Ernexa Therapeutics Inc.

(Unaudited)

1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Ernexa Therapeutics Inc. (the “Company”) is a preclinical-stage synthetic allogeneic iMSC therapy company. Its vision is to improve the lives of patients with difficult-to-treat diseases through innovative, effective, and safe, but accessible cellular therapies, and its 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.

As used herein, the “Company” or “Ernexa” refers collectively to Ernexa and its consolidated subsidiaries (Eterna Therapeutics LLC, Novellus, Inc. and Novellus Therapeutics Limited) unless otherwise stated or the context otherwise requires. In April 2025, the Company formed a new wholly owned Texas subsidiary named Ernexa TX2 Inc., and the Company dissolved Eterna Therapeutics LLC, which was a single-member limited liability company and had no operations.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented.

These condensed consolidated financial statements should be read together with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2025. The accompanying condensed consolidated balance sheet as of December 31, 2024 has been derived from the audited financial statements contained in the 2024 10-K but does not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three months ended March 31, 2025 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2025, or any other period.

2) LIQUIDITY AND CAPITAL RESOURCES

The Company has incurred significant operating losses and has an accumulated deficit as a result of its efforts to develop product candidates and provide general and administrative support for operations. As of March 31, 2025, the Company had a cash balance of approximately $1.9 million and an accumulated deficit of approximately $239.7 million. For the three months ended March 31, 2025, the Company 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 the Company used cash of $2.1 million in operating activities.

In April 2023, the Company entered into a standby equity purchase agreement (the “SEPA”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park committed to purchase up to $10.0 million of the Company’s common stock in an “equity line” financing arrangement. No shares were sold under the SEPA during the three months ended March 31, 2025, and the SEPA expired on May 1, 2025.

In September 2024, the Company entered into certain financing agreements for the private placement of $3.9 million in convertible notes (the “Bridge Notes”) and $1.1 million in shares of the Company’s common stock (the “Equity Financing”), as well as exchange agreements for the exchange of previously issued convertible notes and warrants into shares of common stock (the “Exchange Transaction,” and collectively, the “September 2024 Transactions”). The September 2024 Transactions were subject to shareholder approval, and on October 29, 2024, the shareholders approved the issuance of common stock under the Equity Financing and the conversion of the Bridge Notes and the convertible notes and warrants under the Exchange Transaction into shares of common stock, at which point, the Company had no convertible notes outstanding.

On March 11, 2025 and March 20, 2025, the Company received $1.5 million and $0.8 million, respectively, in exchange for the issuance of two promissory notes with aggregate principal amounts of $2.3 million to an investor. See Note 8 for more information on the promissory notes.

On April 2, 2025, the Company received $1.1 million in gross proceeds from the sale of shares of the Company’s common stock and prefunded warrants. See Note 12,Equity Transaction - Private Placement, for additional information regarding this financing.

In connection with preparing the accompanying condensed consolidated financial statements as of and for the three months ended March 31, 2025, the Company’s management concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern because it does not expect to have sufficient cash or working capital resources to fund operations for the twelve-month period subsequent to the issuance date of these condensed consolidated financial statements. The Company will need to raise additional capital, which could be through public or private equity offerings, debt financings, out-licensing the Company’s intellectual property, strategic partnerships or other means. Other than the securities purchase agreement discussed further in Note 12, the Company currently has no arrangements for capital, and no assurances can be given that it will be able to raise capital when needed, on acceptable terms, or at all. The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

3) CONTRACT WITH CUSTOMER

The Company recognizes revenue under ASC 606,Revenue from Contracts with Customers (“ASC 606”) when a customer obtains control of promised services or goods in an amount that reflects the consideration to which the Company expects to receive in exchange for those goods or services.

The Company had one contract with a customer that was accounted for under ASC 606 related to an exclusive option and license agreement it entered into in February 2023, and amended in August 2023, with a customer, which provided the customer with the option (the “Option Right”) to obtain an exclusive sublicense of intellectual property from the Company and to request to have the Company develop a customized cell line. The customer paid the Company a $0.3 million non-refundable up-front payment (the “Option Fee”) for the Option Right and paid an initial payment of $0.4 million to commence the cell line customization activities.

On September 24, 2024, the Company assigned this customer contract to Factor Bioscience (as defined in Note 13) whereby all the Company’s rights and obligations under the customer contract are now Factor Bioscience’s responsibility. Factor Bioscience will pay the Company thirty percent (30%) of all amounts it actually receives from the customer under the contract in the event that the customer exercises its Option Right, and Factor Bioscience will pay the Company twenty percent (20%) of all amounts it receives from the customer for the customization activities set forth in the contract.

Prior to assigning the contract to Factor Bioscience, the $0.4 million received from the customer was being recognized equally over the development period, and for the three months ended March 31, 2024, the Company recognized less than $0.1 million of revenue related to the customization activities. There wasno such revenue recognized for the three months ended March 31, 2025.

The Company was obligated to pay Factor Bioscience 20% of any amounts the Company received from a customer that was related to the licensed technology under a previous license agreement the Company had with Factor Bioscience, which has since been terminated. For the three months ended March 31, 2024, the Company recognized less than $0.1 million of fees to Factor Bioscience, which was recorded as a cost of revenue. There wasno such cost recognized for the three months ended March 31, 2025.

4) FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between willing market participants. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

● Level 1 Inputs – Valued based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

● Level 2 Inputs – Valued based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

● Level 3 Inputs – Valued based on inputs for which there is little or no market value, which require the reporting entity to develop its own assumptions.

The carrying amounts reported on the balance sheet for cash, other receivable, prepaid assets and other current assets, accounts payable and accrued expenses, notes payable, other current liabilities and other liabilities approximate fair value based due to their short maturities.

The Company issued approximately 343,000 warrants in connection with a private placement during the first quarter of 2022 (the “Q1-22 warrants”), which were determined to be classified as a liability. The Company has also recorded a contingent consideration liability related to an asset acquisition in April 2023.

The Company uses a Black-Scholes option pricing model to estimate the fair value of the Q1-22 warrant liabilities and a Monte Carlo simulation model to estimate the fair value of the contingent consideration liability, both of which are considered a Level 3 fair value measurement.

In connection with the SPA (as defined in Note 12) that the Company entered into on March 31, 2025, the Company recorded a forward sales contract liability at fair value and recognized $5.3 million of expense because the fair value of the expected shares to be purchased by the investors exceeds the proceeds under the SPA.

The Company determined the expense related to the forward sales contract as of March 31, 2025 by taking the difference between (i) the fair value of the expected shares to be purchased by the investors as of the March 31, 2025 date the Company entered into the SPA and (ii) the discounted purchase price of the shares.

The Company remeasures the fair value of the warrant liabilities, thecontingent consideration liability and the forward sales contract liabilityat each reporting period, and changes in the fair values are recognized in the accompanying condensed consolidated statement of operations.

The following table summarizes the liabilities that are measured at fair value as of March 31, 2025 and December 31, 2024 (in thousands):

Certain inputs used in Black-Scholes and Monte Carlo models may fluctuate in future periods based upon factors that are outside of the Company’s control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of the Company’s warrant liabilities or contingent consideration liabilities, which could also result in material non-cash gains or losses being reported in the Company’s condensed consolidated statement of operations.

The following table presents the changes in the liabilities measured at fair value from January 1, 2025 through March 31, 2025 (in thousands):

The Company remeasured the fair value of the Q1-22 warrants for the three months ended March 31, 2025, and the result of the remeasurement wasde minimis. The Company assessed the fair value of the contingent consideration liability at March 31, 2025 and determined that there were no material changes to the inputs used in the December 31, 2024 remeasurement that would have resulted in a material change to the liability at March 31, 2025. Therefore, the Company did not recognize a change in fair value of the contingent consideration liability for the three months ended March 31, 2025.

5) GOODWILL

The Company recorded goodwill in the amount of $2.0 million related to a 2018 acquisition that was accounted for as a business combination. Goodwill is not amortized but is tested for impairment annually, or more frequently if the Company becomes aware of any events occurring or changes in circumstances that indicate that the fair value of the entity is less than its carrying value. As of March 31, 2025, the Company did not identify potential triggering events that could indicate that the fair value of the entity is less than its carrying value and determined there were no such events that occurred.

6) ACCRUED EXPENSES

Accrued expenses at March 31, 2025 and December 21, 2024 consisted of the following (in thousands):

7) **LEASES **

The Company currently has operating leases for officesin the borough of Manhattanin New York, New York, and Cambridge, Massachusetts, which expire in 2026 and 2028, respectively.

For the three months ended March 31, 2025 and 2024, the net operating lease expenses were as follows (in thousands):

Amounts for the three months ended March 31, 2024 in the table above include expense related to a sublease that was terminated effective August 31, 2024.

The tables below show the beginning balances of the operating ROU assets and lease liabilities as of January 1, 2025 and the ending balances as of March 31, 2025, including the changes during the period (in thousands).

As of March 31, 2025, the Company’s operating leases had a weighted-average remaining life of 2.8 years with a weighted-average discount rate of 10.23%. The maturities of the operating lease liabilities are as follows (in thousands):

8) PROMISSORY NOTES

On March 11, 2025, the Company received $1.5 million for the issuance of a promissory note in the principal amount of $1.5 million to Charles Cherington, and on March 21, 2025 the Company received $0.8 million for the issuance of a second promissory note in the principal amount of $750,000 to Mr. Cherington. The promissory notes mature on the earlier of (i)June 15, 2025 or (ii) upon the Company receiving $5.0 million in gross proceeds from a subsequent capital raise. Each of the promissory notes accrues interest at a rate of 5.0% per annum, payable at maturity.

9) **STOCK-BASED COMPENSATION **

Stock Options

During the three months ended March 31, 2025 and 2024, the Company granted options to purchase the number of shares of the Company’s common stock set forth in the table below (in thousands):

The Company recognizes stock-based compensation expense for stock options granted to employees, directors and certain consultants. The Company estimates the fair value of stock options using the Black-Scholes option pricing model. The fair value of stock options granted is recognized as expense over the requisite service period on a straight-lined basis.

The following weighted-average assumptions were used for stock options granted during the three months ended March 31, 2025 and 2024:

The per-share weighted average grant-date fair value of stock options granted during the three months ended March 31, 2025 and 2024 were as follows:

Vesting of all stock options is subject to continuous service with the Company through the applicable vesting date. As of March 31, 2025, there were approximately 4,460,000 shares of the Company’s common stock subject to outstanding stock options.

Restricted Stock Units

The Company recognizes the fair value of RSUs as expense on a straight-line basis over the requisite service period. For performance-based RSUs, the Company begins recognizing the expense once the achievement of the related performance goal is determined to be probable.

Outstanding RSUs are settled in an equal number of shares of common stock on the vesting date of the award. An RSU award is settled only to the extent vested. Vesting generally requires the continued employment or service by the award recipient through the applicable vesting date. Because RSUs are settled in an equal number of shares of common stock without any offsetting payment by the recipient, the measurement of cost is based on the quoted market price of the stock at the measurement date, which is the grant date.

In lieu of paying cash to satisfy withholding taxes due upon the settlement of vested RSUs, at the Company’s discretion, an employee may elect to have shares of common stock withheld that would otherwise be issued at settlement, the value of which is equal to the amount of withholding taxes payable. No RSUs vested during either of the three months ended March 31, 2025 or 2024. As of March 31, 2025, there were less than 500 RSUs outstanding. The Company didnot grant RSUs during either of the three months ended March 31, 2025 or 2024.

Stock-Based Compensation Expense

For the three ended March 31, 2025 and 2024, the Company recognized stock-based compensation expense as follows (in thousands):

10) NET LOSS PER SHARE

The Company calculates basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. The Company’s previously issued convertible notes contractually entitled the holders of such notes to participate in dividends but did not contractually require the holders to participate in the Company’s losses. As such, the two-class method is not applicable during periods with a net loss.

Basic net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, including the weighted average effect of prefunded warrants, and without consideration for potentially dilutive securities.

Diluted net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding, including the weighted average effect of the prefunded warrants, plus dilutive securities. Shares of common stock issuable upon exercise, conversion or vesting of stock options, restricted stock units, warrants and the outstanding Series A convertible preferred stock are considered potential shares of common stock and are included in the calculation of diluted net loss per share using the treasury method when their effect is dilutive. The Company’s convertible notes that were outstanding as of March 31, 2024 were also considered potential shares of common stock for the three months ended March 31, 2024 and were included in the calculation of diluted net loss per share using the “if-converted” method as of such period, and the more dilutive of either the two-class method or the if-converted method was reported. There were no convertible notes outstanding as of March 31, 2025. Diluted net loss per share is the same as basic net loss per share for periods in which the effect of potentially dilutive shares of common stock is antidilutive.

The following table presents the number of shares subject to outstanding warrants, stock options, RSUs, convertible notes and Series A convertible preferred stock that were excluded from the computation of diluted net loss per share of common stock for the three months ended March 31, 2025 and 2024, as their effect was anti-dilutive (in thousands):

11) COMMITMENTS AND CONTINGENCIES

Litigation Matters

The Company is involved in litigation and arbitrations from time to time in the ordinary course of business. Legal fees and other costs associated with such actions are expensed as incurred. In addition, the Company assesses the need to record a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable, and the amount can be reasonably estimated.

Novellus, Inc. v. Sowyrda et al., C.A. No. 2184CV02436-BLS2

On October 25, 2021 Novellus, Inc. filed a complaint in the Superior Court of Massachusetts, Suffolk County, against former Novellus, Inc. employees Paul Sowyrda and John Westman and certain other former investors in Novellus LLC (Novellus, Inc.’s former parent company prior to our acquisition of Novellus, Inc.), alleging breach of fiduciary duty, breach of contract and civil conspiracy. The Company acquired Novellus, Inc. on July 16, 2021. On May 27, 2022 Novellus, Inc. amended the complaint to withdraw all claims against all defendants except Paul Sowyrda and John Westman. Since 2022, the parties have engaged in legal proceedings relating to alleged conduct that took place before the Company acquired Novellus, Inc., including certain counterclaims against Novellus LLC, Novellus Inc., Factor Bioscience Inc., Christopher Rohde, Matthew Angel and the Company (the “Counterclaim Defendants”).

On July 31, 2024, Counterclaim Defendants and Sowyrda informed the Court that they had reached a settlement and requested that all claims pending between them be dismissed with prejudice, and on August 9, 2024, the Court approved the motion for approval of dismissal of all such claims with prejudice. On April 22, 2025, Counterclaim Defendants and Westman reached a confidential settlement with an effective date of April 30, 2025. After the effective date and assuming all of the agreement’s conditions are met, the parties will cooperate to effect the filing of a stipulation of dismissal with prejudice. The Company accrued approximately $0.2 million for this matter as of December 31, 2024 and did not adjust this accrual as of March 31, 2025 because such change was immaterial and will be recorded in Q2 2025.

Licensing Agreements

On September 24, 2024, the Company entered into the Factor L&C Agreement. See Note 13 for details of this agreement.

Retirement Savings Plan

The Company established a defined contribution plan, organized under Section 401(k) of the Internal Revenue Code, which allows employees to defer up to 90% of their pay on a pre-tax basis. The Company matches employees’ contributions at a rate of 100% of the first 3% of the employee’s contribution and 50% of the next 2% of the employee’s contribution, for a maximum Company match of 4%.

12) EQUITY TRANSACTIONS

Private Placement

On March 31, 2025, the Company entered into a securities purchase agreement (the “SPA”) with certain accredited investors to sell 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 the Company’s outstanding common stock.

The SPA represents a forward sale contract obligating the Company to sell a fixed number of shares of its common stock at a fixed price per share and contains an adjustment to the settlement amount based on shareholder approval, which is not an input into the pricing of a fixed-for-fixed forward on equity shares. The Company measured the fair value of the forward sale contract as the difference between (i) the fair value of the expected shares to be purchased by the investors as of the date the Company entered into the SPA and (ii) the discounted purchase price of the shares and recorded a liability of approximately $5.3 million as of March 31, 2025. The Company also recognized $5.3 million of expense for the forward sale contract for the three months ended March 31, 2025, because the fair value of the expected shares to be purchased by the investors exceeds the proceeds under the SPA.

On April 2, 2025, the Company held an initial closing (the “First Closing”) whereby it sold to the investors an aggregate of approximately 9.9 million shares of common stock and approximately 0.5 million pre-funded warrants for aggregate gross proceeds of approximately $1.1 million. 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 for aggregate gross proceeds of $6.2 million will occur upon stockholder approval at the Company’s 2025 annual meeting of stockholders on June 2, 2025, subject to customary closing conditions.

Warrants

As of March 31, 2025, the Company had the following warrants outstanding:

As of March 31, 2025, the weighted average remaining contractual life of the warrants outstanding was 2.66 years and the weighted average exercise price was $27.45, which does not include the prefunded warrants.

During the three months ended March 31, 2025, the Company had the following warrant activity (in thousands):

Standby Equity Purchase Agreement

On April 5, 2023, the Company entered into the SEPA with Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $10.0 million of the Company’s common stock. The Company did not sell any shares of common stock under the SEPA during the three months ended March 31, 2025 or 2024 As of March 31, 2025, there were approximately 2,860,000 shares remaining to be sold under the SEPA, and on May 1, 2025, the SEPA expired in accordance with its terms.

Stock Repurchase Program

In November 2024, the Company’s Board of Directors authorized a stock repurchase program (the “Repurchase Program”) of up to $1.0 million of the Company’s outstanding common stock. Under the Repurchase Program, the repurchases may be made by the Company from time to time through open market purchases, privately negotiated transactions or other means in accordance with applicable securities laws. The timing and amount of repurchases will be determined by the Company, taking into consideration market conditions, stock price, and other factors. The Repurchase Program does not have a set expiration date and may be suspended, modified or discontinued at any time without prior notice. The Company didnot repurchase any of its shares under the Repurchase Program during the three months ended March 31, 2025. There was no such repurchase program during the three months ended March 31, 2024.

13) RELATED PARTY TRANSACTIONS

September 2024 and March 2025 Financings

Investors who (i) entered into an exchange agreement for the exchange of convertible notes and warrants for shares of common stock and the private placement of convertible notes in September 2024 and (ii) entered into a securities purchase agreement for the private placement of common stock in March 2025 included Charles Cherington. Mr. Cherington participated in the applicable financing under the same terms and subject to the same conditions as all the other investors. Mr. Cherington served on the Company’s board of directors from March 2021 to July 6, 2023 and owns approximately 33% of the Company’s outstanding common stock.

March 2025 Promissory Notes

On March 11, 2025, the Company received $1.5 million for the issuance of a promissory note in the principal amount of $1.5 million to Mr. Cherington, and on March 21, 2025 the Company received $0.8 million for the issuance of a second promissory note in the principal amount of $0.8 million to Mr. Cherington. The promissory notes mature on the earlier of (i)June 15, 2025 or (ii) upon us receiving $5 million in gross proceeds from a subsequent capital raise. Each of the promissory notes accrues interest at a rate of 5.0% per annum, payable at maturity. Upon issuance of the notes, Mr. Cherington owned approximately 32% of our outstanding common stock.

14) SEGMENT REPORTING

The Company operates within a single reportable operating segment being the research and development of cellular therapies. The Company has identified its president and chief executive officer as its chief operating decision maker (“CODM”), who regularly reviews the Company’s performance and allocates resources based on information reported at the consolidated entity level.

The CODM uses consolidated net loss as a measure of profit and loss and assesses Company performance through the achievement of its business strategy goals. The CODM is regularly provided with forecasted expense information that is used to determine the Company’s liquidity needs and cash allocation to execute its business strategy, and he uses cash as a measure of segment assets in managing the Company. The Company operates in the United States, and all of its assets are located in the United States.

The table below provides a breakdown of the Company’s significant operating expenses for the three months ended March 31 2025 and 2024 with a reconciliation to net loss for each of those years.

The Company’s revenue and its cost of revenues for the three months ended March 31, 2024 relate to a contract with a customer, as discussed in Note 3. There was no revenue or cost of revenue for the three months ended March 31, 2025. Depreciation and amortization expense was less than $0.1 million for each of the three months ended March 31, 2025 and 2024. During the three months ended March 31, 2025, the Company recognized $5.4 million in other expense, net, primarily related to the SPA discussed in Note 12. The Company recognized $0.9 million in other expense, net, during the three months ended March 31, 2024 due to interest expense of $0.8 million and $0.1 million related to the change in fair value of warrant liabilities.

15) 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 the Company that are not disclosed in the 2024 10-K.

16) SUBSEQUENT EVENT

On April 2, 2025, the Company held the First Closing under the SPA whereby it sold to the investors an aggregate of approximately 9.9 million shares of common stock and approximately 0.5 million pre-funded warrants for aggregate gross proceeds of approximately $1.1 million. See Note 12,*Equity Transaction – Private Placement,*for more information regarding this financing.