Ernexa Therapeutics Inc. 10-K

ITEM 9A. Controls and Procedures Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we were required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as of the end of the period covered by this Annual Report on Form 10-K under the supervision, and with the participation, of our management, including our President and Chief Executive Officer (who serves as our principal executive officer) and our Senior Vice President of Finance (who serves as our principal financial officer) of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Senior Vice President of Finance concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Annual Report on Form 10-K in providing reasonable assurance of achieving the desired control objectives due primarily to the material weakness discussed below. Management’s Plan for Remediation of Material Weakness in Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. We were unable to timely file our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 with the SEC due to identifying errors in our financial statements reported in our Annual Report on Form 10-K for the years ended December 31, 2021 and 2020 during our preparation of the financial statements for the quarter ended March 31, 2022. Management concluded that the errors were the result of accounting personnel’s lack of technical proficiency in complex matters. On June 30, 2022, we filed an amendment to our Annual Report on Form 10-K for the years ended December 31, 2021 and 2020 to correct the errors in our financial statements for the years ended December 31, 2021 and 2020 and for the quarters ended June 30, 2020, September 30, 2020, March 31, 2021, June 30, 2021 and September 30, 2021. 47 Table of Contents Management has implemented measures designed to ensure that the deficiencies contributing to the ineffectiveness of our internal control over financial reporting are remediated, such that the internal controls are designed, implemented and operating effectively. The remediation actions to date include: • enhancing the business process controls related to reviews over technical, complex, and non-recurring transactions; • providing additional training to accounting personnel; and • using an external accounting advisor to review management’s conclusions on technical, complex and non-recurring matters. The material weakness cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As of December 31, 2023, we continue to season and enhance such controls to ensure that they will continue to operate effectively for a sufficient period of time before management can make conclusions on the operating effectiveness. We are committed to developing a strong internal control environment, and we believe the remediation efforts that we have implemented and will implement will result in significant improvements in our control environment. Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary. Changes in Internal Control over Financial Reporting Except for the actions intended to remediate the material weakness as described above, there was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. Other Information During the period from October 1, 2023, to December 31, 2023, none of our executive officers or directors adopted or terminated contracts, instructions or written plans for the purchase or sale of our securities. ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not Applicable. 48 Table of Contents PART III ITEM 10. Directors, Executive Officers and Corporate Governance DIRECTORS & EXECUTIVE OFFICERS The names of our directors and executive officers and their respective ages, positions, biographies and, in the case of directors, their qualifications to serve as directors, are set forth below as of March 12, 2024. Name ​ Age ​ Position (1) Sanjeev Luther ​ 62 ​ President and Chief Executive Officer and Director Dorothy Clarke ​ 59 ​ General Counsel and Director Sandra Gurrola ​ 56 ​ Senior Vice President, Finance James Bristol ​ 77 ​ Chairman of the Board Peter Cicala ​ 62 ​ Director William Wexler ​ 64 ​ Director Sanjeev Luther has served as President, Chief Executive Officer and as a member of our Board of Directors since January 1, 2024. Prior to that, Mr. Luther served as President, Chief Executive Officer and a board member of Cornerstone Pharmaceuticals from November 2017 to December 2023 and as its Chief Operations Officer and Chief Business Officer from December 2014 to November 2017. Prior to that, Mr. Luther served in various leadership roles at Bristol-Myers Squibb, Novartis, Bausch and Lomb and GE Healthcare. Mr. Luther holds an MBA in Marketing and a B.S. in Marketing and Business Administration from the State University of New York at Buffalo. Mr. Luther’s qualifications to serve on our Board include his expertise in the healthcare industry, his business training and education, and his extensive experience managing life science companies. Dorothy Clarke has served as our General Counsel since January 1, 2024 and as a member of our Board of Directors since August 28, 2023. From April 2002 until November 2022, Ms. Clarke worked at Johnson & Johnson (“J&J”), serving in various roles, including in the law department as a regulatory attorney for pharmaceutical, medical device and consumer businesses, a vice president of law and vice president of regulatory affairs in the medical devices sector, the chief privacy officer of J&J, and a vice president of health care compliance for medical devices and for research and development functions. Since November 2023, Ms. Clarke also serves as a board member of Comera Life Sciences. Ms. Clarke received a B.A. in history from Wesleyan University and a J.D. from the New York University School of Law. Ms. Clarke’s qualifications to serve on our Board include her expertise in the healthcare industry, risk management, regulatory affairs and compliance. Sandra Gurrola has served as our Senior Vice President of Finance since May 2023 and as our Vice President of Finance from June 2021 until May 2023. Prior to that, she served as the Senior Vice President of eGames.com Holdings, LLC from March 2021 to June 2021 and as a consultant to us. Ms. Gurrola served as Senior Vice President of Finance to NTN Buzztime, Inc. from September 2019 to March 2021 and its Vice President of Finance from 2014 until 2019. From 2009 to 2014, Ms. Gurrola served NTN Buzztime, Inc. in various leadership accounting roles, including Controller, Director of Accounting, and Director of Financial Reporting and Compliance. Previously, she was a senior manager of financial reporting for Metabasis Therapeutics, Inc., a biotechnology company. Ms. Gurrola received a B.A. in English from San Diego State University. 49 Table of Contents James Bristol has served as a member of our Board of Directors since October 2023. Dr. Bristol worked for 32 years in drug discovery, research and preclinical development at Schering - Plough Corporation, Parke - Davis, and Pfizer Inc. (“Pfizer”), serving in various senior research and development roles. From 2003 until his retirement in 2007, Dr. Bristol served as Senior Vice President of Worldwide Drug Discovery Research at Pfizer Global Research & Development, where he oversaw 3,000 scientists at seven Pfizer sites as they produced an industry leading number of drug development candidates in 11 therapeutic areas. In 2009, Dr. Bristol joined Frazier Healthcare Partners as a Senior Advisor. Since August 2007, Dr. Bristol has served as a member of the board of directors of Deciphera Pharmaceuticals, and since 2018 he has served as a member of the board of directors of Erasca, Inc., both of which are publicly traded life science companies. Dr. Bristol also served on the board of directors of Ignyta from 2014 until its acquisition by Roche in 2018, and served on the board of directors of SUDO Biosciences, Inc. from June 2021 until December 2023, and of Cadent Therapeutics, Inc. from 2011 until 2020. Dr. Bristol is the author of over 100 publications, abstracts and patents, and he conducted postdoctoral research at the University of Michigan (NIH Postdoctoral Fellow) and at The Squibb Institute for Medical Research. Dr. Bristol holds a Ph.D. in organic chemistry from the University of New Hampshire and a B.S. in Chemistry from Bates College. Dr. Bristol’s qualifications to serve on our Board include his vast experience in the biopharmaceutical industry, including in management and as a director, as well as his expertise in drug discovery and development. Peter Cicala has served as a member of our Board of Directors since February 2024. Mr. Cicala currently serves as General Counsel for a private biotechnology company, where he has been since March of 2021. In November of 2019, he co-founded Pretzel Therapeutics, Inc., a biotechnology company, and still serves as an executive advisor. From March 2020 until March 2021, Mr. Cicala served as Chief Intellectual Property Counsel for Intercept Pharmaceuticals, Inc. and from March 2014 until November 2019, he served as Chief Patent Counsel for Celgene Corporation, both publicly traded biopharmaceutical companies. Mr. Cicala has practiced law for over 25 years, and also has over 10 years of experience as a medicinal chemist. He received his B.S. in chemistry from Fairleigh Dickinson University and a J.D. from Seton Hall University School of Law. Mr. Cicala’s qualifications to serve on our Board include his expertise in pharmaceutical and biotechnology intellectual property law and in strategic management of proprietary technology and products. William Wexler has served as a member of our Board of Directors since June 2022. Prior to joining our Board of Directors, Mr. Wexler worked on over 150 individual projects, serving in various capacities including as Chairman, Chief Executive Officer, Chief Restructuring Officer and other designated roles of senior responsibility. Mr. Wexler has served as the Managing Member of WEXLER Consulting LLC, a management consulting firm, since 2012. From 2012 to 2019, he served in various roles, including as Chairman of the Board, interim Chief Executive Officer, Chief Executive Officer and sole director and stockholder representative of Upstate New York Power Products, Inc., a holding company that owned and operated power plants throughout upstate New York. From 2012 to 2013, Mr. Wexler served as Chief Restructuring Officer of VMR Electronics, LLC, a manufacturer of cable assembly products for the electronics interconnect industry. Prior to that, he served as a Managing Director and national finance practice lead at BBK, Ltd., a turn-around advisory firm, from 2006 to 2011. Mr. Wexler served as group Managing Director of corporate restructuring at Huron Consulting Group, LLC from 2002 to 2005. Previously, he was a Managing Director at Berenson Minella & Co., a boutique investment-banking firm, from 2000 to 2002. Between 1986 and 2000 he served as a Senior Director at BNP Paribas, where he established and led Paribas Properties, Inc., a real estate investment arm of the bank, and also where he was a lead officer of the then newly created U.S. asset workout group. Mr. Wexler started his professional career in 1981 in commercial lease brokerage, asset management and investment sales at Jones Lang Wootton (now Jones Lang LaSalle) where he worked until 1986. He earned a B.A. in Political Science from Johns Hopkins University. Mr. Wexler’s qualifications to serve on our Board include his experience in investment and senior management roles, as well as his business training and education. Family Relationships There are no family relationships between any of our officers or directors. 50 Table of Contents Involvement in Certain Legal Proceedings None of our directors or executive officers is involved in any legal proceeding that requires disclosure under Item 401(f) of Regulation S-K. Code of Ethics. Our Board has adopted a Code of Conduct and Ethics that applies to all of our employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of our Code of Conduct and Ethics is available on our website at www.eternatx.com under Investor Relations—Governance and is available in print to any stockholder who requests a copy from our Secretary. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics, or waivers of certain provisions as they relate to our directors and executive officers, at the same location on our website or in our public filings. The information on our website is not intended to form a part of or be incorporated by reference into this Annual Report on Form 10-K. Audit Committee We have a standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Our Audit Committee consists of William Wexler (Chair), James Bristol and Peter Cicala, all of whom meet the requirements for independence of Audit Committee members under applicable Nasdaq and SEC rules, including Rule 10A-3 promulgated under the Exchange Act. All of the members of our Audit Committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and Nasdaq. In addition, Mr. Wexler qualifies as our “Audit Committee financial expert,” as such term is defined in Item 407 of Regulation S-K. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our directors, executive officers and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC reports of ownership of, and transactions in, our equity securities. To our knowledge, based solely on a review of copies of such reports that we received, our records and written representations received from our directors, executive officers and certain of those persons who own greater than 10% of any class of our equity securities, for the year ended December 31, 2023, all applicable Section 16(a) filing requirements were complied with on a timely basis, with the exception of Dr. Bristol’s inadvertent late filing of his Form 3 filed on November 13, 2023, and which was due on November 9, 2023. Changes in Stockholder Nomination Procedures There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since such procedures were last described in our proxy statement filed with the SEC on May 5, 2023. ITEM 11. Executive Compensation Introduction Overview When determining executive officer compensation, and the various components that comprise it, our Compensation Committee evaluates and considers publicly available executive officer compensation survey data to present a competitive compensation package to attract and retain top talent, including an appropriate level of salary, performance-based bonus and equity incentives. Typically, the Compensation Committee evaluates competitive market benchmark data for a given executive role. Additionally, the Compensation Committee is authorized to engage outside advisors and experts to assist and advise the Compensation Committee on matters relating to executive compensation. In 2023, the Compensation Committee retained the services of Pearl Meyer, an independent compensation consultant, to review the cash and equity compensation package to be offered to Mr. Luther prior to his appointment as our Chief Executive Officer. Our Chief Executive Officer presents compensation recommendations to the Compensation Committee with respect to the executive officers other than himself. The Compensation Committee considers such recommendations, in conjunction with possible input from the Compensation Committee’s independent compensation consultant, in making compensation decisions or recommendations to the full Board. The full Board participates in evaluating the performance of our executive officers, except that our Chief Executive Officer does not participate when the Board evaluates his or her performance and is not present during voting or deliberations regarding his or her performance or compensation matters. 51 Table of Contents Compensation-Related Risk Assessment Our Compensation Committee assesses and monitors whether any of our compensation policies and programs are reasonably likely to have a material adverse effect on our Company. The Compensation Committee and management do not believe that the Company presently maintains compensation policies or practices that are reasonably likely to have a material adverse effect on the Company’s risk management or create incentives that could lead to excessive or inappropriate risk taking by employees. In reaching this conclusion, the Compensation Committee considered all components of our compensation program and assessed any associated risks. The Compensation Committee also considered the various strategies and measures employed by the company that mitigate such risk, including: (i) the overall balance achieved through our use of a mix of cash and equity, annual and long-term incentives and time-and performance-based compensation; (ii) our use of multi-year vesting periods for equity grants; and (ii) the oversight exercised by the Compensation Committee over performance metrics, if any, established for performance-based bonuses and its administration of our equity incentive plans. Compensation Recoupment (Clawback) Policy In 2023, we adopted a clawback policy providing for the recovery of erroneously-awarded incentive-based compensation related to the three fiscal years preceding the date on which the company is required to prepare an accounting restatement. The clawback policy complies with the requirements of Nasdaq’s listing rules. Named Executive Officers Under applicable SEC rules and regulations, our “named executive officers” are all individuals who served as our principal executive officer during 2023, our two most highly compensated executive officers (other than our principal executive officer) who were serving as executive officers at December 31, 2023, and up to two additional individuals who would have been one of our top two most highly compensated executive officer had they been serving as an executive officer at the end of 2023. Our 2023 named executive officers are identified in the table below: Name ​ Title Matthew Angel (1) ​ Former Chief Executive Officer Sandra Gurrola ​ Senior Vice President of Finance Andrew Jackson (1) ​ Former Chief Financial Officer (1) Dr. Angel and Mr. Jackson resigned as our Chief Executive Officer and Chief Financial Officer, respectively, effective December 31, 2023 and May 4, 2023, respectively. Summary Compensation Table 52 Table of Contents The following table sets out the compensation for our Named Executive Officers for the years ended December 31, 2023 and December 31, 2022: 2023 Summary Compensation Table Name and Principal Position ​ Fiscal Year ​ Salary (US$) ​ Bonus (US$) ​ Stock- Based Awards (US$) (1) ​ Option- Based Awards (US$) (1) ​ Non-Equity Incentive Plan Compensation (US$) ​ Nonqualified deferred compensation earnings (US$) ​ All Other Compensation (US$) ​ Total Compensation (US$) Matthew Angel, Former Chief Executive Officer and President (2) ​ 2023 ​ $350,000 ​ $— ​ $— ​ $461,680 ​ $13,000 (3) ​ $— ​ $— ) ​ $824,680 2022 ​ $— ​ $210,959 (4) ​ $— ​ $910,453 ​ $— ​ $— ​ $29,842 (5) ​ $1,151,254 Sandra Gurrola, Sr. Vice President of Finance (6) ​ 2023 ​ $255,833 ​ $50,050 (7) ​ $— ​ $— ​ $— ​ $— ​ $— ​ $305,883 Andrew Jackson, Former Chief Financial Officer (8) ​ 2023 ​ $144,621 ​ $— ​ $— ​ $— ​ $— ​ $— ​ $217,487 (9) ​ $362,108 ​ 2022 ​ $243,679 ​ $— ​ $— ​ $305,466 ​ $— ​ $— ​ $— ​ $549,145 1. The amounts reported in this column represent the aggregate grant date fair value of stock options granted during the applicable year. These amounts were calculated in accordance with FASB ASC Topic 718, Compensation – Stock Compensation, except that any estimate of forfeitures was disregarded. For a description of the assumptions used in computing the dollar amount recognized for financial statement reporting purposes, see Note 15, Stock-Based Compensation, in the Notes to the Consolidated Financial Statements 2. Dr. Angel was appointed our Interim Chief Executive Officer and President on May 26, 2022 and to our Board effective June 6, 2022. Dr. Angel was appointed our Chief Executive Officer and President on January 1, 2023. Dr. Angel resigned as our Chief Executive Officer and President and from our Board effective August 4, 2023 and was reappointed as our Chief Executive Officer and President on August 9, 2023. Dr. Angel subsequently resigned as our Chief Executive Officer and President effective December 31, 2023. 3. Represents amounts earned pursuant to Dr. Angel’s employment offer letter equal to two percent of the gross proceeds that we received from an exclusive option and license agreement entered into with a third party. 4. A cash signing bonus, which represents the salary Dr. Angel would have earned for the period during which he served as interim Chief Executive Officer and President, had Dr. Angel’s appointment as Chief Executive Officer and President been in effect beginning May 26, 2022. 5. Represents a reimbursement of legal fees Dr. Angel incurred in connection with entering into his employment offer letter. 6. Ms. Gurrola has served as our Senior Vice President of Finance since May 2023 and was not a named executive officer for the year ended December 31, 2022. 7. Represents a discretionary spot bonus paid to Ms. Gurrola and approved by our Board. 8. Mr. Jackson was appointed Chief Financial Officer effective May 31, 2022 and resigned as our Chief Financial Officer effective May 4, 2023. 9. Includes $207,500 of severance payments, $9,787 in reimbursement payments for COBRA and $200 for cell phone reimbursement. Narrative to Summary Compensation Table The following is a discussion of each component of our executive compensation program for 2023. Base Salary Each of our named executive officers receives a base salary. The base salary is the fixed cash compensation component of our executive compensation program and it recognizes individual performance, time in role, scope of responsibility, leadership skills and experience. The base salary compensates an executive for performing his or her job responsibilities on a day-to-day basis. Generally, base salaries are reviewed annually company-wide and adjusted (upward or downward) when appropriate based upon individual performance, expanded duties, changes in the competitive marketplace and, with respect to upward adjustments, if we are, financially and otherwise, able to pay it. We try to offer competitive base salaries to help attract and retain executive talent. In December 2023, upon the recommendation of the Compensation Committee, the Board approved an increase to Ms. Gurrola’s annual base salary from $220,000 to $275,000. In addition, the Board approved a lump sum payment of $33,542 to Ms. Gurrola, representing the additional amount of salary Ms. Gurrola would have received had the increase to her annual base salary taken effect as of May 5, 2023. Bonus and Incentive Compensation In addition to base salaries, our Compensation Committee has the authority to award discretionary annual bonuses to our named executive officers based on corporate and individual performance. Each year, the Compensation Committee or the Board may establish performance goals, which may be based on measures such as revenue, achievement of certain research and development milestones, completion of a strategic transaction, and other metrics the directors and management believe to provide proper incentives for achieving long-term shareholder value. The Board retains full discretion over performance evaluation and the amount of any bonuses to be paid to a named executive officer. Annual bonuses, if any, are intended to reward the individual performance of each named executive officer. In addition to an assessment of corporate and individual performance, the determination of the amount of a named executive officer’s bonus may vary from year to year depending on our financial condition and conditions in the industry in which we operate. The amount of such bonuses increase with executive rank so that, as rank increases, a greater portion of total annual cash compensation is based on annual corporate and individual performance. 53 Table of Contents For the year ended December 31, 2023, no performance goals were established for any named executive officer, however, the Compensation Committee approved a discretionary spot bonus to be paid to Ms. Gurrola in the amount of $50,050 to reward her individual performance during the year. Under the terms of his offer, Dr. Angel was eligible to receive a performance bonus equal to two percent of the gross proceeds that we actually received under licensing, option, collaboration, partnership, joint venture, settlement, and similar agreements that we enter into, or other actions, judgments, or orders, that generate cash proceeds to us, that are originated, negotiated and/or entered into by us during Dr. Angel’s employment, subject to certain conditions. During 2023, Dr. Angel received $13,000 in performance bonus payments as a result of an exclusive option and license agreement we entered into with a third party. Equity-Based Compensation Programs Historically we have issued stock options to our employees, including our named executive officers, to provide a means whereby our employees may develop a sense of proprietorship and personal involvement in our development and financial success, and to encourage them to devote their best efforts to us, thereby advancing our interests and the interests of stockholders. The Board believes that the granting of equity awards promotes continuity of management and increases incentive and personal interest in our welfare by those who are primarily responsible for shaping and carrying out our long-range plans and pursuing our growth and financial success. In 2023, we granted to Dr. Angel a time-based incentive stock option covering 132,003 shares of common stock, of which 110,043 shares vested immediately on the grant date and the remaining 21,960 shares vest in 35 substantially equal monthly installments on the first day of each month thereafter, subject to his continuous service. In connection with Dr. Angel’s resignation effective December 31, 2023, all unvested options were immediately cancelled, and he has 90 days from the date of termination of his employment to exercise any vested options, at which time any unexercised vested options will be cancelled. Benefits and Perquisites Employee Benefit Plans Named executive officers are eligible to participate in our employee benefit plans, including our medical, disability and life insurance plans, in each case, on the same basis as all of our other employees. Our employee benefit plans are designed to assist in attracting and retaining skilled employees. We also maintain a 401(k) plan for the benefit of our eligible employees, including the named executive officers, as discussed below. 401(k) Plan We maintain a retirement savings plan, or 401(k) plan, that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis. Under the 401(k) Plan, eligible employees may defer up to 90% of their compensation subject to applicable annual contribution limits imposed by the Internal Revenue Code of 1986, as amended (the “Code”), and limits imposed by non-discrimination testing. Our employees’ pre-tax contributions are allocated to each participant’s individual account and participants are immediately and fully vested in their contributions. The 401(k) plan is intended to be qualified under Section 401(a) of the Code with the 401(k) plan’s related trust intended to be tax exempt under Section 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan. Beginning on January 1, 2023, we began matching employees’ contributions at a rate of 100% of the first 3% of the employee’s contribution and 50% of the next 2% of the employee’s contribution, for a maximum match of 4%. Pension Benefits We do not maintain any pension benefit or retirement plans other than the 401(k) Plan. Nonqualified Deferred Compensation We do not maintain any nonqualified deferred compensation plans. Named Executive Officer Employment Agreements and Change in Control Arrangements The following descriptions summarize the principal terms of our employment agreements with our named executive officers. Matthew Angel 54 Table of Contents On December 30, 2022, we entered into an offer letter with Dr. Angel effective on January 1, 2023 with respect to terms of his employment as our Chief Executive Officer and President. The compensatory terms of the offer letter, including equity awards, were approved by the Compensation Committee. Dr. Angel’s hiring, and his offer letter, were approved by the Board. From May 24, 2022 until he was appointed as Chief Executive Officer and President, Dr. Angel served as our interim Chief Executive Officer and President. Dr. Angel did not receive any salary or other cash compensation during his tenure as interim Chief Executive Officer and President. Under the terms of his offer letter, we paid Dr. Angel an annual base salary of $350,000. We also paid Dr. Angel a cash signing bonus of $210,959, which represented the salary Dr. Angel would have earned for the period during which he served as interim Chief Executive Officer and President. Dr. Angel was eligible to receive a performance bonus equal to two percent of the gross proceeds that we actually received pursuant to all licensing, option, collaboration, partnership, joint venture, settlement, other similar agreements that we entered into, or other actions, judgments, or orders that generate cash proceeds to us, that are originated, negotiated and/or entered into by us during Dr. Angel’s employment (commencing on May 26, 2022), subject to certain conditions. In accordance with the terms of his offer letter, in January 2023, we granted to Dr. Angel a time-based incentive stock option covering 132,003 shares of common stock, of which 110,043 shares vested immediately on the grant date and the remaining 21,960 shares vest in 35 substantially equal monthly installments on the first day of each month thereafter, subject to his continuous service. Dr. Angel resigned as our Chief Executive Officer and President effective December 31, 2023. Upon termination of Dr. Angel’s employment, all unvested options were immediately cancelled, and Dr. Angel has 90 days from the date of termination of his employment to exercise any vested options, at which time any unexercised vested options will be cancelled. For information on related party transactions with Dr. Angel, see Item 13, Certain Relationships and Related Transactions, and Director Independence. Sandra Gurrola We entered into an employment agreement, dated as of June 16, 2021, with Sandra Gurrola, which provides for our at-will employment of Ms. Gurrola commencing on June 21, 2021 and continuing until terminated by us or Ms. Gurrola. Ms. Gurrola’s employment agreement provides for an annual base salary of $220,000, which amount is subject to periodic review by the Board or the Compensation Committee. Ms. Gurrola is also eligible to receive an annual cash bonus award in an amount up to 35% of her base salary upon achievement of agreed upon performance targets. The bonus will be determined by the Board or the Compensation Committee and paid annually by March 15 in the year following the performance year on which such bonus is based. In accordance with the terms of her employment agreement, in June 2021, Ms. Gurrola was granted 1,750 restricted stock units, 25% of which vests on each anniversary of the grant date over four years. Vesting generally requires Ms. Gurrola’s continued employment through the relevant vesting date. If Ms. Gurrola’s employment is terminated by us without Cause (as defined in the employment agreement) or by Ms. Gurrola for Good Reason (as defined in the employment agreement), we will pay Ms. Gurrola all amounts accrued but unpaid as of the effective date of such termination, as well as continuation of her salary and benefits for the following six-month period. Notwithstanding the foregoing, if a termination of employment without Cause or for Good Reason occurs within 90 days before or 12 months after a Change in Control (as defined in the employment agreement), Ms. Gurrola will receive the benefits described in the preceding sentence, but the continuation of her salary and benefits will be for 12-month period, and, in addition, Ms. Gurrola will receive a lump-sum payment of her target bonus and the restricted stock units granted to her in June 2021 will fully vest. Any such severance benefits under the employment agreement are contingent on Ms. Gurrola entering into and not revoking a general release of claims in favor of our company. Andrew Jackson We entered into an amended and restated employment agreement, dated as of May 10, 2022, which provided for our at-will employment of Mr. Jackson commencing on May 31, 2022 and continuing until terminated by us or Mr. Jackson. Mr. Jackson resigned as our Chief Financial Officer on May 4, 2023. 55 Table of Contents Under the terms of his employment agreement, we paid Mr. Jackson an annual base salary of $415,000. Mr. Jackson was also eligible to receive an annual cash bonus award in an amount up to 40% of his base salary upon achievement of agreed upon performance targets. The bonus would be determined by the Board or the Compensation Committee and paid annually by March 15 in the year following the performance year on which such bonus was based. In accordance with the terms of his employment agreement, Mr. Jackson received a time-based nonqualified stock option covering 33,239 shares of common stock, 25% of which would vest on the first anniversary of the employment agreement’s effective date, and the remainder would vest ratably on a monthly basis over the three-year period thereafter. Vesting generally required Mr. Jackson’s continued employment through the relevant vesting date. Due to Mr. Jackson’s termination prior to the first anniversary of the employment agreement’s effective date, none of the shares subject to such option vested and all 33,239 shares were immediately cancelled upon his termination. We entered into a separation agreement and general release with Mr. Jackson on May 2, 2023, pursuant to which, we paid Mr. Jackson a continuation of his salary for the following six-month period as well as reimbursement of up to six months of his COBRA premiums in exchange for Mr. Jackson entering into and not revoking a general release of claims in favor or our company. Outstanding Equity Awards at 2023 Fiscal Year-End The following table summarizes the number of shares of our common stock underlying outstanding equity incentive plan awards for each named executive officer as of December 31, 2023. ​ Option Awards ​ Stock Awards Name ​ Grant Date ​ Number of securities underlying unexercised options (#) exercisable ​ ​ Number of securities underlying unexercised options (#) unexercisable ​ Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) ​ Option exercise price ($) ​ Option expiration date ​ Number of shares or units of stock that have not vested (#) ​ Market value of shares of units of stock that have not vested ($) ​ Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) ​ Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested shares ($) Matthew Angel, Former Chief ​ 8/1/2022 (1) ​ 46,629 ​ ​ — ​ — ​ 9.80 ​ 3/30/2024 ​ — ​ — ​ — ​ — Executive Officer and President ​ 1/12/2023 (1) ​ 116,753 ​ ​ — ​ — ​ 4.84 ​ 3/30/2024 ​ — ​ — ​ — ​ — Sandra Gurrola, Sr. Vice President of Finance (3) ​ 6/21/2021 (2) ​ — ​ ​ — ​ — ​ — ​ — ​ 874 ​ 1,573 ​ — ​ — ​ 3/11/2022 (3) ​ 3,339 ​ ​ 2,386 ​ — ​ 38.60 ​ 3/11/2032 ​ — ​ — ​ — ​ — Andrew Jackson, Former Chief Financial Officer ​ — ​ — ​ ​ — ​ — ​ — ​ — ​ — ​ — ​ — ​ — 1. Dr. Angel resigned effective December 31, 2023. Unvested options were immediately cancelled and vested options will expire 90 days from the date of termination. 2. The restricted stock units vest at a rate of 25% of the shares subject to the award in four substantially equal annual installments on the anniversary date of the grant date. 3. The option vests in 36 substantially equal monthly installments. 56 Table of Contents Employment Agreement with Current Chief Executive Officer Sanjeev Luther was appointed as our President and Chief Executive Officer effective January 1, 2024. Mr. Luther did not serve as one of our executive officers during 2023, and is therefore not one of our 2023 named executive officers. We entered into an employment agreement, dated as of December 19, 2023, with Mr. Luther, which provides for at-will employment until terminated by us or Mr. Luther. Mr. Luther’s employment agreement provides for an annual base salary of $550,000, which amount is subject to periodic review by the Board or the Compensation Committee. Mr. Luther also received a one-time signing bonus of $75,000. Mr. Luther is eligible to receive an annual cash bonus award in an amount up to 50% of his base salary upon achievement of agreed upon performance targets. The bonus will be determined by the Board or the Compensation Committee and paid annually by March 15 in the year following the performance year on which such bonus is based. In accordance with the terms of his employment agreement, Mr. Luther was granted an equity award on January 1, 2024, consisting of 1,685,218 non-qualified stock options, which will vest over a four-year period, with 25% of the options vesting on the first anniversary of the grant date, and the remaining options vesting monthly over the remaining three years. Vesting generally requires Mr. Luther’s continued employment through the relevant vesting date. If Mr. Luther’s employment is terminated by us without Cause (as defined in his employment agreement) or by Mr. Luther for Good Reason (as defined in his employment agreement), we will pay Mr. Luther all amounts accrued but unpaid as of the effective date of such termination, as well as a lump sum payment equal to nine months of his salary, as well as up to nine months of continued benefits. Mr. Luther will also be paid a pro-rata performance bonus equal to (x) the performance bonus Mr. Luther would have received based on actual performance for such fiscal year if Mr. Luther had remained employed for the entire fiscal year multiplied by (y) a fraction, the numerator of which is the number of days Mr. Luther was employed during such fiscal year. Notwithstanding the foregoing, if a termination without Cause or for Good Reason occurs beginning upon the occurrence of a Change in Control (as defined in the employment agreement) and ending on the first anniversary of the occurrence of the Change in Control (“Change in Control Protection Period”), Mr. Luther will receive the benefits described in the preceding sentence, but the lump sum severance payment and the payment of benefits will be for a 12-month period and he will receive 100% of his target bonus. In addition, all outstanding and unvested equity awards granted to Mr. Luther during his employment will become immediately vested and exercisable upon such date of termination during the Change in Control Protection Period and will be exercisable for a period of 12 months following the date of termination during the Change in Control Protection Period. Any such severance benefits under the employment agreement are contingent on Mr. Luther entering into and not revoking a general release of claims in favor of our company. Director Compensation We have a non-employee director compensation program to compensate our non-employee directors for their service in such capacity with annual retainers and equity compensation as described below. However, since August 2022, we have not compensated our non-employee directors in accordance with our non-employee director compensation program. Our Compensation Committee and Board are assessing our non-employee director compensation program, and if and when we restart compensating our non-employee directors for their service in such capacity, the elements of our non-employee director compensation program may be different from what is described below. 57 Table of Contents Compensation Element ​ Amount Annual Board Member Compensation ​ Paid in cash or stock options, at the Board’s discretion. Cash paid in quarterly installments or upon the effective date of an earlier resignation of the non-employee director. Stock Options to vest quarterly over one year from grant date: ​ a. ​ Board Member: $40,000 ​ b. ​ Board Chair: $70,000 ​ ​ Committee Member Retainers ​ Paid in cash or stock options, at the Board’s discretion. Cash paid in quarterly installments or upon the effective date of an earlier resignation of the non-employee director. Stock Options to vest quarterly over one year from grant date: ​ c. ​ Audit Committee: $7,500 ​ d. ​ Compensation Committee: $5,000 ​ e. ​ Nominating/Governance Committee: $4,000 ​ ​ Leadership Supplemental Retainer ​ Paid in cash or stock options, at the Board’s discretion. Cash paid in quarterly installments or upon the effective date of an earlier resignation of the non-employee director. Stock Options to vest quarterly over one year from grant date: ​ f. ​ Audit Committee Chair: $15,000 ​ g. ​ Compensation Committee Chair: $10,000 ​ h. ​ Nominating/Governance Committee Chair: $8,000 ​ ​ New Director Equity Award (outside directors) ​ Option for 8,290 shares of Common Stock, which option shall have an exercise price equal to the fair market value per share of common stock, as determined under the 2020 Plan, and, subject to continued service on the Board, vest in an initial installment of 1/3 of the shares on the first anniversary of the grant date, with the remaining shares to vest in 24 substantially equal installments thereafter. The Board and the Compensation Committee designed our non-employee director compensation program to reward directors for their contributions to our success, align the director compensation program with stockholder interests, and provide competitive compensation necessary to attract and retain high quality non-employee directors. We do not pay fees to any of our directors for meeting attendance. 2023 Director Compensation During 2023, we did not compensate any of our directors, in either cash or equity, for their service in such capacity. On January 1, 2024, we granted to Dorothy Clarke a stock option to purchase 84,261 shares of our common stock as compensation for her services as a member of our Board from August 28, 2023 until December 31, 2023, for which she had previously not been compensated. As of December 31, 2023, none of our directors held any outstanding equity awards other than William Wexler, who held a stock option to purchase 15,895 shares of our common stock. As of December 31, 2023, Gregory Fiore, a former director who resigned from our Board effective October 4, 2023, held stock options to purchase 10,742 shares of our common stock, which expired unexercised 90 days following the date of his resignation. 58 Table of Contents ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth information known to us regarding beneficial ownership of common stock as of March 12, 2024 (the “Measurement Date”) by: • each person known by us to be the beneficial owner of more than 5% of outstanding common stock; • each of our named executive officers and directors; and • all of our executive officers and directors as a group. Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days after the Measurement Date. In computing the number of shares beneficially owned by a person or entity and the percentage ownership of that person or entity in the table below, all shares subject to options, warrants and restricted stock units held by such person or entity were deemed outstanding if such securities are currently exercisable, or exercisable or would vest based on service-based vesting conditions within 60 days of the Measurement Date, assuming that the liquidity event vesting conditions had been satisfied as of such date. These shares were not deemed outstanding, however, for the purpose of computing the percentage ownership of any other person or entity. The beneficial ownership of our common stock is based on 5,410,331 shares of our common stock outstanding as of the Measurement Date. Unless otherwise indicated, we believe that each person named in the table below has sole voting and investment power with respect to all shares of common stock beneficially owned by him. Unless otherwise noted, the business address of each of these stockholders is c/o Eterna Therapeutics, Inc., 1035 Cambridge Street, Suite 18A, Cambridge, MA 02141. Name and Address of Beneficial Owner ​ Common Shares Beneficially Owned ​ Percentage of Common Shares Beneficially Owned ​ Series A Convertible Preferred Stock Beneficially Owned ​ Percentage of Series A Convertible Preferred Stock Beneficially Owned ​ Percentage of Total Voting Power Greater than 5% Stockholders : ​ ​ ​ ​ ​ Charles Cherington (1) ​ 1,212,707 ​ 19.99% ​ 71,306 ​ 45.7% ​ 19.99% George Denny (2) ​ 1,237,448 ​ 19.99% ​ 71,306 ​ 45.7% ​ 19.99% Freebird Partners LP (3) ​ 1,283,634 ​ 19.99% ​ — ​ — ​ 19.99% Nicholas J. Singer (4) ​ 600,480 ​ 9.99% ​ — ​ — ​ 9.99% IAF, LLC (5) ​ 576,899 ​ 9.99% ​ — ​ — ​ 9.99% John Halpern (6) ​ 550,282 ​ 9.99% ​ — ​ — ​ 9.99% Named Executive Officers and Directors : ​ ​ ​ ​ ​ Matthew Angel (7) ​ 337,864 ​ 6.06% ​ — ​ — ​ 6.06% Sandra Gurrola (8) ​ 4,903 ​ * ​ — ​ — ​ * Andrew Jackson ​ — ​ — ​ — ​ — ​ — James Bristol ​ — ​ — ​ — ​ — ​ — Dorothy Clarke ​ — ​ — ​ — ​ — ​ — Sanjeev Luther ​ — ​ — ​ — ​ — ​ — William Wexler (9) ​ 15,204 ​ * ​ — ​ — ​ * All current directors and executive officers as a group (5 persons) (10) ​ 20,107 ​ 6.43% ​ — ​ — ​ 6.43% * Less than 1% 59 Table of Contents (1) The number of common shares beneficially owned consists of (i) 556,465 shares of common stock, (ii) 8,460 shares of common stock issuable upon the conversion of shares of Series A convertible preferred stock (assuming a conversion rate of 8.4282 per share) and (iii) 656,242 shares of common stock issuable upon exercise of note warrants and/or the conversion of convertible notes (assuming a conversion price of $1.9194 per share). As further described below, such warrants and convertible notes are subject to a 19.99% blocker. The number of common shares beneficially owned, the percentage of common shares beneficially owned and the percentage of total voting power shown in the table gives effect to such blocker. Pursuant to the terms of the note warrants and convertible notes, the number of shares of common stock that may be acquired by the holder thereof upon exercise of the note warrants and/or conversion of the convertible notes is limited, to the extent necessary, to ensure that following such exercise and/or conversion, the number of shares of common stock then beneficially owned by the holder and any other persons or entities whose beneficial ownership of common stock would be attributed to the holder for purposes of Section 13(d) of the Exchange Act does not exceed 19.99% of the total number of shares of our common stock then outstanding. Upon delivery of a written notice to us, the holder may from time to time increase (with such increase not effective until the 61st day after delivery of such notice) or decrease the blocker to any other percentage not in excess of 9.99%. Mr. Cherington’s address is c/o Ara Partners, LLC, 200 Berkeley Street, 26 th Floor, Boston, MA, 02116. (2) Denny Family Partners II, LLC owns 50,453 shares of common stock and the George Denny III Trust dated 6/11/1981 owns 406,785 shares of common stock. Mr. Denny disclaims beneficial ownership of the shares held by Denny Family Partners II, LLC except to the extent of his pecuniary interest therein. Mr. Denny has sole voting and dispositive power over 204 shares of common stock and has shared voting and dispositive power over 460,209 shares of common stock. Mr. Denny’s address is PO Box 423, Poland, ME 04274. The foregoing information has been included solely in reliance upon, and without independent investigation of, the disclosures contained in the Schedule 13G/A filed by Mr. Denny with the SEC on March 6, 2023. The number of common shares beneficially owned consists of (i) 457,442 shares of common stock, (ii) 8,460 shares of common stock issuable upon the conversion of shares of Series A convertible preferred stock (assuming a conversion rate of 8.4282 per share) and (iii) 780,006 shares of common stock issuable upon exercise of note warrants and/or the conversion of convertible notes (assuming a conversion price of $1.9194 per share). As further described below, such warrants and convertible notes are subject to a 19.99% blocker. The number of common shares beneficially owned, the percentage of common shares beneficially owned and the percentage of total voting power shown in the table gives effect to such blocker. Pursuant to the terms of the note warrants and convertible notes, the number of shares of common stock that may be acquired by the holder thereof upon exercise of the note warrants and/or conversion of the convertible notes is limited, to the extent necessary, to ensure that following such exercise and/or conversion, the number of shares of common stock then beneficially owned by the holder and any other persons or entities whose beneficial ownership of common stock would be attributed to the holder for purposes of Section 13(d) of the Exchange Act does not exceed 19.99% of the total number of shares of our common stock then outstanding. Upon delivery of a written notice to us, the holder may from time to time increase (with such increase not effective until the 61st day after delivery of such notice) or decrease the blocker to any other percentage not in excess of 9.99%. (3) The number of common shares beneficially owned consists of (i) 272,583 shares of common stock and (ii) 1,011,055 shares of common stock issuable upon exercise of note warrants and/or the conversion of convertible notes (assuming a conversion price of $1.9194 per share). As further described below, such warrants and convertible notes are subject to a 19.99% blocker. The number of common shares beneficially owned, the percentage of common shares beneficially owned and the percentage of total voting power shown in the table gives effect to such blocker. Pursuant to the terms of the note warrants and convertible notes, the number of shares of common stock that may be acquired by the holder thereof upon exercise of the note warrants and/or conversion of the convertible notes is limited, to the extent necessary, to ensure that following such exercise and/or conversion, the number of shares of common stock then beneficially owned by the holder and any other persons or entities whose beneficial ownership of common stock would be attributed to the holder for purposes of Section 13(d) of the Exchange Act does not exceed 19.99% of the total number of shares of our common stock then outstanding. Upon delivery of a written notice to us, the holder may from time to time increase (with such increase not effective until the 61st day after delivery of such notice) or decrease the blocker to any other percentage not in excess of 9.99%. Curtis Huff is the sole member of Freebird Partners, LP. Freebird Partners, LP’s address is 2800 Post Oak Blvd, Suite 2000, Houston, TX 77056. (4) The number of common shares beneficially owned consists of shares of common stock issuable upon exercise of note warrants and/or the conversion of convertible notes held by Purchase Capital LLC, of which Mr. Singer is the controlling person, or by Pacific Premier Trust as custodian for the benefit of Mr. Singer . The foregoing information has been included in reliance upon, and without independent investigation of, the disclosures contained in the Schedule 13G/A filed by Mr. Singer with the SEC on January 19, 2024. As further described below, such warrants and convertible notes are subject to a 9.99% blocker. The number of common shares beneficially owned, the percentage of common shares beneficially owned and the percentage of total voting power shown in the table gives effect to such blocker. Pursuant to the terms of the note warrants and convertible notes, the number of shares of common stock that may be acquired by the holder thereof upon exercise of the note warrants and/or conversion of the convertible notes is limited, to the extent necessary, to ensure that following such exercise and/or conversion, the number of shares of common stock then beneficially owned by the holder and any other persons or entities whose beneficial ownership of common stock would be attributed to the holder for purposes of Section 13(d) of the Exchange Act does not exceed 9.99% of the total number of shares of our common stock then outstanding. Upon delivery of a written notice to us, the holder may from time to time increase (with such increase not effective until the 61st day after delivery of such notice) or decrease the blocker to any other percentage not in excess of 9.99%. Mr. Singer’s address is 1395 Brickell Avenue, Suite 800, Miami, FL 33131. 60 Table of Contents (5) The number of common shares beneficially owned consists of (i) 212,464 shares of common stock and (ii) 364,435 shares of common stock issuable upon exercise of note warrants and/or the conversion of convertible notes (assuming a conversion price of $1.9194 per share). As further described below, such warrants and convertible notes are subject to a 9.99% blocker. The number of common shares beneficially owned, the percentage of common shares beneficially owned and the percentage of total voting power shown in the table gives effect to such blocker. Pursuant to the terms of the note warrants and convertible notes, the number of shares of common stock that may be acquired by the holder thereof upon exercise of the note warrants and/or conversion of the convertible notes is limited, to the extent necessary, to ensure that following such exercise and/or conversion, the number of shares of common stock then beneficially owned by the holder and any other persons or entities whose beneficial ownership of common stock would be attributed to the holder for purposes of Section 13(d) of the Exchange Act does not exceed 9.99% of the total number of shares of our common stock then outstanding. Upon delivery of a written notice to us, the holder may from time to time increase (with such increase not effective until the 61st day after delivery of such notice) or decrease the blocker to any other percentage not in excess of 9.99%. IAF, LLC has sole voting and dispositive powers. IAF LLC’s address is 115 Church Street, Charleston, SC 29401. (6) The number of common shares beneficially owned consists of (i) 452,284 shares of common stock held by the John D. Halpern Revocable Trust, of which, Mr. Halpern and Katherine H. Halpern are trustees and (ii) 97,998 shares of common stock issuable upon exercise of note warrants and/or the conversion of convertible notes (assuming a conversion price of $1.9194 per share). As further described below, such warrants and convertible notes are subject to a 9.99% blocker. The number of common shares beneficially owned, the percentage of common shares beneficially owned and the percentage of total voting power shown in the table gives effect to such blocker. Pursuant to the terms of the note warrants and convertible notes, the number of shares of common stock that may be acquired by the holder thereof upon exercise of the note warrants and/or conversion of the convertible notes is limited, to the extent necessary, to ensure that following such exercise and/or conversion, the number of shares of common stock then beneficially owned by the holder and any other persons or entities whose beneficial ownership of common stock would be attributed to the holder for purposes of Section 13(d) of the Exchange Act does not exceed 9.99% of the total number of shares of our common stock then outstanding. Upon delivery of a written notice to us, the holder may from time to time increase (with such increase not effective until the 61st day after delivery of such notice) or decrease the blocker to any other percentage not in excess of 9.99%. Mr. Halpern and Ms. Halpern share voting and dispositive powers. Mr. Halpern’s address is PO Box 540 Portsmouth, New Hampshire 03802. (7) Includes 163,382 shares of common stock issuable upon exercise of options. (8) Includes 3,975 shares of common stock issuable upon exercise of options. (9) Represents shares of common stock issuable upon exercise of options. (10) Includes 19,179 shares of common stock issuable upon exercise of options. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table contains information as of December 31, 2023 with respect to compensation plans under which our equity securities are authorized for issuance. ​ Equity Compensation Plan Information Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted- average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) ​ (a) (b) (c) Equity compensation plans approved by securityholders (1) 296,116 $ 9.79 684,023 Equity compensation plans not approved by securityholders (2) 93,545 $ 158.80 67,863 Total 389,661 $ 45.00 751,886 61 Table of Contents (1) At our 2021 annual meeting of stockholders, our stockholders approved a restatement of the Eterna Therapeutics Inc. Restated 2020 Stock Incentive Plan (the “Restated 2020 Plan”). The Restated 2020 Plan is a broad-based incentive plan, which allows for the grant of stock options, restricted stock, restricted stock units, performance awards, unrestricted stock awards and similar kinds of equity-based compensation to employees, directors, consultants and prospective employees. (2) In May 2021, our Board adopted our 2021 Inducement Stock Incentive Plan (the “2021 Inducement Plan”). The 2021 Inducement Plan was adopted without stockholder approval pursuant to Section 711 of the Company Guide of the NYSE American LLC, the stock exchange on which our common stock was listed at the time the 2021 Inducement Plan was adopted by our Board. The 2021 Inducement Plan provides for the grant of equity-based awards, including non-qualified stock options, performance shares, performance units, restricted stock, restricted stock units, and stock appreciation rights. The awards available for grant under the 2021 Inducement Plan are available only to new employees and incentive stock options may not be issued under the 2021 Inducement Plan. 62 Table of Contents ITEM 13. Certain Relationships and Related Transactions, and Director Independence Except as described in Note 11 (Related Party Transactions) to the consolidated financial statements included in Part II, Item 8 of this report, which is incorporated by reference into this Item 13, since January 1, 2022, there has not been nor are there currently proposed any transactions or series of similar transactions to which we were or are to be a party in which the amount involved exceeds the lesser of $120,000 or one percent (1%) of the average of our total assets at year-end for the last two completed fiscal years and in which any director, executive officer, holder of more than 5% of the common stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest. Related Party Transaction Policy Our Audit Committee is responsible for the review, approval, or ratification of any potential conflict of interest transaction involving any of our directors or executive officers, director nominees, any person known by us to be the beneficial owner of more than 5% of our outstanding capital stock, or any family member of or related party to such persons, including any transaction required to be reported under Item 404(a) of Regulation S-K promulgated by the SEC. In reviewing any such proposed transaction, our Audit Committee is tasked with considering all relevant facts and circumstances, including the commercial reasonableness of the terms, the benefit or perceived benefit, or lack thereof, to us, opportunity costs of alternate transactions, the materiality and character of the related person’s direct or indirect interest and the actual or apparent conflict of interest of the related person. Under our policy, employees are required to report any material transaction or relationship that could result in a conflict of interest to our compliance officer. Director Independence Our Board undertook a review of the independence of each individual serving on our Board. Based on information provided by each such individual concerning his or her background, employment, and affiliations, our Board determined that the Board meets the independence requirements under Nasdaq’s listing rules and the SEC’s applicable rules and regulations. Our Board affirmatively determined that each of our non-employee directors—James Bristol, Peter Cicala and William Wexler—are “independent” as defined in Nasdaq’s listing rules. In making these determinations, our Board considered the current and prior relationships that each individual director has with us and other facts and circumstances our Board deemed relevant in assessing their independence. Under Nasdaq’s listing rules, a director who is, or at any time during the past three years was, employed by us cannot be considered “independent.” Accordingly, our Board determined that neither of the other two members of our Board (Sanjeev Luther, our President and Chief Executive Officer, and Dorothy Clarke, our General Counsel) are “independent” as defined in Nasdaq’s listing rules. ITEM 14. Principal Accounting Fees and Services Fees and Services of Independent Registered Public Accounting Firm The table below summarizes the fees and expenses billed to us by Grant Thornton for the years ended December 31, 2023 and 2022. Year Audit Fees Audit-Related Fees Tax Fees All Other Fees Total 2023 $ 516,224 $ — $ — $ — $ 516,224 2022 $ 435,750 $ — $ — $ — $ 435,750 Audit Fees. Audit fees consist of services rendered by an independent registered public accounting firm for the audit of our consolidated financial statements (including tax services performed to fulfill the auditor’s responsibility under generally accepted auditing standards) and our internal control over financial reporting, reviews of the interim financial statements included in Forms 10-Q and includes services that generally only an external auditor can reasonably provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the SEC. 63 Table of Contents Audit-Related Fees. Audit-related fees consist of assurance and related services (e.g., due diligence) by an external auditor that are reasonably related to the audit or review of financial statements, including employee benefit plan audits, due diligence related to mergers and acquisitions, accounting consultations and audits in connection with proposed or consummated acquisitions, internal control reviews, attest services related to financial reporting that are not required by statute or regulation, and consultation concerning financial accounting and reporting standards. Tax Fees. Tax fees consist of services rendered by an external auditor for tax compliance, tax consulting and tax planning. All Other Fees. All other fees are for any other permissible work that is not an Audit, Audit-Related or Tax Fee. Policy for Approval of Audit and Permitted Non-Audit Services All audit and permissible non-audit services provided by the independent auditors are pre-approved by the Audit Committee (or the Chair of the Audit Committee, pursuant to a delegation of authority). These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. 64 Table of Contents PART IV ITEM 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as a part of this Annual Report on Form 10-K: (1) Consolidated Financial Statements. The consolidated financial statements of the Company and its consolidated subsidiaries are set forth in the “Index to Consolidated Financial Statements” on page F-1. (2) Financial Statement Schedules. None (3) Exhibits. The following exhibits are submitted with this Annual Report on Form 10-K or, where indicated, incorporated by reference to other filings. Exhibit Description Incorporated By Reference Plans of Acquisition 2.1 Asset Purchase Agreement, dated April 26, 2023, by and among Eterna Therapeutics Inc., Exacis Biotherapeutics Inc., the stockholders party thereto and, with respect to certain provisions, Factor Bioscience Limited. Exhibit 10.1 to Form 8-K filed on May 2, 2023 Articles of Incorporation and Bylaws 3.1 Composite Restated Certificate of Incorporation of the Company Filed herewith. 3.2 Second Amended and Restated Bylaws of the Company Exhibit 3.2 to Form 8-K filed on October 11, 2022 3.3 Certificate of Validation of Eterna Therapeutics Inc., as filed with the Secretary of State of the State of Delaware on September 3, 2021 Exhibit 3.1 to Form 8-K filed on September 13, 2021 Instruments Defining Rights of Security Holders 4.1 Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 Exhibit 4.1 to Form 10-K filed on April 15, 2022 Material Contracts 10.1(a) Securities Purchase Agreement, dated as of March 6, 2022, between Eterna Therapeutics Inc. and the purchaser party thereto Exhibit 10.1 to Form 8-K filed on March 9, 2022 10.1(b) Registration Rights Agreement, dated as of March 6, 2022, between Eterna Therapeutics Inc. and the purchaser party thereto Exhibit 10.4 to Form 8-K filed on March 9, 2022 10.1(c) Form of Pre-Funded Warrant (March 2022) Exhibit 10.2 to Form 8-K filed on March 9, 2022 10.1(d) Form of Common Stock Warrant (March 2022) Exhibit 10.3 to Form 8-K filed on March 9, 2022 10.2(a) Securities Purchase Agreement, dated as of November 23, 2022, by and among Eterna Therapeutics Inc. and the purchasers party thereto Exhibit 10.1 to Form 8-K filed on November 25, 2022 10.2(b) Form of Warrant (November 2022) Exhibit 10.1 to Form 8-K filed on December 5, 2022 10.2(c) Registration Rights Agreement, dated as of December 2, 2022, by and among Eterna Therapeutics Inc. and the purchasers party thereto Exhibit 10.2 to Form 8-K filed on December 5, 2022 10.3(a) Registration Rights Agreement, dated as of April 5, 2023, by and between Eterna Therapeutics Inc. and Lincoln Park Capital Fund, LLC Exhibit 10.2 to Form 8-K filed on April 11, 2023 10.3(b) Purchase Agreement, dated as of April 5, 2023, by and between Eterna Therapeutics Inc. and Lincoln Park Capital Fund, LLC Exhibit 10.1 to Form 8-K filed on April 11, 2023 10.4(a) Securities Purchase Agreement, dated as of July 13, 2023, by and among Eterna Therapeutics Inc. and the purchasers party thereto. Exhibit 10.1 to Form 8-K filed on July 18, 2023 10.4(b) Registration Rights Agreement, dated as of July 13, 2023, by and among Eterna Therapeutics Inc. and the purchasers party thereto. Exhibit 10.4 to Form 8-K filed on July 18, 2023 10.4(c) Form of 6% Senior Convertible Note (July 2023) Exhibit 10.2 to Form 8-K filed on July 18, 2023 65 Table of Contents 10.4(d) Form of Common Stock Purchase Warrant (July 2023) Exhibit 10.3 to Form 8-K filed on July 18, 2023 10.5(a)# Securities Purchase Agreement, dated as of December 14, 2023, by and among Eterna Therapeutics Inc. and the purchasers party thereto. Exhibit 10.1 to Form 8-K filed on December 20, 2023 10.5(b) Registration Rights Agreement, dated as of December 14, 2023, by and among Eterna Therapeutics Inc. and the parties thereto. Exhibit 10.2 to Form 8-K filed on December 20, 2023 10.5(c) Form of 12.0% Senior Convertible Note (December 2023 and January 2024) Exhibit 4.1 to Form 8-K filed on December 20, 2023 10.5(d) Form of Warrant (December 2023 and January 2024) Exhibit 4.2 to Form 8-K filed on December 20, 2023 10.6**^ Amended and Restated Exclusive License Agreement, dated November 14, 2023, by and between Factor Bioscience Limited and Eterna Therapeutics Inc. Exhibit 10.1 to Form 8-K filed on November 16, 2023 10.7 Master Services Agreement, dated September 9, 2022, by and between Factor Bioscience Inc. and Eterna Therapeutics Inc. Exhibit 10.1 to Form 8-K filed on September 15, 2022 10.8* Offer Letter, dated December 30, 2022, by and among Eterna Therapeutics Inc. and Dr. Matthew Angel Exhibit 10.1 to Form 8-K filed on January 4, 2023 10.9(a) Agreement to Assign Space Lease dated March 5, 2022 between Eterna Therapeutics LLC and Regen Lab USA LLC. Exhibit 10.5 to Form 10-Q filed on July 1, 2022 10.9(b) Assignment and Assumption of Lease dated March 25, 2022 between Eterna Therapeutics LLC and Regen Lab USA LLC Exhibit 10.6 to Form 10-Q filed on July 1, 2022 10.10 Sublease Agreement, dated October 18, 2022, by and between E.R. Squibb & Sons, LLC and Eterna Therapeutics Inc. Exhibit 10.16 to Form 10-K filed on March 20, 2023 10.11(a)* Amended and Restated Executive Employment Agreement, dated as of May 10, 2022, by and between Eterna Therapeutics Inc. and Andrew Jackson Exhibit 10.1 to Form 8-K filed on May 31, 2022 10.11(b)* Separation Agreement and General Release, dated May 2, 2023, by and between Eterna Therapeutics Inc. and Andrew Jackson. Exhibit 10.1 to Form 8-K filed on May 5, 2023 10.12* Employment Agreement, dated as of December 19, 2023, by and among Eterna Therapeutics Inc. and Sanjeev Luther. Exhibit 10.3 to Form 8-K filed on December 20, 2023 10.13(a)* Eterna Therapeutics Inc. 2021 Inducement Stock Incentive Plan (the “2021 Inducement Plan”) Exhibit 10.3 to Form 8-K filed on May 26, 2021 10.13(b)* Form of Stock Option Inducement Award for issuances under the 2021 Inducement Plan Filed herewith 10.13(c)* Form of Restricted Stock Unit Inducement Award for issuances under the 2021 Inducement Plan Filed herewith 10.14(a)* Eterna Therapeutics Inc. Restated 2020 Stock Incentive Plan (the “Restated 2020 Plan”) Exhibit 99.1 to Form 8-K filed on September 13, 2021 10.14(b)* Form of Stock Option Inducement Award for issuances under the Restated 2020 Plan Filed herewith 10.14(c)* Form of Restricted Stock Unit Inducement Award for issuances under the Restated 2020 Plan Filed herewith 10.15* Inducement Stock Option Award Agreement entered into with Sanjeev Luther Exhibit 99.1 to Form S-8 filed on January 16, 2024 10.16* Employment Agreement, effective January 1, 2023, by and among Eterna Therapeutics Inc. and Dorothy Clarke. Filed herewith 10.17* Employment Agreement, dated June 16, 2021, by and among Eterna Therapeutics Inc. and Sandra Gurrola. Exhibit 10.1 to Form 8-K filed on June 21, 2021 10.18 Form of indemnification agreement for directors and officers Exhibit 10.1 to Form 8-K filed on April 16, 2021 21.1 Subsidiaries of the Company Filed herewith 23.1 Consent of the Independent Registered Accounting Firm, Grant Thornton LLP Filed herewith 31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith 66 Table of Contents 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith 32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Furnished herewith 32.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Furnished herewith 97 Eterna Therapeutics Inc. Clawback Policy Filed herewith 101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) Filed herewith 101.SCH Inline XBRL Taxonomy Extension Schema Document Filed herewith 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Filed herewith 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document Filed herewith 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) * Indicates management contract or compensatory plan. ** Pursuant to Item 601(a)(5) of Regulation S-K, schedules and similar attachments to this exhibit have been omitted because they do not contain information material to an investment or voting decision and such information is not otherwise disclosed in such exhibit. The Company will supplementally provide a copy of any omitted schedule or similar attachment to the U.S. Securities and Exchange Commission or its staff upon request. # Pursuant to Regulation S-K Item 601(b)(2), certain exhibits and schedules to this exhibit have been omitted. The Company agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon its request. ^ Pursuant to Item 601(b)(10) of Regulation S-K, certain confidential portions of this exhibit were omitted by means of marking such portions with an asterisk because such information is both not material and is the type that the Company treats as private or confidential. ITEM 16. Form 10-K Summary None. 67 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized . ETERNA THERAPEUTICS INC. Date: March 14, 2024 By: /s/ Sandra Gurrola Sandra Gurrola Senior Vice President of Finance (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name Title Date /s/ Sanjeev Luther President, Chief Executive Officer, and Director (Principal Executive Officer) March 14, 2024 Sanjeev Luther /s/ Sandra Gurrola Senior Vice President of Finance (Principal Financial Officer and Principal Accounting Officer) March 14, 2024 Sandra Gurrola /s/ James Bristol Chairman of the Board March 14, 2024 James Bristol /s/ Peter Cicala Director March 14, 2024 Peter Cicala /s/ Dorothy Clarke Director March 14, 2024 Dorothy Clarke /s/ William Wexler Director March 14, 2024 William Wexler 68 Table of Contents ETERNA THERAPEUTICS INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 248 ) F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2023 and 2022 F-3 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 F-4 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2023 and 2022 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-6 Notes to the Consolidated Financial Statements F-7 F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Eterna Therapeutics Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheets of Eterna Therapeutics Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Going concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company incurred a net loss of $21,668,000 during the year ended December 31, 2023, and had an accumulated deficit of approximately $187,000,000 as of December 31, 2023. These conditions, along with other matters as set forth in Note 2, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2022. New York, New York March 14, 2024 F-2 Table of Contents ETERNA THERAPEUTICS INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value amounts) December 31, 2023 December 31, 2022 ASSETS Current assets: Cash $ 7,575 $ 11,446 Other receivables 425 951 Prepaid expenses and other current assets 1,599 1,284 Total current assets 9,599 13,681 Restricted cash 4,095 4,095 Property and equipment, net 493 236 Right-of-use assets - operating leases 32,781 1,030 Goodwill 2,044 2,044 Investment in non-controlling interest - 59 Other assets 120 1,134 Total assets $ 49,132 $ 22,279 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,067 $ 1,620 Accrued expenses 1,893 3,626 Income taxes payable 2 - Operating lease liabilities, current 2,216 295 Due to related party, current 1,205 1,750 Deferred revenue, current 190 - Other current liabilities - 363 Total current liabilities 6,573 7,654 Convertible notes, net 6,773 - Warrant liabilities 116 331 Operating lease liabilities, non-current 32,854 887 Due to related party, non-current - 1,206 Deferred revenue, non-current 392 - Contingent consideration liability 107 - Other liabilities 84 94 Total liabilities 46,899 10,172 Stockholder’s equity: Preferred stock, $ 0.005 par value, 1,000 shares authorized, 156 designated and outstanding of Series A convertible preferred stock at December 31, 2023 and 2022 , $ 156 liquidation preference 1 1 Common stock, $ 0.005 par value, 100,000 shares authorized at December 31, 2023 and 2022 ; 5,410 and 5,127 issued and outstanding at December 31, 2023 and 2022 , respectively 27 26 Additional paid-in capital 189,186 177,377 Accumulated deficit ( 186,981 ) ( 165,297 ) Total stockholders’ equity 2,233 12,107 Total liabilities and stockholders’ equity $ 49,132 $ 22,279 The accompanying notes are an integral part of these consolidated financial statements. F-3 Table of Contents ETERNA THERAPEUTICS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Years ended December 31, 2023 2022 Revenue $ 68 $ - Cost of revenues 236 - Gross loss ( 168 ) - Operating expenses: Research and development 5,920 10,392 General and administrative 14,587 16,835 Acquisition of Exacis in-process research and development 460 - Impairment of in-process research and development - 5,990 Total operating expenses 20,967 33,217 Loss from operations ( 21,135 ) ( 33,217 ) Other expense, net: Change in fair value of warrant liabilities 215 10,795 Change in fair value of contingent consideration 118 - Loss on non-controlling investment ( 59 ) ( 941 ) Interest income 138 - Interest expense ( 614 ) ( 30 ) Other expense, net ( 334 ) ( 1,141 ) Total other (expense) income , net ( 536 ) 8,683 Loss before income taxes ( 21,671 ) ( 24,534 ) Benefit (provision) for income taxes 3 ( 45 ) Net loss ( 21,668 ) ( 24,579 ) Series A convertible preferred stock dividend ( 16 ) ( 16 ) Net loss attributable to common stockholders $ ( 21,684 ) $ ( 24,595 ) Net loss per common share - basic and diluted $ ( 4.08 ) $ ( 8.06 ) Weighted average shares outstanding - basic and diluted 5,314 3,051 The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents ETERNA THERAPEUTICS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the years December 31, 2023 and 2022 (In thousands) Series A Convertible Preferred Stock Common Stock Additional Paid- in Accumulated Shares Amount Shares Amount Capital Deficit Total Balances at January 1, 2022 156 $ 1 2,601 $ 13 $ 166,191 $ ( 140,702 ) $ 25,503 Issuance of common stock in connection with private offering - - 275 1 ( 1 ) - - Issuance of common stock from vested restricted stock units - - 2 - ( 5 ) - ( 5 ) Issuance of common stock and warrants in connection with November 2022 private offering, net. - - 2,185 12 7,383 - 7,395 Forfeiture of unvested restricted stock - - ( 4 ) - - - - Cash dividends to Series A convertible preferred stockholders - - - - - ( 16 ) ( 16 ) Stock-based compensation - - - - 2,935 - 2,935 Net loss - - - - - ( 24,579 ) ( 24,579 ) Balances at January 1, 2023 156 $ 1 5,127 $ 26 $ 177,377 $ ( 165,297 ) $ 12,107 Issuance of common stock in connection with Exacis asset acquisition - - 69 - 208 - 208 Issuance of common stock related to stock purchase agreement with Lincoln Park Capital Fund, LLC, net - - 214 1 579 - 580 Issuance of note warrants - - - - 9,014 - 9,014 Repricing of warrants in connection with December 2023 financing - - - - 766 - 766 Cash dividends to Series A convertible preferred stockholders - - - - - ( 16 ) ( 16 ) Stock-based compensation - - - - 1,242 - 1,242 Net loss - - - - - ( 21,668 ) ( 21,668 ) Balances at December 31, 2023 156 $ 1 5,410 $ 27 $ 189,186 $ ( 186,981 ) $ 2,233 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents ETERNA THERAPEUTICS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For years ended December 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 21,668 ) $ ( 24,579 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 84 161 Stock-based compensation 1,242 2,935 Commitment shares issued to Lincoln Park Capital, LLC 249 - Loss on shares sold to Lincoln Park Capital, LLC 11 - Amortization of right-of-use asset 1,039 336 Impairment of right-of-use asset - 772 Non-cash component of acquisition of Exacis in-process research and development 433 - Gain on remeasurement of operating lease liability and right-of-use-asset - ( 642 ) Impairment of in-process research and development - 5,990 Loss on disposal of fixed assets 1 280 Gain on lease termination - ( 85 ) Accrued interest expense 176 - Paid-in-kind interest expense 113 - Amortization of debt discount and debt issuance costs 303 - Change in fair value of warrant liabilities ( 215 ) ( 10,795 ) Change in fair value of contingent consideration liability ( 118 ) - Loss on non-controlling investment 59 941 Changes in operating assets and liabilities: Other receivables 527 ( 262 ) Prepaid expenses and other current assets ( 556 ) ( 187 ) Other non-current assets 1,014 ( 646 ) Accounts payable and accrued expenses ( 2,898 ) 2,034 Operating lease liability 1,338 ( 340 ) Due to related party ( 1,750 ) 2,956 Deferred revenue 582 - Other liabilities ( 374 ) 155 Net cash used in operating activities ( 20,408 ) ( 20,976 ) Cash flows from investing activities: Purchase of property and equipment ( 19 ) ( 297 ) Proceeds from the sale of fixed assets - 250 Net cash used in investing activities ( 19 ) ( 47 ) Cash flows from financing activities: Proceeds received from the convertible notes financings 16,503 - Fees paid related to the Convertible Notes Financings ( 251 ) - Proceeds received under promissory note 1,500 - Principal payment made on promissory note ( 1,500 ) - Proceeds from sale of common stock pursuant to stock purchase agreement with Lincoln Park Capital Fund, LLC 320 - Proceeds from issuance of common stock and warrants in connection with private offering - 19,706 Fees paid in connection with private offering - ( 110 ) Issuance of common stock from exercise of pre-funded warrants - 7 Payroll tax remitted on net share settlement of equity awards - ( 5 ) Dividends paid to Series A convertible preferred stockholders ( 16 ) ( 16 ) Cash paid for fractional shares in connection with reverse stock split - ( 1 ) Principal payments on finance leases - ( 2 ) Net cash provided by financing activities 16,556 19,579 Net decrease in cash and cash equivalents ( 3,871 ) ( 1,444 ) Cash, cash equivalents and restricted cash at beginning of period 15,541 16,985 Cash, cash equivalents and restrictd cash at end of period $ 11,670 $ 15,541 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 20 $ 30 Income taxes $ 4 $ 15 Supplemental disclosure of non-cash investing and financing activities: Contingent consideration for Exacis asset acquisition $ 225 $ - Issuance of common stock for Exacis asset acquisition $ 208 $ - Note warrants issued $ 9,219 $ - Repricing of warrants in connection with December 2023 financing $ 766 $ - Unpaid fees incurred in connection with the December 2023 financing $ 116 $ - Paid-in-kind interest added to convertible notes principal $ 113 $ - Initial measurement of ROU assets $ 34,410 $ 1,706 Initial measurement of lease liabilities $ 34,170 $ 1,706 Adjustment to lease liability and ROU asset due to remeasurement $ ( 1,620 ) $ - Accrual for purchases of property and equipment $ 323 $ - Conversion of warrant liability to equity $ - $ 867 Unpaid fees incurred in connction with November 2022 private offering $ - $ 208 Initial measurement of finance lease liabilities $ - $ 10 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 7,575 $ 11,446 Restricted cash 4,095 4,095 Total cash, cash equivalents and restriced cash at end of period $ 11,670 $ 15,541 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents ETERNA THERAPEUTICS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2023 and 2022 1) Organization and Description of Business Operations Eterna Therapeutics Inc. is a life science company committed to realizing the potential of mRNA cell engineering to provide patients with transformational new medicines. Eterna has in-licensed a portfolio of over 100 patents covering key mRNA cell engineering technologies, including technologies for mRNA cell reprogramming, mRNA gene editing, the NoveSliceTM and UltraSliceTM gene-editing proteins, and the ToRNAdoTM mRNA delivery system, which Eterna collectively refers to as our “mRNA technology platform.” Eterna refers to aspects of its mRNA technology platform as “mRNA delivery,” “mRNA gene editing” and “mRNA cell reprogramming.” Eterna licenses its mRNA technology platform from Factor Bioscience Limited (“Factor Limited”) under an exclusive license agreement. As used herein, the “Company” or “Eterna” refers collectively to Eterna and its consolidated subsidiaries (Eterna LLC, Novellus, Inc. and Novellus Therapeutics Limited) unless otherwise stated or the context otherwise requires. 2) Liquidity and Capital Resources The Company has incurred significant operating losses and has an accumulated deficit as a result of its efforts to develop product candidates, including conducting clinical trials and providing general and administrative support for operations. As of December 31, 2023, the Company had an unrestricted cash balance of approximately $ 7.6 million and an accumulated deficit of approximately $ 187.0 million. For the year ended December 31, 2023, the Company incurred a net loss of $ 21.7 million, and the Company used cash of $ 20.4 million in operating activities. In October 2022, the Company entered into a sublease for approximately 45,500 square feet of office and laboratory space in Somerville, Massachusetts. Pursuant to the sublease, the Company delivered to the sublessor a security deposit in the form of a letter of credit in the amount of $ 4.1 million, which will be reduced on an incremental basis throughout the term of the sublease. The letter of credit was issued by the Company’s commercial bank, which required that the Company cash collateralize the letter of credit by depositing $ 4.1 million in a restricted cash account with such bank. The amount of required restricted cash collateral will decline in parallel with the reduction in the amount of the letter of credit over the term of the sublease. In April 2023, the Company entered into a standby equity purchase agreement (the “SEPA”) and a registration rights agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park committed to purchase up to $ 10.0 million of the Company’s common stock in an “equity line” financing arrangement. During the year ended December 31, 2023, the Company issued and sold approximately 214,000 shares of common stock under the SEPA for gross proceeds of $ 0.3 million . In July and December 2023, the Company received $ 16.5 million in gross proceeds from the issuance of convertible notes and in January 2024 received an additional $ 1.4 million in gross proceeds from the issuance of additional convertible notes. See Notes 6 and 18 for additional information regarding these financings. In connection with preparing the accompanying consolidated financial statements as of and for the year ended December 31, 2023, the Company’s management concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern because it does not expect to have sufficient cash or working capital resources to fund operations for the twelve-month period subsequent to the issuance date of these consolidated financial statements. The Company will need to raise additional capital, which could be through the sales of shares of its common stock under the SEPA, public or private equity offerings, debt financings, out-licensing the Company’s intellectual property, strategic partnerships or other means. Other than the SEPA, the Company currently has no arrangements for capital, and no assurances can be given that it will be able to raise capital when needed, on acceptable terms, or at all. The accompanying 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 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) Basis of Accounting Presentation and Summary of Significant Accounting Policies Basis of Accounting Presentation The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). All significant intercompany balances and transactions have been eliminated in consolidation. F-7 Table of Contents Summary of Significant Accounting Policies Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (a) the reported amounts of assets and liabilities; (b) disclosure of contingent assets and liabilities at the date of the consolidated financial statements; (c) the reported amounts of expenses during the reporting period; and (d) the reported amount of the fair value of assets acquired in connection with business combinations. On an ongoing basis, the Company evaluates its estimates, including those related to the recoverability and useful lives of long-lived assets; stock-based compensation assumptions; valuation assumptions of warrants; contingencies; contingent consideration and the provision for income taxes, including the valuation allowance. The Company bases its estimates on a combination of historical experience and various other assumptions that it believes are reasonable under the circumstances. Actual results may differ materially from these estimates. Cash, Cash Equivalents and Restricted Cash The Company classifies highly liquid investments with a remaining contractual maturity at date of purchase of three months or less as cash equivalents. The Company had no cash equivalents as of December 31, 2023 or 2022. Restricted cash consists of a cash collateralization of $ 4.1 million for a security deposit in the form of a letter of credit issued by the Company’s commercial bank and delivered to the sublessor of office and laboratory space the Company subleases in Somerville, Massachusetts. The amount of required restricted cash collateral will decline in parallel with the reduction in the amount of the letter of credit over the term of the sublease. Property and Equipment Property and equipment are recorded at cost and are depreciated over their estimated useful lives using the straight-line method. Laboratory and manufacturing equipment are depreciated over an estimated useful life of seven years . Leasehold improvements are depreciated over the shorter of their estimated useful life, or the lease term. Furniture and fixtures are depreciated over an estimated useful life of five years . Computer equipment are depreciated over an estimated useful life of three years . Upon retirement or other disposition of these assets, the cost and related accumulated depreciation of these assets are removed from the accounts and the resulting gain or losses are reflected in the results of operations. Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Goodwill Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in the acquisition of IRX Therapeutics, Inc. (“IRX”) in November 2018, which was accounted for as a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events occur or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. Management evaluates the Company as a single reporting unit, therefore, goodwill is tested for impairment at the entity level. Goodwill is tested for impairment as of December 31st of each year, or more frequently as warranted by events or changes in circumstances mentioned above. Accounting guidance also permits an optional qualitative assessment for goodwill to determine whether it is more likely than not that the carrying value of a reporting unit exceeds its fair value. If, after this qualitative assessment, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further quantitative testing would be necessary. A quantitative assessment is performed if the qualitative assessment results in a more likely than not determination or if a qualitative assessment is not performed. The quantitative assessment considers whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair value. F-8 Table of Contents In-Process Research & Development In-process research and development (“IPR&D”) assets represent the fair value assigned to technologies that were acquired in connection with the acquisition of IRX in November 2018, which have not reached technological feasibility and have no alternative future use. IPR&D assets are considered to be indefinite lived until the completion or abandonment of the associated research and development projects. During the period that the IPR&D assets are considered indefinite-lived, they are tested for impairment on an annual basis or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the IPR&D assets are less than their carrying amounts. 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. Revenue Recognition The Company recognizes the related revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, the Company recognizes revenue when a customer obtains control of promised services or goods in an amount that reflects the consideration to which the Company expects to receive in exchange for those goods or services. In general, the Company applies the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when a performance obligation is satisfied. Recognition of revenue is driven by satisfaction of the performance obligations using one of two methods: revenue is either recognized over time or at a point in time. Contracts containing multiple performance obligations classify those performance obligations into separate units of account either as standalone or combined units of account. Allocation of revenue to individual elements that qualify for separate accounting is based on the separate selling prices determined for each component, and total contract consideration is then allocated across the components of the arrangement. If separate selling prices are not available, the Company will use its best estimate of such selling prices, consistent with the overall pricing strategy and after consideration of relevant market factors. The Company estimates the amount of consideration it expects to recognize as revenue that is not probable of having a significant reversal of such recognized revenue, and it places a constraint on the remaining contractual consideration. As it becomes evident that the constrained amounts are no longer at risk of a significant reversal of revenue, the Company will remove the constraint from the related revenue and recognize a cumulative catch-up adjustment to revenue in the period in which the constraint was removed. The Company has one revenue generating contract. Such contract relates to an option and license agreement as well as certain development activities. See Note 5. Contract Assets: A contract asset is an entity’s right to payment for goods and services already transferred to a customer if that right to payment is conditional on something other than the passage of time. Generally, an entity will recognize a contract asset when it has fulfilled a contract obligation but must perform other obligations before being entitled to payment. Contract assets consist primarily of the cost of project contract work performed by third parties whereby the Company expects to recognize any related revenue at a later date, upon satisfaction of the contract obligations. The Company had no contract assets as of December 31, 2023 or 2022. Contract Liabilities: Contract liabilities consist primarily of consideration received, usually in the form of payment, on project work to be performed whereby the Company expects to recognize any related revenue at a later date, upon satisfaction of the contract obligations. As of December 31, 2023, contract liabilities were $ 0.6 million and are recognized as deferred revenue in the accompanying consolidated balance sheet. The Company recognized $ 0.1 million of revenue during the year ended December 31, 2023 from contract liabilities that arose in 2023. There were no contract liabilities as of December 31, 2022. Research and Development The Company expenses its research and development costs as incurred. Research and development expenses consist of costs incurred for company-sponsored research and development activities, as well as support for selected investigator-sponsored research. Upfront payments and milestone payments made for the licensing of technology are expensed as research and development in the period in which they are incurred if the technology is not expected to have any alternative future uses other than the specific research and development project for which it was intended. The major components of research and development costs include salaries and employee benefits, stock-based compensation expense, supplies and materials, preclinical study costs, expensed licensed technology, consulting, scientific advisors and other third-party costs, and allocations of various overhead costs related to our product development efforts. F-9 Table of Contents The Company has contracted with third parties to perform various studies. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. The Company accrues for third party expenses based on estimates of the services received and efforts expended during the reporting period. If the actual timing of the performance of the services or the level of effort varies from the estimate, the accrual is adjusted accordingly. The expenses for some third-party services may be recognized on a straight-line basis if the expected costs are expected to be incurred ratably during the period. Payments under the contracts depend on factors such as the achievement of certain events or milestones, the successful enrollment of patients, the allocation of responsibilities among the parties to the agreement, and the completion of portions of the clinical study or trial or similar conditions. Income Taxes The Company records deferred tax liabilities and assets based on the differences between the consolidated financial statements carrying amounts and the tax basis of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse and establishing a valuation allowance when it was more likely than not that some portion or all of the deferred tax assets would not be realized. Income tax expense consists of the tax payable for the period and the change during the period in deferred tax assets and liabilities. Tax benefits from uncertain tax positions are recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company has no material uncertain tax positions for any of the reporting periods presented. Loss Per Share The Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. The Company’s convertible notes contractually entitle the holders of such notes to participate in dividends but does not contractually require the holders to participate in the Company’s losses. As such, the two-class method is not applicable during periods with a net loss. Basic net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding plus dilutive securities. Shares of common stock issuable upon exercise, conversion or vesting of stock options, restricted stock units, warrants and the outstanding Series A convertible preferred stock are considered potential shares of common stock and are included in the calculation of diluted net loss per share using the treasury method when their effect is dilutive. The Company’s convertible notes are also considered potential shares of common stock and are included in the calculation of diluted net loss per share using the “if-converted” method, and the more dilutive of either the two-class method or the if-converted method is reported. Diluted net loss per share is the same as basic net loss per share for periods in which the effect of potentially dilutive shares of common stock is antidilutive. Segment Reporting The Company’s chief operating decision maker, who is the chief executive officer, reviews operating results on a consolidated basis to make decisions about allocating resources and assessing performance of the Company. As a result, in accordance with ASC No. 280, Segment Reporting, the Company has determined that it operates as one operating segment. Concentration of Credit Risk The Company maintains its cash balances in financial institutions located in the United States. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The Company’s cash balances are uninsured for deposit accounts that exceed the FDIC insurance limit. In the Company’s business, vendor concentrations could be indicative of vulnerabilities in the Company’s supply chain, which could ultimately impact the Company’s ability to continue its research and development activities. For the years ended December 31, 2023 and 2022, there was no vendor concentration related to the Company’s research and development activities. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between willing market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: F-10 Table of Contents • Level 1 Inputs – Valued based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. • Level 2 Inputs – Valued based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. • Level 3 Inputs – Valued based on inputs for which there is little or no market value, which require the reporting entity to develop its own assumptions. The carrying amounts reported on the balance sheet for cash and cash equivalents, other receivables, prepaid assets and other current assets, accounts payable and accrued expenses, other current liabilities and other liabilities approximate fair value due to their short maturities. Leases The Company accounts for its leases under ASC Topic 842, Leases. Operating lease liabilities represent the present value of lease payments not yet paid. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepaid or accrued lease payments, initial direct costs, lease incentives and impairment of operating lease assets. If the interest rate implicit in the lease is not readily determinable, the Company uses the incremental borrowing rates for collateralized borrowings in an amount equal to the lease payments under similar terms. The Company has elected the practical expedient to not separate non-lease components from the lease components to which they relate and instead account for each as a single lease component for all underlying asset classes. 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 payments contemplated in the lease that do not depend on an index or rate are not included in the ROU assets or lease liabilities. Rather, variable payments that do not depend on 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. The Company has also elected not to recognize ROU and lease liabilities for short-term leases that have a term of 12 months or less. The Company accounts for lease modifications as a separate contract when the modification (i) grants the lessee an additional right of use not included in the original lease contract, and (ii) increases the lease payments commensurate with the stand-alone price for the additional right of use. In this case, the Company would be treated as a new lease and measured in accordance with ASC 842 at the commencement date of the new lease without any impact on the existing lease. Otherwise, the Company accounts for lease modifications as a continuance of the existing lease, in which case, the Company reassesses the lease classification, remeasures the lease liability using an updated discount rate, and unless there is a full or partial termination of the lease, adjusts the ROU asset by the amount of change to the lease liability. For a full or partial lease termination, the lessee reduces the carrying amount of the ROU asset on a basis proportionate to the full or partial termination of the lease, and any difference between the adjustment to the ROU asset and the lease liability is recognized as a gain or loss in the current period. Commitment and Contingencies The Company follows ASC No.450-20, Loss Contingencies, to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Stock-Based Compensation The Company recognizes stock-based compensation expense for equity awards granted to employees, directors and certain consultants. The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite service period on a straight-line basis. F-11 Table of Contents Warrants The Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, or meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own stock and whether the holders of the warrants could potentially require net cash settlement in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. Convertible Notes The Company accounts for its convertible notes as a long-term liability equal to the proceeds received from issuance, including the embedded conversion feature, plus any interest paid-in-kind, net of the unamortized debt issuance costs and debt discount on the consolidated balance sheets. The Company evaluates all embedded features contained in the convertible notes, such as the conversion feature, the paid-in-kind feature and the redemption feature in the event of a default, to determine if such features require bifurcation as a derivative. The conversion feature included in the convertible notes is not required to be accounted for separately as an embedded derivative because the conversion feature is considered both indexed to the Company’s own stock and qualifies to be classified in stockholders’ equity. The paid-in-kind feature is considered to be a commitment to originate a loan, and the terms of the additional loans have the same terms as the original debt instrument. Therefore, the paid-in-kind feature qualifies for the scope exception under the applicable accounting guidance and is not required to be bifurcated as a derivative. The redemption feature in the event of a default was determined to be clearly and closely related to the convertible notes and not required to be bifurcated as a derivative. Proceeds from the sale of convertible notes with stock purchase warrants are allocated to the two elements based on their relative fair values. The portion of the proceeds allocated to warrants are recorded as a debt discount to the convertible note proceeds and presented on a net basis in the consolidated balance sheet. Debt issuance costs directly attributable to the transaction are capitalized and allocated to the convertible notes and warrants in the same manner as the proceeds. The amount of debt issuance costs allocated to the convertible notes represent a reduction of the face value of the convertible note proceeds. The Company amortizes debt issuance costs and debt discounts over the contractual term of the convertible notes, using the effective interest method, as interest expense on the consolidated statements of operations. Recent Accounting Standards In June 2022, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”). The FASB issued ASU 2022-03 to (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity related securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years with early adoption permitted. The Company does not expect a material impact to its consolidated financial statements as a result of adopting this ASU. In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements – Codification Amendment in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU modified the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations. The amendments to the various topics should be applied prospectively, and the effective date will be determined for each individual disclosure based on the effective date of the SEC’s removal of the related disclosure. If the SEC has not removed the applicable requirements from Regulation S-X or Regulation S-K by June 30, 2027, then this ASU will not become effective. Early adoption is prohibited. The Company does not expect the amendments in this ASU to have a material impact on its consolidated financial statements. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting – Improvements to Reportable Segment Disclosures, which provides updates to qualitative and quantitative reportable segment disclosure requirements, including enhanced disclosures about significant segment expenses and increased interim disclosure requirements, among others. ASU No. 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments should be applied retrospectively. The Company does not expect the amendments in this ASU to have a material impact on its consolidated financial statements. F-12 Table of Contents In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures, which requires disclosure of disaggregated income taxes paid, prescribes standard categories for the components of the effective tax rate reconciliation, and modifies other income tax-related disclosures. ASU No. 2023-09 is effective for fiscal years beginning after December 15, 2024 and allows for adoption on a prospective basis, with a retrospective option. Early adoption is permitted. The Company does not expect the amendments in this ASU to have a material impact on its consolidated financial statements. 4) Asset Acquisition In April 2023, the Company entered into an asset purchase agreement (the “Exacis Purchase Agreement”), with Exacis Biotherapeutics Inc. (“Exacis”), the stockholders party thereto and, with respect to specified provisions therein, Factor Limited (the “Exacis Acquisition”). Pursuant to the Exacis Purchase Agreement, the Company acquired from Exacis substantially all of Exacis’ intellectual property assets (the “Exacis Assets”), including all of Exacis’ right, title and interest in and to an exclusive license agreement by and between Exacis and Factor Limited (the “Purchased License”). The Company assumed none of Exacis’ liabilities, other than liabilities under the Purchased License that accrue subsequent to the closing date. In consideration for the Exacis Assets, on the closing date of the transaction, the Company issued to Exacis an aggregate of approximately 69,000 shares of the Company’s common stock, which shares are subject to a 12-month lockup, pursuant to which Exacis may not sell or otherwise transfer such shares. The shares were issued to Exacis at a price based on the Company having an assumed equity valuation of $ 75.0 million, divided by the number of issued and outstanding shares of common stock as of the close of business two trading days prior to the closing date. For accounting purposes, the shares issued were valued at $ 3.00 per share, which was the closing price of the Company’s common stock on the date of issuance. The Company additionally agreed to make the following contingent payments: (i) if, at any time during the three-year period commencing on the closing date and ending on the three-year anniversary of the closing date, the Company’s market capitalization equals or exceeds $ 100.0 million for at least ten consecutive trading days, then the Company will issue to Exacis a number of shares of common stock equal to (x) $ 2.0 million divided by (y) the quotient of $ 100.00 million divided by the number of the Company’s then issued and outstanding shares of common stock; (ii) if, at any time during the three-year period commencing on the closing date and ending on the three-year anniversary of the closing date, the Company’s market capitalization equals or exceeds $ 200.0 million for at least ten consecutive trading days, then the Company will issue to Exacis a number of additional shares of common stock equal to (x) $ 2.0 million divided by (y) the quotient of $ 200.00 million divided by the number of the Company’s then issued and outstanding shares of common stock (collectively with (i) above, the “Market Cap Contingent Consideration”); and (iii) during the five-year period commencing on the closing date and ending on the five-year anniversary of the closing date, the Company will pay or deliver to Exacis 20 % of all cash or other consideration (collectively, “License Contingent Consideration”) actually received by the Company during such five-year period from (i) third-party licensees or sublicensees of the intellectual property rights acquired by the Company from Exacis pursuant to the Exacis Purchase Agreement, or (ii) subject to certain exceptions, the sale of such intellectual property rights; provided, that the License Contingent Consideration shall not in any event exceed $ 45.0 million. The Company accounted for the Exacis Acquisition as an asset acquisition because it determined that substantially all of the fair value of the assets acquired was concentrated in the Purchased License. Assets acquired in an asset acquisition are recognized based on their cost to the acquirer and generally allocated to the assets on a relative fair value basis. The Company’s cost for acquiring the Exacis Assets includes the issuance of the shares of the Company’s common stock, direct acquisition-related costs and contingent consideration. F-13 Table of Contents The Market Cap Contingent Consideration is indexed to or settled in the Company’s own shares. As a result, the Company classified the Market Cap Contingent Consideration as a liability measured at fair value because the financial instrument embodies a conditional obligation (the Company would only issue the shares on the condition that the market capitalization thresholds are met), and at inception, the monetary value of the obligation is based solely on a fixed monetary amount ($ 2.0 million of shares for each target), which will be settleable with a variable number of the Company’s shares. The Company used a Monte Carlo simulation model to estimate the fair value of the Market Cap Contingent Consideration as of the acquisition date using the following assumptions: Stock price $ 3.00 Risk-free rate 3.58 % Volatility 100 % Dividend yield 0 % Expected term 3.0 years The License Contingent Consideration is to be settled in cash and is generally recognized when the liability is probable and estimable. As of the acquisition date and as of December 31, 2023, the Company concluded that paying the License Contingent Consideration was not probable or estimable. Therefore, there was no applicable contingent consideration liability recognized. The table below shows the total fair value of the consideration paid for the Exacis Assets (in thousands). Fair Value of Consideration Shares issued $ 208 Contingent consideration 225 Direct costs 27 Total fair value $ 460 The Company allocated 100 % of the fair value of the consideration to the Purchased License, which the Company determined is an IPR&D asset. IPR&D assets acquired through an asset purchase that have no alternative future uses and no separate economic values from their original intended purpose are expensed in the period the cost is incurred. As a result, the Company expensed the fair value of the Purchased License during the year ended December 31, 2023. 5) Contract with Customer On February 21, 2023, the Company and Lineage Cell Therapeutics, Inc. (“Lineage”) entered into an exclusive option and license agreement (the “Lineage Agreement”), which provided Lineage with the option (the “Option Right”) to obtain an exclusive sublicense of intellectual property from the Company and to request the Company to develop a customized cell line. The Lineage Agreement was amended in August 2023 to provide for changes specifically related to the cell line customization activities such as (i) payment terms, (ii) certain definitions, (iii) certain courses of action if the customized cell line selected by Lineage is not successful and (iv) documentation requirements. Lineage paid the Company a $ 0.3 million non-refundable up-front payment (the “Option Fee”) for the Option Right and paid an initial payment of $ 0.4 million to commence the cell line customization activities, per the amended payment terms. If Lineage obtains the sublicense, the Company would be entitled to receive additional license fees, including milestone payments and royalties. Pursuant to ASC 606, the Company determined that the Option Right was an unexercised right held by Lineage under the Lineage Agreement at contract inception, as the cell line customization activities and the sublicense were optional purchases at contract inception. These optional purchases of goods and services would be treated as separate contracts if and when Lineage determines that it will make such purchases. Therefore, 100 % of the Option Fee was allocated to the Option Right. The Option Fee will remain in deferred revenue until such time that Lineage enters into the sublicense or when the Option Right expires. The Option Right and the cell line customization activities are accounted for as separate contracts, and the Company has determined that the amended terms discussed above represent a modification to the cell line customization contract. Because there were no goods or services transferred to Lineage before entering into the amendment, and therefore, no previously recognized revenue, there was no catch-up adjustment to revenue required at the time of the amendment. Lineage will make payments to the Company for the cell line customization activities over the development period. The Company will only earn the remaining full amount of the cell line customization fee if it makes certain progress towards delivery of the customized cell line. The Company has determined that $ 0.4 million of consideration received could be recognized without the probability of being reversed, and it has placed a constraint on the remaining contractual customization fee. The $ 0.4 million is being recognized equally over the development period, which is expected to be approximately 20 to 25 months, as the level of effort to perform the services is happening at the same rate over time. If the development period is expected to be longer or shorter than originally planned, the Company will recognize a cumulative catch-up adjustment in the period that such determination is made. For the year ended December 31, 2023, the Company recognized approximately $ 0.1 million of revenue for the customization activities. F-14 Table of Contents The granting of the license that the Company may provide to Lineage if Lineage exercises the Option Right is not considered a performance obligation at this time, as it is an optional request that the customer may make in the future and will be accounted for as a separate contract when the customer exercises the Option Right. The Company recognizes direct labor and supplies used in the customization activities as incurred and are recorded as a cost of revenue. As provided for in the A&R Factor License Agreement discussed in Note 11, the Company is obligated to pay Factor Limited 20 % of any amounts the Company receives from a customer that is related to the licensed technology under the A&R Factor License Agreement, which is also recorded as a cost of revenue. 6) Promissory Note and Convertible Note Financings On July 14, 2023, the Company received $ 8.7 million from a private placement in which the Company issued $ 8.7 million in aggregate principal amount of convertible notes (the “July 2023 convertible notes”) and warrants to purchase an aggregate of approximately 6.1 million shares of its common stock (the “July 2023 warrants”). The Company recognized approximately $ 0.2 million in fees associated with the transaction . On December 8, 2023, the Company received $ 1.5 million in exchange for the issuance of 6 % promissory note with an aggregate principal amount of $ 1.5 million to Charles Cherington. The promissory note was to mature on January 8, 2024 , and interest accrued at a rate of 6.0 % per annum, payable at maturity. On December 14, 2023, the Company repaid the $ 1.5 million of principal and $ 1,500 of accrued interest due under the promissory note. There are no further obligations under the promissory note . On December 14, 2023, the Company entered into a purchase agreement with certain purchasers for the private placement of $ 9.2 million of convertible notes (the “December 2023 convertible notes” and together with the July 2023 convertible notes, the “convertible notes”) and warrants to purchase an aggregate of approximately 9.6 million shares of the Company’s common stock (the “December 2023 warrants” and together with the July 2023 warrants, the “note warrants”). There were two closings under this purchase agreement. The first closing occurred on December 15, 2023, and the Company received $ 7.8 million and issued $ 7.8 million of December 2023 convertible notes and December 2023 warrants to purchase approximately 8.1 million shares of our common stock. The second closing, in which the Company received the reaming $ 1.4 million under the purchase agreement, occurred in January 2024. See Note 18 for additional information regarding the second closing . See Note 16 for more information on the note warrants . The July 2023 convertible notes bear interest at 6 % per annum, and the December 2023 convertible notes bear interest at 12 % per annum, both of which are payable quarterly in arrears. At the Company’s election, it may pay interest either in cash or in-kind by increasing the outstanding principal amount of the convertible notes. The July 2023 convertible notes mature on July 14, 2028 , and the December 2023 convertible notes issued on December 15, 2023 mature on December 15, 2028 , unless earlier converted or repurchased. The Company does not have the option to redeem any of the convertible notes prior to maturity . At the option of the holders, the convertible notes may be converted from time-to-time in whole or in part into shares of the Company’s common stock at an initial conversion rate of, with respect to the July 2023 convertible notes, $ 2.86 per share and, with respect to the December 2023 convertible notes, $ 1.9194 per share, subject to customary adjustments for stock splits, stock dividends, recapitalization and the like. As of December 31, 2023, none of the convertible notes were converted into shares of common stock . The convertible notes do not contain any ratchet or other financial antidilution provisions. The convertible notes contain conversion limitations such that no conversion may be made if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 4.99 %, 9.99 % or 19.99 % immediately after conversion thereof, subject to certain increases not in excess of either 9.99 % or 19.99 % at the option of such holder . The convertible notes provide for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest, breach of covenants or other agreements in the convertible notes; the occurrence of a material adverse effect event (as defined in the related securities purchase agreement) and certain events of bankruptcy. Generally, if an event of default occurs and is continuing under the convertible notes, the holder thereof may require the Company to repurchase some or all of their convertible notes at a repurchase price equal to 100 % of the principal amount of the convertible notes being repurchased, plus accrued and unpaid interest thereon . In connection with the issuance of the December 2023 convertible notes, the Company agreed to reduce the exercise price of the warrants the Company issued in a private placement in December 2022 (see Note 16) to purchase an aggregate of approximately 4.4 million shares of the Company’s common stock from $ 3.28 to $ 1.43 per share and of the July 2023 warrants from $ 2.61 to $ 1.43 per share. The effect of the reduction of the exercise price of these warrants was approximately $ 1.6 million and measured as the excess of the fair value of the modified instruments over the fair value of the instruments immediately before they were modified. The change in the fair value of the repriced warrants is considered an issuance cost to the December 2023 convertible notes and December 2023 warrants. As such, the $ 1.6 million was allocated to each of those respective instruments based on their relative fair values, or approximately $ 0.8 million to each of the December 2023 convertible notes and December 2023 warrants . F-15 Table of Contents The Company determined that there were no embedded derivatives within the convertible notes that required bifurcation from the host agreement. The Company allocated the gross proceeds received, the fees incurred, and as applicable, the impact of repricing the warrants discussed above, over the July 2023 convertible notes and July 2023 warrants and over the December 2023 convertible notes and December 2023 warrants, as applicable, based on their relative fair values as follows (in thousands): Allocation of Proceeds and Costs: Allocation of Relative Fair Value Allocation Percentage Proceeds Costs Proceeds, Net July 2023 convertible notes $ 8,715 39.94 % $ 3,481 $ ( 80 ) $ 3,401 July 2023 warrants 13,103 60.06 % 5,234 ( 121 ) 5,113 $ 21,818 100.00 % $ 8,715 $ ( 201 ) $ 8,514 Allocation of Proceeds and Costs: Allocation of Relative Fair Value Allocation Percentage Proceeds Costs Warrant Repricing Proceeds, Net December 2023 convertible notes $ 9,059 48.83 % $ 3,803 $ ( 81 ) $ ( 766 ) $ 2,956 December 2023 warrants 9,495 51.17 % 3,985 ( 85 ) ( 802 ) 3,098 $ 18,554 100.00 % $ 7,788 $ ( 166 ) $ ( 1,568 ) $ 6,054 The Company estimated the fair values of the convertible notes as of July 14, 2023 and December 15, 2023 based off a valuation performed by a third-party specialist using a binomial tree model and the following assumptions: Stock Price Credit Spread Volatility Risk-Free Rate July 2023 convertible notes $ 2.81 2,500 108 % 4.60 % December 2023 convertible notes $ 1.51 2,000 109 % 3.90 % The fair value of the note warrants, all of which qualified for equity classification, was determined using the Black-Scholes pricing model as of each of July 14, 2023 and December 15, 2023 using the following assumptions: Stock Price Exercise Price Expected Life Volatility Dividend Risk-Free Rate July 2023 warrants $ 2.81 $ 2.61 5 years 98 % 0.00 % 4.04 % December 2023 warrants $ 1.51 $ 1.43 5 years 101 % 0.00 % 3.91 % The amount of proceeds allocated to the note warrants resulted in a corresponding reduction in the carrying value of the respective convertible notes as a debt discount, which is amortized with the debt issuance costs as a component of interest expense based on the effective interest rate method over the contractual terms of the convertible notes. F-16 Table of Contents The following table shows the activity that occurred during the year ended December 31, 2023 for the convertible notes on the accompanying consolidated balance sheet: Gross convertible notes at issuance $ 16,503 Debt discount and debt issuance costs ( 10,146 ) Amortization of debt discount and debt issuance costs 303 Paid-in-kind interest added to principal 113 Convertible notes, net, at December 31, 2023 $ 6,773 The future minimum principal payments under the convertible notes as of December 31, 2023 are as follows: Years ending December 31, Principal Payments 2024 $ - 2025 - 2026 - 2027 - 2028 16,616 Total $ 16,616 The Company has recognized approximately $ 0.6 million in interest expense for the year ended December 31, 2023 for the convertible notes, which includes $ 0.3 million for the amortization of the debt discount and debt issuance costs. Of the remaining $ 0.3 million in interest expense, $ 0.1 million was paid in-kind and added to the principal of the respective notes and $ 0.2 million of interest is in accrued expenses in the accompanying consolidated balance sheet. 7) Property and Equipment Property and equipment consist of the following (in thousands): As of December 31, 2023 2022 Laboratory and manufacturing equipment $ 40 $ 28 Furniture and fixtures 19 - Leasehold improvements 274 - Computer equipment and programs 274 240 607 268 Less accumulated depreciation and amortization ( 114 ) ( 32 ) Property and equipment, net $ 493 $ 236 During the year ended December 31, 2023, the Company recognized a de minimis loss on disposal of fixed assets. During the year ended December 31, 2022, the Company consolidated its research and development activities in Cambridge, Massachusetts and entered into lease termination agreements for its Brooklyn, New York and San Diego, California facilities. As a result, the Company disposed of certain assets it would no longer use and recognized a loss on disposal of fixed assets of approximately $ 0.3 million, which was composed of $ 0.6 million in remaining net book value of such assets, offset by proceeds received from selling certain fixed assets for approximately $ 0.3 million. Depreciation expense totaled $ 0.1 million and $ 0.2 million for the years ended December 31, 2023 and 2022, respectively. No depreciation expense is recorded on fixed assets in process until such time as the assets are completed and are placed into service. 8) Leases Operating Leases T he Company currently has operating leases for office and laboratory space in (a) the borough of Manhattan in New York, New York, (b) Cambridge, Massachusetts, and (c) Somerville, Massachusetts, which expire in 2026, 2028, and 2033, respectively . Until March 2022, the Company also leased a facility in Brooklyn, New York. In March 2022, the Company entered into an agreement to assign that lease to an unaffiliated third party, who also agreed to purchase certain equipment from the Company for $ 50,000 , which partially reimbursed the Company for certain existing unamortized leasehold improvements, and to reimburse the Company for the approximately $ 63,000 security deposit under the lease. Under the assignment agreement, the unaffiliated third party assumed all of the obligations, liabilities, covenants and conditions of the Company as tenant under the lease. As a result of the lease assignment, the Company wrote off the remaining ROU asset balance of approximately $ 1.4 million and the corresponding lease liability of approximately $ 1.5 million. The Company had also leased a facility in San Diego, California. During the second quarter of 2022, the Company determined to consolidate its research and development efforts in Cambridge, Massachusetts and sublease its San Diego lab and office space. As a result, the Company recognized an impairment charge of approximately $ 0.8 million on the San Diego lease ROU asset during the year ended December 31, 2022. In November 2022, the Company entered into a lease termination agreement, effective January 31, 2023; and as of December 31, 2023, there was no lease liability or ROU asset balances remaining for the San Diego lease. F-17 Table of Contents In October 2022, the Company entered into a sublease with a subsidiary of Bristol-Myers Squibb Company, as sublessor (“Sublessor”), for office, laboratory and research and development space of approximately 45,500 square feet in Somerville, Massachusetts. The lease expires in November 2033 and is subject to a five-year extension. Rent payments under the sublease began on November 29, 2023. The Company pays base rent of approximately $ 0.5 million per month during the first year of the term, which will increase 3 % per year thereafter. The Company also makes monthly payments for parking, which are based on market rates that can change from time to time, and pay its share of traditional lease expenses, including certain taxes, operating expenses and utilities. The Company paid the Sublessor a security deposit in the form of a letter of credit in the amount of approximately $ 4.1 million. Provided there are no events of default by the Company under the sublease, the letter of credit will be reduced on an incremental basis throughout the term. The Sublessor agreed to provide the Company with a tenant improvement allowance (“TIA”) of $ 190 per rentable square foot, or $ 8.6 million. Tenant improvements in excess of this amount will be at the Company’s own cost. Construction was substantially complete in January 2024 and the total out-of-pocket costs for the improvements is estimated to be approximately $ 2.1 million. As of December 31, 2023, the Company received the entire $ 8.6 million TIA. The Company obtained access and control of the premises on June 21, 2023, and as such, the Company determined that the commencement date for accounting purposes was June 21, 2023. The Company also performed an analysis on the accounting ownership of the tenant improvement assets and determined that such assets were sublessor/lessor owned. As a result, TIA payments made by the Sublessor to the Company for the tenant improvement assets are considered a reimbursement rather than a lease incentive and not included as part of the consideration of the contract. Amounts paid by the Company for sublessor/lessor owned assets in excess of the TIA are considered non-cash lease payments and are added to the consideration in the contract. The Company measured the lease liability and corresponding ROU asset for the sublease as of June 21, 2023, which includes lease payments the Company must make over the ten-year lease term. The Company did not include the option to extend the lease for an additional five years in the initial measurement because the Company was not reasonably certain as of June 21, 2023 that it would exercise its right to extend the lease term. As a result, the Company recorded a lease liability of $ 34.4 million, which included $ 0.6 million for the incremental amount above the TIA that the Company expected to pay for sublessor/lessor owned assets as of the initial measurement date, and a corresponding ROU asset of $ 34.7 million as of June 30, 2023. In December 2023, the Company incurred additional out-of-pocket expenses of approximately $ 0.4 million for sublessor/lessor owned assets as a result of out-of-scope changes. These cost changes were accounted for as a lease modification of the existing lease. The Company determined that the lease continued to be classified as an operating lease after modification and remeasured the liability for the remaining unpaid lease payments, including the aggregate $ 1.0 million of unpaid out-of-pocket costs above the TIA that the Company will pay for sublessor/lessor owned assets, as well as remeasuring any variable lease payment that is based on an index or rate. The Company also requested a third-party specialist to reassess the incremental borrowing rate, which is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. This reassessment resulted in an increased incremental borrowing rate from 12.7 % as of the initial measurement date to 14.4 % as of the modification date. The remeasurement resulted in a decrease to the lease liability of approximately $ 1.6 million with a corresponding adjustment to the ROU asset. For the years ended December 31, 2023 and 2022, the net operating lease expenses were as follows (in thousands): Years ended December 31, 2023 2022 Operating lease expense $ 3,399 $ 595 Sublease income ( 84 ) ( 84 ) Variable lease expense 136 150 Total lease expense $ 3,451 $ 661 F-18 Table of Contents The tables below show the beginning balances of the operating ROU assets and lease liabilities as of January 1, 2023 and the ending balances as of December 31 2023, including the changes during the period (in thousands). Operating Lease ROU Assets Operating lease ROU assets at January 1, 2023 $ 1,030 Recognition of ROU asset for Somerville Sublease 34,410 Adjustment to ROU asset for remeasurement of Somvervile Sublease liability ( 1,620 ) Amortization of operating lease ROU assets ( 1,039 ) Operating lease ROU assets at December 31, 2023 $ 32,781 Operating Lease Liabilities Operating lease liabilities at January 1, 2023 $ 1,182 Recognition of lease liability for Somerville Sublease 34,169 Accretion of interest for Somerville Sublease 1,858 Adjustment to lease liablity due to remeasurement of Somerville Sublease ( 1,620 ) Principal payments on operating lease liabilities ( 519 ) Operating lease liabilities at December 31, 2023 35,070 Less non-current portion 32,854 Current portion at December 31, 2023 $ 2,216 As of December 31, 2023, the Company’s operating leases had a weighted-average remaining life of 9.8 years with a weighted-average discount rate of 14.24 %. The maturities of the operating lease liabilities are as follows (in thousands): As of December 31, 2023 2024 $ 6,972 2025 6,075 2026 6,238 2027 6,308 2028 6,406 Thereafter 33,879 Total payments 65,878 Less imputed interest ( 30,808 ) Total operating lease liabilities $ 35,070 Manhattan Sublease In April 2019, the Company entered into a sublease with an unaffiliated third party (the “Subtenant”), whereby the Subtenant agreed to sublease approximately 999 square feet of space rented by the Company in the borough of Manhattan in New York, New York commencing on May 15, 2019. The term of this sublease expires on October 31, 2026 with no option to extend. Rent payments by the Subtenant under the sublease began on September 1, 2019. The sublease stipulates an annual rent increase of 2.25 %. The Subtenant is also responsible for paying to the Company all tenant energy costs, annual operating costs, and annual tax costs attributable to the subleased space during the term of the sublease. The Company received sublease payments of approximately $ 0.1 million for each of the years ended December 31, 2023 and 2022, respectively. In accordance with ASC Topic 842, the Company treats the sublease as a separate lease, as the Company was not relieved of the primary obligation under the related lease. The Company continues to account for the related lease as a lessee and in the same manner as prior to the commencement date of the sublease. The Company accounts for the sublease as a lessor of the lease. The sublease is classified as an operating lease, as it does not meet the criteria of a sale-type or direct financing lease. F-19 Table of Contents The following tables shows the future payments the Company expects to receive from the Subtenant over the remaining term of the sublease (in thousands): As of December 31, 2023 2024 $ 86 2025 88 2026 75 Total payments $ 249 9) Fair Value of Financial Instruments The following tables summarize the liabilities that are measured at fair value as of December 31, 2023 and, 2022 (in thousands): As of December 31, Description Level 2023 2022 Liabilities: Warrant liabilities - Common Warrants 3 $ 116 $ 331 Market Cap Contingent Consideration 3 $ 107 $ - The Company uses a Black-Scholes option pricing model to estimate the fair value of its warrant liabilities and a Monte Carlo simulation model to estimate the fair value of the Market Cap Contingent Consideration, both of which are considered a Level 3 fair value measurement. The Company remeasures the fair value of the warrant liabilities and the Market Cap Contingent Consideration at each reporting period and changes in the fair values are recognized in the statement of operations. Certain inputs used in Black-Scholes and Monte Carlo models may fluctuate in future periods based upon factors that are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of the Company’s warrant liabilities or contingent consideration liabilities, which could also result in material non-cash gains or losses being reported in the Company’s consolidated statement of operations . The following table presents the changes in the liabilities measured at fair value from January 1, 2023, or from the initial measurement date if later than January 1, 2023, through December 31, 2023 (in thousands): Warrant Liabilities Contingent Consideration Fair value at January 1, 2023 $ 331 $ - Initial measurement - 225 Change in fair value ( 215 ) ( 118 ) Fair value at December 31, 2023 $ 116 $ 107 The Black-Scholes valuation assumptions used at December 31, 2023 for the warrant liabilities were 3.69 years expected term, 3.93 % risk-free rate, 103 % volatility and 0 % dividend yield. With the assistance of a third-party specialist, the Company assesses the fair value of the Market Cap Contingent Consideration at each quarterly reporting period using the Monte Carlo model, and as of June 30, 2023, determined that the fair value of the contingent consideration had been reduced by approximately $ 0.1 million from the initial measurement. The Company assessed the fair value of the Market Cap Contingent Consideration as of September 30, 2023 and as of December 31, 2023, and determined that there was no material change to the Market Cap Contingent Consideration for either period, and therefore, did no t recognize a change in the fair value of the Market Cap Contingent Consideration since the June 30, 2023 remeasurement. The Company assessed the fair value as of December 31, 2023, and the inputs used for that assessment was risk-free rate of 4.07 %, expected term of 2.3 years, stock price of $ 1.80 , volatility of 108 % and dividend yield of 0 %. F-20 Table of Contents The table below is provided for comparative purposes only and presents information about the fair value of the convertible notes relative to the carrying values recognized in the consolidated balance sheet as of December 31, 2023 (in thousands). The Company did not have any of the convertible notes or similar instruments outstanding as of December 31, 2022. December 31, 2023 Level Carrying Value Fair Value Convertible Notes 3 $ 16,616 $ 17,594 The carrying value in the table above is shown before the allocation of the proceeds to the note warrants. The Company assesses the fair value of the convertible notes using the binomial model, which is considered a Level 3 measurement. The weighted average inputs used in the binomial model as of December 31, 2023 was stock price of $ 1.80 , credit spread of 1,891 , volatility of 109 % and risk-free rate of 3.87 %. 10) Goodwill and In-Process Research & Development Goodwill In November 2018, the Company acquired IRX, which was accounted for as a business combination. The Company recorded goodwill in the amount of $ 2.0 million related to the acquisition. The Company performed its annual qualitative assessment as of December 31, 2023 and 2022, and based on the assessments, the Company determined that it was more likely than not that the fair value of the entity exceeded its carrying value for such years and that the performance of the quantitative impairment test was not required. Therefore, no impairment was required for any of the periods presented. In-Process Research & Development In 2018, Company recorded IPR&D in the amount of $ 6.0 million, which represented the fair value assigned to technologies that were acquired in connection with the acquisition of IRX in November 2018 and which had not reached technological feasibility and had no alternative future use. In June 2022, the Company received results from the INSPIRE phase 2 trial of IRX-2, a multi-cytokine biologic immunotherapy, in patients with newly diagnosed stage II, III or IVA squamous cell carcinoma of the oral cavity. The IRX-2 multi-cytokine biologic immunotherapy represents substantially all the fair value assigned to the technologies of IRX that the Company acquired. Despite outcomes that favored IRX-2 in certain predefined subgroups, the INSPIRE trial did not meet its primary endpoint of event-free survival. Significant additional clinical development work would be required to advance IRX-2 in the form of additional Phase 2 and 3 studies to further evaluate the treatment effect of IRX-2 in patient subgroups and in combination with checkpoint inhibitor therapies. The INSPIRE trial was the only Company-sponsored study of IRX-2. Based on the totality of available information, the Company decided not to further develop IRX-2. As such, the Company determined that the carrying value of the IPR&D asset was impaired and recognized a non-cash impairment charge of approximately $ 6.0 million on the consolidated statement of operations during 2022, which reduced the value of the asset to zero . 11) Related Party Transactions Agreements with Factor Bioscience Inc. and Affiliates As of December 31, 2023, the Company had the agreements described below with Factor Bioscience Inc. and/or Dr. Matthew Angel. These agreements have been deemed related party transactions because the Company’s former chief executive officer, Dr. Angel, is the chairman and chief executive officer of Factor Bioscience Inc. and a director of its subsidiary, Factor Bioscience Limited (“Factor Limited” and together with Factor Bioscience Inc. and its other affiliates, “Factor Bioscience”). Dr. Angel resigned as the Company’s chief executive officer effective December 31, 2023. In September 2022, the Company entered into a Master Services Agreement (the “MSA”) with Factor Bioscience, pursuant to which Factor Bioscience agreed to provide services to the Company as agreed between the Company and Factor Bioscience and as set forth in one or more work orders under the MSA, including the first work order included in the MSA (“WO1”). The MSA contains customary confidentiality provisions and representations and warranties of the parties, and the MSA may be terminated by either party upon 30 days ’ prior notice, subject to any superseding termination provisions contained in a particular work order. F-21 Table of Contents Under WO1, Factor Bioscience agreed to provide the Company with mRNA cell engineering research support services, including access to certain facilities, equipment, materials and training, and the Company agreed to pay Factor Bioscience an initial fee of $ 5.0 million, payable in 12 equal monthly installments of approximately $ 0.4 million. Of the $ 5.0 million, the Company allocated $ 3.5 million to the License Fee Obligation (as defined below). Following the initial 12-month period, the Company agreed to continue paying Factor Bioscience the monthly fee of $ 0.4 million until such time as WO1 is terminated. Upon entering into the MSA, the Company paid a deposit of $ 0.4 million, which will be applied to the last month of WO1. The Company may terminate WO1 on or after the second anniversary of the date of the MSA, subject to providing Factor Bioscience with 120 days ’ prior notice. Factor Bioscience may terminate WO1 only on and after the fourth anniversary of the date of the MSA, subject to providing the Company with 120 days ’ prior notice. In connection with entering into the MSA, Factor Limited entered into a waiver agreement with Eterna LLC, pursuant to which Factor Limited agreed to waive payment of $ 3.5 million otherwise payable to it (the “License Fee Obligation”) in October 2022 by Eterna LLC under the exclusive license agreement entered into in April 2021 by and among Eterna LLC, Novellus Limited and Factor Limited (the “Original Factor License Agreement”). Under the terms of the waiver agreement, the License Fee Obligation is waived conditionally on the Company paying Factor Bioscience a minimum of $ 3.5 million due under the MSA. Because the License Fee Obligation was conditionally waived until the Company paid Factor Bioscience a minimum of $ 3.5 million under the MSA, the Company recorded a liability of $ 3.5 million. As of December 31, 2023, there was approximately $ 1.2 million of the unamortized License Fee Obligation remaining, which is recorded on the accompanying consolidated balance sheet in the “due to related party, current” line item. In September 2022, Novellus Inc. (“Novellus”) and the Company entered into a Second Amendment to the Limited Waiver and Assignment Agreement (the “Waiver and Assignment Agreement”) with Drs. Matthew Angel and Christopher Rohde (the “Founders”) whereby the Company agreed to be responsible for all future, reasonable and substantiated legal fees, costs, settlements and judgments incurred by the Founders, the Company or Novellus. for certain claims and actions and any pending or future litigation brought against the Founders, Novellus and/or the Company by or on behalf of the Westman and Sowyrda legal matters described in Note 13 (the “Covered Claims”). The Founders will continue to be solely responsible for any payments made to satisfy a judgement or settlement of any pending or future wage act claims. Under the Waiver and Assignment Agreement, the Founders agreed that they are not entitled to, and waived any right to, indemnification or advancement of past, present or future legal fees, costs, judgments, settlement or other liabilities they may have been entitled to receive from the Company or Novellus in respect of the Covered Claims. The Company and the Founders will share in any recoveries up to the point at which the parties have been fully compensated for legal fees, costs and expenses incurred, with the Company retaining any excess recoveries. The Company has the sole authority to direct and control the prosecution, defense and settlement of the Covered Claims. In November 2022, following the expiration of one of the milestone deadlines for certain regulatory filings required under the Third Amended and Restated Exclusive License Agreement between Novellus Limited and Factor Limited entered into in November 2020 (the “Novellus-Factor License Agreement”), which permitted Factor Limited to terminate the license granted to Novellus Limited thereunder, the Company entered into the first amendment to the Original Factor License Agreement (as amended, the “2021 Factor License Agreement”), pursuant to which, among other things, Factor Limited granted to Eterna LLC an exclusive, sublicensable license under certain patents owned by Factor Limited (the “Factor Patents”) for the purpose of identifying and pursuing certain opportunities to grant to third parties sublicenses to the Factor Patents. The Original Factor License Agreement also (i) terminated the Novellus-Factor License Agreement, (ii) confirmed Factor Limited’s grant to Eterna LLC of the rights and licenses Novellus Limited previously granted to Eterna LLC under the Novellus-Factor License Agreement on the same terms and conditions as granted by Novellus Limited to Eterna LLC under such agreement, (iii) confirmed that the sublicense granted by Novellus Limited in accordance with the Novellus-Factor License Agreement to NoveCite, Inc., a company which the Company has a 25 % non-controlling interest (“NoveCite”), survived termination of the Novellus-Factor License Agreement; and (iv) removed Novellus Limited from the Original Factor License Agreement and the license agreement entered into on October 6, 2020 between Novellus Limited and NoveCite, Inc, as amended, and replaced Novellus Limited with Factor Limited as the direct licensor to Eterna LLC and NoveCite under such agreements, respectively. On February 20, 2023, the Company, entered into an exclusive license agreement (the “Feb 2023 Factor Exclusive License Agreement”) with Factor Limited, pursuant to which Factor Limited granted to the Company an exclusive, sublicensable, worldwide license under certain patents owned by Factor Limited for the purpose of, among other things, identifying and pursuing certain opportunities to develop products in respect of such patents and to otherwise grant to third parties sublicenses to such patents. The Feb 2023 Factor Exclusive License Agreement, which terminated and superseded the Amended Factor License Agreement, was subsequently terminated and superseded by the A&R Factor License Agreement (as defined below). F-22 Table of Contents On November 14, 2023, the Company entered into an amended and restated exclusive license agreement (the “A&R Factor License Agreement”) with Factor Limited to replace in its entirety the exclusive license agreement between the parties dated February 20, 2023 and the amendment thereto. Under the terms of the A&R Factor License Agreement, Factor Limited granted to the Company an exclusive, sublicensable license under certain patents owned by Factor Limited (the “Factor Patents”). The A&R Factor License Agreement also provides for, among other things, the expansion of the Company’s license rights to include (i) the field of use of the Factor Patents to include veterinary uses (ii) know-how that is necessary or reasonably useful to practice to the licensed patents, (iii) the ability to sublicense through multiple tiers (as opposed to only permitting a direct sublicense) and (iv) the transfer of technology to the Company, subject to the use restrictions in the A&R Factor License Agreement. The term of the A&R Factor License Agreement expires on November 22, 2027, but will be automatically extended for an additional five years (such period, the “Renewal Term”) if the Company pays at least $ 6.0 million to Factor Limited from fees from sublicenses to the Factor Patents (“Sublicense Fees”), other cash on hand or a combination of both sources of funds. The Company will pay to Factor Limited 20 % of any Sublicense Fee received by the Company during the term of the A&R Factor License Agreement. Beginning in September 2024, the Company will also begin paying Factor Limited a monthly maintenance fee of approximately $ 0.4 million until the expiration of the A&R Factor License Agreement, including any Renewal Term. The Company may terminate the A&R Factor License Agreement upon 120 days’ written notice to Factor Limited, and both parties have additional customary termination rights. Under the A&R Factor License Agreement, the Company is obligated to pay the expenses incurred by Factor Limited in preparing, filing, prosecuting and maintaining the Factor Patents and the Company agreed to bear all costs and expenses associated with enforcing and defending the Factor Patents in any action or proceeding arising from pursuit of sublicensing opportunities under the license granted under the A&R Factor License Agreement. Exacis Asset Acquisition On April 26, 2023, the Company entered into the Exacis Purchase Agreement to acquire the Exacis Assets, including all of Exacis’ right, title and interest in the Purchased License. The Company assumed none of Exacis’ liabilities, other than liabilities under the Purchased License that accrue subsequent to the closing date. See Note 4. The Exacis Acquisition was deemed a related party transaction because Dr. Gregory Fiore, who was the chief executive officer of Exacis at the time of the Exacis Acquisition, was also a member of the Company’s board of directors at the time of the Exacis Acquisition. Additionally, Dr. Angel, who was the Company’s chief executive officer at the time of the Exacis Acquisition, was chairman of Exacis’ scientific advisory board, and an affiliate of Factor Bioscience was the majority stockholder of Exacis at the time of the Exacis Acquisition. In October 2022, the Company entered into an Option Agreement on October 8, 2022 with Exacis (the “Exacis Option Agreement”), pursuant to which Exacis granted the Company the option to negotiate and enter into an exclusive worldwide license to certain of the technology licensed by Exacis for the treatment of cancer in humans. The Exacis Option Agreement provided for the Company paying Exacis a fee of $ 250,000 for the option, which would be creditable against the fees or purchase price payable under any such license if entered into by the Company in accordance with Exacis Option Agreement. The Company did not exercise the option, and the Exacis Option Agreement terminated on December 31, 2022. Consulting Agreement with Former Director In May 2023, the Company entered into a consulting agreement with Dr. Fiore, whereby Dr. Fiore agreed to provide business development consulting services to the Company for a monthly retainer of $ 20,000 . The consulting agreement was terminable for any reason by either party upon 15 days’ written notice. The Company terminated the consulting agreement, effective July 31, 2023. Dr. Fiore served on the Company’s board of directors from June 2022 to October 4, 2023. July 2023 and December 2023 Financings Investors in the July 2023 convertible note financing included Brant Binder, Richard Wagner, Charles Cherington and Nicholas Singer, and investors in the December 2023 convertible note financing included Messrs. Cherington and Singer. Each of them participated in the applicable financing under the same terms and subject to the same conditions as all the other investors. See Note 6 for additional information regarding the financings. Mr. Binder served on the Company’s board of directors from July 6, 2023 to August 8, 2023, Mr. Wagner served on the Company’s board of directors from July 6, 2023 to August 8, 2023, Mr. Cherington served on the Company’s board of directors from March 2021 to July 6, 2023, and Mr. Singer served on the Company’s board of directors from June 2022 to July 6, 2023. Q4-22 PIPE In November 2022, the Company entered into a securities purchase agreement with certain investors providing for the issuance of approximately of 2,185,000 units, each unit consisting of (i) one share of the Company’s common stock and (ii) two warrants to purchase shares of the Company’s common stock, at a purchase price of $ 3.53 per unit. The financing closed in December 2022. Messrs. Cherington and Singer invested in the financing on the same terms and subject to the same conditions as all other investors in the financing. Mr. Cherington served on the Company’s board of directors from March 2021 to July 6, 2023, and Mr. Singer served on the Company’s board of directors from June 2022 to July 6, 2023. F-23 Table of Contents 12) Accrued Expenses Accrued expenses consisted of the following (in thousands): As of December 31, 2023 2022 Legal fees and related $ 643 $ 1,139 Professional fees 239 124 Somerville facility 218 138 Convertible Notes interest 176 - Accrued compensation 109 1,065 Clinical 18 570 Other 490 590 Total accrued expenses $ 1,893 $ 3,626 13) Commitments and Contingencies The Company is involved in litigation and arbitrations from time to time in the ordinary course of business. Legal fees and other costs associated with such actions are expensed as incurred. In addition, the Company assesses the need to record a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable, and the amount can be reasonably estimated. Novellus, Inc. v. Sowyrda et al., C.A. No. 2184CV02436-BLS2 On October 25, 2021 Novellus, Inc. filed a complaint in the Superior Court of Massachusetts, Suffolk County, against former Novellus, Inc. employees Paul Sowyrda and John Westman and certain other former investors in Novellus LLC (Novellus, Inc.’s former parent company prior to the Company’s acquisition of Novellus, Inc.), alleging breach of fiduciary duty, breach of contract and civil conspiracy. The Company acquired Novellus, Inc. on July 16, 2021. On May 27, 2022, Novellus, Inc. amended the complaint to withdraw all claims against all defendants except Messrs. Sowyrda and Westman. On July 1, 2022, Mr. Westman filed a motion to compel arbitration or in the alternative, to stay the litigation pending the disposition of certain litigation in the Court of Chancery for the State of Delaware filed by Mr. Sowyrda against Novellus LLC, Dr. Christopher Rohde, Dr. Matthew Angel, Leonard Mazur and Factor Bioscience, Inc. captioned Zelickson et al., v. Angel et al., C.A. 2021-1014-JRS and by Mr. Westman against Novellus LLC captioned Westman v. Novellus LLC, C.A. No. 2021-0882-NAC (together, the “Delaware Actions”). On July 1, 2022, Mr. Sowyrda answered the complaint and asserted counterclaims against Novellus, Inc, and third-party defendants Dr. Angel and Dr. Rohde alleging violations of the Massachusetts Wage Act, Massachusetts Minimum Fair Wage Law, the Fair Labor Standards Act, breach of contract, unjust enrichment and quantum meruit. Mr. Sowyrda also joined in Mr. Westman’s motion to stay the case pending the Delaware Actions. Novellus, Inc.’s claims and Mr. Sowyrda’s counterclaims relate to alleged conduct that took place before the Company acquired Novellus, Inc. On November 15, 2022, prior to a decision on Messrs. Westman’s and Sowyrda’s motion to compel or stay, the parties agreed to voluntarily dismiss and consolidate the Delaware Actions with this action. On December 15, 2022, Mr. Sowyrda filed an Amended Answer to the Amended Complaint, asserted affirmative defenses and filed Amended Counterclaims against Dr. Angel, Dr. Rohde, Novellus LLC, Novellus Inc., Factor Bioscience Inc., and the Company (collectively, the “Counterclaim Defendants”) alleging against various Counterclaim Defendants breach of contract, breaches of the implied duty of good faith and fair dealing, breaches of fiduciary duty, breaches of the operating agreement, aiding and abetting breaches of fiduciary duty, tortious interference with contract, equitable accounting, violations of the Massachusetts Wage Act, Massachusetts Minimum Fair Wage Law, the Fair Labor Standards Act, unjust enrichment, and quantum meruit. Also on December 15, 2022, Mr. Westman filed an answer to the Amended Complaint and asserted similar counterclaims against the same Counterclaim Defendants. Messrs. Westman and Sowyrda each asserted claims for indemnification and/or advancement against Novellus, Inc. On January 11, 2023, Messrs. Westman and Sowyrda served a joint motion to enforce their advancement and/or indemnification rights against Novellus Inc. Novellus Inc. vigorously opposes this motion and served its opposition on January 27, 2023. On February 8, 2023, Messrs. Westman and Sowyrda served a reply in support of their motion to enforce indemnification/advancement rights, and submitted the motion to the Court. Novellus Inc. answered Messrs. Westman and Sowyrda’s counterclaims on January 27, 2023, denying liability. The remaining Counterclaim Defendants served a motion to dismiss most of the remaining counterclaims on January 27, 2023. The Court entered an order granting the Counterclaim Defendants’ motion to dismiss and denying Messrs. Sowyrda and Westman’s motion to enforce on June 15, 2023. The Court’s order dismissed all of Mr. Westman’s claims against Counterclaim Defendants except his claim for indemnification, and all of Mr. Sowyrda’s claims except his claim for indemnification and his employment-related claims, which Counterclaim Defendants did not move to dismiss. On July 6, 2023, Messrs. Westman and Sowyrda filed a petition for interlocutory review with a single justice of the Massachusetts Appeals Court, seeking to overturn the judge’s decision granting the Counterclaim Defendants’ motion to dismiss most of the remaining counterclaims, but not the decision denying Messrs. Westman and Sowyrda’s motion to enforce advancement rights. On July 25, 2023, the parties to the appeal filed a joint motion to the single justice in the appellate court to stay the appeal to allow for amended counterclaims to be filed by Counterclaim Plaintiffs and a motion to dismiss to be filed by Counterclaim Defendants. Counterclaim Plaintiffs filed an initial set of amended counterclaims on August 15, 2023. Counterclaim Plaintiffs amended and refiled their amended counterclaims on September 29, 2023. Counterclaim Defendants served their motion to dismiss all of the amended counterclaims, except for Mr. Sowyrda’s employment-related claims, on October 13, 2023. F-24 Table of Contents Under applicable Delaware law and Novellus Inc.’s organizational documents, the Company may be required to advance or reimburse certain legal expenses incurred by former officers and directors of Novellus, Inc. in connection with the foregoing matters. However, a future advance or reimbursement is not currently probable nor can it be reasonably estimated. eTheRNA Immunotherapies NV and eTheRNA Inc. v. Eterna Therapeutics Inc. C.A. No. 123CV11732 On July 31, 2023, eTheRNA Immunotherapies NV and eTheRNA Inc. filed a complaint in court against the Company alleging: (1) federal trademark infringement; (2) federal unfair competition; (3) Massachusetts state common law trademark infringement; (4) Massachusetts state unfair competition. Service of process for the complaint was completed on August 1, 2023. The Company’s answer was filed on October 10, 2023. At this stage in the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome. Dhesh Govender v. Eterna Therapeutics 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 Eterna LLC, filed a complaint against Eterna LLC and certain individuals that plaintiff alleged were directors of Eterna LLC. Plaintiff alleged that Eterna LLC and certain of its officers and directors engaged in unlawful and discriminatory conduct based on race, national origin and hostile work environment. Plaintiff also asserted various breach of contract, fraud and quantum meruit claims based on an alleged oral agreement pursuant to which he alleged Eterna LLC agreed to hire him as an executive once the merger involving the Company and NTN Buzztime, Inc. was completed. On December 15, 2022, the parties executed a Confidential Settlement Agreement and Release of All Claims. On January 11, 2023, the parties filed a Stipulation to Discontinue in the Court action. Also on January 11, 2023, plaintiff voluntarily dismissed the arbitration. 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 Novellus, Inc.’s founders and former executives, Dr. Rohde and Dr. Angel. The case includes allegations that Novellus, Inc. violated the Massachusetts Wage Act. The Company acquired Novellus, Inc. on July 16, 2021. Mr. Westman’s claims relate to alleged conduct that took place before the Company acquired Novellus, Inc. Mr. Westman agreed to dismiss the lawsuit and proceed with his claims in arbitration. Following mediation, the parties settled this dispute in December 2022. The aggregate settlement amount payable by the Company for the Westman and Govender matters discussed above was approximately $ 0.5 million, both of which were recognized as expense in the consolidated statement of operations for the year ended December 31, 2022 and were fully paid during the year ended December 31, 2023. Emerald Private Equity Fund, LLC Matter By a letter dated July 7, 2021, Emerald Private Equity Fund, LLC (“Emerald”), a stockholder of the Company, made a demand pursuant to 8 Del. C. 220 to inspect certain books and records of the Company. The stated purpose of the demand was to investigate possible wrongdoing by persons responsible for the implementation of the merger involving the Company and NTN Buzztime, Inc. and the issuance of paper stock certificates, including investigating whether: (i) the Company’s stock certificates were issued in accordance with the merger agreement; (ii) certain restrictions on the sale of the Company’s common stock following the merger were proper and applied without favor; (iii) anyone received priority in post-merger issuances of the Company’s stock certificates that allowed them to benefit from an increase in the trading price of the Company’s common stock; and (iv) it should pursue remedial measures and/or report alleged misconduct to the SEC. The Company responded to the demand letter and 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 subsequently joined as parties to such agreement. Following discussions, with no admission of wrongdoing, the Company and Emerald entered into a confidential settlement agreement, pursuant to which the Company paid $ 1.2 million in 2022 in full settlement of all of the Emerald’s purported claims, including a release by the Emerald in favor of the Company in respect of any and all such claims. F-25 Table of Contents Licensing Agreements Factor Limited On November 14, 2023, the Company and Factor Limited entered into the A&R Factor License Agreement, which terminated and superseded the exclusive license agreement between the parties dated February 20, 2023 and the amendment thereto. See Note 11 for additional information regarding the A&R Factor License Agreement. The Company has other license, collaboration and royalty agreements with third parties related to IRX-2, including an agreement entered into with University of South Florida Research Association, Inc. (“USFRF”) in February 2024 to revoke certain license agreements with USFRF related to IRX-2. The Company does not intend to further develop IRX-2 and has provided USFRF with notice that the Company intends to abandon the IRX-2 patents. USFRF has 30 days to provide the Company with its notice to assume control of such patents. As a result of abandoning the IRX-2 patents, the Company will no longer have any obligations under the existing related agreements. existing related agreements. Retirement Savings Plan The Company established a defined contribution plan, organized under Section 401(k) of the Internal Revenue Code, which allows employees to defer up to 90 % of their pay on a pre-tax basis. Beginning on January 1, 2023, the Company began matching employees’ contributions at a rate of 100 % of the first 3 % of the employee’s contribution and 50 % of the next 2 % of the employee’s contribution, for a maximum Company match of 4 %. For the year ended December 31, 2023, the Company matched less than $ 0.1 million towards employees’ 401k contributions. 14) B asic and Diluted Net Loss per Common Share The following table sets forth the computation of the net loss per share attributable to common stockholders, basic and diluted (in thousands, except per share data): Years Ended December 31, 2023 2022 Numerator: Net loss attributable to common stockholders $ ( 21,684 ) $ ( 24,595 ) Denominator Weighted average shares outstanding - basic and diluted 5,314 3,051 Net loss per common share - basic and diluted $ ( 4.08 ) $ ( 8.06 ) Since the Company was in a net loss position for all periods presented, the net loss per share attributable to common stockholders was the same on a basic and diluted basis, as the inclusion of all potential common equivalent shares outstanding would have been anti-dilutive. The following table presents the amount of warrants, stock options, convertible preferred stock, convertible notes and restricted stock units (“RSUs”) that were excluded from the computation of diluted net loss per share of common stock for the years ended December 31, 2023 and 2022, as their effect was anti-dilutive (in thousands): Years ended December 31, 2023 2022 Warrants 18,922 4,713 C onvertible Notes converted into common stock 7,877 - Stock options 389 359 Preferred stock converted into common stock 18 7 RSUs 1 4 Total potential common shares excluded from computation 27,207 5,083 15) Stock-Based Compensation Equity Incentive Plans The Company’s stock-based compensation plans consist of the Restated 2020 Equity Incentive Plan (the “Restated 2020 Plan”) and the 2021 Inducement Equity Incentive Plan (the “2021 Inducement Plan”). The Company’s board of directors has designated its compensation committee as the administrator of the foregoing plans (the “Plan Administrator”). Among other things, the Plan Administrator selects persons to receive awards under the foregoing plans and determines the number of shares subject to each award and the terms, conditions, performance measures, if any, and other provisions of the award. The Restated 2020 Plan provides for (a) approximately 724,000 shares of common stock that can be issued under the Restated 2020 Plan, which includes an increase to the Restated 2020 Plan of 300,000 that was approved by the Company’s stockholders at the 2023 annual meeting of stockholders on June 16, 2023, and (b) an annual increase in the number of shares reserved for issuance on January 1 of each year from 2022 through 2031 equal to the lesser of (i) 5 % of the number of shares of common stock outstanding on the immediately preceding December 31 and (ii) such smaller number of shares of common stock as may be determine by the board of directors (the provision providing for the increase described in clause (b) is referred to as the “evergreen provision”). As of January 1, 2023, pursuant to the evergreen provision, the number of shares issuable under the Restated 2020 Plan was increased by approximately 256,000 . Based on the number of shares of common stock outstanding on December 31, 2023, as of January 1, 2024, pursuant to the evergreen provision, the number of shares issuable under the Restated 2020 Plan was increased by approximately 271,000 . F-26 Table of Contents Awards under the Restated 2020 Plan may be granted to officers, directors, employees and consultants of the Company. Stock options granted under the Restated 2020 Plan may either be incentive stock options or nonqualified stock options, may have a term of up to ten years , and are exercisable at a price per share not less than the fair market value, as defined in the Restated 2020 Plan, on the date of grant. As of December 31, 2023, there was approximately 684,000 shares of common stock remaining to be issued under the Restated 2020 Plan. As of December 31, 2023, there were approximately 296,000 stock options outstanding under the Restated 2020 Plan and no RSUs granted under the Restated 2020 Plan were outstanding. The 2021 Inducement Plan provides for the grant of up to 75,000 share-based awards as material inducement awards to new employees in accordance with the employment inducement grant rules set forth in Section 711(a) of the NYSE American LLC Company Guide (the Company’s common stock was listed on the NYSE American at the time the 2021 Inducement Plan was adopted). The 2021 Inducement Plan expires in May 2031. As of December 31, 2023, there was approximately 68,000 shares of common stock remaining to be issued under the 2021 Inducement Plan. As of December 31, 2022, there were approximately 4,000 stock options outstanding and approximately 1,000 RSUs outstanding that were granted under the 2021 Inducement Plan. Equity Awards Stock Options The Company records stock-based compensation in accordance with ASC Topic 718, Compensation – Stock Compensation. The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite service period on a straight-lined basis. The risk-free rate is based on the observed interest rates appropriate for the expected life. The expected life (estimated period of time outstanding) of the stock options granted is estimated using the “ simplified ” method as permitted by the SEC’s Staff Accounting Bulletin No. 110, Share-Based Payment . Expected volatility is based on the volatility of the Company’s peer group over the expected life of the stock option granted, and the Company assumes no dividends. Forfeitures are recognized as incurred. The following weighted-average assumptions were used for stock options granted during the years ended December 31, 2023 and 2022: Year ended December 31, 2023 2022 Weighted average risk-free rate 3.82 % 2.52 % Weighted average volatility 95.15 % 90.49 % Dividend yield 0 % 0 % Expected term 5.44 years 5.79 years F-27 Table of Contents The following table summarizes stock option activity for the years ended December 31, 2023 and 2022 (in thousands except for per-share and remaining contractual life data): Outstanding Options Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value Outstanding January 1, 2022 199 $ 168 9.38 $ - Granted 287 17 Cancelled ( 127 ) 141 Outstanding December 31, 2022 359 57 7.57 - Granted 237 4 Cancelled ( 207 ) 19 Outstanding December 31, 2023 389 $ 45 7.04 $ - Options vested and exercisable at December 31, 2023 331 $ 50 6.69 $ - The per-share weighted average grant-date fair value of stock options granted during the year ended December 31, 2022 and 2021 was $ 2.99 and $ 12.91 , respectively. As of December 31, 2023, the unamortized stock-based compensation expense related to outstanding unvested options was approximately $ 0.6 million with a weighted average remaining requisite service period of 1.91 years. The Company expects to amortize this expense over the remaining requisite service period of these stock options. Vesting of all stock options is subject to continuous service with the Company through their applicable vesting dates. During the year ended December 31, 2022, the Company accelerated the vesting of approximately 40,000 stock options under certain time-based vesting stock option grants previously awarded to Dr. Howard Federoff, the Company’s former chief executive officer, pursuant to a separation agreement entered into with Dr. Federoff. The Company also waived a performance condition under a performance-based stock option grant and accelerated the vesting of approximately 21,000 stock options under such grant. Lastly, the Company extended the post-termination exercise period from 90 days to 36 months immediately following his separation date for any options that were vested, including the options that accelerating in vesting, as described above. The above modifications to Dr. Federoff’s stock options grants resulted in modification accounting under ASC 718, Compensation – Stock Compensation . As a result, the Company immediately recognized approximately $ 0.1 million during 2022 for the incremental fair value of stock options that were vested prior to the modification by calculating the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. For stock options that were not vested prior to the modification but then vested as a result of the acceleration, the Company reversed any stock compensation expense previously recognized, remeasured the fair value of the modified award and immediately recognized approximately $ 0.1 million during 2022 of stock compensation expense in full since there was no future service period required to be provided. F-28 Table of Contents Restricted Stock Units The following table summarizes RSU activity for the years ended December 31, 2023 and 2022 (in thousands except for per-share data): Outstanding Restricted Stock Units Weighted Average Fair Value per Share January 1, 2022 12 $ 276 Granted 55 39 Released ( 3 ) 271 Cancelled ( 60 ) 61 December 31, 2022 4 236 Cancelled ( 3 ) 199 December 31, 2023 1 $ 322 Balance expected to vest at December 31, 2023 1 $ 322 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 begins recognizing the expense once the achievement of the related performance goal is determined to be probable. Outstanding RSUs are settled in an equal number of shares of common stock on the vesting date of the award. An RSU award is settled only to the extent vested. Vesting generally requires the continued employment or service by the award recipient through the respective vesting date. Because RSUs are settled in an equal number of shares of common stock without any offsetting payment by the recipient, the measurement of cost is based on the quoted market price of the stock at the measurement date, which is the grant date. In lieu of paying cash to satisfy withholding taxes due upon the settlement of vested RSUs, at the Company’s discretion, an employee may elect to have shares of common stock withheld that would otherwise be issued at settlement, the value of which is equal to the amount of withholding taxes payable. During the year ended December 31, 2023, less than 1,000 RSUs vested. During the year ended December 31, 2022, approximately 3,000 RSUs vested. The Company withheld approximately 1,000 RSUs to cover withholding taxes, and the net 2,000 shares were issued upon settlement. Stock-Based Compensation Expense For the years ended December 31, 2023 and 2022, the Company recognized stock-based compensation expense as follows (in thousands): Years ended December 31, 2023 2022 Research and development $ 234 $ 1,249 General and administrative 1,008 1,686 Total $ 1,242 $ 2,935 16) Equity and Warrants Private Placements Q4-22 PIPE Transaction On November 23, 2022, the Company entered into a purchase agreement with certain investors pursuant to which the Company issued an aggregate of approximately 2.2 million units, with each unit consisting of (i) one share of common stock and (ii) two warrants, each exercisable to purchase one share of common stock at an exercise price of $ 3.28 per, at a purchase price of $ 3.53 per unit (inclusive of $ 0.125 per warrant). The transaction closed on December 2, 2022. The Company received aggregate gross proceeds of approximately $ 7.7 million. The Company incurred fees of approximately $ 0.3 million through December 31, 2022 related to the transaction. Each warrant had an exercise price of $ 3.28 per share (subject to customary adjustments), became exercisable six months from the date of issuance, and expires five-and-one-half years from the date of issuance. The warrants meet the criteria for equity classification. As discussed in Note 6, in connection with the December 2023 convertible note financing, the exercise price of the warrants was reduced from $ 3.28 per share to $ 1.43 per share. F-29 Table of Contents Q1-22 Private Placement On March 6, 2022, the Company entered into a purchase agreement with an investor pursuant to which the Company issued approximately 343,000 units, each unit consisting of (i) one share of the Company’s common stock (or, in lieu thereof, one pre-funded warrant to purchase one share of common stock) and (ii) one warrant to purchase one share of common stock, for an aggregate gross purchase price of approximately $ 12.0 million. The transaction closed on March 9, 2022. The Company issued 275,000 shares of common stock, approximately 68,000 pre-funded warrants and warrants to purchase approximately 343,000 shares of common stock. The Company incurred fees of approximately $ 1.0 million through December 31, 2022 related to this transaction, which were allocated to the fair value of the pre-funded warrants and warrants and Each pre-funded warrant had an exercise price of $ 0.10 per share (subject to customary adjustments), was immediately exercisable, could be exercised at any time, and had no expiration date. Each warrant has an exercise price of $ 38.20 per share (subject to customary adjustments), became exercisable six months following the date of issuance, and expires five-and-one-half years from the date of issuance. The pre-funded warrants and warrants were accounted for as liabilities under ASC 815-40, as these warrants provide for a cashless settlement provision that does not meet the requirements of the indexation guidance under ASC 815-40. These warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the statement of operations. (See Note 9 for more information related to changes in fair value.) Upon exercise, the fair value of the pre-funded warrants and/or warrants on the exercise date is reclassified from warrant liabilities to equity. The fair values of the pre-funded warrants and warrants at the issuance date totaled $ 12.6 million in the aggregate, or $ 0.6 million more than the aggregate gross purchase price of the units sold in the offering. The $ 0.6 million represents an inducement to the investor to enter into the purchase agreement and was recorded in warrant liabilities expense in the accompanying consolidated statement of operations. On July 12, 2022, all the pre-funded warrants were exercised. The Company issued approximately 68,000 shares of common stock upon exercise and received approximately $ 7,000 of proceeds. The fair value of the pre-funded warrants as of the exercise date (approximately $ 0.7 million) was reclassified from warrant liabilities to equity. In connection with the transaction, the Company and the investor also entered into a registration rights agreement pursuant to which the Company agreed to prepare and file a registration statement with the SEC to register the resale of the shares of common stock issued in the offering and issuable upon exercise of the pre-funded warrants and warrants. The resale registration statement became effective on May 11, 2022. Pursuant to the registration rights agreement, the Company is obligated to pay the investor liquidated damages equal to 2 % of the purchase price for the units per month, with a maximum aggregate payment of 12 of the purchase price for the units, in the event the investor is not permitted to use the registration statement to resell the securities registered for resale thereunder for more than a specified period of time. On May 24, 2022, the Company notified the investor that the investor was not able to use the registration agreement because the Company had not timely filed its Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 with the SEC, and that the investor could not use the registration statement until the Company filed that quarterly report, which was filed on June 30, 2022. The Company accrued $ 0.2 million during 2022 for the contingent loss the Company incurred as liquidated damages as a result of the late filing, which is recorded in other expense, net for the year ended December 31, 2022 in the accompanying consolidated statements of operations. The Company paid the $ 0.2 million liquidated damages to the investor in June 2022. Note Warrants As discussed in Note 6, in connection with the July 2023 and December 2023 convertible note financings, the Company issued note warrants to purchase an aggregate of approximately 14.2 million shares of common stock. The exercise price of all such warrants is currently $ 1.43 per share (subject to customary adjustments), are expire five years following the date of issuance. All such warrants qualified for equity classification. The following table shows the Company’s warrant activity for the year ended December 31, 2023 (in thousands except for per-share data): Q1-22 Common Warrants Q4-22 Warrants July 2023 Warrants December 2023 Warrants Total Warrants Balance as of January 1, 2023 343 4,370 - - 4,713 Granted - - 6,094 8,115 14,209 Balance as of December 31, 2023 343 4,370 6,094 8,115 18,922 F-30 Table of Contents As of December 31, 2023, the weighted average remaining contractual life of the warrants outstanding was 4.68 years and the weighted average exercise price was $ 2.10 per share. SEPA On April 5, 2023, the Company entered into the SEPA with Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $ 10.0 million of the Company’s common stock. Such sales of common stock by the Company, if any, are subject to certain conditions and limitations set forth in the SEPA, including a condition that the Company may not direct Lincoln Park to purchase any shares of common stock under the SEPA if such purchase would result in Lincoln Park beneficially owning more than 4.99 % of the Company’s issued and outstanding shares of common stock. Sales under the SEPA may occur from time to time, at the Company’s sole discretion, through April 2025. In consideration of Lincoln Park’s entry into the SEPA, the Company issued to Lincoln Park approximately 74,000 shares of common stock (the “Commitment Shares”). The value of the Commitment Shares was recorded as a period expense and included in other expense, net, in the accompanying consolidated statements of operations for year ended December 31, 2023. The Company evaluated the contract that includes the right to require Lincoln Park to purchase shares of common stock in the future (“put right”) considering the guidance in ASC 815-40, Derivatives and Hedging — Contracts on an Entity’s Own Equity and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting. The Company analyzed the terms of the freestanding put right and concluded that it has an immaterial value as of December 31, 2023. During the year ended December 31, 2023, the Company issued and sold approximately 214,000 shares of common stock under the SEPA, including the 74,000 Commitment Shares, for gross proceeds of approximately $ 0.3 million. As of December 31, 2023, there were approximately 2,860,000 shares remaining to be sold under the SEPA. In connection with entry into the SEPA, the Company terminated its prior purchase agreements with Lincoln Park entered into during 2021. Cumulative Convertible Preferred Stock The Company has authorized 156,000 shares of preferred stock, all of which is designated as Series A Cumulative Convertible Preferred Stock (the “Series A Preferred Stock”), and all of which were issued and outstanding as of December 31, 2023. The Series A Preferred Stock provides for a cumulative annual dividend of $ 0.10 per share, payable in semi-annual installments in June and December. Dividends may be paid in cash or with shares of common stock. The Company paid approximately $ 16 ,000 in cash for payment of dividends during the years ended December 31, 2023 and 2022 . The Series A Preferred Stock has no voting rights and has a $ 1.00 per share liquidation preference over the Company’s common stock. The holder of shares of Series A Preferred Stock has the right at any time to convert such shares into that number of shares of common stock that equals the number of shares of Series A Preferred Stock that are surrendered for conversion divided by the conversion rate. At December 31, 2023, the conversion rate was 8.8016 and, based on that conversion rate, one share of Series A Preferred Stock would have converted into approximately 0.11 shares of common stock, and all the outstanding shares of the Series A Preferred Stock would have converted into approximately 18,000 shares of common stock in the aggregate. There were no conversions during the years ended December 31, 2023 and 2022. There is no mandatory conversion term, date or any redemption features associated with the Series A Preferred Stock. The conversion rate will adjust under the following circumstances: 1. If the Company (a) pays a dividend or makes a distribution in shares of its common stock, (b) subdivides its outstanding shares of common stock into a greater number of shares, (c) combines its outstanding shares of common stock into a smaller number of shares, or (d) issues by reclassification of its shares of common stock any shares of its common stock (other than a change in par value, or from par value to no par value, or from no par value to par value), then the conversion rate in effect immediately prior to the applicable event will be adjusted so that the holders of the Series A Preferred Stock will be entitled to receive the number of shares of common stock which they would have owned or have been entitled to receive immediately following the happening of the event, had the Series A Preferred Stock been converted immediately prior to the record or effective date of the applicable event. F-31 Table of Contents 2. If the outstanding shares of the Company’s common stock are reclassified (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision, combination or stock dividend), or if the Company consolidates with or merge into another corporation and the Company is not the surviving entity, or if the Company sells all or substantially all of its property, assets, business and goodwill, then the holders of the Series A Preferred Stock will thereafter be entitled upon conversion to the kind and amount of shares of stock or other equity securities, or other property or assets which would have been receivable by such holders upon such reclassification, consolidation, merger or sale, if the Series A Preferred Stock had been converted immediately prior thereto. 3. If the Company issues common stock without consideration or for a consideration per share less than the then applicable Equivalent Preference Amount (as defined below), then the Equivalent Preference Amount will immediately be reduced to the amount determined by dividing (A) an amount equal to the sum of (1) the number of shares of common stock outstanding immediately prior to such issuance multiplied by the Equivalent Preference Amount in effect immediately prior to such issuance and (2) the consideration, if any, received by the Company upon such issuance, by (B) the total number of shares of common stock outstanding immediately after such issuance. The “Equivalent Preference Amount” is the value that results when the liquidation preference of one share of Series A Preferred Stock (which is $ 1.00 ) is multiplied by the conversion rate in effect at that time; thus the conversion rate applicable after the adjustment in the Equivalent Preference Amount as described herein will be the figure that results when the adjusted Equivalent Preference Amount is divided by the liquidation preference of one share of Series A Preferred Stock. 17) Income Taxes Loss before income taxes consist of the following (in thousands): Years ended December 31, 2023 2022 (in thousands) Domestic $ ( 21,654 ) $ ( 24,513 ) Foreign ( 17 ) ( 21 ) Total loss before income taxes $ ( 21,671 ) $ ( 24,534 ) For each of the years ended December 31, 2023 and 2022, current tax provisions and current deferred tax provisions were recorded as follows (in thousands): Years ended December 31, 2023 2022 Current Tax Provision Federal $ - $ - State 1 4 Foreign - - 1 4 Deferred Tax Provision Federal ( 2,155 ) ( 6,851 ) State 8 ( 1,602 ) Foreign ( 2 ) ( 187 ) ( 2,149 ) ( 8,640 ) Change in valuation allowance 2,145 8,681 Total tax (benefit) provision for income taxes $ ( 3 ) $ 45 F-32 Table of Contents Deferred tax assets and liabilities consist of the effects of temporary differences as shown in the table below (in thousands). Deferred tax assets have been fully reserved by a valuation allowance since it is more likely than not that such tax benefits will not be realized. As of December 31, 2023 2022 Deferred Tax Assets: Net operating losses $ 12,740 $ 9,382 Foreign net operating losses 784 782 Stock compensation 2,141 2,173 In-process research and development 1,009 1,233 Capitalized rearch and development expenses 3,105 1,502 R&D credit carryforwards 437 517 Compensation accrual 3 81 ROU Liabilities 8,932 334 Other 132 549 Total gross deferred tax assets 29,283 16,553 Valuation allowance ( 18,302 ) ( 16,157 ) Net deferred tax assets 10,981 396 Deferred Tax Liabilities: Fixed assets ( 6 ) ( 10 ) ROU Assets ( 8,349 ) ( 291 ) Convertible debt ( 2,507 ) - Intangibles - goodwill ( 179 ) ( 160 ) Total deferred tax liabilities ( 11,041 ) ( 461 ) Net deferred taxes $ ( 60 ) $ ( 65 ) The reconciliation of computed expected income taxes to effective income taxes by applying the federal statutory rate of 21 % is as follows: As of December 31, 2023 2022 Tax at federal income tax rate 21.00 % 21.00 % State income tax, net of federal tax 4.92 % 6.52 % Foreign tax differential ( 0.01 %) ( 0.01 %) Non-deductible expenses/excludable items ( 0.74 %) 6.09 % Change in valuation allowance ( 9.90 %) ( 35.38 %) Convertible debt ( 11.92 %) 0 .00 % Credits 0 .00 % 0.98 % Uncertain tax positions 0 .00 % ( 0.49 %) Other ( 3.34 %) 1.11 % Benefit (provision) for income taxes 0.01 % ( 0.18 %) The net increase in the total valuation allowance for the year ended December 31, 2023 was an increase of approximately $ 2.1 million. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary difference become deductible. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and planning strategies in making this assessment. Based on the level of historical operating results and projections for the taxable income for the future, management has determined that it is more likely than not that the deferred taxes assets will not be utilized. Accordingly, the Company has recorded a full valuation allowance. The net deferred tax liability represents an indefinite life intangible liability related to tax deductible goodwill, partially offset by an indefinite life deferred tax asset. At December 31, 2023 and 2022, the Company has available net operating loss (“NOL”) carryforwards of approximately $ 48.4 million and $ 35.6 million for federal income tax purposes, respectively, of which approximately $ 48.4 million can be carried forward indefinitely. The Company has available $ 39.6 million and $ 28.8 million state NOLs for the years ended December 31, 2023 and 2022, respectively. The Company also has foreign NOL carryforwards of approximately $ 6.3 million for each of the years ended December 31, 2023 and 2022, which carry forward indefinitely. Section 382 of the Internal Revenue Code (“IRC”) imposes limits on the ability to use NOL carryforwards that existed prior to a change in control to offset future taxable income. Such limitations would reduce, potentially significantly, the gross deferred tax assets disclosed in the table above related to the NOL carryforwards. The Company continues to disclose the NOL carryforwards at their original amount in the table above as no potential limitation has been quantified. The Company has also established a full valuation allowance for all deferred tax assets, including the NOL carryforwards, since the Company could not conclude that it was more likely than not able to generate future taxable income to realize these assets. F-33 Table of Contents At December 31, 2023 and 2022 the Company has federal and state income tax credit carryforwards of approximately $ 0.4 million and $ 0.5 million, respectively. The credits begin to expire in 2041 . In accordance with authoritative guidance, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The following table summarizes amounts the Company recorded for uncertain tax positions as of December 31, 2023 and 2022 (in thousands): As of December 31, 2023 2022 Beginning balance of uncertain tax positions $ 121 $ - Additions based on current year’s tax positions - 45 Net changes based on prior year’s tax positions 272 76 Ending balance of uncertain tax positions $ 393 $ 121 It is reasonably possible that unrecognized tax benefits may increase or decrease within the next twelve months due to tax examination changes, expiration of statute of limitations, or changes in tax law. The Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months. The Company recognizes interest and penalties related to unrecognized tax positions within the income tax expense line in the accompanying consolidated statements of operations. There were no accrued interest and penalties associated with uncertain tax positions as of December 31, 2023 or December 31, 2022. The Company is subject to U.S. federal, state, and foreign income tax. The Company’s income tax returns are subject to examination by the relevant taxing authorities. As of December 31, 2023, the 2020 – 2023 tax years remain subject to examination in the U.S. federal tax, various state, and foreign tax jurisdictions. The Company is not currently under examination by federal state, or foreign jurisdictions. On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted into law. Among other changes to the tax code, the IRA imposes a 1% excise tax on certain repurchases of corporate stock by certain publicly traded corporations. The 1% stock buyback tax applies to redemptions by domestic corporations occurring in taxable years beginning after December 31, 2022. A number of exceptions to the stock buyback tax are available including exceptions to certain reorganizations. However, while these exceptions may be helpful in limiting the application of the stock buyback tax in situations in which it was not intended to apply, more guidance will be necessary for taxpayers to analyze the potential application of these exceptions and whether they will be able to rely upon them. 18) Subsequent Event CEO Inducement Grant On January 1, 2024, Sanjeev Luther was appointed as President, Chief Executive Officer and a director of the Company. Upon his appointment, he was granted a non-qualified stock option to purchase approximately 1,685,000 shares of the Company’s common stock. The stock option has an exercise price of $ 1.80 per share, which was equal to the fair market value of the Company’s common stock on the date of grant, will vest over four years , with 25 % of the shares vesting on the first anniversary of the grant date and the remaining 75 % of the shares vesting in equal monthly installments over the three years thereafter, in each case, subject to continued service. The stock option was granted pursuant to the terms of Mr. Luther’s employment agreement and as a material inducement to his joining the Company in accordance with Nasdaq Listing Rule 5635(c)(4). Remaining Funding Received from December 2023 Financing On January 11, 2024, the second and final closing of the December 2023 convertible note financing occurred. At this closing, the Company received approximately $ 1.4 million and issued an aggregate of $ 1.4 million of December 2023 convertible notes and note warrants to purchase approximately 1.5 million shares of common stock. F-34 Table of Contents The December 2023 convertible notes issued on January 11, 2024 have the same terms as those issued on December 15, 2023, except that the one issued on January 11, 2024 expire on January 11, 2029 . The note warrants issued on January 11, 2024 have the same terms as the note warrants issued on December 15, 2023, except that the one issued on January 11, 2024 expire on January 11, 2029 . See Note 6 for more information regarding the December 2023 convertible note financing, the December 2023 convertible notes and the note warrants. F-35