 15.4 | % |
Total
research and development expenses | |
$ | 2,178 | | |
$ | 794 | | |
$ | 1,384 | | |
| 174.3 | % |
Research
and development (R&D) expenses were $2.2 million for the three months ended June 30, 2022, an increase of $1.4 million or 174.3%
from the three months ended June 30, 2021. This increase was related to increased development activity as we prepare for a Phase 3 clinical
trial for CTx-1301. Manufacturing clinical supply began in the first quarter of 2022 and continued through the second quarter and study
start-up activities have been occurring since late 2021. In addition, the Company added clinical and manufacturing personnel in late
2021 in anticipation of the increased development activity.
General
and administrative expenses
The
following table summarizes our general and administrative (G&A) expenses for the three months ended June 30, 2022 and June 30, 2021:
| |
Three
Months ended | | |
| | |
% | |
| |
June
30, | | |
Increase | | |
Increase | |
(in
thousands) | |
2022 | | |
2021 | | |
(Decrease) | | |
(Decrease) | |
Personnel
expenses | |
$ | 546 | | |
$ | 314 | | |
$ | 232 | | |
| 73.9 | % |
Legal
and professional fees | |
| 401 | | |
| 107 | | |
| 294 | | |
| 274.8 | % |
Occupancy | |
| 118 | | |
| 111 | | |
| 7 | | |
| 6.3 | % |
Insurance | |
| 670 | | |
| 38 | | |
| 632 | | |
| NM | |
Other | |
| 135 | | |
| 59 | | |
| 76 | | |
| 127.3 | % |
Total
general and administrative expenses | |
$ | 1,870 | | |
$ | 629 | | |
$ | 1,241 | | |
| 197.1 | % |
Total
G&A expenses were $1.9 million for the three months ended June 30, 2022, an increase of $1.2 million or 197.1% from the three months
ended June 30, 2021. The overall increase in G&A expenses is the result of operating as a public company in 2022 as compared to operating
as a private company in 2021. Personnel expenses increased by $0.3 million as legal and accounting personnel were added in late 2021,
insurance costs increased by $0.6 million which relates to the directors and officers insurance policy, and legal and professional fees
increased by $0.3 million which relates to increased investor and public relations fees, board compensation fees and audit fees.
Interest
and other income (expense)
The
following table summarizes interest and other income (expense) for the three months ended June 30, 2022 and June 30, 2021:
| |
Three
Months ended | | |
| | |
% | |
| |
June
30, | | |
Increase | | |
Increase | |
(in
thousands) | |
2022 | | |
2021 | | |
(Decrease) | | |
(Decrease) | |
Interest
and other income (expense), net | |
$ | 8 | | |
$ | (9 | ) | |
$ | 17 | | |
| 188.9 | % |
Total
interest and other income (expense), net primarily relates to interest and dividends earned on invested balances during the three months
ended June 30, 2022 and relates to interest incurred on outstanding notes payable during the three months ended June 30, 2021. All notes
payable were paid in full in December 2021 with proceeds from our IPO.
Comparison
of the six months ended June 30, 2022 and June 30, 2021
The
following table summarizes our results of operations for the six months ended June 30, 2022 and June 30, 2021:
| |
Six
Months ended | | |
| | |
% | |
| |
June
30, | | |
Increase | | |
Increase | |
(in
thousands) | |
2022 | | |
2021 | | |
(Decrease) | | |
(Decrease) | |
Operating
Expenses: | |
| | | |
| | | |
| | | |
| | |
Research
and development | |
$ | 4,941 | | |
$ | 1,356 | | |
$ | 3,585 | | |
| 264.4 | % |
General
and administrative | |
| 4,117 | | |
| 1,397 | | |
| 2,720 | | |
| 194.7 | % |
Loss
from operations | |
| (9,058 | ) | |
| (2,753 | ) | |
| (6,305 | ) | |
| 229.0 | % |
Interest
and other income (expense), net | |
| 14 | | |
| (13 | ) | |
| 27 | | |
| 207.7 | % |
Net
Loss | |
$ | (9,044 | ) | |
$ | (2,766 | ) | |
$ | (6,278 | ) | |
| 227.0 | % |
Research
and development expenses
The
following table summarizes our R&D for the six months ended June 30, 2022 and June 30, 2021:
| |
Six
Months ended | | |
| | |
% | |
| |
June
30, | | |
Increase | | |
Increase | |
(in
thousands) | |
2022 | | |
2021 | | |
(Decrease) | | |
(Decrease) | |
Clinical
operations | |
$ | 1,501 | | |
$ | 77 | | |
$ | 1,424 | | |
| NM | |
Drug
manufacturing and formulation | |
| 2,154 | | |
| 600 | | |
| 1,554 | | |
| 259.0 | % |
Personnel
expenses | |
| 1,237 | | |
| 658 | | |
| 579 | | |
| 88.0 | % |
Regulatory
costs | |
| 49 | | |
| 21 | | |
| 28 | | |
| 133.3 | % |
Total
research and development expenses | |
$ | 4,941 | | |
$ | 1,356 | | |
$ | 3,585 | | |
| 264.4 | % |
R&D
expenses were $4.9 million for the six months ended June 30, 2022, an increase of $3.6 million or 264.4% from the six months ended June
30, 2021. This increase was related to increased development activity as we prepare for a Phase 3 clinical trial for CTx-1301. Manufacturing
clinical supply began in the first quarter of 2022 with continued activity in the second quarter and study start-up activities have been
occurring since late 2021. In addition, the Company added clinical and manufacturing personnel in late 2021 in anticipation of the increased
development activity.
General
and administrative expenses
The
following table summarizes our G&A expenses for the six months ended June 30, 2022 and June 30, 2021:
| |
Six
Months ended | | |
| | |
% | |
| |
June
30, | | |
Increase | | |
Increase | |
(in
thousands) | |
2022 | | |
2021 | | |
(Decrease) | | |
(Decrease) | |
Personnel
expenses | |
$ | 1,229 | | |
$ | 595 | | |
$ | 634 | | |
| 106.6 | % |
Legal
and professional fees | |
| 1,048 | | |
| 371 | | |
| 677 | | |
| 182.5 | % |
Occupancy | |
| 246 | | |
| 212 | | |
| 34 | | |
| 16.0 | % |
Insurance | |
| 1,343 | | |
| 79 | | |
| 1,264 | | |
| NM | |
Other | |
| 251 | | |
| 140 | | |
| 111 | | |
| 79.3 | % |
Total
general and administrative expenses | |
$ | 4,117 | | |
$ | 1,397 | | |
$ | 2,720 | | |
| 194.7 | % |
Total
G&A expenses were $4.1 million for the six months ended June 30, 2022, an increase of $2.7 million or 194.7% from the six months
ended June 30, 2021. The overall increase in G&A expenses is the result of operating as a public company in 2022 as compared to
operating as a private company in 2021. Personnel expenses increased by $0.6 million as legal and accounting personnel were added in
late 2021, insurance costs increased by $1.3 million which relates to the directors and officers insurance policy, and legal and
professional fees increased by $0.7 million which relates to increased investor and public relations fees, board compensation fees
and audit fees.
Interest
and other income (expense)
The
following table summarizes interest and other income (expense) for the six months ended June 30, 2022 and June 30, 2021:
| |
Six
Months ended | | |
| | |
% | |
| |
June
30, | | |
Increase | | |
Increase | |
(in
thousands) | |
2022 | | |
2021 | | |
(Decrease) | | |
(Decrease) | |
Interest
and other income (expense), net | |
$ | 14 | | |
$ | (13 | ) | |
$ | 27 | | |
| 207.7 | % |
Total
interest and other income (expense), net primarily relates to interest and dividends earned on invested balances during the six months
ended June 30, 2022 and relates to interest incurred on outstanding notes payable during the six months ended June 30, 2021. All notes
payable were paid in full in December 2021 with proceeds from our IPO.
Cash
Flows
| |
Six
Months ended | |
| |
June
30, | |
| |
2022 | | |
2021 | |
Net
cash (used in) operating activities | |
$ | (8,277 | ) | |
$ | (3,224 | ) |
Net
cash (used in) investing activities | |
| (13 | ) | |
| (89 | ) |
Net
cash (used in) provided by financing activities | |
| (7 | ) | |
| 3,160 | |
Net
decrease in cash and cash equivalents | |
$ | (8,297 | ) | |
$ | (153 | ) |
Cash
Flows from Operating Activities
Net
cash used in operating activities was $8.3 million for the six months ended June 30, 2022. Cash used in operating activities was primarily
due to the use of funds in our operations to develop our product candidates resulting in a net loss of $9.0 million, prior to the effects
of two noncash items, stock-based compensation expense of $0.4 million and depreciation of $0.2 million. Changes in operating assets
and liabilities included a decrease in miscellaneous receivables resulting from the receipt in early 2022 of a significant portion of
the payroll and research and development tax credits owed to us, and a decrease in accrued liabilities resulting from the final payments
made on the second manufacturing press which were accrued at the end of 2021.
Net
cash used in operating activities was $3.2 million for the six months ended June 30, 2021. Cash used in operating activities was primarily
due to the use of funds in our operations to develop our product candidates resulting in a net loss of $2.9 million, offset primarily
by depreciation. Changes in operating assets and liabilities included a decrease in accounts payable and accrued expenses of $0.3 million
mainly due to the timing of payments to our service providers.
Cash
Flows from Investing Activities
Net
cash used in investing activities for both the six months ended June 30, 2022 and June 30, 2021 was related to the purchase of equipment
to support our research and development.
Cash
Flows from Financing Activities
Net
cash used in financing activities in the six months ended June 30, 2022 was related to principal payments on finance lease obligations.
Net
cash provided by financing activities in the six months ended June 30, 2021 was primarily related to proceeds of the issuance of $1.6
million of equity units of CTx.
Liquidity
and Capital Resources
Sources
of Liquidity
On
August 10, 2022, we received $5.0 million pursuant to the WFIA Debt Financing.
Since
our inception in 2012 through June 30, 2022, we have not generated any revenue and have incurred significant operating losses and
negative cash flow from our operations. Based on our current operating plan and with the
proceeds from the WFIA Debt Financing, we expect our cash and cash equivalents will be sufficient to fund our operating
expenses and capital expenditure requirements through the first quarter of 2023. In addition,
in order to achieve the filing of our NDA for CTx-1301 in late 2023 for potential FDA approval, we believe that we will need
approximately $16.5 million of additional capital. We will also need additional capital to advance our other programs. However, it
is difficult to predict our spending for our product candidates prior to obtaining FDA approval. Moreover, changing circumstances
may cause us to expend cash significantly faster than we currently anticipate, and we may need to spend more cash than currently
expected because of circumstances beyond our control.
Our
policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide
liquidity while producing a modest return on investment. Accordingly, our cash equivalents are invested primarily in money market funds
which provide a minimal return.
We
expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop our
product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of our product
candidates. If we obtain marketing approval for our product candidates, we will incur significant sales, marketing and outsourced manufacturing
expenses. In addition, we expect to incur additional expenses to add operational, financial and information systems and personnel, including
personnel to support our planned product commercialization efforts. We also expect to incur significant costs to comply with corporate
governance, internal controls and similar requirements applicable to us as a public company.
Our
future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:
|
● |
the
cost and timing of manufacturing the clinical supply of our product candidates; |
|
|
|
|
● |
the
initiation, progress, timing, costs and results of clinical trials for our product candidates; |
|
|
|
|
● |
the
clinical development plans we establish for each product candidate; |
|
|
|
|
● |
the
number and characteristics of product candidates that we develop or may in-license; |
|
|
|
|
● |
the
terms of any collaboration agreements we may choose to execute; |
|
|
|
|
● |
the
outcome, timing and cost of meeting regulatory requirements established by the FDA or other comparable foreign regulatory authorities; |
|
|
|
|
● |
the
cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights; |
|
|
|
|
● |
the
cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us; |
|
|
|
|
● |
the
cost and timing of the implementation of commercial scale manufacturing activities; and |
|
|
|
|
● |
the
cost of establishing, or outsourcing, sales, marketing and distribution capabilities for any product candidates for which we may
receive regulatory approval in regions where we choose to commercialize our products on our own. |
To
continue to grow our business over the longer term, we plan to commit substantial resources to research and development, including clinical
trials of our product candidates, and other operations and potential product acquisitions and in-licensing. We have evaluated and expect
to continue to evaluate a wide array of strategic transactions as part of our plan to acquire or in-license and develop additional products
and product candidates to augment our internal development pipeline. Strategic transaction opportunities that we may pursue could materially
affect our liquidity and capital resources and may require us to incur additional indebtedness, seek equity capital or both. In addition,
we may pursue development, acquisition or in-licensing of approved or development products in new or existing therapeutic areas or continue
the expansion of our existing operations. Accordingly, we expect to continue to opportunistically seek access to additional capital to
license or acquire additional products, product candidates or companies to expand our operations, or for general corporate purposes.
Strategic transactions may require us to raise additional capital through one or more public or private debt or equity financings or
could be structured as a collaboration or partnering arrangement. We have no arrangements, agreements, or understandings in place at
the present time to enter into any acquisition, in-licensing or similar strategic business transaction. In addition, we continue to evaluate
commercial collaborations, which
would provide us with more immediate access to marketing, sales, market access and distribution infrastructure.
If
we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, would
result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to
take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional
equity that we raise may contain terms, such as liquidation and other preferences that are not favorable to us or our existing stockholders.
If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable
rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.
Contractual
Obligations
The
following summarizes our contractual obligations as of June 30, 2022 that will affect our future liquidity. Based on our current operating
plan, we plan to satisfy the obligations identified below with cash and cash equivalents as of June 30, 2022.
We
entered into a patent and know-how licensing agreement with BDD Pharma Limited in August 2018. See
the “Business – Material Agreements” section of our Form 10-K for a description of this agreement. We may be
required to pay BDD Pharma certain amounts in connection with clinical trial and regulatory milestones. The first milestone payment of
$250,000 will likely become due in the next twelve months based on the dosing of the first patient in the Phase 3 fixed-dose pediatric
and adolescent safety and efficacy study for CTx-1301. This payment is accrued in our June 30, 2022 financial statements.
We
entered into an agreement with a CRO for the Phase 3 fixed-dose pediatric and adolescent safety and efficacy study for CTx-1301, in which
we plan to dose the first patient in late 2022. We also entered into agreements with a CMO and other third parties for manufacture of
the Phase 3 clinical supply of CTx-1301. These contracts do not contain any minimum purchase commitments
and are cancelable by us upon prior written notice. Payments due upon cancellation consist only of payments for services provided or
expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation and in some cases, wind-down
costs. The exact amount of such obligations is dependent on the timing of termination and the terms of the related agreement and are
not known.
Going
Concern
Since
inception we have been engaged in organizational activities, including raising capital and research and development activities. We have
not generated revenues and have not yet achieved profitable operations, nor have we ever generated positive cash flow from operations.
There is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. We are subject to those risks
associated with any pre-clinical stage pharmaceutical company that has substantial expenditures for research and development. There can
be no assurance that our research and development projects will be successful, that products developed will obtain necessary regulatory
approval, or that any approved product will be commercially viable. In addition, we operate in an environment of rapid technological
change and is largely dependent on the services of our employees and consultants. Further, our future operations are dependent on the
success of our efforts to raise additional capital. These uncertainties raise substantial doubt about our ability to continue as a going
concern for one year after the issuance date of our financial statements. The accompanying consolidated financial statements have been
prepared on a going concern basis. The consolidated financial statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern, which contemplates the continuation of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. We have incurred a net loss for the three and six-month periods ended
June 30, 2022 and June 30, 2021 and had accumulated losses of $60.8 million since inception to June 30, 2022. We anticipate incurring
additional losses until such time, if ever, that we can generate significant revenue from our product candidates currently in development.
Our sources of capital have included private capital raises in various classes of units of CTx prior to the Reorganization Merger, the
issuance of equity securities in connection with our IPO and the WFIA Debt Financing. Additional financings will be needed by us to fund
our operations, to complete development of and to commercially develop our product candidates. There is no assurance that such financing
will be available when needed or on acceptable terms.
Recently
Issued Accounting Standards
In
June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments which significantly changes the
way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to
occur over their remaining life, instead of when incurred. In November 2018, the FASB issued ASU 2018-19, Codification Improvements
to Topic 326, Financial Instruments–Credit Losses, which amends Subtopic 326-20 (created by ASU 2016-13) to explicitly state
that operating lease receivables are not in the scope of Subtopic 326-20. Additionally, in April 2019, the FASB issued ASU 2019-04, Codification
Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments;
in May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief; in
November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic
815), and Leases (Topic 842): Effective Dates, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit
Losses; and in March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, to provide further
clarifications on certain aspects of ASU 2016-13. The changes (as amended) are effective for the Company for annual and interim periods
in fiscal years beginning after December 15, 2022. The Company does not expect the adoption of ASU 2016-13 to have a material effect
on its consolidated financial statements.
JOBS
Act
On
April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was signed into law. The JOBS Act contains provisions
that, among other things, reduce certain reporting requirements for an “emerging growth company”. As an “emerging growth
company,” we are electing to take advantage of the extended transition period afforded by the JOBS Act for the implementation of
new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on
which adoption of such standards is required for emerging growth companies.
Subject
to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we are not required to, among other things,
(i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404,
(ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall
Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight
Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the
audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items
such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation
to median employee compensation. These exemptions will apply until the fifth anniversary of the completion of our IPO or until we no
longer meet the requirements for being an “emerging growth company,” whichever occurs first.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Not
applicable.
Item
4. Controls and Procedures.
Evaluation
of Our Disclosure Controls
We
maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated
and communicated to the our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Our Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act)
as of June 30, 2022, have concluded that our disclosure controls and procedures were effective as of June 30, 2022.
Evaluation
of Changes in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the fiscal quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.