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

☐	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

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.

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

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.

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

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

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 Technology^TM.

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.

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.

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.

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


	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.

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.

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:

SCHEDULE OF WARRANTS OUTSTANDING

		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

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.

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:

SUMMARY OF LEASE COSTS

	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.

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”).

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 Pro

SEC Form 10-Q filed by Advaxis, Inc.