| 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 therapeutic.
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 instead is 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 (“HLA”) 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 is capable of generating 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
Exacis Asset Purchase
On April 26, 2023, we entered into an asset purchase agreement (the “Exacis Purchase Agreement”), together with Exacis Biotherapeutics Inc. (“Exacis”), the stockholders party thereto (the “Exacis Stockholders”) and, with respect to specified provisions therein, Factor Limited. Pursuant to the Exacis Purchase Agreement, we acquired from Exacis substantially all of Exacis’ intellectual property assets (the “Purchased 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”). We assumed none of Exacis’ liabilities, other than liabilities under the Purchased License that accrue subsequent to the Closing Date.
In consideration for the Purchased Assets, on the closing date of the transaction, we issued to Exacis an aggregate of 69,343 shares of our common stock, which shares are subject to a 12-month lockup, pursuant to which Exacis may not sell or otherwise transfer such shares. We additionally agreed to make the following contingent payments: (i) if, at any time during the three-year period commencing on such closing date and ending on the three-year anniversary of the closing date, our market capitalization equals or exceeds $100.0 million for at least ten consecutive trading days, then we will issue to Exacis a number of shares of common stock equal to (x) $2.0 million divided by (y) the quotient of $100.00 million divided by the number of our then issued and outstanding shares of common stock; (ii) if, at any time during the three-year period commencing on such closing date and ending on the three-year anniversary of the closing date, our market capitalization equals or exceeds $200.0 million for at least ten consecutive trading days, then we will issue to Exacis a number of additional shares of common stock equal to (x) $2.0 million divided by (y) the quotient of $200.00 million divided by the number of our then issued and outstanding shares of common stock; and (iii) during the five-year period commencing on the closing date and ending on the five-year anniversary of the closing date (the “Five-Year Period”), we will pay or deliver to Exacis 20% of all cash or other consideration (collectively, “License Consideration”) actually received by us during the Five-Year Period from (i) third-party licensees or sublicensees of the intellectual property rights acquired by us from Exacis pursuant to the Exacis Purchase Agreement, or (ii) subject to certain exceptions, the sale of such intellectual property rights; provided, that the License Consideration shall not in any event exceed $45.0 million.
Dr. Matthew Angel, our President and Chief Executive Officer, 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. Dr. Gregory Fiore, one of our directors, is the Chief Executive Officer and a 10% stockholder of Exacis. The Exacis Purchase Agreement and the transactions contemplated thereby were approved by the audit committee of our board of directors, as well as by all of our disinterested directors, comprising a majority of the board of directors.
Standby Securities Purchase Agreement
On April 5, 2023, we and Lincoln Park Capital Fund, LLC (the “Lincoln Park”) entered into a purchase agreement (the “ELOC Purchase Agreement”), pursuant to which we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park would be obligated to purchase, up to $10.0 million of shares of our common stock. Sales of common stock by us are subject to certain limitations, and may occur from time to time, at our sole discretion. As consideration for Lincoln Park’s commitment to purchase shares of common stock in accordance with the ELOC Purchase Agreement, we issued to Lincoln Park 73,659 shares of common stock. In connection with entry into the ELOC Purchase Agreement, we terminated our prior purchase agreements with Lincoln Park entered into during 2021.
Cell Line Customization and License Agreement
On February 21, 2023, we entered into a cell line customization and license agreement (the “Lineage Agreement”) with Lineage Cell Therapeutics, Inc. (“Lineage”), pursuant to which, prior to August 22, 2023, Lineage may 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. The Lineage Agreement also provides Lineage with the option to obtain an exclusive sublicense to certain related technology for preclinical, clinical and commercial purposes, which would permit Lineage to sublicense such intellectual property, subject to payment of certain sublicense royalty fees. Lineage has six months from our delivery to Lineage of such induced pluripotent stem cell lines to exercise such option, and upon any such exercise, Lineage would agree to use its commercially reasonable efforts to exploit and make commercially available one or more licensed products derived from such induced pluripotent stem cell lines in accordance with the Lineage Agreement. Upon entry into the Lineage Agreement, Lineage paid us a $250,000 non-refundable up-front payment. We are also entitled to certain cell line customization fees with respect to cell lines that Lineage may request that we develop for Lineage, as well as royalty payments with respect to any such licensed products, certain sublicense fees and certain milestone payments under the Lineage Agreement.
Certain Related Party Transactions
On February 20, 2023, we and Factor Limited entered into an exclusive license agreement (the “Exclusive Factor License Agreement”), which terminated and replaced in its entirety the Factor License Agreement, dated as of April 26, 2021, and amended on November 22, 2022, by and among us, Eterna Therapeutics LLC, Factor Limited and Novellus Therapeutics Limited. Subject to certain exclusive licenses or other rights granted by Factor Limited to certain third parties as of the effective date of the Exclusive Factor License Agreement, Factor granted us 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 two and a half years (such period, the “Renewal Term”) if we receive at least $100 million in fees from sublicenses to the Factor Patents (“Sublicense Fees”) granted by us pursuant to the Exclusive Factor License Agreement. Pursuant to the Exclusive Factor License Agreement, we will pay to Factor Limited 20% of any Sublicense Fee received by us before the initial expiration date of such license and 30% of any Sublicense Fees received by us during the Renewal Term. We may terminate the Exclusive Factor License Agreement upon 120 days’ written notice to Factor Limited, and both parties otherwise have additional customary termination rights, including in connection with certain uncured material breaches of the Exclusive Factor License Agreement and specified bankruptcy events. Under the Exclusive Factor License Agreement, we are obligated to pay the expenses incurred by Factor Limited in preparing, filing, prosecuting and maintaining the Factor Patents and 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.
There can be no assurance that we can successfully develop and commercialize the technology licensed under the Exclusive Factor License Agreement. See Item 1A “Risk Factors—Risks Related to our Business and Industry—We depend substantially, and expect in the future to continue to depend, on in-licensed intellectual property. Such licenses impose obligations on our business, and if we fail to comply with those obligations, we could lose license rights, which would substantially harm our business” contained in the 202210-K.
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. During the quarter ended March 31, 2023, we entered into the Lineage Agreement, which is an agreement with a customer that includes an up-front option fee recognized as deferred revenue until the applicable performance obligation has been satisfied. This agreement could also include additional licensing and cell line customization revenues at Lineages’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.
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 Months Ended March 31, 2023 and 2022
| | | Three months ended March 31, | | | | |
| | 2023 | | | 2022 | | | Change | |
| (in thousands) | | | | | | | | | |
Operating expenses: | | | | | | | | | |
License costs | | $ | 50 | | | $ | - | | | $ | 50 | |
Research and development | | | 1,674 | | | | 1,782 | | | | (108 | ) |
General and administrative | | | 3,592 | | | | 4,514 | | | | (922 | ) |
| Total operating expenses | | | 5,316 | | | | 6,296 | | | | (980 | ) |
Loss from operations | | | (5,316 | ) | | | (6,296 | ) | | | 980 | |
Other expense, net: | | | | | | | | | | | | |
Change in fair value of warrant liabilities | | | (45 | ) | | | (1,322 | ) | | | 1,277 | |
Loss on non-controlling investment | | | (51 | ) | | | (615 | ) | | | 564 | |
Other income (expense), net | | | 1 | | | | (1,142 | ) | | | 1,143 | |
| Total other expense, net | | | (95 | ) | | | (3,079 | ) | | | 2,984 | |
Loss before income taxes | | | (5,411 | ) | | | (9,375 | ) | | | 3,964 | |
Provision for income taxes | | | (5 | ) | | | - | | | | (5 | ) |
Net loss | | $ | (5,416 | ) | | $ | (9,375 | ) | | $ | 3,959 | |
License Costs
During the three months ended March 31, 2023, we recognized $50,000 of direct costs for amounts owed to Factor Limited in connection with the $250,000 of deferred revenue received from the Lineage Agreement, which represents Factor Limited’s share of such amount in accordance with the Exclusive Factor License Agreement. There was no comparable expense for the three months ended March 31, 2022.
Research and Development Expenses
| | | Three months ended March 31, | |
| | | 2023 | | | 2022 | | | Change | |
| (in thousands) | | | | | | | | | |
MSA expense | | $ | 813 | | | $ | - | | | $ | 813 | |
Payroll-related | | | 203 | | | | 962 | | | | (759 | ) |
Stock-based compensation | | | 64 | | | | 422 | | | | (358 | ) |
Other expenses, net | | | 594 | | | | 398 | | | | 196 | |
| Total research and development expenses | | $ | 1,674 | | | $ | 1,782 | | | $ | (108 | ) |
For the three months ended March 31, 2023, our total research and development expenses decreased compared to the three months ended March 31, 2022, which was primarily the result of less payroll expense and stock-based compensation expense due to employee terminations, offset by an increase in expense recognized during the three months ended March 31, 2023 related to the MSA with Factor (see Note 7 to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q), which did not exist during the three months ended March 31, 2022.
General and Administrative Expenses
| | | Three months ended March 31, | |
| | 2023 | | | 2022 | | | Change | |
| (in thousands) | | | | | | | | | |
Payroll-related | | $ | 357 | | | $ | 749 | | | $ | (392 | ) |
Stock-based compensation | | | 625 | | | | 761 | | | | (136 | ) |
Occupancy expense | | | 23 | | | | 171 | | | | (148 | ) |
Professional fees | | | 1,935 | | | | 2,071 | | | | (136 | ) |
Other expenses, net | | | 652 | | | | 762 | | | | (110 | ) |
| Total general and administrative expenses | | $ | 3,592 | | | $ | 4,514 | | | $ | (922 | ) |
Our general and administrative expenses decreased for the three months ended March 31, 2023 primarily due to decreases in payroll expenses and stock-based compensation expense resulting from lower headcount, occupancy expense due to having fewer leased offices, as well as professional fees and other miscellaneous expenses when compared to the three months ended March 31, 2022.
Change in Fair Value of Warrant Liabilities
For the three months ended March 31, 2023, we recognized an increase in the change in the fair value of warrant liabilities due to an increase in the market price of our common stock as of March 31, 2023. The $1.3 million of warrant liabilities expense recognized for the three months ended March 31, 2022 included (i) $0.6 million related to the excess fair value of the Common Warrants and Pre-Funded Warrant (each as defined in Note 4 to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q) issued in connection with the March 2022 private placement over the $12.0 million gross proceeds received and (ii) the change in the aggregate fair value of the Common Warrants and Pre-Funded Warrants of approximately $0.7 million from the March 2022 issuance date of the warrants to March 31, 2022.
Loss on Non-Controlling Investment
We account for our investment in NoveCite, Inc. (“NoveCite”) under the equity method. During the three months ended March 31, 2023 and 2022, we recognized approximately $0.1 million and $0.6 million of loss, respectively, on our 25% non-controlling investment in NoveCite. We have not guaranteed any obligations of NoveCite nor are we otherwise committed to providing further financial support for NoveCite. Therefore, we will record losses only up to our investment carrying amount.
Other Income (Expense), Net
| | | Three months ended March 31, | |
| | 2023 | | | 2022 | | | Change | |
| (in thousands) | | | | | | | | | |
Private placement transaction fees | | $ | - | | | $ | (992 | ) | | $ | 992 | |
Liquidated damages | | | - | | | | (240 | ) | | | 240 | |
Interest income (expense), net | | | 2 | | | | (1 | ) | | | 3 | |
Other | | | (1 | ) | | | 91 | | | | (92 | ) |
| Total other income (expense), net | | $ | 1 | | | $ | (1,142 | ) | | $ | 1,143 | |
For the three months ended March 31, 2022, we recognized fees associated with the private placement transaction completed in March 2022, all of which were allocated to the warrants issued in connection with the 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. There were no comparable expenses for the three months ended March 31, 2023.
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 March 31, 2023, we had cash, cash equivalents and restricted cash of approximately $9.5 million, of which approximately $4.1 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 that we license from Factor Limited under the Exclusive Factor License Agreement. This customer agreement may also provide for future payments to us if Lineage requests that we develop certain customized cell line activities or if the customer exercises its right to obtain the sublicense, which would include a license fee, milestone payments, royalties, and sublicense fees.
On April 5, 2023, we entered into the ELOC Purchase Agreement, 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 limitations set forth in the ELOC Purchase Agreement, 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 ELOC Purchase Agreement were initially satisfied (the “Commencement Date”). Pursuant to a registration rights agreement entered into in connection with the ELOC Purchase Agreement, we filed a registration statement with the SEC on April 17, 2023 to register for resale shares of common stock issuable pursuant to such purchase agreement and the shares previously issued to Lincoln Park as consideration for entry into the ELOC Purchase Agreement, and the SEC declared such registration statement effective on April 24, 2023.
From and after the Commencement Date, we may from time to time, on any business day selected by us on which the closing sale price per share of common stock as reported on The Nasdaq Capital Market is not less than the “floor price” threshold set forth in the ELOC Purchase Agreement (each such business day, a “purchase date”) direct the investment group to purchase up to 30,000 shares of common stock on such purchase date, at a purchase price per share that will be determined and fixed in accordance with the ELOC Purchase Agreement. The maximum number of shares we may sell to Lincoln Park in a regular purchase may be increased by certain amounts to up to 90,000 shares, with the applicable maximum share limit determined by whether the closing sale price per share of common stock on the applicable purchase date for such regular purchase equals or exceeds certain minimum price thresholds; however, the Lincoln Park’s maximum purchase commitment in any single regular purchase may not exceed $1,000,000. In addition, the Selling Stockholder has committed to purchase other “accelerated amounts” or “additional accelerated amounts” under certain circumstances.
Under applicable Nasdaq listing rules, the aggregate number of shares of common stock that we may issue to Lincoln Park under the ELOC Purchase Agreement cannot exceed 19.99% of our shares of common stock issued and outstanding immediately prior to the execution of the ELOC Purchase Agreement (the “Exchange Cap”), unless (i) we first obtain stockholder approval to issue shares of common stock in excess of the Exchange Cap in accordance with applicable Nasdaq listing rules, or (ii) at the time we have issued shares of common stock equal to the Exchange Cap and at all times thereafter, the average price per share of common stock for all shares of common stock sold by us to Lincoln Park under the ELOC Purchase Agreement equals or exceeds $3.35 per share (representing the lower of the official closing price of the common stock on Nasdaq on the trading day immediately preceding the date of the ELOC Purchase Agreement and the average official closing price of the common stock on Nasdaq for the five consecutive trading days ending on the trading day immediately preceding the date of the ELOC Purchase Agreement, as adjusted pursuant to applicable Nasdaq rules), such that the Exchange Cap limitation would no longer apply to issuances and sales of common stock by us to Lincoln Park pursuant to the ELOC Purchase Agreement under applicable Nasdaq listing rules.
We may not direct Lincoln Park to purchase any shares of common stock under the ELOC Purchase Agreement if such purchase would result in Lincoln Park beneficially owning more than 4.99% of our issued and outstanding shares of 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 believe we do not 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 months ended March 31, 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.
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, reduce the scope of or eliminate one or more research and development programs, 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 three months ended
March 31, | | | | |
| (in thousands) | | 2023 | | | 2022 | | | Change | |
| Cash (used in) provided by: | | | | | | | | | |
| Operating activities | | $ | (6,049 | ) | | $ | (5,432 | ) | | $ | (617 | ) |
| Investing activities | | | - | | | | (46 | ) | | | 46 | |
| Financing activities | | | - | | | | 11,993 | | | | (11,993 | ) |
| Net (decrease) increase in cash and cash equivalents | | $ | (6,049 | ) | | $ | 6,515 | | | $ | (12,564 | ) |
Net Cash Used in Operating Activities
The increase in cash used in operating activities was due to an increase in cash used in operating assets and liabilities of $1.7 million during the three months ended March 31, 2023 compared to the three months ended March 31, 2022, offset by a decrease in net loss of $1.3 million for the 2023 period, after giving effect to adjustments made for non-cash transactions. The increase in cash used in operations was primarily driven by decreased accrued compensation due to payments of severance accruals and payments of accrued costs for litigation matters.
Net Cash Used in Investing Activities
We did not use any cash for investing activities during the three months ended March 31, 2023 and made immaterial purchases of capital equipment during the three months ended March 31, 2022.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2022 related to proceeds received in connection with the private placement of equity completed in March 2022. We did not have a comparable transaction during the three months ended March 31, 2023.
Critical Accounting Estimates
There were no significant changes in our critical accounting estimates during the three months ended March 31, 2023 from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2022 10-K.
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.
| 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 Chief Financial Officer (who served as our principal financial officer through the end of the three month period ended March 31, 2023 and resigned from the Company effective May 4, 2023), of the effectiveness of the design and operation of our disclosure controls and procedures.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer 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.
PART II — OTHER INFORMATION
| Item 1. | Legal Proceedings. |
This information is set forth under “Note 9—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.
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.
| 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.
| Exhibit | Description | Incorporated By Reference |
| Exclusive License Agreement, dated February 20, 2023, by and between Factor Bioscience Limited and Eterna Therapeutics Inc. | Exhibit 10.1 to Form 8-K filed on February 22, 2023 |
| Purchase Agreement, dated as of April 5, 2023, by and between Eterna Therapeutics Inc. and Lincoln Park Capital Fund, LLC | Exhibit 10.1 to Form 8-K filed on April 11, 2023 |
| Registration Rights Agreement, dated as of April 5, 2023, by and between Eterna Therapeutics Inc. and Lincoln Park Capital Fund, LLC | Exhibit 10.1 to Form 8-K filed on April 11, 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. |
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| Date: May 11, 2023 | By: | /s/ Matthew Angel |
| | Matthew Angel |
| | Chief Executive Officer and President |
| | (on behalf of the Registrant and as Principal Executive Officer) |
