Pasithea Therapeutics Corp

FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022

NOTE 1 – NATURE OF THE ORGANIZATION AND BUSINESS

Pasithea Therapeutics Corp. (“Pasithea” or the “Company”) was incorporated in the State of Delaware on May 12, 2020 and completed an Initial Public Offering (the “Initial Public Offering”) on September 17, 2021. The Company is a biotechnology company focused on the discovery, research and development of innovative treatments for central nervous system (CNS) disorders and other diseases, including RASopathies. The Company is leveraging its expertise in the fields of neuroscience, translational medicine, and drug development to bring life-changing therapies to patients.

The Company’s lead product candidate, PAS-004, is a next-generation macrocyclic mitogen-activated protein kinase, or MEK inhibitor that the Company believes may address the limitations and liabilities associated with existing drugs targeting a similar mechanism of action. In December 2023, the U.S. Food and Drug Administration (the “FDA”) cleared our Investigational New Drug application (the “IND”) for PAS-004 and the Company received a study may proceed letter from the FDA for the Company’s Phase 1 multicenter, open-label trial of PAS-004 in patients with MAPK pathway-driven advanced tumors with a documented RAS, NF1 or RAF mutation or patients who have failed BRAF/MEK inhibition. The Company is currently conducting the Phase 1 clinical trial. The Company's clinical development plan for PAS-004 following the Phase 1 study is to begin a Phase 1b/2 clinical trial in neurofibromatosis type 1 (NF1)-associated plexiform neurofibroma pediatric and adult patients.

Additionally, the Company has two programs that are in the discovery stage, which the Company believes address limitations in the treatment paradigm of the indications the Company plans to address with these programs, which are currently amyotrophic lateral sclerosis (“ALS”) for PAS-003 and schizophrenia for PAS-001.

During the year ended December 31, 2023, the Company discontinued providing business support services to anti-depression clinics in the U.K. and in the United States, previously conducted through partnerships with healthcare providers. During the year ended December 31, 2023, the at home services in New York, NY as well as in the U.K were discontinued and the Company sold and disposed of the assets associated with the Clinics operations in Los Angeles, CA. The lease associated with the related property in Los Angeles was assumed by the buyer in the transaction.

Throughout this report, the terms “our,” “we,” “us,” and the “Company” refer to Pasithea Therapeutics Corp. and its subsidiaries, Pasithea Therapeutics Limited (U.K.), Pasithea Therapeutics Portugal, Sociedade Unipessoal Lda, Pasithea Clinics Inc., Alpha-5 Integrin, LLC (“Alpha-5”) (See Note 6), and AlloMek Therapeutics, LLC (“AlloMek”) (See Note 6). Pasithea Therapeutics Limited (U.K.) is a private limited Company, registered in the United Kingdom (U.K.). Pasithea Therapeutics Portugal, Sociedade Unipessoal Lda is a private limited Company, registered in Portugal. Pasithea Clinics Inc. is incorporated in Delaware. Alpha-5 Integrin, LLC is Delaware limited liability company. AlloMek Therapeutics, LLC is Delaware limited liability company. The operations of Pasithea Therapeutics Limited (U.K.), Pasithea Therapeutics Portugal, Sociedade Unipessoal Lda, and Pasithea Clinics Inc. have been discontinued (see Note 14).

Basis of Presentation

The accompanying audited 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”).

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 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.

Liquidity and Capital Resources

As of December 31, 2023, the Company had approximately $16.3 million of cash and cash equivalents and working capital of approximately $14.1 million. The Company’s major sources of cash have been comprised of proceeds from various private offerings, the Initial Public Offering and the exercise of warrants. The Company is dependent on obtaining additional working capital funding from the sale of equity and/or debt securities in order to continue to execute its development plans and continue operations. Based on the foregoing, management believes that the Company will not have sufficient working capital to meet its needs through twelve months from the date of these financial statements if additional funding cannot be obtained.

Going Concern Uncertainty

The accompanying audited consolidated financial statements have been prepared as if the Company will continue as a going concern. The Company has incurred significant operating losses and negative cash flows from operations since inception. On December 31, 2023, the Company had cash and cash equivalents of approximately $16.3 million and an accumulated deficit of approximately $35.3 million. The Company has incurred recurring losses, has experienced recurring negative operating cash flows, and requires significant cash resources to execute its business plans. Historically, the Company’s major sources of cash have been comprised of proceeds from various public and private offerings of its capital stock. The Company is dependent on obtaining additional working capital funding from the sale of equity and/or debt securities in order to continue to execute its development plans and continue operations. Without additional funding, there is substantial doubt about the Company’s ability to continue as a going concern through twelve months from the date of these financial statements.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS

Principles of Consolidation

The Company evaluates the need to consolidate affiliates based on standards set forth in Accounting Standards Codification (“ASC”) 810, “Consolidation,” (“ASC 810”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Alpha-5 Integrin, LLC, AlloMek Therapeutics, LLC, Pasithea Therapeutics Limited (U.K.) and Pasithea Clinics Inc. (“Pasithea Clinics”). All significant intercompany transactions and balances have been eliminated in consolidation.

These consolidated financial statements are presented in U.S. Dollars.

Use of Estimates

The preparation of financial statements 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 statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Management regularly makes estimates related to the fair value of warrant liabilities; the recoverability of long-lived assets; the fair values and useful lives of intangible assets acquired in business combinations; the potential impairment of goodwill; and income taxes. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable, the results of which form the basis for the amounts recorded in the consolidated financial statements. As appropriate, the Company obtains reports from third-party valuation experts to inform and support estimates related to fair value measurements.

Research and Development

Research and development costs are charged to operations when incurred and are included in operating expense, except for goodwill related to intellectual property & patents. Research and development costs consist principally of compensation of employees and consultants that perform the Company’s research activities, payments to third parties for preclinical and non-clinical activities, costs to acquire drug product from contract development and manufacturing organizations and third-party contractors relating to chemistry, manufacturing and controls (“CMC”) efforts, the fees paid for and to maintain the Company’s intellectual property, and research and development costs related to our discovery programs. Depending upon the timing of payments to the service providers, the Company recognizes prepaid expenses or accrued expenses related to these costs. These accrued or prepaid expenses are based on management’s estimates of the work performed under service agreements, milestones achieved and experience with similar contracts. The Company monitors each of these factors and adjusts estimates accordingly.

Research and development also includes contra expense related to costs reimbursed under the Company’s grant agreement. For the years ended December 31, 2023 and 2022, the Company recorded zero and $0.2 million of grant income as a contra expense within research and development.

General and Administrative

Our general and administrative expenses primarily consist of personnel and related costs, including stock-based compensation, legal fees relating to both intellectual property and corporate matters, accounting and audit related costs, insurance, corporate communications and public company expenses, information technology, office and facility rents and related expenses, including depreciation, amortization and maintenance, and fees for consulting, business development and other professional services.

Grants

In connection with the acquisition of Alpha-5, the Company legally assumed rights under a grant agreement with FightMND, which was entered into by Alpha-5 on September 23, 2021. FightMND supports pre-clinical research, development and assessment of therapeutics for motor neuron disease, including ALS. Under the grant agreement, the Company is entitled to reimbursements for costs incurred for research related to its monoclonal antibody targeting a5 b 1 integrin as a potential treatment for ALS. There was no grant income recognized for the year ended December 31, 2023. For the year ended December 31, 2022, the Company recorded $0.2 million of grant income related to this grant as a contra expense within research and development.

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, classified as trading securities. The Company had cash equivalents of $13.4 million as of December 31, 2023, and did not have any cash equivalents as of December 31, 2022.

Property and Equipment and Depreciation

Property and equipment is recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the related assets which range from three to ten years. Expenditures that enhance the useful lives of the assets are capitalized and depreciated. Maintenance and repairs are expensed as incurred. When properties are retired or otherwise disposed of, related costs and related accumulated depreciation are removed from the accounts. Leasehold improvements are amortized over the shorter of the estimated useful life of those leasehold improvements and the remaining lease term.

Warrant Liability

The Company accounts for the publicly traded warrants issued in its Initial Public Offering (the “Public Warrants”) and the warrants issued as compensation to the underwriters in its Initial Public Offering (the “Representative Warrants” and together with the Public Warrants, the “IPO Warrants”) in accordance with the guidance contained in ASC 815, “Derivatives and Hedging,” under which the IPO Warrants do not meet the criteria for equity treatment and must be recorded as derivative liabilities. Accordingly, the Company classifies the IPO Warrants as liabilities at their fair value. This liability is subject to re-measurement at each balance sheet date until the IPO Warrants are exercised or expire, and any change in fair value is recognized in the Company’s consolidated statements of operations and comprehensive loss. The fair value of the IPO Warrants was initially measured using a Black-Scholes pricing model. Currently, the fair value of the Public Warrants is measured using quoted market prices, and the fair value of the Representative Warrants is based on an estimate of the relative fair value to the Public Warrants, accounting for a small difference in the exercise price.

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. As of December 31, 2023, the Company had deferred tax assets related to certain net operating losses. A valuation allowance was established against these deferred tax assets at their full amount, resulting in azero balance of deferred tax assets on the consolidated balance sheets as of December 31, 2023 and 2022.

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 December 31, 2023 and December 31, 2022. 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 December 31, 2023, 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

With the exception of liabilities related to the IPO Warrants, described in the table below, 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:

The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:

The following table presents a reconciliation of the Level 3 Representative Warrants liabilities:

The change in fair value of the Representative Warrants liabilities is recorded in change in fair value of warrant liabilities on the consolidated statements of operations and comprehensive loss.

The fair value of the cash equivalents is based on the fair value of marketable securities invested in U.S. government money market funds.

The fair value of the liability associated with the Public Warrants as of December 31, 2023 and 2022, was based on the quoted closing price on The Nasdaq Capital Market and is classified as Level 1. The fair value of the liability associated with the Representative Warrants as of December 31, 2023 and 2022, was based on an estimate of the relative fair value to the Public Warrants, accounting for a small difference in the exercise price, and is classified as Level 3.

In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.

Net Loss Per Share

Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed similarly to the 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. The following outstanding shares issuable upon exercise of stock options and warrants and vesting of restricted stock units were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect:

Foreign Currency Translations

The Company’s functional and reporting currency is the U.S. dollar. All transactions initiated in other currencies are translated into U.S. dollars using the exchange rate prevailing on the date of transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the U.S. dollar at the rate of exchange in effect at the balance sheet date. Unrealized exchange gains and losses arising from such transactions are deferred until realization and are included as a separate component of stockholders’ equity (deficit) as a component of comprehensive income or loss. Upon realization, the amount deferred is recognized in income in the period when it is realized.

Translation of Foreign Operations

The financial results and position of foreign operations whose functional currency is different from the Company’s presentation currency are translated as follows:

Exchange differences arising on translation of foreign operations are transferred directly to the Company’s accumulated other comprehensive loss in the consolidated financial statements. Transaction gains and losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated statements of operations and comprehensive loss.

The relevant translation rates are as follows:

Comprehensive Loss

ASC 220, “Comprehensive Income,” establishes standards for reporting and display of comprehensive income (loss) and its components in a full set of general-purpose financial statements. As of December 31, 2023 and December 31, 2022, the Company had no material items of other comprehensive income (loss) except for the foreign currency translation adjustment.

Acquisitions, Intangible Assets and Goodwill

The consolidated financial statements reflect the operations of an acquired business beginning as of the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values at the date of acquisition; goodwill is recorded for any excess of the purchase price over the fair value of the net assets acquired. Significant judgment is required to determine the fair value of certain tangible and intangible assets and in assigning their respective useful lives. Accordingly, we typically obtain the assistance of third-party valuation specialists for significant tangible and intangible assets. The fair values are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain, and could affect the accuracy or validity of the estimates and assumptions. Determining the useful life of an intangible asset also requires judgment. Intangible assets are amortized over their estimated lives. Any intangible assets associated with acquired in-process research and development activities (“IPR&D”) are not amortized until a product is available for sale.

Impairment of Long-Lived Assets and Goodwill

Long-lived and amortizable intangible assets are assessed annually for impairment or sooner should impairment indicators exist. Significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Such circumstances may include a significant decrease in the market price of an asset, a significant adverse change in the manner in which the asset is being used or in its physical condition or a history of operating or cash flow losses associated with the use of an asset. An impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss is the excess of the asset’s carrying value over its fair value. There were no charges related to impairments of long-lived assets for all periods presented.

Goodwill is assessed for impairment annually during the fourth quarter, or more frequently if impairment indicators exist. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. The Company may elect to assess goodwill for impairment using a qualitative or a quantitative approach, to determine whether it is more likely than not that the fair value of goodwill is greater than its carrying value. There were no charges related to goodwill impairment for all periods presented.

Leases

The Company’s has leases related to office space. The Company determines whether a contract is or contains a lease at the time of the contract’s inception based on the presence of identified assets and the Company’s right to obtain substantially all the economic benefit from or to direct the use of such assets. When the Company determines a lease exists, it records a right-of-use (“ROU”) asset and corresponding lease liability on its balance sheet. ROU assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are recognized at the lease commencement date at the present value of the remaining future lease payments the Company is obligated for under the terms of the lease. Lease liabilities are recognized concurrent with the recognition of the ROU asset and represent the present value of lease payments to be made under the lease. These ROU assets and liabilities are adjusted for any prepayments, lease incentives received, and initial direct costs incurred. As the discount rate implicit in the lease is not readily determinable in most of the Company’s leases, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. If the Company’s lease terms include an option to extend the lease for a set period, the Company evaluates the renewal option and should it be reasonably certain that the Company will exercise that option, adjusts the ROU asset and liability accordingly.

Stock-Based Compensation

The Company accounts for its stock-based compensation awards to employees and members of its Board of Directors (the “Board”) in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and Board members, including grants of employee stock options, to be recognized in the statements of operations by measuring the fair value of the award on the date of grant and recognizing this fair value as stock-based compensation using a straight-line method over the requisite service period, generally the vesting period.

The Company estimates the grant date fair value of stock option awards using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the Common Stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the Common Stock.

Recent Accounting Pronouncements

The Company 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.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13,Financial Instruments – Credit Losses, which requires entities to estimate all expected credit losses for financial assets measured at amortized cost basis, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The Company adopted this guidance on January 1, 2023. The adoption of this accounting standard did not have a material impact to the Company’s condensed consolidated financial statements.

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment, net consists of the following:

Depreciation expense was $18,290 and $5,094 for the years ended December 31, 2023 and 2022, respectively.

NOTE 4 – LEASES

Laboratory Lease – South San Francisco, California

In August 2022, the Company, as a lessee, entered into an amended sublease agreement to sublease laboratory and office space in South San Francisco, California. The lease commenced on August 15, 2022. The term of this sublease is for a period of thirty-nine and one-fourth (39.25) months commencing on the effective date, until May 15, 2024. The lease had a gross monthly rent of $15,700 per month to December 31, 2022. Starting January 1, 2023, the monthly rent increased by 3% annually, to $16,171 per month in 2023, and will increase to $16,656 in 2024.

This lease was accounted for as an operating lease under ASC 842, Leases, which resulted in the recognition of a right of use asset (“ROU asset”) and liability of approximately $332,000 at inception. The ROU asset is separately presented as a non-current asset and the liability is recorded as a component of current and non-current liabilities on the Company’s Consolidated Balance Sheets. The Company discounted the future lease payments of this lease using the prevailing collateralized lending rate which would be extended to the Company based on its credit profile relative to the period of inception, and the duration of the lease from inception. The interest rate used in calculating the fair value listed above was 7.8%.

As of December 31, 2023, the Company recognized total ROU assets and lease liabilities of as follows:

The following table summarizes the maturity of the Company’s operating lease payments as of December 31, 2023:

NOTE 5 – ACQUISITIONS

Business Combination with Alpha-5 Integrin LLC

On June 21, 2022, the Company entered into a membership purchase agreement (the “Alpha-5 Agreement”) with Alpha-5 to purchase 100% of Alpha-5’s outstanding membership interests. One of the sellers of Alpha-5, Lawrence Steinman, is the Company’s Chairman, and as such is considered a related party to the Company. Alpha-5 was a preclinical-stage company developing a monoclonal antibody (mAbs) for the treatment of amyotrophic lateral sclerosis (“ALS”) and other neuroinflammatory disorders, such as Multiple Sclerosis. In connection with the transaction, the Company issued to the Alpha-5 sellers 163,044 shares of Common Stock, which had a market value of $20.20 on the date of the transaction, and warrants to acquire 50,000 shares of Common Stock at an exercise price of $37.60 per share, for a period offive years from the acquisition date, the aggregate fair value of which was $0.7 million at the date of acquisition.

In addition, the Alpha-5 Agreement allows for an earnout to be paid as part of the consideration due to the sellers. As any future sales are predicated upon FDA approval, no amounts will be due the sellers in the absence of that approval. Should FDA approval be obtained the amount of the earnout payment is dependent on the attainment of certain financial targets. The terms of the earnout contain three performance target thresholds that trigger three different payout amounts depending on which of the three targets is achieved. Sales generated after the drug is no longer subject to any patent protection or regulatory exclusivity are excluded from the earnout calculation. Purchase consideration consisted of the following:

The Alpha-5 acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The fair values of the acquired assets and liabilities as of the acquisition date were:

The goodwill recognized is largely attributable to the potential leveraging of Alpha-5’s scientific expertise in the integrin space. The Company believes the acquisition of Alpha-5 will help in its efforts to move the treatment forward and increase its potential to have a positive impact on the treatment of ALS. This goodwill is expected to be deductible for income tax purposes. Expenses incurred in relation to this acquisition totaled approximately $311,000.

Asset Acquisition of AlloMek Therapeutics, LLC

On October 11, 2022, the Company entered into a membership interest purchase agreement, whereby the Company acquired 100% of the issued and outstanding equity interests of AlloMeK Therapeutics, LLC (“AlloMek”) from the holders thereof on a cash free, debt-free basis (the “AlloMek Acquisition”). AlloMek was a pre-clinical biotechnology company focused on developing PAS-004, a macrocyclic MEK Inhibitor with a unique potency, safety and pharmacokinetic profile. The Company acquired all issued and outstanding equity interests of AlloMek in exchange for:(i) an aggregate of 135,000 shares of Common Stock, (ii) an aggregate of 50,000 warrants to purchase shares of Common Stock at an exercise price of $37.60 per share, which may be exercised on a cashless basis, for a period of five years commencing on the date of issuance, (iii) a cash payment in the amount of $1,050,000, (iv) the right to certain milestone payments in an amount up to $5,000,000, and (v) the right to contingent earn-out payments ranging from 3% to 5% of net sales of the drug depending on the amount of such net sales in the applicable measurement period. In connection with the closing, each of the sellers entered into a two-year Lock-up Agreement with the Company regarding the shares of Common Stock received by the sellers pursuant. On the one-year anniversary of the closing date, the restrictions contained in the Lock-Up Agreements will terminate for 67,500 shares of Common Stock, and then in each subsequent month, the restrictions will cease for an additional 5,625 shares of Common Stock.

The AlloMek acquisition was accounted for as an asset acquisition as substantially all of the fair value of the gross assets acquired is attributable to PAS-004. The cost of the asset acquisition included the purchase consideration as well as transaction expenses, as follows:

The Company capitalized the cost of the asset acquisition as intellectual property within Intangibles on the consolidated balance sheet as of December 31, 2023 and 2022.

NOTE 6 – INTANGIBLE ASSETS AND GOODWILL

Intangible assets, net consists of the following (in thousands):

As of December 31, 2023, future expected amortization expense of Intangible assets was as follows:

There were no changes to goodwill for the year ended December 31, 2023. During the year ended December 31, 2022, the Company acquired $1.3 million of goodwill in connection with the acquisition of Alpha-5.

NOTE 7 – STOCKHOLDERS’ EQUITY

The Company is authorized to issue an aggregate of 105,000,000 shares. The authorized capital stock is divided into: (i) 100,000,000 shares of Common Stock having a par value of $0.0001 per share and (ii) 5,000,000 shares of preferred stock having a par value of $0.0001 per share.

Common Stock

The Company had 1,041,582 and 1,301,921 shares of its Common Stock issued and outstanding at December 31, 2023 and 2022, respectively.

Each holder of Common Stock is entitled toone vote for each share of Common Stock held on all matters submitted to a vote of the stockholders. Our Charter and Amended and Restated Bylaws (the “Bylaws”) do not provide for cumulative voting rights.

In addition, the holders of our Common Stock will be entitled to receive ratably such dividends, if any, as may be declared by the Board out of legally available funds; however, the current policy of our Board is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our Common Stock will be entitled to share ratably in all assets that are legally available for distribution.

Holders of our Common Stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stock that we may designate and issue in the future.

Effective January 2, 2024, the Company amended its certificate of incorporation to effect a one-for-twenty (1:20) reverse stock split of our outstanding shares of Common Stock. No fractional shares were issued as a result of the reverse stock split. Any fractional shares resulting from the reverse stock split were paid in cash. The reverse stock split did not otherwise affect any of the rights currently accruing to holders of our Common Stock. See Note 16 for additional information.

2021 Stock Incentive Plan

The Company’s Board and stockholders adopted and approved the 2021 Stock Incentive Plan (the “2021 Plan”) which took effect on July 15, 2021. The 2021 Plan allows for the issuance of securities, including stock options, restricted stock, and restricted stock units (“RSUs”) to employees, Board members and consultants.

As of January 1, 2023, the number of shares of Common Stock available for issuance under the 2021 Plan automatically increased by 39,065 to 137,389. The Company issued an aggregate of 44,000 and 40,000 stock options under the 2021 Plan during the years ended December 31, 2023 and 2022, respectively. Stock options issued under the 2021 Plan vest over a period of three years. Stock-based compensation related to stock options was $520,533 and $439,979, respectively, for the years ended December 31, 2023 and 2022. On December 19, 2023, the remaining shares available under the 2021 Plan were added to the Company’s 2023 Stock Incentive Plan (the “2023 Incentive Plan”, or “2023 Plan”). There will be no new issuances under the 2021 Plan.

2023 Stock Incentive Plan

The Board and stockholders have adopted and approved the 2023 Plan which took effect on December 19, 2023. The 2023 Plan allows for the issuance of securities, including stock options, restricted stock, and restricted stock units (“RSUs”) to employees, Board members and consultants. The initial number of shares of Common Stock available for issuance under the 2023 Plan was 125,000 shares plus 28,389 unused shares reserved under the 2021 Plan, which will, on January 1 of each calendar year, beginning on January 1, 2024 and ending on and including January 1, 2033, unless the Board decides otherwise, automatically increase to equal to the lessor of (A) three percent (3%) of the number of shares of Common Stock outstanding on the final day of the immediately preceding calendar year or (B) such smaller number of Shares as is determined by the Board.

As of December 31, 2023,153,389 total shares were available under the 2023 Plan, of which no shares were issued and outstanding and 153,389 shares were available for potential issuances.

2022 Common Stock Transactions

During the year ended December 31, 2022, the Company issued 163,044 shares of Common Stock in connection with the business combination with Alpha-5 as referenced in Note 5.

During the year ended December 31, 2022, the Company issued 135,000 shares of Common Stock in connection with the acquisition of AlloMek as referenced in Note 5.

During the year ended December 31, 2022, the Company entered into a comprehensive Settlement and Cooperation Agreement (“the Settlement and Cooperation Agreement”) with certain shareholders (collectively, the “Camac Group”) resolving all outstanding issues between the parties. Pursuant to the Settlement and Cooperation Agreement, the Camac Group agreed to a three-year standstill provision and the parties agreed to dismiss with prejudice the pending Delaware litigation against the Company and the Board filed by the Camac Group. The Company purchased all 160,264 shares of Common Stock held by the Camac Group at a price of $20.006 per share, the equivalent to the 5-day volume-weighted average price of the Common Stock. Additionally, the Company reimbursed approximately $698,000 of certain fees and expenses of the Camac Group, which are included as litigation settlements in the statements of operations.

All repurchased shares were cancelled and recorded within Accumulated Deficit on the Company’s consolidated balance sheet as of December 31, 2022. The Company recorded the reimbursed fees and expenses within Litigation settlements on the consolidated statement of operations for the year ended December 31, 2022.

During the year ended December 31, 2022, the Company entered into settlement agreements with certain shareholders for approximately $300,000, which are included as litigation settlements in the statements of operations.

2023 Common Stock Transactions

On July 20, 2023, the Company announced that its Board authorized the repurchase, through a $4.0 million tender offer of up to approximately 285,000 shares of the Company’s outstanding common stock at a cash purchase price of $14.00 per share (the “Tender Offer”). The Company launched the Tender Offer on August 9, 2023 and it was completed on September 8, 2023.

On September 14, 2023, the Company disclosed the results of the Tender Offer. A total of 266,171 shares of Common Stock (the “Tender Offer Shares”) were validly tendered and not properly withdrawn at a purchase price of $14.00 per share for an aggregate purchase price of $3,726,416, including fees and expenses of $150,000 relating to the Tender Offer. The Company had 1,040,749 shares of Common Stock outstanding following payment for the Tender Offer Shares purchased in the Tender Offer. The Tender Offer Shares were retired and cancelled following the closing of the Tender Offer.

Restricted Stock Units

During the year ended December 31, 2021, the Company issued its chief executive officer, Dr. Marques,10,000 RSUs with a grant date fair value of $288,000. As of December 31, 2023,5,832 RSUs were vested. The Company recognized approximately $72,000 and $96,000 of stock-based compensation expense for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, the remaining unamortized RSU compensation expense was approximately $117,000, and will be expensed quarterly through the year ended December 31, 2024.

Restricted Stock

There was no restricted stock issued during the year ended December 31, 2023.

During the year ended December 31, 2022, the Company issued an aggregate of 13,972 shares of restricted Common Stock to certain consultants for services provided. These 13,972 shares of restricted Common Stock had a total grant date fair value of approximately $282,000 and vested immediately. The Company recognized approximately $282,000 of stock-based compensation expense for these restricted stock issuances for year ended December 31, 2022.

NOTE 8 – STOCK OPTIONS

Stock Options Issued, Vested and Cancelled

During the year ended December 31, 2023, the Company issued stock options under the 2021 Plan to employees to purchase an aggregate of 44,000 shares of Common Stock with a strike price of $9.82 per share and a term often years. One-third of these options vest within one year of the issuance date and then the remaining stock options vest in equal quarterly installments over the remainingtwo years. These options had a total fair value of approximately $288,000, as calculated using the Black-Scholes model.

During the year ended December 31, 2023, stock options to purchase an aggregate of 10,000 shares of Common Stock under our 2021 Plan were cancelled with a strike price of $19.20 per share.

During the year ended December 31, 2023, stock options to purchase an aggregate of 44,667 shares of Common Stock, subject to time-based milestone vesting conditions, vested.

During the year ended December 31, 2022, the Company issued stock options under the 2021 Plan to employees to purchase an aggregate of 20,000 shares of Common Stock with strike prices ranging from $19.20 to $25.20 per share and a term often years. One-third of these options vest on the one-year anniversary of the issuance date and then the remaining stock options vest in equal quarterly installments over the remaining two years. These options had a total fair value of approximately $180,000, as calculated using the Black-Scholes model.

During the year ended December 31, 2022, the Company issued stock options under the 2021 Plan to its current chief financial officer, to purchase an aggregate of 15,000 shares of Common Stock with a strike price of $25.20 per share and a term often years. One-third of these options vest on the one-year anniversary of the issuance date, one-third of these options vest on the two-year anniversary of the issuance date and one-third of these options vest on the three-year anniversary of the issuance date. These options had a total fair value of approximately $174,000, as calculated using the Black-Scholes model.

During the year ended December 31, 2022, the Company issued stock options under the 2021 Plan to a non-executive Board member, to purchase an aggregate of 5,000 shares of Common Stock with a strike price of $21.20 per share and a term often years. One-half of these options vest on the one-year anniversary of the issuance date and one-half of these options vest on the two-year anniversary of the issuance date. These options had a total fair value of approximately $49,000, as calculated using the Black-Scholes model.

During the year ended December 31, 2022, stock options to purchase an aggregate of 5,000 shares of Common Stock under our 2021 Plan were cancelled with a strike price of $100.00 per share.

During the year ended December 31, 2022, stock options to purchase an aggregate of 10,833 shares of Common Stock, subject to time-based milestone vesting conditions, vested.

During the year ended December 31, 2022, the Company recorded approximately $22,000 of stock-based compensation which was included as part of general and administrative expense.

Stock-Based Compensation

For the years ended December 31, 2023 and 2022, total stock-based compensation expense related to the Company’s stock options was approximately $520,000 and approximately $440,000, respectively. For the year ended December 31, 2023, the Company recognized approximately $398,000 of stock-based compensation related to its options within general and administrative expense, and approximately $122,000 within research and development expense. For the year ended December 31, 2022, all stock-based compensation expense was recorded within general and administrative expense.

Stock option activity for the years ended December 31, 2023 and 2022 was as follows:

As of December 31, 2023, remaining unamortized stock-based compensation expense related to the stock options was $408,844.

The Company estimates the fair value of each stock option on the date of grant using the Black-Scholes option pricing model, which requires various assumptions including fair value of the underlying share, volatility, expected option life, risk-free interest rate and expected dividends. The fair value of the underlying share was based on the fair value on the grant date. The expected term was based on the expected exercise behavior of grantees. Expected volatility was calculated based on the volatilities of a peer group of companies. The risk-free rate of the option is based on the U.S. Treasury rate for the expected term of the option. The following weighted-average assumptions were used in the Black-Scholes calculations:

The weighted average grant date fair value of options granted during the years ended December 31, 2023 and 2022 was $6.67 per option and $10.00 per option, respectively.

NOTE 9 – WARRANTS

AlloMek Warrants

During the year ended December 31, 2022, the Company issued warrants to purchase an aggregate of 50,000 shares of Common Stock (the “AlloMek Warrants”) to certain sellers in connection with the acquisition of AlloMek. The AlloMek Warrants were issued on October 11, 2022, were immediately exercisable at $37.60 per share and expire five years from the date of issuance. The total grant date fair value of the AlloMek Warrants was determined to be approximately $0.5 million, as calculated using the Black-Scholes model and were capitalized and included in intangible assets. The assumptions used in the Black-Scholes calculation were as follows: volatility 55.7%; duration five years; and a risk-free rate of 4.14%.

As of December 31, 2023 and 2022,50,000 AlloMek Warrants were outstanding.

Alpha-5 Warrants

During the year ended December 31, 2022, the Company issued warrants to purchase an aggregate of 50,000 shares of Common Stock (the “Alpha-5 Warrants”) to certain sellers in connection with the acquisition of Alpha-5. The Alpha-5 Warrants were issued on June, 21, 2022, were immediately exercisable at $37.60 per share and expire five years from the date of issuance. The total grant date fair value of the Alpha-5 Warrants was determined to be approximately $0.4 million, as calculated using the Black-Scholes model and were recorded as an increase to additional paid-in capital. This amount was included as part of the consideration paid for the Alpha-5 acquisition and were included as part of the purchase price allocation accordingly. The assumptions used in the Black-Scholes calculation were as follows: volatility 55.7%; duration five years; and a risk-free rate of 3.38%.

As of December 31, 2023 and 2022,50,000 Alpha-5 Warrants were outstanding.

PIPE Warrants

During the year ended December 31, 2021, the Company issued PIPE Warrants to purchase an aggregate of 434,000 shares of Common Stock to certain investors in connection with the November 2021 Private Placement. The PIPE Warrants were issued on November 24, 2021, are immediately exercisable at $70.00 per share and expire five years from the date of issuance.

As of December 31, 2023 and 2022,434,000 PIPE Warrants were outstanding.

IPO Warrants

During the year ended December 31, 2021, the Company issued Public Warrants to purchase an aggregate of 276,000 shares of Common Stock in its Initial Public Offering. Simultaneously with the consummation of the closing of the Initial Public Offering, the Company issued the underwriters a total of 13,800 Representative Warrants that became exercisable commencing six (6) months following issuance at an exercise price of $120.00 per share and expire five years from issuance.

The Company evaluated the IPO Warrants based on an assessment of the IPO Warrants’ specific terms and applicable authoritative guidance in ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815, “Derivatives and Hedging” (“ASC 815”). The IPO warrants are classified as liabilities and remeasured at each reporting period.

As of December 31, 2023 and 2022,220,000 Public Warrants and 13,800 Representative Warrants were outstanding.

As of December 31, 2023, the fair value of the Public Warrants was approximately $0.36 per Public Warrant based on the closing price of the Public Warrants on The Nasdaq Capital Market. The fair value of the Representative Warrants was approximately $0.374 per Representative Warrant which was based on the relative fair value to the Public Warrants.

Warrant activity for the years ended December 31, 2023 and 2022 was as follows:

Warrants exercisable at December 31, 2023 were as follows:

No warrants were granted, expired/cancelled, or exercised during the year ended December 31, 2023.

NOTE 10 – INCOME TAXES

The Company accounts for income taxes under ASC 740 - Income Taxes (“ASC 740”), which provides for an asset and liability approach of accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributed to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes.

Significant components of the Company’s deferred tax assets as of December 31, 2023 and 2022 are summarized below.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The Company assessed the need for a valuation allowance against its net deferred tax assets and determined a full valuation allowance is required since the Company has no history of generating taxable income. Our deferred tax asset and valuation allowance increased by $3,471,000 and $3,212,000 for the years ended December 31, 2023 and 2022, respectively.

A reconciliation of the federal income tax rate to the Company’s effective tax rate at December 31, 2023 and 2022 is as follows:

The Company’s ability to utilize net operating loss carryforwards will depend on its ability to generate adequate future taxable income. Future utilization of the net operating loss carry forwards is subject to certain limitations under Section 382 of the Internal Revenue Code. As of December 31, 2023, the Company had federal and state net operating loss carryforwards available to offset future taxable income in the amounts of approximately $24,300,000 and $11,600,000, respectively, which do not expire.

The Company has evaluated its income tax positions and has determined that it does not have any uncertain tax positions. The Company will recognize interest and penalties related to any uncertain tax positions through its income tax expense.

The Company is subject to franchise tax filing requirements in the State of Delaware.

NOTE 11 – NET LOSS PER COMMON SHARE

Basic net loss per share is computed by dividing net loss available to Common Stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options and warrants that are not deemed to be anti-dilutive. The dilutive effect of the outstanding stock options and warrants is computed using the treasury stock method.

At December 31, 2023, diluted net loss per share did not include the effect of 767,800 shares of Common Stock issuable upon the exercise of outstanding warrants, and 99,000 shares of Common Stock issuable upon the exercise of outstanding stock options as their effect would be antidilutive during the periods prior to conversion.

At December 31, 2022, diluted net loss per share did not include the effect of 767,800 shares of Common Stock issuable upon the exercise of outstanding warrants, and 50,000 shares of Common Stock issuable upon the exercise of outstanding stock options as their effect would be antidilutive during the periods prior to conversion.

NOTE 12 – RELATED PARTY TRANSACTIONS

PsychoGenics, Inc.

In April 2023 we entered into a contract with PsychoGenics, Inc. (“PsychoGenics”) for the conduct of one of our preclinical studies. PsychoGenics is a contract manufacturing organization with extensive experience running preclinical and clinical. Pursuant to the contract, we made aggregate payments to PsychoGenics totaling approximately $0.3 million over the term of the contract. The contract was completed in September 2023.

Dr. Emer Leahy, a member of our Board, is the current Chief Executive Officer and a less than 5% owner of PsychoGenics.

Alpha-5 Integrin, LLC

On June 21, 2022, we entered into the Alpha-5 Agreement with PD Joint Holdings, LLC Series 2016-A and Lawrence Steinman (collectively, the “Sellers”), pursuant to which the Sellers sold all of the issued and outstanding equity of Alpha-5 to the Company. Lawrence Steinman, our Executive Chairman and Co-Founder, was a 20% owner of Alpha-5 at the time of the transaction. Alpha-5 is a preclinical-stage company developing a mAbs for the treatment of ALS and other neuroinflammatory disorders, such as Multiple Sclerosis. In connection with the transaction, we issued to the Sellers 163,044 shares of our Common Stock, which had a market value of $1.01 million on the date of the transaction and warrants exercisable for 50,000 shares of Common Stock at an exercise price of $37.60 per share, expiring five years from the acquisition date, the aggregate fair value of which was $0.4 million at the date of acquisition.

In addition, the Alpha-5 Agreement allows for an earnout payment to be paid as part of the consideration due to the Sellers (the “Earnout Amount”). The Earnout Amount is dependent upon FDA approval of a monoclonal antibody targeting alpha5 beta1 integrin that was in development by Alpha-5 at the time of the execution of the Alpha-5 Agreement. Should such FDA approval be obtained, the Earnout Amount will depend on the attainment of certain net sales targets. The terms of the earnout contain three net sales target thresholds that trigger three different Earnout Amounts depending on which of the three net sales targets is achieved. Net sales generated after the drug is no longer subject to any patent protection or regulatory exclusivity are excluded from the Earnout Amount calculation. The earnout is deemed part of the consideration paid for the acquisition, in the form of contingent consideration. As of December 31, 2023, this amount has been determined by the Company to hold no value.

The Steinman Consulting Agreement memorializes the compensation arrangements pursuant to which Prof. Steinman has been compensated for his services to our Company, as previously disclosed in our public filings. Pursuant to the Steinman Consulting Agreement, Prof. Steinman provides a variety of consulting and advisory services relating principally to the clinical and commercial development of our product candidates, including our research and development strategy through all phases of discovery and preclinical development, identifying potential partners for our pre-clinical assets, and business development efforts related to our pre-clinical assets, among other things. Pursuant to the Steinman Consulting Agreement, Prof. Steinman receives $25,000 per quarter for his services.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Legal and Regulatory Environment

The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirement, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers.

Violations of these laws and regulations could result in expulsion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in compliance with fraud and abuse regulations, as well as other applicable government laws and regulations. While no material regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

NOTE 14 – DISCONTINUED OPERATIONS

During the year ended December 31, 2023, we sold and disposed of our assets associated with the Clinics operations in Los Angeles, CA and disposed of our services in the U.K. The lease associated with the related property in Los Angeles was assumed by the buyer in the transaction.

As of December 31, 2023, the carrying amounts of the classes of assets and liabilities related to the discontinued operations of the Clinics operations were $0.

The results of operations from discontinued operations for the years ended December 31, 2023 and 2022, have been reflected in the consolidated statements of operations and consist of the following:

The following table presents the gain on the sale of assets in Los Angeles, CA:

The following table presents non-cash items related to discontinued operations, which are included in the Company’s consolidated statement of cash flows:

NOTE 15 – SUBSEQUENT EVENTS

The Company has evaluated events and transactions subsequent to December 31, 2023 through the date these consolidated financial statements were included on Form 10-K and filed with the SEC. Other than the below, there are no subsequent events identified that would require disclosure in these consolidated financial statements.

Reverse Stock Split

On January 2, 2024, the Company implemented aone-for-twenty reverse stock split (“Reverse Stock Split”) of the Company’s issued and outstanding shares of common stock, par value $0.0001.

As a result of the Reverse Stock Split, every twenty shares of Common Stock issued and outstanding was converted intoone share of Common Stock, with a corresponding reduction in the number of authorized shares of Common Stock from 495,000,000 to 100,000,000. The Reverse Stock Split affected all stockholders uniformly and did not alter any stockholder’s percentage interest in the Company’s equity, except to the extent that the Reverse Stock Split resulted in some stockholders owning a fractional share. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who would have otherwise been entitled to receive a fractional share instead received a cash payment (without interest) equal to such fraction multiplied by the average of the closing sales prices of Common Stock on The Nasdaq Capital Market for the five consecutive trading days immediately preceding the effective date of the Reverse Stock Split (with such average closing sales prices being adjusted to give effect to the Reverse Stock Split).

The Reverse Stock Split did not change the par value of the Common Stock. All outstanding securities entitling their holders to purchase shares of Common Stock or acquire shares of Common Stock, including stock options, convertible debt and warrants, have been adjusted as a result of the Reverse Stock Split, as required by the terms of those securities.

On January 17, 2024, after effecting the Reverse Stock Split, the Company received a letter from the Listing Qualifications Department of The Nasdaq Stock Market stating that the Common Stock had maintained a closing bid price at or above $1.00 per share for a sufficient number of consecutive business days to regain compliance with the minimum bid price requirement, and that the matter is now closed.

As of March 23, 2024, there were 1,042,415 common shares outstanding.

Issuance of Stock Options

On March 1, 2024, the Company issued stock options under the 2023 Plan to purchase an aggregate of 104,433 shares of Common Stock to certain employees and directors of the Company. These stock options had a strike price of $8.13 per share. Of the shares granted,37,433 shares were fully vested at issuance and the remaining options vest over a term ofone tothree years.