Item
1. Financial Statements.
Cingulate
Inc.
Consolidated
Balance Sheets (unaudited)
See
notes to consolidated financial statements.
Cingulate
Inc.
Consolidated
Statements of Operations and Comprehensive Loss (unaudited)
See
notes to consolidated financial statements.
Cingulate
Inc.
Consolidated
Statements of Stockholders’ Equity (unaudited)
See
notes to consolidated financial statements
Cingulate
Inc.
Consolidated
Statements of Cash Flows (unaudited)
See
notes to consolidated financial statements
CINGULATE
INC.
Notes
to Consolidated Financial Statements (unaudited)
(1) Nature of the Business and Liquidity
Organization
Cingulate
Inc. is a 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 has initiated Phase 3 clinical trials
for CTx-1301, with first patients in the adult dose-optimization study dosed in early 2023. 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.
The
consolidated financial statements and notes for the three-month periods ended March 31, 2023 and 2022, represent the full consolidation
of Cingulate and its subsidiaries, including CTx and all references to the Company represent this full consolidation.
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 initial public offering,
which was completed in December 2021, provided approximately $20.4 million in net proceeds. In addition, the Company received proceeds
of $5.0 million from a promissory note in August 2022 and an additional $3.0 million when the promissory note was amended and restated
in May 2023, as further described in Note 7. However, the Company will need additional funding for operations and development. In January
2023, the Company entered into an At The Market Offering Agreement (the ATM Agreement) with H.C. Wainwright & Co., LLC, as sales
agent (Wainwright), pursuant to which the Company may offer and sell, from time to time through Wainwright, shares of its common stock
for aggregate proceeds of up to $4.97 million. In April 2023, the Company entered into a purchase agreement with Lincoln Park Capital
Fund, LLC (Lincoln Park), pursuant to which Lincoln Park has agreed to purchase from the Company up to an aggregate of $12.0 million
of common stock (subject to certain limitations and satisfaction of the conditions set forth in the purchase agreement) from time to
time and at the Company’s sole discretion over the 36-month term of the purchase agreement. Management is evaluating various strategies
to obtain additional funding, which may include additional offerings of common stock, issuance of debt, or other capital sources, including
potential collaborations with other companies or other strategic transactions. 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 March 31, 2023, the consolidated statements of operations and comprehensive loss for the
three-month periods ended March 31, 2023 and 2022, the consolidated statements of stockholders’ equity for the three-month periods
ended March 31, 2023 and 2022, the consolidated statements of cash flows for the three- month periods ended March 31, 2023 and 2022,
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 well as employee retention tax credits for payroll costs incurred in 2020 and the first three quarters of 2021.
The Company analogized to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance”, in accounting
for these receivables. As of March 31, 2023 and December 31, 2022, 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-month periods ended March
31, 2023 or 2022.
(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 9.
(3) Prepaid Expenses
Prepaid
expenses consisted of the following at March 31, 2023 and December 31, 2022:
Schedule
of Prepaid Expenses
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
Research
and development | |
$ | 901,601 | | |
$ | 1,377,391 | |
Insurance | |
| 569,155 | | |
| 472,152 | |
Active
pharmaceutical ingredients | |
| 209,156 | | |
| 209,156 | |
Deferred
capital raise costs | |
| 146,456 | | |
| 100,339 | |
Professional
fees | |
| 20,775 | | |
| 61,524 | |
Dues
and subscriptions | |
| 73,976 | | |
| 37,684 | |
Other | |
| 61,573 | | |
| 20,698 | |
Total
prepaid expenses | |
$ | 1,982,692 | | |
$ | 2,278,944 | |
(4) Property and Equipment
Property
and equipment, net consisted of the following at March 31, 2023, and December 31, 2022:
Schedule
of Property and Equipment
| |
| | |
| | |
| |
| |
Estimated | | |
| | |
| |
| |
Useful
Life | | |
March
31, | | |
December
31, | |
| |
(in
years) | | |
2023 | | |
2022 | |
Equipment | |
| 2-7 | | |
$ | 2,576,171 | | |
$ | 2,565,997 | |
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-
equipment | |
| - | | |
| 1,766,661 | | |
| 1,739,699 | |
Property
and equipment, gross | |
| | | |
| 5,001,989 | | |
| 4,964,853 | |
Less:
accumulated depreciation | |
| | | |
| (2,160,696 | ) | |
| (2,060,066 | ) |
Property
and equipment, net | |
| | | |
$ | 2,841,293 | | |
$ | 2,904,787 | |
Depreciation
expense was $100,629 and $101,429 for the three-month periods ended March 31, 2023 and 2022.
(5) Accrued Expenses
Accrued
expenses consisted of the following at March 31, 2023, and December 31, 2022:
Schedule of Accrued Expenses
| |
March
31, | | |
December
31, | |
| |
2023 | | |
2022 | |
Interest | |
$ | 479,839 | | |
$ | 292,339 | |
Professional
fees | |
| 15,000 | | |
| 314,446 | |
Employee
bonuses | |
| 175,625 | | |
| 175,625 | |
Other | |
| 28,718 | | |
| 112,225 | |
Total
accrued expenses | |
$ | 699,182 | | |
$ | 894,635 | |
(6) Contingencies
The
Company may, from time to time, be subject to legal proceedings and claims arising in the ordinary course of business and otherwise.
A substantial legal liability against us could have an adverse effect on our business, financial condition and results of operations.
The
Company records legal costs associated with loss contingencies as incurred and establishes reserves when those matters present material
loss contingencies that management determines to be both probable and reasonably estimable in accordance with ASC 450, Contingencies.
If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that
range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, we accrue
the minimum amount in the range. These amounts are not reduced by amounts that may be recovered under insurance or claims against third
parties, but undiscounted receivables from insurers or other third parties may be accrued separately if recovery is considered probable.
Management’s judgment is required related to loss contingencies because the outcomes are difficult to predict, and the ultimate
resolution may differ from our current analysis. The Company revises accruals in light of new information. While it is not possible to
predict the outcome of loss contingencies with certainty, management is of the opinion that adequate provision for potential losses associated
with any such matters has been made in the financial statements.
(7) Related Party Note Payable
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. This promissory note is unsecured with interest accruing at 15%
per annum. Outstanding principal and all accrued and unpaid interest are 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. WFIA did not demand payment in
April 2023. The Company may prepay the note, in whole or in part, without premium or penalty; provided, that no amount repaid may be
reborrowed. As of March 31, 2023, and December 31, 2022, the entire $5.0 million was outstanding on the note.
On
May 9, 2023, the Company received an additional $3.0 million of debt financing from WFIA by amending and restating the note to increase
the principal amount to $8.0 million. All other terms of the note remained the same.
During
the three months ended March 31, 2023, the Company recognized $187,500 of interest expense relating to this note. This interest expense
is included in accrued expenses on the consolidated balance sheet at March 31, 2023.
(8) 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 March 31, 2023, and December 31, 2022, of which 11,309,412 shares of common stock were issued and outstanding. The Company has not
issued any shares of preferred stock.
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.
(9) 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 2,786,310 and as of March 31, 2023, 1,546,406 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 $204,479 and $181,518 during the three months ended March 31, 2023 and 2022, respectively.
As of March 31, 2023, and December 31, 2022, there was $2,423,282 and $2,089,509, respectively, 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-month periods ending March 31, 2023 and 2022, is as follows:
Summary
of Option Activity
| |
| | |
| | |
Weighted-Average | | |
| |
| |
| | |
Weighted-Average | | |
Remaining
Contractual | | |
Aggregate
Intrinsic | |
| |
Shares | | |
Exercise
Price | | |
Term
(years) | | |
Value | |
Outstanding
at January 1, 2022 | |
| 523,285 | | |
$ | 6.00 | | |
| 9.94 | | |
| | |
Granted | |
| 342,999 | | |
$ | 1.82 | | |
| 9.91 | | |
| | |
Exercised | |
| - | |
| | | |
| | | |
| | |
Forfeitures
or expirations | |
| - | | |
| | | |
| | | |
| | |
Outstanding
at March 31, 2022 | |
| 866,284 | | |
$ | 4.35 | | |
| 9.78 | | |
$ | 182,900 | |
Vested
and expected to vest at March 31, 2022 | |
| 866,284 | | |
| | | |
| | | |
| | |
Exercisable
at March 31, 2022 | |
| - | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding
at January 1, 2023 | |
| 861,019 | | |
| | | |
| | | |
| | |
Granted | |
| 384,500 | | |
$ | 1.75 | | |
| 9.93 | | |
| - | |
Exercised | |
| - | | |
| | | |
| | | |
| | |
Forfeitures
or expirations | |
| (5,615 | ) | |
| | | |
| | | |
| | |
Outstanding
at March 31, 2023 | |
| 1,239,904 | | |
| | | |
| | | |
| | |
Vested
and expected to vest at March 31, 2023 | |
| 1,239,904 | | |
| | | |
| | | |
| | |
Exercisable
at March 31, 2023 | |
| 286,230 | | |
| | | |
| | | |
| | |
The
Company’s stock options issued qualify for equity accounting treatment under ASC 718, Compensation- Stock Compensation,
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 three-month
periods ending March 31, 2023 and 2022 were as follows, shown on a weighted average basis:
Schedule
of Fair Value Assumption
| |
March
31, | | |
March
31, | |
| |
2023 | | |
2022 | |
Risk-free
interest rate | |
| 3.662 | % | |
| 1.540 | % |
Expected
term (in years) | |
| 6 | | |
| 6 | |
Expected
volatility | |
| 1.13 | | |
| 1.12 | |
Expected
dividend yield | |
| 0 | % | |
| 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 three months ended March 31, 2023, ranged from $0.81 to $1.53 and the grant date
fair value of the options granted during the three months ended March 31, 2022, ranged from $1.12 to $1.16.
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 $0.99 as of March 31, 2023, and $1.97 as of March
31, 2022, based upon the closing price of our common stock on the Nasdaq Capital Market on those dates.
(10) 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 for the three-month periods ended March 31, 2023 and 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
| |
2023 | | |
2022 | |
| |
Three
Months Ended March 31, | |
| |
2023 | | |
2022 | |
Federal
income tax benefit at statutory rate | |
$ | (841,026 | ) | |
$ | (1,039,582 | ) |
State
income tax benefit | |
| (221,470 | ) | |
| (273,757 | ) |
Permanent
differences | |
| 3,669 | | |
| 5,665 | |
Change
in valuation allowance | |
| 1,090,836 | | |
| 1,361,886 | |
Other | |
| (32,009 | ) | |
| (54,212 | ) |
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 $6,989,779 as of March 31, 2023 and $5,580,595
at December 31, 2022, 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 March 31, 2023 or December 31, 2022.
Schedule of Deferred Tax Assets and Liabilities
| |
March
31, 2023 | | |
December
31, 2022 | |
Deferred
income tax assets: | |
| | | |
| | |
Current: | |
| | | |
| | |
Research
and development costs | |
$ | 450,718 | | |
$ | 343,087 | |
Other | |
| 59,018 | | |
| 59,018 | |
Non-current: | |
| | | |
| | |
Net
operating losses | |
| 4,250,020 | | |
| 3,381,215 | |
Research
and development costs | |
| 2,098,416 | | |
| 1,762,716 | |
Unvested
stock options | |
| 283,259 | | |
| 204,380 | |
Patents | |
| 89,517 | | |
| 92,417 | |
Right-of-use
assets | |
| 58,012 | | |
| 63,563 | |
Gross
deferred income tax assets | |
| 7,288,960 | | |
| 5,906,396 | |
Less:
valuation allowance | |
| (6,989,779 | ) | |
| (5,580,595 | ) |
Net
deferred income tax asset | |
| 299,181 | | |
| 325,801 | |
| |
| | | |
| | |
Deferred
income tax liabilities: | |
| | | |
| | |
Current: | |
| | | |
| | |
Accrual
to cash | |
| (11,228 | ) | |
| (11,228 | ) |
Non-current | |
| | | |
| | |
Property
and equipment | |
| (287,953 | ) | |
| (314,573 | ) |
Gross
deferred income tax liabilities | |
| (299,181 | ) | |
| (325,801 | ) |
| |
| | | |
| | |
Net
deferred tax asset (liability) | |
$ | - | | |
$ | - | |
(11) Net Loss Per Share
The
following table sets forth the computation of the basic and diluted net loss per share for the three months ended March 31, 2023 and
March 31, 2022:
Schedule
of Net Loss Per Share Basic and Diluted
| |
2023 | | |
2022 | |
| |
Three
Months Ended March 31, | |
| |
2023 | | |
2022 | |
Numerator: | |
| | | |
| | |
Net
loss | |
$ | (4,004,887 | ) | |
$ | (5,003,511 | ) |
Denominator: | |
| | | |
| | |
Weighted
average common shares outstanding | |
| 11,309,412 | | |
| 11,309,412 | |
Net
loss per share, basic and diluted | |
$ | (0.35 | ) | |
$ | (0.44 | ) |
Potentially
dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows
as of March 31, 2023 and March 31, 2022:
Schedule of Potentially Dilutive Securities
| |
March
31, | | |
March
31, | |
| |
2023 | | |
2022 | |
Stock
options issued under the 2021 Equity Incentive Plan | |
| 1,239,904 | | |
| 866,284 | |
Common
stock purchase warrants outstanding | |
| 4,999,998 | | |
| 4,999,998 | |
Total | |
| 6,239,902 | | |
| 5,866,282 | |
(12) 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. Payments are to be made 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) |
As
of December 31, 2022, the $250,000 milestone for CTx-1301 relating to the dosing of first patient in a Phase 3 Clinical Trial was accrued
as management deemed the milestone probable of occurring. In early 2023, the Company paid this amount as the first patient in a CTx-1301
Phase 3 Clinical Trial was dosed. The Company has not recorded any expense relating to the other milestones for any other product as
it has not deemed them probable of occurring as of March 31, 2023.
(13) 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 $9,000 for both the three months ended March 31, 2023, and 2022, which approximates fair
value. As of March 31, 2023, and December 31, 2022, the Company had no outstanding amounts payable under this lease.
A
member of the Company’s Board of Directors, Peter Werth, is the manager of WFIA, the entity which provided $8.0 million in debt
financing to the Company as described in Note 7. Interest expense of $187,500 was recognized during the three months ended March 31,
2023. The full principal balance of $5.0 million pursuant to the original note was outstanding as of March 31, 2023 and December 31,
2022 and $479,839 and $292,339 of accrued interest relating to this note was outstanding as of March 31, 2023 and December 31, 2022.
(14) Subsequent Events
Management
evaluated events that occurred subsequent to March 31, 2023, through May 10, 2023, which is the date the interim financial statements
were issued.
On
April 24, 2023, the Company entered into a purchase agreement with Lincoln Park, pursuant to which Lincoln Park has agreed to purchase
from the Company up to an aggregate of $12.0 million of common stock (subject to certain limitations and satisfaction of the conditions
set forth in the purchase agreement) from time to time and at the Company’s sole discretion over the 36-month term of the purchase
agreement. Pursuant to the terms of the purchase agreement, on April 24, 2023, the Company issued
368,023 shares of common stock to Lincoln Park as consideration for its commitment to purchase shares of common stock under the purchase
agreement.
On
May 9, 2023, the Company received $3.0 million of debt financing from WFIA by amending and restating the original note payable to WFIA
to increase the principal amount from $5.0 million to $8.0 million. All other terms of the original note remained the same.
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, 2022 (“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 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 initially
focused on the treatment of Attention Deficit/Hyperactivity Disorder (ADHD); however, we have expanded our pipeline to include a product
candidate for the treatment of anxiety. 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, including debt financing, was approximately $68.8 million as of March 31, 2023.
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 $5.0 million for the three-month periods ended March 31, 2023 and 2022, respectively. See “Results of Operations” below
for an explanation of the fluctuations in our net losses. As of March 31, 2023, we had an accumulated deficit of $73.4 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 development studies and clinical trials, primarily for CTx-1301; |
|
|
|
|
● |
outsource
commercial infrastructure to support sales and marketing for CTx-1301; and |
|
|
|
|
● |
operate
as a public company. |
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
On
May 9, 2023, we received an additional $3.0 million of debt financing (the “2023 WFIA Debt Financing”) from Werth Family
Investment Associates LLC (“WFIA”). The $5.0 million promissory note, dated August 9, 2022, in favor of WFIA (the “Original
Note”) was amended and restated to increase the principal amount to $8.0 million (the “WFIA Note”). The WFIA Note 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 July 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
WFIA Note, in whole or in part, without premium or penalty; provided, that no amount repaid may be reborrowed. As
of March 31, 2023, the accrued interest on the Original Note was $0.5 million. See “Liquidity and Capital Resources” below.
WFIA
owns 975,165 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 2023 WFIA Debt Financing
pursuant to our Policy and Procedures for Related Person Transactions and determined that the 2023 WFIA Debt Financing is in our best
interest and the best interests of our stockholders.
Clinical,
Manufacturing, and Business Update
CTx-1301:
We have designed our clinical program for CTx-1301 (dexmethylphenidate), our lead investigational product candidate 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 streamlined approval pathway under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act.
We
initiated a Phase 3 adult dose-optimization study in December 2022 to assess onset and duration and efficacy and safety in adults with
ADHD, the first cohort has been completed and the second cohort is near completion. Results are expected in the third quarter of 2023.
The
Phase 3 fixed-dose pediatric and adolescent safety and efficacy study is expected to commence in mid-2023. Results are expected
in the first quarter of 2024.
In
addition, we are planning to initiate a Phase 3 pediatric and adolescent dose-optimization classroom study in the third quarter of
2023 to assess onset and duration and efficacy and safety in patients with ADHD. Results are expected in the first quarter of
2024.
In
order to meet the pharmacology requirement for the CTx-1301 New Drug Application (NDA) submission, we completed a food effect study in
October of 2022, which demonstrated that CTx-1301 can be taken with or without food.
Assuming
we receive positive clinical results from our Phase 3 trials, we expect to submit the NDA for CTx-1301 in mid-2024 under the Section
505(b)(2) pathway.
Societal
CDMO, Inc. (Societal), a contract development and manufacturing organization (CDMO) dedicated to solving complex formulation and manufacturing
challenges primarily in small molecule therapeutic development, will manufacture all clinical, registration, and commercial batches of
our lead ADHD candidate, CTx-1301. In April 2023, we successfully completed the transfer of our proprietary PTR™ manufacturing
processes for our lead candidate, CTx-1301 (dexmethylphenidate), to Societal, which is producing a scalable supply of CTx-1301 for our
ongoing and upcoming Phase 3 trials in the manufacturing suite within Societal’s Gainesville, GA facility that is outfitted with
equipment supplied by us.
In March 2023, we announced a joint commercialization agreement with Indegene,
a comprehensive life sciences commercialization company, to provide commercial support for our lead candidate CTx-1301 (dexmethylphenidate).
The agreement spans cross-functional services through an omnichannel marketing approach uniquely designed to successfully manage pre-commercial
support during our Phase 3 clinical trials and to effectively commercialize CTx-1301 nationwide following potential FDA approval.
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. We completed a formulation study in which the pharmacokinetics were evaluated for this trimodal tablet providing
three precisely timed doses of buspirone versus one immediate release dose. In addition, scintigraphic imaging visualized transit of
the tablets through the gastrointestinal tract to confirm both the site and onset of release, which will then be correlated with pharmacokinetic
data to establish the full release profile of the CTx-2103 formulation. Based on the pharmacokinetic profile seen in the data, CTx-2103
achieved the desired triple release of buspirone. These positive results provided the critical information required to allow us to request
a Pre-IND meeting with the FDA to discuss the design of our clinical and regulatory program for CTx-2103, which we expect to occur in
the third quarter of 2023 to allow for a potential IND filing in the fourth quarter of 2023.
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 mid-2024 and, if the results from this study are successful, subsequently initiate pivotal Phase
3 clinical trials in all patient segments in late 2024 or early 2025.
PTRTM
Platform: We continue to evaluate opportunities to out-license our PTR platform and to license our product candidates outside
of the United States. In addition, we are evaluating opportunities to expand our relationship with BDD Pharma Limited.
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 contract research organizations (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 all research and development costs as incurred, other than manufacturing equipment used in research and development which is
capitalized and amortized over its useful life. 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.
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 expense on our related party notes payable and interest earned on our cash and cash
equivalents, including money market funds. The primary objective of our investment policy is liquidity and capital preservation.
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 believe the following
accounting policies are those most 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, 2022.
Results
of Operations
Comparison
of the three months ended March 31, 2023 and March 31, 2022:
The
following table summarizes our results of operations for the three months ended March 31, 2023 and March 31, 2022:
| |
Three
Months Ended | | |
| | |
% | |
| |
March
31, | | |
Increase | | |
Increase | |
(in
thousands) | |
2023 | | |
2022 | | |
(Decrease) | | |
(Decrease) | |
Operating
Expenses: | |
| | | |
| | | |
| | | |
| | |
Research
and development | |
$ | 2,129 | | |
$ | 2,762 | | |
$ | (633 | ) | |
| (22.9 | %) |
General
and administrative | |
| 1,721 | | |
| 2,247 | | |
| (526 | ) | |
| (23.4 | %) |
Operating
Loss | |
| (3,850 | ) | |
| (5,009 | ) | |
| (1,159 | ) | |
| 23.1 | % |
Interest
and other income (expense), net | |
| (155 | ) | |
| 6 | | |
| (161 | ) | |
| NM | |
Net
Loss | |
$ | (4,005 | ) | |
$ | (5,003 | ) | |
$ | (998 | ) | |
| 19.9 | % |
Research
and development expenses
The
following table summarizes our research and development (R&D) expenses for the three months ended March 31, 2023 and March 31, 2022:
| |
Three
Months Ended | | |
| | |
% | |
| |
March
31, | | |
Increase | | |
Increase | |
(in
thousands) | |
2023 | | |
2022 | | |
(Decrease) | | |
(Decrease) | |
Clinical
operations | |
$ | 868 | | |
$ | 808 | | |
$ | 60 | | |
| 7.4 | % |
Drug
manufacturing and formulation | |
| 599 | | |
| 1,353 | | |
| (754 | ) | |
| -55.7 | % |
Personnel
expenses | |
| 635 | | |
| 583 | | |
| 52 | | |
| 8.9 | % |
Regulatory
costs | |
| 27 | | |
| 18 | | |
| 9 | | |
| 50.0 | % |
Total
research and development expenses | |
$ | 2,129 | | |
$ | 2,762 | | |
$ | (633 | ) | |
| (22.9 | %) |
R&D
expenses were $2.1 million for the three months ended March 31, 2023, a decrease of $0.6 million or 22.9% from the three months
ended March 31, 2022. This change was primarily a result of a decrease in manufacturing costs for CTx-1301 during the three month
period ended March 31, 2023, as the three month period ended March 31, 2022 included the manufacturing of clinical supply for Phase
3 CTx-1301 clinical trials; whereas the manufacturing activity in the three months ended March 31, 2023 primarily included expenses
related to the build out of our manufacturing suite at our CDMO. This decrease in manufacturing expense was slightly offset by an
increase in clinical and regulatory costs as we initiated a Phase 3 clinical trial for CTx-1301 in the first quarter of
2023.
General
and administrative expenses
The
following table summarizes our general and administrative (G&A) expenses for the three months ended March 31, 2023 and March 31,
2022:
| |
Three Months Ended | | |
| | |
% | |
| |
March 31, | | |
Increase | | |
Increase | |
(in thousands) | |
2023 | | |
2022 | | |
(Decrease) | | |
(Decrease) | |
Personnel expenses | |
$ | 668 | | |
$ | 662 | | |
$ | 6 | | |
| 0.9 | % |
Legal and professional fees | |
| 398 | | |
| 648 | | |
| (250 | ) | |
| (38.6 | %) |
Occupancy | |
| 130 | | |
| 126 | | |
| 4 | | |
| 3.2 | % |
Insurance | |
| 392 | | |
| 674 | | |
| (282 | ) | |
| (41.8 | %) |
Other | |
| 133 | | |
| 137 | | |
| (4 | ) | |
| (2.9 | %) |
Total general and administrative expenses | |
$ | 1,721 | | |
$ | 2,247 | | |
$ | (526 | ) | |
| (23.4 | %) |
Total
G&A expenses were $1.7 million for the three months ended March 31, 2023, a decrease of $0.5 million or 23.4% from the three
months ended March 31, 2022. This change was primarily the result of a decrease in legal and professional fees of $0.3 million and a
decrease in insurance costs of $0.3 million. The decrease in professional fees was related to the timing of services performed for
our annual audits, and the decrease in insurance costs was related to a decline in the annual directors and officers insurance
policy premium which was renewed in December of 2022.
Interest
and other income (expense), net
The
following table summarizes interest and other income (expense), net for the three months ended March 31, 2023 and March 31, 2022:
| |
Three Months Ended | | |
| | |
% | |
| |
March 31, | | |
Increase | | |
Increase | |
(in thousands) | |
2023 | | |
2022 | | |
(Decrease) | | |
(Decrease) | |
Interest and other income (expense), net | |
$ | (155 | ) | |
$ | 6 | | |
$ | (161 | ) | |
| NM | |
Total
interest and other income (expense), net in the three months ended March 31, 2023 primarily related to interest on the $5.0 million related
party note payable to WFIA, dated August 2022, offset by interest earned on invested balances.
Total
interest and other income (expense), net in the three months ended March 31, 2022 primarily related to interest incurred on outstanding
notes payable, offset by interest earned on invested balances.
Cash
Flows
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Net cash (used in) operating activities | |
$ | (3,576 | ) | |
$ | (3,864 | ) |
Net cash (used in) investing activities | |
| (37 | ) | |
| (10 | ) |
Net cash (used in) financing activities | |
| (4 | ) | |
| (4 | ) |
Net increase (decrease) in cash and cash equivalents | |
$ | (3,617 | ) | |
$ | (3,878 | ) |
Cash
Flows from Operating Activities
Net
cash used in operating activities was $3.6 million for the three months ended March 31, 2023. 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 $4.0 million, prior to the effects
of two noncash items, stock-based compensation expense of $0.2 million and depreciation expense of $0.1 million. Changes in operating
assets and liabilities included a decrease in miscellaneous receivables of $0.2 million primarily due to collection of an amount recoverable
on an insurance claim which had been recorded as a receivable as of December 31, 2022, a decrease of prepaid expenses and other current
assets of $0.3 million primarily due to the utilization of a deposit made to our CDMO for the build out of our new manufacturing suite,
and a decrease in trade accounts payable and accrued expenses of $0.4 million due to the payment of certain professional fees and franchise
taxes which had been accrued as of December 31, 2022, as well as general timing variances of trade payables.
Net
cash used in operating activities was $3.9 million for the three months ended March 31, 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 $5.0 million, prior to the effects
of two noncash items, stock-based compensation expense of $0.2 million and depreciation of $0.1 million. Changes in operating assets
and liabilities included a decrease in prepaid expenses of $0.4 million primarily due to a significant down payment made on the directors
and officers insurance policy in late 2021, which is being amortized over the policy period, as well as an increase in accounts payable
and accrued expenses of $0.4 million due to increased development activity on CTx-1301 resulting in increased billings and amounts owed
as of March 31, 2022.
Cash
Flows from Investing Activities
Net
cash used in investing activities for both the three month periods ended March 31, 2023 and March 31, 2022 was related to the purchase
of equipment to support our research and development.
Cash
Flows from Financing Activities
Net
cash used in financing activities for both the three month periods ended March 31, 2023 and March 31, 2022 was related to principal payments
on finance lease obligations.
Liquidity
and Capital Resources
Sources
of Liquidity
On
May 9, 2023, we received $3.0 million pursuant to the 2023 WFIA Debt Financing.
Since
our inception in 2012 through March 31, 2023, we have not generated 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
2023 WFIA Debt Financing, we expect our cash and cash equivalents will be sufficient to fund our development and operating expenditures
into the third quarter of 2023.
We
entered into an At The Market Offering Agreement (the “ATM Agreement”) with H.C. Wainwright & Co., LLC, as sales agent
(“Wainwright”), in January 2023, pursuant to which we may offer and sell, from time to time through Wainwright, shares of
our common stock for aggregate proceeds of up to $4.97 million (upon the terms and subject to the conditions and limitations set forth
in the ATM Agreement). During the three months ended March 31, 2023, we did not make any sales
pursuant to the ATM Agreement. Subsequent to March 31, 2023, we sold 16,707 shares of common stock pursuant to the ATM Agreement, for
net proceeds of $17,369, after deducting Wainwright’s commission of $546 and other fees.
In
April 2023, we entered into a purchase agreement (the “Lincoln Park Agreement”) and a registration rights agreement (the
“Registration Rights Agreement”) with Lincoln Park Capital Fund LLC. Pursuant to the Lincoln Park Agreement, Lincoln
Park has agreed to purchase from us up to an aggregate of $12.0 million of common stock (upon the terms and subject to the
conditions and limitations set forth in the Lincoln Park Agreement) from time to time and at our sole discretion over the 36-month
term of the Lincoln Park Agreement. Pursuant to the terms of the Registration Rights Agreement, we filed with the SEC a registration
statement to register for resale under the Securities Act 4.5 million shares that have been or may be issued to Lincoln Park under
the Lincoln Park Agreement. Upon the signing of the Lincoln Park Agreement, we issued 368,023 shares of common stock to Lincoln
Park as consideration for their commitment to purchase our common stock under the Lincoln Park Agreement. We have sold 10,000 shares of common stock under the Lincoln
Park Agreement, for net proceeds of $10,430.
Management is also evaluating additional strategies to
obtain funding, which may include additional offerings of common stock, issuance of debt, or other capital sources, including
potential collaborations with other companies or other strategic transactions.
In
order to achieve the filing of our NDA for CTx-1301 in mid-2024 for potential FDA approval, we believe that we will need approximately
$25.0 million of capital, in addition to the proceeds from the 2023 WFIA Debt Financing. We will also need additional capital to advance
our other programs and commercialization efforts. 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 are currently providing only a minimal return given the current interest rate environment.
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 or license 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 and timing of outsourcing our commercialization efforts, including, 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. |
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, licensing or similar
strategic business transaction. In March 2023, we entered into a Joint Commercialization Agreement with Indegene, Inc., which will
provide us with commercialization services for CTx-1301, upon approval from the FDA, including marketing, sales, market access and
distribution, on a fee for service basis.
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.
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.
Contractual
Obligations
The
following summarizes our contractual obligations as of March 31, 2023 that will affect our future liquidity.
We
entered into a patent and know-how licensing agreement with BDD Pharma Limited in August 2018. See
“Item 1. Business – Material Agreements” section of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 10, 2023 for a description of this
agreement. We are required to pay BDD Pharma certain amounts in connection with clinical trial and regulatory milestones. The first
milestone payment of $250,000 was paid in February 2023 upon dosing of the first patient in the Phase 3 adult onset and duration
study for CTx-1301. Additional payments will become due upon completion of certain milestones as defined in the
agreement.
We
have entered into agreements with CROs for the Phase 3 adult dose-optimization, onset and duration study for CTx-1301, which was
initiated in December 2022, the Phase 3 fixed-dose
pediatric and adolescent safety and efficacy study for CTx-1301, which is expected to commence in mid-2023 and the Phase 3 pediatric
dose-optimization, onset and duration classroom study, which we plan to initiate in the third quarter of 2023. We have entered into
agreements with a CDMO and other third parties for manufacture of the Phase 3 clinical supply of CTx-1301. We have also entered into
a joint commercialization agreement with Indegene, Inc., pursuant to which Indegene will
provide commercialization services for CTx-1301, upon approval from the FDA, including
marketing, sales, market access and distribution, on a fee for service basis. 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 and restoration 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 that 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-month periods ending March 31, 2023 and 2022 and had accumulated losses of $73.4
million since inception to March 31, 2023. 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 initial public offering and the WFIA debt financing. Additional financings will be needed by us to fund our operations and to
complete development of and commercialize our product candidates. See
“Liquidity and Capital Resources” above for details relating to certain agreements which we have entered into in 2023 as
potential sources of additional capital. 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.