Ernexa Therapeutics Inc. 10-Q

Item 1. Financial Statements BROOKLYN IMMUNOTHERAPEUTICS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value amount) (Unaudited) March 31, 2022 December 31, 2021 ASSETS Current assets: Cash $ 23,500 $ 16,985 Other receivable 835 684 Prepaid expenses and other current assets 800 1,097 Total current assets 25,135 18,766 Property and equipment, net 308 670 Right-of-use assets - operating leases 1,093 2,567 Goodwill 2,044 2,044 In-process research and development 5,990 5,990 Investment in non-controlling interest 385 1,000 Security deposits and other assets 421 488 Total assets $ 35,376 $ 31,525 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,106 $ 1,755 Accrued expenses 2,384 1,249 Operating lease liabilities, current 149 426 Other current liabilities 45 247 Total current liabilities 3,684 3,677 Warrant liabilities 13,315 - Operating lease liabilities, non-current 1,018 2,297 Other liabilities 48 48 Total liabilities 18,065 6,022 Stockholders' equity: Preferred stock, $ 0.005 par value, 1,000 shares authorized, 156 designated and outstanding of Series A convertible preferred stock at March 31 , 2022 and December 31 , 2021 , $ 156 liquidation preference 1 1 Common stock, $ 0.005 par value, 100,000 shares authorized at March 31, 2022 and December 31, 2021; 57,452 and 52,021 issued and outstanding at March 31 , 2022 and December 31 , 2021 , respectively 287 260 Additional paid-in capital 167,100 165,944 Accumulated deficit ( 150,077 ) ( 140,702 ) Total stockholders' equity 17,311 25,503 Total liabilities and stockholders' equity $ 35,376 $ 31,525 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents BROOKLYN IMMUNOTHERAPEUTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) Three months ended March 31, 2022 2021 Operating expenses: Research and development $ 1,782 $ 1,533 General and administrative 4,514 1,623 Transaction costs - 5,765 Total operating expenses 6,296 8,921 Loss from operations ( 6,296 ) ( 8,921 ) Other expense, net: Loss on sale of NTN assets - ( 9,598 ) Warrant liabilities expense ( 1,322 ) - Loss on non-controlling investment ( 615 ) - Other expense, net ( 1,142 ) ( 3 ) Total other expense, net ( 3,079 ) ( 9,601 ) Loss before income taxes ( 9,375 ) ( 18,522 ) Provision for income taxes - - Net loss ( 9,375 ) ( 18,522 ) Net loss per common share - basic and diluted $ ( 0.17 ) $ ( 0.67 ) Weighted average shares outstanding - basic and diluted 53,626 27,799 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents BROOKLYN IMMUNOTHERAPEUTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ AND MEMBERS’ EQUITY For the three months ended March 31, 2022 and 2021 (unaudited) (In thousands) Membership Equity Common Stock Series A Preferred Stock Additional Paid-in Accumulated Class A Class B Class C Common Shares Amount Shares Amount Capital Deficit Total Balances at January 1, 2022 $ - $ - $ - $ - 52,021 $ 260 156 $ 1 $ 165,944 $ ( 140,702 ) $ 25,503 Issuance of common stock in connection with private offering - - - - 5,500 27 - - ( 27 ) - - Forfeiture of unvested restricted stock - - - - ( 78 ) - - - - - - Issuance of common stock from vested restricted stock units - - - - 9 - - - - - - Stock-based compensation - - - - - - - - 1,183 - 1,183 Net loss - - - - - - - - - ( 9,375 ) ( 9,375 ) Balances at March 31, 2022 $ - $ - $ - $ - 57,452 $ 287 156 $ 1 $ 167,100 $ ( 150,077 ) $ 17,311 Balances at January 1, 2021 $ 23,202 $ 1,400 $ 1,000 $ 198 - $ - - $ - $ - $ ( 18,141 ) $ 7,659 Brooklyn rights offerings membership units 10,500 - - - - - - - - - 10,500 Elimination of Brooklyn’s historical members’ equity ( 33,702 ) ( 1,400 ) ( 1,000 ) ( 198 ) - - - - 36,300 - - Issuance of common stock for business combination - - - - 1,514 8 - - 8,170 - 8,178 Series A preferred stock retained in business combination - - - - - - 156 1 ( 1 ) - - Issuance of common stock to Brooklyn members - - - - 38,924 195 - - ( 195 ) - - Issuance of common stock to Financial Advisor upon consummation of merger - - - - 1,068 5 - - 5,760 - 5,765 Stock-based compensation - - - - - - - - 419 - 419 Net loss - - - - - - - - - ( 18,522 ) ( 18,522 ) Balances at March 31, 2021 $ - $ - $ - $ - 41,506 $ 208 156 $ 1 $ 50,453 $ ( 36,663 ) $ 13,999 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents BROOKLYN IMMUNOTHERAPEUTICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) For the three months ended March 31, 2022 2021 Cash flows used in operating activities: Net loss $ ( 9,375 ) $ ( 18,522 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 36 25 Stock-based compensation 1,183 419 Amortization of right-to-use asset 102 70 Transaction costs - shares to Financial Advisor - 5,765 Loss on sale of NTN assets - 9,598 Loss on disposal of fixed assets 371 - Gain on lease termination ( 85 ) - Warrant liabilities expense 1,322 - Loss on non-controlling investment 615 - Changes in operating assets and liabilities: Other receivable ( 146 ) 4 Prepaid expenses and other current assets 298 42 Security deposits and other non-current assets 66 ( 1 ) Accounts payable and accrued expenses 486 ( 766 ) Operating lease liability ( 103 ) ( 64 ) Other liabilities ( 202 ) - Net cash used in operating activities ( 5,432 ) ( 3,430 ) Cash flows used in investing activities: Purchase of property and equipment ( 46 ) - Purchase of NTN, net of cash acquired - 148 Proceeds from the sale of NTN assets, net of cash disposed - 119 Net cash (used in) provided by investing activities ( 46 ) 267 Cash flows provided by financing activities: Proceeds from issuance of common stock and warrants in connection with private offering 11,993 - Proceeds from sale of members’ equity - 10,475 Repayment of NTN’s PPP loan - ( 532 ) Net cash provided by financing activities 11,993 9,943 Net increase in cash and cash equivalents 6,515 6,780 Cash and cash equivalents at beginning of period 16,985 1,630 Cash and cash equivalents at end of period $ 23,500 $ 8,410 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1 $ - Supplemental disclosure of non-cash investing and financing activities: Issuance of common stock for business combination $ - $ 8,178 Series A preferred stock retained in business combination $ - $ 1 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents BROOKLYN IMMUNOTHERAPEUTICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of Business Brooklyn ImmunoTherapeutics Inc., a Delaware corporation (“Brooklyn” or the “Company”), together with its subsidiaries including Brooklyn ImmunoTherapeutics LLC (“Brooklyn LLC”), Novellus, Inc. (“Novellus”) and Novellus Therapeutics, Ltd. (“Novellus, Ltd.”), is a biopharmaceutical company utilizing its mRNA technology platform, including mRNA-based cell reprogramming and gene editing technologies, to create next generation mRNA, gene editing and cell therapies, including iPSC therapies for multiple therapeutic indications. As used herein, the “Company” refers collectively to Brooklyn and its subsidiaries. On August 12, 2020, Brooklyn (then known as “NTN Buzztime, Inc.”), Brooklyn LLC and BIT Merger Sub, Inc., a wholly owned subsidiary of Brooklyn (the “Merger Sub”), entered into an agreement and plan of merger and reorganization (the “Merger Agreement”) pursuant to which, among other matters, Merger Sub merged with and into Brooklyn LLC, with Brooklyn LLC continuing as a wholly owned subsidiary of Brooklyn and as the surviving company of the merger (the “Merger”). The Merger closed on March 25, 2021. After the Merger, Brooklyn changed its name from “NTN Buzztime, Inc.” to “Brooklyn ImmunoTherapeutics, Inc.” The Merger was accounted for as a reverse acquisition, in which Brooklyn LLC was deemed the acquiring company for accounting purposes. On March 26, 2021, Brooklyn sold (the “Disposition”) its rights, title and interest in and to the assets relating to the business operated under the name “NTN Buzztime, Inc.” prior to the Merger to eGames.com Holdings LLC (“eGames.com”) in accordance with the terms of an asset purchase agreement dated September 18, 2020, as amended, between Brooklyn and eGames.com (the “Asset Purchase Agreement”). On July 16, 2021, Brooklyn and its newly formed, wholly owned subsidiary Brooklyn Acquisition Sub, Inc. entered into an agreement and plan of acquisition (the “Acquisition Agreement”) with (a) Novellus LLC, (b) Novellus (the sole equity holder of Novellus, Ltd. and, prior to the closing under the Acquisition Agreement, a wholly owned subsidiary of Novellus, LLC), and (c) a seller representative (the “Acquisition”), pursuant to which Brooklyn acquired Novellus and its subsidiary, Novellus, Ltd. As part of the Acquisition, Brooklyn also acquired 25.0 % of the total outstanding equity interests of NoveCite, Inc. (“NoveCite”), a corporation focused on developing an allogeneic mesenchymal stem cell product for patients with acute respiratory distress syndrome, including from COVID-19. Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. These condensed consolidated financial statements should be read together with the audited consolidated financial statements and notes thereto contained in Brooklyn’s Annual Report on Form 10-K/A for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on June 30, 2022 (the “10-K/A”). The accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited financial statements contained in the 10-K/A, but does not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2022, or any other period. 5 Table of Contents Reclassifi cations Certain reclassifications have been made to Brooklyn’s prior years’ financial statements to conform to the current year presentation. These reclassifications had no effect on Brooklyn’s previously reported results of operations or accumulated deficit. 2) LIQUIDITY AND CAPITAL RESOURCES The Company has incurred significant operating losses and has an accumulated deficit as a result of ongoing efforts to develop product candidates, including conducting clinical trials and providing general and administrative support for operations. As of March 31, 2022, the Company had a cash balance of approximately $ 23.5 million and an accumulated deficit of approximately $ 150.1 million. For the three months ended March 31, 2022, the Company incurred a net loss of $ 9.4 million, and the Company used cash in operating activities of $ 5.4 million. On March 9, 2022, the Company consummated a private placement of common stock and warrants resulting in net proceeds of approximately $ 11 million (See Note 10). In connection with preparing the accompanying condensed consolidated financial statements as of and for the three months ended March 31, 2022, the Company’s management concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern because it does not expect to have sufficient cash or working capital resources to fund operations for the twelve-month period subsequent to the issuance date of these financial statements. The Company will need to raise additional capital, which could be through the remaining availability under our equity line purchase agreement with Lincoln Park Capital Fund, LLC (the “Second Purchase Agreement”) (to the extent the Company is permitted to use such agreement) (see Note 10), public or private equity offerings, debt financings, corporate collaborations or other means. The Company may also seek governmental grants to support its clinical trials and preclinical trials. The Company currently has no arrangements for such capital and no assurances can be given that it will be able to raise such capital when needed, on acceptable terms, or at all. The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern. 3) MERGER, DISPOSITION AND ACQUISITION TRANSACTIONS Merger On August 12, 2020, Brooklyn, Brooklyn LLC and the Merger Sub entered into the Merger Agreement, and the Merger closed on March 25, 2021. The Merger was accounted for as a reverse acquisition, in which Brooklyn LLC was deemed the acquiring company for accounting purposes. Brooklyn LLC, as the accounting acquirer, recorded the assets acquired and liabilities assumed of Brooklyn in the Merger at their fair values as of the acquisition date. Brooklyn LLC was determined to be the accounting acquirer based upon the terms of the Merger and other factors including that (i) Brooklyn LLC members, received common stock in the Merger that represented 96.35 % of Brooklyn’s outstanding common stock on a fully diluted basis, (ii) all of the directors of Brooklyn immediately after the Merger were designated by Brooklyn LLC under the terms of the Merger Agreement and (iii) existing members of Brooklyn LLC’s management became the management of Brooklyn immediately after the Merger. At the closing of the Merger, all the outstanding membership interests of Brooklyn LLC converted into the right to receive an aggregate of approximately 39,992,000 shares of common stock, of which 1,068,000 shares were issued as compensation to Maxim Group LLC, Brooklyn LLC’s financial advisor (the “Financial Advisor”) for its services to Brooklyn LLC in connection with the Merger. 6 Table of Contents The purchase price of $ 8.2 million, which represents the consideration transferred in the Merger to stockholders of Brooklyn immediately before the Merger, was calculated based on the closing price of $ 5.40 per share for approximately 1,514,000 shares common stock that those stockholders owned on March 25, 2021 immediately prior to the Merger because that represented a more reliable measure of the fair value of consideration transferred in the Merger. Under the acquisition method of accounting, the total purchase price has been allocated to the acquired tangible and intangible assets and assumed liabilities of Brooklyn based on their estimated fair values as of March 25, 2021, the Merger closing date. Because the consideration paid by Brooklyn LLC in the Merger is more than the estimated fair values of Brooklyn’s net assets deemed to be acquired, goodwill is equal to the difference of approximately $ 8.6 million, which has been calculated using the fair values of the net assets of Brooklyn as of March 25, 2021. The allocation of the purchase price to the tangible and intangible assets acquired and liabilities deemed to be assumed from Brooklyn, based on their estimated fair values as of March 25, 2021, is as follows (in thousands): Historical Balance Sheet of Brooklyn at March 25, 2021 Fair Value Adjustment to Brooklyn Pre-Merger Assets Price Purchase Allocation Cash and cash equivalents $ 148 $ - $ 148 Accounts receivable 103 - 103 Prepaid expense and other current assets 329 - 329 Property and equipment, net 1,015 - 1,015 Software development costs 1,296 ( 368 ) 928 Customers - 548 548 Trade name - 299 299 Accounts payable, accrued liabilities and other current liabilities ( 3,781 ) - ( 3,781 ) Net assets acquired, excluding goodwill $ ( 890 ) $ 479 $ ( 411 ) Total consideration $ 8,178 Net assets acquired, excluding goodwill ( 411 ) Goodwill $ 8,589 Brooklyn LLC was obligated under the Merger Agreement to have $ 10.0 million in cash and cash equivalents on its balance sheet at the effective time of the Merger. To ensure Brooklyn LLC had the required funds, certain beneficial holders of Brooklyn LLC’s Class A membership interests entered into contractual commitments to invest $ 10.0 million into Brooklyn LLC immediately prior to the closing of the Merger. During March 2021, Brooklyn offered its Class A unit holders an additional 5 % rights offering for an additional $ 0.5 million to be raised by a rights offering. Brooklyn received funds from the rights offering between February 17, 2021 and April 5, 2021. 7 Table of Contents Disposition On March 26, 2021, Brooklyn sold its rights, title and interest in and to the assets relating to the business it operated (under the name NTN Buzztime, Inc.) prior to the Merger to eGames.com in exchange for a purchase price of $ 2.0 million and assumption of specified liabilities relating to that business. The sale was completed in accordance with the terms of the Asset Purchase Agreement. Details of the Disposition are as follows (in thousands): Proceeds from sale: Cash $ 132 Escrow 100 Assume advance/loans 1,700 Interest on advance/loans 68 Carrying value of assets sold: Cash and cash equivalents ( 14 ) Accounts receivable ( 75 ) Prepaids and other current assets ( 124 ) Property and equipment, net ( 1,014 ) Software development costs ( 927 ) Customers ( 548 ) Trade name ( 299 ) Goodwill ( 8,589 ) Other assets ( 103 ) Liabilities transferred upon sale: Accounts payable and accrued expenses 113 Obligations under finance leases 17 Lease liability 26 Deferred revenue 55 Other current liabilities 149 Transaction costs ( 265 ) Total loss on sale of assets $ ( 9,598 ) Acquisition On July 16, 2021, Brooklyn and Brooklyn Acquisition Sub, Inc. entered into the Acquisition Agreement. The Acquisition closed contemporaneously with the execution and delivery of the Acquisition Agreement. At the closing: • Brooklyn acquired all of the outstanding equity interests of Novellus, Inc. as the result of the merger of Brooklyn Acquisition Sub, Inc. with and into Novellus, Inc., following which, Novellus, Inc., as the surviving corporation, became Brooklyn’s wholly owned subsidiary and Novellus Ltd. became Brooklyn’s indirectly owned subsidiary; and • Brooklyn acquired 25.0 % of the total outstanding equity interests of NoveCite. As consideration for the Acquisition, Brooklyn paid $ 22.9 million in cash and delivered approximately 7,022,000 shares of common stock, which under the terms of the Acquisition Agreement, were valued at a total of $ 102.0 million based on an agreed upon price of $ 14.5253 per share. At the date of issuance, the fair value of the shares were approximately $ 58.6 million. The Acquisition Agreement contained customary representations, warranties and certain indemnification provisions. Approximately 741,000 of the shares issued as consideration were placed in escrow for a period of up to 12 months in order to secure indemnification obligations to Brooklyn under the Acquisition Agreement. The Acquisition Agreement also contains certain non-competition and non-solicitation provisions pursuant to which Novellus LLC agreed not to engage in certain competitive activities for a period of five years following the closing, including customary restrictions relating to employees. No employees of Novellus Ltd. or Novellus, Inc. prior to the Acquisition continued their employment, or were otherwise engaged by Brooklyn, following the Acquisition. 8 Table of Contents In connection with the Acquisition, the co-founders of Novellus, Ltd. entered into lock-up agreements with respect to approximately 3,378,000 of the shares of common stock received in the Acquisition, and Brooklyn’s Chairman of the Board of Directors (the “Board”) and its Chief Executive Officer and President entered into identical lock-up agreements with respect to their current holdings of Brooklyn stock. Each lock-up agreement extends for a period of three years , provided that up to 75 % of the shares of common stock subject to the lock-up agreement may be released from the lock-up restrictions earlier if the price of common stock on the Nasdaq exceeds specified thresholds. The lock-up agreements include customary exceptions for transfers during the applicable lock-up period. The Company expects the Acquisition will advance its evolution into a platform company with a pipeline of next generation engineered cellular, gene editing and cytokine programs. In addition, the acquisition of Novellus, Ltd. builds on the License Agreement. (See Note 8). The completion of the acquisition of Novellus, Ltd. relieved Brooklyn LLC from potential obligations to pay Novellus, Ltd. certain upfront fees, clinical development milestone fees and post-registration royalties under the License Agreement. The agreement with Factor Bioscience Limited (“Factor”) under the License Agreement, which grants Brooklyn LLC exclusive rights to develop certain next-generation mRNA gene editing and cell therapy products, remained unchanged. Although Brooklyn acquired all of the outstanding equity interests of Novellus, Inc., the Company accounted for the Acquisition as an asset acquisition (as the assets acquired did not constitute a business as defined in Accounting Standards Codification (“ASC”) Topic 805, Business Combinations ), and was measured by the amount of cash paid and by the fair value of the shares of common stock issued. As a result, substantially all of the value acquired was attributed to IPR&D, with the exception of the cash paid for the investment in NoveCite, which is being accounted for as an investment in equity securities, as discussed further below. Brooklyn paid $ 22.9 million in cash, net of cash acquired, as part of the consideration for the Acquisition, of which $ 1.0 million was paid in cash for the investment in NoveCite. Brooklyn also issued approximately 7,022,000 shares of the Company’s common stock, of which approximately 3,644,000 shares are unrestricted and 3,378,000 shares are subject to the three-year lockup. The unrestricted shares were valued at $ 10.05 per share, which was the closing price of Brooklyn’s common stock on July 16, 2021. The fair value of the restricted shares was discounted by approximately 35 % to $ 6.53 per restricted share, which was derived from the average discount rate between the Black Scholes and Finnerty valuation models. The resulting fair value of the asset acquired is as follows (in thousands): Fair Value of Consideration Cash paid $ 22,882 Cash acquired ( 28 ) Unrestricted shares 36,628 Restricted shares 22,056 Total fair value of consideration paid 81,538 Less amount of cash paid for NoveCite investment ( 1,000 ) Fair value of IPR&D acquired $ 80,538 IPR&D that is acquired through an asset purchase that has no alternative future uses and no separate economic values from its original intended purpose is expensed in the period the cost is incurred. Accordingly, the Company expensed the fair value of the IPR&D during the third quarter of 2021 in the amount of $ 80.5 million. Investment in NoveCite As a result of the Acquisition, Brooklyn acquired and currently owns 25 % of NoveCite and Citius Pharmaceuticals, Inc. (“Citius”) owns the remaining 75 %. A member of the Company’s management holds one of three board seats on NoveCite’s board of directors. Citius’ s officers and directors hold the other two board seats. The Company is accounting for its interest in NoveCite under ASC Topic 323, Investments – Equity Method and Joint Ventures . The investment was recorded at cost, which was $ 1.0 million and is adjusted for the Company’s share of NoveCite’s earnings or losses, which are reflected in the accompanying condensed consolidated statement of operations. The investment may also reflect an equity loss in the event that circumstances indicate an other-than-temporary impairment. For the three months ended March 31, 2022, the Company recorded $ 0.6 million in losses from its investment in NoveCite, of which $ 0.5 million relates to NoveCite’s year ended December 31, 2021. 9 Table of Contents 4) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: • Level 1 Inputs – Valued based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. • Level 2 Inputs – Valued based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. • Level 3 Inputs – Valued based on inputs for which there is little or no market value, which require the reporting entity to develop its own assumptions. The following tables summarize the liabilities that are measured at fair value as of March 31, 2022 (in thousands). There were no liabilities measured at fair value as of December 31, 2021: As of March 31, 2022 Description Level 1 Level 2 Level 3 Liabilities: Warrant liabilities - Pre-Funded Warrants $ - $ 2,782 $ - Warrant liabilities - Common Warrants - - 10,533 Total $ - $ 2,782 $ 10,533 On March 9, 2022, the Company issued pre-funded warrants exercisable for approximately 1,357,000 shares of common stock (the “Pre-Funded Warrants”) and warrants exercisable for approximately 6,857,000 shares of common stock (the “Common Warrants”) in connection with the PIPE Transaction (as defined below). See Note 10 for more information related to the PIPE Transaction. The Common Warrants and Pre-Funded Warrants were accounted for as liabilities under ASC 815-40, Derivatives and Hedging, Contracts in Entity’s Own Equity (“ASC 815-40”), as these warrants provide for a cashless settlement provision that does not meet the requirements of the indexation guidance under ASC 815-40. These warrant liabilities were measured at fair value at inception and are then subsequently measured on a recurring basis, with changes in fair value presented within the Company’s statement of operations. The Company uses a Black-Scholes option pricing model to estimate the fair value of the Common Warrants, which is considered a Level 3 fair value measurement. Certain inputs used in this Black-Scholes pricing model may fluctuate in future periods based upon factors that are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of the Company’s warrant liabilities, which could also result in material non-cash gains or losses being reported in the Company’s consolidated statement of operations. The estimated fair value of the Pre-Funded Warrants was deemed a Level 2 measurement as of March 31, 2022, as all significant inputs to the valuation model used to estimate the fair value of the Pre-Funded Warrants were directly observable from the Company’s publicly-traded common stock. 10 Table of Contents The fair values of the Common Warrants and the Pre-Funded Warrants at the issuance date totaled $ 12.6 million in the aggregate, which was $ 0.6 million more than the $ 12.0 million proceeds received in the PIPE Transaction. The excess $ 0.6 million represents an inducement to the purchaser to enter into the PIPE Transaction and was recorded in warrant liabilities expense in the accompanying consolidated statement of operations. Given the Company’s capital requirements and market conditions, the Company consummated this financing on market terms available at the time of the transaction. The Company remeasured the fair value of the warrant liabilities as of March 31, 2022, and the following table presents the changes in the warrant liabilities from the issuance date (in thousands): Pre-Funded Warrants (Level 2) Common Warrants (Level 3) Total Warrant Liabilities Fair value at January 1, 2022 $ - $ - $ - Fair value at March 9, 2022 (issuance date) 2,646 9,943 12,589 Change in fair value of warrant liabilities 136 590 726 Fair value at March 31, 2022 $ 2,782 $ 10,533 $ 13,315 5) LEASES The Company has operating leases for office and laboratory space in the borough of Manhattan in New York, New York and in Cambridge, Massachusetts, which expire in 2026 and 2028, respectively. On March 31, 2022, the Company entered into the Torrey Pines Science Center Lease in San Diego, California (the “San Diego Lease”) with Torrey Pines Science Center Limited Partnership for approximately 5,200 square feet of lab and office space. The term of the San Diego Lease is 62 months and the lease commencement date was April 19, 2022, which is the date the Company will record a right-of-use (“ROU) asset and corresponding operating lease liability. The San Diego Lease will expire in June 2027. Base rent for the San Diego Lease is $ 6.35 per square foot in the first year of the San Diego Lease, with a rent abatement for the second and third full months of the first year. The base rent will increase by approximately 3 % on each anniversary of the lease commencement date. The Company is also required to pay its share of operating expenses and property taxes. The San Diego Lease provides for a one-time option to extend the lease term for an additional five years at the then fair rental value. On March 5, 2022, the Company entered into an Agreement to Assign Space Lease with Regen Lab USA LLC (“Regen”) pursuant to which the Company agreed to assign its Brooklyn, New York lease (the “Brooklyn Lease”) to Regen. The effective date of the assignment was contingent upon, among other things, a consent from BioBat, Inc. (the “Landlord”) to assign the Brooklyn Lease. Additionally, Regen agreed to purchase certain equipment from the Company for $ 50,000 , partly reimburse the Company $ 50,000 toward certain existing unamortized leasehold improvements, and to reimburse the Company for the existing security deposit the Company had under the Brooklyn Lease of approximately $ 63,000 . On March 25, 2022, the Company entered into an Assignment and Assumption of Lease Agreement (the “Assignment Agreement”) with Regen, the consent of which was provided by the Landlord in the Assignment Agreement. The effective date of the assignment was March 28, 2022. Under the Assignment Agreement, Regen (i) accepts the assignment of the Brooklyn Lease; (ii) assumes all of the obligations, liabilities, covenants and conditions of the Company’s as tenant under the Brooklyn Lease; (iii) assumes and agrees to perform and observe all of the obligations, terms, requirements, covenants and conditions to be performed or observed by the Company under the Brooklyn Lease; and (iv) makes all of the representations and warranties binding under the Brooklyn Lease with the same force and effect as if Regens had executed the Brooklyn Lease originally as the tenant. Notwithstanding the above assumptions by Regen, the Company shall be and remain liable and responsible for the due keeping, and full performance and observance, of all the provisions of the Brooklyn Lease on the part of the tenant to be kept, performed and observed. As a result of the Assignment Agreement, the Company wrote off the remaining ROU asset balance and the corresponding lease liability. 11 Table of Contents The Company accounts for leases under ASC 842, Leases . Operating leases are included in “Right-of use assets - operating leases” within the Company’s balance sheets and represent the Company’s right to use an underlying asset for the lease term. The Company’s related obligation to make lease payments are included in “Operating lease liabilities, non-current” and “Operating lease liabilities, current” within the Company’s balance sheets. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Because the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rates based on the information available at the lease commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance, tax payments and other miscellaneous costs. The variable portion of lease payments is not included in the ROU assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses. Accordingly, all expenses associated with a lease contract are accounted for as lease expenses. During the three months ended March 31, 2022 and 2021, the net operating lease expenses were as follows (in thousands): Three months ended March 31, 2022 2021 Operating lease expense $ 186 $ 151 Sublease income ( 21 ) ( 21 ) Variable lease expense 3 9 Total lease expense $ 168 $ 139 The tables below show the beginning balances of the operating ROU assets and lease liabilities as of January 1, 2022 and the ending balances as of March 31, 2022, including the changes during the period (in thousands). Operating Lease ROU Assets Operating lease ROU assets at January 1, 2022 $ 2,567 Amortization of operating lease ROU assets ( 102 ) Write off of ROU asset due to lease termination ( 1,372 ) Operating lease ROU assets at March 31, 2022 $ 1,093 Operating Lease Liabilities Operating lease liabilities at January 1, 2022 $ 2,723 Principal payments on operating lease liabilities ( 103 ) Write off of operating lease liability due to lease termination ( 1,453 ) Operating lease liabilities at March 31, 2022 1,167 Less non-current portion 1,018 Current portion at March 31, 2022 $ 149 12 Table of Contents As of March 31, 2022, the Company’s operating leases had a weighted-average remaining life of 5.8 years with a weighted-average discount rate of 10.23 %. The maturities of the operating lease liabilities are as follows (in thousands): As of March 31, 2022 $ 201 2023 270 2024 272 2025 274 2026 267 Thereafter 245 Total payments 1,529 Less imputed interest ( 362 ) Total operating lease liabilities $ 1,167 6) GOODWILL AND IN-PROCESS RESEARCH & DEVELOPMENT In 2018, the Company acquired IRX, which was accounted for as a business combination. The Company recorded IPR&D in the amount of $ 6.0 million, which represents the fair value assigned to technologies that were acquired in connection with the IRX Acquisition and which have not reached technological feasibility and have no alternative future use. IPR&D assets acquired in a business combination are considered to be indefinite lived until the completion or abandonment of the associated research and development projects. If and when development is complete, which generally occurs upon regulatory approval, and the Company is able to commercialize products associated with the IPR&D assets, these assets are then deemed definite-lived and are amortized based on their estimated useful lives beginning at that point in time. If development is terminated or abandoned, the Company may have a full or partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets over fair value The Company also recorded goodwill in the amount of $ 2.0 million related to the IRX Acquisition. Goodwill and indefinite-lived IPR&D assets are not amortized but are tested for impairment annually, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the entity is less than its carrying values. As of March 31, 2022, the Company performed a qualitative assessment to determine whether it is more likely than not that the fair value of the entity is less than its carrying value. Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. As a result of the qualitative assessment, the Company determined that due to the decline in the Company’s stock price of $ 4.17 per share as of December 31, 2021 to $ 2.05 per share as of March 31, 2022, there were indications of impairment. Accordingly, the Company engaged a third-party valuation firm to perform a quantitative analysis to compare the entity’s carrying values to its fair value, the results of which showed that the entity’s fair value exceeded its carrying value and there was no impairment of the recorded goodwill or IPR&D. 7) ACCRUED EXPENSES Accrued expenses consisted of the following (in thousands): March 31, 2022 December 31, 2021 Accrued compensation $ 637 $ 656 Accrued research and development expenses 311 222 Accrued general and administrative expenses 1,436 371 Total accrued expenses $ 2,384 $ 1,249 Accrued general and administrative expenses include $ 0.8 million for legal-related matters. 8) COMMITMENTS AND CONTINGENCIES Legal Matters The Company is involved in litigation and arbitrations from time to time in the ordinary course of business. Legal fees and other costs associated with such actions are expensed as incurred. In addition, the Company assesses the need to record a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable, and the amount can be reasonably estimated. 13 Table of Contents Dhesh Govender v. Brooklyn Immunotherapeutics, LLC, et al., Index No. 650847/2021 (N.Y. Sup. Ct. N.Y. Cty. 2021) On or about February 5, 2021, Dhesh Govender, a former short-term consultant of Brooklyn LLC, filed a complaint against Brooklyn LLC and certain individuals that plaintiff alleges were directors of Brooklyn LLC. The complaint is captioned, Dhesh Govender v. Brooklyn Immunotherapeutics, LLC, et al., Index No. 650847/2021 (N.Y. Sup. Ct. N.Y. Cty. 2021). Plaintiff alleges that Brooklyn LLC and certain of its officers and directors (“defendants”) engaged in unlawful and discriminatory conduct based on race, national origin and hostile work environment. Plaintiff also asserts various breach of contract, fraud and quantum meruit claims based on an alleged oral agreement pursuant to which he alleges Brooklyn LLC agreed to hire him as an executive once the Merger was completed. In particular, plaintiff alleges that, in exchange for transferring an opportunity to obtain an agreement to acquire a license from Novellus for its mRNA-based gene editing and cell reprogramming technology to Brooklyn LLC, he was promised a $ 0.5 million salary and 7 % of the equity of Brooklyn LLC. Based on these and other allegations, plaintiff seeks damages of not less than $ 10 million, a permanent injunction enjoining Brooklyn LLC from exercising the option to acquire such license from Novellus or completing the proposed Merger. On or about February 19, 2021, an amended complaint was filed asserting the same causes of action but wi thdrawing the request for injunctive relief. On June 6, 2021, defendants filed a motion to compel arbitration or, in the alternative, for partial dismissal of the complaint for failure to state viable fraud, quantum meruit and employment discrimination claims. After obtaining extensions of time to respond, plaintiff opposed the defendants’ motion on August 9, 2021. The defendants filed their reply on September 3, 2021. The Court heard oral argument on the motion to compel arbitration and/or dismiss and the motion to seal on October 13, 2021. By Order dated November 10, 2021, the Court granted defendants’ motion to compel Govender to arbitrate all of his claims against them, based on the arbitration clause of his consulting agreement with Brooklyn LLC. Govender thereafter filed his Statement of Claim (the “Demand”) with the American Arbitration Association (“AAA”), Case No. 01-21-0017-9417, on December 15, 2021 against the same defendants, and served it on defendants’ counsel on February 3, 2022. In his Demand, Govender continues to assert statutory discrimination claims against all defendants, claims against Brooklyn LLC premised on the breach of an alleged oral promise to issue Govender 7 % of the equity of Brooklyn LLC and to employ Govender at a $ 0.5 million annual salary in exchange for allegedly arranging and negotiating the Novellus license, common law fraud claims against Brooklyn LLC and Cherington based on the breach of these same promises and a claim for quantum meruit against the Brooklyn LLC. In his Demand, Govender now claims that the fair and reasonable value of his services on the quantum meruit claim exceeded $ 100 million and is seeking damages in an amount to be determined at the hearing. Defendants filed an answering statement to the Demand on February 28, 2022 have selected a three -member arbitration panel. Defendants intend to vigorously defend themselv es against these claims. At this stage in the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome. Emerald Private Equity Fund, LLC Matter By a letter dated July 7, 2021, Emerald Private Equity Fund, LLC (“Emerald”), a stockholder of Brooklyn, made a demand pursuant to 8 Del. C. 220 to inspect certain books and records of Brooklyn. The stated purpose of the demand is to investigate possible wrongdoing by persons responsible for the implementation of the Merger and the issuance of paper stock certificates, including investigating whether: (i) Brooklyn’s stock certificates were issued in accordance with the Merger Agreement; (ii) certain restrictions on the sale of Brooklyn common stock following the Merger were proper and applied without favor; (iii) anyone received priority in post-Merger issuances of Brooklyn’s stock certificates that allowed them to benefit from an increase in the trading price of Brooklyn’s common stock; and (iv) it should pursue remedial measures and/or report alleged misconduct to the SEC. Brooklyn has responded to the demand letter and has produced certain information to Emerald in connection with the demand, which is subject to the terms of a confidentiality agreement entered into among the parties, including certain additional stockholders who have subsequently joined as parties to such agreement (including Truell noted above). In October 2021, Emerald requested that Brooklyn produce additional information related to the authority, purpose and justification for the restriction imposed on the sale of Brooklyn common stock following the Merger and the timing of share delivery to Brooklyn stockholders, following which request Brooklyn agreed to produce certain additional information and emails relating to these topics. 14 Table of Contents On March 30, 2022, counsel to Emerald advised the Company that it was prepared to file suit against the Company, certain current and former directors of the Company, and the Company’s financial advisor in connection with the Merger, on behalf of Emerald and a class of similarly situated stockholders with respect to some or all of the foregoing matters, alleging claims for breach of fiduciary duty, conversion and aiding and abetting breach of fiduciary duty. Emerald’s counsel expressed a willingness to engage in private pre-suit early resolution discussions with the Company and its financial advisor on behalf of individual stockholders whom counsel represents in addition to Emerald; and the Company since engaged in such discussions. The Company can provide no assurance that such pre-suit early resolution discussions will be successful or that suit will not ultimately be filed against the Company, nor can the Company currently predict the outcome of any such suit, if filed. The Company intends to defend itself vigorously against any and all claims. Additionally, on April 7, 2022, the Company received a demand for indemnification from its financial advisor as it relates to the aforementioned potential lawsuit. John Westman v. Novellus, Inc., Christopher Rohde, and Matthew Angel, Civil Action No. 2181CV01949 (Middlesex County (Massachusetts) Superior Court) On or about September 7, 2021, John Westman, a former employee of Novellus, Inc. filed a Complaint in Middlesex County (Massachusetts) Superior Court against Novellus, Inc. and the company’s founders and former executives, Christopher Rohde and Matthew Angel (collectively, “Defendants”). The case includes allegations that Novellus, Inc. violated the Massachusetts Wage Act.. Brooklyn acquired Novellus, Inc. on July 16, 2021. Mr. Westman’s claims relate to alleged conduct that took place before Brooklyn acquired Novellus, Inc. Defense and liability in association with any Wage Act claims have been assumed by Mr. Rohde and Mr. Angel. On December 24, 2021, Westman dismissed the case without prejudice so the parties could mediate the matter. The parties’ February 2022 mediation was unsuccessful and the dispute is currently in arbitration. The company accrued $ 0.8 million in legal-related expenses during the quarter ended March 31, 2022 for the matters discussed above. Licensing Agreements USF Brooklyn LLC has license agreements with University of South Florida Research Association, Inc. (“USF”), granting Brooklyn LLC the right to sell, market, and distribute IRX-2, subject to a 7 % royalty payable to USF based on a percentage of gross product sales. Under the license agreement with USF, Brooklyn LLC is obligated to repay patent prosecution expenses incurred by USF. To date, Brooklyn LLC has not recorded any product sales, or obligations related to USF patent prosecution expenses. The license agreement terminates upon the expiration of the IRX-2 patents. Novellus, Ltd. and Factor In December 2020, Brooklyn LLC entered into option agreements (the “Option Agreements”) with Novellus, Ltd. and Factor (together, the “Licensors”) to obtain the right to exclusively license the Licensors’ intellectual property and mRNA cell reprogramming and gene editing technology for use in the development of certain cell-based therapies to be evaluated and developed for treating human diseases, including certain types of cancer, sickle cell disease, and beta thalassemia (the “Licensed Technology”). The option was exercisable before February 28, 2021 (or April 30, 2021 if the Merger had not closed by that date) and required Brooklyn LLC to pay a non-refundable option fee of $ 0.5 million and then an initial license fee of $ 4.0 million (including the non-refundable fee of $ 0.5 million) in order to exercise the option. In April 2021, Brooklyn LLC and the Licensors amended the Option Agreements to extend the exercise period to May 21, 2021 and to require Brooklyn, LLC to pay a total $ 1.0 million of the $ 4.0 million initial license fees to the Licensors by April 15, 2021. In April 2021, Brooklyn LLC and the Licensors entered into an exclusive license agreement (the “License Agreement”) pursuant to which Brooklyn LLC acquired an exclusive worldwide license to the Licensed Technology. Under the terms of the License Agreement, Brooklyn LLC is obligated to pay the Licensors a total of $ 4.0 million in connection with the execution of the License Agreement, all of which was paid as of June 2021. 15 Table of Contents The completion of the acquisition of Novellus, Ltd. relieved Brooklyn LLC from potential obligations to pay Novellus, Ltd. certain upfront fees, clinical development milestone fees and post-registration royalties under the License Agreement. The agreement with Factor under the License Agreement, which grants Brooklyn LLC exclusive rights to develop certain next-generation mRNA gene editing and cell therapy products, remained unchanged. Accordingly, Brooklyn LLC is obligated to pay to Factor a fee of $ 3.5 million in October 2022, which will be in addition to a fee of $ 2.5 million paid to Factor in October 2021. Brooklyn LLC is also required to use commercially reasonably efforts to achieve certain delineated milestones, including specified clinical development and regulatory milestones and specified commercialization milestones. In general, upon its achievement of these milestones, Brooklyn LLC will be obligated to pay, in the case of development and regulatory milestones, milestone payments to the Licensors in specified amounts and, in the case of commercialization milestones, specified royalties with respect to product sales, sublicense fees or sales of pediatric review vouchers. In the event Brooklyn LLC fails to timely achieve certain delineated milestones, the Licensors will have the right to terminate Brooklyn LLC’s rights under provisions of the License Agreement relating to those milestones. Novellus, Ltd. also has a license agreement with Factor, which was entered into in February 2015, amended in June 2018 and March 2020, and then amended and restated in November 2020. This license agreement provides for Novellus, Ltd. to use over 70 granted patents owned by Factor throughout the world covering synthetic mRNA, RNA-based gene editing, and RNA-based cell reprogramming, in addition to specific patents covering methods for treating specific diseases. There are also more than 60 pending patent applications throughout the world focused on these and other aspects of the technology. The patent coverage includes granted patents and pending patent applications in the United States, Europe, and Japan, along with other major life sciences markets. Novellus, Ltd. is required to use commercially reasonably efforts to achieve certain delineated milestones, including specified clinical development and regulatory milestones and specified commercialization milestones. In general, upon its achievement of these milestones, Novellus, Ltd. will be obligated, in the case of development and regulatory milestones, to make milestone payments of up to $ 51.0 million in aggregate to Factor and, in the case of commercialization milestones, specified royalties with respect to product sales, sublicense fees or sales of pediatric review vouchers. In the event Novellus, Ltd. fails to timely achieve certain delineated milestones, Factor may have the right to terminate Novellus, Ltd.’s rights under provisions of the License Agreement relating to those milestones. NoveCite In October 2020, Novellus, Ltd. (as sublicensor) and NoveCite (as sublicensee) entered into an exclusive license agreement (the “Sublicense”) to license novel cellular therapy for acute respiratory distress syndrome, which NoveCite is licensing from Factor. Under the sublicense agreement, NoveCite is required to use commercially reasonably efforts to achieve certain delineated milestones, including specified clinical development and regulatory milestones and specified commercialization milestones. In general, upon its achievement of these milestones, NoveCite will be obligated, in the case of development and regulatory milestones, to make milestone payments to the Novellus, Ltd. in specified amounts and, in the case of commercialization milestones, specified royalties with respect to product sales, sublicense fees or sales of pediatric review vouchers. Under the terms of the Sublicense, in the event that Novellus, Ltd. receives any revenue involving the original cell line included in the licensed technology, then Novellus, Ltd. shall remit to NoveCite 50 % of such revenue. Royalty Agreements Collaborator Royalty Agreement Effective June 22, 2018, IRX terminated its Research, Development and Option Facilitation Agreement and its Options Agreement (the “RDO and Options Agreements”) with a collaborative partner (the “Collaborator”), pursuant to a termination agreement (the “Termination Agreement”). The Termination Agreement was assigned to Brooklyn, LLC in November 2018 when Brooklyn LLC acquired the assets of IRX. In connection with the Termination Agreement, all of the rights granted to the Collaborator under the RDO and Options Agreements were terminated, and Brooklyn LLC has no obligation to refund any payments received from the Collaborator. As consideration for entering into the Termination Agreement, the Collaborator will receive a royalty equal to 6 % of revenues from the sale of IRX-2, for the period of time beginning with the first sale of IRX-2 through the later of (i) the twelfth anniversary of the first sale of IRX-2 or (ii) the expiration of the last IRX patent, or other exclusivity of IRX-2. 16 Table of Contents Royalty Agreement with certain former IRX Therapeutics Investors On May 1, 2012, IRX Therapeutics entered into a royalty agreement (the “IRX Investor Royalty Agreement ” ) with certain investors who participated in a financing transaction. The IRX Investor Royalty Agreement was assigned to Brooklyn LLC in November 2018 when Brooklyn LLC acquired the assets of IRX. Pursuant to the IRX Investor Royalty Agreement, when Brooklyn LLC becomes obligated to pay royalties to USF under the agreement described above under “Licensing Agreements-USF,” it will pay an additional royalty of 1 % of gross sales to an entity organized by the investors who participated in such financing transaction. There are no termination provisions in the IRX Investor Royalty Agreement. Brooklyn LLC has not recognized any revenues to date, and no royalties are due pursuant to any of the above-mentioned royalty agreements. Investor Royalty Agreement On March 22, 2021, Brooklyn LLC restated its royalty agreement with certain beneficial holders of Brooklyn ImmunoTherapeutics Investors GP LLC and Brooklyn ImmunoTherapeutics Investors LP, whereby such beneficial holders will continue to receive, on an annual basis, royalties in an aggregate amount equal to 4 % of the net revenues of IRX-2, a cytokine-based therapy being developed by Brooklyn LLC to treat patients with cancer. 9) STOCK-BASED COMPENSATION Stock Options There were no stock options outstanding or granted during the three months ended March 31, 2021. The following weighted-average assumptions were used for stock options granted during the three months ended March 31, 2022 : Three months ended March 31 , 2022 Weighted average risk-free rate 1.92 % Weighted average volatility 93 % Dividend yield 0 % Expected term 5.78 years 17 Table of Contents The following table summarizes stock option activity for the three months ended March 31, 2022 : Outstanding Options Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value Outstanding January 1, 2022 3,988,000 $ 8.40 9.38 $ - Granted 1,258,000 2.10 - - Cancelled ( 67,000 ) 5.94 - Outstanding March 31 , 2022 5,179,000 $ 6.90 9.32 $ 134,000 Options vested and exercisable at March 31, 2022 10,000 $ 10.26 9.75 $ - The per-share weighted average grant-date fair value of stock options granted during the three months ended March 31, 2022 was $ 1.58 . As of March 31, 2022, the unamortized stock-based compensation expense related to outstanding unvested options was approximately $ 18.5 million with a weighted average remaining requisite service period of 3.06 years. The Company expects to amortize this expense over the remaining requisite service period of these stock options. Included in the 5,179,000 stock options outstanding as of March 31, 2022 are two stock option grants the Company awarded to Howard J. Federoff, M.D., Ph.D. upon his appointment as the Company’s Chief Executive Officer and President in April 2021. Dr. Federoff was granted a nonqualified stock option covering approximately 2,628,000 shares of common stock (the “Time-Based Option”). The Time-Based Option was granted at a per share exercise price equal to the closing price of the common stock on the NYSE American stock exchange on the date of grant. Of the shares covered by the Time-Based Option, 25 % will vest on the one -year anniversary of the grant date, and the remaining shares will vest in substantially 36 equal monthly installments thereafter, so long as Dr. Federoff provides continuous service to the Company throughout the relevant vesting date. Dr. Federoff was also granted a performance-based nonqualified stock option covering approximately 597,000 shares of common stock (the “Milestone Option”). The Milestone Option was granted at a per share exercise price equal to the closing price of common stock on the NYSE American stock exchange on the date of grant, and its fair value is $ 4.3 million . The Milestone Option will fully vest upon the first concurrence by the U.S. Food and Drug Administration that a proposed investigation may proceed following review of a Company filed investigational new drug application in connection with that the License Agreement. This milestone is subject to Dr. Federoff’s continuous service with the Company through such vesting date. As of March 31, 2022, the Company has no t recognized any stock-based compensation expense on the Milestone Option because the Company has determined that it is not yet probable that the performance milestone will be accomplished. Both the Time-Based Option and the Milestone Option were granted outside the Company’s equity incentive plans discussed above. The unvested portion of the Time-Based Option and the Milestone Option will be cancelled upon the termination of Dr. Federoff’s employment with the Company for any reason, subject to certain vesting acceleration provisions upon a qualifying termination, as described in his employment agreement with the Company. Unless earlier terminated in accordance with their terms, each of the Time-Based Option and the Milestone Option will otherwise expire on the tenth anniversary of their respective grant date and be subject to the terms and conditions of the respective option agreement approved by the Company. Each of the Time-Based Option and the Milestone Option was intended to constitute an “employment inducement grant” in accordance with the employment inducement grant rules set forth in Section 711 (a) of the NYSE American LLC Company Guide and was offered as an inducement material to Dr. Federoff in connection with his hiring. There were no options exercised during the three months ended March 31, 2022 and 2021. 18 Table of Contents RSUs Outstanding RSUs are settled in an equal number of shares of common stock on the vesting date of the award. An RSU award is settled only to the extent vested. Vesting generally requires the continued employment or service by the award recipient through the respective vesting date. Because RSUs are settled in an equal number of shares of common stock without any offsetting payment by the recipient, the measurement of cost is based on the quoted market price of the stock at the measurement date, which is the grant date. There were no RSUs outstanding or granted during the three months ended March 31, 2021. The following table summarizes RSU activity for the three months ended March 31, 2022 : Outstanding Restricted Stock Units Weighted Average Fair Value per Share January 1, 2022 240,000 $ 13.80 Granted 1,101,000 1.93 Released ( 9,000 ) 4.21 Cancelled ( 9,000 ) 4.21 March 31 2022 1,323,000 $ 4.05 Balance expected to vest at March 31, 2022 772,000 During the three months ended March 31, 2022, the Company issued approximately 1,101,000 performance based RSUs (the “ 2022 PSUs”) to its employees, of which approximately 414,000 were awarded to Dr. Federoff. The 2022 PSUs are subject to the achievement of four performance goals, which are weighted equally. Once a performance goal is achieved, the tranche of shares allocated to that performance goal will be earned and will begin to vest over a three-year annual basis beginning on the date the performance goal was achieved. If a performance goal is not achieved, the tranche of shares allocated to that performance goal will be unearned and forfeited. The Company recognizes the fair value of RSUs granted as expense on a straight-line basis over the requisite service period. For performance based RSUs, the Company will begin recognizing the expense once the achievement of the related performance goal is probable. As of March 31, 2022, the unamortized stock-based compensation expense related to outstanding RSUs, including performance based RSUs that have been deemed probable, was approximately $ 3.6 million with a weighted average remaining requisite service period of 2.59 years. The Company expects to amortize this expense over the remaining requisite service period of the RSUs. Restricted Stock Pursuant to the Merger, Brooklyn LLC’s approximately 3,000 outstanding restricted common units were exchanged for approximately 630,000 shares of Brooklyn’s restricted common stock. There were no changes to any conditions and requirements of the restricted common stock. The shares vest quarterly beginning on March 31, 2021 and continuing through December 31, 2022, contingent on continued service. Due to the modification of the restricted common units, the fair value of the restricted common stock immediately after the Merger was compared to the fair value of the restricted common units immediately prior to the Merger, and the change in fair value of $ 0.3 million was recognized in the statement of operations during the three months ended March 31, 2021. The Company recognizes the fair value of restricted common stock as an expense on a straight-line basis over the requisite service period. During the quarter ended March 31, 2022, approximately 78,000 shares of unvested restricted common stock were forfeited due to the holders of such shares no longer providing services to the Company. As of March 31, 2022, there were no shares of unvested restricted stock outstanding. 19 Table of Contents Stock-Based Compensation Expense Stock-based compensation is recorded in general and administrative expense and research and development expense in the statement of operations. For the three months ended March 31, 2022 and 2021, stock-based compensation expense recorded in general and administrative expense was $ 0.8 million and $ 17,000 , respectively. For both of the three months ended March 31, 2022 and 2021, stock-based compensation expense recorded in research and development expense was $ 0.4 million. 10) STOCKHOLDERS’ EQUITY Private Placement of Equity On March 6, 2022, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an investor (the “PIPE Investor”) providing for the private placement (the “PIPE Transaction”) to the PIPE Investor of approximately 6,857,000 units (collectively, the “Units”), each Unit consisting of (i) one share of the Company’s common stock (or, in lieu thereof, one pre-funded warrant (the “Pre-Funded Warrants”) to purchase one share of common stock) and (ii) one warrant (the “Common Warrants”) to purchase one share of common stock, for an aggregate gross purchase price of approximately $ 12.0 million (the “Subscription Amount”). The PIPE Transaction closed on March 9, 2022. Each Pre-Funded Warrant has an exercise price of $ 0.005 per share of common stock, was immediately exercisable, may be exercised at any time, has no expiration date and is subject to customary adjustments. The Pre-Funded Warrants may not be exercised if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 9.99 % immediately after exercise thereof. Upon the closing of the transaction, the Company issued 5,500,000 shares of common stock and issued Pre-Funded Warrants representing approximately 1,357,000 shares of common stock. Each Common Warrant has an exercise price of $ 1.91 per share, becomes exercisable six months following the closing of the PIPE Transaction, expires five-and-one-half years from the date of issuance and is subject to customary adjustments. The Common Warrants may not be exercised if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 4.99 % immediately after exercise thereof, subject to increase to 9.99 % at the option of the holder. As of March 31, 2022, the Company had 6,857,000 Common Warrants outstanding with a weighted average exercise price of $ 1.91 per share and a weighted average contractual life of 5.45 years. As of March 31, 2022, the Company had 1,357,000 Pre-Funded Warrants outstanding with a weighted average exercise price of $ 0.005 per share. The Pre-Funded Warrants do not expire. The Common Warrants and Pre-Funded Warrants were accounted for as liabilities under ASC 815-40, as these warrants provide for a cashless settlement provision that does not meet the requirements of the indexation guidance under ASC 815-40. These warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the statement of operations. The fair values of the Common Warrants and the Pre-Funded Warrants at the issuance date totaled $ 12.6 million in the aggregate, which was $ 0.6 million more than the Subscription Amount. The excess $ 0.6 million represents an inducement to the PIPE Investor to enter into the transaction and was recorded in warrant liabilities expense in the accompanying consolidated statement of operations. Given the Company’s capital requirements and market conditions, the Company consummated this financing on market terms available at the time of the transaction. The Company incurred fees of $ 1.0 million through March 31, 2022 related to the PIPE Transaction, which were allocated to the fair value of the Common Warrants and the Pre-Funded Warrants and recorded in other expense, net on the accompanying condensed consolidated statement of operations. 20 Table of Contents In connection with the PIPE Transaction, the Company and the PIPE Investor also entered into a registration rights agreement, dated March 6, 2022, pursuant to which the Company agreed to prepare and file a registration statement with the SEC no later than 15 days following the filing date of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”) to register the resale of the shares of common stock included in the Units and the shares of common stock issuable upon exercise of the Pre-Funded Warrants and the Common Warrants. The Company agreed to use its best efforts to have such registration statement declared effective as promptly as possible after the filing thereof, subject to certain specified penalties if timely effectiveness is not achieved. The Company filed the 2021 Annual Report on April 15, 2022 and the registration statement on April 29, 2022. The registration statement became effective on May 11, 2022. Pursuant to the registration rights agreement, the Company is obligated to pay the PIPE Investor liquidated damages equal to 2 % of the Subscription Amount per month, with a maximum aggregate payment of 12 % of the Subscription Amount, in the event the PIPE Investor is not permitted to use the registration statement to resell the securities registered for resale thereunder for more than 10 consecutive calendar days or more than an aggregate of fifteen calendar days (which need not be consecutive calendar days) during any 12-month period. On May 24, 2022, the Company provided the PIPE Investor with notice that it was not able to resell the securities registered for resale under the registration agreement because the Company had not timely filed this Quarterly Report on Form 10-Q (the “Q1 2022 10-Q”) with the SEC, and that the PIPE Investor could not use the registration statement to resell the related securities until the Company filed the Q1 2022 10-Q. Because the PIPE Investor was unable to use the registration statement for at least 10 consecutive calendar days, the Company accrued $ 0.2 million for the three months ended March 31, 2022 for the estimated contingent loss the Company expected to incur as a result of the late Q1 2022 10Q filing, which is recorded in other expense, net in the accompanying condensed consolidated statements of operations. Reverse Stock-Split On March 25, 2021, immediately prior to the Merger, Brooklyn filed an amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse stock split. As a result of the reverse stock split, the number of issued and outstanding shares of common stock immediately prior to the reverse stock split was reduced into a smaller number of shares, such that every two shares of common stock held by a stockholder of Brooklyn immediately prior to the reverse stock split were combined and reclassified into one share of common stock after the reverse stock split. Immediately following the reverse stock split there were approximately 1,514,000 shares of common stock outstanding prior to the Merger. No fractional shares were issued in connection with the reverse stock split. Merger Under the terms of the Merger Agreement (see Note 3) , on March 25, 2021, Brooklyn issued shares of common stock to the equity holders of Brooklyn LLC. The 87,000 Class A units of Brooklyn LLC were converted into approximately 22,275,000 shares of common stock; the 15,000,000 Class B units were converted into approximately 2,515,000 shares of common stock; the 10,000,000 Class C units were converted into approximately 1,676,000 shares of common stock; approximately 630,000 shares of common units were converted into approximately 630,000 shares of common stock, and 10,500,000 rights options were converted into approximately 11,828,000 shares of common stock. Brooklyn also issued approximately 1,068,000 shares of common stock to the Financial Advisor pursuant to the Merger Agreement . 21 Table of Contents 11) EARNINGS PER SHARE Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period including the weighted average effect of the Pre-Funded Warrants the Company issued in connection with the PIPE Transaction, the exercise of which requires little or no consideration for the delivery of shares of common stock. The Company determined that the exercise of the Pre-Funded Warrants requires nominal consideration for the delivery of shares of common stock, and as such, has considered the 1,357,000 shares underlying the Pre-Funded Warrants to be outstanding effective on March 9, 2022 for the purposes of calculating basic EPS. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding (including the weighted average effect of the Pre-Funded Warrants) plus dilutive securities. Stock options, RSUs, warrants and other convertible securities are considered potential common shares and are included in the calculation of diluted net loss per share using the treasury method when their effect is dilutive. Diluted net loss per share is the same as basic net loss per share in periods where the effect of potentially dilutive shares of common stock are antidilutive. The following table presents the amount of stock options, RSUs, warrants and convertible preferred stock that were excluded from the computation of diluted net loss per common share for three months ended March 31, 2022 and 2021, as their effect was anti-dilutive: Three months ended March 31, 2022 2021 Stock options 5,179,000 - RSUs 1,323,000 - Warrants 6,857,000 - Preferred stock converted into common stock 48,000 42,000 Total potential common shares excluded from computation 13,407,000 42,000 12) RECENT ACCOUNTING PRONOUNCEMENTS There were no recent accounting pronouncements issued during the three months ended March 31, 2022 that would have impacted the Company’s financial statements or operations. 13) SUBSEQUENT EVENT On May 24, 2022, Dr. Federoff resigned as the Company’s Chief Executive Officer and President effective May 26, 2022, and the Board appointed Dr. Matthew Angel as the Company’s interim Chief Executive Officer. In connection with Dr. Federoff’s resignation, the Company entered into a Separation Agreement and General Release with Dr. Federoff (the “ Separation Agreement ”), pursuant to which Dr. Federoff resigned from his positions as Chief Executive Officer and as an officer, director and employee of the Company and all subsidiaries. Dr. Federoff’s resignation from the Board was not due to any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. In consideration for Dr. Federoff’s execution of the Separation Agreement and non-revocation of a waiver and release of claims relating thereto, Dr. Federoff is entitled to the following benefits under the Separation Agreement: • a lump sum cash severance benefit in the amount of $ 0.2 million, representing Dr. Federoff’s target bonus for 2022; • payment of Dr. Federoff’s annual base salary for a period of twelve months after the expiration of the applicable revocation period (the “ Separation Period ”), for a total gross amount equal to $ 0.5 million; • payment of Dr. Federoff’s premiums for continued health benefits provided under COBRA for the Separation Period; • full acceleration of the vesting of all outstanding options (with the exception of the Milestone Options) that would have vested during the Separation Period, and such options, together with outstanding options that vested prior to the Separation Date, representing collectively 1,420,095 shares of common stock, may be exercised for a period of thirty-six months after the Separation Date; • acceleration and vesting of 25/36 th of the Milestone Options, representing collectively 414,759 shares of common stock, may be exercised for a period of thirty-six months after the Separation Date; and • a lump sum cash severance benefit in the amount of $ 0.1 million, representing the value Dr. Federoff would have received if he was entitled to receive a settlement of a pro rata portion of his performance restricted stock units through the expiration of the Separation Period, assuming the performance metrics were waived and assuming a per share value of $ 0.81 . The Separation Agreement also includes certain other customary representations, warranties and covenants of Dr. Federoff, and provides for reimbursement of certain expenses incurred by Dr Federoff. The Separation Agreement supersedes all other agreements or arrangements between Dr. Federoff and the Company regarding the subject matter of the agreement, including those with respect to severance payments and benefits. 22 Table of Contents