EXICURE, INC. 10-K

Item 8. Financial Statements and Supplementary Data. EXICURE, INC. INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm ( KPMG LLP , Chicago, IL , PCAOB ID 185 ) 107 Consolidated Balance Sheets as of December 31, 2021 and 2020 108 Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 109 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021 and 2020 110 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021 and 2020 111 Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 112 Notes to Consolidated Financial Statements 114 106 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Exicure, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Exicure, Inc. and subsidiary (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant expenses and negative cash flows since inception and its current liquidity is not sufficient to fund operations over the next twelve months, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. (signed) KPMG LLP We have served as the Company’s auditor since 2014. Chicago, Illinois March 25, 2022 107 Table of Contents EXICURE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 34,644 $ 33,262 Short-term investments 4,497 48,818 Accounts receivable — 11 Prepaid expenses and other assets 4,525 4,231 Total current assets 43,666 86,322 Property and equipment, net 3,927 4,123 Right-of-use asset 7,950 8,606 Other noncurrent assets 9,325 1,393 Total assets $ 64,868 $ 100,444 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ 6,873 $ — Accounts payable 3,413 1,866 Accrued expenses and other current liabilities 6,464 3,525 Deferred revenue, current 17,317 8,343 Total current liabilities 34,067 13,734 Long-term debt, net — 16,589 Deferred revenue, noncurrent 11,509 — Lease liability, noncurrent 7,404 7,959 Other noncurrent liabilities 656 656 Total liabilities $ 53,636 $ 38,938 Stockholders’ equity: Preferred stock, $ 0.0001 par value per share; 10,000,000 shares authorized, no shares issued and outstanding, December 31, 2021 and December 31, 2020 — — Common stock, $ 0.0001 par value per share; 200,000,000 shares authorized, 108,783,144 issued and outstanding, December 31, 2021; 87,651,352 issued and outstanding, December 31, 2020 11 9 Additional paid-in capital 181,290 167,379 Accumulated other comprehensive (loss) income ( 2 ) 83 Accumulated deficit ( 170,067 ) ( 105,965 ) Total stockholders' equity 11,232 61,506 Total liabilities and stockholders’ equity $ 64,868 $ 100,444 See Accompanying Notes to Consolidated Financial Statements. 108 Table of Contents EXICURE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) Year Ended December 31, 2021 2020 Revenue: Collaboration revenue $ ( 483 ) $ 16,613 Total revenue ( 483 ) 16,613 Operating expenses: Research and development expense 48,979 32,094 General and administrative expense 13,087 9,955 Total operating expenses 62,066 42,049 Operating loss ( 62,549 ) ( 25,436 ) Other (expense) income, net: Dividend income 8 47 Interest income 141 972 Interest expense ( 1,691 ) ( 573 ) Other (expense) income, net ( 11 ) 322 Total other (expense) income, net ( 1,553 ) 768 Net loss before provision for income taxes ( 64,102 ) ( 24,668 ) Provision for income taxes — — Net loss $ ( 64,102 ) $ ( 24,668 ) Basic and diluted loss per common share $ ( 0.72 ) $ ( 0.28 ) Weighted-average basic and diluted common shares outstanding 88,617,332 87,203,588 See Accompanying Notes to Consolidated Financial Statements. 109 Table of Contents EXICURE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands, except share and per share data) Year Ended December 31, 2021 2020 Net loss $ ( 64,102 ) $ ( 24,668 ) Other comprehensive (loss) income, net of taxes Unrealized (losses) gains on available for sale securities, net of tax ( 85 ) 110 Other comprehensive (loss) income ( 85 ) 110 Comprehensive loss $ ( 64,187 ) $ ( 24,558 ) See Accompanying Notes to Consolidated Financial Statements. 110 Table of Contents EXICURE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except shares) Common Stock Shares $ Additional Paid-in- Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Balance at December 31, 2019 86,069,263 $ 9 $ 162,062 $ ( 81,297 ) $ ( 27 ) $ 80,747 Exercise of options 500,905 — 367 — — 367 Equity-based compensation — — 2,184 — — 2,184 Issuance of common stock 1,081,184 — 2,766 — — 2,766 Other comprehensive income, net — — — — 110 110 Net loss — — — ( 24,668 ) — ( 24,668 ) Balance at December 31, 2020 87,651,352 $ 9 $ 167,379 $ ( 105,965 ) $ 83 $ 61,506 Exercise of options 342,246 — 546 — — 546 Equity-based compensation — — 2,939 — — 2,939 Vesting of restricted stock units and related repurchases 24,257 — ( 14 ) — — ( 14 ) Issuance of common stock-ESPP 189,221 — 209 — — 209 Issuance of common stock and warrants 20,576,068 2 10,231 — — 10,233 Other comprehensive income, net — — — — ( 85 ) ( 85 ) Net loss — — — ( 64,102 ) — ( 64,102 ) Balance at December 31, 2021 108,783,144 $ 11 $ 181,290 $ ( 170,067 ) $ ( 2 ) $ 11,232 See Accompanying Notes to Consolidated Financial Statements. 111 Table of Contents EXICURE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 64,102 ) $ ( 24,668 ) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 1,123 766 Amortization of right-of-use asset 656 681 Equity-based compensation 2,939 2,184 Amortization of long-term debt issuance costs and fees 284 111 Amortization of investments 184 319 Other 7 68 Change in fair value of warrant liabilities ( 15 ) ( 399 ) Changes in operating assets and liabilities: Accounts receivable 11 24 Prepaid expenses and other current assets ( 295 ) ( 3,000 ) Other noncurrent assets 68 ( 161 ) Accounts payable 1,582 364 Accrued expenses 2,811 1,174 Deferred revenue 20,483 ( 16,486 ) Other liabilities ( 555 ) ( 247 ) Net cash used in operating activities ( 34,819 ) ( 39,270 ) Cash flows from investing activities: Purchase of available for sale securities ( 6,497 ) ( 56,640 ) Proceeds from sale or maturity of available for sale securities 50,550 69,953 Capital expenditures ( 968 ) ( 3,171 ) Net cash provided by investing activities 43,085 10,142 Cash flows from financing activities: Proceeds from common stock offering 11,486 2,973 Payment of common stock financing costs ( 1,111 ) ( 207 ) Proceeds from long-term borrowing — 17,500 Payment of long-term debt fees and issuance costs — ( 504 ) Repayment of long-term debt ( 10,000 ) ( 4,999 ) Proceeds from issuance of employee stock purchase plan 209 — Proceeds from exercise of common stock options 546 367 Payments for minimum statutory tax withholding related to net share settlement of equity awards ( 14 ) — Net cash provided by financing activities 1,116 15,130 Net increase (decrease) in cash, cash equivalents, and restricted cash 9,382 ( 13,998 ) Cash, cash equivalents, and restricted cash - beginning of period 34,462 48,460 Cash, cash equivalents, and restricted cash - end of period $ 43,844 $ 34,462 112 Table of Contents EXICURE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2021 2020 Supplemental disclosure of cash flow information Non-cash operating activities: Right-of-use asset acquired through operating leases $ — $ 8,147 Non-cash investing activities: Capital expenditures (accounts payable and accrued expenses) 9 43 Non-cash financing activities: Debt fees (accrued expense and other noncurrent liabilities) — 656 Common stock issuance costs (accounts payable and accrued expenses) 142 — The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the amounts shown in the consolidated statements of cash flows: Year Ended December 31, 2021 2020 Cash and cash equivalents $ 34,644 $ 33,262 Restricted cash included in other noncurrent assets 9,200 1,200 Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows $ 43,844 $ 34,462 See Accompanying Notes to Consolidated Financial Statements. 113 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 1. Description of Business and Basis of Presentation Description of Business Exicure, Inc. is an early-stage biotechnology company developing nucleic acid therapies targeting ribonucleic acid against validated targets to neurological disorders and hair loss. The team includes a diverse scientific group with expertise in nucleic acid chemistry, drug development and neuroscience. Headquartered in Chicago, Illinois, the Company conducts its discovery and development efforts in-house with a dedicated 30,000 square foot facility, including rapid and automated high throughput nucleic acid synthesis and screening. The Company’s therapeutic discovery and development efforts are supported by its proprietary Spherical Nucleic Acid, or SNA, technology. SNAs are nanoscale constructs consisting of densely packed synthetic nucleic acid sequences that are radially arranged in three dimensions. The Company believes the design of SNAs gives rise to distinct chemical and biological properties that may provide advantages over other nucleic acid therapeutics and enable therapeutic activity outside of the liver. The Company’s platform for therapeutic nucleic acids has demonstrated potential high potency, broad uptake, and prolonged efficacy in both in vitro and in vivo neurological models. The basis of the Company’s discovery approach harnesses our expertise in oligonucleotide chemistry for use against validated targets where we can screen thousands of oligonucleotides efficiently and identify top candidates in the appropriate cell and live animal models. The Company is conducting preclinical studies for a non-opioid analgesic directed against SCN9A (Nav1.7); undisclosed targets in Huntington’s disease and Angelman syndrome as part of our collaboration with Ipsen Biopharm Limited, or Ipsen; and undisclosed targets in hair loss disorders as part of our collaboration with AbbVie Inc., or AbbVie. Throughout these consolidated financial statements, the terms the “Company,” and “Exicure” refer to Exicure, Inc. and where appropriate, its wholly owned subsidiary, Exicure Operating Company. Exicure Operating Company holds all material assets and conducts all business activities and operations of Exicure, Inc. Basis of Presentation The accompanying consolidated financial statements as of December 31, 2021 and 2020, and for the years then ended, have been presented in conformity with generally accepted accounting principles in the United States (“GAAP”). Principles of Consolidation The accompanying consolidated financial statements include the accounts of Exicure, Inc. and its wholly owned subsidiary, Exicure Operating Company. All intercompany transactions and accounts are eliminated in consolidation. 114 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Significant Risks and Uncertainties As discussed in Note 3, Collaborative Research and License Agreements , revenue recognized under the AbbVie Collaboration Agreement (as defined in Note 3, Collaborative Research and License Agreements ) for the year ended December 31, 2021 reflects the cumulative catchup adjustment (reduction) of revenue of recorded in connection with a change in estimate that occurred during the third quarter of 2021. The Company currently estimates significant additional efforts will be required to satisfy the performance obligation under the AbbVie Collaboration Agreement. These increased estimated efforts in connection with the change in workplan resulted in less progress occurring relative to the increased estimate of total project hours to complete the research services during the year ended December 31, 2021 as compared to the amount of revenue recognized at December 31, 2020, which led to a full year revenue reversal of $( 2,792 ) in the current year. Due to uncertainties inherent in the estimation process, it is at least reasonably possible that estimated efforts required to complete the research services under the AbbVie Collaboration Agreement will be further revised in the near-term which may result in additional adjustments (reductions of revenue) in future periods. As discussed in Note 2, Significant Accounting Policies — Revenue Recognition , determining the estimate of total project hours used to recognize revenue for the Company’s collaboration agreements requires significant judgment and any changes to those estimates may have a significant impact on the amount and timing of revenue recognition for the Ipsen Collaboration Agreement or the AbbVie Collaboration Agreement (each, as defined in Note 3, Collaborative Research and License Agreements ) in future periods. COVID-19 Risks and Uncertainties In response to the ongoing COVID-19 pandemic, the Company has taken and continues to take active measures designed to address and mitigate the impact of the COVID-19 pandemic on its business. The Company continues to monitor closely the developments and continue to take active measures to protect the health of its employees and their families, and its communities. Its on-site activities continue with protocols for safely accessing and working within its facilities. While the Company continues to conduct research and development activities, the COVID-19 pandemic has impacted, and may continue to impact, certain of its early-stage discovery efforts. The Company is working closely with its third-party manufacturers and other partners to manage its supply chain activities and mitigate potential disruptions as a result of the COVID-19 pandemic. The Company has observed minor delays in receipt of key chemicals, reagents and materials as certain manufacturers have had supply disruptions related to the COVID-19 pandemic. If the COVID-19 pandemic continues to persist for an extended period of time and impacts essential distribution systems such as FedEx and postal delivery, the Company could experience future disruptions to its supply chain and operations and associated delays in the manufacturing and its clinical supply, which would adversely impact its preclinical and clinical development activities. However, if the COVID-19 pandemic continues to persist for an extended period of time, the Company could experience further significant disruptions to its clinical and preclinical development timelines, which would adversely affect its business, financial condition, results of operations and growth prospects. In addition, the Company is subject to other challenges and risks specific to its business and its ability to execute on its business plan and strategy, as well as risks and uncertainties common to companies in the biotechnology industry with research and development operations, including, without limitation, risks and uncertainties associated with: obtaining regulatory approval of its product candidates; delays or problems in obtaining clinical supply, loss of single source suppliers or failure to comply with manufacturing regulations; identifying, acquiring or in-licensing additional products or product candidates; product development and the inherent uncertainty of clinical success; and the challenges of protecting and enhancing its intellectual property rights; and the challenges of complying with applicable regulatory requirements. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties.. 115 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Going Concern At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued. The Company is required to make certain additional disclosures if it concludes substantial doubt exists and it is not alleviated by the Company’s plans or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern for a period of one year after the date that the financial statements are issued. As of December 31, 2021, the Company has generated an accumulated deficit of $ 188,904 since inception and expects to incur significant expenses and negative cash flows for the foreseeable future. As of December 31, 2021, the Company’s cash, cash equivalents, short-term investments, and restricted cash were $ 48,341 . Management believes that given the Company’s current cash position, operating plans and forecasted negative cash flows from operating activities over the next twelve months, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued. The Company has no committed sources of additional capital at this time and substantial additional financing will be needed by the Company to fund its operations. Management believes that it will be able to obtain additional funding through equity or debt financings, collaboration agreements, strategic partnerships and licensing arrangements, or other arrangements to fund its current operations and business strategy. However, there can be no assurance that such additional financing will be available and, if available, can be obtained on terms acceptable to the Company. If the Company is unable to raise additional capital, the Company could be forced to delay, reduce the scope of or eliminate its research and development programs or the Company may be required to relinquish rights to assets or preclinical programs that it might otherwise seek to develop independently, any of which could adversely affect its business prospects, or the Company may be unable to continue operations. The accompanying consolidated financial statements have been prepared as though the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Use of Estimates The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Management bases its estimates on certain assumptions which it believes are reasonable in the circumstances and while actual results could differ from those estimates, management does not believe that any change in those assumptions in the near term would have a significant effect on the Company’s financial position, results of operations or cash flows. Actual results in future periods could differ from those estimates . 116 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 2. Significant Accounting Policies Cash, cash equivalents, and short-term investments The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s short-term investments have initial maturities of greater than three months from date of purchase. The Company classifies its marketable debt security investments as “available-for-sale” and carries them at fair market value based upon prices on the last day of the fiscal period for identical or similar items. The Company records unrealized gains and losses on marketable debt securities in other comprehensive income (loss) as a component of stockholders’ equity until realized. Any premium or discount arising at purchase is amortized and/or accreted to interest income and/or interest expense over the life of the of the underlying security. Realized gains and losses are included in other income, net. The Company uses the specific identification method to determine the cost of securities sold. Restricted cash As of December 31, 2021, the Company was required to maintain a balance of $ 8,000 in a blocked account in connection with Amendment No. 4 to the MidCap Credit Agreement (see Note 6); this amount is considered restricted cash and is presented within other noncurrent assets on the accompanying consolidated balance sheet at December 31, 2021. The Company also secures a standby letter of credit with a restricted certificate of deposit account as part of its Chicago lease agreement. The Company considers the restricted certificate of deposit account in the amount of $ 1,200 to be restricted cash because its use to the Company is contractually limited and presents the balance within other noncurrent assets on the accompanying consolidated balance sheet at December 31, 2021. Fair value of financial instruments The Company has estimated the fair value of its financial instruments. The carrying amounts for cash, cash equivalents, accounts receivable, and accounts payable approximate their fair value due to the relatively short-term nature of these instruments. The Company records short-term investments at their estimated fair value based on quoted market prices for identical or similar instruments. The Company believes that its long-term debt bears interest at the prevailing market rate for instruments with similar characteristics and, accordingly, the carrying value of long-term debt also approximates its fair value. Concentrations of credit risk and other risks and uncertainties Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments, and accounts receivable. The Company places its cash, cash equivalents, and short-term investments with reputable financial institutions. The Company primarily invests its excess cash in debt instruments of corporations, the U.S. Treasury, financial institutions, and U.S. government agencies with strong credit ratings and an investment grade rating at or above a long-term rating of Aa3/AA- and a short-term rating of P1/A1. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. The Company periodically reviews and modifies these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no financial instruments with off-balance sheet risk of loss. For the year ended December 31, 2021, the Company’s revenue was generated from its collaborations with Ipsen and AbbVie. The Company is currently not profitable and no assurance can be provided that it will ever be profitable. The Company’s research and development activities have required significant investment since inception and operations are expected to continue to require cash investment in excess of its revenues. See also Note 1, Going Concern , for more information. 117 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) The Company is subject to risks common in therapeutic development including, but not limited to, therapeutic candidates that appear promising in the early phases of development often fail because they prove to be inefficacious or unsafe, clinical trial results are unsuccessful, regulatory bodies may not approve the therapeutic or the therapeutic may not be economical in production or distribution. The Company is also subject to risks common to biotechnology firms including, but not limited to new and disruptive technological innovations, dependence on key personnel, protection of proprietary technology, the validity of and continued access to its owned and licensed intellectual property, limitations on the supply of critical materials, compliance with governmental regulations and market acceptance. Property and equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the various classes of property and equipment, which range from three to seven years . Leasehold improvements are amortized using the straight-line method over the shorter of the remaining terms of the respective leases or the estimated lives of the assets. Depreciation begins at the time the asset is placed in service. Property and equipment are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment losses were recorded from inception in December 2011 through December 31, 2021. Warrants The Company accounts for freestanding warrants within stockholder’s equity or as liabilities based on the characteristics and provisions of each instrument. The Company evaluates outstanding warrants in accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity , and ASC 815, Derivatives and Hedging . If none of the criteria in the evaluation in these standards are met, the warrants are classified as a component of stockholders’ equity and initially recorded at their grant date fair value without subsequent remeasurement. Warrants that meet the criteria are classified as liabilities and remeasured to their fair value, estimated using the Black-Scholes option-pricing model, at the end of each reporting period with changes in the fair value of the liability recorded in other income (expense), net in the consolidated statements of operations. Revenue recognition Effective January 1, 2018, the Company adopted the provisions of ASC 606, Revenue from Contracts with Customers using the modified retrospective method for all contracts not completed as of the date of adoption. Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of ASC 606, the Company performs the following five steps: 1. Identify the contract with the customer. A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights and obligations regarding the goods or services to be transferred and identifies the related payment terms, (ii) the contract has commercial substance, and (iii) the Company determines that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s intent and ability to pay, which is based on a variety of factors including the customer’s historical payment experience, or in the case of a new customer, published credit and financial information pertaining to the customer. 2. Identify the performance obligations in the contract. Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other available resources, and are distinct in the context of the contract, whereby the transfer of the good or 118 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) service is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods and services, the Company must apply judgment to determine whether promised goods and services are both capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation. 3. Determine the transaction price. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method, depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period for any changes. Determining the transaction price requires significant judgment. 4. Allocate the transaction price to performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The consideration to be received is allocated among the separate performance obligations based on relative standalone selling prices. 5. Recognize revenue when or as the Company satisfies a performance obligation. The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized over time if either (i) the customer simultaneously receives and consumes the benefits provided by the entity’s performance, (ii) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (iii) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. If the entity does not satisfy a performance obligation over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or service to a customer. Examples of control are using the asset to produce goods or services, enhance the value of other assets, or settle liabilities, and holding or selling the asset. Revenue allocated to performance obligations relating to provision of research and development activities is recognized as the performance obligations are satisfied using an input method to measure progress, based on an estimate of the percentage of completion of the project based on the actual hours incurred on the project as a percentage of the total expected project hours. The determination of the percentage of completion requires management to estimate the total expected project hours. A detailed estimate of the total expected project hours is re-assessed every reporting period based on the latest project plan and discussions with project teams. If a change in facts or circumstances occurs, the estimate will be adjusted and the revenue will be recognized based on the revised estimate. The difference between the cumulative revenue recognized based on the previous estimate and the revenue recognized based on the revised estimate would be recognized as an adjustment to revenue in the period in which the change in estimate occurs. Determining the estimate of total project hours requires significant judgment and may have a significant impact on the amount and timing of revenue recognition. For example, as discussed in Note 3, Collaborative Research and License Agreements , revenue recognized under the AbbVie Collaboration Agreement (as defined in Note 3, Collaborative Research and License Agreements ) for the year ended 119 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) December 31, 2021 was $( 2,792 ) due primarily to the cumulative catchup adjustment (reduction) of revenue recorded in connection with a change in estimate that occurred during the third quarter of 2021. Licenses of intellectual property : If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from consideration allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the licenses. For licenses that are combined with other promises, the Company utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. Milestone payments: At the inception of each arrangement that includes development milestone payments, the Company evaluates the probability of reaching the milestones and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur in the future, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received and therefore revenue recognized is constrained as management is unable to assert that a reversal of revenue would not be possible. The transaction price is then allocated to each performance obligation on a relative standalone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and earnings in the period of adjustment. To date, the Company has not recognized any milestone payment revenue from any of its collaboration agreements. Royalties : For arrangements that include sales-based royalties, including milestone payments based on levels of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its collaboration agreements. Equity-based compensation The Company measures the cost of equity-based awards at fair value and records the cost of the awards, net of estimated forfeitures, on a straight-line basis over the requisite service period. The Company measures fair value for all common stock options using the Black-Scholes option-pricing model. The fair value of common stock option awards is affected by the valuation assumptions, including the expected volatility based on comparable market participants, expected term of the common stock option, risk-free interest rate, and expected dividends. For all equity-based awards, the fair value measurement date is the date of grant and the requisite service period is the period over which the recipient is required to provide service in exchange for the equity-based awards, which is generally the vesting period. Segments and geographic information The Company has determined it has one reporting segment. Disaggregating the Company’s operations is impracticable because the Company’s research and development activities and its assets overlap and management reviews its business as a single operating segment. Thus, discrete financial information is not available by more than one operating segment. All long-lived assets of the Company are located in the United States. Leases The Company determines if an arrangement is a lease at contract inception. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s 120 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized on the balance sheet at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, the Company includes options to extend or to terminate the lease when it is reasonably certain that the Company will exercise that option. The Company uses the implicit interest rate when readily determinable and uses the Company’s incremental borrowing rate when the implicit rate is not readily determinable based upon the information available at the commencement date in determining the present value of the lease payments. The lease payments used to determine the Company’s operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation when determinable. In addition, the Company’s lease arrangements may contain lease and non-lease components. The Company combines lease and non-lease components, which are accounted for together as a single lease component. Variable lease payments, such as real estate taxes and facility maintenance costs that are allocated by the lessor to the lessee and are not based on an index or a rate, are excluded from the measurement of the lease liability. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Short-term leases, defined as leases that have a lease term of twelve months or less at the commencement date, are excluded from this treatment and are recognized on a straight-line basis over the term of the lease. Costs for variable lease payments that are not included in the lease liability are recognized as expense as incurred. Research and development expense Research and development expenses are charged to expense as incurred in performing research and development activities in accordance with ASC 730, Research and Development . The costs include employee‑related expenses including salaries, benefits, and stock‑based compensation expense, costs of funding research performed by third parties that conduct research and development and preclinical and clinical activities on the Company’s behalf, the cost of purchasing lab supplies and non‑capital equipment used in preclinical and clinical activities and in manufacturing preclinical and clinical study materials, consultant fees, facility costs including rent, depreciation and maintenance expenses, fees for acquiring and maintaining licenses under third party licensing agreements, including any sublicensing or success payments made to the Company’s licensors, and overhead and other expenses directly related to research and development operations. In accruing service fees, the Company estimates 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 Company’s estimate, the accrual or prepaid is adjusted accordingly. The Company defers and capitalizes non-refundable advance payments made by the Company for research and development activities until the related goods are received or the related services are performed. In circumstances where amounts have been paid in excess of costs incurred, the Company records a prepaid expense. Income taxes The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities and the expected benefits of net operating loss carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, is applied during the years in which temporary differences are expected to be settled and is reflected in the financial statements in the period of enactment. The measurement of deferred tax assets is reduced, if necessary, if, based on weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets will not be realized. At December 31, 2021 and 2020, the Company established a full valuation allowance against its deferred tax assets to an amount that is more likely than not to be realized. 121 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Recent Accounting Pronouncements Not Yet Adopted Financial Instruments - Credit Losses In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13) . ASU 2016-13 is a new standard intended to improve reporting requirements specific to loans, receivables and other financial instruments. ASU 2016-13 requires that credit losses on financial assets measured at amortized cost be determined using an expected loss model, instead of the current incurred loss model, and requires that credit losses related to available-for-sale debt securities be recorded through an allowance for credit losses and limited to the amount by which carrying value exceeds fair value. ASU 2016-13 also requires enhanced disclosure of credit risk associated with financial assets. The effective date of ASU 2016-13 was deferred by ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)—Effective Dates to the annual period beginning after December 15, 2022 for companies that (i) meet the definition of an SEC filer and (ii) are eligible as “smaller reporting companies” as such term is defined by the SEC, with early adoption permitted. The Company is currently assessing the impact of adoption of ASU 2016-13 to its consolidated financial statements. 3. Collaborative Research and License Agreements Ipsen Collaboration Agreement Summary of Agreement On July 30, 2021 (the “Ipsen Effective Date”), the Company entered into a Collaboration, Option and License Agreement with Ipsen (the “Ipsen Collaboration Agreement”). Pursuant to the Ipsen Collaboration Agreement, the Company granted to Ipsen exclusive access and options to license SNA-based therapeutics arising from two collaboration programs related to the treatment of Huntington’s disease and Angelman syndrome (each, an “Ipsen Collaboration Program”), respectively. Each such license (obtained in connection with the exercise of an Ipsen Option, as defined and discussed further below) would grant to Ipsen exclusive, royalty-bearing, sublicensable, worldwide rights to develop, manufacture, use and commercialize such SNA therapeutics. Upon written notice to the Company, Ipsen may exercise its option during the corresponding collaboration program’s applicable option exercise period, (each, an “Ipsen Option Exercise Period”). As of the Ipsen Effective Date, the Company and Ipsen have agreed upon a development plan for each Ipsen Collaboration Program that describes the development activities and timelines required to advance each such Ipsen Collaboration Program through its first IND filing (each, an “Ipsen Development Plan”). The activities described in the Ipsen Development Plans are conducted under the supervision of the Ipsen Joint Steering Committee (the “Ipsen JSC”) consisting of three members from each of the Company and Ipsen. Under the terms of the Ipsen Collaboration Agreement, the Company will use commercially reasonable efforts to conduct discovery and development in two collaboration programs for Huntington’s disease (the “HD Program”) and Angelman syndrome (the “AS Program”) (the “Ipsen Development Activities”) respectively. The Company shall be solely responsible for all costs and expenses of conducting each Ipsen Collaboration Program through the selection of SNA therapeutic candidates for further development (“Ipsen Selection”), and Ipsen shall be responsible for all costs and expenses of all activities that are necessary to enable the first filing of an IND for each proposed product candidate. In the event that Ipsen exercises an option, Ipsen will be responsible for further development from the license effective date and commercialization of the corresponding licensed product. Following the completion of all Ipsen Development Activities for the Ipsen Selection (the “Ipsen First R&D Term Activities”), the Company is required to deliver to Ipsen a report that describes the results of the Ipsen First R&D Term Activities and identifies at least one SNA-based compound that satisfies certain criteria for such Ipsen Collaboration Program as determined by the Ipsen JSC (the “Ipsen First Option Data Package”). Following the delivery of the Ipsen First Option Data Package for an Ipsen Collaboration Program, Ipsen will have the ability for a defined period of time (the “Ipsen First Option Exercise Period”) to exercise an option (each a “First Ipsen Option”) 122 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) to obtain worldwide rights and license to the Company’s SNA technology and the Company’s interest in joint collaboration technology to make, have made, import, use, sell or offer for sale any product (each an “Ipsen Licensed Product”) that results from such Ipsen Collaboration Program during the term of the Ipsen Collaboration Agreement. In the event Ipsen (i) does not exercise the First Ipsen Option with respect to an Ipsen Collaboration Program, (ii) the Ipsen Collaboration Agreement has not expired or been terminated with respect to such Ipsen Collaboration Program, and (iii) Ipsen agrees to fully fund additional research activities for an Ipsen Collaboration Program through IND filing, the Company will be responsible for research and development activities for such Ipsen Collaboration Program through IND filing (the “Ipsen Second R&D Term Activities”). Following the completion of the Ipsen Second R&D Term Activities, the Company is required to deliver to Ipsen a report that describes the results of the Ipsen Second R&D Term Activities (the “Ipsen Second Option Data Package”). Following the delivery of the Ipsen Second Option Data Package for an Ipsen Collaboration Program, Ipsen will have the ability for a defined period of time (the “Ipsen Second Option Exercise Period”) to exercise an option (each a “Second Ipsen Option” and together with the First Ipsen Option, the “Ipsen Options”) to obtain worldwide rights and license to the Company’s SNA technology and the Company’s interest in joint collaboration technology to make, have made, import, use, sell or offer for sale any Ipsen Licensed Product” that results from such Ipsen Collaboration Program during the term of the Ipsen Collaboration Agreement. After Ipsen’s exercise of an Ipsen Option for an Ipsen Collaboration Program, the Company shall supply to Ipsen the licensed SNAs under current Good Manufacturing Practice, at the Company’s manufacturing cost pursuant to a clinical supply agreement to be negotiated by the Company and Ipsen in good faith following the Ipsen Effective Date and executed within twelve (12) months after the Ipsen Effective Date (the “Ipsen Supply Agreement”). The Ipsen Supply Agreement will provide for the transfer by the Company to Ipsen of all documents and information, and the provision by the Company of technical assistance and support, for Ipsen to manufacture or have manufactured by a third party contractor engaged by Ipsen the applicable licensed SNA to the extent it is intended to be actually used in the development and manufacture of the applicable licensed products. Under the terms of the Ipsen Collaboration Agreement, the Company received an upfront payment of $ 20,000 (the “Ipsen Upfront Payment”). If Ipsen exercises a First Ipsen Option, Ipsen is required to pay the Company the First Ipsen Option exercise fee of $ 10,000 for each Ipsen Collaboration Program. If Ipsen exercises a Second Ipsen Option, Ipsen is required to pay the Company the Second Ipsen Option exercise fee of $ 25,000 for each Ipsen Collaboration Program. Ipsen will pay a pre-clinical milestone payment of $ 5,000 for each Ipsen Collaboration Program upon achievement of such milestone regardless of whether an Ipsen Option is exercised. In addition to the option exercise fees and the pre-clinical milestones described above, if Ipsen exercises an Ipsen Option for an Ipsen Collaboration Program, development and regulatory milestones will be payable for that program upon the initiation of certain clinical trials and the filing for processing by the United States Food and Drug Administration (“FDA”) in the United States and by two additional regulators outside the United States of a marketing application for review, per the Ipsen Collaboration Program, with an aggregate total of up to $ 180,000 if both Ipsen Options are exercised. Commercial milestones will be payable for that Ipsen Collaboration Program upon first commercial sale of a licensed product in certain jurisdictions and the achievement of specified aggregate sales thresholds for all licensed products from that program, with an aggregate total of up to $ 762,000 if both Ipsen Options are exercised. In the event a therapeutic candidate subject to the Ipsen Collaboration Agreement results in commercial sales, the Company is eligible to receive tiered royalties at percentages ranging from the mid-single digits to the mid-teens on future net product sales of such commercialized therapeutic candidates. A percentage of the aforementioned payments will be due to Northwestern University upon receipt, pursuant to the terms of the Company’s existing license agreements with Northwestern University (see Note 15, Commitment and Contingencies, for more information on the Northwestern University License Agreements (as defined below)). In connection with the receipt of the Ipsen Upfront Payment, the Company paid a $ 3,000 license fee to Northwestern University under the terms of the Northwestern License Agreements. 123 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) The Company’s obligations to conduct activities defined in the Ipsen Development Plan under the Ipsen Collaboration Agreement commenced on July 30, 2021 and continues, unless earlier terminated, until (a) the expiration of the later-to-expire Ipsen Option Exercise Period, if Ipsen does not exercise either Ipsen Option, or (b) the expiration of the last-to-expire royalty term for any licensed product in such country on a licensed product-by-licensed product and country-by-country basis, if Ipsen exercises one or both Ipsen Options. Upon expiration of the royalty term with respect to a particular licensed product in a country, the license for such product in such country will convert to a fully-paid, irrevocable and perpetual license. The Ipsen Collaboration Agreement also contains customary provisions for termination by either party, including by Ipsen for any or no reason in its entirety upon ( 90 ) days prior written notice and including in the event of breach of the Ipsen Collaboration Agreement, subject to cure, and by the Company upon a challenge of the licensed patents, subject, in certain cases, to customary reversion rights. Upon termination of the Ipsen Collaboration Agreement by the Company for Ipsen’s breach or bankruptcy, all licenses granted by the Company to Ipsen will terminate. The Ipsen Collaboration Agreement includes customary representations and warranties on behalf of both the Company and Ipsen. The Ipsen Collaboration Agreement also provides for customary mutual indemnities. In addition, the Ipsen Collaboration Agreement imposes certain exclusivity obligations on Ipsen and the Company, respectively, with respect to the development, use, manufacture and commercialization of oligonucleotide-based therapeutic targeting the same targets in the collaboration programs and/or certain other specific targets. Either party may assign the Ipsen Collaboration Agreement or delegate its obligations to an affiliate or to a successor to substantially all of the business to which the Ipsen Collaboration Agreement relates without the consent of the other party. Accounting Analysis The Company concluded that Ipsen is a customer in this arrangement, and as such the arrangement falls within the scope of the revenue recognition guidance. Under the Ipsen Collaboration Agreement, the Company has identified two performance obligations, as follows: (1) the performance obligation related to the HD Program that includes (i) the Ipsen First R&D Term Activities related to the HD Program (the “Ipsen HD Program R&D Services”), (ii) Ipsen JSC services related to the HD Program during the Ipsen First Term (the “Ipsen HD Program JSC Services”), and (iii) activities related to the negotiation of the Ipsen Supply Agreement within twelve months of the Ipsen Effective Date; and (2) the performance obligation related to the AS Program that includes (i) the Ipsen First R&D Term Activities related to the AS Program (the “Ipsen AS Program R&D Services”), (ii) Ipsen JSC services related to the AS Program during the Ipsen First Term (the “Ipsen AS Program JSC Services”), (iii) and activities related to the negotiation of the Ipsen Supply Agreement within twelve months of the Ipsen Effective Date. The Company has concluded that the Ipsen HD Program R&D Services and the Ipsen AS Program R&D Services are not distinct from the Ipsen HD Program JSC Services and the Ipsen AS Program JSC Services, respectively. The Company has also concluded that the Ipsen HD Program JSC Services and the Ipsen AS Program JSC Services are not distinct from the activities related to entering the Ipsen Supply Agreements for each respective program. The Ipsen JSC provides oversight and management of the overall Ipsen Collaboration Agreement, and the members of the Ipsen JSC from the Company have specialized industry knowledge, particularly as it relates to SNA technology. The Ipsen JSC is meant to facilitate the early stage research being performed and coordinate the activities of both the Company and Ipsen. Further, the Ipsen JSC services are critical to the ongoing evaluation of the Ipsen Collaboration Programs and the drafting and evaluation of the Ipsen First Option Data Package. The Ipsen JSC will also provide oversight and management of the activities to enter into the Ipsen Supply Agreement. Accordingly, the Company’s participation on the Ipsen JSC is essential to Ipsen receiving value from the Ipsen HD Program R&D Services and the Ipsen AS Program R&D Services, and as such, (i) the Ipsen HD Program JSC Services, along with the Ipsen HD Program R&D Services and the activities related to entering the Ipsen Supply Agreement within twelve months of the Ipsen Effective Date for that program are considered a single performance obligation (the “Ipsen HD Program Services”) and (ii) the Ipsen AS Program JSC Services along with the Ipsen AS Program R&D Services and the 124 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) activities related to entering the Ipsen Supply Agreement within twelve months of the Ipsen Effective Date for that program are considered a single performance obligation (the “Ipsen AS Program Services”). As of the Ipsen Effective Date, the total transaction price was determined to be $ 20,000 , consisting solely of the Ipsen Upfront Payment. The Company also utilized the most likely amount method to estimate any development and regulatory milestone payments to be received. As of the Ipsen Effective Date, there were no milestones included in the transaction price. The pre-clinical, development, regulatory, and commercial milestones were fully constrained due to the significant uncertainties surrounding such payments. The Company considered the stage of development and the risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or Ipsen. The Company has determined that any commercial milestones and sales-based royalties will be recognized when the related sales occur and therefore, they have also been excluded from the transaction price. The Company will re-evaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur. As of December 31, 2021, the Company determined that any pre-clinical, development, regulatory, or commercial milestones continue to be constrained and therefore the related milestone payments continue to be excluded from the transaction price at December 31, 2021. The Company allocated the total transaction price to each of the two identified performance obligations under the Ipsen Collaboration Agreement based on an expected cost plus a margin approach, as follows: $ 10,793 of the transaction price allocated to the Ipsen HD Program Services and $ 9,207 of the transaction price allocated to the Ipsen AS Program Services. The Company will recognize revenue related to each of Ipsen HD Program Services and the Ipsen AS Program Services as those performance obligations are satisfied using an input method to measure progress for each of those performance obligations. The Company believes the input method that most accurately depicts the measure of progress is the actual hours incurred to date relative to projected hours to complete the activities for the Ipsen HD Program Services and the Ipsen AS Program Services. During the year ended December 31, 2021, the Company recognized revenue under the Ipsen Collaboration Agreement of approximately $ 2,309 . As of December 31, 2021 , there was $ 17,691 of deferred revenue related to the Ipsen Collaboration Agreement, of which is $ 8,757 is classified as current and $ 8,934 is classified as noncurrent on the consolidated balance sheet. Deferred revenue under the Ipsen Collaboration Agreement will be recognized as revenue in future periods as the Company satisfies its obligations under the Ipsen Collaboration Agreement, which the Company currently estimates to be over the next 30 to 39 months. AbbVie Collaboration Agreement Summary of Agreement On November 13, 2019 (the “AbbVie Effective Date”), the Company entered into a Collaboration, Option and License Agreement (the “AbbVie Collaboration Agreement”), with a wholly-owned subsidiary of Allergan plc, Allergan. On May 8, 2020, Allergan plc, including Allergan was acquired by AbbVie. Pursuant to the AbbVie Collaboration Agreement, the Company granted to AbbVie exclusive access and options to license SNA-based therapeutics arising from two collaboration programs related to the treatment of hair loss disorders (each, an “AbbVie Collaboration Program”). Under each such license (obtained in connection with the exercise of an AbbVie Option, as defined and discussed further below), the Company would grant to AbbVie exclusive, royalty-bearing, sublicensable, nontransferable, worldwide rights to develop, manufacture, use and commercialize such SNA therapeutics. Under the AbbVie Collaboration Agreement, the Company will use commercially reasonable efforts to conduct the AbbVie Collaboration Programs, each focused on one or more hair loss disorders to discover one or more SNA products that are directed to, bind to or inhibit one or more specific AbbVie Collaboration Program targets. 125 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) As of the AbbVie Effective Date, the Company and AbbVie have agreed upon a development plan for each AbbVie Collaboration Program that describes the development activities and timelines required to advance such AbbVie Collaboration Program through its first IND filing (each, an “AbbVie Development Plan”). The activities described in the AbbVie Development Plan are conducted under the supervision of the AbbVie Joint Development Committee (the “AbbVie JDC”) consisting of three members from each of the Company and AbbVie. The Company is primarily responsible for performing early-stage discovery and preclinical activities (the “AbbVie Collaboration Program Initial Development Activities”) set forth in the AbbVie Development Plan for each AbbVie Collaboration Program and will be solely responsible for all costs and expenses related to the AbbVie Collaboration Program Initial Development Activities. AbbVie may elect, in its sole discretion and at its sole cost and expense, to conduct formulation assessment and in vivo testing as set forth in an AbbVie Development Plan. During the third quarter of 2021, the AbbVie JDC revised the AbbVie Initial Development Plan for each AbbVie Collaboration Program. In connection with the revised workplan for each AbbVie Collaboration Program, the Company expects to perform additional early stage discovery and preclinical activities to those set forth in the AbbVie Development Plan. As such, the Company currently estimates significant additional efforts will be required to satisfy the performance obligation under the AbbVie Collaboration Agreement due to the revised workplan for each AbbVie Collaboration Program. Further changes to estimated additional efforts may be required in future periods should there be further revisions to the workplan for each AbbVie Collaboration Program. Following the completion of all AbbVie Initial Development Activities, the Company is required to deliver to AbbVie a report that describes the results of the AbbVie Initial Development Activities and identifies at least one SNA-based compound that satisfies certain criteria for such AbbVie Collaboration Program as determined by the AbbVie JDC (the “AbbVie Initial Development Report”). Following the delivery of the AbbVie Initial Development Report for an AbbVie Collaboration Program, AbbVie will have the ability for a defined period of time (the “AbbVie Initial Option Exercise Period”) to exercise an option (each an “AbbVie Option”) to obtain worldwide rights and license to the Company’s SNA technology and the Company’s interest in joint collaboration technology to make, have made, import, use, sell or offer for sale any product (each an “AbbVie Licensed Product”) that results from such AbbVie Collaboration Program during the term of the AbbVie Collaboration Agreement. At AbbVie’s sole option, AbbVie may extend the AbbVie Initial Option Exercise Period (the “AbbVie Option Extension”) and require the Company to perform IND-enabling activities described in the AbbVie Development Plan (the “AbbVie IND-Enabling Activities”), subject to the payment of additional consideration (“AbbVie Extension Exercise”). If AbbVie exercises the AbbVie Option Extension, the Company would be responsible for conducting the AbbVie IND-Enabling Activities and would be solely responsible for all costs and expenses associated with such activities. Upon completion of the AbbVie IND-Enabling Activities, the Company is required to deliver a report that describes the results of the AbbVie IND-Enabling Activities (the “AbbVie IND-Enabling Activities Data Package”) to AbbVie. Following the delivery of AbbVie IND-Enabling Activities Data Package, AbbVie will have the ability for a defined period of time (the “AbbVie Extended Option Exercise Period”) to exercise an AbbVie Option with respect to such AbbVie Collaboration Program. After the exercise of an AbbVie Option with respect to an AbbVie Collaboration Program, AbbVie will be responsible for all development, manufacturing and commercialization activities, and costs and expense associated with such activities in connection with AbbVie Licensed Products arising from such AbbVie Collaboration Program. The Company’s obligation to conduct the activities defined in the AbbVie Development Plan under the AbbVie Collaboration Agreement commenced on November 13, 2019 and continues until the earlier of (i) the date AbbVie exercises an AbbVie Option, (ii) the date AbbVie abandons an AbbVie Collaboration Program and foregoes its AbbVie Option to that AbbVie Collaboration Program, or (iii) the fifth anniversary of the AbbVie Effective Date (the “AbbVie Research Term”). If the AbbVie Initial Option Exercise Period or AbbVie Extended Option Exercise Period is still in effect for an AbbVie Collaboration Program or if the Company has not delivered a complete AbbVie Initial Development Report or, if AbbVie made an AbbVie Extension Exercise for an AbbVie Collaboration Program, a complete AbbVie IND-Enabling Activities Data Package for such AbbVie Collaboration Program, as 126 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) determined by the AbbVie JDC, then the AbbVie Research Term will automatically extend by one-year increments until such obligation is satisfied, but in no event past the seventh anniversary of the AbbVie Effective Date. Under the terms of the AbbVie Collaboration Agreement, the Company received a $ 25,000 upfront, non-refundable, non-creditable cash payment (the “AbbVie Upfront Payment”) related to the Company’s research and development costs for conducting the AbbVie Development Plan for two AbbVie Collaboration Programs, each focused on one or more targets, and certain options to obtain exclusive, worldwide licenses under certain intellectual property rights owned or controlled by the Company to develop, manufacture and commercialize certain products resulting from each such AbbVie Collaboration Programs. The option exercise fee during the AbbVie Initial Option Exercise Period is $ 10,000 per AbbVie Collaboration Program. If AbbVie elects to extend the AbbVie Initial Option Exercise Period, AbbVie is required to pay an additional fee of $ 10,000 . If AbbVie elects to exercise its option during the AbbVie Extended Option Exercise Period, AbbVie must pay the Company the option exercise fee of $ 15,000 . Following the exercise by AbbVie of an AbbVie Option with respect to an AbbVie Collaboration Program, AbbVie would be required to make certain milestone payments to the Company upon the achievement of specified development, product approval and launch, and commercial events, on an AbbVie Licensed Product by AbbVie Licensed Product basis. On an AbbVie Licensed Product by AbbVie Licensed Product basis, for the first AbbVie Licensed Product to achieve the associated milestone event, the Company is eligible to receive up to an aggregate of $ 55,000 for development milestone payments and $ 132,500 for product approval and launch milestone payments. The Company is also eligible for up to $ 175,000 in sales milestone payments on an AbbVie Collaboration Program by AbbVie Collaboration Program basis, associated with aggregate worldwide sales. Certain product approval milestones are subject to certain reductions under specified circumstances, including for payments required to be made by AbbVie to obtain certain third-party intellectual property rights. In addition, to the extent there is any AbbVie Licensed Product, the Company would be entitled to receive tiered royalty payments of mid-single digits to the mid-teens percentage on future net worldwide product sales of such AbbVie Licensed Products, subject to certain reductions under specified circumstances. Royalties are due on a AbbVie Licensed Product by AbbVie Licensed Product and country by country basis from the date of the first commercial sale of each AbbVie Licensed Product in a country until the latest to occur of: (i) the expiration date in such country of the last to expire valid claim within the licensed intellectual property covering the manufacture, use or sale of such AbbVie Licensed Product in such country, (ii) the tenth anniversary of the first commercial sale of such AbbVie Licensed Product in such country, and (iii) the expiration of regulatory exclusivity for such AbbVie Licensed Product in such country. AbbVie may terminate the AbbVie Collaboration Agreement for any reason or no reason, either in its entirety or on an AbbVie Collaboration Program by AbbVie Collaboration Program basis, at any time on 90 days’ prior written notice to the Company. Unless earlier terminated, the term of the AbbVie Collaboration Agreement shall continue until (i) if both AbbVie Option Exercise Periods expire without AbbVie exercising either AbbVie Option, the expiration of the later to expire AbbVie Option Exercise Period, and (ii) if either or both AbbVie Options are exercised on an AbbVie Licensed Product by AbbVie Licensed Product and country-by-country basis, the expiration of the royalty term for such AbbVie Licensed Product in such country. Either party may terminate the AbbVie Collaboration Agreement if the other party has materially breached or defaulted in the performance of any of its material obligations and such breach or default continues after the specified cure period. Termination of the AbbVie Collaboration Agreement for any reason will not release either party from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination. In addition, termination of the AbbVie Collaboration Agreement will not preclude either party from pursuing any rights and remedies it may have under the agreement or at law or in equity with respect to any breach of the AbbVie Collaboration Agreement. If either party terminates the AbbVie Collaboration Agreement, the license and rights granted to AbbVie with respect to the terminated AbbVie Collaboration Program or AbbVie License Product shall terminate. 127 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Accounting Analysis The Company concluded that AbbVie is a customer in this arrangement, and as such the arrangement falls within the scope of the revenue recognition guidance. Under the AbbVie Collaboration Agreement, the Company has identified a single performance obligation that includes (i) the research and development activities during the AbbVie Research Term (the “AbbVie R&D Services”), and (ii) AbbVie Joint Development Committee services during the AbbVie Research Term (the “AbbVie JDC Services”). The Company has concluded that the AbbVie R&D Services is not distinct from the AbbVie JDC Services during the AbbVie Research Term. The AbbVie JDC provides oversight and management of the overall AbbVie Collaboration Agreement, and the members of the AbbVie JDC from the Company have specialized industry knowledge, particularly as it relates to SNA technology. The AbbVie JDC is meant to facilitate the early-stage research being performed and coordinate the activities of both the Company and AbbVie. Further, the AbbVie JDC services are critical to the ongoing evaluation of an AbbVie Collaboration Program and the drafting and evaluation of the AbbVie Initial Development Report and the AbbVie IND-Enabling Data Package. Accordingly, the Company’s participation on the AbbVie JDC is essential to AbbVie receiving value from the AbbVie R&D Services and as such, the AbbVie JDC Services along with the AbbVie R&D Services are considered one performance obligation (the “AbbVie Collaboration Program Services”). In addition, the Company has concluded that the option to purchase two development and commercialization licenses is considered a marketing offer as the options did not provide any discounts or other rights that would be considered a material right in the arrangement, and thus, not a performance obligation at the onset of the agreement. The consideration for these options will be accounted for when they are exercised. As of the AbbVie Effective Date, the total transaction price was determined to be $ 25,000 , consisting solely of the AbbVie Upfront Payment. The Company also utilized the most likely amount method to estimate any development and regulatory milestone payments to be received. As of the AbbVie Effective Date, there were no milestones included in the transaction price. The milestones were fully constrained due to the significant uncertainties surrounding such payments. The Company considered the stage of development and the risks associated with the remaining development required to achieve the milestone, as well as whether the achievement of the milestone is outside the control of the Company or AbbVie. The Company has determined that any commercial milestones and sales-based royalties will be recognized when the related sales occur and therefore they have also been excluded from the transaction price. The Company will re-evaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur. As of December 31, 2021, the Company determined that any development, regulatory or commercial milestones continue to be constrained and therefore the related milestone payments continue to be excluded from the transaction price at December 31, 2021. The Company will recognize revenue related to the AbbVie Collaboration Program Services as the performance obligation is satisfied using an input method to measure progress. The Company believes the input method that most accurately depicts the measure of progress is the actual hours incurred to date relative to projected hours to complete the research service. As discussed above, during the third quarter of 2021, the AbbVie JDC revised the AbbVie Initial Development Plan for each AbbVie Collaboration Program. As a result, the Company has increased its estimate of total hours to complete the research services, requiring an adjustment to cumulative revenue recognized (considered a change in estimate pursuant to ASC 606), which led to a full year revenue reversal of $( 2,792 ) in the current year. During the year ended December 31, 2021, the Company recognized revenue under the AbbVie Collaboration Agreement of approximately $( 2,792 ), reflecting the cumulative catchup adjustment (reduction) of revenue discussed above due to a change in estimate. The Company currently estimates significant additional efforts will be required to satisfy the performance obligation under the AbbVie Collaboration Agreement due to the revised workplan for each AbbVie Collaboration Program. These increased estimated efforts in connection with the change in workplan resulted in less progress occurring relative to the increased estimate of total project hours to complete the research services during the year ended December 31, 2021 as compared to the amount of revenue recognized at December 31, 2020, which led to revenue reversal in the current year period. During the year ended December 31, 128 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 2020, the Company recognized revenue under the AbbVie Collaboration Agreement of approximately $ 16,486 . As of December 31, 2021, there was $ 11,135 of deferred revenue related to the AbbVie Collaboration Agreement, of which $ 8,560 is classified as current and $ 2,575 is classified as noncurrent on the consolidated balance sheet. Deferred revenue under the AbbVie Collaboration Agreement will be recognized as revenue in future periods as the Company satisfies its obligations under the AbbVie Collaboration Agreement, which the Company currently estimates to be over the next 21 to 24 months. As of December 31, 2020, there was $ 8,343 of deferred revenue related to the AbbVie Collaboration Agreement, which was classified as current on the consolidated balance sheet based on the estimated contract completion date at that time. Dermelix Collaboration Agreement On February 17, 2019, Exicure entered into a License and Development Agreement (the “Dermelix Collaboration Agreement”) with Dermelix, LLC d/b/a Dermelix Biotherapeutics (“Dermelix”). Under the terms of the Dermelix Collaboration Agreement, Exicure received an upfront payment of $ 1,000 , to be applied against the initial $ 1,000 of the Company’s development expenses. The Company initially recorded the upfront payment of $ 1,000 as deferred revenue related to its wholly unsatisfied performance obligation and reduced this balance to zero during 2019 by recognizing revenue as services were provided. The Company recognized no revenue under the Dermelix Collaboration Agreement during the year ended December 31, 2021. The Company recognized $ 127 of revenue during the year ended December 31, 2020 which reflected reimbursement by Dermelix for additional costs incurred by Exicure for early-stage development costs beyond the initial $ 1,000 upfront payment. Summary of Contract Liabilities Up-front payments are recorded as deferred revenue upon receipt or when due until such time as the Company satisfies its performance obligations under these arrangements. The following table presents changes in the balances of the Company’s contract liabilities (in thousands): Deferred Revenue Balance at January 1, 2021 Additions Revenue (Recognized) Reversed Deferred Revenue Balance at December 31, 2021 Ipsen Collaboration Agreement $ — $ 20,000 $ ( 2,309 ) $ 17,691 AbbVie Collaboration Agreement $ 8,343 $ — $ 2,792 $ 11,135 Total $ 8,343 $ 20,000 $ 483 $ 28,826 4. Supplemental Balance Sheet Information Prepaid expenses and other current assets December 31, 2021 2020 Prepaid clinical, contract research and manufacturing costs $ 2,484 $ 2,336 Prepaid insurance 763 694 Other 1,278 1,201 Prepaid expenses and other current assets $ 4,525 $ 4,231 129 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Other noncurrent assets December 31, 2021 2020 Restricted cash $ 9,200 $ 1,200 Other 125 193 Other noncurrent assets $ 9,325 $ 1,393 Property and equipment, net December 31, 2021 2020 Scientific equipment $ 6,471 $ 5,476 Leasehold improvements — 192 Computers and software 60 46 Furniture and fixtures 30 30 Construction in process 33 119 Property and equipment, gross 6,594 5,863 Less: accumulated depreciation ( 2,667 ) ( 1,740 ) Property and equipment, net $ 3,927 $ 4,123 Depreciation and amortization expense was $ 1,123 and $ 766 , for the years ended December 31, 2021 and 2020, respectively. Accrued expenses and other current liabilities December 31, 2021 2020 Accrued clinical, contract research and manufacturing costs $ 3,689 $ 1,372 Accrued restructuring costs 1,191 — Lease liability, current 459 223 Accrued payroll-related expenses 167 1,158 Accrued other expenses 958 772 Accrued expenses and other current liabilities $ 6,464 $ 3,525 5. Investments As of December 31, 2021 and 2020, the Company primarily invested its excess cash in debt instruments of corporations, the U.S. Treasury, financial institutions, and U.S. government agencies with strong credit ratings and an investment grade rating at or above a long-term rating of Aa3/AA- and a short-term rating of P1/A1. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. The Company periodically reviews and modifies these guidelines to maximize trends in yields and interest rates without compromising safety and liquidity. 130 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) The following table summarizes the contract maturity of the available-for-sale securities the Company held as of December 31, 2021: One year or less 100 % After one year but within two years — % Total 100 % All of the Company’s available-for-sale securities are available to the Company for use in its current operations. As a result, the Company categorizes all of these securities as current assets even though the stated maturity of some individual securities may be one year or more beyond the balance sheet date. The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of cash equivalents and available-for-sale securities by type of security at December 31, 2021 and 2020 were as follows: December 31, 2021 Amortized Costs Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value Commercial paper $ 10,498 $ — $ ( 2 ) $ 10,496 $ 10,498 $ — $ ( 2 ) $ 10,496 December 31, 2020 Amortized Costs Gross Unrealized Holding Gains Gross Unrealized Holding Losses Fair Value Commercial paper $ 15,992 $ 2 $ ( 3 ) $ 15,991 Corporate notes/bonds 29,227 72 ( 3 ) 29,296 U.S. Treasuries 2,251 2 — 2,253 U.S. Government agency securities 1,265 13 — 1,278 $ 48,735 $ 89 $ ( 6 ) $ 48,818 131 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 6. Debt MidCap Credit Agreement On December 10, 2021, the Company entered into an amendment (“Amendment No. 4”) to the Company’s Credit and Security Agreement, dated as of September 25, 2020, as amended on October 21, 2020, July 30, 2021 and September 30, 2021, with MidCap Financial Trust, as agent (“MidCap”), and the lenders party thereto from time to time (as amended, the “MidCap Credit Agreement”), to prepay $ 10,000 of the Company’s outstanding loans under the MidCap Credit Agreement. Additionally, in connection with Amendment No. 4, the Company is required to maintain a balance of $ 20,000 in all accounts at Silicon Valley Bank, including $ 8,000 in a blocked account at Silicon Valley Bank. The balance of $ 8,000 in the blocked account at Silicon Valley Bank is restricted cash and is presented within other noncurrent assets on the accompanying consolidated balance sheet. The MidCap Credit Agreement provides for a secured term loan facility in an aggregate principal amount of up to $ 25,000 (the “MidCap Credit Facility”). The Company borrowed the first advance of $ 17,500 (“Tranche 1”) on September 25, 2020 (the “Closing Date”). Amendment No. 4 terminated the availability of the second advance of $ 7,500 (“Tranche 2”), effective as of December 9, 2021, that was previously available under the MidCap Credit Agreement subject to certain conditions. Tranche 1 bears interest at a floating rate equal to 6.25 % per annum, plus the greater of (i) 1.50 % or (ii) one-month LIBOR. Interest on each loan advance is due and payable monthly in arrears. Principal on each loan advance is payable in 36 equal monthly installments beginning October 1, 2022 until paid in full on October 1, 2025 (the “Maturity Date”). Prepayments of the loans under the MidCap Credit Agreement, in whole or in part, will be subject to early termination fees in an amount equal to 3.0 % of principal prepaid if prepayment occurs on or prior to the first anniversary of the Closing Date and 1.0 % of principal prepaid if prepayment occurs after the first anniversary of the Closing Date and prior to the maturity date. In connection with Amendment No. 4, the early termination fee associated with the prepayment of $ 10,000 made in December 2021 was waived and if the remaining principal amount is repaid on or prior to March 31, 2022, the associated early termination fee for that prepayment will be waived. In connection with execution of the MidCap Credit Agreement, the Company paid MidCap a $ 125 origination fee. At the Maturity Date or on any earlier date on which all amounts advanced to the Company become due and payable in full, or are otherwise paid in full, the Company is required to pay an exit fee equal to 3.75 % of the principal amount of all loans advanced to the Company under the MidCap Credit Agreement. Upon the advance of Tranche 1, the Company accrued $ 656 for the related exit fee. In connection with Amendment No. 4, if the remaining principal amount is repaid on or prior to March 31, 2022, a portion of the related exit fee that has not been earned by MidCap will be waived. The Company’s obligations under the MidCap Credit Agreement are secured by a security interest in substantially all of its assets, excluding intellectual property (which is subject to a negative pledge). Additionally, the Company’s future subsidiaries, if any, may be required to become co-borrowers or guarantors under the MidCap Credit Agreement. The MidCap Credit Agreement contains customary affirmative covenants and customary negative covenants limiting the Company’s ability and the ability of the Company’s subsidiaries, if any, to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock and make investments, in each case subject to certain exceptions. The MidCap Credit Agreement also contains customary events of default relating to, among other things, payment defaults, breaches of covenants, a material adverse change, delisting of the Company’s common stock, bankruptcy and insolvency, cross defaults with certain material indebtedness and certain material contracts, judgments, and inaccuracies of representations and warranties. Upon an event of default, the agent and the lenders may declare all or a portion of the Company’s outstanding obligations to be immediately due and payable and 132 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) exercise other rights and remedies provided for under the agreement. During the existence of an event of default, interest on the obligations could be increased by 2.0 %. Total proceeds, net of fees and issuance costs, borrowed under Tranche 1 were $ 16,512 . Fees and issuance costs of $ 332 , as well as fees of $ 656 that are payable to MidCap at maturity of Tranche 1, are recorded as a reduction to the carrying amount of long-term debt on the Company’s balance sheet and will be amortized to interest expense through the maturity date of October 1, 2025 using the effective interest method. Fees and issuance costs of $ 73 attributed to the amount available to be borrowed under Tranche 2 were paid and recorded as deferred financing costs (other assets) and were amortized and recorded to interest expense in 2021 when it was determined that amounts under Tranche 2 would not be borrowed. As of December 31, 2021, deferred financing costs attributed to Tranche 2 are zero. As of December 31, 2021, the aggregate carrying value of the Company’s long-term debt is $ 6,873 . As of December 31, 2021, the principal maturities of the Company’s long-term debt were as follows: December 31, 2021 2022 625 2023 2,500 2024 2,500 2025 1,875 Principal balance outstanding 7,500 less: unamortized discount and debt issuance costs ( 627 ) Long-term debt 6,873 Current portion 6,873 Noncurrent portion $ — The Company paid interest on the MidCap Credit Agreement of $ 1,375 and $ 252 during the years ended December 31, 2021 and 2020, respectively. The Company paid interest on the Hercules Loan Agreement (as discussed below) of $ 0 and $ 142 during the years ended December 31, 2021 and 2020, respectively. On March 15, 2022 the Company repaid all remaining outstanding obligations under the MidCap Credit Agreement. Refer to Note 17, Subsequent Events for more information. Hercules Loan Agreement On March 2, 2020, pursuant to the terms of the loan agreement with Hercules Technology Growth Capital (“Hercules”) and subsequent amendments thereto (the “Hercules Loan Agreement”), the Company repaid all remaining outstanding obligations under the Hercules Loan Agreement as of the maturity date, including the outstanding principal balance of $ 4,999 and the end of term fee of $ 100 . 7. Leases The Company’s lease arrangements at December 31, 2021 consist of (i) a lease for office and laboratory space at its headquarters in Chicago, Illinois that commenced in July 2020 (the “Chicago Lease”), (ii) a lease for office space at a multi-tenant facility in Cambridge, Massachusetts that commenced in March 2019 and is cancelable at any time (the “Cambridge Lease”), and (iii) leases for office equipment (the “Office Equipment Leases”). Each of these leases are classified as operating leases. 133 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Due to the nature of the Cambridge Lease, the Company determined that this lease represented a short-term lease with an initial term of less than twelve months and, as such, the Cambridge Lease is not recorded on the balance sheet and related lease costs are recognized in the statement of operations as they are incurred. The Company has also elected to not record the Office Equipment Leases on the balance sheet since related payment amounts and lease costs are insignificant. Lease costs for the Office Equipment Leases are recognized in the statement of operations on a straight-line basis over the lease term. The Company’s lease arrangement for office and laboratory space at its former headquarters in Skokie, Illinois ended in February 2021 in accordance with the terms of that lease arrangement. Chicago Lease The Company has approximately thirty thousand square feet of office and laboratory space in Chicago, Illinois (the “Chicago Lease”). The original term (the “Original Term”) of the Chicago Lease is 10 years, commencing on July 1, 2020 (the “Commencement Date”), which is the date the premises were ready for occupancy under the terms of the Chicago Lease. The Company has options to extend the term of the Chicago Lease for two additional successive periods of five years each (the “Extension Periods”) at the then prevailing effective market rental rate. The initial annual base rent during the Original Term is approximately $ 1,113 for the first 12-month period of the Original Term, payable in monthly installments beginning on the Commencement Date. Base rent thereafter is subject to annual increases of 3 %, for an aggregate amount of $ 12,761 over the Original Term. The Company must also pay its proportionate share of certain operating expenses and taxes for each calendar year during the term. During the first 12-month period of the Original Term, the base rent and the Company's proportionate share of operating expenses and taxes are subject to certain abatements. Upon execution of the Chicago Lease, the Company paid to the landlord the first installment of base rent and the estimated monthly amount of its pro rata share of taxes and its pro rata share of operating expenses in the aggregate amount of $ 87 which amount had been adjusted for the abatement as set forth in the lease agreement. The Company also paid the landlord a net amount of $ 697 toward tenant improvements. As part of the agreement for the Chicago Lease, the Company is required to maintain a standby letter of credit during the term of the lease, currently in the amount of $ 1,200 and subject to reduction over time, which is secured by a restricted certificate of deposit account and presented within other noncurrent assets on the Company’s consolidated balance sheet at December 31, 2021. The Company recognized a right of use asset of $ 8,931 and a lease liability of $ 8,147 on the Commencement Date. Because the rate implicit in the Chicago Lease is not readily determinable, the Company used its incremental borrowing rate of 8.3 % on the Commencement Date to determine the present value of the lease payments over the Original Term. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. As of December 31, 2021, the Company determined it is not reasonably certain that the renewal option would be exercised. Skokie Lease In connection with the Company’s relocation of its headquarters from Skokie, Illinois to its new facility in Chicago, Illinois on July 1, 2020, the Company determined that the remaining useful life of the right of use asset underlying the Skokie Lease at June 30, 2020 was zero and therefore recognized remaining amortization expense related to the Skokie Lease of $ 211 during the three month period then ended. 134 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Information related to the Company’s operating lease asset and related operating lease liabilities were as follows: December 31, 2021 2020 Weighted-average remaining lease term 8.5 years 9.5 years Weighted-average discount rate 8.3 % 8.3 % The following table summarizes lease costs in the Company’s consolidated statement of operations: December 31, 2021 2020 Operating lease costs $ 1,306 $ 1,042 Variable lease costs 1,070 521 Short term lease costs 130 127 Total lease costs $ 2,506 $ 1,690 The Company made cash payments for operating leases of $ 2,134 and $ 2,244 during the years ended December 31, 2021 and 2020, respectively. Maturities of the Company’s lease liability as of December 31, 2021 were as follows: Years Ending December 31, Operating Leases 2022 1,067 2023 1,198 2024 1,235 2025 1,272 Thereafter 6,207 Total $ 10,979 Less: imputed interest ( 3,116 ) Total lease liability $ 7,863 Current operating lease liability $ 459 Noncurrent operating lease liability 7,404 Total lease liability $ 7,863 8. Restructuring On December 10, 2021, the Company announced its commitment to a plan to wind down the Company’s immuno-oncology program for cavrotolimod (AST-008) and the Company’s XCUR-FXN preclinical program for the treatment of Friedreich’s ataxia. The Company intends to realign its research and development resources to support (i) the development of its preclinical program targeting SCN9A for neuropathic pain, (ii) the continued advancement of its partnered programs with Ipsen Biopharm Limited to develop SNA-based treatments in neuroscience targeting Huntington’s disease and Angelman syndrome, (iii) its continued advancement of its partnered program with AbbVie to develop SNA-based treatments for hair loss disorders, as well as (iv) the continued research and development of other undisclosed therapeutic product candidates. This plan resulted in a 135 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) reduction in force where the Company eliminated approximately 50% of the Company’s existing workforce on a staggered basis through January 2022 as well as other cost-cutting measures. Notified employees were offered separation benefits, including severance payments and temporary healthcare coverage assistance. In most cases, the separation benefits were paid as a lump sum in January 2022. Certain of the notified employees had employment agreements which provided for separation benefits in the form of salary continuation; these benefits will be paid between February 2022 and January 2023. All of the severance costs represent cash expenditures. The Company expensed the following costs associated with these future termination benefit payments resulting from the strategic reduction in force: Year Ended December 31, 2021 Research and development expense $ 623 General and administrative expense 575 $ 1,198 At December 31, 2021, the accrued liability balance associated with the strategic reduction in force announced in the fourth quarter of 2021 is $ 1,191 , presented within accrued expense and other current liabilities on the accompanying consolidated balance sheet. 9. Stockholders’ Equity Preferred Stock The Company has 10,000,000 shares of preferred stock, par value $ 0.0001 authorized and no shares issued and outstanding. Common Stock The Company has 200,000,000 shares of common stock, par value $ 0.0001 , authorized. As of December 31, 2021 and December 31, 2020, the Company had 108,783,144 and 87,651,352 shares issued and outstanding, respectively. The holders of shares of the Company’s common stock are entitled to one vote per share on all matters to be voted upon by the Company’s stockholders and there are no cumulative rights. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of shares of the Company’s common stock are entitled to receive ratably any dividends that may be declared from time to time by the Board out of funds legally available for that purpose. In the event of the Company’s liquidation, dissolution or winding up, the holders of shares of the Company’s common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock then outstanding. The Company’s common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Company’s common stock. The outstanding shares of the Company’s common stock are fully paid and non-assessable. Registered Direct Offering On December 16, 2021, the Company completed a securities purchase agreement (the “Purchase Agreement”) with certain institutional purchasers (the “Purchasers”) entered into on December 14, 2021, pursuant to which the Company offered to the Purchasers, in a registered direct offering priced at-the-market consistent with the rules of the Nasdaq Stock Market (the “Registered Direct Offering”), (i) an aggregate of 13,006,614 shares (the “Shares”) of the Company’s common stock, $ 0.0001 par value per share, (ii) pre-funded warrants to purchase up to an aggregate 136 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) of 21,569,454 shares of Common Stock (the “Pre-Funded Warrants”), and (iii) warrants to purchase up to 17,288,034 shares of Common Stock (the “Warrants”). The combined purchase price of each share of Common Stock and accompanying Warrant is $ 0.3326 per share. The combined purchase price of each Pre-Funded Warrant and accompanying Warrant is $ 0.3316 (equal to the combined purchase price per share of Common Stock and accompanying Warrant, minus $ 0.001 ). The per share exercise price for the Warrants is $ 0.2701 , the closing bid price of the Company’s Common Stock on December 13, 2021. The Warrants will be exercisable immediately from the closing December 16, 2021, and will expire on the five-year anniversary of the date of issuance, or December 16, 2026. The Pre-Funded Warrants and Warrants, which met equity classification, were recognized as a component of permanent stockholders’ equity within additional paid-in-capital together with the net proceeds from the Registered Direct Offering. The gross proceeds to the Company from the Registered Direct Offering (excluding effect of subsequent exercises of pre-funded warrants) were $ 11,478 and net proceeds after deducting the placement agent’s fees and other offering expenses paid or payable by the Company were $ 10,226 . The securities were offered by the Company pursuant to an effective shelf registration statement on Form S-3 (File No. 333-251555) previously filed with the Securities and Exchange Commission (the “SEC”) on December 21, 2020, and which was declared effective by the SEC on January 7, 2021 (the “Registration Statement”). Each Warrant is exercisable for one share of Common Stock at an exercise price of $ 0.2701 per share. The Warrants are immediately exercisable as of the date of issuance of December 16, 2021 and will expire on the five-year anniversary of the date of issuance, or December 16, 2026. The Pre-Funded Warrants were offered in lieu of shares of Common Stock to one of the Purchasers whose purchase of shares of Common Stock in the Registered Direct Offering would otherwise result in said Purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99 % (or, at the election of the Purchaser, 9.99 %) of the Company’s outstanding Common Stock immediately following the consummation of the Registered Direct Offering. Each Pre-Funded Warrant is exercisable for one share of Common Stock at an exercise price of $ 0.001 per share. The Pre-Funded Warrants are immediately exercisable and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. A holder (together with its affiliates) of the Warrant or Pre-Funded Warrant may not exercise any portion of the Warrant or Pre-Funded Warrant, as applicable, to the extent that the holder would own more than 4.99 % (or, at the holder’s option upon issuance, 9.99 %) of the Company’s outstanding Common Stock immediately after exercise, as such percentage ownership is determined in accordance with the terms of the Warrant or Pre-Funded Warrant, as applicable. In lieu of making the cash payment otherwise contemplated to be made to the Company upon exercise of a Warrant in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of Common Stock determined according to a formula set forth in the Warrants, provided that such cashless exercise shall only be permitted if the Registration Statement is not effective at the time of such exercise or if the prospectus to which the Registration Statement is a part is not available for the issuance of shares of Common Stock to the Warrant holder. In lieu of making the cash payment otherwise contemplated to be made to the Company upon exercise of a Pre-Funded Warrant in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of Common Stock determined according to a formula set forth in the Pre-Funded Warrants. Refer to Note 17, Subsequent Events for more information on Pre-Funded Warrants. December 2019 Offering On December 23, 2019, the Company sold 10,000,000 shares of its common stock at the public offering price of $ 2.75 per share in an underwritten public offering for gross proceeds of $ 27,500 and estimated net proceeds of $ 25,344 after deducting underwriting discounts and commission and other offering expenses payable by the Company (the “December 2019 Offering”). In addition, the Company granted the underwriters a 30-day option to purchase an additional 1,500,000 shares of common stock. On January 6, 2020, the underwriters exercised such option with respect to 1,081,184 shares of common stock at the public offering price of $ 2.75 per share for 137 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) additional gross proceeds of $ 2,973 and net proceeds of $ 2,766 after deducting underwriting discounts and commission and other offering expenses. The shares sold in the December 2019 Offering were sold pursuant to a registration statement on Form S-3 that was declared effective by the SEC on July 24, 2019. Common Stock Warrants In December 2021, 7,569,454 Pre-Funded Warrants were exercised for a total exercise price of $ 8 , resulting in the issuance of 7,569,454 shares of common stock. As of December 31, 2021, Pre-Funded Warrants to purchase 14,000,000 shares of common stock at a price of $ 0.001 per share remain outstanding and Warrants to purchase 17,288,034 shares of common stock at a price of $ 0.2701 per share remain outstanding. The warrants are classified as equity. As of December 31, 2020, warrants to purchase 413,320 shares of common stock at a price of $ 3.00 per share that were issued in connection with a private placement offering of common stock in 2017 remained outstanding. These warrants expired unexercised as follows: 163,174 warrants expired on March 27, 2021, 132,884 expired on April 28, 2021, and 117,262 expired on May 3, 2021. These warrants were classified as a liability which was remeasured each period at fair value. See Note 13, Fair Value Measurements for more information on the fair value of the common stock warrant liability. Accumulated Other Comprehensive Loss The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for 2021: Unrealized gains (losses) on short-term investments Total Balance at December 31, 2020 $ 83 $ 83 Other comprehensive loss before reclassifications ( 84 ) ( 84 ) Net gains reclassified from accumulated other comprehensive loss ( 1 ) ( 1 ) Net current period other comprehensive loss ( 85 ) ( 85 ) Balance at December 31, 2021 $ ( 2 ) $ ( 2 ) The net gain reclassified from accumulated other comprehensive loss during the year ended December 31, 2021 resulted from available-for-sale securities that were called prior to maturity. The basis on which the cost of the securities was determined was specific identification. Proceeds related to these sales were $ 4,000 . The following table summarizes the changes in each component of accumulated other comprehensive loss, net of tax, for 2020: Unrealized gains (losses) on short-term investments Total Balance at December 31, 2019 $ ( 27 ) $ ( 27 ) Other comprehensive income (loss) before reclassifications 107 107 Net losses reclassified from accumulated other comprehensive loss 3 3 Net current period other comprehensive income 110 110 Balance at December 31, 2020 $ 83 $ 83 138 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) The net loss reclassified from accumulated other comprehensive loss during the year ended December 31, 2020 resulted from sales of available-for-sale securities prior to maturity. The gross realized gains and gross realized losses of these sales for the year ended December 31, 2020 were $ 23 and $ 6 , respectively. The basis on which the cost of the securities was determined was specific identification. Proceeds related to these sales were $ 9,404 . 10. Equity-Based Compensation 2017 Equity Incentive Plan On September 22, 2017, the Company’s stockholders approved the Exicure, Inc. 2017 Equity Incentive Plan (the “2017 Plan”), which became effective on November 15, 2017. The 2017 Plan provides for the issuance of incentive awards of up to 5,842,525 shares of Exicure common stock, which includes 2,169,905 shares of Exicure common stock to be issued to officers, employees, consultants and directors, plus a number of shares not to exceed 3,683,817 that are subject to issued and outstanding awards under the Exicure OpCo 2015 Equity Incentive Plan (the “2015 Plan”) and were assumed in the merger transaction on September 26, 2017. Awards that may be awarded under the 2017 Equity Incentive Plan include non-qualified and incentive stock options, stock appreciation rights, bonus shares, restricted stock, restricted stock units, performance units and cash-based awards. The number of shares of common stock reserved for issuance under the 2017 Equity Incentive Plan automatically increases on January 1 of each year, beginning on January 1, 2020, by the lesser of (i) 4,600,000 shares, (ii) 5 % of the total number of shares of its capital stock outstanding on December 31 of the preceding calendar year, or (iii) a lesser number of shares determined by the Compensation Committee of the Board (the “Compensation Committee”). No future awards will be made under the 2015 Plan upon the effectiveness of the 2017 Plan. As of December 31, 2021, the aggregate number of awards available for grant under the 2017 Plan was 3,904,367 . On January 1, 2022, pursuant to the terms of the 2017 Plan, the number of awards that are reserved and may be awarded under the 2017 Plan was automatically increased by 4,600,000 awards. Awards granted under the 2017 Plan are contingent on the participants’ continued employment or provision of non-employee services and are subject to forfeiture if employment or continued service terminates for any reason. The initial award granted to an employee or consultant generally vests 25 % on the first 12-month anniversary of the grant date and vests 1/48th monthly thereafter until fully vested at the end of 48 months. Subsequent awards granted to employees or consultants generally vest 1/48th monthly until fully vested at the end of 48 months. The initial stock option grant to a non-employee director vests 1/36th monthly until fully vested at the end of 36 months. Subsequent stock option grants to a non-employee director vests 1/12th monthly until fully vested at the end of 12 months. The term of common stock option grants is 10 years unless terminated earlier as described above. Inducement Grant In May 2021, the Company granted stock options to purchase up to 600,000 shares of common stock as a material inducement to Brian C. Bock to enter into employment with the Company as the Company’s Chief Financial Officer (the “Inducement Grant”). The Inducement Grant, which was made pursuant to a stand-alone nonstatutory stock option agreement (the “Inducement Award Agreement”), was approved by the Compensation Committee, was awarded in accordance with Nasdaq Listing Rule 5635(c)(4) and outside of the Company’s 2017 Equity Incentive Plan and is subject to the terms and conditions of the Inducement Award Agreement. As such, any shares underlying the Inducement Grant are not, upon forfeiture, cancellation or expiration, returned to a pool of shares reserved for future issuance. As of December 31, 2021, stock options to purchase up to 600,000 shares of common stock remained outstanding under the Inducement Grant. In connection with Mr. Bock’s resignation from the Company on February 4, 2022, the stock options underlying the Inducement Grant were forfeited. 139 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Employee Stock Purchase Plan The 2017 Employee Stock Purchase Plan (the “ESPP”) was adopted by the Board in September 2017 and approved by the Company’s stockholders in September 2017. Through the ESPP, eligible employees may authorize payroll deductions of up to 15 % of their compensation to purchase common stock. The maximum number of shares that an employee may purchase on any exercise date in an offer period will be the smaller of (i) 7,500 shares or (ii) such number of shares as has a fair market value (determined as of the offering date for such offer period) equal to $ 25,000 within one calendar year minus the fair market value of any other shares of common stock that are attributed to such calendar year. The purchase price per share at each purchase date is equal to 85 % of the lower of (i) the closing market price per share of Exicure common stock on the employee’s offering date or (ii) the closing market price per share of Exicure common stock on the exercise date. Each offering period is approximately six-months in duration and the first offering period began on November 16, 2020 and ended on May 14, 2021. During 2021, the Company issued 189,221 shares of common stock that were purchased under the ESPP. The ESPP provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2018 and each January 1 thereafter through January 1, 2027, by the least of (i) 300,000 shares; (ii) 0.3 % of the outstanding shares of common stock on the last day of the immediately preceding calendar year; or (iii) a lesser number of shares determined by the Board. As of December 31, 2021, there were 1,014,666 shares available for issuance under the ESPP. On January 1, 2022, the number of shares of common stock available for issuance under the ESPP increased by 300,000 shares. Equity-based compensation expense is classified in the statements of operations as follows: Year Ended December 31, 2021 2020 Research and development expense $ 1,362 $ 878 General and administrative expense 1,577 1,306 $ 2,939 $ 2,184 Unamortized equity-based compensation expense at December 31, 2021 was $ 5,806 , which is expected to be amortized over a weighted-average period of 2.8 years. The Company utilizes the Black-Scholes option-pricing model to determine the fair value of common stock option grants. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The model also requires the input of highly subjective assumptions. In addition to an assumption on the expected term of the option grants as discussed below, application of the Black-Scholes model requires additional inputs for which we have assumed the values described in the table below: Year Ended December 31, 2021 2020 Expected term 5.0 to 6.1 years 5.2 to 6.1 years Risk-free interest rate 0.36 % to 1.12 %; weighted avg. 1.05 % 0.31 % to 1.68 %; weighted avg. 0.61 % Expected volatility 81.7 % to 83.6 %; weighted avg. 82.6 % 81.0 % to 85.8 %; weighted avg. 83.8 % Forfeiture rate 5 % 5 % Expected dividend yield — % — % 140 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) The expected term is based upon the “simplified method” as described in Staff Accounting Bulletin Topic 14.D.2. Currently, the Company does not have sufficient experience to provide a reasonable estimate of an expected term of its common stock options. The Company will continue to use the “simplified method” until there is sufficient experience to provide a more reasonable estimate in conformance with ASC 718-10-30-25 through 30-26. The risk-free interest rate assumptions were based on the U.S. Treasury bond rate appropriate for the expected term in effect at the time of grant. The expected volatility is based on calculated enterprise value volatilities for publicly traded companies in the same industry and general stage of development. The estimated forfeiture rates were based on historical experience for similar classes of employees. The dividend yield was based on expected dividends at the time of grant. The fair value of the underlying common stock and the exercise price for the common stock options granted during the years ended December 31, 2021 and 2020 are summarized in the table below: Common Stock Options Granted During Period Ended: Fair Value of Underlying Common Stock Exercise Price of Common Stock Option Year ended December 31, 2021 $ 1.15 to $ 2.57 ; weighted avg. $ 1.87 $ 1.15 to $ 2.57 ; weighted avg. $ 1.87 Year ended December 31, 2020 $ 1.19 to $ 2.80 ; weighted avg. $ 1.89 $ 1.19 to $ 2.80 ; weighted avg. $ 1.93 The weighted-average grant date fair value of common stock options granted in the years ended December 31, 2021 and 2020 was $ 1.30 and $ 1.32 per common stock option, respectively. A summary of common stock option activity as of the periods indicated is as follows: Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (years) Aggregate Intrinsic Value (thousands) Outstanding - December 31, 2020 7,227,296 $ 2.24 6.8 $ 1,719 Granted 4,427,586 1.87 Exercised ( 342,246 ) 1.60 Forfeited ( 1,367,863 ) 2.48 Outstanding - December 31, 2021 9,944,773 $ 2.06 7.0 $ — Exercisable - December 31, 2021 5,402,307 $ 2.18 5.4 $ — Vested and Expected to Vest - December 31, 2021 9,635,719 $ 2.07 7.0 $ — The aggregate intrinsic value of common stock options exercised during the years ended December 31, 2021 and 2020 was $ 243 and $ 526 , respectively. 141 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) A summary of restricted stock unit activity of the periods indicated is as follows: Restricted Stock Units Weighted-Average Grant Date Fair Value Unvested balance - December 31, 2020 — $ — Granted 734,000 1.49 Vested ( 35,750 ) 1.90 Forfeited ( 395,000 ) 1.31 Unvested balance - December 31, 2021 303,250 $ 1.67 The grant date fair value of restricted stock units is based on the Company’s closing stock price at the date of grant. At vesting, each outstanding restricted stock unit will be exchanged for one share of the Company’s common stock. The restricted stock units granted during the 2021 period generally vest evenly on a quarterly basis over a period of 4 years in exchange for continued service provided by the restricted stock unit recipient during that vesting period. 11. Income Taxes Pre-tax loss before income taxes was $ 64,102 and $ 24,668 for the years ended December 31, 2021 and 2020, respectively, which consists entirely of losses in the U.S. and resulted in no provision for income tax expense during the years then ended. The differences between income taxes computed using the U.S. federal income tax rate and the provision for income taxes are as follows: Year Ended December 31, 2021 2020 Federal income tax expense at statutory rate $ ( 13,461 ) 21.0 % $ ( 5,180 ) 21.0 % State income tax expense at statutory rate ( 4,816 ) 7.5 ( 1,801 ) 7.3 Permanent differences 245 ( 0.4 ) 142 ( 0.6 ) Other ( 32 ) — — — Change in valuation allowance 18,064 ( 28.1 ) 6,839 ( 27.7 ) $ — — % $ — — % The Company’s effective income tax rate for the years ended December 31, 2021 and 2020 is 0 % because the Company has generated tax losses and has provided a full valuation allowance against its deferred tax assets to an amount that is more likely than not to be realized. 142 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) The significant components of the Company’s net deferred tax assets are as follows: December 31, 2021 2020 Deferred Tax Assets Net operating losses $ 42,769 $ 26,346 Tax credits 3,922 — Intangibles 134 152 Accrued expenses 1,331 810 Operating lease liability 2,253 2,333 Equity-based compensation 1,622 1,206 Deferred revenue 3,191 2,378 Other 54 54 Less: Valuation allowance ( 52,392 ) ( 30,406 ) Total deferred tax assets 2,884 2,873 Deferred Tax Liabilities Prepaid Expenses ( 308 ) ( 335 ) Fixed assets and other ( 298 ) ( 85 ) Right-of-use asset ( 2,278 ) ( 2,453 ) Total deferred tax liabilities ( 2,884 ) ( 2,873 ) Deferred taxes, net $ — $ — The Company has recorded a full valuation allowance against its deferred tax assets to an amount that is more likely than not to be realized at December 31, 2021 and 2020. This determination is based on significant negative evidence, including: • Cumulative losses: The Company has been in a significant cumulative loss position since its inception in 2011. • Projected realization of net operating loss carry forward amounts: Projections of future pre-tax book loss and taxable losses based on the Company's recent actual performance and current industry data indicate it is more likely than not that the benefits will not be recognized. At December 31, 2021, the Company had a federal net operating loss carryforward of $ 150,329 , of which $ 31,809 will begin to expire in 2035 and $ 118,520 which do not expire and may be carried forward indefinitely. At December 31, 2021, the Company had $ 149,789 of state net operating loss carryforwards which will begin to expire in 2027. At December 31, 2021 and 2020, the Company had no unrecognized tax benefits. The Company's estimate of the potential outcome of any uncertain tax positions is subject to management's assessment of relevant risks, facts and circumstances existing at that time. The Company evaluates uncertain tax positions to determine if it is more-likely-than-not that they would be sustained upon examination. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. The Company is subject to taxation in the U.S. and various state jurisdictions. The Company remains subject to examination by U.S. federal and state tax authorities for the years 2017 through 2021. There are no pending examinations in any jurisdiction. 143 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 12. Loss Per Common Share Basic loss per common share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share is calculated using the treasury share method by giving effect to all potentially dilutive securities that were outstanding. Potentially dilutive options, restricted stock units and warrants to purchase common stock that were outstanding during the periods presented were excluded from the diluted loss per share calculation for the periods presented because such shares had an anti-dilutive effect due to the net loss reported in those periods. Therefore, basic and diluted loss per common share is the same for each of the years ended December 31, 2021 and 2020. The following is the computation of loss per common share for the years ended December 31, 2021 and 2020: Year Ended December 31, 2021 2020 Net loss $ ( 64,102 ) $ ( 24,668 ) Weighted-average basic and diluted common shares outstanding 88,617,332 87,203,588 Loss per share - basic and diluted $ ( 0.72 ) $ ( 0.28 ) The outstanding securities presented below were excluded from the calculation of loss per common share, for the periods presented, because such securities would have been anti-dilutive due to the Company’s loss per share during that period: December 31, 2021 2020 Options to purchase common stock 9,944,773 7,227,296 Restricted stock units 303,250 — Warrants to purchase common stock 31,288,034 413,320 13. Fair Value Measurements ASC Topic 820, Fair Value Measurement , establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, as follows: Level 1 Inputs - unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date; Level 2 Inputs - other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3 Inputs - unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. 144 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Assets measured at fair value on a recurring basis as of December 31, 2021 are as follows: Total Level 1 Level 2 Level 3 Assets Cash equivalents: Money market funds $ 21,125 $ 21,125 $ — $ — Commercial paper 5,999 — 5,999 — Short-term investments: Commercial paper 4,497 — 4,497 — Total financial assets $ 31,621 $ 21,125 $ 10,496 $ — Assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 are as follows: Total Level 1 Level 2 Level 3 Assets Cash equivalents: Money market funds $ 24,586 $ 24,586 $ — $ — Short-term investments: Commercial paper 15,991 — 15,991 — Corporate notes/bonds 29,296 — 29,296 — U.S. Treasuries 2,253 — 2,253 — U.S. Government agency securities 1,278 — 1,278 — Total financial assets $ 73,404 $ 24,586 $ 48,818 $ — Liabilities Common stock warrant liability $ 15 $ — $ — $ 15 Total financial liabilities $ 15 $ — $ — $ 15 145 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) The Company uses the market approach and Level 1 and Level 2 inputs to value its cash equivalents and Level 2 inputs to value its short-term investments. The Company’s long-term debt bore interest at the prevailing market rates for instruments with similar characteristics and, accordingly, the carrying value for this instrument also approximates its fair value and the financial measurement is also classified within Level 2 of the fair value hierarchy. As of December 31, 2021, the Company’s common stock warrant liability was $ 0 and no warrants were outstanding underlying the common stock warrant liability (refer to Note 9, Stockholders’ Equity , for more information). The following is a reconciliation of the Company’s liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) for the years ended December 31, 2021 and 2020: Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Common Stock Warrant Liability Balance at December 31, 2019 $ 414 Gain included in other income (expense), net ( 399 ) Balance at December 31, 2020 $ 15 Gain included in other income (expense), net ( 15 ) Balance at December 31, 2021 $ — 14. Defined Contribution Plan Exicure maintains a defined contribution savings plan for the benefit of its employees. Company contributions are determined under various formulas. The expense recognized for this plan was $ 402 and $ 257 for the years ended December 31, 2021 and 2020, respectively. 15. Commitments and Contingencies Legal Proceedings On December 13, 2021, Mark Colwell filed a putative securities class action lawsuit against the Company, David A. Giljohann and Brian C. Bock in the United States District Court for the Northern District of Illinois, captioned Colwell v. Exicure, Inc. et al. , Case No. 1:21-cv-0663. On February 4, 2021, Plaintiff filed an amended putative securities class action complaint. The amended complaint alleges that Messrs. Giljohann and Bock made materially false and/or misleading statements related to the Company’s clinical programs purportedly causing losses to investors who acquired Company securities between January 7, 2021 and December 10, 2021. The amended complaint does not quantify any alleged damages but, in addition to attorneys’ fees and costs, plaintiff seeks to recover damages on behalf of himself and others who acquired the Company’s stock during the putative class period at allegedly inflated prices and purportedly suffered financial harm as a result. On February 11, 2022, four members of the putative class moved the Court for appointment as lead plaintiff in the action pursuant to the Private Securities Litigation Reform Act of 1995. Two of those motions were withdrawn on February 25, 2022, and two remain pending. On February 16, 2022, the Court entered an order stating that defendants need not answer, or otherwise respond, until the Court enters an order appointing lead plaintiff and lead counsel, and the parties then submit a schedule to the Court for the filing of a further amended complaint and the timing of defendants’ answer or response. On March 1, 2022, Kapil Puri filed a shareholder derivative lawsuit on behalf of the Company in the United States District Court for the Northern District of Illinois, against Messrs. Giljohann and Bock, Jeffrey L. Cleland, Elizabeth Garofalo, Bosun Hau, Bali Muralidhar, Andrew Sassine, Matthias Schroff, James Sulat and Timothy Walbert, captioned Puri v. Giljohann, et al. , Case No. 1:22-cv-01083. On March 8, 2022, Yixin Sim filed a similar shareholder derivative lawsuit in the same court against the same individuals, captioned Sim v. Giljohann, et al. , 146 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Case No. 1:22-cv-01217. Based on similar factual allegations presented in the Colwell complaint, described above, the Puri and Sim complaints (the “Derivative Complaints”) allege that the defendants caused the Company to issue false and/or misleading statements in its 2021 proxy statement regarding risk oversight, code of conduct, clinical program and compensation matters, among other things, in violation of federal securities law, and committed breaches of fiduciary duties owed under state law. The Derivative Complaints also assert that Messrs. Giljohann and Bock are liable for contribution under the federal securities laws. The Puri complaint further asserts state law claims for unjust enrichment, abuse of control, gross mismanagement and corporate waste. The plaintiffs do not quantify any alleged damages in the Derivative Complaints, but seeks restitution for damages to the Company, attorneys’ fees, costs, and expenses, as well as an order directing that certain proposals for strengthening board oversight be put to a vote of the Company’s shareholders. Leases Refer to Note 7, Leases , for a discussion of the commitments associated with the Company’s lease agreements. Northwestern University License Agreements On December 12, 2011, (1) AuraSense, LLC, the Company’s former parent, assigned to the Company all of its worldwide rights and interests under AuraSense, LLC’s 2009 license agreement with Northwestern University (“NU”) in the field of the use of nanoparticles, nanotechnology, microtechnology or nanomaterial-based constructs as therapeutics or accompanying therapeutics as a means of delivery, but expressly excluding diagnostics (the “assigned field”); (2) in accordance with the terms and conditions of this assignment, the Company assumed all liabilities and obligations of AuraSense, LLC as set forth in its license agreement in the assigned field; and (3) in order to secure this assignment and the patent rights from NU, the Company agreed (i) to pay NU an annual license fee, which may be credited against any royalties due to NU in the same year, (ii) to reimburse NU for expenses associated with the prosecution and maintenance of the license patent rights, (iii) to pay NU royalties based on any net revenue generated by the Company’s sale or transfer of any licensed product, (iv) to pay NU, in the event the Company grants a sublicense under the licensed patent rights, the greater of a percentage of all sublicensee royalties or a percentage of any net revenue generated by a sublicensee’s sale or transfer of any licensed product, and (v) to pay NU a percentage of all other sublicense payments received by the Company. In August 2015, the Company entered into a restated license agreement with NU (the “Restated License Agreement”). In February 2016, the Company obtained exclusive license as to NU’s rights in certain SNA technology it jointly owns with NU (the “Co-owned Technology License”). The Company’s license to NU’s rights is limited to the assigned field, however the Company has no such limitation as to its own rights in this jointly owned technology. The Company’s rights and obligations in the Co-owned Technology License agreement is substantially the same as in the Restated License Agreement from August 2015 (collectively referred to as “the Northwestern University License Agreements”). As of December 31, 2021, the Company has paid to NU an aggregate of $ 11,413 in consideration of each of the obligations described above. 16. Related-Party Transactions The Company received consulting services from, and paid fees to, one of its co-founders who is not an employee but, through April 30, 2021, served as a member of the Board. The Company recognized expense of $ 75 and $ 100 for the years ended December 31, 2021 and 2020 in connection with these consulting services in the accompanying consolidated statement of operations. The consulting agreement with this co-founder and former Board member expired on September 30, 2021 under the terms of the agreement and was not renewed. 147 Table of Contents EXICURE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 17. Subsequent Events MidCap Credit Agreement On March 15, 2022, pursuant to the terms of the MidCap Credit Agreement, the Company repaid all remaining outstanding obligations under the MidCap Credit Agreement, including the outstanding principal balance of $ 7,500 and an exit fee of $ 506 . Exercise of Pre-Funded Warrants On January 4, 2022 and January 21, 2022, the holder of the Pre-Funded Warrants exercised the right to purchase 7,500,000 shares and 6,500,000 shares, respectively, of the Company’s common stock. As a result, 14,000,000 aggregate shares of the Company’s common stock were issued upon such exercises with aggregate proceeds from totaling $ 14 such exercises. There are no remaining unexercised Pre-Funded Warrants as a result of such exercises in January 2022. Repricing of Outstanding and Unexercised Options On March 24, 2022, the Board unanimously approved the repricing of all outstanding and unexercised stock options granted under the 2015 Plan and 2017 Plan (the “Plans”) and held by current employees, executive officers, and directors of the Company (the “Eligible Stock Options”). The exercise price of the Eligible Stock Options will be reduced to the closing price of the Company’s common stock on April 1, 2022. Except for the modification to the exercise price of the Eligible Stock Options, all other terms and conditions of each of the Eligible Stock Options will remain in full force and effect. Pursuant to the Plans, the Board, as the administrator of the Plans, has discretionary authority, exercisable on such terms and conditions that it deems appropriate under the circumstances, to reduce the exercise price in effect for outstanding options under the Plans. In approving the repricing, the Board considered the impact of the current exercise prices of outstanding stock options on the incentives provided to employees and directors, the lack of retention value provided by the outstanding stock options to employees and directors, and the impact of such options on the capital structure of the Company. As of March 24, 2022, there are currently 6,996,741 stock options outstanding under the Plans, and all of the Company’s outstanding stock options have exercise prices in excess of the current fair market value of the Company’s common stock, which is why the Board made the determination to deem all outstanding and unexercised stock options held by current employees, executive officers, and directors as Eligible Stock Options. Matthias Schroff, the Company’s Chief Executive Officer, and Elias Papadimas, the Company’s Chief Financial Officer, hold Eligible Stock Options exercisable into an aggregate of 881,200 and 375,417 shares of the Company’s common stock, respectively. Non-employee directors Jeffrey Cleland, Elizabeth Garofalo, Bali Muralidhar and James Sulat hold Eligible Stock Options exercisable into an aggregate of 115,079 , 150,000 , 115,079 and 93,386 shares of the Company’s common stock, respectively. The Company expects to record the impact of the option repricing in the quarter ending June 30, 2022. 148 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.