Nkgen Biotech Inc.

10/08/2025 | Press release | Distributed by Public on 10/08/2025 04:01

Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to the consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. "Risk Factors" and "Special Note Regarding Forward-Looking Statements". Capitalized terms used in this Item 7 but not otherwise defined herein shall have the meanings ascribed to those terms in the in Item 8.
Overview
We are a clinical-stage biotechnology company focused on the development and commercialization of innovative autologous, allogeneic, and CAR-NK cell therapies utilizing a proprietary SNK platform. Our product candidates are based on a proprietary manufacturing and cryopreservation process which produces SNK cells that have increased activity as compared to the starting population of NK cells, based on the results of in vitro experiments performed by NKMAX, as defined by parameters such as cytotoxicity, cytokine production and activating receptor expression. NKGen believes that SNK cells have the potential to deliver transformational benefits to patients with neurodegenerative diseases, such as Alzheimer's disease ("AD") and Parkinson's disease ("PD"), and cancer.
We were originally incorporated in Delaware on January 28, 2021 under the name Graf Acquisition Corp. IV, a special-purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or engaging in any other similar business combination with one or more businesses or entities.
On April 14, 2023, we entered into the Agreement and Plan of Merger by and among Graf, Merger Sub, and Legacy NKGen. Upon consummation of the transactions under the Merger Agreement on September 29, 2023, Merger Sub merged with and into the Company with Legacy NKGen surviving the merger as a wholly owned subsidiary of Graf. In connection with the consummation of the Business Combination, Graf was renamed to "NKGen Biotech, Inc." and Legacy NKGen changed its name to "NKGen Operating Biotech, Inc." The Common Stock and warrants of the combined company began trading on The Nasdaq Stock Market LLC under the symbols "NKGN" and "NKGNW", respectively, on October 2, 2023.
Throughout the notes to the consolidated financial statements, unless otherwise noted or otherwise suggested by context, the "Company", "we", "us", "our" refers to Legacy NKGen prior to the consummation of the Business Combination, and the Company after the consummation of the Business Combination.
The Business Combination
In connection with the Business Combination, several financial instruments were issued. This included the Senior Convertible Notes, the SPA Warrants, the PIPE Warrants, and the Forward Purchase Agreements. In addition, several pre-existing financial instruments of Graf were deemed issued pursuant to the reverse recapitalization treatment of the Business Combination, including Graf's remaining public shares, the Private Warrants, the Public Warrants, and the Working Capital Warrants. Furthermore, we incurred transaction costs, certain Founder Shares were terminated or placed under vesting conditions, our Legacy Convertible Notes converted, all assets and liabilities of Graf were combined with the assets and liabilities of NKGen on a historical cost basis, all of Legacy NKGen's common stock and stock options were exchanged for common stock of the Company based upon the Exchange Ratio, among other material events. Refer to Note 3, Reverse Recapitalization, of the consolidated financial statements for details surrounding the Business Combination.
Business Highlights
Our goal is to bring transformative Natural Killer ("NK") cell therapies to patients with both neurodegenerative and oncological diseases and thereby realize the potential of our extensive NK cell expertise. On October 14, 2022, we received investigational new drug ("IND") clearance from the U.S. Food and Drug Administration ("FDA") for SNK02 allogeneic NK cell therapy for solid tumors. On October 20, 2023, we received IND clearance from the FDA for SNK01 in AD. On December 21, 2023, we received the No Objection Letter from Health Canada for our clinical trial application of SNK01 in AD. On December 28, 2023, we dosed our first participant in the US on the SNK01-AD01 clinical trial. On April 26, 2024, we received IND clearance from the FDA for SNK01 in PD. During 2024, we made advances on (i) the clinical development of SNK01 and continued enrollment in the Phase I/IIa trial in the United States and Canada for AD, and (ii) the Phase I trial with SNK02 in refractory solid tumors. During 2025 and beyond, we expect continued development of these trials. We also intend to conduct a trial in PD, to evaluate the expansion into other neurodegenerative diseases, accelerate development in oncology through strategic collaborations, and continue investment in our manufacturing technology.
NKGen presented its Phase I clinical trial data at the 16th Annual Clinical Trials on Alzheimer's Disease conference on October 25, 2023. Ten AD patients from the first three cohorts in our ten-week Phase I dose escalation clinical trial were analyzed. NK cells were successfully activated and expanded for 100% of the patients in the trial. No treatment-related adverse events were observed. One week after the last dose (Week 11), 30% of patients showed clinical improvement on the AD composite score ("ADCOMS") compared to baseline, 60% of patients showed a stable ADCOMS score compared to baseline, and 50-70% of patients were stable or improved on the clinical dementia rating sum of boxes ("CDR-SB"), Alzheimer's Disease assessment scale-cognitive subscale ("ADAS-Cog") and/or mini-mental state examination ("MMSE") scores. One patient's score showed a switch from a moderate classification on the ADCOMS to a mild classification. Twelve weeks after the last dose (Week 22), 44-89% of patients remained stable or improved in all cognitive scores compared to Week 11, and 50% of patients' ADCOMS scores remained stable compared to Week 11. Based on the CSF biomarker data, SNK01 given via IV appears to cross the blood-brain barrier to reduce CSF pTau181 levels and neuroinflammation, as measured by GFAP; this effect appears to be persistent at Week 22. Our goal is to utilize our extensive NK cell expertise and bring transformative NK cell therapies to patients with neurodegenerative disease.
On May 20, 2024, after careful review of the Phase 1 data by a majority independent Safety Review Committee, SNK01 was cleared by an Internal Review Board ("IRB") to enter into the Phase 2 portion of the clinical trial. This pivotal stage will assess efficacy and further safety of SNK01 in a larger group of 30 patients with moderate Alzheimer's disease using a randomized, double-blind design (20 to receive SNK01, 10 to receive placebo). The Phase 2 trial will provide deep insights into the potential benefits and risks of SNK01 in moderate Alzheimer's Disease, helping clinical researchers to provide validation of the potential therapeutic value of SNK01.
NKGen presented its Phase I clinical interim trial data for the cryopreserved non-genetically modified allogeneic natural killer cells, SNK02, with enhanced cytotoxicity in five patients with advanced solid tumors without lymphodepletion at the 2024 American Society of Clinical Oncology ("ASCO") Annual Meeting and 6thAnnual Allogeneic Cell Therapies Summit. Five patients with advanced refractory solid tumors (oneleiomyosarcoma, one angiosarcoma, one endometrial adenocarcinoma, one undifferentiated pleomorphic sarcoma, and one colorectal adenocarcinoma)were evaluated for the safety and tolerability of SNK02 treatment without lymphodepletion. There was one death on study, which was deemed unrelated to the investigational product (the "IP"). Out of the 36 doses administered through Cycle 8, there were 17 Grade 1, three Grade 2, and one Grade 3 adverse events related to the IP. The Grade 3 adverse events of increased fatigue resolved after one day with no intervention required. Antibodies appeared to develop around Cycle 5 and appeared to correlate with adverse events. The best objective response of Stable Disease was demonstrated in 100% of patients that completed the eight cycles. SNK02 was well tolerated as a monotherapy and appears to have some clinical activity against pretreated solid tumors despite the lack of lymphodepletion. SNK02 will continue to be studied as a monotherapy and in potential combination treatment regimens with monoclonal antibodies and immune checkpoint inhibitors.
Factors Affecting Our Performance
Our operations to date have been limited to business planning, raising capital, developing, and identifying NK cell therapies utilizing our SNK platform, clinical studies, and other research and development activities. We have never been profitable from operations and our net losses were $44.3 millionand $83.0 millionfor the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, our accumulated deficit was $206.4 million. We expect to continue incurring significant expenses and operating losses for at least the next several years associated with our ongoing activities as we:
initiate and complete nonclinical studies and clinical trials for our product candidates;
contract to manufacture and perform additional process development for our product candidates;
continue research and development efforts to build our pipeline beyond the current product candidates;
maintain, expand, and protect our intellectual property portfolio;
hire additional clinical, quality control, scientific, and management personnel;
add operational and financial personnel to support our product development efforts and planned future commercialization; and
add operational and administrative capabilities applicable to continue operating as a public company.
We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more product candidates, which will not be for many years, if ever. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including from related parties, and potentially grants, collaborations, licenses, or other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates or to our platform technologies that we would otherwise prefer to develop and market ourselves.
We do not currently have, and do not currently expect to have, sufficient funds to service our operations and our expenses and other liquidity needs and will require additional capital immediately. In addition, we have expressed substantial doubt as to our ability to continue as a going concern. There can be no assurance that we will be able to timely secure such additional funding on acceptable terms and conditions, or at all. If we are unable to raise sufficient capital immediately, we will not have sufficient cash and liquidity to finance our business operations and make required payments and may be required to delay, limit, curtail or terminate our product development or may be forced to cease operations or file for bankruptcy protection.
Key Components of Results of Operations
Revenues
We do not currently have any products approved for sale and have not recognized any product revenue to date. In the future, we may generate revenue from a combination of sources, including, without limitation, product sales, payments from licenses, milestone payments or collaboration arrangements. If we fail to achieve clinical success or obtain regulatory approval of any of our product candidates, our ability to generate future revenue will be limited.
We did not have any revenues during the years ended December 31, 2024 and 2023.
Costs and Expenses
Research and Development Expenses
We primarily focus our resources on research and development activities, including the conduct of preclinical studies, product development, regulatory support, and clinical trials for our product candidates. Our research and development expenses consist of:
employee-related expenses, including salaries, benefits, taxes, travel, and stock-based compensation expense, for personnel in research and development functions;
expenses related to process development and production of product candidates;
costs associated with preclinical activities and regulatory operations, including the costs of acquiring, developing, and manufacturing research material;
clinical trials and activities related to regulatory filings for our product candidates; and
allocation of facilities, overhead, depreciation, and amortization of laboratory equipment and other expenses.
We expect our direct and indirect research and development expenses to increase in the future as we continue to develop our platform and product candidates.
The successful development of our platform and product candidates is highly uncertain. The process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time consuming. At this time, we cannot reasonably estimate the nature, timing, or costs of the efforts necessary to finish developing any of our product candidates or the period in which material net cash, if any, from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing therapeutics and will depend on a variety of factors, including, but not limited to:
the scope, rate of progress, expense, and results of clinical trials;
the scope, rate of progress and expense of process development and manufacturing;
preclinical and other research activities; and
the timing of regulatory approvals.
Research and development expenses consist of expenses incurred while performing research and development activities to discover and develop our product candidates. Direct research and development costs include external research and development expenses incurred under agreements with contract research organizations, consultants and other vendors that conduct our preclinical and clinical activities, expenses related to manufacturing our product candidates for preclinical and clinical studies, laboratory supplies and license fees. Indirect research and development costs include personnel-related expenses, consisting of employee salaries, payroll taxes, bonuses, benefits, and stock-based compensation charges for those individuals involved in research and development efforts. Costs incurred in our research and development efforts are expensed as incurred.
We typically use employee, consultant, facility, equipment and certain supply resources across our research and development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, other internal costs or certain external consultant costs to specific product candidates or development programs. These costs are included in indirect research and development expenses. All direct research and development expenses during the years ended December 31, 2024 and 2023 relate to SNK01 and SNK02.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related expenses for executives, human resources, finance, and other general and administrative employees, including salary and stock-based compensation, professional services costs and allocation of facility and overhead costs.
We anticipate that general and administrative expenses will increase in the future in connection with the ongoing costs of operating as a public company, including expanding headcount and increased fees for directors and outside advisors. We expect to incur significant costs to comply with corporate governance, internal controls, and similar
requirements applicable to public companies. Additionally, we expect to incur increased costs associated with establishing sales, marketing and commercialization functions prior to any potential future regulatory approvals or commercialization of our product candidates.
Interest Expense
For the year ended December 31, 2024, interest expense primarily consists of interest incurred for our revolving line of credit, Convertible Bridge Loans, Bridge Loans, Senior Convertible Notes, and 2024 Convertible Notes.
For the year ended December 31, 2023, interest expense primarily consists of interest incurred for our Related Party Loans, Short Term Related Party Loan, revolving line of credit, and Senior Convertible Notes.
Accrued and unpaid interest expense associated with financial instruments for which we have elected to account for at fair value is included in the change in fair value for such instruments.
Loss on Issuance of Financial Instruments
For the year ended December 31, 2024, losses on issuances of financial instruments consist of our Convertible Bridge Loans, 2024 Convertible Notes, the April 2024 FPA, forward purchase contracts, and issuance costs for fair value option-elected securities.
For the year ended December 31, 2023, the loss on issuance of financial instruments primarily relate to the initial recognition of the forward purchase derivative liability and the Bonus Shares in connection with the Private Placement Agreements, which were executed in September 2023 and issued upon the Closing of the Business Combination.
Select financing transactions we enter into may include a combination of convertible promissory notes, convertible bridge loans, warrants, tranche right derivatives, forward purchase derivative liabilities, obligations to issue common stock, and issued common stock. Pursuant to ASC 815, upon initial recognition of these bundled transactions, the proceeds received are first allocated to instruments that are measured at fair value on a recurring basis, which are typically liability-classified instruments, and any residual proceeds are allocated on a relative fair value basis to securities that are not required to be measured at fair value on a recurring basis, which are typically equity-classified issued common stock. Upon initial recognition for each respective financing transaction, to the extent the total fair value of the liability-classified instruments exceeds proceeds received, a loss on issuance is recognized. When a loss on issuance is recognized and the bundled transaction includes issued common stock, such common stock is recorded at par as there are no remaining proceeds to be allocated. The fair value of tranche rights from a market participant perspective pursuant to the principles of ASC 820 may include value associated with common stock embedded in the tranche rights. When a tranche right is exercised and the value of the tranche right plus proceeds received upon exercise exceeds the fair value of liability-classified instruments issued upon exercise, a gain on issuance of financial instruments may be recognized for the value of the equity-classified shares, which were included in the then-extinguished tranche right derivative liability due to the application of ASC 820, but are not recognized at fair value upon issuance due to the absence of proceeds to allocate to the stock.
Loss on Amendment of Financial Instruments, Net
For the year ended December 31, 2024, gains and losses on amendments to financial instruments are attributable to the Q1 2024 FPA Amendments, Q1 2024 PIPE Warrant Amendment, Q2 2024 PIPE Warrant Amendment, and Letter Agreements.
For the year ended December 31, 2023, losses on amendment to financial instruments are attributable to the FPA Amendment entered on December 26, 2023.
In connection with amendments to financial instruments, the difference between the fair value of consideration or incremental rights provided to counterparties and us, is reflected as a gain or loss on amendments to financial instruments.
Change in Fair Value of Financial Instruments
Changes in fair value offinancial instruments for the year ended December 31, 2024 were attributable to mark-to-market adjustments to the warrant derivative liabilities, FPA derivative liability, liability-classified Consideration Shares, 2024 Convertible Notes, and Tranche Rights.
Changes in fair value of financial instruments for the year ended December 31, 2023 were attributable to the mark-to-market adjustments of the FPA derivative liability and the warrant derivative liabilities.
Transaction Costs Expensed
Transaction costs expensed represent Legacy NKGen's transaction costs incurred in connection with the Business Combination that were allocated to liability-classified instruments issued on a relative fair value basis. The Business Combination occurred in September 2023, and therefore transaction costs expensed were not recurring after 2023.
Other Income (loss), Net
Other income, net primarily consists of sublease income and other expenses for the year ended December 31, 2023. Other (loss) was de minimisduring the year ended December 31, 2024.
Provision for Income Taxes
We are subject to U.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities and changes in tax laws.
Provision for income taxes primarily relates to changes in deferred taxes, partially offset by valuation allowances.
Results of Operations
Comparison of Years ended December 31, 2024 and 2023
The following tables summarize our results of operations for the years ended December 31, 2024 and 2023 (in thousands):
For the Years Ended
December 31,
Change
2024 2023 $ Change % Change
Costs and expenses:
Research and development expenses $ 10,656 $ 15,668 $ (5,012) (32) %
General and administrative expenses 16,310 14,078 2,232 16 %
Total costs and expenses 26,966 29,746 (2,780) (9) %
Loss from operations (26,966) (29,746) 2,780 (9) %
Other income (expense):
Interest expense (including related party amounts of $(1,620) and $(431) for the years ended December 31, 2024 and 2023, respectively) (2,724) (745) (1,979) 266 %
Loss on issuance of financial instruments (including related party amounts of $(639) and zero for the years ended December 31, 2024 and 2023, respectively) (25,959) (24,475) (1,484) 6 %
Loss on amendments to financial instruments, net (4,650) (442) (4,208) 952 %
Change in fair value of financial instruments (including related party amounts of $1,825 and $(12) for the years ended December 31, 2024 and 2023, respectively) 16,072 (24,330) 40,402 166 %
Transaction costs expensed - (3,329) 3,329 (100) %
Other, net (6) 120 (126) (105) %
Total other income (expense) (17,267) (53,201) 35,934 (68) %
Net loss before provision for income taxes (44,233) (82,947) 38,714 (47) %
Provision for income taxes (53) (7) (46) 657 %
Net loss $ (44,286) $ (82,954) $ 38,668 (47) %
Research and Development Expenses
The following table summarizes the components of our research and development expenses years ended December 31, 2024 and 2023(in thousands):
For the Years Ended
December 31,
Change
2024 2023 $ Change % Change
Total direct research and development expense
$ 607 $ 1,485 $ (878) (59) %
Indirect research and development expense by type:
Personnel-related costs 6,011 8,395 (2,384) (28) %
Research and development supplies and services
2,587 4,469 (1,882) (42) %
Allocated facility, equipment and other expenses
1,451 1,319 132 10 %
Total indirect research and development expense
10,049 14,183 (4,134) (29) %
Total research and development expense $ 10,656 $ 15,668 $ (5,012) (32) %
During 2024, we prioritized our AD trials and reduced costs and efforts with respect to other indications of SNK01 and SNK02. Total research and development expenses decreased by $5.0 million, or 32%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The decrease was primarily attributable to a decrease in total direct research and development expenses of $0.9 million, or 59% and a decrease in indirect costs of approximately $4.1 million or 29%.
The decrease of $0.9 million in total direct research and development expenses for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily attributable to the decrease of $0.9 million, or 59%, in clinical costs due to an overall decrease of the number of ongoing clinical trial phases during 2024.
The decrease of $4.1 million in total indirect research and development expenses for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily attributable to (i) a $2.4 million, or 28%, decrease in personnel-related costs primarily attributable to a $2.1 million, or 32%, decrease in compensation costs for research and development personnel and a $0.3 million, or 29%, decrease in stock-based compensation expense primarily due to a reduction in headcount in 2024 as well as cancellations and forfeitures of options between March 31, 2023 and December 31, 2024 and (ii) a $1.9 million, or 42%, decrease in research and development supplies and services primarily attributable to a $0.9 million, or 47%, decrease in professional fees due to decreased consulting and regulatory affairs costs and a $1.0 million, or 48%, decrease in laboratory supplies purchases, partially offset by (iii) a $0.1 million, or 10%, increase in allocated facility, equipment, and other expenses primarily attributable to an increase in depreciation expense.
General and Administrative Expenses
General and administrative expenses increased by $2.2 million, or 16%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The increase was primarily attributable to an increase in professional fees of $3.6 million due to increases in legal, consultant, and accounting costs incurred and an increase of $0.5 million in insurance costs incurred in relation to being a public company. The increase was offset by a decrease in salaries and bonuses of $1.3 million, a decrease in depreciation expense of $0.5 million, and a decrease in repairs and maintenance of $0.3 million.
Interest Expense
Interest expense increased by $2.0 million for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The increase was primarily attributable to interest expense related to new debts, including the Convertible Bridge Loans, Bridge Loans, Related Party Loans, revolving line of credit, Senior Convertible Notes, and 2024 Convertible Notes.
Loss on Issuance of Financial Instruments
The following table summarizes the components of our loss on issuance of financial instruments for the years ended December 31, 2024 and 2023 (in thousands):
For the Years Ended
December 31,
Change
2024 2023 $ Change % Change
Convertible Bridge Loans $ (746) $ - $ (746) (100) %
2024 Convertible Notes (24,380) - (24,380) (100) %
April 2024 FPA (258) - (258) (100) %
Q3 2024 FPA Amendments (415) - (415) (100) %
Q4 2024 FPA Amendments (131) - (131) (100) %
Issuance costs on fair value option-elected securities (28) - (28) (100) %
2023 FPA issuances - (24,475) 24,475 100 %
Total $ (25,959) $ (24,475) $ (1,484) 6 %
Loss on issuance of financial instruments decreasedby $1.5 million, or (6)%,during the year ended December 31, 2024as compared to the year ended December 31, 2023. The 2024losses on issuance of financial instruments were primarily attributable to new issuances during 2024including the convertible bridge loans, 2024 convertible notes, April 2024 forward purchase agreement, and Q3 and Q4 forward purchase agreement amendments. The 2023loss on issuance of financial instruments was related to the 2023issuances of forward purchase agreements.
Loss on Amendments to Financial Instruments, Net
The following table summarizes the components of our gain (loss) on amendments of financial instruments for the years ended December 31, 2024 and 2023(in thousands):
For the Years Ended
December 31,
Change
2024 2023 $ Change % Change
Q1 2024 FPA Amendments $ (396) $ - $ (396) (100) %
Q1 2024 PIPE Warrant Amendment 679 - 679 100 %
Q2 2024 PIPE Warrant Amendment (4,430) - (4,430) (100) %
Q3 2024 PIPE Warrant Amendment 1,669 - 1,669 100 %
Letter Agreements (2,137) - (2,137) (100) %
2024 Convertible Bridge Loans (35) - (35) (100) %
2023 FPA Amendments - (442) 442 100 %
Total $ (4,650) $ (442) $ (4,208) 952 %
Losses on amendments to financial instruments increasedby $4.2 million, or 952%,during the year ended December 31, 2024as compared to the year ended December 31, 2023. The 2024losses on amendments to financial instruments were primarily attributable to the FPA, PIPE warrants, and letter agreement amendments to financial instruments issued during 2024. The 2023loss on amendment to financial instruments of $0.4 millionconsisted of 2023amendments to the forward purchase agreements.
Change in Fair Value of Financial Instruments
The following table summarizes the components of our change in fair value of financial instruments for the years ended December 31, 2024 and 2023(in thousands):
For the Years Ended
December 31,
Change
2024 2023 $ Change % Change
Derivative warrant liabilities $ 22,059 $ (23,287) $ 45,346 195 %
FPA derivative liability (194) - (194) (100) %
Liability-classified Consideration Shares 2,028 - 2,028 100 %
2024 Convertible Notes (12,068) - (12,068) (100) %
Convertible Bridge Loans (241) - (241) (100) %
Tranche Rights 4,488 - 4,488 100 %
Legacy Convertible Notes - (1,043) 1,043 100 %
Total $ 16,072 $ (24,330) $ 40,402 166 %
Changes in fair value of financial instruments increasedby $40.4 million, or 166%,during the year ended December 31, 2024as compared to the year ended December 31, 2023.
The 2024changes in fair value of financial instruments primarily consisted of mark-to-market adjustments to the derivative warrant liabilities, FPA derivative liability, liability-classified Consideration Shares, 2024 Convertible Notes, and the Tranche Rights.
The 2023changes in fair value of financial instruments primarily consisted of mark-to-market changes in derivative warrant liabilities and loss on conversion of the Legacy Convertible Notes, which converted to shares of common stock on September 29, 2023 and no longer existed in subsequent periods.
Transaction Costs Expensed
Transaction costs expensed of $3.3 million for the year ended December 31, 2023 represented Legacy NKGen's transaction costs incurred in connection with the Business Combination that were allocated to liability-classified instruments issued on a relative fair value basis. The Business Combination occurred in September 2023, and therefore transaction costs expensed were not recurring after 2023.
Other Income (Loss), Net
Other income (loss), net, decreased by $0.1 million for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The decrease was primarily attributable to the expiration of the sublease arrangement prior to July 2023 for which NKGen was the lessor.
Provision for Income Taxes
Provision for income taxes decreasedby less than $0.1 million for the year ended December 31, 2024 as compared to the year ended December 31, 2023 primarily due to changes in deferred tax balances partially offset by valuation allowances.
Liquidity and Capital Resources
Funding Requirements and Going Concern
We have incurred operating losses and negative cash flows from operations since inception. We are still in our early stages of development and expect to continue to incur significant expenses and operating losses for the foreseeable future as we continue our research and preclinical studies and clinical trials, including our Phase 1 and Phase 1/2 clinical trials and anticipated Phase 2 clinical trials, expand our pipeline or scope of our current studies for our product candidates, initiate additional preclinical or other studies or clinical trials for our product candidates, change or add additional manufacturers or suppliers, seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies, if any, acquire or in-license other product candidates and technologies, maintain, protect and expand our intellectual property portfolio, attract and retain skilled personnel, and experience any delays or encounter issues with any of the above.
Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a combination of equity and debt financings, or other capital sources, including with related parties. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders will be diluted. The terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through collaboration agreements, marketing agreements, or licensing arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates on terms that may not be favorable to us. If we are unable to raise sufficient funds through equity or debt financings, we may be required to delay, limit, curtail or terminate our product development or future commercialization efforts or may be forced to cease operations or file for bankruptcy protection. Additionally, we may never become profitable, or if we do, may not be able to sustain profitability on a recurring basis.
As of December 31, 2024, we had cash and cash equivalents of $0.1 million and a working capital deficit of approximately $55.5 million.
We have incurred substantial transaction expenses in connection with the Business Combination. As of December 31, 2024, we had accrued approximately $15.7 millionin accounts payable and accrued expenses, including the transaction expenses from the Business Combination and our ongoing business operations. However, we continue to have substantial transaction expenses accrued and unpaid subsequent to the Business Combination. Furthermore, we have incurred and expect to incur additional expenses in connection with transitioning to, and operating as, a public company. Additionally, we had $52.8 million in outstanding debts as of December 31, 2024 inclusive of $41.9 millionof debts due within less than one year following December 31, 2024 and $10.8 million of senior convertible promissory notes due to related parties. The debts due within less than one year consist of our revolving line of credit, debts with related parties, convertible promissory notes, convertible bridge loans and convertible bridge loans. In January through May 2025, the Company issued additional debt of $5.9 millionin the form of a $5.0 millionconvertible note with $1.0 millionfunded prior to closing and the remaining balance to be funded on an agreed-upon timetable, $0.8 millionin unsecured promissory notes, and a $0.1 millionshort term bridge note.
Our revolving line of credit, as amended, with East West Bank, which is secured by all of our assets, originally required us to maintain a minimum cash balance of $15.0 millionwith the bank by a certain period as long as there was an outstanding balance under the revolving line of credit. Such cash balance requirement was contractually waived by East West Bank prior to December 31, 2024, and pursuant to an amendment entered into on April 5, 2024, East West Bank has agreed to replace such minimum cash balance requirement with a covenant to use East West Bank as our only commercial bank for cash deposits and extend the maturity date to September 18, 2024. In September 2024, the agreement was further amended, extending the maturity date of the revolving line of credit to December 16, 2024. On April 21, 2025, we entered into an amendment to the East West Bank Loan Agreement to (i) extend the maturity date of the Note to January 15, 2027; (ii) increase the interest rate on the outstanding principal amount to a fixed rate of 10% per annum, to be paid monthly in arrears (iii) deposit $250,000 into a restricted account to be drawn down by East West Bank for monthly interest payments; (iv) establish an amortization schedule with principal-only payments as follows: (a) $1,000,000.00 due on June 1, 2025, (b) $1,000,000.00 due on July 15, 2025, (c) $500,000.00 due on October 15, 2025, and (d) $500,000.00 continuing to be due on the 15th day of each quarter thereafter the Note is repaid in full; and (v) mandate a 5.000 percentage point increase in the interest rate upon the maturity date or upon acceleration due to a default under the East West Bank Loan Agreement, provided that in no event will the interest rate exceed the maximum interest rate permitted under applicable law. The Company paid down $1.0 million of the balance in December 2024 with an outstanding balance of $4.0 million remaining. See "Risk Factors - Risks Related to Our Financial Position - The East West Bank Loan Agreement and Equity and Business Loan Agreement (as defined below) provide each lender with a security interest in all of our assets, and contain financial covenants and other restrictions on our actions that may limit our operational flexibility or otherwise adversely affect our results of operations" for more details.
We entered into certain forward purchase arrangements with various investors in order to facilitate the consummation of the Business Combination. However, in accordance with such Forward Purchase Agreements, the funds raised in connection with such transactions were placed into escrow accounts and not received by us at the Closing of the Business Combination. As of December 31, 2024, we had settled substantially all amounts previously outstanding all of the three Forward Purchase Agreements and related amendments for aggregate proceeds of $3.5 million. There is no guarantee that we will receive substantial amounts of additional funds or any in connection with the outstanding Forward Purchase Agreements. In addition, we may be required to pay cash or issue additional shares of our common stock to holders of the PIPE Warrants under certain circumstances, which could adversely affect our financial position and results of operations. See "Risk Factors - Risks Related to Ownership of Our Securities - We may not receive any cash proceeds from the exercise of certain outstanding warrants and we may be required to pay cash or issue additional shares of Common Stock under certain circumstances" for more details.
We have considered that our long-term operations anticipate continuing net losses and the need for potential debt or equity financing. However, there can be no assurances that additional funding or other sources of capital will be available on terms acceptable to us, or at all. If additional capital is not secured when required, we may need to delay or curtail our operations until such funding is received. If we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, financial condition, and results of operations could be materially and adversely affected.
We do not currently have, and do not currently expect to have, sufficient funds to service our operations and our expenses and other liquidity needs and will require additional capital immediately. In addition, we have expressed substantial doubt as to our ability to continue as a going concern. There can be no assurance that we will be able to timely secure such additional funding on acceptable terms and conditions, or at all. If we are unable to raise sufficient capital immediately, we will not have sufficient cash and liquidity to finance our business operations and make required payments and may be required to delay, limit, curtail or terminate our product development or may be forced to cease operations or file for bankruptcy protection.
Because the proceeds from our financing arrangements will not be adequate to cover our accrued and unpaid expenses and provide the cash and liquidity necessary to operate our business, we continue to seek opportunities for raising additional funds through potential alternatives, which may include, among other things, the issuance of equity, equity-linked, and/or debt securities, debt financings, forward purchase arrangements or other capital sources. However, we may not be successful in securing additional financing on a timely basis, on acceptable terms and conditions or at all. In addition, substantial doubt about our ability to continue as a going concern may cause investors or other financing sources to be unwilling to provide funding to us on commercially reasonable terms, if at all. If sufficient funds are not available, we will have to delay, reduce the scope of, or eliminate some of our business activities, including related operating expenses, which would adversely affect our business prospects and our ability to continue our operations and would have a negative impact on our financial condition and ability to pursue our business strategies. In addition, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and/or seek protection under Chapters 7 or 11 of the United States Bankruptcy Code which could potentially cause us to cease operations and result in a complete or partial loss for our investors.
As a result of these conditions, we have concluded that there is substantial doubt over our ability to continue as a going concern as conditions and events, considered in the aggregate, indicate that we are currently unable to meet our obligations as they become due and expect to be unable to meet our obligations within one year after the date that the financial statements are issued. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The financial information and financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional funds and financing. We will need to raise additional capital immediately to continue operations based on our current business plan, and expectations and assumptions considering current macroeconomic conditions. There can be no assurance that we will be able to secure such additional funding on acceptable terms and conditions, or at all. If we cannot obtain sufficient capital immediately, we will not have sufficient cash flows and liquidity to finance our business operations as currently contemplated and we may need to substantially alter, or possibly even discontinue, our operations. In the event of a bankruptcy proceeding or insolvency, or restructuring of our capital structure, our stockholders could suffer a total loss of their investment.
Sources of Liquidity
To date, we have funded our operations primarily with the net proceeds from the issuance of senior convertible promissory notes, the issuance of related party loans, the issuance of bridge loans, the issuance of convertible bridge loans, the issuance of convertible promissory notes, draws upon a revolving line of credit, the issuance and sale of equity securities, PIPE warrants, private placements, the amendment of private placements, and proceeds from the Business Combination. As of December 31, 2024, we have cash and cash equivalents of $0.1 millionand restricted cash of $0.1 million. In the future, we expect to finance our cash needs through a combination of equity and debt financings, including with related parties.
Senior Convertible Notes
During the year ended December 31, 2023, we entered into convertible note subscription agreements with NKMAX for total proceeds of $10.0 millionupon Closing with a four-yearterm and for which we expect to make interest payments of 8.0%paid in kind rather than 5.0%paid in cash semi-annually.
Legacy Convertible Notes
From November to December 2019 and from March to September 2023, we issued the Legacy Convertible Notes for aggregate proceeds of $17.3 million, of which $0.4 million were issued to related parties.
The Closing of the Business combination triggered the conversion of the Legacy Convertible Notes at their contractual discounts. Pursuant to their terms, all of the Legacy Convertible Notes were converted into 5,579,266 shares of Legacy NKGen common stock, which then converted into 2,278,598 shares of common stock at Closing based on the Exchange Ratio.
Revolving Line of Credit
In June 2023, we entered into a $5.0 million revolving line of credit agreement with a commercial bank with a one year term. The revolving line of credit is secured by all of our assets, including a deed of trust over our owned real property located in Santa Ana, California. Additionally, we are required to maintain a restricted cash balance of $0.3 million following the issuance. The Company was required to maintain deposits with the lender in an amount of at least $15.0 million from a certain period of time as long as there was a debt balance outstanding. Pursuant to a letter of intent signed in March 2024, in April 2024, the lender subsequently waived the minimum cash deposit requirement in exchange for a $0.1 million payment and the Company's agreement to use the lender as their primary banking relationship. The $0.1 million fee is amortized over the remaining term of the revolving line of credit. The Company was in compliance with its debt covenants as of December 31, 2024. As of December 31, 2024, the interest rate for the revolving line of credit was 7.5%. Through December 31, 2024, we drew down $4.9 million upon the revolving line of credit and no repayments of drawdown occurred. In September 2024, the agreement was further amended, extending the maturity date of the revolving line of credit to December 16, 2024. In December 2024, the agreement was further amended, extending the maturity date of the revolving line of credit to April 15, 2025.
In January of 2025, the Company made a principal payment of $1.0 million on the revolving line of credit. Effective April 14, 2025the terms of the revolving line of credit were amended such that the maturity date was extended to January 15, 2027and the interest rate was increased to 10%per annum. Additionally, the amendment stipulated that the Company deposit $0.3 millioninto a restricted account to be drawn down for monthly interest payments. The amendment also established that principal payments shall be due as follows: 1) $1.0 milliondue on June 1, 2025, 2) $1.0 milliondue on July 15, 2025, 3) $0.5 milliondue on October 15, 2025, and 4) $0.5 millioncontinuing to be due on the 15th dayof each quarter thereafter until the revolving line of credit is repaid in full. Subsequent to the amendment, in May and July 2025, the Company made principal repayments totaling $2.0 million for the revolving line of credit. See Note 7, Debt - Revolving Line of Creditand Note 18, Subsequent Events for further details.
Revolving Line of Credit - Promissory Note
On October 29, 2024, the Company executed a revolving line of credit promissory note in favor of EmpiriStat, Inc. in the principal amount of $0.3 million. As of December 31, 2024, the Company has not received a demand for payment and is in compliance with the terms of the note. The note is personally guaranteed by Paul Song, a significant shareholder of the Company. In addition, the Company is obligated to make a $7,500 donation to UC Davis in lieu of reimbursing EmpiriStat's legal fees. The donation of $7,500 was paid on April 29, 2025, and the outstanding balance of $0.3 million due to EmpiriStat was paid in full on May 6, 2025. See Note 7, Debt - Revolving Line of Creditand Note 18, Subsequent Events for further details.
Related Party Loans
From January through April 2023, the Company entered into related party loans with NKMAX ("Related Party Loans") for aggregate gross proceeds of $5.0 million. These Related Party Loans bear an interest rate of 4.6% and matured on December 31, 2024. There are no financial or non-financial covenants associated with the Related Party Loans. The Related Party Loans are not convertible into equity. The Company made payments of $1.4 million consisting of $1.0 million in principal payments and $0.4 million in interest payments during the year ended December 31, 2024. As of the date these financials are filed, the Related Party Loans are past due, and the Company is in process of re-negotiating the terms of the loan.
2024 Convertible Bridge Loans
From February to September 2024, we issued the 2024 Convertible Bridge Loans for total proceeds of $0.7 million, inclusive of $0.4 millionissued to a related party with a 20.0%premium due at maturity. The loans are convertible at any time, in whole or in part, at the holder's option into our common stock at a 15.0%discount to the 10 day VWAP prior to conversion, with the conversion being limited to converting at no more than $2.00per share. As of December 31, 2024, the loans were fully repaid.
On October 8, 2024, we issued two 2024 Convertible Bridge Loans for total proceeds of $0.2 million, inclusive of with a 15.0%premium due at maturity. The loans are convertible at any time, in whole or in part, at the holder's option into our common stock at a fixed price of $0.25per share, upon notice by the holder to the Company prior to the maturity date.
On December 2, 2024, the Company received a conversion notice for the short term bridge note with one holder for the issuances of approximately 460,000shares of common stock to holders of its Convertible Note as a full repayment of an amount due totaling approximately $0.2 million.
Bridge Loans
On March 7, 2024, we entered into two bridge loan agreements for total proceeds of $0.2 million that mature 15 days from issuance, with a 7.5% premium due at maturity. Both loans were repaid upon closing of the convertible secured promissory note.
2024 Convertible Notes
During 2024, we issued multiple 2024 Convertible Notes, including the Related Party Convertible Notes, Secured Convertible Notes, Unsecured Convertible Notes, and Tranche Convertible Notes, for total proceeds of $16.1 million, including amounts attributable to exercised tranche rights. The 2024 Convertible Notes were issued in conjunction with the promise to issue Convertible 2024 Note Warrants as well as Consideration Shares. We amended certain 2024 Convertible Notes pursuant to Letter Agreements. Refer to Note 6, Convertible Notes, for further information, including terms of the 2024 Convertible Notes.
Short Term Related Party Loan
In September 2023, we raised $0.3 million in proceeds in connection with the Short Term Related Party Loan, which bore a 30-day term and an interest rate of 5.1%. The Short Term Related Party Loan was not convertible into equity and was subsequently repaid on October 5, 2023.
Private Placement
During the year ended December 31, 2024, we received total proceeds of $2.6 million pursuant to the Private Placement Agreements in connection with the FPA Amendment in December 2023 and the 2024 FPA Amendments in January, February, April, July and September 2024. We received additional proceeds of $0.9 million from sales of FPA Shares settling all outstanding obligations as of December 31, 2024 under certain of our Forward Purchase Agreements.
Forward Purchase Contract Amendments
On July 12, 2024, we and an FPA Investor entered into an amendment to the Private Placement Agreements, pursuant to which (i) the Amended Prepayment Shortfall was increased by $200,000, (ii) the quantity of Bonus Shares was increased by 200,000, and (iii) we received cash proceeds of $0.2 million.
On July 28, 2024, we and an FPA Investor entered into an amendment to the Private Placement Agreements, pursuant to which (i) the Measurement Period was extended to December 31, 2024, (ii) the Amended Reset Price was lowered, (iii) the quantity of Bonus Shares was increased by 500,000, (iv) we were granted the right to payment of a portion of the Amended Prepayment Shortfall, and (v) we received cash proceeds of $0.5 million.
On July 29, 2024, we and an FPA Investor entered into an amendment to the Private Placement Agreements, pursuant to which (i) the Amended Prepayment Shortfall was increased by $0.2 million, and (ii) we received cash proceeds of $0.5 million.
On December 31, 2024, the Company and an FPA Investor entered into an amendment to the Private Placement Agreements whereas the Company and Seller agreed to extend the Valuation Date to December 31, 2025. All other terms and conditions remained unchanged.
Letter Agreements
On August 7, 2024, we entered into the Q3 Letter Agreements. In connection with the Q3 Letter Agreements, (i) the counterparties agreed to not exercise certain previously exercisable repayment rights, (ii) wepaid $0.1 millionto the counterparties that was not treated as a reduction of principal or interest, and (ii) we granted a counterparty Additional Tranche Rights. The Additional Tranche Rights permit the counterparty at their election, to purchase 2024 Convertible Notes in an aggregate principal amount of up to $2.8 million, which will be issued together with up to 2,750,000 and 2,083,333 Convertible 2024 Note Warrants and Consideration Shares, respectively.
In December 2024, we entered into additional letter agreements with two 2024 Convertible Notes investors ("Q4 Letter Agreements"). In exchange for entering into the Q4 Letter Agreements, we issued the two investors a total of 1,116,250 Consideration Shares as well as 1,116,250 2024 Convertible Note Warrants in satisfaction of the obligations in their original agreement, with such issues to be adjusted in accordance with the Q4 Letter Agreements.
SPA Warrants
We did not receive any proceeds from the SPA Warrants upon the issuance at Closing but may receive proceeds upon their exercise.
Convertible Bridge Loan Warrants
We did not receive any incremental proceeds from the issuance of Convertible Bridge Loan Warrants but may receive proceeds upon their exercise.
Convertible 2024 Note Warrants
We did not receive any incremental proceeds from the issuance of Convertible 2024 Note Warrants but may receive proceeds upon their exercise.
PIPE Warrants
Prior to the Closing, we entered into warrant subscription agreements with certain investors, which closed on September 29, 2023. Pursuant to the Warrant Subscription Agreements, the Warrant Investors purchased an aggregate of 10,209,994 warrants, at a purchase price of $1.00 per warrant for total proceeds of $10.2 million.
On February 9, 2024, we amended our Warrant Subscription Agreement with a Warrant Investor to, among other things, grant the Warrant Investor, (i) the right to exchange each PIPE Warrant for a newly registered share, effectively waiving the original strike price, (ii) a "Most Favored Nation" status with respect to warrant restructuring such that they may amend the terms upon us executing a similar transaction with more favorable terms for so long as any subscription warrants remain outstanding, and (iii) certain registration rights. In exchange, we received an upfront cash payment of $0.3 million during the three months ended March 31, 2024 and the right to receive a second cash payment of up to $0.3 million based on the trailing 5-day VWAP following the effective registration of the shares, which has not yet been achieved. On April 25, 2024, we amended our Warrant Subscription Agreements with Warrant Investors to, among other things, (i) cap the strike price at $2.00 per warrant, (ii) instate a strike price floor of $1.50 per warrant, and (iii) re-instate the downside protection feature. No proceeds were received in connection with the Q2 2024 PIPE Warrant Amendment.
Working Capital Warrants
We did not receive any proceeds from the Working Capital Warrants upon the issuance at Closing but may receive proceeds upon their exercise.
Public Warrants
We did not receive proceeds from the Public Warrants at Closing but may receive proceeds upon their exercise.
Private Warrants
Concurrently with Graf's IPO, Graf issued 4,721,533 warrants to Graf Acquisition Partners IV LLC. We did not receive any additional proceeds from the Private Warrants at Closing but may receive proceeds upon their exercise.
Cash Flows
The following is a summary of our cash flows (in thousands):
For the Years Ended
December 31,
2024 2023
Net cash used in operating activities $ (20,881) $ (21,948)
Net cash used in investing activities $ (13) $ (48)
Net cash provided by financing activities $ 20,853 $ 22,155
Net cash used in operating activities
The decrease in net cash used in operating activities of $1.1 millionfor the year ended December 31, 2024as compared to the year ended December 31, 2023was primarily attributable to a decreasein net loss of $38.7 million, and a $4.2 million increasein the net loss on amendments to financial instruments, primarily offset by a $40.4 million increasein change in fair value of financial instruments and $3.3 million decreasein transaction costs expensed.
Net cash used in operating activities of $20.9 millionfor the year ended December 31, 2024was primarily attributable to NKGen's net loss of $44.3 million, partially offset by changes in operating assets and liabilities of $1.4 millionand $22.0 millionin non-cash charges. The non-cash charges primarily relate to the loss on issuance of financial instruments of $26.0 million, the loss on amendments to financial instruments of $4.7 million, stock-based compensation of $4.1 million, and non-cash interest expense of $2.0 million, offset by the gain from change in fair value of financial instruments of $16.1 million.
Net cash usedin operating activities of $21.9 millionfor the year ended December 31, 2023was primarily attributable to NKGen's net loss of $83.0 million, offset bychanges in operating assets and liabilities of $2.2 millionand by $58.8 millionin non-cash charges. The non-cash charges primarily relate to the loss on issuance of financial instruments of $24.5 million, the change in fair value of financial instruments of $24.3 million, and stock-based compensation of $4.1 million.
Net cash used in investing activities
The net cash used in investing activities for the year ended December 31, 2024 decreasedby less than $0.1 million as compared to year ended December 31, 2023primarily from to increasedsales of property and equipment.
Net cash used in investing activities was less than $0.1 millionfor the year ended December 31, 2024, which consisted of less than $0.1 millionin purchases of capitalized software offset by less than $0.1 million in sales of property and equipment.
Net cash used in investing activities was less than $0.1 millionfor the year ended December 31, 2023, which consisted of purchases of capitalized software.
Net cash provided by financing activities
The net cash provided by financing activities for the year ended December 31, 2024decreased by $1.3 million as compared to the year ended December 31, 2023primarily due to a decreasein proceeds from the issuance of PIPE warrants of $10.2 million, a decreasein proceeds from the issuance of related party convertible promissory notes of $10.0 million, a decreasein proceeds from related party loans of $5.3 million, and a $5.0 million decreasein proceeds from draws on revolving line of credit, offset by a $9.9 million increasein the proceeds from the issuance of convertible promissory notes, a $3.1 million increasein proceeds from capital contributions, and a $14.6 million decreasein transaction costs.
Net cash provided by financing activities was $20.9 millionfor the year ended December 31, 2024, which primarily consisted of proceeds from the issuance of convertible notes of $16.1 millionand proceeds from amendments to the FPA agreements of $2.1 million, offset primarily by the repayment of related party loans of $1.0 million.
Net cash provided by financing activities was $22.2 millionfor the year ended December 31, 2023, which primarily consisted of proceeds from the issuance of PIPE warrants of $10.2 million, proceeds from the issuance of related party senior convertible promissory notes of $10.0 million, proceeds from the issuance of convertible promissory notes of $6.2 million, proceeds from related party loans of $5.3 million, proceeds from draws on the revolving line of credit of $5.0 million, and proceeds from the issuance of common stock of $1.7 million, offset primarily by the payment of $14.6 millionof transaction costs and the payment of $1.3 millionof deferred underwriting fees.
Contractual Obligations and Commitments
Leases
Our operating leases primarily consist of corporate offices. For additional information, see Note 14 - Commitments and Contingenciesin the notes to the consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.
Long-Term Debt
We have long-term debt which matures in 2027. For additional information, see Note 6 - Convertible Notesand Note 7 - Debtin the notes to the consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, to our financial statements, we believe that the following accounting policies are the most critical to fully understanding and evaluating our financial condition and results of operations.
Accrued Clinical and Research and Development Expenses
All research and development costs are expensed in the period incurred. Research and development expenses primarily consist of services provided by contract organizations for clinical development, salaries, and related expenses for personnel, including stock-based compensation expense, outside service providers, facilities costs, fees paid to consultants and other professional services, license fees, depreciation and supplies used in research and development. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the related goods or services are received.
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. The significant estimates in our accrued clinical trial and research and development expenses include the costs incurred for services performed by our vendors in connection with clinical trial and research and development activities for which we have not yet been invoiced.
We determine our expenses related to clinical trial and research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct clinical trials and research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical trial and research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Advance payments for goods and services that will be used in future clinical trial or research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in our reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Stock-Based Compensation
Stock-based compensation expense is comprised of stock options awarded to employees and consultants. Our stock option awards granted to date contain service based vesting conditions only and do not require the achievement of a market or performance condition in order to vest. These share-based awards are accounted for under the fair-value-based method prescribed by Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 718-10, Stock Compensation. The fair value of stock options is estimated using the Black-Scholes option pricing model on the date of grant. This option pricing model involves a number of estimates, including the per share value of the underlying common stock, exercise price, estimate of future volatility, expected term of the stock option award, risk-free interest rate and expected annual dividend yield.
We recognize the expense for options with graded-vesting schedules on a straight-line basis over the requisite service period, which is generally the vesting period. Forfeitures are recognized as they occur.
Valuation of Common Shares
Given the absence of a public trading market for our common shares prior to October 2, 2023, which was the first day of trading of our common stock following the Closing, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately- Held-Company Equity Securities Issued as Compensation, our board of directors exercises its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our common shares, including, but not limited to:
independent third-party valuations of our common shares;
capital resources and financial condition;
the likelihood and timing of achieving a liquidity event;
historical operating and financial performance as well as our estimates of future financial performance;
valuations of comparable companies;
the status of our development;
the relative lack of marketability of our common shares prior to the October 2, 2023;
industry information such as market growth and volume and macro-economic events;
additional objective and subjective factors relating to our business; and
implied fair values upon a merger transaction.
Prior to October 2, 2023, our board of directors determined the fair value of our common shares using both the income and market approach valuation methods. The income approach estimates value based on the expectation of future cash flows that a company will generate. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business as well as implied fair values upon a merger transaction such as the Business Combination. Under the market approach, based on a comparison of the subject company to comparable public companies in a similar line of business, a discount for lack of marketability ("DLOM") was applied to arrive at a fair value of common shares. A DLOM was meant to account for the lack of marketability of shares that were not publicly traded. The valuation of common shares underlying common stock options granted during the year ended December 31, 2023 were estimated under the market approach, based upon the implied fair value of common stock agreed upon in the Business Combination, where the fair values of our common shares as of the respective grant dates were determined using a linear interpolation between the previous valuation and the anticipated closing date of the Business Combination based on circumstances existing as of the respective grant dates. It was determined that the straight-line calculation provides the most reasonable basis for the valuation of our common stock because there was no single event that occurred during the period between the valuation dates that would have caused a material change in fair value.
Applying these valuation approaches involves the use of estimates, judgments and assumptions that are highly complex and subjective, including our expected future revenue and expenses, the determination of discount rates, interpolations, valuation multiples, the selection of comparable public companies and the probability of future events. Changes in any or all of these estimates and assumptions impact our valuation as of each valuation date. Such changes may have a material impact on the valuation of our common shares and our share-based awards.
Beginning October 2, 2023 the fair value of our common shares was based upon our publicly listed share price.
Accounting for Select Financial Instruments
In connection with and following the Business Combination, among other instruments, we issued Public Warrants, Private Warrants, PIPE Warrants, SPA Warrants, Working Capital Warrants, Convertible Bridge Loan Warrants, Convertible 2024 Note Warrants, Convertible 2024 Promissory Notes, Senior Convertible Notes, Deferred Founder Shares, Consideration Shares, Tranche Rights, and forward purchase derivatives (collectively, "Select Financial Instruments"). The accounting determinations surrounding the Select Financial Instruments has a significant effect on our reported financial position and results of operations.
We determine the accounting classification of the Select Financial Instruments by first assessing each instrument under ASC480, Distinguishing Liabilities from Equity, then assessing each instrument under ASC 815, Derivatives and Hedging Activities. Under ASC 480, instruments are considered liability classified if they are mandatorily redeemable, obligate us to settle the warrants or the underlying shares by paying cash or other assets, and instruments that must or may require settlement by issuing variable number of shares. If instruments do not meet the liability classification under ASC 480-10, we assess the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the financial instruments do not require liability classification under ASC 815-40, in order to conclude equity classification, we also assess whether the instruments are indexed to our own common stock and whether the instruments are classified as equity under ASC 815-40 or other GAAP. After all such assessments, we conclude whether the instruments are classified as liability or equity.
In addition, ASC 815 requires companies to bifurcate certain features from their host instruments and account for them as free-standing derivative financial instruments should certain criteria be met. We evaluate our financial instruments to determine whether such instruments are derivatives or contain features that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract and the features of the derivatives. Bifurcated embedded derivatives are recognized at fair value, with changes in fair value recognized in the consolidated statements of operations each period. Bifurcated embedded derivatives are classified with the related host contract in our consolidated balance sheets. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
For convertible debt instruments that are not considered liabilities under ASC 480 or ASC 815, we apply ASC 470, Debt,for the accounting of such instruments, including any premiums or discounts.
Liability classified instruments require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the consolidated statements of operations. Equity classified instruments only require fair value accounting at issuance with no changes recognized subsequent to the issuance date.
Based upon the application of the foregoing accounting guidance to the terms, features, and circumstances surrounding our Select Financial Instruments, the Public Warrants, SPA Warrants, and Deferred Founder Shares were determined to be equity classified instruments, and the Senior Convertible Notes, Private Warrants, PIPE Warrants, Working Capital Warrants, Legacy Convertible Notes, certain Convertible Bridge Loan Warrants, Convertible 2024 Note Warrants, 2024 Convertible Notes,Tranche Rights, unissued Consideration Shares, and forward purchase derivatives were determined to be liability classified instruments. While the Senior Convertible Notes were determined to be liability-classified, they were determined to be in-scope of ASC 470 and not in-scope of ASC 480 or ASC 815. Accordingly, Senior Convertible Notes will not be measured at fair value on a recurring basis as the fair value measurement of this instrument was for purposes of the relative fair value allocation described below as the Senior Convertible Notes were issued together with the SPA Warrants.
Fair Value of Financial Instruments
We account for the fair value of our financial instruments under the framework established by US GAAP which defines fair value and expands disclosures about fair value measurements. 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 market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.
Level 1 - Quoted prices in active markets for identical assets or liabilities we have the ability to access at the measurement date.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.
Level 3 - Pricing inputs that are unobservable, supported by little or no market activity and are significant to the fair value of the assets or liabilities.
Transfers to/from Levels 1, 2, and 3 are recognized at the beginning of the reporting period. There were no transfers to/from Levels 1, 2, and 3 during the three and nine months ended September 30, 2024 and 2023 nor the years ended December 31, 2023 and 2022.
ASC 820, Fair Value Measurement, ("ASC 820") states that in many cases, the transaction price will equal the fair value (for example, that might be the case when on the transaction date the transaction to buy an asset takes place in the market in which the asset would be sold). In determining whether a transaction price represents the fair value at initial
recognition, we consider various factors such as whether the transaction was between related parties, is a forced transaction, or whether the unit of account for the transaction price does not represent the unit of account for the measured instrument.
We do not measure assets at fair value on a recurring basis. Our liabilities that are measured at fair value on a recurring basis are our liability classified warrants, 2024 Convertible Notes, forward purchase derivative liabilities, tranche right derivatives, and liability-classified consideration shares. The carrying value of our related party loans approximates fair value as the stated interest rate approximates market rates for similar loans and due to the short-term nature of such loans, which are due within three years or less from issuance. The carrying value of our cash, restricted cash, accounts payable, accrued expenses, other current liabilities, prepaid expenses and other current assets, capitalized software, related party loans, and revolving line of credit approximates fair value primarily due to the short-term nature of such accounts.
The fair value of equity-classified instruments are determined based on trading prices of identical securities as of the measurement date. Liability-classified instruments measured at fair value on a recurring basis include the Private Warrants, Working Capital Warrants, forward purchase derivative liabilities, PIPE Warrants, Convertible Bridge Loans, Convertible 2024 Note Warrants, 2024 Convertible Notes, Legacy Convertible Notes, tranche right derivatives, and liability-classified consideration shares. Determining the fair value of the liability classified instruments requires the use of accounting estimates and assumptions. Liability-classified instruments measured at fair value on a non-recurring basis include the Senior Convertible Notes.
These estimates and assumptions are judgmental in nature and could have a significant effect on our reported financial position and results of operations.
The fair value of the Private Warrants, Working Capital Warrants, Convertible Bridge Loan Warrants, and Convertible 2024 Note Warrants were measured using a Black-Scholes model. The estimated fair value of the liability classified warrants was determined using Level 3 inputs. Inherent in a Black-Scholes model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. We estimate the volatility of our liability classified warrants based on implied volatility from our traded warrants and from historical volatility of select peer company's common stock that matches the expected remaining life of each class of warrants as well as historical volatility of select peer company's traded options. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of each class of warrants. The expected life of each class of warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which we anticipate remaining at zero.
We historically determined the carrying amount of the Legacy Convertible Notes using a scenario-based analysis that estimates the fair value of the Legacy Convertible Notes based on the probability-weighted present value of expected future investment returns by measuring the fair value of similar debt instruments that do not have the conversion feature. If no similar debt instrument existed, fair value was estimated by using assumptions that market participants would use in pricing a debt instrument, including market interest rates, credit standing, yield curves and volatilities. The fair value of Legacy Convertible Notes immediately prior to their conversion at Closing was based upon the fair value of the shares of our common stock issued upon their conversion totaling based upon the fair value of our common stock at Closing, which was the conversion date.
The fair value of the forward purchase derivative liabilities exclusive of the April 2024 FPA, and PIPE Warrants were estimated using a Monte Carlo simulation approach. Our common share price was simulated with daily time steps for a range of various possible scenarios. The breadth of all possible scenarios was captured in an estimate of volatility, based on comparable companies' historical equity volatilities, considering differences in their capital structure. The simulated prices were compared against the features of the Forward Purchase Agreements and the PIPE Warrants, including the settlement adjustment and downside protection features. The average value for the forward purchase derivative liabilities and the PIPE warrants across the range of possible scenarios for the respective instrument, discounted to present using the risk-free rate, was used as the fair value of the liabilities. The fair value of the April 2024 FPA was estimated using a digital-call option pricing model due to the terms of the April 2024 FPA, which resulted in a binary settlement outcome whereby we may receive either zero dollars or an amount equal to the Reset Price (as amended pursuant to the April 2024
FPA). Inputs to the digital call option pricing model include our closing stock price as of the measurement dates, the Reset Price (as amended pursuant to the April 2024 FPA) ceiling of $1.27 as the exercise price, volatility as determined by re-levering the median asset volatility of selected guideline companies calibrated to our capital structure, and the risk-free rate.
Prior to April 1, 2024, the fair value of the 2024 Convertible Notes was measured using a binomial lattice model. A binomial stock lattice model generates two probable outcomes of stock price -one up and another down -emanating at each point in time or "node", starting from the valuation date until the maturity date. This lattice generates a distribution of stock price. Based on the stock price at each corresponding node, the value of the Notes was determined by evaluating the optimal decision that a holder and/or the issuer would make to maximize its payoff (the "Decision Tree"). At maturity, the value of the notes was calculated as the maximum between the principal amount and the conversion value. At each node prior to maturity, the lattice model determines whether the notes would be (i) converted by the holder, or (ii) held by the holder, based on the payoff related to each decision. Volatility in the model was estimated from historical equity volatility, median asset volatility of comparable companies, and was adjusted using our capital structure. The cost of debt used in discounting the Notes was estimated based on (i) market yield curve corresponding to our estimated synthetic credit rating, and (ii) observed market spreads of publicly traded comparable debt with similar credit rating and industry as ours.
Commencing on April 1, 2024, the fair value of the 2024 Convertible Notes was measured using a probability weighted scenario model. The possible settlement outcomes were identified and a scenario for each outcome was modeled and probability weighted for the likelihood of each respective event as set forth in Note 9, Fair Value of Financial Instruments, of the unaudited condensed consolidated financial statements as of and for the year ended December 31, 2024 included within this Annual Report on Form 10-K. The conversion feature was modeled as a call option, where the exercise price is set equal to the stated conversion price, stock price equals our closing stock price on the Valuation date, volatility uses a re-levered equity volatility estimated from the median historical asset volatility of comparable companies, and a term equal to the expected time to conversion. The Black-Scholes Option Pricing Model was used to value the conversion right, which is added to the present-valued cash flows to calculate the fair value of the 2024 Convertible Notes. The 2024 Convertible Notes' cash flows were present valued using a market yield curves of debt instruments issued by similarly rated issuers, and adjusted based on seniority and securitization of each individual 2024 Convertible Notes. A default scenario was implemented and probability weighted using Bloomberg's Default Risk function. Our historical financial statements were utilized to estimate a probability of default over a given term and a synthetic credit rating. The default scenario value uses a recovery rate observed in instruments with similar seniority per Moody's debt data.
As set forth above, the binomial lattice model captures two probable outcomes while the probability weighted scenario model captures additional possible outcomes with the Black-Scholes Option Pricing Model utilized for the conversion scenario captures all possible outcomes for that scenario. We changed our methodology for the fair value of the 2024 Convertible Notes as of April 1, 2024 because of changes in entity-specific assumptions and the volume of issuances following this date, which introduced a variety of additional types of 2024 Convertible Notes (Related Party Convertible Notes, Tranche Convertible Notes, Secured Convertible Notes) and holders of 2024 Convertible Notes, which increased the diversity of expected behaviors and potential outcomes.
The fair value of the Tranche Rights was based upon the fair value of the 2024 Convertible Notes, 2024 Convertible Note Warrants, and Consideration Shares underlying unexercised tranche rights as of the date of measurement, each measured through identical methodologies as set forth above for the respective underlying instruments. The Tranche Rights expired during the fourth quarter of 2024 and no longer subject to valuation.
The Convertible Bridge Loans were issued together with the promise to issue Convertible Bridge Loan Warrants. The Convertible Bridge Loan Warrants were recorded at fair value, with the residual amount of the proceeds allocated to the convertible debt instrument. The fair value of the Convertible Bridge Loan Warrants was treated as a discount to the Convertible Bridge Loans, which will be amortized to interest expense over the term of the Convertible Bridge Loans.
The Senior Convertible Notes were issued together with the SPA Warrants. Each instrument was recorded at its fair value, limited to a relative fair value based upon the percentage of its fair value to the total fair value based on the
transaction price at Closing on September 29, 2023. The relative fair value of the SPA Warrants was treated as a discount to the Senior Convertible Notes, which will be amortized to interest expense over the term of the Senior Convertible Notes.
We determined the stand-alone fair value of the Senior Convertible Notes using a binomial lattice model, which generates a distribution of stock prices over the term of the note, calculates the associated payoff for the note, and discounts the probability-weighted values from the lattice back to the valuation date. The fair value was estimated by using assumptions that market participants would use in pricing a convertible debt instrument, including market interest rates, credit rating, yield curves, and volatilities.
Recently Issued and Adopted Accounting Pronouncements
We describe the recently issued accounting pronouncements that apply in Note 2, Summary of Significant Accounting Policies, of the consolidated financial statements as of and for the year ended December 31, 2024.
Emerging Growth Company Status
We qualify as an emerging growthcompany, as defined in the Jumpstart Our Business Startups ("JOBS Act") and may remain an emerging growth company for up to five years following the completion of Graf's initial public offering. For so long as we remain an emerging growth company, we are permitted and intends to rely on certain exemptions from various public company reporting requirements, including delaying adopting new or revised accounting standards issued until such time as those standards apply to private companies, not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and any golden parachute payments not previously approved. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
Following the closing of the Business Combination, we are an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the consummation of Graf's initial public offering, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (iii) the last day of the fiscal year in which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year, or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
We qualify as a "smaller reporting company," as such term is defined in Rule 12b-2 of the Exchange Act, meaning that the market value of our common stock held by non-affiliates plus the proposed aggregate amount ofgross proceeds to the Company as a result of the Business Combination is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company following the closing of the Business Combination if either (i) the market value of our common stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our common stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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