Ernexa Therapeutics Inc.: Form 10-Q for the period ended Mar 31, 2025

You should read this discussion together with the unaudited interim condensed consolidated financial statements, related notes, and other financial information included elsewhere in this Quarterly Report on Form 10-Q together with our audited consolidated financial statements, related notes, and other information contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2025. The following discussion contains or is based on assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under “Risk Factors,” in this report and in Part I, Item 1A of the 2024 10-K and as described from time to time in our other filings with the SEC. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.

Overview

We are a preclinical-stage synthetic allogeneic iMSC therapy company. Our vision is to improve the lives of patients with difficult-to-treat diseases through innovative, effective, and safe, but accessible cellular therapies, and our mission is to develop allogenic off-the-shelf cellular therapies, leveraging induced pluripotent stem cell (“iPSC”)-derived mesenchymal stem cells (“iMSCs”) to target solid tumors and autoimmune diseases.

Our lead product candidate ERNA-101 is allogenic IL-7 and IL-15-secreting iMSCs. ERNA-101 capitalizes on the intrinsic tumor-homing ability of MSCs to slip through the tumor’s defenses and to deliver potent pro-inflammatory factors directly to the tumor microenvironment (“TME”), limiting systemic exposure and potential toxicity while unleashing potent anti-cancer immune responses including enhancement of T-cell anti-tumor activity. Our initial focus is to develop ERNA-101 in platinum-resistant, ovarian cancer. We collaborated with the University of Texas MD Anderson Cancer Center to investigate the ability of ERNA-101 to induce and modulate antitumor immunity in an ovarian cancer model. We expect to complete the Investigational New Drug (“IND”) enabling studies and IND submission by 2026 and to subsequently enter a Phase I investigator sponsored clinical trial in the second half of 2026..

We are also investigating anti-inflammatory cytokine (e.g. IL-10)-secreting iMSCs in inflammatory/auto-immune disorders like Rheumatoid arthritis, which we refer to as ERNA-102. MSCs have an intrinsic ability to home to inflamed tissue and have been shown to dampen inflammation and drive/healing/regeneration through multiple secreted mediators and cell-cell interactions. We are investigating the ability of ERNA-102 to turbocharge these anti-inflammatory and regenerative effects.

Additionally, we are actively seeking strategic partnerships to co-develop or out-license therapeutic assets and engage with potential collaborators to expand developmental opportunities.

Recent Developments

On March 31, 2025, we entered into a securities purchase agreement (the “SPA”) with certain accredited investors and a related registration rights agreement. Pursuant to the SPA, we agreed to issue and sell to the investors, and the investors agreed to purchase, in a private placement, an aggregate of approximately 58.3 million shares of common stock at a purchase price of $0.1046 per share, and pre-funded warrants to purchase up to approximately 11.0 million shares of common stock, at a purchase price of $0.0996 per pre-funded warrant. The pre-funded warrants will be exercisable until exercised in full at a nominal exercise of $0.005 per share and may not be exercised to the extent such exercise would cause the holder to beneficially own more than 4.99% or 9.99%, as applicable, of our outstanding common stock.

Upon the initial closing of the SPA on April 2, 2025 (the “First Closing”), we sold to the investors an aggregate of approximately 9.9 million shares of common stock and 0.5 million pre-funded warrants (such shares, including the shares underlying the pre-funded warrants equal to 19.99% of our outstanding shares as of March 31, 2025). The second closing under the SPA for the sale of approximately 48.3 million shares of common stock and 10.5 million pre-funded warrants (the “Second Closing”) will occur upon shareholder approval at our 2025 annual meeting of stockholders on June 2, 2025 (the “Annual Meeting”).

Basis of Presentation

Revenue

Revenue is related to an exclusive option and license agreement we had with a customer, under which we granted the customer an option to obtain an exclusive sublicense to certain of our technology for preclinical, clinical and commercial purposes in exchange for a non-refundable up-front payment to us of $0.3 million. We also began developing certain induced pluripotent stem cell lines in exchange for a cell line customization fee. The customer paid us $0.4 million towards the customization fee, which we were recognizing ratably over the customization period, including less than $0.1 million for the three months ended March 31, 2024.

On September 24, 2024, we entered into an agreement with Factor Bioscience Limited (“Factor Limited” and together with Factor Bioscience Inc. and its other affiliates, “Factor Bioscience”) whereby we assigned the customer contract to Factor Bioscience (the “Assignment Agreement”). The Assignment Agreement with Factor Bioscience assigned all our rights and obligations under the customer contract to Factor Bioscience. Payments to us related to the customer contract will now be subject to the Assignment Agreement, which provides for Factor Bioscience paying us thirty percent (30%) of all amounts it receives from the customer in the event that the customer obtains a sublicense from Factor Bioscience. Upon receipt of future payments for the customization activities set forth in the customer contract, Factor Bioscience will pay us twenty percent (20%) of all amounts Factor Bioscience receives from the customer. Because we have no further obligations under the agreement with the customer, there is no revenue recognized for the three months ended March 31, 2025. For additional information, see Note 3 to the accompanying condensed consolidated financial statements. We have no other revenue generating contracts at this time.

Cost of Revenues

We recognize direct labor and supplies associated with generating our revenue as cost of revenues. We were also obligated to pay Factor Bioscience 20% of any amounts we received from the customer contract discussed above under a previous license agreement we had with Factor Bioscience, which has since been terminated, and such costs were also recognized as cost of revenues.

Research and Development Expenses

We expense our research and development costs as incurred. Research and development expenses consist of costs incurred for company-sponsored research and development activities. Upfront payments and milestone payments made for the licensing of technology are expensed as research and development in the period in which they are incurred if the technology is not expected to have any alternative future uses other than the specific research and development project for which it was intended.

The major components of research and development costs include salaries and employee benefits, stock-based compensation expense, supplies and materials, preclinical study costs, expensed licensed technology, consulting, scientific advisors and other third-party costs, as well as allocations of various overhead costs related to our product development efforts.

We have contracted with third parties to perform various studies. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. We accrue for third party expenses based on estimates of the services received and efforts expended during the reporting period. If the actual timing of the performance of the services or the level of effort varies from the estimate, the accrual is adjusted accordingly. The expenses for some third-party services may be recognized on a straight-line basis if the expected costs are expected to be incurred ratably during the period. Payments under the contracts depend on factors such as the achievement of certain events or milestones, the allocation of responsibilities among the parties to the agreement, and the completion of portions of the preclinical study or similar conditions.

General and Administrative Expenses

Our general and administrative expenses consist primarily of salaries, benefits and other costs, including equity-based compensation, for our executive and administrative personnel, legal and other professional fees, travel, insurance, and other corporate costs.

Results of Operations

Comparison of the Three Months Ended March 31, 2025 and 2024

(In thousands)

Revenue

For the three months ended March 31, 2024, we recognized ratably over the customization period amounts related to a development fee we received from a customer for a customized cell line. For additional information on this customer contract, see Note 3 to the accompanying condensed consolidated financial statements. We did not have any revenue generating contracts during the three months ended March 31, 2025.

Cost of Revenue

For the three months ended March 31, 2024, we recognized less than $0.1 million of fees to Factor Bioscience, which was recorded as a cost of revenue. There was no such cost recognized for the three months ended March 31, 2025.

Research and Development Expenses

(in thousands)

Total research and development expenses decreased by approximately $0.1 million for the three months ended March 31, 2025 compared to the three months ended March 31, 2024, primarily due to payroll-related expense due to decreased headcount and a reduction in the Factor Bioscience MSA/license fee arrangement. These decreases were offset by increased costs related to our ERNA 101 and 102 study fees as well as increased professional fees for consultants.

General and Administrative Expenses

(in thousands)

Our general and administrative expenses decreased by approximately $2.9 million for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 primarily due to reduced rent expense due to a sublease we terminated in August 2024, decreases in professional fees related to legal services and consultants, and a reduction in payroll related expenses. These decreases were offset by increases in stock-based compensation as a result of an increase to stock options granted and vesting during the three months ended March 31, 2025 compared to the three months ended March 31, 2024. We will continue to focus on finding operational efficiencies that result in cost savings.

Forward sales contract expense

For the three months ended March 31, 2025, we recognized a loss of $5.3 million related to the forward sales contract we entered into on March 31, 2025 because the fair value of the shares expected to be issued under the SPA exceeds the proceeds. See Note 12, Equity Transaction - Private Placement, to the accompanying condensed consolidated statement of operations for more information on this SPA. There was no similar transaction for the three months ended March 31, 2024.

Change in Fair Value of Warrant Liabilities

We recognized less than $0.1 million in expense for the three months ended March 31, 2024 for the change in the fair value of warrant liabilities as a result of an increase in the market price of our common stock as of March 31, 2024. The change in the fair value of the warrant liabilities for the three months ended March 31, 2025 was de minimis.

Interest Income (Expense), net

For the three months ended March 31, 2025, we recognized $0.9 million less in interest expense due to a reduction in interest-bearing debt, and we also recognized less than a $0.1 million decrease in interest income due to having reduced cash balances when compared to the three months ended March 31, 2024.

Other Expense, net

During the three months ended March 31, 2025, we recognized $0.1 million of expenses related to the SPA transaction entered into on March 31, 2025. See Note 5, Private Placement, to the accompanying condensed consolidated statement of operations for more information on this SPA.

Provision for Income Taxes

During 2025, we expect to incur state income tax liabilities related to our operations. We have established a full valuation allowance for all deferred tax assets, including our net operating loss carryforwards, since we could not conclude that we were more likely than not able to generate future taxable income to realize these assets. The effective tax rate differs from the statutory tax rate due primarily to our full valuation allowance.

Liquidity and Capital Resources

As of March 31, 2025, we had cash of approximately $1.9 million, and we had an accumulated deficit of approximately $239.7 million. We have to date incurred operating losses, and we expect these losses to continue in the future. For three months ended March 31, 2025, we incurred a net loss of $8.2 million, which includes a $5.3 million non-cash expense upon entering into a forward sales contract, and we used $2.1 million of cash in operating activities.

On March 11, 2025 and March 20, 2025, we received $1.5 million and $0.8 million, respectively, in exchange for the issuance of two promissory notes with an aggregate principal amount of $2.3 million to an investor. The promissory notes mature on the earlier of (i) June 15, 2025 or (ii) upon us receiving greater than $5 million in aggregate proceeds from a subsequent capital raise. Interest accrues at a rate of 5.0% per annum, payable at maturity.

On April 2, 2025, we received $1.1 million in gross proceeds from the First Closing pursuant to the private placement of common stock and prefunded warrants under the SPA we entered into on March 31, 2025. We will receive $6.2 million in gross proceeds from the Second Closing, subject to receipt of stockholder approval at the Annual Meeting and other customary closing conditions. We plan to use the proceeds from this financing for general working capital purposes and to pay off the notes payable discussed above, including any accrued and unpaid interest. See Note 12, Equity Transactions - Private Placement, to the accompanying condensed consolidated statement of operations for additional information regarding this financing.

Based on our current financial condition and forecasts of available cash, we will not have sufficient capital to fund our operations for the 12 months following the issuance date of the accompanying condensed consolidated financial statements. We can provide no assurance that we will be able to obtain additional capital when needed, on favorable terms, or at all. If we cannot raise capital when needed, on favorable terms or at all, we will need to reevaluate our planned operations and may need to reduce expenses, file for bankruptcy, reorganize, merge with another entity, or cease operations. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock. See the risk factor in Item 1A of Part II of our 2024 10-K titled, “We will require substantial additional capital to fund our operations and execute our business strategy, and we may not be able to raise adequate capital on a timely basis, on favorable terms, or at all.”

Historically, the cash used to fund our operations has come from a variety of sources and predominantly from sales of shares of our common stock and convertible notes. We will continue to evaluate and plan to raise additional funds to support our working capital needs through public or private equity offerings, debt financings, strategic partnerships, out-licensing our intellectual property, grants or other means. There can be no assurance that capital will be available when needed or that, if available, it will be obtained on terms favorable to us and our stockholders. Our ability to raise capital through sales of our common stock will depend on a variety of factors including, among others, market conditions, the trading price and volume of our common stock, and investor sentiment. In addition, macroeconomic factors and volatility in the financial market, which may be exacerbated in the short term by concerns over inflation, interest rates, impacts of the wars in Ukraine and the Middle East, strained relations between the U.S. and several other countries, and social and political discord and unrest in the U.S., among other things, may make equity or debt financings more difficult, more costly or more dilutive to our stockholders.

In addition, equity or convertible debt financings may have a dilutive effect on the holdings of our existing stockholders, and debt financings may subject us to restrictive covenants, operational restrictions and security interests in our assets. If we raise capital through collaborative arrangements, we may be required to relinquish some rights to our technologies or grant sublicenses on terms that are not favorable to us.

We prepared the accompanying condensed consolidated financial statements on a going concern basis, which assumes that we will realize our assets and satisfy our liabilities in the normal course of business. As discussed above, there is substantial doubt about our ability to continue as a going concern because we do not have sufficient cash to satisfy our working capital needs and other liquidity requirements over at least the next 12 months from the date of issuance of the accompanying condensed consolidated financial statements. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and reclassification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty of our ability to remain a going concern.

Cash Flows

Cash flows from operating, investing and financing activities, as reflected in the accompanying condensed consolidated statements of cash flows, are summarized as follows:

(in thousands)

Net Cash Used in Operating Activities

There was a decrease of approximately $1.7 million in cash used in operating activities for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. This change was due a $2.4 million decrease in net loss, after giving effect to adjustments made for non-cash transactions, primarily due to a decrease in occupancy expense and professional fees, offset by an increase of $0.7 million in cash used in operating assets and liabilities for the three months ended March 31, 2025 compared to the three months ended March 31, 2024.

Net Cash Used in Investing Activities

We used approximately $0.1 million to pay for the purchases of property and equipment during the three months ended March 31, 2024. There were no investing activities during the three months ended March 31, 2025.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2025 includes $2.3 million of gross proceeds received from the issuance of two promissory notes as well as an immaterial amount received from the exercise of prefunded warrants. Net cash provided by financing activities for the three months ended March 31, 2024 includes $1.4 million of gross proceeds received from the issuance of convertible notes in January 2024 and the fees related to such issuance.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.

Critical Accounting Estimates

There were no significant changes in our critical accounting estimates during the three months ended March 31, 2025 from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2024 10-K.

Recent Accounting Pronouncements

No new Accounting Standards Updates have been issued by the Financial Accounting Standards Board since January 1, 2025 that would apply to us that are not disclosed in the 2024 10-K.

Under the rules and regulations of the SEC, as a smaller reporting company we are not required to provide the information otherwise required by this item.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we were required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q under the supervision, and with the participation, of our management, including our President and Chief Executive Officer (who serves as our principal executive officer) and our Senior Vice President of Finance (who serves as our principal financial officer) of the effectiveness of the design and operation of our disclosure controls and procedures.

Based on that evaluation, our Chief Executive Officer and Senior Vice President of Finance concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q in providing reasonable assurance of achieving the desired control objectives.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our 2024 10-K, in addition to other information in this report, when evaluating our business and before deciding whether to purchase, hold or sell shares of our common stock. Each of these risks and uncertainties, as well as additional risks and uncertainties not presently known to us or that we currently consider immaterial, could harm our business, financial condition, results of operations and/or growth prospects, as well as adversely affect the market price of our common stock, in which case you may lose all or part of your investment. There have been no material changes to the risk factors described in the 2024 10-K, except as follows:

Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock.

Our common stock is listed on The Nasdaq Capital Market. The Nasdaq Capital Market requires that listed companies satisfy certain continued listing requirements. Listing Rule 5500(a)(2) requires that listed companies maintain a minimum bid price of their common stock of at least $1 per share (the “Bid Price Rule”). Listing Rule 5550(b) requires that listed companies have: (1) stockholders’ equity of at least $2.5 million (the “Stockholders’ Equity Rule”; (2) a market value of listed securities (the “MVLS Rule”) of at least $35 million; or (3) net income from continuing operations of $500,000 in the company’s most recently completed fiscal year or in two of the three most recently completed fiscal years.

On December 30, 2024, we received notice from Nasdaq that we no longer met the Bid Price Rule and were provided until June 30, 2025 to regain compliance with the Bid Price Rule. On January 6, 2025, we received notice from Nasdaq informing us that we no longer met the MVLS Rule and were provided until July 7, 2025 to regain compliance with the MLVS Rule. If at any time during the Bid Price Rule compliance period, our closing bid price is at least $1 per share for a minimum of 10 consecutive business days during the 180-day compliance period, Nasdaq will provide written confirmation that we regained compliance with that applicable rule. In the event we do not regain compliance with the Bid Price Rule by June 30, 2025, we may be eligible for consideration of a second 180-day compliance period if we meet the MLVS Rule and all other initial listing standards for Nasdaq’s Capital Market, with the exception of the Bid Price Rule. In addition, we would also be required to notify Nasdaq of our intent to cure the Bid Price Rule deficiency by effecting a reverse stock split, if necessary. If it appears to Nasdaq that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide us notice that our securities will be subject to delisting.

Likewise, if at any time during the MLVS Rule compliance period our MVLS closes at $35 million or more for a minimum of 10 consecutive business days, Nasdaq will provide written confirmation that we have regained compliance that applicable rule. In the event we do not regain compliance with the Market Value Standard by July 7, 2025, Nasdaq will provide us notice that our securities will be subject to delisting, at which time, we may appeal the delisting determination.

At our Annual Meeting, we will seek shareholder approval for a reverse stock split at a ratio of 1-for-10 to 1-for-15, with the final ratio to be determined at the discretion of our Board of Directors (the “Reverse Stock Split Proposal”). Subject to such shareholder approval, we expect to regain compliance with the Bid Price Rule prior to the June 30, 2025 compliance deadline.

On March 31, 2025, we entered into the SPA, which provides for the issuance of approximately $7.3 million of common stock and pre-funded warrants over two closings. Upon the First Closing on April 2, 2025, we sold to the investors approximately $1.1 million shares of common stock and pre-funded warrants. The Second Closing under the SPA for the sale approximately $6.2 million shares of common stock and pre-funded will occur upon shareholder approval at our Annual Meeting, subject to customary closing conditions. Following completion of the Second Closing , we expect to be in compliance with Listing Rule 5550(b)(1), which requires a minimum stockholders’ equity of $2.5 million (the “Stockholders’ Equity Rule”), prior to the deadline to regain compliance with the MLVS Rule.

If we fail to satisfy any of the Nasdaq continued listing requirements, Nasdaq may take steps to delist our common stock.

If our common stock is ultimately delisted by Nasdaq, and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, then we could face significant material adverse consequences, including: a material reduction in the liquidity of our common stock and a corresponding material reduction in the trading price of our common stock; a more limited market quotations for our securities; a determination that our common stock is a “penny stock” that requires brokers to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our securities; more limited research coverage by stock analysts; loss of reputation; more difficult and more expensive equity financings in the future; the potential loss of confidence by investors; and fewer business development opportunities.

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” If our common stock remains listed on Nasdaq, our common stock will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. If our securities were no longer listed on Nasdaq and therefore not “covered securities,” we would be subject to regulation in each state in which we offer our securities.