The following information should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , which was filed with theSecurities and Exchange Commission , orSEC , onMarch 11, 2021 . This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve significant risks and uncertainties. Our actual results, performance or experience could differ materially from what is indicated by any forward-looking statement due to various important factors, risks, uncertainties, assumptions and other factors including, but not limited to, those identified in this Quarterly Report on Form 10-Q and those set forth under the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our otherSEC filings. Such factors may be amplified by the COVID-19 pandemic and its current or future impact on our business and the global economy. Overview We are a clinical-stage biotechnology company developing therapeutics for neurology, immuno-oncology, inflammatory diseases, and other genetic disorders based on our proprietary Spherical Nucleic Acid, or SNA™, technology. We believe that our proprietary SNA architecture has distinct chemical and biological properties that may provide advantages over other nucleic acid therapeutics and may have therapeutic potential to target diseases not typically addressed with other nucleic acid therapeutics. We are in preclinical development of XCUR-FXN, a lipid-nanoparticle SNA-based therapeutic candidate, for the intrathecal treatment of Friedreich's ataxia, or FA. Our therapeutic candidate cavrotolimod (AST-008) is in a Phase 1b/2 clinical trial in patients with advanced solid tumors. We believe one of the key strengths of our proprietary SNAs is that they have the potential for increased cellular uptake compared to conventional linear oligonucleotides and as a result the potential to achieve higher efficacy at the same doses of oligonucleotide administered. We have shown in clinical and preclinical studies that SNAs may have therapeutic potential in immuno-oncology and dermatology. In addition, we have shown in preclinical studies that SNAs may have therapeutic potential in neurology, ophthalmology, pulmonology, and gastroenterology. As a consequence, we have expanded our pipeline into neurology, for which IND-enabling activities are ongoing for XCUR-FXN, and are conducting early stage research activities in ophthalmology, pulmonology, and gastroenterology. The table below sets forth the current status of development of our SNA therapeutic candidates. [[Image Removed: xcur-20210930_g1.jpg]]
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(1) Cavrotolimod is a TLR9 agonist. (2) In combination with checkpoint inhibitors. Operating, financing, and cash flow considerations Since our inception in 2011, we have devoted substantial resources to the research and development of SNAs and the protection and enhancement of our intellectual property. We have no products approved for sale and have primarily funded our operations through sales of our securities and collaborations. ThroughSeptember 30, 2021 , we have raised gross proceeds of$190.1 million from the sale of common stock and preferred stock. We have also received$56.0 million in upfront payments from collaborations, including an upfront payment of$20.0 million we received inAugust 2021 in connection with the Ipsen Collaboration Agreement and an upfront payment of$25.0 million we received inNovember 2019 in connection with the AbbVie Collaboration Agreement. OnSeptember 25, 2020 , we also borrowed$17.5 million under the terms of a credit and security agreement withMidCap Financial Trust (as described further below). As ofSeptember 30, 2021 , our cash, cash equivalents, short-term investments, and restricted cash were$62.0 million . Since our inception, we have incurred significant operating losses. As ofSeptember 30, 2021 , we have generated an accumulated deficit of$175.1 million . Substantially all of our operating losses resulted from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations. We expect to continue to incur losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially as we: •continue research and development of XCUR-FXN and other neurological therapeutic candidates and advance preclinical product candidates into clinical development; •continue to advance the ongoing Phase 1b/2 clinical development for cavrotolimod (AST-008) for immuno-oncology applications; •advance our SNA platform with our current and prospective suitable collaboration partners; •initiate research and development, preclinical studies and clinical trials for any additional therapeutic candidates that we may pursue in the future; •advance other therapeutic candidates through preclinical and clinical development; •increase our research and development activities to enhance our technology platform; •continue to manufacture increasing quantities of drug substance and drug product material for use in preclinical studies and clinical trials; •seek regulatory approval for our therapeutic candidates that successfully complete clinical trials; •maintain, expand and protect our intellectual property portfolio; •acquire or in-license other approved drugs, drug candidates or technologies; •hire additional operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts; and •incur additional costs associated with operating as a public company. We have not generated any revenue from commercial drug sales nor do we expect to generate substantial revenue from product sales unless or until we successfully complete development and obtain regulatory approval of and commercialize one or more of our therapeutic candidates. We do not anticipate generating revenue from drug sales for the next several years, if ever. If we obtain regulatory approval for any of our therapeutic candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and 42
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distribution. Other sources of revenue could include a combination of research and development payments, license fees and other upfront payments, milestone payments, and royalties in connection with our current and any future collaborations and licenses. Until such time, if ever, that we generate revenue from whatever source, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings and research collaboration and license agreements. We may be unable to raise capital or enter into such other arrangements when needed or on favorable terms. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our therapeutic candidates. Recent Developments As previously reported, onNovember 9, 2021 , the Audit Committee of our Board of Directors was notified of a claim made by a former Company senior researcher regarding alleged improprieties that researcher claims to have committed with respect to our XCUR-FXN preclinical program for the treatment of Friedreich's ataxia. The Audit Committee has retained external counsel to conduct an internal investigation of the claim. We are currently unable to predict the timing or outcome of the investigation. Therapeutic Development Program Updates XCUR-FXN, Friedreich's ataxia We are developing XCUR-FXN, an SNA-based therapeutic candidate for the treatment of FA. We remain committed to maintaining our development plans and to pursuing our business strategy in the best interests of our stockholders as well as the patients we look to serve; however, we acknowledge that, at this point in time, we are unable to determine the potential impact of the asserted claim referenced above on our research and development activities or the timing of completion of our current research and development of our XCUR-FXN preclinical program for the treatment of FA, as the investigation of the asserted claim referenced above remains ongoing. Cavrotolimod (AST-008) We are currently evaluating cavrotolimod (AST-008) in a Phase 1b/2 clinical trial in patients with advanced solid tumors. As ofNovember 4, 2021 , we had 25 clinical trial sites activated for enrollment and 2 additional sites pending activation. We expect to open approximately 27 sites in total for the Phase 2 stage of the clinical trial. We anticipate all sites will be activated by the first half of 2022. As ofNovember 4, 2021 , we have dosed 37 patients with 32 mg of cavrotolimod (AST-008) in the Phase 2 portion of the clinical trial, including the primary and exploratory cohorts. Including the six patients dosed with 32 mg of cavrotolimod (AST-008) in the Phase 1b portion of the clinical trial, a total of 43 patients have been dosed with 32 mg of cavrotolimod (AST-008) throughNovember 4, 2021 . As ofNovember 4, 2021 , four of the 43 patients dosed with 32 mg of cavrotolimod (AST-008) have experienced serious adverse events, or SAEs, assessed as related to cavrotolimod by clinical trial investigators. All of these patients were dosed in the Phase 2 stage of the clinical trial. The treatment-related SAEs experienced by these four patients were hypotension (n=2), flu-like symptoms (n=1), injection-related reaction (n=1), and injection site reaction (n=1). None of the 14 patients dosed in the Phase 1b portion of the clinical trial with doses of cavrotolimod (AST-008) less than 32 mg experienced a treatment-related SAE. In summary, as ofNovember 4, 2021 , in total, 4 of 57 patients treated with cavrotolimod (AST-008) have experienced a treatment-related SAE. We believe the impact of the ongoing COVID-19 pandemic continues to contribute to delays that began during the third quarter of 2020 and continued into the second half of 2021 in our enrollment plans and clinical trial site start-ups for the Phase 2 dose expansion phase of the Phase 1b/2 clinical trial for its cavrotolimod (AST-008) clinical program. As a result of these delays, pending further delays or any additional unanticipated effects of the COVID-19 pandemic on our clinical development plans, we now expect to report ORR results of cavrotolimod (AST-008) in the second half of 2022 rather than the first half of 2022. We will also continue to seek opportunities to advance this program through strategic collaborations or partnerships with the goal of maximizing stockholder value of the program and the full potential of our pipeline. 43
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Update Regarding AbbVie Collaboration We previously granted to AbbVie, Inc., or AbbVie, exclusive access and options to license SNA-based therapeutics arising from two collaboration programs we are conducting related to the treatment of hair loss disorders. During the third quarter of 2021, the joint development committee for the AbbVie collaboration made the decision to revise the initial development plan for both of the AbbVie collaboration programs. Due to these revised workplans, we expect significant additional efforts will be required to satisfy the performance obligation under our Collaboration, Option and License Agreement with AbbVie, or the AbbVie Collaboration Agreement, as we conduct additional early-stage discovery and preclinical activities than those originally set forth in the respective initial development plan. These increased estimated efforts in connection with the change in workplan resulted in less progress occurring relative to the increased estimate of total project hours to complete the research services during the three and nine months endedSeptember 30, 2021 as compared to the amount of revenue recognized at bothJune 30, 2021 andDecember 31, 2020 , which led to revenue reversals in each respective period. As such, we recorded a cumulative catchup adjustment (reduction) of revenue of$(4.5) million during the three and nine months endedSeptember 30, 2021 . Refer to Note 3,Collaborative Research and License Agreements, of the accompanying unaudited condensed consolidated financial statements for more information regarding the AbbVie Collaboration Agreement. COVID-19 Business Update As the global spread of the COVID-19 pandemic continues to affect our economy and our industry, we continue to monitor closely the developments and continue to take active measures to protect the health of our employees and their families, our communities, as well as our clinical trial investigators, patients, and caregivers. OnJune 11, 2021 ,Illinois moved into "Phase 5" of the Restore Illinois Plan, which is intended to permit businesses to operate at full capacity and permits fully vaccinated individuals to resume activities without wearing a mask except where required by federal, state, local, tribal, or territorial laws, rules and regulations, including local business and workplace guidance. As ofNovember 12, 2021 ,Illinois remains in "Phase 5" of the Restore Illinois Plan. Supply chain We are working closely with our third-party manufacturers and other partners to manage our supply chain activities and mitigate potential disruptions as a result of the COVID-19 pandemic. We have observed minor delays in receipt of key chemicals, reagents and materials as certain manufacturers have had supply disruptions related to the COVID-19 pandemic. During the second half of 2021, we have experienced delays in the receipt of components needed for the manufacture of GMP drug product of cavrotolimod (AST-008) and XCUR-FXN. We are actively exploring substitutions to, and alternative sources for, these components to minimize any potential delays in the manufacture of these GMP drug products. Delays in the manufacturing of GMP drug product could adversely impact our clinical development activities for those programs. If the COVID-19 pandemic continues to persist for an extended period of time and impacts essential distribution systems such as FedEx and postal delivery, we could experience future disruptions to our supply chain and operations and associated delays in the manufacturing and our clinical supply, which would adversely impact our preclinical and clinical development activities. Clinical operations We believe the ongoing COVID-19 pandemic has affected our Phase 1b/2 clinical trial of cavrotolimod (AST-008). Namely, the COVID-19 pandemic or its impact has contributed to delays that began during the third quarter of 2020 and continued into the second half of 2021 in our enrollment plans and clinical trial site start-ups for the Phase 2 dose expansion phase of the clinical trial. As a result of these delays, pending further delays or any additional unanticipated effects of the COVID-19 pandemic on our clinical development plans, we now expect to report ORR results of cavrotolimod (AST-008) in the second half of 2022 rather than the first half of 2022. Beginning in third quarter of 2020, we implemented, and continue to employ, additional measures to increase the enrollment of patients, including frequent interaction with our clinical trial sites currently open as well as increasing the number of clinical trial sites that potentially are activated for this trial so that we may continue to enroll patients as initially planned. However, any additional delays may require us to further lengthen our clinical development 44
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timeline for cavrotolimod (AST-008) and could potentially delay our proposed clinical development timeline for XCUR-FXN. We remain committed to maintaining our development plans for cavrotolimod (AST-008) and XCUR-FXN and continue to monitor and manage the rapidly evolving situation of the effects of the pandemic. We have taken and continue to take measures to implement remote and virtual approaches, including remote patient monitoring where possible, to maintain patient safety and trial continuity and to preserve study integrity. Should the COVID-19 pandemic or its impact or effects continue, our ability to maintain patient enrollment and our clinical development timeline could continue to be negatively impacted. We could also see an impact on our ability to supply study drug, report trial results, or interact with regulators, ethics committees or other important agencies due to limitations in regulatory authority employee resources or otherwise. In addition, we rely on contract research organizations or other third parties to assist us with clinical trials, and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic. As the COVID-19 pandemic continues to persist for an extended period of time, we continue to be impacted and could experience additional delays in patient enrollment for our Phase 2 stage of the Phase 1b/2 clinical trial of cavrotolimod (AST-008). Any significant disruptions to our clinical development timelines would further delay our anticipated timeline for results and adversely affect our business, financial condition, results of operations and growth prospects. Critical Accounting Policies and Estimates Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue and expenses incurred during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions, including uncertainty in the current economic environment due to the ongoing COVID-19 pandemic. Our critical accounting policies require the most significant judgments and estimates in the preparation of our consolidated financial statements. There have been no significant changes to our critical accounting policies from those which were discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , except as discussed in Note 2, Significant Accounting Policies, in the accompanying notes to the unaudited condensed consolidated financial statements related to revenue recognition. Recently adopted accounting pronouncements None. Recent accounting pronouncements not yet adopted Refer to Note 2, Significant Accounting Policies, of the accompanying unaudited condensed consolidated financial statements for a description of recently accounting pronouncements not yet updated. 45
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Results of Operations
Comparison of the Three Months Ended
Three Months Ended September 30, (dollars in thousands) 2021 2020 Change Revenue: Collaboration revenue$ (3,677) $ 2,443 $ (6,120) (251) % Total revenue (3,677) 2,443 (6,120) (251) % Operating expenses: Research and development expense 16,457 9,139
7,318 80 %
General and administrative expense 2,947 2,424 523 22 % Total operating expenses 19,404 11,563 7,841 68 % Operating loss (23,081) (9,120) (13,961) 153 % Other (expense) income, net: Dividend income 2 2 - - % Interest income 8 205 (197) (96) % Interest expense (455) (27) (428) 1,585 %
Other (expense) income, net (5) 118 (123) n/m Total other (expense) income, net (450) 298
(748) (251) %
Net loss before provision for income taxes (23,531) (8,822)
(14,709) 167 % Provision for income taxes - - - - % Net loss$ (23,531) $ (8,822) $ (14,709) 167 % Revenue
The following table summarizes our revenue earned during the periods indicated:
Three Months Ended September 30, (dollars in thousands) 2021 2020 Change Collaboration revenue:
AbbVie Collaboration Agreement
Ipsen Collaboration Agreement 803 - 803 n/m Dermelix Collaboration Agreement - 41 (41) (100) % Total collaboration revenue$ (3,677) $ 2,443 $ (6,120) (251) % Total revenue$ (3,677) $ 2,443 $ (6,120) (251) % Collaboration revenue was$(3.7) million during the three months endedSeptember 30, 2021 , reflecting a decrease of$6.1 million , or 251%, from collaboration revenue of$2.4 million for the three months endedSeptember 30, 2020 . The decrease in collaboration revenue of$6.1 million is mostly due to a decrease in revenue related to the AbbVie Collaboration Agreement of$6.9 million partially offset by revenue related to the Ipsen Collaboration Agreement of$0.8 million . 46
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As discussed further in Note 3,Collaborative Research and License Agreements, of the accompanying unaudited condensed consolidated financial statements, revenue recognized under the AbbVie Collaboration Agreement for the three months endedSeptember 30, 2021 reflects the cumulative catchup adjustment (reduction) of revenue of$(4.5) million in connection with the change in estimate that resulted from a change in workplan during the third quarter of 2021. We currently estimate significant additional efforts will be required to satisfy the performance obligation under the AbbVie Collaboration Agreement. These increased estimated efforts in connection with the change in workplan resulted in less progress occurring relative to the increased estimate of total project hours to complete the research services during the three and nine months endedSeptember 30, 2021 and compared to the amount of revenue recognized at bothJune 30, 2021 andDecember 31, 2020 , which led to revenue reversals in each respective period. As ofSeptember 30, 2021 , deferred revenue under the AbbVie Collaboration Agreement was$11.7 million and is expected to be recognized as revenue over the next 24 to 27 months as we satisfy our obligations under the AbbVie Collaboration Agreement. InAugust 2021 , we received an upfront payment of$20.0 million in connection with the Ipsen Collaboration Agreement for which revenue has been deferred and will be recognized as revenue in future periods as we satisfy our obligations under the Ipsen Collaboration Agreement. AtSeptember 30, 2021 , deferred revenue under the Ipsen Collaboration Agreement was$19.2 million and is expected to be recognized as revenue over the next 33 to 42 months as we satisfy our obligations under the Ipsen Collaboration Agreement. Refer to Note 3,Collaborative Research and License Agreements, of the accompanying unaudited condensed consolidated financial statements for more information regarding revenue recognition for the AbbVie Collaboration Agreement and Ipsen Collaboration Agreement. We do not expect to generate any product revenue for the foreseeable future. However, future revenue may include amounts attributable to partnership activities including, a combination of research and development payments, license fees and other upfront payments, milestone payments, product sales and royalties, and reimbursement of certain research and development expenses, in connection with the AbbVie Collaboration Agreement, the Ipsen Collaboration Agreement, the Dermelix Collaboration Agreement or any future collaboration and licenses. Research and development expense The following table summarizes our research and development expenses incurred during the periods indicated: Three Months Ended September 30, (dollars in thousands) 2021 2020
Change
Clinical development programs expense$ 6,394 $ 2,173 $ 4,221 194 % Platform and discovery-related expense 5,636 4,055 1,581 39 % Employee-related expense 3,432 2,112 1,320 63 % Facilities, depreciation, and other expenses 995 799 196 25 % Total research and development expense$ 16,457 $ 9,139 $ 7,318 80 % Full time employees 65 48 17 Research and development expense was$16.5 million for the three months endedSeptember 30, 2021 , reflecting an increase of$7.3 million , or 80%, from research and development expense of$9.1 million for the three months endedSeptember 30, 2020 . SinceSeptember 30, 2020 , we have increased our headcount in research and development from 48 to 65 as ofSeptember 30, 2021 . The increase in research and development expense for the three months endedSeptember 30, 2021 of$7.3 million reflects this increased headcount and the related increase in research and development activities, to include increased clinical trial activities. More specifically, the increase in research and development expense for the three months endedSeptember 30, 2021 of$7.3 million was primarily due to a net increase in costs related to our clinical development programs of$4.2 million , higher platform and discovery-related expense of$1.6 million , and higher employee-related expenses of$1.3 million . 47
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The net increase in clinical development programs expense for the three months endedSeptember 30, 2021 of$4.2 million was primarily due to manufacturing and toxicology study costs in connection with IND-enabling and Phase 1 clinical trial preparation activities for XCUR-FXN, in addition to higher clinical trial costs in connection with our Phase 1b/2 clinical trial for cavrotolimod (AST-008), partially offset by lower manufacturing costs for cavrotolimod (AST-008). The increase in platform and discovery-related expense of$1.6 million was mostly due to the license fee paid toNorthwestern University of$3.0 million in connection with the receipt of the upfront payment of$20.0 million from Ipsen, partially offset by lower costs for materials, reagents, supplies, and contract research organizations. The increase in employee-related expense for the three months endedSeptember 30, 2021 of$1.3 million was due to higher compensation and related costs in connection with the net increase in headcount during the period presented as well as certain salary increases in 2021 for existing employees. We expect our research and development expenses to continue to increase during 2021 as compared to 2020 as we broaden our pipeline of SNA-based therapeutic candidates, continue investment into our clinical development programs, and further develop our SNA technology platform. General and administrative expense Three Months Ended September 30, (dollars in thousands) 2021 2020
Change
General and administrative expense
12 9 3 General and administrative expense was$2.9 million for the three months endedSeptember 30, 2021 , representing an increase of$0.5 million , or 22%, from$2.4 million for the three months endedSeptember 30, 2020 . The increase for the three months endedSeptember 30, 2021 was mostly due to higher compensation and related costs in connection with salary increases in 2021 and an increase in headcount, as well as higher legal costs. Interest income The decrease in interest income of$0.2 million for the three months endedSeptember 30, 2021 was primarily the result of lower average balances invested in available for sale securities during the three months endedSeptember 30, 2021 as compared to the prior-year period. Interest expense The increase in interest expense of$0.4 million for the three months endedSeptember 30, 2021 was the result of a higher average debt balance during the three months endedSeptember 30, 2021 as compared to the prior-year period. 48
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Comparison of the Nine Months Ended
Nine Months Ended September 30, (dollars in thousands) 2021 2020 Change Revenue: Collaboration revenue$ (2,601) $ 16,473 $ (19,074) (116) % Total revenue (2,601) 16,473 (19,074) (116) % Operating expenses: Research and development expense 37,562 22,222
15,340 69 %
General and administrative expense 8,937 7,227 1,710 24 % Total operating expenses 46,499 29,449 17,050 58 % Operating loss (49,100) (12,976) (36,124) 278 % Other (expense) income, net: Dividend income 5 45 (40) (89) % Interest income 139 832 (693) (83) % Interest expense (1,314) (155) (1,159) 748 %
Other (expense) income, net (7) 271 (278) n/m Total other (expense) income, net (1,177) 993
(2,170) (219) %
Net loss before provision for income taxes (50,277) (11,983)
(38,294) 320 % Provision for income taxes - - - - % Net loss$ (50,277) $ (11,983) $ (38,294) 320 % Revenue
The following table summarizes our revenue earned during the periods indicated:
Nine Months Ended September 30, (dollars in thousands) 2021 2020 Change Collaboration revenue:
AbbVie Collaboration Agreement
Ipsen Collaboration Agreement 803 - 803 n/m Dermelix Collaboration Agreement - 122 (122) (100) % Total collaboration revenue$ (2,601) $ 16,473 $ (19,074) (116) % Total revenue$ (2,601) $ 16,473 $ (19,074) (116) % Collaboration revenue was$(2.6) million during the nine months endedSeptember 30, 2021 , reflecting a decrease of$19.1 million , or 116%, from collaboration revenue of$16.5 million for the nine months endedSeptember 30, 2020 . The decrease in collaboration revenue of$19.1 million was mostly due to a decrease in revenue related to the AbbVie Collaboration Agreement of$19.8 million partially offset by revenue related to the Ipsen Collaboration Agreement of$0.8 million . As discussed further above in the section titled "Comparison of the Three Months EndedSeptember 30, 2021 and 2020," revenue related to the AbbVie Collaboration Agreement for 49
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the nine months endedSeptember 30, 2021 reflects the cumulative catchup adjustment (reduction) of revenue of$(4.5) million in connection with the change in estimate during the third quarter of 2021. Refer to Note 3,Collaborative Research and License Agreements, of the accompanying unaudited condensed consolidated financial statements for more information regarding revenue recognition for the AbbVie Collaboration Agreement and Ipsen Collaboration Agreement. We do not expect to generate any product revenue for the foreseeable future. However, future revenue may include amounts attributable to partnership activities including, a combination of research and development payments, license fees and other upfront payments, milestone payments, product sales and royalties, and reimbursement of certain research and development expenses, in connection with the AbbVie Collaboration Agreement, the Ipsen Collaboration Agreement, the Dermelix Collaboration Agreement or any future collaboration and licenses. Research and development expense The following table summarizes our research and development expenses incurred during the periods indicated: Nine Months Ended September 30, (dollars in thousands) 2021 2020
Change
Clinical development programs expense$ 13,199 $ 5,438 $ 7,761 143 % Platform and discovery-related expense 11,922 9,620 2,302 24 % Employee-related expense 9,392 5,379 4,013 75 % Facilities, depreciation, and other expenses 3,049 1,785 1,264 71 % Total research and development expense$ 37,562 $ 22,222 $ 15,340 69 % Full time employees 65 48 17 Research and development expense was$37.6 million for the nine months endedSeptember 30, 2021 , reflecting an increase of$15.3 million , or 69%, from research and development expense of$22.2 million for the nine months endedSeptember 30, 2020 . SinceSeptember 30, 2020 , we have increased our headcount in research and development from 48 to 65 atSeptember 30, 2021 . The increase in research and development expense for the nine months endedSeptember 30, 2021 of$15.3 million reflects this increased headcount and the related increase in research and development activities, to include increased clinical trial activities. More specifically, the increase in research and development expense for the nine months endedSeptember 30, 2021 of$15.3 million was primarily due to a net increase in costs related to our clinical development programs of$7.8 million , higher employee-related expenses of$4.0 million , higher platform and discovery-related expense of$2.3 million , and higher facilities, depreciation, and other expenses of$1.3 million . The net increase in clinical development programs expense for the nine months endedSeptember 30, 2021 of$7.8 million was primarily due to manufacturing and toxicology study costs in connection with IND-enabling and Phase 1 clinical trial preparation activities for XCUR-FXN, in addition to higher clinical trial costs in connection with our Phase 1b/2 clinical trial for cavrotolimod (AST-008), partially offset by lower manufacturing costs for cavrotolimod (AST-008). The increase in platform and discovery-related expense of$2.3 million was mostly due to the license fee paid toNorthwestern University of$3.0 million in connection with the receipt of the upfront payment of$20.0 million from Ipsen, partially offset by lower costs for materials and reagents. The increase in employee-related expense for the nine months endedSeptember 30, 2021 of$4.0 million was due to higher compensation and related costs in connection with the net increase in headcount during the period presented as well as certain salary increases in 2021 for existing employees. 50
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The increase in facilities, depreciation, and other expenses for the nine months endedSeptember 30, 2021 of$1.3 million was mostly due to higher lease costs related to ourChicago lease that commenced onJuly 1, 2020 as well as higher depreciation expense in connection with the acquisition of additional scientific equipment that were placed in service since the prior-year period. We expect our research and development expenses to continue to increase during 2021 as compared to 2020 as we broaden our pipeline of SNA-based therapeutic candidates, continue investment into our clinical development programs, and further develop our SNA technology platform. General and administrative expense Nine Months Ended September 30, (dollars in thousands) 2021 2020
Change
General and administrative expense
24 % Full time employees 12 9 3 General and administrative expense was$8.9 million for the nine months endedSeptember 30, 2021 , representing an increase of$1.7 million , or 24%, from$7.2 million for the nine months endedSeptember 30, 2020 . The increase for the nine months endedSeptember 30, 2021 is mostly due to higher compensation and related costs mostly due to salary increases in 2021 and an increase in headcount, recruiting costs, higher consulting and legal costs, and higher D&O insurance premium costs. This increase was partially offset by lower investor relations and franchise tax costs. Interest income The decrease in interest income of$0.7 million for the nine months endedSeptember 30, 2021 was primarily the result of lower average balances invested in available for sale securities during the nine months endedSeptember 30, 2021 as compared to the prior-year period. Interest expense The increase in interest expense of$1.2 million for the nine months endedSeptember 30, 2021 was the result of a higher average debt balance during the nine months endedSeptember 30, 2021 as compared to the prior-year period. Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. We have generated limited revenue to date from our collaboration agreements. We have not yet commercialized any of our product candidates, which are in various phases of preclinical development and clinical trials; and we do not expect to generate revenue from sales of any product for several years, if at all. We have funded our operations to date with proceeds received from equity financings and payments received in connection with collaboration agreements. As ofSeptember 30, 2021 , our cash, cash equivalents, short-term investments, and restricted cash were$62.0 million . As ofSeptember 30, 2021 , we have generated an accumulated deficit of$175.1 million since inception and expect to incur significant expenses and negative cash flows for the foreseeable future. Based on our current operating plans and existing working capital atSeptember 30, 2021 , it is uncertain whether our current liquidity is sufficient to fund operations over the next twelve months from the date of the issuance of the accompanying condensed consolidated financial statements. As a result, there is substantial doubt about our ability to continue as a going concern. We have no committed sources of additional capital at this time and substantial additional financing will be needed by us to fund our operations. Management believes that we will be able to obtain additional funding through equity or debt financings, collaboration agreements, strategic partnerships and licensing arrangements, or other arrangements, such as our "at the market offering" program pursuant to our equity distribution agreement withBMO Capital Markets Corp. , or BMO, to fund our current operations and business strategy. However, there can be no assurance that such additional financing will be available and, if available, can be obtained on terms acceptable to 51
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us. If we are unable to obtain such additional financing, we could be forced to delay, reduce or eliminate its research and development programs or clinical efforts, which could adversely affect its business prospects, or we may be unable to continue operations. We have historically principally raised capital through the sale of our securities. However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption continues to persist and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our ability to raise capital and ultimately, our operations. MidCap Facility OnSeptember 30, 2021 , we entered into an amendment, or Amendment No. 3, to our Credit and Security Agreement, dated as ofSeptember 25, 2020 , as amended onOctober 21, 2020 andJuly 30, 2021 , withMidCap Financial Trust , as agent, or MidCap, and the lenders party thereto from time to time, or as amended by Amendment No. 3, the MidCap Credit Agreement. The MidCap Credit Agreement provides for a secured term loan facility in an aggregate principal amount of up to$25.0 million , or the MidCap Credit Facility. We borrowed the first advance of$17.5 million , or Tranche 1, onSeptember 25, 2020 , or the Closing Date. Amendment No. 3 extends the availability of the second advance of$7.5 million , or Tranche 2, under the MidCap Credit Agreement fromSeptember 30, 2021 toDecember 31, 2021 , subject to our satisfaction of certain applicable funding conditions as described in Amendment No. 3, including our issuance of equity interests, subject to certain limitations, resulting in receipt by us of unrestricted net cash proceeds of at least$20.0 million , and the contribution by us, and receipt byExicure Operating Company , of such cash proceeds to the capital ofExicure Operating Company . Tranche 1 and if borrowed, Tranche 2, each bear 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 is payable in 36 equal monthly installments beginningOctober 1, 2022 until paid in full onOctober 1, 2025 , or the Maturity Date. Prepayments of the loans under the MidCap Credit Agreement, in whole or in part, will be 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. In connection with execution of the MidCap Credit Agreement, we paid MidCap a$125,000 origination fee. At the Maturity Date or on any earlier date on which all amounts advanced to us become due and payable in full, or are otherwise paid in full, we are required to pay an exit fee equal to 3.75% of the principal amount of all loans advanced to us under the MidCap Credit Agreement. Our obligations under the MidCap Credit Agreement are secured by a security interest in substantially all of our assets, excluding intellectual property (which is subject to a negative pledge). Additionally, our future subsidiaries, if any, may be required to become co-borrowers or guarantors under the MidCap Credit Agreement. The MidCap Credit Agreement contains customary affirmative covenants and customary negative covenants limiting our ability and the ability of our 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 contains customary events of default relating to, among other things, payment defaults, breaches of covenants, a material adverse change, delisting of our 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 our outstanding obligations to be immediately due and payable and exercise other rights and remedies provided for under the MidCap Credit Agreement. During the existence of an event of default, interest on the obligations could be increased by 2.0%. 52
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At-the-Market Facility Program InDecember 2020 , we entered into an equity distribution agreement with BMO under which we may offer and sell in "at the market offerings" (as defined in Rule 415(a)(4) of the Securities Act of 1933, as amended) from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to$50.0 million through BMO acting as our distribution agent pursuant to a prospectus supplement and a shelf registration statement on Form S-3 that was declared effective by theSEC onJanuary 7, 2021 . ThroughSeptember 30, 2021 , we have not sold any shares under the equity distribution agreement. Cash Flows The following table shows a summary of our cash flows for the nine months endedSeptember 30, 2021 and 2020: Nine Months Ended September 30, (in thousands) 2021 2020 (unaudited) Net cash used in operating activities$ (21,022) $ (27,463) Net cash provided by (used in) investing activities 38,977 (3,330) Net cash provided by financing activities 668 14,992 Net increase (decrease) in cash, cash equivalents, and restricted cash$ 18,623 $ (15,801) Operating activities Net cash used in operating activities was$21.0 million and$27.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The decrease in cash used in operating activities for the nine months endedSeptember 30, 2021 of$6.4 million was primarily due to the receipt of the upfront payment of$20.0 million from Ipsen in connection with the Ipsen Collaboration Agreement, partially offset by higher cash used for working capital and the license fee paid toNorthwestern University of$3.0 million in connection with receipt of the Ipsen Upfront Payment. Investing activities Net cash provided by (used in) investing activities was$39.0 million and$(3.3) million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in cash provided by investing activities of$42.3 million was primarily due to higher proceeds from the maturity, net of purchases, of available-for-sale securities, as well as a decrease in the purchase of scientific equipment of$2.5 million . Financing activities Net cash provided by financing activities of$0.7 million for nine months endedSeptember 30, 2021 is due to the proceeds received from the exercise of stock options and the issuance of common stock in connection with our employee stock purchase plan. Net cash provided by financing activities of$15.0 million for the nine months endedSeptember 30, 2020 was mostly due to the net proceeds we received of$17.3 million during the period in connection with the MidCap Credit Agreement (as discussed above), as well as the net proceeds received from the sale of shares of our common stock in the amount of$2.8 million pursuant to the partial exercise of the option to purchase additional shares by the underwriters from ourDecember 2019 financing, partially offset by the repayment of the remaining outstanding obligations under the Hercules Loan Agreement in the amount of$5.0 million upon the loan's maturity. 53
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Funding Requirements We expect that our primary uses of capital will continue to be third-party clinical and research and development services, compensation and related expenses, laboratory and related supplies, legal and other regulatory expenses and general overhead costs. Because of the numerous risks and uncertainties associated with research, development and commercialization of therapeutic candidates, we are unable to estimate the exact amount of our working capital requirements. Our future capital requirements are difficult to forecast and will depend on many factors, including: •the terms and timing of any other collaboration, licensing and other arrangements that we may establish; •the initiation, progress, timing and completion of preclinical studies and clinical trials for our potential therapeutic candidates; •the effects of health epidemics, including the ongoing COVID-19 pandemic, on our operations or the business or operations of our contract research organizations, or CROs, or other third parties with whom we conduct business; •the number and characteristics of therapeutic candidates that we pursue; •the progress, costs and results of our preclinical studies and clinical trials; •the outcome, timing and cost of regulatory approvals; •delays that may be caused by changing regulatory requirements; •the cost and timing of hiring new employees to support our continued growth; •unknown legal, administrative, regulatory, accounting, and information technology costs as well as additional costs associated with operating as a public company; •the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims; •the costs of filing and prosecuting intellectual property rights and enforcing and defending any intellectual property-related claims; •the costs and timing of procuring clinical and commercial supplies of our therapeutic candidates; •the extent to which we acquire or in-license other therapeutic candidates and technologies; and •the extent to which we acquire or invest in other businesses, therapeutic candidates or technologies. Based on our current operating plans and existing working capital atSeptember 30, 2021 , it is uncertain whether our current liquidity is sufficient to fund operations over the next twelve months from the date of the issuance of the accompanying condensed consolidated financial statements. As a result, there is substantial doubt about our ability to continue as a going concern. We have no committed sources of additional capital at this time and substantial additional financing will be needed by us to fund our operations. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect. 54
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Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third parties. The COVID-19 pandemic continues to evolve and has resulted in a significant disruption of global financial markets. If the disruption continues to persist and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our operations. To the extent that we raise additional capital through future equity financings, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, reduce or eliminate our product development efforts or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Contractual Obligations and Commitments There have been no material changes to our contractual obligations and commitments from those described in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Off-balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theSEC . JOBS Act We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. In addition, as an emerging growth company, we will not be required to provide an auditor's attestation report on our internal control over financial reporting in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Our compliance with Section 404 of the Sarbanes-Oxley Act first became subject to management's assessment regarding internal control over financial reporting in connection with the filing of our Annual Report on Form 10-K for the fiscal year endingDecember 31, 2018 , and we will not be required to have an independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting until the filing of our first Annual Report on Form 10-K after we lose emerging growth company status, which may not be until the 2023 Annual Report on Form 10-K. In addition, we are also a smaller reporting company as defined in the Securities Exchange Act of 1934, as amended, or Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by non-affiliates is less than$250.0 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than$100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than$700.0 million measured on the last business day of our second fiscal quarter. 55
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