Werewolf Therapeutics, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis is meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts and uncertainties of cash flows from operations and from outside resources, so as to allow investors to better view our company from management’s perspective. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Annual Report, including those factors set forth in the section entitled “Cautionary Note Regarding Forward-Looking Statements and Industry Data” and in the section entitled “Risk Factors” in Part I, Item 1A of this Annual Report. Overview We are an innovative biopharmaceutical company pioneering the development of therapeutics engineered to stimulate the body’s immune system for the treatment of cancer. We are leveraging our proprietary PREDATOR platform to design conditionally activated molecules that stimulate both adaptive and innate immunity with the goal of addressing the limitations of conventional proinflammatory immune therapies. Our molecules, which we refer to as INDUKINE molecules, are intended to activate selectively in the tumor microenvironment. Our most advanced product candidates, WTX-124 and WTX-330, are systemically delivered, conditionally activated Interleukin-2 and Interleukin-12, respectively, INDUKINE molecules for the treatment of multiple tumor types. We plan to submit an investigational new drug application, or IND, to the U.S. Food and Drug Administration for WTX-124 in the second quarter of 2022 and WTX-330 in the third quarter of 2022, and thereafter initiate first in-human clinical trials for each candidate. We were incorporated and commenced operations in 2017. Since inception, we have devoted substantially all of our time and efforts to performing research and development activities, raising capital and recruiting management and technical staff to support these operations. To date, we have financed our operations primarily with proceeds from the sales of our convertible promissory notes and equity securities. From December 2017 to August 2018, we issued convertible promissory notes for aggregate gross cash proceeds of $11.0 million. From August 2019 to June 2020, we issued an aggregate of 80,246,565 shares of Series A preferred stock for aggregate gross cash proceeds of $44.2 million, together with conversion of all of our previously issued convertible promissory notes. In December 2020, we issued 78,222,173 shares of Series B preferred stock at a price of $0.92 per share, resulting in gross cash proceeds of $72.1 million. On May 4, 2021, we completed our IPO, pursuant to which we issued and sold 7,500,000 shares of our common stock at a public offering price of $16.00 per share. We received net proceeds of approximately $109.2 million, after deducting underwriting discounts and commissions and other offering expenses payable by us. Due to our significant research and development expenditures, we have accumulated substantial net losses since our inception. As of December 31, 2021, we had an accumulated deficit of $252.9 million. We expect to continue to incur substantial and increasing expenses and net losses for the foreseeable future, as we continue to advance our current and future product candidates through preclinical and clinical development, manufacture drug product and drug supply, seek regulatory approval for our current and future product candidates, maintain and expand our intellectual property portfolio, hire additional research and development and business personnel and operate as a public company. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as and when needed could have a material adverse effect on our business, results of operations and financial condition. Because of the numerous risks and uncertainties associated with product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to raise capital, maintain our research and development efforts, expand our business or continue our operations at planned levels, and as a result we may be forced to substantially reduce or terminate our operations. Impact of COVID-19 on Our Business The worldwide COVID-19 pandemic continues to evolve, and we will continue to monitor the COVID-19 pandemic closely. To date, we have not experienced a material financial statement impact or material business disruptions, including with our vendors, or impairments of any of our assets as a result of the pandemic. However, we cannot, at this time, predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our financial statements and operations, including our ongoing and planned preclinical activities and future clinical trials. The extent of the impact of the COVID-19 pandemic on our business, operations and clinical development timelines and plans remains uncertain and will depend on certain developments, including the duration and spread of the pandemic and its impact on our contract research organizations, or CROs, third-party manufacturers, and other third parties with which we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with which we do business. Furthermore, the COVID-19 pandemic could affect our employees or the employees of research sites and service providers on which we rely, including CROs, as well as those of companies with which we do business, including our suppliers and contract manufacturing organizations, 70 thereby disrupting our business operations. Quarantines and travel restrictions imposed by governments in the jurisdictions in which we and the companies with which we do business operate could materially impact the ability of employees to access preclinical and clinical sites, laboratories, manufacturing site and office. These and other events resulting from the COVID-19 pandemic could disrupt, delay, or otherwise adversely impact our business. Further information relating to the risks and uncertainties related to the ongoing COVID-19 pandemic is contained in the section titled “Risk Factors” in Part I, Item 1A of this Annual Report. Financial Operations Overview Revenue To date, we have not generated any revenue from any sources, including from product sales, and we do not expect to generate any revenue from the sale of products in the foreseeable future. Operating Expenses Research and Development Expenses Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our product candidates, and include: • salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions; • expenses incurred under agreements with third parties that conduct research and preclinical activities on our behalf; • costs of outside consultants, including their fees, stock-based compensation and related travel expenses; • costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and future clinical trial materials; and • facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs. We expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of performance of the individual arrangements, which may differ from the pattern of billings incurred, and are reflected in our consolidated financial statements as prepaid or accrued research and development expenses. We typically use our employee and infrastructure resources across our development programs. We track external development costs by product candidate or development program, but we do not allocate personnel costs, license payments made under our licensing arrangements or other internal costs to specific development programs or product candidates. Our external development costs for the year ended December 31, 2021 and 2020 were as follows: Year Ended December 31, 2021 2020 WTX-124 $ 8,928 $ 4,420 WTX-330 8,168 3,904 WTX-613 3,401 1,122 Pre-development candidates 1,102 303 Total external development costs $ 21,599 $ 9,749 Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase substantially for the foreseeable future as we initiate clinical trials of WTX-124 and WTX-330, continue preclinical studies of WTX-613 and continue to discover and develop additional product candidates. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. We cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete development of our current or future product candidates. The actual probability of success for our product candidates will depend on a variety of factors, including: • the scope, rate of progress and expenses of our ongoing research activities as well as any preclinical studies and clinical trials and other research and development activities; • establishing an appropriate safety profile; • successful enrollment in and completion of clinical trials; • whether our product candidates show safety and efficacy in our clinical trials; • receipt of marketing approvals from applicable regulatory authorities; • establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers; 71 • obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates; • commercializing product candidates, if and when approved, whether alone or in collaboration with others; and • continued acceptable safety profile of the products following any regulatory approval. A change in the outcome of any of these variables with respect to the development of our current and future product candidates would significantly change the costs and timing associated with the development of those product candidates and we may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development activities. General and Administrative Expenses General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel in our executive, finance, business development and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs. We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support our continued research and development activities, manufacturing activities and expansion of our operations in connection with our anticipated commencement of clinical trials. We also anticipate increased expenses associated with operating as a public company, including costs for audit, legal, regulatory and tax-related services related to compliance with the rules and regulations of the SEC and listing standards applicable to companies listed on a national securities exchange, director and officer insurance premiums and investor relations costs. Other Income Change in fair value of preferred stock tranche liability Change in fair value of our preferred stock tranche liability consists primarily of remeasurement gains or losses attributable to changes in the fair value of the tranche rights associated with our Series A preferred stock. The tranche liability was settled in June 2020 upon the closing of the second tranche of our Series A preferred stock financing. All obligations have been met by December 31, 2020 and therefore there will be no further remeasurement. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates which include, but are not limited to, accrued expenses, stock-based compensation expense and income taxes. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions and conditions. While our significant accounting policies are described in more detail in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated financial statements included within Part IV, Item 15 in this Annual Report, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our consolidated financial statements. Leases At the inception of a contract, we assess whether the contract is, or contains, a lease. The assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. We do not recognize leases with terms of one year or less on the balance sheet. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, we utilize our incremental borrowing rate (“IBR”), which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, and in a similar economic environment. The Company subsequently measures its lease liability at the present value of remaining lease payments, discounted using the IBR for the lease. The right-of-use asset is subsequently measured at the amount of the lease liability, adjusted for prepaid or accrued lease payments and the remaining balance of lease incentives received. The Company recognizes operating lease expense on a straight-line basis over the lease term. Accrued Research and Development Expenses As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses as of each balance sheet date. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. This process involves reviewing open contracts and purchase orders, communicating with 72 internal personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We periodically confirm the accuracy of our estimates with our service providers and make adjustments if necessary. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. The financial terms of agreements with these service providers are subject to negotiation, vary from contract to contract and may result in uneven payment flows. In circumstances where amounts have been paid in excess of costs incurred, we record a prepaid expense. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred. Stock-based Compensation We account for stock-based payments in accordance with Accounting Standards Update (“ASU”) No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASC 718”). This guidance requires all stock-based payments to employees, including grants of employee stock options, restricted stock awards and restricted stock units, to be recognized as expense in the consolidated statements of operations and comprehensive income (loss) based on their grant date fair values. For stock options granted to employees and to members of our board of directors for their services on the board of directors, we estimate the grant date fair value of each stock option using the Black-Scholes option-pricing model. For restricted stock awards and restricted stock units granted to employees, we estimate the grant date fair value of each award using intrinsic value, which is based on the value of the underlying common stock less any purchase price. For stock-based payments subject to service-based vesting conditions, we recognize stock-based compensation expense equal to the grant date fair value of stock-based payment on a straight-line basis over the requisite service period. The Black‑Scholes option pricing model requires the input of certain subjective assumptions, including (i) the calculation of expected term of the stock-based payment, (ii) the risk‑free interest rate, (iii) the expected stock price volatility and (iv) the expected dividend yield. We use the simplified method as prescribed by SEC Staff Accounting Bulletin No. 107 to calculate the expected term for stock options granted to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. We determine the risk‑free interest rate based on a treasury instrument whose term is consistent with the expected term of the stock options. Because there had been no public market for our common stock prior to our IPO, there is a lack of historical and implied volatility data. Accordingly, we base our estimates of expected volatility on the historical volatility of a group of publicly-traded companies with similar characteristics to us, including stage of product development and therapeutic focus within the life sciences industry. Historical volatility is calculated over a period of time commensurate with the expected term of the stock-based payment. We use an assumed dividend yield of zero as we have never paid dividends on our common stock, nor do we expect to pay dividends on our common stock in the foreseeable future. We account for forfeitures of all stock-based payments when such forfeitures occur. Recent Accounting Pronouncements See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our consolidated financial statements included within Part IV, Item 15 of this Annual Report for a description of recent accounting pronouncements applicable to our business. JOBS Act Accounting Election and Smaller Reporting Company Implications We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or Sarbanes-Oxley Act. Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to continue to take advantage of reduced disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act if we are a smaller reporting company with less than $100.0 million in annual revenue. 73 Results of Operations Comparison of the Years Ended December 31, 2021 and 2020 The following table summarizes our results of operations for the years ended December 31, 2021 and 2020: Year Ended December 31, $ Change (in thousands) 2021 2020 Operating expenses: Research and development $ 35,269 $ 16,641 $ 18,628 General and administrative 14,818 5,763 9,055 Total operating expenses 50,087 22,404 27,683 Operating loss (50,087) (22,404) (27,683) Other income: Change in fair value of preferred stock tranche liability — 7,301 (7,301) Interest income, net 104 63 41 Total other income 104 7,364 (7,260) Net loss $ (49,983) $ (15,040) $ (34,943) Research and Development Expenses The following table summarizes our research and development expenses for the years ended December 31, 2021 and 2020: Year Ended December 31, $ Change (in thousands) 2021 2020 Manufacturing 13,797 6,528 7,269 Personnel $ 8,939 $ 3,913 $ 5,026 Contract research organization 7,802 3,221 4,581 Lab consumables 3,250 2,416 834 Facilities 1,294 543 751 Other 187 20 167 Total research and development expenses $ 35,269 $ 16,641 $ 18,628 Research and development expenses for the year ended December 31, 2021 were $35.3 million, compared to $16.6 million for the year ended December 31, 2020. The increase of approximately $18.6 million was primarily due to: • $7.3 million of increased manufacturing expense related to costs incurred with contract manufacturing organizations to support the production of preclinical and future clinical trial materials associated with our product candidates WTX-124, WTX-330 and WTX-613; • $5.0 million of increased personnel costs, including $1.3 million of increased stock-based compensation expense, primarily due to increased headcount associated with expanded discovery efforts as well as the hiring of a clinical development team; • $4.6 million of increased contract research organization expense, primarily driven by preclinical studies to support upcoming IND submissions for WTX-124 and WTX-330; • $0.8 million of increased lab consumables costs, primarily driven by expanded discovery efforts; and • $0.8 million of increased facilities costs, primarily driven by our short-term lease and lease for our new corporate headquarters, signed in March 2021 and June 2021, respectively. 74 General and Administrative Expenses The following table summarizes our general and administrative expenses for the years ended December 31, 2021 and 2020: Year Ended December 31, $ Change (in thousands) 2021 2020 Personnel $ 6,192 $ 2,216 $ 3,976 Professional services 4,280 2,357 1,923 Facilities 1,443 941 502 Other 2,903 249 2,654 Total general and administrative expenses $ 14,818 $ 5,763 $ 9,055 General and administrative expenses were $14.8 million for the year ended December 31, 2021, compared to $5.8 million for the year ended December 31, 2020. The increase of approximately $9.1 million was primarily due to: • $4.0 million of increased personnel costs incurred due to the requirements of operating as a public company, which included $2.1 million of increased stock-based compensation expense; • $1.9 million of increased professional costs to support our operations as a public company; and • $2.7 million of increased other costs, primarily driven by $1.9 million of increased insurance costs associated with public company management liability insurance. Other Income Changes in the fair value of the preferred stock tranche liability resulted in a gain of $7.3 million for the year ended December 31, 2020. The tranche liability was settled in June 2020 upon the closing of the second tranche of our Series A preferred stock financing. Liquidity and Capital Resources Sources of Liquidity We have funded our operations through December 31, 2021 primarily through the issuance of convertible promissory notes for aggregate cash proceeds of $11.0 million, the issuance and sale of shares of our Series A and Series B preferred stock for aggregate cash proceeds of $116.3 million and the issuance and sale of shares of our common stock in our IPO in May 2021 for net proceeds of approximately $109.2 million, after deducting underwriting discounts and commissions and other offering expenses payable by us. Plan of Operation and Future Funding Requirements We use our capital resources primarily to fund operating expenses, primarily research and development expenditures. We plan to increase our research and development expenses for the foreseeable future as we continue the preclinical development and move into clinical development of our product candidates. At this time, due to the inherently unpredictable nature of preclinical and clinical development and given the early stage of our product candidates, we cannot reasonably estimate the costs we will incur and the timelines that will be required to complete development, obtain marketing approval and commercialize our current product candidates or any future product candidates, if at all. For the same reasons, we are also unable to predict when, if ever, we will generate revenue from product sales or whether, or when, if ever, we may achieve profitability. Clinical and preclinical development timelines, the probability of success, and development costs can differ materially from expectations. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. Further, inflation generally affects us by increasing our cost of labor and certain services. We do not believe that inflation had a material effect on our financial statements included elsewhere in this Annual Report; however, our operations may be adversely affected by inflation in the future. Due to our significant research and development expenditures, we have accumulated substantial net losses in each period since inception. We have incurred an accumulated deficit of $252.9 million through December 31, 2021. We expect to continue to incur substantial and increasing expenses and net losses for the foreseeable future, as we continue to advance our current and future product candidates through preclinical and clinical development, manufacture drug product and drug supply, seek regulatory approval for our current and future product candidates, maintain and expand our intellectual property portfolio, hire additional research and development and business personnel and operate as a public company. Based on our current research and development plans, we expect that our existing cash and cash equivalents of $157.5 million, will be sufficient to fund our operations through at least the second quarter of 2023. We have based this estimate on assumptions that may prove to be wrong, however, and we could use our capital resources sooner than we expect. The timing and amount of our operating expenditures will depend largely on: • the scope, progress, timing, costs and results of researching and developing our current product candidates or any future product candidates, including with respect to our planned clinical trials of WTX-124 and WTX-330; the costs associated with attracting, hiring and retaining skilled personnel and consultants as our preclinical and clinical activities increase; • the cost of manufacturing our product candidates WTX-124, WTX-330, WTX-613 and any future product candidates for clinical trials and, if we are able to obtain marketing approval, for commercial sale; • the costs of any third-party products used in our planned combination clinical trials that are not covered by such third parties or other sources; 75 • the potential additional expenses attributable to adjusting our development plans (including any supply related matters) as a result of the COVID-19 pandemic; • the timing of, and the cost involved in, obtaining marketing approval for WTX-124, WTX-330, WTX-613 or any future product candidates, and our ability to obtain marketing approval and generate revenue from any potential commercial sales of such product candidates; • the cost of building a sales force in anticipation of product commercialization and the cost of commercialization activities for WTX-124, WTX-330, WTX-613 or any future product candidates if we receive marketing approval, including marketing, sales and distribution costs; • the potential emergence of competing therapies and other adverse market developments; • the amount and timing of any payments we may be required to make pursuant to our license agreement with Harpoon Therapeutics, Inc., or Harpoon, or other future license agreements or collaboration agreements; • our ability to establish future collaborations, licensing or other arrangements and the financial terms of any such agreements, including the timing and amount of any future milestone, royalty or other payments due under any such agreement; • the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; • any product liability or other lawsuits related to our product candidates; • the extent to which we in-license or acquire other products and technologies; and • the costs of operating as a public company. Our existing cash and cash equivalents will not be sufficient to complete development of WTX-124, WTX-330, WTX-613 or any other product candidate. Accordingly, we will be required to obtain further funding to achieve our business objectives. Until such time, if ever, as we can generate substantial revenue from product sales, we expect to fund our operations and capital funding needs through equity and/or debt financing. We may also consider entering into collaboration arrangements or selectively partnering for clinical development and commercialization. The sale of additional equity may result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations or our ability to incur additional indebtedness or pay dividends, among other items. If we raise additional funds through governmental funding, collaborations, strategic partnerships and alliances or marketing, distribution or licensing arrangements with third parties, 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. If we are not able to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially and adversely affect our business, financial condition, results of operations, cash flows and prospects. Cash Flows The following table provides information regarding our cash flows for the years ended December 31, 2021 and 2020: Year Ended December 31, (in thousands) 2021 2020 Net cash (used in) provided by: Operating activities $ (42,876) $ (18,624) Investing activities (498) (560) Financing activities 109,427 93,857 Net increase in cash, cash equivalents and restricted cash $ 66,053 $ 74,673 Operating Activities Net cash used in operating activities for the year ended December 31, 2021 was $42.9 million, compared to $18.6 million for the year ended December 31, 2020. This increase of approximately $24.3 million was primarily attributable to an increase in net loss of $34.9 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. Included in the aforementioned increase in net loss is an increase in non-cash stock-based compensation expense of $3.4 million and a decrease in gain on change in fair value of preferred stock tranche liability of $7.3 million for the year ended December 31, 2021, compared to the year ended December 31, 2021. Investing Activities Net cash used in investing activities for the year ended December 31, 2021 was $0.5 million, compared to $0.6 million for the year ended December 31, 2020. This decrease of approximately $0.1 million was primarily attributable to a decrease in purchases of property and equipment for the year ended December 31, 2021 compared to the year ended December 31, 2020. 76 Financing Activities Net cash provided by financing activities for the year ended December 31, 2021 was $109.4 million, compared to $93.9 million for the year ended December 31, 2020. This increase of $15.6 million was primarily attributable to the proceeds from the issuance of common stock at the closing of the IPO during the year ended December 31, 2021, compared to the proceeds from the issuance of Series A redeemable convertible preferred stock during the year ended December 31, 2020. Contractual Obligations Overview In the normal course of business, we enter into agreements with CROs, contact manufacturers, vendors and other third parties for preclinical studies, manufacturing services and other services and products for operating purposes. These contracts do not contain minimum purchase commitments and are cancelable by us upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. Clinical Trial Collaboration and Supply Agreement In August 2021, we entered into a Clinical Trial Collaboration and Supply Agreement, or Clinical Supply Agreement, with Merck & Co., Inc., or Merck, to evaluate WTX-124 in combination with KEYTRUDA® (pembrolizumab), Merck’s anti-PD-1 therapy. The planned clinical trial will be conducted by Werewolf and is designed to evaluate the safety and preliminary efficacy of WTX-124 as a monotherapy and in combination with pembrolizumab in patients with solid tumors. Under the terms of the Clinical Supply Agreement, Werewolf will sponsor the study and Merck will supply Werewolf with pembrolizumab in exchange for jointly owning any inventions or discoveries relative to the combined use of WTX-124 and pembrolizumab. Each party is responsible for its own internal costs and expenses to support the trial. Lease Agreements In April 2019, we entered into an operating lease for approximately 9,949 square feet of office and laboratory space which commenced in April 2019 and terminates in March 2024. Total estimated base rent payments over the remaining term of the lease are approximately $2.1 million. In March 2021, we entered into a short-term lease for approximately 7,500 square feet of office and laboratory space which commenced in April 2021 and terminates in May 2022. Total estimated base rent payments over the remaining term of the lease are approximately $0.2 million. In June 2021, we entered into an operating lease for approximately 25,778 square feet of office and laboratory space in Watertown, Massachusetts, which will serve as the Company’s future headquarters. The lease term is targeted to commence in April 2022 and has an approximate eight-year term. Total estimated base rent payments over the term of the lease are approximately $19.1 million. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, or the Exchange Act, and are not required to provide the information under this item. Item 8. Financial Statements and Supplementary Data The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report. An index of those financial statements is found in Part IV, Item 15. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.