SEC Form 10-Q filed by Connect Biopharma Holdings Limited
$CNTB
Biotechnology: Pharmaceutical Preparations
Health Care
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
_______________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2025
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _______ to ________
Commission File Number: 001-40212
_______________________
(Exact name of registrant as specified in its charter)
_______________________
| Not Applicable | |||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||
(Registrant’s Telephone Number, Including Area Code): (858 ) 727-1040
_______________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
American Depositary Shares, each representing one Ordinary Share, par value $0.000174 per Share | ||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o | |||||||||||
| x | Smaller reporting company | |||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 30, 2025, there were 55,561,056 ordinary shares of the Company ($0.000174 par value) outstanding.
CONNECT BIOPHARMA HOLDINGS LIMITED
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2025
TABLE OF CONTENTS
Page | ||||||||||||||
EXPLANATORY NOTE
Connect Biopharma Holdings Limited (the “Company”), an exempted company incorporated under the laws of the Cayman Islands, qualifies as a “foreign private issuer,” as defined in Rule 3b-4 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) in the United States (the “U.S.”). The Company has voluntarily elected to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the U.S. Securities and Exchange Commission (the “SEC”) instead of filing on the reporting forms available to foreign private issuers.
Although the Company has voluntarily elected to file annual, periodic and current reports on U.S. domestic issuer forms, the Company intends to maintain its status as a foreign private issuer. Accordingly, as a foreign private issuer, the Company remains exempt from the U.S. federal proxy rules pursuant to Section 14 of the Exchange Act and Regulations 14A and 14C thereunder, Regulation FD, and its officers, directors, and principal shareholders are not subject to the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
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PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CONNECT BIOPHARMA HOLDINGS LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except par value)
| March 31, 2025 | December 31, 2024 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Right-of-use lease assets, net | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Contract liabilities | |||||||||||
| Current lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Non-current lease liabilities | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Shareholders' equity: | |||||||||||
Ordinary shares, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Treasury shares | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total shareholders' equity | |||||||||||
| Total liabilities and shareholders' equity | $ | $ | |||||||||
See accompanying notes.
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CONNECT BIOPHARMA HOLDINGS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Operating expenses: | |||||||||||
| Research and development expense | $ | $ | |||||||||
| General and administrative expense | |||||||||||
| Total operating expenses | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Other income, net: | |||||||||||
| Interest income | |||||||||||
| Other income, net | |||||||||||
| Total other income, net | |||||||||||
| Net loss before income tax | ( | ( | |||||||||
| Income tax expense | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Other comprehensive loss: | |||||||||||
| Foreign currency translation adjustments | ( | ||||||||||
| Unrealized (losses) gains on available-for-sale investments | ( | ||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
| Basic and diluted net loss per ordinary share | $ | ( | $ | ( | |||||||
| Weighted-average ordinary shares outstanding, basic and diluted | |||||||||||
See accompanying notes.
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CONNECT BIOPHARMA HOLDINGS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(in thousands)
| Ordinary Shares | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Treasury | Accumulated Deficit | Total Shareholders' Equity | ||||||||||||||||||
| Shares | Amount | Shares | |||||||||||||||||||||
| Balance, December 31, 2024 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||
| Issuance of ordinary shares upon exercise of stock options | — | — | — | — | |||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||
| Net unrealized losses on available-for-sale investments | — | — | — | ( | — | — | ( | ||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | ||||||||||||||||||
| Balance, March 31, 2025 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||
| Ordinary Shares | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Treasury | Accumulated Deficit | Total Shareholders' Equity | ||||||||||||||||||
| Shares | Amount | Shares | |||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||
| Share-based compensation expense | — | — | — | — | — | ||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||
| Net unrealized gains on available-for-sale investments | — | — | — | — | — | ||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | ( | — | — | ( | ||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||
See accompanying notes.
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CONNECT BIOPHARMA HOLDINGS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Share-based compensation expense | |||||||||||
| Depreciation and amortization | |||||||||||
| Accretion of discounts on available-for-sale investments | ( | ( | |||||||||
| Loss on disposal of property and equipment | |||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | |||||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Other non-current assets | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued liabilities | ( | ||||||||||
| Contract liabilities | |||||||||||
| Operating lease liabilities | ( | ||||||||||
| Other non-current liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Investing activities: | |||||||||||
| Purchases of short-term investments | ( | ||||||||||
| Proceeds from maturities and sales of short-term investments | |||||||||||
| Purchases of property and equipment | ( | ||||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Net cash (used in) provided by investing activities | ( | ||||||||||
| Financing activities: | |||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of year | |||||||||||
| Cash and cash equivalents at end of year | $ | $ | |||||||||
See accompanying notes.
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CONNECT BIOPHARMA HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Connect Biopharma Holdings Limited (“Connect,” “Connect Biopharma,” the “Company,” “we,” “us,” “our” and similar terms refer to Connect Biopharma Holdings Limited, together with its subsidiaries) was incorporated in November 2015 in the Cayman Islands as an exempted company with limited liability. The Company completed its Initial Public Offering (“IPO”) in March 2021 and its American Depositary Shares (“ADSs”) have been listed on the Nasdaq Global Market since then. Each ADS represents one ordinary share, par value U.S. Dollar (“USD”) $0.000174 per share.
Connect Biopharma, headquartered in San Diego, California, is a clinical-stage biopharmaceutical company focused on advancing rademikibart, a potentially best-in-class next generation anti-interleukin-4-receptor alpha (“IL-4Rα”) antibody, to transform care in asthma and chronic obstructive pulmonary disease (“COPD”).
As of March 31, 2025, we had cash, cash equivalents, and short-term investments of $84.0 million. Based on our current operating plan and projections, management believes that the Company’s cash, cash equivalents and short-term investments will be sufficient to meet the Company’s anticipated cash requirements for a period of at least one year from the date this Quarterly Report on Form 10-Q is filed with the U.S. Securities and Exchange Commission (the “SEC”).
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The Company continues to qualify as a Foreign Private Issuer under SEC rules; however, the Company has voluntarily elected to become a domestic filer, beginning with its Annual Report on Form 10-K for the year ended December 31, 2024, which was filed with the SEC on March 31, 2025 (the “2024 Annual Report”). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) for interim financial information and the applicable rules and regulations of the SEC for interim reporting. Accordingly, since they are interim statements, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three months ended March 31, 2025 are not necessarily indicative of the results that may be expected for other quarters or the year ending December 31, 2025. The condensed consolidated balance sheet as of December 31, 2024 has been derived from the audited financial statements as of that date. These unaudited condensed consolidated financial statements and the notes thereto should be read in conjunction with the audited financial statements included in our 2024 Annual Report.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The following are the Company’s subsidiaries:
Directly Held
•Connect Biopharma HongKong Limited (“Connect HK”)
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Indirectly Held
•Connect Biopharm LLC
•Connect Biopharma Australia PTY LTD
•Suzhou Connect Biopharma Co., Ltd. (“Connect SZ”)
•Connect Biopharma (Beijing) Co., Ltd
•Connect Biopharma (Shanghai) Co., Ltd.
•Connect Biopharma (Shenzhen) Co., Ltd
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Our significant accounting policies that involve significant judgment and estimates include revenue recognition, investments, accrued research and development expenses, income taxes and share-based compensation. Actual results could differ materially from those estimates.
Fair Value of Financial Instruments
A company may elect to use fair value to measure financial instruments. If the use of fair value is elected, any upfront costs and fees related to the item such as debt issuance costs must be recognized in earnings and cannot be deferred. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. Unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings and any changes in fair value are recognized in earnings. We have elected to not apply the fair value option to our financial assets and liabilities.
Cash and cash equivalents, receivables, prepaid expenses, other assets, accounts payable and accrued expenses, are carried at cost, which is considered to be representative of their respective fair values because of the short-term maturity of these instruments. Available-for-sale investment securities are carried at fair value.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements & Disclosures, establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
•Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities.
•Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Accounts Receivable, Net
Accounts receivable are recorded at the invoice amount, net of an allowance for credit losses. The allowance for credit losses reflects accounts receivable balances that are believed to be uncollectible. In estimating the allowance for credit losses, we consider: (1) our historical experience with collections and write-offs; (2) the credit quality of our customers and any recent or anticipated changes thereto; (3) the outstanding balances and past due amounts from our customers; and (4) reasonable and supportable forecast of economic conditions expected to exist throughout the contractual term of the receivable.
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As of March 31, 2025 and December 31, 2024, we determined that an allowance for credit losses was not required. For the three months ended March 31, 2025 and 2024, we did not have any material write-offs of accounts receivable balances.
Share-Based Compensation Expense
On January 1, 2025, we began using the Black-Scholes option pricing model to estimate the fair value of each option grant on the grant date, in order to better align with our peers. Prior to 2025, we estimated the fair value of each option grant on the grant date using the Binomial option pricing model. This fair value is then amortized using the straight-line single-option method of attributing the value of share-based compensation to expense over the requisite service periods of the awards. Forfeitures are accounted for, as incurred, as a reversal of share-based compensation expense related to awards that will not vest. The fair value of each employee share purchase right is estimated on the grant date using the Black-Scholes option pricing model. The estimated fair value of each purchase right is then expensed on a straight-line basis over the requisite service period, which is generally the purchase period. The Black-Scholes option pricing model requires inputs of subjective assumptions, including each option’s expected life and price volatility of the underlying shares.
Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of ordinary shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of ordinary shares and ordinary share equivalents outstanding for the period determined using the treasury share method. For purposes of this calculation, stock options and employee share purchase rights are considered to be ordinary share equivalents and are included in the calculation of diluted net loss per share only when their effect is dilutive.
Because we have incurred a net loss for both periods presented in the condensed consolidated statements of operations and comprehensive loss, the following ordinary share equivalents were not included in the computation of net loss per share because their effect would be anti-dilutive (in thousands):
| March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Stock options outstanding | |||||||||||
| Employee stock purchase rights | |||||||||||
Significant Accounting Policies
A complete description of Connect’s significant accounting policies are disclosed in its 2024 Annual Report.
Recent Accounting Pronouncements
Adopted
In December 2023, FASB issued Accounting Standards Update (“ASU”) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), to enhance income tax reporting disclosures and require disclosure of specific categories in the tabular rate reconciliation. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. On January 1, 2025, we adopted the provisions of ASU 2023-09 on a prospective basis and the required disclosures will be included in our Annual Report on Form 10-K for the year ending December 31, 2025. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its annual disclosures. ASU 2023-09 did not have an impact on our disclosures included in this Quarterly Report on Form 10-Q.
Not Yet Adopted
In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40) (“ASU 2024-03”). ASU 2024-03 requires that public business entities disclose additional information about specific expense categories in the notes to financial statements at interim and annual reporting periods. The prescribed categories include purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depletion. ASU 2024-03 may be applied either prospectively or retrospectively and is effective for annual periods beginning after December 15, 2026 and interim periods beginning after December 15, 2027, with early adoption permitted. We are currently evaluating the impact on our disclosures.
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3. Fair Value Measurements
We measure cash, cash equivalents and short-term investments at fair value on a recurring basis. The fair values of such assets were as follows (in thousands):
| Fair Value Measurements at Reporting Date Using | ||||||||||||||
| Balance at March 31, 2025 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||
| U.S. treasury bills | ||||||||||||||
| U.S. government agency obligations | ||||||||||||||
| U.S. corporate debt securities | ||||||||||||||
| U.S. commercial paper | ||||||||||||||
| Foreign commercial paper | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||
| Balance at December 31, 2024 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||
| U.S. treasury bills | ||||||||||||||
| U.S. government agency obligations | ||||||||||||||
| U.S. corporate debt securities | ||||||||||||||
| U.S. commercial paper | ||||||||||||||
| Foreign commercial paper | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||
We have not transferred any investment securities between the three levels of the fair value hierarchy.
As of March 31, 2025, short-term investments included $36.3 million of available-for-sale securities with contractual maturities of three months to one year. As of December 31, 2024, cash equivalents included $3.0 million of available-for-sale securities with contractual maturities of three months or less and short-term investments included $15.5 million of available-for-sale securities with contractual maturities of three months to one year. The money market funds as of March 31, 2025 and December 31, 2024 are included in cash and cash equivalents on the unaudited condensed consolidated balance sheets.
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4. Balance Sheet Details
Available-for-Sale Investments
The following is a summary of our available-for-sale investments (in thousands):
| March 31, 2025 | ||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||
| U.S. treasury bills | $ | $ | $ | $ | ||||||||||
| U.S. government agency obligations | ( | |||||||||||||
| U.S. corporate debt securities | ||||||||||||||
| U.S. commercial paper | ( | |||||||||||||
| Foreign commercial paper | ||||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||
| December 31, 2024 | ||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||
| U.S. treasury bills | $ | $ | $ | $ | ||||||||||
| U.S. government agency obligations | ( | |||||||||||||
| U.S. corporate debt securities | ||||||||||||||
| U.S. commercial paper | ||||||||||||||
| Foreign commercial paper | ||||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||
At each reporting date, the Company performs an evaluation of impairment to determine if any unrealized losses are the result of credit losses. Impairment is assessed at the individual security level. Factors considered in determining whether a loss resulted from a credit loss or other factors include the Company’s intent and ability to hold the investment until the recovery of its amortized cost basis, the extent to which the fair value is less than the amortized cost basis, the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, any historical failure of the issuer to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency, any adverse legal or regulatory events affecting the issuer or issuer’s industry, and any significant deterioration in economic conditions.
The Company does not intend to sell the investment in unrealized loss position and it is unlikely that the Company will be required to sell the investment before the recovery of its amortized cost basis. Based on its evaluation, the Company determined its credit losses related to its available-for-sale securities were immaterial at March 31, 2025 or December 31, 2024.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. We regularly monitor and evaluate the realizable value of our available-for-sale investment securities. We did not recognize any impairment losses for the three months ended March 31, 2025 or 2024.
Unrealized gains and losses associated with our investments are reported in accumulated other comprehensive loss. For the three months ended March 31, 2025, we recorded $1,000 in net unrealized losses associated with our available-for-sale investments. For the three months ended March 31, 2024, we recorded $9,000 in net unrealized gains associated with our available-for-sale investments.
Realized gains and losses associated with our investments, if any, are reported in the statements of operations and comprehensive loss. We did not
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Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
| March 31, 2025 | December 31, 2024 | ||||||||||
| Prepaid expenses | $ | $ | |||||||||
| Interest receivables | |||||||||||
| Other assets | |||||||||||
| Total prepaid expenses and other current assets | $ | $ | |||||||||
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| March 31, 2025 | December 31, 2024 | ||||||||||
| Accrued clinical, manufacturing and professional expense | $ | $ | |||||||||
| Accrued compensation and benefits | |||||||||||
| Other accrued expenses | |||||||||||
| Total accrued liabilities | $ | $ | |||||||||
5. License and Collaboration Agreement
Simcere License Agreement
On November 21, 2023 (the “Effective Date”), Connect HK and Connect SZ (“Licensor”) entered into an exclusive license and collaboration agreement (the “License Agreement”) with Simcere Pharmaceutical Co., Ltd. (“Simcere” or “Licensee”), a subsidiary of Simcere Pharmaceutical Group Ltd., to develop and commercialize rademikibart in Greater China.
Simcere has been granted exclusive rights to develop, manufacture, and commercialize rademikibart for all indications in Greater China, including mainland China, Hong Kong, Macau, and Taiwan (the “Territory”), while Connect retains rights in all other markets. Under the License Agreement, Connect was required to complete all of rademikibart’s ongoing clinical trials and related analysis in the Territory in atopic dermatitis (“AD”), while the Licensee will be responsible for rademikibart’s new drug application for AD in China and will also conduct and be responsible for the costs of all future clinical studies in all additional disease indications for rademikibart in Greater China.
As consideration for the rights granted to Simcere under the License Agreement, Simcere paid Licensor a non-refundable, non-creditable up-front fee of approximately $21 million. Simcere is required to make milestone payments to the Licensor up to an aggregate amount of $123 million upon the achievement of certain development, regulatory and commercial milestones. The achievement of certain milestones is dependent upon the timing and success of future development activities to be completed by Simcere. Simcere is also required to make payments for cost reimbursements related to certain development activities, including supply of material for clinical development. The License Agreement additionally provides that Simcere is obligated to pay Licensor royalties at tiered percentage rates up to low double-digit percentages on net sales of the licensed product in the Territory.
The term of the License Agreement is coterminous with the period up to which sales-based royalty payments shall be made, which is approximately 12 years after commercialization of the licensed compound. After this period, the license is considered fully paid and Simcere can continue to exploit the rights in the license in the Territory.
Revenue Recognition
The Company evaluated the License Agreement which provides Simcere with the right to use the Company’s intellectual property in the Territory. The Company concluded that the License Agreement was subject to Topic 606 as the Company viewed the License Agreement as a contract with a customer as the activities were central to its business operations. As such, the Company assessed the terms of the License Agreement and identified four performance obligations for the license to research, develop, manufacture and commercialize rademikibart in the Territory. The four performance obligations include: (i) transfer of the intellectual property and know-how; (ii) transfer of the current manufacturing process; (iii) development and transfer of a new manufacturing process; and (iv) completion of certain rademikibart development services.
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At inception of each arrangement that includes milestone payments, the Company evaluates where the milestones are considered probable of being reached. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. At the Effective Date, the Company determined the transaction price to be $25 million, which is comprised of (i) a $21 million upfront payment for the grant of license to the Licensee and (ii) $4 million of cost reimbursement upon delivery of certain clinical trial reports. All other milestones are considered to be constrained at the Effective Date because these milestones are not within the control of the Company and therefore these milestones are not included in the transaction price.
When an intellectual property license is determined to be a predominant promise in the arrangement, sales-based milestone payments and royalties are recognized at the later of when the associated performance obligation has been satisfied or when the sales occur. For cost reimbursements related to the supply of material for clinical development, the Company recognizes revenue when Simcere obtains control of the goods. For the three months ended March 31, 2025 and 2024, there was no
Allocation of the Transaction Price
The transaction price is generally allocated to the identified performance obligations based on the relative stand-alone selling price estimated for each distinct performance obligation. However the Company has allocated certain regulatory and development milestone payments only to certain specific performance obligation(s) where the terms of such payments relate specifically to the Company’s efforts to satisfy the respective performance obligation, and provided that such allocation is consistent with the objective that transaction price is allocated to each performance obligation in order to reflect the consideration to which the Company expects to be entitled to receive in exchange for satisfying those performance obligations. The Company allocated the $25.0 million transaction price based on relative stand-alone selling prices of each performance obligation as $23.8 million for the license, $0.1 million for the transfer of the current manufacturing process, $0.2 million for development and transfer of a new manufacturing process, and $0.9 million for completion of certain rademikibart development services. The Company developed the estimated stand-alone selling price for the license using a discounted cash flows model, which is an income approach. In estimating the stand-alone selling price for each performance obligation, the Company developed assumptions that require judgment and included forecasted revenues, expected development timelines, discount rates, probabilities of technical and regulatory success and costs for manufacturing clinical supplies.
The Company utilizes judgment to assess when control of the goods and services transfers to Simcere, to determine whether the 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. When recognizing revenue over time, the Company evaluates the measure of progress each reporting period and, if necessary, adjusts the progress of performance and related revenue recognition.
The Company expects to recognize the transaction price, at a point in time or over the expected performance period of each respective performance obligation. The Company began recognizing revenue from the License Agreement once the Company had substantially completed the transfer of the intellectual property and know-how to Simcere. The revenue associated with the transfer of the intellectual property and know-how and transfer of the current manufacturing process were recognized at a point in time upon successful completion of each obligation during the second quarter of 2024. The Company will recognize the revenue associated with the transfer of a new manufacturing process at a point in time upon successful completion of the obligation. For the performance obligation to complete certain development services, the Company recognized the transaction price over the expected performance period using an input method. To measure the progress of this obligation, the Company used the cost-to-cost basis approach to estimate the percentage of completion as this method provides the most faithful depiction of the Company’s performance in transferring control of the services promised to Simcere and represents the Company’s best estimate of the period of the obligation. The performance obligation related to certain rademikibart development services was completed in third quarter of 2024.
Milestone Payments
The Licensor is entitled to development milestones under the License Agreement and certain regulatory milestone payments which are paid upon receipt of regulatory approvals within the Territory.
At the end of each reporting period, the Company will re-evaluate the probability of achievement of each milestone and any related constraint, and if necessary, adjust its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect the reported amount of license and collaboration revenues in the period of adjustment.
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Royalties
As the license is deemed to be the predominant item to which sales-based royalties relate, the Company will recognize revenue when the related sales occur.
Contract Assets and Liabilities
As of March 31, 2025 and December 31, 2024, the Company had no 0.2
6. Commitments and Contingencies
Legal Proceedings
From time to time, the Company may be a party to litigation or subject to claims in the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company was not a party to any material litigation and did not have contingency reserves established for any liabilities as of March 31, 2025 or December 31, 2024.
7. Leases
In February 2025, we relocated our corporate headquarters to a new location in San Diego, California. This operating lease for the new corporate headquarters is for 6,942 square feet of office space which expires on January 31, 2028. In the first quarter of 2025, we recognized an initial ROU lease asset of $0.9 million and a lease liability of $0.9 million related to this space in San Diego, California.
As of March 31, 2025, we also had an operating lease for 3,628 square feet of office space in San Diego, California, with a lease term that expired on April 30, 2025. In addition, we have an operating lease for 25,476 square feet of laboratory and office space in Taicang, China, with a lease term that expires on April 30, 2026.
As of March 31, 2025 and December 31, 2024, the weighted average remaining lease term was 2.6 years and 1.0 year, respectively, and the weighted average discount rate used to determine the operating lease liability was 7.9 % and 4.8 %, respectively.
Annual future minimum lease payments as of March 31, 2025 are as follows (in thousands):
| 2025 (remainder of year) | $ | ||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Thereafter | |||||
| Total future minimum lease payments | |||||
| Less: amount representing interest | ( | ||||
| Total lease liabilities | $ | ||||
Rent expense under all operating leases totaled $0.1 0.1
8. Reorganization
Executive Officer Departures
During the second and third quarters of 2024, we implemented changes to our executive leadership structure. In connection with these changes, we provided three executive officers with one-time severance payments upon termination, continued benefits for a specified period of time, and certain stock option modifications. The total expense for these activities was $3.2 million, $2.0 million of which was primarily for cash severance and $1.2 million of which was for non-cash, share-based compensation expense. During the year ended December 31, 2024, we recognized $3.2 million of the total expense, $1.8 million of which was included in general and administrative expense, and $1.4 million of which was included in research and development expense. As of March 31, 2025, we have paid the $2.0 million of cash severance
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charges. We have accounted for these expenses in accordance with the FASB ASC Topic 420, Exit or Disposal Cost Obligation.
9. Shareholders’ Equity
Statutory Reserves
In accordance with the People’s Republic of China (“PRC”) regulations and the articles of association of the companies registered in the PRC, companies are required to set aside 10% of their net profit for the year, offsetting any prior year losses, to the statutory surplus reserve fund as determined under the relevant PRC accounting standards. When the balance of such reserve reaches 50% of the entity’s registered capital, any further appropriation is optional. As of March 31, 2025, we have not made any profit appropriations to the reserve fund, as all of our subsidiaries in the PRC were in an accumulated loss position.
Under PRC laws and regulations, there are restrictions on the Company’s PRC subsidiaries with respect to transferring certain of their net assets to the Company either in the form of dividends, loans, or advances. As of March 31, 2025 and December 31, 2024, restricted net assets including paid-in capital and statutory reserve funds of the Company’s PRC subsidiaries was $29.2 million and $29.6 million, respectively.
10. Equity Incentive Plans
Option Plan Activity
The following table summarizes the stock option activity for the three months ended March 31, 2025:
| Outstanding Options | ||||||||
| Number of Options | Weighted-Average Exercise Price | |||||||
| Outstanding at December 31, 2024 | $ | |||||||
| Granted | $ | |||||||
| Exercised | ( | $ | ||||||
| Cancelled | ( | $ | ||||||
| Outstanding at March 31, 2025 | $ | |||||||
Share-based Compensation
The following table summarizes share-based compensation expense related to share-based payment awards granted pursuant to all of our equity compensation arrangements (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Research and development | $ | $ | |||||||||
| General and administrative | |||||||||||
| Total share-based compensation expense | $ | $ | |||||||||
As of March 31, 2025, there was $9.4 million of total unrecognized compensation cost related to non-vested, share-based payment awards granted under all of our equity compensation plans. Total unrecognized compensation cost will be adjusted for forfeitures. We expect to recognize this compensation cost over a weighted-average period of 3.2 years.
On January 1, 2025, we began using the Black-Scholes option pricing model to estimate the fair value of each option grant on the grant date, in order to better align with our peers. Prior to 2025, we estimated the fair value of each option grant on the grant date using the Binomial option pricing model. In connection with our change in method of estimating the fair value per share, we also began estimating the expected term of each option grant based on the simplified method described in SEC Staff Accounting Bulletin No. 107, Share-Based Payment. We believe the simplified method is appropriate, as all of our stock option grants would be considered “plain-vanilla” and we have a limited history of option exercise activity.
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The following are the weighted-average assumptions for stock options:
| For the Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Risk-free interest rate | % | % | |||||||||
| Dividend yield | % | % | |||||||||
| Volatility | % | % | |||||||||
| Expected life (years) | |||||||||||
| Early exercise multiple (years) | — | ||||||||||
The weighted-average fair value of options granted was $0.81 and $0.90 for the three months ended March 31, 2025 and 2024, respectively.
We estimate the fair value of each purchase right granted under our Employee Stock Purchase Plan at the beginning of each new offering period using the Black-Scholes option pricing model. There were no new offering periods during the three months ended March 31, 2025 or 2024.
11. Income Taxes
For the three months ended March 31, 2025 and 2024, we recorded income tax expense of $54,000 and $30,000 , respectively. Our effective tax rate for the three months ended March 31, 2025 and 2024 was (0.5 )% and (0.3 )%, respectively. The effective tax rate in both periods was primarily driven by the full valuation allowance maintained against the Company’s deferred tax assets.
For the three months ended March 31, 2025, the Company’s provision for income taxes was based on its worldwide estimated annualized effective tax rate, except for (1) jurisdictions for which a loss is expected for the year and no benefit can be realized for those losses, (2) jurisdictions for which forecasted pre-tax income or loss cannot be estimated, and (3) the tax effect of discrete items occurring during the period. The tax for jurisdictions for which a forecast cannot be estimated is based on actual taxes and tax reserves for the quarter.
Under the provisions of ASC 740, Income Taxes, the determination of the Company’s ability to recognize its deferred tax assets requires an assessment of both negative and positive evidence. The Company determined that it was not more likely than not that the Company could recognize its deferred tax assets. The evidence evaluated by the Company included operating results during the most recent three-year period and future projections, with more weight given to historical results than expectations of future profitability, which are inherently uncertain. Certain entities’ net losses in recent periods represented sufficient negative evidence to require a valuation allowance against its net deferred tax assets. This valuation allowance will be evaluated periodically and could be reversed partially or totally if business results sufficiently improve to support realization of deferred tax assets.
As of March 31, 2025, unrecognized tax benefits were $1.3 million, of which none would affect the effective tax rate, if recognized. It is the Company’s policy to classify accrued interest and penalties to unrecognized tax benefits in the provision for income taxes. There were no
12. Segment Reporting
The Company operates in one
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The following table provides significant segment expenses, other segment items, reported segment net loss and a reconciliation of segment net loss to the Company’s total consolidated net loss for the three months ended March 31, 2025 and 2024:
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Research and development expense | $ | ( | $ | ( | |||||||
| General and administrative expense | ( | ( | |||||||||
| Other income, net | |||||||||||
| Income tax expense | ( | ( | |||||||||
| Segment net loss | ( | ( | |||||||||
| Reconciliation of loss: | |||||||||||
| Adjustments and reconciling items | |||||||||||
| Consolidated net loss | $ | ( | $ | ( | |||||||
The Company’s long-lived tangible assets, as well as the Company’s ROU lease assets recognized on the Condensed Consolidated Balance Sheets as of March 31, 2025 and December 31, 2024 were located as follows: $0.9 million and $0.1 million, respectively, in the U.S. and $3.9 million and $4.1 million, respectively, in the PRC.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and related notes included in our 2024 Annual Report.
Forward-Looking Statements
The following discussion and other parts of this quarterly report contain forward-looking statements within the meaning of Section 21E of the Exchange Act. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our strategy, future financial condition, future operations, research and development, potential of, and expectations for, our pipeline and technology platforms, the timing, potential of and expectations for planned clinical trials and preclinical studies, the timing and likelihood of regulatory filings and approvals for our product candidates, our ability to commercialize our product candidates, the potential benefits of collaborations, projected costs, prospects, plans, objectives of management, expected market size and growth for our potential products, the timing of availability of clinical data, program updates and data disclosures, and our plans for rademikibart, are forward-looking statements. These statements are often identified by the use of words such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “might”, “objective,” “plan,” “positioned,” “potential,” “predict,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A under the heading “Risk Factors.” The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
Overview
Connect Biopharma, headquartered in San Diego, California, is a clinical-stage biopharmaceutical company focused on advancing rademikibart, a potentially best-in-class next generation IL-4Rα antibody, to transform acute and chronic care in asthma and COPD.
Significant Developments
The following is a summary of significant developments affecting our business that occurred since the filing of our 2024 Annual Report. For additional information or for a more comprehensive discussion of our product candidate, rademikibart, see our 2024 Annual Report.
In March 2025, we announced the publication of positive data from our global Phase 2 trial of rademikibart in patients with moderate-to-severe uncontrolled asthma in the American Journal of Respiratory and Critical Care Medicine. These data highlight rademikibart’s potential as a novel biologic treatment option for patients with asthma and Type 2 inflammation, demonstrating rapid onset of action, sustained improvement in forced expiratory volume in one second and clinically important reductions in annual exacerbation rates.
In April 2025, we announced positive feedback from our Type C meeting with the U.S. Food and Drug Administration (the “FDA”), Division of Pulmonology, Allergy, and Critical Care, in the Office of Immunology and Inflammation. We obtained the FDA’s alignment on the design of our two parallel Phase 2 trials evaluating rademikibart in patients experiencing an acute exacerbation of asthma or COPD. This treatment setting is of particular interest because available Standard of Care (“SoC”) therapy in the acute setting shows insufficient long-term treatment effect on symptoms and lung function, with frequent exacerbations leading to re-visits by patients to the acute care setting for respiratory critical care treatment. Preventing and delaying recurrent exacerbations in the first 28 days following an exacerbation is a significant unmet medical need and a crucial therapeutic goal in asthma and COPD. Despite current guideline recommendations, treatment with systemic corticosteroids and antibiotics is not wholly adequate.
In May 2025, we announced enrollment of the first patient in our rademikibart Phase 2 clinical trial in patients experiencing an acute exacerbation of asthma or COPD. The Phase 2 acute asthma trial, Seabreeze STAT ASTHMA, and the acute COPD trial, Seabreeze STAT COPD, will evaluate rademikibart plus SoC compared to SoC plus placebo in patients
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with asthma or COPD and Type 2 inflammation who are having an acute exacerbation. The primary endpoint of these two trials is treatment failure over 28 days after randomization. Treatment failure includes: death (any cause), (re)admission to the hospital, an urgent visit to an outpatient or emergency department provider for symptoms that are worsening, or the necessity to intensify pharmacologic treatment. Key secondary efficacy endpoints of these trials include the rate of new exacerbations, time to first new exacerbation, change in symptoms, and change in lung function in the 28 days after randomization. Exploratory endpoints include time-to-discharge in hospitalized patients and disease-specific patient-reported outcomes.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. We evaluate our estimates on an ongoing basis, including those related to revenue recognition, investments, accrued research and development expenses, income taxes and share-based compensation. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Our critical accounting estimates and judgments are described within Item 7 of our 2024 Annual Report.
Recent Accounting Pronouncements
See Note 2 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Results of Operations
Comparison of the Three Months Ended March 31, 2025 and 2024
Research and Development Expense
Research and development expense consisted of the following (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Rademikibart-related costs | $ | 3,656 | $ | 5,684 | |||||||
| Other development related costs | 73 | 263 | |||||||||
| Personnel costs and other expenses | 2,573 | 2,109 | |||||||||
| Share-based compensation expense | 331 | 607 | |||||||||
| Total research and development expense | $ | 6,633 | $ | 8,663 | |||||||
For the three months ended March 31, 2025, research and development expense was $6.6 million, compared to $8.7 million for the same period in 2024. The decrease in research and development expense was primarily due to a decrease in costs related to the development of rademikibart.
General and Administrative Expense
For the three months ended March 31, 2025, general and administrative expense was $4.8 million, compared to $4.0 million for the same period in 2024. The increase in general and administrative expense was primarily due to an increase in professional fees to support our efforts to become more U.S.-centric, as well as an increase in personnel and related costs.
Other Income, Net
For the three months ended March 31, 2025, other income, net was $1.2 million, compared to $4.0 million for the same period in 2024. The decrease in other income, net was primarily due to a decrease in government subsidies and interest income earned on our invested cash balances.
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Reorganization
See Note 8 to the Condensed Consolidated Financial Statements included in Item I of this Quarterly Report on Form 10-Q for discussion of the Company’s executive officer reorganization plan.
Liquidity and Capital Resources
As of March 31, 2025, we had cash, cash equivalents and short-term investments of $84.0 million. Based on our current operating plan and projections, management believes that the Company’s existing cash, cash equivalents and short-term investments will be sufficient to meet the Company’s anticipated cash requirements for a period of at least one year from the date this Quarterly Report on Form 10-Q is filed with the SEC.
Our net loss for the three months ended March 31, 2025 was $10.3 million, or $0.19 per share, compared to a net loss of $8.7 million, or $0.16 per share, for the same period in 2024.
Our net cash used in operating activities for the three months ended March 31, 2025 was $10.0 million, compared to $0.6 million for the same period in 2024. The increase in net cash used in operating activities was primarily due to net changes in our operating assets and liabilities of $7.3 million and an increase in net loss of $1.6 million.
Our net cash used in investing activities for the three months ended March 31, 2025 was $20.6 million, compared to net cash provided by investing activities of $9.3 million for the same period in 2024. The decrease in cash provided by investing activities was primarily due to net purchases of short-term investments of $20.6 million for the three months ended March 31, 2025, compared to net maturities of $9.3 million for the three months ended March 31, 2024.
Our net cash provided by financing activities for the three months ended March 31, 2025 was $2,000, which consisted of proceeds from stock option exercises. There was no comparable activity during the three months ended March 31, 2024.
Historically, we have financed our operations, including technology and product research and development, primarily through sales of our ordinary shares and ADSs, including our IPO that we completed on March 23, 2021 for total cash consideration of $219.9 million before underwriting discounts and commissions, and, through up-front payments, research funding and milestone payments under collaborative arrangements.
Material Cash Requirements
In February 2025, we relocated our corporate headquarters to a new location in San Diego, California. This operating lease for the new corporate headquarters is for 6,942 square feet of office space and expires on January 31, 2028. We have agreed to pay a basic annual rent for the additional office space that increases incrementally over the term of the lease from $0.3 million for the first 12 months of the lease (inclusive of certain rent abatements) to $0.4 million for the last 12 months of the lease, and such other amounts as set forth in the lease.
In addition, as of March 31, 2025, we had a lease for 3,628 square feet of office space in San Diego, California, with a lease term that expired on April 30, 2025. We also have a lease for 25,476 square feet of laboratory and office space in Taicang, China, with a lease term that expires on April 30, 2026. As of March 31, 2025, we had total operating lease obligations of $1.1 million, with $0.3 million due during the remainder of fiscal year 2025 and $0.8 million due within the following two to three years.
At March 31, 2025, our short-term purchase obligations mainly consisted of non-cancellable commitments under agreements with third-party manufacturers in the ordinary course of business. We plan to fund these commitments with our current financial resources.
We enter into agreements with clinical sites and clinical research organizations for the conduct of our clinical trials and contract manufacturing organizations for the manufacture and supply of preclinical, clinical and, eventually, commercial materials and drug product. We make payments to these clinical sites and clinical research organizations based in part on the number of eligible patients enrolled and the length of their participation in the clinical trials. Under certain of these agreements, we may be subject to penalties in the event that we prematurely terminate these agreements. At this time, due to the variability associated with clinical site agreements, contract research organization agreements and contract manufacturing agreements, we are unable to estimate with certainty the future costs we will incur. We intend to use our current financial resources to fund our obligations under these commitments.
We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the
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development of product candidates and programs, and because the extent to which we may enter into collaborations with third parties for development of our product candidates is unknown, we are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements will depend on many factors, including:
•our ability to raise capital in light of the impacts of the current unfavorable global economic and political conditions;
•the scope, progress, results, and costs of drug discovery, preclinical development, laboratory testing, and clinical trials for the product candidates we may develop;
•the costs associated with our manufacturing process development and evaluation of third-party manufacturers and suppliers;
•the costs, timing and outcome of regulatory review of our product candidates;
•the costs of preparing and submitting marketing approvals for any of our product candidates that successfully complete clinical trials, and the costs of maintaining marketing authorization and related regulatory compliance for any products for which we obtain marketing approval;
•the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights, and defending intellectual property-related claims;
•the costs of future activities, including product sales, medical affairs, marketing, manufacturing, and distribution, for any product candidates for which we receive marketing approval;
•the terms of our current and any future license agreements and collaborations;
•the extent to which we acquire or in-license other product candidates, technologies and intellectual property;
•the success of our ongoing or future collaborations;
•our ability to establish and maintain additional collaborations on favorable terms, if at all; and
•the costs of operating as a public company.
Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, monetization transactions, government contracts or other strategic transactions. To the extent that we raise additional capital through the sale of equity, ownership interests of existing holders of our ADSs and ordinary shares will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of holders of our ADSs or ordinary shares. If we raise additional funds through collaboration agreements, strategic alliances, licensing arrangements, monetization transactions, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves. Future debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or equity financing that we raise may contain terms that are not favorable to us or our shareholders.
There have been significant disruptions to global financial markets that have contributed to a general global economic slowdown. The resulting high inflation rates may materially affect our business and corresponding financial position and cash flows. Inflationary factors, such as increases in the cost of our clinical trial materials and supplies, interest rates and overhead costs may adversely affect our operating results. High interest rates also present a recent challenge impacting the U.S. economy and could make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the future. Additionally, the general consensus among economists suggests that we should expect a higher recession risk to continue over the next year, which, together with the foregoing, could result in further economic uncertainty and volatility in the capital markets in the near term, and could negatively affect our operations. Furthermore, such economic conditions have produced downward pressure on share prices. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, we may experience increases in the near future (especially if inflation rates remain high or begin to rise again) on our operating costs, including our labor costs and research and development costs, due to supply chain constraints, consequences associated with geopolitical conflicts such as the ongoing wars involving Ukraine and Israel, the impact of tariffs imposed by or on the U.S. or other matters
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impacting global trade, shifting priorities and policies within the U.S. federal government, worsening global macroeconomic conditions, and employee availability and wage increases, which may result in additional stress on our working capital resources. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, or eliminate our research and development programs or future commercialization efforts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting companies.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As of March 31, 2025, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive and financial officers concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2025.
An evaluation was also performed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any changes in our internal control over financial reporting that occurred during our latest fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently party to any material legal proceedings, and we are not aware of any pending or threatened legal proceeding against us that we believe could have an adverse effect on our business, operating results or financial condition.
Item 1A. Risk Factors.
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in our 2024 Annual Report. Other than the risk factor set forth below, we are not aware of any material changes to the risk factors described in our 2024 Annual Report.
Actual or perceived failures to comply with applicable data protection, privacy and security laws, regulations, standards and other requirements could adversely affect our business, results of operations, and financial condition.
The legislative and regulatory landscape for privacy and data protection continues to evolve in jurisdictions worldwide, and there has been an increasing focus on privacy and data protection issues with the potential to affect our business. Complying with such requirements can be difficult, time-consuming, expensive, and could require us to change our business practices and put in place additional compliance mechanisms. Failure to comply with laws, regulations and
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contractual and other obligations governing personal or other sensitive information could result in enforcement actions against us, including fines, public censure, processing penalties, claims for damages by affected individuals, damage to our reputation and loss of goodwill. It is possible that new and existing laws may be interpreted and applied in a manner that is inconsistent with our practices and our efforts to comply with the evolving data protection rules may be unsuccessful.
In the U.S., the Health Information Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, and their implementing regulations, or collectively HIPAA, imposes, among other things, specific standards relating to the privacy, security, transmission and breach reporting of protected health information. Most healthcare providers, including research institutions from which we obtain patient’s protected health information, are subject to privacy and security regulations promulgated under HIPAA. While we do not believe that we are currently acting as a “covered entity” or “business associate” under HIPAA and thus are not directly regulated under HIPAA, any person may be prosecuted under HIPAA’s criminal provisions either directly or under aiding-and-abetting or conspiracy principles. Consequently, depending on the facts and circumstances, we could face substantial criminal penalties if we knowingly receive protected health information from a HIPAA-covered healthcare provider or research institution that has not satisfied HIPAA’s requirements for disclosure of individually identifiable health information.
Numerous states have also adopted data privacy and security laws and regulations, which govern the privacy, processing and protection of consumer health-related information and other personal information. Such laws and regulations are subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our future customers and strategic partners. For example, the California Consumer Privacy Act of 2018 went into effect on January 1, 2020 and was amended by the California Privacy Rights Act on January 1, 2023 (as amended, the “CPRA”). The CPRA creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling specific personal information. It also provides a private right of action for data breaches which has increased the likelihood of, and risks associated with, data breach litigation and creates a statutory damages framework. In addition, the CPRA created a new state agency to oversee implementation and enforcement efforts. Additional compliance investment and potential business process changes may be required as the CPRA evolves and is enforced. Similar laws have passed in several other states, and have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the U.S. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging. If we are subject to or affected by HIPAA, the CPRA, or other U.S. domestic privacy and data protection laws, any liability from failure to comply with the requirements of these laws could adversely affect our financial condition.
Our operations in the European Union, or the EU, and the United Kingdom, or the UK, may also be subject to increased scrutiny or attention from data protection authorities. For example, the EU General Data Protection Regulation (“EU GDPR”) and the United Kingdom General Data Protection Regulation and Data Protection Act 2018, (together, the “UK GDPR”) (the EU GDPR and UK GDPR together referred to as the “GDPR”), impose comprehensive data privacy compliance requirements in relation to the processing of personal information of individuals. The GDPR increases our obligations with respect to clinical trials conducted in the EU and the UK by, for example, expanding the definition of personal information to include coded or pseudonymized data and imposing specific requirements regarding informed consent practices and the provision of detailed notices for clinical trial subjects and investigators. In addition, some of the personal information we process in respect of clinical trial participants is special category or sensitive personal information under the GDPR and subject to additional compliance obligations and local law derogations. We may be subject to diverging requirements under EU member state laws and UK law, such as whether consent can be used as a legal basis for processing and the roles, responsibilities and liabilities between the different parties involved in clinical trials. As these laws develop, we may need to make operational changes to adapt to these diverging rules, which could increase our costs and adversely affect our business. More generally, the GDPR imposes additional obligations on controllers, including, among other things, requirements around accountability and transparency, the obligation to consider data protection when any new products or services are developed, the obligation to comply with individuals’ data protection rights, and the obligation to report personal information breaches.
Since we are under the supervision of the relevant data protection authorities in both the European Economic Area and the UK, we may be fined under both the EU GDPR and the UK GDPR for the same breach. Failure to comply with the requirements of the GDPR may result in fines of up to €20,000,000 / £17,500,000 or up to 4% of the noncompliant company’s total worldwide annual turnover of the preceding financial year, whichever is higher, and other administrative penalties. In addition, the GDPR confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR.
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In relation to cross-border transfers, case law from the Court of Justice of the European Union states that reliance on the standard contractual clauses - a standard form of contract approved by the European Commission as an adequate personal information transfer mechanism - alone may not necessarily be sufficient in all circumstances and that transfers must be assessed on a case-by-case basis. In relation to data transfers to the US, the EU-US Data Privacy Framework (“DPF”) was approved by the European Commission in July 2023 as an effective EU GDPR data transfer mechanism to U.S. entities self-certified under the DPF. The UK Extension to the DPF followed in October 2023, as an effective UK GDPR data transfer mechanism to U.S. entities self-certified under the UK Extension to the DPF.
We expect the existing legal complexity and uncertainty regarding international personal data transfers to continue under the UK GDPR and EU GDPR. In particular, we expect the DPF to be challenged and international transfers to the U.S. and to other jurisdictions more generally to continue to be subject to enhanced scrutiny by regulators. Further, the U.S. Department of Justice recently issued a final rule that went into effect in April 2025, known as the “Data Security Program” (the “DSP Rule”), which regulates data transactions that could grant access to certain volumes of specified types of U.S. sensitive personal data to certain foreign actors with connections to “countries of concern,” such as China, which the DSP Rule refers to as “covered persons.” We do not believe that we are currently engaged in covered data transactions that implicate the DSP Rule, but we may engage in such transactions in the future, in which case any such transactions could be restricted and subject to certain compliance obligations under the DSP Rule, including with respect to cybersecurity, recordkeeping, reporting and auditing. As the regulatory guidance and enforcement landscape in relation to data transfers continue to develop, we could suffer additional costs, complaints and/or regulatory investigations or fines; we may have to stop using certain tools and vendors and make other operational changes; we may have to implement alternative transfer mechanisms and/or take additional compliance and operational measures; and/or it could otherwise affect the manner in which we provide our services, and could adversely affect our business, operations and financial condition.
On January 31, 2022, the Clinical Trial Regulations entered into application. This regulation imposes obligations on the use of data generated from clinical trials and enables the EU patients to have the opportunity to access information about clinical trials.
As we continue to expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.
Regulatory authorities in the PRC have implemented and are considering a number of legislative and regulatory proposals concerning data protection. For example, the PRC’s Cyber Security Law, which became effective in June 2017, created the PRC’s first national-level data protection for “network operators,” which may include all organizations in the PRC that provide services over the internet or another information network. In addition, some industry-specific laws and regulations affect the collection and transfer of personal information in the PRC. For example, on May 28, 2019, the PRC State Council promulgated the Regulation on the Administration of Human Genetic Resources which became effective on July 1, 2019. Under the Regulation, international collaborative projects involving human genetic resources or HGR are subject to approval by the Ministry of Science and Technology (“MOST”) except for international collaborations on clinical trials intended to support marketing approval of drugs and devices in the PRC that do not transfer HGR Materials abroad. The PRC has established a record-filing procedure for such exceptions. This HGR regulatory regime is further confirmed by the Biosecurity Law of the PRC published by the Standing Committee of the National People’s Congress, or NPC, of the PRC in October 2020 and came into effect in April 2021. To comply with such record-filing procedure, the parties must submit information as to the types, quantities and purposes of the HGR used prior to the commencement of the trials. As for cross-border transfer of the HGR samples or associated data, they are subject to different forms of review and pre-approval, respectively. Any export or cross-border transfer of the HGR samples shall be subject to the approval of the MOST, and an export certificate shall be obtained. The provision of HGR associated data to non-PRC parties or permitting uses of HGR associated data by non-PRC parties requires a record filing with MOST and submission of that corresponding information’s copy. If such provision or permitting uses could impact the public health, national security or public interest of the PRC, an additional security review will be conducted. In May 2023, the MOST published the Implementing Rules for the Regulations of the PRC on the Administration of Human Genetic Resources, which offered certain clarification on the definition of non-PRC parties, the scope of international collaboration, HGR Information and HGR Materials, as well as criteria for security review. In March 2023, the 14th NPC announced a restructuring of the State Council, under which the HGR approval authorities were transferred from MOST to the National Health Commission (the “NHC”). This move was in alignment with the amended Regulation on the Administration of Human Genetic Resources, which was amended in March 2024 and took effect in May 2024. Under these amendments, the NHC has assumed the responsibility of conducting the review and approval processes for HGR. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices, potentially resulting in disgorgement of illegal gains, confiscation of HGR samples and associated data, administrative fines, temporary (1-5 years) or permanent disbarment of companies and responsible persons
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from further HGR projects, or even criminal liability. Further, the parties of an international collaboration are required to jointly own patents arising from the international cooperation, which may adversely affect our ability to exclusively own patents arising from such collaborations as related to our products.
For further information regarding data protection and cybersecurity laws in the PRC, see “Item 1.A. “Risk Factors— Risks Related to Doing Business in the PRC — Compliance with the PRC’s Data Security Law, Cybersecurity Review Measures, Personal Information Protection Law, regulations and guidelines relating to the multi-level protection scheme and any other future laws and regulations may entail significant expenses and could materially affect our business.”
Although we work to comply with applicable laws, regulations and standards, our contractual obligations and other legal obligations, these requirements are evolving and may be modified, interpreted and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another or other legal obligations with which we must comply. Any failure or perceived failure by us or our employees, representatives, contractors, consultants, collaborators, or other third parties to comply with such requirements or adequately address privacy and security concerns, even if unfounded, could result in additional cost and liability to us, damage our reputation, and adversely affect our business and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
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Item 6. Exhibits.
| Incorporation by Reference | ||||||||||||||||||||
| Exhibit No. | Description | Form | File No. | Exhibit Reference | Filing Date | Filed or Furnished Herewith | ||||||||||||||
| 31.1 | Filed | |||||||||||||||||||
| 31.2 | Filed | |||||||||||||||||||
| 32.1# | Furnished | |||||||||||||||||||
| 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | Filed | ||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed | ||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed | ||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | Filed | ||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed | ||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed | ||||||||||||||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) | Filed | ||||||||||||||||||
# The certifications attached as Exhibit 32.1 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Connect Biopharma Holdings Limited | ||||||||
Date: May 15, 2025 | /s/ Barry D. Quart | |||||||
| Barry D. Quart, Pharm.D. | ||||||||
| Chief Executive Officer | ||||||||
| (Registrant’s Principal Executive Officer) | ||||||||
| /s/ Lisa Peraza | ||||||||
| Lisa Peraza | ||||||||
| Vice President of Finance | ||||||||
| (Registrant’s Principal Financial and Accounting Officer) | ||||||||
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