Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 ("Quarterly Report") 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. iMSCs are induced pluripotent stem cell ("iPSC")-derived mesenchymal stem cells. We envision a future where cell therapies powered by synthetic iMSCs can offer new options for patients with limited treatment paths and our mission is to transform the treatment of cancer and autoimmune disease by developing scalable, affordable, off-the-shelf cell therapies that restore hope.

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. In preclinical study, ERNA-101 exhibited reduction of tumor growth and statistically significant survival advantage in the ovarian cancer model as compared to the control group. 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-201. 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-201 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

Amendments to Restated Articles of Incorporation, as Amended

Effective June 2, 2025, we filed a certificate of amendment to our Restated Certificate of Incorporation, as amended, (the "Amended COI") with the Secretary of State of Delaware to increase the authorized shares of our common stock from 100 million to 150 million (the "Authorized Shares Amendment").

Also effective June 2, 2025, we filed a certificate of amendment to our Amended COI with the Secretary of State of Delaware to allow for action required or permitted to be taken by our stockholders to be effected by written consent of such stockholders in addition to duly called annual or special meetings of such stockholders ("the Written Consent Amendment")

On June 10, 2025, we filed a certificate of amendment to our Amended COI with the Secretary of State of Delaware to effect a reverse stock split of our common stock at a ratio of 1-for-15 effective at 12:01 a.m. (the "Reverse Stock Split"). Upon the effectiveness of the Reverse Stock Split, every fifteen shares of the issued and outstanding common stock were automatically combined and reclassified into one issued and outstanding share of common stock. The Reverse Stock Split did not alter the par value of the common stock, and the number of authorized shares of common stock remains unchanged at 150 million. No fractional shares were issued in connection with the Reverse Stock Split, and no cash or other consideration was paid in connection with any fractional shares. Stockholders who otherwise would have held a fractional share after giving effect to the Reverse Stock Split instead owned one whole share of the post-reverse stock split common stock. We issued an aggregate of 153 shares for rounding up fractional shares to whole shares.

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

The Authorized Shares Amendment, Written Consent Amendment, and Reverse Stock Split Amendment were approved by out stockholders at our 2025 Annual Meeting of Stockholders on June 2, 2025 (the "Annual Meeting").

Private Placement of Equity

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 4,621,000 shares of common stock at a purchase price of $1.569 per share (or pre-funded warrants in lieu of common stock at a purchase price of $1.494 per pre-funded warrant). The pre-funded warrants will be exercisable until exercised in full at a nominal exercise of $0.075 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 662,000 shares of common stock and 34,000 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). Following shareholder approval at the Annual Meeting, on June 9, 2025, we sold to the investors an aggregate of approximately 3,182,000 shares of common stock and 622,000 pre-funded warrants, and on June 27, 2025, we sold the remaining approximately 121,000 shares of common stock (the June 9, 2025 and June 27, 2025 issuances collectively referred to as the "Second Closing"). The Company raised approximately $7.2 million in gross proceeds under the SPA.

Compliance with Nasdaq's Continued Listing Standards

On June 11, 2025, we received a notice from Nasdaq Regulation (the "Staff") that based on our Current Report on Form 8-K filed on June 9, 2025 disclosing the Second Closing, the Staff determined that we comply with Listing Rule 5550(b)(1), which requires a minimum stockholders' equity of $2.5 million (the "Stockholders' Equity Rule"). If we fail to evidence compliance with the Stockholders' Equity Rule upon filing our next periodic report, which is this Quarterly Report for the period ended June 30, 2025, we would be subject to delisting. Our stockholders' equity was $4.4 million at June 30, 2025.

As a result of the 1-for-15 reverse stock split we effected on June 12, 2025, we received a notice on July 1, 2025 from the Staff notifying us that we regained compliance with Listing Rule 5550(a)(2), which requires maintaining a minimum bid price of $1.00.

As of the filing of this Quarterly Report, we are in compliance with all Nasdaq continued listing standards.

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 June 30, 2024 and $0.1 million for the six months ended June 30, 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 and six months ended June 30, 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 Bioscience20% 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 and Six Months Ended June 30, 2025 and 2024

		Three months ended June 30,												Six months ended June 30,
(In thousands)		2025				2024				Change				2025				2024				Change
Revenue		$	-			$	47			$	(47	)		$	-			$	94			$	(94	)
Cost of revenues			-				95				(95	)			-				156				(156	)
Gross loss			-				(48	)			48				-				(62	)			62
Operating expenses:
Research and development			1,136				987				149				2,445				2,445				-
General and administrative			1,365				3,896				(2,531	)			2,786				8,211				(5,425	)
Total operating expenses			2,501				4,883				(2,382	)			5,231				10,656				(5,425	)
Loss from operations			(2,501	)			(4,931	)			2,430				(5,231	)			(10,718	)			5,487
Other expense, net:
Forward sales contract expense			(512	)			-				(512	)			(5,847	)			-				(5,847	)
Change in fair value of warrant liabilities			-				136				(136	)			1				66				(65	)
Change in fair value of contingent consideration			-				66				(66	)			-				66				(66	)
Interest (expense) income, net			-				(797	)			797				5				(1,583	)			1,588
Other expense, net			(123	)			-				(123	)			(258	)			-				(258	)
Total other expense, net			(635	)			(595	)			(40	)			(6,099	)			(1,451	)			(4,648	)
Loss before income taxes			(3,136	)			(5,526	)			2,390				(11,330	)			(12,169	)			839
Provision for income taxes			(3	)			(3	)			-				(11	)			(7	)			(4	)
Net loss		$	(3,139	)		$	(5,529	)		$	2,390			$	(11,341	)		$	(12,176	)		$	835

Revenue

For the three and six months ended June 30, 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 and six months ended June 30, 2025.

Cost of Revenue

For the three months ended June 30, 2024, we recognized direct salaries and supplies related to the customized cell line. During the six months ended June 30, 2024, we recognized direct salaries, supplies, and less than $0.1 million of fees to Factor Bioscience under a previous license agreement. There was no such cost recognized for the three and six months ended June 30, 2025.

Research and Development Expenses

		Three months ended June 30,
		2025				2024				Change
(in thousands)
Professional fees		$	202			$	(15	)		$	217
Payroll-related			114				61				53
MSA/license fees			663				812				(149	)
Study fees			60				88				(28	)
Other expenses, net			97				41				56
Total research and development expenses		$	1,136			$	987			$	149

		Six months ended June 30,
		2025				2024				Change
(in thousands)
MSA/license fees		$	1,300			$	1,625			$	(325	)
Payroll-related			211				386				(175	)
Professional fees			358				88				270
Study fees			412				152				260
Other expenses, net			164				194				(30	)
Total research and development expenses		$	2,445			$	2,445			$	-

Total research and development expenses increased by approximately $0.1 million for the three months ended June 30, 2025 compared to the three months ended June 30, 2024, primarily due to increased use of consulting services and headcount, offset by a reduction in the Factor Bioscience license fee arrangement.

Total research and development expenses were flat for the six months ended June 30, 2025 compared to the six months ended June 30, 2024, and was comprised of decreases in the Factor Bioscience license fee arrangement and payroll-related fees due to severance expense incurred during the six months ended June 30, 2024 that was not incurred during the six months ended June 30, 2025. These decreases were offset primarily by increased professional fees from consultants and increased fees for preclinical study costs.

General and Administrative Expenses

		Three months ended June 30,
		2025				2024				Change
(in thousands)
Occupancy expense		$	8			$	1,899			$	(1,891	)
Professional fees2			440				999				(559	)
Stock-based compensation			353				408				(55	)
Other expenses, net			564				590				(26	)
Total general and administrative expenses		$	1,365			$	3,896			$	(2,531	)

		Six months ended June 30,
		2025				2024				Change
(in thousands)
Occupancy expense		$	15			$	3,800			$	(3,785	)
Professional fees			826				2,283				(1,457	)
Payroll-related			821				868				(47	)
Stock-based compensation			839				644				195
Other expenses, net			285				616				(331	)
Total general and administrative expenses		$	2,786			$	8,211			$	(5,425	)

Our general and administrative expenses for the three months ended June 30, 2025 decreased by approximately $2.5 million primarily due to decreases in (i) rent expense due to a sublease we terminated in August 2024, (ii) professional fees related to legal services and consultants, and (iii) stock-based compensation due to equity awards becoming fully vested during the three months ended June 30, 2025 compared to the three months ended June 30, 2024.

For the six months ended June 30, 2025 compared to the six months ended June 30, 2024, our general and administrative expenses decreased $5.4 million primarily due to the termination of the sublease, reduction in our 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 six months ended June 30, 2025 compared to the six months ended June 30, 2024. We will continue to focus on finding operational efficiencies that result in cost savings.

Forward sales contract expense

For the three months ended June 30, 2025, we recognized a loss of $0.5 million related to the change in fair value of our forward sales contract, which was remeasured immediately prior to the respective settlement of shares issued under the SPA entered into on March 31, 2025. For the six months ended June 30, 2025, we recognized $5.8 million related to the forward sales contract, $5.3 million of which was initially recognized at the contract inception date because the fair value of the shares that were expected to be issued under the SPA exceeded the proceeds, and the remaining $0.5 million loss was related to the change in fair value that was remeasured immediately prior to the respective settlement of the shares issued under the SPA. 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 and six months ended June 30, 2024.

Change in Fair Value of Warrant Liabilities

We recognized approximately $0.1 million in income for each of the three and six months ended June 30, 2024 for the change in the fair value of warrant liabilities as a result of a decrease in the market price of our common stock as of June 30, 2024. The change in the fair value of the warrant liabilities for the three and six months ended June 30, 2025 was de minimis.

Interest (Expense) Income, net

For the three and six months ended June 30, 2025, we recognized $0.9 million and $1.7 million less in interest expense, respectively, due to a reduction in interest-bearing debt, and we also recognized approximately $0.1 million less in interest income for each of the three and six months ended June 30, 2025 due to having reduced cash balances when compared to the three and six months ended June 30, 2024.

Other Expense, net

During the three and six months ended June 30, 2025, we recognized $0.1 million and $0.3 million of expenses related to the SPA transaction entered into on March 31, 2025, respectively. See Note 12, Private Placement, to the accompanying condensed consolidated statement of operations for more information on this SPA. There was no comparable expense for the three and six months ended June 30, 2024.

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 June 30, 2025, we had cash of approximately $4.3 million, and we had an accumulated deficit of approximately $242.9 million. We have to date incurred operating losses, and we expect these losses to continue in the future. For the three and six months ended June 30, 2025, we incurred a net loss of $3.1 million and $11.3 million, respectively, which includes a $0.5 million and $5.8 million non-cash expense related to the forward sales contract, respectively. For the six months ended June 30, 2025, we used $4.6 million of cash in operating activities.

On March 11, 2025 and March 20, 2025, we received $1.5 million and $0.8 million, respectively, for the issuance of two promissory notes with an aggregate principal amount of $2.3 million to an investor. The promissory notes had a maturity date of 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 accrued at a rate of 5.0% per annum, payable at maturity. During the three months ended June 30, 2025, the Company repaid the notes in full for $2.3 million, including accrued interest. See Note 8 to the accompanying condensed consolidated statement of operations for more information on the promissory notes.

During the three months ended June 30, 2025, the Company raised $7.2 million in gross proceeds from the sale of shares of the Company's common stock and prefunded warrants. We are using the proceeds from this financing for general working capital purposes and used a portion to repay the notes, as discussed above, . 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 I 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:

		For the six months ended June 30,
(in thousands)		2025				2024				Change
Cash (used in) provided by:
Operating activities		$	(4,597	)		$	(6,006	)		$	1,409
Investing activities			-				(346	)			346
Financing activities			7,183				1,363				5,820
Net increase (decrease) in cash and cash equivalents		$	2,586			$	(4,989	)		$	7,575

Net Cash Used in Operating Activities

There was a decrease of approximately $1.4 million in cash used in operating activities for the six months ended June 30, 2025 compared to the six months ended June 30, 2024. This change was due a $4.3 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 $2.9 million in cash used in operating assets and liabilities for the six months ended June 30, 2025 compared to the six months ended June 30, 2024 primarily related to accounts payable, accrued expenses and operating lease liabilities.

Net Cash Used in Investing Activities

We used approximately $0.3 million to pay for the purchases of property and equipment during the six months ended June 30, 2024. There were no investing activities during the six months ended June 30, 2025.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2025 includes $2.3 million of gross proceeds received from the issuance of two promissory notes and $4.9 million of proceeds received from the First Closing and Second Closing under the SPA, net of offsetting $2.3 million of a receivable related to the Second Closing due from a related party with the outstanding notes payable, including accrued interest, due to the same related party. Net cash provided by financing activities for the six months ended June 30, 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 and six months ended June 30, 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 inthe 2024 10-K.