Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Exicure, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Exicure, Inc. and subsidiary (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant expenses and negative cash flows since inception and its current liquidity is not sufficient to fund operations over the next twelve months, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
(signed) KPMG LLP
We have served as the Company’s auditor since 2014.
Chicago, Illinois
March 27, 2023
EXICURE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 8,577 | | | $ | 34,644 | |
Short-term investments | — | | | 4,497 | |
| | | |
| | | |
Prepaid expenses and other assets | 1,474 | | | 4,525 | |
Total current assets | 10,051 | | | 43,666 | |
Property and equipment, net | 2,530 | | | 3,927 | |
Right-of-use asset | 7,257 | | | 7,950 | |
Other noncurrent assets | 3,490 | | | 9,325 | |
Total assets | $ | 23,328 | | | $ | 64,868 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | — | | | $ | 6,873 | |
Accounts payable | 361 | | | 3,413 | |
Accrued expenses and other current liabilities | 1,278 | | | 6,464 | |
Deferred revenue, current | — | | | 17,317 | |
Total current liabilities | 1,639 | | | 34,067 | |
| | | |
| | | |
Deferred revenue, noncurrent | — | | | 11,509 | |
Lease liability, noncurrent | 6,767 | | | 7,404 | |
Other noncurrent liabilities | — | | | 656 | |
Total liabilities | $ | 8,406 | | | $ | 53,636 | |
| | | |
Stockholders’ equity: | | | |
Preferred stock, $0.0001 par value per share; 10,000,000 shares authorized, no shares issued and outstanding, December 31, 2022 and December 31, 2021 | — | | | — | |
Common stock, $0.0001 par value per share; 200,000,000 shares authorized, 4,965,901 issued and outstanding, December 31, 2022; 3,626,073 issued and outstanding, December 31, 2021 | — | | | — | |
Additional paid-in capital | 187,571 | | | 181,301 | |
Accumulated other comprehensive loss | — | | | (2) | |
Accumulated deficit | (172,649) | | | (170,067) | |
Total stockholders' equity | 14,922 | | | 11,232 | |
Total liabilities and stockholders’ equity | $ | 23,328 | | | $ | 64,868 | |
See Accompanying Notes to Consolidated Financial Statements.
EXICURE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 |
Revenue: | | | | | | | |
Collaboration revenue | | | | | $ | 28,826 | | | $ | (483) | |
Total revenue | | | | | 28,826 | | | (483) | |
Operating expenses: | | | | | | | |
Research and development expense | | | | | 19,767 | | | 48,979 | |
General and administrative expense | | | | | 10,890 | | | 13,087 | |
Total operating expenses | | | | | 30,657 | | | 62,066 | |
Operating loss | | | | | (1,831) | | | (62,549) | |
Other (expense) income, net: | | | | | | | |
Dividend income | | | | | 78 | | | 8 | |
Interest income | | | | | 15 | | | 141 | |
Interest expense | | | | | (595) | | | (1,691) | |
Other expense, net | | | | | (40) | | | (11) | |
Total other expense, net | | | | | (542) | | | (1,553) | |
Net loss before provision for income taxes | | | | | (2,373) | | | (64,102) | |
Provision for income taxes | | | | | 209 | | | — | |
Net loss | | | | | $ | (2,582) | | | $ | (64,102) | |
| | | | | | | |
Basic and diluted loss per common share | | | | | $ | (0.56) | | | $ | (21.70) | |
Weighted-average basic and diluted common shares outstanding | | | | | 4,619,471 | | | 2,953,901 | |
See Accompanying Notes to Consolidated Financial Statements.
EXICURE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except share and per share data)
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Net loss | $ | (2,582) | | | $ | (64,102) | |
Other comprehensive (loss) income, net of taxes | | | |
Unrealized (losses) gains on available for sale securities, net of tax | 2 | | | (85) | |
Other comprehensive (loss) income | 2 | | | (85) | |
Comprehensive loss | $ | (2,580) | | | $ | (64,187) | |
See Accompanying Notes to Consolidated Financial Statements.
EXICURE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Common Stock | | | | | | | | |
| Shares | | $ | | Additional Paid-in- Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
Balance at December 31, 2020 | 2,921,684 | | | $ | — | | | $ | 167,388 | | | $ | (105,965) | | | $ | 83 | | | $ | 61,506 | |
Exercise of options | 11,408 | | | — | | | 546 | | | — | | | — | | | 546 | |
Equity-based compensation | — | | | — | | | 2,939 | | | — | | | — | | | 2,939 | |
Vesting of restricted stock units and related repurchases | 807 | | | — | | | (14) | | | — | | | — | | | (14) | |
Issuance of common stock-ESPP | 6,306 | | | — | | | 209 | | | — | | | — | | | 209 | |
Issuance of common stock and warrants, net | 685,868 | | | — | | | 10,233 | | | — | | | — | | | 10,233 | |
Other comprehensive loss, net | — | | | — | | | — | | | — | | | (85) | | | (85) | |
Net loss | — | | | — | | | — | | | (64,102) | | | — | | | (64,102) | |
Balance at December 31, 2021 | 3,626,073 | | | $ | — | | | $ | 181,301 | | | $ | (170,067) | | | $ | (2) | | | $ | 11,232 | |
Exercise of options | 124 | | | — | | | — | | | — | | | — | | | — | |
Equity-based compensation | — | | | — | | | 1,369 | | | — | | | — | | | 1,369 | |
Vesting of restricted stock units and related repurchases | 3,818 | | | — | | | (4) | | | — | | | — | | | (4) | |
Issuance of common stock-ESPP | 1,851 | | | — | | | 5 | | | — | | | — | | | 5 | |
Issuance of common stock and warrants, net | 1,334,035 | | | — | | | 4,900 | | | — | | | — | | | 4,900 | |
Other comprehensive income, net | — | | | — | | | — | | | — | | | 2 | | | 2 | |
Net loss | — | | | — | | | — | | | (2,582) | | | — | | | (2,582) | |
Balance at December 31, 2022 | 4,965,901 | | | $ | — | | | $ | 187,571 | | | $ | (172,649) | | | $ | — | | | $ | 14,922 | |
See Accompanying Notes to Consolidated Financial Statements.
EXICURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net loss | $ | (2,582) | | | $ | (64,102) | |
Adjustments to reconcile net loss to cash used in operating activities: | | | |
Depreciation and amortization | 1,163 | | | 1,123 | |
Amortization of right-of-use asset | 693 | | | 656 | |
Equity-based compensation | 1,369 | | | 2,939 | |
Amortization of long-term debt issuance costs and fees | 477 | | | 284 | |
Amortization of investments | (2) | | | 184 | |
Other | 39 | | | 7 | |
Change in fair value of warrant liabilities | — | | | (15) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | — | | | 11 | |
Prepaid expenses and other current assets | 3,051 | | | (295) | |
Other noncurrent assets | (2,165) | | | 68 | |
Accounts payable | (3,052) | | | 1,582 | |
Accrued expenses | (5,186) | | | 2,811 | |
Deferred revenue | (28,826) | | | 20,483 | |
Other liabilities | (637) | | | (555) | |
Net cash used in operating activities | (35,658) | | | (34,819) | |
Cash flows from investing activities: | | | |
Purchase of available for sale securities | (1,499) | | | (6,497) | |
Proceeds from sale or maturity of available for sale securities | 6,000 | | | 50,550 | |
Capital expenditures | (10) | | | (968) | |
Proceeds from sale of capital assets | 205 | | | — | |
Net cash provided by investing activities | 4,696 | | | 43,085 | |
Cash flows from financing activities: | | | |
Proceeds from common stock offering | 5,040 | | | 11,478 | |
Payment of common stock financing costs | (154) | | | (1,111) | |
Payment of long-term debt fees and issuance costs | (506) | | | — | |
Repayment of long-term debt | (7,500) | | | (10,000) | |
Proceeds from issuance of employee stock purchase plan | 5 | | | 209 | |
Proceeds from exercise of common stock warrants | 14 | | | 8 | |
Proceeds from exercise of common stock options | — | | | 546 | |
Payments for minimum statutory tax withholding related to net share settlement of equity awards | (4) | | | (14) | |
Net cash (used in) provided by financing activities | (3,105) | | | 1,116 | |
Net (decrease) increase in cash, cash equivalents, and restricted cash | (34,067) | | | 9,382 | |
Cash, cash equivalents, and restricted cash - beginning of period | 43,844 | | | 34,462 | |
Cash, cash equivalents, and restricted cash - end of period | $ | 9,777 | | | $ | 43,844 | |
EXICURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Supplemental disclosure of cash flow information | | | |
| | | |
| | | |
Non-cash investing activities: | | | |
Capital expenditures (accounts payable and accrued expenses) | — | | | 9 | |
Non-cash financing activities: | | | |
| | | |
Common stock issuance costs (accounts payable and accrued expenses) | — | | | 142 | |
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the amounts shown in the consolidated statements of cash flows: | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Cash and cash equivalents | $ | 8,577 | | | $ | 34,644 | |
Restricted cash included in other noncurrent assets | 1,200 | | | 9,200 | |
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 9,777 | | | $ | 43,844 | |
See Accompanying Notes to Consolidated Financial Statements.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Description of Business and Basis of Presentation
Description of Business
Exicure, Inc. has historically been an early-stage biotechnology company focused on developing nucleic acid therapies targeting ribonucleic acid against validated targets. In September 2022, the Company announced a significant reduction in force, suspension of preclinical activities and halting of all research and development, and that the Company was exploring strategic alternatives to maximize stockholder value. With respect to the Company’s historical assets, this includes continuing to explore out-licensing opportunities for cavrotolimod, the Company’s clinical-stage asset in immuno-oncology, as well as for the Company’s preclinical candidate associated with the SCN9A program for neuropathic pain.
While the foregoing efforts are continuing, the Company does not expect they will generate significant value for stockholders, at least in the near term. Therefore, the Company is engaging in a broader exploration of strategic alternatives. This effort involves exploring growth through transactions with potential partners that see opportunity in joining an existing, publicly-traded organization. The Company is exploring transactions both within its historical biotechnology and life science industry and in other industries unrelated to its historical operations.
Throughout these consolidated financial statements, the terms the “Company,” and “Exicure” refer to Exicure, Inc. and where appropriate, its wholly owned subsidiary, Exicure Operating Company. Exicure Operating Company holds all material assets and conducts all business activities and operations of Exicure, Inc.
Basis of Presentation
The accompanying consolidated financial statements as of December 31, 2022 and 2021, and for the years then ended, have been presented in conformity with generally accepted accounting principles in the United States (“GAAP”).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Exicure, Inc. and its wholly owned subsidiary, Exicure Operating Company. All intercompany transactions and accounts are eliminated in consolidation.
Reverse Stock Split
The Company effected a reverse stock split of its Common Stock at a ratio of 1-for-30 as of 5:00 p.m. Eastern Time on June 29, 2022. No fractional shares were issued in connection with the reverse stock split. Stockholders of record who would otherwise be entitled to receive a fractional share received a cash payment in lieu thereof. All information presented in the accompanying consolidated financial statements, unless otherwise indicated herein, assumes a 1-for-30 reverse stock split of the Company’s outstanding shares of Common Stock, and unless otherwise indicated, all such amounts and corresponding conversion price or exercise price data set forth herein have been adjusted to give effect to such assumed reverse stock split.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Going Concern
At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued. The Company is required to make certain additional disclosures if it concludes substantial doubt exists and it is not alleviated by the Company’s plans or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern for a period of one year after the date that the financial statements are issued. As of December 31, 2022, the Company has generated an accumulated deficit of $191,486 since inception and expects to incur significant expenses and negative cash flows for the foreseeable future. As of December 31, 2022, the Company’s cash, cash equivalents, and restricted cash were $9,777. Management believes that given the Company’s current cash position, operating plans and forecasted negative cash flows from operating activities over the next twelve months, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued. The Company has no committed sources of additional capital at this time and substantial additional financing will be needed by the Company to fund its operations.
Management believes that existing cash and cash equivalents could enable the Company to fund its operating expenses into the beginning of the fourth quarter of 2023. However, this estimate is based on assumptions about how the Company can limit spending that may prove to be wrong. It is very difficult to project the Company’s current cash burn rate given the transitional status of the Company and this estimate may prove inaccurate. Depending on the direction of the Company’s review of strategic alternatives, the Company may use available resources sooner than management currently expects. The Company has already engaged in significant cost reductions, so our ability to further cut costs and extend the Company’s operating runway is limited. As a result, substantial additional financing will be needed by the Company within the next few months to pay expenses, fund the ongoing exploration of strategic alternatives and pursue any alternatives that may be identified. There can be no assurance that such additional financing will be available and, if available, can be obtained on acceptable terms.
The accompanying consolidated financial statements have been prepared as though the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on certain assumptions which it believes are reasonable in the circumstances and while actual results could differ from those estimates, management does not believe that any change in those assumptions in the near term would have a significant effect on the Company’s financial position, results of operations or cash flows. Actual results in future periods could differ from those estimates.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
2. Significant Accounting Policies
Cash, cash equivalents, and short-term investments
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s short-term investments have initial maturities of greater than three months from date of purchase. The Company classifies its marketable debt security investments as “available-for-sale” and carries them at fair market value based upon prices on the last day of the fiscal period for identical or similar items. The Company records unrealized gains and losses on marketable debt securities in other comprehensive income (loss) as a component of stockholders’ equity until realized. Any premium or discount arising at purchase is amortized and/or accreted to interest income and/or interest expense over the life of the of the underlying security. Realized gains and losses are included in other income, net. The Company uses the specific identification method to determine the cost of securities sold.
Restricted cash
The Company secures a standby letter of credit with a restricted certificate of deposit account as part of its Chicago lease agreement. The Company considers the restricted certificate of deposit account in the amount of $1,200 to be restricted cash because its use to the Company is contractually limited and presents the balance within other noncurrent assets on the accompanying consolidated balance sheet at December 31, 2022.
Fair value of financial instruments
The Company has estimated the fair value of its financial instruments. The carrying amounts for cash, cash equivalents, and accounts payable approximate their fair value due to the relatively short-term nature of these instruments. The Company records short-term investments at their estimated fair value based on quoted market prices for identical or similar instruments.
Concentrations of credit risk and other risks and uncertainties
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments, and accounts receivable. The Company places its cash, cash equivalents, and short-term investments with reputable financial institutions. The Company primarily invests its excess cash in debt instruments of corporations, the U.S. Treasury, financial institutions, and U.S. government agencies with strong credit ratings and an investment grade rating at or above a long-term rating of Aa3/AA- and a short-term rating of P1/A1. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. The Company periodically reviews and modifies these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no financial instruments with off-balance sheet risk of loss.
For the year ended December 31, 2022, the Company’s revenue was generated from its collaborations with Ipsen and AbbVie, which were terminated in the fourth quarter.
The Company is currently not profitable and no assurance can be provided that it will ever be profitable. The Company’s research and development activities have required significant investment since inception and operations are expected to continue to require cash investment in excess of its revenues. See also Note 1, Going Concern, for more information.
The Company is subject to risks common to biotechnology firms including, but not limited to, new and disruptive technological innovations, dependence on key personnel, protection of proprietary technology, the validity of and continued access to its owned and licensed intellectual property, limitations on the supply of critical materials, compliance with governmental regulations and market acceptance. The Company is also subject to risks associated with its exploration of strategic alternatives including, but not limited, the inability to identify any
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
transactions that will generate value for stockholders, incurrence of excessive costs in seeking to identify and pursue transactions and the possibility that any transaction the Company does pursue will not provide anticipated benefits.
Property and equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the various classes of property and equipment, which range from three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining terms of the respective leases or the estimated lives of the assets. Depreciation begins at the time the asset is placed in service.
Property and equipment are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment losses were recorded from inception in December 2011 through December 31, 2022.
Warrants
The Company accounts for freestanding warrants within stockholder’s equity or as liabilities based on the characteristics and provisions of each instrument. The Company evaluates outstanding warrants in accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. If none of the criteria in the evaluation in these standards are met, the warrants are classified as a component of stockholders’ equity and initially recorded at their grant date fair value without subsequent remeasurement. Warrants that meet the criteria are classified as liabilities and remeasured to their fair value, estimated using the Black-Scholes option-pricing model, at the end of each reporting period with changes in the fair value of the liability recorded in other income (expense), net in the consolidated statements of operations.
Revenue recognition
Under ASC 606, Revenue from Contracts with Customers, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of ASC 606, the Company performs the following five steps:
1.Identify the contract with the customer. A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights and obligations regarding the goods or services to be transferred and identifies the related payment terms, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s intent and ability to pay, which is based on a variety of factors including the customer’s historical payment experience, or in the case of a new customer, published credit and financial information pertaining to the customer.
2.Identify the performance obligations in the contract. Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other available resources, and are distinct in the context of the contract, whereby the transfer of the good or service is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods and services, the Company must apply judgment to determine whether promised goods and services are both capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation.
3.Determine the transaction price. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period for any changes. Determining the transaction price requires significant judgment.
4.Allocate the transaction price to performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The consideration to be received is allocated among the separate performance obligations based on relative standalone selling prices.
5.Recognize revenue when or as the Company satisfies a performance obligation. The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized over time if either (i) the customer simultaneously receives and consumes the benefits provided by the entity’s performance, (ii) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (iii) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. If the entity does not satisfy a performance obligation over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or service to a customer. Examples of control are using the asset to produce goods or services, enhance the value of other assets, or settle liabilities, and holding or selling the asset.
Revenue allocated to performance obligations relating to provision of research and development activities is recognized as the performance obligations are satisfied using an input method to measure progress, based on an estimate of the percentage of completion of the project based on the actual hours incurred on the project as a percentage of the total expected project hours. The determination of the percentage of completion requires management to estimate the total expected project hours. A detailed estimate of the total expected project hours is re-assessed every reporting period based on the latest project plan and discussions with project teams. If a change in facts or circumstances occurs, the estimate will be adjusted and the revenue will be recognized based on the revised estimate. The difference between the cumulative revenue recognized based on the previous estimate and the revenue recognized based on the revised estimate would be recognized as an adjustment to revenue in the period in which the change in estimate occurs. Determining the estimate of total project hours requires significant judgment and may have a significant impact on the amount and timing of revenue recognition.
Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from consideration allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the licenses. For licenses that are combined with other promises, the Company utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone payments: At the inception of each arrangement that includes development milestone payments, the Company evaluates the probability of reaching the milestones and estimates the amount to be included in the
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur in the future, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received and therefore revenue recognized is constrained as management is unable to assert that a reversal of revenue would not be possible. The transaction price is then allocated to each performance obligation on a relative standalone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and earnings in the period of adjustment. To date, the Company has not recognized any milestone payment revenue from any of its collaboration agreements.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on levels of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its collaboration agreements.
Equity-based compensation
The Company measures the cost of equity-based awards at fair value and records the cost of the awards, net of estimated forfeitures, on a straight-line basis over the requisite service period. The Company measures fair value for all common stock options using the Black-Scholes option-pricing model. The fair value of common stock option awards is affected by the valuation assumptions, including the expected volatility based on comparable market participants, expected term of the common stock option, risk-free interest rate, and expected dividends. For all equity-based awards, the fair value measurement date is the date of grant and the requisite service period is the period over which the recipient is required to provide service in exchange for the equity-based awards, which is generally the vesting period.
Segments and geographic information
The Company has determined it has one reporting segment. Disaggregating the Company’s operations is impracticable because the Company’s research and development activities and its assets overlap and management reviews its business as a single operating segment. Thus, discrete financial information is not available by more than one operating segment. All long-lived assets of the Company are located in the United States.
Leases
The Company determines if an arrangement is a lease at contract inception. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized on the balance sheet at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, the Company includes options to extend or to terminate the lease when it is reasonably certain that the Company will exercise that option. The Company uses the implicit interest rate when readily determinable and uses the Company’s incremental borrowing rate when the implicit rate is not readily determinable based upon the information available at the commencement date in determining the present value of the lease payments.
The lease payments used to determine the Company’s operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation when determinable. In addition, the Company’s lease arrangements may contain lease and non-lease components. The Company combines lease and non-lease components, which are accounted for together as a single lease component. Variable lease payments, such as real
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
estate taxes and facility maintenance costs that are allocated by the lessor to the lessee and are not based on an index or a rate, are excluded from the measurement of the lease liability.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Short-term leases, defined as leases that have a lease term of twelve months or less at the commencement date, are excluded from this treatment and are recognized on a straight-line basis over the term of the lease. Costs for variable lease payments that are not included in the lease liability are recognized as expense as incurred.
Research and development expense
Research and development expenses are charged to expense as incurred in performing research and development activities in accordance with ASC 730, Research and Development. The costs include employee‑related expenses including salaries, benefits, and stock‑based compensation expense, costs of funding research performed by third parties that conduct research and development and preclinical and clinical activities on the Company’s behalf, the cost of purchasing lab supplies and non‑capital equipment used in preclinical and clinical activities and in manufacturing preclinical and clinical study materials, consultant fees, facility costs including rent, depreciation and maintenance expenses, fees for acquiring and maintaining licenses under third party licensing agreements, including any sublicensing or success payments made to the Company’s licensors, and overhead and other expenses directly related to research and development operations. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the Company’s estimate, the accrual or prepaid is adjusted accordingly. The Company defers and capitalizes non-refundable advance payments made by the Company for research and development activities until the related goods are received or the related services are performed. In circumstances where amounts have been paid in excess of costs incurred, the Company records a prepaid expense.
Income taxes
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities and the expected benefits of net operating loss carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, is applied during the years in which temporary differences are expected to be settled and is reflected in the financial statements in the period of enactment. The measurement of deferred tax assets is reduced, if necessary, if, based on weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets will not be realized. At December 31, 2022 and 2021, the Company established a full valuation allowance against its deferred tax assets to an amount that is more likely than not to be realized.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Recent Accounting Pronouncements Not Yet Adopted
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13). ASU 2016-13 is a new standard intended to improve reporting requirements specific to loans, receivables and other financial instruments. ASU 2016-13 requires that credit losses on financial assets measured at amortized cost be determined using an expected loss model, instead of the current incurred loss model, and requires that credit losses related to available-for-sale debt securities be recorded through an allowance for credit losses and limited to the amount by which carrying value exceeds fair value. ASU 2016-13 also requires enhanced disclosure of credit risk associated with financial assets. The effective date of ASU 2016-13 was deferred by ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)—Effective Dates to the annual period beginning after December 15, 2022 for companies that (i) meet the definition of an SEC filer and (ii) are eligible as “smaller reporting companies” as such term is defined by the SEC, with early adoption permitted. The Company expects that the adoption of ASU 2016-13 will not have a material impact to the Company’s consolidated financial statements.
3. Collaborative Research and License Agreements
Ipsen Collaboration Agreement
Summary of Agreement
On July 30, 2021 (the “Ipsen Effective Date”), the Company entered into a Collaboration, Option and License Agreement with Ipsen (the “Ipsen Collaboration Agreement”). Pursuant to the Ipsen Collaboration Agreement, the Company granted to Ipsen exclusive access and options to license SNA-based therapeutics arising from two collaboration programs related to the treatment of Huntington’s disease and Angelman syndrome (each, an “Ipsen Collaboration Program”), respectively. Each such license (obtained in connection with the exercise of an Ipsen Option, as defined and discussed further below) would grant to Ipsen exclusive, royalty-bearing, sublicensable, worldwide rights to develop, manufacture, use and commercialize such SNA therapeutics. Upon written notice to the Company, Ipsen may exercise its option during the corresponding collaboration program’s applicable option exercise period, (each, an “Ipsen Option Exercise Period”).
On December 12, 2022 (the “Ipsen Termination Agreement Effective Date”), the Company and Ipsen entered into a Mutual Termination Agreement (the “Ipsen Termination Agreement”), pursuant to which the parties mutually agreed to terminate the Ipsen Collaboration Agreement. Following such termination, the parties will jointly own R&D Term IP (as defined in the Ipsen Collaboration Agreement) and Patents Covering the R&D Term IP (as defined in the Ipsen Collaboration Agreement), with each party owning an equal, undivided interest in and to such R&D Term IP and patents. As a result of the termination of the Ipsen Collaboration Agreement, the Company regained the ability to independently develop medicines targeting Angelman syndrome and Huntington’s disease while Ipsen retains the right to re-enter into the collaboration with the Company in Huntington’s disease and Angelman’s syndrome.
As of the Ipsen Effective Date and through the Ipsen Termination Agreement Effective Date, the Company and Ipsen had agreed upon a development plan for each Ipsen Collaboration Program that describes the development activities and timelines required to advance each such Ipsen Collaboration Program through its first IND filing (each, an “Ipsen Development Plan”). The activities described in the Ipsen Development Plans were conducted under the supervision of the Ipsen Joint Steering Committee (the “Ipsen JSC”) consisting of three members from each of the Company and Ipsen. Under the terms of the Ipsen Collaboration Agreement, the Company was to use commercially reasonable efforts to conduct discovery and development in two collaboration programs for Huntington’s disease (the “HD Program”) and Angelman syndrome (the “AS Program”) (the “Ipsen Development Activities”) respectively. The Company was solely responsible for all costs and expenses of conducting each Ipsen Collaboration Program through the selection of SNA therapeutic candidates for further development (“Ipsen
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Selection”), and Ipsen was responsible for all costs and expenses of all activities that were necessary to enable the first filing of an IND for each proposed product candidate. In the event that Ipsen exercised an option, Ipsen would have been responsible for further development from the license effective date and commercialization of the corresponding licensed product.
In the event of completion of all Ipsen Development Activities for the Ipsen Selection (the “Ipsen First R&D Term Activities”), the Company was required to deliver to Ipsen a report that described the results of the Ipsen First R&D Term Activities and identified at least one SNA-based compound that satisfies certain criteria for such Ipsen Collaboration Program as determined by the Ipsen JSC (the “Ipsen First Option Data Package”). Following the delivery of the Ipsen First Option Data Package for an Ipsen Collaboration Program, Ipsen would have had the ability for a defined period of time (the “Ipsen First Option Exercise Period”) to exercise an option (each a “First Ipsen Option”) to obtain worldwide rights and license to the Company’s SNA technology and the Company’s interest in joint collaboration technology to make, have made, import, use, sell or offer for sale any product (each an “Ipsen Licensed Product”) that resulted from such Ipsen Collaboration Program during the term of the Ipsen Collaboration Agreement.
In the event Ipsen (i) did not exercise the First Ipsen Option with respect to an Ipsen Collaboration Program, (ii) the Ipsen Collaboration Agreement had not expired or been terminated with respect to such Ipsen Collaboration Program, and (iii) Ipsen agreed to fully fund additional research activities for an Ipsen Collaboration Program through IND filing, the Company would have been responsible for research and development activities for such Ipsen Collaboration Program through IND filing (the “Ipsen Second R&D Term Activities”). In the event of completion of the Ipsen Second R&D Term Activities, the Company would have been required to deliver to Ipsen a report that described the results of the Ipsen Second R&D Term Activities (the “Ipsen Second Option Data Package”). Following the delivery of the Ipsen Second Option Data Package for an Ipsen Collaboration Program, Ipsen would have had the ability for a defined period of time (the “Ipsen Second Option Exercise Period”) to exercise an option (each a “Second Ipsen Option” and together with the First Ipsen Option, the “Ipsen Options”) to obtain worldwide rights and license to the Company’s SNA technology and the Company’s interest in joint collaboration technology to make, have made, import, use, sell or offer for sale any Ipsen Licensed Product” that results from such Ipsen Collaboration Program during the term of the Ipsen Collaboration Agreement.
In the event of Ipsen’s exercise of an Ipsen Option for an Ipsen Collaboration Program, the Company would have been required to supply to Ipsen the licensed SNAs under current Good Manufacturing Practice, at the Company’s manufacturing cost pursuant to a clinical supply agreement to be negotiated by the Company and Ipsen in good faith following the Ipsen Effective Date and executed within twelve (12) months after the Ipsen Effective Date (the “Ipsen Supply Agreement”). The Ipsen Supply Agreement would have provided for the transfer by the Company to Ipsen of all documents and information, and the provision by the Company of technical assistance and support, for Ipsen to manufacture or have manufactured by a third party contractor engaged by Ipsen the applicable licensed SNA to the extent it is intended to be actually used in the development and manufacture of the applicable licensed products.
Under the terms of the Ipsen Collaboration Agreement, the Company received a nonrefundable upfront payment of $20,000 (the “Ipsen Upfront Payment”). If Ipsen exercised a First Ipsen Option, Ipsen was required to pay the Company the First Ipsen Option exercise fee of $10,000 for each Ipsen Collaboration Program. If Ipsen exercised a Second Ipsen Option, Ipsen was required to pay the Company the Second Ipsen Option exercise fee of $25,000 for each Ipsen Collaboration Program.
Ipsen would have been required to pay a preclinical milestone payment of $5,000 for each Ipsen Collaboration Program upon achievement of such milestone regardless of whether an Ipsen Option was exercised. In addition to the option exercise fees and the preclinical milestones described above, if Ipsen exercised an Ipsen Option for an Ipsen Collaboration Program, development and regulatory milestones would have been payable for that program upon the initiation of certain clinical trials and the filing for processing by the United States Food and Drug Administration (“FDA”) in the United States and by two additional regulators outside the United States of a marketing application for review, per the Ipsen Collaboration Program, with an aggregate total of up to $180,000 if
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(in thousands, except share and per share data)
both Ipsen Options were exercised. Commercial milestones would have been payable for that Ipsen Collaboration Program upon first commercial sale of a licensed product in certain jurisdictions and the achievement of specified aggregate sales thresholds for all licensed products from that program, with an aggregate total of up to $762,000 if both Ipsen Options were exercised. In the event a therapeutic candidate subject to the Ipsen Collaboration Agreement resulted in commercial sales, the Company was eligible to receive tiered royalties at percentages ranging from the mid-single digits to the mid-teens on future net product sales of such commercialized therapeutic candidates. A percentage of the aforementioned payments would have been due to Northwestern University upon receipt, pursuant to the terms of the Company’s existing license agreements with Northwestern University (see Note 15, Commitment and Contingencies, for more information on the Northwestern University License Agreements (as defined below)). In connection with the receipt of the Ipsen Upfront Payment, the Company paid a $3,000 license fee to Northwestern University under the terms of the Northwestern License Agreements.
The Company’s obligations to conduct activities defined in the Ipsen Development Plan under the Ipsen Collaboration Agreement commenced on July 30, 2021 and continued through the Ipsen Termination Agreement effective date.
Accounting Analysis
The Company concluded that Ipsen was a customer in this arrangement, and as such the arrangement falls within the scope of the revenue recognition guidance. Under the Ipsen Collaboration Agreement, the Company has identified two performance obligations, as follows: (1) the performance obligation related to the HD Program that includes (i) the Ipsen First R&D Term Activities related to the HD Program (the “Ipsen HD Program R&D Services”), (ii) Ipsen JSC services related to the HD Program during the Ipsen First Term (the “Ipsen HD Program JSC Services”), and (iii) activities related to the negotiation of the Ipsen Supply Agreement within twelve months of the Ipsen Effective Date; and (2) the performance obligation related to the AS Program that includes (i) the Ipsen First R&D Term Activities related to the AS Program (the “Ipsen AS Program R&D Services”), (ii) Ipsen JSC services related to the AS Program during the Ipsen First Term (the “Ipsen AS Program JSC Services”), (iii) and activities related to the negotiation of the Ipsen Supply Agreement within twelve months of the Ipsen Effective Date. The Company has concluded that the Ipsen HD Program R&D Services and the Ipsen AS Program R&D Services are not distinct from the Ipsen HD Program JSC Services and the Ipsen AS Program JSC Services, respectively. The Company has also concluded that the Ipsen HD Program JSC Services and the Ipsen AS Program JSC Services are not distinct from the activities related to entering the Ipsen Supply Agreements for each respective program. The Ipsen JSC provided oversight and management of the overall Ipsen Collaboration Agreement, and the members of the Ipsen JSC from the Company have specialized industry knowledge, particularly as it relates to SNA technology. The Ipsen JSC was meant to facilitate the early stage research being performed and coordinate the activities of both the Company and Ipsen. Further, the Ipsen JSC services were critical to the ongoing evaluation of the Ipsen Collaboration Programs and the drafting and evaluation of the Ipsen First Option Data Package. The Ipsen JSC would also have provided oversight and management of the activities to enter into the Ipsen Supply Agreement. Accordingly, the Company’s participation on the Ipsen JSC was essential to Ipsen receiving value from the Ipsen HD Program R&D Services and the Ipsen AS Program R&D Services, and as such, (i) the Ipsen HD Program JSC Services, along with the Ipsen HD Program R&D Services and the activities related to entering the Ipsen Supply Agreement within twelve months of the Ipsen Effective Date for that program are considered a single performance obligation (the “Ipsen HD Program Services”) and (ii) the Ipsen AS Program JSC Services along with the Ipsen AS Program R&D Services and the activities related to entering the Ipsen Supply Agreement within twelve months of the Ipsen Effective Date for that program are considered a single performance obligation (the “Ipsen AS Program Services”).
As of the Ipsen Effective Date, the total transaction price was determined to be $20,000, consisting solely of the Ipsen Upfront Payment. The Company also utilized the most likely amount method to estimate any development and regulatory milestone payments to be received. As of the Ipsen Effective Date, there were no milestones included in the transaction price. The preclinical, development, regulatory, and commercial milestones were fully constrained due to the significant uncertainties surrounding such payments. The Company considered the stage of development
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
and the risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or Ipsen. The Company has determined that any commercial milestones and sales-based royalties will be recognized when the related sales occur and therefore, they have also been excluded from the transaction price. The Company re-evaluated the transaction price at the end of each reporting period and as uncertain events were resolved or other changes in circumstances occurred. As of the Ipsen Termination Agreement Effective Date, the Company determined that the total transaction price was $20,000.
The Company allocated the total transaction price to each of the two identified performance obligations under the Ipsen Collaboration Agreement based on an expected cost plus a margin approach, as follows: $10,793 of the transaction price allocated to the Ipsen HD Program Services and $9,207 of the transaction price allocated to the Ipsen AS Program Services.
The Company recognized revenue related to each of Ipsen HD Program Services and the Ipsen AS Program Services as those performance obligations were satisfied using an input method to measure progress for each of those performance obligations. The Company believes the input method that most accurately depicts the measure of progress is the actual hours incurred to date relative to projected hours to complete the activities for the Ipsen HD Program Services and the Ipsen AS Program Services. In connection with the Ipsen Termination Agreement, the Company recognized as revenue any remaining deferred revenue associated with the Ipsen Collaboration Agreement in the fourth quarter of 2022.
During the years ended December 31, 2022 and 2021, the Company recognized revenue under the Ipsen Collaboration Agreement of approximately $17,691 and $2,309, respectively.
AbbVie Collaboration Agreement
Summary of Agreement
On November 13, 2019 (the “AbbVie Effective Date”), the Company entered into a Collaboration, Option and License Agreement (the “AbbVie Collaboration Agreement”), with a wholly-owned subsidiary of Allergan plc, Allergan. On May 8, 2020, Allergan plc, including Allergan was acquired by AbbVie. Pursuant to the AbbVie Collaboration Agreement, the Company granted to AbbVie exclusive access and options to license SNA-based therapeutics arising from two collaboration programs related to the treatment of hair loss disorders (each, an “AbbVie Collaboration Program”). Under each such license (obtained in connection with the exercise of an AbbVie Option, as defined and discussed further below), the Company would grant to AbbVie exclusive, royalty-bearing, sublicensable, nontransferable, worldwide rights to develop, manufacture, use and commercialize such SNA therapeutics. Under the AbbVie Collaboration Agreement, the Company was to use commercially reasonable efforts to conduct the AbbVie Collaboration Programs, each focused on one or more hair loss disorders to discover one or more SNA products that are directed to, bind to or inhibit one or more specific AbbVie Collaboration Program targets.
On December 13, 2022 (the “AbbVie Termination Agreement Effective Date”), the Company and Allergan entered into a letter agreement (the “AbbVie Termination Agreement”), pursuant to which the parties mutually agreed to terminate the AbbVie Collaboration Agreement. Following such termination, the Company transferred to Allergan all data, information, and reports made or generated by the Company in the course of performing activities under the Development Plan (as defined in the AbbVie Collaboration Agreement), and granted to Allergan all rights to transfer, publish, present, or otherwise publicly disclose any Collaboration Technology (as defined in the AbbVie Collaboration Agreement) and data made or generated by the Company in the course of performing activities under the Development Plan. As a result of the termination of the AbbVie Collaboration Agreement, the Company regained the ability to independently develop medicines targeting hair loss disorders.
As of the AbbVie Effective Date and through the AbbVie Termination Agreement Effective Date, the Company and AbbVie had agreed upon a development plan for each AbbVie Collaboration Program that described the development activities and timelines required to advance such AbbVie Collaboration Program through its first IND
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filing (each, an “AbbVie Development Plan”). The activities described in the AbbVie Development Plan were conducted under the supervision of the AbbVie Joint Development Committee (the “AbbVie JDC”) consisting of three members from each of the Company and AbbVie. The Company was primarily responsible for performing early-stage discovery and preclinical activities (the “AbbVie Collaboration Program Initial Development Activities”) set forth in the AbbVie Development Plan for each AbbVie Collaboration Program and would have been solely responsible for all costs and expenses related to the AbbVie Collaboration Program Initial Development Activities. AbbVie had the right to elect, in its sole discretion and at its sole cost and expense, to conduct formulation assessment and in vivo testing as set forth in an AbbVie Development Plan.
In the event of completion of all AbbVie Initial Development Activities, the Company would have been required to deliver to AbbVie a report that described the results of the AbbVie Initial Development Activities and identified at least one SNA-based compound that satisfies certain criteria for such AbbVie Collaboration Program as determined by the AbbVie JDC (the “AbbVie Initial Development Report”). Following the delivery of the AbbVie Initial Development Report for an AbbVie Collaboration Program, AbbVie would have had the ability for a defined period of time (the “AbbVie Initial Option Exercise Period”) to exercise an option (each an “AbbVie Option”) to obtain worldwide rights and license to the Company’s SNA technology and the Company’s interest in joint collaboration technology to make, have made, import, use, sell or offer for sale any product (each an “AbbVie Licensed Product”) that resulted from such AbbVie Collaboration Program during the term of the AbbVie Collaboration Agreement.
At AbbVie’s sole option, AbbVie had the right to extend the AbbVie Initial Option Exercise Period (the “AbbVie Option Extension”) and require the Company to perform IND-enabling activities described in the AbbVie Development Plan (the “AbbVie IND-Enabling Activities”), subject to the payment of additional consideration (“AbbVie Extension Exercise”). If AbbVie exercised the AbbVie Option Extension, the Company would have been responsible for conducting the AbbVie IND-Enabling Activities and would have been solely responsible for all costs and expenses associated with such activities. In the event of completion of the AbbVie IND-Enabling Activities, the Company would have been required to deliver a report that describes the results of the AbbVie IND-Enabling Activities (the “AbbVie IND-Enabling Activities Data Package”) to AbbVie. Following the delivery of AbbVie IND-Enabling Activities Data Package, AbbVie would have had the ability for a defined period of time (the “AbbVie Extended Option Exercise Period”) to exercise an AbbVie Option with respect to such AbbVie Collaboration Program. After the exercise of an AbbVie Option with respect to an AbbVie Collaboration Program, AbbVie would have been responsible for all development, manufacturing and commercialization activities, and costs and expense associated with such activities in connection with AbbVie Licensed Products arising from such AbbVie Collaboration Program.
The Company’s obligation to conduct the activities defined in the AbbVie Development Plan under the AbbVie Collaboration Agreement commenced on November 13, 2019 and continued through the AbbVie Termination Agreement Effective Date.
Under the terms of the AbbVie Collaboration Agreement, the Company received a $25,000 upfront, non-refundable, non-creditable cash payment (the “AbbVie Upfront Payment”) related to the Company’s research and development costs for conducting the AbbVie Development Plan for two AbbVie Collaboration Programs, each focused on one or more targets, and certain options to obtain exclusive, worldwide licenses under certain intellectual property rights owned or controlled by the Company to develop, manufacture and commercialize certain products resulting from each such AbbVie Collaboration Programs. The option exercise fee during the AbbVie Initial Option Exercise Period was $10,000 per AbbVie Collaboration Program. If AbbVie elected to extend the AbbVie Initial Option Exercise Period, AbbVie would have been required to pay an additional fee of $10,000. If AbbVie elected to exercise its option during the AbbVie Extended Option Exercise Period, AbbVie would have been required to pay the Company the option exercise fee of $15,000.
Following the exercise by AbbVie of an AbbVie Option with respect to an AbbVie Collaboration Program, AbbVie would have been required to make certain milestone payments to the Company upon the achievement of specified development, product approval and launch, and commercial events, on an AbbVie Licensed Product by
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AbbVie Licensed Product basis. On an AbbVie Licensed Product by AbbVie Licensed Product basis, for the first AbbVie Licensed Product to achieve the associated milestone event, the Company was eligible to receive up to an aggregate of $55,000 for development milestone payments and $132,500 for product approval and launch milestone payments. The Company was also eligible for up to $175,000 in sales milestone payments on an AbbVie Collaboration Program by AbbVie Collaboration Program basis, associated with aggregate worldwide sales. Certain product approval milestones were subject to certain reductions under specified circumstances, including for payments required to be made by AbbVie to obtain certain third-party intellectual property rights.
In addition, to the extent there was any AbbVie Licensed Product, the Company would have been entitled to receive tiered royalty payments of mid-single digits to the mid-teens percentage on future net worldwide product sales of such AbbVie Licensed Products, subject to certain reductions under specified circumstances. Royalties were due on a AbbVie Licensed Product by AbbVie Licensed Product and country by country basis from the date of the first commercial sale of each AbbVie Licensed Product in a country until the latest to occur of: (i) the expiration date in such country of the last to expire valid claim within the licensed intellectual property covering the manufacture, use or sale of such AbbVie Licensed Product in such country, (ii) the tenth anniversary of the first commercial sale of such AbbVie Licensed Product in such country, and (iii) the expiration of regulatory exclusivity for such AbbVie Licensed Product in such country.
Accounting Analysis
The Company concluded that AbbVie was a customer in this arrangement, and as such the arrangement falls within the scope of the revenue recognition guidance. Under the AbbVie Collaboration Agreement, the Company has identified a single performance obligation that includes (i) the research and development activities during the AbbVie Research Term (the “AbbVie R&D Services”), and (ii) AbbVie Joint Development Committee services during the AbbVie Research Term (the “AbbVie JDC Services”). The Company has concluded that the AbbVie R&D Services is not distinct from the AbbVie JDC Services during the AbbVie Research Term. The AbbVie JDC provided oversight and management of the overall AbbVie Collaboration Agreement, and the members of the AbbVie JDC from the Company have specialized industry knowledge, particularly as it relates to SNA technology. The AbbVie JDC was meant to facilitate the early-stage research being performed and coordinate the activities of both the Company and AbbVie. Further, the AbbVie JDC services were critical to the ongoing evaluation of an AbbVie Collaboration Program and the drafting and evaluation of the AbbVie Initial Development Report and the AbbVie IND-Enabling Data Package. Accordingly, the Company’s participation on the AbbVie JDC was essential to AbbVie receiving value from the AbbVie R&D Services and as such, the AbbVie JDC Services along with the AbbVie R&D Services are considered one performance obligation (the “AbbVie Collaboration Program Services”). In addition, the Company has concluded that the option to purchase two development and commercialization licenses was considered a marketing offer as the options did not provide any discounts or other rights that would be considered a material right in the arrangement, and thus, not a performance obligation at the onset of the agreement. The consideration for these options would have been accounted for when they are exercised.
As of the AbbVie Effective Date, the total transaction price was determined to be $25,000, consisting solely of the AbbVie Upfront Payment. The Company also utilized the most likely amount method to estimate any development and regulatory milestone payments to be received. As of the AbbVie Effective Date, there were no milestones included in the transaction price. The milestones were fully constrained due to the significant uncertainties surrounding such payments. The Company considered the stage of development and the risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or AbbVie. The Company has determined that any commercial milestones and sales-based royalties will be recognized when the related sales occur and therefore they have also been excluded from the transaction price. The Company re-evaluated the transaction price at the end of each reporting period and as uncertain events were resolved or other changes in circumstances occurred. As of the AbbVie Termination Agreement Effective Date, the Company determined the total transaction price was $25,000.
The Company recognized revenue related to the AbbVie Collaboration Program Services as the performance obligation is satisfied using an input method to measure progress. The Company believes the input method that most
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
accurately depicts the measure of progress is the actual hours incurred to date relative to projected hours to complete the research service.
During the third quarter of 2021, the AbbVie JDC revised the AbbVie Initial Development Plan for each AbbVie Collaboration Program. As a result, the Company had increased its estimate of total hours to complete the research services, requiring an adjustment to cumulative revenue recognized (considered a change in estimate pursuant to ASC 606), which led to a full year revenue reversal of $(2,792) in the prior year.
In connection with the AbbVie Termination Agreement, the Company recognized as revenue any remaining deferred revenue associated with the AbbVie Collaboration Agreement in the fourth quarter of 2022.
During the years ended December 31, 2022 and 2021, the Company recognized revenue under the AbbVie Collaboration Agreement of approximately $11,135 and $(2,792), respectively.
Summary of Contract Liabilities
Up-front payments are recorded as deferred revenue upon receipt or when due until such time as the Company satisfies its performance obligations under these arrangements.
The following table presents changes in the balances of the Company’s contract liabilities (in thousands):
| | | | | | | | | | | | | | |
| | AbbVie Collaboration Agreement | | Ipsen Collaboration Agreement |
Deferred revenue - Balance at January 1, 2021 | | $ | 8,343 | | | $ | — | |
Additions | | — | | | 20,000 | |
Revenue (recognized) reversed | | 2,792 | | | (2,309) | |
Deferred revenue - Balance at December 31, 2021 | | 11,135 | | | 17,691 | |
Additions | | — | | | — | |
Revenue recognized | | (11,135) | | | (17,691) | |
Deferred revenue - Balance at December 31, 2022 | | $ | — | | | $ | — | |
4. Supplemental Balance Sheet Information
Prepaid expenses and other current assets
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Prepaid clinical, contract research and manufacturing costs | $ | 213 | | | $ | 2,484 | |
Prepaid insurance | 408 | | | 763 | |
Other | 853 | | | 1,278 | |
Prepaid expenses and other current assets | $ | 1,474 | | | $ | 4,525 | |
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Other noncurrent assets
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Restricted cash | $ | 1,200 | | | $ | 9,200 | |
Prepaid insurance, noncurrent | 2,252 | | | — | |
Other | 38 | | | 125 | |
Other noncurrent assets | $ | 3,490 | | | $ | 9,325 | |
Property and equipment, net
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Scientific equipment | $ | 6,087 | | | $ | 6,471 | |
| | | |
Computers and software | 63 | | | 60 | |
Furniture and fixtures | 30 | | | 30 | |
Construction in process | — | | | 33 | |
Property and equipment, gross | 6,180 | | | 6,594 | |
Less: accumulated depreciation | (3,650) | | | (2,667) | |
Property and equipment, net | $ | 2,530 | | | $ | 3,927 | |
Depreciation and amortization expense was $1,163 and $1,123, for the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, the Company sold scientific equipment with a net book value of $222 and recognized a loss of $17 in the accompanying statement of operations for the year ended December 31, 2022.
Accrued expenses and other current liabilities | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Accrued clinical, contract research and manufacturing costs | $ | 48 | | | $ | 3,689 | |
Accrued restructuring costs | 48 | | | 1,191 | |
Lease liability, current | 539 | | | 459 | |
Accrued payroll-related expenses | 32 | | | 167 | |
Accrued other expenses | 611 | | | 958 | |
Accrued expenses and other current liabilities | $ | 1,278 | | | $ | 6,464 | |
5. Investments
As of December 31, 2022 and 2021, the Company primarily invested its excess cash in debt instruments of corporations, the U.S. Treasury, financial institutions, and U.S. government agencies with strong credit ratings and an investment grade rating at or above a long-term rating of Aa3/AA- and a short-term rating of P1/A1. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. The Company periodically reviews and modifies these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity.
As of December 31, 2022, the balance of available-for-sale securities was zero as the Company’s excess cash was primarily invested in money market funds.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
As of December 31, 2021, the Company’s available-for-sale securities were available to the Company for use in its current operations. As a result, the Company categorized all of these securities as current assets even though the stated maturity of some individual securities may be one year or more beyond the balance sheet date.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of available-for-sale securities by type of security at December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Costs | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Fair Value |
Commercial paper | $ | 10,498 | | | $ | — | | | $ | (2) | | | $ | 10,496 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| $ | 10,498 | | | $ | — | | | $ | (2) | | | $ | 10,496 | |
6. Debt
MidCap Credit Agreement
On March 15, 2022, pursuant to the terms of the Company’s Credit and Security Agreement, dated as of September 25, 2020, as amended on October 21, 2020, July 30, 2021, September 30, 2021, and December 10, 2021 with MidCap Financial Trust, as agent, and the lenders party thereto from time to time (as amended, the “MidCap Credit Agreement”), the Company repaid all remaining outstanding obligations under the MidCap Credit Agreement, including the outstanding principal balance of $7,500 and an exit fee of $506.
The MidCap Credit Agreement provided for a secured term loan facility in an aggregate principal amount of up to $25,000 (the “MidCap Credit Facility”). The Company borrowed the first advance of $17,500 (“Tranche 1”) on September 25, 2020 (the “Closing Date”). Amendment No. 4 terminated the availability of the second advance of $7,500 (“Tranche 2”), effective as of December 9, 2021, that was previously available under the MidCap Credit Agreement subject to certain conditions.
Tranche 1 bore interest at a floating rate equal to 6.25% per annum, plus the greater of (i) 1.50% or (ii) one-month LIBOR. Interest on each loan advance is due and payable monthly in arrears. Principal on each loan advance was payable in 36 equal monthly installments beginning October 1, 2022 until paid in full on October 1, 2025 (the “Maturity Date”). Prepayments of the loans under the MidCap Credit Agreement, in whole or in part, were subject to early termination fees in an amount equal to 3.0% of principal prepaid if prepayment occurs on or prior to the first anniversary of the Closing Date and 1.0% of principal prepaid if prepayment occurs after the first anniversary of the Closing Date and prior to the maturity date. Pursuant to Amendment No. 4, the early termination fee associated with the prepayment of $10,000 made in December 2021 was waived and, since the remaining principal amount was repaid on or prior to March 31, 2022, the associated early termination fee for that prepayment was also waived. In connection with execution of the MidCap Credit Agreement, the Company paid MidCap a $125 origination fee.
At the Maturity Date or on any earlier date on which all amounts advanced to the Company become due and payable in full, or are otherwise paid in full, the Company was required to pay an exit fee equal to 3.75% of the principal amount of all loans advanced to the Company under the MidCap Credit Agreement. Upon the advance of Tranche 1, the Company accrued $656 for the related exit fee. Pursuant to Amendment No. 4, since the remaining principal amount was repaid on or prior to March 31, 2022, a portion of the related exit fee that had not been earned by MidCap was waived.
The Company’s obligations under the MidCap Credit Agreement were secured by a security interest in substantially all of its assets, excluding intellectual property (which is subject to a negative pledge). Additionally, the Company’s future subsidiaries, if any, may have been required to become co-borrowers or guarantors under the MidCap Credit Agreement.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The MidCap Credit Agreement contained customary affirmative covenants and customary negative covenants limiting the Company’s ability and the ability of the Company’s subsidiaries, if any, to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions.
The MidCap Credit Agreement also contained customary events of default relating to, among other things, payment defaults, breaches of covenants, a material adverse change, delisting of the Company’s common stock, bankruptcy and insolvency, cross defaults with certain material indebtedness and certain material contracts, judgments, and inaccuracies of representations and warranties. Upon an event of default, the agent and the lenders may declare all or a portion of the Company’s outstanding obligations to be immediately due and payable and exercise other rights and remedies provided for under the agreement. During the existence of an event of default, interest on the obligations could have been increased by 2.0%.
Total proceeds, net of fees and issuance costs, borrowed under Tranche 1 were $16,512. Fees and issuance costs of $332, as well as fees of $656 that were payable to MidCap at maturity of Tranche 1, were recorded as a reduction to the carrying amount of long-term debt on the Company’s balance sheet and, prior to the repayment of all remaining outstanding obligations under the MidCap Credit Agreement on March 15, 2022, were amortized to interest expense through the maturity date of October 1, 2025 using the effective interest method. Fees and issuance costs of $73 attributed to the amount available to be borrowed under Tranche 2 were paid and recorded as deferred financing costs (other assets) and were amortized and recorded to interest expense in 2021 when it was determined that amounts under Tranche 2 would not be borrowed.
The Company paid interest on the MidCap Credit Agreement of $194 and $1,375 during the years ended December 31, 2022 and 2021, respectively.
7. Leases
The Company’s lease arrangements at December 31, 2022 consist of (i) a lease for office and laboratory space at its headquarters in Chicago, Illinois that commenced in July 2020 (the “Chicago Lease”) and (ii) leases for office equipment (the “Office Equipment Leases”). The Chicago Lease and the Office Equipment Leases are classified as operating leases.
The Company’s lease arrangement for office and laboratory space at its former headquarters in Skokie, Illinois ended in February 2021 in accordance with the terms of that lease arrangement.
Chicago Lease
The Company has approximately thirty thousand square feet of office and laboratory space in Chicago, Illinois (the “Chicago Lease”). The original term (the “Original Term”) of the Chicago Lease is 10 years, commencing on July 1, 2020 (the “Commencement Date”), which is the date the premises were ready for occupancy under the terms of the Chicago Lease. The Company has options to extend the term of the Chicago Lease for two additional successive periods of five years each (the “Extension Periods”) at the then prevailing effective market rental rate.
The initial annual base rent during the Original Term is approximately $1,113 for the first 12-month period of the Original Term, payable in monthly installments beginning on the Commencement Date. Base rent thereafter is subject to annual increases of 3%, for an aggregate amount of $12,761 over the Original Term. The Company must also pay its proportionate share of certain operating expenses and taxes for each calendar year during the term. During the first 12-month period of the Original Term, the base rent and the Company's proportionate share of operating expenses and taxes are subject to certain abatements.
Upon execution of the Chicago Lease, the Company paid to the landlord the first installment of base rent and the estimated monthly amount of its pro rata share of taxes and its pro rata share of operating expenses in the aggregate amount of $87 which amount had been adjusted for the abatement as set forth in the lease agreement. The Company also paid the landlord a net amount of $697 toward tenant improvements.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
As part of the agreement for the Chicago Lease, the Company is required to maintain a standby letter of credit during the term of the lease, currently in the amount of $1,200 and subject to reduction over time, which is secured by a restricted certificate of deposit account and presented within other noncurrent assets on the Company’s consolidated balance sheet at December 31, 2022.
The Company recognized a right of use asset of $8,931 and a lease liability of $8,147 on the Commencement Date. Because the rate implicit in the Chicago Lease is not readily determinable, the Company used its incremental borrowing rate of 8.3% on the Commencement Date to determine the present value of the lease payments over the Original Term. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. As of December 31, 2022, the Company determined it is not reasonably certain that the renewal option would not be exercised.
Information related to the Company’s operating lease asset and related operating lease liabilities were as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Weighted-average remaining lease term | | 7.5 years | | 8.5 years |
Weighted-average discount rate | | 8.3 | % | | 8.3 | % |
| | | | |
| | | | |
The following table summarizes lease costs in the Company’s consolidated statement of operations:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Operating lease costs | $ | 1,305 | | | $ | 1,306 | |
Variable lease costs | 1,529 | | | 1,070 | |
Short term lease costs | 17 | | | 130 | |
Total lease costs | $ | 2,851 | | | $ | 2,506 | |
The Company made cash payments for operating leases of $3,024 and $2,134 during the years ended December 31, 2022 and 2021, respectively.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Maturities of the Company’s lease liability as of December 31, 2022 were as follows:
| | | | | | | | |
Years Ending December 31, | | Operating Leases |
2023 | | 1,100 | |
2024 | | 1,235 | |
2025 | | 1,271 | |
2026 | | 1,310 | |
Thereafter | | 4,897 | |
Total | | $ | 9,813 | |
Less: imputed interest | | (2,507) | |
Total lease liability | | $ | 7,306 | |
| | |
Current operating lease liability | | $ | 539 | |
Noncurrent operating lease liability | | 6,767 | |
Total lease liability | | $ | 7,306 | |
| | |
| | |
8. Restructuring
September 2022 Restructuring
On September 26, 2022, the Company announced its commitment to a plan to wind down the Company’s R&D activities (the “September 2022 Restructuring”). This plan resulted in a reduction in force where the Company reduced approximately 66% of the Company’s existing workforce in early fourth quarter of 2022. Notified employees were offered separation benefits, including severance payments and temporary healthcare coverage assistance, the majority of which were paid in October 2022 as a lump sum payment. All of the severance costs associated with the September 2022 Restructuring represented cash expenditures and were recorded within research and development expense within the accompanying consolidated statement of operations.
December 2021 Restructuring
On December 10, 2021, the Company announced its commitment to a plan to wind down the Company’s immuno-oncology program for cavrotolimod (AST-008) and the Company’s XCUR-FXN preclinical program for the treatment of Friedreich’s ataxia. The Company intended at the time to realign its research and development resources to support (i) the development of its preclinical program targeting SCN9A for neuropathic pain, (ii) the continued advancement of its partnered programs with Ipsen Biopharm Limited to develop SNA-based treatments in neuroscience targeting Huntington’s disease and Angelman syndrome, (iii) its continued advancement of its partnered program with AbbVie to develop SNA-based treatments for hair loss disorders, as well as (iv) the continued research and development of other undisclosed therapeutic product candidates. This plan resulted in a reduction in force where the Company eliminated approximately 50% of the Company’s existing workforce on a staggered basis through January 2022 as well as other cost-cutting measures.
Notified employees were offered separation benefits, including severance payments and temporary healthcare coverage assistance. In most cases, the separation benefits were paid as a lump sum in January 2022. Certain of the notified employees had employment agreements which provided for separation benefits in the form of salary continuation; these benefits were paid between February 2022 and January 2023. All of the severance costs represent cash expenditures.
The following table presents changes in the accrued restructuring liability balance for the periods presented (in thousands):
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | |
| | December 2021 Restructuring | | September 2022 Restructuring | | Total |
Balance at December 31, 2021 | | $ | 1,191 | | | $ | — | | | $ | 1,191 | |
Payments | | (1,154) | | | (489) | | | (1,643) | |
Additions | | — | | | 488 | | | 488 | |
Adjustments (non-cash) | | 11 | | | 1 | | | 12 | |
Balance at December 31, 2022 | | $ | 48 | | | $ | — | | | $ | 48 | |
The accrued liability balance at December 31, 2022 associated with the strategic reduction in force announced December 2021 of separation benefits in the form of salary continuation pursuant to an employment agreement and was paid in January 2023.
9. Stockholders’ Equity
Preferred Stock
The Company has 10,000,000 shares of preferred stock, par value $0.0001 authorized and no shares issued and outstanding.
Common Stock
The Company has 200,000,000 shares of common stock, par value $0.0001, authorized. As of December 31, 2022 and December 31, 2021, the Company had 4,965,901 and 3,626,073 shares issued and outstanding, respectively.
The holders of shares of the Company’s common stock are entitled to one vote per share on all matters to be voted upon by the Company’s stockholders and there are no cumulative rights. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of shares of the Company’s common stock are entitled to receive ratably any dividends that may be declared from time to time by the Board out of funds legally available for that purpose. In the event of the Company’s liquidation, dissolution or winding up, the holders of shares of the Company’s common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock then outstanding. The Company’s common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Company’s common stock. The outstanding shares of the Company’s common stock are fully paid and non-assessable.
September 2022 PIPE
Securities Purchase Agreement
On September 26, 2022, the Company entered into a securities purchase agreement (the “September 2022 Securities Purchase Agreement”) with CBI USA, pursuant to which the Company agreed to issue and sell to CBI USA in a private placement an aggregate of 3,400,000 shares (the “September 2022 PIPE Shares”) of its common stock, par value $0.0001 per share (the “Common Stock”), at a purchase price of $1.60 per share (the “September 2022 PIPE”).
The September 2022 PIPE closed on February 24, 2023 (the “2023 PIPE Closing Date”). Immediately following the closing of the September 2022 PIPE, CBI USA holds approximately 50.4% of the shares of the Company’s common stock. At closing of the September 2022 PIPE, the Company received aggregate gross proceeds of $5,440 (or net proceeds of approximately $4,597 after transaction expenses).
Refer to Note 17, Subsequent Event, for more information on the September 2022 PIPE.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
September 2022 Registration Rights Agreement
Also, on September 26, 2022, the Company entered into a registration rights agreement (the “September 2022 Registration Rights Agreement”) with CBI USA, pursuant to which the Company agreed to register the resale of the September 2022 PIPE Shares. Under the September 2022 Registration Rights Agreement, the Company has agreed to file a registration statement covering the resale of the September 2022 PIPE Shares no later than the sixtieth (60th) day following the September 2022 PIPE Closing Date. The Company has agreed to use reasonable best efforts to cause such registration statement to become effective as promptly as practicable after the filing thereof but in any event on or prior to the Effectiveness Deadline (as defined in the September 2022 Registration Rights Agreement), and to keep such registration statement continuously effective until the earlier of (i) the date the September 2022 PIPE Shares covered by such registration statement have been sold or may be resold pursuant to Rule 144 without restriction, or (ii) the date that is two (2) years following the September 2022 PIPE Closing Date. The Company has also agreed, among other things, to pay all reasonable fees and expenses (excluding any underwriters’ discounts and commissions and all fees and expenses of legal counsel, accountants and other advisors for CBI USA except as specifically provided in the September 2022 Registration Rights Agreement) incident to the performance of or compliance with the September 2022 Registration Rights Agreement by the Company.
In the event the registration statement has not been filed within 90 days following the September 2022 PIPE Closing Date, subject to certain limited exceptions, then the Company has agreed to make pro rata payments to CBI USA as liquidated damages in an amount equal to 0.5% of the aggregate amount invested by CBI USA in the September 2022 PIPE Shares per 30-day period or pro rata for any portion thereof for each such month during which such event continues, subject to certain caps set forth in the September 2022 Registration Rights Agreement.
The Company has granted CBI USA customary indemnification rights in connection with the registration statement. CBI USA has also granted the Company customary indemnification rights in connection with the registration statement.
May 2022 PIPE
Securities Purchase Agreement
On May 9, 2022, the Company entered into a securities purchase agreement (the “May 2022 Securities Purchase Agreement”) with certain accredited investors (the “Investors”), pursuant to which the Company agreed to issue and sell to the Investors in a private placement an aggregate of 867,369 shares (the “May 2022 PIPE Shares”) of the Company’s Common Stock, par value $0.0001 per share, at a purchase price of $5.81 per share (the “May 2022 PIPE”). The May 2022 PIPE closed on May 18, 2022 (the “May 2022 PIPE Closing Date”). The Company received aggregate net proceeds from the May 2022 PIPE of approximately $4,886 after deducting transaction-related expenses.
Registration Rights Agreement
Also, on May 9, 2022, the Company entered into a registration rights agreement (the “May 2022 Registration Rights Agreement”) with the Investors, pursuant to which the Company agreed to register the resale of the May 2022 PIPE Shares. Under the May 2022 Registration Rights Agreement, the Company agreed to file a registration statement covering the resale of the Shares no later than July 18, 2022. On July 11, 2022, the Company filed a registration statement on Form S-3 with the SEC for the resale of the Shares and caused the registration statement to become effective on July 20, 2022.
The Company has granted the Investors customary indemnification rights in connection with the registration statement. The Investors have also granted the Company customary indemnification rights in connection with the registration statement.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Registered Direct Offering
On December 16, 2021, the Company completed a securities purchase agreement (the “Purchase Agreement”) with certain institutional purchasers (the “Purchasers”) entered into on December 14, 2021, pursuant to which the Company offered to the Purchasers, in a registered direct offering priced at-the-market consistent with the rules of the Nasdaq Stock Market (the “Registered Direct Offering”), (i) an aggregate of 433,553 shares (the “Shares”) of the Company’s common stock, $0.0001 par value per share, (ii) pre-funded warrants to purchase up to an aggregate of 718,981 shares of Common Stock (the “Pre-Funded Warrants”), and (iii) warrants to purchase up to 576,261 shares of Common Stock (the “Warrants”). The combined purchase price of each share of Common Stock and accompanying Warrant is $9.9780 per share. The combined purchase price of each Pre-Funded Warrant and accompanying Warrant is $9.9480 (equal to the combined purchase price per share of Common Stock and accompanying Warrant, minus $0.03). The per share exercise price for the Warrants is $8.1031, the closing bid price of the Company’s Common Stock on December 13, 2021 (and as adjusted for the reverse stock split referenced in Note 1). The Warrants will be exercisable immediately from the closing December 16, 2021, and will expire on the five-year anniversary of the date of issuance, or December 16, 2026. The Pre-Funded Warrants and Warrants, which met equity classification, were recognized as a component of permanent stockholders’ equity within additional paid-in-capital together with the net proceeds from the Registered Direct Offering. The gross proceeds to the Company from the Registered Direct Offering (excluding effect of subsequent exercises of pre-funded warrants) were $11,478 and net proceeds after deducting the placement agent’s fees and other offering expenses paid or payable by the Company were $10,226. The securities were offered by the Company pursuant to an effective shelf registration statement on Form S-3 (File No. 333-251555) previously filed with the Securities and Exchange Commission (the “SEC”) on December 21, 2020, and which was declared effective by the SEC on January 7, 2021 (the “Registration Statement”).
Each Warrant is exercisable for one share of Common Stock at an exercise price of $8.1031 per share. The Warrants are immediately exercisable as of the date of issuance of December 16, 2021 and will expire on the five-year anniversary of the date of issuance, or December 16, 2026. The Pre-Funded Warrants were offered in lieu of shares of Common Stock to one of the Purchasers whose purchase of shares of Common Stock in the Registered Direct Offering would otherwise result in said Purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the Purchaser, 9.99%) of the Company’s outstanding Common Stock immediately following the consummation of the Registered Direct Offering. Each Pre-Funded Warrant is exercisable for one share of Common Stock at an exercise price of $0.030 per share. The Pre-Funded Warrants are immediately exercisable and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full.
A holder (together with its affiliates) of the Warrant or Pre-Funded Warrant may not exercise any portion of the Warrant or Pre-Funded Warrant, as applicable, to the extent that the holder would own more than 4.99% (or, at the holder’s option upon issuance, 9.99%) of the Company’s outstanding Common Stock immediately after exercise, as such percentage ownership is determined in accordance with the terms of the Warrant or Pre-Funded Warrant, as applicable. In lieu of making the cash payment otherwise contemplated to be made to the Company upon exercise of a Warrant in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of Common Stock determined according to a formula set forth in the Warrants, provided that such cashless exercise shall only be permitted if the Registration Statement is not effective at the time of such exercise or if the prospectus to which the Registration Statement is a part is not available for the issuance of shares of Common Stock to the Warrant holder.
In lieu of making the cash payment otherwise contemplated to be made to the Company upon exercise of a Pre-Funded Warrant in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of Common Stock determined according to a formula set forth in the Pre-Funded Warrants.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Common Stock Warrants
In December 2021, 252,315 Pre-Funded Warrants were exercised for a total exercise price of $8, resulting in the issuance of 252,315 shares of common stock. In January 2022, Pre-Funded Warrants were exercised for a total exercise price of $14, resulting in the issuance of 466,666 shares of common stock. As of December 31, 2022, there are no unexercised pre-funded warrants that are outstanding.
As of December 31, 2022, warrants to purchase 576,261 shares of common stock at a price of $8.1031 per share that were acquired in the December 2021 registered-direct offering transaction remain outstanding. The warrants are classified as equity. As a result of the closing of the September 2022 PIPE (see Note 17, Subsequent Events), a warrant holder elected to exercise their option within 30 days of the closing of the September 2022 PIPE (February 24, 2023) to receive a cash payout for the outstanding warrants in the amount of the Black-Scholes value of each warrant as prescribed in the warrant agreement (or $800 in the aggregate).
Accumulated Other Comprehensive Loss
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for 2022: | | | | | | | | | | | | | | |
| | Unrealized gains (losses) on short-term investments | | Total |
Balance at December 31, 2021 | | $ | (2) | | | $ | (2) | |
Other comprehensive income before reclassifications | | 2 | | | 2 | |
| | | | |
Net current period other comprehensive income | | 2 | | | 2 | |
Balance at December 31, 2022 | | $ | — | | | $ | — | |
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for 2021: | | | | | | | | | | | | | | |
| | Unrealized gains (losses) on short-term investments | | Total |
Balance at December 31, 2020 | | $ | 83 | | | $ | 83 | |
Other comprehensive loss before reclassifications | | (84) | | | (84) | |
Net losses reclassified from accumulated other comprehensive income | | (1) | | | (1) | |
Net current period other comprehensive loss | | (85) | | | (85) | |
Balance at December 31, 2021 | | $ | (2) | | | $ | (2) | |
The net gain reclassified from accumulated other comprehensive loss during the year ended December 31, 2021 resulted from available-for-sale securities that were called prior to maturity. The basis on which the cost of the securities was determined was specific identification. Proceeds related to these sales were $4,000.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
10. Equity-Based Compensation
2017 Equity Incentive Plan
On September 22, 2017, the Company’s stockholders approved the Exicure, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), which became effective on November 15, 2017. The 2017 Plan provides for the issuance of incentive awards of up to 194,750 shares of Exicure common stock, which includes 72,330 shares of Exicure common stock to be issued to officers, employees, consultants and directors, plus a number of shares not to exceed 122,793 that are subject to issued and outstanding awards under the Exicure OpCo 2015 Equity Incentive Plan (the “2015 Plan”) and were assumed in the merger transaction on September 26, 2017. Awards that may be awarded under the 2017 Equity Incentive Plan include non-qualified and incentive stock options, stock appreciation rights, bonus shares, restricted stock, restricted stock units, performance units and cash-based awards. The number of shares of common stock reserved for issuance under the 2017 Equity Incentive Plan automatically increases on January 1 of each year, beginning on January 1, 2020, by the lesser of (i) 153,333 shares, (ii) 5% of the total number of shares of its capital stock outstanding on December 31 of the preceding calendar year, or (iii) a lesser number of shares determined by the Compensation Committee of the Board (the “Compensation Committee”). No future awards will be made under the 2015 Plan upon the effectiveness of the 2017 Plan.
As of December 31, 2022, the aggregate number of awards available for grant under the 2017 Plan was 259,031. On January 1, 2023, pursuant to the terms of the 2017 Plan, the number of awards that are reserved and may be awarded under the 2017 Plan was automatically increased by 153,333 awards.
Awards granted under the 2017 Plan are contingent on the participants’ continued employment or provision of non-employee services and are subject to forfeiture if employment or continued service terminates for any reason. The initial award granted to an employee or consultant generally vests 25% on the first 12-month anniversary of the grant date and vests 1/48th monthly thereafter until fully vested at the end of 48 months. Subsequent awards granted to employees or consultants generally vest 1/48th monthly until fully vested at the end of 48 months. The initial stock option grant to a non-employee director vests 1/36th monthly until fully vested at the end of 36 months. Subsequent stock option grants to a non-employee director vests 1/12th monthly until fully vested at the end of 12 months. The term of common stock option grants is 10 years unless terminated earlier as described above.
Inducement Grant
In May 2021, the Company granted stock options to purchase up to 20,000 shares of common stock as a material inducement to Brian C. Bock to enter into employment with the Company as the Company’s Chief Financial Officer (the “Inducement Grant”). The Inducement Grant, which was made pursuant to a stand-alone nonstatutory stock option agreement (the “Inducement Award Agreement”), was approved by the Compensation Committee, was awarded in accordance with Nasdaq Listing Rule 5635(c)(4) and outside of the Company’s 2017 Equity Incentive Plan and is subject to the terms and conditions of the Inducement Award Agreement. As such, any shares underlying the Inducement Grant are not, upon forfeiture, cancellation or expiration, returned to a pool of shares reserved for future issuance. In connection with Mr. Bock’s resignation from the Company on February 4, 2022, the stock options underlying the Inducement Grant were forfeited.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Employee Stock Purchase Plan
The 2017 Employee Stock Purchase Plan (the “ESPP”) was adopted by the Board in September 2017 and approved by the Company’s stockholders in September 2017. Through the ESPP, eligible employees may authorize payroll deductions of up to 15% of their compensation to purchase common stock. The maximum number of shares that an employee may purchase on any exercise date in an offer period will be the smaller of (i) 250 shares or (ii) such number of shares as has a fair market value (determined as of the offering date for such offer period) equal to $25,000 within one calendar year minus the fair market value of any other shares of common stock that are attributed to such calendar year. The purchase price per share at each purchase date is equal to 85% of the lower of (i) the closing market price per share of Exicure common stock on the employee’s offering date or (ii) the closing market price per share of Exicure common stock on the exercise date. Each offering period is approximately six-months in duration and the first offering period began on November 16, 2020 and ended on May 14, 2021. During 2022, the Company issued 1,851 shares of common stock that were purchased under the ESPP.
The ESPP provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2018 and each January 1 thereafter through January 1, 2027, by the least of (i) 10,000 shares; (ii) 0.3% of the outstanding shares of common stock on the last day of the immediately preceding calendar year; or (iii) a lesser number of shares determined by the Board. As of December 31, 2022, there were 41,971 shares available for issuance under the ESPP. On January 1, 2023, the number of shares of common stock available for issuance under the ESPP increased by 10,000 shares.
Equity-based compensation expense is classified in the statements of operations as follows:
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 |
Research and development expense | | | | | $ | 507 | | | $ | 1,362 | |
General and administrative expense | | | | | 862 | | | 1,577 | |
| | | | | $ | 1,369 | | | $ | 2,939 | |
Unamortized equity-based compensation expense at December 31, 2022 was $$2,014, which is expected to be amortized over a weighted-average period of 2.8 years.
The Company utilizes the Black-Scholes option-pricing model to determine the fair value of common stock option grants. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The model also requires the input of highly subjective assumptions. In addition to an assumption on the expected term of the option grants as discussed below, application of the Black-Scholes model requires additional inputs for which we have assumed the values described in the table below:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Expected term | 5.3 to 6.1 years | | 5.0 to 6.1 years |
Risk-free interest rate | 2.86% to 3.56%; weighted avg. 2.90% | | 0.36% to 1.12%; weighted avg. 1.05% |
Expected volatility | 95.2% to 95.8%; weighted avg. 95.2% | | 81.7% to 83.6%; weighted avg. 82.6% |
Forfeiture rate | 5 | % | | 5 | % |
Expected dividend yield | — | % | | — | % |
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The expected term is based upon the “simplified method” as described in Staff Accounting Bulletin Topic 14.D.2. Currently, the Company does not have sufficient experience to provide a reasonable estimate of an expected term of its common stock options. The Company will continue to use the “simplified method” until there is sufficient experience to provide a more reasonable estimate in conformance with ASC 718-10-30-25 through 30-26. The risk-free interest rate assumptions were based on the U.S. Treasury bond rate appropriate for the expected term in effect at the time of grant. For stock options granted after December 31, 2021, the expected volatility is based on the volatility of shares of the Company. For stock options granted prior to January 1, 2022, the expected volatility is based on calculated enterprise value volatilities for publicly traded companies in the same industry and general stage of development. The estimated forfeiture rates were based on historical experience for similar classes of employees. The dividend yield was based on expected dividends at the time of grant.
The fair value of the underlying common stock and the exercise price for the common stock options granted during the years ended December 31, 2022 and 2021 are summarized in the table below:
| | | | | | | | | | | |
Common Stock Options Granted During Period Ended: | Fair Value of Underlying Common Stock | | Exercise Price of Common Stock Option |
Year ended December 31, 2022 | $3.46 to $5.51; weighted avg. $4.56 | | $3.46 to $5.51; weighted avg. $4.56 |
Year ended December 31, 2021 | $34.50 to $77.10; weighted avg. $56.10 | | $34.50 to $77.10; weighted avg. $56.10 |
The weighted-average grant date fair value of common stock options granted in the years ended December 31, 2022 and 2021 was $2.52 and $39.00 per common stock option, respectively.
A summary of common stock option activity as of the periods indicated is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted-Average Exercise Price (1) | | Weighted-Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value (thousands) |
Outstanding - December 31, 2021 | 331,420 | | | $ | 61.82 | | | 7.0 | | $ | — | |
Granted | 232,028 | | | 4.56 | | | | | |
Settled | (124) | | | 5.51 | | | | | |
Forfeited | (340,491) | | | 60.18 | | | | | |
Outstanding - December 31, 2022 | 222,833 | | | $ | 4.74 | | | 7.5 | | $ | — | |
Exercisable - December 31, 2022 | 90,499 | | | $ | 5.94 | | | 5.1 | | $ | — | |
Vested and Expected to Vest - December 31, 2022 | 213,753 | | | $ | 4.78 | | | 7.4 | | $ | — | |
(1) On March 24, 2022, the Company’s Board of Directors unanimously approved the repricing of all outstanding and unexercised stock options granted under our 2015 Equity Incentive Plan and 2017 Equity Incentive Plan and held by its current employees, executive officers, and directors. Effective April 1, 2022, the exercise price of the eligible stock options was reduced to $5.51, the closing price of our common stock on April 1, 2022. See below section titled “Repricing of Outstanding and Unexercised Options” for more information.
The aggregate intrinsic value of common stock options exercised during the years ended December 31, 2022 and 2021 was $0 and $243, respectively.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
A summary of restricted stock unit activity of the periods indicated is as follows:
| | | | | | | | | | | |
| Restricted Stock Units | | Weighted-Average Grant Date Fair Value |
Unvested balance - December 31, 2021 | 10,109 | | | $ | 50.04 | |
Granted | 51,536 | | | 3.42 | |
Vested | (5,535) | | | 22.04 | |
Forfeited | (35,225) | | | 4.72 | |
Unvested balance - December 31, 2022 | 20,885 | | | $ | 12.65 | |
The grant date fair value of restricted stock units is based on the Company’s closing stock price at the date of grant. At vesting, each outstanding restricted stock unit will be exchanged for one share of the Company’s common stock. The restricted stock units granted during the 2022 period generally vest evenly on a quarterly basis over a period of 4 years in exchange for continued service provided by the restricted stock unit recipient during that vesting period.
A summary of performance-based restricted stock unit activity of the periods indicated is as follows:
| | | | | | | | | | | |
| Restricted Stock Units | | Weighted-Average Grant Date Fair Value |
Unvested balance - December 31, 2021 | — | | | $ | — | |
Granted | 97,643 | | | 3.45 | |
Unvested balance - December 31, 2022 | 97,643 | | | $ | 3.45 | |
The grant date fair value of performance-based restricted stock units is based on the Company’s closing stock price at the date of grant. At vesting, each outstanding restricted stock unit will be exchanged for one share of the Company’s common stock. Certain performance metrics must be met by the performance measurement date in 2023 in order for the performance-based restricted stock units granted during 2022 to vest as follows: one-third on May 16, 2023, one-third on May 16, 2024, and one-third on May 16, 2025, in exchange for continued service provided by the performance-based restricted stock unit recipient during that vesting period.
Repricing of Outstanding and Unexercised Options
On March 24, 2022, the Board unanimously approved the repricing of all outstanding and unexercised stock options granted under the 2015 Plan and 2017 Plan (the “Plans”) and held by current employees, executive officers, and directors of the Company (the “Eligible Stock Options”). Effective April 1,2022, the exercise price of the eligible stock options was reduced to $5.51, the closing price of its common stock on April 1, 2022. Except for the modification to the exercise price of the Eligible Stock Options, all other terms and conditions of each of the Eligible Stock Options will remain in full force and effect.
Pursuant to the Plans, the Board, as the administrator of the Plans, has discretionary authority, exercisable on such terms and conditions that it deems appropriate under the circumstances, to reduce the exercise price in effect for outstanding options under the Plans. In approving the repricing, the Board considered the impact of the current exercise prices of outstanding stock options on the incentives provided to employees and directors, the lack of retention value provided by the outstanding stock options to employees and directors, and the impact of such options on the capital structure of the Company. As of March 24, 2022, there were 233,224 stock options outstanding under the Plans, and all of the Company’s outstanding stock options had exercise prices in excess of the current fair market
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
value of the Company’s common stock as of March 24, 2022, which is why the Board made the determination to deem all outstanding and unexercised stock options held by current employees, executive officers, and directors as Eligible Stock Options.
Matthias Schroff, the Company’s Chief Executive Officer, and Elias Papadimas, the Company’s Chief Financial Officer, held Eligible Stock Options exercisable into an aggregate of 29,373 and 12,513 shares of the Company’s common stock, respectively. Former non-employee directors, Jeffrey Cleland, Elizabeth Garofalo, Bali Muralidhar and James Sulat, held Eligible Stock Options exercisable into an aggregate of 3,835, 5,000, 3,835 and 3,112 shares of the Company’s common stock, respectively.
The option repricing resulted in incremental stock-based compensation of $291, of which $213 was recorded as expense in the year ended December 31, 2022 and the remaining balance is expected to be recognized as expense over the requisite service period in which the stock options vest.
11. Income Taxes
Pre-tax loss before income taxes was $2,373 and $64,102 for the years ended December 31, 2022 and 2021, respectively, which consists entirely of losses in the U.S. and resulted in $209 and $0 provision for income tax expense during the years then ended, respectively.
Components for the provision for income taxes consist of the following:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | 2021 |
Current | | | |
Federal | $ | 115 | | | $ | — | |
State and local | 94 | | | — | |
Total current tax expense | $ | 209 | | | $ | — | |
| | | |
Deferred | | | |
Federal | $ | — | | | $ | — | |
State and local | — | | | — | |
Total deferred tax expense | $ | — | | | $ | — | |
| | | |
Provision for income tax expense | $ | 209 | | | $ | — | |
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The differences between income taxes computed using the U.S. federal income tax rate and the provision for income taxes are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
Federal income tax expense at statutory rate | $ | (498) | | | 21.0 | % | | $ | (13,461) | | | 21.0 | % |
State income tax expense at statutory rate | (87) | | | 3.7 | | | (4,816) | | | 7.5 | |
Permanent differences | 108 | | | (4.6) | | | 245 | | | (0.4) | |
Research and development credit | (31) | | | 1.3 | | | — | | | — | |
Other | (16) | | | 0.7 | | | (32) | | | — | |
Change in valuation allowance | 733 | | | (30.9) | | | 18,064 | | | (28.1) | |
| $ | 209 | | | (8.8) | % | | $ | — | | | — | % |
The effective tax rate for the year ended December 31, 2022 is attributable to the fact that the Company is subject to the IRC Sec. 174 regulations requiring companies to capitalize certain research and experimental expenditures and IRC Sec. 382 loss limitation rules on the Company's ability to utilize net operating losses to offset the capitalization requirement. The effective income tax rate for the year ended December 31, 2021 was 0% because the Company generated tax losses and provided a full valuation allowance against its deferred tax assets to an amount that is more likely than not to be realized.
The significant components of the Company’s net deferred tax assets are as follows:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Deferred Tax Assets | | | |
Net operating losses | $ | 36,331 | | | $ | 42,769 | |
Tax credits | 472 | | | 3,922 | |
Capitalized R&D expenses | 5,795 | | | — | |
Intangibles | 117 | | | 134 | |
Accrued expenses | 40 | | | 1,331 | |
Operating lease liability | 2,097 | | | 2,253 | |
Equity-based compensation | 1,874 | | | 1,622 | |
Deferred revenue | — | | | 3,191 | |
Other | 56 | | | 54 | |
Less: Valuation allowance | (44,145) | | | (52,392) | |
Total deferred tax assets | 2,637 | | | 2,884 | |
Deferred Tax Liabilities | | | |
Prepaid expenses | (262) | | | (308) | |
Fixed assets and other | (292) | | | (298) | |
Right-of-use asset | (2,083) | | | (2,278) | |
Total deferred tax liabilities | (2,637) | | | (2,884) | |
Deferred taxes, net | $ | — | | | $ | — | |
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The Company’s effective income tax rate for the year ended December 31, 2022 is (8.8)%. The Company has recorded a full valuation allowance against its deferred tax assets. This determination is based on significant negative evidence, including:
•Cumulative losses: The Company has been in a significant cumulative loss position since its inception in 2012.
•Projected realization of net operating loss carry forward amounts: Projections of future pre-tax book loss and taxable losses based on the Company's recent actual performance and current industry data indicate it is more likely than not that the benefits will not be recognized.
At December 31, 2022, the Company had a federal net operating loss carryforward of $120,346, which will begin to expire in 2035. At December 31, 2022, the Company had $148,344 of state net operating loss carryforwards which will begin to expire in 2027.
As provided by Section 382 of the Internal Revenue Code of 1986 (“Section 382”), and similar state provisions, utilization of net operating losses and tax credit carryforwards may be subject to substantial annual limitations due to ownership change limitations that have previously occurred or that could occur in the future. Ownership changes may limit the amount of net operating losses and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions that increase the ownership of five percent stockholders in the stock of a corporation by more than 50 percent in the aggregate over a three-year period. The Company completed a review of its changes in ownership through December 31, 2022 and determined that it had experienced an “ownership change” within the meaning of Section 382(g) during the fourth quarter of 2022. This ownership change has and will continue to subject the Company’s net operating loss carryforwards to an annual limitation, which will significantly restrict the Company’s ability to use them to offset its taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of our stock at the time of the ownership change multiplied by a specified tax-exempt interest rate.
The Company determined that at the date of the 2022 ownership change, it had a net unrealized built-in loss ("NUBIL"). The NUBIL was determined based on the difference between the fair market value of the Company’s assets and their tax basis at the ownership change date. Because of the NUBIL, certain deductions recognized during the five-year period beginning on the date of the Section 382 ownership change (the “recognition period”) are subject to the same limitation as the net operating loss carryforwards or certain other deductions.
At December 31, 2022 and 2021, the Company had no unrecognized tax benefits. The Company's estimate of the potential outcome of any uncertain tax positions is subject to management's assessment of relevant risks, facts and circumstances existing at that time. The Company evaluates uncertain tax positions to determine if it is more-likely-than-not that they would be sustained upon examination. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes.
The Company is subject to taxation in the U.S. and various state jurisdictions. The Company remains subject to examination by U.S. federal and state tax authorities for the years 2018 through 2022. There are no pending examinations in any jurisdiction.
12. Loss Per Common Share
Basic loss per common share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share is calculated using the treasury share method by giving effect to all potentially dilutive securities that were outstanding. Potentially dilutive options, restricted stock units and warrants to purchase common stock that were outstanding during the periods presented were excluded from the diluted loss per share calculation for the periods presented because such shares had an anti-
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
dilutive effect due to the net loss reported in those periods. Therefore, basic and diluted loss per common share is the same for each of the years ended December 31, 2022 and 2021.
The following is the computation of loss per common share for the years ended December 31, 2022 and 2021: | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2022 | | 2021 |
Net loss | | | | | $ | (2,582) | | | $ | (64,102) | |
Weighted-average basic and diluted common shares outstanding | | | | | 4,619,471 | | | 2,953,901 | |
Loss per share - basic and diluted | | | | | $ | (0.56) | | | $ | (21.70) | |
The outstanding securities presented below were excluded from the calculation of loss per common share, for the periods presented, because such securities would have been anti-dilutive due to the Company’s loss per share during that period:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Options to purchase common stock | | 222,833 | | | 331,420 | |
Restricted stock units | | 20,885 | | | 10,109 | |
Performance stock units | | 97,643 | | | — | |
Warrants to purchase common stock | | 576,261 | | | 1,042,927 | |
13. Fair Value Measurements
ASC Topic 820, Fair Value Measurement, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, as follows: Level 1 Inputs - unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date; Level 2 Inputs - other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3 Inputs - unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
Assets measured at fair value on a recurring basis as of December 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 1,612 | | | $ | 1,612 | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total financial assets | $ | 1,612 | | | $ | 1,612 | | | $ | — | | | $ | — | |
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Assets measured at fair value on a recurring basis as of December 31, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 21,125 | | | $ | 21,125 | | | $ | — | | | $ | — | |
Commercial paper | 5,999 | | | — | | | 5,999 | | | — | |
Short-term investments: | | | | | | | |
Commercial paper | 4,497 | | | — | | | 4,497 | | | — | |
Total financial assets | $ | 31,621 | | | $ | 21,125 | | | $ | 10,496 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Company uses the market approach and Level 1 and Level 2 inputs to value its cash equivalents and Level 2 inputs to value its short-term investments. The Company’s long-term debt bore interest at the prevailing market rates for instruments with similar characteristics and, accordingly, the carrying value for this instrument also approximated its fair value and the financial measurement was also classified within Level 2 of the fair value hierarchy.
As of December 31, 2022, the Company’s common stock warrant liability associated with warrants issued in a private placement offering of common stock in 2017 was $0 and no warrants were outstanding underlying the common stock warrant liability as those warrants expired unexercised during 2021. The following is a reconciliation of the Company’s liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the years ended December 31, 2022 and 2021:
| | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| Common Stock Warrant Liability |
Balance at December 31, 2020 | $ | 15 | |
| |
Gain included in other income (expense), net | (15) | |
Balance at December 31, 2021 | $ | — | |
| |
Gain included in other income (expense), net | — | |
Balance at December 31, 2022 | $ | — | |
14. Defined Contribution Plan
Exicure maintains a defined contribution savings plan for the benefit of its employees. Company contributions are determined under various formulas. The expense recognized for this plan was $276 and $402 for the years ended December 31, 2022 and 2021, respectively.
15. Commitments and Contingencies
Legal Proceedings
On December 13, 2021, Mark Colwell filed a putative securities class action lawsuit against the Company, David A. Giljohann and Brian C. Bock in the United States District Court for the Northern District of Illinois, captioned Colwell v. Exicure, Inc. et al., Case No. 1:21-cv-0663. On February 4, 2021, plaintiff filed an amended putative securities class action complaint. The amended complaint alleges that Dr. Giljohann and Mr. Bock made materially false and/or misleading statements related to the Company’s clinical programs purportedly causing losses to investors who acquired Company securities between January 7, 2021 and December 10, 2021. The amended
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
complaint does not quantify any alleged damages but, in addition to attorneys’ fees and costs, plaintiff seeks to recover damages on behalf of himself and others who acquired the Company’s stock during the putative class period at allegedly inflated prices and purportedly suffered financial harm as a result. On March 20, 2023, the Court issued an Order appointing James Mathew as Lead Plaintiff, and Bleichmar Fonti & Auld LLP as Lead Counsel for the purported class. The parties are required to submit, within two weeks of that Order, a schedule to the Court governing the filing of a further amended complaint and the timing of defendants’ answer or response.
On March 1, 2022, Kapil Puri filed a shareholder derivative lawsuit on behalf of the Company in the United States District Court for the Northern District of Illinois, against Dr. Giljohann and Mr. Bock, Jeffrey L. Cleland, Elizabeth Garofalo, Bosun Hau, Bali Muralidhar, Andrew Sassine, Matthias Schroff, James Sulat and Timothy Walbert, captioned Puri v. Giljohann, et al., Case No. 1:22-cv-01083. On March 8, 2022, Yixin Sim filed a similar shareholder derivative lawsuit in the same court against the same individuals, captioned Sim v. Giljohann, et al., Case No. 1:22-cv-01217. On April 25,2022, Stourbridge Investments LLC filed a similar shareholder derivative lawsuit against the same individuals in the United States District Court for the District of Delaware, captioned Stourbridge Investments LLC v. Exicure, Inc. et al., Case No. 1:22-cv-00526. Based on similar factual allegations presented in the Colwell complaint, described above, the Puri, Sim, and Stourbridge complaints (collectively, the “Derivative Complaints”) allege that the defendants caused the Company to issue false and/or misleading statements in the proxy statement for its 2021 Annual Meeting of Stockholders regarding risk oversight, code of conduct, clinical program and compensation matters, among other things, in violation of federal securities law, and committed breaches of fiduciary duties. The Derivative Complaints also assert that Dr. Giljohann and Mr. Bock are liable for contribution under the federal securities laws. The Puri and Stourbridge complaints further assert state law claims for unjust enrichment, and the Puri complaint additionally asserts state law claims for abuse of control, gross mismanagement and corporate waste. The plaintiffs do not quantify any alleged damages in the Derivative Complaints, but seek restitution for damages to the Company, attorneys’ fees, costs, and expenses, as well as an order directing that certain proposals for strengthening board oversight be put to a vote of the Company’s shareholders.
All of the Derivative Cases have been stayed pending a decision on any motion to dismiss that may be filed in the Colwell case. In addition, the Stourbridge case has been administratively closed pending the decision on motion to dismiss that may be filed in the Colwell case.
Leases
Refer to Note 7, Leases, for a discussion of the commitments associated with the Company’s lease agreements.
EXICURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Northwestern University License Agreements
On December 12, 2011, (1) AuraSense, LLC, the Company’s former parent, assigned to the Company all of its worldwide rights and interests under AuraSense, LLC’s 2009 license agreement with Northwestern University (“NU”) in the field of the use of nanoparticles, nanotechnology, microtechnology or nanomaterial-based constructs as therapeutics or accompanying therapeutics as a means of delivery, but expressly excluding diagnostics (the “assigned field”); (2) in accordance with the terms and conditions of this assignment, the Company assumed all liabilities and obligations of AuraSense, LLC as set forth in its license agreement in the assigned field; and (3) in order to secure this assignment and the patent rights from NU, the Company agreed (i) to pay NU an annual license fee, which may be credited against any royalties due to NU in the same year, (ii) to reimburse NU for expenses associated with the prosecution and maintenance of the license patent rights, (iii) to pay NU royalties based on any net revenue generated by the Company’s sale or transfer of any licensed product, (iv) to pay NU, in the event the Company grants a sublicense under the licensed patent rights, the greater of a percentage of all sublicensee royalties or a percentage of any net revenue generated by a sublicensee’s sale or transfer of any licensed product, and (v) to pay NU a percentage of all other sublicense payments received by the Company. In August 2015, the Company entered into a restated license agreement with NU (the “Restated License Agreement”). In February 2016, the Company obtained exclusive license as to NU’s rights in certain SNA technology it jointly owns with NU (the “Co-owned Technology License”). The Company’s license to NU’s rights is limited to the assigned field, however the Company has no such limitation as to its own rights in this jointly owned technology. The Company’s rights and obligations in the Co-owned Technology License agreement is substantially the same as in the Restated License Agreement from August 2015 (collectively referred to as “the Northwestern University License Agreements”). As of December 31, 2022, the Company has paid to NU an aggregate of $11,515 in consideration of each of the obligations described above.
16. Related-Party Transactions
The Company received consulting services from, and paid fees to, one of its co-founders who is not an employee but, through April 30, 2021, served as a member of the Board. The consulting agreement with this co-founder and former Board member expired on September 30, 2021 under the terms of the agreement and was not renewed. The Company recognized expense of $75 for the year ended December 31, 2021 in connection with these consulting services in the accompanying consolidated statement of operations.
17. Subsequent Events
Closing of September 2022 PIPE
The September 2022 PIPE (see Note 9, Stockholders’ Equity) closed on February 24, 2023. As a result of the closing of the September 2022 PIPE, CBI USA is the beneficial owner of approximately 50.4% of the Company’s outstanding shares. Pursuant to the board designation rights of CBI USA, CBI USA designated three members to the Company’s board of directors effective as of February 24, 2023. Subsequently, the board appointed additional directors. As a result, the board of directors current has 6 members, only one which, Matthias Schroff, the Company’s Chief Executive Officer, served as a director prior to the closing.
In February 2023, the Company received gross proceeds of $5,440 from the September 2022 PIPE (or net proceeds of $4,597 after transaction expenses). Following the closing, a holder of warrants to purchase 526,151 shares of common stock at a price of $8.1031 per share that were acquired in the December 2021 registered-direct offering transaction elected to exercise their option to receive a cash payout for the outstanding warrants in the amount of the Black-Scholes value of each warrant as prescribed in the warrant agreement (or $800 in the aggregate).