SEC Form 10-Q filed by Brooklyn ImmunoTherapeutics Inc.
$BTX
Biotechnology: Pharmaceutical Preparations
Health Care
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 September 30, 2023
or
|
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
(Exact name of registrant as specified in its charter)
|
|
|
|
|
(State of incorporation)
|
(I.R.S. Employer Identification No.)
|
|
|
|
|
|
(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
|
||
|
|
|
|
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
|
☐
|
|
|
☒ |
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 November 10, 2023, the registrant had outstanding 5,410,331
shares of common stock, $0.005 par value per share.
|
|
|
Page
|
|
PART I – FINANCIAL INFORMATION
|
|
|
|
Item 1.
|
Financial Statements (unaudited)
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
Item 2.
|
23
|
|
|
Item 3.
|
33
|
|
|
Item 4.
|
33
|
|
|
|
|
|
|
PART II – OTHER INFORMATION
|
|
|
|
Item 1.
|
34
|
|
|
Item 1A.
|
35
|
|
|
Item 2.
|
35
|
|
|
Item 3.
|
35
|
|
|
Item 4.
|
35
|
|
|
Item 5.
|
35
|
|
|
Item 6.
|
35
|
|
|
37
|
||
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 and targets, revenue generation, product availability and offerings, capital needs, capital expenditures, industry trends 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, 2022 and described in other documents we file from time to
time with the Securities and Exchange Commission, which we refer to as 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.
ETERNA THERAPEUTICS INC.
(In thousands, except par value amount)
(unaudited)
| September 30, | December 31, | |||||||
|
2023
|
2022
|
|||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash
|
$
|
|
$
|
|
||||
|
Other receivables
|
|
|
||||||
|
Prepaid expenses and other current assets
|
|
|
||||||
|
Total current assets
|
|
|
||||||
|
Restricted cash
|
||||||||
|
Property and equipment, net
|
|
|
||||||
|
Right-of-use assets - operating leases
|
|
|
||||||
|
Goodwill
|
|
|
||||||
|
Investment in non-controlling interest
|
||||||||
|
Other assets
|
|
|
||||||
|
Total assets
|
$
|
|
$
|
|
||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$
|
|
$
|
|
||||
|
Accrued expenses
|
|
|
||||||
|
Income taxes payable
|
||||||||
|
Operating lease liabilities, current
|
|
|
||||||
|
Due to related party, current
|
||||||||
|
Deferred revenue, current
|
||||||||
| Other current liabilities | ||||||||
|
Total current liabilities
|
|
|
||||||
|
Convertible notes payable, net
|
||||||||
|
Warrant liabilities
|
|
|
||||||
|
Operating lease liabilities, non-current
|
|
|
||||||
|
Due to related party, non-current
|
||||||||
|
Deferred revenue, non-current
|
||||||||
|
Contingent consideration liability
|
||||||||
|
Other liabilities
|
|
|
||||||
|
Total liabilities
|
|
|
||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, $
|
||||||||
|
Common stock, $
|
|
|
||||||
|
Additional paid-in capital
|
|
|
||||||
|
Accumulated deficit
|
(
|
)
|
(
|
)
|
||||
|
Total stockholders’ equity
|
|
|
||||||
|
Total liabilities and stockholders’ equity
|
$
|
|
$
|
|
||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
ETERNA THERAPEUTICS INC.
(In thousands, except per share amounts)
(unaudited)
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue |
$ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
|
Gross loss
|
( |
) | ( |
) | ||||||||||||
| Operating expenses: | ||||||||||||||||
|
Research and development
|
|
|
|
|
||||||||||||
|
General and administrative
|
||||||||||||||||
|
Acquisition of Exacis in-process research and development
|
||||||||||||||||
|
Impairment of in-process research and development
|
||||||||||||||||
|
Total operating expenses
|
|
|
|
|
||||||||||||
|
Loss from operations
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
| Other (expense) income, net: | ||||||||||||||||
|
Change in fair value of warrant liabilities
|
||||||||||||||||
|
Change in fair value of contingent consideration
|
||||||||||||||||
|
Loss on non-controlling investment
|
( |
) | ( |
) | ( |
) | ||||||||||
|
Other expense, net
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Total other (expense) income, net
|
(
|
)
|
|
(
|
)
|
|
||||||||||
| Loss before income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Benefit (provision) for income taxes |
( |
) | ( |
) | ( |
) | ||||||||||
|
Net loss
|
|
(
|
)
|
|
(
|
)
|
|
(
|
)
|
|
(
|
)
|
||||
| Series A preferred stock dividend | ( |
) | ( |
) | ||||||||||||
|
Net loss attributable to common stockholders
|
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
|
Net loss per common share - basic and diluted
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Weighted average shares outstanding - basic and diluted
|
|
|
|
|
||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
ETERNA THERAPEUTICS INC.
For the three and nine months ended September 30, 2023 and 2022 (unaudited)
(in thousands)
|
Series A Preferred
Stock
|
Common Stock
|
Additional Paid-
in
|
Accumulated
|
|||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
|
Balances at July 1, 2023
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||||||
|
Issuance of warrants in connection with the July 2023 Financing, net of fees
|
- | - | ||||||||||||||||||||||||||
|
Stock-based compensation
|
-
|
|
-
|
|
|
|
|
|||||||||||||||||||||
|
Net loss
|
-
|
|
-
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||
|
Balances at September 30, 2023
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||||||
|
Balances at January 1, 2023
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||||||
|
Issuance of common stock in connection with Exacis asset acquisition
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Issuance of common stock related to stock purchase agreement with Lincoln Park Capital Fund, LLC, net
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Issuance of warrants in connection with the July 2023 Financing, net of fees
|
- | - | ||||||||||||||||||||||||||
|
Cash dividends to Series A preferred stockholders
|
|
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||
|
Stock-based compensation
|
-
|
|
-
|
|
|
|
|
|||||||||||||||||||||
|
Net loss
|
-
|
|
-
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||
|
Balances at September 30, 2023
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||||||
|
Balances at July 1, 2022
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||||||
|
Issuance of common stock from vested restricted stock units
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Issuance of common stock from exercise of pre-funded warrants
|
||||||||||||||||||||||||||||
|
Stock-based compensation
|
-
|
|
-
|
|
|
|
|
|||||||||||||||||||||
|
Net loss
|
-
|
|
-
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||
|
Balances at September 30, 2022
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||||||
|
Balances at January 1, 2022
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||||||
|
Issuance of common stock in connection with private offering
|
|
|
|
|
(
|
)
|
|
|
||||||||||||||||||||
|
Issuance of common stock from vested restricted stock units
|
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||
|
Forfeiture of unvested restricted stock
|
|
|
(
|
)
|
|
|
|
|
||||||||||||||||||||
|
Issuance of common stock from exercise of pre-funded warrants
|
||||||||||||||||||||||||||||
|
Cash dividends to Series A preferred stockholders
|
|
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||
|
Stock-based compensation
|
-
|
|
-
|
|
|
|
|
|||||||||||||||||||||
|
Net loss
|
-
|
|
-
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||
|
Balances at September 30, 2022
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
ETERNA THERAPEUTICS INC.
(in thousands)
(unaudited)
| For the nine months ended | ||||||||
|
|
September 30,
|
|||||||
|
|
2023
|
2022
|
||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Depreciation and amortization
|
|
|
||||||
|
Stock-based compensation
|
|
|
||||||
|
Commitment shares issued to Lincoln Park Capital, LLC
|
||||||||
|
Loss on shares sold to Lincoln Park Capital, LLC
|
||||||||
|
Amortization of right-of-use asset
|
|
|
||||||
|
Impairment of right-of-use-asset
|
||||||||
|
Non-cash component of acquisition of Exacis in-process research and development
|
||||||||
|
Impairment of in-process research and development
|
||||||||
|
Loss on disposal of fixed assets
|
||||||||
|
Gain on lease termination
|
( |
) | ||||||
|
Amortization of debt discount and debt issuance costs
|
||||||||
|
Change in fair value of warrant liabilities
|
( |
) | ( |
) | ||||
|
Change in fair value of contingent consideration liability
|
( |
) | ||||||
|
Loss on non-controlling investment
|
|
|
||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Other receivables
|
(
|
)
|
(
|
)
|
||||
|
Prepaid expenses and other current assets
|
|
(
|
)
|
|||||
|
Other non-current assets
|
(
|
)
|
(
|
)
|
||||
|
Accounts payable and accrued expenses
|
|
|
||||||
|
Operating lease liability
|
|
(
|
)
|
|||||
|
Due to related party
|
( |
) | ||||||
|
Deferred revenue
|
||||||||
|
Other liabilities
|
(
|
)
|
|
|||||
|
Net cash used in operating activities
|
(
|
)
|
(
|
)
|
||||
|
Cash flows from investing activities:
|
||||||||
|
Purchase of property and equipment
|
|
(
|
)
|
|||||
|
Proceeds from the sale of fixed assets
|
||||||||
|
Net used in investing activities
|
|
(
|
)
|
|||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds received from the July 2023 Financing
|
||||||||
|
Fees paid related to the July 2023 Financing
|
( |
) | ||||||
|
Proceeds from sale of common stock pursuant to stock purchase agreement with Lincoln Park Capital Fund, LLC
|
||||||||
|
Proceeds from issuance of common stock and warrants in connection with private offering
|
||||||||
|
Issuance of common stock from exercise of pre-funded warrants
|
||||||||
|
Payroll tax remitted on net share settlement of equity awards
|
( |
) | ||||||
|
Dividends paid to Series A preferred stockholders
|
( |
) | ( |
) | ||||
|
Issuance of common stock from vested restricted stock units
|
||||||||
|
Principal payments on finance leases
|
( |
) | ||||||
|
Net cash provided by financing activities
|
|
|
||||||
|
Net decrease in cash and cash equivalents
|
(
|
)
|
(
|
)
|
||||
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
|
||||||
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
|
$
|
|
||||
|
|
||||||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Cash paid during the period for:
|
||||||||
|
Interest
|
$
|
|
$
|
|
||||
|
Income taxes
|
$ | $ | ||||||
|
Supplemental disclosure of non-cash investing and financing activities:
|
||||||||
|
Contingent consideration for Exacis asset acquisition
|
$ | $ | ||||||
|
Issuance of common stock for Exacis asset acquisition
|
$ | $ | ||||||
|
Warrants issued in connection with the July 2023 Financing
|
$ |
$ |
||||||
|
Unpaid fees incurred in connection with the July 2023 Financing
|
$ |
$ |
||||||
|
Initial measurement of ROU assets
|
$ | $ | ||||||
|
Initial measurement of lease liabilities
|
$ | $ | ||||||
|
Conversion of warrant liability to equity
|
$ |
$ |
||||||
|
Initial measurement of finance lease liabilities
|
$ |
$ |
||||||
|
Reconciliation of cash, cash equivalents and restricted cash at end of period:
|
||||||||
|
Cash and cash equivalents
|
$ | $ | ||||||
|
Restricted cash
|
||||||||
|
Total Cash, cash equivalents and restricted cash at end of period
|
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
ETERNA THERAPEUTICS INC.
(Unaudited)
| 1) |
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
|
Description of Business
Eterna Therapeutics Inc. (“Eterna”), together with its subsidiaries including Eterna Therapeutics LLC (“Eterna LLC”), Novellus, Inc. (“Novellus”) and Novellus Therapeutics Limited (“Novellus
Limited”), 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 NoveSliceTM and UltraSliceTM
gene-editing proteins, and the ToRNAdoTM mRNA delivery system. Eterna plans to develop and advance a pipeline of therapeutic products both internally and through strategic partnerships, with the near-term focus on strategic partnerships.
Eterna licenses its mRNA technology platform from Factor Bioscience Limited (“Factor Limited”) under an exclusive license agreement. As used herein, the “Company” refers collectively to Eterna and its subsidiaries.
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, 2022 filed
with the Securities and Exchange Commission (the “SEC”) on March 20, 2023 (the “2022 10-K”). The accompanying condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited financial statements contained in the
2022 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 nine months ended September 30, 2023 are not necessarily indicative of the
results to be anticipated for the entire year ending December 31, 2023, 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 September 30, 2023, the Company had an unrestricted cash balance of approximately $4.6
million and an accumulated deficit of approximately $180.8 million. For the three and nine months ended September 30, 2023, the
Company incurred a net loss of $5.6 million and $15.5 million, respectively, and the Company used cash in operating activities of $15.7
million during the nine months ended September 30, 2023.
In October 2022, the Company entered into a facility sublease agreement (the “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, which will be reduced on an incremental basis throughout the term of the lease.
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. The amount of required restricted cash collateral will decline in parallel with the reduction in the amount of the letter of
credit over the term of the Sublease.
On April 5, 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 nine months ended September 30, 2023, the Company issued and sold approximately 214,000 shares of common
stock under the SEPA for gross proceeds of $0.3 million. The Company did no t sell any shares under the SEPA for the three months ended September 30, 2023. See Note 15.
On July 14, 2023, the Company closed a financing with certain investors providing for the private placement to the investors of (i) approximately $8.7 million in aggregate principal convertible promissory notes (the “ Convertible Notes”) and (ii) warrants to purchase an aggregate of approximately 6.1 million shares of the Company’s common stock (the “Note Warrants,” and together with the Convertible Notes, the “July 2023 Financing”).
The Convertible Notes bear interest at 6 % per annum, payable quarterly in arrears, and the Company may pay interest in cash or
in-kind by increasing the outstanding principal amount of the Convertible Notes. The Convertible Notes mature in July 2028 and can be converted into shares of the Company’s common stock at the option of the applicable investor.
In connection with preparing the accompanying condensed consolidated financial statements as of and for the three and nine months ended September 30, 2023, 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 in addition to the July 2023 Financing, which could be through the remaining availability under the SEPA, public or
private equity offerings, debt financings, strategic partnerships or other means. Other than the SEPA, the Company currently has no arrangements for such capital, and no assurances can be given that it will be able to raise such 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
|
In April 2023, the
Company entered into an asset purchase agreement (the “Exacis Purchase Agreement”), together with Exacis Biotherapeutics Inc. (“Exacis”), the stockholders party thereto and, with respect to specified provisions therein, Factor Limited (the “Exacis
Acquisition”). 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.
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 are subject to a 12-month lockup, pursuant to which Exacis may not sell or otherwise transfer such shares. 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
|
| (ii) |
if, at any time during the
|
| (iii) |
during the
|
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 Market Cap Contingent Consideration is indexed to or settled in the Company’s own shares. As a result, the Company classified the Market Cap
Contingent Consideration as a liability measured at fair value because the financial instrument embodies a conditional obligation (the Company would only issue the shares on the condition that the market capitalization thresholds are met), and at
inception, the monetary value of the obligation is based solely on a fixed monetary amount ($2.0 million of shares for each target),
which will be settleable with a variable number of the Company’s shares. The Company used a Monte Carlo simulation model to estimate the fair value of the Market Cap Contingent Consideration as of the acquisition date using the following
assumptions:
|
Stock price
|
$
|
|
||
|
Risk-free rate
|
|
%
|
||
|
Volatility
|
|
%
|
||
|
Dividend yield
|
|
%
|
||
|
Expected term
|
|
|||
The License Contingent Consideration is to be settled in cash and is generally recognized when the liability is probable and estimable. As of the
acquisition date and as of September 30, 2023, the Company concluded that paying the License Contingent Consideration was not probable or estimable. Therefore, there was no applicable contingent consideration liability recognized.
The table below shows the
total fair value of the consideration paid for the Exacis Assets (in thousands).
|
Fair Value of
Consideration
|
||||
|
Shares issued
|
$
|
|
||
|
Contingent consideration
|
|
|||
|
Direct costs
|
|
|||
|
Total fair value
|
$
|
|
||
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 nine months ended September 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 “Agreement”), which provided Lineage with the option (the “Option Right”) to obtain an exclusive sublicense to certain related technology for preclinical, clinical and commercial purposes,
which would permit Lineage to further sublicense such intellectual property, subject to payment of certain sublicense royalty fees. Lineage paid the Company a $0.3 million non-refundable up-front payment (the “Option Fee”) for the Option Right.
Under
the Agreement, Lineage could also request that the Company develop for, and deliver to, Lineage certain induced pluripotent stem cell lines, which Lineage would use to evaluate the possible development of cell transplant therapies for treatment
of diseases of the central nervous system in humans, excluding certain indications. Lineage had until August 22, 2023 to request that the Company develop the customized cell line, at which point, the Company would be entitled to certain cell
line customization fees.
Upon Lineage’s
request for the Company to develop the customized cell line, Lineage would then have six months from delivery to Lineage of such induced pluripotent stem cell lines to exercise the Option Right and obtain the sublicense. 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”), which requires the Company to perform the following five steps in order to recognize revenue:
|
1.
|
Identify the contract with a customer;
|
|
2.
|
Identify the performance obligations in the contracts;
|
|
3.
|
Determine the transaction price;
|
|
4.
|
Allocate the transaction price to the performance obligations; and
|
|
5.
|
Recognize revenue when (or as) the performance obligations are satisfied.
|
Pursuant to ASC 606 the Company determined that the Option Right was an unexercised right held by Lineage under the 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.
On August 21, 2023, Lineage requested that the Company begin
developing certain induced pluripotent stem cell lines in exchange for a fixed fee, subject to certain constraints as discussed further below. Also on August 21, 2023, the Company and Lineage entered into an amendment of the
Agreement, which provided 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.
As previously concluded, 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 no
Lineage will make payments to the Company for the cell line customization activities
over the development period. During the three months ended September 30, 2023, the Company received an initial payment of $0.4 million to
commence the cell line customization activities, per the amended payment terms. 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 estimates the amount of consideration it expects to recognize as revenue that is not probable of having a significant reversal of such recognized revenue, and it places a
constraint on the remaining contractual consideration. The Company has determined that $0.4 million of consideration 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 ten months (which is the expected development period), as the level of effort to perform the services is happening at the same rate over time. As it becomes evident that the constrained amounts are no
longer at risk of a significant reversal of revenue, the Company will remove the constraint from the related revenue and recognize a cumulative catch-up adjustment to revenue in the period in which the constraint was removed, with the remaining
unconstrained revenue being recognized over the remaining development time. For the three and nine months ended September 30, 2023, the Company recognized less than $0.1
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 Exclusive 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 Exclusive Factor License Agreement, which is also recorded as a cost of
revenue.
|
5)
|
JULY 2023 FINANCING
|
On
July 14, 2023, the Company completed the July 2023 Financing, which provided for the issuance of approximately $8.7 million in aggregate
principal amount of Convertible Notes and the issuance of the Note Warrants to purchase an aggregate of approximately 6.1 million shares
of common stock. The Company recognized approximately $0.2 million in fees associated with the transaction.
The Convertible Notes bear interest at 6 % per annum, 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 July 14, 2028 , unless earlier converted or repurchased. The Company may not redeem
the Convertible Notes at its option prior to maturity.
At the option of the investors, the Convertible Notes may be converted from
time-to-time in whole or in part into shares of common stock at an initial conversion rate of $2.86 per share, subject to customary
adjustments for stock splits, stock dividends, recapitalization and the like. As of September 30, 2023, there were no Convertible Notes
that were converted into shares of common stock.
The Convertible Notes do not contain any ratchet or other financial antidilution provisions. The Convertible Notes purchased by the investors contain conversion limitations, providing 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, the following: 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 event of default occurs and is continuing under the Convertible Notes, the holder thereof may require the Company to repurchase some or all of their Convertible Notes at a repurchase
price equal to 100 % of the principal amount of the Convertible Notes being repurchased, plus accrued and unpaid interest thereon.
The Note Warrants are
immediately exercisable, have an exercise price of $2.61 per share, expire five years following the date of issuance and are subject to customary adjustments. The Note Warrants purchased by the investors contain a provision pursuant to which such Note Warrants
may not be exercised 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 exercise thereof, subject to certain increases not in excess of either 9.99 % or 19.99 % at the option of such holder.
The Company determined that there
were no embedded derivatives within the Convertible Notes that required bifurcation from the host agreement. The Company allocated the gross proceeds received and the fees incurred over the Convertible Notes and the Note Warrants based on their
relative fair values. For purposes of the allocation, the Company used an estimated fair value of $8.7 million for the Convertible
Notes based off of a valuation performed by a third-party specialist. The fair value of the Note Warrants, which qualified for equity classification, was approximately $13.1 million using the Black-Scholes pricing model as of the transaction date of July 14, 2023. As a result, the Company allocated approximately $5.2 million in proceeds and approximately $0.1 million in fees
to the Note Warrants and a corresponding reduction in the carrying value of the Convertible Notes for the debt discount and debt issuance costs, both of which are amortized as a component of interest expense, based on the effective interest rate
method, over the contractual terms of the Convertible Notes.
As of September 30, 2023, the outstanding principal of the Convertible Notes was $8.7 million, and the unamortized balance of the debt discount and debt issuance costs was $5.2 million. The Company accrued approximately $0.1 million in interest expense related to the
Convertible Notes, which is recorded in accrued expenses in the accompanying condensed consolidated balance sheet. For both the three and nine months
ended September 30, 2023, the Company recognized approximately $0.2 0.1
| 6) |
LEASES
|
The Company currently has operating leases for office and laboratory space
in New York, New York, Cambridge, Massachusetts and Somerville, Massachusetts, which expire in 2026, 2028, and 2033, respectively.
During the second quarter of 2022, the Company determined to consolidate its research and development efforts in Cambridge, Massachusetts and
sublease its San Diego lab and office space. As a result, the Company recognized an impairment charge of approximately $0.8 million on
the San Diego Lease ROU asset during the nine months ended September 30, 2022. In November 2022, the Company entered into a lease termination agreement, effective January 31, 2023; and as of September 30, 2023, there was no
In October 2022, the Company entered into the Sublease with E.R. Squibb & Sons, L.L.C., a subsidiary
of Bristol-Myers Squibb Company (“Sublessor”), for office, laboratory and research and development space (the “Premises”). The Premises consist of approximately 45,500 square feet on the ninth floor of a building currently under construction located in Somerville, Massachusetts. The lease expires in November 2033 and is subject to a five-year extension.
Rental payments for the Sublease will begin on November 29, 2023. The Company will pay base rent of
approximately $0.5 million per month during the first year of the term, which will increase 3 % per year thereafter. The Company will also make monthly payments for parking, which are based on market rates that can change from time to time, as well as pay its share
of traditional lease expenses, including certain taxes, operating expenses and utilities.
Pursuant to the Sublease, the Company paid the Sublessor a security deposit in the form of a letter of
credit in the amount of approximately $4.1 million. Provided there are no events of default by the Company under the Sublease, the
letter of credit will be reduced on an incremental basis throughout the Term.
The Sublessor has agreed to provide the Company with a tenant improvement allowance (“TIA”) of $190 per rentable square foot, or $8.6
million. Tenant improvements to the Premises in excess of this amount, if any, will be at the Company’s own cost. It is anticipated that the construction will be substantially complete by [the end of 2023].
The Company obtained access and control of the Premises on June 21, 2023, and as such, the Company determined that the
commencement date for accounting purposes was June 21, 2023. The Company also performed an analysis on the accounting ownership of the tenant improvement assets and determined that such assets were Sublessor/Lessor owned. As a result, TIA
payments made by the Sublessor to the Company for the tenant improvement assets are considered a reimbursement rather than a lease incentive and not included as part of the consideration of the contract. Amounts paid by the Company for
Sublessor/Lessor owned assets that are in excess of the TIA are considered non-cash lease payments and are added to the consideration in the contract.
The Company measured the lease
liability and corresponding ROU asset for the Somerville Sublease as of June 21, 2023, which includes lease payments the Company must make over the ten-year lease term. The Company did not include the option to extend the lease for an
additional five years in the initial measurement because the Company was not reasonably certain as of June 21, 2023 that it would exercise its right to extend the lease term. As a result, the Company recorded a lease liability of $34.2 million, which includes $0.6
million for the incremental amount above the TIA that the Company expects to pay for Sublessor/Lessor owned assets, and a corresponding ROU asset of $34.4 million as of June 30, 2023. As of September 30, 2023, the Company has recorded approximately $1.1
million as other receivables in the condensed consolidated balance sheet for amounts submitted for reimbursement under the TIA for Sublessor/Lessor owned assets and approximately $3.5 million recorded in other current assets in the condensed consolidated balance sheet for amounts paid by the Company but not yet submitted for reimbursement of
Sublessor/Lessor owned assets.
For the three and nine months ended September 30, 2023 and 2022, the net operating lease expenses were as follows (in
thousands):
|
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
|
2023
|
2022
|
2023
|
2022
|
|||||||||||||
|
Operating lease expense
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Sublease income
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Variable lease expense
|
|
|
|
|
||||||||||||
|
Total lease expense
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The tables below show the beginning
balances of the operating ROU assets and lease liabilities as of January 1, 2023 and the ending balances as of September 30, 2023, including the changes during the period (in thousands).
|
Operating Lease
ROU Assets
|
||||
|
Operating lease ROU assets at
January 1, 2023
|
$
|
|
||
|
Recognition of ROU asset for Somerville Sublease
|
||||
|
Amortization of operating lease
ROU assets
|
(
|
)
|
||
|
Operating lease ROU assets at
September 30, 2023
|
$
|
|
||
|
Operating Lease
Liabilities
|
||||
|
Operating lease liabilities at
January 1, 2023
|
$
|
|
||
|
Recognition of lease liability for Somerville Sublease
|
||||
|
Accretion of interest for Somerville Sublease
|
||||
|
Principal payments on operating
lease liabilties
|
(
|
)
|
||
|
Operating lease liabilities at
September 30, 2023
|
|
|||
|
Less non-current portion
|
|
|||
|
Current portion at September 30,
2023
|
$
|
|
||
As of September 30, 2023, the Company’s operating leases had a weighted-average
remaining life of 10.0 years with a weighted-average discount rate of 12.6 %. The maturities of the operating lease liabilities are as follows (in thousands):
|
As of
September 30, 2023
|
||||
|
2023
|
$
|
|
||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
Thereafter
|
|
|||
| Total payments | |
|
||
| Less imputed interest | ( |
) | ||
| Total operating lease liabilities | $ | |||
| 7) |
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Fair
value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between willing market participants. A fair value hierarchy has been established for valuation inputs that gives the
highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
|
●
|
Level
1 Inputs – Valued based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
|
●
|
Level 2 Inputs – Valued based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. |
|
●
|
Level
3 Inputs – Valued based on inputs for which there is little or no market value, which require the reporting entity to develop its own assumptions.
|
The carrying amounts reported on the balance sheet for cash and cash equivalents, other receivable, prepaid assets and other current assets, accounts payable and accrued expenses, other current liabilities and other
liabilities approximate fair value based due to their short maturities.
The following tables summarize the liabilities that are measured at fair value as of September 30, 2023 and December 31, 2022 (in thousands):
|
Description
|
Level
|
September 30, 2023
|
December 31, 2022
|
|||||||||
|
Liabilities:
|
||||||||||||
|
Warrant liabilities - Common Warrants
|
3
|
$
|
|
$
|
|
|||||||
|
Market Cap Contingent Consideration
|
3 | $ | $ | |||||||||
The Company uses a
Black-Scholes option pricing model to estimate the fair value of its warrant liabilities and a Monte Carlo simulation model to estimate the fair value of the Market Cap Contingent Consideration, both of which are considered a Level 3 fair
value measurement. The Company remeasures the fair value of the warrant liabilities and the Market Cap Contingent Consideration at each reporting period and changes in the fair values are recognized in the statement of operations.
Certain inputs used in Black-Scholes, and Monte Carlo models may fluctuate in future
periods based upon factors that are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of the Company’s
warrant liabilities or contingent consideration liabilities, which could also result in material non-cash gains or losses being reported in the Company’s consolidated statement of operations.
The following table presents the
changes liabilities measured at fair value from January 1, 2023, or from the initial measurement date if later than January 1, 2023, through September 30, 2023 (in thousands):
|
|
Warrant
Liabilities
|
Contingent
Consideration
|
||||||
|
Fair value at January 1, 2023
|
$
|
|
$ | |||||
|
Initial measurement
|
||||||||
|
Change in fair value
|
(
|
)
|
( |
) | ||||
|
Fair value at September 30, 2023
|
$
|
|
$ | |||||
The Company assessed the fair value of the Market Cap
Contingent Consideration at September 30, 2023 and determined that there were no material changes to the inputs used in the June 30, 2023 remeasurement that would have resulted in a material change to the liability at September 30, 2023.
Therefore, the Company did no t recognize a change in the fair value of the Market Cap Contingent Consideration for the three
months ended September 30, 2023.
The table below is provided for comparative purposes only and presents information about the fair value of the Company’s Convertible Notes relative to the
carrying values recognized in the condensed consolidated balance sheet as of September 30, 2023 (in thousands). The Company did not have the Convertible Notes as of December 31, 2022.
|
September 30, 2023
|
||||||||
|
|
Carrying
Value
|
Fair
Value
|
||||||
|
|
||||||||
|
Convertible Notes
|
$
|
|
$
|
|
||||
The Company assesses the fair value of the Convertible Notes using a binomial model, which is considered a Level 3
measurement.
| 8) |
GOODWILL
|
In 2018, the Company acquired IRX Therapeutics (“IRX”), which was accounted for as a business combination. The Company recorded goodwill in the
amount of $2.0 million related to the IRX acquisition . Goodwill is not amortized but is
tested for impairment annually, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the entity is less than its carrying value. Because management evaluates
the Company as a single reporting unit, goodwill is tested for impairment at the entity level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the entity is less than its
carrying value. Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. If the entity does not pass the qualitative assessment,
then the entity’s carrying value is compared to its fair value. Goodwill is considered impaired if the carrying value of the entity exceeds its fair value.
As of September 30, 2023, the Company performed a qualitative assessment to determine whether it was more likely than not that the fair value
of the entity is less than its carrying value of goodwill. Such qualitative factors included macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. As a result of
the decline in the Company’s stock price from $2.26 per share as of June 30, 2023 to $2.18 per share as of September 30, 2023, the Company determined that there were indications of impairment. Accordingly, the Company proceeded to the first step in the
quantitative assessment of impairment and determined that the fair value of the reporting unit exceeded the carrying amount of goodwill, and therefore, the goodwill was not impaired as of September 30, 2023.
| 9) |
RELATED PARTY TRANSACTIONS
|
Agreements with Factor Bioscience Inc. and Affiliates
As of September 30, 2023, the agreements below were in place related to Factor Bioscience Inc.
(including its affiliates, “Factor Bioscience”) and Dr. Matthew Angel. These agreements have been deemed related party transactions, as the Company’s Chief Executive Officer, Dr. Matthew Angel, is also the Chairman and Chief Executive Officer
of Factor Bioscience and a Director of Factor Limited.
In September
2022, the Company entered into a Master Services Agreement (the “MSA”) with Factor Bioscience, pursuant to which Factor Bioscience agreed to provide services to the Company as agreed between the Company and Factor Bioscience and as set forth in
one or more work orders under the MSA, including the first work order included in the MSA (“WO1”). Under WO1, Factor Bioscience agreed to provide the Company with mRNA cell engineering research support services, including access to certain
facilities, equipment, materials and training, and the Company agreed to pay Factor Bioscience an initial fee of $5.0 million,
payable in twelve equal monthly installments of approximately $0.4 million. Of the $5.0 million, the Company allocated $3.5 million to the License Fee Obligation (as defined below). Following the initial 12-month period, the Company agreed to continue paying Factor
Bioscience the monthly fee of $0.4 million until such time as WO1 is terminated. Upon entering into the MSA, the Company paid a
deposit of $0.4 million, which will be applied to the last month of WO1.
The
Company may terminate WO1 under the MSA on or after the second anniversary of the date of the MSA, subject to providing Factor Bioscience with 120
days’ prior notice. Factor Bioscience may terminate such work order only on and after the fourth anniversary of the date of the MSA, subject to providing the Company with 120 days’ prior notice. The MSA contains customary confidentiality provisions and representations and warranties of the parties, and the MSA may be
terminated by either party upon 30 days’ prior notice, subject to any superseding termination provisions contained in a particular
work order.
In connection with entering into the MSA, Factor Bioscience’s subsidiary, Factor Limited, entered into a waiver
agreement (the “Waiver Agreement”) with Eterna LLC, pursuant to which Factor Limited agreed to waive payment of $3.5 million
otherwise payable to it (the “License Fee Obligation”) in October 2022 by Eterna LLC under the exclusive license agreement entered into in April 2021 by and among Eterna LLC, Novellus Limited and Factor Limited, as amended in November
2022 (the “Original Factor License Agreement”). Under the terms of the Waiver Agreement, the License Fee Obligation is waived conditionally on the Company paying Factor Bioscience a minimum of $3.5 million due under the MSA.
Because the License Fee Obligation was conditionally waived until such amount
has been paid under the MSA, the Company recorded a liability of $3.5 million. As of September 30, 2023, there was approximately $1.6 million of the unamortized License Fee Obligation remaining, which is recorded on the accompanying condensed consolidated balance sheet in the
“due to related party” line items.
On February 20,
2023, the Company and Factor Limited entered into an exclusive license agreement (the “Exclusive Factor License Agreement”), which terminated and superseded the Original Factor License Agreement. Subject to certain exclusive licenses or other
rights granted by Factor Limited to other third parties as of the effective date of the Exclusive Factor License Agreement, Factor granted the Company the exclusive, sublicensable license under certain patents owned by Factor Limited (the
“Factor Patents”). The term of the Exclusive Factor License Agreement expires on November 22, 2027, but will be automatically extended for an additional (such period, the “Renewal Term”) if the Company receives at least $100
million in fees from sublicenses to the Factor Patents (“Sublicense Fees”) granted by the Company pursuant to the Exclusive Factor License Agreement. The Company will pay to Factor Limited 20 % of any Sublicense Fee received by the Company before the initial expiration date of such license and 30 % of any Sublicense Fees received by the Company during the Renewal Term. The Company may terminate the Exclusive Factor License Agreement upon 120 days’ written notice to Factor Limited, and both parties otherwise have additional customary termination rights. Under the Exclusive Factor
License Agreement, the Company is obligated to pay the expenses incurred by Factor Limited in preparing, filing, prosecuting and maintaining the Factor Patents and has agreed to bear all costs and expenses associated with enforcing and
defending the Factor Patents in any action or proceeding arising from pursuit of sublicensing opportunities under the license granted under the Exclusive Factor License Agreement.
On July 12, 2023, The Company and Factor Limited entered into the First
Amendment to the Exclusive Factor License Agreement (the “Exclusive License Agreement Amendment”), which amended the Exclusive
Factor License Agreement to (i) expand the field of use of the Factor Patents to include veterinary uses, (ii) extend the Renewal Term from to five years if the Company pays at least $6.0 million to Factor Limited from Sublicense Fees, other cash on hand or a combination of both sources of funds, (iii) reduce the Sublicense Fees
payable to Factor Limited during the Renewal Term from 30 % to 20 %, (iv) eliminate Factor Limited’s termination rights with respect to Factor Patents that are not sublicensed, or for which an opportunity has not been identified, in
each case by a certain date and (v) provide for the Company’s payment to Factor Limited of a monthly maintenance fee of approximately $0.4
million, beginning in September 2024.
In
September 2022, Novellus and Eterna entered into a Second Amendment to the Limited Waiver and Assignment Agreement (the “Waiver and Assignment Agreement”) with Drs. Matthew Angel and Christopher Rohde (the “Founders”) whereby the Company agreed
to be responsible for all future, reasonable and substantiated legal fees, costs, settlements and judgments incurred by the Founders, the Company or Novellus for certain claims and actions and any pending or future litigation brought against
the Founders, Novellus and/or the Company by or on behalf of the Westman and Sowyrda legal matters described in Note 11 (the “Covered Claims”). The Founders will continue to be solely responsible for any payments made to satisfy a judgement or
settlement of any pending or future wage act claims. Under the Waiver and Assignment Agreement, the Founders agreed that they are not entitled to, and waived any right to, indemnification or advancement of past, present or future legal fees,
costs, judgments, settlement or other liabilities they may have been entitled to receive from the Company or Novellus in respect of the Covered Claims. The Company and the Founders will share in any recoveries up to the point at which the
parties have been fully compensated for legal fees, costs and expenses incurred, with the Company retaining any excess recoveries. The Company has the sole authority to direct and control the prosecution, defense and settlement of the Covered
Claims.
Exacis Asset Acquisition
On April 26, 2023, the Company entered into the Exacis Purchase Agreement
to acquire the Exacis Assets, including all of Exacis’ right, title and interest in the Purchased License. The Company assumed none of Exacis’ liabilities, other than liabilities under the Purchased License that accrue subsequent to the
closing date. See Note 3.
The Exacis Acquisition was deemed a related party transaction because Dr. Gregory Fiore, who was the Chief Executive Officer of Exacis, was also a member
of the Company’s board of directors at the time of the Exacis Acquisition. Additionally, Dr. Angel was Chairman of Exacis’ scientific advisory board, he is the co-founder, President, CEO, and a director of Factor Bioscience Inc., which
is the parent of Factor Limited and a wholly owned subsidiary of Factor Bioscience LLC, the latter of which is the majority stockholder of Exacis.
Consulting Agreement with Dr. Fiore
In May 2023, the Company entered into a consulting agreement with Dr. Fiore, a former director of the Company, whereby Dr. Fiore agreed to
provide business development consulting services to the Company for a monthly retainer of $20,000 . The consulting agreement was terminable for
any reason by either party upon 15 days’ written notice, and the Company terminated the consulting agreement,
effective July 31, 2023.
July 2023 Financing
On July 14, 2023, the Company closed the July 2023 Financing. Brant Binder, Richard Wagner Charles
Cherington and Nicholas Singer, who were former directors of the Company, participated in the July 2023 Financing under the same terms and subject to the same conditions as all the other purchasers. See Note 5.
|
10)
|
ACCRUED EXPENSES
|
Accrued expenses at September 30, 2023 and December 31, 2022 consisted of the
following (in thousands):
|
September 30,
2023 |
December 31,
2022
|
|||||||
|
Buildout costs for Somerville facility
|
$ | $ | ||||||
|
Legal fees and settlements
|
|
|
||||||
|
Clinical
|
|
|
||||||
|
Professional fees
|
|
|
||||||
|
Accrued compensation
|
|
|
||||||
|
Other
|
|
|
||||||
|
Total accrued expenses
|
$
|
|
$
|
|
||||
The $3.2 million shown above for the Somerville buildout costs will be subject to the TIA reimbursement described in Note 6 once such amount has been paid by the Company.
| 11) |
COMMITMENTS AND CONTINGENCIES
|
Litigation Matters
The Company is involved in litigation and arbitrations from time to time in the ordinary course of business. Legal fees and other costs
associated with such actions are expensed as incurred. In addition, the Company assesses the need to record a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable, and the
amount can be reasonably estimated.
Novellus, Inc. v. Sowyrda et al., C.A. No.
2184CV02436-BLS2
On October 25, 2021 Novellus, Inc. filed a complaint in the Superior Court of Massachusetts, Suffolk County, against former Novellus, Inc.
employees Paul Sowyrda and John Westman and certain other former investors in Novellus LLC (Novellus, Inc.’s former parent company prior to our acquisition of Novellus, Inc.), alleging breach of fiduciary duty, breach of
contract and civil conspiracy. Eterna acquired Novellus, Inc. on July 16, 2021. On May 27, 2022 Novellus, Inc. amended the complaint to withdraw all claims against all defendants except Paul Sowyrda and John Westman. On
July 1, 2022, Westman filed a motion to compel arbitration or in the alternative, to stay the litigation pending the disposition of certain litigation in the Court of Chancery for the State of Delaware filed by Mr. Sowyrda
against Novellus LLC, Dr. Christopher Rohde, Dr. Matthew Angel, Leonard Mazur and Factor Bioscience, Inc. captioned Zelickson et al., v. Angel et al., C.A. 2021-1014-JRS and by Westman against Novellus LLC captioned Westman
v. Novellus LLC, C.A. No. 2021-0882-NAC (the “Delaware Actions”). On July 1, 2022, Sowyrda answered the complaint and asserted counterclaims against Novellus, Inc, and third-party defendants Dr. Matthew Angel and Dr.
Christopher Rohde alleging violations of the Massachusetts Wage Act, Massachusetts Minimum Fair Wage Law, the Fair Labor Standards Act, breach of contract, unjust enrichment and quantum meruit. Sowyrda also joined in
Westman’s motion to stay the case pending the Delaware Actions. Novellus, Inc.’s claims and Mr. Sowyrda’s counterclaims relate to alleged conduct that took place before Eterna acquired Novellus, Inc.
On November 15, 2022, prior to a decision on Westman’s and Sowyrda’s motion to compel or stay, the Parties agreed to voluntarily dismiss and consolidate the Delaware Actions with
this action. On December 15, 2022, Sowyrda filed an Amended Answer to the Amended Complaint, asserted affirmative defenses and filed Amended Counterclaims against Dr. Angel, Dr. Rohde, Novellus LLC, Novellus Inc., Factor
Bioscience Inc., and Eterna Therapeutics Inc. (“Counterclaim Defendants”) alleging against various Counterclaim Defendants breach of contract, breaches of the implied duty of good faith and fair dealing, breaches of
fiduciary duty, breaches of the operating agreement, aiding and abetting breaches of fiduciary duty, tortious interference with contract, equitable accounting, violations of the Massachusetts Wage Act, Massachusetts
Minimum Fair Wage Law, the Fair Labor Standards Act, unjust enrichment, and quantum meruit. Also on December 15, 2022, Westman filed an answer to the Amended Complaint and asserted similar counterclaims against the same
Counterclaim Defendants. Westman and Sowyrda each asserted claims for indemnification and/or advancement against Novellus, Inc. On January 11, 2023, Westman and Sowyrda served a joint motion to enforce their advancement
and/or indemnification rights against Novellus Inc. Novellus Inc. vigorously opposes this motion and served its opposition on January 27, 2023. On February 8, 2023, Westman and Sowyrda served a reply in support of their
motion to enforce indemnification/advancement rights, and submitted the motion to the Court. Novellus Inc. answered Westman and Sowyrda’s counterclaims on January 27, 2023, denying liability. The remaining Counterclaim
Defendants served a motion to dismiss most of the remaining counterclaims on January 27, 2023. The Court entered an order granting the Counterclaim Defendants’ motion to dismiss and denying Sowyrda and Westman’s motion to
enforce on June 15, 2023. The Court’s order dismissed all of Westman’s claims against Counterclaim Defendants except his claim for indemnification, and all of Sowyrda’s claims except his claim for indemnification and his
employment-related claims, which Counterclaim Defendants did not move to dismiss. On July 6, 2023, Westman and Sowyrda filed a petition for interlocutory review with a single justice of the Massachusetts Appeals Court,
seeking to overturn the judge’s decision granting the Counterclaim Defendants’ motion to dismiss most of the remaining counterclaims, but not the decision denying Westman and Sowyrda’s motion to enforce advancement rights.
On July 25, 2023, the parties to the appeal filed a joint motion to the single justice in the appellate court to stay the appeal to allow for amended counterclaims to be filed by Counterclaim Plaintiffs and a motion to dismiss
to be filed by Counterclaim Defendants. Counterclaim Plaintiffs filed an initial set of amended counterclaims on August 15, 2023. Counterclaim Plaintiffs amended and refiled their amended counterclaims on September 29,
2023. Counterclaim Defendants served their motion to dismiss all of the amended counterclaims, except for Sowyrda’s employment-related claims, on October 13, 2023.
Under applicable Delaware law and Novellus Inc.’s organizational documents, the Company may be required to advance or
reimburse certain legal expenses incurred by former officers and directors of Novellus, Inc. in connection with the foregoing Westman and Sowyrda matters. However, a future advance or reimbursement is not currently probable
nor can it be reasonably estimated.
eTheRNA Immunotherapies NV and eTheRNA Inc. v. Eterna Therapeutics Inc. C.A. No. 123CV11732
On July 31, 2023, eTheRNA Immunotherapies NV and eTheRNA Inc. filed a complaint in court against Eterna Therapeutics Inc.
alleging the following claims: (1) federal trademark infringement; (2) federal unfair competition; (3) Massachusetts state common law trademark infringement; (4) Massachusetts state unfair competition. Service of process
for the complaint was completed on August 1, 2023. At this stage in the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome.
Licensing Agreements
On February 20, 2023, the Company and Factor Limited
entered into the Exclusive Factor License Agreement, which terminated and superseded the Original Factor License Agreement. On July 12, 2023, the Company and Factor Limited entered into the Exclusive License Agreement Amendment. See Note
9 for details of these agreements.
Retirement Savings Plan
The Company established a defined contribution plan, organized under Section 401(k) of the Internal Revenue Code, which allows employees to defer up to 90 % of their pay on a pre-tax basis. Beginning on January 1, 2023, the Company began matching employees’ contributions at a rate of 100 % of the first 3 % of
the employee’s contribution and 50 % of the next 2 % of the employee’s contribution, for a maximum Company match of 4 %.
| 12) |
STOCK-BASED COMPENSATION
|
Stock Options
During the three and nine months ended September 30, 2023 and 2022, the Company
granted the following stock options (in thousands):
|
|
Three months ended September 30,
|
Nine months ended September 30,
|
||||||||||||||
|
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
|
Stock options granted
|
|
|
|
|
||||||||||||
The Company recognizes stock-based compensation expense for stock options granted to employees, directors and certain consultants. The Company estimates the fair value
of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite service period on a straight-lined basis.
The following weighted-average assumptions were used for
stock options granted during the three and nine months ended September 30, 2023 and 2022:
|
|
Three months ended September 30,
|
Nine months ended September 30,
|
||||||||||||||
|
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
|
Weighted average risk-free rate
|
|
|
%
|
|
%
|
|
%
|
|||||||||
|
Weighted average volatility
|
|
|
%
|
|
%
|
|
%
|
|||||||||
|
Dividend yield
|
|
|
|
%
|
|
%
|
|
%
|
||||||||
|
Expected term
|
-
|
|
|
|
||||||||||||
The per-share weighted average grant-date fair value of stock options granted during the three and nine months ended September 30,
2023 and 2022 was as follows:
|
|
Three months ended September 30,
|
Nine months ended September 30,
|
||||||||||||||
|
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
|
Weighted average grant date fair value
|
|
|
$
|
|
$
|
|
$
|
|
||||||||
Vesting of all stock option grants is subject to continuous service with the Company through such vesting dates. As of September 30, 2023,
there were approximately 510,000 stock options outstanding.
Restricted Stock Units
During
the nine months ended September 30, 2022, the Company granted approximately 55,000 performance-based restricted stock units (“RSUs”),
all of which were forfeited during 2022, as the applicable performance goals were not met. The Company did no
The
Company recognizes the fair value of RSUs as expense on a straight-line basis over the requisite service period. For performance-based RSUs, the Company begins recognizing the expense once the achievement of the related performance goal is
determined to be probable.
Outstanding
RSUs are settled in an equal number of shares of common stock on the vesting date of the award. An RSU award is settled only to the extent vested. Vesting generally requires the continued employment or service by the award recipient through the
respective vesting date. Because RSUs are settled in an equal number of shares of common stock without any offsetting payment by the recipient, the measurement of cost is based on the quoted market price of the stock at the measurement date,
which is the grant date.
In lieu of paying cash to satisfy withholding taxes due upon the settlement of vested RSUs, at the Company’s discretion, an
employee may elect to have shares of common stock withheld that would otherwise be issued at settlement, the value of which is equal to the amount of withholding taxes payable. During each of the nine months ended September 30, 2023 and 2022,
less than 1,000 No 1,000
RSUs outstanding.
Stock-Based Compensation Expense
For the three and nine months ended September 30, 2023 and 2022, the Company recognized stock-based compensation expense as follows (in
thousands):
|
|
Three months ended September 30,
|
Nine months ended September 30,
|
||||||||||||||
|
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
|
Research and development
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
General and administrative
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
| 13) |
WARRANTS
|
On March 9, 2022, in connection with a
private placement of equity (the “March 2022 Private Placement”), the Company issued pre-funded warrants to purchase approximately 68,000
shares of common stock (the “Pre-Funded Warrants”) and warrants to purchase approximately 343,000 shares of common stock (the
“Common Warrants”).
On July 12, 2022, the investor exercised its 68,000 Pre-Funded Warrants at an exercise price of $0.10 per share for an aggregate exercise price of approximately $7,000 , in cash. The Company reclassified approximately $0.7 million of
the fair value of the exercised warrants as of the exercise date from warrant liabilities to equity. Subsequent to the exercise, no
Pre-Funded Warrants remained outstanding.
The Common Warrants have an exercise price of $38.20 per share,
are currently exercisable, expire years from the date of issuance and are subject to customary adjustments.
The Common Warrants may not be exercised if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 4.99 %
immediately after exercise thereof, subject to increase to 9.99 % at the option of the holder.
The
Common Warrants and Pre-Funded Warrants were accounted for as liabilities under ASC 815-40, as these warrants provide for a cashless settlement provision that does not meet the requirements of the indexation guidance under ASC 815-40. These
warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the statement of operations. (See Note 7 for more information related to changes in fair value.)
The
fair values of the Common Warrants and the Pre-Funded Warrants at the issuance date totaled $12.6 million in the aggregate, which was
$0.6 million more than the subscription amount. The excess $0.6 million represents an inducement to the investor to enter into the transaction and was recorded in warrant liabilities expense in the accompanying condensed consolidated statement of
operations for the nine months ended September 30, 2022.
The
Company incurred fees of approximately $1.0 million related to the March 2022 Private Placement, which were allocated to the fair
value of the Common Warrants and the Pre-Funded Warrants and recorded in other expense, net on the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2022.
In connection with the closing of the July 2023 Financing on July 14, 2023, the Company issued the Note Warrants to purchase an aggregate of approximately 6.1 million
shares of common stock. The Note Warrants purchased by the investors contain a provision pursuant to which such Note Warrants may not be exercised 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 exercise thereof, subject to certain increases not in excess of either 9.99 % or 19.99 % at the option of such holder. (See Note 5 for more information related to the Note Warrants.)
As of September 30, 2023, the Company has the following warrants outstanding that were issued in connection with transactions discussed above as well as a private placement with other investors from November 2022:
|
|
Warrants
Outstanding (in thousands) |
Exercise
Price |
Date
Exerciseable |
Expiration
Date |
Classification
|
||||||||
| Common Warrants | $ |
Liability |
|||||||||||
| November 2022 Warrants |
$ |
Equity |
|||||||||||
| Note Warrants |
$ |
Equity | |||||||||||
As
of September 30, 2023, the weighted average remaining contractual life of the warrants outstanding was 4.72 years and the
weighted average exercise price was $4.01 .
| 14) |
NET LOSS PER SHARE
|
The
Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. The Company’s Convertible Notes contractually entitle the holders of
such notes to participate in dividends but does not contractually require the holders to participate in the Company’s losses. As such, the two-class method is not applicable during periods with a net loss.
Basic net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration for
potentially dilutive securities. Diluted net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding plus dilutive securities. Shares of common
stock issuable upon exercise, conversion or vesting of stock options, RSUs, warrants and the outstanding Series A convertible preferred stock are considered potential shares of common stock and are included in the calculation of diluted net
loss per share using the treasury method when their effect is dilutive. The Company’s Convertible Notes outstanding are also considered potential shares of common stock and are included in the calculation of diluted net loss per share using the
“if-converted” method, and the more dilutive of either the two-class method or the if-converted method is reported. Diluted net loss per share is the same as basic net loss per share for periods in which the effect of potentially dilutive
shares of common stock is antidilutive.
The
following table presents the amount of warrants, stock options, convertible preferred stock, Convertible Notes and RSUs that were excluded from the computation of diluted net loss per share of common stock for the three and nine months ended
September 30, 2023 and 2022, as their effect was anti-dilutive (in thousands):
|
Three and Nine months ended September 30,
|
||||||||
|
2023
|
2022
|
|||||||
|
Warrants
|
||||||||
|
Convertible Notes converted into common stock
|
||||||||
|
Stock options
|
|
|
||||||
|
Preferred stock converted into common stock
|
|
|
||||||
|
RSUs
|
||||||||
|
Total potential shares of common stock excluded from computation
|
|
|
||||||
| 15) |
STANDBY EQUITY PURCHASE AGREEMENT
|
On
April 5, 2023, the Company entered into the SEPA with Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $10.0
million of the Company’s common stock, subject to the terms and conditions contained in the appliable agreements. Such sales of common stock by the Company, if any, are subject to certain limitations set forth in the SEPA, and may occur from time
to time, at the Company’s sole discretion, over a period of up to 24-months , commencing April 25, 2025, which was the date on which
each of the conditions to the Lincoln Park’s purchase obligations set forth in the purchase agreement were initially satisfied. In consideration of Lincoln Park’s entry into the SEPA, the Company issued to Lincoln Park approximately 74,000 shares of common stock (the “Commitment Shares”). The value of the Commitment Shares was recorded as a period expense and included in other
expense, net, in the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2023.
The
Company evaluated the contract that includes the right to require Lincoln Park to purchase shares of common stock in the future (“put right”) considering the guidance in ASC 815-40, Derivatives and Hedging — Contracts on an Entity’s Own
Equity and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company has analyzed the terms of the freestanding put right and has concluded that it
has an immaterial value as of September 30, 2023.
During
the nine months ended September 30, 2023, the Company had issued and sold 214,000 shares of common stock under the SEPA, including the 74,000
Commitment Shares, for gross proceeds of approximately $0.3 million. There were no shares sold under the SEPA during the three months ended September 30, 2023. As of September 30, 2023, there were approximately 2,860,000 shares remaining to be sold under the SEPA.
In
connection with entry into the SEPA, the Company terminated its prior purchase agreements with Lincoln Park entered into during 2021.
| 16) |
RECENT ACCOUNTING PRONOUNCEMENTS
|
There have been no recent Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (the “FASB”) that would apply to the Company since the ASUs disclosed in the 2022 10-K except for the following:
In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements – Codification Amendment in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU modified the disclosure and presentation requirements of a variety of
codification topics by aligning them with the SEC’s regulations. The amendments to the various topics should be applied prospectively, and the effective date will be determined for each individual disclosure based on the effective date of
the SEC’s removal of the related disclosure. If the SEC has not removed the applicable requirements from Regulation S-X or Regulation S-K by June 30, 2027, then this ASU will not become effective. Early adoption is prohibited. The
Company does not expect the amendments in this ASU to have a material impact on the Company’s consolidated financial statements.
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
You should read this discussion together with the unaudited interim condensed consolidated financial statements, related notes, and other financial information included elsewhere in this Quarterly
Report on Form 10-Q together with our audited consolidated financial statements, related notes, and other information contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 20, 2023 (the
“2022 10-K”). The following discussion contains or is based on assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors,” in Part I, Item 1A of the
2022 10-K and as described from time to time in our other filings with the SEC. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
We are a life science company committed to realizing the potential of mRNA cell engineering to provide patients with transformational new medicines. We have in-licensed a portfolio of over 100
patents covering key mRNA cell engineering technologies, including technologies for mRNA cell reprogramming, mRNA gene editing, the NoveSliceTM and UltraSliceTM gene-editing proteins, and the ToRNAdoTM mRNA delivery system, which we collectively
refer to as our “mRNA technology platform.” We plan to develop and advance a pipeline of therapeutic products, both internally and through strategic partnerships, with the near-term focus on deploying our mRNA technology platform through strategic
partnerships. We license our mRNA technology platform from Factor Bioscience Limited (“Factor Limited”) under the Exclusive Factor License Agreement (as defined below).
Through strategic partnerships, we expect that our mRNA technology platform will be used for preclinical and eventual clinical development of product candidates for a variety of clinical indications.
We expect that the initial product candidates developed by our strategic partners utilizing our mRNA technology platform will include hypoimmune induced pluripotent stem cell (“iPSC”)-derived product candidates for the treatment of neurological
indications and iPSC-derived immune-modulating cells (“iIMCs”) for indications such as acute myeloid leukemia (“AML”) and solid tumors.
We refer to aspects of our mRNA technology platform as “mRNA delivery,” “mRNA gene editing” and “mRNA cell reprogramming.”
mRNA Delivery
Nucleic acids, such as mRNA, can be used to induce cells to express desired proteins, including proteins that are capable of re-writing genetic and epigenetic cellular programs. However, the plasma
membrane surrounding cells normally protects cells from exogenous nucleic acids, preventing efficient uptake and protein translation. Delivery systems can be used to enhance the uptake of nucleic acids by cells. Conventional delivery systems, such
as lipid nanoparticle (“LNP”)-based delivery, often suffer from endosomal entrapment and toxicity, which can limit their therapeutic use. Our mRNA delivery technology is designed to use a novel chemical substance that is designed to deliver nucleic
acids, including mRNA, to cells both ex vivo and in vivo. Our nucleic acid delivery technology is also designed for ex vivo
delivery of mRNA encoding gene-editing proteins and reprogramming factors, including to primary cells, insertion of exogenous sequences into genomic safe-harbor loci, and in vivo delivery of mRNA to the
brain, eye, skin, and lung, which may be useful for the development of mRNA-based therapeutics.
mRNA Gene Editing
Our mRNA gene-editing technology is designed to delete, insert, and repair DNA sequences in living cells, which may be useful for correcting disease-causing mutations, making cells resistant to
infection and degenerative disease, modulating the expression of immunoregulatory proteins to enable the generation of durable allogeneic cell therapies, and engineering immune cells to more effectively fight cancer.
Conventional gene-editing technologies typically employ plasmids or viruses to express gene-editing proteins, which can result in low-efficiency editing and unwanted mutagenesis when an exogenous
nucleic acid fragment is inserted at random locations in the genome. Our mRNA gene-editing technology is instead designed to employ mRNA to express gene-editing proteins, which can potentially enable gene editing without unwanted insertional
mutagenesis, because unlike conventional gene-editing technologies that employ viruses or DNA-based vectors, mRNA does not typically cause unwanted insertional mutagenesis. We believe the efficiency of our mRNA gene-editing technology has the
potential to support development of product candidates that could create new therapeutic approaches. For example, we anticipate that our mRNA gene-editing technology can be used to generate allogeneic chimeric antigen receptor T-cell (“CAR-T”)
therapies for the treatment of cancer. In such allogeneic CAR-T therapies, mRNA encoding gene-editing proteins would be used to inactivate the endogenous T-cell receptor to prevent therapeutic T-cells from causing graft-versus-host disease (“GvHD”).
GvHD occurs when transplanted cells view the patient’s (i.e. the host’s) cells as a threat and attack the host’s cells. We expect that this same mechanism of action can generate allogeneic stem cell-derived therapies in which mRNA encoding
gene-editing proteins could be used to inactivate one or more components of the human leukocyte antigen complex to render the cells immuno-nonreactive or “stealth,” which may be useful for the development of allogeneic cell-based therapies.
mRNA Cell Reprogramming
Our mRNA cell-reprogramming technology can generate clonal lines of pluripotent stem cells that can be expanded and differentiated into many desired cell types that may be useful for the development
of regenerative cell therapies.
Conventional cell-reprogramming technologies (e.g., using Sendai virus or episomal vectors) can result in low efficiency reprogramming, can select for cells with abnormal growth characteristics, and
can leave traces of the vector in reprogrammed cells. Our mRNA cell-reprogramming technology instead is designed to employ mRNA to express reprogramming factors, which can enable cell reprogramming without
leaving traces of the vector in reprogrammed cells, because unlike conventional cell-reprogramming technologies that employ viruses or DNA-based vectors, mRNA does not typically leave traces of the vector in reprogrammed cells.
Recent Developments
Private Placement of Convertible Notes and Warrants
On July 13, 2023, we entered into a purchase agreement with certain purchasers for the private placement of $8.7 million in aggregate principal amount of convertible notes (the “Convertible Notes”)
and the issuance of the warrants (the “Note Warrants” and together with the Convertible Notes, the “July 2023 Financing”) to purchase an aggregate of approximately 6.1 million shares of Common Stock. The July 2023 Financing closed on July 14, 2023
(the “Closing Date”), and we are using the net proceeds from the transaction for general working capital purposes.
The Convertible Notes bear interest at 6% per annum, payable quarterly in arrears. At our election, we may pay interest either in cash or in-kind by increasing the outstanding principal amount of
the Convertible Notes. The Convertible Notes mature on July 14, 2028, unless earlier converted or repurchased. We may not redeem the Convertible Notes at our option 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 common stock at an initial conversion rate of $2.86 per share, subject to
customary adjustments for stock splits, stock dividends, recapitalization and the like.
The Convertible Notes do not contain any ratchet or other financial antidilution provisions. The Convertible Notes purchased by the Purchasers contain conversion limitations, providing 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 (subject in certain cases to customary grace and cure periods), which include, among others, the following: nonpayment of principal or
interest; breach of covenants or other agreements in the Convertible Notes; the occurrence of a material adverse effect event and certain events of bankruptcy. Generally, if an event of default occurs and is continuing under the Convertible Notes,
the holder thereof may require us to repurchase some or all of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes being repurchased, plus accrued and unpaid interest thereon.
The Note Warrants are immediately exercisable, have an exercise price of $2.61 per share, expire five years following the Closing Date and are subject to customary adjustments. The Note Warrants
purchased by the Purchasers contain a provision pursuant to which such Note Warrants may not be exercised 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 exercise thereof, subject to certain increases not in excess of either 9.99% or 19.99% at the option of such holder.
Basis of Presentation
Revenues
We are a pre-clinical stage company and have had no revenues from product sales to date. We will not have revenues from product sales until such time as we receive regulatory approval of our product
candidates and successfully commercialize our products.
In February 2023, we entered into an exclusive option and license agreement (the “Agreement” with Lineage
Cell Therapeutics, Inc. (“Lineage”), which provided Lineage with the option (the “Option Right”) to obtain an exclusive sublicense to certain related technology for preclinical, clinical and commercial purposes, which would permit Lineage to further
sublicense such intellectual property, subject to payment of certain sublicense royalty fees. Lineage paid us a $0.3 million non-refundable up-front payment (the “Option Fee”) for the Option Right.
Under the Agreement, Lineage could also request that we develop for, and deliver to, Lineage certain induced
pluripotent stem cell lines, which Lineage would use to evaluate the possible development of cell transplant therapies for treatment of diseases of the central nervous system in humans, excluding certain indications. Lineage had until August 22,
2023 to request that we develop the customized cell line, at which point, we would be entitled to certain cell line customization fees.
Upon Lineage’s request for us to develop the customized cell line, Lineage would then have six months from
delivery to Lineage of such induced pluripotent stem cell lines to exercise the Option Right and obtain the sublicense. If Lineage obtains the sublicense, we would be entitled to receive additional license fees, including milestone payments and
royalties.
On August 21, 2023, we entered into an
amendment of the Agreement with Lineage, which provided 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.
Also on August 21, 2023, Lineage requested that we begin developing certain induced pluripotent stem cell
lines in exchange for a cell line customization fee. This agreement could also include additional licensing revenues at Lineage’s discretion. There can be no assurances that we will recognize such additional revenues or that we will enter into other
agreements with customers in the future. For additional information, see Note 5 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
License Costs
We recognize certain license costs payable to Factor Limited under the Exclusive Factor License Agreement in connection with contracts with customers.
Research and Development Expenses
We expense our research and development costs as incurred. Our research and development expenses consist of costs incurred for company-sponsored research and development activities, as well as
support for selected investigator-sponsored research. Upfront payments and milestone payments we make for the in-licensing of technology are expensed as research and development in the period in which they are incurred if the technology is not
expected to have any alternative future uses other than the specific research and development project for which it was intended. In-process research and development (“IPR&D”) that we acquire and which has no alternative future uses and,
therefore, no separate economic values, is expensed to research and development costs at the time the costs are incurred.
The major components of research and development costs have included preclinical study costs, clinical manufacturing costs, clinical study and trial expenses, insurance coverage for clinical trials,
expensed licensed technology, consulting, scientific advisors and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials and allocations of various overhead costs related to our product
development efforts.
We have contracted with third parties to perform various clinical study and trial activities in the development and testing of potential products. The
financial terms of these agreements vary from contract to contract and may result in uneven payment flows. We accrue for third party expenses based on estimates of the services received and efforts expended during the reporting period. If the actual
timing of the performance of the services or the level of effort varies from the estimate, the accrual is adjusted accordingly. The expenses for some third-party services may be recognized on a straight-line basis if the expected costs are expected
to be incurred ratably during the period. Payments under the contracts depend on factors such as the achievement of certain events or milestones, the successful enrollment of patients, the allocation of responsibilities among the parties to the
agreement, and the completion of portions of the clinical study or trial or similar conditions. Preclinical and clinical study and trial associated activities such as production and testing of clinical material require significant up-front
expenditures.
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries, benefits and other costs, including equity-based compensation, for our executive and administrative personnel, legal and other
professional fees, travel, insurance, and other corporate costs.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2023 and 2022
|
|
Three months ended September 30,
|
Nine months ended September 30,
|
||||||||||||||||||||||
|
(In thousands)
|
2023
|
2022
|
Change
|
2023
|
2022
|
Change
|
||||||||||||||||||
|
Revenue
|
$
|
51
|
$
|
-
|
$
|
-
|
$
|
51
|
$
|
-
|
$
|
-
|
||||||||||||
|
Cost of revenues
|
120
|
-
|
80
|
170
|
-
|
130
|
||||||||||||||||||
|
Gross loss
|
(69
|
)
|
-
|
(80
|
)
|
(119
|
)
|
-
|
(130
|
)
|
||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||
|
Research and development
|
1,457
|
4,963
|
(3,463
|
)
|
4,710
|
8,430
|
(3,677
|
)
|
||||||||||||||||
|
General and administrative
|
3,979
|
3,341
|
642
|
10,081
|
14,060
|
(3,975
|
)
|
|||||||||||||||||
|
Acquisition of Exacis in-process research and development
|
-
|
-
|
-
|
460
|
-
|
460
|
||||||||||||||||||
|
Impairment of in-process research and development
|
-
|
-
|
-
|
-
|
5,990
|
(5,990
|
)
|
|||||||||||||||||
|
Total operating expenses
|
5,436
|
8,304
|
(2,821
|
)
|
15,251
|
28,480
|
(13,182
|
)
|
||||||||||||||||
|
Loss from operations
|
(5,505
|
)
|
(8,304
|
)
|
2,741
|
(15,370
|
)
|
(28,480
|
)
|
13,052
|
||||||||||||||
|
|
||||||||||||||||||||||||
|
Other (expense) income, net:
|
||||||||||||||||||||||||
|
Change in fair value of warrant liabilities
|
20
|
1,024
|
(1,004
|
)
|
166
|
10,493
|
(10,327
|
)
|
||||||||||||||||
|
Change in fair value of contingent consideration
|
-
|
-
|
-
|
118
|
-
|
118
|
||||||||||||||||||
|
Loss on non-controlling investment
|
-
|
(21
|
)
|
21
|
(59
|
)
|
(932
|
)
|
873
|
|||||||||||||||
|
Other expense, net
|
(114
|
)
|
(10
|
)
|
(104
|
)
|
(369
|
)
|
(1,166
|
)
|
797
|
|||||||||||||
|
Total other (expense) income, net
|
(94
|
)
|
993
|
(1,087
|
)
|
(144
|
)
|
8,395
|
(8,539
|
)
|
||||||||||||||
|
Loss before income taxes
|
(5,599
|
)
|
(7,311
|
)
|
1,654
|
(15,514
|
)
|
(20,085
|
)
|
4,513
|
||||||||||||||
|
|
||||||||||||||||||||||||
|
Benefit (provision) for income taxes
|
8
|
(5
|
)
|
13
|
(1
|
)
|
(5
|
)
|
4
|
|||||||||||||||
|
Net loss
|
$
|
(5,591
|
)
|
$
|
(7,316
|
)
|
$
|
1,667
|
$
|
(15,515
|
)
|
$
|
(20,090
|
)
|
$
|
4,517
|
||||||||
Revenue
During the three and nine months ended September 30, 2023, we recognized revenue related to the cell line customization activities that we are performing for Lineage. The agreement with Lineage was
not in place during the three and nine months ended September 30, 2022.
Cost of Revenue
During the three and nine months ended September 30, 2023, our cost of revenues include direct labor and materials to perform the customization cell line activities, as well as royalty expense owed
to Factor Limited in accordance with the Exclusive Factor License Agreement. There were no comparable expenses for the three and nine months ended September 30, 2022.
Research and Development Expenses
|
|
Three months ended September 30,
|
|||||||||||
|
|
2023
|
2022
|
Change
|
|||||||||
|
(in thousands)
|
||||||||||||
|
MSA expense
|
$
|
813
|
$
|
3,699
|
$
|
(2,886
|
)
|
|||||
|
Payroll-related
|
134
|
735
|
(601
|
)
|
||||||||
|
Stock-based compensation
|
57
|
183
|
(126
|
)
|
||||||||
|
Professional fees
|
295
|
57
|
238
|
|||||||||
|
Other expenses, net
|
158
|
289
|
(131
|
)
|
||||||||
|
Total research and development expenses
|
$
|
1,457
|
$
|
4,963
|
$
|
(3,506
|
)
|
|||||
|
|
Nine months ended September 30,
|
|||||||||||
|
|
2023
|
2022
|
Change
|
|||||||||
|
(in thousands)
|
||||||||||||
|
Payroll-related
|
$
|
504
|
$
|
2,337
|
$
|
(1,833
|
)
|
|||||
|
MSA expense
|
2,438
|
3,699
|
(1,261
|
)
|
||||||||
|
Stock-based compensation
|
177
|
1,075
|
(898
|
)
|
||||||||
|
Professional fees
|
825
|
177
|
648
|
|||||||||
|
Other expenses, net
|
766
|
1,142
|
(376
|
)
|
||||||||
|
Total research and development expenses
|
$
|
4,710
|
$
|
8,430
|
$
|
(3,720
|
)
|
|||||
Total research and development expenses decreased by approximately $3.5 million and $3.7 million for the three and nine months ended September 30, 2023, respectively, when compared to the three and
nine months ended September 30, 2022. The decrease was primarily related to a reduction in the MSA fees paid to Factor Bioscience, as the three and nine months ended September 30, 2022 included $3.5 million of expense allocated to the license, which
has no alternative future use. The research and development expenses incurred during the three and nine months ended September 30, 2023 also include a reduction in payroll expense and stock-based compensation expense due to employee terminations,
offset by an increase in professional fees related to consulting activities when compared to the three and nine months ended September 30, 2022.
General and Administrative Expenses
|
|
Three months ended September 30,
|
|||||||||||
|
|
2023
|
2022
|
Change
|
|||||||||
|
(in thousands)
|
||||||||||||
|
Occupancy expense
|
$
|
1,563
|
$
|
189
|
$
|
1,374
|
||||||
|
Professional fees
|
1,656
|
1,628
|
28
|
|||||||||
|
Insurance
|
209
|
528
|
(319
|
)
|
||||||||
|
Stock-based compensation
|
117
|
293
|
(176
|
)
|
||||||||
|
Payroll-related
|
254
|
424
|
(170
|
)
|
||||||||
|
Other expenses, net
|
180
|
279
|
(99
|
)
|
||||||||
|
Total general and administrative expenses
|
$
|
3,979
|
$
|
3,341
|
$
|
638
|
||||||
|
|
Nine months ended September 30,
|
|||||||||||
|
|
2023
|
2022
|
Change
|
|||||||||
|
(in thousands)
|
||||||||||||
|
Payroll-related
|
$
|
1,312
|
$
|
2,706
|
$
|
(1,394
|
)
|
|||||
|
Professional fees
|
4,904
|
6,251
|
(1,347
|
)
|
||||||||
|
Impairment of ROU asset
|
-
|
772
|
(772
|
)
|
||||||||
|
Stock-based compensation
|
900
|
1,463
|
(563
|
)
|
||||||||
|
Insurance
|
936
|
1,422
|
(486
|
)
|
||||||||
|
Loss on disposal of fixed assets
|
1
|
431
|
(430
|
)
|
||||||||
|
Occupancy expense
|
1,606
|
541
|
1,065
|
|||||||||
|
Other expenses, net
|
422
|
474
|
(52
|
)
|
||||||||
|
Total general and administrative expenses
|
$
|
10,081
|
$
|
14,060
|
$
|
(3,979
|
)
|
|||||
Our general and administrative expenses increased by approximately $0.6 million for the three ended September 30, 2023 when compared to the three months ended September 30, 2022 primarily due to
increased occupancy expense related to the Somerville sublease that began being incurred during the three months ended September 30, 2023, offset by decreases in payroll expenses and stock-based compensation expense resulting from lower headcount and
decreases in insurance premiums.
Our general and administrative expenses decreased by approximately $4.0 million for the nine months ended September 30, 2023 when compared to the nine months ended September 30, 2022 due to decreases
in payroll expenses and stock-based compensation expense resulting from lower headcount, a non-recurring impairment expense recognized during the nine months ended September 30, 2022 related to the ROU asset for our former San Diego facility lease,
decreased professional fees resulting from less legal and consulting fees and a reduction in the loss on disposal of fixed assets. These decreases were offset by increased occupancy expenses related to the Somerville sublease.
Acquisition of Exacis In-Process Research and Development
As discussed in Note 3 to the unaudited accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, we acquired
from Exacis Biotherapeutics Inc. (“Exacis”) substantially all of Exacis’ intellectual property 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 Purchased License was determined to be an IPR&D asset that has no alternative future use and no separate economic value from its original intended purpose, which is expensed in the period the cost is incurred. As a
result, we expensed the fair value of the Purchased License during the nine months ended September 30, 2023 of approximately $0.5 million.
Impairment of In-Process Research and Development
During the nine months ended September 30, 2022, we received the results from the INSPIRE phase 2 trial of IRX-2. The IRX-2 multi-cytokine biologic immunotherapy represents substantially all the fair
value assigned to the technologies of IRX that we acquired in 2018. Despite outcomes that favored IRX-2 in certain predefined subgroups, the INSPIRE trial did not meet the primary endpoint of event-free survival at two years of follow up. Significant
additional clinical development work would be required to advance IRX-2 in the form of additional Phase 2 and 3 studies to further evaluate the treatment effect of IRX-2 in patient subgroups and in combination with checkpoint inhibitor therapies.
Based on the totality of available information, we determined we would not further develop the IRX-2 product candidate and that the carrying value of the IPR&D asset was impaired. Accordingly, we recognized a non-cash impairment charge of
approximately $6.0 million during the nine months ended September 30, 2022, which reduced the value of this asset to zero.
Change in Fair Value of Warrant Liabilities
For the three and nine months ended September 30, 2023 and 2022, we recognized credits to expense related to the change in the fair value of warrant liabilities due to a decrease in the market price
of our common stock.
Change in Fair Value of Contingent Consideration
On the closing date of the Exacis Acquisition, we recognized a contingent consideration liability of $0.2 million for future payments that may be payable to Exacis, which was included as part of the
$0.5 million fair value of the Purchased License asset and expensed as IPR&D for the nine months ended September 30, 2023. This contingent consideration liability is remeasured at each period end, and any change in the fair value of the
contingent liability is recognized in the statement of operations. As of September 30, 2023, we determined that the change in fair value for the contingent consideration liability from the June 30, 2023 remeasurement was immaterial, and therefore,
we did not recognize a credit or expense for the three months ended September 30, 2023. For the nine months ended September 30, 2023, we recognized expense related to the decrease in the fair value of the contingent consideration liability from the
closing date. There were no contingent consideration liabilities during the same periods in 2022.
Loss on Non-Controlling Investment
We account for our 25% non-controlling investment in NoveCite, Inc. (“NoveCite”) under the equity method. We have not guaranteed any obligations of NoveCite, nor are we otherwise committed to
providing further financial support for NoveCite. Therefore, we only record 25% of NoveCite’s losses up to our investment carrying amount. As a result, we did not recognize additional losses related to NoveCite for the three months ended September
30, 2023. For the nine months ended September 30, 2023, we recognized approximately $0.1 million of loss and for the three and nine months ended September 30, 2022, we recognized losses of approximately $21,000 and $0.9 million, respectively.
Other Expense, Net
|
|
Three months ended September 30,
|
|||||||||||
|
|
2023
|
2022
|
Change
|
|||||||||
|
(in thousands)
|
||||||||||||
|
Interest expense, net
|
(114
|
)
|
(10
|
)
|
(104
|
)
|
||||||
|
Total other expense, net
|
$
|
(114
|
)
|
$
|
(10
|
)
|
$
|
(104
|
)
|
|||
|
|
Nine months ended September 30,
|
|||||||||||
|
|
2023
|
2022
|
Change
|
|||||||||
|
(in thousands)
|
||||||||||||
|
PIPE transaction fees
|
$
|
-
|
$
|
(1,007
|
)
|
$
|
1,007
|
|||||
|
Liquidated damages
|
-
|
(240
|
)
|
240
|
||||||||
|
SEPA fees
|
(280
|
)
|
-
|
(280
|
)
|
|||||||
|
Interest expense, net
|
(88
|
)
|
(24
|
)
|
(64
|
)
|
||||||
|
Other income, net
|
(1
|
)
|
105
|
(106
|
)
|
|||||||
|
Total other expense, net
|
$
|
(369
|
)
|
$
|
(1,166
|
)
|
$
|
797
|
||||
For the three months ended September 30, 2023, total other expense, net increased in expense by $0.1 million as a result of an increase in interest expense related to our Convertible Notes payable,
which was offset by increased interest income on our cash balances when compared to the three months ended September 30, 2022.
For the nine months ended September 30, 2023, we recognized approximately $0.3 million related to a stand-by equity purchase agreement (the “SEPA”) with Lincoln Park Capital Fund LLC (“Lincoln Park”)
for the commitment fees and other fees. We also recognized interest expense related to the Convertible Notes, which was offset by interest income on our cash. For the nine months ended September 30, 2022, we expensed fees associated with the March
2022 Private Placement, as all of the fees incurred were allocated to the warrants issued in connection with such transaction, and we accrued for a loss for the estimated liquidated damages we incurred as a result of not timely filing with the SEC
our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022.
Provision for Income Taxes
During 2023, we expect to incur state income tax liabilities related to our operations. We have established a full valuation allowance for all deferred tax assets, including our net operating loss
carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets. The effective tax rate differs from the statutory tax rate due primarily to our full valuation allowance.
Liquidity and Capital Resources
At September 30, 2023, we had cash, cash equivalents and restricted cash of approximately $8.6 million, of which approximately $4.6 million was restricted cash, as discussed below.
In October 2022, we entered into a facility sublease agreement (the “Sublease”) for approximately 45,500 square feet of office and laboratory space in Somerville, Massachusetts. The term of the
Sublease is approximately 10 years, and we will pay approximately $63.0 million in base rental payments over the 10-year term, plus our share of the Sublessor’s parking spaces and operating expenses. As part of the Sublease, we delivered a security
deposit in the form of a letter of credit in the amount of $4.1 million, which will be reduced on an incremental basis throughout the term of the lease. The letter of credit was issued by our commercial bank, which required that we cash
collateralize the letter of credit with $4.1 million of cash deposited in a restricted account maintained by such bank. The amount of required restricted cash collateral will decline in parallel with the reduction in the amount of the letter of
credit over the term of the sublease.
In February 2023, we entered into the Lineage Agreement, pursuant to which we received a $0.3 million upfront, nonrefundable payment for an option right to obtain a sublicense of intellectual
property from Factor Limited under the Exclusive Factor License Agreement. As provided for in such agreement, in August 2023, Lineage requested that we develop certain customized cell line activities, and as a result, the Company received $0.4
million in an upfront, nonrefundable progress payment for the development activities. If Lineage exercises its right to obtain the sublicense, then the Company is entitled to receive a license fee, milestone payments, royalties, and sublicense fees.
In April 2023, we entered into the SEPA, pursuant to which Lincoln Park committed to purchase up to $10.0 million of our common stock. Such sales of common stock by us, if any,
are subject to certain conditions and limitations set forth in the SEPA, and may occur from time to time, at our sole discretion, over a period of up to 24 months, commencing April 25, 2025, which was the date on which each of the conditions to the
Lincoln Park’s purchase obligations set forth in the SEPA were initially satisfied. To date, we have issued and sold approximately 214,000 shares of our common stock to Lincoln Park, including the 74,000 commitment shares, and have received
approximately $0.3 million in gross proceeds from such sales.
Under applicable Nasdaq listing rules, the aggregate number of shares of common stock that we had been able to issue to Lincoln Park under the SEPA could not exceed 19.99% of our
shares of common stock issued and outstanding immediately prior to the execution of the SEPA (the “Exchange Cap”) unless certain conditions were met, including obtaining stockholder approval to issue shares of common stock in excess of the Exchange
Cap in accordance with applicable Nasdaq listing rules. On June 16, 2023, at the Company’s 2023 Annual Meeting of Stockholders, the Company’s stockholders approved, for purposes of complying with applicable Nasdaq listing rules, the Company’s
potential issuance of shares of common stock under the SEPA in excess of the Exchange Cap. As a result, the Exchange Cap limitation no longer applies to issuances and sales of common stock by us to Lincoln Park under the SEPA. However, we may not
direct Lincoln Park to purchase any shares of common stock under the SEPA if such purchase would result in Lincoln Park beneficially owning more than 4.99% of our issued and outstanding shares of common stock.
On July 14, 2023, we closed the July 2023 Financing of $8.7 million in aggregate principal amount of Convertible Notes and the issuance of the Note Warrants. We intend to use the net proceeds from
the July 2023 Financing for general working capital purposes.
The Convertible Notes bear interest at 6% per annum, payable quarterly in arrears. At our election, we may pay interest either in cash or in-kind by increasing the outstanding principal amount of
the Convertible Notes. The Convertible Notes mature on July 14, 2028, unless earlier converted or repurchased. We may not redeem the Convertible Notes at our option 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 common stock at an initial conversion rate of $2.86 per share, subject to
customary adjustments for stock splits, stock dividends, recapitalization and the like. As of September 30, 2023, no portion of the Convertible Notes have been converted to our common stock.
We have to date incurred operating losses, and we expect these losses to continue in the future as we further develop our product development programs and operate as a publicly
traded company. In the near-term, we intend to focus on licensing opportunities for our in-licensed technology, but there can be no assurance that we will enter into agreements with respect to such opportunities on such terms and within a timeframe
necessary to satisfy our need for working capital. While we are not presently pursuing product development, we may do so in the future, and current and potential licensing partners may seek to do so. Developing product candidates, conducting
clinical trials and commercializing products are expensive, and we would need to raise substantial additional funds if we were to pursue the development of one or more product candidates Based on our current financial condition and forecasts of
available cash, we do not believe that we have sufficient funds to fund our operations for the next twelve months from the filing of the financial statements contained in this Quarterly Report on Form 10-Q for the three and nine months ended
September 30, 2023. We can provide no assurance that we will be able to satisfy our near- or long-term cash needs through licensing transactions, or that we will obtain any additional financing that we require in the future or, even if such financing
is available, that it will be obtainable on terms acceptable to us. These conditions raise substantial doubt about our ability to continue as a going concern.
In that regard, our future funding requirements will depend on many factors, including:
| • |
the terms and timing of any collaborative, licensing and other agreements that we may establish;
|
| • |
the cost of filing and potentially prosecuting, defending and enforcing any patent claims and other intellectual property rights;
|
| • |
the cost and timing of regulatory approvals;
|
| • |
the cost and delays in product development as a result of any changes in regulatory oversight applicable to our products;
|
| • |
the cost and timing of establishing sales, marketing and distribution capabilities;
|
| • |
the effect of competition and market developments;
|
| • |
the scope, rate of progress and cost of clinical trials and other product development activities; and
|
| • |
future clinical trial results.
|
We plan to raise additional funds to support our product development activities and working capital requirements through public or private equity offerings, debt financings, strategic partnerships,
out-license collaborations or other means. Any sale by us of additional equity or convertible debt securities could result in dilution to our stockholders. There can be no assurance that any such required additional funding will be available to us at
all or available on terms acceptable to us.
Further, to the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our technologies or grant sublicenses on terms that are not
favorable to us. If we are not able to secure additional funding when needed, we may have to delay the commercialization of our products or reduce the scope of or eliminate one or more research and development programs, either of which could have an
adverse effect on our business.
Cash Flows
Cash flows from operating, investing and financing activities, as reflected in the accompanying condensed consolidated statements of cash flows, are summarized as follows:
|
|
For the nine months ended
September 30, |
|||||||||||
|
(in thousands)
|
2023
|
2022
|
Change
|
|||||||||
|
Cash (used in) provided by:
|
||||||||||||
|
Operating activities
|
$
|
(15,747
|
)
|
$
|
(15,541
|
)
|
$
|
(206
|
)
|
|||
|
Investing activities
|
-
|
(176
|
)
|
176
|
||||||||
|
Financing activities
|
8,852
|
11,986
|
(3,134
|
)
|
||||||||
|
Net decrease in cash and cash equivalents
|
$
|
(6,895
|
)
|
$
|
(3,731
|
)
|
$
|
(3,164
|
)
|
|||
Net Cash Used in Operating Activities
The increase of approximately $0.2 million in cash used in operating activities for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, was primarily
due to an increase in cash used in operating assets and liabilities of $6.5 million, primarily related to MSA fees, insurance premiums and accrued severance payments. This $6.5 million increase in cash used in operating activities for the nine
months ended September 30, 2023, as compared to the nine months ended September 30, 2022, was offset by a decrease in net loss of approximately $6.3 million, after giving effect to adjustments made for non-cash transactions.
Net Cash Used in Investing Activities
The decrease of $0.2 million in cash used in investing activities during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, was primarily related to a
decrease in the purchase of capitalized equipment as well as a decrease in the sale of fixed assets.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2023 includes approximately $8.5 million in net proceeds from the July 2023 Financing that closed in July 2023 and
proceeds of approximately $0.3 million received under the SEPA with Lincoln Park. For the nine months ended September 30, 2022, net cash provided by financing activities included approximately $12.0 million related to proceeds received in connection
with the March 2022 Private Placement.
Critical Accounting Estimates
There were no significant changes in our critical accounting estimates during the three and nine months ended September 30, 2023 from those described in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” section of the 2022 10-K, except as follows.
Contingent Consideration
Contingent consideration from an asset acquisition that is indexed to or settled in shares of our common stock and that is classified as a liability is initially measured at fair value, with
subsequent changes in fair value recognized in earnings. Measuring the fair value requires various inputs, and a significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair
value of the contingent consideration liability, which could also result in material non-cash gains or losses being reported in the Company’s consolidated statement of operations.
Recent Accounting Pronouncements
There have been no recent Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board that would apply to us since the ASUs
disclosed in the 2022 10-K except for the following:
In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements – Codification Amendment in Response to the SEC’s
Disclosure Update and Simplification Initiative. This ASU modified the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations. The amendments to the various topics should
be applied prospectively, and the effective date will be determined for each individual disclosure based on the effective date of the SEC’s removal of the related disclosure. If the SEC has not removed the applicable requirements from Regulation S-X
or Regulation S-K by June 30, 2027, then this ASU will not become effective. Early adoption is prohibited. We do not expect the amendments in this ASU to have a material impact on our consolidated financial statements.
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk.
|
Under the rules and regulations of the SEC, as a smaller reporting company we are not required to provide the information otherwise required by this item.
| Item 4. |
Controls and Procedures.
|
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, designed to ensure that information required to be disclosed in our
reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our
principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and we were required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as of the end of the period covered by this
Quarterly Report on Form 10-Q under the supervision, and with the participation, of our management, including our Chief Executive Officer and President (who serves as our principal executive officer) and our Vice President of Finance (who serves as
our principal financial officer) of the effectiveness of the design and operation of our disclosure controls and procedures.
Based on that evaluation, our Chief Executive Officer and Vice President of Finance concluded that our disclosure controls and procedures were not effective as of the end of the period covered by
this Quarterly Report on Form 10-Q in providing reasonable assurance of achieving the desired control objectives due primarily to the material weakness discussed below.
Management’s Plan for Remediation of Material Weakness in Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
We were unable to timely file our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 with the SEC due to identifying errors in our financial statements reported in the Annual
Report on Form 10-K for the years ended December 31, 2021 and 2020 during our preparation of the financial statements for the quarter ended March 31, 2022. Management concluded that the errors were the result of accounting personnel’s lack of
technical proficiency in complex matters. We filed an amendment to our Annual Report on Form 10-K/A for the years ended December 31, 2021 and 2020 on June 30, 2022 to correct the errors in our financial statements for the years ended December 31,
2021 and 2020 and for the quarters ended June 30, 2020, September 30, 2020, March 31, 2021, June 30, 2021 and September 30, 2021.
Management is implementing measures designed to ensure that the deficiencies contributing to the ineffectiveness of our internal control over financial reporting are promptly remediated, such that
the internal controls are designed, implemented and operating effectively. The remediation actions include:
| • |
enhancing the business process controls related to reviews over technical, complex, and non-recurring transactions;
|
| • |
providing additional training to accounting personnel; and
|
| • |
consulting with an accounting advisor for technical, complex and non-recurring matters, with whom we have engaged and begun consulting.
|
The material weakness cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls
are operating effectively.
We are committed to developing a strong internal control environment, and we believe the remediation efforts that we have implemented and will implement will result in significant improvements in our
control environment. Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking
further action and implementing additional enhancements or improvements, as necessary.
Changes in Internal Control over Financial Reporting
Except for the actions intended to remediate the material weakness as described above, there was no change in our internal control over financial reporting during the most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| Item 1. |
Legal Proceedings.
|
This information is set forth under “Note 11—Commitments and Contingencies—Legal Matters” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q and is
incorporated in this Item 1 by reference.
From time to time we may become involved in legal proceedings arising in the ordinary course of business. Except as described above, we do not believe there is any litigation pending that could have,
individually or in the aggregate, a material adverse effect on our results of operations, financial condition or cash flows.
| Item 1A. |
Risk Factors.
|
During the reporting period covered by this Quarterly Report on Form 10-Q, there have been no material changes to our risk factors as set forth in the 2022
10-K, except as follows:
The terms of Convertible Notes could limit our growth and our ability to finance our operations, fund our
capital needs, respond to changing conditions and engage in other business activities that may be in our best interests.
The Convertible Notes contain a number of restrictive covenants that, among other things, generally limit the ability of the
Company and its subsidiaries to create liens, pay dividends, acquire shares of capital stock and make payments on subordinated debt, incur indebtedness, or enter into transactions with affiliates.
Our ability to comply with these covenants may be adversely affected by events beyond our control, and we cannot assure you that
we can maintain compliance with these covenants. The financial covenants could limit our ability to make needed expenditures or otherwise conduct necessary or desirable business activities.
The requirement that we redeem the Convertible Notes in cash could adversely affect our business plan,
liquidity, financial condition, and results of operations.
If not converted, we are required to redeem some or all of the principal on the Convertible Notes for cash under certain
circumstances. These obligations could have important consequences on our business. In particular, they could:
|
•
|
limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
|
|
•
|
increase our vulnerability to general adverse economic and industry conditions; and
|
|
•
|
place us at a competitive disadvantage compared to our competitors.
|
No assurances can be given that we will be successful in making the required payments to the holders of the Convertible Notes or
that we will be able to comply with the financial or other covenants contained in the Convertible Notes. If we are unable to make the required cash payments or otherwise comply with Convertible Notes:
|
•
|
the holders of the Convertible Notes may require us to repurchase some or all of their Convertible Notes at a price equal to 100% of the
principal amount being repurchased, plus accrued and unpaid interest;
|
|
•
|
the holders of the Convertible Notes could foreclose against our assets; and/or
|
|
•
|
we could be forced into bankruptcy or liquidation.
|
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds.
|
None
| Item 3. |
Defaults Upon Senior Securities.
|
None.
| Item 4. |
Mine Safety Disclosures.
|
Not Applicable.
| Item 5. |
Other Information.
|
None
| Item 6. |
Exhibits
|
|
Exhibit
|
Description
|
Incorporated By
Reference
|
|
Securities Purchase Agreement, dated as of July 13, 2023, by and among Eterna Therapeutics Inc. and the purchasers party thereto.
|
Exhibit 10.1 to Form 8-K filed on July 18, 2023
|
|
|
Registration Rights Agreement, dated as of July 13, 2023, by and among Eterna Therapeutics Inc. and the purchasers party thereto.
|
Exhibit 10.4 to Form 8-K filed on July 18, 2023
|
|
|
Form of Senior Convertible Note.
|
Exhibit 10.2 to Form 8-K filed on July 18, 2023
|
|
|
Form of Common Stock Purchase Warrant.
|
Exhibit 10.3 to Form 8-K filed on July 18, 2023
|
|
|
First Amendment to Exclusive License Agreement, dated as of July 12, 2023, by and between Eterna Therapeutics Inc. and Factor Bioscience Limited.
|
Exhibit 10.1 to Form 8-K filed on July 13, 2023
|
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
Filed herewith
|
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
Filed herewith
|
|
|
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Furnished herewith
|
|
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Furnished herewith
|
|
|
101.INS
|
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
|
Filed herewith
|
|
101.SCH
|
Inline XBRL Taxonomy Extension Schema Document
|
Filed herewith
|
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document
|
Filed herewith
|
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Linkbase Document
|
Filed herewith
|
|
101.LAB
|
Inline XBRL Taxonomy Extension Label Linkbase Document
|
Filed herewith
|
|
101.PRE
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document
|
Filed herewith
|
|
104
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
ETERNA THERAPEUTICS INC.
|
||
|
Date: November 13, 2023
|
By:
|
/s/ Matthew Angel
|
|
Matthew Angel
|
||
|
Chief Executive Officer and President
|
||
|
(Principal Executive Officer)
|
||
|
Date: November 13, 2023
|
By:
|
/s/ Sandra Gurrola
|
|
Sandra Gurrola
|
||
|
Vice President of Finance
|
||
|
(Principal Financial Officer and Principal Accounting Officer)
|
37