Cibus, Inc. 10-K/A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations EXECUTIVE OVERVIEW Calyxt is a plant-based synthetic biology company. The Company leverages its proprietary PlantSpring technology platform to engineer plant metabolism to produce innovative, high-value, and sustainable materials and products for use in helping customers meet their sustainability targets and financial goals. In October 2021, the Company announced the launch of a strategic initiative which focused is on engineering synthetic biology solutions through its PlantSpring platform for manufacture using its proprietary and differentiated BioFactory production system for a diverse base of target customers across a range of end markets, including the cosmeceutical, nutraceutical, and pharmaceutical industries. The Company also commercializes its PlantSpring technology platform by licensing elements of the platform and historically developed traditional agriculture seed-trait product candidates, as well as selectively developing product candidates for customers in traditional agriculture. The business is described in greater detail in “Item 1. Business—Company Overview.” The Company is an early-stage company and has incurred net losses since its inception. As of December 31, 2022, the Company had an accumulated deficit of $212.2 million. The Company’s net losses were $16.9 million for the year ended December 31, 2022. The Company expects to continue to incur significant expenses and operating losses for the next several years. Those expenses and losses may fluctuate significantly from quarter-to-quarter and year-to-year. Historically, the Company’s expenses in connection with the execution of its long-term business plan have been primarily driven by: • R&D expenses associated with developing and enhancing the capabilities of its PlantSpring technology platform; • R&D expenses and capital expenditures to expand its BioFactory production system; • regulatory expenses associated with R&D and product development; • maintaining, protecting, expanding, and defending its intellectual property portfolio, including intellectual property related to the PlantSpring technology platform and BioFactory production system; • human capital related expenses associated with attracting and retaining skilled personnel; and • pursuing and negotiating agreements with customers, licensees, and infrastructure partners. On September 22, 2022, the Company announced that the Board had begun evaluating potential strategic alternatives to maximize shareholder value, including financing alternatives, merger, reverse merger, other business combinations, sale of assets, licensing, or other transactions. On January 13, 2023, the Company and Merger Subsidiary entered into the Merger Agreement with Cibus. Pursuant to the Merger Agreement, following the Transactions, Calyxt will be organized in an “Up-C” structure and re-named “Cibus, Inc.” and its only material asset will consist of common units of Cibus. If the Transactions are completed, the business of Cibus will continue as the primary business of the combined organization and the equity holders of Cibus will own a substantial majority of the issued and outstanding common stock of the Company. The closing of the Transactions is subject to the approval of Calyxt’s stockholders, the approval of Cibus’ members, the receipt of required regulatory approvals (to the extent applicable) and satisfaction of other customary closing conditions. The closing is currently expected to occur in the second quarter of 2023. Additional information regarding the Transactions is included in Calyxt’s registration statement on Form S-4 initially filed with the SEC in February 2023. If, for any reason, the Transactions are not completed, the Company will reconsider its available alternatives at such time and could pursue one of the following courses of action, which the Company currently believes to be the most likely alternatives: • Dissolve and liquidate. The Company may decide to dissolve and liquidate its assets. In such a circumstance, Calyxt would be required to pay all of its debts and contractual obligations and to set aside certain reserves for potential future claims. In light of Calyxt’s current capital resources, it is highly unlikely, in this case, that substantial resources, if any, would be available for distributions to stockholders. • Pursue another strategic transaction . The Company may decide to resume the process of evaluating a potential merger, reorganization or other business combination transaction or to sell or otherwise dispose of certain of the Company’s assets. Any of these alternatives would be costly and time-consuming and would require that Calyxt obtain additional near-term funding in parallel to, or as part of, such a strategic transaction. The Company expects that it would be difficult to secure such funding in a timely manner, on favorable terms or at all. • Operate the business . Although substantially less likely than the alternatives above, the Calyxt board could elect to seek to continue to operate the Company’s business. This alternative would require that Calyxt obtain additional near-term funding, which the Company expects would be difficult to secure in a timely manner, on favorable terms or at all. If pursued, Calyxt would likely need to significantly delay or further scale back operations beyond its already narrowly focused operational activities. 29 Table of Contents Current Operational Focus Prior to the announcement of the Transactions, the Company’s primary focus was on the development of synthetic biology products for its customers using its BioFactory production system. In light of the proposed Transactions and recent capital resource constraints, the Company has substantially scaled back its operations and has focused its current business activities on ensuring it has cash sufficient to achieve a closing of the proposed Transactions. Accordingly, Calyxt’s management has implemented cost reduction and other cash-focused measures, including reduction of capital expenditures, headcount reductions, and renegotiation or termination of professional services agreements. To conserve cash, Calyxt has also strategically evaluated its arrangements with suppliers and service providers and has, in several instances, transitioned such relationships to lower cost alternative providers. In limiting operations to core activities, the Company has focused its continuing operations on • scaling production of a single Plant Cell Matrix with its manufacturing partner, Evologic; • licensing efforts with respect to its PlantSpring technology and plant traits, including the TALEN technology; and • continuing to progress its three current customer projects—(1) its research collaboration with a leading global food ingredient manufacturer to develop a soybean trait to serve as an alternative to palm oil, (2) its plant-based chemistry pilot project for a major consumer packaged goods company, and (3) supporting late-stage development activities for its improved digestibility alfalfa trait, which was developed with and licensed to S&W Seed Company. The Company has suspended non-core activities, such as efforts toward the development and integration of AIML and the initiation, development and commercialization of additional synthetic biology products, or chemistries, beyond those involved in the continuing operations identified above. RELATIONSHIP WITH CELLECTIS AND COMPARABILITY OF RESULTS The Company’s largest shareholder is Cellectis. As of December 31, 2022, Cellectis owned 49.1 percent of the Company’s issued and outstanding common stock. Cellectis has certain contractual rights as well as rights pursuant to the Company’s certificate of incorporation and bylaws, in each case, for so long as it maintains threshold beneficial ownership levels in the Company’s shares. See “Risk Factors—Although Cellectis and its affiliates hold less than a majority of the Company’s outstanding common stock, Cellectis possesses certain rights that prevent other stockholders from influencing significant decisions.” In addition, Cellectis has guaranteed the lease agreement for the Company’s headquarters. However, the Company previously agreed to indemnify Cellectis for any obligations under this guaranty, effective upon Cellectis’ ownership falling to 50 percent or less of the Company’s outstanding common stock. Accordingly, the Company’s indemnification obligation was triggered in October 2022. The Company holds an exclusive license from Cellectis that broadly covers the use of engineered nucleases for plant gene editing. This intellectual property covers methods to edit plant genes using “chimeric restriction endonucleases,” which include TALEN ® , CRISPR/Cas9, zinc finger nucleases, and some types of meganucleases. FINANCIAL OPERATIONS OVERVIEW Revenue Revenue is recognized from sales of products, from licenses of technology, and from product development activities for customers. Cost of Goods Sold Cost of goods sold are recognized as products are sold. There are minimal cost of goods sold associated with the Company’s technology licensing activities. Research and Development Expense The Company’s R&D expenses primarily consist of employee-related costs for personnel who research and develop its product candidates, fees for contractors who support product development activities, purchasing material and supplies for its laboratories, licensing, an allocation of facility and information technology expenses, and other costs associated with owning and operating its own laboratories and pilot BioFactory capabilities. This includes the costs of performing activities to discover and develop products and advance the Company’s PlantSpring technology platform, including its intellectual property portfolio. BioFactory expenses from lab through pilot, unless incurred related to a specific product sold to a customer, are also classified as R&D expense. R&D expenses also include costs to write and support the research for filing patents. The Company recognizes R&D expenses as they are incurred. 30 Table of Contents Selling, General, and Administrative Expense Selling, general, and administrative (SG&A) expenses consist primarily of employee-related expenses for selling and licensing the Company’s products and employee-related expenses for its executive, legal, intellectual property, information technology, finance, and human resources functions. In periods prior to 2021, these expenses also included employee-related and other expenses for selling soybean oil and meal, soybean acreage acquisition, and managing the soybean product supply chain. Other SG&A expenses include facility and information technology expenses not otherwise allocated to R&D expenses, professional fees for auditing, tax and legal services, expenses associated with maintaining patents, consulting costs and other costs of the Company’s information systems, and costs to market its products. Interest, net Interest, net is comprised of interest income resulting from investments of cash and cash equivalents, short-term investments, unrealized gains and losses on short-term investments, issuance costs associated with the Company’s Common Warrants issued in February 2022, and interest expense incurred related to financing lease obligations. It is also driven by balances, yields, and timing of financing and other capital raising activities. Non-operating income (expenses) Non-operating income (expenses) are income or expenses that are not directly related to ongoing operations and are primarily comprised of gains and losses from the mark-to-market of Common Warrants, gain from a legal settlement, expenses associated with the evaluation of strategic alternatives, foreign exchange-related transactions, and disposals of land, buildings, and equipment. Changes Between Revenues and Costs The Company was previously focused on the development of traits for traditional agriculture that it planned to commercialize using either a vertically integrated or licensing business model. The Company’s first commercial product, a high oleic soybean, was launched in this manner in the first quarter of 2019. In August 2020, the Company announced it was winding down the vertically integrated soybean product line. The wind-down of this product line was completed in late 2021 with the final sales of soybean grain to a large soybean processor. As the Company transitioned its business model, the composition of revenues and costs has evolved, with soybean-related revenues declining to zero, the negative gross profit margins experienced from sales of those products no longer occurring, and the significant working capital investment to support those activities also declining. To the extent any revenue is generated under the Company’s current business model, such revenue would derive from product development activities for customers for both the BioFactory production system and agricultural production and technology licensing arrangements. Any such cash and revenue-generating opportunities associated with these activities would be expected to primarily arise from up-front and milestone payments, annual license fees, and royalties. If and when the BioFactory begins to produce products for customers, it is anticipated that such revenues would grow and surpass revenues from other sources. During the course of discussions with Cibus regarding, and following the execution of, the Merger Agreement, Calyxt has streamlined and focused its business activities on preserving cash sufficient to achieve a closing of the Transactions. Accordingly, Calyxt has taken additional steps to streamline its operations and to reduce its operating expenses, while focusing on a limited scope of core projects. While these projects are important for Calyxt’s overall product development pipeline, none of these projects is expected to generate material revenue in the near term. While the Company continuously implemented cost reduction measures including not filling open positions throughout 2022, the principal impact of these actions affects results of operations beginning in early 2023 following the reduction in employees from 48 to 28, including attrition, in January 2023. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2022, COMPARED TO THE YEAR ENDED DECEMBER 31, 2021 A summary of results of operations for the years ended December 31, 2022, and 2021 follows: Year Ended December 31, 2022 2021 $ Change % Change (In thousands, except percentage values) Revenue $ 157 $ 25,987 $ (25,830 ) (99 )% Cost of goods sold — 28,557 (28,557 ) (100 )% Gross profit 157 (2,570 ) 2,727 106 % Research and development 11,553 11,335 218 2 % Selling, general, and administrative 10,974 15,427 (4,453 ) (29 )% Loss from operations (22,370 ) (29,332 ) 6,962 24 % Gain upon extinguishment of Payroll Protection Program loan — 1,528 (1,528 ) (100 )% Interest, net (87 ) (1,414 ) 1,327 94 % Non-operating income (expenses) 5,566 19 5,547 29,195 % Net loss $ (16,891 ) $ (29,199 ) $ 12,308 42 % Basic and diluted net loss per share $ (0.37 ) $ (0.78 ) $ 0.41 53 % 31 Table of Contents Revenue, Cost of Goods Sold, and Gross Profit Revenues were $0.2 million in 2022, a decrease of $26.0 million, or 99 percent, from 2021. Cost of goods sold was zero in 2022, a decrease of $28.6 million, or 100 percent, from 2021. Gross profit was $0.2 million, constituting 100 percent of revenue, in 2022, compared to negative $2.6 million, or negative 47 percent of revenue, in 2021. The decreases in revenue and cost of goods sold and improvement in gross profit were driven by the late 2021 completion of the wind-down of the Company’s soybean product line and transition of the Company’s focus to synthetic biology, which remains an early stage field and has not yet generated significant revenue. Revenue in the 2022 was primarily associated with the Company’s agreement with a large food ingredient manufacturer to develop a palm oil alternative. Research and Development Expense R&D expense was $11.6 million in 2022, an increase of $0.2 million, or 2 percent, from 2021. The increase was primarily driven by an increase in allocated SG&A costs of $2.0 million as the Company adjusted its cost allocation methodology at the beginning of 2022, partially offset by $0.7 million of cost savings due to the change in the Company’s business model, $0.6 million lower cash compensation expense, and $0.5 million lower non-cash stock compensation expense. Selling, General, and Administrative Expense SG&A expense was $11.0 million in 2022, a decrease of $4.5 million, or 29 percent, from 2021. The decrease was driven by cost allocations to R&D expense of $2.0 million, lower cash compensation expense of $1.0 million, other expense reductions of $0.9 million, and a $0.6 million one-time benefit from the modification of the Company’s former CEO’s severance agreement. These decreases were partially offset by $0.8 million in higher rent expense as a result of the adoption of the lease accounting standard. Gain Upon Extinguishment of Payroll Protection Program Loan On April 8, 2021, the Company was notified by the U.S Small Business Administration (SBA) that the full principal amount and all accrued interest of the Paycheck Protection Program loan had been forgiven. Accordingly, the Company recognized a gain upon the extinguishment of the Payroll Protection Program Loan (the PPP loan) of $1.5 million in 2021. Interest, net Interest, net was an expense of $0.1 million in 2022, an improvement of $1.3 million, or 94 percent, from 2021. The improvement was driven by the adoption of the lease accounting standard, which shifted amounts previously reported as interest expense to SG&A expense Non-operating income (expenses) Non-operating income (expenses) were income of $5.6 million in 2022, an improvement of $5.5 million from 2021. The improvement was driven by the mark-to-market of the Company’s Common Warrants derivative liability, which declined in value due to a decline in stock price in 2022, partially offset by expenses associated with the strategic alternatives review. Net Loss Net loss was $16.9 million in 2022, an improvement of $12.3 million, or 42 percent, from 2021. The improvement in net loss was driven by the mark-to-market of the Company’s Common Warrants derivative liability, the completion of the wind-down of the soybean product line in late 2021, and lower operating expenses. These improvements were partially offset by the gain realized on the forgiveness of the PPP loan in the second quarter of 2021. Net Loss Per Share Net loss per share was $0.37 in 2022, an improvement of $0.41 per share, or 53 percent, from 2021. The improvement in net loss per share was driven by the improvement in net loss and a year-over-year increase in the weighted average shares outstanding. LIQUIDITY AND CAPITAL RESOURCES Liquidity The Company’s primary sources of liquidity are its cash and cash equivalents. As of December 31, 2022, the Company had $3.5 million of cash, cash equivalents, and restricted cash. The Company’s restricted cash balances are cash and cash equivalents deposited in an amount equal to future equipment rent payments, as required under its equipment lease facility. The Company may request the return of excess restricted cash collateral annually in December. The Company’s restricted cash was $0.1 million as of December 31, 2022. Current liabilities were $1.7 million as of December 31, 2022. The Company’s current cash, cash equivalents, and restricted cash is sufficient to cover all of its current liabilities as of December 31, 2022. The Company’s liquidity funds its non-discretionary cash requirements and its discretionary spending. Prior to the wind-down of the Company’s soybean go-to-market strategy, working capital was its principal non-discretionary funding requirement. In addition, the Company has contractual obligations related to recurring business operations, primarily related to lease payments for its headquarters and laboratory facilities. The Company’s principal discretionary cash spending is for capital expenditures, short-term working capital payments, and professional and other transaction-related expenses incurred as the Company pursues additional financing and evaluates potential alternative transactions. 32 Table of Contents The Company incurred net losses of $16.9 million for the year ended December 31, 2022. As of December 31, 2022, the Company had an accumulated deficit of $212.2 million and expects to continue to incur losses in the future. Cash Flows from Operating Activities Year Ended December 31, In Thousands 2022 2021 $ Change % Change Net loss $ (16,891 ) $ (29,199 ) $ 12,308 42 % Gain upon extinguishment of Payroll Protection Program loan — (1,528 ) 1,528 100 % Depreciation and amortization expenses 1,534 2,338 (804 ) (34 )% Stock-based compensation 3,998 2,090 1,908 91 % Unrealized (gain) loss on mark-to-market of common stock warrants (5,120 ) — (5,120 ) NM Changes in operating assets and liabilities (2,885 ) 7,488 (10,373 ) (139 )% Net cash used by operating activities $ (19,364 ) $ (18,811 ) $ (553 ) (3 )% NM- not meaningful Net cash used by operating activities was $19.4 million in 2022, an increase in cash used of $0.6 million, or three percent, from 2021. The net cash used by operating activities result was driven by a $12.3 million improvement in net loss, a $1.9 million increase in non-cash stock compensation, primarily the result of the forfeiture of unvested stock awards in the first quarter of 2021, and the $1.5 million gain upon extinguishment of the PPP loan in the second quarter of 2021, which were more than offset by a $5.1 million gain on mark-to-market of the Common Warrants and a $10.4 million decline in cash provided by operating assets and liabilities due to the completion of the wind-down of the soybean product line in late 2021 and transition of the Company’s focus to synthetic biology, which remains an early stage field and has not yet generated significant revenue. The Company expects cash used by operating activities in 2023 to be lower than 2022 driven by reductions in operating expenses as a result of the Company’s cost reduction initiatives and streamlining of operational focus prior to the anticipated closing of the Transactions. Cash Flows from Investing Activities Year Ended December 31, In Thousands 2022 2021 $ Change % Change Sales and (purchases) of short-term investments, net $ — $ 11,698 $ (11,698 ) (100 )% Purchases of land, buildings, and equipment (1,520 ) (497 ) (1,023 ) (206 )% Net cash (used) provided by investing activities $ (1,520 ) $ 11,201 $ (12,721 ) (114 )% Net cash used by investing activities was $1.5 million in 2022, an increase in cash used of $12.7 million, or 114 percent, from 2021. This increase in cash used by investing activities was driven by the 2021 sale of short-term investments to fund operations and higher capital expenditures. The Company expects cash used for purchases of land, buildings, and equipment in 2023 to be lower than 2022, driven by reductions in cash expenditures as a result of the Company’s cost reduction initiatives and streamlining of operational focus prior to the anticipated closing of the Transactions. Cash Flows from Financing Activities Year Ended December 31, In Thousands 2022 2021 $ Change % Change Proceeds from common stock issuance $ 11,538 $ 4,380 $ 7,158 163 % Costs incurred related to the issuance of stock (1,173 ) (501 ) (672 ) (134 )% Repayments of financing lease obligations (376 ) (364 ) (12 ) (3 )% Proceeds from the exercise of stock options — 227 (227 ) (100 )% Net cash provided by financing activities $ 9,989 $ 3,742 6,247 167 % Net cash provided by financing activities was $10.0 million in 2022, an increase of $6.2 million, or 167 percent, from 2021. The increase was primarily driven by $10.0 million of net proceeds from the Follow-On Offering in February 2022. The Company expects net cash provided by financing activities in 2023 to decrease compared to 2022, as a result of the Company’s cost reduction initiatives and streamlining of operational focus prior to the anticipated closing of the Transactions. Capital Resources The Company has an effective shelf registration on Form S-3 on file with the SEC and additional capital is accessible from the capital markets, including pursuant to its ATM Facility. However, amounts available under the shelf registration statement, including the ATM Facility, are significantly limited 33 Table of Contents because the Company’s public float is less than $75,000,000. Subject to Instruction I.B.6 to Form S-3, which is referred to as the “baby shelf” rules, for so long as the Company’s public float is less than $75,000,000, it may not sell more than the equivalent of one-third of its public float during any 12 consecutive months pursuant to the baby shelf rules. Such additional liquidity and access to capital resources is subject to market conditions and other factors, including challenges associated with raising sufficient capital to meet the Company’s financing needs in light of the Company’s current stock price and related constraints. Prior to December 31, 2022, the Company completed the following capital raising transactions: • On July 25, 2017, the Company completed its IPO of common stock. In the aggregate, the Company received net proceeds from the IPO of $58.0 million, all of which have been used to fund R&D costs, build out commercial capabilities, and for general corporate purposes. • On May 22, 2018, the Company completed a follow-on offering of its common stock. In the aggregate, the Company received net proceeds from the follow-on offering of $57.0 million. • On October 20, 2020, the Company completed a follow-on offering of its common stock. In the aggregate, the Company received net proceeds from the follow-on offering of $14.0 million. • On September 21, 2021, the Company entered into an ATM Facility. In the aggregate, the Company received net proceeds from the ATM Facility of $4.1 million through early January 2022. • During the February 2022 Offering, the Company issued 3,880,000 shares of its common stock, 3,880,000 Pre-Funded Warrants, and 7,760,000 Common Warrants. In the aggregate, the Company received net proceeds of $10.0 million, after deducting approximately $0.9 million of underwriting discounts and estimated other offering expenses. • On October 3, 2022, the Company entered into an amendment to the Open Market Sale Agreement with Jefferies for the ATM Facility that enables it, subject to the applicable baby shelf rules, to offer and sell up to 15,661,000 shares of its common stock. At its discretion, the Company determines the timing and number of shares to be issued under the ATM Facility. During the fourth quarter of 2022, the Company issued approximately 2.0 million shares of common stock under the ATM Facility for proceeds of $0.1 million net of commissions and payments for other share issuance costs. From December 31, 2022, through the date of this report, the Company has not issued any additional shares under the ATM Facility. Operating Capital Requirements The Company has incurred losses since its inception and its net loss was $16.9 million for the year ended December 31, 2022, and it used $19.4 million of cash for operating activities for the year ended December 31, 2022. The Company has incurred losses since its inception. If the Transactions are not consummated for any reason, the Company may decide to dissolve and liquidate its assets. In such a circumstance, Calyxt would be required to pay all of its debts and contractual obligations and to set aside certain reserves for potential future claims. In light of Calyxt’s current capital resources, it is highly unlikely, in this case, that substantial resources, if any, would be available for distributions to stockholders. To the extent the Transactions are not consummated for any reason and the Company is not liquidated and dissolved, it anticipates that it will continue to generate losses for the next several years or until such time as an alternative strategic transaction is consummated. In the less likely scenario in which the Company seeks to continue to operate its business and until the Company can generate cash flows sufficient to support its operating capital requirements, it would seek to finance a portion of future cash needs through (i) cash on hand, (ii) commercialization activities, which may result in various types of revenue streams from (a) future product development agreements and technology licenses, including upfront and milestone payments, annual license fees, and royalties; and (b) product sales from its proprietary BioFactory production system; (iii) government or other third-party funding, (iv) public or private equity or debt financings, or (v) a combination of the foregoing. However, capital generated by commercialization activities, if any, is expected to be received over a period of time and near-term additional capital may not be available on reasonable terms, if at all. In connection with the Transactions, beginning at the earlier of March 15, 2023 or the date Calyxt’s unrestricted cash balance first drops below $1,500,000, Calyxt can request, and Cibus has agreed to provide, an unsecured, interest-free revolving line of credit of up to $3,000,000 in cash, which amount may be increased to $4,000,000 if Cibus elects to extend the outside date (as defined in the Merger Agreement) to June 30, 2023. Funds can be drawn by Calyxt in $500,000 increments and may only be used to fund operating expenses incurred in the ordinary course of business consistent with past practice and consistent with the negative covenants in the Merger Agreement. The full outstanding balance of the Interim Funding will be reduced to zero in connection with the closing of the Transactions, if consummated. The full outstanding balance of the Interim Funding will be forgiven by Cibus if the Merger Agreement is terminated for any reason other than certain under certain conditions, as detailed in the Merger Agreement. The Interim Funding is subject to acceleration in connection with certain bankruptcy events. The Company faces uncertainty regarding the adequacy of its capital resources and presently has limited access to additional financing and expects to rely upon the Interim Funding in order to continue operations through the consummation of the Transactions. 34 Table of Contents While alternative public and private transaction structures may be available, these may require additional time and cost, may result in fixed payment obligations, may result in substantial dilution to existing stockholders, particularly in light of the Company’s current stock price, may impose operational restrictions on the Company, may grant holders rights senior to those of the Company’s shares of common stock, and may not be available on attractive terms. Further, during the pendency of the Transactions, any such transactions could only be entered into with the consent of Cibus. Accordingly, although the Company continuously assesses market conditions and available financing alternatives, in light of the Company’s current stock price, the restrictions imposed by the Merger Agreement and the availability of the Interim Funding, the Company does not anticipate any additional third-party funding prior to the consummation of the Transactions. The Company believes its cash, cash equivalents, and restricted cash as of December 31, 2022, considering continuing actions taken to reduce its operating expenses to enable the proposed Transactions to close, the legal settlement discussed in Note 8 to the consolidated financial statements, and the availability of the Interim Funding are sufficient to fund its operations through the second quarter of 2023. The Company’s management has concluded there is substantial doubt regarding its ability to continue as a going concern for a period of 12 months or more from the date of this filing. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above. In light of the Company’s current liquidity challenges and capital resource constraints, management has implemented cost reduction and other cash-focused measures to manage liquidity, including reduction of capital expenditures, headcount reductions, and renegotiation or termination of professional services agreements. To conserve cash, the Company has also strategically evaluated its arrangements with suppliers and service providers and has, in several instances, transitioned such relationships to lower cost alternative providers. During the course of discussions with Cibus regarding, and following the execution of, the Merger Agreement, Calyxt has further streamlined and focused its business activities on preserving cash sufficient to achieve a closing of the Mergers. Accordingly, Calyxt has taken additional steps to reduce its operating expenses and has focused its continuing operations on scaling production of its Plant Cell Matrix structures with its manufacturing partner, licensing efforts with respect to its PlantSpring technology and plant traits and continuing to progress its three key customer projects. If the Company is unable to consummate the Transactions, the Company may have to implement increasingly stringent cost saving measures and significantly delay, scale back, or cease operations, in part or in full. If the Company decided to cease operations and dissolve and liquidate its assets, it is unclear to what extent the Company would be able to pay its existing obligations. In such a circumstance and in light of the Company’s current capital resources position, it is unlikely that substantial resources would be available for distributions to stockholders. CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND CONTINGENCIES As of December 31, 2022, the Company’s contractual obligations consisted of minimum lease payments for its corporate headquarters and laboratory facilities and equipment leases. In the aggregate, $7.5 million is due within the next five years, of which $1.5 million is payable in 2023. Sale-Leaseback of Headquarters and Laboratory Facilities In September 2017, the Company consummated a sale-leaseback transaction with a third party for its corporate headquarters and laboratory facilities in Roseville, Minnesota, which encompasses approximately 44,000 square feet including office and lab space, the first pilot BioFactory production system, greenhouses, and outdoor research plots. The Company is deemed the owner for accounting purposes. The lease has a term of twenty years with four options to extend its term for five years each subject to there being no default under the lease terms beyond any cure period and the Company occupying the property at the time of extension. In 2017, the Company received $7.0 million in connection with the sale of the land and uncompleted facility. The lease commenced in May 2018. Under the lease, the Company pays an annual base rent of eight percent of the total project cost with scheduled increases in rent of 7.5 percent on the sixth, eleventh, and sixteenth anniversaries of the start of the lease commencement as well as on the first day of each renewal term. Currently, the Company pays an annual base rent of $1.4 million. The first increase will occur during 2023. The Company is also responsible for all operating costs and expenses associated with the property. If the landlord decides to sell the property, the Company has a right of first refusal to purchase the property on the same terms offered to any third party. Concurrent with entering the lease, Cellectis guaranteed the lease agreement for the Company’s headquarters. However, the Company previously agreed to indemnify Cellectis for any obligations under this guaranty, effective upon Cellectis’ ownership falling to 50 percent or less of the Company’s outstanding common stock. The Company’s indemnification obligation was triggered in October 2022. Prior to 2022, this lease was considered a failed sale leaseback based on the nature of the transactions and was reported as a financing-type lease. As discussed below in Note 1 to the Consolidated Financial Statements, with the Company’s adoption of the New Lease Standard on January 1, 2022, this lease is now considered an operating lease. 35 Table of Contents Sale-Leaseback of Equipment The Company also has an equipment financing arrangement that is considered a financing-type lease which matures in 2023. The Company was required to deposit cash into a restricted account in an amount equal to the future rent payments required by the lease. As of December 31, 2022, this restricted cash totaled $0.1 million, and will be returned following the payoff of the lease obligations in 2023. CRITICAL ACCOUNTING ESTIMATES The accompanying discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements and the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates, assumptions, and judgments that affect the reported amounts in the Company’s consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following policies to be the most critical to understanding its financial condition and results of operations because they require the use of estimates, assumptions, and judgments about matters that are inherently uncertain. Stock-Based Compensation The valuation of stock options is a critical accounting estimate that requires the use of judgments and assumptions that are likely to have a material impact on the Company’s consolidated financial statements. The Company generally measures the fair value of employee and nonemployee stock-based awards on their grant date and records compensation expense on a straight-line basis over the related service period of the award, which is generally the vesting period. The Company uses the Black-Scholes option pricing model to value its stock option awards, which requires the Company to make predictive assumptions regarding employee exercise behavior, future stock price volatility, and dividend yield. The Company generally measures compensation expense for grants of restricted stock units using the Company’s share price on the date of grant. The Company uses a Monte Carlo simulation pricing model when estimating the fair values of PSUs, which requires the Company to make predictive assumptions. The Company estimates fair values and accounts for employee and nonemployee awards in a similar manner. Due to the limited historical experience of the Company’s stock awards program, it has elected to account for forfeitures of awards as they occur. If an award is forfeited prior to vesting, the associated reduction in expense is reflected net in stock-based compensation expense in that period. Stock Options The estimated fair values of stock options granted, and the assumptions used for the Black-Scholes option-pricing model were as follows: 2022 2021 Expected term (in years) 5.5 - 6.9 5.5 - 6.5 Expected volatility 89.7% - 92.8 % 80.1% - 91.0 % Risk-free interest rate 1.9% - 3.5 % 0.6% - 1.2 % Due to the Company’s limited history, it does not always have sufficient historical stock option activity to make predictive assumptions based solely on its stock or stock option activity for the Black-Scholes option pricing model. As a result, the Company may need to use data from other comparable public companies or alternative calculation methods as allowed by generally accepted accounting principles to make predictive assumptions. The Company estimates its future stock price volatility using the weighted-average historical volatility calculated from a group of comparable public companies over the expected term of the option. The group of comparable public companies is determined by management on an annual basis. When selecting a comparable company, management considers relevant factors including industry and strategy, size, maturity, and financial leverage. The comparable companies used by management to calculate expected volatility may change from year-to-year because of changes in those factors and because a new comparable company may become publicly traded. A one percentage point increase in the Company’s volatility assumption, leaving all other assumptions constant, would increase the grant date fair value by one percent. The expected term of stock options is estimated using the average of the vesting tranches and the contractual life of each grant for employee options, or the simplified method, as the Company has limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. The use of the simplified method is dependent upon the type of equity award granted and the term of the award. Management reviews the expected term of stock options before issuance to ensure that the use of the simplified method is appropriate and that the Company does not have sufficient historical exercise data to estimate the expected term using a different method. An increase in the expected term by one year, leaving all other assumptions constant, would increase the grant date fair value by five percent. The Company estimates the risk-free interest rate based on the United States Treasury zero-coupon yield curve at the date of grant for the expected term of the option. A one percentage point increase in the risk-free interest rate, leaving all other assumptions constant, would not change the grant date fair value. The Company does not, nor does it expect to pay dividends in the foreseeable future. Performance Stock Units From time-to-time the Company issues PSUs to certain individuals in management to align their objectives with stockholders of the Company. 36 Table of Contents In March 2022, the Company granted 530,000 PSUs under the 2017 Plan to five employees, including four executive officers. The PSUs include three annual performance periods (2022, 2023, and 2024) and target performance levels for each of those periods linked to the achievement of Company objectives as determined annually for the respective period by the Compensation Committee of the Company’s Board of Directors. Once the annual objectives are approved, the associated expense will be recognized on a straight-line basis over the period from the date of grant through the determination date, which can be no later than March 15 of the following year. Earned awards will be settled in shares of Company stock no later than the March 15 determination date in the following calendar year. The grant date for the tranche of awards linked to 2022 performance is May 4, 2022. The Calyxt Board approved the level of performance for the 2022 grant on March 1, 2023, and at the same time established the performance criteria for the 2023 awards. Determination of expense for the 2024 tranche of PSUs will be made when the associated business objectives are determined. In July 2021, the Company granted 600,000 PSUs under the Inducement Plan to Mr. Michael A. Carr, its President and Chief Executive Officer. The estimated fair values of PSUs granted in 2021, and the assumptions used were as follows: Estimated fair values of performance stock units granted: At least $12 per share $ 2.16 At least $15 per share $ 1.89 At least $20 per share $ 1.55 Assumptions: Expected term (in years) 3.0 Expected volatility 90.0 % Risk-free interest rate 0.4 % The Company estimated the fair value of each tranche of the PSUs on the grant date using the Monte Carlo simulation pricing model, which required it to make predictive assumptions as to the expected term of the grant, future stock price volatility, and dividend yield. The expected term represents the expected service period of the PSUs granted. It does not represent a significant accounting estimate. Due to the expected term of the award being three years and the Company having been publicly traded for more than three years, the volatility assumption was based on the historical volatility of the Company’s common stock over the expected term. The Company estimates the risk-free interest rate based on the United States Treasury zero-coupon yield curve at the date of grant for the expected term of the PSU. Valuation of Common Warrants The Common Warrants have been classified as a liability in the Company’s consolidated balance sheet because the warrants include a put option election available to the holder of a Common Warrant that is contingently exercisable if the Company enters into a Fundamental Transaction through a Change of Control Put. If the Change of Control Put is exercised by the holder of a Common Warrant, they may elect to receive either the consideration of the Fundamental Transaction or put the Common Warrant back to the Company in exchange for cash, based on terms and timing specified in the Common Warrant. If the put option is exercised, the Company is required to pay cash to the holder in an amount as determined by the Black Scholes pricing model, with assumptions determined in accordance with the terms of the Common Warrants. Those assumptions were as follows on December 31, 2022: As of December 31, 2022 Estimated fair value of Common Warrants: $ 0.04 Assumptions: Expected term to liquidation (in years) 4.6 Expected volatility 85.0 % Risk-free interest rate 4.0 % A ten percent change in any of the assumptions would not have had a material effect on the Company’s results of financial condition or results of operations. Net Realizable Value of Inventories Due to the wind-down of its soybean product line in 2021, the Company did not have any inventory balances, nor does it anticipate having any such balances in 2023 based on the nature of its business activities. Under the Company’s prior go-to-market soybean strategy, the determination of the net realizable value of inventories was a critical accounting estimate that required the use of judgments and assumptions that may have had a material impact on the Company’s consolidated financial statements. At each period-end, the Company made assumptions regarding projected selling prices of its products considering futures market prices for the underlying agricultural markets and its associated risk management strategies, anticipated costs, and other factors that take into consideration the Company’s limited operating history and compare those prices to the current weighted average costs of its inventories. If the Company’s costs were higher than the projected selling prices, then a valuation adjustment was recorded. 37 Table of Contents Income Tax Valuation Allowances The determination of the income tax valuation allowances requires the use of judgments and assumptions that may have a material impact on the Company’s consolidated financial statements, especially at the early stage of commercialization. The Company provides deferred taxes for deductible and taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when the Company believes it is more likely than not that some portion or all the deferred tax assets will not be realized. Because the Company has generated losses cumulatively, management believes it is more likely than not that some portion or all the deferred tax assets will not be realized and have reflected a full valuation allowance against its net deferred tax assets. If the Company were to generate profits, the valuation allowance may change. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS For more information on recently issued accounting pronouncements, see the Company’s consolidated financial statements and related financial statement schedules on page F-1.