Cero Therapeutics Holdings, Inc 8-K/A, filed Apr 2, 2024
Cero Therapeutics Holdings, Inc. (CERO)
About this 8-K/A
Cero Therapeutics Holdings, Inc filed this 8-K/A on April 2, 2024, reporting on events of February 13, 2024.
Items reported
- Item 8.01: Other events
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
(Amendment No. 2)
Pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.
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INTRODUCTORY NOTE
This Form 8-K/A is being filed in order to include the (i) consolidated financial statements of CERo Therapeutics, Inc., a Delaware corporation (“CERo”), for the years ended December 31, 2023 and 2022, (ii) unaudited pro forma condensed combined financial information of the Company for year ended December 31, 2023 and (iii) management’s discussion and analysis of financial condition and results of operations of CERo for the years ended December 31, 2023 and 2022.
This Form 8-K/A does not amend any other item of the Original Report or purport to provide an update or a discussion of any developments at the Company or its subsidiaries, subsequent to the filing date of the Original Report. The information previously reported in or filed with the Original Report is hereby incorporated by reference to this Form 8-K/A.
1
Item 8.01. Financial Statements and Exhibits
Reference is made to the disclosure under the heading “Introductory Note” of this Report, which disclosure is incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
The consolidated financial statements of CERo for the years ended December 31, 2023 and 2022 are attached as Exhibit 99.1 and are incorporated herein by reference.
The management’s discussion and analysis of financial condition and results of operations of CERo for the years ended December 31, 2023 and 2022 is attached hereto as Exhibit 99.3 and incorporated herein by reference.
(b) Pro forma financial information.
The unaudited pro forma condensed combined financial information of the Company for the year ended December 31, 2023 is attached hereto as Exhibit 99.2 and incorporated herein by reference.
(d) Exhibits.
| Exhibit No. | Description | |
| 99.1 | Consolidated financial statements of CERo for the years ended December 31, 2023 and 2022. | |
| 99.2 | Unaudited pro forma condensed combined financial information of the Company for the year ended December 31, 2023. | |
| 99.3 | Management’s discussion and analysis of financial condition and results of operations of CERo for the years ended December 31, 2023 and 2022. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
| CERO THERAPEUTICS HOLDINGS, INC. | ||
| By: | /s/ Brian G. Atwood | |
| Name: | Brian G. Atwood | |
| Title: | Chief Executive Officer | |
Dated: April 2, 2024
3
Exhibit 99.1
CERo Therapeutics, Inc.
Financial Statements
December 31, 2023 and 2022
Table of Contents
i
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of CERo Therapeutics, Inc.:
Opinion on the Financial Statements
We have audited the accompanying balance sheets of CERo Therapeutics, Inc. (the “Company”) as of December 31, 2023 and 2022, the related statements of operations, convertible preferred stock and stockholders’ deficit and cash flows for the years then ended, and the related notes to the financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of a Matter Regarding Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred net losses since its inception, and has negative cash flows from operations and will need additional funding to complete planned development efforts. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Wolf & Company, P.C.
We have served as the Company’s auditor since 2023.
Boston, MA
April 1, 2024
1
Balance Sheets
December 31, 2023 and 2022
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Cash, restricted cash, and cash equivalents | $ | 1,601,255 | $ | 6,819,564 | ||||
| Prepaid expenses and other current assets | 368,780 | 256,459 | ||||||
| Total current assets | 1,970,035 | 7,076,023 | ||||||
| Operating lease right-of-use asset | 2,189,565 | 2,846,041 | ||||||
| Property and equipment, net | 966,702 | 1,427,424 | ||||||
| Total assets | $ | 5,126,302 | $ | 11, 349,488 | ||||
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT | ||||||||
| Accounts payable | $ | 1,671,745 | $ | 391,185 | ||||
| Accrued liabilities | 144,633 | 100,394 | ||||||
| Common stock subscription deposit | 1,875 | - | ||||||
| Operating lease liability | 769,092 | 672,374 | ||||||
| Short-term notes payable, net | 599,692 | - | ||||||
| Preferred stock warrant liability | 320,117 | - | ||||||
| Total current liabilities | 3,507,154 | 1,163,953 | ||||||
| Operating lease liability, net of current portion | 1,575,499 | 2,344,590 | ||||||
| Preferred stock warrant liability | - | 610,381 | ||||||
| Total liabilities | 5,082,653 | 4,118,924 | ||||||
| Commitments and contingencies | ||||||||
| Convertible preferred stock, $0.0001 par value per share, issuable in series: | ||||||||
| Series Seed: 5,155,703 shares authorized, issued and outstanding; aggregate liquidation preference of $4,154,981 at December 31, 2023 | 4,077,560 | 4,077,560 | ||||||
| Series A: 24,614,402 shares authorized, 22,764,764 shares issued and outstanding; aggregate liquidation preference of $39,999,967 at December 31, 2023 | 38,023,784 | 38,023,784 | ||||||
| Total convertible preferred stock | 42,101,344 | 42,101,344 | ||||||
| Stockholders’ deficit | ||||||||
| Common stock, $0.0001 par value, 45,350,000 shares authorized: 9,068,899 and 9,044,733 shares issued and outstanding at December 31, 2023 and 2022, respectively | 907 | 904 | ||||||
| Additional paid-in capital | 1,031,219 | 928,560 | ||||||
| Accumulated deficit | (43,089,821 | ) | (35,800,244 | ) | ||||
| Total stockholders’ deficit | (42,057,695 | ) | (34,870,780 | ) | ||||
| Total liabilities, convertible preferred stock and stockholders’ deficit | $ | 5,126,302 | $ | 11,349,488 | ||||
See accompanying notes to financial statements.
2
Statements of Operations
For the years ended December 31, 2023 and 2022
| 2023 | 2022 | |||||||
| Operating expenses: | ||||||||
| Research and development | $ | 5,288,580 | $ | 9,845,603 | ||||
| General and administrative | 2,386,469 | 2,125,628 | ||||||
| Total operating expenses | 7,675,049 | 11,971,231 | ||||||
| Loss from operations | (7,675,049 | ) | (11,971,231 | ) | ||||
| Interest and other income, net | 385,472 | 142,115 | ||||||
| Net loss | $ | (7,289,577 | ) | $ | (11,829,116 | ) | ||
| Net loss per share: | ||||||||
| Basic and diluted | $ | (0.80 | ) | $ | (1.32 | ) | ||
| Shares used in computing net loss per share: | ||||||||
| Basic and diluted | 9,058,025 | 8,974,247 | ||||||
See accompanying notes to financial statements.
3
Statements of Convertible Preferred Stock and Stockholders’ Deficit
For the years ended December 31, 2023 and 2022
| Convertible Preferred Stock | Additional | Total | ||||||||||||||||||||||||||||||||||
| Series Seed | Series A | Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 5,155,703 | 4,077,560 | 22,764,764 | 38,023,784 | 8,974,421 | 897 | 541,872 | (23,971,128 | ) | (23,428,359 | ) | |||||||||||||||||||||||||
| Issuance of common stock from exercise of stock options | - | - | - | - | 70,312 | 7 | 5,618 | - | 5,625 | |||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | 381,070 | - | 381,070 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (11,829,116 | ) | (11,829,116) | ||||||||||||||||||||||||||
| Balance at December 31, 2022 | 5,155,703 | $ | 4,077,560 | 22,764,764 | $ | 38,023,784 | 9,044,733 | $ | 904 | $ | 928,560 | $ | (35,800,244 | ) | $ | (34,870,780 | ) | |||||||||||||||||||
| Issuance of common stock from exercise of stock options | - | - | - | - | 24,166 | 3 | 5,763 | - | 5,766 | |||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | 96,896 | - | 96,896 | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | (7,289,577 | ) | (7,289,577 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2023 | 5,155,703 | $ | 4,077,560 | 22,764,764 | $ | 38,023,784 | 9,068,899 | $ | 907 | $ | 1,031,219 | $ | (43,089,821 | ) | $ | (42,057,695 | ) | |||||||||||||||||||
See accompanying notes to financial statements.
4
Statements of Cash Flows
For the years ended December 31, 2023 and 2022
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (7,289,577 | ) | $ | (11,829,116 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | 460,722 | 476,275 | ||||||
| Stock-based compensation | 96,896 | 381,070 | ||||||
| Amortization of right-to-use operating lease asset | 656,476 | 596,534 | ||||||
| Amortization of debt discount | 35,655 | - | ||||||
| Gain on revaluation of warrant liability | (290,264 | ) | (36,992 | ) | ||||
| Change in assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | (112,321 | ) | 49,587 | |||||
| Accounts payable | 1,280,560 | (68,734 | ) | |||||
| Accrued liabilities | 44,239 | (692,685 | ) | |||||
| Operating lease liability | (672,373 | ) | (585,250 | ) | ||||
| Net cash used in operating activities | (5,789,987 | ) | (11,709,311 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | - | (694,232 | ) | |||||
| Net cash used in investing activities | - | (694,232 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of convertible notes, net | 605,230 | - | ||||||
| Issuance costs for convertible notes | (41,193 | ) | - | |||||
| Common stock subscription deposit | 1,875 | - | ||||||
| Cash proceeds from exercise of stock options | 5,766 | 5,625 | ||||||
| Net cash provided by financing activities | 571,678 | 5,625 | ||||||
| Net decrease in cash, restricted cash, and cash equivalents | (5,218,309 | ) | (12,397,918 | ) | ||||
| Cash, restricted cash, and cash equivalents at beginning of year | 6,819,564 | 19,217,482 | ||||||
| Cash, restricted cash, and cash equivalents at end of year | $ | 1,601,255 | $ | 6,819,564 | ||||
| Supplemental disclosure of cash as reported within the audited condensed balance sheets: | ||||||||
| Cash | $ | 1,518,676 | $ | 6,651,454 | ||||
| Cash equivalents | 2,823 | 88,354 | ||||||
| Restricted cash | 79,756 | 79,756 | ||||||
| Cash, cash equivalents, and restricted cash | 1,601,255 | 6,819,564 | ||||||
See accompanying notes to financial statements.
5
CERo Therapeutics, Inc.
Notes to Financial Statements
NOTE 1 – Organization and Description of the Business
Nature of Operations – CERo Therapeutics, Inc. (the “Company”) was incorporated in Delaware on September 23, 2016, and is based in South San Francisco, California. The Company is focused on genetically engineering human immune cells to fight cancer. Since inception, the Company has focused on developing its therapeutic platform and has not yet begun clinical development or product commercialization. Future Company efforts will focus on continued product development, including clinical development, to support regulatory approval to commercialize and subsequent product commercialization.
Going concern – The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s ability to continue as a going concern is dependent on its ability to raise additional capital to fund its research and development (“R&D”) activities and meet its obligations on a timely basis. Since inception, the Company has incurred net losses and operating cash flow deficits, resulting in an accumulated deficit of $43.1 million as of December 31, 2023. Additional funds are necessary to maintain current operations and to continue R&D activities. However, there can be no assurance that sufficient funding will be available to allow the Company to successfully continue its R&D activities and planned regulatory filings with the Food and Drug Administration (“FDA”). If the Company is unable to obtain necessary funds, significant reductions in spending and the delay or cancellation of planned activities may be necessary. These actions would have a material adverse effect on the Company’s business, results of operations, and prospects. These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date these financial statements are issued. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Risks and uncertainties – The Company is subject to all of the risks inherent in an early-stage biotechnology company. These risks include, but are not limited to, limited management resources, intense competition, and dependence upon the availability of cash to sustain operations. The Company’s operating results may be materially affected by the foregoing factors.
The Company’s research also requires approvals from the FDA prior to beginning clinical trials and prior to product commercialization. There can be no assurance that the Company’s current ongoing research and future clinical development will result in the granting of these required approvals. If the Company is denied such approvals or such approvals are substantially delayed, they could have a material adverse effect upon the Company’s future financial results and cash flows.
NOTE 2 – Significant Accounting Policies
Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expenses incurred during the reporting period. Items subject to such estimates and assumptions include the estimates of the fair values of convertible preferred stock, common stock, and preferred stock warrant liability, stock-based compensation expense, the present value of right-to-use assets and lease liabilities, and the valuation allowance associated with deferred tax assets. Actual results could differ from those estimates.
Cash, restricted cash, and cash equivalents – The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. As of December 31, 2023 and 2022, cash and cash equivalents consist of cash deposited with banks, including a money market sweep account. Restricted cash consists of $79,756 held on account by a financial institution as collateral for a demand letter of credit issued as a real estate security deposit.
6
CERo Therapeutics, Inc.
Notes to Financial Statements
Concentration of credit risk – Financial instruments that potentially subject the Company to credit risk consist primarily of cash, restricted cash, and cash equivalents. The Company’s cash, restricted cash, and cash equivalents are on deposit with two financial institutions that management believe are of sufficiently high credit quality. Deposits at any of the Company’s financial institutions may, at times, exceed federal insured limits.
Property and equipment – Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to five years or the remaining lease term for leasehold improvements, if shorter. Expenditures for repairs and maintenance are charged to expense as incurred. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in the statements of operations.
Impairment of long-lived assets – The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When such an event occurs, management determines whether there has been an impairment by comparing the anticipated undiscounted future net cash flows to the related asset’s carrying value. If an asset is considered impaired, the asset is written down to fair value, which is determined based either on discounted cash flows or appraised value, depending on the nature of the asset. Through December 31, 2023, the Company has not experienced any impairment losses on its long-lived assets.
Leases – The Company determines if an arrangement contains a lease at inception. A lease is an operating or financing contract, or part of a contract, that conveys the right to control the use of an identified tangible asset for a period of time in exchange for consideration.
At lease inception, the Company recognizes a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as for lease incentives. In determining the present value of the lease payments, the Company uses its incremental borrowing rate, determined by estimating the Company’s applicable, fully collateralized borrowing rate, with adjustment as appropriate for lease term. The lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an extension option if the Company is reasonably certain to exercise that option.
Right-of-use assets and obligations for leases with an initial term of 12 months or less are considered short term and are (a) not recognized in the balance sheet and (b) recognized as an expense on a straight-line basis over the lease term. The Company does not sublease any of its leased assets to third parties and the Company’s lease agreements do not contain any residual value guarantees or restrictive covenants.
The accounting for leases includes a number of reassessment and re-measurement requirements for lessees based on certain triggering events or impairment conditions. There were no impairment indicators identified during the years ended December 31, 2023 or 2022 that would require impairment testing of the Company’s right-of-use assets.
Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as common area maintenance services. The Company has elected to separate the accounting for fixed lease components and variable and non-lease components for real estate and equipment leases. The variable lease costs are recorded on the statement of operations as rent expense, within general and administrative expenses. The Company does not have any financing leases at December 31, 2023 or 2022.
Convertible preferred stock – The Company’s convertible preferred stock is redeemable upon the liquidation or winding up of the Company, a change in control, or a deemed liquidation event related to the sale of substantially all the assets of the Company. Based on the ownership of the Company’s equity and associated board of director control, deemed liquidation events are not solely within the control of the Company. As a result, the shares of the Company’s convertible preferred stock are considered contingently redeemable. The Company has elected to present its convertible preferred stock as mezzanine equity in its balance sheet. Further, the Company has elected not to adjust the carrying values of its convertible preferred stock to the redemption value of such shares, since it is uncertain whether or when a redemption event will occur. Subsequent adjustments to increase the carrying values to the redemption values will be made when it becomes probable that such redemption will occur. The Company has not included the effect of convertible preferred stock in the calculation of diluted loss per share, since the inclusion of such convertible preferred stock would be anti-dilutive.
7
CERo Therapeutics, Inc.
Notes to Financial Statements
Preferred stock warrant liability – Warrant accounting requires liability classification of warrants when the warrants include a conditional obligation, once the warrant is exercised, that would require the Company to redeem its equity shares. As stated above, the shares of the Company’s convertible preferred stock are considered contingently redeemable and therefore, any preferred stock warrants to purchase preferred shares are classified as a liability in the Company’s balance sheets. The warrants are analyzed to determine whether the warrant is a freestanding instrument and if so, whether the warrant was issued in a transaction with other instrument(s). If a freestanding warrant is issued with other instruments in a single transaction, then the proceeds of the transaction are allocated first to the fair value of the warrant, with the remainder being allocated to the other instruments. The warrants are remeasured as of each reporting period end, with any changes in fair value recognized as interest and other income, net in the statement of operations. The Company has determined that the warrant liability is a Level 3 instrument in the fair value measurements hierarchy. The Company has not included the effect of the preferred stock warrants in the calculation of diluted loss per share since the inclusion of such warrants would be anti-dilutive.
Fair value measurements – The Company’s assets and liabilities are carried at fair value. Fair value is the amount 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. In determining fair value, the assumptions that market participants would use in pricing an asset or liability (the inputs) are based on a tiered fair value hierarchy consisting of three levels, as follows:
| Level 1 | – | Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. |
| Level 2 | – | Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
| Level 3 | – | Unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions about how market participants would price the asset or liability. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
Carrying amounts of certain of the Company’s financial instruments, including cash, restricted cash, and cash equivalents, prepaid expenses and other current assets, accounts payable, and accrued liabilities approximate fair value due to their relatively short maturities.
Non-financial assets such as property and equipment are evaluated for impairment and adjusted to fair value using Level 3 inputs only when impairment is recognized. Fair values are considered Level 3 when management makes significant assumptions in developing a discounted cash flow model based upon a number of considerations including projections of revenues, earnings, and a discount rate. To date, the Company has not recorded any adjustments to fair value related to impairment on property and equipment.
8
CERo Therapeutics, Inc.
Notes to Financial Statements
At December 31, 2023 and 2022, the fair value of the Company’s preferred stock warrant liability (see Note 7 for details) was classified as follows:
| December 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Preferred stock warrant liability | $ | - | $ | - | $ | 320,117 | $ | 320,117 | ||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Preferred stock warrant liability | $ | - | $ | - | $ | 610,381 | $ | 610,381 | ||||||||
The change in the fair value measurement using significant inputs (Level 3) is summarized below:
| Balance at December 31, 2021 | $ | 647,373 | ||
| Gain on revaluation of warrant liability | (36,992 | ) | ||
| Balance at December 31, 2022 | $ | 610,381 | ||
| Gain on revaluation of warrant liability | (290,264 | ) | ||
| Balance at December 31, 2023 | $ | 320,117 |
Research and development – R&D costs consist primarily of salaries and benefits, including stock-based compensation, occupancy, materials and supplies, contracted research, consulting arrangements, and other expenses incurred in the pursuit of the Company’s R&D programs. R&D costs are expensed as incurred.
Stock-based compensation – The Company periodically issues common stock and stock options to officers, directors, and consultants for services rendered. Stock-based compensation accounting requires the recognition of stock-based compensation expense, using a grant date fair value-based method, for costs related to all share-based payments including stock options and restricted stock awards granted to employees and non-employees. Companies are required to estimate the fair value of all share-based payment awards on the date of grant using an option pricing model, and the Company uses a Black-Scholes option pricing model (“Black-Scholes”) to estimate option award fair value. The fair value of restricted stock awards is based upon the estimated share price of the common shares on the date of grant. Forfeitures are accounted for as they occur, and the Company applies the simplified method to estimate expected term of “plain vanilla” options. All options and restricted stock awards granted since inception are expensed on a straight-line basis over the requisite service period, which is usually the vesting period, and the related amount is recognized in the statements of operations.
The accounting for stock options granted to outside consultants is consistent with the accounting for stock-based payments to officers and directors, as described above, by measuring the cost of services received in exchange for equity awards utilizing the grant date fair value of the awards, with the cost recognized as stock-based compensation expense on the straight-line basis in the Company’s financial statements over the vesting period of the awards.
Income taxes – The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
9
CERo Therapeutics, Inc.
Notes to Financial Statements
The Company follows tax accounting requirements for the recognition, measurement, presentation, and disclosure in the financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the financial statements. It is the Company’s policy to include penalties and interest expense related to income taxes as a component of income tax expense, as necessary. The Company has not recorded any interest or penalties associated with income tax since inception. Tax years subsequent to 2020 are subject to examination by federal and state authorities.
Earnings per share – The Company reports both basic and diluted earnings per share. Basic earnings per share is calculated based on the weighted average number of shares of common stock outstanding and excludes the dilutive effect of convertible preferred stock, convertible preferred stock warrants, stock options or any other type of convertible securities. Diluted earnings per share is calculated based on the weighted average number of shares of common stock outstanding and when the effect of stock options, warrants and other types of convertible securities is dilutive, they are included in the calculation. Dilutive securities are excluded from the diluted earnings per share calculation if their effect is anti-dilutive, such as in periods where the Company reports a net loss.
Recent accounting pronouncements not yet adopted – In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This amends the ASC 815 Derivatives and Hedging—Contracts in Entity’s Own Equity to simplify the guidance on (1) accounting for convertible instruments, and (2) the derivatives scope exception for contracts in an entity’s own equity. The guidance on earnings per share (“EPS”) has also been amended to simplify the calculations and make them more internally consistent. The standard will be effective for nonpublic business entities beginning after December 15, 2023. The Company is currently evaluating this new standard and the impact it will have on its financial statements, information technology systems, processes, and internal controls.
NOTE 3 – NET LOSS PER COMMON SHARE
The accounting standards require the presentation of both basic and diluted earnings per share on the face of the statements of operations. The Company’s basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period. If there are dilutive securities, diluted income per share is computed by including common stock equivalents which includes shares issuable upon the exercise of stock options into shares of common stock, exercise of preferred warrants into shares of preferred stock, and conversion of preferred stock into shares of common stock, net of any shares assumed to have been purchased with the proceeds, using the treasury stock method. In periods for which the Company reports a net loss, the common stock equivalents are not included, as they would be anti-dilutive.
The following table summarizes the number of shares of common stock issuable upon conversion or exercise, as applicable, of convertible securities, warrants and restricted stock that were not included in the calculation of diluted net loss per share because such shares are antidilutive:
| Year ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Common stock options | 782,499 | 1,138,110 | ||||||
| Convertible preferred stock | 27,920,467 | 27,920,467 | ||||||
| Convertible preferred warrants | 1,849,638 | 1,849,638 | ||||||
| 30,552,604 | 30,908,215 | |||||||
Restricted common stock can be issued to directors, executives or employees of the Company and are subject to time-based vesting. These potential shares are excluded from the computation of basic loss per share as these shares are not considered outstanding until vested. No unvested restricted common stock awards were outstanding at December 31, 2023 or 2022.
10
CERo Therapeutics, Inc.
Notes to Financial Statements
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment, net, consisted of the following as of December 31, 2023 and 2022:
| 2023 | 2022 | |||||||
| Laboratory equipment | $ | 2,507,839 | $ | 2,507,839 | ||||
| Computers | 38,323 | 38,323 | ||||||
| Furniture | 8,429 | 8,429 | ||||||
| Less: Accumulated depreciation | (1,587,889 | ) | (1,127,167 | ) | ||||
| $ | 966,702 | $ | 1,427,424 | |||||
Depreciation expense was $460,722 and $476,275 for the years ended December 31, 2023 and 2022, respectively.
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31, 2023 and 2022:
| 2023 | 2022 | |||||||
| Employee-related liabilities | $ | 68,697 | $ | 19,758 | ||||
| Accrued legal expenses | 46,466 | 18,040 | ||||||
| Accrued interest | 27,637 | 12,014 | ||||||
| Accrued consulting expenses | 1,833 | 50,582 | ||||||
| $ | 144,633 | $ | 100,394 | |||||
NOTE 6 – Leases
As of December 31, 2023 and 2022, the Company holds one five-year lease for laboratory and office space. The lease has escalating contractual rent and variable rent components and the Company elects to separate the contractual and variable elements for valuing the lease liability and right-to-use asset. The lease does not have any options for extension or expansion of the lease. The Company recorded the following lease costs:
| For the year ended December, 31 | ||||||||
| 2023 | 2022 | |||||||
| Operating leases: | ||||||||
| Operating lease cost | $ | 930,913 | $ | 917,324 | ||||
| Variable lease cost | 637,016 | 545,220 | ||||||
| Total lease cost | $ | 1,567,929 | $ | 1,462,544 | ||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 933,221 | $ | 906,040 | ||||
| Right-of-use assets, net | 2,189,565 | 2,846,041 | ||||||
| Operating lease liabilities, current | 769,092 | 672,374 | ||||||
| Operating lease liabilities, non-current | 1,575,499 | 2,344,590 | ||||||
| Total operating lease liabilities | $ | 2,344,591 | $ | 3,016,964 | ||||
| Weighted-average remaining lease term of operating leases (in years) | 2.75 | 3.75 | ||||||
| Weighted-average discount rate for operating leases | 9.60 | % | 9.60 | % | ||||
11
CERo Therapeutics, Inc.
Notes to Financial Statements
The interest expense related to leases was $260,848 and $320,790 for years ended December 31, 2023 and 2022, respectively.
The following table reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year to the total operating lease liabilities recognized on the balance sheets as of December 31, 2023:
| Year ending December 31: | Operating Leases | |||
| 2024 | 961,218 | |||
| 2025 | 990,055 | |||
| 2026 | 726,394 | |||
| Total lease payments | 2,677,667 | |||
| Less imputed interest | (333,076 | ) | ||
| Total lease liabilities | $ | 2,344,591 | ||
NOTE 7 – CONVERTIBLE PREFERRED STOCK
The Company had 75,120,105 shares of capital stock authorized as of December 31, 2023 and 2022, consisting of 45,350,000 shares of common stock and 29,770,105 shares of convertible preferred stock. All classes of the Company’s stock have a par value of $0.0001. On February 14, 2024, on the close of the business combination (the “Business Combination”), pursuant to the Business Combination Agreement, dated as of June 4, 2023, as amended from time to time (as amended, the “Business Combination Agreement”) by and among the Company, Phoenix Biotech Acquisition Corp. (“PBAX”) and PBCE Merger Sub, Inc. (“Merger Sub”), the outstanding convertible preferred stock converted to CERo Therapeutics Holdings, Inc. (“New CERo”) common stock at a conversion ratio equal to 0.0806 and 0.1757 shares of New CERo common stock, par value $0.0001 per share (“New CERo Common Stock”) for each share of Series Seed convertible preferred stock (“Series Seed Preferred Stock”) and Series A convertible preferred stock (“Series A Preferred Stock”), respectively, resulting in the issuance of 415,498 and 3,999,997 common shares for the Series Seed Preferred Stock and Series A Preferred Stock, respectively (see Note 15).
At December 31, 2023 and 2022, convertible preferred stock consisted of the following:
| Shares authorized | Shares issued and outstanding | Liquidation amount | ||||||||||
| Series Seed | 5,155,703 | 5,155,703 | $ | 4,154,981 | ||||||||
| Series 1 | 100 | - | - | |||||||||
| Series A | 24,614,402 | 22,764,764 | 39,999,967 | |||||||||
| 29,770,205 | 27,920,467 | $ | 44,154,948 | |||||||||
Series 1 Convertible Preferred Stock – The Company issued 100 shares of Series 1 preferred stock (“Series 1 Preferred Stock”) in 2018, which was subsequently converted on November 14, 2019 into 2,845,597 shares of Series A Preferred Stock. There were no shares of Series 1 Preferred Stock outstanding in the years ended December 31, 2023 or 2022.
Series Seed and Series A Preferred Stock – Holders have various rights and preferences as follows:
Voting rights – The holders of convertible preferred stock are entitled to vote on all matters on which the common stockholders are entitled to vote. Holders of convertible preferred stock and common stock vote together as a single class. Each holder of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which the shares held by such holder are convertible.
Dividends – Dividends are payable when and if declared by the board of directors (the “Board of Directors”), and preferred stockholders have preference over common stockholders for the payment of dividends. The holders of Series Seed Preferred Stock and Series A Preferred Stock are entitled to receive, when and if declared by the Board of Directors, noncumulative dividends at a rate of $0.0645 and $0.1406, respectively, per share, per annum, adjustable for certain events, such as stock splits and combinations. No dividends have been declared or paid by the Company to date.
12
CERo Therapeutics, Inc.
Notes to Financial Statements
Liquidation – Upon the occurrence of a liquidation, dissolution, or winding up of the Company, either voluntary or involuntary, the holders of Series A Preferred Stock then outstanding shall be entitled to be paid, out of the available funds and assets, and prior and in preference to any payment or distribution of any such funds on any shares of Series Seed Preferred Stock, and common stock, an amount per share equal to $1.7571, plus all declared but unpaid dividends.
Upon the completion of the distribution described above, the holders of Series Seed Preferred Stock then outstanding shall be entitled to receive, out of the available funds and assets, in preference to any distribution of any of the assets to holders of common stock, an amount equal to the original issue price for such series of convertible preferred stock, $0.8059, plus any declared but unpaid dividends.
Thereafter, any remaining proceeds shall be distributed among the holders of common stock pro rata based on the number of shares held by each such holder.
Conversion – Each share of convertible preferred stock is convertible into common stock: (i) at the option of the holder; (ii) at the closing of an initial public offering of the Company’s common stock at a price not less than $3.5142 per share and having aggregate cash proceeds of not less than $60,000,000; and (iii) at the date specified by written consent or agreement of the holders of at least 60% of the outstanding shares of Series A Preferred Stock, voting together as a single class. The conversion ratio for the conversion in the above scenarios is currently 100%, determined by dividing the original issue price per share by the conversion price per share, which are each $0.8059 for Series Seed Preferred Stock and each $1.7571 for Series A Preferred Stock.
Redemption – Convertible preferred stock is not mandatorily redeemable and is contingently redeemable only on defined liquidation events not solely in the control of the Company and without fixed or determinable dates.
NOTE 8 – CONVERTIBLE PREFERRED STOCK Warrant liability
On November 14, 2019, the Company issued warrants to purchase a total of 1,849,638 shares of Series A Preferred Stock at a price of $1.7571 per share. The warrants are exercisable into shares of Series A Preferred Stock at the discretion of the holder, at any time in the five years after issuance. The warrants were analyzed and determined to be freestanding instruments issued in a transaction including the conversion or sale of Series A Preferred Stock. A warrant to purchase up to 426,839 shares of Series A Preferred Stock was issued in a transaction that included the conversion of 100 shares of Series 1 Preferred Stock into 2,845,597 shares of Series A Preferred Stock. Another warrant to purchase up to 1,422,799 shares of Series A Preferred Stock was issued concurrent with the purchase of 2,845,597 shares of Series A Preferred Stock. These warrants are collectively are referred to as the “preferred stock warrants.” On February 14, 2024, the preferred stock warrants were converted into warrants to purchase up to 324,999 shares of New CERo Common Stock.
The Company initially recorded the warrants at fair value as valued by a third-party appraiser, who estimated fair value using with estimates of the value and volatility of the Company’s Series A Preferred Stock as well as estimation of the risk-free rate. The appraiser subsequently estimated the fair value of the preferred stock warrants at December 31, 2023 and 2022, using Black-Scholes with the following assumptions:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Risk-free interest rate | 5.4 | % | 4.7 | % | ||||
| Expected life (in years) | 0.25 | 1.0 | ||||||
| Expected dividend yield | - | % | - | % | ||||
| Expected volatility | 65.9 | % | 85.0 | % | ||||
At December 31, 2023 and 2022, the preferred stock warrants were exercisable and remained outstanding.
13
CERo Therapeutics, Inc.
Notes to Financial Statements
NOTE 9 – COMMON STOCK
In September 2016, the Company issued 8,500,000 shares of common stock to the founders (“Founder Stock”) in exchange for consideration payable by cash and by transfer of certain technology and related rights owned by the founders. The Founder Stock vested ratably over a four-year period following the date of issuance. As of December 31, 2022, all Founders Stock was fully vested.
The holders of common stock are also entitled to receive dividends whenever funds are legally available, when and if declared by the Board of Directors. As of December 31, 2023, dividends have never been declared.
At December 31, 2023 and 2022, the Company had reserved common stock for future issuance as follows:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Convertible preferred stock, authorized but not yet issued | 1,849,738 | 1,849,738 | ||||||
| Conversion of convertible preferred stock issued and outstanding | 27,920,467 | 27,920,467 | ||||||
| Stock Incentive Plan: | ||||||||
| Awards available for grant | 3,537,004 | 3,205,559 | ||||||
| Outstanding stock options | 782,499 | 1,138,110 | ||||||
| 34,089,708 | 34,113,874 | |||||||
NOTE 10 – STOCK-BASED COMPENSATION
In October 2016, the Company’s Board of Directors approved the adoption of an Equity Incentive Plan (“EIP”). As amended, the EIP permits the Company to grant awards allowing for the issuance of up to 4,888,402 shares of the Company’s common stock.
The EIP provides for the grant of incentive and non-statutory stock options and restricted stock awards to employees, non-employee directors, and consultants of the Company. Stock options and restricted stock awards granted under the EIP generally vest 25% on the first anniversary of the grant, then monthly to the fourth anniversary of the date of grant. All awards expire ten years from the date of grant. Options are exercisable only to the extent vested. The per share purchase price of all restricted stock and the exercise price of all stock options granted under the EIP must be at least equal to 100% of the fair value of the Company’s common stock at the date of grant, as determined by the Board of Directors.
Stock option activity for the years ended December 31, 2023 and 2022, was as follows:
| Outstanding Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life (in years) | ||||||||||
| Balance, December 31, 2022 | 1,138,110 | $ | 0.29 | 8.18 | ||||||||
| Options exercised | (24,166 | ) | $ | 0.24 | ||||||||
| Options cancelled/forfeited/expired | (331,445 | ) | $ | 0.31 | ||||||||
| Balance, December 31, 2023 | 782,499 | $ | 0.27 | 6.86 | ||||||||
| Exercisable | 651,663 | $ | 0.28 | 6.60 | ||||||||
The intrinsic value of options exercised during the years ended December 31, 2023 and 2022 was $9,458 and $35,859, respectively.
14
CERo Therapeutics, Inc.
Notes to Financial Statements
No options were granted in 2023, and the Company estimated the fair value of stock options granted during the year ended December 31, 2022, using Black-Scholes with the following weighted average assumptions:
| 2022 | ||||
| Risk-free interest rate | 2.28 | % | ||
| Expected life (in years) | 8.30 | |||
| Expected dividend yield | 0.0 | % | ||
| Estimated volatility | 71.31 | % | ||
| ● | The common stock expected dividend yield assumption of 0.0% is based on the Company’s history and expectation of no dividend payouts to common stock. |
| ● | The risk-free interest rate assumption is based on the U.S. Department of Treasury instruments whose term was most consistent with the expected life of the Company’s stock options. |
| ● | The expected stock price volatility assumption was determined by examining the historical volatilities for industry peers, as the Company does not have any public trading history for the Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term assumption as more historical data for the Company’s common stock becomes available. |
| ● | The expected lives of stock options are estimated based on the type of award issued using approaches that do not rely on the historical data of the Company, as management has concluded there is insufficient data to provide a reasonable forward-looking estimate. The expected life of an incentive stock option is estimated using the simplified method described in Staff Accounting Bulletin Topic 14 – Share-Based Payment. All incentive stock options awarded by the Company have terms consistent with this approach, which is to calculate the weighted average midpoint between the vesting date of each vesting tranche and the termination date of the option. Non-qualified stock options are valued using the contractual life as the expected term. |
For the year ended December 31, 2023, the Company recorded stock-based compensation expense of $96,896, of which $91,664 was related to R&D and $5,232 was related to general and administrative.
For the year ended December 31, 2022, the Company recorded stock-based compensation expense of $381,070, of which $294,164 was related to R&D and $86,906 was related to general and administrative.
As of December 31, 2023, there was $79,526 of unamortized stock-based compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 1.05 years. No options were granted in 2023, and the weighted average grant date calculated fair value per share of options granted during the year ended December 31, 2022, was $0.50.
NOTE 11 – INCOME TAXES
The components of the net deferred tax assets were approximately as follows as of December 31, 2023 and 2022:
| 2023 | 2022 | |||||||
| Net operating loss carryforwards | $ | 9,067,000 | $ | 5,600,000 | ||||
| Section 174 research and development capitalization | 2,490,000 | 1,807,000 | ||||||
| Research credits | 1,535,000 | 1,364,000 | ||||||
| Fixed assets and intangible assets | 401,000 | 321,000 | ||||||
Right of use asset | (613,000 | ) | (598,000 | ) | ||||
| Lease liability, net | 657,000 | 634,000 | ||||||
| Accruals and others | 66,000 | 42,000 | ||||||
| 13,603,000 | 9,170,000 | |||||||
| Less: valuation allowance | (13,603,000 | ) | (9,170,000 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
15
CERo Therapeutics, Inc.
Notes to Financial Statements
The Company has incurred significant tax losses since inception. Based on the available objective evidence, management cannot conclude it is more likely than not that the net deferred tax assets will be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets. For the years ended December 31, 2023 and 2022, the valuation allowance increased by approximately $4,433,000 and $2,964,000, respectively.
At December 31, 2023, the Company has federal net operating loss carryforwards of approximately $727,000 that begin to expire in 2036. The Company also has federal net operating losses of $28,973,000 that arose after the 2017 tax year that will carry forward indefinitely and the utilization of which is limited to 80% of taxable income for tax years beginning after 2021. The Company has state net operating loss carryforwards of approximately $40,522,000 that will begin to expire in 2036.
Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carry forwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three-year period. The impact of any limitations that may be imposed due to such ownership changes has not been determined.
As of December 31, 2023, the Company has research credit carry forwards of approximately $930,000 and $1,296,000 for federal and state tax purposes, respectively. If not utilized, the federal carryforward will expire in various amounts beginning in 2040. The California credits can be carried forward indefinitely. The Company has not undertaken a detailed analysis of all amounts claimed as research credits for federal or state tax purposes. As a result, amounts ultimately realized for research credits were included in management’s consideration of uncertain tax benefits.
As of December 31, 2023 and 2022, the Company had an unrecognized tax benefit balance of approximately $459,000 and $427,00, respectively, related to R&D credits.
No amount of unrecognized tax benefits as of December 31, 2023 and 2022, if recognized, would reduce the Company’s effective tax rate because the benefits would be in the form of tax credit carryforwards, which would attract a full valuation allowance. There are no provisions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date. Because the statute of limitations does not expire until after the net operating loss and credit carryforwards are actually used, the statutes are still open on calendar years ended 2016 and 2017 forward for federal and state purposes.
The Company did not recognize any expense for interest and penalties related to uncertain tax positions during 2023 and 2022, and the Company does not have any amounts related to interest and penalties accrued at December 31, 2023 and 2022.
The Company files U.S. federal and state tax returns. The Company’s tax years will remain open for examination by the federal and state authorities for three and four years, respectively, from the date of utilization of any net operating loss credit.
A reconciliation of the beginning and ending amount of the liability for uncertain tax positions, excluding potential interest and penalties, is as follows:
| Balance as of December 31, 2022 | $ | 427,000 | ||
| Increase/(decrease) based on current year tax positions | 17,000 | |||
| Increase/(decrease) for prior year tax positions | 15,000 | |||
| Lapses of applicable statutes | - | |||
| Balance as of December 31, 2023 | $ | 459,000 |
16
CERo Therapeutics, Inc.
Notes to Financial Statements
NOTE 12 – COLLABORATIVE AGREEMENTS
The Company entered into a Collaboration and Option Agreement (the “Collaboration Agreement”) dated March 3, 2020. The Collaboration Agreement granted a royalty-free, nonexclusive, worldwide license to share each party’s technologies to create bi-functional T-cells. The Company was responsible for all employee and other internal costs incurred in the performance of all the Company’s R&D activities, with approved cost overruns funded by the collaborative partner. At the end of the research project, the collaborative partner will be granted the option to enter into an exclusive license for the further development of the combined drug. The Company recognizes the allocation of the costs incurred with respect to the jointly conducted activities as a component of the related expense in the period incurred. The Company ensured that the presentation, classification, and disclosure requirements related to the Collaboration Agreement were followed. Costs incurred related to the Collaboration Agreement are included in R&D costs in the statements of operations, and expense reimbursements of approximately $0 and $182,577 were netted against those costs for the years ended December 31, 2023 and 2022, respectively. The Collaboration Agreement was terminated on March 3, 2023.
NOTE 13 – 401(k) RETIREMENT SAVINGS PLAN
The Company sponsors a 401(k) defined contribution plan covering eligible employees who elect to participate. The Company is allowed to make discretionary profit sharing and 401(k) matching contributions as defined in the plan and as approved by the Board of Directors. The Company made $63,344 and $139,804 contributions during 2023 and 2022, respectively.
NOTE 14 – RELATED-PARTY TRANSACTIONS
A founder, investor and board observer, has a family relation with the chief executive officer and the chief financial officer in office in 2022. At December 31, 2023, this individual maintained 16.33% of the outstanding and 14.99% of the fully diluted ownership of the Company. In addition, this individual was under a consulting contract in 2022 to advise on research and clinical strategy as the head of the scientific advisory board, for which the individual was paid $50,000 in the year ending December 31, 2022 and $0 in 2023.
An investor had a working relationship with the Company under the Collaboration Agreement described in Note 11 and was actively collaborating with the Company in the year ended December 31, 2022. At December 31, 2023, this investor maintained 7.69% of the outstanding and 9.89% of the fully diluted ownership of the Company.
NOTE 15 – SUBSEQUENT EVENTS
Business Combination
On February 5, 2024, the Company, PBAX and Merger Sub entered into Amendment No. 1 to the Business Combination Agreement (the “First BCA Amendment”) to, among other things, (i) remove the minimum cash condition, (ii) modify the stock-price based milestones such that (a) the trading price condition for the First Level Earnout Target (as defined in the First BCA Amendment) shall be reset from $12.50 to 125% of the reset Conversion Price (as defined in the First BCA Amendment) of the New CERo Series A Preferred Stock (as defined below) and (b) the trading price condition for the Second Level Earnout Target (as defined in the First BCA Amendment) shall be reset from $15.00 to 150% of the reset Conversion Price of New CERo Series A Preferred Stock, and (iii) increase the aggregate number of shares of PBAX Class A common stock, par value $0.0001 per share (“Class A common stock”), issuable to the stockholders of the Company in connection with the Business Combination from 4,651,704 shares to 5,000,000 shares. Such number of shares is in addition to up to 1,200,000 shares issuable upon satisfaction of certain earn-out conditions and 382,651 shares issuable upon exercise of rollover options or warrants.
17
CERo Therapeutics, Inc.
Notes to Financial Statements
On February 8, 2024, PBAX held a special meeting of stockholders (the “Fourth Special Meeting”). At the Fourth Special Meeting, PBAX’s stockholders adopted and approved (i) the Business Combination Agreement, pursuant to which Merger Sub merged with and into the Company, with the Company surviving as a wholly-owned subsidiary of PBAX and approved the Business Combination and the other transactions and ancillary documents contemplated by and required for the Business Combination; (ii) on a non-binding advisory basis, certain changes to the amended and restated charter of PBAX, including the name change of Phoenix Biotech Acquisition Corp. to CERo Therapeutics Holdings, Inc., share authorizations, and others; (iii) the issuance of Class A common stock to the Company’s stockholders pursuant to the Business Combination Agreement; (iv) the election of five directors; and (v) the 2024 Equity Incentive Plan and the 2024 Employee Stock Purchase Plan (in each case, as defined in the Business Combination Agreement), contingent of the consummation of the Business Combination.
In connection with the approval of the Business Combination, holders of 671,285 shares of Class A common stock, exercised redemption rights. As a result, following satisfaction of such redemptions, PBAX had 5,563,297 shares of Class A common stock outstanding, of which (i) 82,047 were shares of Class A common stock issued to the public in its initial public offering (“IPO”), which shares of Class A common stock were entitled to receive a pro rata portion of the remaining funds in the PBAX trust account in connection with its initial business combination, a liquidation or certain other events, (ii) 4,596,250 were shares of Class A common stock issued upon the conversion of an equal number of shares of PBAX Class B common stock, par value $0.0001 per share (“Class B common stock”), acquired by Phoenix Biotech Sponsor, LLC (the “Sponsor”) prior to its IPO, which shares of Class A common stock did not have redemption rights, and (iii) 885,000 were shares of Class A common stock included in the private placement units acquired in the private placement by the Sponsor and other investors concurrent with the PBAX IPO, which shares of Class A common stock did not have redemption rights. On February 14, 2024, PBAX made a series of payments of an aggregate of $7,456,463.30 to holders of redeemed Class A common stock (an aggregate of $11.11 per redeemed share).
On February 13, 2024, the Company, PBAX and Merger Sub entered into Amendment No. 2 to the Business Combination Agreement to create two additional pools of earnout shares (the “Earnout Shares”) of Class A common stock, one pool of which will contain 875,000 shares, which will be fully vested at closing of the Business Combination and which are being issued as an offset to the agreement by Sponsor to forfeit an offsetting number of shares, and one pool of which will contain 1,000,000 shares, which will be fully vested upon the achievement of certain regulatory milestone-based earnout targets and make certain other technical changes to the timing and process for issuance of the 1,200,000 shares of Class A common stock subject to the other earn-out conditions set forth in the Business Combination Agreement.
The Business Combination closed on February 14, 2024, at which time the following occurred:
1. Each outstanding share of the Company’s convertible preferred stock was converted into the number of shares of Class A common stock calculated by dividing the liquidation preference by $10.00.
2. Each outstanding share of the Company’s common stock was converted into the number of shares of Class A common stock calculated by multiplying each share by the exchange ratio (the “Exchange Ratio”). The Exchange Ratio of 0.064452 was calculated by first subtracting the aggregate liquidation preference of outstanding preferred shares from $50 million, then dividing the result by the number of shares of the Company’s common stock outstanding and dividing by $10.00 per share.
3. Each holder of the Company’s common stock received a pro rata portion of up to 1.2 million Earnout Shares, 1,000,000 of which are subject to vesting upon the achievement of certain stock price-based earnout targets and 200,000 of which are subject to vesting upon a change of control, respectively.
4. Certain holders of the Company’s common stock received a pro rata portion of 875,000 Earnout Shares, which became fully vested upon the closing of the Business Combination.
18
CERo Therapeutics, Inc.
Notes to Financial Statements
5. Certain holders of the Company’s common stock received a pro rata portion of up to 1.0 million Earnout Shares, which are subject to vesting upon the Company’s filing an investigational new drug application with the FDA.
6. Each outstanding Company option was converted into an option to purchase a number of shares of Class A common stock, equal to the Company’s common shares underlying the option multiplied by the Exchange Ratio, at an exercise price per share equal to the Company option exercise price divided by the Exchange Ratio.
7. Each warrant to purchase the Company’s convertible preferred stock was converted into a warrant to acquire a number of shares of Class A common stock obtained by dividing the warrant as-if-exercised liquidation preference by $10.00, with the exercise price equal to the total Company warrant exercise amount divided by the number of shares of Class A common stock issuable upon exercise.
8. The Company’s convertible notes automatically converted into shares of New CERo Series A Preferred Stock, at a conversion price equal to $1,000 per share.
PIPE Financing
In February 2024, New CERo consummated a private placement of 10,039 shares of New CERo Series A Preferred Stock, par value $0.0001 per share (the “New CERo Series A Preferred Stock”), warrants to purchase 612,746 shares of common stock (the “Common Warrants”) and warrants to purchase 2,500 shares of Series A Preferred Stock (the “Preferred Warrants” and, together with the Common Warrants, the “PIPE Warrants”), pursuant to the Amended and Restated Securities Purchase Agreement, dated February 14, 2024, by and among the Company, PBAX and certain accredited investors (the “Initial Investors”) for aggregate cash proceeds to New CERo of approximately $10.0 million. On April 1, 2024, we consummated a private placement of 626 shares of Series B Preferred Stock, pursuant to the Securities Purchase Agreement, dated March 28, 2024, by and among us and certain accredited investors (the “Additional Investors” and, together with the Initial Investors, the “PIPE Investors”), for aggregate cash proceeds to us of approximately $0.5 million. Such private placement is expected to close on or around April 1, 2024. A portion of such Series A Preferred Stock was issued as consideration for the cancellation of outstanding indebtedness or securities of the Company, including a promissory note of PBAX and the Company’s convertible notes. Such transactions collectively are referred to as the “PIPE Financing.”
19
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Phoenix Biotech Acquisition Corp. (“PBAX” and, after the Business Combination (as defined below), “New CERo”) is providing the following unaudited pro forma condensed combined financial information to aid you in your analysis of the financial aspects of the Business Combination and related transactions. The following unaudited pro forma condensed financial information presents the combination of the financial information of PBAX and CERo Therapeutics, Inc. (“CERo”) adjusted to give effect to the Business Combination and related transactions. The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.”
The historical financial information of PBAX was derived from the audited financial statements of PBAX for the year ended December 31, 2023. The historical financial information of CERo was derived from audited financial statements of CERo the for the year ended December 31, 2023. Such unaudited pro forma financial information has been prepared on a basis consistent with the audited financial statements of PBAX and CERo, respectively, and should be read in conjunction with the audited historical financial statements and related notes. This information should be read together with PBAX’s and CERo’s audited financial statements and related notes, the sections titled “PBAX Management’s Discussion and Analysis of Results of Financial Condition and Results of Operations” and “CERo Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included the Annual Report on Form 10-K and elsewhere in this amendment to the report on Form 8-K.
The unaudited pro forma condensed combined balance sheet as of December 31, 2023, combines the historical balance sheet of PBAX and the historical balance sheet of CERo on a pro forma basis as if the Business Combination and the related transactions contemplated by the Business Combination Agreement, summarized below, had been consummated on December 31, 2023. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023 combines the historical statement of operations of PBAX and historical statement of operations of CERo on a pro forma basis as if the Business Combination and the transactions contemplated by the Business Combination Agreement, summarized below, had been consummated on January 1, 2023. There were no pro forma adjustments required to eliminate activities between the companies.
These unaudited pro forma condensed combined financial statements are for informational purposes only. They do not purport to indicate the results that would have been obtained had the Business Combination and related transactions actually been completed on the assumed date or for the period presented, or which may be realized in the future. The pro forma adjustments are based on the information currently available and the assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes. Actual results may differ materially from the assumptions within the accompanying unaudited pro forma condensed combined financial information.
On June 6, 2023, PBAX entered into a Business Combination Agreement and Plan of Reorganization (the “Business Combination Agreement”) with PBCE Merger Sub, Inc. (“Merger Sub”) and CERo, pursuant to which Merger Sub merged with and into CERo, with CERo surviving as a wholly-owned subsidiary of the Company (the “Business Combination”). The Business Combination Agreement was amended on February 5, 2024 and again on February 13, 2024. The Business Combination closed on February 14, 2024, at which time the following occurred:
| 1. | Each outstanding share of CERo’s convertible preferred stock (the “CERo preferred stock”) was converted into the number of shares of PBAX’s Class A common stock, par value $0.0001 per share (the “Class A Common Stock”), calculated by dividing the liquidation preference by $10.00. |
| 2. | Each outstanding share of CERo’s common stock (the “CERo common stock”) was converted into the number of shares of Class A Common Stock calculated by multiplying each share by the exchange ratio (the “Exchange Ratio”). The Exchange Ratio of 0.064452 was calculated by first subtracting the aggregate liquidation preference of outstanding preferred shares from $50 million, then dividing the result by the number of shares of CERo common stock outstanding and dividing by $10.00 per share. |
| 3. | Each holder of CERo common stock received a pro rata portion of up to 1.2 million earnout shares of Class A common stock, 1,000,000 of which are subject to vesting upon the achievement of certain stock price-based earnout targets and 200,000 of which are subject to vesting upon a change of control, respectively. |
| 4. | Certain holders of CERo common stock received a pro rata portion of 875,000 earnout shares of Class A Common Stock, which became fully vested upon the closing of the Business Combination. |
| 5. | Certain holders of the Company’s common stock received a pro rata portion of up to 1.0 million earnout shares of Class A Common Stock, which are subject to vesting upon the Company’s filing an investigational new drug application with the Food and Drug Administration (“FDA”). |
| 6. | Each outstanding option to purchase CERo’s common stock (“CERo option”) was converted into an option to purchase a number of shares of Class A Common Stock, equal to the shares of CERo common stock underlying the option multiplied by the Exchange Ratio, at an exercise price per share equal to the CERo option exercise price divided by the Exchange Ratio. |
| 7. | Each warrant to purchase CERo’s convertible preferred stock (“CERo warrant”) was converted into a warrant to acquire a number of shares of Class A Common Stock obtained by dividing the warrant as-if-exercised liquidation preference by $10.00, with the exercise price equal to the total CERo warrant exercise amount divided by the number of shares of Common Stock issuable upon exercise. |
| 8. | The CERo convertible notes (the “CERo Bridge Notes”) automatically converted into shares of New CERo’s Series A convertible preferred stock, par value $0.0001 per share (“Series A Preferred Stock”), at a conversion price equal to $750 per share. |
New CERo issued, transferred from Phoenix Biotech Sponsor, LLC (the “Sponsor”), or reserved for issuance an aggregate of 8.4 million shares of Class A Common Stock to the holders of CERo common stock and CERo preferred stock or reserved for issuance upon exercise of CERo options or warrants as consideration in the Business Combination. In connection with the Business Combination, PBAX changed its name to “CERo Therapeutics Holdings, Inc.”
The unaudited pro forma condensed combined financial information has been prepared using the assumptions below:
Based on the terms of the earnout shares described above, we have determined that equity treatment is appropriate in accordance with ASC 815-40 and would be accounted for akin to a deemed distribution resulting in a net zero impact to the unaudited pro forma condensed combined statement of operations. We also concluded that there is a very low likelihood of meeting the milestones and determined that any pro forma adjustment would be immaterial to an investor due to the net zero impact within equity.
On June 4, 2023, CERo entered into a bridge financing agreement (the “Bridge Financing”) in anticipation of CERo completing the Business Combination with PBAX pursuant to a definitive Business Combination Agreement. On June 6, 2023, CERo sold the CERo Bridge Notes with an aggregate principal amount of $605,230 to certain eligible participants. The CERo Bridge Notes were automatically converted (principal and accrued interest) upon the Business Combination into an aggregate of 628 shares of Series A Preferred Stock at conversion rate of $1,000 per share, and all of the CERo Bridge Notes were retired.
2
An additional 1,000,000 shares of restricted New CERo common stock, par value $0.0001 per share (“New CERo Common Stock”) were issued to select CERo stockholders and CERo Bridge Note investors and a corresponding 1,000,000 shares of New CERo Common Stock held by the Sponsor have been restricted. Upon the filing of an investigational new drug (“IND”) application with the FDA, the restrictions upon the shares of New CERo Common Stock issued to such CERo stockholders and CERo Bridge Note investors will be removed, and the shares of New CERo Common Stock held by the Sponsor will be retired. Should New CERo fail to file an IND with the FDA, the shares of New CERo Common Stock issued to such CERo stockholders and CERo Bridge Note investors will be retired and the restrictions on the Sponsor’s New CERo Common Stock will be removed.
Of the 2,000,000 shares of New CERo Common Stock held by Sponsor, 250,000 shares were transferred to a key investor, 875,000 shares were distributed to select CERo stockholders and CERo Bridge Note investors as earnout shares, and 875,000 shares being retained by the Sponsor.
New CERo also issued 1,943,550 new shares of New CERo Common Stock in connection with the Business Combination, consisting of (i) 1,649,500 shares issued to select vendors in lieu of cash payment for services provided related to the Business Combination, (ii) 175,000 shares provided to individuals as compensation and (iii) 119,050 shares issued to Keystone Capital Partners, LLC (“Keystone”) as consideration for its entry into the Keystone ELOC (defined below).
Additionally, in February 2024, New CERo consummated a private placement of 10,039 shares of Series A Preferred Stock, warrants to purchase 612,746 shares of New CERo Common Stock (the “Common Warrants”) and warrants to purchase 2,500 shares of Series A Preferred Stock (the “Preferred Warrants” and, together with the Common Warrants, the “PIPE Warrants”), pursuant to the Amended and Restated Securities Purchase Agreement, dated February 14, 2024, by and among PBAX, CERo and certain accredited investors (the “Initial Investors”) for aggregate cash proceeds to New CERo of approximately $8.1 million, plus additional cash proceeds of $2.0 million on the mandatory exercise of the Preferred Warrants on the registration of the underlying common shares. A portion of such Series A Preferred Stock was issued as consideration for the cancellation of outstanding indebtedness or securities of PBAX or CERo, including a promissory note of PBAX and the CERo Bridge Notes. Such transactions collectively are referred to as the “PIPE Financing.”
In addition, New CERo entered into a side letter with Keystone, pursuant to which New CERo agreed to make a payment of $1.0 million to Keystone, which amount reflects an original issue discount to Keystone, and to reimburse $150,000 of legal expenses incurred thereby. In addition, the Sponsor agreed to transfer an aggregate of 250,000 shares of Class A Common Stock to another investor as consideration for their participation in the PIPE Financing.
On February 14, 2024, as a condition to the closing of the PIPE Financing, New CERo entered into a common stock purchase agreement (the “Common Stock Purchase Agreement”) with Keystone, pursuant to which New CERo may sell and issue, and Keystone is obligated to purchase, up to the lesser of $25 million of New CERo Common Stock or a limit determined by maximum ownership percentages (the “Keystone ELOC”). On February 23, 2024, New CERo entered into a purchase agreement (the “Purchase Agreement”) with Arena, pursuant to which New CERo may sell and issue, and Arena is obligated to purchase, up to $25 million of New CERo Common Stock or a limit determined by maximum ownership percentages (the “Arena ELOC”). Each of the Keystone ELOC and Arena ELOC is in place, but there was no accounting impact on the date of the transaction.
3
The following summarizes the pro forma ownership of New CERo Common Stock following the Business Combination
| Shares | % | |||||||
| Public shares(1) | 82,047 | 0.6 | % | |||||
| Common shares issued to CERo stockholders(2) | 8,075,000 | 54.8 | % | |||||
| Non-Sponsor held private shares(3) | 2,378,554 | 23.0 | % | |||||
| Shares held by Sponsor | 4,171,246 | 21.6 | % | |||||
| Shares outstanding | 14,706,847 | 100.0 | % | |||||
| 1. | Excludes CERo warrants, which were converted into warrants to purchase approximately 325,000 shares of New CERo Common Stock. |
| 2. | Excludes 750,000 options granted under CERo’s 2016 Equity Incentive Plan, which were converted into options to purchase 48,399 shares of Class A common stock. |
| 3. | Excludes PBAX’s Public Warrants, Private Placement Warrants, and PIPE Warrants exercisable in the aggregate for 9,805,246 shares of common stock. Also excludes 1,203,500 shares of common stock underlying the conversion of 10,039 shares of Series A Preferred Stock and 626 shares of Series B Preferred Stock and the exercise and conversion of 2,500 Preferred Warrants. |
The Business Combination is being accounted for using the asset acquisition method in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Under this method of accounting, we have determined that PBAX is the accounting acquirer as PBAX is (i) the entity issuing its own shares to consummate the Business Combination, (ii) the senior management team will primarily be comprised of PBAX’s existing management team, and (iii) PBAX’s assets are were significantly larger than CERo’s, based on the terms of the Business Combination Agreement. The merger is being accounted for as an asset acquisition as substantially all of the fair value is concentrated within in-process research and development (“IPR&D”), an intangible asset. CERo’s assets (except for cash) and liabilities will be measured and recognized as an allocation of the transaction price based on their relative fair values as of the transaction date with any value associated with IPR&D with no alternative future use being expensed.
4
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF December 31, 2023
Phoenix Biotech Acquisition Corp. and CERo Therapeutics, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
(In thousands)
As of December 31, 2023
| As
of December 31, 2023 | ||||||||||||||||
| Phoenix
Biotech Acquisition Corp. (Historical) | CERo
Therapeutics, Inc. (Historical) | Transaction
Accounting Adjustments) | As
of December 31, 2023 Pro Forma Combined | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash, restricted cash, and cash equivalents | $ | 96,873 | $ | 1,601,255 | $ 911,357 | B | $ | 8,960,705 | ||||||||
| (984,914 | )F | |||||||||||||||
| (250,000 | )H | |||||||||||||||
| 7,586,134 | J | |||||||||||||||
| Prepaid expenses and other current assets | 27,426 | 368,780 | — | 396,206 | ||||||||||||
| Series A Preferred warrant assets | 2,000,000 | K | 2,000,000 | |||||||||||||
| Money market funds held in Trust Account | 8,436,311 | — | (7,524,954 | )A | — | |||||||||||
| (911,357 | )B | |||||||||||||||
| Total current assets | 8,560,610 | 1,970,035 | 826,266 | 11,356,911 | ||||||||||||
| Non-current assets: | ||||||||||||||||
| Equipment, net | — | 966,702 | — | 966,702 | ||||||||||||
| Operating lease right-of-use assets | — | 2,189,565 | — | 2,189,565 | ||||||||||||
| Total non-current assets | — | 3,156,267 | — | 3,156,267 | ||||||||||||
| TOTAL ASSETS | 8, 560,610 | 5,126,302 | 826,266 | 14,513,178 | ||||||||||||
| LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
| Accounts payable | 3,535,084 | 1,671,745 | (116,065 | )F | 5,090,764 | |||||||||||
| Accrued liabilities | — | 144,633 | (27,636 | )C | 116,997 | |||||||||||
| Common stock subscription deposit | — | 1,875 | — | 1,875 | ||||||||||||
| Operating lease liability | — | 769,092 | — | 769,092 | ||||||||||||
| Short-term notes payable, net | — | 599,692 | (599,692 | )C | — | |||||||||||
| Income tax payable | 23,633 | — | — | 23,633 | ||||||||||||
| Working capital loan – related party | 1,555,000 | — | (1,555,000 | )G | — | |||||||||||
| Excise tax payable | 56,389 | — | — | 56,389 | ||||||||||||
| Due to affiliate | 3,315 | — | — | 3,315 | ||||||||||||
| Preferred stock warrant liability | — | 320,117 | — | 320,117 | ||||||||||||
| Earn-out liability | — | — | 10,780,000 | F | 10,780,000 | |||||||||||
| Total current liabilities | 5,173,421 | 3,507,154 | 8,481,607 | 17,162,182 | ||||||||||||
| Non-current liabilities: | ||||||||||||||||
| Operating lease liability, net of current portion | — | 1,575,499 | — | 1,575,499 | ||||||||||||
| Derivative liabilities in New CERo Series A Preferred Stock | — | — | 2,096 | C | 2,096,709 | |||||||||||
| — | — | 51,502 | G | |||||||||||||
| — | — | 2,043,111 | J | |||||||||||||
| Deferred underwriting fee | 9,150,000 | — | (5,570,000 | )H | 3,580,000 | |||||||||||
| Total non-current liabilities | 9,150,000 | 1,575,499 | (3,473,291 | ) | 7,252,208 | |||||||||||
| Total liabilities | 14,323,421 | 5,082,653 | 5,008,316 | 24,414,390 | ||||||||||||
| Common stock subject to possible redemption | 8,436,311 | — | (8,436,311 | )A | — | |||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||||
| Convertible preferred stock: | ||||||||||||||||
| Series Seed | — | 4,077,560 | (4,077,560 | )E | — | |||||||||||
| Series A | — | 38,023,784 | (38,023,784 | )E | — | |||||||||||
| New CERo Series A Preferred Stock | — | — | 630,770 | C | 7,677,291 | |||||||||||
| 1,503,498 | G | |||||||||||||||
| 5,543,023 | J | |||||||||||||||
| Total convertible preferred stock | — | 42,101,344 | (34,424,053 | ) | 7,677,291 | |||||||||||
| Stockholders’ deficit: | ||||||||||||||||
| Common stock | — | 907 | (907 | )D | — | |||||||||||
| Class A Common Stock | 547 | — | 82 | B | 1,530 | |||||||||||
| 806 | E | |||||||||||||||
| 61 | F | |||||||||||||||
| 20 | H | |||||||||||||||
| 12 | K | |||||||||||||||
| Additional paid-in capital | — | 1,031,219 | (7,524,954 | )A | 42,321,785 | |||||||||||
| 8,436,229 | B | |||||||||||||||
| (43,088,914 | )D | |||||||||||||||
| 87,819,313 | E | |||||||||||||||
| (10,780,000 | )F | |||||||||||||||
| 2,961,989 | G | |||||||||||||||
| 980,000 | I | |||||||||||||||
| 2,000,000 | K | |||||||||||||||
| 486,903 | L | |||||||||||||||
| Retained deficit | (14,199,669 | ) | (43,089,821 | ) | (5,538 | )D | (59,901,818 | ) | ||||||||
| 43,089,821 | D | |||||||||||||||
| (45,718,778 | )E | |||||||||||||||
| (3,830,899 | )G | |||||||||||||||
| 4,339,980 | I | |||||||||||||||
| (486,915 | )L | |||||||||||||||
| Total stockholders’ deficit | (14,199,122 | ) | (42,057,695 | ) | 38,678,314 | (17,578,503 | ) | |||||||||
| TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT | $ | 8,560,610 | $ | 5,126,302 | $ | 826,266 | $ | 14,513,178 | ||||||||
5
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2023
Phoenix Biotech Acquisition Corp. and CERo Therapeutics, Inc.
Unaudited Pro Forma Condensed Combined Detailed Adjusted Statement of Operations
For the Year Ended December 31, 2023
| For
the Year Ended December 31, 2023 | For the | |||||||||||||||
| Phoenix Biotech Acquisition Corp. (Historical) | CERo
Therapeutics, Inc. (Historical) | Transaction
Accounting Adjustments | Year
Ended December, 2023 Pro Forma Combined | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | — | $ | 5,288,580 | $ | — | $ | 5,288,580 | ||||||||
| General and administrative | 2,892,935 | 2,386,469 | 3,830,899 | AA | 9,597,218 | |||||||||||
| 486,915 | BB | |||||||||||||||
| Franchise tax | 40,050 | — | — | 40,050 | ||||||||||||
| Total operating expenses | 2,932,985 | 7,675,049 | 4,317,814 | 14,925,848 | ||||||||||||
| Loss from operations | (2,932,985 | ) | (7,675,049 | ) | (4,317,814 | ) | (14,925,848 | ) | ||||||||
| Other income: | ||||||||||||||||
| Interest and other income, net | 491,571 | 385,472 | (5,538 | )DD | 871,505 | |||||||||||
| Gain on settlement of deferred underwriting fees | — | — | 4,339,980 | CC | 4,339,980 | |||||||||||
| Expense of acquired in-process research and development | (45,101,193 | )EE | (45,101,193 | ) | ||||||||||||
| Total other income | 491,571 | 385,472 | (40,766,750 | ) | (39,889,708 | ) | ||||||||||
| Net loss before income taxes | (2,441,414 | ) | (7,289,577 | ) | (45,084,565 | ) | (54,815,556 | ) | ||||||||
| Income tax expense | (94,819 | ) | — | — | (94,819 | ) | ||||||||||
| Net loss attributable to common shareholders | $ | (2,536,233 | ) | $ | (7,289,577 | ) | $ | (45,084,564 | ) | $ | (54,910,374 | ) | ||||
| Net loss per share (Note 4) | ||||||||||||||||
| Basic and diluted weighted average shares outstanding, Class A Common Stock | 4,224,247 | 9,058,025 | 14,706,847 | |||||||||||||
| Basic and diluted net loss per share | $ | (0.39 | ) | $ | (0.80 | ) | $ | (3.73 | ) | |||||||
| Basic and diluted weighted average shares outstanding, Class B Common Stock | 2,304,421 | N/A | N/A | |||||||||||||
| Basic and diluted net loss per share | $ | (0.39 | ) | N/A | N/A | |||||||||||
6
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Note 1. Basis of Presentation
The Business Combination is being accounted for as an asset acquisition in accordance with U.S. GAAP. Under this method of accounting, PBAX will be treated as the “accounting acquirer” and CERo as the “accounting acquiree” for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination is being accounted for as an asset acquisition as substantially all of the fair value is concentrated in IPR&D, an intangible asset. CERo’s assets (except for cash) and liabilities will be measured and recognized as an allocation of the transaction price based on their relative fair values as of the transaction date with any value associated with IPR&D with no alternative future use being expensed. The fair value measurements utilize estimates based on key assumptions of the Business Combination, including historical and current market data.
The unaudited pro forma adjustments included herein are preliminary and will be adjusted as additional information becomes available and as additional analyses are performed. The final purchase price allocation will be determined subsequent to the Merger, and the final amounts of the assets acquired, and liabilities assumed may differ materially from the values recorded in the pro forma financial information.
The unaudited pro forma condensed combined balance sheet as of December 31, 2023, gives effect to the Business Combination and related transactions as if they had been completed on December 31, 2023. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023, gives effect to the Business Combination and related transactions as if they had been completed on January 1, 2023. These periods are presented on the basis that PBAX is the acquirer for accounting purposes.
The pro forma adjustments reflecting the consummation of the Business Combination and the related transaction are based on certain currently available information and certain assumptions and methodologies that PBAX management believes are reasonable under the circumstances. The unaudited condensed combined pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments, and it is possible that the differences may be material. PBAX management believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination and the related transactions based on information available to management at this time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings, or cost savings that may be associated with the Business Combination. The unaudited pro forma condensed combined financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the Business Combination and related transactions taken place on the dates indicated, nor are they indicative of the future results of operations or financial position of the post-combination company. They should be read in conjunction with the historical financial statements and notes thereto of PBAX and CERo.
Note 2. Accounting Policies and Reclassifications
After consummation of the Business Combination, management will perform a comprehensive review of the two entities’ accounting policies. As a result of the review, management may identify differences between the accounting policies of the two entities which, when conformed, could have a material impact on the financial statements of the post-combination company. Based on its initial analysis, management did not identify any differences that would have a material impact on the unaudited pro forma condensed combined financial information. As a result, the unaudited pro forma condensed combined financial information does not assume any differences in accounting policies.
7
Note 3. Preliminary Purchase Price
The accompanying unaudited pro forma condensed combined financial statements reflect an estimated preliminary purchase price of approximately $45,718,778 comprised of equity consideration of approximately $39,567,500, and PBAX estimated transaction costs of $6,151,278.
The table below represents the total estimated preliminary purchase price:
| Total shares transferred (CERo Shareholders on a fully- diluted basis exclusive of Preferred Shareholders) | 584,505 | |||
| Value per share(1) | $ | 4.90 | ||
| $ | 2,864,074 | |||
| Conversion Convertible Preferred Shares into Class A Common Shares | ||||
| Series seed liquidation value | 415,498 | |||
| Series A liquidation amount | 3,999,997 | |||
| 4,415,495 | ||||
| Value per share(1) | $ | 4.90 | ||
| $ | 21,635,926 | |||
| Reallocation Shares | ||||
| Reallocation shares | 875,000 | |||
| Value per share(1) | $ | 4.90 | ||
| $ | 4,287,500 | |||
| Additional earnout and reallocation shares | ||||
| Price and M&A earnout | 1,200,000 | |||
| IND filing earnout | 1,000,000 | |||
| 2,200,000 | ||||
| Value per share(1) | $ | 4.90 | ||
| $ | 10,780,000 | |||
| Total Share Consideration | $ | 39,567,500 | ||
| Transaction costs | $ | 6,151,278 | ||
| Total purchase consideration | $ | 45,718,778 |
| (1) | Share consideration is calculated using a $4.90 reference price, which was the February 15, 2024 closing price of CERo Therapeutics Holdings, Inc. on the first full day of trading. |
For purposes of this pro forma analysis, the above estimated purchase price has been allocated based on the relative fair value of the preliminary estimate of the fair value of assets and liabilities to be acquired:
| Preliminary Purchase Price Allocation: | ||||
| In-process research and development | 45,101,193 | |||
| Long-term assets | 3,156,267 | |||
| Net working capital (Excluding cash) | (2,538,682 | ) | ||
| Net assets acquired | $ | 45,718,778 | ||
8
The guidance in ASC 805 requires an initial screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set is not a business. The initial screen test was met as PBAX determined that substantially all of the fair value was concentrated in the acquired IPR&D. The fair value of the IPR&D was determined to be approximately $61 million before the purchase price was allocated among the assets and liabilities acquired, as shown above.
IPR&D represents the R&D assets of CERo which were in-process, but not yet completed, and which PBAX has the opportunity to advance. Current accounting standards require that the fair value of IPR&D projects acquired in an asset acquisition with no alternative future use be allocated a portion of the consideration transferred and charged to expense at the acquisition date.
Note 4. Adjustments to Unaudited Pro Forma Condensed Combined Financial Information
The unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the Business Combination and related transactions and has been prepared for informational purposes only.
The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.” Release No. 33-10786 replaces the existing pro forma adjustment criteria with simplified requirements to depict the accounting for the transaction (“Transaction Accounting Adjustments”) and present the reasonably estimable synergies and other transaction effects that have occurred or are reasonably expected to occur (“Management’s Adjustments”). The pro forma adjustments reflecting the consummation of the Business Combination and related transactions are based on certain currently available information and certain estimates, assumptions and methodologies that management believes are reasonable under the circumstances. The unaudited condensed combined pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. PBAX has elected not to present Management’s Adjustments and will only be presenting Transaction Accounting Adjustments in the unaudited pro forma condensed combined financial information. There were no pro forma adjustments required to eliminate activities between the companies.
The unaudited pro forma condensed combined financial information does not include an income tax adjustment. Upon closing of the Business Combination, it is likely that the combined company will record a valuation allowance against the total U.S. and state deferred tax assets as the recoverability of the tax assets is uncertain. The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had the combined company filed consolidated income tax returns during the period presented.
The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined statement of operations are based upon the number of shares of New CERo Common Stock outstanding, assuming the Business Combination and related transactions occurred on the beginning of the earliest period presented.
Adjustments to Unaudited Pro Forma Condensed Consolidated Combined Balance Sheet:
The adjustments included in the unaudited pro forma condensed combined balance sheet as of December 31, 2023 are as follows:
| A. | Reflects the redemption of 671,285 PBAX shares for $7,524,954, reflecting a redemption price of $11.11 per share. |
| B. | Reflects the reclassification of PBAX’s remaining 82,047 shares from redeemable to permanent equity and reclassification of the remaining $911,357 from the restricted cash held in trust to cash. |
| C. | Reflects the automatic conversion of $605,230 of principal and $27,636 of accrued interest into 631 New CERo Series A Preferred Shares based on the final terms of the Bridge Financing. This adjustment includes a $5,538 adjustment to retained earnings to reflect the amortization of the remaining debt discount and $2,096 of derivative liabilities associated with the Preferred A conversion features. |
| D. | Reflects the elimination of CERo’s outstanding equity, exclusive of its preferred shares which is adjusted in (E), comprised of 9,068,899 shares of common stock, par value of $0.0001, accumulated deficit of $43,089,821, and a $43,088,914 decrease in additional paid-in capital. |
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| E. | Reflects the Merger Consideration (as defined in the Business Combination Agreement), including the estimated fair value of shares of PBAX Class A Common Stock to existing CERo common stock shareholders, estimated fair value of 4,415,494 shares of PBAX Class A Common stock to existing convertible preferred shareholders (Note 3), estimated fair value of 875,000 shares of PBAX Class A Common stock to existing shareholders for reallocation shares, estimated fair value of 2,200,000 shares of PBAX Class A Common stock to existing shareholders for earnout and reallocation shares, and estimated transaction costs. Also reflects the elimination of CERo’s Series Seed and Series A Preferred shares at $4,077,560 and $38,023,784, respectively, an increase in additional paid-in capital of $87,819,313, as well as the adjustment to accumulated deficit for the acquired IPR&D as follows: |
| December 31, 2023 | ||||
| Expensed IPR&D acquired (DD) | 45,101,193 | |||
| Long-term assets | 3,156,267 | |||
| Net working capital (exclusive of cash and cash equivalents) | (2,538,682 | ) | ||
| Total adjustments to accumulated deficit | $ | 45,718,778 | ||
| F. | Reclassification of the estimated fair value of the 2,200,000 earn-out shares from equity to short term liability as the shares are restricted until the trigger events occur. The Company estimates that the trigger events are likely to occur within the year 2024. |
| G. | Represents CERo’s estimated transaction costs of $7.6 million, inclusive of advisory, banking, legal and other professional fees that are expensed as a part of the Business Combination, $3.8 million of which has already been reflected within the historical financial statements of CERo and $1.5 million of which has already been paid. PBAX recorded an additional $3.8 million additional fees related to the transaction. PBAX negotiated fee modification agreements with vendors resulting in a gain on settlement of expenses of $1.3 million and payment in equity with a fair value of $3.0 million. PBAX paid $1.2 million in cash and has deferred the remaining amounts owed. |
| H. | Repayment of PBAX working capital loan — related party. The working capital loan was converted into shares of Series A Preferred Stock at a price of $10.00 per share, resulting in an additional issuance of 1,555 New CERo Common Stock. |
| I. | Represents the settlement of PBAX’s deferred underwriting fees related to its initial public offering, resulting in a reduction of $5,570,000 of deferred underwriting fees owed in exchange for a $250,000 cash payment, issuance of 200,000 shares of New CERo Common Stock and further deferral of $2.5 million. This resulted in a gain on the settlement of deferred underwriting fees and associated reduction in retained deficit of $4.3 million. |
| J. | In February 2024, New CERo consummated a private placement of 10,039 shares of New CERo Series A Preferred Stock, par value $0.0001 per share (the “New CERo Series A Preferred Stock”), warrants to purchase 612,746 shares of common stock (the “Common Warrants”) and warrants to purchase 2,500 shares of Series A Preferred Stock (the “Preferred Warrants” and, together with the Common Warrants, the “PIPE Warrants”), pursuant to the Amended and Restated Securities Purchase Agreement, dated February 14, 2024, by and among the Company, PBAX and certain accredited investors (the “Initial Investors”) for aggregate cash proceeds to New CERo of approximately $10.0 million. A portion of such Series A Preferred Stock was issued as consideration for the cancellation of outstanding indebtedness or securities of the Company, including a promissory note of PBAX and the Company’s convertible notes. . Certain conversion features with an estimated fair value of $315,799 and warrants to purchase 612,746 common shares for $9.20 per share granted to certain investors with a preliminary estimated fair value of $1,727,312 are presented as derivative liabilities. Net cash proceeds was $7.6 million for purchased shares and warrants, which resulted in $2.1 million being recorded as a warrant liability and $5.5 million recorded as Series A Preferred stock. |
| K. | As part of the PIPE Financing, New CERo sold 2,500 Preferred Warrants to certain investors for an aggregate of $2.0 million. Once the underlying shares of common stock are registered, such investors must exercise such Preferred Warrants upon written notice of New CERo. |
| L. | As consideration for the establishment of an Equity Line of Credit to sell up to the lesser of 2,977,070 shares of newly issued shares of Common Stock and (ii) the Exchange Cap of 19.99% ownership of the outstanding common stock of the Company, unless shareholders approve a higher quantity, New CERo issued 119,050 common shares with a value of $486,915 on February 15, 2024, the first full day of trading of the combined entity. Another $250,000 of shares of Common Stock will be issued at 90 and 180 days after the effectiveness of a registration statement filed by New CERo to register such shares. |
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Adjustments to Unaudited Pro Forma Condensed Combined Statement of Operations
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2023, are as follows:
| AA. | Reflects CERo’s and PBAX’s additional $3.8 million of transaction costs incurred after December 31, 2023. | |
| BB. | Reflects the recognition of expense associated with the fair value of the 119,050 shares of common stock paid in association with the arrangement of the $25 million ELOC. | |
| CC. | Reflects the $4.3 million gain on settlement of transaction expenses and deferred underwriting fees. | |
| DD. |
Reflects the amortization of the remaining debt discount related to the CERo bridge notes. | |
| EE. | Reflects the expensing of the $45.1 million of acquired CERo in-process research and development |
Note 5. Net Loss per Share
Net loss per share was calculated using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination and the related transactions, assuming the shares were outstanding since January 1, 2023. As the Business Combination and the related transactions are being reflected as if they had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes that the shares issuable relating to the Business Combination and related have been outstanding for the entirety of the period presented.
The following has been prepared to present the net loss per share at the time of the Business Combination for the year ended December 31, 2023:
| Pro forma net loss | $ | (54,910,374 | ) | |
| Weighted average shares outstanding – basic and diluted | 14,706,847 | |||
| Net loss per share – basic and diluted | $ | (3.73 | ) | |
| Excluded securities | ||||
| SPAC Private Placement Warrants | 442,500 | |||
| SPAC Public Warrants | 8,750,000 | |||
| Investor warrants | 612,746 | |||
| CERo Warrants | 324,999 | |||
| CERo Options | 48,339 | |||
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Exhibit 99.3
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CERO Therapeutics, Inc.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information which Cero Therapeutics, Inc. (“CERo” or the “Company”) management believes is relevant to an assessment and understanding of its results of operations and financial condition. The discussion should be read together with CERo’s financial statements and related notes that are included elsewhere in this Form 8-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements resulting from various factors. Please see “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” in the proxy statement/prospectus, dated January 22, 2024 (the “Proxy Statement/Prospectus”), and filed with the Securities and Exchange Commission (the “SEC”). Unless the context otherwise requires, references in this section to “CERo” and the “Company” are intended to mean the business and operations of CERo Therapeutics, Inc. prior to the consummation of the Business Combination.
Overview
CERo was incorporated in Delaware on September 23, 2016, and is based in South San Francisco, California. The Company is focused on genetically engineering human immune cells to fight cancer. Since inception, the Company has focused on developing its therapeutic platform and has not yet begun clinical development or product commercialization. Future efforts will focus on continued product development, including clinical development, to support regulatory approval to commercialize and subsequent product commercialization.
Since inception, CERo has had significant operating losses. CERo’s net loss was $7.3 million for the year ended December 31, 2023. As of December 31, 2023, the Company had an accumulated deficit of $43.1 million and had $1.6 million in cash, restricted cash, and cash equivalents. The Company expects to continue to incur net losses for the foreseeable future, and that research and development (“R&D”) expenses and general and administrative expenses will continue to increase.
Recent Developments
Business Combination
On February 5, 2024, CERo, PBAX and PBCE Merger Sub, Inc. (“Merger Sub”) entered into Amendment No. 1 to the Business Combination Agreement (the “First BCA Amendment”) to, among other things, (i) remove the minimum cash condition, (ii) modify the stock-price based milestones such that (a) the trading price condition for the First Level Earnout Target (as defined in the First BCA Amendment) shall be reset from $12.50 to 125% of the Conversion Price (as defined in the First BCA Amendment) of the Series A convertible preferred stock, par value $0.0001 per share (“Series A Preferred Stock”) upon the reset of such Conversion Price as described below and (b) the trading price condition for the Second Level Earnout Target (as defined in the First BCA Amendment) shall be reset from $15.00 to 150% of the Conversion Price of the Series A Preferred Stock upon reset of such Conversion Price as described below, and (iii) increase the aggregate number of shares of Class A common stock, par value $0.0001 per share (“Class A common stock”) issuable to the stockholders of CERo in connection with Merger Sub merging with and into CERo, with CERo surviving as a wholly-owned subsidiary of PBAX (the “Business Combination”) from 4,651,704 shares to 5,000,000 shares. Such number of shares is in addition to up to 1,200,000 shares issuable upon satisfaction of certain earn-out conditions and 382,651 shares issuable upon exercise of rollover options or warrants.
On February 13, 2024, CERo, PBAX and Merger Sub entered into Amendment No. 2 to the Business Combination Agreement to create two additional pools of earnout shares (the “Earnout Shares”) of Class A common stock, one pool of which will contain 875,000 shares, which will be fully vested at Closing of the Business Combination and which are being issued as an offset to the agreement by Phoenix Biotech Sponsor, LLC to forfeit an offsetting number of shares, and one pool of which will contain 1,000,000 shares, which will be fully vested upon the achievement of certain regulatory milestone-based earnout targets and make certain other technical changes to the timing and process for issuance of the 1,200,000 shares of Class A common stock subject to the other earn-out conditions set forth in the Business Combination Agreement.
On February 14, 2024, the Business Combination between CERo and PBAX was consummated pursuant to the Business Combination Agreement, dated as of June 4, 2023, as amended from time to time (as amended, the “Business Combination Agreement”) by and among CERo, PBAX and Merger Sub. In connection with the consummation of the Business Combination, PBAX changed its corporate name to “CERo Therapeutics Holdings, Inc.” (“New CERo”).
At the effective time of the Business Combination, (i) each outstanding share of CERo common stock, (the “CERo common stock”), was cancelled and converted into the right to receive shares of common stock of PBAX; (ii) each outstanding option to purchase CERo common stock was converted into an option to purchase shares of common stock, par value $0.0001 per share (“Common Stock”); (iii) each outstanding share of CERo preferred stock, was converted into the right to receive shares of Common Stock, and (iv) each outstanding warrant to purchase CERo preferred stock (the “CERo warrants”) was converted into a warrant to acquire shares of Common Stock. In addition, each outstanding CERo convertible bridge note was exchanged for shares of Series A Preferred Stock.
In addition, the holders of CERo common stock and CERo preferred stock have the contingent right to receive the Earnout Shares. At the closing of the Business Combination (the “Closing”), PBAX issued three pools of shares subject to forfeiture if the applicable conditions to transferability thereof are not satisfied: (i) 1,200,000 shares of Common Stock, which will be fully vested upon the achievement of certain adjusted stock price-based earnout targets or upon a qualifying transaction (ii) 875,000 shares of Common Stock, pursuant to a Letter Agreement, dated as of February 14, 2024 (the “Sponsor Share Forfeiture Agreement”) which were fully vested at Closing of the Business Combination and which were issued as an offset to the Sponsor Share Forfeiture Agreement, and (iii) 1,000,000 shares of Common Stock, which will be fully vested upon to achievement of certain regulatory milestone-based earnout targets.
As consideration for the Business Combination, PBAX issued to CERo stockholders an aggregate of 7,597,638 shares of Common Stock, including 2,200,000 Earnout Shares and 382,651 shares issuable upon exercise of rollover options or warrants.
PIPE Financing
In February 2024, New CERo consummated the first tranche of a private placement of 10,039 shares of Series A Preferred Stock, of New CERo, warrants to purchase 612,746 shares of Common Stock (the “Common Warrants”) and warrants to purchase 2,500 shares of Series A Preferred Stock, pursuant to the Amended and Restated Securities Purchase Agreement, dated February 14, 2024, by and among CERo, PBAX and certain accredited investors for aggregate cash proceeds to New CERo of approximately $10.0 million. On April 1, 2024, we consummated a private placement of 626 shares of Series B Preferred Stock, pursuant to the Securities Purchase Agreement, dated March 28, 2024, by and among us and certain accredited investors (the “Additional Investors” and, together with the Initial Investors, the “PIPE Investors”), for aggregate cash proceeds to us of approximately $0.5 million. A portion of such Series A Preferred Stock was issued as consideration for the cancellation of outstanding indebtedness or securities of the Company or PBAX, including a promissory note of PBAX and certain convertible bridge notes of CERo. Such transactions collectively are referred to as the “PIPE Financing.”
Factors Affecting Our Performance
CERo believes that its performance and future success depend on several factors that present significant opportunities for CERo but also pose risks and challenges. These include, among others:
| ● | the extent to which the Company develops, in-licenses or acquires other product candidates and technologies in its product candidate pipeline; |
| ● | the costs and timing of process development and manufacturing scale-up activities associated with the Company’s product candidates and other programs as CERo advances them through preclinical and clinical development; |
| ● | the number and development requirements of product candidates that the Company may pursue; |
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| ● | the costs, timing and outcome of regulatory review of CERo’s product candidates; |
| ● | CERo’s headcount growth and associated costs as it expands its R&D capabilities, establishes and maintains the administrative functions required for a publicly traded company, and establishes and expands its commercial infrastructure and operations; |
| ● | the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of the Company’s product candidates for which CERo receives market approval; |
| ● | the revenue, if any, received from commercial sales of CERo’s product candidates for which it receives marketing approval; |
| ● | competition from other similar product candidates; and |
For additional information on the risks associated with future results of operations, please see “Risk Factors — Risks Related to our Business and Industry,” “— Risks Related to CERo’s Reliance on Third-Parties,” “— Risks Related to Government and Regulation” and “— Risks Related to Intellectual Property” our annual report on Form 10-K for the period ended December 31, 2023.
Components of Results of Operations
Revenue
CERo has not recognized any revenue from any sources, including from product sales, and does not expect to generate any revenue from the sale of products in the foreseeable future. If the development efforts for the Company’s product candidates, each of which is a specific product and indication combination, are successful and result in regulatory approval, or if CERo executes license agreements with third parties, the Company may generate revenue from R&D services, from the achievement of development milestones or from milestones and royalties related to product sales. However, there can be no assurance as to when any revenues will be generated, if at all.
Operating Expenses
Research and Development Expenses
R&D expenses consist of discovery activities, manufacturing development and production, preclinical and clinical development, and regulatory filing for product candidates. R&D expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in R&D are capitalized until the goods or services are received. Costs incurred in obtaining technology licenses through asset acquisitions, if incurred, will be charged to R&D expense if the licensed technology has not reached technological feasibility and has no alternative future use. R&D expenses include or could include:
| ● | employee-related expenses, including salaries, bonuses, benefits, stock-based compensation and other related costs for those employees involved in R&D efforts; |
| ● | external R&D expenses incurred under agreements with pre-clinical research organizations, clinical research organizations, investigative sites, centralized clinical laboratories, and consultants to conduct preclinical and clinical studies; |
| ● | costs related to manufacturing material for preclinical studies and clinical trials, including fees paid to contract development and manufacturing organizations; |
| ● | product-liability insurance for clinical development product(s); |
| ● | laboratory supplies and research materials; |
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| ● | software and systems related to R&D activities; |
| ● | costs related to regulatory filing and compliance; and |
| ● | facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, and equipment. |
Product candidates in later stages of development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. The Company plans to substantially increase its R&D expenses for the foreseeable future as it continues the development of its product candidates through clinical development. CERo cannot determine with certainty the timing of initiation, the duration or the costs of current or future preclinical studies and clinical trials required for regulatory approval due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. CERo anticipates that it will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and ongoing assessments as to each product candidate’s commercial potential. CERo will need to raise substantial additional capital in the future. Future R&D expenses may vary significantly between periods and from current expectations based on factors such as:
| ● | expenses incurred to conduct preclinical studies required to advance product candidates into clinical trials; |
| ● | per patient clinical trial costs based on a number of factors, including number of patient clinical visits, clinical laboratory testing, and potential medical imaging; |
| ● | the number of clinical trials required for approval, the number of patients who enroll in each clinical trial, and the number and geographic locations of sites included in the clinical trials; |
| ● | the length of time required to screen and enroll eligible patients, screen-failure rate, or the discontinuation rates of enrolled patients; |
| ● | potential additional safety monitoring requested by regulatory agencies; |
| ● | the cost of insurance, including product liability insurance, in connection with clinical trials; and |
| ● | suspension or termination of clinical development activities by regulators or institutional review boards for various reasons, including regulatory noncompliance or a finding that the participants are being exposed to unacceptable health risks. |
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs for personnel in executive and administrative functions, including stock-based compensation, travel expenses and recruiting expenses. Other general and administrative expenses include professional fees for legal, accounting and tax-related services and insurance costs.
CERo anticipates that its general and administrative expenses will increase in the future as the Company increases headcount and contracted services for operational support for expanded operations and infrastructure, as well as the initiation, continuation and expansion of preclinical studies and clinical trials for product candidates. The Company also anticipates that general and administrative expenses will increase as a result of expenses for accounting, audit, legal and consulting services, as well as costs associated with maintaining compliance with Nasdaq listing rules and SEC requirements, director and officer liability insurance, investor and public relations activities and other expenses associated with operating as a public company.
Interest and Other Income, Net
Interest and other income, net consists predominantly of interest income from interest bearing bank accounts, interest expense on payables, and the gain or loss on the revaluation of the warrant liability, which represents the change in fair value of outstanding warrants between periods.
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Results of Operations
Results of Operations for the Year Ended December 31, 2023 as Compared to Year Ended December 31, 2022
| 2023 | 2022 | Difference | ||||||||||
| Operating expenses: | ||||||||||||
| Research and development | $ | 5,288,580 | $ | 9,845,603 | $ | (4,557,023 | ) | |||||
| General and administrative | 2,386,469 | 2,125,628 | 260,841 | |||||||||
| Total operating expenses | 7,675,049 | 11,971,231 | (4,296,182 | ) | ||||||||
| Loss from operations | (7,675,049 | ) | (11,971,231 | ) | 4,296,182 | |||||||
| Interest and other income, net | 385,472 | 142,115 | 243,357 | |||||||||
| Net loss | $ | (7,289,577 | ) | $ | (11,829,116 | ) | $ | 4,539,539 | ||||
General and Administrative Expenses
General and administrative expenses were $2.39 million for the year ended December 31, 2023 compared to $2.13 million for the year ended December 31, 2022, reflecting a decrease of $0.26 million. Compensation related expenses decreased $0.87 million in 2023 as compared to 2022, due primarily to reduced headcount and recruiting expenses and reduction in software and other employee support expenses contributed $0.15 million to the 2023 decrease from 2022. Intellectual property expenses declined $0.66 million and public communication services expenses declined $0.42 million in 2023 relative to 2022. These decreases in expenses were offset by a $1.41 million increase in legal, accounting, and business consulting fees related to outsourced finance functions and activity related to preparation for the Business Combination.
Research and Development Expenses
R&D expenses were $5.29 million for the year ended December 31, 2023, compared to $9.85 million for the year ended December 31, 2022 reflecting a decrease of $4.6 million. Compensation related expenses decreased $2.1 million in 2023 as compared to 2022, due primarily to reduced headcount and recruiting expenses and reduction in software and other employee support expenses contributed $0.14 million to the 2023 decrease from 2022. Research activity slowed, resulting in a decrease of $1.84 million in supplies and external research service expenses in 2023 relative to 2022. Manufacturing slowed in 2023 relative to 2022, causing contract manufacturing expense to decline 0.70 million in 2023 versus 2022. Partially offsetting these declines, the Company received $0.18 million less in expense reimbursements from a collaboration partner in 2023 compared to 2022.
CERo anticipates that its R&D expenses will significantly increase in the future as the Company increases headcount and contracted services for preclinical and clinical development of its product candidates, as well as for manufacturing of clinical product to be used in clinical development.
Interest and Other Income, Net
Interest and other income, net increased $0.24 million, from $0.14 million in the year ended December 31, 2022 to $0.39 million in the year ended December 31, 2023. The change was primarily due to a $0.25 million increase in the gain on the revaluation of the warrant liability from $0.04 million to $0.29 million as of December 31, 2022, and 2023, respectively. This decrease was offset by a $0.01 million decrease in net interest income from $0.1 to $0.09 million in the years ended December 31, 2022, and 2023, respectively.
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Liquidity and Capital Resources
Capital Requirements
CERo has not generated any revenues from any source and the Company does not expect to generate revenue for at least the next few years. If the Company fails to complete the timely development of, or fails to obtain regulatory approval for, its product candidates, the ability of the Company to generate future revenue will be adversely affected. CERo does not know when, or if, it will generate any revenue from its product candidates, and does not expect to generate revenue unless and until the Company obtains regulatory approval and commercialization of its product candidates.
CERo expects its expenses to increase significantly in connection with its ongoing activities, particularly as it continues and expands research, preclinical development, and clinical development to support marketing approval for its product candidates. In addition, if the Company obtains approval for any of its product candidates, CERo expects to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution. Furthermore, following the completion of the Business Combination, the Company expects to incur additional costs associated with operating as a public company.
CERo, therefore, anticipates that substantial additional funding will be needed in connection with its continuing operations. After the Business Combination and PIPE Financing, the Company anticipates that it will have approximately $8.9 million in cash and cash equivalents. CERo intends to devote most of the net proceeds from Business Combination to the preclinical and clinical development of its product candidates and public company compliance costs. Based on current business plans, CERo believes that the anticipated net proceeds from the Business Combination and PIPE Financing will not fund its operating expenses and capital requirements for 12 months after the filing of the financial statements for CERo Therapeutics, Inc. for the year ended 2023. The Company has arranged two equity lines of credit, one providing for the sale of up to the lesser of 2,977,070 shares of newly issued shares of Common Stock and (ii) the Exchange Cap of 19.99% ownership of the outstanding common stock of the Company, unless shareholders approve a higher quantity, and the other providing for the purchase of up to $25 million of Common shares on the satisfaction of certain conditions. The Company has no guarantee that the conditions will be satisfied to require the purchase of all, or any, of the Equity Line of Credit (“ELOC”) funds. Any estimate as to how long the Company expects the net proceeds from the Business Combination, PIPE Financing, and ELOC funding may fund the Company operations is based on assumptions that may prove to be wrong, and CERo could use its available capital resources sooner than its current expectations. Changing circumstances, some of which may be beyond the Company’s control, could result in less cash and cash equivalents available to fund operations or cause the Company to consume capital significantly faster than currently anticipated, and CERo may need to seek additional funds from additional sources sooner than planned.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical drug products, the Company is unable to estimate the exact amount of its operating capital requirements. CERo’s future funding requirements will depend on many factors, including, but not limited to those listed under “Factors Affecting Our Performance” above.
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain process that takes many years to complete, and CERo may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, the Company’s product candidates, if approved, may not achieve commercial success. Commercial revenues, if any, will be derived from sales of product candidates that the Company does not expect to be commercially available in the near term, if at all. Accordingly, CERo will need to continue to rely on additional financing to achieve its business objectives. Adequate additional financing may not be available to the Company on acceptable terms, or at all. To the extent that CERo raises additional capital through the sale of equity or convertible debt securities, the terms of these equity securities or this debt may restrict the Company’s ability to operate. Any future debt financing and equity financing, if available, may involve covenants limiting and restricting the ability to take specific actions, such as incurring additional debt, making capital expenditures, entering into profit-sharing or other arrangements or declaring dividends. If CERo raises additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, it may be required to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to the Company. If CERo is unable to raise capital when needed or on acceptable terms, the Company could be forced to delay, reduce or eliminate its R&D programs or future commercialization efforts.
Cash Flows
Net cash used in operating activities
Net cash used in operating activities decreased $5.9 million from $11.7 million to $5.8 million in the years ended December 31, 2022, and 2023, respectively. CERo’s operating activities significantly slowed and headcount was reduced, resulting in a $4.5 million reduction in net loss in 2023 relative to 2022, and an increase in accrued expenses and accounts payable of $2.1 million in 2023 relative to 2022 resulted in $6.6 million less cash being expended in 2023 compared to 2022. The gain on the revaluation of the warrant liability resulted in a $0.25 million offset and other non-cash components resulted in a $0.20 million offset to the decrease in the net loss in 2023 versus 2022.
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Net cash used in investing activities
In the year ended December 31, 2022, the Company purchased $0.69 million of property and equipment, while no purchases were made in 2023. The majority of the purchases were laboratory equipment.
Net cash provided by financing activities
Net cash provided in financing activities increased $0.57 million from an immaterial amount to $0.57 million in the years ended December 31, 2023, and 2023, respectively. The change was a result of the issuance of a bridge loan to investors that provided $0.57 million of net proceeds in 2023.
Contractual Obligations and Other Commitments
None.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expenses incurred during the reporting period. Significant items subject to such estimates and assumptions include the estimates of the fair values of convertible preferred stock, common stock, and preferred stock warrant liability, stock-based compensation expense, the fair value of right-to-use assets and lease liabilities, and the valuation allowance associated with deferred tax assets. Actual results could differ from those estimates.
CERo defines its critical accounting policies as those accounting principles that require it to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on its financial condition and results of operations, as well as the specific manner in which it applies those principles. While significant accounting policies are more fully described in Note 2 to CERo’s audited financial statements appearing elsewhere in this Form 8-K, the Company believes the following are the critical accounting policies used in the preparation of its financial statements that require significant estimates and judgments.
Leases
Per ASC 842, the Company determines if an arrangement contains a lease at inception. A lease is an operating or financing contract, or part of a contract, that conveys the right to control the use of an identified tangible asset for a period of time in exchange for consideration.
At lease inception, the Company recognizes a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments, such as for lease incentives. In determining the present value of the lease payments, the Company uses its incremental borrowing rate, determined by estimating the Company’s applicable, fully collateralized borrowing rate, with adjustment as appropriate for lease term. The lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an extension option if the Company is reasonably certain to exercise that option.
Right-of-use assets and obligations for leases with an initial term of 12 months or less are considered short term and are a) not recognized in the balance sheet and b) recognized as an expense on a straight-line basis over the lease term. The Company does not sublease any of its leased assets to third parties and the Company’s lease agreements do not contain any residual value guarantees or restrictive covenants.
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ASC 842 includes a number of reassessment and re-measurement requirements for lessees based on certain triggering events or impairment conditions. There were no impairment indicators identified during the years ended December 31, 2022 or 2021 that would require impairment testing of the Company’s right-of-use assets.
Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and certain non-lease components that transfer a distinct service to the Company, such as common area maintenance services. The Company has elected to separate the accounting for fixed lease components and variable and non-lease components for real estate and equipment leases. The Company does not have any financing leases at December 31, 2023 or 2022.
Research and development
R&D costs consist primarily of salaries and benefits, including stock-based compensation, occupancy, materials and supplies, contracted research, consulting arrangements, and other expenses incurred in the pursuit of the Company’s R&D programs. R&D costs are expensed as incurred.
Stock-based compensation
The Company periodically issues common stock and stock options to officers, directors, and consultants for services rendered. The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation (Topic 718). ASC 718 requires the recognition of stock-based compensation expense, using a grant date fair value-based method, for costs related to all share-based payments including stock options and restricted stock awards granted to employees and non-employees. ASC 718 requires companies to estimate the fair value of all share-based payment awards on the date of grant using an option pricing model, and the Company uses a Black-Scholes model to estimate option award fair value. The fair value of restricted stock awards is based upon the estimated share price of the common shares on the date of grant. Forfeitures are accounted for on occurrence and the Company applies the simplified method to estimate expected term of options provided in SAB Topic 14 for “plain vanilla” options. All options and restricted stock awards granted since inception are expensed on a straight-line basis over the requisite service period, which is usually the vesting period, and the related amount is recognized in the statements of operations. The accounting for stock options granted to outside consultants is consistent with the accounting for stock-based payments to officers and directors, as described above, by measuring the cost of services received in exchange for equity awards utilizing the grant date fair value of the awards, with the cost recognized as stock-based compensation expense on a straight-line basis in the Company’s financial statements over the vesting period of the awards.
Income taxes
The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company follows the provisions of ASC 740, Accounting for Uncertainty in Income Taxes, for the recognition, measurement, presentation, and disclosure in the financial statements of any uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the financial statements. It is the Company’s policy to include penalties and interest expense related to income taxes as a component of income tax expense, as necessary. The Company has not recorded any interest or penalties associated with income tax since inception.
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Fair Value of Common Stock
In order to determine the fair value of a share of CERo’s common stock for use in developing fair value estimates for derivative instruments, CERo’s board of directors considered, among other things, contemporaneous valuations of the Company’s common stock. Given the absence of a public trading market of CERo’s capital stock to date, the board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of a share of the Company’s common stock, including:
| ● | contemporaneous valuations of the Company’s common stock and market transactions involving private investments in the equity instruments of comparable companies; | |
| ● | CERo’s business, financial condition and results of operations, including related industry trends affecting the Company’s operations; | |
| ● | the likelihood of achieving a liquidity event, such as a merger into a special purpose acquisition corporation, or sale of the company, given prevailing market conditions; | |
| ● | the lack of marketability of the Company’s common stock; | |
| ● | the market performance of comparable publicly traded companies; | |
| ● | U.S. and global economic and capital market conditions and outlook; and | |
| ● | common stock valuation methodology. |
In estimating the fair market value of a share of CERo’s common stock, the board of directors first determined the equity value of the Company’s business using accepted valuation methods. A discount for lack of marketability was then applied to conclude a fair market value for one share of the Company’s common stock for use in models used to develop fair value estimates for derivative instruments.
Recent Accounting Pronouncements
See Note 2 to CERo’s audited financial statements appearing elsewhere in this amendment report on Form 8-K for a description of recent accounting pronouncements applicable to CERo’s financial statements.
Qualitative and Quantitative Disclosures About Market Risk
CERo’s primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because of the Company’s investments, including cash equivalents, which may be in the form of a money market fund.
In the future, CERo may contract with vendors invoicing in a foreign denominated currency. As a result, the Company may be subject to fluctuations in foreign currency rates in connection with certain of these agreements. Transactions denominated in currencies other than the United States dollar will be recorded based on exchange rates at the time such transactions arise. As of December 31, 2023, all transactions have been denominated in U.S. dollars.
Inflation will generally affect the Company by increasing the cost of labor and costs associated with preclinical and clinical trials and future manufacturing and commercialization activities as well as general corporate costs. CERo does not believe that inflation had a material effect on CERo’s business, financial condition or results of operations for the years ended December 31, 2023 or 2022, but increased inflation may materially impact the Company in 2024 and beyond.
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Emerging Growth Company and Smaller Reporting Company Status
In April 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. PBAX previously elected the extended transition period for complying with new or revised accounting standards, which delays the adoption of these accounting standards until they would be applicable to private companies. Following the consummation of the Business Combination, New CERo expects to continue to take advantage of the benefits of the extended transition period.
In addition, as an emerging growth company, New CERo may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
| ● | being permitted to present only two years of audited financial statements in addition to any required unaudited interim financial statements, with correspondingly reduced disclosure in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; |
| ● | an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended; |
| ● | reduced disclosure about the Company’s executive compensation arrangements in its periodic reports, proxy statements and registration statements; |
| ● | exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements; and |
| ● | an exemption from compliance with the requirements of the Public Company Accounting Oversight Board regarding the communication of critical audit matters in the auditor’s report on financial statements. |
New CERo will cease to qualify as an emerging growth company on the date that is the earliest of: (i) the last day of the fiscal year following the fifth anniversary of the date of the first sale of PBAX shares in its initial public offering, (ii) the last day of the fiscal year in which New CERo has more than $1.07 billion in total annual gross revenues, (iii) the date on which New CERo is deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of the Common Stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, or (iv) the date on which New CERo has issued more than $1.0 billion of non-convertible debt over the prior three-year period. CERo may choose to take advantage of some but not all of these reduced reporting burdens. CERo has taken advantage of certain reduced reporting requirements in this Form 8-K. Accordingly, the information contained herein may be different than you might obtain from other public companies.
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