CARVE-OUT CRITERIA AND ASSUMPTIONS

12 Months Ended

Dec. 31, 2023

Carve-out Criteria And Assumptions

CARVE-OUT CRITERIA AND ASSUMPTIONS

NOTE 4 – CARVE-OUT CRITERIA AND ASSUMPTIONS

The carve-out statements of operations, as set forth above for the year ended December 31, 2022 and which was the subject of the statement of operations contained herein, reflect direct revenues and expenses and allocations of indirect expenses related to certain support functions that were provided on a centralized basis by Chromocell Holdings. These expenses, assets, and liabilities were allocated to the Company on the basis of direct usage when identifiable, with others allocated based on relevant data criteria.

● Employment related expenses – allocated all Chromocell direct salaries and an allocation of headquarters salaries based on headcounts.

● General and administrative expenses and Professional fees – allocated all direct Chromocell related expenses and corporate expense have been allocated to reflect the utilization of those corporate services by the Company.

● Research and development expenses – all Research and development expenses are direct Chromocell expenses.

● Rent and related expenses and security deposits – applied a ratio based on floor space used by Chromocell.

● Long lived assets – long lived assets are owned by Chromocell Holdings Inc and under shared use by its components including the Company. Operating expenses are allocated that reflect the usage of the long-lived asset by the Company.

● Accounts payable and accrued expenses – allocated all direct Chromocell liabilities and an allocation corporate expense reflecting the utilization of those corporate services by the Company.

● PPP loan and PPP loan forgiveness – allocated to reflect the utilization of the proceeds by the Company.

● Bridge loan – the bridge loan was fully allocated to the Company. (See Note 6)

Chromocell Holdings uses a centralized approach to cash management of its operations. Any cash excess over comprehensive income earned by the Company were transferred to Chromocell Holdings through “net parent investment.” Accordingly, none of the Chromocell Holdings cash and cash equivalents, have been assigned to the Company in the carve-out combined financial statements.

As these carve-out financial statements present a portion of the business of Chromocell Holdings, which does not constitute a separate legal entity for the purposes of carve-out financial statements, the net assets of the Chromocell Holdings have been presented as parent’s net deficit. Except for the PPP loan, Chromocell Holdings third-party bank loans, related party loans and the related interest expense have not been included in the carve-out financial statements for any of the periods presented. Chromocell is not the legal obligor on those loans, and they were not directly attributable to the Chromocell operations.

As the lease is held by Chromocell Holdings, the Company does not have the right to control the use of the space being leased and only shares the space. As such, there is no lease liability or right of use asset recorded for Chromocell.

Management believes the assumptions underlying the carve-out, including the assumptions regarding allocation of expenses, are reasonable.

For the year ended December 31, 2023, the financial statements reflect Chromocell as a stand-alone entity.

Contribution Agreement

On August 10, 2022, the Company and Chromocell Holdings Corporation (“Chromocell Holdings”) entered into the Contribution Agreement effecting (1) the contribution by Chromocell Holdings to the Company of  assets related to Chromocell Holding’s  Therapeutics Business, including all intellectual property related to Chromocell Holding’s NaV1.7 program and its clinical-stage CC8464 lead compound, (2) assumption by the Company of direct liabilities related to Chromocell Holding’s  historical Therapeutics Business in the amount of $1,556,323 as well as a cash payment by the Company to Chromocell Holdings of $597,038 and (3) the issuance by the Company to Chromocell Holdings of 10,000,000 shares of its common stock and 600,000 shares of its Series A Convertible Preferred Stock.

As part of the contribution agreement, Chromocell Holdings transferred to the Company assets related to Chromocell Holding’s Therapeutics Business, including all the patents and intellectual property related to Chromocell Holding’s NaV1.7 program and its clinical-stage CC8464 lead compound.

The Company analyzed the transaction for common control pursuant to ASC 805-50. While the term “common control” is not defined, there are examples in the Transactions between Entities under Common Control Subsection that, among others, indicates that “an entity [that] charters a newly formed entity and then transfers some or all of its assets to the newly chartered entity” is an example of a transaction involving common control, yielding recordation of assets at the transferors’ historical cost basis. This directly mirrors the terms underlying the Contribution Agreement whereby Holdings established the Company as wholly owned subsidiary and transferred the Intangibles in return to 100% of the stock of the Company. Further, Staff Accounting Bulletin (“SAB”) Topic 5G dictates that “transfers of nonmonetary assets to a company by its promoters or shareholders in exchange for stock prior to or at the time of the company’s initial public offering normally should be recorded at the transferors’ historical cost basis determined under GAAP.” As a result, pursuant to ASC 805-50 and SAB Topic 5G, the Company recorded the net assets acquired at historical value when the Contribution Agreement was executed.

All of the assets, liabilities and results of operations of the Company as of and for the periods prior to the Contribution Date were identified based on the assets contributed to the Company from Chromocell Holdings. Management believes the assumptions underlying the Company’s carve-out financial statements are reasonable. Nevertheless, the financial statements may not include all of the actual expenses that would have been incurred had the Company operated as a standalone company during the periods presented, and may not reflect the Company’s results of operations, financial position and cash flows had the Company operated as a standalone company during the periods presented. Actual costs that would have been incurred if the Company had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.