Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in "Item 8. Financial Statements and Supplementary Data." in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve substantial risks and uncertainties. As a result of many factors, including those factors set forth in Part I, Item 1A. "Risk Factors" of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. For further information regarding our forward-looking statements, see "Cautionary Note Regarding Forward-Looking Statements" in this Annual Report on Form 10-K.

Overview

We are a clinical-stage biotechnology company committed to developing potential best-in-class therapeutics that address significant unmet need for patients living with immune-mediated diseases. We have built our pipeline by strategically acquiring or in-licensing product candidates that we believe have clear biological rationale, well-defined development pathways, and the potential to address multiple indications.

We are developing our product candidates for multiple immune-mediated diseases, as summarized in the pipeline figure below.

We acquired the rights to our product candidates through license and asset purchase agreements. We have worldwide rights to develop and commercialize budoprutug for all indications, except for oncology. We have rights to develop and commercialize CLYM116 for all indications worldwide outside of Greater China.

Since our inception, we have primarily funded our operations with proceeds from the sale and issuance of shares of our redeemable convertible preferred stock, our IPO, and the sale and issuance of shares in a Private Placement in connection with the Acquisition. We do not have any products approved for sale and have not generated any revenue from product sales since our inception. Our ability to generate product revenue will depend on the successful development, regulatory approval and eventual commercialization of one or more of our product candidates, if approved. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities. We expect to continue to incur operating losses for the foreseeable future and will need to raise substantial additional capital in the future. Until such time, if ever, as we can generate significant revenue from product sales, we may finance our operations through equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. Adequate funding may not be available when needed or on terms acceptable to us, or at all.

If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Our ability to raise additional funds may be adversely impacted by the potential worsening of global economic conditions and the recent disruptions to, and volatility in, worldwide credit and financial markets, resulting from increased volatility in the trading prices for shares in the biopharmaceutical industry, or otherwise. Further, imposition of tariffs and other trade restrictions by the U.S., as well as reciprocal trade restrictions imposed by other countries, could adversely affect global economies, financial markets and the overall environment in which we do business, as further described in Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K.

Based on our current operating plan, we estimate that our cash, cash equivalents and marketable securities will be sufficient to fund our planned operations into 2028. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently anticipate, in which case we would be required to obtain additional financing, which may not be available to us on acceptable terms, or at all. See "-Liquidity and Capital Resources".

Components of Operating Results

Operating Expenses

Our operating expenses consist of (i) research and development expenses, (ii) acquired in-process research and development (IPR&D) expense, related party, and (iii) general and administrative expenses.

Research and Development

Research and development expenses consist of costs incurred for our research and development activities, including development of our product candidates, budoprutug and CLYM116, and our previous product candidates, ETX-123 and ETX-155, consisting primarily of the following:

We expense research and development costs to operations as incurred. Advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.

Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to CDMOs, CROs, consultants and contractors, in connection with our nonclinical and clinical development activities. We do not allocate employee costs, costs associated with facility expenses, or other indirect costs, to specific programs because these costs are deployed across multiple product development programs and, as such, are not separately classified.

We expect our research and development expenses to increase substantially for the foreseeable future as we conduct our ongoing research and development activities. The process of conducting nonclinical studies, acquiring drug product supply, and conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for budoprutug, CLYM116, or any product candidate we may develop.

The timelines and costs associated with research and development activities are uncertain and can vary significantly among product candidates and development programs due to the inherently unpredictable nature of nonclinical and clinical development. We anticipate that we will make determinations as to which indications to pursue in connection with our clinical development of budoprutug, CLYM116, or any product candidates we may develop and how much funding to direct to each such indication on an ongoing basis in response to nonclinical and clinical results, regulatory developments, and ongoing assessments as to each such indication's commercial potential. Our future research and development costs may vary significantly and differ materially from expectations, and a change in the outcome of variables with respect to the development of budoprutug, CLYM116, or any product candidates we may develop could significantly change the costs and timing associated with such development. See the section titled "Risk Factors-Risks Related to our Financial Position and Need for Additional Capital."

Acquired In-Process Research and Development, Related Party

Our acquired IPR&D expense consists of the fair value of consideration transferred in the Acquisition allocated to assets acquired that were in the research and development phase and determined to not have any alternative future use.

General and Administrative

Our general and administrative expenses consist primarily of personnel-related expenses such as salaries, bonuses, benefits, stock-based compensation, and termination benefits, for our personnel in executive, finance and accounting, legal, human resources, business development, information technology and other administrative functions. Other significant general and administrative expenses include legal fees relating to corporate matters and intellectual property, professional fees for accounting, audit, regulatory, tax and consulting services, insurance costs, as well as investor and public relations costs.

We expect that our general and administrative expenses will increase for the foreseeable future, including increases in headcount as we continue to support our growth strategy and, if any product candidates receive marketing approval, commercialization activities, as well as to support our operations generally.

Other Income (Expense)

Interest Income

Our interest income consists of interest earned on our cash, cash equivalents and marketable securities, including amortization of purchase premiums and accretion of discounts of marketable securities.

Foreign Currency Loss

Our foreign currency loss consists of foreign exchange losses resulting from remeasurement of foreign currency transactions to the U.S. Dollar.

Results of Operations

The following table sets forth our results of operations (in thousands):

Comparison of the Years Ended December 31, 2025 and 2024

Operating Expenses

Research and Development

The following table sets forth our research and development expenses (in thousands):

Research and development expenses increased from $14.3 million for the year ended December 31, 2024 to $46.7 million for the year ended December 31, 2025. The increase was due primarily to an increase of $19.1 million for our budoprutug program, which we acquired as part of the Acquisition on June 27, 2024. Costs incurred for our budoprutug program increased primarily due to costs related to the advancement of our clinical trials of budoprutug in pMN, ITP and SLE, and increased manufacturing costs, and milestone payments under our license agreements. Costs related to our CLYM116 program, which we licensed in January 2025, were $12.0 million, consisting of an upfront payment of $9.0 million under the Mabworks Agreement, milestone payments under our license agreements, and nonclinical, clinical, and manufacturing costs. Personnel-related expenses increased by $0.2 million due primarily to increased headcount and stock-based compensation expense, partially offset by a decrease due to prior year restructuring costs. Research and development expenses for the years ended December 31, 2025 and 2024 included stock-based compensation expense of $3.5 million and $3.0 million, respectively. Other research and development expenses increased by $1.2 million primarily due to an increase in consulting expenses to support our programs.

Acquired In-Process Research and Development, Related Party

Acquired IPR&D expense, related party was $51.7 million for the year ended December 31, 2024. This amount represents the recognition of IPR&D expense from the Acquisition completed on June 27, 2024.

General and Administrative

General and administrative expenses increased from $16.0 million for the year ended December 31, 2024 to $21.2 million for the year ended December 31, 2025. The increase was primarily due to an increase in personnel-related expenses of $3.3 million from increased headcount and stock-based compensation expense. General and administrative expenses for the years ended December 31, 2025 and 2024 included stock-based compensation expense of $4.6 million and $2.5 million, respectively. Legal expenses also increased by $1.0 million.

Other Income (Expense)

Interest Income

Interest income increased from $8.1 million for the year ended December 31, 2024 to $8.3 million for the year ended December 31, 2025 due to higher invested balances, partially offset by lower yields during 2025 as compared to 2024.

Foreign Currency Loss

Foreign currency loss for the year ended December 31, 2025 consisted of the remeasurement of transactions denominated in a foreign currency. Foreign currency loss was not material for the year ended December 31, 2024.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have primarily funded our operations with proceeds from the sale and issuance of shares of our redeemable convertible preferred stock, our IPO, and the sale and issuance of shares of our common stock in the Private Placement in connection with the Acquisition. We have not generated any revenue from product sales or otherwise. We have incurred net losses from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. As of December 31, 2025, we had cash, cash equivalents and marketable securities of $160.7 million.

In March 2025, we entered into an Equity Distribution Agreement (the Distribution Agreement) with Oppenheimer & Co. Inc., as agent (Oppenheimer), pursuant to which we may offer and sell shares of our common stock from time to time through Oppenheimer having an aggregate offering price of up to $22.4 million in an at the market offering. During the year ended December 31, 2025, we did not issue and sell any shares of our common stock pursuant to the Distribution Agreement.

Cash Flows

The following table sets forth our cash flows (in thousands):

Operating activities

For the year ended December 31, 2025, net cash used in operating activities was $54.4 million, resulting from our net loss of $59.9 million and cash used by changes in our operating assets and liabilities of $0.6 million, partially offset by $6.1 million in non-cash charges. Cash used by changes in our operating assets and liabilities primarily consisted of an increase in other long-term assets of $1.5 million and an increase in prepaid expenses and other current assets of $0.8 million, partially offset by an increase in accounts payable and accrued expenses and other current liabilities of $1.9 million.

For the year ended December 31, 2024, net cash used in operating activities was $15.6 million, resulting from our net loss of $73.9 million, partially offset by $56.6 million in non-cash charges, which consisted primarily of our IPR&D charge of $51.7 million, and cash provided by changes in our operating assets and liabilities of $1.7 million. Cash provided by changes in our operating assets and liabilities primarily consisted of a decrease in prepaid expenses and other current assets of $1.9 million.

Changes in prepaid expenses and other current assets, other assets, accounts payable, and accrued expenses and other current liabilities were generally due to the advancement of our research and development programs and the timing of vendor invoicing and payments.

Investing activities

For the year ended December 31, 2025, net cash provided by investing activities was $2.8 million consisting primarily of $111.1 million in proceeds received from maturities of marketable securities, partially offset by purchases of $108.1 million of marketable securities.

For the year ended December 31, 2024, net cash used by investing activities was $121.1 million, consisting primarily of purchases of $132.2 million of marketable securities, the issuance of a promissory loan of $5.0 million and cash paid of $4.6 million in connection with the Acquisition, partially offset by $20.8 million in proceeds received from maturities of marketable securities.

Financing activities

For the year ended December 31, 2025, net cash used by financing activities was less than $0.1 million, consisting of pre-funded warrant issuance costs, partially offset by $0.1 million in proceeds from exercises of stock options. On December 11, 2025, we entered into the Exchange Agreement, pursuant to which the Exchanging Holder exchanged an aggregate of 20,440,000 shares of our common stock beneficially owned by the Exchanging Holder for a pre-funded warrant to purchase the same number of shares of common stock at an exercise price of $0.0001 per share. The exchange of common stock for the pre-funded warrant did not impact cash (See Note 6 to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the Exchange Agreement).

For the year ended December 31, 2024, net cash provided by financing activities was $130.7 million, consisting of $119.7 million in proceeds received from the issuance of our common stock in the Private Placement in connection with the Acquisition and $11.0 million in proceeds from exercises of stock options.

Funding Requirements

We believe our existing cash, cash equivalents and marketable securities of $160.7 million as of December 31, 2025 will be sufficient to fund our operations into 2028. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We anticipate that our expenses will increase for the foreseeable future as we continue to advance our current product candidates and any product candidates we may develop, expand our corporate infrastructure, and incur costs associated with potential commercialization.

We are subject to all of the risks typically related to the development of biopharmaceutical candidates, and we may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors that may adversely affect our business. Our future funding requirements will depend on many factors, including the following:

Furthermore, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development expenditures. Until such time, if ever, as we can generate substantial revenue from product sales, we may finance our operations through equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed or on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders.

Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or our product candidates or grant licenses on terms that may not be favorable to us and may reduce the value of our common stock. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts, or grant rights to develop and market budoprutug, CLYM116, or any product candidates we may develop even if we would otherwise prefer to develop and market suchproduct candidates ourselves.

Contractual Commitments and Obligations

In the normal course of business, we enter into contracts with CROs, CDMOs, and other third parties for nonclinical studies and clinical trials, supply of materials and manufacturing services. These contracts do not contain material minimum purchase commitments and generally provide us with the option to cancel, reschedule and adjust our requirements based on our business needs, prior to the delivery of goods or performance of services. However, it is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each agreement.

We have a lease agreement, as amended, for office space in Wellesley Hills, Massachusetts with remaining fixed payments of $0.3 million through December 2026, with an option to extend the lease through December 2027 for additional fixed payments of $0.3 million.

We have obligations under the Asset Purchase Agreement with Acelyrin with respect to Products (as defined in the Asset Purchase Agreement) and certain license agreements that may obligate us to make specified milestone and royalty payments. The payment obligations under these agreements are contingent upon future events, such as our achievement of specified development, regulatory and commercial milestones, or generating product sales. We are unable to estimate the timing or likelihood of achieving these milestones or generating future product sales. See Note 8 to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of these milestone and royalty obligations.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 to our audited consolidated financial statements, appearing in Part II of Item 8 of this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate certain research and development expenses. This process involves estimating the level of services performed and the associated cost incurred for services when we have not yet been invoiced or otherwise notified of actual costs, or when payments for such activities differ from the pattern of costs incurred. We make estimates of our accrued expenses or prepaid expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of certain estimates with the service providers. Examples of estimated accrued research and development expenses include those related to fees paid to:

We base the expense recorded on our estimates of the services received and efforts expended pursuant to quotes and contracts with our vendors, CROs and CDMOs that conduct services and supply materials. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. In recording service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. Certain of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; while others require advance payments. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. We record these as prepaid expenses on our consolidated balance sheet. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.

Stock-Based Compensation

We measure our stock options with service-based vesting or performance-based vesting granted to employees, non-employee directors, consultants and independent advisors based on the estimated fair value on the date of grant using the Black-Scholes option-pricing model. We measure compensation expense for restricted common stock units based on the fair value on the date of grant using the market value of our common stock. Compensation expense for the awards is recognized over the requisite service period for employees and directors and as services are delivered for consultants and independent advisors, both of which are generally the vesting period of the respective award. We use the straight-line method to record the expense of awards with only service-based vesting conditions. We use the graded-vesting method to record the expense of awards with both service-based and performance-based vesting conditions, commencing once achievement of the performance condition becomes probable. The Black-Scholes option-pricing model uses as inputs assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. We do not estimate and apply a forfeiture rate as we have elected to account for forfeitures of share-based awards as they occur.

Recently Issued Accounting Pronouncements Not Yet Adopted

See Note 2 to our audited consolidated financial statements, appearing in Part II of Item 8 of this Annual Report on Form 10-K.

Internal Controls over Financial Reporting

In connection with the preparation of our consolidated financial statements for the year ended December 31, 2020, we identified material weaknesses in our internal control over financial reporting, two of which remain unremediated as of December 31, 2025. The material weaknesses, and our remediation plan, are disclosed in Part II of Item 9A of this Annual Report on Form 10-K.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued after the enactment of the JOBS Act until those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years audited consolidated financial statements in a registration statement for an IPO, an exemption from the requirement to provide an auditor's report on internal controls over financial reporting pursuant to the Sarbanes-Oxley Act, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will cease to be an emerging growth company on December 31, 2026.