| 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 theour Annual Report on Form 10-K/A10-K filed with the Securities and Exchange Commission (the “SEC”) on June 30, 2022March 20, 2023 (the “10-K/A”), as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Original“2022 10-K”), filed with the SEC on April 15, 2022, to the extent the information contained in the Original 10-K was not superseded by the information contained in the 10-K/A. . The following discussion contains or is based on assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors,” in Part I, Item 1A of the 10-K/A2022 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 biopharmaceuticallife science company committed to realizing the potential of mRNA cell engineering to provide patients with transformational new medicines. We have in-licensed a portfolio of over 100 patents covering key mRNA cell engineering technologies, including technologies for mRNA cell reprogramming, mRNA gene editing, the NoveSliceTM and UltraSliceTM gene-editing proteins, and the ToRNAdoTM mRNA delivery system, which we collectively refer to as our “mRNA technology platform.” We plan to develop and advance a pipeline of therapeutic products, both internally and through strategic partnerships, with the near-term focus on deploying our mRNA technology platform through strategic partnerships. We license our mRNA technology platform from Factor Bioscience Limited (“Factor Limited”) under the Exclusive Factor License Agreement (as defined below).
Through strategic partnerships, we expect that our mRNA technology platform will be used for preclinical and eventual clinical development of product candidates for a variety of clinical indications. We expect that the initial product candidates developed by our strategic partners utilizing our mRNA technology platform including mRNA-based cell reprogramming and gene editing technologies, to create next generation mRNA, gene-editing and cell therapies, including iPSC therapies for multiple therapeutic indications. Our mRNA technology platform, which includes novel lipid nanoparticles (“LNPs”) for mRNA delivery and targeted transgene insertion, was acquired through a license with Factor Bioscience Limited, or Factor, and through our acquisition of Novellus, Inc. and Novellus, Ltd. in July 2021, which we refer to as the Acquisition.
Merger with NTN Buzztime, Inc.
On March 25, 2021, we completed the Merger with NTN Buzztime, Inc. In accordance with the Merger Agreement, on March 25, 2021, Brooklyn amended its restated certificate of incorporation in order to effect:
• prior to the Merger, a reverse stock split of its common stock, par value $0.005 per share, at a ratio of one-for-two; and
• following the Merger, a change in its corporate name from “NTN Buzztime, Inc.” to “Brooklyn ImmunoTherapeutics, Inc.”
On March 26, 2021, we sold the rights, title and interest in and to the assets relating to the business operated under the name “NTN Buzztime, Inc.” prior to the Merger to eGames.com Holdings LLC, or eGames.com, in exchange for eGames.com’s payment of a purchase price of $2.0 million and assumption of specified liabilities relating to such pre-Merger business. This transaction, which we refer to as the Disposition, was completed in accordance with the terms of an asset purchase agreement dated September 18, 2020, as amended, between us and eGames.com.
The Merger has been accounted for as a reverse acquisition in accordance with U.S. generally accepted accounting principles, or GAAP. Under this method of accounting, Brooklyn LLC was deemed the “acquiring” company and Brooklyn (then known as NTN Buzztime, Inc.) was treated as the “acquired” company for financial reporting purposes. Operations prior to the Merger are those of Brooklyn LLC, and the historical financial statements of Brooklyn LLC became the historical financial statements of Brooklyn with respect to periods prior to the completion of the Merger.
Acquisition of Novellus
On July 16, 2021, we acquired Novellus, Inc. and Novellus, Inc.’s wholly owned subsidiary, Novellus, Ltd. Brooklyn also acquired 25.0% of the total outstanding equity interests of NoveCite, Inc. As consideration for the Acquisition, we paid $22.9 million in cash and delivered 7,022,000 shares of common stock, which under the terms of the Acquisition Agreement, were valued at a total of $102.0 million based on an agreed upon price of $14.5253 per share. At the date of issuance, the fair value of the shares was approximately $58.7 million.
mRNA, Gene-Editing, and Cellular Medicines
We are advancing the technology that we obtained through a license with Factor and through the Acquisition of Novellus, Inc. and Novellus, Ltd. in July 2021 to evaluate and develop mRNA, gene-editing, and cellular medicines, with an initial focus on hematologic and solid tumors. We expect that the first-generation product candidates will include gene-editing mRNA for in vivo cell engineering andhypoimmune induced pluripotent stem cell (“iPSC”)-derived cytotoxic lymphocytes (“iCLs”)product candidates for the treatment of neurological indications and iPSC-derived immune-modulating cells (“iIMCs”) for indications such as acute myeloid leukemia (“AML”) and solid tumors.
We refer to aspects of our mRNA technology platform as “mRNA delivery,” “mRNA gene editing” and “mRNA cell reprogramming.”
mRNA Delivery
Nucleic acids, such as mRNA, can be used to induce cells to express desired proteins, including proteins that are capable of re-writing genetic and epigenetic cellular programs. However, the plasma membrane surrounding cells normally protects cells from exogenous nucleic acids, preventing efficient uptake and protein translation. Delivery systems can be used to enhance the uptake of nucleic acids by cells. Conventional delivery systems, such as lipid nanoparticle (“LNP”)-based delivery, often suffer from endosomal entrapment and toxicity, which can limit their therapeutic use. Our mRNA delivery technology is designed to use a novel chemical substance that is designed to deliver nucleic acids, including mRNA, to cells both ex vivo and in vivo. We expectOur nucleic-acid delivery technology is also designed for ex vivo delivery of mRNA encoding gene-editing proteins and reprogramming factors, including to begin preclinical development, including manufacturing processprimary cells, insertion of exogenous sequences into genomic safe-harbor loci, and in vivo delivery of mRNA to the brain, eye, skin, and lung, which may be useful for the development of iCLsmRNA-based therapeutic.
mRNA Gene Editing
Our mRNA gene-editing technology is designed to delete, insert, and iIMCsrepair DNA sequences in living cells, which may be useful for clinical indications including hematologiccorrecting disease-causing mutations, making cells resistant to infection and solid tumors,degenerative disease, modulating the expression of immunoregulatory proteins to enable the generation of durable allogeneic cell therapies, and engineering immune cells to more effectively fight cancer.
Conventional gene-editing technologies typically employ plasmids or viruses to express gene-editing proteins, which can result in low-efficiency editing and unwanted mutagenesis when an exogenous nucleic acid fragment is inserted at random locations in the genome. Our mRNA gene-editing technology instead is designed to employ mRNA to express gene-editing proteins, which can potentially enable gene editing without unwanted insertional mutagenesis, because, unlike conventional gene-editing technologies that employ viruses or DNA-based vectors, mRNA does not typically cause unwanted insertional mutagenesis. We believe the efficiency of our mRNA gene-editing technology has the potential to support development of product candidates that could create new therapeutic approaches. For example, we anticipate that our mRNA gene-editing technology can be used to generate allogeneic chimeric antigen receptor T-cell (“CAR-T”) therapies for the treatment of cancer. In such allogeneic CAR-T therapies, mRNA encoding gene-editing proteins would be used to inactivate the endogenous T-cell receptor to prevent therapeutic T-cells from causing graft-versus-host disease (“GvHD”). GvHD occurs when transplanted cells view the patient’s (i.e. the host’s) cells as well as other indications that require overcoming molecular cues ofa threat and attack the tissue microenvironment. The prior work of Novellus and NoveCite shows evidence for preclinical efficacy of iPSC-derived cells in inflammatory conditions (for example, acute respiratory distress syndrome, or ARDS). Interactions with the FDA provided guidance on Chemistry, Manufacturing and Controls (“CMC”), and manufacturing plans, which will be undertaken in a similar manner for additional applications.host’s cells. We expect that second generation products will involvethis same mechanism of action can generate allogeneic stem cell-derived therapies in which mRNA encoding gene-editing proteins could be used to inactivate one or more components of the human leukocyte antigen (“HLA”) complex gene editing,to render the cells immuno-nonreactive or “stealth,” which may be useful for which we anticipate using the stepwise additiondevelopment of genes provided by the in-licensed Factor Bioscience gene editing machinery, NoveSlice, to efficiently place genes and regulatory sequences into safe harbor locations. Development of processes to advance CMC and manufacturing will follow the experience from first generation products. We are also exploring opportunities to advance in vivo mRNA cell engineering therapies for hematologic and solid tumors by combining the NoveSlice gene editing technology with ToRNAdoTM, the in-licensed LNP technology.
IRX-2
IRX-2 is a mixed, human-derived cytokine product with multiple active constituents including Interleukin-2, or IL2, and other key cytokines. Together, these cytokines are believed to signal, enhance and restore immune function suppressed by the tumor, thus enabling the immune system to attack cancer cells, unlike many existing cancer therapies, which rely on targeting the cancer directly. IRX-2 is prepared from the supernatant of pooled allogeneic peripheral blood mononuclear cells, known as PBMCs, that have been stimulated using a proprietary process employing a specific population of cells and a specific mitogen.
Unlike existing recombinant IL2 therapies, IRX-2 is derived from human blood cells. We believe this may promote better tolerance, broader targeting and a natural molecular conformation leading to greater activity, and may permit low physiologic dosing, rather than the high doses needed in other existing IL2cell-based therapies.
ResultsmRNA Cell Reprogramming
Our mRNA cell-reprogramming technology is capable of generating clonal lines of pluripotent stem cells that can be expanded and differentiated into many desired cell types that may be useful for the development of regenerative cell therapies.
Conventional cell-reprogramming technologies (e.g., using Sendai virus or episomal vectors) can result in low efficiency reprogramming, can select for cells with abnormal growth characteristics, and can leave traces of the Phase 2b INSPIRE trial,vector in reprogrammed cells.Our mRNA cell-reprogramming technology instead is designed to employ mRNA to express reprogramming factors, which can enable cell reprogramming without leaving traces of the vector in reprogrammed cells, because, unlike conventional cell-reprogramming technologies that employ viruses or DNA-based vectors, mRNA does not typically leave traces of the INSPIRE trial, releasedvector in June 2022, showed outcomes favored IRX-2 in certain predefined subgroups but the INSPIRE trial did not meet the primary endpoint of Event-Free Survival (“EFS”) at two years of follow up. One hundred and fifty patients were enrolled in the study. At two years of follow-up in the intention-to-treat (ITT, n=105) population the median EFS was 48.3 months and was not reached in the control arm (Hazard Ratio 1.10 (95% Confidence Interval, 0.6-2.1; p value=0.62)). Subgroups favoring the IRX-2 arm included patients with later stage (III and IV) disease and those that did not receive chemotherapy. Trends in EFS rates as defined by the Kaplan-Meier estimate at two years of follow-up in patients with later stage (III and IV) disease were 57.2 (40.3, 70.9) vs 49.4 (28.3, 67.4) in favor of IRX-2. In patients that did not receive chemotherapy (radiation only) as part of adjuvant treatment, the EFS Kaplan-Meier estimate at two years of follow-up was 76.4 (52.2, 89.4) vs 60.6 (29.4, 81.4) in favor of IRX-2. There were no new safety signals observed with IRX-2. We currently do not have plans to further develop the IRX-2 product candidate.reprogrammed cells.
Impact of COVID-19 Pandemic
The development of our product candidates has been, and could continue to be, disrupted and materially adversely affected by past and continuing impacts of the COVID-19 pandemic. This is largely a result of measures imposed by the governments and hospitals in affected regions, businesses and schools were suspended due to quarantines intended to contain this outbreak. The spread of COVID-19 from China to other countries resulted in the Director General of the World Health Organization declaring COVID-19 a pandemic in March 2020. Despite progress in vaccination efforts, the longer-term impact of the COVID-19 pandemic on our development plans and on the ability to conduct our clinical trials remains uncertain and cannot be predicted with confidence. COVID-19 could continue to disrupt production and cause delays in the supply and delivery of products used in our operations, may affect our operations, including the conduct of clinical studies, or the ability of regulatory bodies to grant approvals or supervise our candidates and products, may further divert the attention and efforts of the medical community to coping with the COVID-19 and disrupt the marketplace in which we operate and may have a material adverse effects on our operations. COVID-19 may also affect our employees and employees and operations at suppliers that may result in delays or disruptions in supply. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. Additionally, if the COVID-19 pandemic has a significant impact on our business and financial results for an extended period of time, our liquidity and cash resources could be negatively impacted. The extent to which the COVID-19 pandemic and ongoing global efforts to contain its spread will impact our operations will depend on future developments, which are highly uncertain, and include the duration, severity and scope of the pandemic and the actions taken to contain or treat the COVID-19 pandemic. Further, the specific clinical outcomes, or future pandemic related impacts of emerging COVID-19 variants cannot be reliably predicted.
Recent Developments
PIPE TransactionPrivate Placement of Convertible Notes and Warrants
On March 6, 2022,July 13, 2023, we entered into a Securities Purchase Agreementpurchase agreement with an investor (the “PIPE Investor”) providingcertain purchasers for the private placement (the “PIPE Transaction”“Private Placement”) toof $8.7 million in aggregate principal amount of convertible notes (the “Notes”) and the PIPE Investorissuance of approximately 6,857,000 unitsthe warrants (the “Units”), each of which consisted of (i) one share of our common stock (or, in lieu thereof, one pre-funded warrant (the “Pre-Funded“Note Warrants”) to purchase one share of common stock) and (ii) one warrant (the “Common Warrants”) to purchase one share of common stock, for an aggregate purchase price of approximately $12.06.1 million (the “Subscription Amount”).shares of Common Stock. The PIPE TransactionPrivate Placement closed on March 9, 2022.July 14, 2023 (the “Closing Date”), and we intend to use the net proceeds from the Private Placement for general working capital purposes.
The Notes bear interest at 6% per annum, payable quarterly in arrears. At our election, we may pay interest either in cash or in-kind by increasing the outstanding principal amount of the Notes. The Notes mature on July 14, 2028, unless earlier converted or repurchased. We incurred feesmay not redeem the Notes at our option prior to maturity.
At the option of $1.0 million through June 30, 2022 relatedthe holders, the Notes may be converted from time-to-time in whole or in part into shares of Common Stock at an initial conversion rate of $2.86 per share, subject to the PIPE Transaction.customary adjustments for stock splits, stock dividends and recapitalization.
Each Pre-Funded Warrant hasThe Notes do not contain any ratchet or other financial antidilution provisions. The Notes purchased by certain of the Purchasers contain conversion limitations, providing 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 Notes provide for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, the following: nonpayment of principal or interest; breach of covenants or other agreements in the Notes; and certain events of bankruptcy. Generally, if an event of default occurs and is continuing under the Notes, the holder thereof may require the Company to repurchase some or all of their Notes at a repurchase price equal to 100% of the principal amount of the Notes being repurchased, plus accrued and unpaid interest thereon.
The Note Warrants are immediately exercisable, have an exercise price of $0.005$2.61 per share, of common stock, was immediately exercisableexpire five years following the Closing Date and may be exercised at any time and has no expiration date and isare subject to customary adjustments. The Pre-FundedNote Warrants purchased by certain of the Purchasers contain a provision pursuant to which such Note Warrants may not be exercised if the aggregate number of shares of common stockCommon Stock beneficially owned by the holder thereof would exceed 4.99%, 9.99% immediately after exercise thereof.
Each Common Warrant has an exercise price of $1.91 per share, becomes exercisable six months following the closing of the PIPE Transaction, expires five-and-one-half years from the date of issuance, and is subject to customary adjustments. The Common Warrants may not be exercised if the aggregate number of shares of common stock beneficially owned by the holder thereof would exceed 4.99%or 19.99% immediately after exercise thereof, subject to increase tocertain increases not in excess of either 9.99% or 19.99% at the option of thesuch holder.
The Common Warrants and Pre-Funded Warrants were accounted for as liabilities under ASC 815-40, Derivatives and Hedging, Contracts in Entity’s Own Equity, as these warrants provide for a cashless settlement provision that fails the requirement of the indexation guidance under ASC 815-40. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the statement of operations.Amendment to Exclusive Factor License Agreement
The fair valuesOn February 20, 2023, the Company and Factor Limited entered into an exclusive license agreement (the “Exclusive Factor License Agreement”), which terminated and superseded our original license agreement with Factor Limited. Subject to certain exclusive licenses or other rights granted by Factor Limited to other third parties as of the Common Warrantseffective date of the Exclusive Factor License Agreement, Factor granted the Company the exclusive, sublicensable license under certain patents owned by Factor Limited (the “Factor Patents”). For additional information, see Note 8 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. On July 12, 2023, the Company and Factor Limited entered into the Pre-Funded WarrantsFirst Amendment to the Exclusive Factor License Agreement (the “Exclusive License Agreement Amendment”). The Exclusive License Agreement Amendment amended the Exclusive Factor License Agreement to (i) expand the field of use of the Factor Patents to include veterinary uses, (ii) extend the Renewal Term from two and a half years to five years if the Company pays at least $6.0 million to Factor Limited from Sublicense Fees, other cash on hand or a combination of both sources of funds, (iii) reduce the issuanceSublicense Fees payable to Factor Limited during the Renewal Term from 30% to 20%, (iv) eliminate Factor Limited’s termination rights with respect to Factor Patents that are not sublicensed, or for which an opportunity has not been identified, in each case by a certain date totaled $12.6and (v) provide for the Company’s payment to Factor Limited of a monthly maintenance fee of approximately $0.4 million, beginning in September 2024.
There can be no assurance that we can successfully develop and commercialize the technology licensed under the Exclusive Factor License Agreement, as amended. See Item 1A “Risk Factors—Risks Related to our Business and Industry—We depend substantially, and expect in the aggregate,future to continue to depend, on in-licensed intellectual property. Such licenses impose obligations on our business, and if we fail to comply with those obligations, we could lose license rights, which was $0.6 million more than the Subscription Amount. The excess $0.6 million represents an inducement to the PIPE Investor to enter into the PIPE Transaction and was recorded in warrant liabilities expensewould substantially harm our business” contained in the accompanying consolidated statement of operations.
In connection with the PIPE Transaction, we and the PIPE Investor also entered into a registration rights agreement, dated March 6, 2022 pursuant to which we agreed to prepare and file a registration statement with the Securities and Exchange Commission (the “SEC”) to register the resale of the shares of common stock included in the Units and the shares of common stock issuable upon exercise of the Pre-Funded Warrants and the Common Warrants. We agreed to use our best efforts to have such registration statement declared effective as promptly as possible after the filing thereof, subject to certain specified penalties if timely effectiveness is not achieved. We filed such registration statement on April 29, 2022, which became effective on May 11, 2022.10-K.
Pursuant to the registration rights agreement, we are obligated to pay the PIPE Investor liquidated damages equal to 2% of the Subscription Amount per month, with a maximum aggregate payment of 12% of the Subscription Amount, in the event the PIPE Investor is not permitted to use the registration statement to resell the related securities for more than 10 consecutive calendar days or more than an aggregate of fifteen calendar days (which need not be consecutive calendar days) during any 12-month period.Exacis Asset Purchase
On May 24, 2022,April 26, 2023, we providedentered into an asset purchase agreement (the “Exacis Purchase Agreement”), together with Exacis Biotherapeutics Inc. (“Exacis”), the PIPE Investorstockholders party thereto and, with notice that it was not ablerespect to resellspecified provisions therein, Factor Limited (the “Exacis Acquisition”). Pursuant to the securitiesExacis Purchase Agreement, we acquired from Exacis substantially all of Exacis’ intellectual property 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”). We assumed none of Exacis’ liabilities, other than liabilities under the registration agreement because we did not timely file ourPurchased License that accrue subsequent to the closing date. For additional information, see Note 8 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (the “Q1 2022 10-Q”) with.
Dr. Matthew Angel, our President and Chief Executive Officer, is the SEC,co-founder, President, CEO, and thata director of Factor Bioscience Inc., which is the PIPE Investor could not useparent of Factor Limited and a wholly owned subsidiary of Factor Bioscience LLC, the registration statement to reselllatter of which is the related securities until we filedmajority stockholder of Exacis. Dr. Gregory Fiore, one of our directors, is the Q1 2022 10-Q. BecauseChief Executive Officer and a 10% stockholder of Exacis. The Exacis Purchase Agreement and the PIPE Investor was unable to usetransactions contemplated thereby were approved by the resale registration statement for at least 10 consecutive calendar days, we accrued $0.2 million during the first quarteraudit committee of 2022 for the estimated contingent loss we expect to incurour board of directors, as well as by all of our disinterested directors, comprising a resultmajority of the late Q1 2022 10Q filing, which is recorded in other expense, net for the six months ended June 30, 2022 in the accompanying condensed consolidated statementsboard of operations. We paid the $0.2 million liquidated damages payment in June 2022.directors.
Standby Equity Purchase Agreement
On June 30, 2022,April 5, 2023, we filedand Lincoln Park Capital Fund, LLC (the “Lincoln Park”) entered into a purchase agreement (the “SEPA”), pursuant to which we have the Q1 2022 10-Q alongright, but not the obligation, to sell to Lincoln Park, and Lincoln Park would be obligated to purchase, up to $10.0 million of shares of our common stock. Sales of common stock by us are subject to certain limitations, and may occur from time to time, at our sole discretion. As consideration for Lincoln Park’s commitment to purchase shares of common stock in accordance with the 10-K/A,SEPA, we issued to Lincoln Park approximately 74,000 shares of common stock. As of August 9, 2023, we had issued and on July 1, 2022,sold 214,000 shares of our common stock under the SEPA, including the 74,000 commitment shares, for gross proceeds of approximately $0.3 million. In connection with entry into the SEPA, we provided notice to the PIPE Investor that it may resume useterminated our prior purchase agreements with Lincoln Park entered into in 2021.
22
Basis of Presentation
Revenues
We are a developmentpre-clinical stage company and have had no revenues from product sales to date. We will not have revenues from product sales until such time as we receive regulatory approval of our product candidates and successfully commercialize our products or enterproducts. During the six months ended June 30, 2023, we entered into a cell line customization and license agreement (the “Lineage Agreement”) with Lineage Cell Therapeutics, Inc. (“Lineage”), pursuant to which, prior to August 22, 2023, Lineage may request that we develop for, and deliver to, Lineage certain induced pluripotent stem cell lines, which Lineage would use to evaluate the possible development of cell transplant therapies for treatment of diseases of the central nervous system in humans, excluding certain indications. The Lineage Agreement is an agreement with a customer that includes an up-front option fee recognized as deferred revenue until the applicable performance obligation has been satisfied. This agreement could also include additional licensing agreement which may include up-front licensing fees, of which thereand cell line customization revenues at Lineages’ discretion. There can be no assurance.assurances that we will recognize such additional revenues or that we will enter into other agreements with customers in the future. For additional information, see Note 5 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
License Costs
We recognize certain license costs payable to Factor Limited under the Exclusive Factor License Agreement in connection with contracts with customers..
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 licensingin-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. In-Process ResearchIn-process research and Developmentdevelopment (“IPR&D”) that is acquired through an asset acquisitionwe acquire and which has no alternative future uses and, therefore, no separate economic values, is expensed to research and development costs at the time the costs are incurred.
The major components of research and development costs includehave included preclinical study costs, clinical manufacturing costs, clinical study and trial expenses, insurance coverage for clinical trials, expensed licensed technology, consulting, scientific advisors and other third-party costs, salaries and employee benefits, stock-based compensation expense, supplies and materials and allocations of various overhead costs related to our product development efforts.
In the normal course of our business, we contractWe have contracted with third parties to perform various clinical study and trial activities in the on-going development and testing of potential products. The financial terms of these agreements are subject to negotiation and 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. Preclinical and clinical study and trial associated activities such as production and testing of clinical material require significant up-front expenditures. We anticipate paying significant portions of a study’s or trial’s cost before such begins and incurring additional expenditures as the study or trial progresses and reaches certain milestones.
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.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 20222023 and 20212022
| | | Three months ended June 30, | | Change | | Six months ended June 30, | | Change | | | Three months ended June 30, | | | | Six months ended June 30, | | | |
| 2022 | | 2021 | 2022 | | 2021 | | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | |
License costs | | | $ | - | | $ | - | | $ | - | | $ | 50 | | $ | - | | $ | 50 | |
Research and development | | $ | 1,685 | | $ | 5,432 | | $ | (3,747 | ) | | $ | 3,467 | | $ | 6,965 | | $ | (3,498 | ) | | 1,579 | | 1,685 | | (106 | ) | | 3,253 | | 3,467 | | (214 | ) |
General and administrative | | 6,205 | | 4,581 | | 1,624 | | 10,719 | | 6,204 | | 4,515 | | | 2,510 | | 6,205 | | (3,695 | ) | | 6,102 | | 10,719 | | (4,617 | ) |
Impairment of in-process research and | | 5,990 | | - | | 5,990 | | 5,990 | | - | | 5,990 | | |
Transaction costs | | | - | | | - | | | - | | | - | | | 5,765 | | | (5,765 | ) | |
Acquisition of Exacis in-process research and development | | | 460 | | - | | 460 | | 460 | | - | | 460 | |
Impairment of in-process research and development | | | | - | | | 5,990 | | | (5,990 | ) | | | - | | | 5,990 | | | (5,990 | ) |
| Total operating expenses | | | 13,880 | | | 10,013 | | | 3,867 | | | 20,176 | | | 18,934 | | | 1,242 | | | 4,549 | | 13,880 | | (9,331 | ) | | 9,865 | | 20,176 | | (10,311 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss from operations | | (13,880 | ) | | (10,013 | ) | | (3,867 | ) | | (20,176 | ) | | (18,934 | ) | | (1,242 | ) | | | (4,549 | ) | | | (13,880 | ) | | | 9,331 | | | (9,865 | ) | | | (20,176 | ) | | | 10,311 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense), net: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss on sale of NTN assets | | - | | (50 | ) | | 50 | | - | | (9,648 | ) | | 9,648 | | |
Change in fair value of warrant liabilities | | 10,792 | | - | | 10,792 | | 9,470 | | - | | 9,470 | | | 191 | | 10,792 | | (10,601 | ) | | 146 | | 9,470 | | (9,324 | ) |
Change in fair value of contingent consideration | | | 118 | | - | | 118 | | 118 | | - | | 118 | |
Loss on non-controlling investment | | (296 | ) | | - | | (296 | ) | | (911 | ) | | - | | (911 | ) | | (8 | ) | | (296 | ) | | 288 | | (59 | ) | | (911 | ) | | 852 | |
Other expense, net | | | (14 | ) | | | (22 | ) | | | 8 | | | (1,156 | ) | | | (25 | ) | | | (1,131 | ) | | | (256 | ) | | | (14 | ) | | | (242 | ) | | | (255 | ) | | | (1,156 | ) | | | 901 | |
| Total other income (expense), net | | 10,482 | | (72 | ) | | 10,554 | | 7,403 | | (9,673 | ) | | 17,076 | | | | 45 | | | 10,482 | | | (10,437 | ) | | | (50 | ) | | | 7,403 | | | (7,453 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss before income taxes | | | (4,504 | ) | | (3,398 | ) | | (1,106 | ) | | (9,915 | ) | | (12,773 | ) | | 2,858 | |
Provision for income taxes | | | | (4 | ) | | | - | | | (4 | ) | | | (9 | ) | | | - | | | (9 | ) |
Net loss | | $ | (3,398 | ) | | $ | (10,085 | ) | | $ | 6,687 | | $ | (12,773 | ) | | $ | (28,607 | ) | | $ | 15,834 | | | $ | (4,508 | ) | | $ | (3,398 | ) | | $ | (1,110 | ) | | $ | (9,924 | ) | | $ | (12,773 | ) | | $ | 2,849 | |
License Costs
During the six months ended June 30, 2023, we recognized $50,000 of direct costs for amounts owed to Factor Limited in connection with the $250,000 of deferred revenue received from the Lineage Agreement, which represents Factor Limited’s share of such amount in accordance with the Exclusive Factor License Agreement. There was no comparable expense for the three months ended June 30, 2023 or for the three and six months ended June 30, 2022.
Research and Development Expenses
| | | Three months ended June 30, | | | Three months ended June 30, | |
| | | 2022 | | 2021 | | Change | | | 2023 | | 2022 | | Change | |
| (in thousands) | | | | | | | | | | | | | | |
License fees | | $ | - | | $ | 4,000 | | $ | (4,000 | ) | |
| Payroll-related | | | $ | 167 | | $ | 639 | | $ | (472 | ) |
Stock-based compensation | | 470 | | 168 | | 302 | | | 56 | | 470 | | (414 | ) |
Payroll-related | | 639 | | 593 | | 46 | | |
Clinical trials | | 402 | | 526 | | (124 | ) | |
Professional fees | | 79 | | 39 | | 40 | | | 249 | | 79 | | 170 | |
| MSA expense | | | 813 | | - | | 813 | |
Other expenses, net | | | 95 | | | 106 | | | (11 | ) | | | 294 | | | 497 | | | (203 | ) |
| Total research and development expenses | | $ | 1,685 | | $ | 5,432 | | $ | (3,747 | ) | | $ | 1,579 | | $ | 1,685 | | $ | (106 | ) |
| | | | | | | | | |
| | | | Six months ended June 30, | |
| | | | 2023 | | 2022 | | Change | |
| (in thousands) | | | | | | | | |
| Payroll-related | | | $ | 369 | | $ | 1,601 | | $ | (1,232 | ) |
| Stock-based compensation | | | 120 | | 892 | | (772 | ) |
| Professional fees | | | 529 | | 120 | | 409 | |
| MSA expense | | | 1,625 | | - | | 1,625 | |
| Other expenses, net | | | | 610 | | | 854 | | | (244 | ) |
| Total research and development expenses | | | $ | 3,253 | | $ | 3,467 | | $ | (214 | ) |
| | | Six months ended June 30, | |
| | | 2022 | | | 2021 | | | Change | |
| (in thousands) | | | | | | | | | |
License fees | | $ | - | | | $ | 4,000 | | | $ | (4,000 | ) |
Payroll-related | | | 1,601 | | | | 1,054 | | | | 547 | |
Stock-based compensation | | | 891 | | | | 571 | | | | 320 | |
Clinical trials | | | 632 | | | | 961 | | | | (329 | ) |
Professional fees | | | 120 | | | | 126 | | | | (6 | ) |
Other expenses, net | | | 223 | | | | 253 | | | | (30 | ) |
| Total research and development expenses | | $ | 3,467 | | | $ | 6,965 | | | $ | (3,498 | ) |
For the three and six months ended June 30, 2022,2023, our total research and development expenses decreased compared to the three and six months ended June 30, 2022, which was primarily due to a $4.0 million license fee paid in 2021 to Factorthe result of less payroll expense and Novellus, Ltd. (the “Licensors”) under the exclusive license agreement with the Licensors, as well as due to a decrease in clinical trial and other miscellaneous expense, offset by increased stockstock-based compensation expense due to increased equity awards grantedemployee terminations, offset by an increase in professional fees related to consulting activities and expense recognized during 2022, as compared to equity awards granted in 2021,the three and increased payroll expense due to increased headcount, as well as increased severance expense when comparedsix months ended June 30, 2023 related to the same periodsMSA with Factor (see Note 8 to the unaudited condensed consolidated financial statements contained in 2021.
In January 2022, we completed a reduction in our workforce involving eight research and development employees. As a result, we incurred approximately $0.5 million for severance and termination-related costs,this Quarterly Report on Form 10-Q), which we recordeddid not exist during the first quarter ofthree and six months ended June 30, 2022. In June 2022, we made the decision to consolidated our research and development in Cambridge, Massachusetts, and as a result, we accrued approximately $0.1 million for severance and termination-related costs for certain employees in the San Diego, California location.
General and Administrative Expenses
| | | Three months ended June 30, | | | Three months ended June 30, | |
| | | 2022 | | 2021 | | Change | | | 2023 | | 2022 | | Change | |
| (in thousands) | | | | | | | | | | | | | | | | |
| Professional fees | | | $ | 1,312 | | | $ | 2,552 | | | $ | (1,240 | ) |
Payroll-related | | $ | 1,533 | | $ | 142 | | $ | 1,391 | | | | 700 | | | | 1,533 | | | | (833 | ) |
Impairment of ROU asset | | 772 | | - | | 772 | | | | - | | | | 772 | | | | (772 | ) |
Professional fees | | 2,083 | | 2,721 | | (638 | ) | |
| Insurance | | | | 194 | | | | 527 | | | | (333 | ) |
Stock-based compensation | | 409 | | 986 | | (577 | ) | | | 158 | | | | 409 | | | | (251 | ) |
Insurance | | 527 | | 367 | | 160 | | |
Occupancy expense | | 182 | | 150 | | 32 | | | | 19 | | | | 182 | | | | (163 | ) |
Other expenses, net | | | 699 | | | 215 | | | 484 | | | | 127 | | | | 230 | | | | (103 | ) |
| Total general and administrative expenses | | $ | 6,205 | | $ | 4,581 | | $ | 1,624 | | | $ | 2,510 | | | $ | 6,205 | | | $ | (3,695 | ) |
| | | | | | | | | | | | | | |
| | | | Six months ended June 30, | |
| | | | 2023 | | | 2022 | | Change | |
| (in thousands) | | | | | | | | | | | | | |
| Professional fees | | | $ | 3,248 | | | $ | 4,623 | | | $ | (1,375 | ) |
| Payroll-related | | | | 1,057 | | | | 2,282 | | | | (1,225 | ) |
| Impairment of ROU asset | | | | - | | | | 772 | | | | (772 | ) |
| Stock-based compensation | | | | 783 | | | | 1,170 | | | | (387 | ) |
| Occupancy expense | | | | 43 | | | | 352 | | | | (309 | ) |
| Insurance | | | | 726 | | | | 894 | | | | (168 | ) |
| Other expenses, net | | | | 245 | | | | 626 | | | | (381 | ) |
| Total general and administrative expenses | | | $ | 6,102 | | | $ | 10,719 | | | $ | (4,617 | ) |
| | | Six months ended June 30, | |
| | | 2022 | | | 2021 | | | Change | |
| (in thousands) | | | | | | | | | |
Payroll-related | | $ | 2,282 | | | $ | 175 | | | $ | 2,107 | |
Impairment of ROU asset | | | 772 | | | | - | | | | 772 | |
Professional fees | | | 3,404 | | | | 4,040 | | | | (636 | ) |
Insurance | | | 894 | | | | 400 | | | | 494 | |
Stock-based compensation | | | 1,170 | | | | 1,003 | | | | 167 | |
Occupancy expense | | | 382 | | | | 301 | | | | 81 | |
Loss on disposal of fixed assets | | | 274 | | | | - | | | | 274 | |
Other expenses, net | | | 1,541 | | | | 285 | | | | 1,256 | |
| Total general and administrative expenses | | $ | 10,719 | | | $ | 6,204 | | | $ | 4,515 | |
25
Our general and administrative expenseexpenses decreased for the three and six months ended June 30, 2022 was2023 primarily relateddue to increaseddecreases in payroll expenses and stock-based compensation expense resulting from lower headcount, occupancy expense due to having fewer leased offices, insurance expense due to a reduction in premiums, as well as severance expense for certain employees, including our former Chief Executive Officer, who resigned effective May 26, 2022. We also recognized a non-cash impairment charge on our San Diego, California right-of-use (“ROU”) operating lease asset due to our intent to consolidate our researchprofessional fees and development activities in Cambridge, Massachusetts and to sublease the San Diego, California facility. Other increases include premiums for public company insurance policies, non-cash stock-based compensation expense due to increased equity awards, increased other miscellaneous expenses net, primarily due to legal-related matters, and losses on the disposal of fixed assets when compared to the same periodsthree and six months ended June 30, 2022, which prior-year period also included a non-recurring impairment expense of the ROU asset related to our former San Diego facility lease.
Acquisition of Exacis In-Process Research and Development
The Purchased License acquired in 2021.the Exacis Acquisition was determined to be an 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, the Company expensed the fair value of the Purchased License during the three and six months ended June 30, 2023 of approximately $0.5 million.
Impairment of In-Process Research and Development
As discussed above, inDuring the three and six months ended June 30, 2022, we received the results from the INSPIRE phase 2 trial of IRX-2. The IRX-2 multi-cytokine biologic immunotherapy represents substantially all the fair value assigned to the technologies of IRX that we acquired in 2018. Despite outcomes that favored IRX-2 in certain predefined subgroups, the INSPIRE trial did not meet the primary endpoint of Event-Free Survival (EFS)event-free survival at two years of follow up. Significant additional clinical development work willwould be required to advance IRX-2 in the form of additional Phase 2 and 3 studies to further evaluate the treatment effect of IRX-2 in patient subgroups and in combination with checkpoint inhibitor therapies. The INSPIRE trial is the only company sponsored study of IRX-2. IRX-2 has been studied externally in other clinical settings outside of head and neck cancer in the form of investigator sponsored trials, which have either ended or are not currently active. Based on the totality of available information, we currently dodetermined we would not have plans to further develop the IRX-2 product candidate. As such, we determinedcandidate and that the carrying value of the IPR&D asset was impaired andimpaired. Accordingly, we recognized a non-cash impairment charge of approximately $6.0 million on the condensed consolidated balance sheet as of June 30, 2022, which reduced the value of this asset to zero.
Transaction CostsWarrant Liabilities
The $5.8 million in transaction costs during the six months ended June 30, 2021 related to the issuance of common stock to Brooklyn LLC’s financial advisor upon consummation of the Merger, and there were no comparable transaction costs for same periods in 2022.
Loss on Sales of NTN Assets
A $0.1 million and $9.6 million loss on the sale of NTN assets forFor the three and six months ended June 30, 2021, respectively, were incurred when we completed the Disposition, and there were no comparable losses on sale for the three and six months ended June 30, 2022.
Warrant Liabilities Expense
For the three months ended June 30, 2022,2023, we recognized a creditcredits of $10.8$0.2 million and $0.1 million, respectively, for the change in the fair value of warrant liabilities due to a decrease in the market price of our common stock during the quarter. For the six months endedas of June 30, 2022, we recognized a credit of $10.1 million for the change in the fair value of warrant liabilities, which was offset by $0.6 million in expense related to the excess fair value of the Common Warrants and Pre-Funded Warrant issued in connection with the PIPE Transaction over the $12.0 million gross proceeds received. There were no comparable expenses for the three and six months ended June 30, 2021.
Loss on Non-Controlling Investment
During2023. For the three and six months ended June 30, 2022, we recognized $0.3credits of $10.8 million and $0.9$9.5 million, of loss on our 25% non-controlling investment in NoveCite, respectively. Of the $0.9 million lossrespectively, for the six months endedchange in the fair value of warrant liabilities due to a decrease in the market price of our common stock as of June 30, 2022,2022.
Change in Fair Value of Contingent Consideration
On the closing date of the Exacis Acquisition, 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 relates tofair value of the prior year. We account for our investment in NoveCite under the equity method. There were no comparable expensesPurchased License asset and expensed as IPR&D for the three and six months ended June 30, 2021.2023. 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 June 30, 2023, we remeasured the contingent liability and recognized a credit of $0.1 million for both the three and six months ended June 30, 2023 due to the decrease in the fair value of the contingent consideration liability. There were no contingent consideration liabilities during the same periods in 2022.
Loss on Non-Controlling Investment
We account for our investment in NoveCite, Inc. (“NoveCite”) under the equity method. For the three and six months ended June 30, 2023, we recognized approximately $8,000 and $0.1 million of loss, respectively, on our 25% non-controlling investment in NoveCite, as compared to $0.3 million and $0.9 million for the three and six months ended June 30, 2022, respectively. We have not guaranteed any obligations of NoveCite nor are we otherwise committed to providing further financial support for NoveCite. Therefore, we only record losses up to our investment carrying amount. As of June 30, 2023, our investment carrying amount was zero.
Other Expense, Net
| | | Three months ended June 30, | |
| | | 2022 | | | 2021 | | | Change | |
| (in thousands) | | | | | | | | | |
PIPE transaction fees | | $ | (15 | ) | | $ | - | | | $ | (15 | ) |
Interest expense, net | | | (13 | ) | | | (22 | ) | | | 9 | |
Other (expense) income , net | | | 14 | | | | - | | | | 14 | |
| Total other expense, net | | $ | (14 | ) | | $ | (22 | ) | | $ | 8 | |
| | | | Three months ended June 30, | |
| | | | 2023 | | 2022 | | Change | |
| (in thousands) | | | | | | | | |
| SEPA commitment shares | | | $ | (249 | ) | | $ | - | | $ | (249 | ) |
| Interest income (expense), net | | | 24 | | (13 | ) | | 37 | |
| Other | | | | (31 | ) | | | (1 | ) | | | (30 | ) |
| Total other expense, net | | | $ | (256 | ) | | $ | (14 | ) | | $ | (242 | ) |
| | | | | | | | | |
| | | Six months ended June 30, | | | Six months ended June 30, | |
| | | 2022 | | 2021 | | Change | | | | 2023 | | | 2022 | | Change | |
| (in thousands) | | | | | | | | | | | | | | |
PIPE transaction fees | | $ | (1,007 | ) | | $ | - | | $ | (1,007 | ) | | $ | - | | $ | (1,007 | ) | | $ | 1,007 | |
Liquidated damages | | (240 | ) | | - | | (240 | ) | | - | | (240 | ) | | 240 | |
Interest expense, net | | (14 | ) | | (36 | ) | | 22 | | | 26 | | (14 | ) | | 40 | |
Other (expense) income , net | | | 105 | | | 11 | | | 94 | | |
| SEPA commitment shares | | | (249 | ) | | - | | (249 | ) |
| Other income, net | | | | (32 | ) | | | 105 | | | (137 | ) |
| Total other expense, net | | $ | (1,156 | ) | | $ | (25 | ) | | $ | (1,131 | ) | | $ | (255 | ) | | $ | (1,156 | ) | | $ | 901 | |
For the three months and six months ended June 30, 2022, we recognized an immaterial decreasefees associated with the private placement transaction completed in other expense, net when compared to the same period in 2021. During the six months ended June 30,March 2022, our increase in other expense, net was primarily due to fees related to the PIPE Transaction,all of which waswere allocated to the warrants issued in connection with the transaction. Additionally,transaction, and we incurredaccrued for a loss related tofor the estimated liquidated damages we incurred as a result of not timely filing the Q1 2022 10Q with the SEC. These increases in expense were offset by a decrease in interest expense and an increase in other incomeSEC our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022. For the three and six months ended June 30, 2022 when compared2023, we recognized $249,000 in respect of the value of the commitment shares issued to Lincoln Park under the same period in 2021.SEPA.
33Provision for Income Taxes
During 2023, 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
At June 30, 2022,2023, we had cash, and cash equivalents and restricted cash of approximately $19.4 million. On March 9,$5.9 million, of which approximately $4.1 million was restricted cash, as discussed below.
In October 2022, we entered into a facility sublease agreement (the “Sublease”) for approximately 45,500 square feet of office and laboratory space in Somerville, Massachusetts. The term of the Sublease is approximately 10 years, and we will pay approximately $63.0 million in base rental payments over the 10-year term, plus our share of the Sublessor’s parking spaces and operating expenses. As part of the Sublease, we delivered a security deposit in the form of a letter of credit in the amount of $4.1 million, which will be reduced on an incremental basis throughout the term of the lease. The letter of credit was issued 5,500,000by our commercial bank, which required that we cash collateralize the letter of credit with $4.1 million of cash deposited in a restricted account maintained by such bank. The amount of required restricted cash collateral will decline in parallel with the reduction in the amount of the letter of credit over the term of the sublease.
In February 2023, we entered into the Lineage Agreement, pursuant to which we received a $0.3 million upfront, nonrefundable payment for an option right to obtain a sublicense of intellectual property that we license from Factor Limited under the Exclusive Factor License Agreement. This customer agreement may also provide for future payments to us if Lineage requests that we develop certain customized cell line activities or if the customer exercises its right to obtain the sublicense, which would include a license fee, milestone payments, royalties, and sublicense fees.
On April 5, 2023, we entered into the SEPA, pursuant to which Lincoln Park committed to purchase up to $10.0 million of our common stock. Such sales of common stock by us, if any, are subject to certain conditions and limitations set forth in the SEPA, and may occur from time to time, at our 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 SEPA were initially satisfied. Pursuant to a registration rights agreement entered into in connection with the SEPA, we filed a registration statement with the SEC on April 17, 2023 to register for resale shares of common stock issuable pursuant to such purchase agreement and Pre-Funded Warrants representingthe shares previously issued to Lincoln Park as consideration for entry into the SEPA, and the SEC declared such registration statement effective on April 24, 2023. To date, we have issued and sold approximately 1,357,000214,000 shares of our common stock to Lincoln Park, including the 74,000 commitment shares, and have receive approximately $0.3 million in gross proceeds from such sales.
Under applicable Nasdaq listing rules, the aggregate number of shares of common stock that we had been able to issue to Lincoln Park under the SEPA could not exceed 19.99% of our shares of common stock issued and outstanding immediately prior to the execution of the SEPA (the “Exchange Cap”) unless certain conditions were met, including obtaining stockholder approval to issue shares of common stock in excess of the Exchange Cap in accordance with applicable Nasdaq listing rules. On June 16, 2023, at the Company’s 2023 Annual Meeting of Stockholders, the Company’s stockholders approved, for purposes of complying with applicable Nasdaq listing rules, the Company’s potential issuance of shares of common stock under the SEPA in excess of the Exchange Cap. As a result, the Exchange Cap limitation no longer applies to issuances and sales of common stock by us to Lincoln Park under the SEPA. However, we may not direct Lincoln Park to purchase any shares of common stock under the SEPA if such purchase would result in Lincoln Park beneficially owning more than 4.99% of our issued and outstanding shares of common stock.
On July 14, 2023, we closed the Private Placement of $8.7 million in aggregate principal amount of Notes and the issuance of the Note Warrants. We intend to use the net proceeds of approximately $11.0 millionfrom the Private Placement for general working capital purposes.
The Notes bear interest at 6% per annum, payable quarterly in connection witharrears. At our election, we may pay interest either in cash or in-kind by increasing the PIPE Transaction. Pursuant to the purchase agreement entered into in respectoutstanding principal amount of the PIPE Transaction, we are prohibited from issuing equity in variable rate transactions for a period of one-year following consummationNotes. The Notes mature on July 14, 2028, unless earlier converted or repurchased. We may not redeem the Notes at our option prior to maturity.
At the option of the PIPE Transaction, including issuing equity underholders, the Second Purchase Agreement.Notes may be converted from time-to-time in whole or in part into shares of common stock at an initial conversion rate of $2.86 per share, subject to customary adjustments for stock splits, stock dividends and recapitalization.
The Notes do not contain any ratchet or other financial antidilution provisions. The Notes purchased by certain of the Purchasers contain conversion limitations, providing 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 Note Warrants are immediately exercisable, have an exercise price of $2.61 per share, expire five years following the Closing Date and are subject to customary adjustments. The Note Warrants purchased by certain of the Purchasers contain a provision pursuant to which such Note Warrants may not be exercised 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 exercise thereof, subject to certain increases not in excess of either 9.99% or 19.99% at the option of such holder.
We have to date incurred operating losses, and we expect these losses to continue in the future as we further develop our product development programs and operate as a publicly traded company. In the near-term, we intend to focus on licensing opportunities for our in-licensed technology, but there can be no assurance that we will enter into agreements with respect to such opportunities on such terms and within a timeframe necessary to satisfy our need for working capital. While we are not presently pursuing product development, we may do so in the future, and current and potential licensing partners may seek to do so. Developing product candidates, conducting clinical trials and commercializing products are expensive, and we willwould need to raise substantial additional funds if we were to achieve our strategic objectives. It will likely be some years before we obtainpursue the necessary regulatory approvals to commercializedevelopment of one or more of our product candidates.candidates Based on our current financial condition and forecasts of available cash, including as mentioned above, we believe we do not have sufficient funds to fund our operations for the next twelve months from the filing of the financial statements contained in this Quarterly Report on Form 10-Q for the periodthree and six months ended June 30, 2022 (the “Q2 2022 10-Q”). There2023. We can beprovide no assurance that we will ever be in a positionable to commercialize IRX-2satisfy our near- or any other product candidate we may acquire,long-term cash needs through licensing transactions, or that we will obtain any additional financing that we require in the future or, even if such financing is available, that it will be obtainable on terms acceptable to us.
In that regard, our future funding requirements will depend on many factors, including:
the terms and timing of any collaborative, licensing and other agreements that we may establish;
the cost of filing and potentially prosecuting, defending and enforcing any patent claims and other intellectual property rights;
the cost and timing of regulatory approvals;
the cost and delays in product development as a result of any changes in regulatory oversight applicable to our products;
the cost and timing of establishing sales, marketing and distribution capabilities;
the effect of competition and market developments;
the cost of filing and potentially prosecuting, defending and enforcing any patent claims and other intellectual property rights;
the scope, rate of progress and cost of our clinical trials and other product development activities; and
We plan to raise additional funds to support our product development activities and working capital requirements through the remaining availability under the Second Purchase Agreement (to the extent we are permitted to use such agreement), public or private equity offerings, debt financings, corporatestrategic partnerships, out-license collaborations or other means. We may also seek governmental grants to support our clinical trials and preclinical trials. Further, we may seek to raise capital to fund additional product development efforts even if we have sufficient funds for our planned operations. Any sale by us of additional equity or convertible debt securities could result in dilution to our stockholders. There can be no assurance that any such required additional funding will be available to us at all or available on terms acceptable to us.
Further, to the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our technologies or grant sublicenses on terms that are not favorable to us. If we are not able to secure additional funding when needed, we may have to delay the commercializecommercialization of our products, reduce the scope of or eliminate one or more research and development programs, which could have an adverse effect on our business.
Cash flows from operating, investing and financing activities, as reflected in the accompanying condensed consolidated statements of cash flows, are summarized as follows:
There were no significant changes in our critical accounting estimates during the three and six months ended June 30, 20222023 from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 10-K/A.2022 10-K, except as follows.
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.
We maintain “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we were required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as of the end of the period covered by this Q2 2022Quarterly Report on Form 10-Q under the supervision, and with the participation, of our management, including our interim Chief Executive Officer and President (who serves as our principal executive officer) and our Chief Financial OfficerVice President of Finance (who serves as our principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures.
