Cero Therapeutics Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2024

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information which CERo Therapeutics Holdings, Inc. (“the Company”) management believes is relevant to an assessment and understanding of its results of operations and financial condition. The discussion should be read together with the Company’s financial statements and related notes that are presented above. This Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements resulting from various factors. Please see “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023), filed with the Securities and Exchange Commission (the “SEC”). Unless the context otherwise requires, references in this section to “Predecessor” is intended to mean the business and operations of CERo Therapeutics, Inc. prior to the Merger.

Overview

CERo Therapeutics, Inc. (Predecessor) was incorporated in Delaware on September 23, 2016, and is based in South San Francisco, California. Predecessor was focused on developing its therapeutic platform to genetically engineer human immune cells to fight cancer and did not begin clinical development or product commercialization. The Company’s efforts will focus on continued product development, including clinical development, to support regulatory approval to commercialize and subsequent product commercialization.

On February 5, 2024, Predecessor, PBAX and PBCE Merger Sub, Inc. (“Merger Sub”) entered into Amendment No. 1 to the Business Combination Agreement (the “First BCA Amendment”) to, among other things, (i) remove the minimum cash condition, (ii) modify the stock-price based milestones such that (a) the trading price condition for the First Level Earnout Target (as defined in the First BCA Amendment) shall be reset from $12.50 to 125% of the Conversion Price (as defined in the First BCA Amendment) of the Company’s Series A convertible preferred stock, par value $0.0001 per share (“Series A Preferred Stock”) upon the reset of such Conversion Price as described below and (b) the trading price condition for the Second Level Earnout Target (as defined in the First BCA Amendment) shall be reset from $15.00 to 150% of the Conversion Price of the Series A Preferred Stock upon reset of such Conversion Price as described below, and (iii) increase the aggregate number of shares of PBAX Class A Common Stock, par value $0.0001 per share (“PBAX Class A Common Stock”) issuable to the stockholders of Predecessor in connection with Merger Sub merging with and into Predecessor, with Predecessor surviving as a wholly-owned subsidiary of the Company (the “Merger”), from 4,651,704 shares to 5,000,000 shares of PBAX Class A Common Stock. Such number of shares of PBAX Class A Common Stock is in addition to up to 1,200,000 shares of PBAX Class A Common Stock issuable upon satisfaction of certain earn-out conditions and 382,651 shares of PBAX Class A Common Stock issuable upon exercise of rollover options or warrants.

On February 13, 2024, Predecessor, PBAX and Merger Sub entered into Amendment No. 2 to the Business Combination Agreement to create two additional pools of earnout shares (the “Earnout Shares”) of PBAX Class A Common Stock (one pool of which contains 875,000 shares, and one pool of which contains 1,000,000 shares of PBAX Class A Common Stock) and make certain other technical changes to the timing and process for issuance of the 1,200,000 shares of PBAX Class A Common Stock subject to the other earnout conditions set forth in the Business Combination Agreement.

On February 14, 2024, the Merger between Predecessor and PBAX was consummated pursuant to the Business Combination Agreement, dated as of June 4, 2023, as amended from time to time (as amended, the “Business Combination Agreement”) by and among Predecessor, PBAX and Merger Sub. In connection with the consummation of the Merger, PBAX changed its corporate name to “CERo Therapeutics Holdings, Inc.”

At the effective time of the Merger, (i) each outstanding share of Predecessor common stock, was cancelled and converted into the right to receive shares of Common Stock; (ii) each outstanding option to purchase Predecessor common stock was converted into an option to purchase shares of Common Stock, par value $0.0001 per share; (iii) each outstanding share of Predecessor preferred stock, was converted into the right to receive shares of Common Stock, and (iv) each outstanding warrant to purchase Predecessor preferred stock was converted into a warrant to acquire shares of Common Stock. In addition, each outstanding Predecessor convertible bridge note was exchanged for shares of Series A Preferred Stock.

In addition, the holders of Predecessor common stock and Predecessor preferred stock have the contingent right to receive the Earnout Shares. At the Closing, the Company issued three pools of shares of Common Stock subject to forfeiture if the applicable conditions to transferability thereof are not satisfied: (i) 1,200,000 shares of Common Stock, which will be fully vested upon the achievement of certain adjusted stock price-based earnout targets or upon a qualifying transaction (ii) 875,000 shares of Common Stock, pursuant to a Letter Agreement, dated as of February 14, 2024 which were fully vested at Closing of the Merger and which were issued as an offset to the Sponsor Share Forfeiture Agreement, and (iii) 1,000,000 shares of Common Stock, which were fully vested upon the June 28, 2024 achievement of certain regulatory milestone-based earnout targets.

As consideration for the Merger, the Company issued to Predecessor stockholders an aggregate of 7,597,638 shares of Common Stock, including 2,200,000 Earnout Shares and 382,651 shares issuable upon exercise of rollover options or warrants.

PIPE Financing

In February 2024, the Company consummated the first tranche of a private placement of 10,039 shares of the Series A Preferred Stock, issuance of common warrants to purchase 612,746 shares of Common Stock and warrants to purchase 2,500 shares of Series A Preferred Stock, pursuant to the Amended and Restated Securities Purchase Agreement, dated February 14, 2024, by and among Predecessor, PBAX and certain accredited investors for aggregate cash proceeds to the Company of approximately $10.0 million. On April 1, 2024, the Company consummated a private placement of 626 shares of the Series B Preferred Stock, pursuant to the Securities Purchase Agreement, dated March 28, 2024, by and among the Company and certain accredited investors, for aggregate cash proceeds to the Company of approximately $0.5 million. A portion of the Series A Preferred Stock was issued as consideration for the cancellation of outstanding indebtedness or securities of Predecessor or PBAX, including a promissory note of PBAX and certain convertible bridge notes of Predecessor. Such transactions collectively are referred to as the “PIPE Financing.”

Recent Developments

Investigational New Drug Application Submission

On June 28, 2024, the Company submitted an Investigational New Drug Application (“IND”) for its product candidate, CER-1236, to the Food and Drug Administration (the “FDA”). On July 26, 2024, the Company was informed by the FDA that it has placed a clinical hold on the IND. The FDA indicated that the clinical hold has been placed as a result of insufficient data provided with regard to two issues within pharmacology and toxicology of CER-1236. The FDA indicated that, within 30 calendar days, it would provide a detailed official hold letter and requested that the Company hold its response until after receipt of such letter (the “Hold Letter”). The Company plans to work expeditiously to resolve this clinical hold so that CER-1236 may proceed to the clinic, including by beginning scientific experimental activities to address the two issues based upon the FDA communication, as well as earlier discussions with the FDA. Notwithstanding the FDA Communication and pending receipt of the Hold Letter, the Company continues to believe that it will be able to initiate the planned clinical trial by the end of 2024.

Nasdaq Notices of Non-compliance

On July 19, 2024, the Company received a letter (the “Bid Price Requirement Letter”) from the staff at The Nasdaq Global Market (“Nasdaq”) notifying the Company that, for the 30 consecutive trading days prior to the date of the Bid Price Requirement Letter, the closing bid price for the Common Stock has been below the minimum $1.00 per share required for continued listing on Nasdaq set forth in Nasdaq Listing Rule 450(a)(1), which is required for continued listing of the Common Stock on Nasdaq (the “Bid Price Requirement”).

On July 19, 2024, the Company also received a letter (the “MVPHS Letter”) from Nasdaq notifying the Company that the “Market Value of Publicly Held Shares” (the “MVPHS”) of the Common Stock had been below the minimum of $15,000,000 for the last 30 consecutive business days prior to the date of the MVPHS Letter, which is required for continued listing of the Common Stock on Nasdaq (the “MVPHS Requirement”).

Such letters are in addition to the letter from Nasdaq received by the Company on May 2, 2024 (the “MVLS Letter” and, together with the Bid Price Letter and the MVPHS Letter, the “Letters”) notifying the Company that, for the 30 consecutive trading days prior to the date of such MVLS Letter, the Common Stock had traded at a value below the minimum $50,000,000 “Market Value of Listed Securities” (“MVLS”) requirement set forth in Nasdaq Listing Rule 5450(b)(2)(A), which is required for continued listing of the Common Stock on Nasdaq (the “MVLS Requirement” and, together with the Bid Price Requirement and the MVPHS Requirement, the “Requirements”).

The Letters are only notifications of deficiency, not of imminent delisting, and have no current effect on the listing or trading of the Company’s securities on Nasdaq.

In accordance with Nasdaq listing rules 5810(c)(3)(C) and 5810(c)(3)(D), respectively, the Company has 180 calendar days, or until January 15, 2025, to regain compliance with the Requirements, except for the MVLS Requirement, with respect to which such deadline is October 29, 2024. To regain compliance with the Bid Price Requirement, the bid price of the Company’s common stock must close at $1.00 per share or more for a minimum of ten consecutive business days. To regain compliance with the MVPHS Requirement, the Company’s common stock must trade at or above a level such that the Company’s MVPHS closes at or above $15,000,000 for a minimum of ten consecutive business days. If the Company does not regain compliance with the Bid Price Requirement by January 15, 2025, the Company may be afforded a second 180 calendar day period to regain compliance. To qualify, the Company would be required to meet the MVPHS Requirement and all other initial listing standards for The Nasdaq Global Market, except for the Bid Price Requirement. In addition, the Company would be required to notify Nasdaq of its intent to cure the deficiency during the second compliance period. In order to regain compliance with the MVPHS Requirement, the Common Stock must trade at or above a level such that the Company’s MVLS closes at or above $50,000,000 for a minimum of ten consecutive business days during the compliance period. If the Company is unable to satisfy the MVLS requirement prior to such date, the Company may be eligible to transfer the listing of its securities to The Nasdaq Capital Market (provided that it then satisfies the requirements for continued listing on that market).

The Company intends to actively monitor the closing bid price for its common stock, its MVPHS and its MVLS and may, if appropriate, evaluate available options to resolve these deficiencies and regain compliance with the Requirements. Such options may include seeking to qualify for continued listing under a different continued listing standard of the Nasdaq Global Market or Nasdaq Capital Market, in lieu of the MVPHS and MVLS requirements, including the Equity Standard, if the Company has sufficient stockholders’ equity at such time. While the Company is exercising diligent efforts to maintain the listing of its securities on Nasdaq, there can be no assurance that the Company will be able to regain or maintain compliance with Nasdaq listing standards.

Factors Affecting Our Performance

The Company believes that its performance and future success depend on several factors that present significant opportunities for the Company but also pose risks and challenges. These include, among others:

• the extent to which the Company develops, in-licenses or acquires other product candidates and technologies in its product candidate pipeline;
• the costs and timing of process development and manufacturing scale-up activities associated with the Company’s product candidates and other programs as the Company advances them through preclinical and clinical development;
• the number and development requirements of product candidates that the Company may pursue;
• the costs, timing and outcome of regulatory review of the Company’s product candidates;
• the Company’s headcount growth and associated costs as it expands its R&D capabilities, establishes and maintains the administrative functions required for a publicly traded company, and establishes and expands its commercial infrastructure and operations;
• the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of the Company’s product candidates for which the Company receives market approval;
• the revenue, if any, received from commercial sales of the Company’s product candidates for which it receives marketing approval; and
• competition from other similar product candidates.

Components of Results of Operations

Revenue

Predecessor and the Company have not recognized any revenue from any sources, including from product sales, and the Company does not expect to generate any revenue from the sale of products in the foreseeable future. If the development efforts for the Company’s product candidates, each of which is a specific product and indication combination, are successful and result in regulatory approval, or if the Company executes license agreements with third parties, the Company may generate revenue from R&D services, from the achievement of development milestones or from milestones and royalties related to product sales. However, there can be no assurance as to when any revenues will be generated, if at all.

Operating Expenses

Research and Development Expenses

R&D expenses consist of discovery activities, manufacturing development and production, preclinical and clinical development, and regulatory filing for product candidates. R&D expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in R&D are capitalized until the goods or services are received. Costs incurred in obtaining technology licenses through asset acquisitions, if incurred, will be charged to R&D expense if the licensed technology has not reached technological feasibility and has no alternative future use. R&D expenses include or could include:

• employee-related expenses, including salaries, bonuses, benefits, stock-based compensation and other related costs for those employees involved in R&D efforts;
• external R&D expenses incurred under agreements with pre-clinical research organizations, clinical research organizations, investigative sites, centralized clinical laboratories, and consultants to conduct preclinical and clinical studies;
• costs related to manufacturing material for preclinical studies and clinical trials, including fees paid to contract development and manufacturing organizations;
• product-liability insurance for clinical development product(s);
• laboratory supplies and research materials;
• software and systems related to R&D activities;
• costs related to regulatory filing and compliance; and
• facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, and equipment.

Product candidates in later stages of development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. The Company plans to substantially increase its R&D expenses for the foreseeable future as it continues the development of its product candidates through clinical development. The Company cannot determine with certainty the timing of initiation, the duration or the costs of current or future preclinical studies and clinical trials required for regulatory approval due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. The Company anticipates that it will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and ongoing assessments as to each product candidate’s commercial potential. The Company will need to, and plans to, raise substantial additional capital in the future. Future R&D expenses may vary significantly between periods and from current expectations based on factors such as:

• expenses incurred to conduct preclinical studies required to advance product candidates into clinical trials;
• per patient clinical trial costs based on a number of factors, including number of patient clinical visits, clinical laboratory testing, and potential medical imaging;
• the number of clinical trials required for approval, the number of patients who enroll in each clinical trial, and the number and geographic locations of sites included in the clinical trials;
• the length of time required to screen and enroll eligible patients, screen-failure rate, or the discontinuation rates of enrolled patients;
• potential additional safety monitoring requested by regulatory agencies;
• the cost of insurance, including product liability insurance, in connection with clinical trials; and
• suspension or termination of clinical development activities by regulators or institutional review boards for various reasons, including regulatory noncompliance or a finding that the participants are being exposed to unacceptable health risks.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive and administrative functions, including stock-based compensation, travel expenses and recruiting expenses. Other general and administrative expenses include professional fees for legal, accounting and tax-related services and insurance costs.

The Company anticipates that its general and administrative expenses will increase in the future as the Company increases headcount and contracted services for operational support for expanded operations and infrastructure. The Company also anticipates that general and administrative expenses will increase as a result of expenses for accounting, audit, legal and consulting services, as well as costs associated with maintaining compliance with Nasdaq listing rules and SEC requirements, director and officer liability insurance, investor and public relations activities and other expenses associated with operating as a public company.

Interest and Other Income, Net

Interest and other income, net consists predominantly of interest income from interest bearing bank accounts, interest expense on payables, and the gain or loss on the revaluation of derivative liabilities, which represents the change in fair value of earnout liabilities or outstanding warrants between periods.

Results of Operations for the three-months ended June 30, 2024 and 2023

Condensed Consolidated STATEMENTS OF OPERATIONS

(Unaudited)

General and Administrative Expenses

General and administrative expenses were $2.4 million for the three-month period ended June 30, 2024 compared to $1.2 million for the three-month period ended June 30, 2023, reflecting an increase of $1.3 million. The increase in the three-month period ended June 30, 2024, over the three-month period ended June 30, 2023, was predominantly due to the expenses associated with operating as a publicly traded company. The hiring of senior management in G&A resulted in an increase of $0.9 million the three-month period ended June 30, 2024, versus the three-month period ended June 30, 2023, while reduction of business consulting expense offset $0.2 million of the increase. Expenses related to services required for SEC compliance, such as printing and transfer agency fees, totaled $0.1 million and public company insurance coverage increased insurance expenses $0.1 million in the three-month period ended June 30, 2024, versus the three-month period ended June 30, 2023. Corporate communications and website development increased $0.1 million and legal expenses increased $0.1 million in the three-month period ended June 30, 2024, versus the three-month period ended June 30, 2023, due to increased requirements of a public company. Public company director fees were $0.1 million in the three-month period ended June 30, 2024, versus no fees as a private company in the three-month period ended June 30, 2023.

Research and Development Expenses

Research and development expenses were $2.7 million for the three-month period ended June 30, 2024 compared to $1.2 million for the three-month period ended June 30, 2023, reflecting an increase of $1.5 million. The increase was related to increased research and development activity as the Company prepared and filed the IND for CER-1236. Compensation increased $0.6 million in the three-month period ended June 30, 2024, over the three-month period ended June 30, 2023, due to increases in compensation, bonus accruals, and increased stock-based compensation expense for employees. Multiple manufacturing runs were necessary to complete the IND application, increasing manufacturing costs by $0.3 million in the three-month period ended June 30, 2024, over the three-month period ended June 30, 2023. Additionally, clinical and regulatory consultants were required to complete and file the IND application, resulting in an increase in scientific consulting of $0.5 million in the three-month period ended June 30, 2024, over the three-month period ended June 30, 2023. The remaining $0.1 million increase in the three-month period ended June 30, 2024, over the three-month period ended June 30, 2023, was related to lab supplies and expenses, additional pre-clinical work and facilities rent escalation.

The Company anticipates that its R&D expenses will significantly increase in the future as the Company increases headcount, compensation expense, and contracted services for preclinical and clinical development of its product candidates, as well as for manufacturing of clinical product to be used in clinical development.

Interest and Other Income, Net

Interest and other income, net was $2.7 million for the three-month period ended June 30, 2024 compared to $0.3 million for the three-month period ended June 30, 2023, reflecting an increase of $2.4 million. The increase in the three-month period ended June 30, 2024, over the three-month period ended June 30, 2023, was predominantly due to the $2.9 million change in value of the Company’s Earnout Liability. Settlement of vendor liabilities in the three-month period ended June 30, 2024, resulted in a $0.4 million increase in income in the three-month period ended June 30, 2024 versus the three-month period ended June 30, 2023, offset by the $0.6 million other expense for the delayed S-1 penalty and a 0.3 million decrease in other income the three-month period ended June 30, 2024, related to the elimination of the gain on the revaluation of warrants in the three-month period ended June 30, 2023, and reduced interest income, net in the three-month period ended June 30, 2024.

Results of Operations for the six-months ended June 30, 2024 and 2023

The Results of Operations for the six-month period ended June 30, 2024 are pro forma as the period presented in the following table and discussion includes the Predecessor for the period from January 1, 2024 through February 13, 2024 and the Company for the period from February 14, 2024 through June 30, 2024. This pro forma period from January 1, 2024 to June 30, 2024 does not include the Merger transactions that occurred on-the-line.

Condensed Consolidated STATEMENTS OF OPERATIONS

(Unaudited)

General and Administrative Expenses

General and administrative expenses were $5.3 million for the six-month period ended June 30, 2024, compared to $1.9 million for the six-month period ended June 30, 2023, reflecting an increase of $3.4 million. The increase in the six-month period ended June 30, 2024, over the six-month period ended June 30, 2023, was predominantly due to a $1.8 million expense consisting of the remaining underwriting fees from the PBAX initial public offering, which were earned on the consummation of the business combination. Additionally, the hiring of senior management in G&A resulted in an increase of $1.1 million, including recruiting fees, offset by $0.2 million less in business consulting as functions were brought in house in the six-month period ended June 30, 2024. Legal fees declined $0.1 million in the six-month period ended June 30, 2024, versus the six-month period ended June 30, 2023. Expenses related to services required for SEC compliance, such as printing and transfer agency fees, increased $0.3 million and public company insurance coverage increased insurance expenses $0.2 million in the six-month period ended June 30, 2024, compared to the six-month period ended June 30, 2023. Corporate communications and website development, accounting and director fees each increased $0.1 million in the six-month period ended June 30, 2024 compared to the six-month period ended June 30, 2023, for an aggregate $0.3 million due to increased requirements of a public company.

Research and Development Expenses

Research and development expenses were $4.4 million for the six-month period ended June 30, 2024, compared to $3.0 million for the six-month period ended June 30, 2023, reflecting an increase of $1.4 million. The increase was related to increased R&D activity as the Company prepared and filed the IND for CER-1236. Compensation increased $0.3 million in the six-month period ended June 30, 2024, versus the six-month period ended June 30, 2023, due to increases in compensation, bonus accruals, and increased stock-based compensation expense for employees. To complete the IND application, multiple manufacturing runs were necessary, increasing manufacturing costs by $0.1 million in the six-month period ended June 30, 2024, versus the six-month period ended June 30, 2023. Additionally, clinical and regulatory consultants were required to complete and file the IND application, resulting in an increase in scientific consulting of $0.6 million in the six-month period ended June 30, 2024, versus the six-month period ended June 30, 2023. The remaining $0.4 million increase in the six-month period ended June 30, 2024, versus the six-month period ended June 30, 2023, was related to lab supplies and expenses, additional pre-clinical work and facilities rent escalation.

The Company anticipates that its R&D expenses will significantly increase in the future as the Company increases headcount, compensation expense, and contracted services for preclinical and clinical development of its product candidates, as well as for manufacturing of clinical product to be used in clinical development.

Interest and Other Income, Net

Interest and other income, net was $5.0 million for the six-month period ended June 30, 2024, compared to $0.3 million for the six-month period ended June 30, 2023, reflecting an increase of $4.7 million. The increase in 2024 relative to 2023 was predominantly due to the $4.7 million change in value of the Company’s Earnout Liability in the six-month period ended June 30, 2024. Settlement of vendor liabilities in 2024 resulted in a $0.6 million increase in income in 2024, offset by the $0.6 million other expense for the delayed S-1 penalty.

Liquidity and Capital Resources

Capital Requirements

Predecessor and the Company have not generated any revenue from any source and the Company does not expect to generate revenue for at least the next few years. If the Company fails to complete the timely development of, or fails to obtain regulatory approval for, its product candidates, the ability of the Company to generate future revenue will be adversely affected. The Company does not know when, or if, it will generate any revenue from its product candidates, and does not expect to generate revenue unless and until the Company obtains regulatory approval and commercialization of its product candidates.

The Company expects its expenses to increase significantly in connection with its ongoing activities, particularly as it continues and expands research, preclinical development, and clinical development to support marketing approval for its product candidates. In addition, if the Company obtains approval for any of its product candidates, the Company expects to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution. Furthermore, the Company expects to incur additional costs associated with operating as a public company.

The Company, therefore, anticipates that substantial additional funding will be needed in connection with its continuing operations. At June 30, 2024, the Company had $3.6 million in cash, restricted cash and cash equivalents. The Company intends to devote most of the available cash to the preclinical and clinical development of its product candidates and public company compliance costs. Based on current business plans, the Company believes that the cash available at June 30, 2024 will not fund its operating expenses and capital requirements for 12 months after the filing of the unaudited financial statements for the six-month period ended June 30, 2024. The Company has arranged two equity lines of credit, one providing for the sale of up to 25,000,000 newly issued shares of Common Stock and the other providing for the purchase of up to $25 million of Common Stock on the satisfaction of certain conditions. At June 30, 2024, the Company had 17.5 million shares remaining in the first ELOC and $25 million remaining in the second ELOC. The Company has no guarantee that the conditions will be satisfied to require the purchase of all, or any additional amount, of the Equity Line of Credit (“ELOC”) funds. Any estimate as to how long the Company expects the net proceeds from the ELOC funding may fund the Company’s operations is based on assumptions that may prove to be wrong, and the Company could use its available capital resources sooner than its current expectations. Changing circumstances, some of which may be beyond the Company’s control, could result in less cash and cash equivalents available to fund operations or cause the Company to consume capital significantly faster than currently anticipated, and the Company may need to seek additional funds from additional sources sooner than planned.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical drug products, the Company is unable to estimate the exact amount of its operating capital requirements. The Company’s future funding requirements will depend on many factors, including, but not limited to those listed under “Factors Affecting Our Performance” above.

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete, and the Company may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, the Company‘s product candidates, if approved, may not achieve commercial success. Commercial revenues, if any, will be derived from sales of product candidates that the Company does not expect to be commercially available in the near term, if at all. Accordingly, the Company will need to continue to rely on additional financing to achieve its business objectives. Adequate additional financing may not be available to the Company on acceptable terms, or at all. To the extent that the Company raises additional capital through the sale of equity or convertible debt securities, the terms of these equity securities or this debt may restrict the Company’s ability to operate. Any future debt financing and equity financing, if available, may involve covenants limiting and restricting the ability to take specific actions, such as incurring additional debt, making capital expenditures, entering into profit-sharing or other arrangements or declaring dividends. If the Company raises additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, it may be required to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to the Company. If the Company is unable to raise capital when needed or on acceptable terms, the Company could be forced to delay, reduce or eliminate its R&D programs or future commercialization efforts.

Cash Flows

29

Net cash used in operating activities

Net cash used in operating activities increased $5.4 million from $3.5 million to $8.9 million in the six-month period ended June 30, 2023 and 2024 respectively. The increase in cash used was largely related to having a $4.8 million increase in the adjustment to net loss related to the gain on the revaluation of derivative liabilities. The difference in net loss reflected $0.3 million more cash being used in the six-month period ended June 30, 2024 versus 2023. The difference of $1.3 million of cash used to pay down accounts payable and accruals, $0.6 million in vendor settlements, and $0.4 more cash consumed on prepaid expenses in the six-month period ended June 30, 2024 versus 2023 was offset by $0.7 million in accrued expense addition, and $1.4 million less in cash adjustments due to stock-based compensation expense in the six-month period ended June 30, 2024 versus 2023. The remaining difference was an additional $0.1 million in adjustment to lease liability due to rent escalation.

Net cash provided by financing activities

Net cash provided by financing activities increased $9.1 million from $0.6 million in the three-month period ended June 30, 2023 to $9.7 million in the three-month period ended June 30, 2024. The increase was related to the net proceeds of $7.3 million from the issuance of Series A and B Preferred Stock, the net proceeds of $1.7 million for the sale of common stock under the ELOC, $0.8 million from the issuance of ELOC commitment shares to compensate the ELOC investor, and $0.2 million related to net insurance financing. These increases in cash were partially offset by the $0.6 million borrowing under the bridge loan in 2023, for which there was no equivalent in the six-month period ended June 30, 2024.

Contractual Obligations and Other Commitments

None.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expenses incurred during the reporting period. Significant items subject to such estimates and assumptions include the estimates of the fair values of convertible preferred stock, earnout-related Common Stock, and preferred stock warrant liability, stock-based compensation expense, the fair value of right-to-use assets and lease liabilities, and the valuation allowance associated with deferred tax assets. Actual results could differ from those estimates.

Predecessor and the Company define its critical accounting policies as those accounting principles that require it to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on its financial condition and results of operations, as well as the specific manner in which it applies those principles. While significant accounting policies are more fully described in Note 2 to the Company’s unaudited financial statements appearing elsewhere in this Form 10-Q, the Company believes the following are the critical accounting policies used in the preparation of its financial statements that require significant estimates and judgments.

Fair value measurements – Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows:

Level 1 – Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 – Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3 – Unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions about how market participants would price the asset or liability. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The carrying amounts of cash, restricted cash, and cash equivalents, prepaid expenses and other current assets, accounts payable, and accrued liabilities approximate fair value due to their relatively short-term maturities.

Research and development – R&D costs consist primarily of salaries and benefits, including stock-based compensation, occupancy, materials and supplies, contracted research, consulting arrangements, and other expenses incurred in the pursuit of R&D programs. R&D costs are expensed as incurred.

Stock-based compensation – The Company periodically issues Common Stock and stock options to officers, directors, and consultants for services rendered. The Company accounts for stock-based compensation as measured at grant date, based on the fair value of the award. The Company uses a Black-Scholes option pricing model (“Black-Scholes”) to estimate option award fair value, which requires the input of subjective assumptions, including the expected volatility of Common Stock, expected risk-free interest rate, and the option’s expected life. The Company also evaluates the impact of modifications made to the original terms of equity awards when they occur. The fair value of restricted stock awards is based upon the share price of the Common Stock on the date of grant.

The fair value of equity awards that are expected to vest is amortized on a straight-line basis over the requisite service period. Stock-based compensation expense is recognized net of actual forfeitures when they occur, as an increase to additional paid-in capital in the condensed consolidated balance sheets and in research and development or, general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss. All stock-based compensation costs are recorded in the condensed consolidated statements of operations based upon the underlying employee’s role within the Company.

Income taxes – The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company follows tax accounting requirements for the recognition, measurement, presentation, and disclosure in the financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the financial statements. It is the Company’s policy to include penalties and interest expense related to income taxes as a component of income tax expense, as necessary. The Company has not recorded any interest or penalties associated with income tax since inception. Tax years subsequent to 2020 are subject to examination by federal and state authorities.

There were no material changes in critical accounting estimates during the period covered by this quarterly report on Form 10-Q.

Recent Accounting Pronouncements

The Company has concluded that there are no recent accounting pronouncements expected to have a material impact on the Company’s financial statements.

Qualitative and Quantitative Disclosures About Market Risk

The Company’s primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because of the Company’s investments, including cash equivalents, which may be in the form of a money market fund.

In the future, the Company may contract with vendors invoicing in a foreign denominated currency. As a result, the Company may be subject to fluctuations in foreign currency rates in connection with certain of these agreements. Transactions denominated in currencies other than the United States dollar will be recorded based on exchange rates at the time such transactions arise. As of June 30, 2024, all transactions have been denominated in U.S. dollars.

Inflation will generally affect the Company by increasing the cost of labor and costs associated with preclinical and clinical trials and future manufacturing and commercialization activities as well as general corporate costs. The Company does not believe that inflation had a material effect on the Company’s business, financial condition or results of operations for the period ended June 30, 2024, but increased inflation may materially impact the Company in later periods of 2024 and beyond.

Emerging Growth Company and Smaller Reporting Company Status

In April 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. PBAX previously elected the extended transition period for complying with new or revised accounting standards, which delays the adoption of these accounting standards until they would be applicable to private companies. The Company expects to continue to take advantage of the benefits of the extended transition period.

In addition, as an emerging growth company, the Company may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

• being permitted to present only two years of audited financial statements in addition to any required unaudited interim financial statements, with correspondingly reduced disclosure in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
• an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended;
• reduced disclosure about the Company’s executive compensation arrangements in its periodic reports, proxy statements and registration statements;
• exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements; and
• an exemption from compliance with the requirements of the Public Company Accounting Oversight Board regarding the communication of critical audit matters in the auditor’s report on financial statements.

The Company will cease to qualify as an emerging growth company on the date that is the earliest of: (i) the last day of the fiscal year following the fifth anniversary of the date of the first sale of shares of PBAX Class A Common Stock in its initial public offering, (ii) the last day of the fiscal year in which the Company has more than $1.07 billion in total annual gross revenues, (iii) the date on which the Company is deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of the Common Stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, or (iv) the date on which the Company has issued more than $1.0 billion of non-convertible debt over the prior three-year period. The Company may choose to take advantage of some but not all of these reduced reporting burdens. The Company has taken advantage of certain reduced reporting requirements in this Form 10-Q. Accordingly, the information contained herein may be different than you might obtain from other public companies.

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2024. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

Changes in Internal Control Over Financial Reporting

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Except as set forth below, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 2, 2024. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations .

The issuance of shares of our Common Stock upon conversion or exercise of our outstanding Series A Preferred Stock, Series B Preferred Stock, Common Warrants and other securities that we may issue in future financing transactions may result in substantial dilution to our stockholders.

As of the date of this report, the Company currently has outstanding 7,406 shares of Series A Preferred Stock with a stated value of approximately 7.4 million, convertible into shares of Common Stock at a conversion rate of the stated value thereof divided by a conversion price of $1.00, 486 shares of Series B Preferred Stock with a stated value of approximately $0.49 million, convertible into shares of Common Stock at a conversion rate of the stated value thereof divided by a conversion price of $1.00, and 0.5 million Common Warrants to purchase shares of Common Stock at an exercise price of $1.40. Since the closing of the Business Combination through the date of this report, holders of 2,634 shares of Series A Preferred Stock and 140 shares of Series B Preferred Stock converted such shares into an aggregate of approximately 25.0 million shares of Common Stock.

Although each of the conversion price of the Series A Preferred Stock and the Series B Preferred Stock and the exercise price of the Common Warrants are above the trading price of our Common Stock as of the date of this report, if such trading price increases, such conversion prices and exercise price will not change as a result thereof and could be below the trading price of our Common Stock as of the date of any future conversion or exercise thereof, resulting in dilution to our stockholders. In addition, the terms of the Series A Preferred Stock and the Series B Preferred Stock contain certain penalties and adjustments to the amount included in determination of the conversion rate following certain breaches of the Company’s obligations thereunder, including, among other things, as a result of a failure to file or cause the SEC to declare one or more registration statements relating to the resale of the shares of Common Stock issuable upon conversion thereof by specified deadlines, certain defaults under indebtedness of the Company or judgments against the Company and failure to deliver shares of Common Stock upon conversion in a timely manner. The penalties and adjustments include a 25% premium added to the stated value for determining the conversion rate in connection with breaches other than the breach of the requirement to redeem the shares of Series A Preferred Stock and Series B Preferred Stock by August 14, 2025, which results in a 50% premium, and the addition to the stated value of an amount equal to the value of the shares of Common Stock into which the Series A Preferred Stock or Series B Preferred Stock would have been convertible if the conversion price were equal to 80% of the lowest volume weighted average price during the five trading days immediately prior to conversion. Such penalties and adjustments, which applied during the period when all of the conversions since the Business Combination described in the preceding paragraph occurred as a result of a failure to file and cause the SEC to declare a registration statement with respect to the resale of the underlying shares in a timely manner, have resulted and may in the future result in the issuance of shares of Common Stock at an effective conversion price below the trading price of our Common Stock at the time of such conversion.

We cannot assure you that we will remain in compliance with all of the terms of the Series A Preferred Stock or Series B Preferred Stock and that such penalties and adjustments will not apply in the future. In addition, we cannot assure you that we will not issue additional convertible or other derivative securities with highly dilutive penalty or adjustment provisions. As described elsewhere in this report, the Company needs to obtain financing to fund its research and development activities and, if the IND is accepted, clinical trials, as well as other operations. Under challenging conditions in the equity capital markets, particularly for pre-commercialization biotech companies, we may have no viable alternatives to agreeing to inclusion of such provisions in the terms of future financings.

Clinical development and the regulatory approval process involve a lengthy and expensive process with an uncertain outcome and results of earlier studies and preclinical data, and trials may not be predictive of future clinical trial results. If our preclinical studies and clinical trials are not sufficient to support regulatory approval of any of our product candidates, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development of such product candidate.

The research, testing, manufacturing, labeling, licensure, sale, marketing and distribution of biological products are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, and such regulations differ from country to country. We are not permitted to market our product candidates in the United States or in any foreign countries until they receive the requisite licensure from the applicable regulatory authorities of such jurisdictions. We have not previously submitted a BLA to the FDA or similar licensure applications to comparable foreign regulatory authorities. A BLA must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety, purity and potency for each desired indication. The BLA must also include significant information regarding the manufacturing controls for the product. We expect the novel nature of our product candidates to create further challenges in obtaining regulatory approval. Accordingly, the regulatory approval pathway for our product candidates may be uncertain, complex, expensive and lengthy, and licensure may not be obtained.

We cannot be certain that our preclinical studies and clinical trial results will be sufficient to support regulatory approval of our product candidates. Clinical testing is expensive and can take many years to complete and its outcome is inherently uncertain. Human clinical trials are expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. Failure or delay can occur at any time during the clinical trial process.

We may experience delays in obtaining the FDA’s authorization to initiate clinical trials under future INDs and completing ongoing clinical studies of our product candidates due to a variety of factors. Additionally, we cannot be certain that preclinical studies or clinical trials for our product candidates will begin on time, not require redesign, enroll an adequate number of subjects on time, or be completed on schedule, if at all. Clinical trials can be delayed or terminated for a variety of reasons, including delays or failures related to:

• the availability of financial resources to commence and complete the planned trials
• the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of our clinical trials;
• delays in obtaining regulatory approval to commence a clinical trial;
• our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory authority that any of our product candidates are safe, potent and pure;
• the FDA’s or the applicable foreign regulatory agency’s disagreement with our trial protocol or the interpretation of data from preclinical studies or clinical trials;
• our inability to demonstrate that the clinical and other benefits of any of our product candidates outweigh any safety or other perceived risks;
• the FDA’s or the applicable foreign regulatory agency’s requirement for additional preclinical studies or clinical trials;
• the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for licensure;
• the data collected from clinical trials of our product candidates may not be sufficient to the satisfaction of the FDA or comparable foreign regulatory authorities to support the submission of a BLA or other comparable submission in foreign jurisdictions or to obtain licensure of our product candidates in the United States or elsewhere;
• reaching agreement on acceptable terms with prospective CDMOs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CDMOs and clinical trial sites;
• obtaining IRB or ethics committee approval at each clinical trial site;
• recruiting an adequate number of suitable patients to participate in a clinical trial;
• having subjects complete a clinical trial or return for post-treatment follow-up;
• clinical trial sites deviating from clinical trial protocol or dropping out of a clinical trial;
• addressing subject safety concerns that arise during the course of a clinical trial;
• adding a sufficient number of clinical trial sites;
• obtaining sufficient product supply of product candidate for use in preclinical studies or clinical trials from third-party suppliers;
• the FDA’s or the applicable foreign regulatory agency’s findings of deficiencies or failure to approve the manufacturing processes or facilities of third-party manufacturers upon which we rely; or
• the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.
• We may experience numerous adverse or unforeseen events during, or as a result of, preclinical studies and clinical trials that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:
• we may receive feedback from regulatory authorities that requires us to modify the design of our clinical trials;
• we may obtain a result from preclinical studies such as a binder specificity study or a safety toxicology study that require us to modify the design of our clinical trials, abandon our research efforts for product candidates, or result in delays;
• clinical trials of our product candidates may produce negative or inconclusive results and we may decide, or regulators may require us, to conduct additional clinical trials or abandon our research efforts for our other product candidates;
• the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate or participants may drop out of our clinical trials at a higher rate than we anticipate;
• our third-party contractors may fail to comply with regulatory requirements, fail to maintain adequate quality controls or be unable to provide us with sufficient product supply to conduct and complete preclinical studies or clinical trials of our product candidates in a timely manner, or at all;
• we or our investigators might have to suspend or terminate clinical trials of our product candidates for various reasons, including non-compliance with regulatory requirements, a finding that our product candidates have undesirable side effects or other unexpected characteristics or a finding that the participants are being exposed to unacceptable health risks;
• the cost of clinical trials of our product candidates may be greater than we anticipate;
• the quality of our product candidates or other materials necessary to conduct preclinical studies or clinical trials of our product candidates may be insufficient or inadequate;
• regulators may revise the requirements for approving our product candidates, or such requirements may not be as we anticipate; and
• future collaborators may conduct clinical trials in ways they view as advantageous to them but that are suboptimal for us.

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our product candidates or other testing, if the results of these trials or tests are not positive or are only moderately positive or if there are safety concerns, our business and results of operations may be adversely affected and we may incur significant additional costs. In addition, costs to treat patients with relapsed or refractory cancer and to treat potential side effects that may result from our product candidates can be significant. Accordingly, our clinical trial costs are likely to be significantly higher than those for more conventional therapeutic technologies or drug product candidates.

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such clinical trials are being conducted, by the Data Safety Monitoring Board for such clinical trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a clinical trial due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical trial protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from the product candidates, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. For example, in July 2024, we announced a clinical hold as a result of insufficient data provided with regard to two issues within pharmacology and toxicology of CER-1236. We plan to work expeditiously to resolve this clinical hold so that CER-1236 may proceed to the clinic, but there is no guarantee that we will be able to address the clinical hold issues to FDA’s satisfaction or in a timely manner to resume development.

Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of our product candidates and would materially adversely impact our business and prospects and our ability to generate revenues from any of these product candidates will be delayed or not realized at all. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates. If one or more of our product candidates generally prove to be ineffective, unsafe or commercially unviable, our CER-T cell platform would have little, if any, value, which would have a material and adverse effect on our business, financial condition, results of operations and prospects.

Any of these factors, many of which are beyond our control, may result in our failing to obtain regulatory approval to market any of our product candidates, or a delay in such approval, which would significantly harm our business, results of operations, and prospects. Of the large number of biological products in development, only a small percentage successfully complete the FDA or other regulatory approval processes and are commercialized. Even if we eventually complete clinical testing and receive licensure from the FDA or applicable foreign regulatory authorities for any of our product candidates, the FDA or the applicable foreign regulatory may license our product candidates for a more limited indication or a narrower patient population than we originally requested, and the FDA, or applicable foreign regulatory agency, may not license our product candidates with the labeling that we believe is necessary or desirable for the successful commercialization of such product candidates.

The FDA has placed a clinical hold on CER-1236. If the FDA does not remove the clinical hold in a timely basis, or at all, our development timelines and our business may be adversely affected, and our stock price may decline.

As previously announced by the Company in July 2024, the FDA placed a full clinical hold on CER-1236 as a result of insufficient data provided with regard to two issues within pharmacology and toxicology of CER-1236. We plan to work expeditiously to resolve this clinical hold so that CER-1236 may proceed to the clinic, but there is no guarantee that we will be able to address the clinical hold issues to FDA’s satisfaction or in a timely manner to resume development. If the FDA does not lift the clinical hold in a timely manner, or at all, our long-term development timeline for CER-1236 and our business, financial condition or results of operations, may be adversely affected.