Cibus, Inc.: Form 10-Q for the period ended Mar 31, 2023

The following discussion and analysis of the Company’s financial condition and results of operations should be read together with its consolidated financial statements and related notes, which are included elsewhere in this Quarterly Report on Form 10-Q and with its Annual Report on Form 10-K/A for the year ended December 31, 2022, including the Consolidated Financial Statements and Notes incorporated therein. The Company uses the term “compounds” to describe compounds, molecules, and plant-based chemistries interchangeably.

EXECUTIVE OVERVIEW

Calyxt is a plant-based synthetic biology company. The Company leverages its proprietary PlantSpring™ technology platform to engineer plant metabolism to produce innovative, high-value, and sustainable materials and products for use in helping customers meet their sustainability targets and financial goals. The Company’s primary focus and commercialization strategy is on engineering synthetic biology solutions through its PlantSpring platform for manufacture using its proprietary and differentiated BioFactory™ production system for a diverse base of target customers across an expanded group of end markets including the cosmeceutical, nutraceutical, and pharmaceutical industries. The Company also seeks to commercialize its PlantSpring technology platform by licensing elements of the platform and historically developed traditional agriculture seed-trait product candidates, as well as selectively developing product candidates for customers in traditional agriculture.

The Company is an early-stage company and has incurred net losses since its inception. As of March 31, 2023, the Company had an accumulated deficit of $217.5 million. The Company’s net losses were $5.4 million for the three months ended March 31, 2023. The Company expects to continue to incur significant expenses and operating losses for the next several years. Those expenses and losses may fluctuate significantly from quarter-to-quarter and year-to-year.

Historically, the Company’s expenses in connection with the execution of its long-term business plan have been primarily driven by:

• Research and Development (R&D) expenses associated with developing and enhancing the capabilities of its PlantSpring technology platform;
• R&D expenses and capital expenditures to expand its BioFactory production system;
• regulatory expenses associated with R&D and product development;
• maintaining, protecting, expanding, and defending its intellectual property portfolio, including intellectual property related to the PlantSpring technology platform and BioFactory production system;
• human capital related expenses associated with attracting and retaining skilled personnel; and
• pursuing and negotiating agreements with customers, licensees, and infrastructure partners.

BUSINESS UPDATE

Merger Agreement and Interim Funding

On September 22, 2022, the Company announced that the Board had begun evaluating potential strategic alternatives to maximize shareholder value, including financing alternatives, merger, reverse merger, other business combinations, sale of assets, licensing, or other transactions.

On January 13, 2023, the Company, Cibus, and certain other parties thereto entered into the Merger Agreement. Pursuant to the Merger Agreement, following the Transactions, Calyxt will be organized in an “Up-C” structure and re-named “Cibus, Inc.”, Calyxt will act as the managing member of Cibus, and its only material asset will consist of common units of Cibus. If the Transactions are completed, the business of Cibus will continue as the primary business of the combined organization and the current equity holders of Cibus will own a substantial majority of the issued and outstanding common stock of the Company.

The closing of the Transactions is subject to the approval of Calyxt’s stockholders, the approval of Cibus’ members, the receipt of required regulatory approvals (to the extent applicable), and satisfaction of other customary closing conditions. The closing is currently expected to occur in the second quarter of 2023. Additional information regarding the Transactions is included in Calyxt’s registration statement on Form S-4 initially filed with the SEC on February 14, 2023, as amended on April 14, 2023.

Pursuant to the Merger Agreement, beginning at the earlier of March 15, 2023, and the date Calyxt’s unrestricted cash balance first drops below $1.5 million, Calyxt could request, and Cibus agreed to provide, an unsecured, interest-free revolving line of credit of up to $3.0 million in cash, which amount may be increased to $4.0 million if Cibus elects to extend the outside date (as defined in the Merger Agreement) to June 30, 2023. Funds can be drawn by Calyxt in $0.5 million increments and may only be used to fund operating expenses incurred in the ordinary course of business consistent with past practice and consistent with the negative covenants in the Merger Agreement. The full outstanding balance of the Interim Funding will be reduced to zero in connection with the closing of the Transactions, if consummated. The full outstanding balance of the Interim Funding will be forgiven by Cibus if the Merger Agreement is terminated for any reason under certain conditions, as detailed in the Merger Agreement. The Interim Funding is subject to acceleration in connection with certain bankruptcy events. As of March 31, 2023, the Company had received $1.0 million of Interim Funding from Cibus. Subsequent to March 31, 2023, and prior to the filing date of this Form 10-Q, the Company received another $0.5 million of Interim Funding from Cibus.

If, for any reason, the Transactions are not completed, the Company will reconsider its available alternatives at such time and could pursue one of the following courses of action, which the Company currently believes to be the most likely alternatives:

• Dissolve and liquidate. The Company may decide to dissolve and liquidate its assets. In such a circumstance, Calyxt would be required to pay all of its debts and contractual obligations and to set aside certain reserves for potential future claims. In light of Calyxt’s current capital resources, it is highly unlikely, in this case, that substantial resources, if any, would be available for distribution to stockholders.
• Pursue another strategic transaction. The Company may decide to resume the process of evaluating a potential merger, reorganization, or other business combination transaction or to sell or otherwise dispose of certain of the Company’s assets. Any of these alternatives would be costly and time-consuming and would require that Calyxt obtain additional near-term funding in parallel to, or as part of, such a strategic transaction. The Company expects that it would be difficult to secure such funding in a timely manner, on favorable terms, or at all.
• Operate the business. Although substantially less likely than the alternatives above, the Calyxt Board could elect to seek to continue to operate the Company’s business. This alternative would require that Calyxt obtain additional near-term funding, which the Company expects would be difficult to secure in a timely manner, on favorable terms, or at all. If pursued, Calyxt would likely need to significantly delay or further scale back operations beyond its already narrowly focused operational activities.

Current Operational Focus

Prior to the announcement of the Transactions, the Company’s primary focus was on the development of synthetic biology products for its customers using its BioFactory production system. In light of the proposed Transactions and recent capital resource constraints, the Company has substantially scaled back its operations and has focused its current business activities on ensuring it has cash sufficient to achieve a closing of the proposed Transactions. Accordingly, Calyxt’s management has implemented cost reduction and other cash-focused measures, including reduction of capital expenditures, headcount reductions, and renegotiation or termination of professional services agreements. To conserve cash, Calyxt has also strategically evaluated its arrangements with suppliers and service providers and has, in several instances, transitioned such relationships to lower cost alternative providers.

In limiting operations to core activities, the Company has focused its continuing operations on:

• scaling production of a single Plant Cell Matrix with its manufacturing partner, Evologic;
• licensing efforts with respect to its PlantSpring technology and plant traits, including the TALEN technology; and
• continuing to progress its three current customer projects—(1) its research collaboration with a leading global food ingredient manufacturer to develop a soybean trait to serve as an alternative to palm oil, (2) its plant-based chemistry pilot project for a major consumer packaged goods company, and (3) supporting late-stage development activities for its improved digestibility alfalfa trait, which was developed with and licensed to S&W Seed Company.

The Company has suspended non-core activities, such as efforts toward the development and integration of AIML and the initiation, development, and commercialization of additional synthetic biology products, or chemistries, beyond those involved in the continuing operations identified above.

RELATIONSHIP WITH CELLECTIS AND COMPARABILITY OF RESULTS

The Company’s largest shareholder is Cellectis. As of March 31, 2023, Cellectis owned 48.2 percent of the Company’s issued and outstanding common stock.

Cellectis has certain contractual rights as well as rights pursuant to the Company’s certificate of incorporation and bylaws, in each case, for so long as it maintains threshold beneficial ownership levels in the Company’s shares. See “Risk Factors—Although Cellectis and its affiliates hold less than a majority of the Company’s outstanding common stock, Cellectis possesses certain rights that prevent other stockholders from influencing significant decisions” of the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2022.

In addition, Cellectis has guaranteed the lease agreement for the Company’s headquarters. However, the Company previously agreed to indemnify Cellectis for any obligations under this guaranty, effective upon Cellectis’ ownership falling to 50 percent or less of the Company’s outstanding common stock. Accordingly, the Company’s indemnification obligation was triggered in October 2022.

The Company holds an exclusive license from Cellectis that broadly covers the use of engineered nucleases for plant gene editing. This intellectual property covers methods to edit plant genes using “chimeric restriction endonucleases,” which include TALEN®, CRISPR/Cas9, zinc finger nucleases, and some types of meganucleases.

FINANCIAL OPERATIONS OVERVIEW

Revenue

Revenue is recognized from sales of products, from licenses of technology, and from product development activities for customers.

Cost of Goods Sold

Cost of goods sold are recognized as products are sold. There are minimal costs of goods sold associated with the Company’s technology licensing activities.

Research and Development Expense

The Company’s R&D expense primarily consist of employee-related costs for personnel who research and develop its product candidates, fees for contractors who support product development activities, purchasing material and supplies for its laboratories, licensing, an allocation of facility and information technology expenses, and other costs associated with owning and operating its own laboratories and pilot BioFactory capabilities. This includes the costs of performing activities to discover and develop products and advance the Company’s PlantSpring technology platform, including its intellectual property portfolio. BioFactory expenses from lab through pilot, unless incurred related to a specific product sold to a customer, are also classified as R&D expense. R&D expenses also include costs to write and support the research for filing patents. The Company recognizes R&D expenses as they are incurred.

Selling, General, and Administrative Expense

SG&A expenses consist primarily of employee-related expenses for selling and licensing the Company’s products and employee-related expenses for its executive, legal, intellectual property, information technology, finance, and human resources functions. Other SG&A expenses include facility and information technology expenses not otherwise allocated to R&D expenses, professional fees for auditing, tax and legal services, expenses associated with maintaining patents, consulting costs and other costs of the Company’s information systems, and costs to market its products.

Interest, net

Interest, net is comprised of interest income resulting from investments of cash and cash equivalents, short-term investments, unrealized gains and losses on short-term investments, issuance costs associated with the Common Warrants, and interest expense incurred related to financing lease obligations. It is also driven by balances, yields, and timing of financing and other capital raising activities.

Non-operating income (expenses)

Non-operating income (expenses) are expenses that are not directly related to ongoing operations and are primarily comprised of gains and losses from the mark-to-market of Common Warrants, gain from a legal settlement, costs related to the completion of the Transactions, foreign exchange-related transactions, and disposals of land, buildings, and equipment.

Revenues and Costs

To the extent any revenue is generated under the Company’s current business model, such revenue would derive from product development activities for customers for both the BioFactory production system and agricultural production and technology licensing arrangements. Any such cash and revenue- generating opportunities associated with these activities would be expected to primarily arise from up-front and milestone payments, annual license fees, and royalties. If, and when, the BioFactory begins to produce products for customers, it is anticipated that such revenues would grow and surpass revenues from other sources.

During the course of discussions with Cibus regarding, and following the execution of, the Merger Agreement, Calyxt has streamlined and focused its business activities on preserving cash sufficient to achieve a closing of the Transactions. Accordingly, Calyxt has taken additional steps to streamline its operations and to reduce its operating expenses, while focusing on a limited scope of core projects. While these projects are important for Calyxt’s overall product development pipeline, none of these projects is expected to generate material revenue in the near term. While the Company continuously implemented cost reduction measures including not filling open positions throughout 2022, the principal impact of these actions affects results of operations beginning in early 2023 following the reduction in employees from 48 to 28 in January 2023. As of March 31, 2023, the Company had 25 full time employees.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2023, COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2022

A summary of the Company’s results of operations for the three months ended March 31, 2023, and 2022 follows:

(In thousands, except percentage values)

Revenue, Cost of Goods Sold, and Gross Profit

Revenues and gross profit were nominal in the first quarter of 2023 and 2022. Revenue in the first quarter of 2023 and 2022 was primarily associated with the Company’s agreement with a large food ingredient manufacturer to develop a palm oil alternative. The $10 thousand increase in revenue and gross profit was due to a change made to the estimated completion date of the contract in the first quarter of 2022.

Research and Development Expense

R&D expense was $2.2 million in the first quarter of 2023, a decrease of $0.7 million, or 25 percent, from the first quarter of 2022. The decrease was primarily driven by the reduction in headcount year-over-year and other cost reduction initiatives.

Selling, General, and Administrative Expense

SG&A expense was $2.3 million in the first quarter of 2023, a decrease of $0.9 million, or 28 percent, from the first quarter of 2022. The decrease was driven by the reduction in headcount year-over-year and other cost reduction initiatives.

Interest, net

Interest, net was nominal in the first quarter of 2023 and 2022. The increase in expense was driven by a full quarter of amortization of financing costs associated with the issuance of common stock warrants in the first quarter of 2023 compared to a partial quarter of amortization in the first quarter of 2022, partially offset by a lower financing lease obligations balance.

Non-operating income (expenses)

Non-operating income (expenses) were expense of $0.9 million in the first quarter of 2023, an increase in expense of $1.4 million, or 287 percent, from the first quarter of 2022. The increase in expense was driven by $1.3 million of mark-to-market loss on the Company’s Common Warrants, which increased in value due to an increase in stock price, as well as $0.8 million of costs associated with the Transactions. These expenses were partially offset by $0.8 million of gain contingency associated with the final payment to the Company for settlement of a legal matter with one of the Company’s technology vendors regarding alleged intellectual property infringement.

Net Loss

Net loss was $5.4 million in the first quarter of 2023, an improvement of $0.2 million, or 4 percent, from the first quarter of 2022. The improvement in net loss was driven by the improvement in R&D and SG&A expenses partially offset by the increase in Non-operating income (expenses) discussed above.

Net Loss Per Share

Net loss per share was $1.09 in the first quarter of 2023, an improvement of $0.25 per share, or 19 percent, from the first quarter of 2022. The improvement in net loss per share was driven by the improvement in net loss and a year-over-year increase in weighted average shares outstanding.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Company’s primary sources of liquidity are its cash and cash equivalents. As of March 31, 2023, the Company had $2.1 million of cash and cash equivalents. Current liabilities were $4.2 million as of March 31, 2023.

The Company’s current cash and cash equivalents, when combined with Interim Funding available from Cibus, are sufficient to cover the Company’s current liabilities as of March 31, 2023. See above under the heading “Business Update—Merger Agreement and Interim Funding” for additional details regarding the Interim Funding. The Company’s liquidity funds its non-discretionary cash requirements and its discretionary spending. The Company has contractual obligations related to recurring business operations, primarily related to lease payments for its headquarters and laboratory facilities. The Company’s principal discretionary cash spending is for capital expenditures, short-term working capital payments, and professional and other transaction-related expenses incurred as the Company pursues additional financing and evaluates potential alternative transactions.

The Company incurred net losses of $5.4 million for the three months ended March 31, 2023. As of March 31, 2023, the Company had an accumulated deficit of $217.5 million and expects to continue to incur losses in the future.

Cash Flows from Operating Activities

In Thousands

-23-

Net cash used by operating activities was $2.4 million in the first quarter of 2023, an improvement of $4.0 million, or 63 percent, from the first quarter of 2022. The improvement was driven by a $2.1 million decrease in cash used by operating liabilities, primarily related to severance and bonus payments made in the first quarter of 2022, a $1.3 million unrealized gain from the increase in value of the Common Warrants, a $0.2 million decrease in net loss discussed above, and a $0.3 million increase in non-cash stock compensation, primarily the result of higher forfeiture amounts of stock awards in the first quarter of 2022.

The Company expects cash used by operating activities in 2023 to be lower than 2022 driven by the reduction in operating expenses, partially offset by non-operating expenses consisting primarily of costs associated with the Transactions.

Cash Flows from Investing Activities

In Thousands

There was no net cash provided or used by investing activities in the first quarter of 2023, a decrease in cash used by investing activities of $0.5 million, or 100 percent, from the first quarter of 2022. The decrease in cash used by investing activities used was driven by the decision to conserve cash and place capital projects on hold in anticipation of the completion of the Transactions.

The Company expects cash used for purchases of land, buildings, and equipment in 2023 to be lower than in 2022, driven by its reduced operational focus.

Cash Flows from Financing Activities

In Thousands

NM – not meaningful

Net cash provided by financing activities was $0.9 million in the first quarter of 2023, a decrease of $9.5 million, or 91 percent, from the first quarter of 2022. The decrease was primarily due to the receipt of $10.0 million of net proceeds from the Follow-On Offering in the first quarter of 2022 partially offset by the receipt of the Interim Funding in the first quarter of 2023.

The Company expects net cash provided by financing activities in 2023 to decrease compared to 2022, driven by financing transactions completed in 2022.

Capital Resources

Operating Capital Requirements

The Company has incurred losses since its inception and its net loss was $5.4 million for the three months ended March 31, 2023, and it used $2.4 million of cash for operating activities for the three months ended March 31, 2023.

If the Transactions are not consummated for any reason, the Company may decide to dissolve and liquidate its assets. In such a circumstance, Calyxt would be required to pay its debts and contractual obligations and to set aside certain reserves for potential future claims. In light of Calyxt’s current capital resources, it is highly unlikely, in this case, that substantial resources, if any, would be available for distribution to stockholders.

To the extent the Transactions are not consummated for any reason and the Company is not liquidated and dissolved, it anticipates that it will continue to generate losses for the next several years or until such time as an alternative strategic transaction is consummated.

In the less likely scenario in which the Company seeks to continue to operate its business and until the Company can generate cash flows sufficient to support its operating capital requirements, it would seek to finance a portion of future cash needs through (i) cash on hand, (ii) commercialization activities, which may result in various types of revenue streams from (a) future product development agreements and technology licenses, including upfront and milestone payments, annual license fees, and royalties; and (b) product sales from its proprietary BioFactory production system; (iii) government or other third-party funding, (iv) public or private equity or debt financings, (v) the execution of strategic transactions, or (vi) a combination of the foregoing. However, capital generated by commercialization activities, if any, is expected to be received over a period of time and near-term additional capital may not be available on reasonable terms, if at all.

The Company’s primary capital resources are its cash and cash equivalents and available Interim Funding.

The Company faces uncertainty regarding the adequacy of its capital resources and presently has limited access to additional financing and expects to rely upon the Interim Funding in order to continue operations through the consummation of the Transactions.

While certain public and private transaction structures may be available to the Company, these may require additional time and cost, may result in fixed payment obligations, may result in substantial dilution to existing stockholders, particularly in light of the Company’s current stock price, may impose operational restrictions on the Company, may grant holders rights senior to those of the Company’s shares of common stock, and may not be available on attractive terms. Further, during the pendency of the Transactions, any such transactions could only be entered into with the consent of Cibus. Accordingly, although the Company continuously assesses market conditions and available financing alternatives, in light of the Company’s current stock price, the restrictions imposed by the Merger Agreement and the availability of the Interim Funding, the Company does not anticipate any additional third-party funding prior to or not contingent upon the consummation of the Transactions.

The Company believes its cash and cash equivalents as of March 31, 2023, considering continuing actions taken to reduce its operating expenses to enable the proposed Transactions to close, the legal settlement discussed in Note 8 to the consolidated financial statements, and the availability of the Interim Funding, are sufficient to fund its operations through the second quarter of 2023. The Company’s management has concluded there is substantial doubt regarding its ability to continue as a going concern for a period of 12 months or more from the date of filing of this Quarterly report on Form 10-Q.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.

In light of the Company’s current liquidity challenges and capital resource constraints, management has implemented cost reduction and other cash-focused measures to manage liquidity, including reduction of capital expenditures, headcount reductions, and renegotiation or termination of professional services agreements. To conserve cash, the Company has also strategically evaluated its arrangements with suppliers and service providers and has, in several instances, transitioned such relationships to lower cost alternative providers. During the course of discussions with Cibus regarding, and following the execution of, the Merger Agreement, Calyxt has further streamlined and focused its business activities on preserving cash sufficient to achieve a closing of the Mergers. Accordingly, Calyxt has taken additional steps to reduce its operating expenses and has focused its continuing operations on scaling production of its Plant Cell Matrix™ structures with its manufacturing partner, licensing efforts with respect to its PlantSpring™ technology and plant traits, and continuing to progress its three key customer projects.

If the Company is unable to raise additional capital in a sufficient amount or on acceptable terms or to consummate the Transactions, the Company may have to implement increasingly stringent cost saving measures and significantly delay, scale back, or cease operations, in part or in full. If the Company decided to cease operations and dissolve and liquidate its assets, it is unclear to what extent the Company would be able to pay its existing obligations. In such a circumstance and in light of the Company’s current capital resources position, it is unlikely that substantial resources would be available for distributions to stockholders.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND CONTINGENCIES

As of March 31, 2023, there were no material changes in the Company’s commitments under contractual obligations as disclosed in its Annual Report.

CRITICAL ACCOUNTING ESTIMATES

The preceding discussion and analysis of the Company’s financial condition and results of operations are based upon its consolidated financial statements and the related disclosures, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires the Company to make estimates, assumptions, and judgments that affect the reported amounts in its consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the policies discussed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, are the most critical to an understanding of its financial condition and results of operations because they require it to make estimates, assumptions, and judgments about matters that are inherently uncertain.

Valuation of Common Warrants

The Common Warrants have been classified as a liability in the Company’s consolidated balance sheet because the warrants include a put option election available to the holder of a Common Warrant that is contingently exercisable if the Company enters into a Fundamental Transaction through a Fundamental Change Put. If the Fundamental Change Put is exercised by the holder of a Common Warrant, they may elect to receive either the consideration of the Fundamental Transaction or put the Common Warrant back to the Company in exchange for cash, based on terms and timing specified in the Common Warrant. If the put option is exercised, the Company is required to pay cash to the holder in an amount as determined by the Black Scholes pricing model, with assumptions determined in accordance with the terms of the Common Warrants.

The estimated fair values of the Common Warrants, and the assumptions used for the Black-Scholes option pricing model were as follows:

A ten percent change in any of the assumptions would not have had a material effect on the Company’s results of financial condition or results of operations.

As of March 31, 2023, there were no other significant changes to the Company’s critical accounting policies disclosure reported in “Critical Accounting Estimates” in its Annual Report.

For quantitative and qualitative disclosures about market risk that affect us, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of the Annual Report. There have been no material changes in information that would have been provided in the context of Item 3 from the end of the preceding fiscal year until March 31, 2023. However, the Company does provide risk management discussion in various places in this Quarterly Report on Form 10-Q, primarily in Note 3. Financial Instruments Measured at Fair Value and Concentrations of Credit Risk.

Management’s Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, its principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, were effective as of March 31, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2023, that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes in risk factors in the period covered by this report. See the discussion of risk factors in Part I, Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2022.