Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2024 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or the SEC, on March 31, 2025. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Quarterly Report on Form 10-Q, 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. You should carefully read the "Risk Factors" section of this Quarterly Report on Form 10-Q to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "we," "us" and "our" refer to Turnstone Biologics Corp.

Overview

We are a biotechnology company that was previously focused on developing new medicines to treat and cure patients with solid tumors through a differentiated approach to tumor infiltrating lymphocytes (TIL) therapy by selecting and expanding the most potent tumor-reactive T cells, which we refer to as Selected TILs for potential treatment across the majority of solid tumors. Our previous lead Selected TIL candidate, TIDAL-01, was being developed for the treatment of colorectal cancer, head and neck cancer, and uveal melanoma and two investigator sponsored trials with H. Lee Moffitt Cancer Center and Research Institute, Inc., or Moffitt, across colorectal cancer, head and neck cancer, and uveal melanoma.

Merger Agreement

On June 26, 2025, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with XOMA Royalty Corporation, a Nevada corporation, or XOMA, and XRA 3 Corp., a Delaware corporation and a wholly-owned subsidiary of XOMA, or the Merger Sub. The Merger Agreement provides for, among other things: (i) the acquisition of all of our outstanding shares of common stock, par value $0.001 per share common stock, by XOMA through a cash tender offer, or the Offer, by Merger Sub, for a price per share of common stock of (A) $0.34, or the Cash Amount, payable subject to any applicable tax withholding and without interest, plus (B) one contingent value right, or CVR, which shall represent the right to receive potential payments, in cash, payable subject to any applicable tax withholding and without interest (such amount being the "CVR Amount", and the Cash Amount plus the CVR Amount, collectively being the "Offer Price"); and (ii) the merger of Merger Sub with and into us, or the Merger, with us surviving the Merger.

Pursuant to the terms of the Merger Agreement, as of immediately prior to the effective time of the Merger, or the Effective Time, by virtue of the Merger and without any action on the part of the holders of common stock, each outstanding share of common stock will be converted into the right to receive the Offer Price. Each option to purchase shares of common stock will be cancelled and terminated for no consideration. The vesting for each restricted stock unit, or RSU, shall be accelerated and each RSU that is then outstanding will be cancelled and, in exchange therefor, the holder of such cancelled RSU will be entitled to receive in consideration of the cancellation of such RSU (A) an amount in cash without interest, less any applicable tax withholding, equal to the Cash Amount and (B) one CVR.

At or prior to the time at which XOMA first irrevocably accepts for purchase the shares of common stock tendered in the Offer, XOMA and Merger Sub expect to enter into a CVR Agreement with a rights agent and a representative, agent and attorney-in-fact of the holders of CVRs. Each CVR holder will be entitled to the right to receive, its portion of the amount equal to (i) up to an aggregate amount for all CVR holders of $1.1 million to the extent received by us as a result of contingent payments relating to tax receivables and a lease security deposit, plus (ii) Net Cash Excess (as defined in the CVR Agreement), and minus (iii) Net Cash Shortfall (as defined in the CVR Agreement), or the CVR Proceeds. In the event that any such CVR Proceeds are received after one year following the date of the closing of the Merger, holders of the CVRs will not receive any payment pursuant to the CVR Agreement.

The right to the contingent payments contemplated by the CVR Agreement is a contractual right only and will not be transferable, except in the limited circumstances specified in the CVR Agreement. The CVRs will not be evidenced by a certificate or any other instrument and will not be registered with the SEC. The CVRs will not have any voting or dividend rights and will not represent any equity or ownership interest in XOMA, any constituent corporation party to the Merger or any of their respective affiliates. No interest will accrue on any amounts payable on the CVRs to any holders.

If the Merger is consummated, our common stock will be delisted and will no longer be quoted on Nasdaq, our obligation to file periodic reports under the Securities Exchange Act of 1934, as amended, will be suspended and we will be privately held.

Reduction in Force and No Standalone Business Plan

We are reducing our workforce while also implementing cost-containment and cash conservation measures. We intend to retain all employees essential for supporting value-realization as part of our pursuit of the Merger. As of the date hereof, we have 2 employees.

After a thorough assessment of our assets, liabilities and financial condition, particularly considering our market capitalization and our workforce reductions executed in October 2024 through July 2025, our Board has concluded that we do not have a standalone business plan and our only plan in the absence of a sale or merger is to pursue a dissolution and liquidation.

Nasdaq Compliance

On September 27, 2024, we received a deficiency letter from the Nasdaq Listing Qualifications Department notifying us that we are not in compliance with Nasdaq Listing Rule 5450(a)(1), which requires us to maintain a minimum bid price of at least $1.00 per share for continued listing on The Nasdaq Global Select Market, or the Minimum Bid Requirement. Our failure to comply with the Minimum Bid Requirement was based on our common stock per share price being below the $1.00 threshold for a period of 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided an initial period of 180 calendar days, to regain compliance with the Minimum Bid Requirement.

On March 27, 2025, we received approval from the Listing Qualifications Department of Nasdaq to transfer the listing of the Company's common stock from the Nasdaq Global Market to the Nasdaq Capital Market, or the Approval. Our securities were transferred to the Nasdaq Capital Market at the opening of business on March 31, 2025. Our common stock will continue to trade under the symbol "TSBX." The Nasdaq Capital Market operates in substantially the same manner as the Nasdaq Global Market, but with less stringent listing requirements, although listed companies must meet certain financial requirements and comply with Nasdaq's corporate governance requirements.

In connection with the Approval, we were granted an additional 180-day grace period, or until September 22, 2025, to regain compliance with the Minimum Bid Price Requirement. To regain compliance with the Minimum Bid Price Requirement and qualify for continued listing on the Nasdaq Capital Market, the minimum bid price per share of our common stock must be at least $1.00 for at least ten consecutive business days during the additional 180-day grace period. If we do not regain compliance during this additional grace period, its common stock would be subject to delisting by Nasdaq. As part of its transfer application, we notified Nasdaq that in order to regain compliance with the Minimum Bid Price Requirement during the additional grace period, we will implement a reverse stock split, and have filed a proxy statement soliciting a stockholder vote on such reverse stock split. If our stock becomes subject to delisting as a result of our failure to regain compliance with the Minimum Bid Price Requirement by September 22, 2025, we may appeal the decision to a Nasdaq Hearings Panel. In the event of an appeal, our common stock would remain listed on the Nasdaq Capital Market pending a written decision by the Nasdaq Hearings Panel following a hearing. In the event that the Nasdaq Hearings Panel determines not to continue our listing and our common stock is delisted from The Nasdaq Capital Market, our common stock may trade on the OTC Bulletin Board or other small trading markets, such as the pink sheets.

Collaboration Agreements

Below is a summary of the key terms for certain of our collaboration agreements. For a more detailed description of our collaboration agreements, see Note 6 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Moffitt Collaboration Agreements

Master Collaboration Agreement

In January 2021, we entered into an amended and restated master collaboration agreement, or the Moffitt Agreement, with Moffitt, to amend a then-existing master collaboration agreement from November 2019, as amended March 2020, between Moffitt and our now wholly-owned subsidiary, Myst Therapeutics LLC, with the intent to continue to work collaboratively in the research of cancer immunotherapies.

Moffitt granted us (1) a royalty-free, sublicensable, non-transferable, perpetual, non-exclusive license to use and practice certain inventions invented solely by Moffitt in the performance of a research plan or through use of any data generated thereunder, or Moffitt Inventions, (a) for internal, non-commercial research purposes outside the field of adoptive cell therapy and/or (b) to research, develop, make, use, sell, offer to sell, or import products and/or services in the field of adoptive cell therapy and (2) a royalty free, sublicensable, non-transferable, perpetual, non-exclusive license to use and practice certain inventions invented in performance of a

research plan or through the use of Moffitt research materials, which are (i) specifically directed to the identity of melanoma-specific T cell receptors, (ii) invented during the collaboration term or within one year after the end of the collaboration term within the field of adoptive cell therapy, and (iii) invented solely by either parties' employees or by both parties' employees jointly, to research, develop, make, use, sell, offer to sell, or import products and/or services for cancer immunotherapy involving identifying relevant tumor reactive T cells from TILs.

The Moffitt Agreement expired in January 2025, which was four years from the effective date of the Moffitt Agreement. All activity being performed under the Moffitt Agreement has been transferred to the Alliance Agreement (as defined below).

Moffitt Alliance Agreement

In June 2022, we entered into a life science alliance agreement with Moffitt, or the Alliance Agreement, in order to further expand our relationship and support our existing agreements with Moffitt, or the Underlying Agreements. Pursuant to the Alliance Agreement, we will have priority access to Moffitt's scientific research, manufacturing, and clinical capabilities for the development of novel TIL therapies, including expedited clinical trial activation, enhanced patient screening and data sharing, access to Moffitt's cellular therapies research and development infrastructure, expanded molecular data sets and biospecimens for research, and allocated cGMP manufacturing capacity for our product candidates.

Under the Alliance Agreement, we are obligated to use commercially reasonable efforts to further develop TIL Products (as defined below), to manufacture TIL Products, to obtain regulatory approval for at least one TIL Product in the United States and to commercialize TIL Products in all countries in which regulatory approval for a TIL Product has been obtained. For purposes of the Alliance Agreement, TIL Product means any pharmaceutical, biopharmaceutical, or biotechnology TIL product that has been developed by us or Moffitt and is advanced into clinical development under an IND sponsored by Moffitt.

Pursuant to the Alliance Agreement, we agreed to pay to Moffitt a total amount of at least $17.5 million, or Alliance Funding Amount, for research, development and manufacturing related services that will be paid equally over five years on June 1st of each year starting on June 1, 2023. The Alliance Funding Amount will be calculated annually at the conclusion of each payment period, and, to the extent our annual aggregate payments to Moffitt of $3.5 million exceeds the applicable annual installment amount, we will receive a reduction in the amount due for future installment payments based on a predetermined formula agreed to by the parties. To the extent the aggregate annual payments are less than $3.5 million, we will prepay the remaining amount due. On June 28, 2024, the Alliance Agreement was amended to remove the true up of the applicable annual installment amount of $3.5 million. The Alliance Funding Amount remains $17.5 million over the five-year term.

In connection with the execution of the Alliance Agreement, we issued Moffitt 91,721 shares of our common stock. As partial consideration under the Alliance Agreement, we also agreed to issue Moffitt an additional 366,884 shares of our common stock in the aggregate upon the satisfaction of certain clinical and regulatory milestones with respect to TIL Products. During the twelve months ended December 31, 2023, an additional 91,721 shares of our common stock were issued to Moffitt as a result of the achievement of the milestone related to the start of the Phase 1 clinical trial for a TIL Product. In addition, upon achievement of certain thresholds for aggregate net sales of all TIL Products, we are required to make tiered sales-based milestones payments to Moffitt of up to an aggregate of $50.0 million. With respect to each of the equity and sales milestones described above, TIL Products include any pharmaceutical, biopharmaceutical or biotechnology TIL product that is developed by us or Moffitt and is advanced into clinical development under an IND sponsored by Moffitt.

At any time after June 1, 2025, either party may terminate the Alliance Agreement without cause upon sixty days prior written notice to the other party (a "Termination for Convenience"). Upon a Termination for Convenience, the terminating party shall pay to the other party a termination fee in an amount equal to a low double digit percentage of the then remaining Alliance Funding Amount.

On June 26, 2025, we (i) entered into an Asset Purchase Agreement, or the Purchase Agreement, by and among us and Moffitt, pursuant to which we will sell certain assets related to its TIDAL-01 program in consideration for the termination of the Alliance Agreement (as defined in the Purchase Agreement), or the Asset Sale, subject to the terms and conditions of the Purchase Agreement, and (ii) entered into an Escrow Agreement, or the Escrow Agreement, by and among us, Moffitt, and Citibank, N.A., as escrow agent.

Pursuant to the terms of the Purchase Agreement, Moffitt will assume certain obligations of ours under the Myst Merger Agreement. We will receive a total consideration of approximately $3.0 million to offset our obligations to Moffitt under the Alliance Agreement, of which, approximately $1.8 million was placed into an escrow account as of the date of the Purchase Agreement (the "Escrow Account"), subject to the terms and conditions of the Escrow Agreement.

Moffitt's obligation to closing the Asset Sale is subject to certain conditions set forth in the Purchase Agreement. Pursuant to the Merger Agreement, effective as of the Offer Closing Time (as defined in the Merger Agreement), Merger Sub shall assume all of our obligations, duties, and covenants under the Purchase Agreement. Immediately following the consummation of the Merger, Merger Sub, as the sole stockholder of ours shall duly execute a written consent pursuant to the requirements of the our governing documents and applicable law, for the adoption of the transactions, contemplate by the the Purchase Agreement. Following the consummation of the Merger, anticipated to occur in the third quarter of 2025, the Escrow Amount will be released to the us.

It is a condition to the closing of the Merger that certain conditions to the Asset Sale shall have been satisfied or, if permitted by applicable law, waived.

If the transactions contemplated by the Merger Agreement are not consummated and we fail to obtain the requisite stockholder approval for the Asset Sale, the Purchase Agreement will terminate in accordance with its terms. If the foregoing should occur or if the Purchase Agreement is otherwise terminated, including as a result of the Asset Sale not being consummated by December 26, 2025, the Escrow Amount will be released to Moffitt.

Components of Our Results of Operations

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of external and internal costs incurred for our research and development activities, including adjusted development of our platform, our product discovery efforts and the development of our future product candidates. We expense research and development costs as incurred.

External costs include:

Internal costs include:

Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our unaudited condensed consolidated financial statements as prepaid or accrued research and development expenses. Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed.

In connection with the execution of the Merger Agreement, we discontinued all clinical studies evaluating TIDAL-01 and all nonclinical research and manufacturing activities.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, allocated expenses and other expenses for outside professional services, including legal, intellectual property, human resources, audit and accounting services. Personnel costs consist of salaries, bonuses, benefits and stock-based compensation.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income earned on our short-term investments and foreign currency remeasurement gains and losses.

Results of Operations

Comparison of the Three Months Ended June 30, 2025 and 2024

The following tables set forth our results of operations (in thousands):

Research and Development Expenses

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

Research and development expenses were $0.1 million and $17.7 million during the three months ended June 30, 2025 and 2024, respectively, a decrease of $17.6 million, or 99.4%. The decrease was due to shutting down all clinical development and pursuit of a strategic transaction.

General and Administrative Expenses

General and administrative expenses were $5.4 million and $4.3 million during the three months ended June 30, 2025 and 2024, respectively, an increase of $1.1 million, or 25.6% due to the costs to the execution of our Merger Agreement and employee restructuring.

Other Income, Net

Other income, net was $0.1 million and $0.8 million during the three months ended June 30, 2025 and 2024, respectively, a decrease of $0.7 million, or 89.3% due to the decrease in interest earned on cash and cash equivalents as well as a loss on the sale of laboratory equipment of $0.2 million.

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Comparison of the Six Months Ended June 30, 2025 and 2024

The following tables set forth our results of operations (in thousands):

Research and Development Expenses

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

Research and development expenses were $4.5 million and $33.5 million during the six months ended June 30, 2025 and 2024, respectively, a decrease of $29.0 million, or 86.6%. The decrease was due to shutting down clinical development and pursuit of a strategic transaction.

General and Administrative Expenses

General and administrative expenses were $10.2 million and $9.2 million during the six months ended June 30, 2025 and 2024, respectively, an increase of $1.0 million, or 10.9% due to expenses related to the pursuit of a strategic transaction.

Other Income (Expense), Net

Other income (expense), net was ($2.6) million and $1.8 million during the six months ended June 30, 2025 and 2024, respectively, a decrease of $4.4 million, or 244.4% due to the decrease in cash and cash equivalents as well as a loss on the sale of laboratory equipment. We anticipate that this will continue to decrease as we earn less interest income due to the continued decrease in the balance of cash and cash equivalents.

Liquidity and Capital Resources

Our headquarters are located in Los Angeles, California and we operate as one segment. Since our inception, we have devoted substantially all of our efforts and financial resources to organizing and staffing our company, business planning, raising capital, discovering product candidates and securing related intellectual property rights and conducting research and development activities for our Selected TIL programs and product candidates. We do not have any products approved for sale, we have not generated any revenue from product sales, and we have incurred overall net losses since our inception through June 30, 2025.

On June 26, 2025 we entered into the Merger Agreement. We have devoted, and expect to continue to devote, substantial time and resources to complete the Merger. We expect that the Merger will close in the third quarter of 2025. There can be no assurance that the Merger will be consummated or lead to increase stockholder value, or that we will make any cash distributions to our stockholders. If the Merger is not consummated, our Board intends to pursue a dissolution and liquidation.

On April 26, 2024, or the Loan Closing Date, we entered into a Loan and Security Agreement, or LSA, with Banc of California, or BOC, for a revolving credit facility in an aggregate principal amount of up to $20 million with interest at the greater of the Prime

Rate or 4.25%. This LSA includes a covenant requiring us to (i) receive positive interim Phase 1 data for TIDAL-01 (as determined by our Board) and (ii) receive at least $40.0 million in new funding from the sale of equity, partnerships, and/or business development payments, which was not achieved, in each case, by March 31, 2025. If we fail to comply with any of the foregoing covenants, BOC may terminate the commitments to make further loans and declare all of our obligations under the LSA to be immediately due and payable. On May 14, 2025, the LSA was terminated with no amounts having been drawn and no significant termination fees incurred.

Funding Requirements

Because of the numerous risks and uncertainties associated with the status of our company and the Merger, we are unable to estimate the exact amount of our operating capital requirements. The amount and timing of our future funding requirements will depend on many factors, including, but not limited to:

As of June 30, 2025 and December 31, 2024, we had cash and cash equivalents of $16.7 million and $28.9 million, respectively. We believe that our existing cash and cash equivalents will enable us to fund our planned operating expenses and capital expenditures through our anticipated closing of the Merger in the third quarter of 2025. If the Merger is not consummated, our Board intends to pursue a dissolution and liquidation.

Cash Flows

The following table summarizes our cash flows (in thousands):

Cash Flows from Operating Activities

Cash used in operating activities for the six months ended June 30, 2025 was $11.4 million, primarily due to our net loss of $17.3 million which was partially offset by the decrease in our net operating assets and liabilities of $2.5 million, changes in stock-based compensation of $0.6 million, loss on the disposal of property and equipment of $2.6 million and depreciation and amortization expense of $0.3 million.

Cash used in operating activities for the six months ended June 30, 2024 was $33.4 million, primarily due to our net loss of $40.9 million and accretion of the premium on short-term investments of $1.4 million which was partially offset by the decrease in our net operating assets and liabilities of $5.8 million, changes in stock-based compensation of $2.1 million, and depreciation and amortization expense of $1.0 million.

Cash Flows from Investing Activities

Cash provided by investing activities for the six months ended June 30, 2025 was $1.0 million, resulting from the sale of property and equipment.

Cash provided by investing activities for the six months ended June 30, 2024 was $33.0 million, due primarily to $40.0 million in maturities of short-term investments offset by the purchases of $6.7 million of short-term investments and $0.3 million in purchases of property and equipment.

Contractual Obligations and Commitments

We enter into contracts in the normal course of business with CROs and CMOs for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts provide for termination at the

request of either party with less than one year notice, and therefore we believe that our non-cancellable obligations under these agreements are not material. We additionally have contractual obligations for our operating lease related to our office space. These obligations are further described in Note 12 to our unaudited condensed consolidated financial statements. We are also party to certain collaboration and license agreements, which contain a number of contractual obligations. Those contractual obligations may entitle us to receive, or may obligate us to make, certain payments. The amount and timing of those payments are unknown or uncertain as the Company is unable to estimate the timing or likelihood of the events that will obligate those payments.

We have milestones, royalties, and/or other payments due to third parties under our existing license and collaboration agreements. See Note 6 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We can't estimate when such payments will be due and none of these events were probable to occur as of June 30, 2025 and December 31, 2024, respectively.

Critical Accounting Polices and Estimates

The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles in the United States and our discussion and analysis of our financial condition and operating results require us to make judgments, assumptions and estimates that affect the amounts reported in our unaudited condensed consolidated financial statements and accompanying notes. Our significant accounting policies and methods used in preparation of our unaudited condensed consolidated financial statements are described in Note 2 to our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.

There have been no material changes to our critical accounting policies from those described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" included in our 10-K filed with the SEC on March 31, 2025.

Accounting Pronouncements Recently Adopted

We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q, such standards will not have a material impact on our unaudited condensed consolidated financial statements or do not otherwise apply to our current operations.

Emerging Growth and Smaller Reporting Company Status

The JOBS Act permits an "emerging growth company" such as us to take advantage of reduced reporting requirements that are otherwise applicable to public companies and also an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected to not "opt out" of this provision and, as a result, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that we either (i) irrevocably elect to "opt out" of such extended transition period or (ii) no longer qualify as an emerging growth company.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the IPO, (ii) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more, (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the previous rolling three-year period or (iv) the date on which we are deemed to be a large accelerated filer under the Exchange Act.

We are also a "smaller reporting company" as defined in the 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 our ordinary shares held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our ordinary shares held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.