X4 Pharmaceuticals Inc.
03/17/2026 | Press release | Distributed by Public on 03/17/2026 05:00
Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to provide material information around events and uncertainties known to management that are relevant to an assessment of the financial condition and results of operations of X4 Pharmaceuticals and should therefore be read in conjunction with our audited Consolidated Financial Statements and the related notes thereto and other disclosures included as part of this Annual Report on Form 10-K, including the disclosures under Part I, Item 1A. Risk Factors.
Overview
We are a biopharmaceutical company developing, and commercializing novel therapeutics for the treatment of rare hematology diseases. We continue to progress our global, pivotal Phase 3 clinical trial, (the "4WARD" trial) to evaluate the efficacy, safety, and tolerability of oral, once-daily mavorixafor (with or without stable doses of granulocyte colony-stimulating factor ("G-CSF") in people with congenital, acquired primary autoimmune, or idiopathic chronic neutropenia ("CN") who are experiencing recurrent and/or serious infections. The 52-week trial is a randomized, double-blind, placebo-controlled, multicenter study aiming to enrollup to 176 patients, with full enrollment expected in the third quarter of 2026. The U.S. Food and Drug Administration ("FDA") has granted Fast Track designation to mavorixafor for the treatment of CN, whichis defined as periods lasting more than three months persistently or intermittently where there are abnormally low levels of neutrophils circulating in the blood, and may be idiopathic (of unknown origin), cyclic (episodes typically occurring every three weeks), or congenital (of genetic causation). CN disorders are rare blood conditions similarly characterized by increased risks of infections and cancer due to abnormally low levels of neutrophils in the body. In all cases, the CXCL12/CXCR4 pathway is the key regulator of neutrophil release from the bone marrow.
We have one commercially approved product, XOLREMDI ® (mavorixafor), which has received accelerated approval in the United States from the FDA for use as an oral, once-daily therapy in patients 12 years of age and older with WHIM (warts, hypogammaglobulinemia, infections, and myelokathexis) syndrome, to increase the number of circulating mature neutrophils and lymphocytes. WHIM syndrome is a rare combined primary immunodeficiency and CN disorder. In connection with our long term strategy to successfully complete the 4WARD Phase 3 trial in patients with moderate and severe CN, we are no longer prioritizing investment in the WHIM indication.
Private Placement Financing and Management Changes
During the third quarter of 2025, we sold shares of common stock and pre-funded warrants to purchase shares of common stock in a private placement that resulted in net proceeds of approximately $81.0 million, after deducting placement agent fees and other expenses. Pursuant to registration rights agreements, we registered the shares of common stock issued and issuable under pre-funded warrants under a registration statement on Form S-3 that was declared effective by the SEC on September 17, 2025.
Concurrent with the financing and effective August 12, 2025, our former President and Chief Executive Officer, Paula Ragan, PhD, and Chief Financial Officer, Adam Mostafa, stepped down from their respective roles and their employment was terminated. Dr. Ragan also resigned from the Company's Board of Directors (the "Board"), and Michael Wyzga transitioned from Board Chair to Lead Independent Director. The Board appointed Adam R. Craig, M.D., Ph.D, MBA as Executive Chairman, John Volpone as President and subsequently as Chief Operating Officer, and David Kirske as Chief Financial Officer.
Q4 2025 Equity Financing
In October 2025, we closed an underwritten public offering of our common stock and, in lieu of common stock to certain investors, pre-funded warrants to purchase shares of common stock, raising net proceeds of $145.6 million, net of underwriting discounts and estimated offering expenses.
Strategic Restructurings
•In the first quarter of 2025, we implemented a strategic restructuring of our business operations, workforce and capital spending to focus efforts on advancing mavorixafor to treat patients with CN. As part of this restructuring, we (i) implemented a net reduction of our employee headcount by 43 employees, representing approximately 30% of our total workforce, including our U.S. commercial field team, (ii) commenced the closure of our research and development facility in Vienna, Austria, (iii) paused our pre-clinical drug candidate programs and (iv) streamlined other spending to support the ongoing clinical development of mavorixafor for the larger population of those with chronic neutropenia. We incurred charges of approximately $2.1 million for severance and other employee termination-related costs related to this strategic restructuring.
•In the third quarter 2025, we announced an additional strategic restructuring designed to further sharpen operational focus and align resources with our long-term strategy to successfully complete the 4WARD Phase 3 trial in patients with moderate and severe CN. As part of this initiative, we further reduced our workforce by approximately 50%. We incurred expenses of approximately $4.9 million during the third quarter for severance and other employee termination-related costs related to this strategic restructuring. This workforce reduction was substantially completed in the third quarter of 2025.
These strategic restructuring actions have allowed us to decrease our operating expenses, including research and development and general and administrative expenses, from $143.2million in 2024 to $116.2 million in 2025. The estimate of costs that we expect to incur related to these workforce reduction as well as the decrease in spending, and the timing thereof are subject to a number of assumptions and actual results may differ. We may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the actions described above.
Regulatory Update and Out-License Agreements
In early 2025, we submitted a Marketing Authorization Application ("MAA") to the EMA seeking regulatory approval to commercialize mavorixafor for WHIM syndrome in the European Union. Such MAA was validated for processing by the EMA in January 2025. In February 2026, the EMA's Committee for Medicinal Products for Human Use adopted a positive opinion recommending the grant of marketing authorization, under exceptional circumstances, for mavorixafor for the treatment of WHIM syndrome in the European Union. The positive opinion has been submitted to the European Commission for review, and we expect the European Commission to issue a final approval decision in the second quarter of 2026. On January 13, 2025, we announced a License and Supply Agreement (the "Norgine Agreement") with Norgine Pharma UK ("Norgine"), pursuant to which Norgine was granted an exclusive license to distribute, market and sell our drug product for all indications in the European Economic Area, Switzerland, the United Kingdom, Australia, and New Zealand.
Results of Operations
The following table summarizes the results of our operations for the years ended December 31, 2025 and 2024:
| Year Ended December 31, | ||||||||||||||||||||
| (in millions) | 2025 | 2024 | Change | |||||||||||||||||
| Revenue | $ | 35.1 | $ | 2.6 | $ | 32.5 | ||||||||||||||
| Cost and operating expenses: | ||||||||||||||||||||
| Cost of revenue | 5.8 | 0.8 | 5.0 | |||||||||||||||||
| Research and development | 72.7 | 81.6 | (8.9) | |||||||||||||||||
| General and administrative | 43.5 | 61.6 | (18.1) | |||||||||||||||||
| Gain on sale of non-financial asset | - | (105.0) | 105.0 | |||||||||||||||||
| Total operating expenses | 122.0 | 39.0 | 83.0 | |||||||||||||||||
| Loss from operations | (86.9) | (36.4) | (50.5) | |||||||||||||||||
| Total other income (expense), net | 7.7 | (0.7) | 8.4 | |||||||||||||||||
| Loss before income taxes | (79.2) | (37.1) | (42.1) | |||||||||||||||||
| Provision for income taxes | - | (0.4) | 0.4 | |||||||||||||||||
| Net loss | $ | (79.2) | $ | (37.5) | $ | (41.7) | ||||||||||||||
Revenue
License and Other
In January 2025, we granted an exclusive license to Norgine to distribute, market and sell our product for all indications in the European Economic Area, Switzerland, the United Kingdom, Australia and New Zealand following regulatory approval. For the year ended December 31, 2025, we recognized $27.6 million for the delivery of the license and $1.0 millionfor the provision of research and development services to Norgine. We had no license or other revenue during the year ended December 31, 2024.
Product Revenue, Net
We began recognizing product sales in June 2024 following FDA approval of XOLREMDI on April 29, 2024 and its subsequent commercial launch in the United States. Net product sales were as follows for years ended December 31, 2025 and 2024, and for each of the quarterly periods therein.
| (in thousands) | 2025 | 2024 | |||||||||
| First quarter | $ | 942 | $ | - | |||||||
| Second quarter | 1,744 | 563 | |||||||||
| Third quarter | 1,566 | 560 | |||||||||
| Fourth quarter | 2,271 | 1,434 | |||||||||
| Year ended December 31, | $ | 6,523 | $ | 2,557 | |||||||
Co-pay assistance payments and rebates to U.S. government payors have comprised the majority of our gross-to-net revenue adjustments. Gross-to-net adjustments were approximately 10% and 9% for the years ended December 31, 2025 and 2024, respectively.
Operating Cost and Expenses:
Cost of Revenue
Cost of revenue primarily consists of amortization of an intangible asset related to accrued and paid milestone payments associated with our license agreement (the "Genzyme Agreement") with Genzyme Corporation ("Genzyme"), a wholly owned subsidiary of Sanofi, and sales and sublicense-based royalty payments due thereunder. Cost of revenue increased $5.0million in the yearended December 31, 2025, as compared to the prior year, primarily due to additional royalties in the current year associated with sublicense income from our Norgine Agreement.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates, including employee salaries and related expenses, clinical development expenses, internal and third-party costs of manufacturing our drug products for use in our clinical trials. Research and development expenses also include costs related to compliance with regulatory requirements; and prior to the FDA's approval of XOLREMDI in the U.S. in the second quarter of 2024, payments made under third-party licensing agreements were charged to research and development expense.
Following our strategic restructuring announced during the first quarter of 2025, substantially all of our research and development has been focused on our one product candidate, mavorixafor. The following table shows external costs incurred by product candidate (primarily external contract research organization costs) and unallocated research and development costs, primarily consisting of employee salaries and related expense for our research and development organization.
| Year Ended December 31, | |||||||||||||||||
| (in millions) | 2025 | 2024 | Change | ||||||||||||||
| Direct research and development expenses by product candidate: | |||||||||||||||||
| Mavorixafor | $ | 41.4 | $ | 41.5 | $ | (0.1) | |||||||||||
| X4P-002 | - | 0.2 | (0.2) | ||||||||||||||
| X4P-003 | - | 0.2 | (0.2) | ||||||||||||||
| Unallocated expense | 31.3 | 39.7 | (8.4) | ||||||||||||||
| Total research and development expenses | $ | 72.7 | $ | 81.6 | $ | (8.9) | |||||||||||
Research and development expenses decreased by $8.9millionin the year ended December 31, 2025 as compared to the prior yearprimarily due to decreases in spending associated with our 2025 strategic restructurings, including lower spending on non-clinical programs, lower consulting fees, lower drug substance manufacturing costs, and lower regulatory costs. For the year ended December 31, 2025, unallocated expense includes $2.0 millionin severance charges for terminated employees. The overall decrease in research and development expenses in the current year was partially offset by higher clinical costs associated with our 4WARD trial.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance, and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting, and audit services.
General and administrative expenses decreased by approximately $18.1million in the year ended December 31, 2025 as compared to the prior year. General and administrative expenses include $5.0 millionin severance charges for terminated employees in the year ended December 31, 2025. The decrease to general and administrative expenses was primarily due to an $8.0 million decrease in compensation expense due to lower head count in our sales, general and administrative functions, and a decrease of $9.0 million in sales and marketing expenses in the current year as compared to the prior year during which we incurred commercialization sales and marketing launch costs related to XOLREMDI. These decreases in general and administrative expenses were partially offset by higher severance costs associated with our 2025 strategic restructurings and higher legal costs in the current year.
Other Income (Expense), Net
| Year Ended December 31, | ||||||||||||||||||||
| 2025 | 2024 | change | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Interest income | $ | 4.6 | $ | 5.8 | $ | (1.2) | ||||||||||||||
| Interest expense | (8.9) | (8.8) | (0.1) | |||||||||||||||||
| Change in fair value of Class C warrant liability | 12.8 | 1.9 | 10.9 | |||||||||||||||||
| Other (expense) income, net | (0.8) | 0.4 | (1.2) | |||||||||||||||||
| Total other income (expense), net | $ | 7.7 | $ | (0.7) | $ | 8.4 | ||||||||||||||
Other income (expense), net, increased approximately $8.4 million in the year ended December 31, 2025 as compared to the prior year primarily due to higher gains in the current year on fair value adjustments related to our Class C warrants, partially offset by lower interest income earned on our marketable security investment portfolio.
Provision for Income Taxes
Our income tax provision of $41.0 thousand for the year ended December 31, 2025, which was primarily related to our Austrian subsidiary, was lower than our income tax provision in the prior year. Our income tax provision for the year ended December 31, 2024 of $0.3 million reflected U.S. federal and state taxable income that included the sale of a priority review voucher, generating $105.0 million of taxable income, partially offset by available deductions, net operating loss carryforwards, which were limited under IRC 382 due to several qualifying ownership changes, and available research and development credits. We will continue to maintain a full valuation allowance against net deferred tax assets, including net operating loss carryforwards, until we are able to consistently generate sufficient taxable income to realize the benefit of our net deferred tax assets.
Liquidity and Capital Resources
Sources of Liquidity
To date, we have funded our operations primarily with proceeds from sales of common stock, warrants, prefunded warrants and preferred stock, proceeds from the issuance of convertible debt and borrowings under loan and security agreements.
Public and Private Equity Offerings. Over the past several years we have funded our operations primarily from sales of common stock, warrants and prefunded warrants through both public offerings and private placements. Most
recently in August 2025, we sold shares of common stock and, in lieu of common stock to certain investors, pre-funded warrants to purchase shares of common stock in a private placement offering (the "Q3 2025 PIPE") resulting in net proceeds of $81.0 million, after deducting placement agent fees and offering expenses. In addition, in Q4 2025 we completed an underwritten public offering of 52,844,000 shares of our common stock (inclusive of 6,984,000 shares pursuant to the exercise in full of the underwriters' option to purchase additional shares) at a public offering price of $2.90 per share and, in lieu of
common stock to certain investors, prefunded warrants to purchase up to 700,000 shares of our common stock at a price of $2.899 per pre-funded warrant, for net proceeds of $145.6 million, after underwriting discounts and offering expenses.
ATM Sales Agreement. We are party to a Controlled Equity OfferingSM Sales Agreement ("ATM"), dated as of August 7, 2020, pursuant to which we may offer and sell shares of our common stock through one or more investment banks. To date, for the year ended December 31, 2025 and for the three months ended December 31, 2025, we have sold $24.2 million, $9.7 million, and $0.7 million, respectively, of our common stock, net of offering costs, under the ATM. Pursuant to our Registration Statement on Form S-3 that became effective on August 24, 2023 and the related ATM prospectus contained therein, we may offer and sell shares of our common stock having an aggregate offering price of up to an additional $65.3 million.
Product Sales and License Revenue. We commercially launched XOLREMDI in the second quarter of 2024 following the approval of XOLREMDI by the FDA on April 29, 2024. To date, we have generated $9.1 million of net product revenue from the sale of XOLREMDI. For the year ended December 31, 2025, we generated $27.6 million in license revenue from the exclusive licensing and supply agreement with Norgine.
Hercules Loan Agreement. We are a party to a loan and security agreement (the "Hercules Loan Agreement"), which provides for a term loan facility of up to $107.5 million, under which we have borrowed an aggregate of $75.0 million of term loans to date, representing the maximum borrowings as of December 31, 2025. The term loan facility requires that we make interest-only payments through maturity on July 1, 2027 and requires that we meet certain operational and financial covenants. See Note 11 to the consolidated financial statements contained herein for a full description of our Hercules Loan Agreement.
Historical Cash Flows
The following table summarizes our cash flow activities for each of the periods presented:
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in millions) | |||||||||||
| Net loss | $ | (79.2) | $ | (37.5) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities | (3.8) | (96.1) | |||||||||
| Changes in operating assets and liabilities | (2.6) | 2.7 | |||||||||
| Net cash used in operating activities | (85.6) | (130.9) | |||||||||
| Net cash provided by investing activities | 8.2 | 67.0 | |||||||||
| Net cash provided by financing activities | 238.6 | 20.3 | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 0.2 | (0.1) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 161.4 | (43.7) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 56.5 | 100.2 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 217.9 | $ | 56.5 | |||||||
Operating Activities
During the year ended December 31, 2025, net cash used in operating activities was $85.6 million, primarily resulting from net losses of $79.2 million adjusted for net non-cash income of $3.8 million, primarily related to gains on changes to the fair value of our Class C warrants that are measured quarterly at fair value, and $2.6 million of changes to operating assets and liabilities primarily related to a reduction in accounts payable and accrued expenses. Net cash used in operating activities for the year ended December 31, 2024 was $130.9 million, primarily resulting from our operating losses of $142.5 million adjusted for noncash expenses of $8.9 million and changes in our operating assets and liabilities of $2.7 million. Noncash expenses primarily include stock-based compensation expense of $8.2 million and non-cash lease expense of $1.6 million, partially offset by $1.9 million of non-cash gains on the change in fair value of our Class C Warrant liability.
Investing Activities
During the year ended December 31, 2025, cash provided by investing activities of $8.2 million primarily includes net sales of short-term marketable securities. During the year ended December 31, 2024, cash provided by investing activities was $67.0 million, primarily due to the receipt of $105.0 million of cash from the sale of a PRV, partially offset by net investments in short-term marketable securities.
Financing Activities
During the year ended December 31, 2025, cash provided by financing activities of $238.6 million was primarily due to net proceeds of $226.6 million from the sale our common stock and pre-funded warrants in private placement and public offerings and $11.9 million from sales of our common stock through our ATM program and purchase agreement with Lincoln Park Capital Fund LLC. Cash provided by financing activities for the year ended December 31, 2024 included $20.0 million of new borrowings on our loan facility.
Capital Resources
Based on our cash, cash equivalents and marketable securities on hand as of March 17, 2026, and our current operating plan, we believe that our cash, cash equivalents and marketable securities will allow us to fund operations for at least the next 12 months.
Capital Requirements
During the year ended December 31, 2025, we sold shares of common stock and, in lieu of common stock to certain investors, pre-funded warrants to purchase shares of common stock in a private placement offering and an underwritten public offering for aggregate net proceeds of $226.6 million, after placement agent and underwriting fees and offering expenses. These financing events extend our ability to fund our operations and financial obligations into 2028. We expect to continue to incur operating losses as we advance our lead drug candidate through the 4WARD trial. Until we reach profitability, we will need to raise additional capital, which cannot be assured, to fund our operations and meet our financial obligations beyond this period. Such additional capital could be raised through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements, or other collaborations and strategic alliances. If we are unable to obtain funding, we could be forced to delay, reduce, or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which would adversely affect our business prospects, or we may be unable to continue operations and may need to restructure our obligations in a court-supervised process or otherwise.
Due to the numerous risks and uncertainties associated with the future sale of our approved drug product and the research, development, and commercialization of future product candidates, we are unable to estimate the exact amount of our funding requirements. Our short-term and long-term funding requirements will depend on and could increase significantly as a result of many factors, including:
•the scope, number, initiation, progress, timing, costs, design, duration, any potential delays, and results of clinical trials and nonclinical studies for our current or future product candidates, particularly our Phase 3 clinical trial of mavorixafor for the treatment of individuals with chronic neutropenic disorders;
•the outcome, timing and cost of regulatory reviews, approvals or other actions to meet regulatory requirements established by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies for our product candidates than those that we currently expect;
•our ability to obtain marketing approval for our product candidates;
•the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights covering our product and product candidates, including any such patent claims and intellectual property rights that we have licensed from Genzyme pursuant to the terms of our license agreement with Genzyme;
•our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us or our product or product candidates;
•our ability to establish and maintain licensing, collaboration or similar arrangements on favorable terms and whether and to what extent we retain development or commercialization responsibilities under any new licensing, collaboration or similar arrangement;
•the success of any other business, product or technology that we acquire or in which we invest;
•the costs of acquiring, licensing or investing in businesses, product candidates and technologies;
•the effect of competing technological and market developments; and
•the costs to continue operating as a public company.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United
States. 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, 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 consolidated financial statements included elsewhere in this Annual Report, 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.
Accrued Research and Development Expenses. As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a predetermined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. For our significant vendors, we confirm the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:
•vendors in connection with preclinical development activities;
•CROs and investigative sites in connection with preclinical studies and clinical trials; and
•CMOs in connection with the production of preclinical and clinical trial materials.
We base the expense recorded related to external research and development on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CMOs and CROs that supply, conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. 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. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly.
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 not been any material adjustments to our prior estimates of accrued research and development expenses.
Stock-Based Compensation. We measure all stock-based awards granted to employees, directors and consultants based on the
grant-date fair value of the award and recognized compensation expense, net of estimated forfeitures, over the requisite service
period, which is generally the vesting period of the respective award. The stock-based awards that we have issued to date include a service-based vesting condition, and the expense for these awards is recognized using the straight-line method. We have also issued stock-based awards with performance-based vesting conditions that vest in part upon our achievement of operational milestones and over time thereafter for the subsequent two years as the employee continues to provide services. We assess the probability of achievement of these operational milestones and recognize stock-based compensation for these awards using the accelerated attribution model based on the fair value of the awards as of the date of grant and our best estimate of the date each operational milestone will be achieved. We update our estimates related to the probability and timing of achievement of the operational milestones each period until the award either vests or is forfeited.
The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of the stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and an expected dividend yield. Prior to the closing of the merger with Arsanis Inc in March 2019 and the listing of our common stock on the Nasdaq Capital Market, our board of directors historically determined, as of the date of each option grant and with input
from our management, and the assistance of a third-party valuation specialist, the estimated fair value of our common stock on the date of grant based on a number of objectives and subjective factors. Since the merger and the listing of our common stock on the Nasdaq Capital Market, we have relied on the market price of our common stock to determine the fair value on the date of grant. As our common stock does not have a sufficient history of trading, we estimate our volatility based on the historical volatility of publicly traded peer companies. We estimate the expected term of our stock awards by utilizing the "simplified" method, which calculates the expected term based on the weighted average midpoint of the award's vesting and expiration dates. We determine the risk-free interest rate by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. We estimate that no dividends will be paid as we do not expect to pay cash dividends in the foreseeable future.
The assumptions underlying these valuations represent the best estimates of our management, which involve inherent uncertainties and the application of our judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, the resulting share-based compensation expense could be materially different.
Goodwill.Business combinations are accounted for under the acquisition method. The total purchase price of an acquisition is
allocated to the underlying identifiable net assets, based on their respective estimated fair values as of the acquisition date. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, probabilities of success, discount rates, and asset lives, among other items. Assets acquired and liabilities assumed are recorded at their estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
Goodwill is tested quantitatively for impairment at the reporting unit level annually in the fourth quarter, or more frequently when events or changes in circumstances indicate that the asset might be impaired. Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition.
We have determined that we operate in a single operating segment and have a single reporting unit. To perform its quantitative test, we compare the fair value of our single reporting unit to the carrying value of its net assets, including goodwill. We use our market capitalization (common shares outstanding multiplied by the price per share of our common stock) to measure the fair value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of its net assets, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we measure the impairment loss as the excess of the carrying value over the fair value of the reporting unit. See Note 6 for more information on our goodwill impairment test as of December 31, 2025.
Intangible Assets, Net. Definite-lived intangible assets related to capitalized milestones under license agreements are amortized on a straight-line basis, which aligns with the pattern over which the economic benefit of the intangible assets is consumed, over their remaining useful lives, which are estimated to be the remaining patent life. If our estimate of the product's useful life is shorter than the remaining patent life, then a shorter period is used. Amortization expense is recorded as a component of cost of revenue on the consolidated statements of operations and comprehensive loss.
Revenue Recognition.We recognize revenue when our customers obtain control of the promised good, such as our drug product or licensed intellectual property rights, in an amount that reflects the consideration that we expect to receive in exchange for those goods. We perform the following five steps to determine the amount of revenue to recognize: (1) identify the customer and contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price, adjusted for variable consideration resulting from potential returns, rebates, discounts, and down-stream charges; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when we satisfy the performance obligations, which is upon shipment of our drug product to the customer or delivery of licensed rights to the customer.
As part of the accounting for contracts with our customers, we make significant judgments, primarily related to the estimation of the amount of variable consideration to include in the transaction price upon delivery of our drug product or licensed rights. The variable consideration includes estimates for discounts, product returns, and rebates that will be due to U.S. federal and state payors, such as Medicaid, based on agreements that we have with these payors who provide medical insurance to the end patient, and estimated co-pay assistance payments for patients who enroll in our patient assistance program. These variable payments are considered a reduction of the transaction price and must be estimated at the time our product is delivered to the customer. For our license arrangements, we will receive milestone payments based on our achievement of defined operational events or cumulative sales levels achieved. When we conclude that the achievement of such milestones is probable, we include the value of the milestone in the transaction price using the most likely amount method. For product sales, we determine the
amount of variable consideration to include in the transaction price by using the expected value method. Net revenue recognized for each period is the amount for which, based on our estimate, it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate these estimates based on new information and actual operational trends and, if necessary, adjust these variable consideration estimates. Any such adjustments are recorded on a cumulative catch-up basis in the period of the adjustment.
Smaller Reporting Company Status
We are a smaller reporting company ("SRC") as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K. We may take advantage of certain of the scaled disclosures available to smaller reporting companies 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.
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