Cingulate Inc

Consolidated Balance Sheets (unaudited)

Consolidated Statements of Operations and Comprehensive Loss (unaudited)

Consolidated Statements of Stockholders’ Equity (unaudited)

Consolidated Statements of Cash Flows (unaudited)

See notes to consolidated financial statements

CINGULATE INC.

Notes to Consolidated Financial Statements

(1) Nature of the Business and Liquidity

Organization

Cingulate Inc. (Cingulate, or the Company), a Delaware corporation, is a biopharmaceutical company focused on the development of products utilizing its drug delivery platform technology that enables the formulation and manufacture of once-daily tablets of multi-dose therapies, with an initial focus on the treatment of Attention Deficit/Hyperactivity Disorder (ADHD). The Company is developing two proprietary, first-line stimulant medications, CTx-1301 (dexmethylphenidate) and CTx-1302 (dextroamphetamine), for the treatment of ADHD intended for all patient segments: children, adolescents, and adults. CTx-1301 and CTx-1302 utilize a flexible core tableting technology with target product profile designed to deliver a rapid onset and last the entire active day with a controlled descent of plasma drug level and have favorable tolerability. The Company has closed enrollment of Phase 3 clinical trials for CTx-1301 and plans to submit a New Drug Application (NDA) for CTx-1301in the first half of 2025. In addition, the Company has a third product to treat anxiety, CTx-2103, in a formulation stage.

The consolidated financial statements and notes for the three-month periods ended March 31, 2024 and 2023, represent the full consolidation of Cingulate and its subsidiaries, including CTx and all references to the Company represent this full consolidation.

Liquidity

The Company has incurred losses and negative cash flows from operations since inception. As a pre-revenue entity, the Company is dependent on the ability to raise capital to support operations until such time as the product candidates under development are U.S. Food and Drug Administration (FDA) approved, manufactured, commercially available to the marketplace and produce revenues. The Company’s initial public offering, which was completed in December 2021, provided approximately $20.4 million in net proceeds. Since that time, net proceeds from capital sources have totalled $27 million, including a related party note that was subsequently converted to equity as described in Note 7, utilization of the At the Market Agreement with H.C. Wainwright and Purchase Agreement with Lincoln Park Capital LLC, a private placement, and public offerings including the February 2024 Offering with gross proceeds of $7.5 million, as further described in Note 9. However, the Company will need additional funding for operations and development. Management is evaluating various strategies to obtain additional funding, which may include additional offerings of equity, issuance of debt, or other capital sources, including potential collaborations with other companies or other strategic transactions. Successful implementation of these plans involves both the Company’s efforts and factors that are outside its control, such as market factors and FDA approval of product candidates. The Company can give no assurance that its plans will be effectively implemented in such a way that they will sufficiently alleviate or mitigate the conditions and events noted above, which results in substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not reflect any adjustments that might result from the outcome of this uncertainty.

(2) Summary of Significant Accounting Policies

(a) Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The consolidated financial statements include the accounts of Cingulate and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

(c) Concentration of Credit Risk

The Company maintains cash equivalent deposits, which at various times throughout the fiscal year exceeded the amounts insured by the Federal Deposit Insurance Corporation limit of $250,000 (without regard to reconciling items). Management monitors the soundness of these financial institutions and does not believe the Company is subject to any material credit risk relative to the uninsured portion of the deposits.

(d) Impairment of Long-lived Assets

The Company assesses the carrying value of its long-lived assets, including property and equipment, as well as lease right of use (ROU) assets, when events or circumstances indicate that the carrying value of such assets may not be recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets. If the sum of the expected future cash flows is less than the carrying amount, the Company would recognize an impairment loss. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the long-lived asset groups. No impairment was recognized during the three-month periods ended March 31, 2024 or 2023.

(e) Stock-Based Compensation

The Company measures employee and director stock-based compensation expense for all stock-based awards based on their grant date fair value using the Black-Scholes option-pricing model. For stock-based awards with service conditions, stock-based compensation expense is recognized over the requisite service period using the straight-line method. Forfeitures are recognized as they occur. See additional information in Note 10.

(3) Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following at March 31, 2024 and December 31, 2023:

(4) Property and Equipment

Property and equipment, net consisted of the following at March 31, 2024 and December 31, 2023:

Depreciation expense was $163,600 and $100,629, respectively, for the three-month periods ended March 31, 2024 and 2023.

(5) Accrued Expenses

Accrued expenses consisted of the following at March 31, 2024 and December 31, 2023:

(6) Contingencies

The Company may, from time to time, be subject to legal proceedings and claims arising in the ordinary course of business and otherwise. A substantial legal liability against us could have an adverse effect on our business, financial condition and results of operations.

The Company records legal costs associated with loss contingencies as incurred and establishes reserves when those matters present material loss contingencies that management determines to be both probable and reasonably estimable in accordance with ASC 450,*Contingencies.*If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, we accrue the minimum amount in the range. These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately if recovery is considered probable. Management’s judgment is required related to loss contingencies because the outcomes are difficult to predict, and the ultimate resolution may differ from our current analysis. The Company revises accruals in light of new information. While it is not possible to predict the outcome of loss contingencies with certainty, management is of the opinion that adequate provision for potential losses associated with any such matters has been made in the financial statements. No accruals for loss contingencies were recorded in the consolidated balance sheets as of March 31, 2024 or 2023.

(7) Related Party Note Payable

In August 2022, the Company received $5.0 million of debt financing from Werth Family Investment Associates LLC (WFIA). Peter Werth, manager of WFIA, is a member of the Company’s Board of Directors. The promissory note, dated August 9, 2022, was unsecured with interest accruing at 15% per annum. In May 2023, the Company received an additional $3.0 million of debt financing from WFIA by amending and restating the note to increase the principal amount to $8.0 million. All other terms of the note remained the same.

On September 8, 2023, the Company and CTx entered into a note conversion agreement with WFIA, pursuant to which WFIA agreed to convert the original principal amount of $5.0 million under the note plus all accrued interest on the original principal, or $5,812,500, by issuing pre-funded warrants to purchase 341,912 shares of the Company’s common stock at a conversion price per pre-funded warrant of $17.00. The closing price of the Company’s common stock on Nasdaq on September 8, 2023, was $11.55 per share. The pre-funded warrants had no expiration date and were exercisable immediately at an exercise price of $0.002 per share, to the extent that after giving effect to such exercise, WFIA and its affiliates would beneficially own, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), no more than 19.99% of the outstanding shares of common stock of the Company.

On January 25, 2024, the Company and CTx entered into another note conversion agreement with WFIA, pursuant to which WFIA agreed to convert the remaining principal amount of the note payable of $3.0 million plus all accrued interest, or $3,287,500 by issuing pre-funded warrants to purchase 687,043 shares of the Company’s common stock at a conversion price per pre-funded warrant of $4.785. The closing price of the Company’s common stock on Nasdaq on January 24, 2024, was $4.35 per share. The pre-funded warrants had no expiration date and were exercisable immediately at an exercise price of $0.0001 per share, to the extent that after giving effect to such exercise, WFIA and its affiliates would beneficially own, for purposes of Section 13(d) of the Exchange Act, no more than 19.99% of the outstanding shares of common stock of the Company. In March of 2024, the Company issued to WFIA an additional pre-funded warrant to purchase 7,053 shares of common stock as a result of an error in the interest calculation, on the same form and at the same conversion price as the January pre-funded warrants.

WFIA exercised all of its pre-funded warrants in April 2024.

The Company considered ASC 470-60,Troubled Debt Restructurings by Debtors, in accounting for the debt conversions. The difference between the fair value of the pre-funded warrants issued and the carrying value of the debt and accrued interest settled in each transaction was recognized as a capital contribution in the Statement of Stockholders’ Equity based on the related party nature of the counterparty.

During the three months ended March 31, 2024 and 2023, the Company recognized $31,250 and $187,500, respectively, of interest expense relating to this note.

(8) Stockholders’ Equity

The Company has authorized 240,000,000 shares of $0.0001 par value common stock and 10,000,000 shares of $0.0001 par value preferred stock at March 31, 2024 and December 31, 2023, of which 5,010,470 and 1,167,521 shares of common stock were issued and outstanding, respectively. The Company has not issued any shares of preferred stock.

The holders of common stock are entitled to one vote for each share of common stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, after the payment or provision for payment of all debts and liabilities of the Company, the holders of common stock shall be entitled to share in the remaining assets of the Company available for distribution, if any. Holders of the shares of common stock are entitled to dividends when, as and if declared by the Board of Directors.

Reverse Stock Split

On November 30, 2023, the Company completed aone-for-twenty reverse stock split (Reverse Stock Split), which reduced the number of shares of the Company’s common stock that were issued and outstanding immediately prior to the effectiveness of the Reverse Stock Split. The number of shares of the Company’s authorized common stock was not affected by the Reverse Stock Split and the par value of the Company’s common stock remained unchanged at $0.0001 per share. No fractional shares were issued in connection with the Reverse Stock Split. Except where disclosed, all amounts related to number of shares and per share amounts have been retrospectively restated in these financial statements.

(9) Sale of Securities

At the Market Offering

In January 2023, the Company entered into the At-the-Market Agreement (ATM Agreement) with H.C. Wainwright & Co., LLC (HCW) pursuant to which the Company could issue and sell, from time to time, shares of the Company’s common stock having an aggregate offering price of up to $4.97 million in at-the-market offerings sales. HCW acts as sales agent and is paid a 3% commission on each sale under the ATM Agreement. The Company’s common stock is sold at prevailing market prices at the time of the sale, and, as a result, prices will vary.

In January 2024, the Company sold 283,800 shares of common stock under the ATM Agreement, for net proceeds of $3,115,303. On March 18, 2024, the Company increased the maximum aggregate offering price of the shares of the Company’s common stock issuable under the ATM Agreement from $4.97 million to $8.47 million and filed a prospectus supplement for an aggregate of $3.5 million. In connection with the filing of the prospectus supplement, on March 17, 2024, the Company received a waiver from the purchaser in the February 2024 Offering (the February 2024 Offering) under the securities purchase agreement, dated February 2, 2024, by and between the Company and such purchaser. In consideration of the waiver set forth therein, the Company agreed to lower the exercise price of the Series A Warrants to purchase up to an aggregate of 346,261 shares of common stock and Series B Warrants to purchase up to an aggregate of 173,131 shares of common stock to $1.13, which warrants were previously issued by the Company to such purchaser on September 13, 2023 and to extend the exercise term of the Series A Warrants to March 17, 2029 and the term of the Series B Warrants to March 17, 2026. The modifications to the warrants had no impact on the consolidated financial statements.

Conversion of Related Party Note

The Company issued pre-funded warrants to purchase 694,096 shares of the Company’s common stock pursuant to a note conversion agreement with WFIA, dated January 25, 2024, to convert the remaining principal amount of the note payable to WFIA, as described in Note 7.

In April 2024, WFIA exercised all of its pre-funded warrants, including pre-funded warrants it received in September 2023, as described in Note 7.

Public Offering

On February 2, 2024, the Company completed a public offering (the February 2024 Offering) pursuant to which the Company issued 1,375,000 shares of its common stock and accompanying Series A and Series B warrants at a combined price of $2.00 per share, and pre-funded warrants to purchase up to an aggregate of 2,375,000 shares of its common stock and accompanying Series A and Series B warrants at a combined purchase price of $1.999 per pre-funded warrant, which represents the public offering price for the common stock less the $0.0001 per share exercise price per share for each pre-funded warrant. The pre-funded warrants were exercisable at any time after the date of issuance and have no expiration date. The holders of pre-Funded warrants may not exercise the warrants if the holder, together with its affiliates, would beneficially own more than 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to such exercise. Each share of common stock and each pre-funded warrant were sold along with one Series A and 0.5 Series B warrants. The February 2024 Offering resulted in gross proceeds to the Company of $7.5 million before deducting $750,950 of placement agent fees and other offering expenses. As of March 31, 2024,2,177,000 of the pre-funded warrants had been exercised.

(10) Stock-Based Compensation

In September 2021, the Company’s board of directors and stockholders adopted the 2021 Equity Incentive Plan (the 2021 Plan), which provides for the grant of incentive stock options and non-qualified stock options to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock units, restricted or unrestricted shares of common stock, performance shares, performance units, incentive bonus awards, other stock-based awards and other cash-based awards. No awards may be made under the 2021 Plan on or after September 24, 2031, but the 2021 Plan will continue thereafter while previously granted awards remain outstanding.

The maximum number of shares of common stock available for issuance in connection with options and other awards granted under the 2021 Plan is 256,926 and as of March 31, 2024,15,169 shares of common stock were available for issuance under the 2021 Plan. The number of shares of common stock available for issuance under the 2021 Plan will automatically increase on January 1st of each year until the expiration of the 2021 Plan, in an amount equal to 5% percent of the total number of shares of our common stock outstanding on December 31st of the preceding calendar year, on a fully diluted basis, unless the board of directors takes action prior thereto to provide that there will not be an increase in the share reserve for such year or that the increase in the share reserve for such year will be of a lesser number of shares of common stock than would otherwise occur. The shares of common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, repurchased or are otherwise terminated by the Company under the 2021 Plan will be added back to the shares of common stock available for issuance under the 2021 Plan.

The Company recorded stock-based compensation expense of $164,575 and $204,479 during the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024 and December 31, 2023, there was $1,327,356 and $1,278,981, respectively, of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2021 Plan, which is expected to be recognized over the next one to four years.

A summary of option activity under the Plan during the three-month periods ending March 31, 2024 and 2023, is as follows:

The Company’s stock options issued qualify for equity accounting treatment under ASC 718,Compensation- Stock Compensation, and are measured at fair value as of their grant date accordingly. The fair value of the options were estimated using a Black-Scholes model. The assumptions that the Company used to estimate the grant-date fair value of stock options granted to employees during the three-month periods ending March 31, 2024 and 2023 were as follows, shown on a weighted average basis:

Risk-Free Interest Rate: The Company based the risk-free interest rate over the expected term of the options based on the constant maturity of U.S. Treasury securities with similar maturities as of the date of grant.

Expected Term: The expected term represents the period that the options granted are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting dates and the end of the contractual term.)

Expected Volatility: The Company uses an average historical stock price volatility of comparable public companies within the biotechnology and pharmaceutical industry that were deemed to be representative of future stock price trends as the Company does not have sufficient trading history for its common stock. The Company will continue to apply this process until a sufficient amount of historical information regarding volatility of its own stock price becomes available.

Expected Dividend Yield: The Company has not paid and does not anticipate paying any dividends in the near future. Therefore, the expected dividend yield was zero.

The grant-date fair value of options granted during the three months ended March 31, 2024 ranged from $0.81 to $1.53 and the grant date fair value of the options granted during the three months ended March 31, 2023 ranged from $22.40 to $23.20.

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock. The fair value per share of common stock was 1.10 as of March 31, 2024, and 19.70 as of March 31, 2023, based upon the closing price of our common stock on the Nasdaq Capital Market on those dates or the last trading date prior to those dates if those dates were not a trading date.

(11) Common Stock Purchase Warrants

For each of the 3,750,000 shares of common stock and pre-funded warrants issued in the February 2024 Offering, the Company issued Series A warrants to purchase up to 3,750,000 shares of common stock and Series B warrants to purchase up to 1,875,000 shares of common stock. The Series A and Series B warrants have an exercise price of $2.00 per share and became exercisable on the effective date of stockholder approval of the shares issuable pursuant to the warrants. The Series A warrants have afive-year term and the Series B warrants have atwo-year term from the initial exercise date of February 5, 2024.

The Company evaluated the warrants for liability or equity classification in accordance with the provisions of ASC Topic 480,Distinguishing Liabilities from Equity, and ASC Topic 815,Derivatives and Hedging, and determined that equity treatment was appropriate. The Company valued the pre-funded warrants to purchase 2,375,000 shares of common stock based on their issuance date fair value of $2.00. As of March 31, 2024,2,177,000 of the pre-funded warrants relating to the February 2024 Offering had been exercised.

In connection with the February 2024 Offering, the Company issued placement agent warrants to purchase up to 150,000 shares of common stock. The placement agent warrants have an exercise price of $2.50 per share. These warrants have afive-year term ending February 2, 2029.

The Series A, Series B and placement agent warrants issued in the February 2024 Offering were valued using a Black-Scholes model with a risk-free rate of 4.0%-5.0%, the respective terms offive andtwo years, and a volatility of 1.56-1.83. The estimated volatility of the Company’s common stock at the date of measurement is based on an average historical stock price volatility of comparable public companies within the biotechnology and pharmaceutical industry that were deemed to be representative of future stock price trends as the Company does not have sufficient trading history for its common stock. The risk-free rate is based on the expected term of the warrants based on the constant maturity of U.S. Treasury securities with similar maturities as of the date of grant. The expected term has been estimated using the contractual term of the warrants.

The following table summarizes the Company’s outstanding common stock purchase warrants as of March 31, 2024:

In April 2024, WFIA exercised all of its pre-funded warrants, including pre-funded warrants it received in September 2023, as described in Note 7.

The Company has accounted for these warrants as equity-classified instruments under ASC Subtopic 815-40,Derivatives and Hedging;*Contracts in Entity’s Own Equity,*as they are indexed to the Company’s common stock, and they meet all other conditions for equity classification. The gross proceeds of the February 2024 Offering was allocated to the common stock and common stock purchase warrants using the relative fair value method shown as follows. Fair value of the warrants was recorded to Additional Paid-in-Capital on the Company’s balance sheet.

(12) Income Taxes

Cingulate Inc. is taxed as a C corporation under the Internal Revenue Code. Cingulate Inc. records deferred income taxes to reflect the impact of temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. CTx is a wholly-owned disregarded entity of Cingulate Inc., and all of the activity for CTx, along with its wholly-owned subsidiary Cingulate Works Inc., is included in the calculation of the current and deferred tax assets and liabilities for Cingulate Inc. No deferred income tax benefit or expense was recorded for the three-month periods ended March 31, 2024 and 2023, for federal or state income taxes.

Income tax expense differed from the expected expense computed by applying the U.S. Federal income tax rate as follows:

Evaluating the need for, and amount of, a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence on a jurisdiction-by-jurisdiction basis. Such judgments require the Company to interpret existing tax law and other published guidance as applied to its circumstances. As part of this assessment, the Company considers both positive and negative evidence about its profitability and tax situation. A valuation allowance is provided if, based on available evidence, it is more likely than not that all or some portion of a deferred tax asset will not be realized. The Company determined that it was more likely than not that it would not realize its deferred tax assets, based on historical levels of income and future forecasts of taxable income, among other items. The Company recorded a valuation allowance of its net deferred tax assets totaling $13,373,133 as of March 31, 2024 and $12,631,033 at December 31, 2023, the current year portion which was recorded as a component of income tax expense on the accompanying consolidated statements of operations and other comprehensive loss.

The Company files income tax returns in the U.S. federal and various state jurisdictions. The Companies are not subject to U.S. federal and state income tax examinations by tax authorities for years before 2018.

The Company follows the provisions of FASB ASC 740,Income Taxes, to evaluate uncertain tax positions. This topic prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has not identified any material uncertain tax positions requiring recognition in the consolidated financial statements as of March 31, 2024 or December 31, 2023.