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, 2022
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
graphic 
Eterna Therapeutics Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
  
31-1103425
(State of incorporation)
  
(I.R.S. Employer Identification No.)

10355 Science Center Drive, Suite 150
San Diego, California
  
92121
(Address of principal executive offices)
  
(Zip Code)

(212) 582-1199
(Registrant’s telephone number, including area code)

Brooklyn ImmunoTherapeutics, Inc.
(Former name, former address and former fiscal year, if changed since last report)

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 11, 2022, the registrant had outstanding 2,942,120 shares of common stock, $0.005 par value per share.

 

TABLE OF CONTENTS


 
 
Page
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited)
 
 
1
 
2
 
3
 
5
 
6
Item 2.
29
Item 3.
42
Item 4.
 42
 
 
 
PART II – OTHER INFORMATION
 
Item 1.
 44
Item 1A.
44
Item 2.
44
Item 3.
44
Item 4.
44
Item 5.
44
Item 6.
44
46

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 and targets, revenue generation, product availability and offerings, capital needs, capital expenditures, industry trends 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/A for the year ended December 31, 2021 and described in other documents we file from time to time with the Securities and Exchange Commission, which we refer to as 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.

On October 17, 2022 we changed our name from Brooklyn ImmunoTherapeutics, Inc. to Eterna Therapeutics Inc. 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 “Brooklyn LLC” refer to Brooklyn ImmunoTherapeutics LLC, a wholly owned subsidiary of Eterna, and references to the “Company,” “we,” “us” or “our” refer to Eterna and its subsidiaries, including Brooklyn 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 amount)
(unaudited)

    September 30,     December 31,  
 
2022
    
2021
  
ASSETS
          
Current assets:
            
Cash
  
$
13,254
    
$
16,985
  
Other receivable
    
926
      
684
  
Prepaid expenses and other current assets
    
1,672
      
1,097
  
Total current assets
    
15,852
      
18,766
  
Property and equipment, net
    
231
      
670
  
Right-of-use assets - operating leases
    
1,912
      
2,567
  
Goodwill
    
2,044
      
2,044
  
In-process research and development
    
-
      
5,990
  
Investment in non-controlling interest
     68       1,000  
Other assets
    
819
      
488
  
Total assets
  
$
20,926
    
$
31,525
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable
  
$
1,150
    
$
1,755
  
Accrued expenses
    
3,230
      
1,249
  
Operating lease liabilities, current
    
436
      
426
  
Finance lease liabilities, current
     3       -  
Other current liabilities     2,648       247  
Total current liabilities
    
7,467
      
3,677
  
Warrant liabilities
    
633
      
-
  
Operating lease liabilities, non-current
    
2,317
      
2,297
  
Finance lease liabilities, non-current
     6       -  
Other liabilities
    
1,690
      
48
  
Total liabilities
    
12,113
      
6,022
  
                 
Stockholders’ equity:
                
Preferred stock, $0.005 par value, 1,000 shares authorized, 156 designated and outstanding of Series A convertible preferred stock at September 30, 2022 and December 31, 2021, $156 liquidation preference
     1       1  
Common stock, $0.005 par value, 100,000 shares authorized at September 30, 2022 and December 31, 2021; 2,942 and 2,601 issued and outstanding at September 30, 2022 and December 31, 2021, respectively
    
15
      
13
  
Additional paid-in capital
    
169,596
      
166,190
  
Accumulated deficit
    
(160,799
)
    
(140,701
)
Total stockholders’ equity
    
8,813
      
25,503
  
Total liabilities and stockholders’  equity
  
$
20,926
    
$
31,525
  

Share and per share data have been adjusted for all periods presented to reflect a 1-for-20 reverse stock split effective October 17, 2022.

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)

    Three months ended September 30,     Nine months ended September 30,  
    2022     2021     2022     2021  
Operating expenses:
                        
Research and development
  
$
4,963
    
$
1,491
    
$
8,430
    
$
8,456
  
In-process research and development
    
-
      
80,538
      
5,990
      
80,538
  
General and administrative
     3,341
       4,247
       14,060
       10,451
  
Transaction costs
    
-
      
-
      
-
      
5,765
  
Total operating expenses
    
8,304
      
86,276
      
28,480
      
105,210
  
Loss from operations
    
(8,304
)
    
(86,276
)
    
(28,480
)
    
(105,210
)
                                 
Other income (expense), net:
                                
Loss on sale of NTN assets
    
-
      
-
      
-
      
(9,648
)
Change in fair value of warrant liabilities
     1,024       -       10,493       -  
Loss on non-controlling investment
     (21 )     -       (932 )     -  
Other (expense) income, net
    
(10
)
    
290
      
(1,166
)
    
265
  
Total other income (expense), net
    
993
      
290
      
8,395
      
(9,383
)
Loss before income taxes
     (7,311 )     (85,986 )     (20,085 )     (114,593 )
Provision for income taxes
     (5 )     -       (5 )     -  
Net loss
    
(7,316
)
    
(85,986
)
    
(20,090
)
    
(114,593
)
Series A preferred stock dividend
     -       -       (8 )     (8 )
Net loss attributable to common stockholders
   $ (7,316 )   $ (85,986 )   $ (20,098 )   $ (114,601 )

                               
Net loss per common share - basic and diluted
  
$
(2.49
)
  
$
(34.03
)
  
$
(7.04
)
  
$
(56.79
)
Weighted average shares outstanding - basic and diluted
    
2,941
      
2,527
      
2,855
      
2,018
  

Share and per share data have been adjusted for all periods presented to reflect a 1-for-20 reverse stock split effective October 17, 2022.

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

2
ETERNA THERAPEUTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ AND MEMBERS’ EQUITY
For the three and nine months ended September 30, 2022 and 2021 (unaudited)
(in thousands)

   
Common Stock
    
Series A Preferred
Stock
    
Additional Paid-
in
    
Accumulated
        
   
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Deficit
    
Total
  
Balances at July 1, 2022
    
 2,873     $
 14       156     $ 1     $
 168,246     $
 (153,483 )   $
 14,778  
Issuance of common stock from vested restricted stock units
     1       -       -       -       -       -       -  
Issuance of common stock from exercise of pre-funded warrants
     68       1       -       -       874       -       875  
Stock-based compensation
     -       -       -       -       476       -       476  
Net loss
     -       -       -       -       -       (7,316 )     (7,316 )
Balances at September 30, 2022
     2,942     $
 15       156     $
 1     $
 169,596     $
 (160,799 )   $
 8,813  
Balances at January 1, 2022
     2,601     $
 13       156     $ 1     $ 166,190     $
 (140,701 )   $
 25,503  
Issuance of common stock in connection with private offering
     275       1       -       -       (1 )     -       -  
Forfeiture of unvested restricted stock
     (4 )     -       -       -       -       -       -  
Issuance of common stock from vested restricted stock units
     2       -       -       -       (5 )     -       (5 )
Issuance of common stock from exercise of pre-funded warrants
     68       1       -       -       874       -       875  
Stock-based compensation
     -       -       -       -       2,538       -       2,538  
Cash dividends to Series A preferred stockholders
     -       -       -       -       -       (8 )     (8 )
Net loss
     -       -       -       -       -       (20,090 )     (20,090 )
Balances at September 30, 2022
     2,942     $ 15       156     $
 1     $
 169,596     $ (160,799 )   $
 8,813  

Share and per share data have been adjusted for all periods presented to reflect a 1-for-20 reverse stock split effective October 17, 2022.

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

3
ETERNA THERAPEUTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ AND MEMBERS’ EQUITY
For the three and nine months ended September 30, 2022 and 2021 (unaudited)
(in thousands)

         
Membership Equity
          
Common Stock
    
Series A Preferred
Stock
    
Additional Paid-
 in
    
Accumulated
        
   
Class A
    
Class B
    
Class C
    
Common
    
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Deficit
    
Total
  
Balances at July 1, 2021
  
$
-
    
$
-
    
$
-
    
$
-
      
2,235
    
$
11
      
156
    
$
1
    
$
100,347
    
$
(46,756
)
  
$
53,603
  
Common stock to be retained by NTN stockholders
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Issuance of common stock from the exercise of stock options
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Issuance of common stock related to stock purchase agreement with Lincoln Park Capital Fund, LLC, net
     -       -      
-
      
-
      
17
      
-
      
-
      
-
      
3,500
      
-
      
3,500
  
Issuance of common stock in lieu of cash dividend to Series A preferred stockholders
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
  
Issuance of common stock in connection with the acquisition of Novellus, Inc.
    
-
      
-
      
-
      
-
      
351
      
2
      
-
      
-
      
58,682
      
-
      
58,684
  
Forfeiture of unvested restricted stock
    
-
      
-
      
-
      
-
      
(1
)
    
-
      
-
      
-
      
-
      
-
      
-
  
Stock-based compensation
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
1,729
      
-
      
1,729
  
Net loss
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(85,986
)
    
(85,986
)
Balances at September 30, 2021
  
$
-
    
$
-
    
$
-
    
$
-
      
2,602
    
$
13
      
156
    
$
1
    
$
164,258
    
$
(132,742
)
  
$
31,530
  
Balances at January 1, 2021
  
$
23,202
    
$
1,400
    
$
1,000
    
$
198
      
-
    
$
-
      
-
    
$
-
    
$
-
    
$
(18,141
)
  
$
7,659
  
Brooklyn rights offerings membership units
    
10,500
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
10,500
  
Elimination of Brooklyn’s historical members’ equity
    
(33,702
)
    
(1,400
)
    
(1,000
)
    
(198
)
    
-
      
-
      
-
      
-
      
36,300
      
-
      
-
  
Issuance of common stock for business combination
    
-
      
-
      
-
      
-
      
76
      
-
      
-
      
-
      
8,177
      
-
      
8,177
  
Series A preferred stock retained in business combination
    
-
      
-
      
-
      
-
      
-
      
-
      
156
      
1
      
(1
)
    
-
      
-
  
Issuance of common stock to Brooklyn members
    
-
      
-
      
-
      
-
      
1,946
      
10
      
-
      
-
      
(10
)
    
-
      
-
  
Issuance of common stock to Financial Advisor upon consummation of merger
    
-
      
-
      
-
      
-
      
53
      
-
      
-
      
-
      
5,765
      
-
      
5,765
  
Issuance of common stock from the exercise of stock options
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
10
      
-
      
10
  
Issuance of common stock related to stock purchase agreement with Lincoln Park Capital Fund, LLC, net
    
-
      
-
      
-
      
-
      
178
      
1
      
-
      
-
      
52,025
      
-
      
52,026
  
Issuance of common stock in lieu of cash dividend to Series A preferred stockholders
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
8
      
(8
)
    
-
  
Issuance of common stock in connection with the acquisition of Novellus, Inc.
    
-
      
-
      
-
      
-
      
351
      
2
      
-
      
-
      
58,682
      
-
      
58,684
  
Forfeiture of unvested restricted stock
    
-
      
-
      
-
      
-
      
(2
)
    
-
      
-
      
-
      
-
      
-
      
-
  
Stock-based compensation
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
3,302
      
-
      
3,302
  
Net loss
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(114,593
)
    
(114,593
)
Balances at September 30, 2021
  
$
-
    
$
-
    
$
-
    
$
-
      
2,602
    
$
13
      
156
    
$
1
    
$
164,258
    
$
(132,742
)
  
$
31,530
  

Share and per share data have been adjusted for all periods presented to reflect a 1-for-20 reverse stock split effective October 17, 2022.

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

4
ETERNA THERAPEUTICS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

    For the nine months ended  
 
  
September 30,
  
 
  
2022
    
2021
  
Cash flows used in operating activities:
            
Net loss
  
$
(20,090
)
  
$
(114,593
)
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation and amortization
    
144
      
93
  
Stock-based compensation
    
2,538
      
3,302
  
Amortization of right-of-use asset
    
267
      
243
  
Impairment of right-of-use asset
     772       -  
Impairment of in-process research and development
     5,990       -  
In-process R&D acquired in Novellus asset acquisition
     -       80,538  
Transaction costs - shares to Financial Advisor
    
-
      
5,765
  
Loss on sale of NTN assets
    
-
      
9,648
  
Loss on disposal of fixed assets
     431       13  
Gain on forgiveness of PPP loan
     -       (310 )
Gain on lease termination
     (85 )     -  
Gain on lease warrant liabilities
     (10,493 )     -  
Loss on non-controlling investment
    
932
      
-
  
Changes in operating assets and liabilities:
                
Other receivable
    
(237
)
    
5
  
Prepaid expenses and other current assets
    
(575
)
    
(1,109
)
Other non-current assets
    
(331
)
    
(31
)
Accounts payable and accrued expenses
    
1,376
      
(196
)
Operating lease liability
    
(223
)
    
(226
)
Other liabilities
    
4,043
      
202
  
Net cash used in operating activities
    
(15,541
)
    
(16,656
)
Cash flows used in investing activities:
                
Purchase of property and equipment
    
(276
)
    
(7
)
Purchase of Novellus, net of common stock issue and cash acquired
     -       (22,854 )
Proceeds from the sales of fixed assets
     100       -  
Purchase of NTN, net of cash acquired
    
-
      
147
  
Proceeds from the sale of NTN assets, net of cash disposed
    
-
      
119
  
Net cash used in investing activities
    
(176
)
    
(22,595
)
Cash flows provided by financing activities:
                
Proceeds from issuance of common stock and warrants in connection with private offering
     11,993       -  
Issuance of common stock from exercise of pre-funded warrants
     7       -  
Payroll tax remitted on net share settlement of equity awards
     (5 )     -  
Dividends paid to Series A preferred stockholders
     (8 )     -  
Principal payments on finance leases
     (1 )     -  
Proceeds from issuance of common stock to Lincoln Park
     -       54,106  
Fees incurred in connection with the common stock issued to Lincoln Park
     -       (2,080 )
Proceeds from sale of members’ equity
    
-
      
10,500
  
Proceeds from the exercise of stock options
     -       10  
Repayment of NTN’s PPP loan
    
-
      
(532
)
Net cash provided by financing activities
    
11,986
      
62,004
  
Net (decrease) increase in cash and cash equivalents    
(3,731
)
    
22,753
  
Cash and cash equivalents at beginning of period
    
16,985
      
1,630
  
Cash and cash equivalents at end of period
  
$
13,254
    
$
24,383
  
 
                
Supplemental disclosures of cash flow information:
                
Cash paid during the period for:
                
Interest
  
$
25
    
$
13
  
Income taxes
   $ 8     $ -  
 
                
Supplemental disclosure of non-cash investing and financing activities:
                
Conversion of warrant liability to equity
   $ 867     $ -  
Issuance of common stock for Series A preferred stock dividend
   $ -     $ 8  
Issuance of common stock for business combination
  
$
-
    
$
8,177
  
Issuance of common Stock for Novellus acquisition
   $ -     $ 58,684  
Series A preferred stock retained in business combination
   $ -     $ 1  
Initial measurement of ROU assets, net of tenant improvement allowance
   $ 1,706     $ 816  
Initial measurement of operating lease liabilities
   $ 1,706     $ 866  
Initial measurement of finance lease liabilities
   $ 10     $ -  

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

5
ETERNA THERAPEUTICS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1)
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 

Description of Business



On October 11, 2022, Eterna Therapeutics Inc., a Delaware corporation, (“Eterna” or the “Company”), filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Restated Certificate of Incorporation, as amended (the “Charter”), to change its name from Brooklyn ImmunoTherapeutics, Inc. to Eterna Therapeutics Inc., which became effective on October 17, 2022 (the “Name Change”). The Name Change did not require approval of the Company’s stockholders and did not affect the rights of the Company’s security holders. In connection with the Name Change, the trading symbol of the Company’s common stock, par value $0.005 per share (“common stock”), on The Nasdaq Global Market changed from “BTX” to “ERNA.”



Eterna, together with its subsidiaries including Brooklyn ImmunoTherapeutics LLC (“Brooklyn LLC”), Novellus, Inc. (“Novellus”) and Novellus Therapeutics Limited (“Novellus Ltd.”), is a biopharmaceutical company using its mRNA technology platform, including mRNA-based cell reprogramming and gene editing technologies, to create next generation mRNA, gene editing and cell therapies, including iPSC therapies for multiple therapeutic indications. The Company also plans to develop and advance a pipeline of therapeutic products both internally and through strategic partnerships. As used herein, the “Company” refers collectively to Eterna and its subsidiaries.


On August 12, 2020, Eterna (then known as “NTN Buzztime, Inc.”), Brooklyn LLC and BIT Merger Sub, Inc., a wholly owned subsidiary of Eterna (the “Merger Sub”), entered into an agreement and plan of merger and reorganization (the “Merger Agreement”) pursuant to which, among other matters, Merger Sub merged with and into Brooklyn LLC, with Brooklyn LLC continuing as a wholly owned subsidiary of Eterna and as the surviving company of the merger (the “Merger”). The Merger closed on March 25, 2021. In connection with the Merger, the Company changed its name from “NTN Buzztime, Inc.” to “Brooklyn ImmunoTherapeutics, Inc.,” and, as described above, the Company has since changed its name to Eterna Therapeutics Inc. The Merger was accounted for as a reverse acquisition, in which Brooklyn LLC was deemed the acquiring company for accounting purposes.



On March 26, 2021, Eterna sold its rights, title and interest in and to the assets relating to the business operated under the name “NTN Buzztime, Inc.” (the “Disposition”) prior to the Merger to eGames.com Holdings LLC (“eGames.com”) in accordance with the terms of an asset purchase agreement dated September 18, 2020, as amended, between Eterna and eGames.com (the “Asset Purchase Agreement”).



On July 16, 2021, Eterna and its newly formed, wholly owned subsidiary Brooklyn Acquisition Sub, Inc. entered into an agreement and plan of acquisition (the “Novellus Acquisition Agreement”) with (a) Novellus LLC, (b) Novellus (the sole equity holder of Novellus Ltd. and, prior to the closing under the Novellus Acquisition Agreement, a subsidiary of Novellus LLC), and (c) a seller representative (the “Novellus Acquisition”), pursuant to which Eterna acquired Novellus and its subsidiary, Novellus Ltd. As part of the Novellus Acquisition, Eterna also acquired 25.0% of the total outstanding equity interests of NoveCite, Inc. (“NoveCite”), a corporation focused on developing an allogeneic mesenchymal stem cell product for patients with acute respiratory distress syndrome, including from COVID-19.



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.


6

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/A for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on June 30, 2022 (the “10-K/A”). The accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited financial statements contained in the 10-K/A 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, 2022 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2022, or any other period.



Reverse Stock Split



As approved by the Company’s stockholders at the Company’s Annual Meeting of Stockholders held on September 21, 2022, the Company effected a reverse stock split of its common stock at a ratio of 1-for-20, as determined by the Company’s Board of Directors within the parameters approved by the Company’s stockholders (the “Reverse Stock Split”).  The Reverse Stock Split became effective under Delaware law at 11:59 p.m. Eastern time on October 16, 2022.



Upon the effectiveness of the Reverse Stock Split, every twenty shares of the issued and outstanding common stock were automatically combined and reclassified into one issued and outstanding share of common stock. The Reverse Stock Split did not affect any stockholder’s ownership percentage of the common stock, alter the par value of the common stock or modify any voting rights or other terms of the common stock. The number of authorized shares of common stock under the Charter remains unchanged. No fractional shares were issued in connection with the Reverse Stock Split. In lieu of any fractional shares to which a stockholder would otherwise be entitled, the Company paid an amount of cash equal to the product of (i) the fractional share to which the holder would otherwise be entitled and (ii) the then fair value of a share as determined in good faith by the Board. The Company paid an aggregate of $719 for a total of 175 fractional shares.



All share and per share data in this Quarterly Report on Form 10-Q have been adjusted for all periods presented to reflect the Reverse Stock Split.


Reclassifications



Certain reclassifications have been made to Eterna’s prior years’ financial statements to conform to the current year presentation. These reclassifications had no effect on Eterna’s previously reported results of operations or accumulated deficit.
    
2)
LIQUIDITY AND CAPITAL RESOURCES
 

The Company has incurred significant operating losses and has an accumulated deficit as a result of ongoing efforts to develop product candidates, including conducting clinical trials and providing general and administrative support for operations. As of September 30, 2022, the Company had a cash balance of approximately $13.3 million and an accumulated deficit of approximately $160.8 million. For the three and nine months ended September 30, 2022, the Company incurred a net loss of $7.3 million and $20.1 million, respectively, and for the nine months ended September 30, 2022, the Company used cash in operating activities of $15.5 million.
 

On October 18, 2022, the Company entered into a facility sublease agreement (the “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, which will be reduced on an incremental basis throughout the term of the lease.  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.  The amount of required restricted cash collateral will decline in parallel with the reduction in the amount of the letter of credit over the term of the sublease.  The Company’s deposit of this restricted cash reduced the amount of working capital the Company has to fund its operations. See Note 15, Subsequent Events, for more information on the Sublease.


7

In connection with preparing the accompanying condensed consolidated financial statements as of and for the three and nine months ended September 30, 2022, 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 financial statements. The Company will need to raise additional capital, which could be through the remaining availability under an equity line purchase agreement with Lincoln Park Capital Fund, LLC (the “Second Purchase Agreement”) (to the extent the Company is permitted to use such agreement) (see Note 12), public or private equity offerings, debt financings, corporate collaborations or other means. The Company may also seek governmental grants to support its clinical trials and preclinical trials. The Company currently has no arrangements for such capital and no assurances can be given that it will be able to raise such 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)
MERGER, DISPOSITION AND ACQUISITION TRANSACTIONS
 

Merger


On August 12, 2020, Eterna, Brooklyn LLC and the Merger Sub entered into the Merger Agreement, and the Merger closed on March 25, 2021. The Merger was accounted for as a reverse acquisition, in which Brooklyn LLC was deemed the acquiring company for accounting purposes. Brooklyn LLC, as the accounting acquirer, recorded the assets acquired and liabilities assumed of Eterna in the Merger at their fair values as of the acquisition date.


Brooklyn LLC was determined to be the accounting acquirer based upon the terms of the Merger and other factors including that (i) Brooklyn LLC members, received common stock in the Merger that represented 96.35% of Eterna’s outstanding common stock on a fully diluted basis, (ii) all of the directors of Eterna immediately after the Merger were designated by Brooklyn LLC under the terms of the Merger Agreement and (iii) existing members of Brooklyn LLC’s management became the management of Eterna immediately after the Merger.


At the closing of the Merger, all the outstanding membership interests of Brooklyn LLC converted into the right to receive an aggregate of approximately 1,999,000 shares of common stock, of which 53,000 shares were issued as compensation to Brooklyn LLC’s financial advisor for its services to Brooklyn LLC in connection with the Merger.


The purchase price of $8.2 million, which represents the consideration transferred in the Merger to stockholders of Eterna immediately before the Merger, was calculated based on the closing price of $108 per share for approximately 76,000 shares common stock that those stockholders owned on March 25, 2021 immediately prior to the Merger because that represented a more reliable measure of the fair value of consideration transferred in the Merger.


Under the acquisition method of accounting, the total purchase price has been allocated to the acquired tangible and intangible assets and assumed liabilities of Eterna based on their estimated fair values as of March 25, 2021, the Merger closing date. Because the consideration paid by Brooklyn LLC in the Merger is more than the estimated fair values of Eterna’s net assets deemed to be acquired, goodwill is equal to the difference of approximately $8.6 million, which has been calculated using the fair values of the net assets of Eterna as of March 25, 2021.

The allocation of the purchase price to the tangible and intangible assets acquired and liabilities deemed to be assumed from Eterna, based on their estimated fair values as of March 25, 2021, is as follows (in thousands):

 
  
Historical
Balance
Sheet of
Eterna at
March 25, 2021
    
Fair Value
Adjustment
to
Eterna
Pre-Merger
Assets
    
Purchase
Price
Allocation
  
Cash and cash equivalents
  
$
148
    
$
-
    
$
148
  
Accounts receivable
    
103
      
-
      
103
  
Prepaid expense and other current assets
    
329
      
-
      
329
  
Property and equipment, net
    
1,015
      
-
      
1,015
  
Software development costs
    
1,296
      
(368
)
    
928
  
Customers
    
-
      
548
      
548
  
Trade name
    
-
      
299
      
299
  
Accounts payable, accrued liabilities and other current liabilities
    
(3,781
)
    
-
      
(3,781
)
Net assets acquired, excluding goodwill
  
$
(890
)
  
$
479
    
$
(411
)
                         
Total consideration
  
$
8,178
                  
Net assets acquired, excluding goodwill
    
(411
)
                
Goodwill
  
$
8,589
                  


Brooklyn LLC was obligated under the Merger Agreement to have $10.0 million in cash and cash equivalents on its balance sheet at the effective time of the Merger. To ensure Brooklyn LLC had the required funds, certain beneficial holders of Brooklyn LLC’s Class A membership interests entered into contractual commitments to invest $10.0 million into Brooklyn LLC immediately prior to the closing of the Merger. During March 2021, Eterna offered its Class A unit holders an additional 5% rights offering for an additional $0.5 million to be raised by a rights offering. Eterna received funds from the rights offering between February 17, 2021 and April 5, 2021.


Disposition


On March 26, 2021, Eterna sold its rights, title and interest in and to the assets relating to the business it operated (under the name NTN Buzztime, Inc.) prior to the Merger to eGames.com in exchange for a purchase price of $2.0 million and assumption of specified liabilities relating to that business. The sale was completed in accordance with the terms of the Asset Purchase Agreement. Details of the Disposition are as follows (in thousands):

Proceeds from sale:
      
Cash   $ 132  
Escrow
    
50
  
Assume advance/loans
    
1,700
  
Interest on advance/loans
    
68
  
         
Carrying value of assets sold:
        
Cash and cash equivalents
    
(14
)
Accounts receivable
    
(75
)
Prepaids and other current assets
    
(124
)
Property and equipment, net
    
(1,014
)
Software development costs
    
(927
)
Customers
    
(548
)
Trade name
    
(299
)
Goodwill
    
(8,589
)
Other assets
    
(103
)
         
Liabilities transferred upon sale:
        
Accounts payable and accrued expenses
    
113
  
Obligations under finance leases
    
17
  
Lease liability
    
26
  
Deferred revenue
    
55
  
Other current liabilities
    
149
  
         
Transaction costs
    
(265
)
         
Total loss on sale of assets
  
$
(9,648
)

9

Acquisition


On July 16, 2021, Eterna and Brooklyn Acquisition Sub, Inc. entered into the Novellus Acquisition Agreement. The Novellus Acquisition closed contemporaneously with the execution and delivery of the Novellus Acquisition Agreement. At the closing:

 
●
Eterna acquired all of the outstanding equity interests of Novellus as the result of the merger of Brooklyn Acquisition Sub, Inc. with and into Novellus, following which, Novellus, as the surviving corporation, became Eterna’s wholly owned subsidiary and Novellus Ltd. became Eterna’s indirectly owned subsidiary; and

 
●
Eterna acquired 25.0% of the total outstanding equity interests of NoveCite.


As consideration for the Novellus Acquisition, Eterna paid $22.9 million in cash and delivered approximately 351,000 shares of common stock, which under the terms of the Novellus Acquisition Agreement, were valued at a total of $102.0 million based on an agreed upon price of $290.5060 per share. At the date of issuance, the fair value of the shares was approximately $58.7 million.


The Novellus Acquisition Agreement contained customary representations, warranties and certain indemnification provisions. Approximately 37,000 of the shares issued as consideration were placed in escrow to secure indemnification obligations to Eterna under the Novellus Acquisition Agreement, and all such shares were released to the sellers in July 2022. The Novellus Acquisition Agreement also contains certain non-competition and non-solicitation provisions pursuant to which Novellus LLC agreed not to engage in certain competitive activities for a period of five years following the closing, including customary restrictions relating to employees. No employees of Novellus Ltd. or Novellus prior to the Novellus Acquisition continued their employment, or were otherwise engaged by Eterna, immediately following the Novellus Acquisition.



In connection with the Novellus Acquisition, the co-founders of Novellus entered into lock-up agreements with respect to approximately 169,000 of the shares of common stock received in the Novellus Acquisition, and Eterna’s Chairman of the Board and its former Chief Executive Officer and President entered into identical lock-up agreements with respect to their current holdings of Eterna stock. Each lock-up agreement extends for a period of three years, provided that up to 75% of the shares of common stock subject to the lock-up agreement may be released from the lock-up restrictions earlier if the price of common stock on the Nasdaq exceeds specified thresholds. The lock-up agreements include customary exceptions for transfers during the applicable lock-up period.


The Company expects the Novellus Acquisition will advance its evolution into a platform company with a pipeline of next generation mRNA cellular and gene editing programs. In addition, the acquisition of Novellus Ltd. builds on the License Agreement (as defined in Note 10). As a result of the Novellus Acquisition, in accordance with the terms of the Novellus-Factor License Agreement, the rights and obligations of Novellus Ltd. thereunder pertaining to any and all licensed products have inured to Eterna. The License Agreement with Factor Bioscience Limited (“Factor Limited”) under the License Agreement, which grants Brooklyn LLC exclusive rights to develop certain next-generation mRNA gene editing and cell therapy products, remained unchanged after the completion of the Novellus Acquisition.

10

Although Eterna acquired all of the outstanding equity interests of Novellus, the Company accounted for the Novellus Acquisition as an asset acquisition (as the assets acquired did not constitute a business as defined in Accounting Standards Codification (“ASC”) Topic 805, Business Combinations), and was measured by the amount of cash paid and by the fair value of the shares of common stock issued. As a result, substantially all of the value acquired was attributed to in-process research and development (IPR&D), with the exception of the cash paid for the investment in NoveCite, which is being accounted for as an investment in equity securities, as discussed further below.


Eterna paid $22.9 million in cash, net of cash acquired, as part of the consideration for the Novellus Acquisition, of which $1.0 million was paid in cash for the investment in NoveCite. Eterna also issued approximately 351,000 shares of the Company’s common stock, of which approximately 182,000 shares are unrestricted and 169,000 shares are subject to the three-year lockup. The unrestricted shares were valued at $201 per share, which was the closing price of Eterna’s common stock on July 16, 2021. The fair value of the restricted shares was discounted by approximately 35% to $130.60 per restricted share, which was derived from the average discount rate between the Black Scholes and Finnerty valuation models. The resulting fair value of the asset acquired is as follows (in thousands):

 
  
Fair Value of
Consideration
  
Cash paid
  
$
22,882
  
Cash acquired
    
(28
)
Unrestricted shares
    
36,628
  
Restricted shares
    
22,056
  
Total fair value of consideration paid
    
81,538
  
Less amount of cash paid for NoveCite investment
    
(1,000
)
Fair value of IPR&D acquired
  
$
80,538
  


IPR&D that is acquired through an asset purchase that has no alternative future uses and no separate economic values from its original intended purpose is expensed in the period the cost is incurred. Accordingly, the Company expensed the fair value of the IPR&D during the third quarter of 2021 in the amount of $80.5 million.

Investment in NoveCite


As a result of the Novellus Acquisition,  Eterna acquired and currently owns 25% of NoveCite and Citius Pharmaceuticals, Inc. (“Citius”) owns the remaining 75%. A member of the Company’s management is entitled to hold one of three board seats on NoveCite’s board of directors. Citius’ s officers and directors hold the other two board seats. The Company is accounting for its interest in NoveCite under ASC Topic 323, Investments – Equity Method and Joint Ventures. The investment was recorded at cost, which was $1.0 million and is adjusted for the Company’s share of NoveCite’s earnings or losses, which are reflected in the accompanying condensed consolidated statement of operations. The investment may also reflect an equity loss in the event that circumstances indicate an other-than-temporary impairment. For the three and nine months ended September 30, 2022, the Company recorded approximately $21,000 and $0.9 million, respectively, in losses from its investment in NoveCite, and of the $0.9 million loss for the nine months ended September 30, 2022, $0.5 million related to NoveCite’s year ended December 31, 2021. The Company does not guarantee obligations of NoveCite nor is it otherwise committed to providing further financial support for NoveCite. Therefore, the Company will record losses only up to its investment carrying amount.
 
4)
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 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.
 
11
 
●
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.
 

There were no liabilities measured at fair value as of December 31, 2021. The following tables summarize the liabilities that are measured at fair value as of September 30, 2022 (in thousands):

 
  
As of September 30, 2022
  
Description
  
Level 1
    
Level 2
    
Level 3
  
Liabilities:
                  
Warrant liabilities - Common Warrants
   $
-
     $
-
     $
633
  
Total
  
$
-
    
$
-
    
$
633
  




On March 9, 2022, the Company issued pre-funded warrants exercisable for approximately 68,000 shares of common stock (the “Pre-Funded Warrants”) and warrants exercisable for approximately 343,000 shares of common stock (the “Common Warrants”) to the PIPE Investor in connection with the PIPE Transaction (as each such term is defined in Note 12). On July 12, 2022, the PIPE Investor exercised its 68,000 Pre-Funded Warrants at an exercise price of $0.10 per share for an aggregate exercise price of approximately $7,000 in cash. The Company issued 68,000 shares of common stock to the PIPE Investor on July 14, 2022 upon receipt of the cash proceeds. Following the exercise, no Pre-Funded Warrants remained outstanding. See Note 12 for more information related to the PIPE Transaction.



The Common Warrants and Pre-Funded Warrants were accounted for as liabilities under ASC 815-40, Derivatives and Hedging, Contracts in Entity’s Own Equity (“ASC 815-40”), as these warrants provide for a cashless settlement provision that does not meet the requirements of the indexation guidance under ASC 815-40.  These warrant liabilities were measured at fair value at inception and are then subsequently measured on a recurring basis, with changes in fair value presented within the Company’s statements of operations.



The Company uses a Black-Scholes option pricing model to estimate the fair value of the Common Warrants, which is considered a Level 3 fair value measurement.  Certain inputs used in this Black-Scholes pricing model 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, which could also result in material non-cash gains or losses being reported in the Company’s consolidated statement of operations.


The estimated fair value of the Pre-Funded Warrants was deemed a Level 2 measurement as all significant inputs to the valuation model used to estimate the fair value of the Pre-Funded Warrants were directly observable from the Company’s publicly-traded common stock. Upon exercise of the Pre-Funded Warrants on July 12, 2022, the Company reclassified the fair value of the Pre-Funded Warrants to equity as of such date.



The fair values of the Common Warrants and the Pre-Funded Warrants at the issuance date totaled $12.6 million in the aggregate, which was $0.6 million more than the $12.0 million proceeds received in the PIPE Transaction.  The excess $0.6 million represents an inducement to the purchaser to enter into the PIPE Transaction and was recorded in warrant liabilities expense in the accompanying consolidated statement of operations.  Given the Company’s capital requirements and market conditions, the Company consummated this financing on market terms available at the time of the transaction.


The Company remeasured the fair value of the Common Warrants as of September 30, 2022. The following table presents the changes in the warrant liabilities from the issuance date (in thousands):
 
 
  
Pre-Funded
Warrants
(Level 2)
    
Common Warrants
(Level 3)
    
Total Warrant
Liabilities
  
Fair value at January 1, 2022
  
$
-
    
$
-
    
$
-
  
Fair value at March 9, 2022 (issuance date)
    
2,646
      
9,943
      
12,589
  
Change in fair value of warrant liabilities
    
(1,779
)
    
(9,310
)
    
(11,089
)
Exercise of pre-funded warrants     (867 )     -       (867 )
Fair value at September 30, 2022
  
$
-
    
$
633
    
$
633
  
 
5)
LEASES

 

Operating Leases



The Company has operating leases for office and laboratory space in the borough of Manhattan in New York, New York and in Cambridge, Massachusetts, which expire in 2026 and 2028, respectively. On March 31, 2022, the Company entered into a facility lease in San Diego, California (the “San Diego Lease”) with Torrey Pines Science Center Limited Partnership for approximately 5,200 square feet of laboratory and office space. The term of the San Diego Lease is 62 months and the lease commencement date was April 19, 2022. The San Diego Lease will expire in June 2027. See Note 15 for information regarding an additional lease the Company entered into in October 2022.
 

Base rent for the San Diego Lease is $6.35 per square foot in the first year of the San Diego Lease, with a rent abatement for the second and third full months of the first year. The base rent will increase by approximately 3% on each anniversary of the lease commencement date. The Company is also required to pay its share of operating expenses and property taxes. The San Diego Lease provides for a one-time option to extend the lease term for an additional five years at the then fair rental value. The Company recorded a $1.7 million right-of-use (“ROU”) asset and $1.7 million lease liabilities for the San Diego Lease.


During the second quarter of 2022, the Company decided to consolidate its research and development efforts in Cambridge, Massachusetts, and the Company intends to sublease the San Diego laboratory and office space.  As a result, the Company recognized an impairment charge of approximately $0.8 million on the San Diego Lease ROU asset during the nine months ended September 30, 2022, which is recorded in general and administrative expense on the condensed consolidated statements of operations. There was no impairment charge recognized for the three months ended September 30, 2022. 


On March 5, 2022, the Company entered into an Agreement to Assign Space Lease with Regen Lab USA LLC (“Regen”) pursuant to which the Company agreed to assign its Brooklyn, New York lease (the “Brooklyn Lease”) to Regen. The effective date of the assignment was contingent upon, among other things, a consent from BioBat, Inc. (the “Landlord”). Additionally, Regen agreed to purchase certain equipment from the Company for $50,000, partly reimburse the Company $50,000 toward certain existing unamortized leasehold improvements, and to reimburse the Company for the existing security deposit the Company had under the Brooklyn Lease of approximately $63,000.



On March 25, 2022, the Company entered into an Assignment and Assumption of Lease Agreement (the “Assignment Agreement”) with Regen, which included the Landlord’s consent to the assignment. The effective date of the assignment was March 28, 2022.  Under the Assignment Agreement, Regen (i) accepted the assignment of the Brooklyn Lease; (ii) assumed all of the obligations, liabilities, covenants and conditions of the Company’s as tenant under the Brooklyn Lease; (iii) assumed and agreed to perform and observe all of the obligations, terms, requirements, covenants and conditions to be performed or observed by the Company under the Brooklyn Lease; and (iv) made all of the representations and warranties under the Brooklyn Lease with the same force and effect as if Regen had executed the Brooklyn Lease originally as the tenant.



Notwithstanding Regen’s assumption of the Brooklyn Lease, the Company remains liable and responsible for the due keeping, and full performance and observance, of all the provisions of the Brooklyn Lease applicable to the tenant thereunder.  As a result of the Assignment Agreement, the Company wrote off the remaining ROU asset balance and the corresponding lease liability.


13

The Company accounts for leases under ASC 842, Leases. Operating leases are included in “Right-of use assets - operating leases” within the Company’s balance sheets and represent the Company’s right to use an underlying asset for the lease term. The Company’s related obligation to make lease payments are included in “Operating lease liabilities, non-current” and “Operating lease liabilities, current” within the Company’s balance sheets. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Because the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rates based on the information available at the lease commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term.



Some leasing arrangements require variable payments that are dependent on usage or may vary for other reasons, such as payments for insurance, tax payments and other miscellaneous costs. The variable portion of lease payments is not included in the ROU assets or lease liabilities. Rather, variable payments, other than those dependent upon an index or rate, are expensed when the obligation for those payments is incurred and are included in lease expenses. Accordingly, all expenses associated with a lease contract are accounted for as lease expenses.



During the three and nine months ended September 30, 2022 and 2021, the net operating lease expenses were as follows (in thousands):


    Three months ended September 30,
  
   
2022
     2021
  
Operating lease expense
  
$
143
    
$
187
  
Sublease income
    
(21
)
    
(21
)
Variable lease expense
    
60
      
6
  
Total lease expense
  
$
182
    
$
172
  



    Nine months ended September 30,  
    2022     2021
  
Operating lease expense
  
$
476
    
$
501
  
Sublease income
    
(63
)
    
(62
)
Variable lease expense
    
113
      
16
  
Total lease expense
  
$
526
    
$
455
  



The tables below show the beginning balances of the operating ROU assets and lease liabilities as of January 1, 2022 and the ending balances as of September, 2022, including the changes during the period (in thousands).


   
Operating Lease
ROU Assets
  
       
Operating lease ROU assets at January 1, 2022
  
$
2,567
  
Initial measurement of operating lease ROU assets     1,706  
Amortization of operating lease ROU assets
    
(267
)
Impairment of ROU assets     (772 )
Remeasurement of ROU asset
     50  
Write off of ROU asset due to lease termination
    
(1,372
)
Operating lease ROU assets at September 30, 2022
  
$
1,912
  


   
Operating Lease
Liabilities
  
Operating lease liabilities at January 1, 2022
  
$
2,723
  
Initial measurement of operating lease liabilities     1,706  
Principal payments on operating lease liabilities
    
(223
)
Write off of operating lease liability due to lease termination
    
(1,453
)
Operating lease liabilities at September 30, 2022
    
2,752
  
Less non-current portion
    
2,317
  
Current portion at September 30, 2022
  
$
436
  

As of September 30, 2022, the Company’s operating leases had a weighted-average remaining life of 4.9 years with a weighted-average discount rate of 8.97%.  The maturities of the operating lease liabilities are as follows (in thousands):


   
As of
September 30,
2022
  
2022
  
$
166
  
2023
    
673
  
2024
    
688
  
2025
    
703
  
2026
    
708
  
Thereafter
    
470
  
Total payments  
3,408
  
Less imputed interest     (656 )
Total operating lease liabilities   $ 2,752  

6)
IN-PROCESS RESEARCH & DEVELOPMENT AND GOODWILL
 

In 2018, the Company acquired IRX Therapeutics (“IRX”), which was accounted for as a business combination. The Company recorded IPR&D in the amount of $6.0 million, which represented the fair value assigned to technologies that were acquired in connection with the IRX acquisition and which have not reached technological feasibility and have no alternative future use. IPR&D assets acquired in a business combination are considered to be indefinite lived until the completion or abandonment of the associated research and development projects. If and when development is complete, which generally occurs upon regulatory approval, and the Company is able to commercialize products associated with the IPR&D assets, these assets are then deemed definite-lived and are amortized based on their estimated useful lives beginning at that point in time. If development is terminated or abandoned, the Company may have a full or partial impairment charge related to the IPR&D assets, calculated as the excess of carrying value of the IPR&D assets over fair value.


The Company also recorded goodwill in the amount of $2.0 million related to the IRX acquisition. Goodwill and indefinite-lived IPR&D assets are not amortized but are 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 values.


In June 2022, the Company received results from the INSPIRE phase 2 trial of IRX-2, a multi-cytokine biologic immunotherapy, in patients with newly diagnosed stage II, III or IVA squamous cell carcinoma of the oral cavity. The IRX-2 multi-cytokine biologic immunotherapy represents substantially all the fair value assigned to the technologies of IRX that the Company acquired. Despite outcomes that favored IRX-2 in certain predefined subgroups, the INSPIRE trial did not meet the primary endpoint of Event-Free Survival (at two years of follow up). Significant additional clinical development work would be required to advance IRX-2 in the form of additional Phase 2 and 3 studies to further evaluate the treatment effect of IRX-2 in patient subgroups and in combination with checkpoint inhibitor therapies. The INSPIRE trial was the only Company-sponsored study of IRX-2. IRX-2 has been studied externally in other clinical settings outside of head and neck cancer in the form of investigator sponsored trials, which have either ended or are not currently active. Based on the totality of available information, the Company currently does not have plans to further develop the IRX-2 product candidate. As such, the Company determined that the carrying value of the IPR&D asset was impaired and recognized a non-cash impairment charge of approximately $6.0 million on the condensed consolidated statement of operations during the second quarter of 2022, which reduced the value of the asset to zero.


15

As of September 30, 2022, the Company performed a qualitative assessment to determine whether it was more likely than not that the fair value of the entity is less than its carrying value of goodwill. Such qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. As a result of the decline in the Company’s stock price from $10.40 per share as of June 30, 2022 to $4.94 per share as of September 30, 2022, the Company determined that there were indications of impairment. Accordingly, the Company proceeded to the first step in the quantitative assessment of impairment and determined that the fair value of the reporting unit exceeded the carrying amount of goodwill, and therefore, the goodwill was not impaired as of September 30, 2022.
 
7)
CEO SEPARATION AGREEMENT



On May 24, 2022, Dr. Howard J. Federoff resigned as the Company’s Chief Executive Officer and President effective May 26, 2022. In connection with Dr. Federoff’s resignation, the Company entered into a Separation Agreement and General Release with Dr. Federoff (the “Separation Agreement”), pursuant to which Dr. Federoff resigned from his positions as Chief Executive Officer and as an officer, director and employee of the Company and all subsidiaries. Dr. Federoff’s resignation from the Board was not due to any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. In consideration for Dr. Federoff’s execution of the Separation Agreement and non-revocation of a waiver and release of claims relating thereto, Dr. Federoff will receive following benefits under the Separation Agreement:



 ●
a lump sum cash severance benefit in the amount of $0.2 million, representing Dr. Federoff’s target bonus for 2022;

 

 ●
payment of Dr. Federoff’s annual base salary for a period of twelve months after the expiration of the applicable revocation period (the “Separation Period”), for a total gross amount equal to $0.5 million;

 

 ●
payment of Dr. Federoff’s premiums for continued health benefits provided under COBRA for the Separation Period;

 

 ●
full acceleration of the vesting of all outstanding options (with the exception of the Milestone Grant (as defined below) options) that would have vested during the Separation Period, and such options, together with outstanding options that vested prior to the separation date, representing collectively approximately 76,000 shares of common stock, may be exercised for a period of thirty-six months after the separation date (see Note 11 for modification accounting impact);

 

 ●
acceleration and vesting of 25/36th of the Milestone Grant options, representing collectively approximately 21,000 shares of common stock, may be exercised for a period of thirty-six months after the separation date (see Note 11 for modification accounting impact); and

 

 ●
a lump sum cash severance benefit in the amount of $0.1 million, representing the value Dr. Federoff would have received if he was entitled to receive a settlement of a pro rata portion of his performance restricted stock units through the expiration of the Separation Period, assuming the performance metrics were waived and assuming a per share value of $16.20.



The Separation Agreement also includes certain other customary representations, warranties and covenants of Dr. Federoff, and provides for reimbursement of certain expenses incurred by Dr Federoff. The Separation Agreement supersedes all other agreements or arrangements between Dr. Federoff and the Company regarding the subject matter of the agreement, including those with respect to severance payments and benefits.

8)
RELATED PARTY TRANSACTIONS


On September 9, 2022, the Company entered into a Master Services Agreement (the “MSA”) with Factor Bioscience Inc. (“Factor”), pursuant to which Factor has agreed to provide services to the Company as agreed between the Company and Factor and as set forth in one or more work orders under the MSA, including the first work order included in the MSA. Under the first work order, Factor has agreed to provide the Company with mRNA cell engineering research support services, including access to certain facilities, equipment, materials and training, and the Company has agreed to pay Factor an initial fee of $5.0 million, payable in twelve equal monthly installments of approximately $0.4 million. Following the initial 12-month period, the Company has agreed to pay Factor a monthly fee of $0.4 million until such time as the first work order under the MSA is terminated. The Company paid a deposit of $0.4 million, which will be applied to the last month of the first work order.

16

The Company may terminate the first work under the MSA on or after the second anniversary of the date of the MSA, subject to providing Factor with 120 days’ prior notice. Factor may terminate such work order only on and after the fourth anniversary of the date of the MSA, subject to providing the Company with 120 days’ prior notice. The MSA contains customary confidentiality provisions and representations and warranties of the parties, and the MSA may be terminated by ether party upon 30 days’ prior notice, subject to any superseding termination provisions contained in a particular work order.



In connection with entering into the MSA, on September 9, 2022, Factor’s subsidiary, Factor Limited, entered into a waiver agreement (the “Waiver Agreement”) with Brooklyn 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 Brooklyn LLC under a license agreement by and among Factor Limited, Novellus Ltd., and Brooklyn LLC.  See Note 10, License Agreements, for more information on this agreement. Under the terms of the Waiver Agreement, the License Fee Obligation is waived conditionally on the Company paying Factor Inc. amounts due under the MSA.



As a result of entering into the Waiver Agreement and the MSA on September 9, 2022, the Company recognized $3.5 million in research and development expense, as the license does not have an alternative future use, and a corresponding liability.


On September 1, 2022, Novellus and Eterna 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 has 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 Sowydra 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.


On September 6, 2022, the Company entered into an assignment and assumption of contracts agreement (the “Assignment and Assumption Agreement”) with Factor, pursuant to which the Company assumed certain contracts with third parties that Factor had previously entered into in anticipation of entering into a sublease for premises in Somerville, Massachusetts.  In October 2022, the Company entered into a sublease for the premises (see Note 15).  Under the Assignment and Assumption Agreement, the Company agreed to reimburse Factor for costs already incurred or paid by it under the assumed contracts in the amount of approximately $0.1 million, and the Company assumed the future obligations under these contracts, which relate to the design and build-out of the subleased space.


The MSA, any work orders under the MSA, the Waiver Agreement, the Waiver and Assignment Agreement, and the Assignment and Assumption Agreement have been deemed related party transactions, as the Company’s Interim Chief Executive Officer, Dr. Matthew Angel, is also the Chairman and Chief Executive Officer of Factor and the Director of Factor Limited.

17
9)
ACCRUED EXPENSES AND OTHER LIABILITIES
 

Accrued expenses consisted of the following (in thousands):
 
   
September 30,
2022
     December 31,
2021		  
Accrued compensation
  
$
1,701
    
$
656
  
Accrued research and development expenses
    
373
      
222
  
Accrued general and administrative expenses
    
1,156
      
371
  
Total accrued expenses
  
$
3,230
    
$
1,249
  


Other liabilities consisted of the following (in thousands):

   
September 30,
2022
    
December 31,
2021
  
Current portion of License Fee Obligation
  
$
1,750
    
$
-
  
Insurance policy premiums
    
898
      
247
  
Total other current liabilities
   $ 2,648     $ 247  
                 
Long term portion of License Fee Obligation
   $ 1,642     $ -  
Other
    
48
      
48
  
Total other liabilities
  
$
1,690
    
$
48
  

18

Accrued compensation at September 30, 2022 includes approximately $1.0 million of severance, of which, approximately $0.3 million relates to severance for Dr. Federoff pursuant to the Separation Agreement discussed above. Accrued general and administration expenses at September 30, 2022 includes $0.6 million for legal-related matters.
 
10)
COMMITMENTS AND CONTINGENCIES
 

Legal 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.


Dhesh Govender v. Brooklyn Immunotherapeutics, LLC, et al., Index No. 650847/2021 (N.Y. Sup. Ct. N.Y. Cty. 2021)


On or about February 5, 2021, Dhesh Govender, a former short-term consultant of Brooklyn LLC, filed a complaint against Brooklyn LLC and certain individuals that plaintiff alleges were directors of Brooklyn LLC. The complaint is captioned, Dhesh Govender v. Brooklyn Immunotherapeutics, LLC, et al., Index No. 650847/2021 (N.Y. Sup. Ct. N.Y. Cty. 2021). Plaintiff alleges that Brooklyn LLC and certain of its officers and directors (“defendants”) engaged in unlawful and discriminatory conduct based on race, national origin and hostile work environment. Plaintiff also asserts various breach of contract, fraud and quantum meruit claims based on an alleged oral agreement pursuant to which he alleges Brooklyn LLC agreed to hire him as an executive once the Merger was completed. In particular, plaintiff alleges that, in exchange for transferring an opportunity to obtain an agreement to acquire a license from Novellus for its mRNA-based gene editing and cell reprogramming technology to Brooklyn LLC, he was promised a $0.5 million salary and 7% of the equity of Brooklyn LLC. Based on these and other allegations, plaintiff seeks damages of not less than $10 million. By Order dated November 10, 2021, the Court granted defendants’ motion to compel Govender to arbitrate all of his claims against them, based on the arbitration clause of his consulting agreement with Brooklyn LLC.  Govender thereafter filed his Statement of Claim (the “Demand”) with the American Arbitration Association (“AAA”), Case No. 01-21-0017-9417, on December 15, 2021 against the same defendants, and served it on defendants’ counsel on February 3, 2022. In his Demand, Govender continues to assert statutory discrimination claims against all defendants, claims against Brooklyn LLC premised on the breach of an alleged oral promise to issue Govender 7% of the equity of Brooklyn LLC and to employ Govender at a $0.5 million annual salary in exchange for allegedly arranging and negotiating the Novellus license, common law fraud claims against Brooklyn LLC and Cherington based on the breach of these same promises and a claim for quantum meruit against the Brooklyn LLC. In his Demand, Govender now claims that the fair and reasonable value of his services on the quantum meruit claim exceeded $100 million and is seeking damages in an amount to be determined at the hearing. Defendants filed an answering statement to the Demand on February 28, 2022 and the parties have selected a three-member arbitration panel. The date on which arbitration is scheduled to begin has not yet been set. Defendants intend to vigorously defend themselves against these claims. At this stage in the litigation, the Company is not able to predict the probability of a favorable or unfavorable outcome.


Emerald Private Equity Fund, LLC Matter


By a letter dated July 7, 2021, Emerald Private Equity Fund, LLC (“Emerald”), a stockholder of Eterna, made a demand pursuant to 8 Del. C. 220 to inspect certain books and records of Eterna. The stated purpose of the demand was to investigate possible wrongdoing by persons responsible for the implementation of the Merger and the issuance of paper stock certificates, including investigating whether: (i) Eterna’s stock certificates were issued in accordance with the Merger Agreement; (ii) certain restrictions on the sale of Eterna common stock following the Merger were proper and applied without favor; (iii) anyone received priority in post-Merger issuances of Eterna’s stock certificates that allowed them to benefit from an increase in the trading price of Eterna’s common stock; and (iv) it should pursue remedial measures and/or report alleged misconduct to the SEC. Eterna responded to the demand letter and produced certain information to Emerald in connection with the demand, which is subject to the terms of a confidentiality agreement entered into among the parties, including certain additional stockholders who subsequently joined as parties to such agreement. In October 2021, Emerald requested that Eterna produce additional information related to the authority, purpose and justification for the restriction imposed on the sale of Eterna common stock following the Merger and the timing of share delivery to Eterna stockholders, following which request Eterna agreed to produce certain additional information and emails relating to these topics.


19
On March 30, 2022, counsel to Emerald advised the Company that it was prepared to file suit against the Company, certain current and former directors of the Company, and the Company’s financial advisor in connection with the Merger, on behalf of Emerald and a class of similarly situated stockholders with respect to some or all of the foregoing matters, alleging claims for breach of fiduciary duty, conversion and aiding and abetting breach of fiduciary duty. Emerald’s counsel expressed a willingness to engage in private pre-suit early resolution discussions with the Company and its financial advisor on behalf of individual stockholders whom counsel represents in addition to Emerald (collectively, the “Emerald Plaintiffs”); and the Company engaged in such discussions in lieu of incurring the legal costs anticipated in respect of litigating the Emerald Plaintiffs’ claims, all of which the Company disputes.  Following such discussions, with no admission of wrongdoing, the Company and the Emerald Plaintiffs entered into a confidential settlement agreement, pursuant to which the Company paid $1.2 million in full settlement of all of the Emerald Plaintiffs’ purported claims, including a release by the Emerald Plaintiffs in favor of the Company in respect of any and all such claims.


John Westman v. Novellus, Inc., Christopher Rohde, and Matthew Angel, Civil Action No. 2181CV01949 (Middlesex County (Massachusetts) Superior Court)


On or about September 7, 2021, John Westman, a former employee of Novellus, Inc. filed a Complaint in Middlesex County (Massachusetts) Superior Court against Novellus, Inc. and the company’s founders and former executives, Dr. Christopher Rohde and Dr. Matthew Angel (collectively, “Defendants”). The case includes allegations that Novellus, Inc. violated the Massachusetts Wage Act. Eterna acquired Novellus, Inc. on July 16, 2021. Mr. Westman’s claims relate to alleged conduct that took place before Eterna acquired Novellus, Inc. Defense and liability in association with any Wage Act claims have been assumed by Dr. Rohde and Dr. Angel. On December 24, 2021, Westman dismissed the case without prejudice so the parties could mediate the matter. The parties’ February 2022 mediation was unsuccessful and the dispute is currently pending in arbitration.


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 the Company’s 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 (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. Defense and liability in association with any Wage Act claims have been assumed by Dr. Rohde and Dr. Angel. The Company filed its opposition to Sowyrda and Westman’s motions on August 19, 2022.  On September 9, 2022, Westman and Sowyrda filed replies in support of their motions and requested to be heard.  The hearing is scheduled for November 16, 2022.

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.

20

Licensing Agreements

 

USF

 

Brooklyn LLC has license agreements with University of South Florida Research Association, Inc. (“USF”), granting Brooklyn LLC the right to sell, market, and distribute IRX-2, subject to a 7% royalty payable to USF based on a percentage of gross product sales. Under the license agreement with USF, Brooklyn LLC is obligated to repay patent prosecution expenses incurred by USF. To date, Brooklyn LLC has not recorded any product sales, or obligations related to USF patent prosecution expenses. The license agreement terminates upon the expiration of the IRX-2 patents.

 

Novellus Ltd. and Factor Limited



In December 2020, Brooklyn LLC entered into option agreements (the “Option Agreements”) with Novellus Ltd. and Factor Limited (together, the “Licensors”) to obtain the right to exclusively license the Licensors’ intellectual property and mRNA cell reprogramming and gene editing technology for use in the development of certain cell-based therapies to be evaluated and developed for treating human diseases, including certain types of cancer, sickle cell disease, and beta thalassemia (the “Licensed Technology”). The option was exercisable before February 28, 2021 (or April 30, 2021 if the Merger had not closed by that date) and required Brooklyn LLC to pay a non-refundable option fee of $0.5 million and then an initial license fee of $4.0 million (including the non-refundable fee of $0.5 million) in order to exercise the option.


In April 2021, Brooklyn LLC and the Licensors amended the Option Agreements to extend the exercise period to May 21, 2021 and to require Brooklyn LLC to pay a total $1.0 million of the $4.0 million initial license fees to the Licensors by April 15, 2021.


In April 2021, Brooklyn LLC and the Licensors entered into an exclusive license agreement (the “License Agreement”) pursuant to which Brooklyn LLC acquired an exclusive worldwide license to the Licensed Technology for use in the development of certain mRNA, gene-editing, and cellular therapies to be evaluated and developed for treating human diseases, including certain types of cancer, sickle cell disease, and beta thalassemia. Under the terms of the License Agreement, Brooklyn LLC is obligated to pay the Licensors a total of $4.0 million in connection with the execution of the License Agreement, all of which was paid as of June 2021.


As a result of the Novellus Acquisition, in accordance with the terms of the Novellus-Factor License Agreement, the rights and obligations of Novellus Ltd. thereunder pertaining to any and all licensed products have inured to Eterna. The agreement with Factor Limited under the License Agreement, which grants Brooklyn LLC exclusive rights to develop certain next-generation mRNA gene editing and cell therapy products, remained unchanged after the completion of the Novellus Acquisition. Accordingly, under the License Agreement, Brooklyn LLC remained obligated to pay to Factor Limited a fee of $3.5 million in October 2022, which would have been in addition to a fee of $2.5 million paid to Factor Limited in October 2021. In connection with the Company entering into the MSA (see Note 8), Factor Limited entered into the Waiver Agreement with Brooklyn LLC, pursuant to which Factor Limited waived payment of the $3.5 million otherwise payable to it in October 2022 by Brooklyn LLC.



Brooklyn LLC is also required to use commercially reasonably efforts to achieve certain delineated milestones, including specified clinical development and regulatory milestones and specified commercialization milestones. In general, upon its achievement of these milestones, Brooklyn LLC will be obligated to pay, in the case of development and regulatory milestones, milestone payments to the Licensors in specified amounts and, in the case of commercialization milestones, specified royalties with respect to product sales, sublicense fees or sales of pediatric review vouchers. In the event Brooklyn LLC fails to timely achieve certain delineated milestones, the Licensors will have the right to terminate Brooklyn LLC’s rights under provisions of the License Agreement relating to those milestones.

 

Novellus Ltd. also has a license agreement with Factor Limited, which was entered into in February 2015, amended in June 2018 and March 2020, and then amended and restated in November 2020 (the “Novellus-Factor License Agreement”).  The Novellus-Factor License Agreement grants to Novellus Ltd. an exclusive license to use certain technology owned by Factor Limited for the development of mesenchymal stem cell-based cellular therapies for treating diseases and conditions in humans and animals  (the “Novellus-Factor Licensed Technology”). Under the License Agreement, Novellus Ltd. in turn granted a sublicense to Brooklyn LLC to use the Novellus-Factor Licensed Technology to develop up to four mesenchymal stem cell-based therapy products for use in the treatment of cancer in humans.

 
21

Under the Novellus-Factor License Agreement, Novellus Ltd. is required to use commercially reasonably efforts to achieve certain delineated milestones, including specified clinical development and regulatory milestones and specified commercialization milestones. The Novellus-Factor License Agreement states that upon its achievement of these milestones, Novellus Ltd. will be obligated to make milestone payments of up to $51.0 million in aggregate to Factor Limited as well as specified royalties with respect to product sales, sublicense fees or sales of pediatric review vouchers. In the event Novellus Ltd. fails to timely achieve certain delineated milestones under the Novellus-Factor License Agreement, Factor Limited could seek to terminate the license granted thereunder. The Novellus-Factor License Agreement provides that in the event of termination of the Novellus-Factor License Agreement, if Novellus Ltd. requests that its sublicense to Brooklyn LLC under the License Agreement survive such termination, such sublicense shall be considered a direct license from Factor Limited to Brooklyn LLC, provided that Brooklyn LLC agrees in writing that (i) Factor Limited is entitled to enforce all relevant provisions directly against Brooklyn LLC, and (ii) Factor Limited shall not assume, and shall not be responsible to Brooklyn LLC for, any representations, warranties or obligations of Novellus Ltd. to Brooklyn LLC, other than to permit Brooklyn LLC to exercise any rights to the technology sublicensed by Novellus Ltd. to Brooklyn LLC.  Factor Limited also agreed under the License Agreement that upon the termination of the Novellus-Factor License Agreement for any reason other than Brooklyn LLC’s breach of the License Agreement, the rights and licenses granted to Brooklyn LLC by Novellus Ltd. under the License Agreement shall survive such termination of the Novellus-Factor License Agreement, and Factor Limited grants to Brooklyn LLC such rights and licenses on the same terms and conditions as granted by Novellus Ltd. to Brooklyn LLC under the License Agreement.. Following the expiration of one of the delineated milestone deadlines in the Novellus-Factor License Agreement without Novellus Ltd.’s achievement of the required regulatory filing on November 1, 2022, Novellus Ltd., Brooklyn LLC and Factor began discussions regarding an amendment to the terms of the License Agreement and the Novellus-Factor License Agreement in order for Brooklyn LLC, among other things, to directly license the Novellus-Factor Licensed Technology from Factor and consolidate and amend the milestone, payment and other terms with respect thereto accordingly. There can be no assurance that such an amendment will be made on the forgoing terms, if at all.

 

NoveCite


In October 2020, Novellus Ltd. (as sublicensor) and NoveCite (as sublicensee) entered into an exclusive license agreement (the “Sublicense”) to license novel cellular therapy for acute respiratory distress syndrome, which NoveCite is licensing from Factor Limited. Under the sublicense agreement, NoveCite is required to use commercially reasonably efforts to achieve certain delineated milestones, including specified clinical development and regulatory milestones and specified commercialization milestones. In general, upon its achievement of these milestones, NoveCite will be obligated, in the case of development and regulatory milestones, to make milestone payments to the Novellus Ltd. in specified amounts and, in the case of commercialization milestones, specified royalties with respect to product sales, sublicense fees or sales of pediatric review vouchers.


Under the terms of the Sublicense, in the event that Novellus Ltd. receives any revenue involving the original cell line included in the licensed technology, then Novellus Ltd. shall remit to NoveCite 50% of such revenue.


Royalty Agreements

 

Collaborator Royalty Agreement

 

Effective June 22, 2018, IRX terminated its Research, Development and Option Facilitation Agreement and its Options Agreement (the “RDO and Options Agreements”) with a collaborative partner (the “Collaborator”), pursuant to a termination agreement (the “Termination Agreement”). The Termination Agreement was assigned to Brooklyn LLC in November 2018 when Brooklyn LLC acquired the assets of IRX. In connection with the Termination Agreement, all of the rights granted to the Collaborator under the RDO and Options Agreements were terminated, and Brooklyn LLC has no obligation to refund any payments received from the Collaborator. As consideration for entering into the Termination Agreement, the Collaborator will receive a royalty equal to 6% of revenues from the sale of IRX-2, for the period of time beginning with the first sale of IRX-2 through the later of (i) the twelfth anniversary of the first sale of IRX-2 or (ii) the expiration of the last IRX patent, or other exclusivity of IRX-2.


Royalty Agreement with certain former IRX Therapeutics Investors



On May 1, 2012, IRX Therapeutics entered into a royalty agreement (the “IRX Investor Royalty Agreement”) with certain investors who participated in a financing transaction. The IRX Investor Royalty Agreement was assigned to Brooklyn LLC in November 2018 when Brooklyn LLC acquired the assets of IRX. Pursuant to the IRX Investor Royalty Agreement, when Brooklyn LLC becomes obligated to pay royalties to USF under the agreement described above under “Licensing Agreements-USF,” it will pay an additional royalty of 1% of gross sales to an entity organized by the investors who participated in such financing transaction. There are no termination provisions in the IRX Investor Royalty Agreement. Brooklyn LLC has not recognized any revenues to date, and no royalties are due pursuant to any of the above-mentioned royalty agreements.


Investor Royalty Agreement

 

On March 22, 2021, Brooklyn LLC restated its royalty agreement with certain beneficial holders of Brooklyn ImmunoTherapeutics Investors GP LLC and Brooklyn ImmunoTherapeutics Investors LP, whereby such beneficial holders will continue to receive, on an annual basis, royalties in an aggregate amount equal to 4% of the net revenues of IRX-2, a cytokine-based therapy being developed by Brooklyn LLC to treat patients with cancer.

22

11)
STOCK-BASED COMPENSATION
 

Stock Options

 

During the three and nine months ended September 30, 2022 and 2021, the Company granted the following stock options (in thousands):


 
  
Three months ended September 30,
    
Nine months ended September 30,
  
 
  
2022
    
2021
    
2022
    
2021
  
Stock options granted
    
188
      
12
      
287
      
180
  



The following weighted-average assumptions were used for stock options granted during the three and nine months ended September 30, 2022 and 2021:


    Three months ended September 30,  
 
  
2022
    
2021
  
Weighted average risk-free rate
    
2.64%

   
0.97%

Weighted average volatility
    
89.80%

   
143.29%

Dividend yield
    
0%
   
0%

Expected term
  
5.73 years
    
6.08 years
  


   
Nine months ended September 30,
  
   
2022
    
2021
  
Weighted average risk-free rate
    
2.54%

   
1.06%

Weighted average volatility
    
91.20%

   
134.88%

Dividend yield
    
0%

   
0%

Expected term
  
5.30 years
    
6.08 years
  



During the three and nine months ended September 30, 2022, options to purchase approximately 124,000 shares of common stock were granted to Dr. Matthew Angel, the Company’s Interim Chief Executive Officer. Dr. Angel’s stock options vest at rate of 1/24 on the grant date with the remaining options to vest in 46 substantially equal monthly installments thereafter. For the nine months ended September 30, 2022, stock options to purchase approximately 21,000 shares of common stock were granted to Dr. Howard J. Federoff, who served as the Company’s Chief Executive Officer and President until May 26, 2022 (the “March 2022 Stock Option Grant”). The March 2022 Stock Option Grant vests in 36 substantially equal monthly installments from the grant date and had an exercise price equal to the closing price of the Company’s common stock on the grant date.



During the nine months ended September 30, 2021, options to purchase approximately 161,000 shares of common stock were granted to Dr. Federoff upon his appointment as Chief Executive Officer and President in April 2021. Approximately 131,000 stock options were under a time-based grant (the “Time-Based Grant”) and approximately 30,000 stock options were under a performance-based grant (the “Milestone Grant”). The Time-Based Grant vests over four years, with 25% vesting on the one-year anniversary of the grant date and the remaining options vesting in 36 substantially equal monthly installments thereafter. The Milestone Grant vests upon the first concurrence by the U.S. Food and Drug Administration that a proposed investigation may proceed following review of a Company filed investigational new drug application in connection with that the License Agreement. Both the Time-Based Grant and the Milestone Grant had an exercise price equal to the closing price of the Company’s common stock on the grant date.

Vesting of all stock options grants is subject to continuous service with the Company through such vesting dates.



As discussed above, pursuant to the Separation Agreement with Dr. Federoff, the Company accelerated the vesting of approximately 7,000 stock options under the March 2022 Stock Option Grant and approximately 33,000 stock options under the Time-Based Grant. The Company also waived the performance condition under the Milestone Grant and accelerated the vesting of approximately 21,000 stock options under the Milestone Grant. Lastly, the Company extended the post-termination exercise period from 90 days to 36 months immediately following the Separation Date for all options that were vested after such accelerations.



The above modifications to Dr. Federoff’s stock options grants resulted in modification accounting under ASC 718, Compensation – Stock Compensation. As a result, the Company immediately recognized approximately $0.1 million for the incremental fair value of stock options that were vested prior to the modification by calculating the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. For stock options that were not vested prior to the modification but then vested as a result of the acceleration, the Company reversed any stock compensation expense previously recognized, remeasured the fair value of the modified award and immediately recognized approximately $0.1 million of stock compensation expense in full since there was no future service period required to be provided.



During the three and nine months ended September 30, 2021, there were 65 options exercised for total cash proceeds of $10,202. The options exercised had a total intrinsic value of $57,212. There were no options exercised during the three and nine months ended September 30, 2022.

 

As of September 30, 2022, there were approximately 362,000 stock options outstanding.

 

Restricted Stock Units

 

During the three and nine months ended September 30, 2022 and 2021, the Company granted the following restricted stock units (“RSUs”) (in thousands):


 
  
Three months ended September 30,
    
Nine months ended September 30,
  
 
  
2022
    
2021
    
2022
    
2021
  
RSUs Granted
    
-
      
6
      
55
      
11
  



The Company recognizes the fair value of RSUs granted 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 respective 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. The following table shows the number of RSUs that vested and were settled during the three and nine months ended September 30, 2022, as well as the number of shares of common stock withheld to cover the withholding taxes and the net shares issued upon settlement (in thousands):


24
 
  
Three months ended
    
Nine months ended
  
 
  
September 30, 2022
    
September 30, 2022
  
RSUs vested
    
1
   
3
  
Common stock withheld to cover taxes
    
-
   
(1
)
Common stock issued
    
1
      
2