Ernexa Therapeutics Inc. 10-Q

Item 1A. Risk Factors. An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our 2023 10-K, in addition to other information in this report, when evaluating our business and before deciding whether to purchase, hold or sell shares of our common stock. Each of these risks and uncertainties, as well as additional risks and uncertainties not presently known to us or that we currently consider immaterial, could harm our business, financial condition, results of operations and/or growth prospects, as well as adversely affect the market price of our common stock, in which case you may lose all or part of your investment. There have been no material changes to the risk factors described in the 2023 10-K, except as follows: 28 Table of Contents Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock. As previously reported, we received a notice (the “Notice”) from the Listing Qualifications Staff (“Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) stating that we are not in compliance with Nasdaq Listing Rule 5550(b)(1) because we reported stockholders’ equity of less than $2.5 million as of December 31, 2024. Our stockholders’ equity was $2.2 million as of December 31, 2024. The Notice had no immediate effect on our Nasdaq listing. We submitted a plan to the Staff advising of actions we have taken or will take to regain compliance with Nasdaq Listing Rule 5550(b)(1). If the Staff determines to accept the plan, the Staff can grant us an extension of up to 180 calendar days from the date of the Notice to regain compliance. If the plan is not accepted or if we are unable to regain compliance within any extension period granted by Nasdaq, Nasdaq would be required to issue a delisting determination. In such event, we may be entitled to request a hearing before a Nasdaq Hearings Panel to appeal such determination. We can provide no assurance that our plan to regain compliance with Nasdaq Listing Rule 5550(b)(1) will be accepted by Nasdaq, or if accepted, that we will be able to regain compliance with Nasdaq Listing Rule 5550(b)(1) within any extension period granted by Nasdaq, or that we will be able to continue to satisfy any other continued listing requirements of Nasdaq. If our common stock is delisted by Nasdaq, and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, then we could face significant material adverse consequences, including: a material reduction in the liquidity of our common stock and a corresponding material reduction in the trading price of our common stock; a more limited market quotations for our securities; a determination that our common stock is a “penny stock” that requires brokers to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our securities; more limited research coverage by stock analysts; loss of reputation; more difficult and more expensive equity financings in the future; the potential loss of confidence by investors; and fewer business development opportunities. The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” If our common stock remains listed on Nasdaq, our common stock will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. If our securities were no longer listed on Nasdaq and therefore not “covered securities,” we would be subject to regulation in each state in which we offer our securities. 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. The remaining term of our sublease for office and laboratory space in Somerville, Massachusetts is approximately 9.6 years, and our base rent obligations over the remaining term is estimated to be approximately $61.7 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. We have not paid our rent obligations under the sublease for February, March, April or May 2024, and, as of the date of filing this report, we owe approximately $2.3 million in past due rent, including our share of amounts related to property taxes and common area maintenance costs. Under the sublease, an event of default exists if we fail to pay any installment of rent or other charge or money obligation when due and such default continues for five business days after written notice from the sublessor thereof; except that such notice and cure period does not apply after the first two occasions during any consecutive 12-month period in which a default notice for such a failure is given to us. On May 3, 2024, we received a notice, dated May 2, 2024, from the sublessor stating that we have past due rent payments of approximately $2.3 million, including our share of amounts related to property taxes and common area maintenance costs, 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 will constitute 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 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. 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. 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. 29 Table of Contents If we default, beyond applicable notice and cure periods, with respect to any provision of the sublease, including the provisions relating to the payment of rent, 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. 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. If we seek to terminate the sublease, we may nonetheless be required to perform our obligations under the sublease including, among other things, paying the base rent for the balance of the term if we cannot negotiate a mutually acceptable termination payment. As mentioned above, we have been, and continue to be, in discussions with the sublessor to remedy the existing event of default under the sublease and to renegotiate the terms of the sublease, which may include, among other things, deferment of rent and/or a reduction of the lease term, square footage, and/or base rent. However, no assurances can be given that we will succeed in remedying the existing event of default or renegotiating any of the terms of the sublease. Moreover, an event of default under our outstanding convertible notes includes (i) a final judgment for the payment of money aggregating in excess of $2.0 million rendered against us which is not, within 45 days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 45 days after the expiration of such stay, and (ii) a material adverse effect on our results of operations, assets, business, prospects or condition (financial or otherwise). If an event of default were found to exist under our convertible notes, the holders thereof may require us to redeem all or any portion of their convertible notes. As of the date of the filing of this report, the aggregate amount outstanding under our convertible notes, including accrued interest that has been paid in-kind, is $18.5 million. In the event of default under our sublease and/or our convertible notes, we could have to file for bankruptcy or cease operations. See the risk factor titled, “We will require substantial additional capital to fund our operations and execute our business strategy, and we may not be able to raise adequate capital on a timely basis, on favorable terms, or at all,” in Part I, Item 1A of the 2023 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None. Item 4. Mine Safety Disclosures. Not Applicable.