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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

or

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _____________

Commission file number: 001-11460

Eterna Therapeutics Inc.

(Exact name of registrant as specified in its charter)

Delaware |  | 31-1103425
(State of incorporation) |  | (I.R.S. Employer Identification No.)

1035 Cambridge Street, Suite 18A Cambridge, Massachusetts |  | 02141
(Address of principal executive offices) |  | (Zip Code)

(212) 582-1199

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading symbol |  | Name of each exchange on which registered
Common stock, $0.005 par value per share |  | ERNA |  | The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
|  | Emerging growth company | ☐ |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 8, 2024, the registrant had outstanding 51,374,713 shares of common stock, $0.005 par value per share.

TABLE OF CONTENTS

|  | Page
PART I – FINANCIAL INFORMATION |
Item 1. | Financial Statements (unaudited) |
| Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 | 1
| Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023 | 2
| Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity for the three and nine months ended September 30, 2024 and 2023 | 3
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023 | 4
| Notes to Condensed Consolidated Financial Statements | 5
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 32
Item 4. | Controls and Procedures | 33
PART II – OTHER INFORMATION |
Item 1. | Legal Proceedings | 34
Item 1A. | Risk Factors | 34
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 34
Item 3. | Defaults Upon Senior Securities | 34
Item 4. | Mine Safety Disclosures | 34
Item 5. | Other Information | 34
Item 6. | Exhibits | 35
Signatures | 36

i

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements related to future events, results, performance, prospects and opportunities, including statements related to our strategic plans, capital needs, and our financial position. Forward-looking statements are based on information currently available to us, on our current expectations, estimates, forecasts, and projections about the industries in which we operate and on the beliefs and assumptions of management. Forward looking statements often contain words such as “expects,” “anticipates,” “could,” “targets,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “would,” and similar expressions. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Forward-looking statements by their nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in any forward-looking statements. For us, particular factors that might cause or contribute to such differences include those risks and uncertainties described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2024, in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q, and in other documents we file from time to time with the SEC.

Readers are urged not to place undue reliance on the forward-looking statements in this Quarterly Report on Form 10-Q, which speak only as of the date of this Quarterly Report on Form 10-Q. We are including this cautionary note to make applicable, and take advantage of, the safe harbor provisions of the PSLRA. Except as required by law, we do not undertake, and expressly disclaim any obligation, to disseminate, after the date hereof, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based.

We believe that the expectations reflected in forward-looking statements in this Quarterly Report on Form 10-Q are based upon reasonable assumptions at the time made. However, given the risks and uncertainties, you should not rely on any forward-looking statements as a prediction of actual results, developments or other outcomes. You should read these forward-looking statements with the understanding that we may be unable to achieve projected results, developments or other outcomes and that actual results, developments or other outcomes may be materially different from what we expect.

Unless stated otherwise or the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “Eterna” refer to Eterna Therapeutics Inc., references to “Eterna LLC” refer to Eterna Therapeutics LLC, a wholly owned subsidiary of Eterna, and references to the “Company,” “we,” “us” or “our” refer to Eterna and its subsidiaries, including Eterna LLC, Novellus, Inc. and Novellus Therapeutics Limited.

ii

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ETERNA THERAPEUTICS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

(unaudited)

|  | September 30, 2024 |  |  | December 31, 2023 |
ASSETS |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Cash |  | $ | 4,264 |  |  | $ | 7,575 |
Other receivables |  |  | 187 |  |  |  | 425 |
Prepaid expenses and other current assets |  |  | 279 |  |  |  | 1,599 |
Total current assets |  |  | 4,730 |  |  |  | 9,599 |
Restricted cash |  |  | - |  |  |  | 4,095 |
Property and equipment, net |  |  | 105 |  |  |  | 493 |
Right-of-use assets - operating leases |  |  | 719 |  |  |  | 32,781 |
Goodwill |  |  | 2,044 |  |  |  | 2,044 |
Other assets |  |  | 120 |  |  |  | 120 |
Total assets |  | $ | 7,718 |  |  | $ | 49,132 |
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 2,193 |  |  | $ | 1,067 |
Accrued expenses |  |  | 1,166 |  |  |  | 1,893 |
Income taxes payable |  |  | 18 |  |  |  | 2 |
Bridge notes, net of debt discount |  |  | 776 |  |  |  | - |
Bridge notes derivative liability |  |  | 4,926 |  |  |  | - |
Operating lease liabilities, current |  |  | 201 |  |  |  | 2,216 |
Due to related party, current |  |  | 559 |  |  |  | 1,205 |
Deferred revenue, current |  |  | - |  |  |  | 190 |
Other current liabilities |  |  | 113 |  |  |  | - |
Total current liabilities |  |  | 9,952 |  |  |  | 6,573 |
Convertible notes, net |  |  | 32,037 |  |  |  | 6,773 |
Warrant liabilities |  |  | 10,463 |  |  |  | 116 |
Operating lease liabilities, non-current |  |  | 534 |  |  |  | 32,854 |
Deferred revenue, non-current |  |  | - |  |  |  | 392 |
Contingent consideration liability |  |  | 41 |  |  |  | 107 |
Other liabilities |  |  | 84 |  |  |  | 84 |
Total liabilities |  |  | 53,111 |  |  |  | 46,899 |
Stockholders’ (deficit) equity: |  |  |  |  |  |  |  |
Preferred stock, $0.005 par value, 1,000 shares authorized, 156 designated and outstanding of Series A convertible preferred stock at September 30, 2024 and December 31, 2023, $156 liquidation preference |  |  | 1 |  |  |  | 1 |
Common stock, $0.005 par value, 100,000 shares authorized at September 30, 2024 and December 31, 2023; 5,411 and 5,410 issued and outstanding at September 30, 2024 and December 31, 2023, respectively |  |  | 27 |  |  |  | 27 |
Additional paid-in capital |  |  | 180,348 |  |  |  | 189,186 |
Accumulated deficit |  |  | (225,769 | ) |  |  | (186,981 | )
Total stockholders’ (deficit) equity |  |  | (45,393 | ) |  |  | 2,233 |
Total liabilities and stockholders’ (deficit) equity |  | $ | 7,718 |  |  | $ | 49,132 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

ETERNA THERAPEUTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

|  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
Revenue |  | $ | 487 |  |  | $ | 51 |  |  | $ | 581 |  |  | $ | 51 |
Cost of revenues |  |  | (60 | ) |  |  | 120 |  |  |  | 96 |  |  |  | 170 |
Gross income (loss) |  |  | 547 |  |  |  | (69 | ) |  |  | 485 |  |  |  | (119 | )
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  |  | 1,001 |  |  |  | 1,387 |  |  |  | 3,446 |  |  |  | 4,560 |
General and administrative |  |  | 3,381 |  |  |  | 4,049 |  |  |  | 11,592 |  |  |  | 10,231 |
Gain on lease termination |  |  | (1,576 | ) |  |  | - |  |  |  | (1,576 | ) |  |  | - |
Acquisition of Exacis in-process research and development |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 460 |
Total operating expenses |  |  | 2,806 |  |  |  | 5,436 |  |  |  | 13,462 |  |  |  | 15,251 |
Loss from operations |  |  | (2,259 | ) |  |  | (5,505 | ) |  |  | (12,977 | ) |  |  | (15,370 | )
Other expense, net: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss on extinguishment of debt |  |  | (22,440 | ) |  |  | - |  |  |  | (22,440 | ) |  |  | - |
Fair value adjustments to bridge notes derivative liability |  |  | (1,038 | ) |  |  | - |  |  |  | (1,038 | ) |  |  | - |
Change in fair value of warrant liabilities |  |  | 831 |  |  |  | 20 |  |  |  | 897 |  |  |  | 166 |
Change in fair value of contingent consideration |  |  | - |  |  |  | - |  |  |  | 66 |  |  |  | 118 |
Loss on non-controlling investment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (59 | )
Interest expense, net |  |  | (1,686 | ) |  |  | (113 | ) |  |  | (3,269 | ) |  |  | (88 | )
Other expense, net |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | (281 | )
Total other expense, net |  |  | (24,333 | ) |  |  | (94 | ) |  |  | (25,784 | ) |  |  | (144 | )
Loss before income taxes |  |  | (26,592 | ) |  |  | (5,599 | ) |  |  | (38,761 | ) |  |  | (15,514 | )
(Provision) benefit for income taxes |  |  | (12 | ) |  |  | 8 |  |  |  | (19 | ) |  |  | (1 | )
Net loss |  |  | (26,604 | ) |  |  | (5,591 | ) |  |  | (38,780 | ) |  |  | (15,515 | )
Series A preferred stock dividend |  |  | - |  |  |  | - |  |  |  | (8 | ) |  |  | (8 | )
Net loss attributable to common stockholders |  | $ | (26,604 | ) |  | $ | (5,591 | ) |  | $ | (38,788 | ) |  | $ | (15,523 | )
Net loss per common share - basic and diluted |  | $ | (4.92 | ) |  | $ | (1.03 | ) |  | $ | (7.17 | ) |  | $ | (2.94 | )
Weighted average shares outstanding - basic and diluted |  |  | 5,410 |  |  |  | 5,410 |  |  |  | 5,410 |  |  |  | 5,281 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

ETERNA THERAPEUTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

For the three and nine months ended September 30, 2024 and 2023 (unaudited)

(in thousands)

|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Total |
|  | Series A Preferred Stock |  |  | Common Stock |  |  | Additional Paid-in |  |  | Accumulated |  |  |  |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Capital |  |  | Deficit |  |  | Total |
Balances at July 1, 2024 |  |  | 156 |  |  | $ | 1 |  |  |  | 5,411 |  |  | $ | 27 |  |  | $ | 190,611 |  |  | $ | (199,165 | ) |  | $ | (8,526 | )
Fair value of forward sale contract pursuant to common stock offering |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 576 |  |  |  | - |  |  |  | 576 |
Reclassification of warrants to liability |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (11,244 | ) |  |  | - |  |  |  | (11,244 | )
Stock-based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 405 |  |  |  | - |  |  |  | 405 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (26,604 | ) |  |  | (26,604 | )
Balances at September 30, 2024 |  |  | 156 |  |  | $ | 1 |  |  |  | 5,411 |  |  | $ | 27 |  |  | $ | 180,348 |  |  | $ | (225,769 | ) |  | $ | (45,393 | )
Balances at January 1, 2024 |  |  | 156 |  |  | $ | 1 |  |  |  | 5,410 |  |  | $ | 27 |  |  | $ | 189,186 |  |  | $ | (186,981 | ) |  | $ | 2,233 |
Fair value of forward sale contract pursuant to common stock offering |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 576 |  |  |  | - |  |  |  | 576 |
Reclassification of warrants to liability |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (11,244 | ) |  |  | - |  |  |  | (11,244 | )
Issuance of note warrants |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 720 |  |  |  | - |  |  |  | 720 |
Stock-based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,110 |  |  |  | - |  |  |  | 1,110 |
Issuance of common stock from vested restricted units |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Cash dividends to Series A preferred stockholders |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (8 | ) |  |  | (8 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (38,780 | ) |  |  | (38,780 | )
Balances at September 30, 2024 |  |  | 156 |  |  | $ | 1 |  |  |  | 5,411 |  |  | $ | 27 |  |  | $ | 180,348 |  |  | $ | (225,769 | ) |  | $ | (45,393 | )
Balances at July 1, 2023 |  |  | 156 |  |  | $ | 1 |  |  |  | 5,410 |  |  | $ | 27 |  |  | $ | 179,067 |  |  | $ | (175,229 | ) |  | $ | 3,866 |
Issuance of warrants in connection with convertible notes financing |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5,113 |  |  |  | - |  |  |  | 5,113 |
Stock-based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 174 |  |  |  | - |  |  |  | 174 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5,591 | ) |  |  | (5,591 | )
Balances at September 30, 2023 |  |  | 156 |  |  | $ | 1 |  |  |  | 5,410 |  |  | $ | 27 |  |  | $ | 184,354 |  |  | $ | (180,820 | ) |  | $ | 3,562 |
Balances at January 1, 2023 |  |  | 156 |  |  | $ | 1 |  |  |  | 5,127 |  |  | $ | 26 |  |  | $ | 177,377 |  |  | $ | (165,297 | ) |  | $ | 12,107 |
Issuance of common stock in connection with Exacis asset acquisition |  |  | - |  |  |  | - |  |  |  | 69 |  |  |  | - |  |  |  | 208 |  |  |  | - |  |  |  | 208 |
Issuance of common stock related to stock purchase agreement with Lincoln Park Capital Fund, LLC, net |  |  | - |  |  |  | - |  |  |  | 214 |  |  |  | 1 |  |  |  | 579 |  |  |  | - |  |  |  | 580 |
Issuance of warrants in connection with convertible notes financing |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5,113 |  |  |  | - |  |  |  | 5,113 |
Cash dividends to Series A preferred stockholders |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (8 | ) |  |  | (8 | )
Stock-based compensation |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,077 |  |  |  | - |  |  |  | 1,077 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (15,515 | ) |  |  | (15,515 | )
Balances at September 30, 2023 |  |  | 156 |  |  | $ | 1 |  |  |  | 5,410 |  |  | $ | 27 |  |  | $ | 184,354 |  |  | $ | (180,820 | ) |  | $ | 3,562 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

ETERNA THERAPEUTICS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

|  | 2024 |  |  | 2023 |
|  | For the nine months ended September 30, |
|  | 2024 |  |  | 2023 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net loss |  | $ | (38,780 | ) |  | $ | (15,515 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 120 |  |  |  | 62 |
Stock-based compensation |  |  | 1,110 |  |  |  | 1,077 |
Amortization of right-of-use asset |  |  | 1,450 |  |  |  | 580 |
Gain on lease termination |  |  | (1,576 | ) |  |  | - |
Accrued interest expense |  |  | 441 |  |  |  | 113 |
Paid-in-kind interest expense |  |  | 829 |  |  |  | - |
Amortization of debt discount and debt issuance costs |  |  | 2,148 |  |  |  | 52 |
Loss on extinguishment of debt |  |  | 22,440 |  |  |  | - |
Fair value adjustments to bridge notes derivative liability |  |  | 1,038 |  |  |  |  |
Change in fair value of warrant liabilities |  |  | (897 | ) |  |  | (166 | )
Change in fair value of contingent consideration liability |  |  | (66 | ) |  |  | (118 | )
Commitment shares issued to Lincoln Park Capital, LLC |  |  | - |  |  |  | 249 |
Loss on shares sold to Lincoln Park Capital, LLC |  |  | - |  |  |  | 11 |
Non-cash component of acquisition of Exacis in-process research and development |  |  | - |  |  |  | 433 |
Gain on disposal of fixed assets |  |  | - |  |  |  | 1 |
Loss on non-controlling investment |  |  | - |  |  |  | 59 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Other receivables |  |  | 238 |  |  |  | (825 | )
Prepaid expenses and other current assets |  |  | 1,225 |  |  |  | 340 |
Other non-current assets |  |  | 1 |  |  |  | (2,911 | )
Accounts payable and accrued expenses |  |  | 758 |  |  |  | 1,099 |
Operating lease liability |  |  | (1,656 | ) |  |  | 795 |
Due to related party |  |  | (646 | ) |  |  | (1,313 | )
Deferred revenue |  |  | (582 | ) |  |  | 599 |
Other liabilities |  |  | 113 |  |  |  | (369 | )
Net cash used in operating activities |  |  | (12,291 | ) |  |  | (15,747 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |
Purchase of property and equipment |  |  | (369 | ) |  |  | - |
Proceeds received from the sale of fixed assets |  |  | 4 |  |  |  | - |
Net cash used in investing activities |  |  | (365 | ) |  |  | - |
Cash flows from financing activities: |  |  |  |  |  |  |  |
Proceeds received from convertible note financings |  |  | 1,405 |  |  |  | 8,715 |
Fees paid related to convertible note financings |  |  | (34 | ) |  |  | (175 | )
Proceeds received from bridge notes financings |  |  | 3,887 |  |  |  | - |
Proceeds from sale of common stock pursuant to stock purchase agreement with Lincoln Park Capital Fund, LLC |  |  | - |  |  |  | 320 |
Dividends paid to Series A preferred stockholders |  |  | (8 | ) |  |  | (8 | )
Net cash provided by financing activities |  |  | 5,250 |  |  |  | 8,852 |
Net decrease in cash and cash equivalents |  |  | (7,406 | ) |  |  | (6,895 | )
Cash, cash equivalents and restricted cash at beginning of period |  |  | 11,670 |  |  |  | 15,541 |
Cash, cash equivalents and restricted cash at end of period |  | $ | 4,264 |  |  | $ | 8,646 |
Supplemental disclosures of cash flow information: |  |  |  |  |  |  |  |
Cash paid during the period for: |  |  |  |  |  |  |  |
Interest |  | $ | 46 |  |  | $ | 13 |
Income taxes |  | $ | 2 |  |  | $ | 4 |
Supplemental disclosure of non-cash investing and financing activities: |  |  |  |  |  |  |  |
Note warrants issued |  | $ | 755 |  |  | $ | - |
Unpaid fees incurred in connection with the December 2023 financing |  | $ | 32 |  |  | $ | - |
Paid in-kind interest added to convertible notes principal |  | $ | 1,006 |  |  | $ | - |
Adjustment to lease liability and ROU asset due to remeasurement |  | $ | 4,245 |  |  | $ | - |
Reclassification of warrants to liability |  | $ | 11,244 |  |  | $ | - |
Warrants issued in connection with July 2023 Financing |  | $ | - |  |  | $ | 5,234 |
Unpaid fees incurred in connection with the July 2023 Financing |  | $ | - |  |  | $ | 27 |
Initial measurement of ROU assets |  | $ | - |  |  | $ | 34,410 |
Initial measurement of lease liability |  | $ | - |  |  | $ | 34,170 |
Contingent consideration for Exacis asset acquisition |  | $ | - |  |  | $ | 225 |
Issuance of common stock for Exacis asset acquisition |  | $ | - |  |  | $ | 208 |
Reconciliation of cash, cash equivalents and restricted cash at end of period: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 4,264 |  |  | $ | 4,551 |
Restricted cash |  |  | - |  |  |  | 4,095 |
Total cash, cash equivalents and restricted cash at end of period |  | $ | 4,264 |  |  | $ | 8,646 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

ETERNA THERAPEUTICS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1) | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Eterna Therapeutics Inc. (the “Company”) is a preclinical-stage cell therapy company. Its vision is to improve the lives of patients with difficult-to-treat diseases through innovative, effective, and safe, but accessible cellular therapies, and its 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. As used herein, the “Company” or “Eterna” refers collectively to Eterna and its consolidated subsidiaries (Eterna Therapeutics LLC, Novellus, Inc. and Novellus Therapeutics Limited) unless otherwise stated or the context otherwise requires .

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented.

These condensed consolidated financial statements should be read together with the audited consolidated financial statements and notes thereto contained in Eterna’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2024, as amended by the Form 10-K/A filed with the SEC on March 18, 2024 (as amended, the “2023 10-K”). The accompanying condensed consolidated balance sheet as of December 31, 2023 has been derived from the audited financial statements contained in the 2023 10-K but does not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2024, or any other period.

Reclassifications

Certain reclassifications have been made to the Company’s prior year amounts to conform to the current year presentation.

2) | LIQUIDITY AND CAPITAL RESOURCES

The Company has incurred significant operating losses and has an accumulated deficit as a result of its efforts to develop product candidates and providing general and administrative support for operations. As of September 30, 2024, the Company had an unrestricted cash balance of approximately $4.3 million and an accumulated deficit of approximately $225.8 million. For the three and nine months ended September 30, 2024, the Company incurred a net loss of $26.6 million and $38.8 million, respectively, and for the nine months ended September 30, 2024, the Company used cash of $12.3 million in operating activities.

In October 2022, the Company entered into a sublease for approximately 45,500 square feet of office and laboratory space in Somerville, Massachusetts. Pursuant to the sublease, the Company delivered to the sublessor a security deposit in the form of a letter of credit in the amount of $4.1 million. The letter of credit was issued by the Company’s commercial bank, which required that the Company cash collateralize the letter of credit by depositing $4.1 million in a restricted cash account with such bank.

On August 5, 2024, the sublessor drew down on the letter of credit for the full $4.1 million to cover past due rent, plus penalties and interest. On August 9, 2024, the Company and the sublessor entered into a sublease termination agreement, effective August 31, 2024. See Note 8 for additional information regarding the sublease and sublease termination agreement..

5

In April 2023, the Company entered into a standby equity purchase agreement (the “ELOC”) and a registration rights agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park committed to purchase up to $10.0 million of the Company’s common stock in an “equity line” financing arrangement. During the year ended December 31, 2023, the Company issued and sold approximately 214,000 shares of common stock under the ELOC for gross proceeds of $0.3 million. No shares were sold under the ELOC during the three or nine months ended September 30, 2024.

In July and December 2023, the Company received $16.5 million in aggregate gross proceeds from the issuance of convertible notes, and on January 11, 2024 it received an additional $1.4 million in gross proceeds from the issuance of additional convertible notes. On September 24, 2024, the Company received $3.9 million in aggregate gross proceeds from the issuance of convertible notes, and on October 29, 2024, the Company received $1.1 million in gross proceeds from the sale of shares of the Company’s common stock. See Note 5 and Note 17 for additional information regarding these financings.

In connection with preparing the accompanying condensed consolidated financial statements as of and for the three and nine months ended September 30, 2024, the Company’s management concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern because it does not expect to have sufficient cash or working capital resources to fund operations for the twelve-month period subsequent to the issuance date of these condensed consolidated financial statements. The Company will need to raise additional capital, which could be through the sales of shares of its common stock under the ELOC, public or private equity offerings, debt financings, out-licensing the Company’s intellectual property, strategic partnerships or other means. Other than the ELOC, the Company currently has no arrangements for capital, and no assurances can be given that it will be able to raise capital when needed, on acceptable terms, or at all.

The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

3) | ASSET ACQUISITION

On April 26, 2023, the Company entered into an asset purchase agreement (the “Exacis Purchase Agreement”), with Dilos Bio (formerly known as Exacis Biotherapeutics Inc. (“Exacis”)), the stockholders party thereto and, with respect to specified provisions therein, Factor Limited. Pursuant to the Exacis Purchase Agreement, the Company acquired from Exacis substantially all of Exacis’ intellectual property assets (the “Exacis Assets”), including all of Exacis’ right, title and interest in and to an exclusive license agreement between Exacis and Factor Limited (the “Purchased License”). The Company assumed none of Exacis’ liabilities, other than liabilities under the Purchased License that accrue subsequent to the closing date. The transactions contemplated by the Exacis Purchase Agreement (the “Exacis Acquisition”) closed on April 26, 2023.

In consideration for the Exacis Assets, on the closing date of the transaction, the Company issued to Exacis approximately 69,000 shares of common stock, which shares were subject to a 12-month lockup that expired in April 2024. The shares were issued to Exacis at a price based on the Company having an assumed equity valuation of $75.0 million, divided by the number of issued and outstanding shares of common stock as of the close of business two trading days prior to the closing date. For accounting purposes, the shares issued were valued at $3.00 per share, which was the closing price of the Company’s common stock on the date of issuance. The Company additionally agreed to make certain contingent payments through April 23, 2026 related to achieving a market capitalization of $100 million and $200 million for a consecutive period of time (the “Market Cap Contingent Consideration”), as well as contingent payments related to the Company receiving proceeds related to the Purchased License through April 23, 2028.

6

The Company accounted for the Exacis Acquisition as an asset acquisition because it determined that substantially all of the fair value of the assets acquired was concentrated in the Purchased License. Assets acquired in an asset acquisition are recognized based on their cost to the acquirer and generally allocated to the assets on a relative fair value basis. The Company’s cost for acquiring the Exacis Assets includes the issuance of the Company’s common stock, direct acquisition-related costs and contingent consideration. The table below shows the total fair value of the consideration paid for the Exacis Assets (in thousands). See Note 4 for more information on the fair value measurement of the assets acquired.

SCHEDULE OF FAIR VALUE MEASUREMENT OF ASSETS ACQUIRED

|  | Fair Value of Consideration |
Shares issued |  | $ | 208 |
Contingent consideration |  |  | 225 |
Direct costs |  |  | 27 |
Total fair value |  | $ | 460 |

The Company allocated 100% of the fair value of the consideration to the Purchased License, which the Company determined is an in-process research and development (“IPR&D”) asset. IPR&D assets acquired through an asset purchase that have no alternative future uses and no separate economic values from their original intended purpose are expensed in the period the cost is incurred. As a result, the Company expensed the fair value of the Purchased License during the three and nine months ended September 30, 2023.

On September 24, 2024, in connection with entering into the Exclusive License and Collaboration Agreement (“the Factor L&C Agreement”) with Factor Bioscience Limited (“Factor Limited”), the Purchase License was terminated. See Note 10 for more information on the Factor L&C Agreement.

4) | CONTRACT WITH CUSTOMER

On February 21, 2023, the Company and Lineage Cell Therapeutics, Inc. (“Lineage”) entered into an exclusive option and license agreement (the “Lineage Agreement”), which provided Lineage with the option (the “Option Right”) to obtain an exclusive sublicense of intellectual property from the Company and to request the Company to develop a customized cell line (the intellectual property that would be sublicensed by Lineage is currently licensed by the Company from Factor Limited). The Lineage Agreement was amended in August 2023 to provide for changes specifically related to the cell line customization activities such as (i) payment terms, (ii) certain definitions, (iii) certain courses of action if the customized cell line selected by Lineage is not successful and (iv) documentation requirements. Lineage paid the Company a $0.3 million non-refundable up-front payment (the “Option Fee”) for the Option Right and paid an initial payment of $0.4 million to commence the cell line customization activities, per the amended payment terms. If Lineage obtained the sublicense, the Company would be entitled to receive additional license fees, including milestone payments and royalties.

On September 24, 2024, the Company and Factor Bioscience (as defined in Note 10) entered into an agreement (the “Lineage Assignment Agreement”) under which the Company assigned the Lineage Agreement to Factor Bioscience. The Company’s rights and obligations under the agreement are now the responsibility of Factor Bioscience.

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Payments to the Company related to the Lineage Agreement will be subject to the Lineage Assignment Agreement, which provides for Factor Bioscience paying the Company 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 Bioscience will pay the Company twenty percent (20%) of all amounts Factor Bioscience receives from Lineage.

The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”) when a customer obtains control of promised services or goods in an amount that reflects the consideration to which the Company expects to receive in exchange for those goods or services.

Pursuant to ASC 606, the Company determined that the Option Right was an unexercised right held by Lineage under the Lineage Agreement at contract inception, as the cell line customization activities and the sublicense were optional purchases at contract inception. These optional purchases of goods and services would be treated as separate contracts if and when Lineage determines that it would make such purchases. Therefore, 100% of the Option Fee was allocated to the Option Right. The Option Fee would remain in deferred revenue until such time that Lineage entered into the sublicense or when the Option Right expired. However, as a result of the Lineage Assignment Agreement, and there being no further obligations regarding the nonrefundable payment related to the Option Right, the Company recognized the $0.3 million Option Right payment in full as revenue during the three and nine months ended September 30, 2024.

The Option Right and the cell line customization activities were accounted for as separate contracts, and the Company determined that the amended terms discussed above represented a modification to the cell line customization contract. Because there were no goods or services transferred to Lineage before entering into the amendment, and therefore, no previously recognized revenue, there was no catch-up adjustment to revenue required at the time of the amendment.

Lineage was to make payments to the Company for the cell line customization activities over the development period. The Company would only earn the remaining full amount of the cell line customization fee if it made certain progress towards delivery of the customized cell line. The Company determined that $0.4 million of consideration received could be recognized without the probability of being reversed, and it placed a constraint on the remaining contractual customization fee. The $0.4 million was being recognized equally over the development period. However, as a result of the Lineage Assignment Agreement, and there being no further obligations the Company must fulfill for the customization activities, the Company accelerated the recognition of the remaining deferred revenue and recognized approximately $0.2 million during the three and nine months ended September 30, 2024. The Company recognized approximately $0.1 million in revenue during the three and nine months ended September 30, 2023 related to the customization activities.

The Company recognized direct labor and supplies used in the customization activities as incurred, which are recorded as a cost of revenue. As provided for in the A&R Factor License Agreement discussed in Note 10, the Company was obligated to pay Factor Limited 20% of any amounts the Company received from a customer that was related to the licensed technology under the A&R Factor License Agreement, which is also recorded as a cost of revenue. For the three and nine months ended September 30, 2023, the Company recognized $0.1 million in license fees, which is recorded in cost of revenues, due to Factor Limited. There was no such license fee incurred during the three or nine months ended September 30, 2024.

5) | CONVERTIBLE NOTES FINANCINGS, BRIDGE FINANCING, EXCHANGE TRANSACTION AND EQUITY FINANCING

On July 14, 2023, the Company received $8.7 million from a private placement in which the Company issued $8.7 million in aggregate principal amount of convertible notes (the “July 2023 Convertible Notes”) and warrants to purchase an aggregate of approximately 6.1 million shares of its common stock (the “July 2023 Warrants”). The Company recognized approximately $0.2 million in fees associated with the transaction.

On December 14, 2023, the Company entered into a purchase agreement with certain purchasers for the private placement of $9.2 million of convertible notes (the “December 2023 Convertible Notes” and together with the July 2023 Convertible Notes, the “Convertible Notes”) and warrants to purchase an aggregate of approximately 9.6 million shares of the Company’s common stock (the “December 2023 Warrants” and together with the July 2023 Warrants, the “Note Warrants”).

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There were two closings under the December 14, 2023 purchase agreement – one on December 15, 2023 and the second on January 11, 2024. At the first closing, the Company received $7.8 million and issued $7.8 million of December 2023 Convertible Notes and December 2023 Warrants to purchase approximately 8.1 million shares of its common stock. At the second closing, the Company received $1.4 million and issued $1.4 million of December 2023 Convertible Notes and December 2023 Warrants to purchase approximately 1.5 million shares its common stock.

See Note 13 for more information on the Note Warrants.

The July 2023 Convertible Notes bear interest at 6% per year, and the December 2023 Convertible Notes bear interest at 12% per year, both of which are payable quarterly in arrears. At the Company’s election, it may pay interest either in cash or in-kind by increasing the outstanding principal amount of the Convertible Notes. The Convertible Notes mature on the five-year anniversary of the date of their issuance, unless earlier converted or repurchased. The Company does not have the option to redeem any of the Convertible Notes prior to maturity.

At the option of the holders, the Convertible Notes may be converted from into shares of the Company’s common stock at an initial conversion price of, with respect to the July 2023 Convertible Notes, $2.86 per share and, with respect to the December 2023 Convertible Notes, $1.9194 per share, subject to customary adjustments for stock splits, stock dividends, recapitalization and the like.

As of September 30, 2024, none of the Convertible Notes were converted into shares of common stock.

The Convertible Notes provide for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest, breach of covenants or other agreements in the Convertible Notes; the occurrence of a material adverse effect event (as defined in the related securities purchase agreement) and certain events of bankruptcy. Generally, if an undisputed event of default occurs and is continuing under the Convertible Notes, the holder may require the Company to redeem some or all of their Convertible Notes at a redemption price equal to 100% of the principal amount of the Convertible Notes being redeemed, plus accrued and unpaid interest thereon. As of September 30, 2024, there were no events of default that occurred under any of the Convertible Notes.

Bridge Notes Financing

On September 24, 2024, the Company entered into a purchase agreement with certain purchasers for the private placement of $3.9 million of convertible notes (the “Bridge Notes”). The Bridge Notes bear interest at 12% per year, payable quarterly in arrears. At the Company’s election, it may pay interest either in cash or in-kind by increasing the outstanding principal amount of the Bridge Notes. The Bridge Notes mature on the one-year anniversary of the date of their issuance, unless earlier converted or repurchased. The Company does not have the option to redeem any of the Bridge Notes prior to maturity. The Bridge Notes financing closed on September 24, 2024.

The only conversion event for the Bridge Notes is upon stockholder approval at the Company’s annual meeting of stockholders on October 29, 2024 (the “Annual Meeting), in which case, 100% of the principal amount of the Bridge Notes plus all accrued and unpaid interest thereon and, interest that would have accrued on the principal amount through December 24, 2024, will automatically convert into shares of the Company’s common stock at a conversion price of $0.50. Otherwise, the Bridge Notes may be paid in cash upon maturity.

The Bridge Notes have the same customary events of default provision as the Convertible Notes. As of September 30, 2024, there were no events of default that occurred under any of the Bridge Notes.

The Company was required to bifurcate the conversion feature from the Bridge Notes and record it as a derivative liability at its fair value. The Company determined the fair value of the derivative liability by taking the difference between the fair value of the Bridge Notes with the conversion feature and without the conversion feature, which resulting in the Company recording a $5.5 million derivative liability, with a corresponding $3.9 million reduction in the carrying value of the Bridge Notes recorded as a debt discount and a $1.6 million charge to expense for the incremental fair value of the derivative liability as of September 24, 2024. The debt discount is are amortized over the contractual terms of the Bridge Note as a component of interest expense.

At September 30, 2024, the Company remeasured the fair value of the Bridge Notes derivative liability and recorded a reduction in the liability of $0.6 million. The corresponding credit of $0.6 million is recorded as a component of the fair value adjustments to Bridge Notes derivative liability on the accompanying condensed consolidated statement of operations for the three and nine months ended September 30, 2024, which also includes the $1.6 million incremental expense noted above.

Exchange Transaction

On September 24, 2024, the Company entered into exchange agreements (the “Exchange Agreements”) with the holders of (i) warrants to purchase an aggregate of approximately 4.4 million shares of our common stock the Company issued in December 2022 with an exercise price of $1.43 per share (the “December 2022 warrants”); (ii) the July 2023 convertible notes and July 2023 warrants; and (iii) the December 2023 convertible notes and the December 2023 warrants (the “Exchange Transactions”). The parties to the Exchange Agreements represent the holders of all the outstanding convertible notes and all the outstanding warrants described above except for a December 2022 warrant to purchase approximately 0.1 million shares of our common stock.

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Subject to approval by the Company’s stockholders at the Annual Meeting, under the Exchange Agreements (i) the holders of the warrants agreed to exchange all their warrants for shares of the Company’s 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 (ii) the holders of the convertible notes agreed to exchange all their convertible notes for shares of the Company’s 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 (the sum of (A) totaling approximately $28.4 million), divided by (B) $1.00 (rounded up to the nearest whole number) (the “Exchange Transactions”).

The Company determined that the modifications to the convertible notes should be accounted for as an extinguishment of debt because there was at least a 10% change in the cash flows of the modified debt instrument compared to the carrying amount of the original debt instrument, and as such, the difference between the reacquisition price (which includes any premium) and the net carrying amount of the debt being extinguished (which includes any deferred debt issuance costs) should be recognized as a gain or loss when the debt is extinguished.

As of September 24, 2024, prior to entering into the Exchange Agreements, there was approximately $10.1 million of net carrying amount of the convertible notes, which was comprised of $19.4 million of principal and accrued interest through such date, offset by approximately $9.3 million of unamortized debt issuance costs. The fair value of the reacquired convertible notes was $32.0 million and was determined by multiplying approximately 28,351,000 shares the Company would be issuing on October 29, 2024 by the closing stock price of $1.13 per share on September 24, 2024. The difference between the reacquisition price and the net carrying amount of the convertible notes being extinguished was approximately $21.9 million. Accordingly, the Company increased the carrying value of the reacquired convertible notes to $32.0 million and recognized a loss on extinguishment of debt of approximately $21.9 million during the three and nine months ended September 30, 2024.

Because shareholder approval was required for the Exchange Transactions to occur, the Company determined that the modifications to the warrants resulted in a change in classification of such warrants from equity to liability. A provision that requires shareholder approval precludes equity classification because such approval is not an input into a fixed-for-fixed valuation model. As a result, the Company recorded the warrants at fair value as of September 24, 2024 by taking the number of shares of common stock issuable from the exchanged warrants multiplied by the closing stock price of $1.13 and reclassified approximately $11.2 million from equity to warrant liabilities. The Company then marked-to-market the warrants as of September 30, 2024 by taking the same quantity of shares multiplied by the closing stock price on such date and recognized a reduction to the warrant liabilities of $0.8 million. A corresponding credit of $0.8 million was recognized as a change in fair value of warrant liabilities for the three and nine months ended September 30, 2024 on the accompanying condensed consolidated statement of operations.

Equity Financing

On September 24, 2024, the Company entered into a securities purchase agreement (the “SPA”) with certain accredited investors to sell in a private placement an aggregate of approximately 1,517,000 shares of the Company’s common stock (or, in lieu thereof, pre-funded warrants to purchase one share of our common stock) for a purchase price of $0.75 per share of common stock and $0.745 per pre-funded warrant (the “Common Stock Private Placement” and together with the Bridge Notes and the Exchange Transactions, the “September 2024 Transactions”). The closing of the Common Stock Private Placement was conditioned upon receiving stockholder approval at the Annual Meeting.

The SPA represents a forward sale contract obligating the Company to sell a fixed number of shares of its common stock at a fixed price per share upon obtaining shareholder approval at the Annual Meeting. The Company measured the fair value of the forward sale contract as the difference between (A) the fair value of the expected shares to be purchased by the investors as of the date the Company entered into the SPA and (B) the purchase price of the shares, and recorded approximately $0.6 million to additional paid-in capital as of September 24, 2024. Because of the concurrent execution of the SPA and the Exchange Agreements, and because the investors in the SPA are also parties to the Exchange Transactions, the $0.6 million was added to the $21.9 million loss on extinguishment of debt discussed above for a total loss of $22.4 million during the three and nine months ended September 30, 2024.

On October 29, 2024, the Company held its Annual Meeting, the Company’s stockholders approved the September 2024 Transactions, and as a result, the following occurred on October 29, 2024:

| ● | Under the Common Stock Private Placement, the Company issued approximately 1,402,000 shares of common stock and pre-funded warrants to purchase 115,000 shares of common stock and received approximately $1.1 million in gross proceeds from the issuance of such securities. The pre-funded warrants have an exercise price of $0.005 per share, are exercisable at any time and will not expire until exercised in full.
| ● | Under 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 approximately 6,244,000 shares of the Company’s 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 common stock. The pre-funded warrants have an exercise price of $0.005 per share, are exercisable at any time and will not expire until exercised in full. As of October 29, 2024, there were no Bridge Notes outstanding.
| ● | Under the Exchange Transactions, (i) the holders of the warrants exchanged approximately 19,902,000 warrants for approximately 9,951,000 shares of the Company’s common stock, and (ii) the holders of the convertible notes exchanged all their convertible notes for approximately 28,351,000 shares of our common stock for a total of 38,302,000 shares of our common stock under the Exchange Transactions. As of October 29, 2024, there were no Convertible Notes outstanding.

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6) | FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between willing market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

● Level 1 Inputs – Valued based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

● Level 2 Inputs – Valued based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

● Level 3 Inputs – Valued based on inputs for which there is little or no market value, which require the reporting entity to develop its own assumptions.

The carrying amounts reported on the balance sheet for cash, other receivable, prepaid assets and other current assets, accounts payable and accrued expenses, other current liabilities and other liabilities approximate fair value based due to their short maturities.

The Company issued approximately 343,000 warrants in connection with a private placement during the first quarter of 2022 (the “Q1-22 warrants”), which were determined to be classified as a liability. The Company also recorded the Market Cap Contingent Consideration liability related to the Exacis Acquisition. See Note 3 for more information related to the Exacis Acquisition.

In connection with the Bridge Notes, the Company recorded a derivative liability as of September 24, 2024. In connection with the Exchange Transactions, on September 24, 2024, the Company reclassified the warrants included in the Exchange Transactions from equity to a liability. See Note 5 for more information related to the Bridge Notes and Exchange Transactions.

The Company uses a Black-Scholes option pricing model to estimate the fair value of the Q1-22 warrant liabilities and a Monte Carlo simulation model to estimate the fair value of the contingent consideration related to the Market Cap Contingent Consideration, both of which are considered a Level 3 fair value measurement.

The Company determined the fair value of the derivative liability by taking the difference between the fair value of the Bridge Notes with the conversion feature and without the conversion feature.

With respect to the warrants in the Exchange Transactions, the Company determined the fair value of the warrants as of September 24, 2024 by taking the number of shares of common stock issuable from the exchanged warrants multiplied by the closing stock price of $1.13 and reclassified approximately $11.2 million from equity to warrant liabilities.

The Company remeasures the fair value of the warrant liabilities, the Bridge Notes derivative liability and the Market Cap Contingent Consideration at each reporting period and changes in the fair values are recognized in the statement of operations.

The following tables summarize the liabilities that are measured at fair value as of September 30, 2024 and December 31, 2023 (in thousands):

SCHEDULE OF LIABILITIES MEASURED AT FAIR VALUE

Description |  | Level |  |  | September 30, 2024 |  |  | December 31, 2023 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Warrant liabilities - Q1-22 warrants |  |  | 3 |  |  | $ | 15 |  |  | $ | 116 |
Warrant liabilities – Exchange Transactions |  |  | 3 |  |  | $ | 10,448 |  |  | $ | - |
Bridge Notes derivative liability |  |  | 3 |  |  | $ | 4,926 |  |  | $ | - |
Market Cap Contingent Consideration |  |  |  |  |  |  | - |  |  |  | - |
Liability fair value disclosure |  |  |  |  |  |  | - |  |  |  | - |

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Certain inputs used in Black-Scholes and Monte Carlo models may fluctuate in future periods based upon factors that are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of the Company’s warrant liabilities or contingent consideration liabilities, which could also result in material non-cash gains or losses being reported in the Company’s condensed consolidated statement of operations.

The following table presents the changes in the liabilities measured at fair value from January 1, 2024 through September 30, 2024 (in thousands):

SCHEDULE OF CHANGES IN WARRANT LIABILITIES

|  | Warrant Liabilities |  |  | Derivative Liability |  |  | Contingent Consideration |
Fair value at January 1, 2024 |  | $ | 116 |  |  | $ | - |  |  | $ | 107 |
Reclassification of warrants from equity to liability |  |  | 11,244 |  |  |  | - |  |  |  | - |
Initial measurement of Bridge Notes derivative liability |  |  | - |  |  |  | 5,566 |  |  |  | - |
Change in fair value |  |  | (897 | ) |  |  | (640 | ) |  |  | (66 | )
Fair value at September 30, 2024 |  | $ | 10,463 |  |  | $ | 4,926 |  |  | $ | 41 |

The Company assessed the fair value of the Market Cap Contingent Consideration at September 30, 2024 and determined that there were no material changes to the inputs used in the June 30, 2024 remeasurement that would have resulted in a material change to the liability at September 30, 2024. Therefore, the Company did not recognize a change in fair value of the Market Cap Contingent Consideration for the three months ended September 30, 2024.

The Company remeasured the Bridge Notes derivative liability by taking the difference between the fair value of the Bridge Notes with the conversion feature and without the conversion feature as of September 30, 2024 and recorded a $0.6 million credit for the change in fair value during the three months ended September 30, 2024.

The table below is provided for comparative purposes only and presents information about the fair value of the Company’s convertible notes relative to the carrying values recognized in the condensed consolidated balance sheet as of September 30, 2024 and December 31, 2023 (in thousands).

SCHEDULE OF FAIR VALUE AND CARRYING VALUES OF CONVERTIBLE NOTES

|  |  |  |  | September 30, 2024 |  |  | December 31, 2023 |
|  | Level |  |  | Carrying Value |  |  | Fair Value |  |  | Carrying Value |  |  | Fair Value |
Convertible Notes |  |  | 3 |  |  | $ | 32,037 |  |  | $ | 29,768 |  |  | $ | 16,616 |  |  | $ | 17,594 |
Bridge Notes |  |  | 3 |  |  | $ | 3,887 |  |  | $ | 8,409 |  |  | $ | - |  |  | $ | - |

The carrying value of the Convertible Notes in the table above is reflective of the reacquisition price of the Convertible Notes as a result of the Exchange Agreements entered into on September 24, 2024, which was recorded at its fair value as of September 24, 2024. The Company determined the fair value of the Convertible Notes by multiplying the 28.4 million shares expected to be issued in common stock on October 29, 2024 by the closing stock price of $1.05 per share on September 30, 2024.

The carrying value of the Bridge Notes in the table above is shown before the bifurcation of the Bridge Notes derivative liability. The Company determined the fair value of the Bridge Notes by multiplying the 8.0 million shares expected to be issued in common stock (or in pre-funded warrants) on October 29, 2024 by the closing stock price of $1.05 per share on September 30, 2024.

See Note 5 for more information on the Convertible Notes and the Bridge Notes.

The Company assessed the fair value of the 2023 convertible notes as of December 31, 2023 using a binomial model, which is considered a Level 3 measurement.

7) | GOODWILL

In 2018, the Company acquired IRX Therapeutics (“IRX”), which was accounted for as a business combination. The Company recorded goodwill in the amount of $2.0 million related to the IRX acquisition. Goodwill is not amortized but is tested for impairment annually, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the entity is less than its carrying value. As of September 30, 2024, the Company did not identify potential triggering events that could indicate that the fair value of the entity is less than its carrying value and determined there were no such events that occurred.

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8) | LEASES

The Company currently has operating leases for office in the borough of Manhattan in New York, New York, and Cambridge, Massachusetts, which expire in 2026 and 2028, respectively.

In addition, in October 2022, the Company entered into a sublease with a subsidiary of Bristol-Myers Squibb Company, as sublessor (“Sublessor”), for office, laboratory and research and development space of approximately 45,500 square feet in Somerville, Massachusetts. The sublease provided for base rental payments of approximately $0.5 million per month as well as monthly payments for parking and the Company’s share of traditional lease expenses, including certain taxes, operating expenses and utilities. The Company paid the Sublessor a security deposit in the form of a letter of credit in the amount of approximately $4.1 million.

On May 3, 2024, the Company received a notice from the Sublessor regarding past due rent payments of approximately $2.3 million, including amounts related to property taxes and common area maintenance costs, that the Company did not pay for the months of February, March, April and May 2024. Failure to pay the past due rent payments in full, plus approximately $70,000 in late fees and interest, within five business days from the date of the notice constitutes an event of default under the sublease.

The Company also did not pay the rent for June, July or August 2024 and, as of August 1, 2024, owed approximately $4.0 million in the aggregate in past due rent. On August 5, 2024, the Sublessor drew down on the letter of credit for the full $4.1 million to cover the approximately $4.0 million of past due rent payments, plus interest and penalties.

On August 9, 2024, the Company and Sublessor entered into a sublease termination agreement, effective August 31, 2024. The sublease was originally scheduled to expire in 2033. Pursuant to the sublease termination agreement, the Company agreed to the following: to surrender and vacate the premises; that the Company’s right, title and interest in all furniture, fixtures and laboratory equipment at the premises will become the property of the sublessor; and that both parties will be released of their obligations under the sublease. As a result of the sublease termination, the Company recognized a gain on lease termination of approximately $1.6 million for the three and nine months ended September 30, 2024, which includes a loss on disposal of fixed assets of approximately $0.5 million.

For the three and nine months ended September 30, 2024 and 2023, the net operating lease expenses were as follows (in thousands):

NET OPERATING LEASE EXPENSE

|  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
Operating lease expense |  | $ | 1,110 |  |  | $ | 1,623 |  |  | $ | 4,380 |  |  | $ | 1,758 |
Sublease income |  |  | (21 | ) |  |  | (21 | ) |  |  | (63 | ) |  |  | (63 | )
Variable lease expense |  |  | 225 |  |  |  | 6 |  |  |  | 887 |  |  |  | 18 |
Total lease expense |  | $ | 1,314 |  |  | $ | 1,608 |  |  | $ | 5,204 |  |  | $ | 1,713 |

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The tables below show the beginning balances of the operating ROU assets and lease liabilities as of January 1, 2024 and the ending balances as of September 30, 2024, including the changes during the period (in thousands).

OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES

|  | Operating Lease ROU Assets |
Operating lease ROU assets at January 1, 2024 |  | $ | 32,781 |
Adjustment to ROU asset for remeasurement of |  |  |  |
Somerville Sublease liability |  |  | 4,245 |
Write-off of Somerville Sublease ROU asset |  |  | (34,857 | )
Amortization of operating lease ROU assets |  |  | (1,450 | )
Operating lease ROU assets at September 30, 2024 |  | $ | 719 |

|  | Operating Lease Liabilities |
Operating lease liabilities at January 1, 2024 |  | $ | 35,070 |
Adjustment to lease liability due to remeasurement of Somerville Sublease |  |  | 4,245 |
Accretion of interest for Somerville Sublease |  |  | 2,465 |
Write-off of Somerville Sublease liability |  |  | (36,924 | )
Principal payments on operating lease liabilities |  |  | (4,121 | )
Operating lease liabilities at September 30, 2024 |  |  | 735 |
Less non-current portion |  |  | 534 |
Current portion at September 30, 2024 |  | $ | 201 |

As of September 30, 2024, the Company’s operating leases had a weighted-average remaining life of 3.3 years with a weighted-average discount rate of 10.23%. The maturities of the operating lease liabilities are as follows (in thousands):

MATURITIES OF OPERATING LEASE LIABILITIES

|  | As of September 30, 2024 |
2024 |  | $ | 69 |
2025 |  |  | 274 |
2026 |  |  | 267 |
2027 |  |  | 163 |
2028 |  |  | 82 |
Total payments |  |  | 855 |
Less imputed interest |  |  | (120 | )
Total operating lease liabilities |  | $ | 735 |

9) | ACCRUED EXPENSES

Accrued expenses at September 30, 2024 and December 31, 2023 consisted of the following (in thousands):

SCHEDULE OF ACCRUED EXPENSES

|  | September 30, 2024 |  |  | December 31, 2023 |
Professional fees |  | $ | 290 |  |  | $ | 239 |
Legal fees |  |  | 267 |  |  |  | 643 |
Accrued compensation |  |  | 108 |  |  |  | 109 |
Convertible notes interest |  |  | 38 |  |  |  | 176 |
Somerville facility |  |  | - |  |  |  | 218 |
Other |  |  | 463 |  |  |  | 508 |
Total accrued expenses |  | $ | 1,166 |  |  | $ | 1,893 |

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10) | RELATED PARTY TRANSACTIONS

Agreements with Factor Bioscience Inc. and Affiliates

As of September 30, 2024, the Company had entered into the agreements described below with Factor Bioscience Inc. and/or Dr. Matthew Angel. These agreements have been deemed related party transactions because the Company’s former chief executive officer, Dr. Angel, is the chairman and chief executive officer of Factor Bioscience Inc. and a director of its subsidiary, Factor Bioscience Limited (“Factor Limited” and together with Factor Bioscience Inc. and its other affiliates, “Factor Bioscience”). Dr. Angel resigned as the Company’s chief executive officer effective December 31, 2023.

In September 2022, the Company entered into a Master Services Agreement (the “MSA”) with Factor Bioscience, pursuant to which Factor Bioscience agreed to provide services to the Company as agreed between the Company and Factor Bioscience and as set forth in one or more work orders under the MSA, including the first work order included in the MSA (“WO1”). The MSA contains customary confidentiality provisions and representations and warranties of the parties, and the MSA may be terminated by either party upon 30 days’ prior notice, subject to any superseding termination provisions contained in a particular work order.

Under WO1, Factor Bioscience agreed to provide the Company with mRNA cell engineering research support services, including access to certain facilities, equipment, materials and training, and the Company agreed to pay Factor Bioscience an initial fee of $5.0 million, payable in 12 equal monthly installments of approximately $0.4 million. Of the $5.0 million, the Company allocated $3.5 million to the License Fee Obligation (as defined below). Following the initial 12-month period, the Company agreed to continue paying Factor Bioscience the monthly fee of $0.4 million until such time as WO1 is terminated. Upon entering into the MSA, the Company paid a deposit of $0.4 million, which will be applied to the last month of WO1.

Under the terms of an amendment to WO1, the Company may terminate WO1 on or after the second anniversary of the date of the MSA, subject to providing Factor Bioscience with 75 days’ prior notice if such notice is provided no later than June 30, 2024. On June 26, 2024, the Company provided Factor Bioscience with its notice to terminate WO1, which became effective on September 9, 2024.

In connection with entering into the MSA, Factor Limited entered into a waiver agreement with Eterna LLC, pursuant to which Factor Limited agreed to waive payment of $3.5 million otherwise payable to it (the “License Fee Obligation”) in October 2022 by Eterna LLC under the exclusive license agreement entered into in April 2021 among Eterna LLC, Novellus Limited and Factor Limited (the “Original Factor License Agreement”). Under the waiver agreement, the License Fee Obligation is waived conditionally on the Company paying Factor Bioscience a minimum of $3.5 million due under the MSA.

Because the License Fee Obligation was conditionally waived until the Company paid Factor Bioscience a minimum of $3.5 million under the MSA, the Company recorded a liability of $3.5 million. As of September 30, 2024, there was no License Fee Obligation liability remaining.

In September 2022, Novellus Inc. (“Novellus”) and the Company entered into a Second Amendment to the Limited Waiver and Assignment Agreement (the “Waiver and Assignment Agreement”) with Drs. Matthew Angel and Christopher Rohde (the “Founders”) whereby the Company agreed to be responsible for all future, reasonable and substantiated legal fees, costs, settlements and judgments incurred by the Founders, the Company or Novellus for certain claims and actions and any pending or future litigation brought against the Founders, Novellus and/or the Company by or on behalf of the Westman and Sowyrda legal matters described in Note 10 (the “Covered Claims”). The Founders will continue to be solely responsible for any payments made to satisfy a judgement or settlement of any pending or future wage act claims. Under the Waiver and Assignment Agreement, the Founders agreed that they are not entitled to, and waived any right to, indemnification or advancement of past, present or future legal fees, costs, judgments, settlement or other liabilities they may have been entitled to receive from the Company or Novellus in respect of the Covered Claims. The Company and the Founders will share in any recoveries up to the point at which the parties have been fully compensated for legal fees, costs and expenses incurred, with the Company retaining any excess recoveries. The Company has the sole authority to direct and control the prosecution, defense and settlement of the Covered Claims.

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In November 2022, following the expiration of one of the milestone deadlines for certain regulatory filings required under the Third Amended and Restated Exclusive License Agreement between Novellus Limited and Factor Limited entered into in November 2020 (the “Novellus-Factor License Agreement”), which permitted Factor Limited to terminate the license granted to Novellus Limited thereunder, the Company entered into the first amendment to the Original Factor License Agreement (as amended, the “2021 Factor License Agreement”), pursuant to which, among other things, Factor Limited granted to Eterna LLC an exclusive, sublicensable license under certain patents owned by Factor Limited (the “Factor Patents”) for the purpose of identifying and pursuing certain opportunities to grant to third parties sublicenses to the Factor Patents. The Original Factor License Agreement also (i) terminated the Novellus-Factor License Agreement, (ii) confirmed Factor Limited’s grant to Eterna LLC of the rights and licenses Novellus Limited previously granted to Eterna LLC under the Novellus-Factor License Agreement on the same terms and conditions as granted by Novellus Limited to Eterna LLC under such agreement, (iii) confirmed that the sublicense granted by Novellus Limited in accordance with the Novellus-Factor License Agreement to NoveCite, Inc., a company which the Company has a 25% non-controlling interest (“NoveCite”), survived termination of the Novellus-Factor License Agreement; and (iv) removed Novellus Limited from the Original Factor License Agreement and the license agreement entered into on October 6, 2020 between Novellus Limited and NoveCite, Inc, as amended, and replaced Novellus Limited with Factor Limited as the direct licensor to Eterna LLC and NoveCite under such agreements, respectively.

On February 20, 2023, the Company, entered into an exclusive license agreement (the “Feb 2023 Factor Exclusive License Agreement”) with Factor Limited, pursuant to which Factor Limited granted to the Company an exclusive, sublicensable, worldwide license under certain patents owned by Factor Limited for the purpose of, among other things, identifying and pursuing certain opportunities to develop products in respect of such patents and to otherwise grant to third parties sublicenses to such patents. The Feb 2023 Factor Exclusive License Agreement, which terminated and superseded the Amended Factor License Agreement, was subsequently terminated and superseded by the A&R Factor License Agreement (as defined below).

On November 14, 2023, the Company entered into an amended and restated exclusive license agreement (the “A&R Factor License Agreement”) with Factor Limited to replace in its entirety the exclusive license agreement between the parties dated February 20, 2023 and the amendment thereto. Under the A&R Factor License Agreement, Factor Limited granted to the Company an exclusive, sublicensable license under certain patents owned by Factor Limited (the “Factor Patents”). The A&R Factor License Agreement also provides for, among other things, the expansion of the Company’s license rights to include (i) the field of use of the Factor Patents to include veterinary uses (ii) know-how that is necessary or reasonably useful to practice to the licensed patents, (iii) the ability to sublicense through multiple tiers (as opposed to only permitting a direct sublicense) and (iv) the transfer of technology to the Company, subject to the use restrictions in the A&R Factor License Agreement. The A&R Factor License Agreement was subsequently terminated and superseded by the Factor L&C Agreement discussed below.

On September 24, 2024, the Company entered into the Factor L&C Agreement, effective as of September 9, 2024, with Factor Limited. The Factor L&C Agreement terminated the A&R Factor License Agreement as well as the Purchased License that Exacis entered into with Factor Bioscience on November 4, 2020, which the Company acquired pursuant to the Exacis Purchase Agreement with Exacis and certain stockholders of Exacis on April 26, 2023.

Under the Factor L&C Agreement, the Company has obtained exclusive licenses in the fields of cancer, autoimmune disorders, and rare diseases with respect to certain licensed technology and has 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 Bioscience to facilitate the development of the licensed technology and to enable the Company 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. The Company may terminate the Factor L&C Agreement for any reason upon 90 days’ written notice to Factor Bioscience, 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, the Company will pay Factor Bioscience approximately $0.2 million per month for the first twelve months, approximately $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.

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Exacis Asset Acquisition

On April 26, 2023, the Company closed the Exacis Acquisition. See Note 3 for additional information.

The Exacis Acquisition was deemed a related party transaction because, at the time of the acquisition, (i) Dr. Gregory Fiore was both the chief executive officer of Exacis and a member of the Company’s board of directors, (ii) Dr. Angel was both the Company’s chief executive officer and chairman of Exacis’ scientific advisory board, and (iii) an affiliate of Factor Bioscience was the majority stockholder of Exacis.

Consulting Agreement with Former Director

In May 2023, the Company entered into a consulting agreement with Dr. Fiore, whereby Dr. Fiore agreed to provide business development consulting services to the Company for a monthly retainer of $20,000. The consulting agreement was terminable for any reason by either party upon 15 days’ written notice. The Company terminated the consulting agreement, effective July 31, 2023. Dr. Fiore served on the Company’s board of directors from June 2022 to October 4, 2023.

July 2023, December 2023 and September 2024 Financings

Investors in the July 2023 convertible note financing included Brant Binder, Richard Wagner, Charles Cherington and Nicholas Singer, and investors in the December 2023 convertible note financing and the September 2024 financing included Messrs. Cherington and Singer. Each of them participated in the applicable financing under the same terms and subject to the same conditions as all the other investors. See Note 5 and Note 17 for additional information regarding the financings. Mr. Binder served on the Company’s board of directors from July 6, 2023 to August 8, 2023, Mr. Wagner served on the Company’s board of directors from July 6, 2023 to August 8, 2023, Mr. Cherington served on the Company’s board of directors from March 2021 to July 6, 2023, and Mr. Singer served on the Company’s board of directors from June 2022 to July 6, 2023.

11) | COMMITMENTS AND CONTINGENCIES

Litigation Matters

The Company is involved in litigation and arbitrations from time to time in the ordinary course of business. Legal fees and other costs associated with such actions are expensed as incurred. In addition, the Company assesses the need to record a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable, and the amount can be reasonably estimated.

Novellus, Inc. v. Sowyrda et al., C.A. No. 2184CV02436-BLS2

On October 25, 2021 Novellus, Inc. filed a complaint in the Superior Court of Massachusetts, Suffolk County, against former Novellus, Inc. employees Paul Sowyrda and John Westman and certain other former investors in Novellus LLC (Novellus, Inc.’s former parent company prior to our acquisition of Novellus, Inc.), alleging breach of fiduciary duty, breach of contract and civil conspiracy. Eterna acquired Novellus, Inc. on July 16, 2021. On May 27, 2022 Novellus, Inc. amended the complaint to withdraw all claims against all defendants except Paul Sowyrda and John Westman. On July 1, 2022, Westman filed a motion to compel arbitration or in the alternative, to stay the litigation pending the disposition of certain litigation in the Court of Chancery for the State of Delaware filed by Mr. Sowyrda against Novellus LLC, Dr. Christopher Rohde, Dr. Matthew Angel, Leonard Mazur and Factor Bioscience, Inc. captioned Zelickson et al., v. Angel et al., C.A. 2021-1014-JRS and by Westman against Novellus LLC captioned Westman v. Novellus LLC, C.A. No. 2021-0882-NAC (together, the “Delaware Actions”). On July 1, 2022, Sowyrda answered the complaint and asserted counterclaims against Novellus, Inc, and third-party defendants Dr. Matthew Angel and Dr. Christopher Rohde alleging violations of the Massachusetts Wage Act, Massachusetts Minimum Fair Wage Law, the Fair Labor Standards Act, breach of contract, unjust enrichment and quantum meruit. Sowyrda also joined in Westman’s motion to stay the case pending the Delaware Actions. Novellus, Inc.’s claims and Mr. Sowyrda’s counterclaims relate to alleged conduct that took place before Eterna acquired Novellus, Inc.

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On November 15, 2022, prior to a decision on Westman’s and Sowyrda’s motion to compel or stay, the parties agreed to voluntarily dismiss and consolidate the Delaware Actions with this action. On December 15, 2022, Sowyrda filed an Amended Answer to the Amended Complaint, asserted affirmative defenses and filed Amended Counterclaims against Dr. Angel, Dr. Rohde, Novellus LLC, Novellus Inc., Factor Bioscience Inc., and Eterna Therapeutics Inc. (collectively, the “Counterclaim Defendants”) alleging against various Counterclaim Defendants breach of contract, breaches of the implied duty of good faith and fair dealing, breaches of fiduciary duty, breaches of the operating agreement, aiding and abetting breaches of fiduciary duty, tortious interference with contract, equitable accounting, violations of the Massachusetts Wage Act, Massachusetts Minimum Fair Wage Law, the Fair Labor Standards Act, unjust enrichment, and quantum meruit. Also on December 15, 2022, Westman filed an answer to the Amended Complaint and asserted similar counterclaims against the same Counterclaim Defendants. Westman and Sowyrda each asserted claims for indemnification and/or advancement against Novellus, Inc. On January 11, 2023, Westman and Sowyrda served a joint motion to enforce their advancement and/or indemnification rights against Novellus Inc. Novellus Inc. vigorously opposes this motion and served its opposition on January 27, 2023. On February 8, 2023, Westman and Sowyrda served a reply in support of their motion to enforce indemnification/advancement rights, and submitted the motion to the Court. Novellus Inc. answered Westman and Sowyrda’s counterclaims on January 27, 2023, denying liability. The remaining Counterclaim Defendants served a motion to dismiss most of the remaining counterclaims on January 27, 2023. The Court entered an order granting the Counterclaim Defendants’ motion to dismiss and denying Sowyrda and Westman’s motion to enforce on June 15, 2023. The Court’s order dismissed all of Westman’s claims against Counterclaim Defendants except his claim for indemnification, and all of Sowyrda’s claims except his claim for indemnification and his employment-related claims, which Counterclaim Defendants did not move to dismiss. On July 6, 2023, Westman and Sowyrda filed a petition for interlocutory review with a single justice of the Massachusetts Appeals Court, seeking to overturn the judge’s decision granting the Counterclaim Defendants’ motion to dismiss most of the remaining counterclaims, but not the decision denying Westman and Sowyrda’s motion to enforce advancement rights. On July 25, 2023, the parties to the appeal filed a joint motion to the single justice in the appellate court to stay the appeal to allow for amended counterclaims to be filed by Counterclaim Plaintiffs and a motion to dismiss to be filed by Counterclaim Defendants. Counterclaim Plaintiffs filed an initial set of amended counterclaims on August 15, 2023. Counterclaim Plaintiffs amended and refiled their amended counterclaims on September 29, 2023. Counterclaim Defendants served their motion to dismiss all of the amended counterclaims, except for Sowyrda’s employment-related claims, on October 13, 2023. On June 13, 2024, the motion to dismiss was denied and the court set a schedule for discovery limited to a threshold factual issue. Discovery as to all other issues pertaining to the counterclaims was stayed. On July 15, 2024, Westman and Sowyrda requested that the single justice in the appellate court continue to stay the appeal pending the outcome of the limited discovery ordered by the Court. On July 31, 2024, Counterclaim Defendants and Sowyrda informed the Court that they had reached a settlement and requested that all claims pending between them be dismissed with prejudice, and on August 9, 2024, the Court approved the motion for approval of dismissal of all such claims with prejudice. Pursuant to the Court’s order, Counterclaim Defendants are engaged in limited discovery with Westman.. The next Court conference is scheduled for November 18, 2024.

Under applicable Delaware law and Novellus Inc.’s organizational documents, the Company may be required to advance or reimburse certain legal expenses incurred by former officers and directors of Novellus, Inc. in connection with the foregoing Westman and Sowyrda matters. However, a future advance or reimbursement is not currently probable nor can it be reasonably estimated.

eTheRNA Immunotherapies NV and eTheRNA Inc. v. Eterna Therapeutics Inc. C.A. No. 123CV11732

On July 31, 2023, eTheRNA Immunotherapies NV and eTheRNA Inc. filed a complaint against the Company alleging the following claims: (1) federal trademark infringement; (2) federal unfair competition; (3) Massachusetts state common law trademark infringement; (4) Massachusetts state unfair competition. On April 2, 2024, the parties settled the claims and stipulated to dismiss the complaint with prejudice. Per the settlement agreement entered into between the parties on March 19, 2024, the Company plans to phase-out its current use of the ETERNA trademark by October 31, 2024.

On October 6, 2024, the parties entered into an addendum to the settlement agreement extending the deadline for phasing out the Company’s use of the ETERNA trademark until March 31, 2025. If the Company continues to use the Eterna Therapeutics name as of April 1, 2025, it will be obligated to pay €667 per day that it continues to do so.

Licensing Agreements

On September 24, 2024, the Company entered into the Factor L&C Agreement. See Note 10 for details of this agreement.

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Retirement Savings Plan

The Company established a defined contribution plan, organized under Section 401(k) of the Internal Revenue Code, which allows employees to defer up to 90% of their pay on a pre-tax basis. Beginning on January 1, 2023, the Company began matching employees’ contributions at a rate of 100% of the first 3% of the employee’s contribution and 50% of the next 2% of the employee’s contribution, for a maximum Company match of 4%.

12) | STOCK-BASED COMPENSATION

Stock Options

During the nine months ended September 30, 2024 and 2023, the Company granted options to purchase the number of shares of the Company’s common stock set forth in the table below (in thousands):

SCHEDULE OF STOCK OPTION GRANTED

|  | Nine months ended September 30, |
|  | 2024 |  |  | 2023 |
Stock options granted |  |  | 2,375 |  |  |  | 237 |

There were no stock options granted during either of the three months ended September 30, 2024 or 2023.

On January 1, 2024, Sanjeev Luther was appointed as President, Chief Executive Officer and a director of the Company. Upon his appointment, he was granted a non-qualified stock option to purchase approximately 1,685,000 shares of the Company’s common stock. The stock option has an exercise price of $1.80 per share, which was equal to the fair market value (as defined in the 2020 Restated Equity Incentive Plan) of the Company’s common stock on the date of grant, will vest over four years, with 25% of the shares vesting on the first anniversary of the grant date and the remaining 75% of the shares vesting in equal monthly installments over the three years thereafter, in each case, subject to continued service. The stock option was granted pursuant to the terms of Mr. Luther’s employment agreement and as a material inducement to his joining the Company in accordance with Nasdaq Listing Rule 5635(c)(4).

On April 26, 2024, the vesting terms of Mr. Luther’s stock option award were amended so that the option vests over three years, with 25% of the shares vesting on the first anniversary of the grant date and the remaining 75% of the shares will vest in equal monthly installments over the remaining two years, in each case, subject to continued service.

Since the only modification to Mr. Luther’s stock option award was to the vesting terms, there was no change to the fair value of the stock option and the total compensation cost was unchanged. However, the total compensation cost will be recognized over three years rather than four years, and as a result, the Company recognized approximately $0.1 million in additional stock-based compensation expense during the nine months ended September 30, 2024 as a result of the modification.

The Company recognizes stock-based compensation expense for stock options granted to employees, directors and certain consultants. The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite service period on a straight-lined basis.

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The following weighted-average assumptions were used for stock options granted during the nine months ended September 30, 2024 and 2023:

SCHEDULE OF WEIGHTED-AVERAGE ASSUMPTIONS USED FOR STOCK OPTIONS GRANTED

|  | Nine months ended September 30, |
|  | 2024 |  |  | 2023 |
Weighted average risk-free rate |  |  | 4.45 | % |  |  | 3.82 | %
Weighted average volatility |  |  | 97.91 | % |  |  | 95.15 | %
Dividend yield |  |  | 0.00 | % |  |  | 0 | %
Expected term |  |  | 5.85 years |  |  |  | 5.44 years |

The per-share weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2024 and 2023 were as follows:

SCHEDULE OF WEIGHTED AVERAGE GRANT-DATE FAIR VALUE OF STOCK OPTIONS

|  | Nine months ended September 30, |
|  | 2024 |  |  | 2023 |
Weighted average grant date fair value |  | $ | 1.44 |  |  | $ | 2.99 |

Vesting of all stock options is subject to continuous service with the Company through the applicable vesting date. As of September 30, 2024, there were approximately 2,516,000 shares of the Company’s common stock subject to outstanding stock options.

Restricted Stock Units

The Company recognizes the fair value of RSUs as expense on a straight-line basis over the requisite service period. For performance-based RSUs, the Company begins recognizing the expense once the achievement of the related performance goal is determined to be probable.

Outstanding RSUs are settled in an equal number of shares of common stock on the vesting date of the award. An RSU award is settled only to the extent vested. Vesting generally requires the continued employment or service by the award recipient through the applicable vesting date. Because RSUs are settled in an equal number of shares of common stock without any offsetting payment by the recipient, the measurement of cost is based on the quoted market price of the stock at the measurement date, which is the grant date.

In lieu of paying cash to satisfy withholding taxes due upon the settlement of vested RSUs, at the Company’s discretion, an employee may elect to have shares of common stock withheld that would otherwise be issued at settlement, the value of which is equal to the amount of withholding taxes payable. During the three and nine months ended September 30, 2024 and 2023, less than 1,000 RSUs vested. As of September 30, 2024, there were less than 1,000 RSUs outstanding.

The Company did not grant RSUs during either of the three or nine months ended September 30, 2024 and 2023.

Stock-Based Compensation Expense

For the three and nine months ended September 30, 2024 and 2023, the Company recognized stock-based compensation expense as follows (in thousands):

SCHEDULE OF STOCK-BASED COMPENSATION EXPENSE

|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
Research and development |  | $ | 13 |  |  | $ | 57 |  |  | $ | 74 |  |  | $ | 177 |
General and administrative |  |  | 392 |  |  |  | 117 |  |  |  | 1,036 |  |  |  | 900 |
Total |  | $ | 405 |  |  | $ | 174 |  |  | $ | 1,110 |  |  | $ | 1,077 |

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13) | WARRANTS

As discussed in Notes 5 and 6, respectively, the Company has previously issued the note warrants and the Q1-22 warrants. The Company also has the December 2022 warrants outstanding from a private placement completed in the fourth quarter of 2022.

As of September 30, 2024, the Company has the following warrants outstanding:

SCHEDULE OF WARRANTS OUTSTANDING

|  | Warrants Outstanding (in thousands) |  |  | Exercise Price |  |  | Expiration Date |  | Classification
Q1-22 warrants |  |  | 343 |  |  | $ | 38.20 |  |  | September 9, 2027 |  | Liability
December 2022 Warrants |  |  | 4,370 |  |  | $ | 1.43 |  |  | June 2, 2028 |  | Equity
July 2023 Note Warrants |  |  | 6,094 |  |  | $ | 1.43 |  |  | July 14, 2028 |  | Equity
December 2023 Note Warrant issued December 15, 2023 |  |  | 8,115 |  |  | $ | 1.43 |  |  | December 15, 2028 |  | Equity
December 2023 Note Warrant issued January 11, 2024 |  |  | 1,464 |  |  | $ | 1.43 |  |  | January 11, 2029 |  | Equity
|  |  | 20,386 |  |  |  |  |  |  |  |  |

As of September 30, 2024, the weighted average remaining contractual life of the warrants outstanding was 3.95 years and the weighted average exercise price was $2.05.

On October 29, 2024, all of the warrants except for the Q1-22 warrants and approximately 142,000 of the December 2022 Warrants were exchanged for common stock at a rate of one-half share of common stock for every one warrant share pursuant to the Exchange Transactions. See Note 5 and 17 for more information regarding the Exchange Transactions.

14) | NET LOSS PER SHARE

The Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. The convertible notes contractually entitle the holders thereof to participate in dividends but does not contractually require the holders to participate in the Company’s losses. As such, the two-class method is not applicable during periods with a net loss.

Basic net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding plus dilutive securities. Shares of common stock issuable upon exercise, conversion or vesting of outstanding stock options, RSUs, warrants and shares of Series A convertible preferred stock are considered potential shares of common stock and are included in the calculation of diluted net loss per share using the treasury method when their effect is dilutive. The outstanding convertible notes are also considered potential shares of common stock and are included in the calculation of diluted net loss per share using the “if-converted” method, and the more dilutive of either the two-class method or the if-converted method is reported. Diluted net loss per share is the same as basic net loss per share for periods in which the effect of potentially dilutive shares of common stock is antidilutive.

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The following table presents the number of shares subject to outstanding warrants, stock options, RSUs, Series A convertible preferred stock and convertible notes that were excluded from the computation of diluted net loss per share of common stock for the three and nine months ended September 30, 2024 and 2023, as their effect was anti-dilutive (in thousands):

SCHEDULE OF COMPUTATION OF DILUTED NET LOSS PER SHARE OF COMMON STOCK

|  | Three and nine months ended September 30, |
|  | 2024 |  |  | 2023 |
Warrants |  |  | 20,386 |  |  |  | 10,807 |
Convertible Notes converted into common stock |  |  | 16,106 |  |  |  | 3,087 |
Stock options |  |  | 2,516 |  |  |  | 510 |
Preferred stock converted into common stock |  |  | 31 |  |  |  | 12 |
RSUs |  |  | - |  |  |  | 1 |
Total potential common shares excluded from computation |  |  | 39,039 |  |  |  | 14,417 |

15) | STANDBY EQUITY PURCHASE AGREEMENT

On April 5, 2023, the Company entered into the ELOC with Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $10.0 million of the Company’s common stock, subject to the terms and conditions contained in the appliable agreements. Such sales of common stock by the Company, if any, are subject to certain limitations set forth in the purchase agreement, and may occur from time to time, at the Company’s sole discretion, over a period of up to 24-months, commencing April 25, 2023, which was the date on which each of the conditions to Lincoln Park’s purchase obligations set forth in the purchase agreement were initially satisfied. In consideration of Lincoln Park’s entry into the purchase agreement, the Company issued to Lincoln Park approximately 74,000 shares of common stock as commitment shares. The value of the commitment shares was recorded as a period expense and included in other expense, net, in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2023.

In April 2023, the Company filed a registration statement on Form S-1 to register the sale from time to time of up to 2,930,237 shares of the Company’s common stock by Lincoln Park, including the approximately 74,000 commitment shares, which was declared effective on April 24, 2023 (the “ELOC S-1”).

During the three and nine months ended September 30, 2023, the Company issued and sold approximately 214,000 shares of common stock under the ELOC, including the approximately 74,000 commitment shares, for gross proceeds of $0.3 million. No shares were sold under the ELOC during the three or nine months ended September 30, 2024. As of September 30, 2024, there were approximately 2,716,000 shares remaining to be sold under the ELOC that are registered for resale by Lincoln Park under the ELOC S-1.

16) | RECENT ACCOUNTING PRONOUNCEMENTS

No new Accounting Standards Updates have been issued by the Financial Accounting Standards Board since January 1, 2024 that would apply to the Company that are not disclosed in the 2023 10-K.

17) | SUBSEQUENT EVENT

As discussed in Note 5, on September 24, 2024, the Company entered into the September 2024 Transactions. On October 29, 2024, the Company held its Annual Meeting, whereby the Company’s stockholders approved the September 2024 Transactions, and as a result, the following occurred:

| ● | Under the Common Stock Private Placement, the Company issued approximately 1,402,000 shares of common stock and pre-funded warrants to purchase 115,000 shares of common stock and received approximately $1.1 million in gross proceeds from the issuance of such securities. The pre-funded warrants have an exercise price of $0.005 per share, are exercisable at any time and will not expire until exercised in full.
| ● | Under 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 approximately 6,244,000 shares of the Company’s 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 common stock. The pre-funded warrants have an exercise price of $0.005 per share, are exercisable at any time and will not expire until exercised in full.
| ● | Under the Exchange Transactions, (i) the holders of the warrants exchanged approximately 19,902,000 warrants for approximately 9,951,000 shares of the Company’s common stock at an exchange ratio of one-half 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 (ii) the holders of the convertible notes exchanged all their convertible notes for approximately 28,351,000 shares of the Company’s 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). The Company issued approximately 38,302,000 shares of our common stock at the closing of the Exchange Transactions.

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 September 24, 2024 Transactions and had 51.4 million shares of common stock issued and outstanding.

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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.

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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.

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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.

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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.

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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.

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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 |

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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.

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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.

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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.

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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.

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Item 4. Controls and Procedures.

Disclosure Controls and Procedures

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 Quarterly Report on Form 10-Q under the supervision, and with the participation, of our management, including our President and Chief Executive Officer (who serves as our principal executive officer) and our Senior Vice President of Finance (who serves as our principal financial officer) of the effectiveness of the design and operation of our disclosure controls and procedures.

Based on that evaluation, our Chief Executive Officer and Senior Vice President of Finance concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q in providing reasonable assurance of achieving the desired control objectives due primarily to the material weakness discussed below.

Management’s Plan for Remediation of Material Weakness in Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

We were unable to timely file our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 with the SEC due to identifying errors in our financial statements reported in our Annual Report on Form 10-K for the years ended December 31, 2021 and 2020 during our preparation of the financial statements for the quarter ended March 31, 2022. Management concluded that the errors were the result of accounting personnel’s lack of technical proficiency in complex matters. On June 30, 2022, we filed an amendment to our Annual Report on Form 10-K for the years ended December 31, 2021 and 2020 to correct the errors in our financial statements for the years ended December 31, 2021 and 2020 and for the quarters ended June 30, 2020, September 30, 2020, March 31, 2021, June 30, 2021 and September 30, 2021.

Management has implemented measures designed to ensure that the deficiencies contributing to the ineffectiveness of our internal control over financial reporting are remediated, such that the internal controls are designed, implemented and operating effectively. The remediation actions to date include:

| ● | enhancing the business process controls related to reviews over technical, complex, and non-recurring transactions;
| ● | providing additional training to accounting personnel; and
| ● | using an external accounting advisor to review management’s conclusions on technical, complex and non-recurring matters.

The material weakness cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As of September 30, 2024, we continue to season and enhance such controls to ensure that they will continue to operate effectively for a sufficient period of time before management can make conclusions on the operating effectiveness.

We are committed to developing a strong internal control environment, and we believe the remediation efforts that we have implemented and will implement will result in significant improvements in our control environment. Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary.

Changes in Internal Control over Financial Reporting

Except for the actions intended to remediate the material weakness as described above, there was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

The information set forth under “Note 11—Commitments and Contingencies—Legal Matters” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated in this Item 1 by reference.

From time to time, we may become involved in legal proceedings arising in the ordinary course of business. Except as described above, are not party to any material legal proceedings.

Item 1A. Risk Factors.

An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our 2023 10-K, in addition to other information in this report, when evaluating our business and before deciding whether to purchase, hold or sell shares of our common stock. Each of these risks and uncertainties, as well as additional risks and uncertainties not presently known to us or that we currently consider immaterial, could harm our business, financial condition, results of operations and/or growth prospects, as well as adversely affect the market price of our common stock, in which case you may lose all or part of your investment. There have been no material changes to the risk factors described in the 2023 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The securities issued in connection with the closing of each of the September 2024 Transactions were exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), under Section 3(a)(9) of the Securities Act, Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D of the Securities Act. Each of the investors in the common stock private placement and the bridge notes represented to the Company that it is an accredited investor within the meaning of Rule 501(a) of Regulation D and that it is acquiring the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. Each party to an Exchange Agreement represented to the Company that it has not paid or given, and will not pay or give, to any person, any commission or other remuneration, directly or indirectly, for soliciting the exchange of securities thereunder. None of the securities offered in the September 2024 Transactions were offered through any general solicitation by the Company or its representatives. This report is not an offer to sell or a solicitation of an offer to buy any of the securities described herein.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

(a) None.

(b) None.

(c) During the quarter covered by this report, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated any Rule 10b5-1 trading arrangement (as defined in Item 408(a)(1)(i) of Regulation S-K) or any non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K).

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Item 6. Exhibits

Exhibit |  | Description |  | Incorporated By Reference
10.1 |  | Securities purchase agreement, dated as of September 24, 2024, between Eterna Therapeutics Inc. and the purchaser parties thereto |  | Exhibit 10.1 to Form 8k filed on September 25, 2024
10.2 |  | Form of pre-funded warrant issuable under the securities purchase agreement, dated as of September 24, 2024, between Eterna Therapeutics Inc. and the purchaser parties thereto |  | Exhibit 10.2 to Form 8k filed on October 29, 2024
10.3 |  | Form of exchange agreement, dated as of September 24, 2024, between Eterna Therapeutics Inc. and the parties thereto |  | Exhibit 10.3 to Form 8k filed on September 25, 2024
10.4 |  | Note purchase agreement, dated as of September 24, 2024, between Eterna Therapeutics Inc. and the purchaser parties thereto |  | Exhibit 10.4 to Form 8k filed on September 25, 2024
10.5 |  | Form of 12.0% senior convertible note issued under the note purchase agreement, dated as of September 24, 2024, between Eterna Therapeutics Inc. and the purchaser parties thereto |  | Exhibit 10.5 to Form 8k filed on September 24, 2024
10.6 |  | Form of pre-funded warrant issuable upon conversion of 12.0% senior convertible notes issued under the note purchase agreement, dated as of September 24, 2024, between Eterna Therapeutics Inc. and the purchaser parties thereto |  | Exhibit 10.3 to Form 8k filed on October 29, 2024
10.7 |  | Form of support agreement, dated as of September 24, 2024, between Eterna Therapeutics Inc. and the stockholder parties thereto |  | Exhibit 10.7 to Form 8k filed on September 24, 2024
10.8 |  | Form of lock-up agreement, dated as of September 24, 2024, between Eterna Therapeutics Inc. and the stockholder parties thereto |  | Exhibit 10.8 to Form 8k filed on September 24, 2024
10.9 |  | Registration Rights Agreement, dated October 29, 2024, between Eterna Therapeutics Inc. and the purchaser parties thereto |  | Exhibit 10.1 to Form 8-K Filed on October 29, 2024
10.10 |  | Exclusive License and Collaboration Agreement, effective as of September 9, 2024, with Factor Bioscience Limited |  | Filed herewith
10.11 |  | Sublease Termination Agreement, dated August 9, 2024, between Eterna Therapeutics Inc. and E.R. Squibb & Sons, L.L.C. |  | Filed herewith
31.1 |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  | Filed herewith
31.2 |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  | Filed herewith
32.1 |  | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Furnished herewith
32.2 |  | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Furnished herewith
101 |  | Inline XBRL Document Set for the financial statements and accompanying notes in Part I, Item 1, of this Quarterly Report on Form 10-Q. |  | Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

| ETERNA THERAPEUTICS INC.
Date: November 12, 2024 | By: | /s/ Sanjeev Luther
|  | Sanjeev Luther
|  | President and Chief Executive Officer
|  | (Principal Executive Officer)

Date: November 12, 2024 | By: | /s/ Sandra Gurrola
|  | Sandra Gurrola
|  | Senior Vice President of Finance
|  | (Principal Financial Officer and Principal Accounting Officer)

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