Item 7. Management’s Discussion and Analysis
Item
7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
eXoZymes
is a biotechnology, pre-revenue, development stage company. Management believes that eXoZymes’s technology is a differentiated and unique synthetic biology platform.
Management believes the platform will enable scalable production of chemical molecules found in nature in a process that is alternative
to and more environmentally friendly and sustainable than the typical methods used today, such as chemical synthesis, natural extraction,
and synthetic biology. eXoZymes believes its technology could significantly change biomanufacturing through leveraging cell-free, multi-step
enzyme-based systems that will be able to transform natural or renewable resources into sought after chemicals. The objective with the eXoZymes synthetic biology platform, as it is developed over time, for diverse range of select chemicals will enable the
production of pharmaceuticals, fuels, materials, food additives, and novel compounds.
Results
of Operations
The
Company has determined its reporting units in accordance with ASC (Accounting Standards Codification) 280, Segment Reporting. The Company
has one reportable segment for eXoZymes as a whole. A single management team that reports to the Chief Executive Officer comprehensively
manages the business. Accordingly, the Company does not have separately reportable segments.
The
Company’s consolidated statements of operations as discussed herein are presented below.
29
Consolidated
Results of Operations for the Years Ended December 31, 2024 and 2023
2024
2023
$ Change
% Change
Total operating income
$ -
$ 70,069
(70,069 )
-100.0 %
Operating costs:
General and administrative costs:
Compensation
2,527,772
596,174
1,931,598
324.0 %
Professional fees
1,167,249
436,338
730,911
167.5 %
Information technology
38,658
21,803
16,855
77.3 %
General and administrative-other
329,660
284,496
45,164
15.9 %
Total general and administrative costs
4,063,339
1,338,811
2,724,528
203.5 %
Research and development costs, net of grants amounting to $2,333,722 and $2,954,208, for the years ended December 31
1,868,766
527,480
1,341,286
254.3 %
Total operating costs
5,932,105
1,866,291
4,065,815
217.9 %
Net operating loss
(5,932,105 )
(1,796,222 )
(4,135,883 )
230.3 %
Other income/(expense):
Interest income/ (expense)
77,612
100
77,512
77512.0 %
Other Income/ (expense)
(6,834 )
-
(6,834 )
100.0 %
Change in fair value of SAFE
(8 )
(200,000 )
199,992
-100.0 %
Loss before income taxes
(5,861,335 )
(1,996,122 )
(3,865,213 )
193.6 %
Income taxes
-
42,267
(42,267 )
-100.0 %
Net loss
$ (5,861,335 )
$ (2,038,389 )
(3,822,946 )
187.5 %
General
and Administrative Costs .
During years ended December 31, 2024, and 2023, respectively, several factors contributed to changes
in various expense categories:
● Compensation
Expense: The increase in compensation expense during the year ending December 31, 2024, resulted
from the recruitment of additional administrative staff, in the latter half of 2023, who
are not covered by grants.
● Professional
Fees: The increase in professional fees compared to previous period was due to higher consulting
costs related to operations and the expenses of the initial public offering. Along with higher
legal, tax, audit, and consulting costs associated with completing year-end financial audits
and preparing for the initial public offering.
● Information
Technology Costs: The increase in costs for the year ending December 31, 2024, were negligible
compared to the same period in the previous year.
● Other
General and Administrative Costs: The increase in costs for the year ending December 31,
2024, were negligible compared to the same period in the previous year.
Research
and Development Costs .
For the year ended December 31, 2024, there was an increase of $1,341,286 in research and development
costs due to an increase in salary and lab expenses and a decrease in grant funding. It is important to note that the upswing in grant
funding was not linked to any specific event.
30
Consolidated
Balance Sheet as of December 31, 2024 and December 31, 2023
2024
2023
$ Change
% Change
ASSETS
Cash and cash equivalents
$ 9,719,310
$ 66,533
9,652,777
14508.3 %
Grants receivable
737,282
882,319
(145,037 )
-16.4 %
Prepaid expenses and other current assets
363,790
264,762
99,028
37.4 %
Total current assets
10,820,382
1,213,614
9,606,768
791.6 %
Property and equipment, net
882,445
753,376
129,069
17.1 %
Operating lease right-of-use asset, net
1,331,577
1,591,519
(259,942 )
-16.3 %
Total assets
$ 13,034,404
$ 3,558,509
9,475,895
266.3 %
LIABILITIES AND DEFICIT
Accounts payable
$ 924,252
$ 702,911
221,341
31.5 %
Due to affiliates
178,966
445,128
(266,162 )
-59.8 %
Operating lease liabilities – Current
230,027
224,988
5,039
2.2 %
SAFE Liability
-
1,000,000
(1,000,000 )
-100.0 %
Taxes payable
-
42,267
(42,267 )
-100.0 %
Total current Liabilities
1,333,245
2,415,294
(1,082,049 )
-44.8 %
Deferred grant reimbursement
123,579
140,703
(17,124 )
-12.2 %
Operating lease liabilities
1,156,805
1,386,831
(230,026 )
-16.6 %
Total liabilities
$ 2,613,629
$ 3,942,828
(1,329,199 )
-33.7 %
Deficit:
-
Common shares
8
6
2
33.3 %
Paid-in-capital
22,366,725
5,700,298
16,666,427
292.4 %
Accumulated deficit
(11,945,958 )
(6,084,623 )
(5,861,335 )
96.3 %
Total deficit
10,420,775
(384,319 )
10,805,094
-2811.5 %
Total liabilities and deficit
$ 13,034,404
$ 3,558,509
9,475,895
266.3 %
Financial
Condition:
The
increase in assets was due to changes in several asset classes, but mainly in cash and cash equivalents after closing IPO. The
decrease in grants receivable was driven by completion of certain grants and timing of grant drawdowns. The increase in prepaid expenses was due to prepayment of the D&O insurance policy. The increase in property and equipment was due to the purchase of lab equipment. The decrease in
operating lease right-of-use assets resulted from the usage and payments of office space during the period.
The
decrease in liabilities were primarily driven by the conversion of the SAFE note by $1,000,000 to common shares and repayment of related party balances. The decrease
in operating lease liability was due to normal lease liability payments during the period.
The
equity increase was driven by the increase of commons shares, paid-in capital and warrants because of the initial public offering
officially closed on November 11, 2024.
31
Liquidity
and Capital Resources – December 31, 2024 and 2023
The
Company’s consolidated statements of cash flows as discussed herein are presented below.
Years
Ended December 31,
2024
2023
Net
cash used in operating activities
$ (8,505,650 )
$ (1,180,870 )
Net
cash used in investing activities
(359,216 )
(311,167 )
Net
cash provided by financing activities
18,517,643
1,000,000
Net
increase (decrease) in cash and cash equivalents
$ 9,652,777
$ (492,037 )
On
December 31, 2024, the Company had working capital of $9,487,137, as compared to working capital of $(1,201,680) on December 31, 2023,
reflecting an increase in working capital of $10,688,817. This increase in working capital was primarily the result of an increase
in cash and cash equivalents due to the closing of the initial public offering. On December 31, 2024, the Company had cash of
$9,719,310 available to fund its operation.
On
November 11, 2024, the Company signed a firm commitment underwriting agreement for its IPO, in which it sold an aggregate of 1,987,666
shares of Common Stock, including 112,666 shares pursuant to the underwriter overallotment option, for gross proceeds $15,901,328, and
net proceeds of approximately $15,206,543. The proceeds are planned to be used, throughout 2025, in the expansion of its production capabilities,
staffing, R&D and other working capital requirements, and repayment of approximately $4,243,022 in loans from MDB Capital Holdings, LLC.
In
a private placement (“Concurrent Private Offering”) completed concurrently with the IPO, the Company sold to accredited investors
an aggregate of 93,750 warrants to purchase up to 93,750 shares of Common Stock (the “Private Warrants”). The Private Warrants
were sold at a purchase price of $0.125. The Private Warrants have an exercise price of $8.00 per share, are exercisable beginning six
months after issuance, and expire five years from the date of issuance. The Private Warrants have a cashless exercise provision and registration
rights for the underlying shares of Common Stock. The gross proceeds from the Concurrent Private Offering were approximately $11,719,
and if the Private Warrants are fully exercised, for cash, the Company will receive up to $750,000.
In
October 2024, the Company received an additional cost share grant from the Department of Defense (DOD) BioMADE initiative to help fund
next steps toward cell-free biomanufacturing of isobutanol in the amount of approximately $1,000,000 against our own required expenses
of an equal amount. The Company intends to pursue additional grants which will further improve its working capital position.
Based
on its working capital of approximately $9,487,137 after the IPO, and its program of seeking various grants, the Company believes it
is in a good financial position. If, however, it does require capital, it may sell its equity securities, seek
institutional and bank funding, and sell or license various of its intellectual property rights.
Operating
Activities.
For the year ended December 31, 2024, operating activities utilized cash of $8,505,650, which was driven by an
increased research and development activity, as well as increased general and administrative costs. Additionally, the Company paid $4,243,022 in related party loans to MDB Capital Holdings, LLC.
For
the year ended December 31, 2023, operating activities utilized cash of $1,180,870, which was driven by a combination of increased research
and development activity, as well as increased general and administrative costs.
Investing
Activities .
For
the years ended December 31, 2024 and 2023, investing activities consisted of the purchase of laboratory equipment.
Financing
Activities .
For the year ended December 31, 2024, financing activities consisted of loans from a related party and the proceeds
from the IPO.
For
the year ended December 31, 2023, financing activities consisted of investments from the parent company in the form of a SAFE
and related party notes.
32
Recently
Issued Accounting Pronouncements
Recent Accounting Pronouncements
ASU 2024-03
In November 2024, the FASB issued ASU No. 2024-03, Disaggregation
of Income Statement Expenses (DISE) ( ASU 2024-03 ), which requires disclosure of certain categories of expenses such as
the purchase of inventory, employee compensation, depreciation, and intangible asset amortization that are components of existing expense
captions presented on the face of the income statement. ASU 2024-03 is effective for annual periods beginning after 15 December 2026 and
interim periods beginning after 15 December 2027, with early adoption permitted. ASU 2024-03 should be applied prospectively; however,
retrospective application is permitted. We are currently evaluating the impact of ASU 2024-03 on our disclosures.
ASU 2023-07
In November 2023, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements
to Reportable Segment Disclosures (“ASU 2023-07”), which requires all public entities, including public entities with a single
reportable segment, to provide in interim and annual periods one or more measures of segment profit or loss used by the chief operating
decision maker to allocate resources and assess performance. Additionally, the standard requires disclosures of significant segment expenses
and other segment items as well as incremental qualitative disclosures. The Company adopted ASU 2023-07 effective December 31, 2024, on
a retrospective basis. The adoption of 2023-07 did not change the way that the Company identifies its reportable segments and, as a result,
did not have a material impact on the Company’s segment-related disclosures.
ASU 2023-09
In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures ( ASU
2023-09 ), which is intended to enhance the transparency of income tax matters within financial statements, providing stakeholders
with a clearer understanding of an entity’s operations and the associated tax risks. ASU 2023-09 requires public business entities to
disclose, on an annual basis, specific categories in the rate reconciliation and provide additional information for reconciling items
that meet a specific quantitative threshold. There is a further requirement that public business entities will need to disclose a tabular
reconciliation, using both percentages and reporting currency amounts. ASU 2023-09 is effective for fiscal years beginning after 15 December
2024. The adoption of ASU 2023-09 will result in modifications to our income tax disclosures beginning in 2025.
Critical
Accounting Estimates
The
preparation of financial statements in conformity with general accepted accounting principles in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
We have identified certain accounting policies as being critical because they require us to make difficult, subjective, or complex judgments
about matters that are uncertain. We believe that the judgment, estimates, and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances
at the time. However, actual results could differ, and the use of other assumptions or estimates could result in material differences
in our results of operations or financial condition. Our critical accounting estimates are:
Accounting
for Research Grants
eXoZymes
receives grant reimbursements, which are netted against research and development expenses in the consolidated statement
of operations. Grant reimbursements for capitalized assets are recognized over the useful life of the assets, with the unrecognized portion
considered a deferred liability and are included in accounts payable and accrued expenses in the consolidated balance
sheet.
Grants
that operate on a reimbursement basis are recognized on the accrual basis as revenues to the extent of disbursements and commitments
that are allowable for reimbursement of allowable expenses incurred as of December 31, 2024 and 2023 and expected to be received
from funding sources in the subsequent year. Management considers such receivables at December 31, 2024 and 2023, to be fully
collectable, due to the historical experience with the Federal Government of the United States of America. Accordingly, no allowance
for grants receivable was recorded in the accompanying consolidated financial statements.
Research
grants received from organizations are subject to the contract agreement as to how eXoZymes conducts its research activities, and eXoZymes
is required to comply with the agreement terms relating to those grants. Amounts received under research grants are nonrefundable, regardless
of the success of the underlying research project, to the extent that such amounts are expended in accordance with the approved grant
project. eXoZymes is permitted to draw down (a process of submitting expenses for reimbursement) the research grants after incurring
the related expenses. Amounts received under research grants are offset against the related research and development costs in the Company’s consolidated statement of operations.
Summary
of Business Activities and Plans
On
November 11, 2024, the Company signed a firm commitment underwriting agreement for its initial public offering (IPO) with a closing
date of November 11, 2024, which consisted of the sale of an aggregate of 1,875,000 shares of Common Stock. The public offering
price was $8.00 per share, for gross proceeds of $15,000,000. The underwriter was granted its overallotment option for up to an
additional 281,250 shares until December 26, 2024. The net proceeds for the initial public offering with the overallotment were
$15,206,543 as of the date of this report. The proceeds will be used for the development of eXoZymes, expansion of production
capabilities, increased staff and related expenses, R&D expenses, repayment of a related party loan and other general corporate
and working capital requirements.
External
Risks Associated with the Company’s Business Activities
Inflation
Risk . The Company does not believe that inflation has had a material effect on its operations to date, other than its impact
on the general economy.
33
Supply
Chain Issues . The Company continues to monitor changes in tariffs and indirect trade restraints. The Company does not
currently expect that supply chain issues will have a significant impact on its business activities.
Potential
Recession . There are various indications that the United States economy may be entering a recessionary period. Also, there is possible economic instability due to the possibility of tariffs and other economic changes due to
government policy of the United States and other countries. Although unclear
at this time, an economic recession would likely impact the general business environment and the capital markets, which could, in turn, affect the Company.
The
Company is continuing to monitor these matters and will adjust its current business and financing plans as more information and guidance
become available.
Technology.
The Company’s endeavors to create and bring new technologies to the market may never come to fruition or might not reach a
level of development sufficient for commercial viability. Even if they do achieve a commercial level of development, the acceptance of
these technologies within the marketplace is uncertain. There’s a possibility that the technologies they develop may not gain widespread
or timely acceptance. Moreover, technologies from our Company that undergo regulatory scrutiny, testing, and approval may ultimately
fail to receive the necessary approvals from relevant regulatory bodies.
Trends,
Events and Uncertainties
Other
than as discussed above, we are not currently aware of any trends, events or uncertainties that are likely to have a material effect
on our financial condition in the near term, although it is possible that new trends or events may develop in the future that could have
a material effect on our financial condition.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
We
are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, therefore are not required to provide the information
under this item.