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, 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 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. 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 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. 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 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. As of December 31, 2022, we had an accumulated deficit of $306.7 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 71 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 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 Revenue 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 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, 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 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 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, 2022 2021 WTX-124 $ 8,461 $ 8,928 WTX-330 13,702 8,168 JZP898 (formerly WTX-613) 8,181 3,401 Pre-development candidates 2,588 1,102 Total external development costs $ 32,932 $ 21,599 72 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 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. 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, 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; • 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; • 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, people operations, business development, legal, IT 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 the increasing size and complexity of our research, development and manufacturing activities. Other Income 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 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. 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 73 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. 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, 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. We recognize 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 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, or ASU, No. 2018-07, Compensation—Stock Compensation (Topic 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 74 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. Results of Operations Comparison of the years ended December 31, 2022 and 2021 The following table summarizes our results of operations for the years ended December 31, 2022 and 2021: Year Ended December 31, $ Change (in thousands) 2022 2021 Revenue: Collaboration revenue $ 16,401 $ — $ 16,401 Operating expenses: Research and development 53,761 35,269 18,492 General and administrative 18,696 14,818 3,878 Total operating expenses 72,457 50,087 22,370 Operating loss (56,056) (50,087) (5,969) Other income: Other income, net 338 — 338 Interest income 1,908 104 1,804 Total other income 2,246 104 2,142 Net loss $ (53,810) $ (49,983) $ (3,827) Revenue 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. 75 Research and Development Expenses The following table summarizes our research and development expenses for the years ended December 31, 2022 and 2021: Year Ended December 31, $ Change (in thousands) 2022 2021 Manufacturing $ 22,605 $ 13,797 $ 8,808 Personnel 14,170 8,939 5,231 Contract research organization 10,327 7,802 2,525 Facilities 2,805 1,294 1,511 Lab consumables 3,305 3,250 55 Other 549 187 362 Total research and development expenses $ 53,761 $ 35,269 $ 18,492 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 $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; and • $1.5 million of increased facilities expense primarily related to leasing of additional space to support additional headcount. General and Administrative Expenses The following table summarizes our general and administrative expenses for the years ended December 31, 2022 and 2021: Year Ended December 31, $ Change (in thousands) 2022 2021 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) 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 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; and • $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, 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. 76 Jazz Collaboration In April 2022, we entered into the Collaboration Agreement with Jazz. 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. 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. 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. 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. ATM Offering 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. 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. 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 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. 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. 77 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 $306.7 million through December 31, 2022. 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 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 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 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; • 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 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. 78 Cash Flows The following table provides information regarding our cash flows for the years ended December 31, 2022 and 2021: Year Ended December 31, (in thousands) 2022 2021 Net cash (used in) provided by: Operating activities $ (40,596) $ (42,876) Investing activities (3,611) (498) Financing activities 15,906 109,427 Net (decrease) increase in cash, cash equivalents and restricted cash $ (28,301) $ 66,053 Operating Activities 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 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 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. 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 Overview 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. 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 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. 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. 79 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.