UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _____________

Commission file number: 001-11460

Eterna Therapeutics Inc.

(Exact name of registrant as specified in its charter)

Delaware		31-1103425
(State of incorporation)		(I.R.S. Employer Identification No.)

1035 Cambridge Street, Suite 18A

Cambridge, Massachusetts

02141

(Address of principal executive offices)

(Zip Code)

(212) 582-1199

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading symbol		Name of each exchange on which registered
Common stock, $0.005 par value per share		ERNA		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 9, 2024, the registrant had outstanding 5,410,588 shares of common stock, $0.005 par value per share.

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023	1
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2024 and 2023	2
	Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity for the three and six months ended June 30, 2024 and 2023	3
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements related to future events, results, performance, prospects and opportunities, including statements related to our strategic plans, capital needs, and our financial position. Forward-looking statements are based on information currently available to us, on our current expectations, estimates, forecasts, and projections about the industries in which we operate and on the beliefs and assumptions of management. Forward looking statements often contain words such as “expects,” “anticipates,” “could,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “would,” and similar expressions. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in any forward-looking statements. For us, particular factors that might cause or contribute to such differences include those risks and uncertainties described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2024, in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q, and in other documents we file from time to time with the SEC.

Readers are urged not to place undue reliance on the forward-looking statements in this Quarterly Report on Form 10-Q, which speak only as of the date of this Quarterly Report on Form 10-Q. We are including this cautionary note to make applicable, and take advantage of, the safe harbor provisions of the PSLRA. Except as required by law, we do not undertake, and expressly disclaim any obligation, to disseminate, after the date hereof, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based.

We believe that the expectations reflected in forward-looking statements in this Quarterly Report on Form 10-Q are based upon reasonable assumptions at the time made. However, given the risks and uncertainties, you should not rely on any forward-looking statements as a prediction of actual results, developments or other outcomes. You should read these forward-looking statements with the understanding that we may be unable to achieve projected results, developments or other outcomes and that actual results, developments or other outcomes may be materially different from what we expect.

Unless stated otherwise or the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “Eterna” refer to Eterna Therapeutics Inc., references to “Eterna LLC” refer to Eterna Therapeutics LLC, a wholly owned subsidiary of Eterna, and references to the “Company,” “we,” “us” or “our” refer to Eterna and its subsidiaries, including Eterna LLC, Novellus, Inc. and Novellus Therapeutics Limited.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ETERNA THERAPEUTICS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

(unaudited)

	June 30, 2024			December 31, 2023
ASSETS
Current assets:
Cash	$	2,586		$	7,575
Other receivables		228			425
Prepaid expenses and other current assets		769			1,599
Total current assets		3,583			9,599
Restricted cash		4,095			4,095
Property and equipment, net		654			493
Right-of-use assets - operating leases		35,990			32,781
Goodwill		2,044			2,044
Other assets		120			120
Total assets	$	46,486		$	49,132

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable	$	2,193		$	1,067
Accrued expenses		2,389			1,893
Income taxes payable		7			2
Operating lease liabilities, current		4,266			2,216
Due to related party, current		331			1,205
Deferred revenue, current		189			190
Other current liabilities		225			-
Total current liabilities		9,600			6,573
Convertible notes, net		8,895			6,773
Warrant liabilities		50			116
Operating lease liabilities, non-current		36,044			32,854
Deferred revenue, non-current		298			392
Contingent consideration liability		41			107
Other liabilities		84			84
Total liabilities		55,012			46,899

Stockholders’ (deficit) equity:
Preferred stock, $0.005 par value, 1,000 shares authorized, 156 designated and outstanding of Series A convertible preferred stock at June 30, 2024 and December 31, 2023, $156 liquidation preference		1			1
Common stock, $0.005 par value, 100,000 shares authorized at June 30, 2024 and December 31, 2023; 5,411 and 5,410 issued and outstanding at June 30, 2024 and December 31, 2023, respectively		27			27
Additional paid-in capital		190,611			189,186
Accumulated deficit		(199,165	)		(186,981	)
Total stockholders’ (deficit) equity		(8,526	)		2,233

Total liabilities and stockholders’ (deficit) equity	$	46,486		$	49,132

The accompanying notes are an integral part of these condensed consolidated financial statements.

ETERNA THERAPEUTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

	2024			2023			2024			2023
	Three months ended June 30,						Six months ended June 30,
	2024			2023			2024			2023
Revenue	$	47		$	-		$	94		$	-
Cost of revenues		95			-			156			50
Gross loss		(48	)		-			(62	)		(50	)

Operating expenses:
Research and development		987			1,499			2,445			3,173
General and administrative		3,896			2,590			8,211			6,182
Acquisition of Exacis in-process research and development		-			460			-			460
Total operating expenses		4,883			4,549			10,656			9,815
Loss from operations		(4,931	)		(4,549	)		(10,718	)		(9,865	)

Other (expense) income, net:
Change in fair value of warrant liabilities		136			191			66			146
Change in fair value of contingent consideration		66			118			66			118
Loss on non-controlling investment		-			(8	)		-			(59	)
Interest (expense) income, net		(797	)		24			(1,583	)		25
Other expense, net		-			(280	)		-			(280	)
Total other (expense) income, net		(595	)		45			(1,451	)		(50	)
Loss before income taxes		(5,526	)		(4,504	)		(12,169	)		(9,915	)
Provision for income taxes		(3	)		(4	)		(7	)		(9	)
Net loss		(5,529	)		(4,508	)		(12,176	)		(9,924	)
Series A preferred stock dividend		(8	)		(8	)		(8	)		(8	)
Net loss attributable to common stockholders	$	(5,537	)	$	(4,516	)	$	(12,184	)	$	(9,932	)
Net loss per common share - basic and diluted	$	(1.02	)	$	(0.85	)	$	(2.25	)	$	(1.90	)
Weighted average shares outstanding - basic and diluted		5,410			5,303			5,410			5,215

The accompanying notes are an integral part of these condensed consolidated financial statements.

ETERNA THERAPEUTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

For the three and six months ended June 30, 2024 and 2023 (unaudited)

(in thousands)

	Shares		Amount		Shares		Amount		Capital		Deficit			Total
	Series A Preferred Stock				Common Stock				Additional Paid-in		Accumulated
	Shares		Amount		Shares		Amount		Capital		Deficit			Total

Balances at April 1, 2024		156	$	1		5,410	$	27	$	190,188	$	(193,628	)	$	(3,412	)
Issuance of common stock from vested restricted stock units		-		-		1		-		-		-			-
Stock-based compensation		-		-		-		-		423		-			423
Cash dividends to Series A preferred stockholders		-		-		-		-		-		(8	)		(8	)
Net loss		-		-		-		-		-		(5,529	)		(5,529	)
Balances at June 30, 2024		156	$	1		5,411	$	27	$	190,611	$	(199,165	)	$	(8,526	)

Balances at January 1, 2024		156	$	1		5,410	$	27	$	189,186	$	(186,981	)	$	2,233
Issuance of note warrants		-		-		-		-		720		-			720
Issuance of common stock from vested restricted stock units		-		-		1		-		-		-			-
Stock-based compensation		-		-		-		-		705		-			705
Cash dividends to Series A preferred stockholders		-		-		-		-		-		(8	)		(8	)
Net loss		-		-		-		-		-		(12,176	)		(12,176	)
Balances at June 30, 2024		156	$	1		5,411	$	27	$	190,611	$	(199,165	)	$	(8,526	)

Balances at April 1, 2023		156	$	1		5,127	$	26	$	178,066	$	(170,713	)	$	7,380
Issuance of common stock in connection with Exacis asset acquisition		-		-		69		-		208		-			208
Issuance of common stock related to stock purchase agreement with Lincoln Park Capital Fund, LLC, net		-		-		214		1		579		-			580
Cash dividends to Series A preferred stockholders		-		-		-		-		-		(8	)		(8	)
Stock-based compensation		-		-		-		-		214		-			214
Net loss		-		-		-		-		-		(4,508	)		(4,508	)
Balances at June 30, 2023		156	$	1		5,410	$	27	$	179,067	$	(175,229	)	$	3,866

Balances at January 1, 2023		156	$	1		5,127	$	26	$	177,377	$	(165,297	)	$	12,107
Balance		156	$	1		5,127	$	26	$	177,377	$	(165,297	)	$	12,107
Issuance of common stock in connection with Exacis asset acquisition		-		-		69		-		208		-			208
Issuance of common stock related to stock purchase agreement with Lincoln Park Capital Fund, LLC, net		-		-		214		1		579		-			580
Cash dividends to Series A preferred stockholders		-		-		-		-		-		(8	)		(8	)
Stock-based compensation		-		-		-		-		903		-			903
Net loss		-		-		-		-		-		(9,924	)		(9,924	)
Balances at June 30, 2023		156	$	1		5,410	$	27	$	179,067	$	(175,229	)	$	3,866
Balance		156	$	1		5,410	$	27	$	179,067	$	(175,229	)	$	3,866

The accompanying notes are an integral part of these condensed consolidated financial statements.

ETERNA THERAPEUTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	2024			2023
	For the six months ended June 30,
	2024			2023
Cash flows from operating activities:
Net loss	$	(12,176	)	$	(9,924	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		83			42
Stock-based compensation		705			903
Commitment shares issued to Lincoln Park Capital, LLC		-			249
Loss on shares sold to Lincoln Park Capital, LLC		-			11
Non-cash component of acquisition of Exacis in-process research and development		-			433
Amortization of right-of-use asset		1,036			83
(Gain) loss on disposal of fixed assets		(2	)		1
Accrued interest expense		422			-
Paid-in-kind interest expense		407			-
Amortization of debt discount and debt issuance costs		919			-
Change in fair value of warrant liabilities		(66	)		(146	)
Change in fair value of contingent consideration liability		(66	)		(118	)
Loss on non-controlling investment		-			59
Changes in operating assets and liabilities:
Other receivables		197			(33	)
Prepaid expenses and other current assets		734			214
Other non-current assets		1			(481	)
Accounts payable and accrued expenses		1,549			(454	)
Operating lease liability		995			(215	)
Due to related party		(874	)		(875	)
Deferred revenue		(95	)		250
Other liabilities		225			80
Net cash used in operating activities		(6,006	)		(9,921	)
Cash flows from investing activities:
Purchase of property and equipment		(350	)		-
Proceeds received from the sale of fixed assets		4			-
Net cash used in investing activities		(346	)		-
Cash flows from financing activities:
Proceeds received from the convertible notes financing		1,405			-
Fees paid related to the convertible notes financing		(34	)		-
Proceeds from sale of common stock pursuant to stock purchase agreement with Lincoln Park Capital Fund, LLC		-			320
Dividends paid to Series A preferred stockholders		(8	)		(8	)
Net cash provided by financing activities		1,363			312
Net decrease in cash and cash equivalents		(4,989	)		(9,609	)
Cash, cash equivalents and restricted cash at beginning of period		11,670			15,541
Cash, cash equivalents and restricted cash at end of period	$	6,681		$	5,932

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	6		$	13
Income taxes	$	2		$	4

Supplemental disclosure of non-cash investing and financing activities:
Note warrants issued	$	755		$	-
Unpaid fees incurred in connection with the December 2023 financing	$	32		$	-
Paid in-kind interest added to convertible notes principal	$	584		$	-
Adjustment to lease liability and ROU asset due to remeasurement	$	4,245		$	-
Property and equipment purchased but not paid	$	18		$	-
Initial measurement of ROU assets	$	-		$	34,410
Initial measurement of lease liability	$	-		$	34,169
Contingent consideration for Exacis asset acquisition	$	-		$	225
Issuance of common stock for Exacis asset acquisition	$	-		$	208

Reconciliation of cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents	$	2,586		$	1,837
Restricted cash		4,095			4,095
Total cash, cash equivalents and restricted cash at end of period	$	6,681		$	5,932

The accompanying notes are an integral part of these condensed consolidated financial statements.

ETERNA THERAPEUTICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Eterna Therapeutics Inc. is a life science company committed to realizing the potential of mRNA cell engineering to provide patients with transformational new medicines. Eterna has in-licensed a portfolio of over 100 patents covering key mRNA cell engineering technologies, including technologies for mRNA cell reprogramming, mRNA gene editing, the NoveSlice^TM and UltraSlice^TM gene-editing proteins, and the ToRNAdo^TM mRNA delivery system, which Eterna collectively refers to as our “mRNA technology platform.” Eterna refers to aspects of its mRNA technology platform as “mRNA delivery,” “mRNA gene editing” and “mRNA cell reprogramming.” Eterna licenses its mRNA technology platform from Factor Bioscience Limited (“Factor Limited”) under an exclusive license agreement. As used herein, the “Company” or “Eterna” refers collectively to Eterna and its consolidated subsidiaries (Eterna Therapeutics LLC, Novellus, Inc. and Novellus Therapeutics Limited) unless otherwise stated or the context otherwise requires.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented.

These condensed consolidated financial statements should be read together with the audited consolidated financial statements and notes thereto contained in Eterna’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2024, as amended by the Form 10-K/A filed with the SEC on March 18, 2024 (as amended, the “2023 10-K”). The accompanying condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited financial statements contained in the 2023 10-K but does not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2024, or any other period.

Reclassifications

Certain reclassifications have been made to the Company’s prior year amounts to conform to the current year presentation.

2) LIQUIDITY AND CAPITAL RESOURCES

The Company has incurred significant operating losses and has an accumulated deficit as a result of its efforts to develop product candidates, including conducting clinical trials and providing general and administrative support for operations. As of June 30, 2024, the Company had an unrestricted cash balance of approximately $2.6 million and an accumulated deficit of approximately $199.2 million. For the three and six months ended June 30, 2024, the Company incurred a net loss of $5.5 million and $12.2 million, respectively, and for the six months ended June 30, 2024, the Company used cash of $6.0 million in operating activities.

In October 2022, the Company entered into a sublease for approximately 45,500 square feet of office and laboratory space in Somerville, Massachusetts. Pursuant to the sublease, the Company delivered to the sublessor a security deposit in the form of a letter of credit in the amount of $4.1 million. The letter of credit was issued by the Company’s commercial bank, which required that the Company cash collateralize the letter of credit by depositing $4.1 million in a restricted cash account with such bank.

On August 5, 2024, the sublessor drew down on the letter of credit for the full $4.1 million to cover past due rent, plus penalties and interest. On August 9, 2024 the Company and the sublessor entered into a sublease termination agreement, effective August 31, 2024. See Note 8 for additional information regarding the sublease, and see Note 17 for additional information regarding the sublease termination agreement.

In April 2023, the Company entered into a standby equity purchase agreement (the “SEPA”) and a registration rights agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park committed to purchase up to $10.0 million of the Company’s common stock in an “equity line” financing arrangement. During the year ended December 31, 2023, the Company issued and sold approximately 214,000 shares of common stock under the SEPA for gross proceeds of $0.3 million. No shares have been sold under the SEPA during the three and six months ended June 30, 2024.

In July and December 2023, the Company received $16.5 million in aggregate gross proceeds from the issuance of convertible notes and in January 2024 received an additional $1.4 million in gross proceeds from the issuance of additional convertible notes. See Note 5 for additional information regarding these financings.

In connection with preparing the accompanying condensed consolidated financial statements as of and for the three and six months ended June 30, 2024, the Company’s management concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern because it does not expect to have sufficient cash or working capital resources to fund operations for the twelve-month period subsequent to the issuance date of these condensed consolidated financial statements. The Company will need to raise additional capital, which could be through the sales of shares of its common stock under the SEPA, public or private equity offerings, debt financings, out-licensing the Company’s intellectual property, strategic partnerships or other means. Other than the SEPA, the Company currently has no arrangements for capital, and no assurances can be given that it will be able to raise capital when needed, on acceptable terms, or at all.

The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

3) ASSET ACQUISITION

On April 26, 2023, the Company entered into an asset purchase agreement (the “Exacis Purchase Agreement”), with Exacis Biotherapeutics Inc. (“Exacis”), the stockholders party thereto and, with respect to specified provisions therein, Factor Limited. Pursuant to the Exacis Purchase Agreement, the Company acquired from Exacis substantially all of Exacis’ intellectual property assets (the “Exacis Assets”), including all of Exacis’ right, title and interest in and to an exclusive license agreement by and between Exacis and Factor Limited (the “Purchased License”). The Company assumed none of Exacis’ liabilities, other than liabilities under the Purchased License that accrue subsequent to the closing date. The transactions contemplated by the Exacis Purchase Agreement (the “Exacis Acquisition”) closed on April 26, 2023.

In consideration for the Exacis Assets, on the closing date of the transaction, the Company issued to Exacis an aggregate of approximately 69,000 shares of common stock, which shares were subject to a 12-month lockup that expired in April 2024. The shares were issued to Exacis at a price based on the Company having an assumed equity valuation of $75.0 million, divided by the number of issued and outstanding shares of common stock as of the close of business two trading days prior to the closing date. For accounting purposes, the shares issued were valued at $3.00 per share, which was the closing price of the Company’s common stock on the date of issuance. The Company additionally agreed to make the following contingent payments:

(i)

if, at any time during the three-year period commencing on the closing date and ending on the three-year anniversary of the closing date, the Company’s market capitalization equals or exceeds $100.0 million for at least ten consecutive trading days, then the Company will issue to Exacis a number of shares of common stock equal to (x) $2.0 million divided by (y) the quotient of $100.00 million divided by the number of the Company’s then issued and outstanding shares of common stock;

(ii)

if, at any time during the three-year period commencing on the closing date and ending on the three-year anniversary of the closing date, the Company’s market capitalization equals or exceeds $200.0 million for at least ten consecutive trading days, then the Company will issue to Exacis a number of additional shares of common stock equal to (x) $2.0 million divided by (y) the quotient of $200.00 million divided by the number of the Company’s then issued and outstanding shares of common stock (collectively with (i) above, the “Market Cap Contingent Consideration”); and

(iii)

during the five-year period commencing on the closing date and ending on the five-year anniversary of the closing date, the Company will pay or deliver to Exacis 20% of all cash or other consideration (collectively, “License Contingent Consideration”) actually received by the Company during the five-year period from (i) third-party licensees or sublicensees of the intellectual property rights acquired by the Company from Exacis pursuant to the Exacis Purchase Agreement, or (ii) subject to certain exceptions, the sale of such intellectual property rights; provided, that the License Contingent Consideration shall not in any event exceed $45.0 million.

The Company accounted for the Exacis Acquisition as an asset acquisition because it determined that substantially all of the fair value of the assets acquired was concentrated in the Purchased License. Assets acquired in an asset acquisition are recognized based on their cost to the acquirer and generally allocated to the assets on a relative fair value basis. The Company’s cost for acquiring the Exacis Assets includes the issuance of the Company’s common stock, direct acquisition-related costs and contingent consideration. The table below shows the total fair value of the consideration paid for the Exacis Assets (in thousands). See Note 4 for more information on the fair value measurement of the assets acquired.

	Fair Value of Consideration
Shares issued	$	208
Contingent consideration		225
Direct costs		27
Total fair value	$	460

The Company allocated 100% of the fair value of the consideration to the Purchased License, which the Company determined is an in-process research and development (“IPR&D”) asset. IPR&D assets acquired through an asset purchase that have no alternative future uses and no separate economic values from their original intended purpose are expensed in the period the cost is incurred. As a result, the Company expensed the fair value of the Purchased License during the three and six months ended June 30, 2023.

4) CONTRACT WITH CUSTOMER

On February 21, 2023, the Company and Lineage Cell Therapeutics, Inc. (“Lineage”) entered into an exclusive option and license agreement (the “Lineage Agreement”), which provided Lineage with the option (the “Option Right”) to obtain an exclusive sublicense of intellectual property from the Company and to request the Company to develop a customized cell line. The Lineage Agreement was amended in August 2023 to provide for changes specifically related to the cell line customization activities such as (i) payment terms, (ii) certain definitions, (iii) certain courses of action if the customized cell line selected by Lineage is not successful and (iv) documentation requirements. Lineage paid the Company a $0.3 million non-refundable up-front payment (the “Option Fee”) for the Option Right and paid an initial payment of $0.4 million to commence the cell line customization activities, per the amended payment terms. If Lineage obtains the sublicense, the Company would be entitled to receive additional license fees, including milestone payments and royalties.

The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”) when a customer obtains control of promised services or goods in an amount that reflects the consideration to which the Company expects to receive in exchange for those goods or services.

Pursuant to ASC 606, the Company determined that the Option Right was an unexercised right held by Lineage under the Lineage Agreement at contract inception, as the cell line customization activities and the sublicense were optional purchases at contract inception. These optional purchases of goods and services would be treated as separate contracts if and when Lineage determines that it will make such purchases. Therefore, 100% of the Option Fee was allocated to the Option Right. The Option Fee will remain in deferred revenue until such time that Lineage enters into the sublicense or when the Option Right expires.

The Option Right and the cell line customization activities are accounted for as separate contracts, and the Company has determined that the amended terms discussed above represent a modification to the cell line customization contract. Because there were no goods or services transferred to Lineage before entering into the amendment, and therefore, no previously recognized revenue, there was no catch-up adjustment to revenue required at the time of the amendment.

Lineage will make payments to the Company for the cell line customization activities over the development period. The Company will only earn the remaining full amount of the cell line customization fee if it makes certain progress towards delivery of the customized cell line. The Company has determined that $0.4 million of consideration received could be recognized without the probability of being reversed, and it has placed a constraint on the remaining contractual customization fee. The $0.4 million is being recognized equally over the development period, which is expected to be approximately 20 to 25 months, as the level of effort to perform the services is happening at the same rate over time. If the development period is expected to be longer or shorter than originally planned, the Company will recognize a cumulative catch-up adjustment in the period that such determination is made. For the three and six months ended June 30, 2024, the Company recognized less than $0.1 million and $0.1 million of revenue, respectively, for the customization activities. The Company did not recognize any revenue for either of the three or six months ended June 30, 2023.

The granting of the license that the Company may provide to Lineage if Lineage exercises the Option Right is not considered a performance obligation at this time, as it is an optional request that the customer may make in the future and will be accounted for as a separate contract when the customer exercises the Option Right.

The Company recognizes direct labor and supplies used in the customization activities as incurred and are recorded as a cost of revenue. As provided for in the A&R Factor License Agreement discussed in Note 9, the Company is obligated to pay Factor Limited 20% of any amounts the Company receives from a customer that is related to the licensed technology under the A&R Factor License Agreement, which is also recorded as a cost of revenue. For the six months ended June 30, 2023, the Company recognized less than $0.1 million in license fees, which is recorded in cost of revenues, due to Factor Limited as a result of receiving the $0.3 million Option Fee payment from Lineage. There was no such license fee incurred during the three months ended June 30, 2023 or during the three or six months ended June 30, 2024.

5) CONVERTIBLE NOTES FINANCINGS

On July 14, 2023, the Company received $8.7 million from a private placement in which the Company issued $8.7 million in aggregate principal amount of convertible notes (the “July 2023 convertible notes”) and warrants to purchase an aggregate of approximately 6.1 million shares of its common stock (the “July 2023 warrants”). The Company recognized approximately $0.2 million in fees associated with the transaction.

On December 14, 2023, the Company entered into a purchase agreement with certain purchasers for the private placement of $9.2 million of convertible notes (the “December 2023 convertible notes” and together with the July 2023 convertible notes, the “convertible notes”) and warrants to purchase an aggregate of approximately 9.6 million shares of the Company’s common stock (the “December 2023 warrants” and together with the July 2023 warrants, the “note warrants”).

There were two closings under the December 14, 2023 purchase agreement – one on December 15, 2023 and the second on January 11, 2024. At the first closing, the Company received $7.8 million and issued $7.8 million of December 2023 convertible notes and December 2023 warrants to purchase approximately 8.1 million shares of its common stock. At the second closing, the Company received $1.4 million and issued $1.4 million of December 2023 convertible notes and December 2023 warrants to purchase approximately 1.5 million shares its common stock.

See Note 13 for more information on the note warrants.

The July 2023 convertible notes bear interest at 6% per annum, and the December 2023 convertible notes bear interest at 12% per annum, both of which are payable quarterly in arrears. At the Company’s election, it may pay interest either in cash or in-kind by increasing the outstanding principal amount of the convertible notes. The convertible notes mature on the five-year anniversary of the date of their issuance, unless earlier converted or repurchased. The Company does not have the option to redeem any of the convertible notes prior to maturity.

At the option of the holders, the convertible notes may be converted from time-to-time in whole or in part into shares of the Company’s common stock at an initial conversion rate of, with respect to the July 2023 convertible notes, $2.86 per share and, with respect to the December 2023 convertible notes, $1.9194 per share, subject to customary adjustments for stock splits, stock dividends, recapitalization and the like. As of June 30, 2024, none of the convertible notes were converted into shares of common stock.

The convertible notes do not contain any ratchet or other financial antidilution provisions. The convertible notes contain conversion limitations such that no conversion may be made if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 4.99%, 9.99% or 19.99% immediately after conversion thereof, subject to certain increases not in excess of either 9.99% or 19.99% at the option of such holder.

The convertible notes provide for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest, breach of covenants or other agreements in the convertible notes; the occurrence of a material adverse effect event (as defined in the related securities purchase agreement) and certain events of bankruptcy. Generally, if an undisputed event of default occurs and is continuing under the convertible notes, the holder thereof may require the Company to redeem some or all of their convertible notes at a redemption price equal to 100% of the principal amount of the convertible notes being redeemed, plus accrued and unpaid interest thereon. As of June 30, 2024, there were no events of default that occurred under the convertible notes.

The Company determined that there were no embedded derivatives within the convertible notes that required bifurcation from the host agreement. In connection with the December 2023 convertible notes that were issued on January 11, 2024, the Company allocated the gross proceeds received and the fees incurred over the applicable convertible notes and warrants based on their relative fair values as follows (in thousands):

Relative

Allocation

Allocation of Proceeds and Costs

Allocation of Proceeds,

Fair Value

Percentage

Proceeds

Costs

Net

Convertible notes

1,750

46.24

SEC Form 10-Q filed by Eterna Therapeutics Inc.