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 Annual Report on Form 10-K for the year ended December 31, 2022, as amended on April 4, 2023. 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 our Annual Report on Form 10-K, 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. Throughout this report, the terms “our,” “we,” “us,” and the “Company” refer to Pasithea Therapeutics Corp. and its subsidiaries, Pasithea Therapeutics Limited (UK), Pasithea Clinics Corp., Pasithea Therapeutics Portugal, Sociedade Unipessoal Lda, Alpha-5 integrin, LLC and AlloMek Therapeutics, LLC. Pasithea Clinics Corp. is incorporated in Delaware Pasithea Therapeutics Portugal, Sociedade Unipessoal Lda is a private limited company, registered in Portugal. Alpha-5 integrin, LLC and AlloMek Therapeutics, LLC are both Delaware limited liability companies. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally identified by the use of such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “continue,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature. These forward-looking statements speak only as of the date of filing this Quarterly Report with the SEC. There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to: ● our lack of operating history; ● the expectation that we will incur significant operating losses for the foreseeable future and will need significant additional capital; ● the period over which we estimate our existing cash and cash equivalents will be sufficient to fund our future operating expenses and capital expenditure requirements; ● our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; ● our plans to develop and commercialize our product candidates; ● the timing of our Investigational New Drug (“IND”) submission with the U.S. Food and Drug Administration or other regulatory submissions with foreign regulatory agencies for PAS-004; ● the timing of our planned clinical trials for PAS-004; ● the ability of our clinical trials to demonstrate safety and efficacy of our future product candidates, and other positive results; ● the timing and focus of our future preclinical studies and clinical trials, and the reporting of data from those studies and trials; ● the size of the market opportunity for our future product candidates, including our estimates of the number of patients who suffer from the diseases we are targeting; 16 ● the success of competing therapies that are or may become available; ● the beneficial characteristics, safety, efficacy and therapeutic effects of our future product candidates; ● our ability to obtain and maintain regulatory approval of our future product candidates; ● our plans relating to the further development of our future product candidates, including additional disease states or indications we may pursue; ● existing regulations and regulatory developments in the United States and other jurisdictions; ● our dependence on third parties; ● the need to hire additional personnel and our ability to attract and retain such personnel; ● our plans and ability to obtain or protect intellectual property rights, including extensions of patent terms where available and our ability to avoid infringing the intellectual property rights of others; ● our financial performance and sustaining an active trading market for our Common Stock and Warrants; and ● our ability to restructure our operations to comply with any potential future changes in government regulation. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. You should refer to the “ Risk Factors ” section of this Quarterly Report for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. We operate in an evolving environment and new risk factors and uncertainties may emerge from time to time. It is not possible for management to predict all risk factors and uncertainties. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. You should review the factors and risks and other information we describe in the reports we will file from time to time with the SEC. Company Summary We are a biotechnology company primarily focused on the discovery, research and development of innovative treatments for central nervous system (CNS) disorders and RASopathies. Our primary operations (the “Therapeutics” segment) are focused on developing our lead therapeutic candidate, PAS-004, a macrocyclic MEK inhibitor for potential use in a range of CNS-related indications, including neurofibromatosis type 1 (NF1) as well as Noonan syndrome, lamin A/C cardiomyopathy and certain oncology indications that we acquired from AlloMek Therapeutics, LLC in October 2022. PAS-004 has completed pre-clinical testing and animal toxicology studies to support a regulatory application to study PAS-004 for the treatment of NF1. We anticipate initiating our first-in-human Phase 1 clinical trial as soon as possible after the acceptance of our regulatory submission by the regulatory agencies. We are also focused on the development of our discovery programs through lead identification of drug candidates, including PAS-003, a monoclonal antibody targeting α5β1 integrin for the treatment of amyotrophic lateral sclerosis (ALS), PAS-002, a DNA vaccine targeting GlialCAM for the treatment of multiple sclerosis (MS), and PAS-001, a small molecule targeting the compliment component 4 (C4) gene for the treatment of schizophrenia. 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. 17 We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates through all stages of development and clinical trials and, ultimately, seek regulatory approval. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We expect our expenses and capital requirements will increase significantly in connection with our ongoing activities as we: ● continue our ongoing and planned research and development of our product candidates; ● initiate nonclinical studies and clinical trials for any additional product candidates that we may pursue; ● scale up external manufacturing capacity with the aim of securing sufficient quantities to meet our capacity requirements for clinical trials and potential commercialization; ● establish a sales, marketing and distribution infrastructure to commercialize any approved product candidates and related additional commercial manufacturing costs; ● develop, maintain, expand, protect and enforce our intellectual property portfolio; ● acquire or in-license product candidates and technologies; and ● add clinical, operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts. Recent Developments Tender Offer to Repurchase Shares of Common Stock On July 20, 2023, we announced that our Board of Directors authorized the repurchase, through a $4.0 million tender offer, of up to approximately 5.7 million shares of our outstanding common stock at a cash purchase price of $0.70 per share (the “Tender Offer”). We launched the Tender Offer on August 9, 2023 and it expired on September 8, 2023, subject to the terms and conditions of the Tender Offer. The Tender Offer resulted in the Company purchasing 5,323,451 shares of its common stock for an aggregate purchase price of approximately $3.7 million, excluding fees and expenses relating to the Tender Offer. For more information on the Tender Offer, see “Note 6 – Stockholders’ Equity” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. Selection of PAS-003 Lead Candidate On November 9, 2023, we announced that we selected our PAS-003 lead development candidate, a humanized monoclonal antibody with optimal properties that targets α5β1 integrin for the treatment of both sporadic and familial ALS. PAS-003 is now ready for manufacturing and IND enabling studies. Impact of Inflation We have recently experienced higher costs across our business as a result of inflation, including higher costs related to employee compensation and outside services. We expect inflation to continue to have a negative impact throughout 2023, and it is uncertain whether we will be able to offset the impact of inflationary pressures in the near term. 18 Results of Operations Comparison of the Three and Nine Months Ended September 30 , 2023 and 2022 Our financial results for the three and nine months ended September 30 , 2023 and 2022 are summarized as follows: For the Three Months Ended September 30, 2023 2022 Change % Change Selling, general and administrative $ 2,164,560 $ 2,576,802 $ (412,242 ) (16.0 )% Research and development 1,624,766 1,278,922 345,844 27.0 % Loss from operations (3,789,326 ) (3,855,724 ) 66,398 1.7 % Other income (expense), net 176,736 (335,317 ) 512,053 152.7 % Net loss from continuing operations (3,612,590 ) (4,191,041 ) 578,451 13.8 % Net loss from discontinued operations, net of tax - (395,089 ) 395,089 100.0 % Net loss $ (3,612,590 ) $ (4,586,130 ) $ 973,540 21.2 % For the Nine Months Ended September 30, 2023 2022 Change % Change Selling, general and administrative $ 6,081,362 $ 7,267,239 $ (1,185,877 ) (16.3 )% Research and development 4,749,217 1,278,922 3,470,295 271.3 % Loss from operations (10,830,579 ) (8,546,161 ) (2,284,418 ) (26.7 )% Other income, net 354,095 871,680 (517,585 ) (59.4 )% Net loss from continuing operations (10,476,484 ) (7,674,481 ) (2,802,003 ) (36.5 )% Net loss from discontinued operations, net of tax (437,015 ) (1,144,283 ) 707, 268 61.8 % Net loss $ (10,913,499 ) $ (8,818,764 ) $ (2,094,735 ) (23.8 )% Selling, general and administrative Selling, general and administrative expenses consist primarily of personnel expenses, including salaries, benefits, and stock-based compensation expense, for employees and consultants in executive, finance and accounting, legal, operations support, information technology and human resource functions. Selling, general and administrative expense also includes corporate facility costs not otherwise included in research and development expense, including rent, utilities, depreciation, amortization, and maintenance, as well as legal fees related to intellectual property and corporate matters and fees for accounting and consulting services. For the three and nine months ended September 30, 2023, selling, general and administrative expenses were approximately $2.2 million and $6.1 million, respectively. Selling, general and administrative expenses decreased for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 primarily due to the discontinued Clinics operations in 2023. We expect selling, general, and administrative expenses to remain relatively flat throughout the rest of 2023. Research and Development Research and development expenses relate to our activities performed by our Therapeutics segment, which is primarily focused on the development of PAS-004, our lead product candidate, and PAS-003, our most advanced discovery candidate. For the three and nine months ended September 30, 2023, research and development expenses were approximately $1.6 million and $4.7 million, respectively. Research and development expenses increased for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 primarily due to the commencement and expansion of our drug development activities related to PAS-004 and PAS-003. We expect research and development expenses to continue to increase throughout the rest of 2023 primarily due to manufacturing, regulatory and clinical development of PAS-004. 19 Other income (expense), net For the three months ended September 30, 2023, other income (expense), net increased by approximately $512 thousand compared to the three months ended September 30, 2022. The increase in other income, net is due primarily to the decrease in the fair value of the publicly traded warrants issued in our Initial Public Offering (the “Public Warrants”) and the warrants issued as compensation to the underwriters in our Initial Public Offering (the “Representative Warrants”) that occurred during the three months ended September 30, 2023, compared to a larger increase in the fair value of the Public Warrants and the Representative Warrants that occurred during the three months ended September 30, 2022. See “Note 2 – Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for more information on the accounting treatment of the Public Warrants and the Representative Warrants. The remaining increase in other income (expense), net is due to dividend income of $142 thousand during the three months ended September 30, 2023. For the nine months ended September 30, 2023, other income, net decreased by approximately $517 thousand compared to the nine months ended September 30, 2022. The decrease is primarily due to the decrease of approximately $67 thousand that occurred during the nine months ended September 30, 2023, compared to a $1.4 million decrease in the fair value of our Public Warrants and Representative Warrants that occurred during the nine months ended September 30, 2022, partially offset by an increase in dividend income of $253 thousand during the nine months ended September 30. Working Capital As of September 30, 2023 As of December 31, 2022 (1) Current assets $ 20,771,268 $ 33,913,231 Current liabilities 2,043,929 1,641,755 Working capital $ 18,727,339 $ 32,271,476 (1) the numbers for December 31, 2022, exclude the discontinued operation Working capital decreased by approximately $13.5 million between December 31, 2022 and September 30, 2023 due primarily to cash used to repurchase shares of our common stock in the Tender Offer and to fund operations for the nine months ended September 30, 2023. Liquidity and Financial Condition Nine Months Ended September 30, 2023 2022 Net loss $ (10,913,499 ) $ (8,818,764 ) Net cash used in operating activities $ (9,519,789 ) $ (8,709,179 ) Net cash provided by investing activities 20,663 42,203 Net cash used in financing activities (3,726,416 ) - Effect of foreign currency translation (7,056 ) (129,521 ) Net cash used in discontinued operations (270,576 ) (1,725,701 ) Decrease in cash and cash equivalents $ (13,503,174 ) $ (10,522,198 ) Cash and cash equivalents decreased by approximately $13.5 million for the nine months ended September 30, 2023, compared to a decrease of approximately $10.5 million for the nine months ended September 30, 2022, which was primarily attributable to cash used to repurchase shares of our common shares in the Tender Offer during the period and cash used to fund operations, partially offset by a decrease of approximately $271 thousand in net cash used in discontinued operations, compared to a decrease of approximately $1.7 million in the corresponding period of 2022. 20 Liquidity & Capital Resources Outlook As of September 30, 2023, we had approximately $19.6 million in operating bank accounts and money market funds, with working capital of approximately $18.7 million. We are dependent on obtaining additional working capital funding from the sale of equity and/or debt securities in order to continue to execute our development plans and continue operations. Subsequent to the consummation of the Initial Public Offering, our liquidity was and continues to be satisfied through the net proceeds from the Initial Public Offering, the private placement we consummated in November 2021 and the receipt of cash upon the prior exercise of our outstanding warrants. Based on the foregoing, management believes that we will have sufficient working capital to meet our needs through twelve months from the issuance date of the financial statements included in this quarterly report. Liquidity & Capital Resources Outlook Our primary use of cash is to fund operating expenses, primarily selling, general and administrative and research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable, accrued expenses and prepaid expenses. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to: ● the scope, timing, progress and results of discovery, preclinical development, laboratory testing and clinical trials for our product candidates; ● the costs of manufacturing our product candidates for clinical trials and in preparation for marketing approval and commercialization; ● the extent to which we enter into collaborations or other arrangements with third parties in order to further develop our product candidates; ● the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; ● the costs and fees associated with the discovery, acquisition or in-license of additional product candidates or technologies; ● expenses needed to attract and retain skilled personnel; ● the costs required to scale up our clinical, regulatory and manufacturing capabilities; ● the costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing and distribution capabilities, for any of our product candidates for which we receive marketing approval; and ● revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval. We will need significant additional funds to meet operational needs and capital requirements for clinical trials, other research and development expenditures, and business development activities. We currently have no credit facility or committed sources of capital. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical studies. 21 Contractual Obligations See Note 9 – Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a summary of our contractual obligations. Off-Balance Sheet Arrangements During the periods presented, 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. Critical Accounting Policies and Estimates Our critical accounting policies and estimates, which include (1) revenue recognition, (2) stock-based compensation and (3) fair value measurements, are more fully described in the Notes to our Consolidated Financial Statements included in our Form 10-K for the fiscal year ended December 31, 2022, as amended on April 4, 2023. During the three and nine months ended September 30, 2023, there were no material changes to our critical accounting policies and estimates from those described in our Form 10-K. We believe that the following critical accounting estimates are particularly subject to management’s judgment and could materially affect our financial condition and results of operations. ● Assumptions used in the Black-Scholes pricing model for valuation of stock option awards, such as expected volatility, risk-free interest rate, expected term and expected dividends. ● Valuation of the liability for Representative Warrants, for which there is no active market, based on the relative fair value to the quoted market price of the Public Warrants, accounting for a small difference in the exercise price. Recent Accounting Pronouncements See Note 2 – Summary of Significant Accounting Policies in the Notes to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for a description of recent accounting pronouncements applicable to our financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable. As a smaller reporting company, we are not required to provide the information required by this Item.