Cibus, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of the Company’s financial condition and results of operations should be read together with its condensed consolidated financial statements and related notes, which are included elsewhere in this Quarterly Report on Form 10-Q and with its Annual Report, including the Consolidated Financial Statements and Notes incorporated therein.

OVERVIEW AND BUSINESS UPDATE

Cibus is a leading agricultural technology company that uses its proprietary gene editing technologies to develop and license traits to seed companies for royalties. The company is a technology leader in developing traits (or specific genetic characteristics) using gene editing. Its primary business is the development of productivity traits in major agricultural crops, such as canola, rice and soybean. Productivity traits help make farmers more productive, thereby driving greater farming profitability and efficiency. They do this in several ways such as making plants resistant to diseases or pests, thereby reducing the use of chemicals like fungicides and insecticides, enabling plants to process nutrients more efficiently, thereby reducing the use of fertilizers, and making crops more adaptable to their environment and to climate change.

In agriculture, gene editing is an advanced plant breeding technology. The promise of gene editing in agriculture is the ability to develop new plant traits that are indistinguishable from traits developed using conventional breeding but that can be developed at a fraction of the time and cost of conventional breeding or genetically-modified organism (GMO) breeding technologies. To many, gene editing represents agriculture’s “analog to digital” technology moment. It is a technology that promises to change the speed and scale of trait development.

The closing of the Merger Transactions in the second quarter of 2023 brought together two pioneers in the gene editing business combining their technology platforms and facilities to create a leader in precision gene editing focused on driving sustainable agriculture. This established one of the world’s most sophisticated facilities for trait development and next-generation plant breeding and consolidated important gene editing intellectual property and technologies of both companies.

In the second quarter of 2023, Cibus opened its Oberlin facility (Oberlin Facility), the first stand-alone high-throughput (gene editing) trait development facility for editing plants. The core of the Oberlin Facility is the Company's patented technology platform process called the Rapid Trait Development System™ or RTDS® (RTDS) which is covered by over 400 patents or patents pending. RTDS is the underlying technology platform for the Company's high-throughput semi-automated gene editing system that directly edits seed companies’ elite germplasm. The Company calls this semi-automated high-throughput system, the Trait Machine System (Trait Machine™). It is a time bound, reproducible, and predictable science-based breeding process. In addition, Legacy Calyxt has significant patented agricultural gene editing technologies including the exclusive rights to TALEN® for use in plants.

Importantly, in many countries, regulations have separated gene edited traits from traits developed using GMO technologies as long as the gene edited technologies, such as RTDS, do not contain transgenes in their final products. Over the past few years, many countries such as the US, Canada, large parts of South America, India, and Japan, have introduced regulations or guidelines for crop varieties that were developed using genome editing that enable the use of such edited lines in agriculture in a similar way as conventionally bred lines, provided, they do not contain a transgene or foreign genetic material. More recently in Europe, the UK approved a law to exempt genome-edited crops from GMO regulations. In parallel, the EU recently published proposed regulations that would also treat most gene edited lines in a similar way to conventional breeding. These regulatory distinctions are an important element of why gene edited traits are considered the beginning of the post GMO era in agriculture.

Because the Trait Machine is intended to be integrated into seed companies’ breeding operations, the customer relationship between Cibus and seed companies with which it engages is a progressive relationship. Typically, the customer relationship is initiated with Cibus through the entry into a material transfer agreement pursuant to which seed companies transfer elite germplasm lines to Cibus for gene-editing and delivery back to the seed company for pre-commercialization testing and validation. Accordingly, Cibus refers to seed company “customers” in its disclosure once such a customer relationship has been initiated. At present, all of the Company's customers discussed in this overview and business update are at this initial stage of a relationship. While this initial stage of such customer relationships is a necessary prerequisite to the entry into a revenue generating commercial contract with such seed companies, currently, Cibus has certain customer relationships which include commercial contract terms, however as the potential products are in various stages of development, including some in field testing, they have not yet generated revenue.

Cibus believes that RTDS and its Trait Machine, represent the technological breakthrough in plant breeding that is the ultimate promise of plant gene editing: the ability to materially accelerate the trait breeding process that currently averages more than a decade. The Trait Machine materially changes not only the scale and speed of the breeding process, but it also exponentially changes the range of possible genetic solutions from breeding and with it, the capability to develop desired characteristics or traits needed for greater farming sustainability and food security. The Oberlin Facility is operational and is currently serving canola (oil seed rape), and rice customers, and is expected to service soybean customers as the system comes fully online with respect to soybean in 2024. In the more distant future, gene editing technologies from Cibus and others has the potential to accelerate agriculture’s jump to a climate smart, more sustainable crop production system and industry’s move to sustainable low carbon ingredients.

2023 has been a major inflection point for Cibus. It transitioned from a primarily research-focused company to a primarily commercial-focused company based on its successful development of three important productivity traits for canola and rice and its development of its scalable editing platform in canola and rice. Based on the completion of successful validation field trials for these traits, the Company has witnessed increased demand for these traits based on customers observing trait performance in field trials. In addition, due to the speed with which the company is able to develop new traits, it has two advanced traits under development for Sclerotinia resistance and a new broad leaf herbicide trait. What added to this major inflection point was the opening of the Oberlin Facility, a stand-alone gene editing facility, that is projected to enable Cibus to meet the editing demand from its new customer base to introduce its new traits to multiple lines on an accelerated basis. Lastly, the final highlight in this inflection year is the positive progress the Company has made in the development of an editing platform for soybean, including significant advances toward enabling a scalable editing system for soybean. The key system work is expected to be completed in the fourth quarter of 2023, with the soybean platform expected to be operational in 2024. Soybean is a 200+ million-acre crop for which our Sclerotinia and HT2 traits would have enormous potential to provide an important impact on productivity and value for soybean farmers. Once built, the editing platform for soybean could be a major platform for developing alternative oils that have the potential to replace traditional less sustainable sources of oils such as palm oil and palm kernel oil.

The Company's three initially developed traits are critical components of its commercial business. They address important needs for canola and rice crops. Together, they form a diverse product line of three key traits across multiple crops and geographies where these crops are grown. The Company's two additional advanced traits and its progress toward adding a third crop, soybean, to its Trait Machine fill out its pipeline with five traits and three crops creating an over 250 million-acre commercial opportunity. For each of these traits, Cibus would be paid trait royalties for each acre of seed a customer sells that incorporates a Cibus trait. This is identical to the trait royalty payments made to GMO trait providers for traits such as insect tolerance (using the BT trait) or glyphosate tolerance. These payments are typically made at the end of each season for each acre the seed is sold on.

• Its pod shatter reduction (PSR) trait in canola and winter oilseed rape (WOSR), strengthens the sheath around the canola seeds that is important to maintaining yields in high winds and extreme weather. Cibus has multiple years of successful field trials with this trait. Cibus currently has ten seed customers for PSR in canola and WOSR that have transferred to Cibus their elite germplasm for editing. These customers represent approximately 20 million acres of potential opportunity for the Company's traits to be deployed on. Cibus has edited each customer’s canola/WOSR breeding lines and has begun transferring back to them their elite germplasm with the PSR trait. The first was to Nuseed in the first quarter of 2023. Through the third quarter of 2023, Cibus has transferred three elite germplasm to different customers with the PSR trait. Taking advantage of the new rules in the UK for gene edited traits, a potential opportunity for expansion into WOSR crops in the UK with this trait was created when Cibus started field trials in the UK in the summer of 2023.
• The Company's herbicide tolerance (HT) traits HT1 and HT3 in rice fulfill an important need in rice farming because rice has not had the benefit of the widely used GMO traits for weed management that benefited, canola, corn, and soybean. These traits provide resistance to two different herbicides that could be used in rice farming. Cibus has multiple years of field trials in rice for both traits. Based on these trials, Cibus has developed strong customer potential in North and South America and has begun transferring their elite germplasm to Cibus. The Company made its first rice transfer back to Nutrien in the second quarter of 2023. Herbicide resistance will form an economic base for Cibus in parallel with the development of multiple traits in canola.
• The Company's two advanced traits for Sclerotinia resistance and for HT2 are both being developed for canola and WOSR. Sclerotinia is the costliest disease in canola and WOSR. In some seasons, farmers can lose a majority of their crop yield to Sclerotinia. It will be both an extremely important and valuable trait for canola/WOSR. HT2 is a new herbicide tolerance trait for broad leaf weeds. Because of the developing resistance of weeds due to overused herbicides, new herbicide traits are important and a key target for gene editing technologies. Together with PSR, these advanced traits will form an extremely important family of traits for Cibus.
• Soybean is expected to be the third leg of the Company's economic base and the key system work is expected to be completed in the fourth quarter of 2023, with the Trait Machine for soybean operational and initiating edits in 2024 with its lead customer GDM, the leading soybean seed company in South America. Both traits have strong demand in soybean which is a large 200+ million-acre crop. With canola and rice and the two advanced traits, soybean has the potential to provide a large third economic base for Cibus.

The three crops: canola, rice, and soybean; with the Company's five traits: PSR, HT1, HT2, HT3, and Sclerotinia resistance make up the core of its three crop-five trait business model which is the central focus of its business. The three crop-five trait core focus represents both an enormous business opportunity and an economic base from which to build Cibus upon. The three developed traits in canola and rice have strong customer demand already and initial transfers of customer elite germplasm have already started towards commercialization in the field.

Cibus sees its business as the start of the important gene editing industry in agriculture, an industry characterized by the ability to do high-throughput gene editing serving as extensions of seed company plant breeding operations. Further, there is great demand for the ability to develop complex traits such as disease resistance which historically has been very difficult to deliver. Cibus is a leader in this vision. Cibus and its Trait Machine do not compete with breeding operations, they augment them. Cibus provides traits that it edits in the elite germplasm of its customers for commercialization. Its role is to improve the efficiency and effectiveness of developing the complex traits needed to address agriculture’s, and farmers’, most pressing productivity issues. Importantly, Cibus and its Trait Machine provide the ability to efficiently gene edit these new traits directly into elite germplasm of major crops. Cibus sees itself as the leader in both gene editing process and trait development aspects of this new industry.

The Company has incurred net losses since its inception. As of September 30, 2023, the Company had an accumulated deficit of $262.7 million. The Company’s net losses were $60.4 million for the nine months ended September 30, 2023. As Cibus continues to develop its pipeline of productivity traits and as a result of its limited commercial activities, Cibus 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.

Strategic Realignment

On October 18, 2023, Cibus implemented a strategic realignment to align with its primary commercial objective of advancing its late-stage activities. In particular, Cibus is focusing its operations on completing the launch of its first three traits—PSR, HT1, and HT3—in its crop programs in canola, WOSR, and rice, enabling its soybean platform, and advancing its Sclerotinia resistance trait and HT2 trait in canola, WOSR, and soybean.

The Company believes that this refocusing on its strengths and highest priorities best positions it to meet its strategic objectives.

The strategic realignment resulted in a reduction in workforce in full time employees from 242 full-time employees as of October 17, 2023, to approximately 185 full-time employees. This reduction was intended to align the Company’s human capital resources to meet its commercial and strategic goals. The Company communicated the workforce reduction to affected employees on October 18, 2023, and expects the majority of the associated costs to be incurred during the quarter ending December 31, 2023.

As part of the strategic realignment, the Company has also initiated cost reduction initiatives designed to preserve capital resources for the advancement of its priority objectives, which initiatives include reductions in capital expenditures, streamlining of independent contractor utilization, and prioritization of near-term payment obligations.

RELATIONSHIP WITH CELLECTIS AND COMPARABILITY OF RESULTS

Prior to the completion of the Merger Transactions, the Company's largest shareholder was Cellectis, which owned approximately 48.0 percent of the Company’s issued and outstanding common stock. Immediately following the completion of the Merger Transactions, Cellectis reported in a Schedule 13D filing that it held 2.9 percent of the Company's outstanding Class A Common Stock and did not hold any of the Company's Class B Common Stock. Upon the completion of the Merger Transactions, Cellectis no longer possesses any contractual governance rights under the Company's Amended Certificate of Incorporation or bylaws.

Cellectis has guaranteed the lease agreement for the Company’s Roseville, Minnesota facility. 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 a license from Cellectis that broadly covers the use of engineered nucleases for plant gene editing. Information about the license can be found in Note 15 to the unaudited condensed consolidated financial statements.

FINANCIAL OPERATIONS OVERVIEW

Revenue

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

Collaboration and research revenues are primarily related to revenues earned from performance obligations under collaboration arrangements. Pursuant to the terms of the collaboration agreements, the Company receives non-refundable payments for ongoing R&D activities, reimbursements of R&D costs, and milestone payments upon the achievement of certain scientific, regulatory, or commercial milestones. Pursuant to the collaboration agreements, the Company also will receive royalty payments in connection with the sale of commercialized products containing the traits that are subject to those agreements.

In the future, the Company may continue to generate revenue from collaboration and research agreements, but it expects an increasing amount of its revenue to come from royalty payments relating to its trait development activities. The Company is using advanced technologies, including RTDS, to develop desirable plant traits for the global seed industry. The Company plans to sell or license its developed traits with royalty revenue from these licensing agreements increasingly becoming its main source of future revenues.

The Company's ability to generate substantial revenue from plant traits depends upon the ability to further expand its Trait Machine/RTDS platforms, which are fundamental for multiple different plant traits. The Company is advancing the licensing for commercialization by seed companies of traits developed using RTDS and currently has three “developed” traits for two global crops.

Research and Development Expenses

The company's R&D expenses primarily consist of expenses incurred while performing activities to discover and develop potential product candidates and to establish Trait Machine/RTDS platforms such as:

• personnel costs, including salaries and related benefits, for employees engaged in scientific R&D functions;
• cost of third-party contractors and consultants who support its product candidate and Trait Machine/RTDS platform development;
• development costs associated with seed increases (small-scale and large-scale testing) for trait validation;
• purchases of laboratory supplies and non-capital equipment used for its R&D activities;
• facilities costs, including rent, utilities, and maintenance expenses, allocated to R&D activities; and
• costs of in-licensing or acquiring technology from third parties.

The Company's R&D efforts are focused on advancing its existing product candidates, enhancing its product candidate pipeline through the development of additional traits within its Trait Machine/RTDS platforms, and establishing additional Trait Machine/RTDS platforms for the development and advancement of additional traits. The Company's infrastructure resources are utilized across multiple R&D programs. In addition, employees typically work across multiple R&D programs. The Company manages certain activities, such as field trials and seed production, through third-party vendors. Due to the number of ongoing projects and its ability to use resources across several projects, it does not record or maintain information regarding the costs incurred for its R&D programs on a program-specific basis.

The Company's R&D efforts are central to its business and account for a significant portion of its operating expenses. R&D expenses are expected to increase for the foreseeable future as the product candidate pipeline is expanded, additional Trait Machine/RTDS platforms are established, additional technologies are developed or acquired and additional personnel are hired to support product development. Additionally, product candidates in later stages of development generally have higher development costs than those in earlier stages of development, primarily due to the increased expense associated with large-scale field testing and seed increases (small scale and large-scale) for trait validation.

The Company recognizes R&D expenses as they are incurred, primarily due to the uncertainty of future commercial value. At this time, it cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of its current product candidates or any new product candidates that may be identified and developed. The duration, costs, and timing of development of its product candidates are subject to numerous uncertainties and will depend on a variety of factors, including:

• levels of hiring and retaining R&D personnel;
• the extent to which any serious adverse events in its field trials are encountered;
• the impact of any business interruptions to operations or to those of the third parties with whom the Company works with; and
• the impact of any new or changing government regulations related to its product candidates.

Any of these factors could significantly impact the costs, timing, and viability associated with the development of its product candidates.

Prior to the second quarter of 2023, the Company recognized its intellectual property portfolio and costs to write and support the research for filing patents as R&D expense. It made the decision to classify these expenses as part of selling, general, and administrative (SG&A) expense going forward. The amounts in the prior reporting periods are not material and as such no historical amounts have been reclassified.

Selling, General, and Administrative Expenses

SG&A expense consists primarily of employee-related expenses, such as salaries for its executive, business development, legal, intellectual property, information technology, finance, human resources, and other administrative functions. These costs include legal, professional, and consulting fees for external firms and contractors. All selling and marketing expenses, including advertising expenses and allocated facility costs including rent, utilities, maintenance expenses, and depreciation and amortization, are included in SG&A expense in the accompanying condensed consolidated statements of operations.

Beginning in the second quarter of 2023, SG&A expense includes costs related to its intellectual property portfolio and costs to write and support the research for filing patents. Historically, the Company expensed patent application costs and related legal costs for maintenance of such patents as incurred and such costs were included in R&D expense in the accompanying condensed consolidated statements of operations.

Royalty Liability Interest Expense - Related Parties

Royalty liability interest expense – related parties (Royalty Liability Interest) is based on the warrant exchange agreement (Warrant Exchange Agreement) Cibus Global entered into in 2014, which remains in place following the Company's acquisition of Cibus Global in the Merger Transactions, Cibus Global is required to make ongoing quarterly payments equal to a portion of the aggregate amount of certain worldwide revenues received during the applicable quarter. The Company refers to such payment obligations as its Royalty Liability. Management estimates the total amount of royalty payments over the life of the Warrant Exchange Agreement that Cibus Global will be required to make to holders of certain warrants (Royalty Holders) that were exchanged for the rights to future royalty payments pursuant to the Warrant Exchange Agreement. See Note 11 to the accompanying unaudited condensed consolidated financial statements for information related to the calculation and valuation of the Royalty Liability.

The Company expects the Royalty Liability balance to continue to increase each year until the accretion of Royalty Liability Interest, which increases the Royalty Liability, outpaces the cash payments for royalties due, which decreases the Royalty Liability. Similarly, the Company also expects the related non-cash Royalty Liability Interest it records to increase in conjunction with the underlying Royalty Liability balance. There are risks associated with the Royalty Liability. See “Risk Factors—Risks Related to Cibus’ Organization and Operation—Cibus’ Royalty Liability may contribute to net losses for Cibus and cause the value for securities of Cibus to fluctuate,” included in the Closing 8-K.

Other Interest Income (Expense), net

Other interest income (expense), net is comprised of interest income resulting from investments of cash and cash equivalents and interest expense incurred related to financing lease obligations and notes payable. 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 income or 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, and foreign exchange-related transactions.

Revenues and Costs

Prior to the Merger Transactions, Legacy Calyxt reduced employee headcount and streamlined and focused business activities on a limited scope of core projects. Subsequent to the completion of the Merger Transactions, the Company’s employee headcount increased as a result of the acquisition of Cibus Global. As of September 30, 2023, the Company had 236 employees.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023, COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2022

A summary of the Company’s results of operations for the three months ended September 30, 2023, and 2022 follows:

In Thousands, except per share and percentage values

NM – not meaningful

Revenue

Revenue was $0.5 million in the third quarter of 2023, an increase of $0.4 million, or 1,031 percent, from the third quarter of 2022. The increase was driven by the addition of Cibus Global revenue which included amounts earned from collaboration agreements related to contract research for rice and soybean. Revenue in the third quarter of 2023 and 2022 from Legacy Calyxt's operations was primarily associated with the Company’s agreement with a large food ingredient manufacturer to develop a palm oil alternative.

Research and Development Expense

R&D expense was $17.5 million in the third quarter of 2023, an increase of $14.5 million, or 481 percent, from the third quarter of 2022. The increase was primarily driven by expenses of $12.7 million incurred due to the acquisition of Cibus Global which primarily included increases in headcount, laboratory supplies, and facility costs and $2.8 million of stock compensation expense related to RSAs granted as part of the completion of the Merger Transactions. These expenses were partially offset by a $1.0 million decrease in Legacy Calyxt expenses due to lower headcount and cost reduction efforts in preparation for the Merger Transactions.

Selling, General, and Administrative Expense

SG&A expense was $8.8 million in the third quarter of 2023, an increase of $5.5 million, or 171 percent, from the third quarter of 2022. The increase was primarily driven by expenses of $5.1 million incurred due to the acquisition of Cibus Global which primarily included increases in headcount and professional fees and $2.9 million of stock compensation expense related to RSAs granted as part of the completion of the Merger Transactions contributed to the increase. These expenses were partially offset by a $2.6 million decrease in Legacy Calyxt expenses due to lower headcount and cost reduction efforts in preparation of the Merger Transactions.

Royalty Liability Interest Expense - Related Parties

Royalty Liability Interest was $8.1 million in the third quarter of 2023, an increase of $8.1 million from the third quarter of 2022. The increase was due to the assumption of the Royalty Liability as part of the Merger Transactions.

Other Interest Income (Expense), net

Other interest income (expense), net was income of $0.3 million in the third quarter of 2023, an increase in income of $0.3 million, or

698 percent, from the third quarter of 2022. The increase in income was driven by interest earned on the $59.4 million cash received in connection with the closing of the Merger Transactions.

Non-Operating Income (Expenses)

Non-operating income (expenses) was expense of $0.9 million in the third quarter of 2023, a decrease in income of $1.2 million, or 392 percent, from the third quarter of 2022. The decrease in income was driven by an increase in expense related to the mark-to-market of the Common Warrants due to a $0.9 million loss in the current period in addition to a $0.3 million gain in the prior year period.

Net Loss Attributable to Redeemable Noncontrolling Interest

Net loss attributable to redeemable noncontrolling interest was $8.1 million in third quarter of 2023, an increase in net loss attributable to redeemable noncontrolling interest of $8.1 million, from the third quarter of 2022. The increase in net loss attributable to redeemable noncontrolling interest is a result of the Up-C Units created as part of the closing of the Merger Transactions, and the amount for the period is based on the percentage of Cibus Global that is not owned by Cibus Inc.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023, COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2022

A summary of the Company’s results of operations for the nine months ended September 30, 2023, and 2022 follows:

In Thousands, except per share and percentage values

NM – not meaningful

Revenue

Revenue was $0.7 million in the first nine months of 2023, an increase of $0.6 million, or 521 percent, from the first nine months of 2022. The increase was driven by the addition of Cibus Global revenue which included amounts earned from collaboration agreements related to contract research for rice and soybean. Revenue from Legacy Calyxt's operations in the first nine months of 2023 and 2022 was primarily associated with the Company’s agreement with a large food ingredient manufacturer to develop a palm oil alternative.

Research and Development Expense

R&D expense was $28.2 million in the first nine months of 2023, an increase of $19.0 million, or 206 percent, from the first nine months of 2022. The increase was primarily driven by expenses of $16.9 million incurred due to the acquisition of Cibus Global which primarily included increases in headcount, laboratory supplies, and facility costs, $3.8 million of stock compensation expense related to RSAs granted as part of the completion of the Merger Transactions, and $1.3 million of one-time stock compensation expense from accelerated share vesting per the individual stock award agreements due to the completion of the Merger Transactions. These expenses were partially offset by a $3.1 million decrease in Legacy Calyxt expenses due to lower headcount and cost reduction efforts in preparation for the Merger Transactions.

Selling, General, and Administrative Expense

SG&A expense was $22.1 million in the first nine months of 2023, an increase of $12.2 million, or 122 percent, from the first nine months of 2022. The increase was primarily driven by an increase of $6.8 million due to the addition of Cibus Global which primarily included increases in headcount and professional fees and $3.9 million of stock compensation expense related to RSAs granted as part of the completion of the Merger Transactions, In addition, $6.5 million in one-time expenses due to the closing of the Merger Transactions which included $3.5 million of legal and professional fees, $1.9 million of severance resulting from pre-existing employment agreements, and $1.1 million related to stock compensation expense from accelerated share vesting per the individual stock award agreements contributed to this increase. These expenses were partially offset by a $5.5 million decrease in Legacy Calyxt expenses due to lower headcount and cost reduction efforts in preparation of the Merger Transactions.

Royalty Liability Interest Expense - Related Parties

Royalty Liability Interest was $10.8 million in the first nine months of 2023, an increase of $10.8 million from the first nine months of 2022. The increase was due to the assumption of the Royalty Liability as part of the Merger Transactions.

Other Interest Income (Expense), net

Other interest income (expense), net was $0.4 million in the first nine months of 2023, an increase in income of $0.4 million, or 549 percent, from the first nine months of 2022. The increase in income was driven by interest earned on the $59.4 million cash received in connection with the closing of the Merger Transactions.

Non-Operating Income (Expenses)

Non-operating income (expenses) was expense of $0.5 million in the first nine months of 2023, a decrease in income of $5.5 million, or 109 percent, from the first nine months of 2022. The decrease in income was driven by an increase in expense of $6.2 million related to the mark-to-market of the Common Warrants due to a $5.0 million gain in the prior year period in addition to a $1.2 million loss in the current period. This expense was partially offset by a $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 Attributable to Redeemable Noncontrolling Interest

Net loss attributable to redeemable noncontrolling interest was $9.9 million in first nine months of 2023, an increase in net loss attributable to redeemable noncontrolling interest of $9.9 million, from the first nine months of 2022. The increase in net loss attributable to redeemable noncontrolling interest is a result of the Up-C Units created as part of the closing of the Merger Transactions, and the amount for the period is based on the percentage of Cibus Global that is not owned by Cibus Inc.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The Company’s primary source of liquidity is its cash and cash equivalents, with additional capital resources accessible from the capital markets, subject to market conditions and other factors, including limitations that may apply to the Company under applicable SEC and Nasdaq regulations. In addition, on October 20, 2023, Cibus entered into a binding term sheet with Rory Riggs, the Company’s Chairman and Chief Executive Officer, which makes available to the Company, beginning January 1, 2024, a line of credit (the Loan) in the aggregate principal amount of $5.0 million. The Loan, which automatically terminates if the Company secures additional financing in the aggregate amount of $20.0 million prior to January 1, 2024, is intended to provide additional certainty with respect to the Company’s capital resources as it pursues additional debt and/or equity financing.

As of September 30, 2023, the Company had $31.9 million of cash and cash equivalents. Current liabilities were $25.1 million as of September 30, 2023.

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 corporate and laboratory facilities. The Company’s principal discretionary cash spending is for salaries, capital expenditures, short-term working capital payments, and professional and other transaction-related expenses incurred as the Company pursues additional financing.

The Company incurred net losses of $60.4 million for the nine months ended September 30, 2023. As of September 30, 2023, the Company had an accumulated deficit of $262.7 million and expects to continue to incur losses in the future.

Cash Flows from Operating Activities

In Thousands, except percentage values

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Net cash used by operating activities was $29.2 million in the first nine months of 2023, an increase in cash used of $13.6 million, or 87 percent, from the first nine months of 2022. The increase in cash used was primarily driven by an increase in net loss related to the operations acquired in the Merger Transactions offset by an increase of $5.3 million from the changes in operating assets and liabilities related to assets and liabilities assumed from the closing of the Merger Transactions with Cibus Global, LLC.

The Company expects cash used by operating activities in 2023 to be higher than 2022 driven by consummation of the Merger Transactions and the resulting operating activities conducted by Cibus Global, as a subsidiary of the Company.

Cash Flows from Investing Activities

In Thousands, except percentage values

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Net cash provided by investing activities was $55.5 million in the first nine months of 2023, an increase of $57.0 million, or 3,779 percent, from the first nine months of 2022. The increase was driven by the cash acquired resulting from the merger with Cibus Global partially offset by an increase in capital expenditures.

The Company expects cash provided by investing activities in 2023 to be higher than 2022 driven by the cash acquired as a result of the Merger Transactions.

Cash Flows from Financing Activities

In Thousands, except percentage values

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Net cash provided by financing activities was $2.0 million in the first nine months of 2023, a decrease of $7.9 million, or 79 percent, from the first nine months 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, $0.8 million from repayments of notes payable, and $0.7 million from payments of taxes related to vested restricted stock units. These decreases were partially offset by the $2.5 million receipt of the Interim Funding and $1.3 million issuance of notes payable related to equipment and insurance policy purchases.

The Company expects cash provided by financing activities in 2023 to be similar to 2022 driven by potential financing activity as the Company evaluates capital markets conditions during the fourth quarter of 2023.

Capital Resources

Operating Capital Requirements

The Company has incurred losses since its inception and its net loss was $60.4 million for the nine months ended September 30, 2023, and it used $29.2 million of cash for operating activities for the nine months ended September 30, 2023. The Company’s primary source of liquidity is its cash and cash equivalents, with additional capital resources accessible, subject to market conditions and other factors, including limitations that may apply to the Company under applicable SEC and Nasdaq regulations, from the capital markets, including through stock offerings of common stock or other securities, which may be implemented pursuant to the Company’s effective registration statement on Form S-3. In addition, the Loan, which automatically terminates if the Company secures additional financing in the aggregate amount of $20.0 million prior to January 1, 2024, is intended to provide additional certainty with respect to the Company’s capital resources as it pursues additional debt and/or equity financing.

As of September 30, 2023, the Company had $31.9 million of cash and cash equivalents. Current liabilities were $25.1 million as of September 30, 2023.

As part of the Company’s strategic realignment discussed above, the Company has initiated cost reduction initiatives designed to preserve capital resources for the advancement of its priority objectives, which initiatives include reductions in capital expenditures, streamlining of independent contractor utilization, and prioritization of near-term payment obligations.

The Company has incurred losses since its inception and anticipates that it will continue to generate losses for the next several years. Over the longer term and until the Company can generate cash flows sufficient to support its operating capital requirements, it expects 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 future trait R&D collaboration agreements and technology licenses, including upfront and milestone payments, annual license fees, and royalties; (iii) government or other third-party funding (iv) public or private equity or debt financings, or (v) 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 accompanying unaudited condensed consolidated 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.

The Company’s ability to continue as a going concern will depend on its ability to obtain additional public or private equity or debt financing, obtain government or private grants and other similar types of funding, attain further operating efficiencies, reduce or contain expenditures, and, ultimately, to generate revenue. The Company believes that its cash and cash equivalents as of September 30, 2023 is not sufficient to fund its operations for a period of 12 months or more from the date of this filing. Taking into account anticipated cost savings and without giving effect to potential financing transactions that Cibus is pursuing, Cibus expects that existing cash and cash equivalents will fund planned operating expenses and capital expenditure requirements into early in the first quarter of 2024.

Management will need to raise additional capital to support its business plans to continue as a going concern within one year after the date that these financial statements are issued. Although the Company has implemented a strategic realignment, which has included headcount reductions, and has initiated cost reduction initiatives designed to preserve capital resources, if the Company is unable to raise additional capital in a sufficient amount or on acceptable terms, the Company may have to implement additional, more stringent cost reduction measures to manage liquidity, and the Company may have to significantly delay, scale back, or cease operations, in part or in full. If the Company raises additional funds through the issuance of additional debt or equity securities, including as part of a strategic alternative, it could result in substantial dilution to its existing stockholders and increased fixed payment obligations, and these securities may have rights senior to those of the Company’s shares of common stock. These factors raise substantial doubt about the Company's ability to continue as a going concern for at least one year from the date of issuance of these financial statements. Any of these events could impact the Company’s business, financial condition, and prospects.

The Company’s financing needs are subject to change depending on, among other things, the success of its trait and product development efforts, the effective execution of its business model, its revenue, and its efforts to effectively manage expenses. The effects of macroeconomic events and potential geopolitical developments on the financial markets and broader economic uncertainties may make obtaining capital through equity or debt financings more challenging and may exacerbate the risk that such capital, if available, may not be available on terms acceptable to the Company.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND CONTINGENCIES

The following table summarizes the Company's contractual obligations and commitments as of September 30, 2023:

In Thousands

Royalty Liability - Related Parties

The company assumed the Royalty Liability as part of the Merger Transactions. In 2014, Cibus Global entered into the Warrant Exchange Agreement. Under the Warrant Exchange Agreement, the Royalty Holders are entitled to future royalty payments equal to 10 percent of the subject revenues (Subject Revenues), which includes all revenues earned by Cibus Global, including consideration attributable to crop traits developed using the Company’s gene editing technology, but excludes specifically, (i) revenues attributable to the Nucelis product line, (ii) amounts received from the sale or disposition of the Company’s assets to the extent the purchaser agrees to be bound by the Warrant Exchange Agreement, (iii) payments for the Cibus Global capital stock, and (iv) revenues attributable to collaboration and research projects. Royalty payments will begin in the first fiscal quarter after which the aggregate Subject Revenues during any consecutive 12-month period equals or exceeds $50.0 million, at which point Cibus Global will be obligated to pay all aggregated but unpaid payments under the Warrant Exchange Agreement. This condition had not occurred as of September 30, 2023. Additionally, Cibus Global granted the Royalty Holders a continuing security interest in certain intellectual property of Cibus Global to secure the payment and performance of obligations of Cibus Global under the Warrant Exchange Agreement. The initial term of the Warrant Exchange Agreement is 30 years and may be extended for an additional 30-year term if the holders provide written notice and make a payment of $100. The Company's payments under, and performance of, the Royalty Liability are secured by a security interest in substantially all of its intellectual property.

Cibus Non-Profit Foundation

During 2022, Cibus Global created the Cibus Charitable Foundation, Inc., a nonprofit legal entity (the Cibus Non-Profit Foundation). As of September 30, 2023, the Cibus Non-Profit Foundation has not received any donations or commenced operations. The Company is obligated to make donations to the Cibus Non-Profit Foundation each fiscal year at a rate of 1.0 percent of all net royalty revenue in the applicable fiscal year that is equal to or greater than $100 million up to, and including, $1.0 billion, and then steps up to 2.0 percent in respect of any portion of such net royalty revenue in excess of $1.0 billion. For purposes of this calculation, net royalty revenue refers to all royalty payments received by the Company, net of all taxes (other than income taxes) and all amounts payable pursuant to the Royalty Liability. The donation payable by the Company may be reduced, including to zero, to the extent necessary to comply with any covenant or obligation in any instrument evidencing third-party indebtedness, to permit a financing to occur, to preclude undercapitalization, to satisfy working capital requirements or provide for strategic needs of the Company, to ensure timely payment of the Company's liabilities and debts to third parties as they become due, or to comply with applicable law. The Company has agreed not to enter any change of control transaction unless the surviving entity assumes the obligation to pay such donations to the Cibus Non-Profit Foundation.

This obligation is contingent upon the Cibus Non-Profit Foundation obtaining and maintaining its status as a 501(c)(3) charitable organization, although such registration has not yet been achieved. The Cibus Non-Profit Foundation must use all donations received consistent with its mission statement: to drive sustainable agriculture and sustainable agricultural communities in the developing world. Accordingly, as of September 30, 2023, the Company had not recorded a liability related to its obligations to the Cibus Non-Profit Foundation within the accompanying condensed consolidated financial statements.

As of September 30, 2023, there were no other 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 condensed consolidated financial statements and the related disclosures, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires the Company to make estimates, assumptions, and judgments that affect the reported amounts in its condensed 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 & 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 condensed consolidated balance sheets 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 Change of Control Put. If the Change of Control 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.

Royalty Liability - Related Parties

Changes in expected royalty payments, as a result of changes to estimates of the underlying revenues, are recognized prospectively as an adjustment to the effective yield as interest expense. For purposes of determining the Royalty Liability, the Company estimates the total amount of future revenues expected to be received from the Company's customers over the life of the agreement. The Company then calculates the amount of future royalty payments required to be paid based upon the estimated future revenues. The Company will periodically assess the expected royalty payments using a combination of internal projections and external sources. If global net sales of the company's products developed using RTDS technologies are greater than or less than expected, the interest expense recorded with respect to the Royalty Liability would be greater or less, respectively, over the term of the arrangement. As of September 30, 2023, the Royalty Liability reflected an effective yield of 23.7 percent.

Accounting for Business Combinations

The Company applies Accounting Standards Codification (ASC) 805, Business Combinations, when accounting for acquisitions of a business under GAAP. Identifiable assets acquired, liabilities assumed, and noncontrolling interest, if applicable, are recorded at their estimated fair values at the acquisition date. Significant judgment is required in determining the acquisition date fair value of the assets acquired and liabilities assumed, predominantly with respect to property, plant, and equipment and intangible assets. Evaluations include numerous inputs, including forecasted cash flows that incorporate the specific attributes of each asset. For property, plant, and equipment, the Company considers the remaining useful life of equipment, current replacement costs for similar assets, and comparable market transactions. The Company evaluates all available information, as well as all appropriate methodologies, when determining the fair value of assets acquired, liabilities assumed, and noncontrolling interest, if applicable, in a business combination. In addition, once the appropriate fair values are determined, the Company must determine the remaining useful life for property, plant, and equipment and the amortization period and method of amortization for each finite-lived intangible asset. The estimates of fair values of assets impact future depreciation and amortization and the initial amount of goodwill recorded.

Impairment Testing of Goodwill and Indefinite-Lived Intangible Assets

As of September 30, 2023, the Company performed a qualitative impairment assessment of goodwill and indefinite-lived intangible assets which included an evaluation of changes in industry, market, and macroeconomic conditions as well as consideration of its financial performance and any significant trends. The qualitative assessment indicated that it was not more likely than not that goodwill and indefinite-lived intangible assets are impaired as of September 30, 2023. If the Company experiences a sustained decline in its stock price or other material changes in the significant assumptions that affect the determination of the fair value of the Company’s single reporting unit, it may result in a goodwill and/or intangible asset impairment charge in future periods, and such charge may be material. On an annual basis, the Company performs an impairment test which is planned for the fourth quarter of 2023.

As of September 30, 2023, there were no other significant changes to the Company’s critical accounting policies disclosure reported in “Critical Accounting Estimates” in its Annual Report.

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 September 30, 2023.

Changes in Internal Control over Financial Reporting

No changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2023, that have materially affected, or 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, except for the supplemental risk factors reported by the Company in its Current Report on Form 8-K filed on October 18, 2023, which are incorporated by reference herein. See the discussion of risk factors described in Exhibit 99.3 to the Company's Current Report on Form 8-K filed on June 1, 2023, and under the heading “Item 8.01 – Other Events—Supplemental Risk Factors” in the Company's Current Report on Form 8-K filed on October 18, 2023.