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

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes thereto and other disclosures included in this Quarterly Report on Form 10-Q, including the disclosures under Part II, Item IA "Risk Factors," and our audited condensed consolidated financial statements and the accompanying notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2024, which was filed with the Securities and Exchange Commission, or the SEC, on March 26, 2025. Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and, unless otherwise indicated, amounts are presented in U.S. dollars.

Company Overview

We are a biopharmaceutical company developing biomarker-targeted antibody therapies designed to treat patients with cancer by inhibiting fundamental tumor-promoting pathways, targeting cancer-specific cell surface molecules, and harnessing the immune system to attack cancer cells. Our strategy is to identify, acquire, and develop molecules that will rapidly translate into high impact therapeutics that generate durable clinical benefit and enhanced patient outcomes.

Our lead clinical stage program is sirexatamab (DKN-01), a monoclonal antibody that inhibits Dickkopf-related protein 1, or DKK1. We also have a preclinical antibody programs FL-501.

We intend to apply our extensive experience in identifying and developing transformational products to build a pipeline of programs that have the potential to change the practice of cancer medicine.

We have devoted substantially all of our resources to development efforts relating to our product candidates, including manufacturing and conducting clinical trials of our product candidates, providing general and administrative support for these operations and protecting our intellectual property. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through proceeds from our sales of common stock and preferred stock and proceeds from the issuance of notes payable.

Recent Developments

Since March 31, 2025, we provided the following development and business updates.

DKN-01 Development Update

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Business Updates

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Financial Overview

Research and Development Expenses

Our research and development activities have included conducting nonclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our product candidates, primarily sirexatamab. We recognize research and development expenses as they are incurred. Our research and development expenses during the six months ended June 30, 2025 consisted primarily of:

Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of internal and external costs, such as employee costs, including salaries and stock-based compensation, other internal costs, fees paid to consultants, central laboratories, contractors and CROs in connection with our clinical and preclinical trial development activities. We use internal resources to manage our clinical and preclinical trial development activities and perform data analysis for such activities.

We participate, through our subsidiary in Australia, in the Australian government's research and development ("R&D") Incentive program ("R&D Incentive Program"), such that a percentage of our eligible research and development expenses are reimbursed by the Australian government as a refundable tax offset and such incentives are reflected as other income.

The table below summarizes our research and development expenses incurred by development program and the R&D Incentive income for the three and six months ended June 30, 2025 and 2024:

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The successful development of our clinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. We have engaged a leading financial advisor to explore strategic alternatives to preserve and maximize shareholder value, including any or all of the following: entering into a merger, asset sale, or license agreement with another company; selling or partnering sirexatamab or FL-501 in a transaction with a pharmaceutical company, biotechnology company, or investment fund; or seeking additional funding through public or private equity financings. There can be no assurance that we will successfully complete a transaction as part of the strategic alternative process, and any such transaction, if available, may not be on terms favorable to us and may not allow for the continued development of our product candidates. If we are is not able to successfully complete any transaction, our business, operations and financial condition will be materially adversely affected, and we would be forced to discontinue our business (including the further development of the products) and operations entirely, wind-up and liquidate.

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, accounting and audit services.

Interest income

Interest income consists primarily of interest income earned on cash and cash equivalents.

Research and development incentive income

Research and development incentive income includes payments under the R&D Incentive Program from the government of Australia. The R&D Incentive Program is one of the key elements of the Australian government's support for Australia's innovation system. It was developed to assist businesses in recovering some of the costs of undertaking research and development. The research and development tax incentive provides a tax offset to eligible companies that engage in research and development activities.

Companies engaged in research and development may be eligible for either:

We recognize as income the amount we expect to be reimbursed for qualified expenses.

Foreign currency translation adjustment

Foreign currency translation adjustment consists of gains (losses) due to the revaluation of foreign currency transactions attributable to changes in foreign currency exchange rates associated with our Australian subsidiary.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of our 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 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.

Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations- Critical Accounting Policies and Significant Judgments and Estimates" in our Annual Report on Form 10-K filed with the SEC on March 26, 2025, and the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We believe that of our critical accounting policies, the following accounting policies involve the most judgment and complexity:

Results of Operations

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

The following table summarizes our results of operations for the three months ended June 30, 2025 and 2024:

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Research and Development Expenses

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Research and development expenses were $10.5 million for the three months ended June 30, 2025, compared to $17.9 million for the three months ended June 30, 2024. The decrease of $7.4 million in research and development expenses during the three months ended June 30, 2025 as compared to the same period in 2024, was primarily due to a decrease of $3.9 million in clinical trial costs. There was also a decrease of $1.7 million in payroll and other related expenses due to a decrease in headcount of our R&D full-time employees due to a reduction in force, a decrease of $1.4 million in manufacturing costs and a decrease of $0.4 million in stock based compensation expense as there were no stock options granted during the three months ended June 30, 2025.

General and Administrative Expenses

General and administrative expenses were $1.8 million for the three months ended June 30, 2025, compared to $3.4 million for the three months ended June 30, 2024. The decrease of $1.6 million in general and administrative expenses during the three months ended June 30, 2025 as compared to the same period in 2024, was due to a $1.4 million decrease in payroll and other related expenses mainly due to a decrease in incentive based compensation expense for our general and administrative full-time employees, and a $0.2 million decrease in general and administrative related stock based compensation expense.

Restructuring Charges

During the three months ended June 30, 2025, we announced a workforce reduction involving approximately 75% of our workforce. As a result of this workforce reduction, during the three months ended June 30, 2025, we incurred $4.5 million of charges, consisting primarily of one-time employee severance and benefit costs and stock based compensation expense related to acceleration of vesting.

Interest Income

During the three months ended June 30, 2025, we recorded interest income of $0.2 million. During the three months ended June 30, 2024, we recorded interest income of $0.9 million. The decrease was due to a higher average cash and cash equivalent balance during the three months ended June 30, 2024.

Australian Research and Development Incentives

We recorded R&D incentive income of $0.3 million during the three months ended June 30, 2024, based upon the applicable percentage of eligible research and development activities under the R&D Incentive Program, which expenses included the cost of manufacturing clinical trial material. During the three months ended June 30, 2025, we recorded an immaterial amount of R&D incentive income.

The R&D incentive receivable has been recorded as "Research and development incentive receivable" in the condensed consolidated balance sheets.

Foreign Currency Gain/Loss

During the three months ended June 30, 2025 and 2024, we recorded an immaterial amount of foreign currency transaction losses. Foreign currency transaction gains and losses are due to changes in the Australian dollar exchange rate related to activities of the Australian entity.

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

The following table summarizes our results of operations for the six months ended June 30, 2025 and 2024:

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Research and Development Expenses

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Research and development expenses were $23.5 million for the six months ended June 30, 2025, compared to $29.2 million for the six months ended June 30, 2024. The decrease of $5.7 million in research and development expenses during the six months ended June 30, 2025 as compared to the same period in 2024, was primarily due to a decrease of $2.5 million in manufacturing costs and a decrease of $1.3 million in clinical trial costs. There was also a decrease of $1.7 million in payroll and other related expenses due to a decrease in headcount of our R&D full-time employees due to a reduction in force and a decrease of $0.2 million in stock based compensation expense as there were no stock options granted during the six months ended June 30, 2025.

General and Administrative Expenses

General and administrative expenses were $4.8 million for the six months ended June 30, 2025, compared to $6.9 million for the six months ended June 30, 2024. The decrease of $2.1 million in general and administrative expenses during the six months ended June 30, 2025 as compared to the same period in 2024, was primarily due to a $1.3 million decrease in payroll and other related expenses due to a decrease in incentive based compensation expense for our general and administrative full-time employees. There was also a decrease of $0.3 million in professional fees, a decrease of $0.3 million in taxes and insurance and a decrease of $0.2 million in general and administrative related stock based compensation expense.

Restructuring Charges

During the six months ended June 30, 2025, we announced a workforce reduction involving approximately 75% of our workforce. As a result of this workforce reduction, during the six months ended June 30, 2025, we incurred $4.5 million of charges, consisting primarily of one-time employee severance and benefit costs and stock based compensation expense related to acceleration of vesting.

Interest Income

During the six months ended June 30, 2025, we recorded interest income of $0.7 million. During the six months ended June 30, 2024, we recorded interest income of $1.6 million. The decrease was due to a higher average cash and cash equivalent balance during the six months ended June 30, 2024.

Australian Research and Development Incentives

We recorded R&D incentive income of $0.1 million and $0.5 million, respectively, during the six months ended June 30, 2025 and 2024, based upon the applicable percentage of eligible research and development activities under the R&D Incentive Program, which expenses included the cost of manufacturing clinical trial material.

The R&D incentive receivable has been recorded as "Research and development incentive receivable" in the condensed consolidated balance sheets.

Foreign Currency Gain/Loss

During the six months ended June 30, 2025 and 2024, we recorded an immaterial amount of foreign currency transaction losses. Foreign currency transaction gains and losses are due to changes in the Australian dollar exchange rate related to activities of the Australian entity.

Financial Position, Liquidity and Capital Resources

Since our inception, we have been engaged in organizational activities, including raising capital, and research and development activities. We do not yet have a product that has been approved by the Food and Drug Administration (the "FDA"), have not yet achieved profitable operations, nor have we ever generated positive cash flows from operations. There is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. Further, our future operations are dependent on the success of efforts to raise additional capital, our research and commercialization efforts, regulatory approval, and, ultimately, the market acceptance of our products.

In accordance with Accounting Standards Codification ("ASC") 205-40, Going Concern, we have evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. As of June 30, 2025, we had cash and cash equivalents of $18.1 million. Additionally, we had an accumulated deficit of $499.4 million at June 30, 2025, and during the six months ended June 30, 2025, we incurred a net loss of $32.1 million. We expect to continue to generate operating losses in the foreseeable future. The foregoing matters give rise to a substantial doubt about our ability to continue as a going concern for at least the next 12 months from the issuance of this report on Form 10-Q.

We have engaged a leading financial advisor to explore strategic alternatives to preserve and maximize shareholder value, including any or all of the following: entering into a merger, asset sale, or license agreement with another company; selling or partnering sirexatamab or FL-501 in a transaction with a pharmaceutical company, biotechnology company, or investment fund; or seeking additional funding through public or private equity financings. There can be no assurance that we will successfully complete a transaction as part of the strategic alternative process, and any such transaction, if available, may not be on terms favorable to us. If we are not able to successfully complete any transaction, our business, operations and financial condition will be materially adversely affected, and we would be forced to discontinue our business and operations entirely, wind-up and liquidate.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

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Operating activities. Net cash used in operating activities for the six months ended June 30, 2025 was primarily related to our net loss from the operation of our business of $32.1 million and net changes in working capital, including a decrease of $0.2 million in income tax payable, a decrease of $0.2 million in lease liabilities and an increase in research and development incentive receivable of $0.1 million. These changes were partially offset by an increase in accounts payable and accrued expenses of $0.6 million, a decrease of $0.1 million in prepaid expenses and other assets, a decrease of $0.2 million in right-of-use asset and noncash stock-based compensation expense of $2.7 million.

Net cash used in operating activities for the six months ended June 30, 2024 was primarily related to our net loss from the operation of our business of $33.9 million and net changes in working capital, including an increase in research and development incentive receivable of $0.5 million, an increase of $0.2 million in prepaid expenses and other assets and a decrease in lease liabilities of $0.1 million. These changes were partially offset by an increase in accounts payable and accrued expenses of $2.7 million, a decrease of $0.2 million in right-of-use asset, a decrease of $0.1 million in other assets and noncash stock-based compensation expense of $2.6 million.

Investing Activities. There were no investing activities during the six months ended June 30, 2025 and 2024.

Financing Activities.Net cash provided by financing activities for the six months ended June 30, 2024 consisted of $40.0 million in gross proceeds from the April 2024 Private Placement and an immaterial amount of proceeds upon the exercise of stock options, partially offset by $2.9 million of offering costs paid. Net cash used in financing activities for the six months ended June 30, 2025 consisted of $0.2 million of principal payments of insurance financing and an immaterial amount of proceeds upon the exercise of stock options.

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