Pasithea Therapeutics Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of financial condition and operating results together with our financial statements and the related notes and other financial information included elsewhere in this quarterly report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our prospectus, dated September 14, 2021, filed with the Securities and Exchange Commission (“SEC”) in accordance with Rule 424(b) of the Securities Act on September 16, 2021 (the “Prospectus”) in connection with our initial public offering (“Initial Public Offering”). This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in the section of this report captioned “Risk Factors” and elsewhere in this quarterly report on Form 10-Q as well as the risk factors set forth in the section titled “Risk Factors” included in the Prospectus, our actual results may differ materially from those anticipated in these forward-looking statements. For convenience of presentation some of the numbers have been rounded in the text below. Overview The Company was incorporated in the State of Delaware on May 12, 2020. The Company is a biotechnology company focused on the research and discovery of new and effective treatments for psychiatric and neurological disorders. The Company’s primary biotech operations will focus on developing drugs that target the pathophysiology underlying such disorders rather than symptomatic treatments, with the goal of developing new pharmacological agents that display significant advantages over conventional therapies with respect to efficacy and tolerability. The Company’s secondary operations are focused on providing business support services to anti-depression clinics in the UK and in the United States. Its operations in the UK will involve providing business support services to registered healthcare providers who will assess patients and, if appropriate, administer intravenous infusions of ketamine. Its operations in the United States will involve providing business support services to entities that furnish similar services to patients who personally pay for those services. Operations are expected to initially take place across the United States and the UK through partnerships with healthcare companies, and its operations in the UK and the United States are expected to be limited to providing business support services to healthcare companies. The Company is located in Miami Beach, Florida USA. As of September 30, 2021, the Company had not commenced core operations or entered into agreements with independent professional services companies or other potential counterparties relating to its ketamine infusion business in the United States. All activity for the period from May 12, 2020 (inception) through September 30, 2021 relates to the Company’s formation and raising funds through issuing shares of the Company’s Common Stock. The Company has selected December 31 as its fiscal year end. Throughout this report, the terms “our,” “we,” “us,” and the “Company” refer to Pasithea Therapeutics Corp. and its subsidiaries, Pasithea Therapeutics Limited (UK) and Pasithea Clinics Inc. Pasithea Therapeutics Limited (UK) is a private limited Company, registered in the United Kingdom (UK). Pasithea Clinics Inc. is incorporated in Delaware. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the consolidated financial statements of the Company and its subsidiaries. All inter-company balances and transactions among the companies have been eliminated upon consolidation. Initial Public Offering On September 17, 2021, we completed our Initial Public Offering of 4,800,000 units (“Units”), each Unit consisting of one share of our common stock (“Common Stock”), par value $0.0001 per share, and one warrant (“Warrant”) to purchase one share of our Common Stock at an initial public offering price of $5.00 per Unit, resulting in aggregate net proceeds to us of approximately $20.6 million, after deducting the underwriting discount and commissions of approximately $2.1 million and offering expenses of approximately $1.3 million. We granted the underwriters an option for a period of 45 days to purchase up to an additional 720,000 shares of Common Stock and/or Warrants to purchase up to 720,000 shares of Common Stock at $5.00 per Unit less the underwriting discounts and commissions. On October 29, 2021, the underwriters’ option lapsed without exercise. 13 Impact of COVID-19 Pandemic In March 2020, the WHO characterized the outbreak of the novel strain of coronavirus, specifically identified as COVID-19, as a global pandemic. This has resulted in governments enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to business, resulting in a global economic slowdown. Equity markets have experienced significant volatility and weakness and the governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The current challenging economic climate may lead to adverse changes in cash flows, working capital levels and/or debt balances, which may also have a direct impact on the Company’s operating results and financial position in the future. The ultimate duration and magnitude of the impact and the efficacy of government interventions on the economy and the financial effect on the Company is not known at this time. The extent of such impact will depend on future developments, which are highly uncertain and not in the Company’s control, including new information which may emerge concerning the spread and severity of COVID-19 and actions taken to address its impact, among others. The repercussions of this health crisis could have a material adverse effect on the Company’s business, financial condition, liquidity and operating results. In response to COVID-19, the Company has implemented working practices to address potential impacts to its operations, employees and customers, and will take further measures in the future if and as required. At present, we do not believe there has been any appreciable impact on the Company specifically associated with COVID-19. Emerging Growth Company Status The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used. Results of Operations Three Months Ended September 30, 2021 and 2020 For the three months ended September 30, 2021 and 2020, we reported no revenues and incurred operating expenses of $1,273,600 and $13,970, respectively. For the three months ended September 30, 2021, operating expenses were primarily attributable to legal and professional fees related to corporate development and financing and stock based compensation. For the three months ended September 30, 2020, operating expenses were attributable primarily to legal fees and advertising. For the three months ended September 30, 2021, we reported a loss on the change in fair value of warrant liabilities of approximately $252,000 due to an increase in the fair value of our warrant liabilities. For the three months ended September 30, 2021 and 2020, we incurred a net loss of $ 1,526,108 and $13,970, respectively. 14 Nine Months Ended September 30, 2021 and the Period from May 12, 2020 (Inception) to September 30, 2020 For the nine months ended September 30, 2021 and the period from May 12, 2020 (inception) to September 30, 2020, we reported no revenues and incurred operating expenses of $2,551,156 and $13,970, respectively. For the nine months ended September 30, 2021, operating expenses were primarily attributable to legal and professional fees, as well as stock based compensation. For the period from May 12, 2020 (inception) to September 30, 2020, operating expenses were primarily attributable to legal fees and advertising. For the nine months ended September 30, 2021, we reported a loss on the change in fair value of warrant liabilities of approximately $252,000 due to an increase in the fair value of our warrant liabilities. For the nine months ended September 30, 2021 and for the period from May 12, 2020 (inception) to September 30, 2020, we incurred a net loss of $2,803,664 and $13,970, respectively. Working Capital As of September 30, 2021 December 31, 2020 Current assets $ 21,033,846 $ 247,958 Current liabilities 528,096 6,603 Working capital $ 20,505,750 $ 241,355 Current assets increased by $20,818,421 between December 31, 2020 and September 30, 2021 due mainly to funds received as part of our Initial Public Offering. Current liabilities increased by $521,493 between December 31, 2020 and September 30, 2021 due mainly to an increase in accounts payable attributable to outstanding payments related to legal and professional fees. Liquidity and Financial Condition Nine Months Ended September 30, 2021 May 12, 2020 (Inception) to September 30, 2020 Net loss $ (2,803,664 ) $ (13,970 ) Net cash used in operating activities (1,429,725 ) (23,970 ) Net cash used in investing activities (8,570 ) - Net cash provided by financing activities 21,763,726 33,000 Effect of foreign currency translation (3,762 ) - Increase in cash and cash equivalents $ 20,321,669 $ 9,030 Cash Flows From Operating Activities Net cash used in operating activities for the nine months ended September 30, 2021 was $1,429,725, as compared to net cash used in operating activities of $23,970 for the period from May 12, 2020 (inception) to September 30, 2020. This increase was primarily attributable to legal and professional fees. 15 Cash Flows From Investing Activities Net cash used in investing activities for the nine months ended September 30, 2021 was $8,570 for the purchase of equipment. For the period from May 12, 2020 (inception) to September 30, 2020, there were no cash transactions related to investing activities. Cash Flows From Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2021, was $21,763,726, primarily from the sale of 4,800,000 Units in our Initial Public Offering. For the period from May 12, 2020 (inception) to September 30, 2020, we received $33,000 from the sale of our common stock. Liquidity & Capital Resources Outlook As of September 30, 2021, we had approximately $20.5 million of working capital. Our liquidity needs prior to the consummation of our Initial Public Offering had been satisfied through proceeds from the issuance of common stock in private placements. Subsequent to the consummation of the Initial Public Offering, our liquidity is satisfied through the net proceeds from the Initial Public Offering. Based on the foregoing, management believes that we will have sufficient working capital to meet our needs through twelve months from the date of these financial statements. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Exchange Act. Contractual Obligations and Commitments We did not have any contractual obligations. Critical Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and are unaudited. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2020 was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Form S-1 Registration Statement, as filed with the Securities and Exchange Commission on April 13, 2021, as amended. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results for the year ending December 31, 2021 or for any future period. Principles of Consolidation The Company evaluates the need to consolidate affiliates based on standards set forth in ASC 810, “Consolidation,” (“ASC 810”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Pasithea Therapeutics Limited (UK) and Pasithea Clinics Inc. All significant consolidated transactions and balances have been eliminated in consolidation. These condensed consolidated financial statements are presented in U.S. Dollars. 16 Emerging Growth Company The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and approval of any golden parachute payments not previously approved. Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s unaudited consolidated financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used. Use of Estimates The preparation of financial statement in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statement, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates. Cash and cash equivalents The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. Offering Costs Offering costs consist of professional fees, filing, regulatory and other costs incurred through the balance sheet date that are directly related to the Initial Public Offering. Warrant Liability The Company accounts for its Public and Representative Warrants (each, the “Public Warrants” and “Representative Warrants” and, collectively, the “Warrants”) in accordance with the guidance contained in ASC 815 under which the Warrants do not meet the criteria for equity treatment and must be recorded as derivative liabilities. Accordingly, the Company classifies the Warrants as liabilities at their fair value and adjusts the Warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the Warrants are exercised or expire, and any change in fair value is recognized in the Company’s statement of operations. The fair value of the Public and Representative Warrants was initially and subsequently measured at the end of each reporting period, using a Black-Scholes option pricing model. 17 Income Taxes The Company follows the asset and liability method of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of September 30, 2021. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist of a cash account in a financial institution, which, at times, may exceed the Federal Depository Insurance Coverage of $250,000. As of September 30, 2021, the Company has not experienced losses on this account and management believes the Company is not exposed to significant risks on such account. Fair Value of Financial Instruments The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the accompanying balance sheet, primarily due to their short-term nature. Fair Value Measurements Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include: ● Level 1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets; ● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and ● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. 18 Net Loss Per Share Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed similar to basic earnings per share, except the weighted average number of common shares outstanding are increased to include additional shares from the assumed exercise of share options, if dilutive. There are no outstanding dilutive or potentially dilutive instruments. Foreign Currency Translations The Company’s functional and reporting currency is the U.S. dollar. All transactions initiated in other currencies are translated into U.S. dollars using the exchange rate prevailing on the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the U.S. dollar at the rate of exchange in effect at the balance sheet date. Unrealized exchange gains and losses arising from such transactions are deferred until realization and are included as a separate component of stockholders’ equity (deficit) as a component of comprehensive income or loss. Upon realization, the amount deferred is recognized in income in the period when it is realized. Comprehensive Income (Loss) FASB Topic No. 220, “Comprehensive Income,” establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. As of September 30, 2021, the Company had no material items of other comprehensive income except for the foreign currency translation adjustment. Recent Accounting Pronouncements Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Company’s financial statements.