NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Company Information
NKGen Biotech, Inc. (“Company” or “NKGen”), a Delaware corporation headquartered in Santa Ana, California, is a clinical-stage biotechnology company focused on the development and commercialization of innovative autologous, allogeneic and CAR-NK natural killer cell therapies utilizing their proprietary SNK (Super-Natural-Killer) platform. The Company was formerly majority owned and controlled by NKMAX Co., Ltd. (“NKMAX”), a company formed under the laws of the Republic of Korea.
Graf Acquisition Corp. IV (“Graf”) was originally incorporated in Delaware on January 28, 2021, as a special-purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or engaging in any other similar business combination with one or more businesses or entities.
On April 14, 2023, the Company entered into the Agreement and Plan of Merger by and among Graf, Austria Merger Sub, Inc. (“Merger Sub”), a Delaware corporation and wholly owned subsidiary of Graf, and NKGen Biotech, Inc. (“Merger Agreement”). Upon consummation of the transactions under the Merger Agreement on September 29, 2023 (the “Business Combination”), Merger Sub merged with and into NKGen Biotech, Inc. (“Legacy NKGen”) with Legacy NKGen surviving the merger as a wholly owned subsidiary of Graf (the “Merger”). In connection with the consummation of the Business Combination (the “Closing”), Graf was renamed to “NKGen Biotech, Inc.” and Legacy NKGen changed its name to “NKGen Operating Biotech, Inc.” The common stock and warrants of the combined company began trading on The Nasdaq Stock Market LLC under the symbols “NKGN” and “NKGNW”, respectively, on October 2, 2023.
Throughout the notes to the unaudited condensed consolidated financial statements, unless otherwise noted or otherwise suggested by context, the “Company” refers to Legacy NKGen prior to the consummation of the Business Combination, and the Company after the consummation of the Business Combination.
Going Concern
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements — Going Concern, which requires that management evaluate whether there are relevant conditions and events that in aggregate raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the unaudited condensed consolidated financial statements are issued. Under the guidance, the Company must first evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern (step 1). If the Company concludes substantial doubt is raised, management also is required to consider whether its plans alleviate that doubt (step 2).
The Company has a limited operating history, has incurred significant operating losses since its inception, and the revenue and income potential of the Company’s business and market are unproven. The Company’s unaudited condensed consolidated financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of September 30, 2024, the Company had an accumulated deficit of $177.0 million and cash and cash equivalents of $8 thousand. To date, the Company has funded its operations primarily with the net proceeds from the issuance of senior convertible promissory notes, the issuance of related party loans, the issuance of bridge loans, the issuance of convertible bridge loans, the issuance of convertible promissory notes, draws upon a revolving line of credit, the issuance and sale of equity securities, PIPE warrants, private placements, the amendment of private placements, and proceeds from the Business Combination. The Company expects to incur substantial operating losses for the next several years and will need to obtain additional near-term financing in order to continue its research and development activities, initiate and complete clinical trials and launch and commercialize any product candidates for which it receives regulatory approval. Management has prepared cash flow forecasts which indicate that based on the Company’s expected operating losses and negative cash flows, there is substantial doubt about the Company’s ability to continue as a going concern for twelve months from the issuance of these unaudited condensed consolidated financial statements.
The Company plans to continue to fund its losses from operations and capital funding needs through additional debt or equity financings to be received from related parties, private equity, or other sources. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, suspend or curtail planned programs, or may be forced to cease operations or file for bankruptcy protection. Any of these actions could materially harm the Company’s business, results of operations and future prospects. There can be no assurance that such financing will be available or will be at terms acceptable to the Company. The preparation of these unaudited condensed consolidated financial statements does not include any adjustments that may result from the outcome of this uncertainty.
2.Summary of Significant Accounting Policies
Basis of Presentation
NKMAX held a majority of the voting power of Legacy NKGen before the Business Combination and continued to hold a majority of the voting power of the Company after the Business Combination. Therefore, as there was no change in control, the Business Combination was accounted for as a common control transaction with respect to Legacy NKGen along with a reverse recapitalization of the Company. Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of Legacy NKGen with the Business Combination being treated as the equivalent of Legacy NKGen issuing shares for the net assets of Graf, accompanied by a recapitalization. The net assets of Graf were recognized as of the Closing at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination are presented as those of Legacy NKGen, and the accumulated deficit of Legacy NKGen has been carried forward after Closing.
Upon the consummation of the Business Combination, all of Legacy NKGen’s equity was converted into equity of the Company based upon an exchange ratio (“Exchange Ratio”). In addition, all stock options of Legacy NKGen were converted using the Exchange Ratio into options exercisable for shares of the Company with the same terms and vesting conditions. The Exchange Ratio as of September 29, 2023, the date of Closing, was approximately 0.408.
All periods prior to the Business Combination have been retrospectively adjusted using the Exchange Ratio to reflect the reverse recapitalization. In connection with the reverse recapitalization treatment of the Business Combination, all issued and outstanding securities of Graf upon Closing were treated as issuances of the Company upon the consummation of the Business Combination.
The accompanying financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and generally accepted accounting principles in the United States of America (“US GAAP”). The Company maintains its accounting records under the accrual method of accounting in conformity with US GAAP. The condensed consolidated balance sheet as of December 31, 2023 included herein was derived from the audited financial statements as of that date. Certain information and disclosures normally included in the financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such regulations. Accordingly, these unaudited condensed consolidated financial statements and accompanying footnotes should be read in conjunction with NKGen’s financial statements as of and for the year ended December 31, 2023. The results for the interim periods are not necessarily indicative of results for the full year.
In the opinion of management, all adjustments, of a normal recurring nature, considered necessary for a fair presentation have been included in the unaudited condensed consolidated financial statements. The Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that impact the reported amounts of certain assets and liabilities, certain disclosures at the date of the unaudited condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. The most significant estimates in the Company’s unaudited condensed consolidated financial statements include, but are not limited to, accrued clinical and research and development expenses, legacy convertible notes, convertible promissory notes, senior convertible promissory notes due to related parties, forward purchase derivative liabilities, derivative warrant liabilities, derivative warrant assets, common stock, and equity awards. These estimates and assumptions are based upon historical experience, knowledge of current events, and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Restricted Cash
Restricted cash consists of funds that are contractually restricted due to a revolving line of credit, which was entered into during June 2023. In accordance with the terms of the revolving line of credit, the Company would have been required to maintain $15.0 million in cash balances with the lender from September 30, 2024 as additional collateral for the borrowings until repayment of all principal and other payables to the lender under the revolving line of credit was made. In April 2024, the lender subsequently waived the minimum cash deposit requirement in exchange for the Company's agreement to use the lender as their primary banking relationship. As of both September 30, 2024 and December 31, 2023, $0.2 million in restricted cash was recorded on the unaudited condensed consolidated balance sheet. The Company includes its restricted bank deposits in cash, cash equivalents and restricted cash when reconciling beginning-of-period and end-of-period total amounts shown on the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2024 and 2023.
Hybrid Instruments
The Company follows FASB ASC 480, Distinguishing Liabilities from Equity, when evaluating the accounting for its hybrid instruments. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: (a) a fixed monetary amount known at inception; (b) variations in something other than the fair value of the issuer’s equity shares; or (c) variations inversely related to changes in the fair value of the issuer’s equity shares. Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives and are carried as a liability at fair value at each balance sheet date.
Derivative Instruments
FASB ASC 815, Derivatives and Hedging Activities, requires companies to bifurcate certain features from their host instruments and account for them as freestanding derivative financial instruments should certain criteria be met. The Company does not use derivative instruments to hedge exposures to interest rate, market, or foreign currency risks. The Company evaluates its financial instruments to determine whether such instruments are derivatives or contain features that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract and the features of the derivatives. Bifurcated embedded derivatives are recognized at fair value, with changes in fair value recognized in the unaudited condensed consolidated statements of operations and comprehensive loss each period. Bifurcated embedded derivatives are classified with the related host contract in the Company’s unaudited condensed consolidated balance sheets. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
Debt
For convertible debt instruments that are not considered liabilities under ASC 480 or ASC 815, the Company applies ASC 470, Debt, for the accounting of such instruments, including any premiums or discounts. The Company’s bridge loans, senior convertible promissory notes, and convertible bridge loans are accounted for under ASC 470. Accrued interest paid-in-kind is added to the carrying amount of the Company’s senior convertible promissory notes.
Sequencing Sufficiency of Authorized and Unissued Shares
For purposes of assessment of the sufficiency of authorized and unissued shares relevant to classification of equity linked contracts, the Company applies a sequencing policy based upon issuance dates. Pursuant to the sequencing policy, as of the date an equity-linked contract is issued for which the underlying shares may exceed the Company’s pool of remaining authorized and unissued shares, taking into account outstanding pre-existing contracts that may be settled in shares, that equity-linked contract and all subsequent equity-linked contracts are deemed to meet the liability classification criteria due to insufficiency of authorized and unissued shares. This policy is applied on a dynamic basis such that upon termination of a given equity-linked contract, the sequencing policy is reapplied, which may result in qualification of equity classification criteria for certain previously issued equity-linked contracts that were previously liability classified solely due to insufficiency of authorized and unissued shares.
Subscription and Shareholder Receivables
The Company records stock issuances at the effective date. If the amounts are not funded upon issuance, the Company records a subscription receivable or shareholder receivable as an asset on the unaudited condensed consolidated balance sheets. When subscription receivables are not received prior to the balance sheet date in satisfaction of the requirements under ASC 505, Equity, the subscription receivable is reclassified as a contra account to stockholders' deficit on the unaudited condensed consolidated balance sheets.
Shareholder receivable represents amount due from the shareholder. If the shareholder does not fund the receivable prior to the balance sheet date, the Company records a receivable that is reclassified as a contra account to stockholders' deficit on the unaudited condensed consolidated balance sheets. During the nine months ended September 30, 2024, $0.5 million due from the shareholder was received by the Company.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset, or asset group, may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. The Company has not recognized any impairment losses for the three and nine months ended September 30, 2024 and 2023.
Fair Value Option
In lieu of bifurcation, on an instrument-by-instrument basis, the Company may elect the fair value option for certain financial instruments that meet the required criteria under ASC 825, Financial Instruments. The Company elected the fair value option for both its legacy convertible notes and convertible promissory notes, which met the required criteria under ASC 825, Financial Instruments. Interest expense associated with both the legacy convertible and convertible promissory notes that is accrued and unpaid is included in the change in fair value of such instruments. Issuance and modification fees incurred on instruments for which the fair value option was elected are not deferred and are recognized as an expense when incurred.
Fair Value of Financial Instruments
The Company accounts for the fair value of its financial instruments under the framework established by US GAAP, which defines fair value and expands disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.
Level 1 — Quoted prices in active markets for identical assets or liabilities the Company has the ability to access at the measurement date.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.
Level 3 — Pricing inputs that are unobservable, supported by little or no market activity and are significant to the fair value of the assets or liabilities.
Transfers to/from Levels 1, 2, and 3 are recognized at the beginning of the reporting period. There were no transfers to/from Levels 1, 2, and 3 during the nine months ended September 30, 2024 and 2023.
ASC 820 states that in many cases, the transaction price will equal the fair value (for example, that might be the case when on the transaction date, the transaction to buy an asset takes place in the market in which the asset is sold). In determining whether a transaction price represents the fair value at initial recognition, the Company considers various factors such as whether the transaction was between related parties, is a forced transaction, or whether the unit of account for the transaction price does not represent the unit of account for the measured instrument.
The Company does not measure assets at fair value on a recurring basis. The Company's liabilities that are measured at fair value on a recurring basis are its liability classified warrants, convertible promissory notes, forward purchase derivative liabilities, and obligation to issue common stock. Refer to Note 9, Fair Value of Financial Instruments, for further discussion regarding the Company’s fair value measurements. The carrying value of the Company’s related party loans approximates fair value as the stated interest rate approximates market rates for similar loans and due to the short-term nature of such loans, which are due within three years or less from issuance. The carrying value of the Company’s cash, restricted cash, accounts payable, accrued expenses, bridge loans, convertible bridge loans, other current liabilities, and revolving line of credit approximates fair value primarily due to the short-term nature of such accounts.
Loss on Issuances of Financial Instruments
Select financing transactions the Company enters into may include a combination of convertible promissory notes, convertible bridge loans, warrants, tranche right derivatives, forward purchase derivative liabilities, obligations to issue common stock, and issued common stock. Pursuant to ASC 815, upon initial recognition of these bundled transactions, the proceeds received are first allocated to instruments that are measured at fair value on a recurring basis, which are typically liability-classified instruments, and any residual proceeds are allocated on a relative fair value basis to securities that are not required to be measured at fair value on a recurring basis, which are typically equity-classified issued common stock. Upon initial recognition for each respective financing transaction, to the extent the total fair value of the liability-classified instruments exceeds proceeds received, a loss on issuance is recognized. When a loss on issuance is recognized and the bundled transaction includes issued common stock, such common stock is recorded at par as there are no remaining proceeds to be allocated. The fair value of tranche rights from a market participant perspective pursuant to the principles of ASC 820 may include value associated with common stock embedded in the tranche rights. When a tranche right is exercised and the value of the tranche right plus proceeds received upon exercise exceeds the fair value of liability-classified instruments issued upon exercise, a gain on issuance of financial instruments may be recognized for the value of the equity-classified shares, which were included in the then-extinguished tranche right derivative liability due to the application of ASC 820, but are not recognized at fair value upon issuance due to the absence of proceeds to allocate to the stock.
Leases
The Company accounts for its leases under ASC 842, Leases. The operating lease right-of-use (“ROU”) asset represents the Company’s right to use an underlying asset during the lease term, and operating lease liability represents the Company’s obligation to make lease payments arising from the lease. Operating leases are included in the ROU asset, current operating lease liability, and non-current operating lease liability in the accompanying unaudited condensed consolidated balance sheets. The operating lease ROU asset and lease liability are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using the Company’s incremental borrowing rate applicable to the lease asset, unless the implicit rate is readily determinable. The operating lease ROU asset also includes any lease payments made at or before lease commencement and excludes any lease incentives received. The Company determines the lease term as the noncancelable period of the lease and may include options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. Leases with a term of 12 months or less are not recognized in the unaudited condensed consolidated balance sheets. The Company’s leases do not contain any residual value guarantees. Lease expense for minimum lease payments is recognized as rent expense on a straight-line basis over the lease term. Operating expenses such as common area maintenance and utilities are treated as variable lease payments.
Stock-Based Compensation
Stock-based compensation expense is comprised of stock options awarded to employees and consultants. The Company accounts for share-based awards under the fair value method prescribed by ASC 718-10, Stock Compensation. The fair value of stock options is estimated using the Black-Scholes option pricing model on the date of grant. This option pricing model involves a number of estimates, including the per share value of the underlying common stock, exercise price, estimate of future volatility, expected term of the stock option award, risk-free interest rate and expected annual dividend yield.
The fair value of the shares of common stock underlying the stock options has historically been determined by the Company’s board of directors as there was no public market for the underlying common stock prior to October 2, 2023. The Company’s board of directors determined the fair value of the Company’s common stock by considering a number of objective and subjective factors including contemporaneous third-party valuations of its common stock, the valuation of comparable companies, sales of the Company’s common stock to outside investors in arm's-length transactions, the Company’s operating and financial performance, the lack of marketability, and general and industry specific economic outlook, and the implied fair values upon a merger transaction, amongst other factors.
The Company recognizes the expense for options with graded-vesting schedules on a straight-line basis over the requisite service period, which is generally the vesting period. Forfeitures are recognized as they occur.
Basic and Diluted Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) for the period by the weighted-average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding and potentially dilutive securities outstanding for the period using the treasury stock or if-converted method if their inclusion is dilutive. Diluted net income per common share for the three months ended September 30, 2024 is including the effect of the dilutive shares compared to the basic net income per common share. Diluted net loss per common share for the nine months ended September 30, 2024 is the same as basic net loss per common share because the inclusion of potentially dilutive shares would be anti-dilutive to the calculation of net loss per common share.
The Company has one class of shares issued and outstanding. Accordingly, basic and diluted net income (loss) per share is not allocated among multiple classes of shares. Basic and diluted net income (loss) per share for all periods prior to the Closing have been retrospectively adjusted by the Exchange Ratio to affect the reverse recapitalization.
The reconciliation of the numerator and denominator of the net income (loss) per share calculation is presented in Note 17, Earnings Per Share.
Emerging Growth Company
The Company is an “Emerging Growth Company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s unaudited condensed consolidated financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued Accounting Standards Update ("ASU") No. 2023-07, Segment Reporting, Improvements to Reportable Segment Disclosures (Topic 280). The FASB issued this update to improve the disclosures about an entity’s reportable segments, including providing more detailed information about a reportable segment’s expenses, enhancing interim disclosure requirements and providing new segment disclosure requirements for entities with a single reportable segment. This standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Entities should apply the amendments retrospectively to all prior periods presented in the financial statements. This ASU is applicable to the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2024, and subsequent interim periods. ASU No. 2023-07 will not impact the Company's results of operations, financial condition or cash flows. The Company is assessing the form and content of the disclosure of its significant segment expenses as required by ASU No. 2023-07.
In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740). The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This ASU will result in the required additional disclosures being included in the Company's unaudited condensed consolidated financial statements, once adopted. The Company is currently assessing ASU No. 2023-09 and its impact on its income tax disclosures. ASU No. 2023-09 does not impact the Company's results of operations, financial condition or cash flows. The Company does not plan to early adopt ASU No. 2023-09.
In November 2024, the FASB issued ASU No. 2024-03, Income Statement -Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses ("ASU 2024-03"). ASU 2024-03 requires additional disclosures about the nature of expenses included in the income statement, such as purchases of inventory, employee compensation and depreciation. ASU 2024-03 is effective for public business entities for annual periods beginning after December 15, 2026 and interim reporting periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2024-03 on its financial statements and related disclosures.
3.Reverse Recapitalization
As discussed in Note 1, Company Information, the Closing of the Business Combination occurred on September 29, 2023. In connection with the Business Combination:
•All of Legacy NKGen’s legacy convertible notes were converted into shares of Legacy NKGen common stock immediately prior to Closing and pursuant to their terms, totaling 5,579,266 shares, which were then cancelled and converted into 2,278,598 shares of the Company’s common stock after giving effect to the Exchange Ratio;
•All of Legacy NKGen’s 38,185,814 issued and outstanding shares were cancelled and converted into 15,595,260 shares of the Company’s common stock after giving effect to the Exchange Ratio (inclusive of shares attributable to the Legacy NKGen convertible notes);
•All of Legacy NKGen’s 5,146,354 issued and outstanding stock options were cancelled and converted into 2,101,760 outstanding stock options of the Company;
•The Company’s amended and restated certificate of incorporation and amended and restated bylaws were adopted;
•The Company adopted an employee stock purchase plan; and
•The Company adopted the 2023 equity incentive plan.
The other related events that occurred in connection with the Closing include the following:
•The execution of the private placement agreements, as described in Note 4, Private Placement;
•The assumption of the public and private warrants, as described in Note 5, Warrants;
•The execution of the warrant subscription agreements, as described in Note 5, Warrants;
•The conversion of Legacy NKGen’s legacy convertible notes, as described in Note 6, Convertible Notes;
•The execution of the securities purchase agreement, as described in Note 6, Convertible Notes; and
•The execution of the amended and restated sponsor support and lockup agreement, as described in Note 8, Related Party Transactions.
Refer to Note 9, Fair Value of Financial Instruments, for the Company’s measurements with respect to the financial instruments issued in connection with the foregoing agreements. Legacy NKGen incurred $7.5 million of transaction costs in connection with the Business Combination, which was determined to be a capital-raising transaction for Legacy NKGen. Of the $7.5 million in transaction costs, $4.2 million and $3.3 million were allocated on a relative fair value basis to equity-classified instruments and liability-classified instruments, respectively.
The following tables reconcile elements of the Business Combination to the Company’s unaudited condensed consolidated financial statements, and should be read in conjunction with the footnotes referenced above (in thousands, except share amounts):
| | | | | |
| Shares |
Graf public shares, net of redemptions | 93,962 |
Private placement investors’ shares | 3,683,010 |
Graf founder shares | 2,516,744 |
| Total Graf shares outstanding immediately prior to the Business Combination | 6,293,716 |
Conversion of Legacy NKGen convertible promissory notes (after the application of the Exchange Ratio) | 2,278,598 |
Legacy NKGen rollover shares (after the application of the Exchange Ratio) | 13,316,662 |
| Total Legacy NKGen shares | 15,595,260 |
| Total Company common stock outstanding immediately following the Business Combination | 21,888,976 |
| | | | | |
| (In thousands) | Recapitalization |
| Closing proceeds | |
Proceeds from issuance of common stock | $ | 1,667 | |
Proceeds from issuance of PIPE warrants | 10,210 | |
Proceeds from issuance of senior convertible promissory notes with warrants | 10,000 | |
| Closing disbursements | |
Less: Payment of Graf deferred underwriter fees | (1,250) | |
Less: Payment of Graf transaction costs at Closing (1) | (7,456) | |
Less: Payment of Legacy NKGen transaction costs at Closing | (3,510) | |
| Net cash proceeds from the Business Combination at Closing | 9,661 | |
Less: Payment of Legacy NKGen transaction costs prior to Closing | (2,089) | |
| Net cash proceeds from the Business Combination | 7,572 | |
| Noncash activity | |
Conversion of legacy NKGen convertible promissory notes | 18,913 | |
Less: Operating liabilities assumed from Graf | (860) | |
Less: Unpaid transaction costs – assumed from Graf (1) | (5,400) | |
Less: Unpaid transaction costs – Legacy NKGen | (1,938) | |
| Liability-classified instruments | |
Less: Fair value of PIPE warrants | (10,210) | |
Less: Fair value of forward purchase derivative liabilities | (20,201) | |
Less: Fair value of senior convertible promissory notes(2) | (9,707) | |
Less: Fair value of private warrants | (1,841) | |
Less: Fair value of working capital warrants | (204) | |
| Net equity impact of the Business Combination | $ | (23,876) | |
(1)The Graf transaction costs includes a $4.0 million accrual related to a certain vendor to be paid in cash and common stock of $2.0 million each. At Closing, a cash payment of $1.3 million was disbursed to this vendor. The remaining $2.7 million amount was recognized as a component of the unpaid transaction costs assumed from Graf, of which $0.7 million represents a cash settlement obligation, and the remaining $2.0 million represents an obligation to issue a variable number of shares for a fixed monetary amount which was accounted for as a liability under ASC 480, Distinguishing Liabilities from Equity. Under ASC 480, the obligation to issue shares is not subsequently measured at fair value with changes recorded in earnings because the monetary amount is fixed.
(2)Represents allocated fair value.
4.Private Placement
Initial Recognition
Background
Prior to the Closing, the Company entered into private agreements (“Private Placement Agreements”) with investors (“FPA Investors”) consisting of forward purchase agreements (“Forward Purchase Agreements”), subscription agreements, a side letter, and escrow agreements. The Private Placement Agreements closed on September 29, 2023. Pursuant to the Private Placement Agreements, the FPA Investors purchased 3,168,121 shares of common stock (“FPA Shares”) for $32.9 million (“Prepayment Amount”).
The Prepayment Amount was deposited into escrow accounts. The terms of the Private Placement Agreements provide that following a one-year period after the Closing, subject to early termination and settlement with respect to any number of FPA Shares at the election of the FPA Investors (“Measurement Period”), funds in the escrow accounts may be released to the FPA Investors, the Company or a combination of both based on a combination of factors, including the volume weighted-average price of the Company’s common stock (“VWAP”) over a specified valuation period during the Measurement Period (“Reset Price”), the number of shares sold by the FPA Investors during the Measurement Period, and the application of anti-dilution provisions. The Private Placement Agreements expire at the end of the Measurement Period.
All funds in escrow will be released to the Company, the FPA Investors, or a combination of both, at or before the one year anniversary of the Closing. The maximum and minimum that could be released from escrow is the Prepayment Amount and zero, respectively, for both the FPA Investors and the Company. In addition, all interest earned on the funds in the escrow accounts will be released to the FPA Investors.
During the Measurement Period, to the extent the Company’s share price approaches or exceeds $10.44 per share, the likelihood and amount of escrow funds to be released to the Company increases and the likelihood and amount of escrow funds to be released to the FPA Investors decreases. Conversely, during the Measurement Period, to the extent the Company’s share price decreases below $10.44 per share, the likelihood and amount of escrow funds to be released to the Company decreases and the likelihood and amount of escrow funds to be released to the FPA Investors increases. Other drivers of settlement outcomes include the number of shares sold by FPA Investors to third parties during the Measurement Period, whereby the selling of shares may decrease portions of escrow funds to be released to the FPA Investors by up to $2.00 per share sold, the application of antidilution provisions, the timing of sales and settlements, among other factors. Additionally, a prepayment shortfall of $0.1 million was established in connection with the Private Placement Agreements (“Prepayment Shortfall”). Pursuant to the terms and conditions of the Private Placement Agreements, sales of FPA Shares to third parties are required to first be applied toward the Prepayment Shortfall prior to the subscription receivable (described further below).
In addition to the FPA Shares, the FPA Investors received 514,889 shares of common stock for no incremental consideration (“Bonus Shares”). The Bonus Shares are not subject to an escrow arrangement.
Accounting
All FPA Shares and Bonus Shares are outstanding shares of the Company that are not held in escrow, are transferable without restrictions, and have the same voting as well as dividend and liquidation participation rights as other shares of the Company. Accordingly, such shares are equity classified and presented together with other shares of common stock in the unaudited condensed consolidated financial statements.
The escrow agreements provide that funds placed into escrow are held in escrow for the benefit of the FPA Investors until they are released to the Company pursuant to the terms of the Private Placement Agreements and the Company’s creditors do not have access to the funds held in escrow in the event of bankruptcy of the Company. Accordingly, the Company accounted for the original Prepayment Amount of $32.9 million as a contra-equity subscription receivable because the funds held in escrow represent receivable from shareholder.
The features of the Private Placement Agreements met the derivatives criteria under ASC 815 because they contained an underlying, notional amount, payment provision, and net settlement. Accordingly, a derivative liability was recognized based on the estimated measurement of the portion of the funds in escrow that could be released to the FPA Investors, based on circumstances existing as of Closing. The net balance of the Prepayment Amount presented as a subscription receivable and the derivative liability when considered together represents the estimated amount of escrow funds the Company expects to receive from the escrow accounts. Subsequent changes in fair value of the derivative liability associated with the Private Placement Agreements will be recognized through earnings on a quarterly basis.
Upon the Closing, in addition to the $32.9 million subscription receivable, a loss on issuance of forward purchase contract totaling $24.5 million was recorded, which consisted of the fair value of the derivative liabilities of $20.2 million plus the fair value of the Bonus Shares of $4.3 million. The forward purchase derivative liabilities are treated as a current liabilities because the Private Placement Agreements mature or otherwise are subject to early termination at or prior to the one year at or before the one year anniversary of the Closing.
December 2023 Amendment
On December 26, 2023, pursuant to the Private Placement Agreements, the Company and an FPA Investor entered into an amendment to their Forward Purchase Agreement ("December 2023 FPA Amendment") for total proceeds of $0.5 million. No other Private Placement agreements were amended during the year ended December 31, 2023. The December 2023 FPA Amendment provided that, (i) 200,000 FPA Shares were re-designated to Bonus Shares, (ii) the definition of Reset Price was changed (“Amended Reset Price”), (iii) the definition of the prepayment shortfall was amended (“Amended Prepayment Shortfall”), and (iv) the funds in the escrow account were transferred to a separate account held by the FPA Investor. The funds from the FPA Investor in connection with the amendment were not received by the Company until January 2024.
The terms of the Amended Reset Price provide for (i) a rolling ceiling effective as of the December 2023 FPA Amendment execution date based on a weekly trailing VWAP such that the Company does not benefit from increases in share price during the Measurement Period, and (ii) discounts of generally 10.0% to the VWAP measurement that benefit the FPA Investor.
Proceeds from the sale of FPA Shares by FPA Investors to third parties are required to be treated as a reduction to the prepayment shortfall until no balance remains in the prepayment shortfall (“Shortfall Sales”), at which point proceeds from such sales of stock may be treated as reductions to the subscription receivable that may result in cash proceeds to the Company. If all FPA Shares are sold without full satisfaction of the prepayment shortfall, the Company is required, at their election, to either pay a cash amount equal to the remaining prepayment shortfall balance or issue additional shares at 90.0% of the VWAP for the trailing 20 trading days.
The terms of the Amended Prepayment Shortfall provide for a $0.5 million increase to the FPA Investor’s pre-existing prepayment shortfall of $0.1 million.
Upon execution of the FPA Amendment in December 2023, the Company recognized a loss on amendment to forward purchase contract as set forth below (in thousands):
| | | | | |
| Loss on Amendment |
| Reduction of subscription receivable | $ | 15,123 |
| Reduction in forward purchase derivative liabilities | (14,181) |
| Shareholder receivable | (500) |
| Loss on amendments to financial instruments, net | $ | 442 |
The $0.4 million loss recognized in connection with the FPA Amendment represents the reduction in cash proceeds the Company may receive under the forward purchase contract, partially offset by the reduction in the forward purchase derivative liabilities and the shareholder receivable. As a result of the FPA Amendment, the maximum cash proceeds the Company could receive under the forward purchase contract, reflected in the subscription receivable balance, was lowered. The reduction in the subscription receivable of $15.1 million was caused by (i) the Amended Reset Price, which reduced the maximum price per FPA Share the Company could receive (initially, $10.44 per share), (ii) the re-designation of 200,000 FPA Shares to Bonus Shares, reducing the total quantity of FPA Shares, and (iii) the Amended Prepayment Shortfall, which increased the prepayment shortfall amount. The Company does not receive any consideration for sales or settlements of Bonus Shares or Shortfall Sales, described further below. In addition to the reduction in the subscription receivable, the Company recognized a corresponding reduction in the fair value of the forward purchase derivative liabilities of $14.2 million.
Q1 2024 FPA Amendments
From January to February 2024, pursuant to the Private Placement Agreements, the Company and certain FPA Investors entered into several additional amendments to the Forward Purchase Agreements ("Q1 2024 FPA Amendments") for total proceeds to the Company of $1.0 million. The Q1 2024 FPA Amendments provided that, (i) 200,000 additional FPA Shares were re-designated to Bonus Shares, (ii) the definition of the prepayment shortfall consideration was further amended (“2024 Amended Prepayment Shortfall”), and (iii) for the FPA Investor who was not party to the December 2023 FPA Amendment, the definition of Reset Price was changed (“2024 Amended Reset Price”).
The terms of the 2024 Amended Reset Price provide the FPA Investor (i) a rolling price per share effective as of the Q1 2024 FPA Amendment execution dates based on a weekly trailing VWAP, subject to a ceiling of $10.44 per share ("Initial Price"), and (ii) discounts of generally 10.0% to the VWAP measurement that benefit the FPA Investor.
The terms of the 2024 Amended Prepayment Shortfall provide for an aggregate $1.1 million increase to the FPA Investors’ pre-existing prepayment shortfall of $0.7 million.
Upon execution of the Q1 2024 FPA Amendments, the Company recognized a loss on amendment to forward purchase contract as set forth below (in thousands):
| | | | | |
| Loss on Amendment |
| Reduction of subscription receivable | $ | 2,764 |
| Reduction in forward purchase derivative liabilities | (1,418) |
| Cash received in connection with the amendments | (950) |
| Loss on amendments to financial instruments, net | $ | 396 |
The $0.4 million loss recognized in connection with the Q1 2024 FPA Amendments represents the reduction in cash proceeds the Company may receive under the forward purchase contract, partially offset by the reduction in the forward purchase derivative liability and the shareholder receivable. As a result of the Q1 2024 FPA Amendments, the maximum cash proceeds the Company could receive under the forward purchase contract, reflected in the subscription receivable balance, was lowered. The reduction in the subscription receivable of $2.8 million was caused by (i) the existing 2024 Amended Reset Price provisions as of the effective date of the 2024 FPA Amendments, (ii) the re-designation of 200,000 additional FPA Shares to Bonus Shares, further reducing the total quantity of FPA Shares outstanding, and (iii) the 2024 Amended Prepayment Shortfall, which increased the prepayment shortfall amount by an incremental $1.1 million. In addition to the reduction in the subscription receivable, the Company recognized a corresponding reduction in the fair value of the forward purchase derivative liabilities of $1.4 million.
April 2024 FPA
On April 18, 2024, pursuant to the Private Placement Agreements, the Company amended their Forward Purchase Agreement with an FPA Investor, which had been previously amended on January 19, 2024 in connection with the Q1 2024 FPA Amendments, to amend the Reset Price to establish a ceiling of $1.27 per share and gave the FPA Investor the ability to purchase up to 248,360 additional FPA Shares (“April 2024 FPA”). Following the April 2024 FPA, the FPA Investor subscribed for, and the Company issued, all 248,360 additional shares of common stock. In connection with the April 2024 FPA, no proceeds were received by the Company. The April 2024 FPA is accounted for as a new forward purchase contract. Accordingly, in connection with the initial recognition of the April 2024 FPA, the Company recorded an additional subscription receivable of $0.3 million with a corresponding offset within additional paid-in capital and a loss on issuance of the FPA derivative of $0.3 million. The subsequent accounting for the April 2024 FPA is substantially the same as set forth for the Private Placement Agreements described above.
Q3 2024 FPA Amendments
From July to September 2024, pursuant to the Private Placement Agreements, the Company and certain FPA Investors entered into several additional amendments to the Forward Purchase Agreements ("Q3 2024 FPA Amendments")
for total proceeds to the Company of $1.2 million. The Q3 2024 FPA Amendments provided that, (i) 950,000 additional FPA Shares were re-designated to Bonus Shares, (ii) the definition of the prepayment shortfall consideration was further amended (“Q3 2024 Amended Prepayment Shortfall”), (iii) gave an FPA investor the ability to purchase up to 248,360 additional FPA Shares (iv) for the FPA Investor who was not party to the December 2023 FPA Amendment or Q1 2024 FPA Amendment, the definition of Reset Price was changed (“Q3 2024 Amended Reset Price”) and, (v) the funds in the escrow account were remitted back to an FPA Investor.
From July to September 2024, the FPA Investors subscribed for, and the Company issued, 1,216,350 additional shares of common stock. These subscriptions are accounted for as a new forward purchase contract. Accordingly, in connection with the initial recognition, the Company recorded an additional subscription receivable of $0.3 million with a corresponding offset within additional paid-in capital and a loss on issuance of the FPA derivative of $0.4 million. The subsequent accounting is substantially the same as set forth for the Private Placement Agreements described above.
The terms of the Q3 2024 Amended Reset Price provide the FPA Investor that the Reset Price will be adjusted weekly on the first scheduled trading day of each week to be the lowest of (a) 90% of the VWAP Price of the Shares during the prior week, (b) the then current Reset Price, and (c) the Initial Price.
The terms of the Q3 2024 Amended Prepayment Shortfall provide for an aggregate $1.4 million increase to the FPA Investors’ pre-existing prepayment shortfall of $0.1 million.
Upon execution of the Q3 2024 FPA Amendments, the Company recognized a gain on amendment to forward purchase contract as set forth below (in thousands):
| | | | | |
| Gain on Amendment |
| Reduction of subscription receivable | $ | (10,389) |
| Reduction in forward purchase derivative liabilities | 10,897 |
| Cash received in connection with amendments | 1,162 |
| Gain on amendments to financial instruments, net | $ | 1,670 |
The $1.7 million gain recognized in connection with the Q3 2024 FPA Amendments represents the reduction in the forward purchase derivative liability and cash received, offset by the reduction in cash proceeds the Company may receive under the forward purchase contract. As a result of the Q3 2024 FPA Amendments, the maximum cash proceeds the Company could receive under the forward purchase contract, reflected in the subscription receivable balance, was lowered. The reduction in the subscription receivable of $10.4 million was caused by (i) the Q3 2024 Amended Reset Price provisions as of the effective date of the Q3 2024 FPA Amendments, (ii) the re-designation of 950,000 additional FPA Shares to Bonus Shares, further reducing the total quantity of FPA Shares outstanding, and (iii) the 2024 Amended Prepayment Shortfall, which increased the prepayment shortfall amount by an incremental $1.4 million. In addition to the reduction in the subscription receivable, the Company recognized a corresponding reduction in the fair value of the forward purchase derivative liabilities of $10.9 million.
Additional Shares of Common Stock
Following the Q3 2024 FPA Amendment, the FPA Investors may subscribe for and purchase a total of 200,000 additional shares of common stock under the Private Placement Agreements.
Sales of FPA Shares and Settlements of Forward Purchase Contracts
Pursuant to the terms and conditions of the Private Placement Agreements, any sales of the Company’s common stock associated with the Private Placement Agreements may not be treated as sales of Bonus Shares until all FPA Shares are sold, at which point such sales of stock may be considered sales of Bonus Shares.
As set forth above in this note, the forward purchase derivative liabilities represent the portion of the subscription receivable that may be released to the FPA Investors rather than the Company. Immediately prior to the settlement of a
forward purchase contract, the derivative liability balance is adjusted to the applicable subscription receivable balance less the cash proceeds to be received as of the settlement date, recognized within the change in fair value of forward purchase derivative liabilities. Upon settlement of a forward purchase contract, the respective derivative liability and subscription receivable balances are derecognized and the cash proceeds to be received are recognized by the Company. Refer to Note 9, Fair Value of Financial Instruments, for further discussion.
As of September 30, 2024, certain FPA Investors sold an aggregate of 2,497,854 shares of the Company’s common stock to third parties. No other sales of FPA Shares occurred during the three or nine months ended September 30, 2024.
The following table summarizes the sales of FPA Shares and proceeds to the Company as of September 30, 2024 (in thousands):
| | | | | |
| Sales of FPA Shares |
| Total sales of FPA Shares | $ | 3,001 |
| Shortfall Sales | (2,127) |
| Proceeds received from sales of FPA Shares | $ | 874 |
Reconciliation of Subscription Receivable and Forward Purchase Derivative Liability
The following presents a reconciliation of the subscription receivable and forward purchase derivative liabilities during the nine months ended September 30, 2024 (in thousands): | | | | | | | | | | | |
| Total Subscription Receivable | | Total Forward Purchase Derivative Liabilities |
| Balance at December 31, 2023 | $ | 17,792 | | $ | 15,804 |
| Loss on amendments to financial instruments, net | (2,764) | | (1,418) |
| Change in fair value of financial instruments | — | | (535) |
| Sales and settlement of forward purchase contracts | (4,639) | | (3,766) |
| Balance at March 31, 2024 | 10,389 | | 10,085 |
| Additional subscriptions | 317 | | 258 |
| Change in fair value of financial instruments | — | | 168 |
| Balance at June 30, 2024 | 10,706 | | 10,512 |
| Additional subscriptions | 308 | | 415 |
| Loss on amendments to financial instruments, net | (10,389) | | (10,897) |
| Change in fair value of financial instruments | — | | 462 |
| Sales and settlement of forward purchase contracts | (374) | | (374) |
| Ending balance at September 30, 2024 | $ | 251 | | $ | 118 |
5.Warrants
Refer to Note 17, Earnings Per Share, for a listing of all unexercised warrants.
Public Warrants
In connection with Graf’s initial public offering (“IPO”), 3,432,286 warrants were issued to Graf’s investors (“Public Warrants”). The Public Warrants, which entitle the registered holder to purchase one share of the Company’s common stock, have an exercise price of $11.50 per warrant, became exercisable 30 days after the completion of the Business Combination, and are set to expire five years from the completion of the Business Combination, or earlier upon
redemption. The Public Warrants may be called for redemption at the sole discretion of the Company if the Company’s stock price equals or exceeds $18.00 per share and other certain conditions are met. The Public Warrants are equity classified due to terms indexed to the Company’s own stock and the satisfaction of other equity classification criteria.
Private Warrants
Concurrently with Graf’s IPO, Graf issued 4,721,533 warrants to Graf Acquisition Partners IV LLC (“Private Warrants”). The terms of the Private Warrants are identical to the Public Warrants with an exercise price of $11.50 per warrant, except that they are subject to certain transfer and sale restrictions and are not optionally redeemable so long as they are held by the initial purchasers or their permitted transferees. Additionally, the Private Warrants are exercisable on a cashless basis. If the Private Warrants are held by a party other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. The Private Warrants are liability classified due to terms not indexed to the Company’s own stock. As described in Note 8, Related Party Transactions, the Private Warrants are a related party financial instrument. Private Warrants are classified to non-current liabilities because their term ends beyond one year from the latest unaudited condensed consolidated balance sheet date.
SPA Warrants
Together with the issuance of the Senior Convertible Notes described in Note 6, Convertible Notes, 1,000,000 warrants were issued to NKMAX at an exercise price of $11.50 per warrant (“SPA Warrants”). The terms of the SPA Warrants are identical to the terms of the Public Warrants with redemption at the sole discretion of the Company if the Company’s stock price equals or exceeds $18.00 per share and other certain conditions are met. The SPA Warrants are equity classified due to terms indexed to the Company’s own stock and the satisfaction of other equity classification criteria, including redemption in the Company’s control if the Company’s stock price equals or exceeds $18.00 per share. As described in Note 8, Related Party Transactions, the SPA Warrants are a related party financial instrument.
Working Capital Warrants
Prior to the Closing, Graf executed drawdowns upon a working capital loan facility. Upon Closing, the $0.8 million balance of the working capital loan facility was settled through the issuance of 523,140 warrants (“Working Capital Warrants”). The terms of the Working Capital Warrants are identical to the terms of the Private Warrants with an exercise price of $11.50 per warrant. The Working Capital Warrants are liability classified due to terms not indexed to the Company’s own stock. As described in Note 8, Related Party Transactions, the Working Capital Warrants are a related party financial instrument. Working Capital Warrants are classified to non-current liabilities because their term ends beyond one year from the latest unaudited condensed consolidated balance sheet date.
PIPE Warrants
Prior to the Closing, the Company entered into warrant subscription agreements (the “Warrant Subscription Agreements”) with certain investors (“Warrant Investors”), which closed on September 29, 2023. Pursuant to the Warrant Subscription Agreements, the Warrant Investors purchased an aggregate of 10,209,994 warrants, at a purchase price of $1.00 per warrant (“PIPE Warrants”) for total proceeds of $10.2 million. The PIPE Warrants are exercisable for cash (or by “cashless” exercise under certain circumstances) during the five-year period beginning on the Closing. One-third of the PIPE Warrants are exercisable initially at $10.00 per warrant, one-third of the PIPE Warrants are exercisable initially at $12.50 per warrant, and one-third of the PIPE Warrants are exercisable initially at $15.00 per warrant. The initial exercise prices of each tranche are subject to adjustment every 180 days after the Closing based upon declines in trading prices of the Company’s common stock, as well as antidilutive adjustments for stock splits, stock dividends, and the like. In addition, the PIPE Warrants contain a downside protection provision, pursuant to which the Warrant Investors may demand a cashless exchange of certain PIPE Warrants and, to the extent the relevant reference price is less than $1.50 per share, a cash payment calculated as the difference between $1.50 per share and the then-current exercise price multiplied by the applicable number of warrant shares shall be paid to the Warrant Investors ("Downside Protection"). The PIPE Warrants are liability classified due to terms not indexed to the Company’s own stock and their cash settlement provisions.
PIPE Warrants are classified to non-current liabilities because their term ends beyond one year from the latest unaudited condensed consolidated balance sheet date.
Q1 2024 PIPE Warrant Amendment
On February 9, 2024, the Company amended their Warrant Subscription Agreement with a Warrant Investor ("Q1 2024 PIPE Warrant Amendment") to, among other things, grant the Warrant Investor, (i) the right to exchange each PIPE Warrant for a newly registered share, effectively waiving the original strike price and downside protection feature, (ii) a “Most Favored Nation” status with respect to warrant restructuring such that they may amend the terms upon the Company executing a similar transaction with more favorable terms for so long as any subscription warrants remain outstanding, and (iii) certain registration rights. In exchange, the Company received an upfront cash payment of $0.3 million and the right to receive a second cash payment of up to $0.3 million based on the trailing 5-day VWAP following the effective registration of the shares ("Deferred Payment"). All other terms and conditions remained unchanged.
A gain on amendment was recognized as set forth below (in thousands):
| | | | | |
| PIPE Warrant Amendment |
| Cash proceeds | $ | 250 |
| Reduction in PIPE Warrant derivative liability | 429 |
| Gain on amendment of PIPE warrant agreement | $ | 679 |
The reduction in the PIPE Warrant derivative liability was primarily attributable to the removal of the downside protection feature as well as the recognition of the Deferred Payment.
Q2 2024 PIPE Warrant Amendment
On April 25, 2024, the Company amended their Warrant Subscription Agreements with Warrant Investors ("Q2 2024 PIPE Warrant Amendment") to, among other things, (i) cap the strike price at $2.00 per warrant and (ii) instate a strike price floor of $1.50 per warrant. No proceeds were received in connection with the Q2 2024 PIPE Warrant Amendment.
A loss on amendment of $4.4 million was recognized representing the incremental fair value provided to the PIPE Warrant Investors as a result of the Q2 2024 PIPE Warrant Amendment.
Q3 2024 PIPE Warrants Exercised
On September 9, 2024, per the amended Warrant Subscription Agreement with a Warrant Investor ("Q1 and Q2 2024 PIPE Warrant Amendments"), 2,000,000 share warrants were exercised, resulting in the issuance of 2,000,000 common shares. The Company received aggregate proceeds of $0.3 million and recognized a gain on the change of the fair value of the warrant liability of $2.4 million upon issuance of the shares.
Convertible Bridge Loan Warrants
Together with the issuance of the Convertible Bridge Loans described in Note 6, Convertible Notes, the Company agreed to issue 1,250,000 warrants to lenders (“Convertible Bridge Loan Warrants”), of which 400,000 warrants were to a related party (“Related Party Convertible Bridge Loan Warrants”). The Convertible Bridge Loan Warrants, which entitle the registered holder to purchase one share of the Company’s common stock, have an exercise price of $1.50 to $2.00 per warrant, became exercisable on the date of the issuance of the warrant, and are set to expire five years from issuance or earlier upon redemption. Additionally, the Convertible Bridge Loan Warrants are exercisable on a cashless basis if mutually agreed upon with the Company. Some of the warrants also have most favored nation status and reset provisions with respect to new warrant issues and existing warrant restructuring. The Convertible Bridge Loan Warrants original exercise price of $2.00 per warrant was reset to an adjusted price of $0.60 per warrant as of September 16, 2024. The Convertible Convertible Bridge Loan Warrants are liability classified due to terms not indexed to the Company’s own stock. The Convertible Bridge Loan warrants are classified to non-current liabilities because their term ends beyond one year from the latest unaudited condensed consolidated balance sheet date.
Convertible 2024 Note Warrants
Together with the issuance of the 2024 Convertible Promissory Notes as well as the Letter Agreements, each described in Note 6, Convertible Notes, the Company agreed to issue 9,562,877 warrants to lenders (“Convertible 2024 Note Warrants”) of which 550,000 warrants were promised to be issued to related parties ("Related Party Convertible 2024 Note Warrants"). The terms of the Convertible 2024 Note Warrants are identical to the Convertible Bridge Loan Warrants. They entitle the registered holder to purchase one share of the Company’s common stock at an exercise price of $2.00 per warrant, became exercisable on the date of the issuance of the warrant, and are set to expire five years from issuance or earlier upon redemption. Pursuant to the terms of the Convertible Note Warrants, with an original exercise price of $2.00 per warrant, was reset to an adjusted price of $0.60 per warrant as of September 16, 2024. The Convertible Promissory 2024 Note Warrants are liability classified due to terms not indexed to the Company’s own stock. Such warrants are classified to non-current liabilities because their term ends beyond one year from the latest unaudited condensed consolidated balance sheet date.
6.Convertible Notes
Consideration Shares
Certain Convertible Bridge Loans, 2024 Convertible Notes, and Letter Agreements, each as defined below, entitle the holders to shares of the Company's common stock (“Consideration Shares”). The quantity of Consideration Shares attributable to the Convertible Bridge Loans, the 2024 Convertible Notes, and the Letter Agreements, inclusive of such Consideration Shares related to amendments to these agreements, totaled 24,001 shares, 8,124,122 shares, and 1,160,567 shares, respectively.
Consideration Shares were liability classified until issuance due to the insufficiency of authorized and unissued shares. The Company made payments on the Convertible Promissory Notes resulting in an increase of the available unissued shares as of September 30, 2024. Accordingly, the Company issued shares and the liability classified consideration shares were reclassified to equity. As of September 30, 2024, 0 and 9,308,690 Consideration Shares were liability classified and equity classified, respectively.
2024 Convertible Bridge Loans
From February to September 2024, the Company issued convertible bridge loans to holders ("2024 Convertible Bridge Loans") and related parties ("2024 Related Party Convertible Bridge Loan") (collectively referred to as "Convertible Bridge Loans") for total proceeds of $0.3 million and $0.4 million, respectively, with a 20.0% premium due at maturity. The Convertible Bridge Loans mature at the earlier of (i) 60 days from the respective issuance dates, (ii) upon a financing event with third parties exceeding between $5.0 million and $10.0 million, depending on the agreement, (iii) the occurrence of any event of default, or (iv) the acceleration of the short-term bridge note. The loans are convertible at any time, in whole or in part, at the holder's option into the Company's common stock at a 15.0% discount to the VWAP 10 days prior to conversion, with the conversion being limited to converting at no more than $2.00 per share. Additionally, as described in Note 5, Warrants, concurrently with the Convertible Bridge Loans, the Company issued the Convertible Bridge Loan Warrants to holders which were recognized at fair value of $1.4 million. There are no other financial or non-financial covenants associated with the Convertible Bridge Loans.
The Company recognized a loss of $0.7 million upon issuance of the Convertible Bridge Loans, Convertible Bridge Loan Warrants and Consideration Shares representing the excess of the $1.4 million initial fair value of the Convertible Bridge Loan Warrants over the $0.7 million proceeds received. Accordingly, a discount was recognized on the Convertible Bridge Loans. Refer to Note 9, Fair Value of Financial Instruments.
In April 2024, the outstanding principal and interest of two of the 2024 Convertible Bridge Loans and the 2024 Related Party Convertible Bridge Loan were repaid in full, for an aggregate payment of $0.3 million and $0.5 million, respectively.
On April 19, 2024, one of the Convertible Bridge Loans was amended to (a) extend the maturity date to be the earliest of (i) 90 days from issuance, (ii) upon a financing event with third parties exceeding $5.0 million, (iii) the occurrence of any event of default, or (iv) the acceleration of the amended and restated short-term bridge note, (b) increase the premium due at maturity to 24.6%, and (c) grant the holder (i) 22,000 Convertible Bridge Loan Warrants and (ii) 16,667 Consideration Shares. In connection with the amendment, less than $0.1 million was recognized as loss on amendments to financial instruments. On April 25, 2024, $0.1 million, representing a portion of the outstanding balance, was repaid to the lender with less than $0.1 million remaining outstanding under the related Convertible Bridge Loan.
On August 29, 2024, the remaining portion of the outstanding balance was repaid to the lender under the related Convertible Bridge Loan.
The Company accretes the balance of the Convertible Bridge Loans on a straight-line basis to its repayment amount through interest expense. During the three months ended September 30, 2024, the Company had no interest expense and discount amortization related to the 2024 Convertible Bridge Loans to record and no interest expense and discount amortization related to the 2024 Related Party Convertible Bridge Loan to record. During the nine months ended September 30, 2024, the Company recorded $0.4 million of interest expense and discount amortization related to the 2024 Convertible Bridge Loans and $0.5 million interest expense and discount amortization related to the 2024 Related Party Convertible Bridge Loan. As of September 30, 2024, zero remained to be accreted through interest expense on the Convertible Bridge Loans. No interest expense was incurred for the Convertible Bridge Loans during the three and nine months ended September 30, 2023.
2024 Convertible Notes
During 2024, the Company issued multiple convertible promissory note agreements, of which two were with related parties and unsecured (“Related Party Convertible Notes”), one was secured (“Secured Convertible Notes”), eighteen were unsecured (“Unsecured Convertible Notes”), and three were unsecured containing tranche rights (“Tranche Convertible Notes", collectively with the Related Party Convertible Notes, Secured Convertible Notes, and Unsecured Convertible Notes, “2024 Convertible Notes”). Each 2024 Convertible Note was issued with 2024 Convertible Note Warrants and Consideration Shares as set forth above. In connection with the Company's policy described in Note 2, Summary of Significant Accounting Policies, for each of the three and nine months ended September 30, 2024, a loss on
issuance of 2024 Convertible Notes of $3.6 million was recognized, of which less than $0.1 million was pursuant to related party issuances.
The Company elected to measure the 2024 Convertible Notes, including accrued interest, using the fair value option under ASC 825, Financial Instruments. Changes in fair value are included in change in fair value of 2024 Convertible Notes on the unaudited condensed consolidated statements of operations and comprehensive loss. See Note 9, Fair Value of Financial Instruments, for further information.
The 2024 Convertible Notes are convertible into shares of the Company's common stock, in full or in part, at any time at the election of the holder, at a conversion price of $0.60 per share. On September 16, 2024, the Company issued approximately 162,000 shares of common stock, par value $0.0001 per share to two holders of its Convertible Notes at their request in partial repayment of amounts due under each holder’s respective Convertible Note (the “Conversions”). Pursuant to the terms of the Convertible Notes, the shares of Common Stock were issued at $0.60, which is 80% of the lowest volume weight average price of the Common Stock on any trading day during the 10-trading day period prior to the Conversions (the “Adjusted Price”). Such Conversions constitute dilutive issuances for 2024 Convertible Notes and Warrants. Pursuant to the terms of the Notes and the Warrants, as of September 16, 2024, the conversion prices of the Notes and the exercise prices of the Warrants with an original price of $2.00 per share, have been reset to the adjusted price of $0.60 per share.
During the three months ended September 30, 2024, seven of the Unsecured Convertible Notes were partially repaid, for an aggregate payment of $0.2 million. All other 2024 Convertible Notes remained outstanding as of September 30, 2024.
The 2024 Convertible Notes are prepayable with a negotiated premium. The Secured Convertible Notes are secured by all of the Company’s assets, including a deed of trust over the Company’s owned real property located in Santa Ana, California.
Upon an event of default, the 2024 Convertible Notes (i) will become immediately due and payable, (ii) will accrue interest at the default rate (set forth below in tabular format), and (iii) may be convertible at a discounted conversion price. The events of default include, among other things, failure to comply with SEC reporting requirements, cessation of operations, declines in market capitalization below $10.0 million, and failure to pay principal or interest.
The tranche rights of the Tranche Convertible Notes entitle the holder at their sole discretion to purchase additional installments of unsecured zero coupon promissory notes inclusive of additional Convertible Note Warrants and Consideration Shares (“Tranche Rights”). The Tranche Rights expire six months after the date of the agreement. With respect to the Tranche Convertible Notes issued on May 7, 2024, the respective Tranche Rights allow the holder to purchase up to an aggregate amount of $2.5 million of unsecured zero coupon promissory notes in four tranches. Each tranche would consist of (i) $0.6 million (including a purchase discount of $0.1 million), (ii) 550,000 2024 Convertible Notes Warrants, and (iii) 416,667 Consideration Shares. With respect to the Tranche Convertible Notes issued on May 9, 2024, pursuant to their respective Tranche Rights, the holder is entitled to purchase up to an aggregate amount of $1.5 million of unsecured 12% coupon promissory notes in four tranches. Each tranche would consist of (i) $0.4 million (including a purchase discount of $0.1 million), (ii) 330,000 2024 Convertible Notes Warrants, and (iii) 250,000 Consideration Shares. The Tranche Rights are liability-classified on a recurring fair value measurement basis due to their exercise being out of the Company’s control, the instruments underlying the Tranche Rights being liability-classified, and satisfaction of the derivatives criteria under ASC 815, Derivatives and Hedging. See Note 9, Fair Value of Financial Instruments, for further information. As of September 30, 2024 (during the nine months), two of the four Tranche Rights associated with the May 7, 2024 Tranche Convertible Notes were exercised and one of the four Tranche Rights associated with the May 9, 2024 Tranche Convertible Notes were exercised. During the three months ended September 30, 2024, there were no Tranche Rights exercised with both Tranche Convertible Notes.
In April 2024, the Company entered into letter agreements with two 2024 Convertible Notes investors (“Letter Agreements”). Pursuant to the Letter Agreements, the investors agreed to not exercise certain previously exercisable repayment rights upon financings exceeding $5.0 million. In exchange for entering into the Letter Agreements, the Company paid $0.1 million to the investors and issued the investors 416,667 Consideration Shares as well as 550,000
Convertible 2024 Note Warrants. Because the 2024 Convertible Notes are accounted for under the fair value option, the consideration transferred by the Company under the Letter Agreements was recognized as an expense of $0.1 million during the nine months ended September 30, 2024.
In August 2024, the Company entered into four additional letter agreements with four 2024 Convertible Notes investors ("Letter Agreements"). Pursuant to the Letter Agreements, the investors agreed to not exercise certain previously exercisable repayment rights upon financings exceeding $5.0 million. In exchange for entering into the additional Letter Agreements, the Company issued the investors 743,900 Consideration Shares as well as 981,948 Warrants.
The table below summarizes the terms and certain amounts (dollar amounts in thousands) with respect to the outstanding 2024 Convertible Notes as of September 30, 2024 (inclusive of instruments issued in connection with the Letter Agreements and exercised Tranche Rights):
| | | | | | | | | | | | | | | | | | | | | | | |
| Related Party Convertible Notes | | Secured Convertible Notes | | Unsecured Convertible Notes | | Tranche Convertible Notes |
| Quantity issued | 2 | | | 1 | | | 18 | | | 3 | |
| Proceeds | $ | 500 | | | $ | 5,000 | | | $ | 5,033 | | | $ | 1,100 | |
| Total principal | $ | 550 | | | $ | 5,000 | | | $ | 5,550 | | | $ | 1,356 | |
| Issuance date | May 6, 2024 and June 7, 2024 | | April 5, 2024 | | March 21, 2024 - June 26,2024, and August 2024 | | May 7, 2024 - June 18, 2024 |
| Original issue discount | 10.0 | % | | N/A | | 4.0 % - 23.3 % | | 23.2 | % |
| Coupon rate | 12.0 | % | | 7.5 | % | | 12.0 % - 23.2 % | | 12.0 | % |
| Default rate | 24.0 | % | | 12.5 | % | | 24.0 | % | | 24.0 | % |
| Maturity date | May 6, 2025 and June 7, 2025 | | October 4, 2026
| | March 21, 2025 - December 26, 2026, and February 14, 2027 | | May 7, 2025 - June 18, 2025 |
| Interest payment frequency | Monthly starting in the third month after issuance | | Monthly | | Monthly starting in the third month after issuance | | Monthly starting in the third month after issuance |
| Principal payment frequency | Monthly starting in the third month after issuance | | At maturity | | Monthly starting in the third month after issuance | | Monthly starting in the third month after issuance |
| Quantity of Convertible 2024 Note Warrants | 550,000 | | | 1,000,000 | | | 6,802,877 | | | 1,210,000 | |
| Quantity of Consideration Shares (total) | 416,666 | | | 2,797,661 | | | 3,993,128 | | | 916,667 | |
| Quantity of Consideration Shares (issued during three-month period ended September 30, 2024) | — | | | — | | | 2,083,333 | | | — | |
| Repayments for the three months ended September 30, 2024 | $ | — | | | $ | — | | | $ | (67) | | | $ | (147) | |
| Repayments for the nine months ended September 30, 2024 | $ | — | | | $ | — | | | $ | (806) | | | $ | (147) | |
| Quantity of Liability Consideration Shares (Total) | — | | | — | | | — | | | — | |
Senior Convertible Notes
Prior to the Closing, the Company entered into convertible note subscription agreements (“Securities Purchase Agreement”) with NKMAX for total proceeds of $10.0 million, with a four-year term and an interest rate of 5.0% paid in
cash semiannually or 8.0% paid in kind (“Senior Convertible Notes”), which closed on September 29, 2023. Interest began accruing at Closing and is payable semiannually in arrears, with interest that is paid in kind (if applicable) increasing the principal amount outstanding on each interest payment date. The Company currently expects to make their interest payments in-kind in lieu of periodic cash payments. The Senior Convertible Notes are convertible at any time, in whole or in part, at NKMAX’s option at a conversion price of $10.00 per share of common stock (subject to anti-dilution adjustments in the event of stock splits and the like). The Senior Convertible Notes have a put option which may be exercised by NKMAX 2.5 years after the issuance of the Senior Convertible Notes. No less than six months after exercise of the put option, the Company will be required to repay all principal and accrued interest of the Senior Convertible Notes. Should the put option remain unexercised, the outstanding principal and accrued interest will be due and payable on September 29, 2027. Additionally, as described in Note 5, Warrants, together with the Securities Purchase Agreement, the SPA Warrants were issued to NKMAX. Accordingly, a relative fair value allocation was applied and discount was recognized on the Senior Convertible Notes as set forth in Note 9, Fair Value of Financial Instruments. There are no financial or non-financial covenants associated with the Senior Convertible Notes. During the three and nine months ended September 30, 2024, the Company recorded $0.2 million and $0.6 million of interest expense and discount amortization related to the Senior Convertible Notes, respectively. As described in Note 8, Related Party Transactions, the Senior Convertible Notes are a related party financial instrument.
The following table presents a reconciliation of the Senior Convertible Notes (in thousands):
| | | | | |
| Senior Convertible
Notes |
| Balance as of December 31, 2023 | $ | 9,930 |
| Amortization of discount | 11 |
| Paid-in-kind interest | 206 |
| Balance as of March 31, 2024 | 10,147 |
| Amortization of discount | 14 |
| Paid-in-kind interest | 211 |
| Balance as of June 30, 2024 | 10,372 |
| Amortization of discount | 15 |
| Paid-in-kind interest | 217 |
| Balance as of September 30, 2024 | $ | 10,604 |
Legacy Convertible Notes
From November to December 2019 and from March to September 2023, the Company issued convertible promissory notes for aggregate proceeds of $17.3 million, of which $0.4 million were issued to related parties (“Legacy Convertible Notes”). The convertible notes issued during 2019 and 2023 bore an interest rate of 1.7% and 4.6% per year, respectively.
Pursuant to their terms, immediately prior to Closing, all of the Legacy Convertible Notes were converted into 5,579,266 shares of Legacy NKGen common stock, which then converted into 2,278,598 shares of the Company’s common stock at Closing based on the Exchange Ratio.
7.Debt
Revolving Line of Credit
In June 2023, the Company entered into a $5.0 million revolving line of credit agreement (as amended on September 19, 2023, January 30, 2024 and April 5, 2024) with a commercial bank with a one-year term and an interest rate based on the higher of (i) the one-month secured overnight financing rate plus 2.9% or (ii) 7.5%. Issuance fees of $0.1 million were incurred in connection with this revolving line of credit. All outstanding balances under the revolving line of credit were due and payable on June 20, 2024. In April 2024, the agreement was amended to extend the maturity date of
the revolving line of credit to September 18, 2024. In September 2024, the agreement was further amended, extending the maturity date of the revolving line of credit to December 16, 2024. The revolving line of credit is secured by all of the Company’s assets, including a deed of trust over the Company’s owned real property located in Santa Ana, California. The Company was required to maintain deposits with the lender in an amount of at least $15.0 million from a certain period of time as long as there was a debt balance outstanding. Pursuant to a letter of intent signed in March 2024, in April 2024, the lender subsequently waived the minimum cash deposit requirement in exchange for a $0.1 million payment and the Company's agreement to use the lender as their primary banking relationship. The $0.1 million fee is amortized over the remaining term of the revolving line of credit. The Company was in compliance with its debt covenants as of September 30, 2024. Additionally, the Company is required to maintain a restricted cash balance of $0.3 million following the issuance. As of September 30, 2024, the interest rate for the revolving line of credit was 7.8%.
Through September 30, 2024, the Company drew down $4.9 million upon the revolving line of credit and no repayments of drawdowns occurred. Interest expense of $0.1 million and less than $0.1 million was incurred upon the revolving line of credit, which was paid in cash during the three months ended September 30, 2024 and 2023, respectively. Interest expense of $0.3 million and less than $0.1 million was incurred on the revolving line of credit, which was paid in cash during the nine months ended September 30, 2024 and 2023, respectively.
As of the date of this filing, the revolving line of credit is past due. The Company is in the process of amending the agreement with the parties to allow for a further extension or over-time repayment under specific terms. The Company paid down $1.0 million of the balance in December 2024 with an outstanding balance of $4.0 million remaining.
Related Party Loans
From January through April 2023, the Company entered into related party loans with NKMAX (“Related Party Loans”) for aggregate gross proceeds of $5.0 million. These Related Party Loans bear an interest rate of 4.6% and matured on December 31, 2024. There are no financial or non-financial covenants associated with the Related Party Loans. The Related Party Loans are not convertible into equity. As of the date these financials are filed, Related Party Loans are past due, and the Company is in process of re-negotiating the terms of the loan. The Company made interest payments of $0.4 million during the three months ended December 31, 2024.
In connection with the Related Party Loans, interest expenses incurred were $0.1 million for both the three months ended September 30, 2024 and 2023, and $0.2 million for both the nine months ended September 30, 2024 and 2023. Related party interest payable amounts recorded to other current liabilities on the unaudited condensed consolidated balance sheets were $0.4 million and $0.2 million as of September 30, 2024 and December 31, 2023, respectively.
Bridge Loans
In March 2024, the Company entered into bridge loan agreements ("Bridge Loans") for total proceeds of $0.2 million, with a premium of 7.5% of the principal, and a maturity date 15 days from funding. The Bridge Loans were subsequently paid in full on April 10, 2024.
8.Related Party Transactions
Founder Shares
Contemporaneously with the execution of the Merger Agreement, Graf and NKGen entered into an amended and restated sponsor support and lockup agreement (“Amended and Restated Sponsor Support and Lockup Agreement”). In connection with the Amended and Restated Sponsor Support and Lockup Agreement, of the 4,290,375 shares of Graf formerly held by Graf’s sponsor and insiders (“Founder Shares”), (i) 1,773,631 shares were forfeited, (ii) 1,173,631 shares became restricted shares subject to vesting conditions (“Deferred Founder Shares”), and (iii) the remaining 1,343,113 shares are subject to trading restrictions for up to two years and continue to be outstanding and fully vested shares.
Deferred Founder Shares do not have voting rights, do not participate in dividends and are not transferable. During the vesting period of five years from Closing (“Vesting Period”), if the trading price or price per share consideration upon a change in control for common stock is greater than or equal to $14.00 at any 20 trading days in a 30 consecutive trading-day period, then 873,631 Deferred Founder Shares will immediately vest; and if greater than or equal to $20.00 at any 20 trading days in a 30 consecutive trading-day period, then an additional 300,000 Deferred Founder Shares will immediately vest. In the event there is a sale of the Company, then immediately prior to the consummation of such sale, the calculated acquirer sale price, as defined in the agreement, will take into account the number of Deferred Founder Shares that will vest upon a change in control. Upon the expiration of the Vesting Period, unvested Founder Shares will be forfeited and cancelled for no consideration.
All Founder Shares, including Deferred Founder Shares, are equity classified primarily due to terms indexed to the Company’s own stock, including upon a change in control.
Related Party Financial Instruments
The Company’s related party financial instruments include (i) the Founder Shares, including Deferred Founder Shares described above in this Note 8, (ii) the SPA Warrants described in Note 5, Warrants, (iii) the Working Capital Warrants described in Note 5, Warrants, (iv) the Senior Convertible Notes described in Note 6, Convertible Notes, (v) 2024 Related Party Convertible Bridge Loan described in Note 6, Convertible Notes, (vi) Related Party Convertible Bridge Notes described in Note 6, Convertible Notes, (vii) select Legacy Convertible Notes described in Note 6, Convertible Notes, (viii) the Related Party Loans described in Note 7, Debt, (ix) the Private Warrants described in Note 5, Warrants, (x) 400,000 of the Convertible Bridge Warrants described in Note 5, Warrants, and (xi) 550,000 of the Convertible 2024 Note Warrants described in Note 5, Warrants.
Purchases of Laboratory Supplies
For the three and nine months ended September 30, 2024, the Company recorded $0.1 million of research and development expenses associated with the purchase of laboratory supplies from NKMAX. For the three and nine months ended September 30, 2023, the Company recorded $0.1 million of research and development expenses associated with the purchase of laboratory supplies from NKMAX. As of September 30, 2024, $0.1 million remained outstanding relating to the purchase of laboratory supplies. As of December 31, 2023, $0.6 million remained outstanding relating to the purchase of laboratory supplies from NKMAX, which were recorded to accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets.
9.Fair Value of Financial Instruments
The following table summarizes the liabilities measured at fair value on a recurring basis as of September 30, 2024 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at Reporting Date Using |
| Balance as of
September 30,
2024 | | Level 1 | | Level 2 | | Level 3 |
| PIPE Warrants | $ | 10,990 | | | $ | — | | | $ | — | | | $ | 10,990 | |
| 2024 Convertible Note Warrants | 2,645 | | | — | | | — | | | 2,645 | |
| Convertible Bridge Loan Warrants | 238 | | | — | | | — | | | 238 | |
| Private Warrants | 74 | | | — | | | — | | | 74 | |
| Working Capital Warrants | 61 | | | — | | | — | | | 61 | |
| Subtotal - Derivative warrant liabilities | 14,008 | | | — | | | — | | | 14,008 | |
| Forward purchase derivative liabilities | 118 | | | — | | | — | | | 118 | |
| Convertible promissory notes (2024 Convertible Notes) | 9,709 | | | — | | | — | | | 9,709 | |
| Tranche right derivative liabilities (Tranche Rights) | 70 | | | — | | | — | | | 70 | |
| Total | $ | 23,905 | | | $ | — | | | $ | — | | | $ | 23,905 | |
In addition to items that are measured at fair value on a recurring basis, the Company also has liabilities that are measured at fair value on a nonrecurring basis and therefore are not included in the tables above. Liabilities that are measured at fair value on a nonrecurring basis as of September 30, 2024 include the Senior Convertible Notes. The Senior Convertible Notes were determined to be in scope of ASC 470, Debt. Accordingly, this instrument will not be measured at fair value on a recurring basis as the fair value measurement of this instrument was for purposes of the relative fair value allocation as the Senior Convertible Notes were issued together with the SPA Warrants.
Legacy Convertible Notes
For the three and nine months ended September 30, 2023, the Company recognized $(1.7) million and $1.0 million of income (expense) associated with the change in fair value of the Legacy Convertible Notes, respectively.
The Legacy Convertible Notes converted at Closing on September 29, 2023. The fair value of the notes immediately prior to their conversion at Closing was based upon the fair value of the 2,278,598 shares of the Company’s common stock issued upon their conversion totaling $18.9 million, at a per share value of $8.30 based upon the fair value of the Company’s common stock at Closing.
2024 Convertible Notes
The following table presents a reconciliation of the 2024 Convertible Notes (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Related Party Convertible Notes | | Secured Convertible Notes | | Unsecured Convertible Notes | | Tranche Convertible Notes | | Total 2024 Convertible Notes |
| Balance as of December 31, 2023 | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Issuance | — | | | — | | | 250 | | | — | | | 250 | |
| Change in fair value | — | | | — | | | 478 | | | — | | | 478 | |
| Balance as of March 31, 2024 | — | | | — | | | 728 | | | — | | | 728 | |
| Issuance | 543 | | | 4,346 | | | 1,817 | | | 1,160 | | | 7,866 | |
| Change in fair value | (18) | | | (412) | | | (149) | | | (17) | | | (596) | |
| Repayment | — | | | — | | | (739) | | | — | | | (739) | |
| Balance as of June 30, 2024 | 525 | | | 3,934 | | | 1,657 | | | 1,143 | | | 7,259 | |
| Issuance | — | | | — | | | 2,556 | | | — | | | 2,556 | |
| Change in fair value | (14) | | | (179) | | | 364 | | | 38 | | | 209 | |
| Repayment | — | | | — | | | (67) | | | (147) | | | (214) | |
| Conversions to equity | — | | | — | | | (37) | | | (64) | | | (101) | |
| Balance as of September 30, 2024 | $ | 511 | | | $ | 3,755 | | | $ | 4,473 | | | $ | 970 | | | $ | 9,709 | |
Prior to April 1, 2024, the fair value of the 2024 Convertible Notes was measured using a binomial lattice model. A binomial stock lattice model generates two probable outcomes of stock price - one up and another down - emanating at each point in time or "node", starting from the valuation date until the maturity date. This lattice generates a distribution of stock price. Based on the stock price at each corresponding node, the value of the Notes was determined by evaluating the optimal decision that a holder and/or the issuer would make to maximize its payoff. At maturity, the value of the notes was calculated as the maximum between the principal amount and the conversion value. At each node prior to maturity, the lattice model determines whether the notes would be (i) converted by the holder, or (ii) held by the holder, based on the payoff related to each decision. Volatility in the model was estimated from historical equity volatility, median asset volatility of comparable companies, and was adjusted using the Company's capital structure. The cost of debt used in discounting the Notes was estimated based on (i) market yield curve corresponding to the estimated synthetic credit rating
of the Company, and (ii) observed market spreads of publicly traded comparable debt with similar credit rating and industry as that of the Company.
Commencing on April 1, 2024, the fair value of the 2024 Convertible Notes was measured using a probability weighted scenario model. The possible settlement outcomes were identified and a scenario for each outcome was modeled and probability weighted for the likelihood of each respective event as set forth in tabular format below. The conversion feature was modeled as a call option, where the exercise price is set equal to the stated conversion price, stock price equals the Company’s closing stock price on the Valuation date, volatility uses a re-levered equity volatility estimated from the median historical asset volatility of comparable companies, and a term equal to the expected time to conversion. The Black-Scholes Option Pricing Model, which captures all possible outcomes, was used to value the conversion right, which is added to the present-valued cash flows to calculate the fair value of the 2024 Convertible Notes. The 2024 Convertible Notes' cash flows were present valued using a market yield curves of debt instruments issued by similarly rated issuers, and adjusted based on seniority and securitization of each individual 2024 Convertible Notes. A default scenario was implemented and probability weighted using Bloomberg’s Default Risk function. The Company’s historical financial statements were utilized to estimate a probability of default over a given term and a synthetic credit rating. The default scenario value uses a recovery rate observed in instruments with similar seniority per Moody’s debt data.
As set forth above, the binomial lattice model captures two probable outcomes while the probability weighted scenario model captures additional possible outcomes with the Black-Scholes Option Pricing Model utilized for the conversion scenario captures all possible outcomes for that scenario. The Company changed their methodology for the fair value of the 2024 Convertible Notes as of April 1, 2024 because of changes in entity-specific assumptions and the volume of issuances following this date, which introduced a variety of additional types of 2024 Convertible Notes (Related Party Convertible Notes, Tranche Convertible Notes, Secured Convertible Notes) and holders of 2024 Convertible Notes, which increased the diversity of expected behaviors and potential outcomes.
The following unobservable assumptions were used in determining the fair value of the 2024 Convertible Notes prior to April 1, 2024:
| | | | | |
| |
| Credit spread | 27.5 | % |
| Equity volatility | 45.0 | % |
The following unobservable assumptions were used in determining the fair value of the 2024 Convertible Notes following April 1, 2024:
| | | | | | | | | | | |
| September 30, 2024 | | Issuance Dates |
| Conversion | 41.0% - 60.0% | | 60.0% - 75.0% |
| Maturity | 14.0% - 20.0% | | 0.0 | % |
| Default feature | 20.0% - 45.0% | | 25.0% - 40.0% |
| | | | | | | | | | | |
| September 30, 2024 | | Issuance Dates |
| Dividend yield | 0.0 | % | | 0.0 | % |
| Volatility | 137.0% - 167.0% | | 108.0% - 151.0% |
| Discount yield | 12.3% - 14.7% | | 14.1% - 17.8% |
Liability Classified Warrants
The following table represents a reconciliation of all liability classified warrants (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Private Warrants | | Working Capital Warrants | | Convertible Bridge Loan Warrants | | Convertible Promissory Note Warrants | | PIPE Warrants | | Total |
| Balance as of December 31, 2023 | $ | 377 | | | $ | 43 | | | $ | — | | | $ | — | | | $ | 25,339 | | | $ | 25,759 | |
| Issuances | — | | | — | | | 1,424 | | | 323 | | | — | | | 1,747 | |
| Change in fair value in connection with the Q1 2024 PIPE Warrant Amendment | — | | | — | | | — | | | — | | | (429) | | | (429) | |
| Change in fair value | 426 | | | 46 | | | 398 | | | 619 | | | (5,206) | | | (3,717) | |
| Balance as of March 31, 2024 | 803 | | | 89 | | | 1,822 | | | 942 | | | 19,704 | | | 23,360 | |
| Issuances | — | | | — | | | 16 | | | 5,247 | | | — | | | 5,263 | |
| Change in fair value in connection with the Q2 2024 PIPE Warrant Amendment | — | | | — | | | — | | | — | | | 4,430 | | | 4,430 | |
| Reclassification to equity pursuant to sequencing policy | — | | | — | | | (297) | | | — | | | — | | | (297) | |
| Change in fair value | (378) | | | (42) | | | (701) | | | (1,023) | | | (7,376) | | | (9,520) | |
| Balance as of June 30, 2024 | 425 | | | 47 | | | 840 | | | 5,166 | | | 16,758 | | | 23,236 | |
| Issuances | — | | | — | | | — | | | 2,545 | | | — | | | 2,545 | |
| Exercises of PIPE Warrants | — | | | — | | | — | | | — | | | (250) | | | (250) | |
| Change in fair value | (351) | | | 14 | | | (602) | | | (5,066) | | | (5,518) | | | (11,523) | |
| Balance as of September 30, 2024 | $ | 74 | | | $ | 61 | | | $ | 238 | | | $ | 2,645 | | | $ | 10,990 | | | $ | 14,008 | |
The fair value of the Private Warrants, Working Capital Warrants, Convertible Bridge Loan Warrants, and Convertible 2024 Note Warrants was measured using a Black-Scholes model. The estimated fair value of the liability classified warrants was determined using Level 3 inputs. Inherent in a Black-Scholes model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its liability classified warrants based on implied volatility from the Company’s traded warrants and from historical volatility of select peer company’s common stock that matches the expected remaining life of each class of warrants as well as historical volatility of select peer company’s traded options. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of each class of warrants. The expected life of each class of warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates remaining at zero.
The fair value of the PIPE Warrants was valued using Level 3 inputs and was estimated using a Monte Carlo simulation approach. The Company’s common share price was assumed to follow a Geometric Brownian Motion over a period from the Valuation Date to the Expiration Date. The breadth of all possible scenarios was captured in an estimate of volatility, based on comparable companies’ historical equity volatilities, considering differences in their capital structure. For each simulation path, the test price and Reset Price were calculated based on the daily stock price during the measurement period. On each reset date, the downside protection condition was assessed to see if it was met by comparing the test price with the downside protection threshold price. The value of each tranche of warrants was then computed, factoring in any downside protection shares and downside protection cash, if applicable. The average value across this range of possible scenarios, discounted to present using the risk-free rate, was used as the fair value of the PIPE Warrants. The change in fair value of the PIPE Warrants was primarily attributable to select features of the Warrant Subscription Agreements, including strike price resets and downside protection which results in decreased value as the Company’s stock price volatility increases and the stock price declines.
The following unobservable assumptions were used in determining the fair value of the liability classified warrants as it relates to the PIPE Warrants:
| | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2024 | | At Q2 2024 PIPE Warrant Amendment Date | | At Q1 2024 PIPE Warrant Amendment Date | | At December 31, 2023 |
| Credit spread | 8.5 | % | | 12.2 | % | | 17.8 | % | | 12.7 | % |
| Equity volatility | 115.0 | % | | 98.0 | % | | 105.0 | % | | 100.0 | % |
The following unobservable assumptions were used in determining the fair value of the liability classified warrants as it relates to the Private Warrants and Working Capital Warrants:
| | | | | | | | | | | |
| At September 30, 2024 | | At December 31, 2023 |
| Volatility | 108.0 | % | | 35.3 | % |
| Dividend yield (per share) | - | | 0.0% |
The following unobservable assumptions were used in determining the fair value of the liability classified warrants as it relates to the Convertible Bridge Loan Warrants and Convertible 2024 Note Warrants:
| | | | | | | | | | | |
| At September 30, 2024 | | At Issuance Dates |
| Convertible Bridge Loan Warrants | | | |
| Volatility | 111.0% - 112.0% | | 98.0% - 105.0% |
| Dividend yield (per share) | 0.0% | | 0.0% |
| 2024 Convertible Note Warrants | | | |
| Volatility | 110.0% - 112.0% | | 96.0% - 106.0% |
| Dividend yield (per share) | 0.0% | | 0.0% |
Forward Purchase Derivative Liabilities
The forward purchase derivative liabilities were initially recognized at Closing on September 29, 2023, and additional forward purchase derivative liabilities were initially recognized at the subsequent subscription date of April 18, 2024. The fair value of forward purchase derivative liabilities as of September 30, 2024 was $0.1 million.
Refer to Note 4, Private Placement, for a reconciliation of the forward purchase derivative liabilities.
The fair value of the forward purchase derivative liabilities, exclusive of the April 2024 FPA, was estimated using a Monte Carlo simulation approach. The Company’s common share price was simulated with daily time steps for a range of various possible scenarios. The breadth of all possible scenarios was captured in an estimate of volatility, based on comparable companies’ historical equity volatilities, considering differences in their capital structure. The simulated prices were compared against the settlement adjustment features of the Forward Purchase Agreements. Under each simulated scenario of future stock price, the Company calculated the value of the forward purchase derivative liability arrangement. The average value across this range of possible scenarios, discounted to present using the risk-free rate, was used as the fair value of the forward purchase derivative liabilities.
The fair value of the April 2024 FPA was estimated using a digital-call option pricing model due to the terms of the April 2024 FPA, which resulted in a binary settlement outcome whereby the Company may receive either zero dollars or an amount equal to the Reset Price (as amended pursuant to the April 2024 FPA). Inputs to the digital call option pricing model include the Company's closing stock price as of the measurement dates, the Reset Price (as amended pursuant to the April 2024 FPA) ceiling of $1.27 as the exercise price, volatility as determined by re-levering the median asset volatility of selected guideline companies calibrated to the Company's capital structure, and the risk-free rate.
The following unobservable assumptions were used in determining the fair value of the forward purchase derivative liabilities, at the respective balance sheet and amendment dates:
| | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | At September Q3 2024 FPA Amendment | At July Q3 2024 FPA Amendment | At February Q1 2024 FPA Amendment | At January Q1 2024 FPA Amendment | December 31, 2023 |
| Dividend yield | — | % | — | % | — | % | — | % | — | % | — | % |
| Equity volatility | 195.0 | % | 141.0% - 152.0% | 133.0%- 154.0% | 145 | % | 105 | % | 115.0 | % |
Consideration Shares
The Consideration Shares are recorded at fair value on a recurring basis. These shares are liability-classified until issuance and relate to the Convertible Bridge Loans and 2024 Convertible Notes. The liability associated with these Consideration Shares is carried at fair value, demonstrating the obligation to the lenders. The estimated fair value of the Consideration Shares is based on quoted market prices that are readily and regularly available in an active market.
The following table presents a reconciliation of the liability classified Consideration Shares (in thousands):
| | | | | |
| Consideration Shares |
| Balance as of December 31, 2023 | $ | — | |
| Additions | 14 | |
| Change in fair value | — | |
| Balance as of March 31, 2024 | 14 | |
| Additions | 3,926 | |
| Reclassification of liability classified stock to equity | (12) | |
| Change in fair value | (311) | |
| Balance as of June 30, 2024 | 3,617 | |
| Additions | 1,877 | |
| Reclassification of liability classified stock to equity | (3,762) | |
| Change in fair value | (1,732) | |
| Balance as of September 30, 2024 | $ | — | |
Tranche Rights
The following table presents a reconciliation of the Tranche Rights (in thousands):
| | | | | |
| Tranche Rights |
| Balance as of December 31, 2023 | $ | — | |
| Issuance | 5,045 | |
| Change in fair value | (137) | |
| Exercise of tranche rights | (572) | |
| Balance as of June 30, 2024 | $ | 4,336 | |
| Change in fair value | (4,266) | |
| Balance as of September 30, 2024 | $ | 70 | |
The fair value of the Tranche Rights was based upon the fair value of the 2024 Convertible Notes, 2024 Convertible Note Warrants, and Consideration Shares underlying unexercised tranche rights as of the date of measurement, each measured through identical methodologies as set forth in this Note 9 for the respective underlying instruments.
The following unobservable assumptions were used in determining the fair value of the 2024 Convertible Note Warrants underlying the Tranche Rights:
| | | | | | | | | | | |
| September 30, 2024 | | At Issuance Dates |
| Dividend yield | 0.0% | | 0.0% |
| Equity volatility | 110.0% - 111.0% | | 97.0 % - 98.0 % |
The following unobservable assumptions were used in determining the fair value of the 2024 Convertible Notes underlying the Tranche Rights:
| | | | | | | | | | | |
| September 30, 2024 | | Issuance Dates |
| Conversion | 55.0 | % | | 75.0 | % |
| Maturity | 20.0 | % | | 0.0 | % |
| Default feature | 25.0 | % | | 25.0 | % |
| | | | | | | | | | | |
| September 30, 2024 | | Issuance Dates |
| Dividend yield | 0.0 | % | | 0.0 | % |
| Volatility | 101.0% - 108.0% | | 98.0 | % |
| Discount yield | 14.7% | | 16.9 % - 17.8 % |
Residual Fair Values
The Convertible Bridge Loans were issued together with the promise to issue Convertible Bridge Loan Warrants. The Convertible Bridge Loan Warrants were recorded at fair value, under ASC 815, Derivatives and Hedging, and the Convertible Bridge Loans were determined to be in-scope of 470, Debt. Accordingly, the Company recorded the fair value of the Convertible Bridge Loan Warrants at issuance, with the residual amount of the proceeds allocated to the convertible debt instrument.
The fair value of the Convertible Bridge Loan Warrants was treated as a discount to the Convertible Bridge Loans, which will be amortized to interest expense over the term of the Convertible Bridge Loans. The stand-alone fair value at initial recognition for the Convertible Bridge Loan Warrants was $1.4 million. Less than $0.1 million in residual value was allocated to the Convertible Bridge Loans. The Company received total proceeds of $0.7 million from the issuance of the Convertible Bridge Loans. Accordingly, upon issuance, the Company recognized a loss of $0.7 million within Loss on issuance of financial instruments in the unaudited condensed consolidated statements of operations and comprehensive loss representing the fair value of the Convertible Bridge Loan Warrants over the proceeds received for the issuance of the Convertible Bridge Loans, Convertible Bridge Loan Warrants and Consideration Shares.
10.Stockholders' Deficit
Reverse Recapitalization
As described in Note 2, Summary of Significant Accounting Policies, all historical equity data, including stock option data, in these unaudited condensed consolidated financial statements has been retrospectively adjusted by the Exchange Ratio to reflect the reverse recapitalization that occurred on September 29, 2023.
Common Stock
As of September 30, 2024, the Company had authorized 500,000,000 shares of common stock, par value $0.0001 per share. As of September 30, 2024, 35,715,643 shares of common stock were issued and outstanding, and 464,284,357 shares of common stock were reserved for future issuance.
Preferred Stock
As of September 30, 2024, the Company had authorized 10,000,000 shares of preferred stock, par value $0.0001. As of September 30, 2024, zero shares of preferred stock were issued or outstanding.
Employee Stock Purchase Plan
Upon consummation of the Business Combination, the Company adopted an employee stock purchase plan (“ESPP”). The maximum number of shares of the Company’s common stock that may be issued under the ESPP is 3.0% of the fully diluted common stock of the Company, determined as of immediately following Closing. Such maximum number of shares is subject to automatic annual increases. The Company’s employees and the employees of any designated affiliates may participate in the ESPP. The purchase price of the ESPP shares is 85.0% of the lesser of the fair market value of the Company’s common stock on the first day of an offering or on the applicable date of purchase. As of September 30, 2024, there were no transactions with respect to the ESPP.
2019 Equity Incentive Plan
The Company’s 2019 equity incentive plan (“2019 Plan”) became effective on October 23, 2019. The 2019 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock unit awards and performance share awards to employees, directors, and consultants of the Company.
Stock options granted under the 2019 Plan expire no later than ten years from the date of grant and generally vest over a four-year period, with vesting occurring at a rate of 25.0% at the end of the first and thereafter in 36 equal monthly installments, or in the case of awards granted to board members, on a monthly basis over three or four years. In general, vested options expire if not exercised within three months after termination of service.
2023 Equity Incentive Plan
Upon consummation of the Business Combination, the Company adopted the 2023 equity incentive plan (“2023 Plan”). The maximum number of shares of common stock that may be issued under the 2023 Plan is 12.0% of the fully diluted common stock of the Company, determined as of immediately following Closing. Such maximum number of shares is subject to automatic annual increases. Under the 2023 Plan, restricted shares and stock options with service or performance based conditions may be granted to employees and nonemployees.
Upon the effective date of the 2023 Plan, the Company may not grant any additional awards under the 2019 Plan. As of September 30, 2024, certain awards to executives and non-employee directors were granted under the 2023 Plan. Stock options granted under the 2023 Plan expire no later than ten years from the date of grant and generally vest on a monthly basis over three or four years. In general, vested options expire if not exercised within three months after termination of service.
The fair value of each employee and non-employee stock option grant under the 2019 Plan and 2023 Plan is estimated on the date of grant using the Black-Scholes option pricing model. Due to the Company’s limited operating history and a lack of company-specific historical and implied volatility data, the Company estimated expected volatility based on the historical volatility of a group of similar companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. Due to the lack of historical exercise history, the expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods
approximately equal to the expected term of the award. The expected dividend yield is zero since the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
A summary of the Company’s stock option activity for the nine months ended September 30, 2024 is as follows:
| | | | | | | | | | | |
| Stock Options Outstanding | | Weighted-Average
Exercise Price |
| Outstanding as of December 31, 2023 | 2,078,986 | | $ | 6.25 | |
| Granted | 2,295,000 | | 1.62 | |
| Forfeited | (137,718) | | 6.63 | |
| Exercised | — | | — | |
| Outstanding as of September 30, 2024 | 4,236,268 | | $ | 3.72 | |
The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of stock option grants for the nine months ended September 30, 2024 were as follows:
| | | | | |
| 2023 Plan |
| Common stock fair value | $ | 1.62 | |
| Risk-free interest rate | 4.2 % |
| Expected volatility | 92.0 % |
| Expected term (in years) | 6.87 |
| Expected dividend yield | 0.0 | % |
Stock options outstanding, vested and expected to vest and exercisable as of September 30, 2024 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Stock
Options | | Weighted-Average
Remaining
Contractual
Life (Years) | | Weighted-
Average
Exercise
Price | | Total
Aggregate
Intrinsic
Value (in
thousands) |
| Outstanding as of December 31, 2023 | 2,078,986 | | 8.86 | | $ | 6.25 | | | $ | 317 | |
| Outstanding as of September 30, 2024 | 4,236,268 | | 8.78 | | $ | 3.72 | | | $ | 8 | |
| Vested and expected to vest as of September 30, 2024 | 4,236,268 | | 8.78 | | $ | 3.72 | | | $ | 8 | |
| Exercisable as of September 30, 2024 | 1,560,213 | | 8.44 | | $ | 4.09 | | | $ | 8 | |
Intrinsic value is calculated as the difference between the exercise price of the underlying options and the estimated fair value of the common stock for the options that had exercise prices that were lower than the per share fair value of the common stock on the related measurement date. The aggregate fair value of stock options vested during the nine months ended September 30, 2024 was $6.0 million.
As of September 30, 2024, the total unrecognized stock-based compensation related to unvested stock option awards granted was $10.1 million, which the Company expects to recognize over a remaining weighted-average period of approximately 2.6 years.
Stock-based compensation expense, recognized in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss for the 2019 Plan and 2023 Plan was recorded as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Research and development | $ | 164 | | $ | 197 | | | $ | 486 | | | $ | 736 | |
| General and administrative | 928 | | | 770 | | | 2,821 | | | 2,471 | |
| Total stock-based compensation expense | $ | 1,092 | | | $ | 967 | | | $ | 3,307 | | | $ | 3,207 | |
11.Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Useful Life | | September 30,
2024 | | December 31,
2023 |
| Land | — | | $ | 5,025 | | | $ | 5,025 | |
| Buildings | 40 years | | 8,325 | | | 8,325 | |
| Furniture and fixtures | 7 years | | 749 | | | 749 | |
| Lab equipment | 5 years | | 4,004 | | | 4,004 | |
| Leasehold improvements | Lesser of estimated useful life or
related lease term | | 52 | | | 52 | |
| Office equipment | 5 years | | 17 | | | 17 | |
| Vehicles | 5 years | | 27 | | | 112 | |
| | | 18,199 | | | 18,284 | |
| Less: Accumulated depreciation | | | (4,623) | | | (3,825) | |
| Total Property and Equipment | | | $ | 13,576 | | | $ | 14,459 | |
Depreciation expense related to property and equipment was $0.3 million and $0.3 million for the three months ended September 30, 2024 and 2023, and $0.8 million and $0.9 million for the nine months ended September 30, 2024 and 2023, respectively. No gains or losses on the disposal of property and equipment have been recorded for the three months ended September 30, 2024 and 2023. Less than $0.1 million in losses and no gains or losses on the disposal of property and equipment have been recorded for the nine months ended September 30, 2024 and 2023, respectively.
12.Additional Balance Sheet Information
Prepaid expenses and other current assets consist of the following (in thousands):
| | | | | | | | | | | |
| September 30,
2024 | | December 31,
2023 |
| Prepaid expenses | $ | 650 | | | $ | 1,565 | |
| Other receivables | 24 | | | 26 | |
| Revolving line of credit issuance fees | — | | | 47 | |
| Other | — | | | 16 | |
| Prepaid expenses and other current assets | $ | 674 | | | $ | 1,654 | |
Accounts payable and accrued expenses consist of the following (in thousands):
| | | | | | | | | | | |
| September 30,
2024 | | December 31,
2023 |
| Accounts payable | $ | 13,451 | | | $ | 10,330 | |
| Accrued liabilities | 1,015 | | | 1,360 | |
| Employee compensation | 1,306 | | | 911 | |
| Income Tax Payable | 710 | | | 710 | |
| Other | 126 | | | 84 | |
| Accounts payable and accrued expenses | $ | 16,608 | | | $ | 13,395 | |
13.Additional Statements of Operations and Comprehensive Loss Information
Loss on issuance of financial instruments consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Convertible Bridge Loans | $ | — | | $ | — | | | $ | (729) | | | $ | — | |
| 2024 Convertible Notes | (3,575) | | | — | | | (16,154) | | | — | |
| April 2024 FPA | — | | | — | | | (258) | | | — | |
| Q3 2024 FPA Amendments | (415) | | | — | | | (415) | | | — | |
| Issuance costs on fair value option-elected securities | — | | | — | | | (320) | | | — | |
| 2023 FPA issuances | — | | | (24,475) | | | — | | | (24,475) | |
| Total | $ | (3,990) | | | $ | (24,475) | | | $ | (17,876) | | | $ | (24,475) | |
Gain (Loss) on amendments to financial instruments consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Q1 2024 FPA Amendments | $ | — | | $ | — | | | $ | (396) | | | $ | — | |
| Q1 2024 PIPE Warrant Amendment | — | | | — | | | 679 | | | — | |
| Q2 2024 PIPE Warrant Amendment | — | | | — | | | (4,430) | | | — | |
| Q3 2024 FPA Amendments | 1,669 | | | — | | | 1,669 | | | — | |
| Letter Agreements | (670) | | | — | | | (1,427) | | | — | |
| 2024 Convertible Bridge Loans | — | | | — | | | (35) | | | — | |
| Total | $ | 999 | | | $ | — | | | $ | (3,940) | | | $ | — | |
Change in fair value of financial instruments consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Derivative warrant liabilities | $ | 11,523 | | $ | — | | | $ | 24,760 | | | $ | — | |
| FPA derivative liability | (463) | | | — | | | (96) | | | — | |
| Liability-classified Consideration Shares | 1,732 | | | — | | | 2,028 | | | — | |
| 2024 Convertible Notes | (209) | | | — | | | (92) | | | — | |
| Legacy Convertible Notes | — | | | 1,741 | | | — | | | (1,043) | |
| Tranche Rights | 4,266 | | | — | | | 4,403 | | | — | |
| Total | $ | 16,849 | | | $ | 1,741 | | | $ | 31,004 | | | $ | (1,043) | |
14.Collaboration Agreement
On September 17, 2020, the Company entered into a strategic collaboration with Affimed GmbH (“Affimed”) to initiate a Phase 1/2 trial of SNK01 in combination with AFM24, a tetravalent biologic created by Affimed designed to direct NK cell killing of epidermal growth factor receptor (“EGFR”) expressing tumors. Under the collaboration agreement, the Company and Affimed split the development costs of the combination product equally, for which Affimed's portion of the shared costs are recognized as a reduction to research and development expenses. The study associated with the strategic collaboration with Affimed was discontinued by mutual agreement in June 2023.
Total reductions to research and development expenses for the three and nine months ended September 30, 2024 were less than $0.1 million. Total reductions to research and development expenses for the three and nine months ended September 30, 2023 were less than $0.1 million.
15.Commitments and Contingencies
Leases
In February 2018, the Company entered into an operating lease agreement for office space located in 10 Pasteur, Irvine, California, with a lease term of approximately five years. Rent payments commenced in February 2018. The lease expired on February 5, 2023. In October 2021, the Company entered into an operating lease agreement for office space located in 19700 Fairchild, Irvine, California, with a lease term of approximately two years with an option to extend the term for one two-year term, which at the time was not reasonably assured of exercise and therefore, not included in the lease term. Rent payments commenced in December 2021. The lease expired on December 31, 2023.
On November 9, 2023, the Company entered into a new operating lease agreement for office space located in Irvine, California, with a lease term of approximately three years and rent payments commencing on January 1, 2024. The lease commencement date is January 1, 2024.
As of September 30, 2024, the Company recorded an aggregate ROU asset of $0.4 million with an accumulated amortization of $0.1 million in the unaudited condensed consolidated balance sheets as operating lease ROU assets, net, and an aggregate lease liability of $0.5 million in the unaudited condensed consolidated balance sheets, which is comprised of $0.2 million operating lease liability, current and $0.3 million of operating lease liability, non-current. As of September 30, 2024, the weighted-average remaining lease term is 2.3 years and the weighted-average discount rate is 22.4%.
Future minimum lease payments under the new office lease are as follows (in thousands):
| | | | | |
| Minimum lease
payments |
| 2024 (excluding the nine months ended September 30, 2024) | $ | 59 | |
| 2025 | 242 | |
| 2026 | 249 | |
| Total operating lease liability | $ | 550 | |
License Agreements
The Company has entered into exclusive license agreements with NKMAX, as amended in October 2021, April 2023 and August 2023 (“Intercompany License”), pursuant to which the Company acquired certain intellectual property for the development of treatments for cancer, neurodegenerative diseases, and other fields of use. Pursuant to each license agreement, as consideration for an exclusive license to the intellectual property, the Company paid an upfront fee of $1.0 million (“Licensed Technology”), which was recognized as research and development expense in the period paid as the license has no alternative future use.
Additionally, the Company is also required to pay one time milestone payments for the first receipt of regulatory approval by the Company or any of its affiliates for a Licensed Technology in the following jurisdictions (and amounts): the United States ($5.0 million), the European Union (“EU”) ($4.0 million), and four other countries ($1.0 million each). The Company is obligated to pay a mid-single digit royalty on net sales of Licensed Technology by it, its affiliates or its sub-licensees, subject to customary reductions. The Company is also required to pay a percentage of its sublicensing revenue ranging from a low double-digit percentage to a mid-single digit percentage. As of September 30, 2024, the Company has not paid any milestone payments and no sales of Licensed Technology have occurred.
Litigation
The Company is subject to legal proceedings and claims, which arise in the ordinary course of business.
The Company is not subject to any currently pending legal matters or claims that would have a material adverse effect on its financial position, results of operations or cash flows.
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. No amounts were accrued as of September 30, 2024 and December 31, 2023.
16. Income Taxes
The Company is subject to taxation in the U.S. and various state jurisdictions. The Company is not subject to taxation in foreign countries. The Company’s effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. Each quarter, an estimate of the annual effective tax rate is updated should the Company revise its forecast of earnings based upon its operating results. If there is a change in the estimated effective annual tax rate, a cumulative adjustment is made.
The difference between the effective tax rate of 0.0% and the U.S. federal statutory rate of 21.0% for the nine months ended September 30, 2024 and 2023 was due to changes in the valuation allowance, which entirely offsets the Company's net deferred assets. As of September 30, 2024 and 2023, the Company determined that, based on an evaluation of the Company's history of net losses and all available evidence, both positive and negative, including the Company's latest forecasts and cumulative losses in recent years, it was more likely than not that none or substantially none of the Company's deferred tax assets would be realized and, therefore, the Company continued to record a valuation allowance.
17. Earnings Per Share
The following table reconciles the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| (In thousands, except per share data) | 2024 | | 2023 | | 2024 | | 2023 |
| Net income (loss) | $ | 6,598 | | $ | (33,177) | | $ | (14,872) | | $ | (49,348) |
| Effect of dilutive convertible promissory notes | (291) | | | — | | | — | | | — | |
| Net income (loss) for diluted earnings per share | 6,307 | | | (33,177) | | | (14,872) | | | (49,348) | |
| | | | | | | |
| Weighted-average shares outstanding | 29,133,049 | | | 13,397,968 | | | 25,112,714 | | | 13,342,568 | |
| Dilutive effect of 2024 convertible promissory notes | 12,198,209 | | | — | | | — | | | — | |
| Diluted weighted-average shares outstanding | 41,331,258 | | | 13,397,968 | | | 25,112,714 | | | 13,342,568 | |
| | | | | | | |
| Basic earnings per share | $ | 0.23 | | | $ | (2.48) | | | $ | (0.59) | | | $ | (3.70) | |
| Diluted earnings per share | $ | 0.15 | | | $ | (2.48) | | | $ | (0.59) | | | $ | (3.70) | |
Potentially anti-dilutive shares excluded from the calculation of diluted net income (loss) per share for the three and nine months ended September 30, 2024 include the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Private warrants | 4,721,533 | | 4,721,533 | | 4,721,533 | | 4,721,533 |
| Working capital warrants | 523,140 | | 523,140 | | 523,140 | | 523,140 |
| Public warrants | 3,432,286 | | 3,432,286 | | 3,432,286 | | 3,432,286 |
| PIPE warrants | 8,209,994 | | 10,209,994 | | 8,209,994 | | 10,209,994 |
| Stock options | 4,236,268 | | 2,101,760 | | 4,236,268 | | 2,101,760 |
| SPA warrants | 1,000,000 | | 1,000,000 | | 1,000,000 | | 1,000,000 |
| Senior convertible notes shares | 978,495 | | 1,000,000 | | 978,495 | | 1,000,000 |
Deferred founder shares (1) | 1,173,631 | | 1,173,631 | | 1,173,631 | | 1,173,631 |
| 2024 convertible promissory notes | 0 | | — | | 14,680,669 | | — |
| 2024 convertible promissory note warrants | 9,562,877 | | — | | 9,562,877 | | — |
| Convertible bridge loan warrants | 1,272,000 | | — | | 1,272,000 | | — |
| Tranche right derivatives | 6,658,378 | | — | | 6,658,378 | | — |
| Total Anti-Dilutive Securities | 41,768,602 | | 24,162,344 | | 56,449,271 | | 24,162,344 |
| | | | | | | |
(1)As described in Note 8, Related Party Transactions, deferred founder shares do not have voting rights, do not participate in dividends and are not transferable absent the Company’s consent. Therefore, while deferred founder shares are considered outstanding for legal purposes and are included in the total quantity of outstanding shares on the unaudited condensed consolidated statements of stockholders’ deficit, they are not considered outstanding for accounting purposes, including basic and diluted net income (loss) per share purposes.
18. Subsequent Events
Forward Purchase Contract Amendments
On December 31, 2024, the Company and an FPA Investor entered into an amendment to the Forward Purchase Agreement whereas the Company and Seller agreed to extend the Valuation Date to December 31, 2025. All other terms and conditions remained unchanged.
Investment Purchase Agreement
On November 25, 2024, the Seoul Bankruptcy Court approved a Conditional Investment Agreement for the merger and acquisition of NKMAX Co., Ltd. (the “Agreement”) between NKGen Biotech, Inc. (the “Company”) and NKMAX Co., Ltd. (“NKMAX”). NKMAX will issue 46,400,000 registered common shares to the Company with an issue price per share of five hundred Korean Won (approximately $0.36 per share). The Company has deposited an amount equal to 10% of the Acquisition Price into a bank account designated in the name of NKMAX to secure the Company’s performance of the Agreement. the Company will deposit the remaining balance of the acquisition price into a bank account designated in the name of NKMAX no later than five business days prior to the date of the NKMAX stakeholders’ meeting for the approval of the NKMAX rehabilitation plan.
2023 Equity Incentive Plan
On December 6, 2024, the Company granted its Chief Executive Officer, Paul Song, and its interim Chief Financial Officer, James Graf, special one time option awards to purchase 2,000,000 and 500,000 shares of the Company’s common stock, respectively, under the Company’s 2023 Equity Incentive Plan. The Options have a 10-year term and an exercise price equal to the closing price of the Company’s common stock on December 6, 2024. Mr. Song’s Option vests ratably in forty-eight equal monthly installments, subject to Mr. Song’s continued service through each vesting date. Mr. Graf’s Option vests twenty-five percent as of December 6, 2024, with the remaining seventy-five percent vesting ratably in thirty-six equal monthly installments, subject to Mr. Graf’s continued service through each vesting date.
2024 Convertible Notes
On December 31, 2024, the Company received total proceeds of $4.2 million in exchange for a December 2024 Convertible Note with a principal amount of $4.5 million, 1,500,000 Warrants, and 1,500,000 Consideration Shares. The Company received an additional $0.3 million in proceeds through the date of this filing.
Between October 28, 2024 and February 24, 2025, the Company issued $1.0 million in unsecured promissory notes to various lenders. The notes have an interest rate of 12% and mature between January 8, 2026 and April 28, 2026.
Repayments
On October 9, 2024, the Company received a conversion notice for the issuance of approximately 492,800 shares of common stock to a holder of its Convertible Notes as full repayment of the amounts due. The conversion constituted a dilutive issuance for the Company's outstanding convertible notes and warrants which triggered a price reset for the conversion prices of the Notes and exercise prices of the warrants to $0.25 per share.
During the quarter ended December 31, 2024, the Company received other conversion notices for the issuances of approximately 1,452,700 shares of common stock to holders of its Convertible Notes as full and partial repayments of amounts due totaling approximately $0.4 million.
On October 1, 2024, 1,313,555 PIPE warrants converted to shares on cashless basis.
Other Events
On November 5, 2024, the Company, as part of its greater cost-reduction efforts, conducted a group layoff of 16 employees. As part of the group layoff, each impacted employee received a settlement and release agreement, which provides for cash severance equal to one week of base pay per year of service with the Company in exchange for the employee’s execution of a release of claims against the Company. The Company recognized $0.1 million for severance costs and other related costs. The Company made these payments in the fourth quarter of fiscal year 2024.
Reverse Stock Split
On February 23, 2025, the board of directors (the “Board”) of NKGen determined to effect a one-for-six (1-for-6) reverse stock split of the Company’s common stock, subject to shareholder approval of the Reverse Stock Split Proposal. The reverse stock split ratio approved by the Board is within the previously disclosed range of ratios for a reverse stock split authorized by the stockholders of the Company at the Special Meeting. The timing of the reverse stock split will be determined by the Board without further approval or authorization of NKGen’s stockholders and included in a public announcement once determined. No fractional shares will be issued in connection with the reverse stock split. Stockholders who would otherwise hold a fraction of a share of Common Stock of the Company will receive one full share of Common Stock.