Ernexa Therapeutics Inc. 10-Q

Item 1. Financial Statements ETERNA THERAPEUTICS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value amounts) (unaudited) June 30, 2024 December 31, 2023 ASSETS Current assets: Cash $ 2,586 $ 7,575 Other receivables 228 425 Prepaid expenses and other current assets 769 1,599 Total current assets 3,583 9,599 Restricted cash 4,095 4,095 Property and equipment, net 654 493 Right-of-use assets - operating leases 35,990 32,781 Goodwill 2,044 2,044 Other assets 120 120 Total assets $ 46,486 $ 49,132 LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY Current liabilities: Accounts payable $ 2,193 $ 1,067 Accrued expenses 2,389 1,893 Income taxes payable 7 2 Operating lease liabilities, current 4,266 2,216 Due to related party, current 331 1,205 Deferred revenue, current 189 190 Other current liabilities 225 - Total current liabilities 9,600 6,573 Convertible notes, net 8,895 6,773 Warrant liabilities 50 116 Operating lease liabilities, non-current 36,044 32,854 Deferred revenue, non-current 298 392 Contingent consideration liability 41 107 Other liabilities 84 84 Total liabilities 55,012 46,899 Stockholders’ (deficit) equity: Preferred stock, $ 0.005 par value, 1,000 shares authorized, 156 designated and outstanding of Series A convertible preferred stock at June 30, 2024 and December 31, 2023, $ 156 liquidation preference 1 1 Common stock, $ 0.005 par value, 100,000 shares authorized at June 30, 2024 and December 31, 2023; 5,411 and 5,410 issued and outstanding at June 30, 2024 and December 31, 2023, respectively 27 27 Additional paid-in capital 190,611 189,186 Accumulated deficit ( 199,165 ) ( 186,981 ) Total stockholders’ (deficit) equity ( 8,526 ) 2,233 Total liabilities and stockholders’ (deficit) equity $ 46,486 $ 49,132 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 ETERNA THERAPEUTICS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (unaudited) 2024 2023 2024 2023 Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Revenue $ 47 $ - $ 94 $ - Cost of revenues 95 - 156 50 Gross loss ( 48 ) - ( 62 ) ( 50 ) Operating expenses: Research and development 987 1,499 2,445 3,173 General and administrative 3,896 2,590 8,211 6,182 Acquisition of Exacis in-process research and development - 460 - 460 Total operating expenses 4,883 4,549 10,656 9,815 Loss from operations ( 4,931 ) ( 4,549 ) ( 10,718 ) ( 9,865 ) Other (expense) income, net: Change in fair value of warrant liabilities 136 191 66 146 Change in fair value of contingent consideration 66 118 66 118 Loss on non-controlling investment - ( 8 ) - ( 59 ) Interest (expense) income, net ( 797 ) 24 ( 1,583 ) 25 Other expense, net - ( 280 ) - ( 280 ) Total other (expense) income, net ( 595 ) 45 ( 1,451 ) ( 50 ) Loss before income taxes ( 5,526 ) ( 4,504 ) ( 12,169 ) ( 9,915 ) Provision for income taxes ( 3 ) ( 4 ) ( 7 ) ( 9 ) Net loss ( 5,529 ) ( 4,508 ) ( 12,176 ) ( 9,924 ) Series A preferred stock dividend ( 8 ) ( 8 ) ( 8 ) ( 8 ) Net loss attributable to common stockholders $ ( 5,537 ) $ ( 4,516 ) $ ( 12,184 ) $ ( 9,932 ) Net loss per common share - basic and diluted $ ( 1.02 ) $ ( 0.85 ) $ ( 2.25 ) $ ( 1.90 ) Weighted average shares outstanding - basic and diluted 5,410 5,303 5,410 5,215 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 ETERNA THERAPEUTICS INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY For the three and six months ended June 30, 2024 and 2023 (unaudited) (in thousands) Shares Amount Shares Amount Capital Deficit Total Series A Preferred Stock Common Stock Additional Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total Balances at April 1, 2024 156 $ 1 5,410 $ 27 $ 190,188 $ ( 193,628 ) $ ( 3,412 ) Issuance of common stock from vested restricted stock units - - 1 - - - - Stock-based compensation - - - - 423 - 423 Cash dividends to Series A preferred stockholders - - - - - ( 8 ) ( 8 ) Net loss - - - - - ( 5,529 ) ( 5,529 ) Balances at June 30, 2024 156 $ 1 5,411 $ 27 $ 190,611 $ ( 199,165 ) $ ( 8,526 ) Balances at January 1, 2024 156 $ 1 5,410 $ 27 $ 189,186 $ ( 186,981 ) $ 2,233 Issuance of note warrants - - - - 720 - 720 Issuance of common stock from vested restricted stock units - - 1 - - - - Stock-based compensation - - - - 705 - 705 Cash dividends to Series A preferred stockholders - - - - - ( 8 ) ( 8 ) Net loss - - - - - ( 12,176 ) ( 12,176 ) Balances at June 30, 2024 156 $ 1 5,411 $ 27 $ 190,611 $ ( 199,165 ) $ ( 8,526 ) Balances at April 1, 2023 156 $ 1 5,127 $ 26 $ 178,066 $ ( 170,713 ) $ 7,380 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 Cash dividends to Series A preferred stockholders - - - - - ( 8 ) ( 8 ) Stock-based compensation - - - - 214 - 214 Net loss - - - - - ( 4,508 ) ( 4,508 ) Balances at June 30, 2023 156 $ 1 5,410 $ 27 $ 179,067 $ ( 175,229 ) $ 3,866 Balances at January 1, 2023 156 $ 1 5,127 $ 26 $ 177,377 $ ( 165,297 ) $ 12,107 Balance 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 Cash dividends to Series A preferred stockholders - - - - - ( 8 ) ( 8 ) Stock-based compensation - - - - 903 - 903 Net loss - - - - - ( 9,924 ) ( 9,924 ) Balances at June 30, 2023 156 $ 1 5,410 $ 27 $ 179,067 $ ( 175,229 ) $ 3,866 Balance 156 $ 1 5,410 $ 27 $ 179,067 $ ( 175,229 ) $ 3,866 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ETERNA THERAPEUTICS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) 2024 2023 For the six months ended June 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 12,176 ) $ ( 9,924 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 83 42 Stock-based compensation 705 903 Commitment shares issued to Lincoln Park Capital, LLC - 249 Loss on shares sold to Lincoln Park Capital, LLC - 11 Non-cash component of acquisition of Exacis in-process research and development - 433 Amortization of right-of-use asset 1,036 83 (Gain) loss on disposal of fixed assets ( 2 ) 1 Accrued interest expense 422 - Paid-in-kind interest expense 407 - Amortization of debt discount and debt issuance costs 919 - Change in fair value of warrant liabilities ( 66 ) ( 146 ) Change in fair value of contingent consideration liability ( 66 ) ( 118 ) Loss on non-controlling investment - 59 Changes in operating assets and liabilities: Other receivables 197 ( 33 ) Prepaid expenses and other current assets 734 214 Other non-current assets 1 ( 481 ) Accounts payable and accrued expenses 1,549 ( 454 ) Operating lease liability 995 ( 215 ) Due to related party ( 874 ) ( 875 ) Deferred revenue ( 95 ) 250 Other liabilities 225 80 Net cash used in operating activities ( 6,006 ) ( 9,921 ) Cash flows from investing activities: Purchase of property and equipment ( 350 ) - Proceeds received from the sale of fixed assets 4 - Net cash used in investing activities ( 346 ) - Cash flows from financing activities: Proceeds received from the convertible notes financing 1,405 - Fees paid related to the convertible notes financing ( 34 ) - Proceeds from sale of common stock pursuant to stock purchase agreement with Lincoln Park Capital Fund, LLC - 320 Dividends paid to Series A preferred stockholders ( 8 ) ( 8 ) Net cash provided by financing activities 1,363 312 Net decrease in cash and cash equivalents ( 4,989 ) ( 9,609 ) Cash, cash equivalents and restricted cash at beginning of period 11,670 15,541 Cash, cash equivalents and restricted cash at end of period $ 6,681 $ 5,932 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 6 $ 13 Income taxes $ 2 $ 4 Supplemental disclosure of non-cash investing and financing activities: Note warrants issued $ 755 $ - Unpaid fees incurred in connection with the December 2023 financing $ 32 $ - Paid in-kind interest added to convertible notes principal $ 584 $ - Adjustment to lease liability and ROU asset due to remeasurement $ 4,245 $ - Property and equipment purchased but not paid $ 18 $ - Initial measurement of ROU assets $ - $ 34,410 Initial measurement of lease liability $ - $ 34,169 Contingent consideration for Exacis asset acquisition $ - $ 225 Issuance of common stock for Exacis asset acquisition $ - $ 208 Reconciliation of cash, cash equivalents and restricted cash at end of period: Cash and cash equivalents $ 2,586 $ 1,837 Restricted cash 4,095 4,095 Total cash, cash equivalents and restricted cash at end of period $ 6,681 $ 5,932 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ETERNA THERAPEUTICS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of Business 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 NoveSlice TM and UltraSlice TM gene-editing proteins, and the ToRNAdo TM 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 Therapeutics LLC, Novellus, Inc. and Novellus Therapeutics Limited) unless otherwise stated or the context otherwise requires. Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. These condensed consolidated financial statements should be read together with the audited consolidated financial statements and notes thereto contained in Eterna’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2024, as amended by the Form 10-K/A filed with the SEC on March 18, 2024 (as amended, the “2023 10-K”). The accompanying condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited financial statements contained in the 2023 10-K but does not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2024, or any other period. Reclassifications Certain reclassifications have been made to the Company’s prior year amounts to conform to the current year presentation. 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 June 30, 2024, the Company had an unrestricted cash balance of approximately $ 2.6 million and an accumulated deficit of approximately $ 199.2 million. For the three and six months ended June 30, 2024, the Company incurred a net loss of $ 5.5 million and $ 12.2 million, respectively, and for the six months ended June 30, 2024, the Company used cash of $ 6.0 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. 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. 5 On August 5, 2024, the sublessor drew down on the letter of credit for the full $ 4.1 million to cover past due rent, plus penalties and interest. On August 9, 2024 the Company and the sublessor entered into a sublease termination agreement, effective August 31, 2024. See Note 8 for additional information regarding the sublease, and see Note 17 for additional information regarding the sublease termination agreement. 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. No shares have been sold under the SEPA during the three and six months ended June 30, 2024. In July and December 2023, the Company received $ 16.5 million in aggregate 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 Note 5 for additional information regarding these financings. In connection with preparing the accompanying condensed consolidated financial statements as of and for the three and six months ended June 30, 2024, 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 condensed 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 condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern. 3) ASSET ACQUISITION On April 26, 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. 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. The transactions contemplated by the Exacis Purchase Agreement (the “Exacis Acquisition”) closed on April 26, 2023. 6 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 common stock, which shares were subject to a 12 -month lockup that expired in April 2024. 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 the 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 Company’s common stock, direct acquisition-related costs and contingent consideration. The table below shows the total fair value of the consideration paid for the Exacis Assets (in thousands). See Note 4 for more information on the fair value measurement of the assets acquired. SCHEDULE OF FAIR VALUE MEASUREMENT OF ASSETS ACQUIRED 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 in-process research and development (“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 three and six months ended June 30, 2023. 7 4) 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. The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”) 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. 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 three and six months ended June 30, 2024, the Company recognized less than $ 0.1 million and $ 0.1 million of revenue, respectively, for the customization activities. The Company did no t recognize any revenue for either of the three or six months ended June 30, 2023. 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 9, 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. For the six months ended June 30, 2023, the Company recognized less than $ 0.1 million in license fees, which is recorded in cost of revenues, due to Factor Limited as a result of receiving the $ 0.3 million Option Fee payment from Lineage. There was no such license fee incurred during the three months ended June 30, 2023 or during the three or six months ended June 30, 2024. 5) CONVERTIBLE NOTES 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 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”). 8 There were two closings under the December 14, 2023 purchase agreement – one on December 15, 2023 and the second on January 11, 2024. At the first closing, 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 its common stock. At the second closing, the Company received $ 1.4 million and issued $ 1.4 million of December 2023 convertible notes and December 2023 warrants to purchase approximately 1.5 million shares its common stock. See Note 13 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 convertible notes mature on the five -year anniversary of the date of their issuance, 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 June 30, 2024, 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 undisputed event of default occurs and is continuing under the convertible notes, the holder thereof may require the Company to redeem some or all of their convertible notes at a redemption price equal to 100 % of the principal amount of the convertible notes being redeemed, plus accrued and unpaid interest thereon. As of June 30, 2024, there were no events of default that occurred under the convertible notes. The Company determined that there were no embedded derivatives within the convertible notes that required bifurcation from the host agreement. In connection with the December 2023 convertible notes that were issued on January 11, 2024, the Company allocated the gross proceeds received and the fees incurred over the applicable convertible notes and warrants based on their relative fair values as follows (in thousands): SCHEDULE OF BASED ON RELATIVE FAIR VALUE ALLOCATION OF PROCEEDS AND COSTS Relative Allocation Allocation of Proceeds and Costs Allocation of Proceeds, Fair Value Percentage Proceeds Costs Net Convertible notes $ 1,750 46.24 % $ 650 $ ( 31 ) $ 619 Note warrants 2,035 53.76 % 755 ( 35 ) 720 $ 3,785 100.00 % $ 1,405 $ ( 66 ) $ 1,339 The Company estimated the fair values of the convertible notes as of January 11, 2024 based off a valuation performed by a third-party specialist as of December 15, 2023 using a binomial tree model and the following assumptions: SCHEDULE OF FAIR VALUE ASSUMPTIONS Stock Price Credit Spread Volatility Risk-Free Rate Convertible notes $ 1.75 2,000 109 % 3.90 % 9 The fair value of the note warrants, all of which qualified for equity classification, was determined using the Black-Scholes pricing model as of January 11, 2024 using the following assumptions: Stock Price Exercise Price Expected Life Volatility Dividend Risk-Free Rate Warrants $ 1.75 $ 1.43 5 years 102 % 0.00 % 3.90 % 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. The following table shows the activity that occurred during the six months ended June 30, 2024 for the convertible notes on the accompanying condensed consolidated balance sheet: SCHEDULE OF ACTIVITY OF CONVERTIBLE NOTES Gross convertible notes Debt discount and debt issuance costs Convertible notes, net Beginning balance as of January 1, 2024 $ 16,616 $ ( 9,843 ) $ 6,773 December 2023 notes issued in January 2024 1,405 ( 786 ) 619 Paid-in-kind interest added to principal 584 - 584 Amortization of debt discount and debt issuance costs - 919 919 Ending balance as of June 30, 2024 $ 18,605 $ ( 9,710 ) $ 8,895 To date, the Company has elected to pay in-kind the accrued interest payable on the convertible notes and has added the accrued and unpaid interest to the principal amount of the applicable convertible note. For the three months ended June 30, 2024, the Company has recognized approximately $ 0.9 million in interest expense for the convertible notes, which includes $ 0.5 million for the amortization of the debt discount and debt issuance costs and $ 0.4 million for accrued and unpaid interest on the convertible notes recorded in accrued expenses in the accompanying condensed consolidated balance sheet. For the six months ended June 30, 2024, the Company has recognized approximately $ 1.7 million in interest expense, which includes $ 0.9 million for the amortization of the debt discount and debt issuance costs, $ 0.4 million recorded for accrued and unpaid interest on the convertible notes recorded in accrued expenses in the accompanying condensed consolidated balance sheet and $ 0.4 million of accrued interest that was paid in-kind and added to the principal of the convertible notes. 6) 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: ● 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. 10 ● 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 receivable, prepaid assets and other current assets, accounts payable and accrued expenses, other current liabilities and other liabilities approximate fair value based due to their short maturities. The Company issued approximately 343,000 warrants in connection with a private placement during the first quarter of 2022 (the “Q1-22 warrants”), which were determined to be classified as a liability. The Company also recorded the Market Cap Contingent Consideration liability related to the Exacis Acquisition. See Note 3 for more information related to the Exacis Acquisition. Both of these liabilities are remeasured at each reporting period, with changes in their fair values recognized in earnings. 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 contingent consideration related to 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. The following tables summarize the liabilities that are measured at fair value as of June 30, 2024 and December 31, 2023 (in thousands): SCHEDULE OF LIABILITIES MEASURED AT FAIR VALUE Description Level June 30, 2024 December 31, 2023 Liabilities: Warrant liabilities - Q1-22 warrants 3 $ 50 $ 116 Market Cap Contingent Consideration 3 $ 41 $ 107 Liabilities, fair value disclosure 3 $ 41 $ 107 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 condensed consolidated statement of operations. The following table presents the changes in the liabilities measured at fair value from January 1, 2024 through June 30, 2024 (in thousands): SCHEDULE OF CHANGES IN WARRANT LIABILITIES Warrant Liabilities Contingent Consideration Fair value at January 1, 2024 $ 116 $ 107 Change in fair value ( 66 ) ( 66 ) Fair value at June 30, 2024 $ 50 $ 41 The table below is provided for comparative purposes only and presents information about the fair value of the Company’s convertible notes relative to the carrying values recognized in the condensed consolidated balance sheet as of June 30, 2024 and December 31, 2023 (in thousands). SCHEDULE OF FAIR VALUE AND CARRYING VALUES OF CONVERTIBLE NOTES June 30, 2024 December 31, 2023 Level Carrying Value Fair Value Carrying Value Fair Value Convertible notes 3 $ 18,605 $ 22,470 $ 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 as of June 30, 2024 using a Monte Carlo simulation model and as of December 31, 2023 using a binomial model, both of which are considered a Level 3 measurement. 11 7) GOODWILL In 2018, the Company acquired IRX Therapeutics (“IRX”), which was accounted for as a business combination. The Company recorded goodwill in the amount of $ 2.0 million related to the IRX acquisition. Goodwill is not amortized but is tested for impairment annually, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the entity is less than its carrying value. As of June 30, 2024, the Company did not identify potential triggering events that could indicate that the fair value of the entity is less than its carrying value and determined there were no such events that occurred. 8) LEASES T he Company currently has operating leases for office and laboratory space in the borough of Manhattan in New York, New York, and Cambridge, Massachusetts, which expire in 2026 and 2028, respectively. In addition, 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 sublease provides for base rental payments of approximately $ 0.5 million per month as well as monthly payments for parking and the Company’s 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. The Sublessor provided the Company with a tenant improvement allowance (“TIA”) of $ 190 per rentable square foot, or $ 8.6 million. As of June 30, 2024, the Company received the entire $ 8.6 million TIA. The Company incurred out-of-pocket tenant improvements costs of approximately $ 1.6 million, which were in excess of the $ 8.6 million TIA. On May 3, 2024, the Company received a notice from the Sublessor regarding past due rent payments of approximately $ 2.3 million, including amounts related to property taxes and common area maintenance costs, that the Company did not pay 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. The Company also did not pay the rent for June, July or August 2024, and as of August 1, 2024, owed approximately $ 4.0 million in the aggregate in past due rent. On August 5, 2024, the Sublessor drew down on the letter of credit for the full $ 4.1 million to cover the approximately $ 4.0 million of past due rent payments, plus interest and penalties. On August 9, 2024, the Company and Sublessor entered into a sublease termination agreement, effective August 31, 2024. The sublease was originally scheduled to expire in 2033. See Note 17 for more information on the sublease termination agreement. 12 For the three and six months ended June 30, 2024 and 2023, the net operating lease expenses were as follows (in thousands): NET OPERATING LEASE EXPENSE 2024 2023 2024 2023 Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Operating lease expense $ 1,633 $ 67 $ 3,269 $ 135 Sublease income ( 21 ) ( 21 ) ( 42 ) ( 42 ) Variable lease expense 332 7 663 12 Total lease expense $ 1,944 $ 53 $ 3,890 $ 105 The tables below show the beginning balances of the operating ROU assets and lease liabilities as of January 1, 2024 and the ending balances as of June 30, 2024, including the changes during the period (in thousands). OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES Operating Lease ROU Assets Operating lease ROU assets at January 1, 2024 $ 32,781 Adjustment to ROU asset for remeasurement of Somerville Sublease liability 4,245 Amortization of operating lease ROU assets ( 1,036 ) Operating lease ROU assets at June 30, 2024 $ 35,990 Operating Lease Liabilities Operating lease liabilities at January 1, 2024 $ 35,070 Adjustment to lease liability due to remeasurement of Somerville Sublease 4,245 Accretion of interest for Somerville Sublease 1,787 Principal payments on operating lease liabilities ( 792 ) Operating lease liabilities at June 30, 2024 40,310 Less non-current portion 36,044 Current portion at June 30, 2024 $ 4,266 As of June 30, 2024, the Company’s operating leases had a weighted-average remaining life of 9.3 years with a weighted-average discount rate of 11.07 % . The maturities of the operating lease liabilities are as follows (in thousands): MATURITIES OF OPERATING LEASE LIABILITIES As of June 30, 2024 2024 $ 5,305 2025 6,075 2026 6,238 2027 6,308 2028 6,406 Thereafter 33,879 Total payments 64,211 Less imputed interest ( 23,901 ) Total operating lease liabilities $ 40,310 13 9) ACCRUED EXPENSES Accrued expenses at June 30, 2024 and December 31, 2023 consisted of the following (in thousands): SCHEDULE OF ACCRUED EXPENSES June 30, 2024 December 31, 2023 Somerville facility $ 547 $ 218 Legal fees 545 643 Convertible notes interest 422 176 Professional fees 229 239 Accrued compensation 134 109 Other 512 508 Total accrued expenses $ 2,389 $ 1,893 10) RELATED PARTY TRANSACTIONS Agreements with Factor Bioscience Inc. and Affiliates As of June 30, 2024, 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. 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. Under the terms of an amendment to WO1, the Company may terminate WO1 on or after the second anniversary of the date of the MSA, subject to providing Factor Bioscience with 75 days’ prior notice if such notice is provided no later than June 30, 2024. On June 26, 2024, the Company provided Factor Bioscience with its notice to terminate WO1, which will be effective on September 9, 2024. 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 June 30, 2024, there was approximately $ 0.3 million of the unamortized License Fee Obligation remaining, which is recorded on the accompanying condensed consolidated balance sheet in the “due to related party, current” line item. 14 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 10 (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). 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. 15 Exacis Asset Acquisition On April 26, 2023, the Company closed the Exacis Acquisition. See Note 3 for additional information. The Exacis Acquisition was deemed a related party transaction because, at the time of the acquisition, (i) Dr. Gregory Fiore was both the chief executive officer of Exacis and a member of the Company’s board of directors, (ii) Dr. Angel was both the Company’s chief executive officer and chairman of Exacis’ scientific advisory board, and (iii) an affiliate of Factor Bioscience was the majority stockholder of Exacis. 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 4 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. 16 11) COMMITMENTS AND CONTINGENCIES Litigation Matters The Company is involved in litigation and arbitrations from time to time in the ordinary course of business. Legal fees and other costs associated with such actions are expensed as incurred. In addition, the Company assesses the need to record a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable, and the amount can be reasonably estimated. 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 our acquisition of Novellus, Inc.), alleging breach of fiduciary duty, breach of contract and civil conspiracy. Eterna acquired Novellus, Inc. on July 16, 2021. On May 27, 2022 Novellus, Inc. amended the complaint to withdraw all claims against all defendants except Paul Sowyrda and John Westman. On July 1, 2022, 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 Westman against Novellus LLC captioned Westman v. Novellus LLC , C.A. No. 2021-0882-NAC (together, the “Delaware Actions”). On July 1, 2022, Sowyrda answered the complaint and asserted counterclaims against Novellus, Inc, and third-party defendants Dr. Matthew Angel and Dr. Christopher 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. Sowyrda also joined in 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 Eterna acquired Novellus, Inc. On November 15, 2022, prior to a decision on 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, 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 Eterna Therapeutics Inc. (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, Westman filed an answer to the Amended Complaint and asserted similar counterclaims against the same Counterclaim Defendants. Westman and Sowyrda each asserted claims for indemnification and/or advancement against Novellus, Inc. On January 11, 2023, 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, 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 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 Sowyrda and Westman’s motion to enforce on June 15, 2023. The Court’s order dismissed all of Westman’s claims against Counterclaim Defendants except his claim for indemnification, and all of 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, 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 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 Sowyrda’s employment-related claims, on October 13, 2023. On June 13, 2024, the motion to dismiss was denied and the court set a schedule for discovery limited to a threshold factual issue. Discovery as to all other issues pertaining to the counterclaims was stayed. On July 15, 2024, Westman and Sowyrda requested that the single justice in the appellate court continue to stay the appeal pending the outcome of the limited discovery ordered by the Court. On July 31, 2024, Counterclaim Defendants and Sowyrda informed the Court that they had reached a settlement and requested that all claims pending between them be dismissed with prejudice, and on August 9, 2024, the Court approved the motion for approval of dismissal of all such claims with prejudice. Pursuant to the Court’s order, Counterclaim Defendants are engaged in limited discovery with Westman. A status conference has been set for September 12, 2024. 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 Westman and Sowyrda matters. However, a future advance or reimbursement is not currently probable nor can it be reasonably estimated. 17 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 against the Company alleging the following claims: (1) federal trademark infringement; (2) federal unfair competition; (3) Massachusetts state common law trademark infringement; (4) Massachusetts state unfair competition. On April 2, 2024, the parties settled the claims and stipulated to dismiss the complaint with prejudice. Per the settlement agreement entered into between the parties on March 19, 2024, the Company plans to phase-out its current use of the ETERNA trademark by October 31, 2024. Licensing Agreements On November 14, 2023, the Company entered into the A&R Factor License Agreement with Factor Limited. See Note 9 for details of this agreement. 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 %. 12) STOCK-BASED COMPENSATION Stock Options During the three and six months ended June 30, 2024 and 2023, the Company granted stock options to purchase the number of shares of the Company’s common stock set forth in the table below (in thousands): SCHEDULE OF STOCK OPTION GRANTED 2024 2023 2024 2023 Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Stock options granted 501 25 2,375 237 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 (as defined in the 2020 Restated Equity Incentive Plan) 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). On April 26, 2024, the vesting terms of Mr. Luther’s stock option award were amended so that the stock option vests over three years , with 25 % of the shares vesting on the first anniversary of the grant date and the remaining 75 % of the shares will vest in equal monthly installments over the remaining two years , in each case, subject to continued service. Since the only modification to Mr. Luther’s stock option award was to the vesting terms, there was no change to the fair value of the stock option and the total compensation cost was unchanged. However, the total compensation cost will now be recognized over three years rather than four years, and as a result, the Company recognized approximately $ 0.1 million in additional stock-based compensation expense during the three and six months ended June 30, 2024 as a result of the modification. 18 The Company recognizes stock-based compensation expense for stock options 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-lined basis. The following weighted-average assumptions were used for stock options granted during the three and six months ended June 30, 2024 and 2023: SCHEDULE OF WEIGHTED-AVERAGE ASSUMPTIONS USED FOR STOCK OPTIONS GRANTED ixbrl 2024 2023 2024 2023 Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Weighted average risk-free rate 4.32 % 3.54 % 4.45 % 3.82 % Weighted average volatility 91.77 % 96.09 % 97.91 % 95.15 % Dividend yield 0.00 % 0 % 0 % 0 % Expected term 5.68 years 6.08 years 5.85 years 5.44 years The per-share weighted average grant-date fair value of stock options granted during the three and six months ended June 30, 2024 and 2023 were as follows: SCHEDULE OF WEIGHTED AVERAGE GRANT-DATE FAIR VALUE OF STOCK OPTIONS 2024 2023 2024 2023 Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Weighted average grant date fair value $ 1.42 $ 1.64 $ 1.44 $ 2.99 Vesting of all stock options is subject to continuous service with the Company through the applicable vesting date. As of June 30, 2024, there were approximately 2,536,000 shares of the Company’s common stock subject to outstanding stock options. Restricted Stock Units The Company recognizes the fair value of RSUs 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 applicable 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 three and six months ended June 30, 2024 and 2023, less than 1,000 RSUs vested. As of June 30, 2024, there were less than 1,000 RSUs outstanding. The Company did no t grant RSUs during either of the three or six months ended June 30, 2024 and 2023. Stock-Based Compensation Expense For the three and six months ended June 30, 2024 and 2023, the Company recognized stock-based compensation expense as follows (in thousands): SCHEDULE OF STOCK-BASED COMPENSATION EXPENSE 2024 2023 2024 2023 Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Research and development $ 15 $ 56 $ 61 $ 120 General and administrative 408 158 644 783 Total $ 423 $ 214 $ 705 $ 903 19 13) WARRANTS As discussed in Notes 5 and 6, respectively, the Company has previously issued the note warrants and the Q1-22 warrants. The Company also has warrants outstanding from a private placement completed in the fourth quarter of 2022 (the “Q4-22 warrants”). As of June 30, 2024, the Company has the following warrants outstanding: SCHEDULE OF WARRANTS OUTSTANDING Warrants Outstanding (in thousands) Exercise Price Expiration Date Classification Q1-22 warrants 343 $ 38.20 September 9, 2027 Liability Q4-22 warrants 4,370 $ 1.43 June 2, 2028 Equity July 2023 note warrants 6,094 $ 1.43 July 14, 2028 Equity December 2023 note warrant issued December 15, 2023 8,115 $ 1.43 December 15, 2028 Equity December 2023 note warrant issued January 11, 2024 1,464 $ 1.43 January 11, 2029 Equity 20,386 As of June 30, 2024, the weighted average remaining contractual life of the warrants outstanding was 4.21 years and the weighted average exercise price was $ 2.05 . 14) NET 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 convertible notes contractually entitle the holders thereof 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 outstanding stock options, RSUs, warrants and shares of 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 outstanding 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. 20 The following table presents the number of shares subject to outstanding warrants, stock options, RSUs, Series A convertible preferred stock and convertible notes that were excluded from the computation of diluted net loss per share of common stock for the three and six months ended June 30, 2024 and 2023, as their effect was anti-dilutive (in thousands): SCHEDULE OF COMPUTATION OF DILUTED NET LOSS PER SHARE OF COMMON STOCK Three and six months ended June 30, 2024 2023 Warrants 20,386 4,713 Convertible Notes converted into common stock 8,135 - Stock options 2,536 522 Preferred stock converted into common stock 19 7 RSUs - 1 Total potential common shares excluded from computation 31,076 5,243 15) STANDBY EQUITY PURCHASE AGREEMENT 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, subject to the terms and conditions contained in the appliable agreements. Such sales of common stock by the Company, if any, are subject to certain limitations set forth in the purchase agreement, and may occur from time to time, at the Company’s sole discretion, over a period of up to 24 -months, commencing April 25, 2025, which was the date on which each of the conditions to the Lincoln Park’s purchase obligations set forth in the purchase agreement were initially satisfied. In consideration of Lincoln Park’s entry into the purchase agreement, the Company issued to Lincoln Park approximately 74,000 shares of common stock as commitment shares. The value of the commitment shares was recorded as a period expense and included in other expense, net, in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2023. In April 2023, the Company filed a registration statement on Form S-1 (File No. 333-271279) to register the sale from time to time of up to 2,930,237 shares of the Company’s common stock by Lincoln Park, including the approximately 74,000 commitment shares, which was declared effective on April 24, 2023 (the “SEPA S-1”). During the three and six months ended June 30, 2023, the Company issued and sold approximately 214,000 shares of common stock under the SEPA, including the approximately 74,000 commitment shares, for gross proceeds of $ 0.3 million. No shares have been sold under the SEPA during the three or six months ended June 30, 2024. As of June 30, 2024, there were approximately 2,716,000 shares remaining to be sold under the SEPA that are registered for resale by Lincoln Park under the SEPA S-1. 16) 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 the Company that are not disclosed in the 2023 10-K. 17) SUBSEQUENT EVENT On August 5, 2024, the sublessor of the Company’s sublease for the property located in Somerville, Massachusetts drew down on the letter of credit related to the sublease for the full $ 4.1 million to cover the approximately $ 4.0 million of past due rent payments, plus interest and penalties. On August 9, 2024, the Company and the sublessor entered into a sublease termination agreement pursuant to which the parties agreed to terminate the sublease effective August 31, 2024. Pursuant to the sublease termination agreement, the Company agreed to surrender and vacate the premises, all of the Company’s right, title and interest in all furniture, fixtures and laboratory equipment at the premises will become the property of the sublessor, and both parties will be released of their obligations under the sublease. As a result of the sublease termination, the Company expects to save approximately $ 58.5 million in base rental payments plus parking, operating expenses, taxes and utilities that it would have paid over the remaining lease term. 21