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Item 7. Management’s Discussion and Analysis

2023-03-23 compared with 2022-03-24 · 149 added, 84 removed, 204 unchanged (53% of the section changed)

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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.

In addition to historical information, the 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.

We discuss factors 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.

We are an innovative biopharmaceutical company pioneering the development of therapeutics engineered to stimulate the body’s immune system for the treatment of cancer.

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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.

In the second quarter of 2022, we received clearance from the U.S.

Food and Drug Administration, or the FDA, for our investigational new drug application, or IND, for WTX-124.

In the third quarter of 2022, the first patient was dosed in a Phase 1/1b clinical trial to evaluate WTX-124 as a monotherapy and in combination with Merck’s anti-PD-1 therapy KEYTRUDA ® (pembrolizumab) in patients with advanced or metastatic solid tumors, with initial data anticipated in the fourth quarter of 2023.

In the third quarter of 2022, we submitted our IND for WTX-330 and have since received clearance from the FDA.

In the first quarter of 2023, the first patient was dosed in a Phase 1 clinical trial to evaluate the safety and tolerability of WTX-330 in patients with advanced or metastatic solid tumors or lymphoma resistant to checkpoint inhibitors or for which checkpoint inhibitors are not approved.

In April 2022, we entered into a collaboration and license agreement, or the Collaboration Agreement, with Jazz Pharmaceuticals Ireland Limited, or Jazz, pursuant to which we granted Jazz certain licenses to develop and commercialize products containing our Interferon alpha (IFNα) INDUKINE molecule, JZP898 (formerly WTX-613), as well as products containing certain isolated recombinant polypeptides comprising IFNα that meet specified criteria, which we refer to as the Licensed Products.

Under the Collaboration Agreement, we are initially responsible for certain pre-clinical development activities with respect to JZP898 and other development activities specified in mutually agreed upon development plans.

Jazz will generally reimburse us for the cost of such activities.

Jazz is responsible for all other development and commercialization activities conducted to exploit the Licensed Products, including submission of an IND to the FDA.

Under the terms of the Collaboration Agreement, we received an upfront payment of $15.0 million in April 2022, and we are eligible to receive cost reimbursements for research services performed under the Collaboration Agreement.

We are also eligible to receive up to $520.0 million in development and regulatory milestones, and up to $740.0 million in sales-based milestones for all Licensed Products.

In addition, we are eligible to receive tiered mid-single digit royalties based on Jazz’s, and any of its affiliates’ and sublicensees’, annual net sales of Licensed Products, subject to reduction in specified circumstances.

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.

To date, we have financed our operations primarily with proceeds from the sales of our convertible promissory notes and equity securities and from the upfront payment that we received from Jazz pursuant to the terms of the Collaboration Agreement.

From December 2017 to August 2018, we issued convertible promissory notes for aggregate gross cash proceeds of $11.0 million.

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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.

On May 4, 2021, we completed our initial public offering, or 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.

On May 10, 2022, we entered into a sales agreement, or the Sales Agreement, with SVB Securities LLC, or SVB, pursuant to which we may offer and sell shares of our common stock with an aggregate offering price of up to $50.0 million, which we refer to as the ATM Offering.

As of December 31, 2022, we had sold an aggregate of 3,827,567 shares under the ATM Offering at an average price of $4.36 per share for net proceeds of $15.7 million after deducting sales commissions and offering expenses.

During the period beginning January 1, 2023 and ending March 23, 2023, we issued and sold approximately 3.8 million shares of our common stock in connection with the ATM Offering, resulting in gross proceeds of approximately $8.8 million before deducting sales commissions and offering expenses.

Due to our significant research and development expenditures, we have accumulated substantial net losses since our inception.

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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.

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.

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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,

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.

The extent, duration and full impact of the COVID-19 pandemic on our financial statements and operations, including our ongoing and planned preclinical activities and ongoing and future clinical trials, remains uncertain.

Further information relating to the risks and uncertainties related to the COVID-19 pandemic is contained in the section titled “Risk Factors” in Part I, Item 1A of this Annual Report.

Financial Operations Overview

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.

We have not generated any revenue to date from product sales and do not expect to do so in the near future.

For the year ended December 31, 2022, we recognized $16.4 million of revenue related to the Collaboration Agreement, of which $7.3 million related to the upfront payment received in April 2022 and $9.1 million related to costs incurred for research services to be reimbursed by Jazz.

We had $7.7 million of deferred revenue as of December 31, 2022, which is classified as either current or net of current portion in our consolidated balance sheets based on the period over which the revenue is expected to be recognized.

As of December 31, 2022, we had not received any milestone or royalty payments under the Collaboration Agreement.

In the future, we expect to continue to generate revenue from the Collaboration Agreement and may generate revenue from product sales or other collaboration agreements, strategic alliances and licensing arrangements.

We expect that our revenue will fluctuate from quarter-to-quarter and year-to-year based upon our pattern of performance under the Collaboration Agreement and as a result of the timing and amount of milestones, reimbursement of costs incurred and other payments and product sales, to the extent any are successfully commercialized.

If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Operating Expenses

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• 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;

• expenses incurred under agreements with third parties that conduct research, preclinical and clinical 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;

• costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials;

• facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

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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:

We track external development costs by product candidate or development program, but generally 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 years ended December 31, 2022 and 2021 were as follows (in thousands):

Year Ended December 31,

$ 8,461 $ 8,928

JZP898 (formerly WTX-613)

Pre-development candidates

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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.

We expect that our research and development expenses will continue to increase substantially for the foreseeable future as we progress our clinical trials of WTX-124 and WTX-330 and continue to discover and develop additional product candidates.

As a result of our entry into the Collaboration Agreement, which commenced in April 2022, our external preclinical development costs for JZP898 (formerly WTX-613) will generally be reimbursed by Jazz.

WTX-712 did not incur material external development costs for the years ended December 31, 2022 and 2021.

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming.

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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;

• the scope, rate of progress and expenses of our ongoing research activities as well as any preclinical studies and clinical trials, including our ongoing Phase 1/1b clinical trial for WTX-124 and Phase 1 clinical trial for WTX-330, and other research and development activities;

• establishing an appropriate safety profile;

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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;

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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.

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.

We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support the increasing size and complexity of our research, development and manufacturing activities.

Other Income, Net

Other income, net consists primarily of remeasurement gains or losses attributable to changes in the fair value of the success payment liability associated with our debt agreement with Pacific Western Bank, or PWB, and amortization of debt issuance costs related to our debt agreement with PWB.

For more information see “Liquidity and Capital Resources” below.

Critical Accounting Policies and Estimates

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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.

Revenue Recognition

We analyze our collaborations to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and therefore within the scope of Accounting Standards Codification, or ASC, Topic 808, Collaborative Arrangements, or ASC 808.

This assessment is

performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement.

For arrangements within the scope of ASC 808 that contain multiple elements, we first determine which elements of the collaboration are deemed to be within the scope of ASC 808 and which elements of the collaboration are more reflective of a vendor-customer relationship and therefore within the scope of ASC Topic 606, Revenue from Contracts with Customers , or ASC 606.

For elements of collaboration arrangements that are accounted for pursuant to Topic 808, an appropriate recognition method is determined and applied consistently, either by analogy to authoritative accounting literature or by applying a reasonable and rational policy election.

For those elements of the arrangement that are accounted for pursuant to ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services.

In applying ASC 606, we perform the following five steps:

(i) identify the contract(s) with a customer;

(ii) identify the promises and performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) we satisfy the performance obligations.

We only apply the five-step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services we transfer to the customer.

At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract, determine those that are performance obligations and assess whether each promised good or service is distinct.

We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

As part of the assessment, we must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract.

We use key assumptions to determine the standalone selling price, which may include reimbursement rates for personnel costs, development timelines and probabilities of regulatory success.

We do not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of promised goods or services to the customer will be one year or less.

Arrangements that include upfront payments may require deferral of revenue recognition to a future period until obligations under these arrangements are fulfilled.

The event-based milestone payments represent variable consideration, and we use the “most likely amount” method to estimate this variable consideration.

Given the high degree of uncertainty around the occurrence of these events, we determine the milestone and other contingent amounts to be fully constrained until the uncertainty associated with these payments is resolved.

Revenue will be recognized from sales-based royalty payments when or as the sales occur.

We will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur.

At the inception of a contract, we assess whether the contract is, or contains, a lease.

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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.

As a result, we utilize our incremental borrowing rate, or 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.

We subsequently measure our 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.

We recognize operating lease expense on a straight-line basis over the lease term.

Accrued Research and Development Expenses

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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

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.

This process involves reviewing open contracts and purchase orders, communicating with 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.

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Stock-based Compensation

We account for stock-based payments in accordance with Accounting Standards Update (“ASU”) No.

We account for stock-based payments in accordance with Accounting Standards Update, or ASU, No.

2018-07, Compensation—Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting (“ASC 718”).

Improvements to Nonemployee Share-Based Payment Accounting , or 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.

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.

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(in thousands)

Collaboration revenue $ 16,401 $ — $ 16,401

Operating expenses:

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Other income:

Change in fair value of preferred stock tranche liability

Other income, net

Interest income

1,908 104 1,804

Interest income, net

Total other income

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$ (53,810) $ (49,983) $ (3,827)

Revenue was $16.4 million for the year ended December 31, 2022, which is comprised of partial recognition of the $15.0 million upfront payment received in April 2022 upon the execution of the Collaboration Agreement with Jazz and costs incurred for research services to be reimbursed by Jazz.

There was no collaboration revenue in the year ended December 31, 2021.

Research and Development Expenses

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Contract research organization 10,327 7,802 2,525

Lab consumables 3,250 2,416 834

Facilities 2,805 1,294 1,511

Lab consumables 3,305 3,250 55

Other 549 187 362

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Research and development expenses for the year ended December 31, 2022 were $53.8 million, compared to $35.3 million for the year ended December 31, 2021.

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;

• $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.

The increase of $18.5 million was primarily due to:

• $8.8 million of increased manufacturing expense related to costs incurred with contract manufacturing organizations to support the production of preclinical and current and future clinical trial materials associated with our product candidates WTX-124, WTX-330 and JZP898 (formerly WTX-613);

• $5.2 million of increased personnel costs, including $1.9 million of increased stock-based compensation expense, primarily due to increased headcount associated with expanded discovery efforts as well as the hiring of clinical development personnel;

• $2.5 million of increased contract research organization expense incurred to support IND enabling studies and clinical start-up activities for WTX-124 and WTX-330;

• $1.5 million of increased facilities expense primarily related to leasing of additional space to support additional headcount.

General and Administrative Expenses

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Personnel $ 8,949 $ 6,192 $ 2,757

Corporate insurance 2,852 2,011 841

IT costs 592 344 248

Professional services 4,008 4,280 (272)

Facilities 1,443 941 502

Facility costs 1,368 1,443 (75)

Other 927 548 379

Total general and administrative expenses $ 18,696 $ 14,818 $ 3,878

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;

• $2.7 million of increased other costs, primarily driven by $1.9 million of increased insurance costs associated with public company management liability insurance.

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.

General and administrative expenses for the year ended December 31, 2022 were $18.7 million, compared to $14.8 million for the year ended December 31, 2021.

The increase of $3.9 million was primarily due to:

• $2.8 million of increased personnel costs, including $1.4 million of increased stock-based compensation expense, due to the full-year impact of increased headcount in 2021 to support operating as a public company;

• $0.8 million of increased corporate insurance costs, driven by the full-year impact of public company management liability insurance.

Other Income, Net

Other income for the year ended December 31, 2022 was $2.2 million, compared to $0.1 million for the year ended December 31, 2021.

The increase of $2.1 million was primarily due to $1.8 million of increased interest income due to rising interest rates.

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.

We have funded our operations through December 31, 2022 primarily through aggregate cash proceeds from convertible promissory notes of $11.0 million, gross proceeds from private placements of our convertible preferred stock of $116.3 million, net proceeds from our IPO of $109.2 million, a non-refundable upfront payment of $15.0 million received in connection with the Collaboration Agreement and net proceeds from our ATM Offering of $15.7 million.

Jazz Collaboration

In April 2022, we entered into the Collaboration Agreement with Jazz.

In addition, we are eligible to receive up to $520.0 million in development and regulatory milestones, and up to $740.0 million in sales-based milestones for all Licensed Products.

Term Loan Facility

In April 2022, we entered into an amended and restated loan and security agreement, or the Loan Agreement, with PWB, which amended and restated in its entirety our previous loan and security agreement with PWB.

Under the terms of the Loan Agreement, PWB made available term loans in an aggregate principal amount of up to $40.0 million, or the Term Loans, consisting of (i) a term loan in the aggregate principal amount of up to $20.0 million available at any time until February 28, 2024 (which may be extended to August 31, 2024, upon the satisfaction of certain conditions set forth in the Loan Agreement), or the Amortization Date, and (ii) a term loan in the aggregate principal amount of up to $20.0 million available at any time until the Amortization Date upon the acceptance by the FDA of two IND submissions on or before March 31, 2023.

On March 15, 2023, we drew down $40.0 million of the Term Loans.

The Term Loans bear interest on the outstanding daily balance at a floating annual rate equal to greater of:

(i) 0.5% above the prime rate then in effect or (ii) 4.50%.

If the prime rate changes throughout the term, the interest rate is adjusted effective on the date of the prime rate change.

All interest chargeable under the Loan Agreement is computed on a 360-day year for the actual number of days elapsed, with interest payable monthly.

The Loan Agreement provides for interest-only payments until the Amortization Date, at which time the aggregate outstanding principal balance of the Term Loans is required to be repaid in monthly installments on a 24-month repayment schedule.

All unpaid principal and accrued and unpaid interest with respect to the Term Loans is due and payable in full on February 28, 2026, as extended to August 31, 2026 upon the satisfaction of certain conditions set forth in the Loan Agreement.

At our option, we may elect to prepay all, or any part, of the outstanding Term Loans at any time without premium or penalty.

We are obligated to pay PWB a fee in the event of certain corporate transactions equal to either (i) the greater of (a) $200,000 and (b) 2.00% of the amount drawn under the Term Loans for a transaction occurring on or prior to March 31, 2023, or (ii) for any transaction occurring thereafter, the greater of (a) $400,000 and (b) 4.00% of the amount drawn under the Term Loans, which fee is referred to as a Success Fee.

The Success Fee survives ten years from the date of payment of the Term Loans in full, such that, if the Loan Agreement is terminated prior to the payment of the Success Fee, we will remain obligated to pay the Success Fee upon the occurrence of a Success Fee Event during such ten-year period.

Under the Loan Agreement, we are required to comply with certain negative covenants, which among other things, restrict us from incurring future debt or granting liens, effectuating a merger or consolidation with or into any other business organization, paying dividends or making certain other distributions, selling or otherwise transferring our assets, and making investments in any entities or instruments, subject, in each case, to certain exceptions specified in the Loan Agreement.

The Loan Agreement also contains standard affirmative covenants, including with respect to the issuance of audited consolidated financial statements, insurance, maintenance of good standing and government compliance in our state of formation.

On or before September 30, 2023, we are required to raise aggregate gross cash process of at least $50.0 million from the sale or issuance of our equity or from strategic partnerships or any similar transaction.

From receipt of those proceeds, we are required to maintain at all times at least $20.0 million of unrestricted cash in accounts with PWB.

Our failure to comply with any of the foregoing covenants would result in an event of default under the Loan Agreement.

On May 10, 2022, we entered into the Sales Agreement with SVB, pursuant to which we may offer and sell shares of our common stock with an aggregate offering price of up to $50.0 million, which we refer to as the ATM Offering.

The Sales Agreement provides that SVB will be entitled to a sales commission equal to 3.0% of the gross sales price per share of all shares sold under the ATM Offering.

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.

We plan to increase our research and development expenses for the foreseeable future as we continue the preclinical and 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.

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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.

As of December 31, 2022, we had cash and cash equivalents of $129.3 million.

After updating our expense forecasting, we now expect that our existing cash and cash equivalents, together with anticipated collaboration revenue, will be sufficient to fund our operational expenses and capital expenditure requirements through at least the fourth quarter of 2024.

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;

• 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 clinical trials of WTX-124 and WTX-330 and 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, 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 combination clinical trials that are not covered by such third parties or other sources;

• 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 success of our collaboration with Jazz;

• the timing of, and the cost involved in, obtaining marketing approval for WTX-124 and WTX-330 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 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;

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• 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.

Our existing cash and cash equivalents will not be sufficient to complete development of WTX-124, WTX-330 or any other product candidate.

Accordingly, we will be required to obtain further funding to achieve our business objectives.

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Investing activities

(3,611) (498)

Financing activities

15,906 109,427

Net increase in cash, cash equivalents and restricted cash

Net (decrease) increase in cash, cash equivalents and restricted cash

$ (28,301) $ 66,053

1 unchanged sentence

Net cash used in operating activities for the year ended December 31, 2022 was $40.6 million, compared to $42.9 million for the year ended December 31, 2021.

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.

This decrease of approximately $2.3 million was primarily attributable to increased non-cash stock-based compensation, depreciation, and lease expenses of $5.1 million, a gain on change in fair value of the success payment liability of $0.6 million and amortization of debt issuance costs of $0.2 million partially offset by an increase in net loss of $3.8 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2022 was $3.6 million, compared to $0.5 million for the year ended December 31, 2021.

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.

This increase of approximately $3.1 million was primarily attributable to cash paid for leasehold improvements and various equipment for our new headquarters.

Our move into the new facility was completed in May 2022.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022 was $15.9 million, compared to $109.4 million for the year ended December 31, 2021.

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.

Cash provided by financing activities for the year ended December 31, 2022 primarily consisted of proceeds from our ATM Offering, compared to proceeds from our IPO during the year ended December 31, 2021.

Contractual Obligations

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.

In the normal course of business, we enter into agreements with CROs, contact manufacturers, vendors and other third parties for preclinical studies and clinical trials, 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.

Term Loan Facility

See “Liquidity and Capital Resources – Sources of Liquidity – Term Loan Facility” for a description of our Loan Agreement.

As of March 23, 2023, we have drawn $40.0 million under the Term Loans.

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 for office and laboratory space that we entered into in April 2019 as our prior headquarters are approximately $1.2 million.

In May 2022, we entered into a sublease agreement with Crossbow Therapeutics, Inc., or Crossbow, to sublease the entirety of this space.

The annual rent from the subleased premises will be approximately $1.1 million in the first year and $1.0 million in the second year, which is greater than the annual rent paid by us to the landlord for the leased premises.

Crossbow is obligated to pay all real estate taxes and costs related to the subleased premises, including cost of operations, maintenance, repair, replacement, and property management.

The short-term lease for office and laboratory space that we entered into in March 2021 terminated in May 2022.

The lease for office and laboratory space that we entered into in June 2021 commenced in May 2022.

Total estimated base rent payments over the remaining term of the lease are approximately $19.1 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.

Quantitative and Qualitative Disclosures about Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis