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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934 For the quarterly period ended September 30, 2023

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934 For the transition period from _____ to _____

 

Commission File Number: 001-36138

 

AYALA PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware 02-0563870
(State or other jurisdiction   (IRS Employer
of incorporation)   Identification No.)

 

9 Deer Park Drive, Suite K-1    
Monmouth Junction, NJ 08852
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (609) 452-9813

 

(Former name, former address and former fiscal year, if changed since last report):

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer Accelerated Filer
Non-accelerated Filer Smaller Reporting Company
Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

The registrant had 10,751,792 shares of common stock, par value $0.001 per share, outstanding as of November 11, 2023.

 

 

 

 

 

 

  Table of Contents  
    Page
PART I. FINANCIAL INFORMATION 1
     
Item 1. Condensed Consolidated Financial Statements (Unaudited) 1
     
  Condensed Consolidated Balance Sheets 1
     
  Condensed Consolidated Statements of Operations 2
     
  Condensed Consolidated Statements of Stockholders’ Equity (Deficency) 3
     
  Condensed Consolidated Statements of Cash Flows 4
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
     
Item 4. Controls and Procedures 26
     
PART II. OTHER INFORMATION 27
     
Item 1. Legal Proceedings 27
     
Item 1A. Risk Factors 27
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
     
Item 3. Defaults Upon Senior Securities 27
     
Item 4. Mine Safety Disclosures 27
     
Item 5. Other Information 27
     
Item 6. Exhibits 29
     
SIGNATURES 31

 

i

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report, including without limitation statements relating to our development of AL101 and AL102, our ability to continue as a going concern, our future capital needs and our need to raise additional funds, recently completed merger with Biosight Ltd., the promise and potential impact of our preclinical or clinical trial data, the timing of and plans to initiate additional clinical trials of AL101 and AL102, and the timing and results of any clinical trials or readouts, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”, or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements are identified by these terms or expressions. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the factors described under the sections in this Quarterly Report titled and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.

 

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

 

ii

 

 

PART I—FINANCIAL INFORMATION

 

Item 1: Financial Statements

 

AYALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

   September 30,   December 31, 
   2023   2022 
    (Unaudited)      
CURRENT ASSETS:          
Cash and cash equivalents  $2,123   $2,408 
Short-term restricted bank deposits   102    110 
Trade receivables   -    234 
Prepaid expenses and other current assets   2,327    436 
Total current assets   4,552    3,188 
LONG-TERM ASSETS:          
Deferred issuance costs   -    1,953 
Operating lease right of use asset   1,276    1,462 
Intangible assets, net   107    - 
Property and equipment, net   845    960 
Other assets  $201   $206 
Total long-term assets   2,429    4,581 
Total assets  $6,981   $7,769 
LIABILITIES AND STOCKHOLDERS’ EQUITY:          
CURRENT LIABILITIES:          
Trade payable  $5,056   $4,080 
Operating lease liabilities   480    419 
Accrued expenses   1,556    551 
Accrued payroll and employee benefits   1,231    994 
Other accounts payable   204    169 
Total current liabilities   8,527    6,213 
LONG TERM LIABILITIES:          
Long-term warrant liability   65    - 
Convertible Note   2,068    - 
Uncertain tax position   1,630    1,323 
Long-term operating lease liabilities   932    1,332 
Total long-term liabilities  $4,695   $2,655 
STOCKHOLDERS’ EQUITY (DEFICIENCY):          
Common Stock of $0.001 par value per share; 170,000,000 and 37,480,000 shares authorized on September 30, 2023 (unaudited) and on December 31, 2022, respectively; 4,838,322 and 2,775,906 shares issued and on September 30, 2023 (unaudited) and December 31, 2022, respectively; 4,788,091 and 2,695,067 shares outstanding on September 30, 2023 (unaudited) and December 31, 2022, respectively.*  $5   $3 
Additional paid-in capital*   166,307    148,052 
Accumulated deficit   (172,553)   (149,154)
Total stockholders’ equity (deficiency)   (6,241)   (1,099)
Total liabilities and stockholders’ equity (deficiency)  $6,981   $7,769 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

*Common Stock, additional paid-in capital and per share data have been retroactively adjusted for the impact of the January 2023 merger between Old Ayala, Inc. (f/k/a Ayala Pharmaceuticals, Inc.) and Ayala Pharmaceutical, Inc.(f/k/a Advaxis, Inc.). See note 1

 

1
 

 

AYALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share & per share amounts)

 

   2023   2022   2023   2022 
   For the Three Months Ended   For the Nine Months Ended 
 September 30,   September 30, 
   2023   2022   2023   2022 
Revenues from licensing agreement and others  $-   $91   $13   $587 
Cost of services   -    (91)   (13)   (497)
Gross profit               90 
Operating expenses:                    
Research and development   5,683    7,199    18,671    20,282 
General and administrative   1,448    2,881    8,815    7,586 
Operating loss   (7,131)   (10,080)   (27,486)   (27,778)
Financial (loss) income, net   (143)   1   72    41 
Loss before income tax   (7,274)   (10,079)   (27,414)   (27,737)
Taxes on income   (65)   (106)   4,015    (509)
Net loss   (7,339)   (10,185)   (23,399)   (28,246)
Net loss per share attributable to common stockholders, basic                    
and diluted  $(1.53)  $(3.51)  $(5.03)  $(9.81)
Weighted average common shares outstanding, basic and diluted*   4,784,474    2,901,478    4,648,599    2,879,465 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

*Common Stock, additional paid-in capital and per share data have been retroactively adjusted for the impact of the January 2023 merger between Old Ayala, Inc. (f/k/a Ayala Pharmaceuticals, Inc.) and Ayala Pharmaceutical, Inc.(f/k/a Advaxis, Inc.). See note 1

 

2
 

 

AYALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY (DEFICIENCY)

(Unaudited)

(In thousands, except share and per share amounts)

 

   Number   Amount**   Capital**   Deficit   (Deficiency) 
           Additional       Total 
   Common Stock**   Paid-in   Accumulated   Stockholders’
Equity
 
   Number   Amount   Capital**   Deficit   (Deficiency) 
Balance as of December 31, 2021   2,615,360   $3   $145,296   $(111,141)  $34,158 
Vested restricted shares   6,658    -    -    -    - 
Share based compensation   -    -    1,914    -    1,914 
Proceeds from issuance of common stock, net of issuance cost of $3   58,172    -*    512    -    512 
Net loss   -    -    -    (28,246)   (28,246)
Balance as of September 30, 2022   2,680,190   $3    147,722   $(139,387)  $8,338 
                                     
Balance as of December 31, 2022   2,695,067    3    148,052    (149,154)   (1,099)
Vested restricted shares     30,882       -       -       -       -  
Share based compensation   -    -    1,308    -    1,308 
Issuance of shares upon January 2023 Merger, net of issuance costs of $3,153   2,062,143    2    16,947    -    16,949 
Net loss   -    -    -    (23,399)   (23,399)
Balance as of September 30, 2023   4,788,092   $5   $166,307   $(172,553)  $(6,241)

 

           Additional       Total 
   Common Stock**   Paid-in   Accumulated   Stockholders’ 
   Number   Amount   Capital**   Deficit   Equity 
Balance as of June 30, 2022   2,620,716   $3   $146,738   $(129,202)  $17,539 
Vested restricted shares     2,220       -       -       -       -  
Share based compensation   -    -    516    -    516 
Proceeds from issuance of common stock, net of issuance cost of $3   57,254    -*    468    -    468 
Net loss   -    -    -    (10,185)   (10,185)
Balance as of September 30, 2022   2,680,190   $3    147,722   $(139,387)  $8,338 
                                  
Balance as of June 30, 2023   4,779,826    5    166,218    (165,214)   1,009 
Vested restricted shares     8,266       -       -       -       -  
Share based compensation   -    -    89    -    89 
Net loss   -    -    -    (7,339)   (7,339)
Balance as of September 30, 2023   4,788,092   $5   $166,307   $(172,553)  $(6,241)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

*Represents an amount lower than $1.

 

**All of the Common Stock and per share data have been retroactively adjusted for the impact of the January 2023 merger between Old Ayala, Inc. (f/k/a Ayala Pharmaceuticals, Inc.) and Ayala Pharmaceutical, Inc.(f/k/a Advaxis, Inc.). See note 1

 

3
 

 

AYALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS 

(Unaudited)

 

(In thousands)

 

   2023   2022 
   Nine Months Ended
   September 30,   September 30, 
   2023   2022 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(23,399)  $(28,246)
Adjustments to reconcile net loss to net cash used in operating activities:          
Shared based compensation   1,308    1,914 
Depreciation and Amortization   143    121 
Asset write-downs   28    - 
Remeasurement of long term warrant liability   (138)   - 
Remeasurement of convertible note   68    - 
Loss from exchange rate fluctuation   26    - 
(Increase) decrease in prepaid expenses and other assets   (1,590)   1,106 
Decrease (increase) in trade receivables   234    (129)
Increase (decrease) in trade payables   1,225    (888)
Decrease in operating lease right-of-use assets   255    220 
Decrease in operating lease liabilities   (409)   (568)
Increase (decrease) in accrued expenses   (573)   330 
Increase (decrease) in accrued payroll and employee benefits   197    (618)
Changes in uncertain tax position   307    542 
Increase (decrease)in other accounts payable   35    (126)
Net cash used in operating activities   (22,283)   (26,342)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of shares, net of issuance cost of $3  $-   $512 
Proceeds from issuance of convertible note    2,000    - 
Issuance of shares upon Merger, net of issuance costs   20,001    - 
Net cash provided by financing activities  $22,001   $512 
Effect of exchange rate changes on cash, cash equivalents and restricted cash   (26)     
Decrease in cash and cash equivalents and restricted cash   (308)   (25,830)
Cash and cash equivalents and restricted cash at beginning of the period   2,724    37,339 
Cash and cash equivalents and restricted cash at end of the period  $2,416    11,509 
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES          
Lease liabilities arising from new right-of-use assets   -    537 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION          
Tax paid in cash  $286   $182 

 

Reconciliation of cash, cash equivalents and restricted cash

 

    September 30,    September 30, 
    2023    2022 
Cash and cash equivalents  $2,123   $11,195 
Restricted bank deposits   102    110 
Restricted bank deposits in other assets   191    204 
Cash and cash equivalents and restricted cash at end of the period  $2,416   $11,509 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4
 

 

AYALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 1—GENERAL

 

In these financial statements, unless otherwise stated or the context otherwise indicates, references to “New Ayala,” the “Company,” “we,” “us,” “our” and similar references refer to Ayala Pharmaceuticals, Inc., a Delaware corporation, which prior to the change of its name effected on January 19, 2023, was known as Advaxis, Inc. The name change was affected in connection with the January 2023 Merger, as described below. References to “former Advaxis” refer to our company solely in the period prior to the January 2023 Merger.

 

Prior to the January 2023 Merger, we were a clinical-stage biotechnology company focused on the development and commercialization of proprietary Listeria monocytogenes (“Lm”)-based antigen delivery products. These efforts utilized our Lm platform directed against tumor-specific targets in order to engage the patient’s immune system to destroy tumor cells. Through a license from the University of Pennsylvania, we have exclusive access to this proprietary formulation of attenuated Lm called Lm TechnologyTM.

 

Following the January 2023 Merger, we are primarily a clinical-stage oncology company focused on developing and commercializing small molecule therapeutics for patients suffering from rare and aggressive cancers, primarily in genetically defined patient populations. Our differentiated development approach is predicated on identifying and addressing tumorigenic drivers of cancer, through a combination of our bioinformatics platform and next-generation sequencing to deliver targeted therapies to underserved patient populations. Our current portfolio of product candidates, AL101 and AL102, targets the aberrant activation of the Notch pathway using gamma secretase inhibitors. Gamma secretase is the enzyme responsible for Notch activation and, when inhibited, turns off the Notch pathway activation. Aberrant activation of the Notch pathway has long been implicated in multiple solid tumor and hematological cancers and has often been associated with more aggressive cancers. In cancers, Notch is known to serve as a critical facilitator in processes such as cellular proliferation, survival, migration, invasion, drug resistance and metastatic spread, all of which contribute to a poorer patient prognosis. AL101 and AL102 are designed to address the underlying key drivers of tumor growth, and our initial Phase 2 clinical data of AL101 suggest that our approach may address shortcomings of existing treatment options. We believe that our novel product candidates, if approved, have the potential to transform treatment outcomes for patients suffering from rare and aggressive cancers. We also continue to conduct certain operations relating to former Advaxis’ operations as a clinical-stage biotechnology company focused on the development and commercialization of proprietary Listeria monocytogenes (“Lm”)-based antigen delivery products. These efforts are primarily focused on the development of ADXS-504, a Lm-based therapy for early-stage prostate cancer.

 

In 2017, the Company entered into an exclusive worldwide license agreement with respect to AL101 and AL102. See note 5.

 

Going Concern

 

The Company has incurred recurring losses since inception as a research and development organization and has an accumulated deficit of $172.6 million as of September 30, 2023. For the nine months ended September 30, 2023, the Company used approximately $22.3 million of cash in operations. The Company has relied on its ability to fund its operations through public and private equity financings. The Company expects operating losses and negative cash flows to continue at significant levels in the future as it continues its clinical trials.

 

As of September 30, 2023, the Company had approximately $2.1 million in cash and cash equivalents, and had approximately $1.6 million, as of the date of filing of this Form 10-Q, following the completion of the financing transactions on November 17, 2023 (the “November 17 Financing”), as described below The Company has limited available cash resources and believes that its current resources will not, without additional funding, be sufficient to meet its current obligations on the date of issuance of these condensed consolidated financial statements, which are estimated at approximately $12 million, and $2 million Convertible note received on August 7, 2023. Also, The Company had deferred payments to its suppliers and its certain former officers starting approximately six months ago. The Company is in the process of obtaining deferrals for its current obligations.

 

Management has evaluated different strategies to obtain the required funding for future operations, including through public or private debt and equity financings, but despite its efforts, the Company has been unsuccessful, other than the November 17 Financing, in securing additional capital to fund operations and otherwise satisfy creditor obligations. Obtaining additional funding is essential to provide sufficient cash flow to meet current operating requirements. There can be no assurances that such financing will become available to the Company on satisfactory terms, or at all.

 

In addition to seeking to obtain additional financing, management and the Board are evaluating strategic alternatives that may be available. Should financing not be obtained, or another strategic alternative not consummated, management and the Board may consider other alternatives, including without limitation bankruptcy and liquidation of the Company or an assignment for the benefit of creditors.

 

5
 

 

AYALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 1—GENERAL (continued):

 

During the three months ended September 30, 2023, the Company had a reduction in workforce in which the employment of approximately 30% of the Company’s employees was terminated. This reduction in workforce has not yet required the Company to cease any major development efforts. Following the reduction in workforce, the Company had 21 employees. The Company expects to be able to meet its financial obligations to its employees and to its creditors only if able to reach agreements on payment terms and secure additional funding. The Company is evaluating additional reductions in costs, including additional reductions in workforce expenses and is also actively working on securing additional funding to help meet current obligations.

 

If the Company is unable to obtain funding, the Company would be forced to delay, reduce, or eliminate its research and development programs, which could adversely affect its business prospects, or the Company may be unable to continue operations. As such, those factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Therefore, the unaudited condensed consolidated financial statements for the nine months ended September 30, 2023, do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

 

On November 17, 2023, the Company issued Senior Convertible Promissory Notes (collectively, the “Senior Convertible Notes”), in an aggregate amount of $4.0 million, to several existing lenders and investors in the Company, including Israel Biotech Fund I, L.P., Israel Biotech Fund II, L.P., Arkin Bio Ventures L.P. and Biotel Limited. The amounts borrowed by the Company under the Senior Convertible Notes are expected to be funded to the Company on or about November 20, 2023. The Senior Convertible Notes are convertible into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at any time at the option of the noteholders, and are subject to mandatory conversion upon certain events. See note 7 for more details.

 

Merger with Ayala Pharmaceuticals, Inc.

 

On October 18, 2022, the Company, which at the time was named Advaxis, Inc., entered into a Merger Agreement (the “Merger Agreement”), with an entity then known as Ayala Pharmaceuticals, Inc. (which shortly prior to the closing of the merger in January 2023 changed its name to Old Ayala, Inc., (“Old Ayala”) and Doe Merger Sub, Inc. (“Merger Sub”), a direct, wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement, Merger Sub merged with and into Old Ayala, with Old Ayala continuing as the surviving company and a wholly-owned subsidiary of the Company (the “January 2023 Merger”). Immediately after the January 2023 Merger, former Advaxis stockholders as of immediately prior to the Merger own approximately 37.5% of the outstanding shares of the combined Company and former Old Ayala shareholders own approximately 62.5% of the outstanding shares of the combined Company.

 

At the effective time of the January 2023 Merger (the “Effective Time”), each share of share capital of Old Ayala issued and outstanding immediately prior to the Effective Time was converted into the right to receive a number of shares of the Company’s common stock, par value $0.001 per share, equal to the exchange ratio, 0.1874 shares of the Company’s common stock per Old Ayala share.

 

The January 2023 Merger has been accounted for as a reverse merger with Old Ayala as the accounting acquirer and former Advaxis as the accounting acquiree. In identifying Old Ayala as the accounting acquirer, the companies considered ASC 805-10-55 including the structure of the January 2023 Merger, relative outstanding share ownership at closing and the composition of the combined Company’s board of directors and senior management. The financial reporting reflects the accounting from the perspective of Old Ayala (“accounting acquirer”), except for the legal capital, which has been retroactively adjusted to reflect the capital of former Advaxis (“accounting acquiree”) in accordance with ASC 805-40-45. As such, the historical financial information presented is that of Old Ayala as the accounting acquirer in the January 2023 Merger.

 

Because most of the value of the assets of former Advaxis was in cash and cash equivalents, the January 2023 Merger is treated primarily as a financing transaction for accounting purposes with a small component as a business acquisition. Therefore, no gain or loss is recorded as a result of the January 2023 Merger. Old Ayala’s transaction costs were capitalized and offset against the shareholder’s equity upon the January 2023 Merger, and former Advaxis’ transaction costs were expensed as merger costs. The consolidated financial statements from the closing date of the January 2023 Merger include the assets, liabilities, and results of operations of the combined company.

 

Fair Value Allocation

 

The following sets forth the fair value of acquired identifiable assets and assumed liabilities of former Advaxis which includes preliminary adjustments to reflect the fair value of intangible assets acquired (in thousands) as of January 19, 2023:

 

   Amounts 
Cash and cash equivalents  $22,539 
Prepaid expenses and other current assets   300 
Property and equipment, net   34 
Intangible assets   130 
Operating right-of-use asset   5 
Other assets   11 
Total assets   23,019 
      
Common stock warrant liability   (203)
Other current liabilities and trade payables   (2,714)
Total liabilities   (2,917)
Net assets acquired  $20,102 

 

The fair value estimate for all identifiable assets and liabilities assumed is preliminary and is based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). This preliminary fair value estimate could include assets that are not intended to be used, may be sold, or are intended to be used in a manner other than their best use. Such estimates are subject to change during the measurement period, which is not expected to exceed one year. Any adjustments identified during the measurement period will be recognized in the period in which the adjustments are determined.

 

The Company recognized intangible assets related to the January 2023 Merger, which consist of the Patents and License agreements valued at $130 thousand with an estimated useful life of four years. Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. The basis of amortization approximates the pattern in which the assets are utilized, over their estimated useful lives. The Company routinely reviews the remaining estimated useful lives of finite-lived intangible assets. In case the Company reduces the estimated useful life for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life.

 

These intangible assets are classified as Level 3 measurements within the fair value hierarchy.

 

6
 

 

AYALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 1—GENERAL (continued):

 

The following unaudited table provides certain pro forma financial information for the Company as if the January 2023 Merger occurred on January 1, 2022 (in thousands except per share amounts):

 

   Nine months   Nine months 
   ended   ended 
   September 30,   September 30, 
    2023    2022*
    Unaudited    Unaudited 
Revenue  $13   $837 
Net loss  $(23,583)  $(40,308)

 

   Three months   Three months 
   Ended   ended 
   September 30,   September 30, 
    2023    2022*
    Unaudited    Unaudited 
Revenue  $-   $91 
Net loss  $(7,992)  $(17,061)

 

*The pro forma amounts above are derived from historical numbers of the Company and Old Ayala. The results of operations for the three and nine months ended September 30, 2022 include the operations of the Company for the period from May 1, 2022 to July 31, 2022 and November 1, 2021 to July 31, 2022, respectively which was the first nine months of fiscal year 2022 prior to the change in our fiscal year end from October 31 to December 31, which change was effected in January 2023.

 

The unaudited pro forma results have been prepared based on estimates and assumptions, which we believe are reasonable; however, they are not necessarily indicative of the consolidated results of operations had the acquisition occurred on January 1, 2022, or of future results of operations.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments (of a normal recurring nature) considered necessary for a fair statement of the results for the interim periods presented have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2022, included in the Annual Report on Form 10-K of Old Ayala filed for the year ended December 31, 2022 (the “Old Ayala 2022 Form 10-K”) with the Securities and Exchange Commission (the “SEC”) on March 31, 2023 and the Annual Report on Form 10-K of the Company filed for the year ended October 31, 2022 (the “Form 10-K”) with the SEC on February 10, 2023. The Company’s significant accounting policies have not changed materially from those included in note 2 of the Company’s consolidated financial statements for the year ended December 31, 2022, included in the Old Ayala 2022 Form 10-K and the Form 10-K, unless otherwise stated.

 

Use of estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. The Company’s management believes that the estimates, judgment and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the unaudited condensed consolidated financial statements. Actual results could differ from those estimates.

 

7
 

 

AYALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 1—GENERAL (continued):

 

Net Loss per Share

 

Basic loss per share is computed by dividing the net loss by the weighted average number of shares of Common Stock outstanding during the period. Diluted loss per share is computed by dividing the net loss by the weighted average number of shares of Common Stock outstanding together with the number of additional shares of Common Stock that would have been outstanding if all potentially dilutive shares of Common Stock had been issued. Diluted net loss per share is the same as basic net loss per share in periods when the effects of potentially dilutive shares of Common Stock are anti-dilutive.

 

The table below sets forth the number of potential shares of common stock that have been excluded from diluted net loss per share

 

 SCHEDULE OF ANTI-DILUTIVE SECURITIES EXCLUDED FROM DILUTED NET LOSS PER SHARE

                 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Net loss  attributable to common stockholders, basic and diluted   (7,339)   (10,185)   (23,399)   (28,246 
                     
Weighted average common shares outstanding, basic and diluted*   4,784,474    2,901,478    4,648,599    2,879,465 
                     
Warrants   465,271    109,316    465,271    109,316 
Stock options   110,860    213,997    110,860    213,997 
Anti dilutive shares outstanding which were not included in the diluted calculation   576,131    323,313    576,131    323,313 
                     
Net loss per share attributable to common stockholders, basic and diluted  $(1.53)  $(3.51)  $(5.03)  $(9.81)

See note 5 for condition of warrants.

 

All of the Common Stock, exercise prices and per share data have been retroactively adjusted for the impact of the January 2023 Merger. The shares have been adjusted to the merger ratio of 0.1874.

 

Fair value of financial instruments

 

The Company measures and discloses the fair value of financial assets and liabilities in accordance with ASC Topic 820, “Fair Value Measurement.” Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Restricted bank deposits, trade receivables, trade payables are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date. Warrants liabilities and convertible note are stated at fair value on a recurring basis.

 

Recently Adopted Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13 (Topic 326), Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The new guidance was effective for the Company on January 1, 2023 and the adoption did not have a material impact on the Company’s consolidated financial statements.

 

In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopt ASU 2021-08 on January 1, 2023, and will apply this new guidance to all business combinations consummated subsequent to this date. Currently, this ASU has no impact on the Company’s consolidated financial statements.

 

8
 

 

AYALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 2—REVENUES

 

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which applies to all contracts with customers.

 

At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within the contract and determines those that are performance obligations and assesses whether each promised good or service is distinct.

 

Revenue is recognized when control of the promised goods or services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services.

 

In December 2018, the Company entered into an evaluation, option and license agreement (the “Novartis Agreement”) with Novartis International Pharmaceutical Limited (“Novartis”) for which the Company is paid for its research and development costs.

 

The Company concluded that there is one distinct performance obligation under the Novartis Agreement: Research and development services, an obligation which is satisfied over time.

 

Revenue associated with the research and development services in the amount of approximately $13 thousand in the nine months ended September 30, 2023 while there was no revenue recognized in the three months ended September 30, 2023.

 

Revenue associated with the research and development services in the amount of approximately $587 and $91 thousands was recognized in the nine and three months ended September 30, 2022, respectively.

 

The Company concluded that progress towards completion of the research and development performance obligation related to the Novartis Agreement is best measured in an amount proportional to the expenses relative to the total estimated expenses. The Company periodically reviews and updates its estimates, when appropriate, which may adjust revenue recognized for the period. Most of the company’s revenues derive from the Novartis Agreement, for which revenues consist of reimbursable research and development costs. On June 2, 2022, Novartis informed the Company that Novartis does not intend to exercise its option to obtain an exclusive license for AL102, thereby terminating the agreement.

 

9
 

 

AYALA PHARMACEUTICALS,

INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 3—TAX

 

The Company has reviewed the tax positions taken, or to be taken, in its tax returns for all tax years currently open to examination by a taxing authority. As of September 30, 2023 and December 31, 2022, the Company has recorded an uncertain tax position liability exclusive of interest and penalties of $1.6 million and $1.3 million, respectively, which were classified as other accounts payable. As of September 30, 2023 and December 31, 2022, the Company accrued interest related to uncertain tax positions of $103 thousand and $79 thousand, respectively. The interest is recorded as part of financial expenses. These uncertain tax positions would impact the Company’s effective tax rate, if recognized. A reconciliation of the Company’s unrecognized tax benefits is below:

 

   Nine months   Year 
   Ended   ended 
   September 30,   December 31, 
   2023   2022 
    (In thousands)    (In thousands) 
Uncertain tax position at the beginning of the period  $1,323   $858 
Additions for uncertain tax position of prior years (foreign exchange and interest)   35    36 
Subtractions for tax positions of previous period   (7)     
Additions for tax positions of current period   279    429 
Uncertain tax position at the end of the period  $1,630   $1,323 

 

The Company files U.S. federal, various U.S. state and Israeli income tax returns. The associated tax filings remain subject to examination by applicable tax authorities for a certain length of time following the tax year to which those filings relate. In the United States and Israel, the 2018 and subsequent tax years remain subject to examination by the applicable taxing authorities as of September 30, 2023.

 

In March 2023, the Company received $4.7 million of proceeds from the sale of our Net Operating Losses (“NOLs”) under the State of New Jersey NOL Transfer Program. This was recorded as a tax benefit and offset against income tax expense in the consolidated statement of operations.

 

NOTE 4 – COMMON STOCK PURCHASE WARRANTS AND WARRANT LIABILITY

 

Common Stock Rights

 

The Common Stock Rights confer upon the holders the right to vote in annual and special meetings of the Company, and to participate in the distribution of the surplus assets of the Company upon liquidation of the Company.

 

Warrants

 

As of September 30, 2023, there were 465,271 warrants outstanding of which 290,206 were exercisable warrants to purchase shares of our common stock, with exercise prices ranging from $2.79 to $224.00 per share. As of December 31, 2022, there were outstanding and exercisable warrants to purchase 337,320*, shares of our common stock with exercise prices ranging from $0.05* to $96.58* per share. Information on the outstanding warrants as of September 30, 2023 is as follows:

 

    Number of       
    Shares       
    Underlying       
Exercise Price   Warrants   Expiration Date  Type of Financing
$2.79    879   September 2024  September 2018 Public Offering
$224.00    4,092   July 2024  July 2019 Public Offering
$28.00    57,230   November 2025  November 2020 Public Offering
$56.00    140,552   April 2026  April 2021 Registered Direct Offering (Accompanying Warrants)
$56.00    175,065   5 years after the date such warrants become exercisable, if ever  April 2021 Private Placement (Private Placement Warrants)
$96.58    87,453*  February 2024  February 2021 Private Placement (issued by Old Ayala)
 Grand Total    465,271       

 

*Exercise price and warrant numbers of Old Ayala’s warrants have been retroactively adjusted for the impact of the January 2023 Merger, see note 1

 

10
 

 

AYALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 4 – COMMON STOCK PURCHASE WARRANTS AND WARRANT LIABILITY (continued):

 

As of September 30, 2023, the Company had 289,327 of its total 465,271 outstanding warrants classified as equity. As of December 31, 2022, all outstanding warrants were classified as equity. At issuance, equity warrants are recorded in additional paid-In capital.

 

A summary of warrant activity was as follows (in thousands, except share and per share data):

 

           Weighted     
           Average     
       Weighted   Remaining     
       Average Contractual Life   Aggregate 
   Shares   Exercise Price   In Years   Intrinsic Value 
Outstanding and exercisable warrants at December 31, 2022   337,320   $25.08    1.14   $86,613 
Issuance of warrants upon January 2023 Merger   377,818*   53.45*          
Exercised   (249,867)*   0.05*          
Outstanding warrants at September 30, 2023   465,271*  $61.56*   3.15   $- 
Exercisable warrants at September 30, 2023   290,206   $64.92    2.29   $- 

 

*Exercise price and warrant numbers have been retroactively adjusted for the impact of the January 2023 Merger, see note 1.

 

Shares Issued for Warrants Exercises

 

During the nine months ended September 30, 2023, pre-funded warrant holders from the Old Ayala’s February 2019 Offering automatically net exercised 249,867 warrants in exchange for 246,192 shares of the Company’s common stock in accordance with their terms.

 

Warrant Liability

 

The warrants issued in the April 2021 Private Placement will become exercisable only on such day, if ever, that is 14 days after the Company files an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock, $0.001 par value per share from 170,000,000 shares to 300,000,000 shares. These warrants expire five years after the date they become exercisable. As of September 30, 2023, such an amendment has not been filed, and thus the warrants have not become exercisable. Accordingly, based on certain indemnification provisions of the securities purchase agreement, the Company concluded that liability classification is warranted. The Company utilized the Black Scholes model to calculate the fair value of these warrants at the merger and reporting date.

 

The September 2018 Public Offering warrants contain a down round feature, except for exempt issuances as defined in the warrant agreement, in which the exercise price would immediately be reduced to match a dilutive issuance of common stock, options, convertible securities and changes in option price or rate of conversion. As of September 30, 2023, the down round feature was triggered five times and the exercise price of the warrants were reduced from $1,800.00 to $2.79. The warrants require liability classification as the warrant agreement requires the Company to maintain an effective registration statement and does not specify any circumstances under which settlement in other than cash would be permitted or required. In addition, the contract contains an unpermitted adjustment to the exercise price, and therefore precludes an equity classification. As a result, net cash settlement is assumed, and liability classification is warranted. The Company utilized the Black Scholes model to calculate the fair value of these warrants at the merger and reporting date.

 

In measuring the warrant liability for the warrants issued in the April 2021 Private Placement and September 2018 Public Offering at September 30, 2023, the Company used the following inputs in its Black Scholes model:

 

  

September 30,

2023

  

January 19,

2023

 
Exercise Price  $55.73   $55.73 
Stock Price  $0.94   $2.95 
Expected Term   4.98 years    4.98 years 
Volatility %   128%   117%
Risk Free Rate   4.60%   3.60%

 

For the nine months ended September 30, 2023, the Company reported a gain of approximately $138 due to changes in the fair value of the warrant liability

 

Convertible Note

 

On August 7, 2023, the Company entered into a convertible note agreement (the “Note”) with ISRAEL BIOTECH FUND I, L.P. The Note provides for the borrowing by the Company of up to $2.0 million dollars, which borrowings are expected to fund on or after September 1, 2023, or sooner under certain circumstances if required, which as of date of this filling have not been met. The Note is convertible into shares of the Company’s common stock under the terms described in the Note, with the expected mandatory conversion in the event of a PIPE (Private Investment into a Public Entity) with the minimum of $15 Million investment at a price equal to 65% of the lowest price offered in the PIPE.

 

On September 1, 2023 the company received the $2.0 million dollars, and since then no further payments have been made or withdrawn.

 

The Company has elected the fair value option to measure the Note upon issuance, in accordance with ASC 825-10. Under the fair value option, the Note is measured at fair value each period with changes in fair value reported in the consolidated statements of operations. According to ASC 825-10, changes in fair value that are caused by changes in the instrument-specific credit risk will be presented separately in other comprehensive income (loss).

 

The Note was valued using a probability-weighted expected return model, which incorporated significant unobservable inputs such as the likelihood of a voluntary Note conversion (30% likelihood), the Note being held to maturity (30% likelihood) and the Note mandatory conversion in a PIPE (40% likelihood). This resulted in an implied borrowing rate of 37.8% was used as an input to the fair value measurement. None of the change in fair value was deemed to be attributable to instrument-specific credit risk and thus the full amount of such change was recognized in the statements of operations.

 

In measuring the note for issued the Company used the following inputs:

 

  

September 30,

2023

   

August 7,

2023

 
Stock price  $0.94    $ 1.15  
Interest rate   7.4      7.3 %
Implied discount   48.8%    

40.6

%
Volatility %   80.2%     74.5 %
Risk Free Rate   4.60%     4.20 %

 

For the nine months ended September 30, 2023, the Company reported change in fair value of not of approximately $68 as part of financial loss in the consolidated statement of operations.

 

11
 

 

AYALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 5—FAIR VALUE MEASUREMENTS

 

As of September 30, 2022 the Company did not have any assets or liabilities carried at fair value on a recurring basis. The following table provide the liabilities carried at fair value measured on a recurring basis as of September 30, 2023:

 

Fair Value Measured at September 30, 2023

 

   Level 1   Level 2   Level 3   Total 
                 
Financial liabilities at fair value:                
Convertible note  $-   $-   $2,068  $2,068 
Long term warrant liability  $-   $-   $65   $65 
Total financial liabilities at fair value  $-   $-   $2,133   $2,133 

 

The changes in the fair value of the Company’s Level 3 financial liabilities, which are measured on a recurring basis are as follows (in thousands):

 

   For the 9 months ended
September 30, 2023
   For the 3 months ended
September 30, 2023
 
Beginning balance   -    67 
Long term warrant assumed from Merger   203    - 
Proceed from issuance of loan  $2,000    2,000 
Revaluation recorded in financial income, net   (70)   66 
Ending balance   2,133    2,133 

 

NOTE 6—COMMITMENTS AND CONTINGENT LIABILITIES

 

In January 2019, the Company’s wholly owned Israeli subsidiary, Ayala-Oncology Israel Ltd. (the “Subsidiary”), signed a new lease agreement. The term of the lease is for 63 months and includes an option to extend the lease for an additional 60 months. As part of the agreement, the lessor also provided the Company an amount of approximately $0.5 million paid in arrears for leasehold improvements. The amount was recorded as an incentive and is taken into account when computing the right of use (“ROU”) asset.

 

The Subsidiary obtained a bank guarantee in the amount of approximately $191 thousand for its new office lease agreement.

 

On March 25, 2021, the Company entered into a one-year lease agreement for its corporate office/lab with base rent of approximately $29 per year, plus other expenses. In September 2021, the Company exercised its option to renew the lease, extending the lease term until March 31, 2023. On March 25, 2023 the Company signed an extension up to March 31, 2025, with base rent of approximately $36 per year. The Company recorded an ROU asset and liability of approximately $65.

 

The Company has the following operating ROU assets and lease liabilities:

 

   September 30, 2023 
    ROU assets    Lease liabilities 
Offices  $1,179   $1,350 
Cars   97    62 
Total operating leases  $1,276   $1,412 

 

   December 31, 2022 
    ROU assets    Lease liabilities 
Offices  $1,273   $1,612 
Cars   189    139 
Total operating leases  $1,462   $1,751 

 

   September 30,   December 31, 
   2023   2022 
   Lease liabilities   Lease liabilities 
Current lease liabilities  $480   $419 
Non-current lease liabilities   932    1,332 
Total lease liabilities  $1,412   $1,751 

 

The following table summarizes the lease costs recognized in the condensed consolidated statement of operations:

 

   For nine months   For nine months 
   ended   ended 
   September 30,   September 30, 
   2023   2022 
Operating lease cost  $348   $341 
Variable lease cost   6    10 
Total lease cost  $354   $351 

 

   For three months   For three months 
   ended   ended 
   September 30,   September 30, 
   2023   2022 
Operating lease cost  $79   $120 
Variable lease cost   -    - 
Total lease cost  $79   $120 

 

As of September 30, 2023, the weighted-average remaining lease term and weighted-average discount rate for operating leases are 2.7 years and 7.4%, respectively.

 

12
 

 

AYALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 6—COMMITMENTS AND CONTINGENT LIABILITIES (continued):

 

The following table summarizes the future payments of the Company for its operating lease liabilities:

 

   September 30, 
   2023 
2023 (from October 1)  $146 
2024   380 
2025   318 
2026   308 
2027   308 
After 2027   411 
Total undiscounted lease payments  $1,871 
Less: Interest   459 
Total lease liabilities – operating  $1,412 

 

Purported Stockholder Claims

 

Purported Stockholder Claims Related to January 2023 Merger with Old Ayala

 

On December 15, 2022, a purported stockholder of Old Ayala filed a complaint in the U.S. District Court for the Southern District of New York against Old Ayala and the members of its Board, captioned Stephen Bushansky v. Ayala Pharmaceuticals, Inc., Case No.1:22-cv-10621 (S.D.N.Y.) (the “Complaint”).

 

13
 

 

AYALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 6—COMMITMENTS AND CONTINGENT LIABILITIES (continued):

 

The Complaint asserts claims against all defendants under Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 14a-9 promulgated thereunder for omitting or misrepresenting material information from Old Ayala’s Proxy Statement and against the individual defendants under Section 20(a) of the Exchange Act for alleged “control person” liability with respect to such alleged omissions and misrepresentations. The allegations in the Complaint include that the Proxy Statement omitted material information regarding Old Ayala’s financial projections and the financial analyses of Old Ayala’s financial advisor for the January 2023 Merger. The Complaint seeks, among other relief, (1) to enjoin defendants from consummating the January 2023 Merger; (2) to enjoin a vote on the January 2023 Merger; (3) to rescind the January 2023 Merger Agreement or recover damages, if the Merger is completed; (4) a declaration that defendants violated Sections 14(a) or 20(a) and Rule 14a-9 of the Exchange Act; and (5) attorneys’ fees and costs. The complaint was never served on all defendants.

 

In addition, approximately nine purported stockholders of Old Ayala sent letters to those noted in the above-referenced Complaint alleging similar deficiencies in Old Ayala’s Proxy Statement (collectively, the “Demand Letters”).

 

At this time, the Company is unable to predict the likelihood of an unfavorable outcome with respect to the Complaint and the Demand Letters.

 

NOTE 7 – SUBSEQUENT EVENTS

 

Merger with Biosight

  

On July 26, 2023, the Company and its wholly owned subsidiary organized under the laws of the State of Israel, Advaxis Israel Ltd. (“Biosight Merger Sub”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Biosight Ltd. (“Biosight”), a privately-held Israeli pharmaceutical company developing innovative therapeutics for hematological malignancies and disorders. Under the terms of the Merger Agreement on October 18, 2023, Merger Sub merged (the “Biosight Merger”) with and into Biosight, which is now a wholly owned subsidiary of the Company. At completion of the Biosight Merger, Ayala’s then-current equity holders own approximately 45% and the former Biosight equity holders own approximately 55% of Ayala’s common stock.

 

Based on the agreement, Ayala Pharmaceuticals, Inc. is the legal acquirer in the Merger. In addition, the Company considered ASC 805-10-55 to determine the accounting acquirer in the Merger. As the Company holds a majority of the members of the governing body of the combined Company, the Company’s former management dominates the majority of the senior management of the combined Company and after considering all other factors according to ASC 805-10-55, the Company was identified as the accounting acquirer in the Merger. The Company has accounted for the Merger as a business combination according to ASC 805 “Business Combinations”.

 

Senior Convertible Notes

 

On November 17, 2023, the Company issued Senior Convertible Promissory Notes (collectively, the “Senior Convertible Notes”), in an aggregate amount of $4.0 million, to several existing lenders and investors in the Company, including Israel Biotech Fund I, L.P., Israel Biotech Fund II, L.P., Arkin Bio Ventures L.P. and Biotel Limited. The amounts borrowed by the Company under the Senior Convertible Notes are expected to be funded to the Company on or about November 20, 2023. The Senior Convertible Notes are convertible into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at any time at the option of the noteholders, and are subject to mandatory conversion upon certain events. including a change of control transaction and certain financing transactions involving the Company, at a conversion price equal to the lower of (i) 50% of the Common Stock’s price per share as of market close on November 16, 2023 and (ii) 50% of the Common Stock’s price per share as of the close of market on the Trading Day immediately prior to the date of the Notice of Conversion, subject to certain adjustments. In connection with the issuance of the Senior Convertible Notes, the Company has issued to the noteholders warrants to purchase an aggregate of 15,000,000 shares of the Common Stock with an exercise price equal to the lower of (A) 50% of the Common Stock’s price per share as of market close on November 16, 2023 and (ii) 50% of the Common Stock’s price per share as of the close of market on the Trading Day immediately prior to the date of the Notice of Exercise of the warrant, subject to adjustment, which exercise may be on a cashless basis. The noteholders also have the right, pursuant to a Side Letter Agreement between the noteholders and the Company, to lend an additional $4.0 million dollars to the Company on the same terms. The Company and Israel Biotech Fund I, L.P. and Israel Biotech Fund II, L.P. also agreed to amend and restate the terms of the Senior Secured Convertible Promissory Notes issued by the Company on August 7, 2023 to conform to the terms of the Senior Convertible Notes, and issued to the holders of such notes warrants to purchase an aggregate of 7,500,000 shares of the Common Stock on the terms of the above-described warrants.

 

14
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended October 31, 2022 and the Annual Report of Old Ayala, Inc. on Form 10-K for the fiscal year ended December 31, 2022 (the “Old Ayala 2022 Form 10-K”), our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Recent Developments

 

Merger with Biosight

  

On July 26, 2023, the Company and its wholly owned subsidiary organized under the laws of the State of Israel, Advaxis Israel Ltd. (“Biosight Merger Sub”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Biosight Ltd. (“Biosight”), a privately-held Israeli pharmaceutical company developing innovative therapeutics for hematological malignancies and disorders. Under the terms of the Merger Agreement on October 18, 2023, Merger Sub merged (the “Biosight Merger”) with and into Biosight, which is now a wholly owned subsidiary of the Company. At completion of the Biosight Merger, Ayala’s then-current equity holders own approximately 45% and the former Biosight equity holders own approximately 55% of Ayala’s common stock.

 

Cost-reduction Plan Implementation and Reduction in Workforce

 

During the three months ended September 30, 2023, the Company had a reduction in workforce in which the employment of approximately 30% of the Company’s employees was terminated. This reduction in workforce has not yet required the Company to cease any major development efforts. Following the reduction in workforce, the Company had approximately 21 employees. The Company expects to be able to meet its financial obligations to its employees and to its creditors only if able to reach agreements on payment terms and secure additional funding. The Company is evaluating additional reductions in costs, including additional reductions in workforce expenses and is also actively working on securing additional funding to help meet current obligations.

 

Management and the Board are evaluating strategic alternatives that may be available. Should financing not be obtained, or another strategic alternative not consummated, management and the Board may consider other alternatives, including without limitation bankruptcy and liquidation of the Company or an assignment for the benefit of creditors.

 

As of September 30, 2023, the Company had approximately $2.1 million in cash and cash equivalents, and had approximately $1.6 million, as of the date of filing of this Form 10-Q, following the completion of the financing transactions on November 17, 2023 (the “November 17 Financing”), as described below. The Company has limited available cash resources and believes that its current resources will not, without additional funding, be sufficient to meet its current obligations on the date of issuance of these condensed consolidated financial statements, which are estimated at approximately $12 million, and $2 million Convertible note received on August 7, 2023. Also, The Company had deferred payments to its suppliers and its certain former officers starting approximately six months ago. The Company is in the process of obtaining deferrals for its current obligations.

 

Management has evaluated different strategies to obtain the required funding for future operations, including through public or private debt and equity financings, but despite its efforts, the Company has been unsuccessful, other than the November 17 Financing, in securing additional capital to fund operations and otherwise satisfy creditor obligations. Obtaining additional funding is essential to provide sufficient cash flow to meet current operating requirements. There can be no assurances that such financing will become available to the Company on satisfactory terms, or at all.

 

January 2023 Merger with Old Ayala

 

On October 18, 2022, the Company, which at the time was named Advaxis, Inc., entered into a Merger Agreement (the “Merger Agreement”), subject to shareholder approval, with the entity then known as Ayala Pharmaceuticals, Inc., with the Ayala Pharmaceuticals, Inc. shortly prior to the closing of the merger in January 2023 changing its name to Old Ayala Inc., (“Old Ayala”) and Doe Merger Sub, Inc. (“Merger Sub”), our direct, wholly-owned subsidiary. Under the terms of the Merger Agreement, Merger Sub merged with and into Old Ayala, with Old Ayala continuing as the surviving company and our wholly-owned subsidiary (the “January 2023 Merger”). Immediately after the January 2023 Merger, our stockholders as of immediately prior to the January 2023 Merger owned approximately 37.5% of the outstanding shares of the combined company and former Old Ayala shareholders owned approximately 62.5% of the outstanding shares of the combined company. The January 2023 Merger was accounted for a reverse acquisition pursuant to ASC 805-40.

 

At the effective time of the January 2023 Merger (the “Effective Time”), each share of common stock of Old Ayala issued and outstanding immediately prior to the Effective Time was converted into the right to receive a number of shares of the our common stock equal to the exchange ratio, 0.1874 shares of our common stock per Old Ayala share.

 

Overview

 

Following the January 2023 Merger and the Biosight Merger we are primarily a clinical-stage oncology company focused on developing and commercializing small molecule therapeutics for patients suffering from rare and aggressive cancers, primarily in genetically defined patient populations. Our differentiated development approach is predicated on identifying and addressing tumorigenic drivers of cancer, through a combination of our bioinformatics platform and next-generation sequencing to deliver targeted therapies to underserved patient populations. Our current portfolio of product candidates, AL101 and AL102, targets the aberrant activation of the Notch pathway using gamma secretase inhibitors. Gamma secretase is the enzyme responsible for Notch activation and, when inhibited, turns off the Notch pathway activation. Aberrant activation of the Notch pathway has long been implicated in multiple solid tumor and hematological cancers and has often been associated with more aggressive cancers. In cancers, Notch is known to serve as a critical facilitator in processes such as cellular proliferation, survival, migration, invasion, drug resistance and metastatic spread, all of which contribute to a poorer patient prognosis. AL101 and AL102 are designed to address the underlying key drivers of tumor growth, and our initial Phase 2 clinical data of AL101 suggest that our approach may address shortcomings of existing treatment options. We believe that our novel product candidates, if approved, have the potential to transform treatment outcomes for patients suffering from rare and aggressive cancers. We also continue to conduct certain operations relating to former Advaxis’ operations as clinical-stage biotechnology company focused on the development and commercialization of proprietary Listeria monocytogenes (“Lm”)-based antigen delivery products. These efforts are primarily focused on the development of ADXS-504, a Lm-based therapy for early-stage prostate cancer.

 

We also continue to conduct certain operations relating to Biosight’s operations which are focused on the development of Aspacytarabine (“BST-236”) – a novel proprietary anti-metabolite, prodrug of cytarabine, cytarabine covalently bound to asparagine. BST-236 enables delivery of high cytarabine doses to leukemia patients with lower systemic exposure to the free drug. BST-236 demonstrated monotherapy activity in Phase 2 studies. It is currently tested in a combination study, Ph1, together with Venetoclax, a BCL2 inhibitor. We believe this combination in unfit Acute myeloid Leukemia (“AML”) patients has the potential to improve response rates and survival.

 

15
 

 

Our product candidates, AL101 and AL102, are being developed as potent, selective, small molecule gamma secretase inhibitors, or GSIs. We obtained an exclusive, worldwide license to develop and commercialize AL101 and AL102 from Bristol-Myers Squibb Company, or BMS, in November 2017. BMS evaluated AL101 in three Phase 1 studies involving more than 200 total subjects and AL102 in a single Phase 1 study involving 36 subjects with various cancers who had not been prospectively characterized for Notch activation, and to whom we refer to as unselected subjects. While these Phase 1 studies did not report statistically significant overall results, clinical activity was observed across these studies in cancers in which Notch has been implicated as a tumorigenic driver.

 

We are currently evaluating AL102, our oral GSI for the treatment of desmoid tumors, in our RINGSIDE Phase 2/3 pivotal study. In February 2022, Part A completed enrollment of 42 patients with progressive desmoid tumors in three study arms across three doses of AL102. We reported initial interim data from Part A in July 2022 with additional updated data released at medical conference in September 2022 and June 2023, showing efficacy across all cohorts, with early tumor responses that deepened over time. AL102 was well tolerated. We have initiated Part B of RINGSIDE (Phase 3), and are enrolling patients in an open label extension study. Part B of the study is a double-blind placebo-controlled study enrolling up to 156 patients with progressive disease, randomized between AL102 or placebo. The study’s primary endpoint will be progression free survival, or PFS with secondary endpoints including ORR, duration of response, or DOR and patient reported QOL measures. On September 27, 2022, we announced that FDA has granted Fast Track designation for AL102 for the treatment of progressing desmoid tumors. The FDA grants Fast Track designation to facilitate development and expedite the review of therapies with the potential to treat a serious condition where there is an unmet medical need. A therapeutic that receives Fast Track designation can benefit from early and frequent communication with the agency, in addition to a rolling submission of the marketing application, with potential pathways for expedited approval that have the objective of getting important new therapies to patients more quickly.

 

On July 5, 2023, Ayala announced that an instructive and successful End-of-Phase-2 (EOP2) meeting with the U.S. Food and Drug Administration (FDA) was concluded. As a result of the meeting, the Company confirmed that it is in agreement with the FDA on key elements of the randomized Phase 3 segment of RINGSIDE. The FDA accepted the Company’s selection of the 1.2 mg once daily dose being evaluated in the currently-enrolling Phase 3 and the completed and proposed clinical pharmacology plan.

 

In addition, we collaborated with Novartis International Pharmaceutical Limited, or Novartis, to develop AL102 for the treatment of multiple myeloma, or MM, in combination with Novartis’ B-cell maturation antigen, or BCMA, targeting therapies. On June 2, 2022, Novartis informed the Company that Novartis does not intend to exercise its option to obtain an exclusive license for AL102, thereby terminating the agreement. Novartis has informed that initial results from a phase 1 dose-escalation study of WVT078, a BCMA×CD3 bispecific antibody, in combination with AL102 in patients with multiple myeloma was presented at a medical conference.

 

We are currently concluding a Phase 2 ACCURACY trial for the treatment of recurrent/metastatic adenoid cystic carcinoma, or R/M ACC, in subjects with progressive disease and Notch-activating mutations. We refer to this trial as the ACCURACY trial. We use next-generation sequencing, or NGS, to identify patients with Notch-activating mutations, an approach that we believe will enable us to target the patient population with cancers that we believe are most likely to respond to and benefit from AL101 treatment. We chose to initially target R/M ACC based on our differentiated approach, which is comprised of: data generated in a Phase 1 study of AL101 in unselected, heavily pretreated subjects conducted by BMS, our own data generated in patient-derived xenograft models, our bioinformatics platform and our expertise in the Notch pathway.

 

16
 

 

Based on available AL101 clinical data in the ACC Notch positive population, Ayala expects to obtain clarity on the potential regulatory registration pathway with FDA by the second half of 2024. AL101 was granted Orphan Drug Designation in May 2019 for the treatment of adenoid cystic carcinoma, or ACC, and fast track designation in February 2020 for the treatment of R/M ACC. We reported interim data regarding the most recent safety efficacy, pharmacokinetics, and pharmacodynamics data from Phase 2 of the ACCURACY trial in June 2022 and final topline data was presented at a medical conference in October 2023.

 

As part of our efforts to focus our resources on the more advanced programs and studies including the RINGSIDE study in desmoid tumors and the ACCURACY study for ACC, we elected to cease the TENACITY trial, which was evaluating AL101 as a monotherapy in an open-label Phase 2 clinical trial for the treatment of patients with Notch-activated R/M TNBC.

 

We were originally incorporated in the State of Colorado on June 5, 1987 and later reorganized as a Delaware corporation in 2006. Our principal executive offices are located at 9 Deer Park Drive, Suite K-1, Monmouth Junction, New Jersey 08852. Old Ayala, the accounting acquirer in the January 2023 Merger, was incorporated as a Delaware corporation on November 14, 2017. Our operations to date have been limited to organizing and staffing our company, business planning, raising capital and conducting research and development activities for our product candidates. To date, we have funded our operations primarily through the sales of common stock and convertible preferred stock.

 

We have incurred significant net operating losses in every year since our inception and expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year and could be substantial. Our net losses were approximately $23.4 million and $28.2 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, we had an accumulated deficit of $172.6 million. We anticipate that our expenses will increase significantly as we:

 

advance our development of AL101 for the treatment of R/M ACC;

 

advance our Phase 2/3 RINGSIDE pivotal trial of AL102 for the treatment of desmoid tumors, or conduct clinical trials for any other product candidates;

 

assuming successful completion of our Phase 2 ACCURACY trial of AL101 for the treatment of R/M ACC, may be required by the FDA to complete Phase 3 clinical trials to support submission of a New Drug Application, or NDA, of AL101 for the treatment of R/M ACC;

 

establish a sales, marketing and distribution infrastructure to commercialize AL101 and/or AL102, if approved, and for any other product candidates for which we may obtain marketing approval;

 

17
 

 

maintain, expand, protect and enforce our intellectual property portfolio;

 

hire additional staff, including clinical, scientific, technical, regulatory operational, financial, commercial and other personnel, to execute our business plan; and

 

add clinical, scientific, operational, financial and management information systems and personnel to support our product development and potential future commercialization efforts, and to enable us to operate as a public company.

 

We do not expect to generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for a product candidate. Additionally, we currently use contract research organizations, or CROs, to carry out our clinical development activities. Furthermore, we incur additional costs associated with operating as a public company. As a result, we will need substantial additional funding to support our continuing operations, pursue our growth strategy and continue as a going concern. Until such time as we can generate significant revenue from product sales, if ever, we expect to fund our operations through public or equity offerings or debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or other sources. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our current or any future product candidates.

 

Because of the numerous risks and uncertainties associated with therapeutics product development, we are unable to predict accurately the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we can generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

 

As of September 30, 2023, we had cash and cash equivalents of approximately $2.1 million. Due to the uncertainty in securing additional funding, and the insufficient amount of cash and cash equivalent resources on September 30, 2023, we have concluded that substantial doubt exists with respect to our ability to continue as a going concern within 1 month after the date of the filing of this Quarterly Report on Form 10-Q. See “— Liquidity and Capital Resources.” Substantial doubt about our ability to continue as a going concern may materially and adversely affect the price per share of our common stock, and it may be more difficult for us to obtain financing. If potential collaborators decline to do business with us or potential investors decline to participate in any future financings due to such concerns, our ability to increase our cash position may be limited. We will need to generate significant revenues to achieve profitability, and we may never do so. Because of the numerous risks and uncertainties associated with the development of our current and any future product candidates, the development of our platform and technology and because the extent to which we may enter into collaborations with third parties for development of any of our product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses required for completing the research and development of our product candidates.

 

If we raise additional funds through marketing and distribution arrangements and other collaborations, strategic alliances, and licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, intellectual property, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate product candidate development programs or future commercialization efforts, grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves or discontinue operations.

 

18
 

 

Bristol-Myers Squibb License Agreements

 

In November 2017, we entered into an exclusive worldwide license agreement with Bristol-Myers Squibb Company, or BMS, for AL101 and AL102, each a small molecule gamma secretase inhibitor in development for the treatment of cancers. Under the terms of the license agreement, we have licensed the exclusive worldwide development and commercialization rights for AL101 (previously known as BMS-906024) and AL102 (previously known as BMS-986115).

 

We are responsible for all future development and commercialization of AL101 and AL102. In consideration for the rights granted under the agreement, we paid BMS a payment of $6 million and issued to BMS 1,125,929 shares of Series A preferred stock valued at approximately $7.3 million. We are obligated to pay BMS up to approximately $142 million in the aggregate upon the achievement of certain clinical development or regulatory milestones and up to $50 million in the aggregate upon the achievement of certain commercial milestones by each product containing the licensed BMS compounds. In addition, we are obligated to pay BMS tiered royalties ranging from a high single-digit to a low teen percentage on worldwide net sales of all products containing the licensed BMS compounds.

 

BMS has the right to terminate the BMS License Agreement in its entirety upon written notice to us (a) for insolvency-related events involving us, (b) for our material breach of the BMS License Agreement if such breach remains uncured for a defined period of time, (c) for our failure to fulfil our obligations to develop or commercialize the BMS Licensed Compounds and/or BMS Licensed Products not remedied within a defined period of time following written notice by BMS, or (d) if we or our affiliates commence any action challenging the validity, scope, enforceability or patentability of any of the licensed patent rights. We have the right to terminate the BMS License Agreement (a) for convenience upon prior written notice to BMS, the length of notice dependent on whether a BMS Licensed Product has received regulatory approval, (b) upon immediate written notice to BMS for insolvency-related events involving BMS, (c) for BMS’s material breach of the BMS License Agreement if such breach remains uncured for a defined period of time, or (d) on a BMS Licensed Compound-by-BMS Licensed Compound and/or BMS Licensed Product-by-BMS Licensed Product basis upon immediate written notice to BMS if we reasonably determine that there are unexpected safety and public health issues relating to the applicable BMS Licensed Compounds and/or BMS Licensed Products. Upon termination of the BMS License Agreement in its entirety by us for convenience or by BMS, we grant an exclusive, non-transferable, sublicensable, worldwide license to BMS under certain of our patent rights that are necessary to develop, manufacture or commercialize BMS Licensed Compounds or BMS Licensed Products. In exchange for such license, BMS must pay us a low single-digit percentage royalty on net sales of the BMS Licensed Compounds and/or BMS Licensed Products by it or its affiliates, licensees or sublicensees, provided that the termination occurred after a specified developmental milestone for such BMS Licensed Compounds and/or BMS Licensed Products.

 

19
 

 

Novartis License Agreements

 

In December 2018, we entered into an evaluation, option and license agreement, or the Novartis Agreement, with Novartis International Pharmaceutical Limited, or Novartis, pursuant to which we granted Novartis an exclusive option to obtain an exclusive license to research, develop, commercialize and manufacture AL102 for the treatment of multiple myeloma.

 

We supplied Novartis quantities of AL102, products containing AL102 and certain other materials for purposes of conducting evaluation studies not comprising human clinical trials during the option period, together with our know-how as may have been reasonably be necessary in order for Novartis to conduct such evaluation studies. Novartis agreed to reimburse us for all such expenses.

 

On June 2, 2022, Novartis informed the Company that Novartis does not intend to exercise its option to obtain an exclusive license for AL102, thereby terminating the agreement.

 

Financial Overview

 

Except as described below, there have been no material changes from the disclosure provided under the caption “Components of Results of Operations” in the Old Ayala 2022 Form 10-K.

 

Results of Operations (in thousands, except share and per share amounts)

 

Comparison of the nine months ended September 30, 2023 and 2022

 

The following table summarizes our results of operations for nine months ended September 30, 2023 and 2022. The results of operations for the nine months ended September 30, 2023, reflect the operations of the post- January 2023 Merger combined company for the period from January 20, 2023 to September 30, 2023. The results of operations for the nine months ended September 30, 2022, reflect the operations solely of Old Ayala, which was the accounting acquirer in the January 2023 Merger.

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Revenues from licensing agreement and others  $-   $91   $13   $587 
Cost of services   -    (91)   (13)   (497)
Gross profit               90 
Operating expenses:                    
Research and development   5,683    7,199    18,671    20,282 
General and administrative   1,448    2,881    8,815    7,586 
Operating loss   (7,131)   (10,080)   (27,486)   (27,778)
Financial (loss) income, net   (143)   1    72    41 
Loss before income tax   (7,274)   (10,079)   (27,414)   (27,737)
Taxes on income   (65)   (106)   4,015    (509)
Net loss   (7,339)   (10,185)   (23,399)   (28,246)
Net loss per share attributable to common stockholders, basic and diluted  $(1.53)  $(3.51)  $(5.03)  $(9.81)
Weighted average common shares outstanding, basic and   4,784,474    2,901,478    4,648,599    2,879,465 

 

20
 

 

Revenue

 

To date, we have not generated any revenue from product sales, and we do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval and successful commercialization efforts, we may generate revenue from product sales in the future. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

 

For the nine months ended September 30, 2023 and 2022, we recognized approximately $13 thousand in revenue and $587 thousand in revenue, respectively, mainly as a result of the Novartis Agreement. For the three months ended September 30, 2023 did not recognize any revenue while for the three months ended September 30, 2022, we recognized approximately $91 thousand in revenue mainly as a result of the Novartis Agreement.

 

Refer to note 2 to our unaudited condensed consolidated financial statements for information regarding our recognition of revenue under the Novartis Agreement.

 

Research and Development

 

Research and development expenses consist primarily of costs incurred for our research activities, including the development of and pursuit of regulatory approval of our lead product candidates, AL101 and AL102, and which include:

 

employee-related expenses, including salaries, benefits and stock-based compensation expense for personnel engaged in research and development functions;

 

expenses incurred in connection with the preclinical and clinical development of our product candidates, including under agreements with CROs, investigative sites and consultants;

 

costs of manufacturing our product candidates for use in our preclinical studies and clinical trials, as well as manufacturers that provide components of our product candidates for use in our preclinical and current and potential future clinical trials;

 

costs associated with our bioinformatics platform;

 

consulting and professional fees related to research and development activities;

 

costs related to compliance with clinical regulatory requirements; and

 

Facility costs and other allocated expenses, which include expenses for rent and maintenance of our facility, utilities, depreciation and other supplies.

 

Conduct certain operations relating to former Advaxis’ operations as clinical-stage biotechnology company focused on the development and commercialization of proprietary Listeria monocytogenes (“Lm”)-based antigen delivery products.

 

We expense research and development costs as incurred. Our external research and development expenses consist primarily of costs such as fees paid to consultants, contractors and CROs in connection with our preclinical and clinical development activities. We typically use our employee and infrastructure resources across our development programs and we do not allocate personnel costs and other internal costs to specific product candidates or development programs with the exception of the costs to manufacture our product candidates.

 

   Nine Months Ended September 30, 
   2023   2022   $ Change   % Change 
   ($ in thousands)         
Research and development  $18,671   $20,282   $(1,611)   (7.94)%

 

   Three Months Ended September 30, 
   2023   2022   $ Change   % Change 
   ($ in thousands)         
Research and development  $5,683   $7,199   $(1,516)   (21)%

 

Research and development expenses were $18.7 million for the nine months ended September 30, 2023 compared to $20.3 million for the nine months ended September 30, 2022. The decrease was due to the termination of the TENACITY trial and winding down of the ACCURACY trial offset by expenses incurred by the programs of former Advaxis.

 

Research and development expenses were $5.7 million for the three months ended September 30, 2023 compared to $7.2 million for the three months ended September 30, 2022. The decrease was due to the termination of the TENACITY trial and winding down of the ACCURACY trial offset by expenses incurred by the programs of former Advaxis.

 

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The following table summarizes our research and development expenses by product candidate or development program for the three and nine months ended

 

September 30, 2023 and 2022:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2023   2022   2023   2022 
Program-Specific Costs:                    
AL 101                    
ACC   292    940    1,545    2,703 
TNBC (1)   793    926    1,680    3,460 
General expenses   285    728    1,378    1,904 
AL 102                    
General expenses   218    74    1,700    254 
Desmoid   3,320    4,531    7,957    11,961 
Other R&D expenses (Mainly Lm)   775    -    4,411    - 
Total research and development expenses  $5,683   $7,199   $18,671   $20,282 

 

(1)As part of our efforts to focus our resources on the more advanced programs and studies including the RINGSIDE study in desmoid tumors and the ACCURACY study for ACC, we elected to cease the TENACITY trial, which was evaluating AL101 as a monotherapy in an open-label Phase 2 clinical trial for the treatment of patients with Notch-activated R/M TNBC.

 

We expect our research and development expenses to increase for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as our programs advance into later stages of development and as we conduct additional clinical trials.

 

General and Administrative Expenses  Nine Months Ended September 30, 
   2023   2022   $ Change   % Change 
   ($ in thousands)         
General and Administrative  $8,815   $7,586   $1,229    16%

 

   Three Months Ended September 30, 
General and Administrative Expenses  2023   2022   $ Change   % Change 
   ($ in thousands)         
General and Administrative  $1,448   $2,881   $(1,433)   (50)%

 

General and administrative expenses were $8.8 million for the nine months ended September 30, 2023 compared to $7.6 million for the nine months ended September 30, 2022. The increase was mainly due to severance agreement obligations recognized in the period to former executives of $0.9 million in salary compensation and $1.1 million in stock-based compensation due to acceleration of options as part of severance agreement.

 

General and administrative expenses were $1.5 million for the three months ended September 30, 2023, compared to $2.9 million for the three months ended September 30, 2022. The decrease was mainly due to reduction in personnel costs.

 

Financial Loss, net

 

Financial income, net was $72 thousand for the nine months ended September 30, 2023 compared to financial gain of $41 thousand for the nine months ended September 30, 2022. The main change is due to the revaluation of the convertible note during Q3 2023.

 

Financial loss, net was $143 thousand for the three months ended September 30, 2023 compared to $1 thousand for the three months ended September 30, 2022. The main change is due to the revaluation of the convertible note.

 

Taxes on income

 

Taxes on Income expenses were $65 thousand for the three months ended September 30, 2023, compared to $106 thousand for the three months ended September 30, 2022. The decrease was mainly due to reduction in stock-based compensation and payroll costs in Israel due to a reduction in personnel costs, as we pay tax based on our expenses in Israel.

 

Taxes on Income credit net was $4,015 thousand for the nine months ended September 30, 2023, compared to $509 thousand expenses for the nine months ended September 30, 2022. The credit amount was mostly due to receiving of $4.7 million of proceeds from the sale of our Net Operating Losses (“NOLs”) under the State of New Jersey NOL Transfer Program. This was recorded as a tax benefit and offset against income tax expense in the consolidated statement of operations.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. Our net losses were approximately $23.4 million for the nine months ended September 30, 2023. As September 30, 2023, we had an accumulated deficit of $172.6 million. The company is actively seeking investments to fund the operations.

 

Funding Requirements

 

As of September 30, 2023, we had cash and cash equivalents of approximately $2.1 million, and had approximately $1.6 million as of the date of filing of this Form 10-Q, following the completion of certain financing transactions on November 17, 2023 (the “November 17 Financing”), as described in Part II, Item 5 of this Form 10-Q.

 

We believe based on our current operating plan, our existing cash and cash equivalents on hand as of the date of filing of this Form 10-Q will enable us to fund our operations assuming we can manage the timing of payment of our current obligations and are able to secure additional funding while maintaining a level of general and administrative expenses to support the business and continue focus on development of AL102. The Company expects to be able to meet its financial obligations to its employees and to its vendors only if able to reach agreements on payment terms and secure additional funding. The Company is evaluating additional reductions in costs including additional reductions in workforce expenses, to help meet current obligations.

 

Management has evaluated different strategies to obtain the required funding for future operations. Despite its efforts, the Company has been unsuccessful in securing additional capital to fund operations and otherwise satisfy creditor obligations. As a result, management and the Board are evaluating strategic alternatives that may be available. Should financing not be obtained, or another strategic alternative consummated, management and the Board may consider other alternatives, including without limitation bankruptcy and liquidation of the Company or an assignment for the benefit of creditors.

 

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On February 19, 2021, Old Ayala entered into a Securities Purchase Agreement (the “2021 Purchase Agreement”) with the purchasers named therein (the “Investors”). Pursuant to the 2021 Purchase Agreement, Old Ayala agreed to sell (i) an aggregate of 62,467* shares of our common stock (the “Private Placement Shares”), par value $0.01 per share, together with warrants to purchase an aggregate of 21,863* shares of Old Ayala’s common stock with an exercise price of $96.58* per share (the “Common Warrants”), for an aggregate purchase price of $4,999,995.00 and (ii) pre-funded warrants to purchase an aggregate of 249,866* shares of our common stock with an exercise price of $0.05* per share (the “Pre-Funded Warrants” and collectively with the Common Warrants, the “Private Placement Warrants”), together with an aggregate of 87,453*Common Warrants, for an aggregate purchase price of $19,986,661.67 (collectively, the “Private Placement”). The Private Placement closed on February 23, 2021.

 

In June 2021, Old Ayala entered into an Open Market Sales Agreement, or the Sales Agreement, with Jefferies LLC, or Jefferies, as sales agent, pursuant to which Old Ayala was able to, from time to time, issue and sell common stock with an aggregate value of up to $200.0 million in “at-the-market” offerings (the “ATM”), under a registration statement on Form S-3 filed with the SEC. Sales of common stock, if any, pursuant to the Sales Agreement, could be made in sales deemed to be an “at the market offering” as defined in Rule 415(a) of the Securities Act, including sales made directly through The Nasdaq Global Market or on any other existing trading market for our common stock. During the nine months ended September 30, 2022, Old Ayala sold a total of 918 shares of its common stock for total gross proceeds of approximately $47 thousand.

 

The exercise price and the number of shares of common stock issuable upon exercise of each Private Placement Warrant are subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock. In addition, in certain circumstances, upon a fundamental transaction, a holder of Common Warrants will be entitled to receive, upon exercise of the Common Warrants, the kind and amount of securities, cash or other property that such holder would have received had they exercised the Private Placement Warrants immediately prior to the fundamental transaction. The Pre-Funded Warrants will be automatically exercised on cashless basis upon the occurrence of a fundamental transaction. Each Common Warrant is exercisable from the date of issuance and has a term of three years and each Pre-Funded Warrant is exercisable from the date of issuance and has a term of ten years. Pursuant to the 2021 Purchase Agreement, we registered the Private Placement Shares and Private Placement Warrants for resale by the Investors on a registration statement on Form S-3 (the “Private Placement Registration Statement”).

 

On October 18, 2022, the Company, which at the time was named Advaxis, Inc., entered into a Merger Agreement (the “Merger Agreement”), with entity then known as Ayala Pharmaceuticals, Inc. following its January 2023 name change to Old Ayala, Inc., (“Old Ayala”) and Doe Merger Sub, Inc. (“Merger Sub”), a direct, wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement, Merger Sub merged with and into Old Ayala, with Old Ayala continuing as the surviving company and a wholly-owned subsidiary of the Company (the “January 2023 Merger”). Immediately after the January 2023 Merger, former Advaxis stockholders as of immediately prior to the January 2023 Merger own approximately 37.5% of the outstanding shares of the combined Company and former Old Ayala shareholders own approximately 62.5% of the outstanding shares of the combined Company.

 

At the effective time of the January 2023 Merger (the “Effective Time”), each share of share capital of Old Ayala issued and outstanding immediately prior to the Effective Time was converted into the right to receive a number of shares of the Company’s common stock, par value $0.001 per share, equal to the exchange ratio, 0.1874 shares of the Company’s common stock per Old Ayala share.

 

Cash Flows

 

The following table summarizes our cash flow for the nine months ended September 30, 2023 and 2022:

 

   Nine Months Ended September 30, 
   2023   2022 
   ($ in thousands) 
Cash flows (used in) provided by:          
Operating activities   (22,283)   (26,342)
Financing activities   22,001    512 
Effect of exchange rate changes on cash, cash equivalents and restricted cash   (26)   - 
Increase (decrease) in cash and cash equivalents and restricted cash   (308)   (25,830)

 

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Operating Activities

 

Net cash used in operating activities during the nine months ended September 30, 2023 of approximately $22.3 million was primarily attributable to our net loss of $23.4 million, adjusted for non-cash expenses of $1.4 million, which includes stock-based compensation of $1.3 million, and a net increase in working capital of $0.3 million.

 

Net cash used in operating activities during the nine months ended September 30, 2022 of approximately $26.3 million was primarily attributable to our net loss of $28.2 million, adjusted for non-cash expenses of $2.0 million, which includes stock-based compensation of $1.9 million, and a net increase in working capital of $0.1 million.

 

Investing Activities

 

We did not have any cash provided by investing activities during the nine months ended September 30, 2023 and 2022.

 

Financing Activities

 

Net cash provided by financing activities during the nine months ended September 30, 2023 of $22.0 million is attributable to the January 2023 Merger.

 

Net cash provided by financing activities during the nine months ended September 30, 2022 of $512 thousand was attributable to sales of securities by Old Ayala.

 

Funding Requirements

 

Our future capital requirements are difficult to forecast and will depend on many factors, including our ability to raise additional funding. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development for, initiate later-stage clinical trials for, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution. Furthermore, we incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

 

As of September 30, 2023, we had cash and cash equivalents of $2.1 million. We evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern after the date that the unaudited condensed consolidated financial statements are issued. Due to the uncertainty in securing additional funding, and the insufficient amount of cash and cash equivalent resources at September 30, 2023, we have concluded that substantial doubt exists with respect to our ability to continue as a going concern within one year after the date of the filing of this Report on Form 10-Q. Our future capital requirements will depend on many factors, including:

 

the costs of consummating the January 2023 Merger and the Biosight Merger.;

 

our receipt of funds pursuant to bridge financing arrangements that we have recently entered into

 

the costs of conducting future clinical trials of AL102;

 

the cost of manufacturing additional material for future clinical trials of AL102;

 

The cost of conducting and completing clinical trials of BST-236;

 

the scope, progress, results and costs of discovery, preclinical development, laboratory testing and clinical trials for other potential product candidates we may develop or acquire, if any;

 

the costs, timing and outcome of regulatory review of our product candidates;

 

the achievement of milestones or occurrence of other developments that trigger payments under any current or future license, collaboration or other agreements;

 

the costs and timing of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;

 

24
 

 

the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;

 

the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining, protecting and enforcing our intellectual property rights and defending intellectual property-related claims;

 

our headcount growth and associated costs as we expand our business operations and our research and development activities; and

 

the costs of operating as a public company.

 

Conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect your rights as a common stockholder. Any debt financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business.

 

If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, such as our former agreement with Novartis, we may have to relinquish valuable rights to our technologies, intellectual property, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Contractual Obligations

 

There have been no material changes to our contractual obligations from those described in the Old Ayala 2022 Form 10-K.

 

Critical Accounting Policies

 

Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience, known trends and events, and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

 

There have been no significant changes in our critical accounting policies as discussed in the Old Ayala 2022 Form 10-K, except as described in note 1 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

25
 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Material Weaknesses

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements could not be prevented or detected on a timely basis. We have identified material weaknesses in our controls related to the aggregation of open control deficiencies across the Company’s financial reporting processes because the controls were not fully designed and operating effectively.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2023, our disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting.

 

Changes in Internal control over Financial Reporting

 

During the fiscal quarter ended September 30, 2023, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

However, management has identified a material weakness in internal controls related to the aggregation of open control deficiencies across the Company’s financial reporting processes.

 

Remediation Plan for the Material Weakness

 

Management is committed to the remediation of the material weakness described above, as well as the continued improvement of the Company’s internal control over financial reporting. Management has implemented and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented and operating effectively.

 

Management is re-assessing the design of manual controls and modifying processes designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weaknesses, including but not limited to, (a) frequent communications between our Audit Committee and management regarding our financial reporting and internal control environment and (b) planned upgrading of the finance, accounting and reporting functions through the addition of experienced and qualified resources.

 

We will continue to evaluate and improve the internal controls over financial reporting and take additional measures to address control deficiencies. Management will test and evaluate the implementation of internal controls and revised processes to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material error in our financial statements.

 

We believe that once these actions have been completed, it will remediate the material weakness. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded that controls are operating effectively. The elements of our remediation plan can only be accomplished over time. We can offer no assurance that the elements of our remediation plan initiatives will ultimately have the intended effects.

 

26
 

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

See the matters set forth in note 4, “Commitments and Contingent Liabilities – Purported Stockholder Claims” in the Notes to Condensed Consolidated Financial Statements included herein.

 

Item 1A. Risk Factors.

 

There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended October 31, 2022, except for the following:

 

Situation in Israel

 

In October 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks on the Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in other areas within the State of Israel. These attacks resulted in thousands of deaths and injuries, and Hamas additionally kidnapped many Israeli civilians and soldiers. Following the attack, Israel’s security cabinet declared war against Hamas and commenced a military campaign against Hamas. The Company cannot currently predict the intensity or duration of Israel’s war against Hamas, nor can predict how this war will ultimately affect the Company’s business and operations or Israel’s economy in general.

 

Despite recent cost-saving measures, our cash and cash equivalents are not sufficient to fund, assuming we can manage the time of payment of our current obligations and are able to secure additional funding and our Board currently is evaluating several options, including bankruptcy and liquidation of the Company and an assignment for the benefit of creditors.

 

As of September 30, 2023, we had cash and cash equivalents of approximately $2.1 million, and had approximately $1.6 million as of the date of filing of this Form 10-Q, following the completion of certain financing transactions on November 17, 2023 (the “November 17 Financing”), as described in Part II, Item 5 of this Form 10-Q. We believe based on our current operating plan, our existing cash and cash equivalents on hand as of the filing date of this Form 10-Q will enable us to fund our operations, assuming we can manage the time of payment of our current obligations and are able to secure additional funding. As of the filing date of this Form 10-Q, the Board is evaluating several options, including additional financing as well as strategic alternatives that may be available. Should financing not be obtained, or another strategic alternative consummated, management and the Board may consider other alternatives, including without limitation bankruptcy and liquidation of the Company or an assignment for the benefit of creditors.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None of our directors or officers adopted, modified or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during our fiscal quarter ended September 30, 2023.

 

Information Regarding November 17, 2023 Financing Transactions

 

On November 17, 2023, the Company issued Senior Convertible Promissory Notes (collectively, the “Senior Convertible Notes”), in an aggregate amount of $4.0 million, to several existing lenders and investors in the Company, including Israel Biotech Fund I, L.P., Israel Biotech Fund II, L.P., Arkin Bio Ventures L.P. and Biotel Limited. The amounts borrowed by the Company under the Senior Convertible Notes are expected to be funded to the Company on or about November 20, 2023. The Senior Convertible Notes are convertible into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at any time at the option of the noteholders, and are subject to mandatory conversion upon certain events, including a change of control transaction and certain financing transactions involving the Company, at a conversion price equal to the lower of (i) 50% of the Common Stock’s price per share as of market close on November 16, 2023 and (ii) 50% of the Common Stock’s price per share as of the close of market on the Trading Day immediately prior to the date of the Notice of Conversion, subject to certain adjustments. In connection with the issuance of the Senior Convertible Notes, the Company has issued to the noteholders warrants to purchase an aggregate of 15,000,000 shares of the Common Stock with an exercise price equal to the lower of (A) 50% of the Common Stock’s price per share as of market close on November 16, 2023 and (ii) 50% of the Common Stock’s price per share as of the close of market on the Trading Day immediately prior to the date of the Notice of Exercise of the warrant, subject to adjustment, which exercise may be on a cashless basis.

 

27
 

 

The noteholders also have the right, pursuant to a Side Letter Agreement (New Notes) between the noteholders and the Company, to lend an additional $4.0 million dollars to the Company on the same terms, including warrant coverage. This right is exercisable until the earliest of (i) May 17, 2024, (ii) the date of consummation of a Change of Control Transaction, and (iii) the date of consummation of a Financing Transaction (both as defined in the New Side Letter Agreement.

 

The Company and Israel Biotech Fund I, L.P. and Israel Biotech Fund II, L.P. also agreed to amend and restate the terms of the Senior Secured Convertible Promissory Notes issued by the Company on August 7, 2023, as previously disclosed by the Company in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 (the “Existing Secured Notes”), to conform to the terms of the Senior Convertible Notes, and issued to the holders of the Existing Secured Notes warrants to purchase an aggregate of 7,500,000 shares of the Common Stock on the terms of the above-described warrants.

 

Those members of the Company’s Board of Directors who are associated with Israel Biotech Fund I, L.P., Israel Biotech Fund II, L.P. and Arkin Bio Ventures L.P. did not participate in any of the deliberations or decisions with respect to the transactions described in this paragraph, all of which were reviewed and approved by the disinterested members of the Board.

 

In connection with the issuance of the Senior Convertible Notes, the Company also entered into a new Side Letter Agreement for Conversion dated November 17, 2023 (the “New Side Letter Agreement”) with the Investors. Pursuant to the New Side Letter Agreement, the Company and the Investors agreed that until the earliest of (i) November 17, 2028, (ii) the date of consummation of a Change of Control Transaction, and (iii) the date of consummation of a Financing Transaction (both as defined in the New Side Letter Agreement, the Investors shall have the right (but not the obligation) to purchase senior convertible promissory notes of the Company on the same terms (including with respect to warrant coverage) of the Senior Convertible Notes, up to an aggregate amount of $1,458,000.

 

In addition, the Company and the lenders under the Senior Convertible Notes and the Existing Secured Notes entered into a Subordination Agreement dated as of November 17, 2023 (the “Subordination Agreement”), and the Company and the parties to the Senior Convertible Notes entered into a Registration Rights Agreement dated as of November 17, 2023 (the “Registration Rights Agreement”) providing to the holders of the notes and the warrants customary rights with respect to the registration of the shares of Common Stock issuable upon conversion of the notes or exercise of the warrants under the Securities Act of 1933, as amended.

 

The Senior Convertible Notes, the amended and restated Existing Secured Notes. the warrants issued in connection therewith, and the shares of Common Stock issuable pursuant to the exercise of such warrants, are being offered and sold pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof, for the sale of securities not involving a public offering.

 

Following the issuance of the Senior Convertible Notes, the amendment and restatement of the Existing Secured Notes, the issuance of the warrants described in this Item 5 and the entry into of the New Side Letter Agreement, Israel Biotech Fund I, L.P. and Israel Biotech Fund II, L.P. own approximately _59% of the Common Stock on a fully converted basis. Israel Biotech Fund I, L.P. and Israel Biotech Fund II, L.P. invested $2.4 million in the Senior Convertible Notes and $2.0 million in the Existing Secured Notes, from their funds held for investment.

 

The foregoing summaries of the Senior Convertible Notes, the amended and restated Existing Secured Notes, the warrants issued in connection with the Senior Convertible Notes, the warrants issued in connection with the amended and restated Existing Secured Notes, the New Side Letter Agreement, the Subordination Agreement and the Registration Rights Agreement do not purport to be complete and are qualified in their entireties by reference to the full copies of such agreements and instruments, which are attached as exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6 and 10.7, respectively, to this Form 10-Q and incorporated into this Item 5 by reference.

 

28
 

 

Item 6. Exhibits.

 

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q (unless otherwise indicated, the file number with respect to each filed document is 001-36138):

 

Exhibit Number   Description   Form   Exhibit   Filing Date   Filed/ Furnished Herewith
2.1   Agreement and Plan of Merger and Reorganization, by and among the Company, Advaxis Israel Ltd., a company organized under the laws of the State of Israel and a wholly owned subsidiary of the Company (“Merger Sub”), and Biosight. Ltd., dated as of July 26, 2023.   8-K   2.1   August 1, 2023    
                     
10.1(1)   Amended and Restated Senior Secured Convertible Promissory Note, dated November 17, 2023, by and between Ayala Pharmaceuticals, Inc. and Israel Biotech Fund I, L.P.               *
                     
10.2(2)   Senior Convertible Promissory Note, dated November 17, 2023, by and between Ayala Pharmaceuticals, Inc. and Israel Biotech Fund I, L.P.               *
                     
10.3(3)   Common Stock Purchase Warrant (Convertible Note), dated November 17, 2023, issued by Ayala Pharmaceuticals, Inc. to Israel Biotech Fund I, L.P.               *
                     
10.4(4)   Common Stock Purchase Warrant (Secured Note), dated November 17, 2023, issued by Ayala Pharmaceuticals, Inc. to Israel Biotech Fund I, L.P.               *
                     
10.5   Side Letter Agreement (New Notes), dated November 17, 2023, by and among Ayala Pharmaceuticals, Inc., Israel Biotech Fund I, L.P., Israel Biotech Fund II, L.P., Arkin Bio Ventures L.P., Biotel Limited and Arkin Communication Ltd.               *
                     
10.6   Subordination Agreement, dated November 17, 2023, by and among Ayala Pharmaceuticals, Inc., Israel Biotech Fund I, L.P. and Israel Biotech Fund II, L.P., Arkin Bio Ventures L.P. and Biotel Limited               *
                     
10.7   Registration Rights Agreement, dated November 17, 2023, by and among Ayala Pharmaceuticals, Inc., Israel Biotech Fund I, L.P., Israel Biotech Fund II, L.P., Arkin Bio Ventures L.P., Biotel Limited and Arkin Communication Ltd.               *
                     
31.1   Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.               *
                     
31.2   Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.               *
                     
32.1   Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.               *
                     
32.2   Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.               *
                     
101.INS   Inline XBRL Instance Document—the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document               *
101.SCH   Inline XBRL Taxonomy Extension Schema Document               *
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document               *
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document               *
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document               *
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document               *
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)               *

 

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(1) Pursuant to Instruction 2 to Item 601 of Regulation S-K, the Company has filed a copy of one Amended and Restated Senior Secured Convertible Promissory Note, and has set forth as follows the other document omitted. The Company acknowledges that the Commission may at any time in its discretion require filing of copies of any documents so omitted.

 

1.Amended and Restated Senior Secured Convertible Promissory Note, dated November 17, 2023, by and between Ayala Pharmaceuticals, Inc. and Israel Biotech Fund II, L.P.

 

(2) Pursuant to Instruction 2 to Item 601 of Regulation S-K, the Company has filed a copy of one Senior Convertible Promissory Note, and has set forth as follows the other documents omitted. The Company acknowledges that the Commission may at any time in its discretion require filing of copies of any documents so omitted.

 

1.Senior Convertible Promissory Note, dated November 17, 2023, by and between Ayala Pharmaceuticals, Inc. and Israel Biotech Fund II, L.P.

 

2.Senior Convertible Promissory Note, dated November 17, 2023, by and between Ayala Pharmaceuticals, Inc. and Arkin Bio Ventures L.P.

 

3.Senior Convertible Promissory Note, dated November 17, 2023, by and between Ayala Pharmaceuticals, Inc. and Biotel Limited.

 

(3) Pursuant to Instruction 2 to Item 601 of Regulation S-K, the Company has filed a copy of one Common Stock Purchase Warrant (Convertible Note), and has set forth as follows the other documents omitted. The Company acknowledges that the Commission may at any time in its discretion require filing of copies of any documents so omitted.

 

1.Common Stock Purchase Warrant (Convertible Note), dated November 17, 2023, issued by Ayala Pharmaceuticals, Inc. to Israel Biotech Fund II, L.P.

 

2.Common Stock Purchase Warrant (Convertible Note), dated November 17, 2023, issued by Ayala Pharmaceuticals, Inc. to Arkin Bio Ventures L.P.

 

3.Common Stock Purchase Warrant (Convertible Note), dated November 17, 2023, issued by Ayala Pharmaceuticals, Inc. to Biotel Limited.

 

(4) Pursuant to Instruction 2 to Item 601 of Regulation S-K, the Company has filed a copy of one Common Stock Purchase Warrant (Secured Note), and has set forth as follows the other document omitted. The Company acknowledges that the Commission may at any time in its discretion require filing of copies of any documents so omitted.

 

1.Common Stock Purchase Warrant (Secured Note), dated November 17, 2023, issued by Ayala Pharmaceuticals, Inc. to Israel Biotech Fund II, L.P.

 

*Filed herewith.

 

**Furnished herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  AYALA Pharmaceuticals, Inc.
     
Date: November 20, 2023 By: /s/ Kenneth Berlin
    Kenneth Berlin
    President and Chief Executive Officer
    (principal executive  officer)
     
Date: November 20, 2023 By: /s/ Roy Golan
    Roy Golan
    Chief Financial Officer
    (principal financial and accounting officer)

 

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