Ernexa Therapeutics Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read this discussion together with the unaudited interim condensed consolidated financial statements, related notes, and other financial information included elsewhere in this Quarterly Report on Form 10-Q together with our audited consolidated financial statements, related notes, and other information contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2023, as amended by the Form 10-K/A filed with the SEC on March 18, 2024 (as amended, the “2023 10-K”). The following discussion contains or is based on assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors,” in Part I, Item 1A of the 2023 10-K and as described from time to time in our other filings with the SEC. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements. Overview We are a life science company committed to realizing the potential of mRNA cell engineering to provide patients with transformational new medicines. We have in-licensed a portfolio of over 100 patents covering key mRNA cell engineering technologies, including technologies for mRNA cell reprogramming, mRNA gene editing, the NoveSlice TM and UltraSlice TM gene-editing proteins, and the ToRNAdo TM mRNA delivery system, which we collectively refer to as our “mRNA technology platform.” We refer to aspects of our mRNA technology platform as “mRNA delivery,” “mRNA gene editing” and “mRNA cell reprogramming.” We license our mRNA technology platform from Factor Bioscience Limited (“Factor Limited”) under an exclusive license agreement. We believe that our proprietary technology platform can be used to develop novel pharmaceutical products to treat a broad range of diseases and address unmet medical needs. In the short term, we are planning to derive revenue by leveraging our core intellectual property (“IP”) portfolio by licensing our IP to third parties in out-licensing or co-development arrangements. In addition, we are also planning to enhance our developmental activities through preclinical studies in selected indications. In the mid-term, we are planning to transform our preclinical stage company into a clinical-stage company through investigational new drug application (“IND”)-enabling studies, IND approval, and initiation of our first-in-human study. After achieving the initial milestones, we’ll seek to diversify our pipeline of product candidates and strengthen the mRNA technology platform with the goal of generating IND applications each year. In the long term, we aspire to become a therapeutics company with multiple approved gene and cellular therapy products across multiple indications in oncology, autoimmune diseases, and rare diseases. We refer to aspects of our mRNA technology platform as “mRNA delivery,” “mRNA gene editing” and “mRNA cell reprogramming.” mRNA Delivery Nucleic acids, such as mRNA, can be used to induce cells to express desired proteins, including proteins that are capable of re-writing genetic and epigenetic cellular programs. However, the plasma membrane surrounding cells normally protects cells from exogenous nucleic acids, preventing efficient uptake and protein translation. Delivery systems can be used to enhance the uptake of nucleic acids by cells. Conventional delivery systems, such as lipid nanoparticle (“LNP”)-based delivery, often suffer from endosomal entrapment and toxicity, which can limit their therapeutic use. Our mRNA delivery technology is designed to use a novel chemical substance that is designed to deliver nucleic acids, including mRNA, to cells both ex vivo and in vivo . Our nucleic-acid delivery technology is also designed for ex vivo delivery of mRNA encoding gene-editing proteins and reprogramming factors, including to primary cells, insertion of exogenous sequences into genomic safe-harbor loci, and in vivo delivery of mRNA to the brain, eye, skin, and lung, which may be useful for the development of mRNA-based therapeutic. mRNA Gene Editing Our mRNA gene-editing technology is designed to delete, insert, and repair DNA sequences in living cells, which may be useful for correcting disease-causing mutations, making cells resistant to infection and degenerative disease, modulating the expression of immunoregulatory proteins to enable the generation of durable allogeneic cell therapies, and engineering immune cells to more effectively fight cancer. 20 Table of Contents Conventional gene-editing technologies typically employ plasmids or viruses to express gene-editing proteins, which can result in low-efficiency editing and unwanted mutagenesis when an exogenous nucleic acid fragment is inserted at random locations in the genome. Our mRNA gene-editing technology instead is designed to employ mRNA to express gene-editing proteins, which can potentially enable gene editing without unwanted insertional mutagenesis, because, unlike conventional gene-editing technologies that employ viruses or DNA-based vectors, mRNA does not typically cause unwanted insertional mutagenesis. We believe the efficiency of our mRNA gene-editing technology has the potential to support development of product candidates that could create new therapeutic approaches. For example, we anticipate that our mRNA gene-editing technology can be used to generate allogeneic chimeric antigen receptor T-cell (“CAR-T”) therapies for the treatment of cancer. In such allogeneic CAR-T therapies, mRNA encoding gene-editing proteins would be used to inactivate the endogenous T-cell receptor to prevent therapeutic T-cells from causing graft-versus-host disease (“GvHD”). GvHD occurs when transplanted cells view the patient’s (i.e. the host’s) cells as a threat and attack the host’s cells. We expect that this same mechanism of action can generate allogeneic stem cell-derived therapies in which mRNA encoding gene-editing proteins could be used to inactivate one or more components of the human leukocyte antigen (“HLA”) complex to render the cells immuno-nonreactive or “stealth,” which may be useful for the development of allogeneic cell-based therapies. mRNA Cell Reprogramming Our mRNA cell-reprogramming technology is capable of generating clonal lines of pluripotent stem cells that can be expanded and differentiated into many desired cell types that may be useful for the development of regenerative cell therapies. Conventional cell-reprogramming technologies (e.g., using Sendai virus or episomal vectors) can result in low efficiency reprogramming, can select for cells with abnormal growth characteristics, and can leave traces of the vector in reprogrammed cells. Our mRNA cell-reprogramming technology instead is designed to employ mRNA to express reprogramming factors, which can enable cell reprogramming without leaving traces of the vector in reprogrammed cells, because, unlike conventional cell-reprogramming technologies that employ viruses or DNA-based vectors, mRNA does not typically leave traces of the vector in reprogrammed cells. Recent Developments Private Placement of Convertible Notes and Warrants On December 14, 2023, we 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 our common stock (the “December 2023 warrants” and together with the July 2023 warrants, the “note warrants”). There were two closings under this purchase agreement: on December 15, 2023, we received $7.8 million and issued $7.8 million in December 2023 convertible notes and December 2023 warrants to purchase approximately 8.1 million shares of our common stock, and on January 11, 2024, we received the remaining $1.4 million and issued an aggregate of $1.4 million in December 2023 convertible notes and December 2023 warrants to purchase approximately 1.5 million shares of our common stock. See Notes 4 and 12 to the accompanying condensed consolidated financial statements for additional information. Notice of Default under Sublease We have not paid our rent obligations under our Somerville, Massachusetts sublease for February, March, April or May 2024, and, as of the date of filing of this report, we owe approximately $2.3 million in past due rent. On May 3, 2024, we received a notice of default from the sublessor related to the foregoing and have had subsequent discussions with the Sublessor about remedying the event of default. See “Liquidity and Capital Resources—Material Cash Requirements—Somerville Sublease,” below. Basis of Presentation Revenue Our near-term focus is on deploying our mRNA technology platform through strategic partnerships. We are not currently developing any product candidates. Our future revenue, if any, is primarily expected to come from out-licensing our mRNA technology platform and/or aspects thereof. 21 Table of Contents In February 2023, we entered into an exclusive option and license agreement with a third party, under which we granted such third party an option to obtain an exclusive sublicense to certain of our technology for preclinical, clinical and commercial purposes in exchange for a non-refundable up-front payment to us of $0.3 million. In August 2023, that third party requested that we begin developing certain induced pluripotent stem cell lines in exchange for a cell line customization fee. The third party paid us $0.4 million towards the customization fee, which we are recognizing ratably over the customization period, which is expected to be approximately 20 to 25 months. We will only earn the remaining amount of the customization fee if we make certain progress towards delivery of the customized cell line. We estimate the amount of consideration we expect to recognize as revenue that is not probable of having a significant reversal of such recognized revenue, and we place 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, we 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. For additional information, see Note 3 to the accompanying condensed consolidated financial statements. Cost of Revenues We recognize direct labor and supplies associated with generating our revenue as cost of revenues. As provided for in the amended and restated exclusive license agreement we entered into with Factor Limited (the “A&R Factor License Agreement”) discussed in Note 9 to the accompanying condensed consolidated financial statements, we are obligated to pay Factor Limited 20% of any amounts we receive from a customer that is related to the licensed technology under the A&R Factor License Agreement, which we also recognize as a cost of revenue. Research and Development Expenses We expense our research and development costs as incurred. Our research and development expenses consist of costs incurred for company-sponsored research and development activities, as well as support for selected investigator-sponsored research. Upfront payments and milestone payments we make for the in-licensing of technology are expensed as research and development in the period in which they are incurred if the technology is not expected to have any alternative future uses other than the specific research and development project for which it was intended. 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 research and development efforts. We have 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. We accrue for third party expenses based on estimates of the services received and efforts expended during the reporting period. If the actual timing of the performance of the services or the level of effort varies from the estimate, the accrual is adjusted accordingly. The expenses for some third-party services may be recognized on a straight-line basis if the expected costs are expected to be incurred ratably during the period. Payments under the contracts depend on factors such as the achievement of certain events or milestones, the successful enrollment of patients, the allocation of responsibilities among the parties to the agreement, and the completion of portions of the clinical study or trial or similar conditions. General and Administrative Expenses Our general and administrative expenses consist primarily of salaries, benefits and other costs, including equity-based compensation, for our executive and administrative personnel, legal and other professional fees, travel, insurance, and other corporate costs. 22 Table of Contents Results of Operations Comparison of the Three Months Ended March 31, 2024 and 2023 Three months ended March 31, (In thousands) 2024 2023 Change Revenue $ 47 $ - $ 47 Cost of revenues 61 50 11 Gross loss (14 ) (50 ) 36 Operating expenses: Research and development 1,458 1,674 (216 ) General and administrative 4,315 3,592 723 Total operating expenses 5,773 5,266 507 Loss from operations (5,787 ) (5,316 ) (471 ) Other expense, net: Change in fair value of warrant liabilities (70 ) (45 ) (25 ) Loss on non-controlling investment - (51 ) 51 Interest (expense) income, net (786 ) 1 (787 ) Total other expense, net (856 ) (95 ) (761 ) - Loss before income taxes (6,643 ) (5,411 ) (1,232 ) Provision for income taxes (4 ) (5 ) 1 Net loss $ (6,647 ) $ (5,416 ) $ (1,231 ) Revenue During the three March 31, 2024, we recognized revenue related to the cell line customization activities that we are performing for a third party. We did not perform any such activities, or otherwise recognize any revenue, during the three months ended March 31, 2023. Cost of Revenue During the three months ended March 31, 2024, our cost of revenues included direct labor and materials to perform the customization cell line activities for a third party. During the three months ended March 31 2023, we received a $0.3 upfront payment pursuant to a customer contract with this third party. Although the $0.3 million was recorded as deferred revenue as of March 31, 2023, the obligation to pay Factor Limited the 20% license fee was incurred upon receipt of the payment from the third party, and was therefore recognized as a cost of revenue during the three months ended March 31, 2023. As of March 31, 2024, the $0.3 upfront payment continues to be recognized in long-term deferred revenue in the accompanying condensed consolidated balance sheet. Research and Development Expenses Three months ended March 31, 2024 2023 Change (in thousands) Professional fees $ 103 $ 280 $ (177 ) Stock-based compensation 46 64 (18 ) Payroll-related 325 203 122 MSA fees 812 812 - Other expenses, net 172 315 (143 ) Total research and development expenses $ 1,458 $ 1,674 $ (216 ) Total research and development expenses decreased by approximately $0.2 million for the three months ended March 31, 2024 when compared to the three months ended March 31, 2023 primarily due to a decrease in professional fees related to closing down a clinical trial we ended in 2022 and other miscellaneous expenses, partially offset by increased payroll expense due to severance recognized during the three months ended March 31, 2024. 23 Table of Contents General and Administrative Expenses Three months ended March 31, 2024 2023 Change (in thousands) Occupancy expense $ 1,901 $ 23 $ 1,878 Payroll-related 532 357 175 Professional fees 1,285 1,935 (650 ) Stock-based compensation 236 625 (389 ) Insurance 216 533 (317 ) Other expenses, net 145 119 26 Total general and administrative expenses $ 4,315 $ 3,592 $ 723 Our general and administrative expenses increased by approximately $0.7 million for the three months ended March 31, 2024 when compared to the three months ended March 31, 2023 primarily due to increased occupancy expense related to the Somerville sublease that we began to incur in July 2023, as well as increased payroll related to increased general and administrative headcount. These increases were partially offset by decreases in professional fees related to legal services, insurance expense due to lower premiums and stock-based compensation expense resulting from a decrease in the fair value of stock options expensed during the three months ended March 31, 2024 compared to the fair value of the stock options expensed during the three months ended March 31, 2023. Change in Fair Value of Warrant Liabilities For the three months ended March 31, 2024 and 2023, we recognized expense related to the change in the fair value of warrant liabilities due to an increase in the market price of our common stock. Loss on Non-Controlling Investment We account for our 25% non-controlling investment in NoveCite, Inc. (“NoveCite”) under the equity method. We have not guaranteed any obligations of NoveCite, nor are we otherwise committed to providing further financial support for NoveCite. Therefore, we only record 25% of NoveCite’s losses up to our investment carrying amount.. As a result, we did not recognize additional losses related to NoveCite for the three months ended March 31, 2024. For the three months ended March 31, 2023, we recognized approximately $0.1 million of loss. Interest (Expense) Income, net We recognized an increase in interest expense for the three months ended March 31, 2024 of approximately $0.8 million primarily due to approximately $0.4 million of interest related to the convertible notes as well as the amortization of the debt discount and debt issuance costs associated with the convertible note financings of approximately $0.4 million. There were no convertible notes (or similar debt instruments) outstanding during the three months ended March 31, 2023. This increase in expense was partially offset by an increase in interest income from our cash that was deposited into interest-bearing accounts. Provision for Income Taxes During 2024, we expect to incur state income tax liabilities related to our operations. We have established a full valuation allowance for all deferred tax assets, including our net operating loss carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets. The effective tax rate differs from the statutory tax rate due primarily to our full valuation allowance. 24 Table of Contents Liquidity and Capital Resources At March 31, 2024, we had cash and cash equivalents of approximately $9.2 million, of which approximately $4.1 million was restricted cash (see—Material Cash Requirements—Somerville Sublease, below) and an accumulated deficit of approximately $193.6 million. We have to date incurred operating losses, and we expect these losses to continue in the future. For the three months ended March 31, 2024, we incurred a net loss of $6.6 million, and we used $3.7 million in operating activities. Currently, our sole source of liquidity is through sales of our common stock under the standby equity purchase agreement (the “SEPA”) we entered into with Lincoln Park Capital Fund, LLC (“Lincoln Park”) in April 2023, pursuant to which Lincoln Park committed to purchase up to $10.0 million of our common stock. Such sales of common stock by us, if any, are subject to certain conditions and limitations set forth in the SEPA, including a condition that we may not direct Lincoln Park to purchase any shares of common stock under the SEPA if such purchase would result in Lincoln Park beneficially owning more than 4.99% of our issued and outstanding shares of common stock. Sales under the SEPA may occur from time to time, at our sole discretion, through April 2025. To date, we have issued and sold approximately 214,000 shares of our common stock to Lincoln Park, including the 74,000 commitment shares, and have received approximately $0.3 million in gross proceeds from such sales. We sold no shares under the SEPA during the three months ended March 31, 2024. Based on our current financial condition and forecasts of available cash, we will not have sufficient capital to fund our operations for the 12 months following the issuance date of the accompanying condensed consolidated financial statements. We can provide no assurance that we will be able to obtain additional capital when needed, on favorable terms, or at all. If we cannot raise capital when needed, on favorable terms or at all, we will need to reevaluate our planned operations and may need to reduce expenses, file for bankruptcy, reorganize, merge with another entity, or cease operations. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock. See the risk factor in Item 1A of Part II of our 2023 10-K titled, “We will require substantial additional capital to fund our operations, and if we fail to obtain the necessary financing, we may not be able to pursue our business strategy.” Historically, the cash used to fund our operations has come from a variety of sources and predominantly from sales of shares of our common stock and of convertible notes. We will continue to evaluate and plan to raise additional funds to support our working capital needs through public or private equity offerings, debt financings, strategic partnerships, out-licensing our intellectual property or other means. There can be no assurance that capital will be available when needed or that, if available, it will be obtained on terms favorable to us and our stockholders. Our ability to raise capital through sales of our common stock will depend on a variety of factors including, among others, market conditions, the trading price and volume of our common stock, and investor sentiment. In addition, macroeconomic factors and volatility in the financial market, which may be exacerbated in the short term by concerns over inflation, interest rates, impacts of the wars in Ukraine and the Middle East, strained relations between the U.S. and several other countries, and social and political discord and unrest in the U.S., among other things, may make equity or debt financings more difficult, more costly or more dilutive to our stockholders. In addition, equity or debt financings may have a dilutive effect on the holdings of our existing stockholders, and debt financings may subject us to restrictive covenants, operational restrictions and security interests in our assets. If we raise capital through collaborative arrangements, we may be required to relinquish some rights to our technologies or grant sublicenses on terms that are not favorable to us. We prepared the accompanying condensed consolidated financial statements on a going concern basis, which assumes that we will realize our assets and satisfy our liabilities in the normal course of business. As discussed above, there is substantial doubt about our ability to continue as a going concern because we do not have sufficient cash to satisfy our working capital needs and other liquidity requirements over at least the next 12 months from the date of issuance of the accompanying condensed consolidated financial statements. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and reclassification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of our ability to remain a going concern. 25 Table of Contents In addition, while we are not presently pursuing product development, we may do so in the future. Developing product candidates, conducting clinical trials and commercializing products requires substantial capital, and we would need to raise substantial additional funds if we were to pursue the development of one or more product candidates. Cash Flows Cash flows from operating, investing and financing activities, as reflected in the accompanying condensed consolidated statements of cash flows, are summarized as follows: For the three months ended March 31, (in thousands) 2024 2023 Change Cash (used in) provided by: Operating activities $ (3,747 ) $ (6,049 ) $ 2,302 Investing activities (97 ) - (97 ) Financing activities 1,385 - 1,385 Net decrease in cash and cash equivalents $ (2,459 ) $ (6,049 ) $ 3,590 Net Cash Used in Operating Activities There was a decrease of approximately $2.3 million in cash used in operating activities for the three months ended March 31, 2024 compared to the same period in 2023. This change was due to a decrease in cash used in operating assets and liabilities of $2.5 million, primarily related to accounts payable and accrued expenses, partially offset by a $0.2 million increase in net loss, after giving effect to adjustments made for non-cash transactions, for the three months ended March 31, 2024 compared to the same period in 2023. Net Cash Used in Investing Activities We used approximately $0.1 million to pay for the purchases of property and equipment during the three months ended March 31, 2024. There were no investing activities during the three months ended March 31, 2023. Net Cash Provided by Financing Activities Net cash provided by financing activities for the three months ended March 31, 2024 includes approximately $1.4 million of proceeds received from the second closing of the December 2023 convertible notes financing that occurred in January 2024. There were no financing activities during the three months ended March 31, 2023. Material Cash Requirements Somerville Sublease In October 2022, we entered into a sublease for approximately 45,500 square feet of office and laboratory space in Somerville, Massachusetts. The term of the sublease is approximately 10 years, and our base rent obligations over the term is estimated to be approximately $63.0 million, plus our share of the sublessor’s parking spaces and operating expenses. Our base rent obligations under the sublease during 2024 are expected to be $0.5 million per month. As part of the sublease, we delivered a security deposit in the form of a letter of credit in the amount of $4.1 million, which will be reduced on an incremental basis throughout the term of the sublease. The letter of credit was issued by our commercial bank, which required that we cash collateralize the letter of credit with $4.1 million of cash deposited in a restricted account maintained by such bank. The amount of required restricted cash collateral will decline in parallel with the reduction in the amount of the letter of credit over the term of the sublease. On May 3, 2024, we received a notice from the sublessor regarding past due rent payments of approximately $2.3 million, including our share of amounts related to property taxes and common area maintenance costs, that we have not paid for the months of February, March, April and May 2024. Failure to pay the past due rent payments in full, plus approximately $70,000 in late fees and interest, within five business days from the date of the notice constitutes an event of default under the sublease. We had discussions with the Sublessor subsequent to receiving notice about remedying the event of default, and as a result of those discussions, we did not pay any of the past due rent payments or any of the late fees or interest within such five business day period. We also have been in, and intend to continue, discussions with the sublessor to renegotiate the terms of the sublease, which may include, among other things, deferment of rent payments and/or a reduction of the lease term, square footage, and/or base rent. If an event of default exists under the sublease, beyond applicable notice and cure periods, the sublessor may draw down the letter of credit and use, apply or retain such portion of the proceeds from the letter of credit as may be necessary (i) for the payment of any rent or any other sum in default, (ii) for the payment of any other amount which the sublessor may, in accordance with the terms of the sublease, spend or become obligated to spend by reason of our default, or (iii) to compensate the sublessor, in accordance with the terms of the sublease, for any other loss or damage which the sublessor may suffer by reason of our default, including costs and reasonable attorneys’ fees incurred by the sublessor to recover possession of the premises following a default by us. As of the date of filing of this report, the sublessor has not drawn down on the letter of credit. The use or application of the proceeds from the letter of credit or any portion thereof does not prevent the sublessor from exercising any other right or remedy provided under the sublease or under law. If any portion of the letter of credit is so used or applied, we must, upon demand therefor, amend the letter of credit, provide an additional letter of credit or deposit cash with the sublessor, in each such case in an amount sufficient to restore the security deposit within 10 business days to the appropriate amount. See the risk factor titled, “Our monthly rent payment obligations under our sublease are significant and we currently owe approximately $2.3 million in past due rent. An event of default under our sublease could be an event of default under our outstanding convertible notes,” in Item 1A. Risk Factors of Part II of this report. 26 Table of Contents Convertible Notes As of the date of this report, the aggregate amount outstanding under our convertible notes, including accrued interest that has been paid in-kind, is $18.5 million, of which $9.0 million and $9.5 million relates to the July 2023 convertible notes and the December 2023 convertible notes, respectively. Unless earlier called for redemption by the holders thereof, the convertible notes mature on the five-year anniversary of their date of issuance. We may not redeem any of the convertible notes prior to maturity. See Note 4 to the accompanying condensed consolidated financial statements for additional information. See also the risk factor titled, “Our monthly rent payment obligations under our sublease are significant and we currently owe approximately $2.3 million in past due rent. An event of default under our sublease could be an event of default under our outstanding convertible notes,” in Item 1A. Risk Factors of Part II of this report. Critical Accounting Estimates There were no significant changes in our critical accounting estimates during the three months ended March 31, 2024 from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2023 10-K. Recent Accounting Pronouncements No new Accounting Standards Updates have been issued by the Financial Accounting Standards Board since January 1, 2024 that would apply to us that are not disclosed in the 2023 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Under the rules and regulations of the SEC, as a smaller reporting company we are not required to provide the information otherwise required by this item.