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 this report and 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 preclinical-stage cell therapy company. Our vision is to improve the lives of patients with difficult-to-treat diseases through innovative, effective, and safe, but accessible cellular therapies, and our mission is to develop allogenic off-the-shelf cellular therapies, leveraging induced pluripotent stem cell (“iPSC”)-derived mesenchymal stem cells (“iMSCs”) to target solid tumors. Our lead product ERNA-101 is allogenic IL-7 and IL-15-secreting iMSCs. ERNA-101 capitalizes on the intrinsic tumor-homing ability of MSCs to slip through the tumor’s defenses and to deliver potent pro-inflammatory factors directly to the tumor microenvironment (“TME”), limiting systemic exposure and potential toxicity while unleashing potent anti-cancer immune responses including enhancement of T-cell anti-tumor activity. Our initial focus is to develop ERNA-101 in triple negative breast cancer and platinum-resistant, tp53-mutant ovarian cancer. We collaborated with the University of Texas MD Anderson Cancer Center to investigate the ability of ERNA-101 to induce and modulate antitumor immunity in ovarian cancer and breast cancer model. We are expecting to complete the Investigational New Drug (“IND”) enabling studies and IND submission by 2026. We are also planning to investigate anti-inflammatory cytokine (e.g. IL-10)-secreting iMSCs in inflammatory/auto-immune disorders like Rheumatoid arthritis. We are actively seeking strategic partnerships to co-develop or out-license therapeutic assets and engage with potential collaborators to expand developmental opportunities. Recent Developments Private Placement On October 29, 2024, we closed a private placement in which we sold an aggregate of 1,401,994 shares of our common stock and pre-funded warrants to purchase 115,000 shares of our common stock at a purchase price of $0.75 per share of common stock and $0.745 per pre-funded warrant. We received approximately $1.1 million in gross proceeds from the issuance of such securities. For additional information regarding this private placement, see Note 5 to the accompanying condensed consolidated financial statements. Exchange Transactions Also on October 29, 2024, in accordance with exchange agreements we entered into with the holders of certain of our warrants and convertible notes, we issued an aggregate of 38,302,029 shares of our common stock in exchange for: (i) warrants to purchase an aggregate of approximately 4.4 million shares of our common stock that we issued in December 2022 with an exercise price of $1.43 per share; (ii) $8.7 million in the aggregate principal amount of convertible notes that we issued in July 2023 and warrants to purchase an aggregate of approximately 6.1 million shares of our common stock that we issued in July 2023 with an exercise price of $1.43 per share; (iii) $9.2 million in the aggregate principal amount of convertible notes that we issued in December 2023 and warrants to purchase an aggregate of approximately 9.6 million shares of our common stock that we issued in December 2023 with an exercise price of $1.43 per share. 23 The holders of the warrants described in the paragraph above exchanged all their warrants for shares of our common stock at an exchange ratio of 0.5 of a share of common stock for every one share of common stock issuable upon exercise of the applicable warrant (rounded up to the nearest whole number), and the holders of the convertible notes described in the paragraph above exchanged all their convertible notes for shares of our common stock at an exchange ratio equal to (A) the sum expressed in U.S. dollars of (1) the principal amount of the applicable convertible note, plus (2) all accrued and unpaid interest thereon through the date the applicable convertible note is exchanged plus (3) all interest that would have accrued through, but not including, the maturity date of applicable convertible note if it was outstanding from the date such convertible note is exchanged through its maturity date, divided by (B) $1.00 (rounded up to the nearest whole number). For additional information regarding the exchange transactions, see Note 5 to the accompanying condensed consolidated financial statements. Conversion of Bridge Notes On September 24, 2024, we closed a private placement in which we sold an aggregate principal amount of approximately $3.9 million of 12.0% senior convertible notes (the “bridge notes”). On October 29, 2024, in accordance with the terms of the bridge notes, approximately $3.0 million of the principal amount of the bridge notes plus all accrued and unpaid interest thereon, plus such amount of interest that would have accrued on the principal amount through December 24, 2024, was automatically converted at a conversion price of $0.50 into 6,244,237 shares of our common stock, and approximately $0.9 million of the principal amount of the bridge notes plus all accrued and unpaid interest thereon, plus such amount of interest that would have accrued on the principal amount through December 24, 2024, was automatically converted at a conversion price of $0.50 into pre-funded warrants to purchase 1,764,000 shares of our common stock. For additional information regarding the private placement and conversion of the bridge notes, see Note 5 to the accompanying condensed consolidated financial statements. In total, the Company issued approximately 45.9 million shares of common stock and 1.9 million pre-funded warrants on October 29, 2024 pursuant to the private placement, the exchange transactions and the conversion of the bridge notes discussed above and had 51.4 million shares of common stock issued and outstanding. Agreements with Factor Bioscience License Agreement On September 24, 2024, we entered into the Exclusive License and Collaboration Agreement (“the Factor L&C Agreement”) with Factor Bioscience Limited (“Factor Limited”). The Factor L&C Agreement terminated the Amended and Restated Factor License Agreement (the “A&R Factor License Agreement”) entered into on November 14, 2023 as well as an exclusive license agreement we acquired from Dilos Bio (formerly known as Exacis Biotherapeutics Inc. (“Exacis”)) under an asset purchase agreement in April 2023. Under the Factor L&C Agreement, we have obtained an exclusive license in the fields of cancer, autoimmune disorders, and rare diseases with respect to certain licensed technology and we have the right to develop the licensed technology directly or enter into co-development agreements with partners who can help bring such technology to market. The Factor L&C Agreement also provides for certain services and materials to be provided by Factor to facilitate our development of the licensed technology and to enable us to scale up production at third party facilities. The initial term of the Factor L&C Agreement is one year after the effective date, and it automatically renews yearly thereafter. We may terminate the Factor L&C Agreement for any reason upon 90 days’ written notice to Factor, and the parties otherwise have customary termination rights, including in connection with certain uncured material breaches and specified bankruptcy events. Pursuant to the Factor L&C Agreement, we will pay Factor $0.2 million per month for the first twelve months, $0.1 million per month for the first nine months toward patent costs, certain milestone payments, royalty payments on net sales of commercialized products and sublicensing fee payments. Lineage Assignment Agreement On September 24, 2024, we entered into an agreement with Factor Bioscience Inc. (“Factor”) whereby we assigned the exclusive option and license agreement (the “Lineage Agreement”) to Factor (the “Lineage Assignment Agreement”). Our rights and obligations under the agreement are now Factor’s responsibility. 24 Payments related to the Lineage Agreement will now be subject to the Lineage Assignment Agreement, which provides for Factor paying us thirty percent (30%) of all amounts it actually receives from Lineage in the event that Lineage exercises its Option Right. Upon receipt of payment for the customization activities set forth in the Lineage Agreement, Factor will pay the Company twenty percent (20%) of all amounts Factor receives from Lineage. Termination of Sublease In October 2022, we entered into a sublease for office and laboratory space in Somerville, Massachusetts. In connection with entering into 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 collateralized with $4.1 million of cash deposited in a restricted account. 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 for February 2024 through August 2024, plus interest and penalties. On August 9, 2024, we 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, we agreed to surrender and vacate the premises, all of our 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, we recognized a gain on lease termination of approximately $1.6 million for the three and nine months ended September 30, 2024, and we expect to save approximately $72 million in base rental payments, parking, operating expenses, taxes and utilities that we would have paid over the remaining lease term. Nasdaq Matters On March 19, 2024, we received a notice from the Listing Qualifications Staff (“Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) stating that we were not in compliance with the Nasdaq listing rule 5550(b)(1) (the “Minimum Stockholders’ Equity Rule”) because we reported stockholders’ equity of less than $2.5 million as of December 31, 2023. The notice had no immediate effect on our Nasdaq listing. In May 2024, we submitted a plan to Nasdaq advising of actions we have taken or will take to regain compliance with the Minimum Stockholders’ Equity Rule. Nasdaq accepted our plan and granted us a 180-day extension, or through September 16, 2024, to regain compliance with the Minimum Stockholders’ Equity Rule. On September 17, 2024, we received a notice from the Staff stating that the Staff has determined that we did not meet the terms of the extension to confirm or demonstrate compliance with the Minimum Stockholders’ Equity Rule by September 16, 2024, and, as a result, unless we request an appeal of such determination by September 24, 2024, trading of our common stock will be suspended at the opening of business on September 26, 2024, and a Form 25-NSE will be filed with the SEC, which will remove our securities from listing and registration on Nasdaq. On September 24, 2024,we submitted a timely request for a hearing with the Nasdaq’s Hearings Panel to appeal the Staff’s determination. The request stayed the suspension of trading of our common stock and the filing of the Form 25-NSE pending the Hearing Panel’s decision. The hearing was scheduled for November 12, 2024. After giving effect to (i) the reclassification of the debt represented by the convertible notes to equity as a result of the exchange of the convertible notes that occurred on October 29, 2024, (ii) the receipt of net proceeds we received in the October 2024 private placement of our common stock and pre-funded warrants to purchase shares of our common stock, and (iii) the reclassification of the debt represented by the bridge notes to equity as a result of the conversion of the bridge notes into shares of our common stock or pre-funded warrants to purchase shares of our common stock, and after taking into account the savings resulting from the termination of our former sublease, our stockholders’ equity exceeds $2.5 million on a proforma basis as of September 30, 2024, which we communicated in our pre-hearing submission of materials to the Hearing Panel on October 23, 2024. Additionally, due to issuing over 45.9 million shares of common stock from the transactions described above and having a total of 51.4 million shares of common stock issued and outstanding as of October 29, 2024, the market value of our listed securities has exceeded the minimum of $35 million under Nasdaq Listing Rule 5550(b)(2) for ten consecutive trading days. As a result, the Staff informed the Company that is has regained compliance with Nasdaq Listing Rule 5550(b) and our stock will continue to be listed and traded on Nasdaq. Accordingly, the Hearing Panel cancelled the November 12, 2024 hearing. 25 Basis of Presentation Revenue In February 2023, we entered into the Lineage Agreement with Lineage, under which we granted Lineage 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, Lineage requested that we begin developing certain induced pluripotent stem cell lines in exchange for a cell line customization fee. Lineage paid us $0.4 million towards the customization fee, which we were recognizing ratably over the customization period. On September 24, 2024, we entered into the Lineage Assignment Agreement with Factor Inc. to assign all our rights and obligations under that the Lineage Agreement to Factor Inc. Payments to us related to the Lineage Agreement will now be subject to the Lineage Assignment Agreement, which provides for Factor Inc. paying the us thirty percent (30%) of all amounts it receives from Lineage in the event that Lineage obtains a sublicense from Factor Inc. Upon receipt of future payments for the customization activities set forth in the Lineage Agreement, Factor Inc. will pay the us twenty percent (20%) of all amounts Factor Inc. receives from Lineage. Because we have no further obligations under the agreement with Lineage, we have fully recognized as revenue amounts previously recorded in deferred revenue of approximately $0.5 million for the three and nine months ended September 30, 2024. For additional information, see Note 4 to the accompanying condensed consolidated financial statements. We have no other revenue generating contracts at this time. Cost of Revenues We recognize direct labor and supplies associated with generating our revenue as cost of revenues. As provided for in the A&R Factor License Agreement discussed in Note 10 to the accompanying condensed consolidated financial statements, we were obligated to pay Factor Limited 20% of any amounts we receive from a customer that was 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. 26 Results of Operations Comparison of the Three and Nine Months Ended September 30, 2024 and 2023 Three months ended September 30, Nine months ended September 30, 2024 2023 Change 2024 2023 Change Revenue $ 487 $ 51 $ 436 $ 581 $ 51 $ 530 Cost of revenues (60 ) 120 (180 ) 96 170 (74 ) Gross income (loss) 547 (69 ) 616 485 (119 ) 604 Operating expenses: Research and development 1,001 1,387 (386 ) 3,446 4,560 (1,114 ) General and administrative 3,381 4,049 (668 ) 11,592 10,231 1,361 Gain on lease termination (1,576 ) - (1,576 ) (1,576 ) - (1,576 ) Acquisition of Exacis in-process research and development - - - - 460 (460 ) Total operating expenses 2,806 5,436 (2,630 ) 13,462 15,251 (1,789 ) Loss from operations (2,259 ) (5,505 ) 3,246 (12,977 ) (15,370 ) 2,393 Other (expense) income, net: Loss on extinguishment of debt (22,440 ) - (22,440 ) (22,440 ) - (22,440 ) Incremental fair value of bridge note derivative liability (1,038 ) - (1,038 ) (1,038 ) - (1,038 ) Change in fair value of warrant liabilities 831 20 811 897 166 731 Change in fair value of contingent consideration - - - 66 118 (52 ) Loss on non-controlling investment - - - - (59 ) 59 Interest expense, net (1,686 ) (113 ) (1,573 ) (3,269 ) (88 ) (3,181 ) Other expense, net - (1 ) 1 - (281 ) 281 Total other expense, net (24,333 ) (94 ) (24,239 ) (25,784 ) (144 ) (25,640 ) Loss before income taxes (26,592 ) (5,599 ) (20,993 ) (38,761 ) (15,514 ) (23,247 ) (Provision) benefit for income taxes (11 ) 8 (19 ) (18 ) (1 ) (17 ) Net loss $ (26,603 ) $ (5,591 ) $ (21,012 ) $ (38,779 ) $ (15,515 ) $ (23,264 ) Revenue During the three and nine months ended September 30, 2024, we fully accelerated the recognition of approximately $0.5 million of deferred revenue related to nonrefundable payments we received from Lineage due to the Lineage Assignment Agreement we entered into on September 24, 2024 with Factor Inc. discussed earlier. For the three and nine months ended September 30, 2023, the revenue we recognized was related to customization activities performed for Lineage. Cost of Revenue During the nine months ended September 30, 2024, our cost of revenues included direct labor and materials to perform the customization cell line activities for Lineage. During the three months ended September 30, 2024, we recognized a credit for amounts previously accrued related to customization cell line activities that were no longer due as a result of entering into the Lineage Assignment Agreement with Factor Inc. During the three and nine months ended September 30, 2023, we recognized direct labor and materials related to the customization activities as well as the 20% license fee due to Factor Limited related to upfront payments received from Lineage under the customer agreement. 27 Research and Development Expenses Three months ended September 30, 2024 2023 Change (in thousands) Professional fees $ 64 $ 225 $ (161 ) Payroll-related 58 134 (76 ) MSA/license fees 767 813 (46 ) Stock-based compensation 13 57 (44 ) Other expenses, net 99 158 (59 ) Total research and development expenses $ 1,001 $ 1,387 $ (386 ) Nine months ended September 30, 2024 2023 Change (in thousands) Professional fees $ 152 $ 675 $ (523 ) Stock-based compensation 74 177 (103 ) Payroll-related 444 504 (60 ) MSA/license expense 2,392 2,438 (46 ) Other expenses, net 384 766 (382 ) Total research and development expenses $ 3,446 $ 4,560 $ (1,114 ) Total research and development expenses decreased by approximately $0.4 million and $1.1 million for the three and nine months ended September 30, 2024, respectively, compared to the three months ended September 30, 2023, primarily due to decreased professional fees due to a reduction in consultant services, payroll-related expenses and stock-based compensation from a reduction in headcount, MSA/license fees as a result of the new L&C Agreement and other expenses related to closing down a clinical trial we ended in 2022. General and Administrative Expenses Three months ended September 30, 2024 2023 Change (in thousands) Professional fees $ 1,125 $ 1,726 $ (601 ) Occupancy expense 1,267 1,563 (296 ) Insurance 93 209 (116 ) Stock-based compensation 392 117 275 Payroll-related 367 254 113 Other expenses, net 137 180 (43 ) Total general and administrative expenses $ 3,381 $ 4,049 $ (668 ) Nine months ended September 30, 2024 2023 Change (in thousands) Occupancy expense $ 5,068 $ 1,606 $ 3,462 Stock-based compensation 1,036 900 136 Professional fees 3,409 5,054 (1,645 ) Insurance 405 936 (531 ) Payroll-related 1,234 1,312 (78 ) Other expenses, net 440 423 17 Total general and administrative expenses $ 11,592 $ 10,231 $ 1,361 28 Our general and administrative expenses decreased by approximately $0.7 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to decreases in professional fees related to legal services and consultants, rent expense due to the termination of our Somverville sublease effective August 31, 2024 and a reduction in insurance premiums. These decreases were offset by increases in payroll-related expense and stock-based compensation due to an increase in headcount as well as an inducement stock option grant given to our chief executive officer in January 2024 compared to the three months ended September 30, 2023. Our general and administrative expenses increased by approximately $1.4 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to increased occupancy expense related to the Somerville sublease that we began to incur in July 2023 as well as increased stock-based compensation due to the chief executive officer’s inducement stock option grant. The increase in occupancy expense was partially offset by decreases in professional fees related to legal services and consultants, insurance expense due to lower premiums and payroll-related expenses resulting from a decrease severance expense during the nine months ended September 20, 2024 compared to the nine months ended September 30, 2023. Gain on Lease Termination On August 9, 2024, we and the sublessor of our Somerville sublease entered into a sublease termination agreement effective August 31, 2024. Pursuant to the sublease termination agreement, we agreed to surrender and vacate the premises, all of our 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, we recognized a gain on lease termination of approximately $1.6 million for the three and nine months ended September 30, 2024 in the accompanying condensed consolidated statement of operations. There was no similar transaction during the three or nine months ended September 30, 2023. Acquisition of Exacis In-Process Research and Development In April 2023, we acquired from Exacis substantially all of its intellectual property assets, including all of its right, title and interest in and to the Purchased License. The Purchased License was determined to be an in-process research and development (“IPR&D”) asset that has no alternative future use and no separate economic value from its original intended purpose, which is expensed in the period the cost is incurred. As a result, we expensed the fair value of the Purchased License of approximately $0.5 million during the three and nine months ended September 30, 2023. For additional information, see Note 3 to the accompanying consolidated financial statements included in this report. There was no similar transaction during the three or nine months ended September 30, 2024. Loss on Extinguishment of Debt We recognized a $22.4 million loss on extinguishment of debt for the three and nine months ended September 30, 2024 related to the Exchange Agreements and common stock private placement entered into on September 24, 2024. There was no similar transaction during the three or nine months ended September 30, 2023. See Note 5 to the accompanying condensed consolidated financial statements for more information on the Exchange Transaction. Fair Value Adjustments to Bridge Notes Derivative Liability We recognized expense of $1.6 million related to the initial measurement at September 24, 2024 of the incremental fair value of the bridge notes derivative liability over the carrying value due to bifurcation of the conversion feature from the bridge notes. This was offset by a $0.6 million credit for the change in fair value of the bridge notes derivative liability due to remeasuring the liability as of September 30, 2024. There was no similar transaction during the three or nine months ended September 30, 2023. See Note 5 to the accompanying condensed consolidated financial statements for more information on the bridge notes. Change in Fair Value of Warrant Liabilities We recognized credits of less than $0.8 million and $0.9 million for the three and nine months ended September 30, 2024 for the change in the fair value of warrant liabilities, which includes certain warrants that were reclassified to a liability on September 24, 2024. The credits were due to a decrease in the market price of our common stock as of September 30, 2024. For the three and nine months ended September 30, 2023, we recognized credits of less than $0.1 million and $0.2 million, respectively, for the change in the fair value of warrant liabilities due to a decrease in the market price of our common stock as of September 30, 2023. See Note 5 to the accompanying condensed consolidated financial statements for more information on the reclassification of the warrants. 29 Change in Fair Value of Contingent Consideration On the closing date of the acquisition of assets from Exacis in April 2023, we recognized a contingent consideration liability of $0.2 million for future payments that may be payable to Exacis, which was included as part of the $0.5 million fair value of the Purchased License asset and expensed as IPR&D for the nine months ended September 30, 2023. This contingent consideration liability is remeasured at each period end, and any change in the fair value of the contingent liability is recognized in the statement of operations. As of September 30, 2023, we remeasured the contingent liability and recognized a credit of $0.1 million for the nine months ended September 30, 2023 due to the decrease in the fair value of the contingent consideration liability. As of September 30, 2024, we remeasured the contingent liability and recognized a credit of $0.1 million for the nine months ended September 30, 2024 due to the decrease in the fair value of the contingent consideration liability. There were no amounts recognized for either of the three months ended September 30, 2023 or 2024. 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 or nine months ended September 30, 2024 or the three months ended September 30, 2023. We recognized a loss of approximately $0.1 million for the nine months ended September 30, 2023. Interest Expense, net We recognized an increase in interest expense for the three and nine months ended September 30, 2024 of approximately $1.6 million and $3.2 million, respectively, primarily due to interest expense and amortization of debt issuance costs associated with the 2023 convertible note financings and bridge notes when compared to the three and nine months ended September 30, 2023. As a result of the closing of the Exchange Transactions on October 29, 2024, we expect our future interest expense to be significantly decreased. Other Expense, net During the nine months ended September 30, 2023, we recognized $0.3 million of other expense, all of which related to the value of the commitment shares issued to Lincoln Park Capital Fund, LLC (“Lincoln Park”) under a standby equity purchase agreement (the “ELOC”) we entered into in April 2023 as well as other associated fees. We did not recognize any such expense during the three or nine months ended September 30, 2024 and a de minimus amount of other expense during the three months ended September 30, 2023. 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. Liquidity and Capital Resources As of September 30, 2024, we had cash of approximately $4.3 million, of which approximately $3.9 million was from proceeds from the bridge notes received on September 24, 2024, and we had an accumulated deficit of approximately $225.8 million. We have to date incurred operating losses, and we expect these losses to continue in the future. For the three and nine months ended September 30, 2024, we incurred a net loss of $26.6 million and $38.8 million, respectively. For the nine months ended September 30, 2024, we used $12.3 million of cash in operating activities. 30 On October 29, 2024, we also received approximately $1.1 million upon the closing of the common stock private placement. Other than the proceeds raised under the bridge notes and the common stock private placement, our sole source of liquidity is through sales of our common stock under the ELOC, 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 ELOC, including a condition that we may not direct Lincoln Park to purchase any shares of common stock under the ELOC 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 ELOC 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 approximately 74,000 commitment shares, and have received approximately $0.3 million in gross proceeds from such sales. We sold no shares under the ELOC during the nine months ended September 30, 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 execute our business strategy, and we may not be able to raise adequate capital on a timely basis, on favorable terms, or at all.” 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. 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. 31 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 nine months ended September 30, (in thousands) 2024 2023 Change Cash (used in) provided by: Operating activities $ (12,291 ) $ (15,747 ) $ 3,456 Investing activities (365 ) - (365 ) Financing activities 5,250 8,852 (3,602 ) Net decrease in cash and cash equivalents $ (7,406 ) $ (6,895 ) $ (511 ) Net Cash Used in Operating Activities There was a decrease of approximately $3.5 million in cash used in operating activities for the nine months ended September 30, 2024 compared to the same period in 2023. This change was due to a decrease in cash used in operating assets and liabilities of $2.0 million primarily related to a reduction in amounts due for the buildout costs of the Somerville facility and a $1.4 million decrease in net loss, after giving effect to adjustments made for non-cash transactions, for the nine months ended September 30, 2024 compared to the same period in 2023. Net Cash Used in Investing Activities We used approximately $0.3 million to pay for the purchases of property and equipment during the nine months ended September 30, 2024. There were no investing activities during the nine months ended September 30, 2023. Net Cash Provided by Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2024 includes approximately $5.3 million of gross proceeds received from the convertible note financings that occurred in January 2024 and September 2024. Net cash provided by financing activities for the nine months ended September 30, 2023 includes approximately $8.7 million of gross proceeds from convertible note financings and $0.3 million of proceeds received from selling approximately 214,000 shares to Lincoln Park under the ELOC. The Company did not sell any shares under the ELOC during the nine months ended September 30, 2024. Critical Accounting Estimates There were no significant changes in our critical accounting estimates during the three months ended September 30, 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. 32