Werewolf Therapeutics, Inc. 10-Q

Item 1. Financial Statements Werewolf Therapeutics, Inc. Condensed Consolidated Balance Sheets (unaudited) (amounts in thousands, except par value amounts) September 30, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 130,058 $ 129,315 Prepaid expenses and other current assets 3,289 3,957 Other receivables 5,911 6,928 Total current assets 139,258 140,200 Property and equipment, net 8,342 8,988 Restricted cash and cash equivalents, net of current portion 21,019 1,214 Operating lease right of use asset 7,251 8,463 Other non-current assets 516 1,380 Total assets $ 176,386 $ 160,245 Liabilities and Stockholders’ Equity: Current liabilities: Accounts payable $ 1,386 $ 1,221 Accrued expenses and other current liabilities 7,967 14,152 Operating lease liability, current 1,605 2,084 Deferred revenue, current 1,814 6,532 Note payable, current 1,667 — Total current liabilities 14,439 23,989 Operating lease liability, net of current portion 11,352 12,600 Deferred revenue, net of current portion 588 1,128 Notes payable, net of discount, issuance costs, and current portion 37,564 — Other liabilities — 191 Total liabilities 63,943 37,908 Commitments and contingencies Stockholders’ equity: Preferred stock, $ 0.0001 par value, 5,000 shares authorized at September 30, 2023 and December 31, 2022; no shares issued or outstanding as of September 30, 2023 and December 31, 2022, respectively — — Common stock, $ 0.0001 par value, 200,000 shares authorized as of September 30, 2023 and December 31, 2022; 35,658 and 31,515 shares issued as of September 30, 2023 and December 31, 2022, respectively; 35,658 and 31,434 shares outstanding as of September 30, 2023 and December 31, 2022, respectively 3 3 Additional paid-in capital 444,510 429,039 Accumulated deficit ( 332,070 ) ( 306,705 ) Total stockholders’ equity 112,443 122,337 Total liabilities and stockholders’ equity $ 176,386 $ 160,245 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents Werewolf Therapeutics, Inc. Condensed Consolidated Statements of Operations (unaudited) (amounts in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue: Collaboration revenue $ 5,897 $ 4,970 $ 18,442 $ 9,118 Operating expenses: Research and development 10,838 13,070 32,127 37,902 General and administrative 4,310 4,439 13,856 14,093 Total operating expenses 15,148 17,509 45,983 51,995 Operating loss ( 9,251 ) ( 12,539 ) ( 27,541 ) ( 42,877 ) Other income: Other (expense) income, net ( 5 ) 3 ( 1,136 ) 268 Interest income, net 971 593 3,312 729 Total other income 966 596 2,176 997 Net loss $ ( 8,285 ) $ ( 11,943 ) ( 25,365 ) ( 41,880 ) Net loss per share, basic and diluted $ ( 0.23 ) $ ( 0.40 ) $ ( 0.72 ) $ ( 1.48 ) Weighted-average common shares outstanding, basic and diluted 35,654 29,764 35,335 28,233 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents Werewolf Therapeutics, Inc. Condensed Consolidated Statements of Stockholders’ Equity (unaudited) (amounts in thousands) Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at December 31, 2022 31,515 $ 3 $ 429,039 $ ( 306,705 ) $ 122,337 Issuance of common stock from at the market offering, net of issuance costs of $ 103 3,824 — 8,610 — 8,610 Stock-based compensation expense — — 2,108 — 2,108 Net loss — — — ( 11,982 ) ( 11,982 ) Balance at March 31, 2023 35,339 3 439,757 ( 318,687 ) 121,073 Issuance of common stock from at the market offering, net of issuance costs of $ 31 272 — 644 — 644 Issuance of common stock under Employee Stock Purchase Plan 29 — 45 — 45 Stock-based compensation expense — — 1,930 — 1,930 Stock option exercises 2 — 5 — 5 Net loss — — — ( 5,098 ) ( 5,098 ) Balance at June 30, 2023 35,642 3 442,381 ( 323,785 ) 118,599 Issuance of common stock from at the market offering, net of issuance costs of $ 29 15 — 30 — 30 Stock-based compensation expense — — 2,097 — 2,097 Stock option exercises 1 — 2 — 2 Net loss — — — ( 8,285 ) ( 8,285 ) Balance at September 30, 2023 35,658 $ 3 $ 444,510 $ ( 332,070 ) $ 112,443 Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at December 31, 2021 27,608 $ 2 $ 405,680 $ ( 252,895 ) $ 152,787 Stock-based compensation expense — — 1,745 — 1,745 Stock option exercises 46 — 129 — 129 Net loss — — — ( 15,343 ) ( 15,343 ) Balance at March 31, 2022 27,654 2 407,554 ( 268,238 ) 139,318 Issuance of common stock from at the market offering, net of issuance costs of $ 314 801 — 3,339 — 3,339 Stock-based compensation expense — — 1,777 — 1,777 Stock option exercises 1 — 1 — 1 Net loss — — — ( 14,594 ) ( 14,594 ) Balance at June 30, 2022 28,456 2 412,671 ( 282,832 ) 129,841 Issuance of common stock from at the market offering, net of issuance costs of $ 87 2,248 1 11,019 — 11,020 Stock-based compensation expense — — 1,936 — 1,936 Stock option exercises 32 — 93 — 93 Net loss — — — ( 11,943 ) ( 11,943 ) Balance at September 30, 2022 30,736 $ 3 $ 425,719 $ ( 294,775 ) $ 130,947 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents Werewolf Therapeutics, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) (amounts in thousands) Nine Months Ended September 30, 2023 2022 Operating activities: Net loss $ ( 25,365 ) $ ( 41,880 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 6,135 5,458 Depreciation expense 1,304 687 Non-cash interest expense 181 — Non-cash lease expense 1,212 1,265 Change in fair value of success payment liability ( 1,030 ) 253 Amortization of debt issuance costs 60 — Changes in operating assets and liabilities: Prepaid expenses and other current assets 596 ( 3,398 ) Other receivables 1,017 ( 4,300 ) Other non-current assets 136 ( 1,204 ) Accounts payable 241 ( 778 ) Accrued expenses and other current liabilities ( 5,338 ) 4,677 Deferred revenue ( 5,258 ) 10,801 Operating lease liability ( 1,727 ) ( 498 ) Other liabilities ( 191 ) 191 Net cash used in operating activities ( 28,027 ) ( 28,726 ) Investing activities: Purchases of property and equipment ( 571 ) ( 3,093 ) Net cash used in investing activities ( 571 ) ( 3,093 ) Financing activities: Proceeds from at the market offering of common stock 9,447 14,761 Proceeds from drawdown of term loans 40,000 — Payment of equity issuance costs ( 143 ) ( 341 ) Proceeds from issuances under Employee Stock Purchase Plan 45 — Proceeds from stock option exercises 7 230 Net cash provided by financing activities 49,356 14,650 Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents 20,758 ( 17,169 ) Cash, cash equivalents and restricted cash and cash equivalents—beginning of period 130,529 158,830 Cash, cash equivalents and restricted cash and cash equivalents—end of period $ 151,287 $ 141,661 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,646 $ — Supplemental disclosure of non-cash investing and financing activities: Purchases of property and equipment in accounts payable and accrued expenses $ 198 $ 307 Issuance costs in accounts payable and accrued expenses $ 24 $ 61 Stock option exercise receivables in prepaid expenses and other current assets $ — $ ( 7 ) Leasehold improvements paid by landlord $ — $ 5,444 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents Werewolf Therapeutics, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Nature of Business Werewolf Therapeutics, Inc. (“Werewolf” or the “Company”) was incorporated in the state of Delaware in October 2017. The Company is an innovative biopharmaceutical company pioneering the development of therapeutics engineered to stimulate the body’s immune system for the treatment of cancer. The Company’s headquarters are located in Watertown, Massachusetts. Since inception, the Company has devoted substantially all of its time and efforts to performing research and development activities, raising capital and recruiting management and technical staff to support these operations. The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry including, but not limited to, technical risks associated with the successful research, development and manufacturing of product candidates, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Current and future programs will require significant research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales. The Company had cash and cash equivalents of $ 130.1 million at September 30, 2023. The Company expects that its cash and cash equivalents will enable it to fund its operating expenses and capital expenditure requirements for at least twelve months from the date of issuance of the condensed consolidated financial statements in this Form 10-Q. However, additional funding will be necessary beyond this point to fund future preclinical and clinical activities. The Company expects to finance its future cash needs through a combination of equity or debt financings, collaboration agreements, strategic alliances and licensing arrangements. 2. Summary of Significant Accounting Policies Basis of Presentation and Consolidation The accompanying condensed consolidated financial statements as of September 30, 2023 and December 31, 2022, and for the three and nine months ended September 30, 2023 and 2022, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”) for condensed consolidated financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these condensed consolidated financial statements reflect all normal recurring adjustments which are necessary for a fair presentation of the Company’s financial position and results of its operations, as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 23, 2023 (the “2022 Annual Report”). The information presented in the condensed consolidated financial statements and related notes as of September 30, 2023, and for the three and nine months ended September 30, 2023 and 2022, is unaudited. The December 31, 2022 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements. Interim results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023, or any future period. The accompanying condensed consolidated financial statements include the accounts of Werewolf Therapeutics, Inc. and its wholly owned subsidiary, Werewolf Therapeutics Mass Securities, Inc. All intercompany transactions and balances have been eliminated in consolidation. Summary of Significant Accounting Policies The significant accounting policies and estimates used in the preparation of the condensed consolidated financial statements are described in the Company’s audited financial statements as of and for the year ended December 31, 2022, and the notes thereto, which are included in the 2022 Annual Report. There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2023. 8 Table of Contents Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates and judgments including, but not limited to, those related to revenue recognition, accrued expenses, assumptions used in the valuation of stock-based compensation and income taxes. Actual results could differ from those estimates. Recent Accounting Pronouncements Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s condensed consolidated financial statements upon adoption. Subsequent Events The Company has evaluated subsequent events and transactions that occurred in the period from the balance sheet date to the date that the financial statements were issued. Other than as described in these condensed consolidated financial statements, the Company did not identify any subsequent events that require adjustment or disclosure in the condensed consolidated financial statements. 3. Jazz Collaboration and License Agreement In April 2022, the Company entered into an exclusive global collaboration and license agreement (the “Collaboration Agreement”) with Jazz Pharmaceuticals Ireland Limited (“Jazz”) pursuant to which the Company granted Jazz certain licenses to develop and commercialize products containing the Company’s Interferon alpha (“IFNα”) INDUKINE™ molecule, JZP898 (formerly WTX-613), as well as products containing certain isolated recombinant polypeptides comprising IFNα that meet specified criteria (each such product, a “Licensed Product”). Under the Collaboration Agreement, the Company is 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 the Company for the cost of such activities. Jazz will be responsible for all other development and commercialization activities conducted to exploit the Licensed Products, including submission of an investigational new drug application (“IND”) to the U.S. Food and Drug Administration (the “FDA”). Jazz received IND application clearance for JZP898 in July 2023. Under the terms of the Collaboration Agreement, the Company received a non-refundable upfront cash payment of $ 15.0 million in April 2022 and a variable consideration payment of $ 5.0 million in July 2023, which is included in the overall transaction price as described below. Milestones and Royalties The Company is 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, the Company is 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. As of September 30, 2023, the Company has not recognized any revenue related to sales-based milestones. Accounting Analysis under ASC 606 Identification of the Contract(s) The Company assessed the Collaboration Agreement and concluded that it represents a contract with a customer within the scope of ASC Topic 606, Revenue from Contracts with Customers . Identification of Promises and Performance Obligations The Company has concluded that the exclusive license to its intellectual property, JZP898, and the non-exclusive corresponding “know-how” are not capable of being distinct from the other promises within the contract, and as such, the Company has determined that the license and “know-how” combined with the other research and development services and supply represent a single combined performance obligation. Determination of Transaction Price The overall transaction price as of the inception of the contract was determined to be $ 32.3 million, which is comprised of the nonrefundable upfront payment of $ 15.0 million and the estimated costs for research services of $ 17.3 million. Outside of the estimated costs for research services, there is no other variable consideration included in the transaction price at inception. The Company used the most likely amount method to estimate variable consideration and estimated that the most likely amount for 9 Table of Contents each potential development and regulatory milestone payment under this agreement was zero at the inception of the contract, as achievement of those milestones was uncertain and highly susceptible to factors outside the Company’s control. Accordingly, all such milestone payments were excluded from the transaction price at inception of contract. Management reevaluates the transaction price at the end of each reporting period, including developing a revised estimate for research services costs and the most likely amount for each potential development and regulatory milestone, and as uncertain events are resolved or other changes in circumstances occur, adjusts the transaction price as necessary. Sales based royalties, including milestones based on the level of sales, were also excluded from the transaction price, as the license is deemed to be the predominant item to which the royalties relate. The Company will recognize such revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). The upfront payment of $ 15.0 million was recorded as deferred revenue and, along with payments related to the Company’s conduct of research services under the Collaboration Agreement or any development and regulatory milestones, will be recognized as revenue using an input-based measurement of actual costs incurred as a percentage of the estimated total costs expected to be incurred over the expected term of conduct of the research services. Th e Company believes this input-based method to recognize revenue best reflects the transfer of value to Jazz. The remaining deferred revenue is expected to be recognized as revenue over a term of approximately 2.5 years. Recognition of Revenue For the nine months ended September 30, 2023, using the cost-to-cost input method, which best depicts the research services performed for the customer, the Company recognized $ 18.4 million of revenue related to the Collaboration Agreement. During the three and nine months ended September 30, 2023, the Company determined that a variable consideration payment totaling $ 5.0 million was likely to be achieved and accordingly revised its estimate of the overall transaction price to include this amount. During the three and nine months ended September 30, 2023, the Company recognized a cumulative catch-up of revenue of $ 4.2 million related to the increase to the overall transaction price of $ 5.0 million, based on the cost-to-cost input method discussed above. As of September 30, 2023, there is $ 1.8 million and $ 0.6 million of current and non-current deferred revenue, respectively, related to the Collaboration Agreement. As of December 31, 2022, there was $ 6.5 million and $ 1.1 million of current and non-current deferred revenue, respectively, related to the Collaboration Agreement. All costs associated with the Collaboration Agreement are recorded in research and development expense in the condensed consolidated statements of operations. Unbilled receivables related to the Collaboration Agreement of $ 0.9 million and $ 4.1 million is included within other receivables in the accompanying condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022, respectively. Receivables related to the Collaboration Agreement of $ 5.0 million and $ 2.8 million are included within other receivables in the accompanying condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022, respectively. The following table presents changes in the Company’s contract liabilities during the nine months ended September 30, 2023 (in thousands): Balance as of Balance as of December 31, 2022 Additions Reductions September 30, 2023 Contract liabilities: Deferred revenue $ 7,660 $ 5,000 $ ( 10,258 ) $ 2,402 Totals $ 7,660 $ 5,000 $ ( 10,258 ) $ 2,402 As of September 30, 2023, the Company has not received any royalty payments under the Collaboration Agreement. 4. Financial Instruments and Fair Value Measurements Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company’s financial instruments that are measured at fair value on a recurring basis consist of money market funds, classified as cash, cash equivalents and restricted cash and cash equivalents on the Company’s condensed consolidated balance 10 Table of Contents sheets, and a success payment liability pursuant to an amended and restated loan and security agreement (the “Loan Agreement”) with Pacific Western Bank (“PWB”) (see Note 7, Term Loan ). The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities. The carrying amounts reflected in the condensed consolidated balance sheets for cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values, due to their short-term nature. Assets measured at fair value on a recurring basis as of September 30, 2023 were as follows (in thousands): Level 1 Level 2 Level 3 Total Assets: Money market funds $ 144,740 $ — $ — $ 144,740 Total assets $ 144,740 $ — $ — $ 144,740 Assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 were as follows (in thousands): Level 1 Level 2 Level 3 Total Assets: Money market funds $ 128,812 $ — $ — $ 128,812 Total assets $ 128,812 $ — $ — $ 128,812 Liabilities Success payment liability $ — $ — $ 570 $ 570 Total liabilities $ — $ — $ 570 $ 570 The success payment liability was included within accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets as of December 31, 2022. There were no changes in valuation techniques during the three or nine months ended September 30, 2023. There were no liabilities measured at fair value on a recurring basis as of September 30, 2023. Success Payment Liability The Company was obligated to pay to PWB a one-time success payment of up to $ 1.6 million upon the occurrence of the Company achieving certain conditions defined in the Loan Agreement. The Success Fee Event (as defined in the Loan Agreement) occurred during the second quarter of 2023, resulting in the immediate payment in full of the required Success Fee (as defined in Note 7 below). The following table reconciles the change in fair value of the success payment liability during the nine months ended September 30, 2023 based on Level 3 inputs (in thousands): Nine Months Ended September 30, 2023 Balance at December 31, 2022 $ 570 Additions — Change in fair value 1,030 Payment at Success Event ( 1,600 ) Balance at September 30, 2023 $ — The success payment liability is stated at fair value and was previously considered Level 3 because its fair value measurement was based, in part, on significant inputs not observed in the market. Upon completion of the Success Fee Event, the Company removed the corresponding financial instrument for the success payment liability and paid the total $ 1.6 million. Prior to repayment, the Company remeasured the liability at fair value with a corresponding increase of $ 1.0 million recorded to other expense, net for the nine months ended September 30, 2023. 5. Restricted Cash and Cash Equivalents The Company maintained restricted cash and cash equivalents of $ 21.2 million and $ 1.2 million at September 30, 2023 and December 31, 2022, respectively. At September 30, 2023, $ 20.0 million of the restricted cash and cash equivalents balance represents an obligation under the term loan facility to maintain a minimum cash balance in the Company’s PWB accounts. This became effective upon imminent achievement of the funding goal as required by the terms of the Loan Agreement (see Note 7, Term Loan ). The remaining restricted cash amounts are comprised solely of letters of credit required pursuant to the 11 Table of Contents Company’s leased office spaces. The current portion of restricted cash and cash equivalents is included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets for all periods presented below (in thousands): Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Beginning of Period End of Period Beginning of Period End of Period Cash and cash equivalents $ 129,315 $ 130,058 $ 157,531 $ 140,450 Restricted cash and cash equivalents, current — 210 91 — Restricted cash and cash equivalents, net of current portion 1,214 21,019 1,208 1,211 Cash, cash equivalents and restricted cash and cash equivalents $ 130,529 $ 151,287 $ 158,830 $ 141,661 6. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities as of September 30, 2023 and December 31, 2022 were comprised as follows (in thousands): September 30, 2023 December 31, 2022 Manufacturing $ 1,928 $ 6,674 Contract research 1,745 2,990 Employee compensation and benefits 2,666 3,135 Professional fees 678 613 Success payment liability — 570 Other 950 170 Total accrued expenses and other current liabilities $ 7,967 $ 14,152 7. Term Loan In April 2022, the Company entered into the Loan Agreement with PWB. Under the terms of the Loan Agreement, PWB made available a term loan in an aggregate principal amount of up to $ 20.0 million (“Tranche I Loan”) available at any time after the closing date until February 28, 2024 as extended to August 31, 2024 upon the satisfaction of certain conditions set forth in the Loan Agreement (such date, the “Amortization Date”). Based on the satisfaction of certain conditions defined in the Loan Agreement, PWB was also obligated to make available an additional term loan in the aggregate principal amount of up to $ 20.0 million (“Tranche II Loan”, or collectively with the Tranche I Loan, the “Term Loans”) available at any time after the closing date until the Amortization Date upon the acceptance by the U.S. Food and Drug Administration (the “FDA”) of two investigational new drug (“IND”) submissions on or before March 31, 2023. As of September 30, 2023, the Company has drawn down $ 40.0 million of the Term Loans. The outstanding notes payable balance under the Term Loans as of September 30, 2023 consists of the following (in thousands): September 30, 2023 Note payable $ 40,000 Unamortized debt discount and issuance costs ( 769 ) Net carrying amount of note payable 39,231 Less: current portion of note payable ( 1,667 ) Note payable, net, less current portion $ 37,564 Subsequent to the interest-only period, which ends on August 31, 2024, the Company is required to make equal monthly principal payments plus interest until the Term Loans mature on August 31, 2026. The Term Loans will 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) 4.5 %. If the prime rate changes throughout the term, the interest rate will be 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 Company recognized interest expense related to the Loan Agreement of $ 0.9 million and $ 1.9 million during the three and nine months ended September 30, 2023, respectively. The Company did not incur interest expense during the three and nine months ended September 30, 2022. The Company was obligated to pay PWB a one-time fee in the event of certain corporate transactions equal to either (i) the greater of (a) $ 0.2 million and (b) 2.0 % of the amount drawn under the Term Loans, for a transaction occurring on or before 12 Table of Contents March 31, 2023, or (ii) for any transaction occurring thereafter, the greater of (a) $ 0.4 million and (b) 4.0 % of the amount drawn under the Term Loans (the “Success Fee”). The Success Fee Event occurred during the second quarter of 2023, resulting in the immediate payment in full of the $ 1.6 million required Success Fee. All outstanding obligations under the Loan Agreement are secured by the Company’s personal property (exclusive of any intellectual property) and are subject to acceleration in the event of default. In the event of a late payment or default, the Company is obligated to pay a fee equal to 5.0 % of such unpaid amounts. In connection with the Loan Agreement, the Company is required to comply with certain negative covenants, which among other things, restrict the Company from (i) incurring future debt or granting liens, (ii) effectuating a merger or consolidation with or into any other business organization, (iii) paying dividends or making certain other distributions, (iv) selling or otherwise transferring its assets, (v) making investments in any entities or instruments other than certain investments specified in the Loan Agreement and (vi) making capitalized expenditures in excess of 125 % of the amount provided for in the annual budget approved by the board of directors. The Loan Agreement also contains standard affirmative covenants, including with respect to the issuance of audited consolidated financial statements, insurance, and maintenance of good standing and government compliance in the Company’s state of formation. On or before September 30, 2023, the Company was required to raise aggregate gross cash process of at least $ 50.0 million from the sale or issuance of the Company’s equity or from strategic partnerships or any similar transaction. From after receipt of those proceeds, the Company is required to maintain at all times at least $ 20.0 million of otherwise unrestricted cash in accounts with PWB, which is included within restricted cash and cash equivalents, net of current portion on the Company’s condensed consolidated balance sheet as of September 30, 2023. On April 17, 2023, the Company achieved the $ 50.0 million funding milestone, triggering the corresponding $ 20.0 million cash covenant, full payment of the Success Fee of $ 1.6 million, and the updated Amortization Date of August 31, 2024. PWB has the right to accelerate all outstanding obligations of the Company under the Loan Agreement or terminate any remaining Term Loan commitments in the event of a material adverse effect on (i) the operations, business or financial condition of the Company, (ii) the Company’s ability to repay any portion of the Term Loans or perform any of its other obligations under the Loan Agreement, and (iii) the Company’s interest in, or the value, perfection or priority of PWB’s security interest in the collateral. As of September 30, 2023, the Company had drawn both Term Loans and had $ 40.0 million outstanding principal. 8. Common and Preferred Stock Common Stock The Company is authorized to issue 200.0 million shares of common stock. Common stockholders are entitled to dividends if and when declared by the Company’s board of directors. As of September 30, 2023, no dividends on common stock had been declared by the Company. On May 10, 2022, the Company entered into a Sales Agreement (the “Sales Agreement”) with Leerink Partners LLC (“Leerink”), formerly known as SVB Securities LLC, pursuant to which the Company may offer and sell shares of its common stock with an aggregate offering price of up to $ 50.0 million (the “ATM Offering”). The Sales Agreement provides that Leerink 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 September 30, 2023, the Company had sold an aggregate of 7,938,848 shares under the ATM Offering at an average price of $ 3.33 per share for net proceeds of $ 25.0 million after deducting sales commissions and offering expenses. Preferred Stock The Company is authorized to issue 5.0 million shares of undesignated preferred stock in one or more series. As of September 30, 2023, no shares of preferred stock were issued or outstanding. Shares Reserved for Future Issuance The Company had reserved shares of common stock for issuance as follows (in thousands): As of September 30, As of December 31, 2023 2022 Shares reserved for exercises of outstanding stock options 6,480 5,244 Shares reserved for vesting of restricted stock units 317 323 Shares reserved for exercises of warrants 59 59 Shares reserved for future issuance under the 2021 Employee Stock Purchase Plan 530 244 Shares reserved for future issuance under the 2021 Stock Incentive Plan 1,281 939 Total shares reserved for future issuance 8,667 6,809 13 9. Stock-based Compensation 2017 Stock Incentive Plan In December 2017, the Company adopted the 2017 Stock Incentive Plan (the “2017 Plan”), as amended and restated, under which it could grant incentive stock options (“ISOs”), non-qualified stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights and other stock-based awards to eligible employees, officers, directors and consultants. The terms of stock options and RSAs, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2017 Plan. 2021 Stock Incentive Plan In April 2021, the board of directors adopted and the Company’s stockholders approved the 2021 Stock Incentive Plan (the “2021 Plan”), which became effective immediately prior to the effectiveness of the Company’s initial public offering (“IPO”). As a result of the adoption of the 2021 Plan, no further awards will be made under the 2017 Plan. The 2021 Plan provides for the grant of ISOs, non-qualified stock options, RSAs, RSUs, stock appreciation rights and other stock-based awards. The Company’s employees, officers, directors, consultants and advisors are eligible to receive awards under the 2021 Plan. The terms of awards, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2021 Plan. The Company initially registered 3,352,725 shares of common stock under the 2021 Plan, pursuant to a Registration Statement on Form S-8 filed with the SEC on April 30, 2021, which was comprised of (i) 2,843,116 shares of common stock reserved for issuance under the 2021 Plan, (ii) 31,884 shares of common stock originally reserved for issuance under the 2017 Plan that became available for issuance under the 2021 Plan upon the completion of the IPO, and (iii) 477,725 shares of unvested restricted stock subject to repurchase by the Company that may become issuable under the 2021 Plan following such repurchase. The 2021 Plan also provides that an additional number of shares will be added annually to the shares authorized for issuance under the 2021 Plan on the first day of each fiscal year, beginning with the fiscal year ended December 31, 2022 and continuing until, and including, the fiscal year ending December 31, 2031. The number of shares added each year will be equal to the lesser of (i) 5 % of the number of outstanding common stock on such date and (ii) such amount as determined by the board of directors. Effective January 1, 2022 and 2023, 1,380,397 and 1,575,753 additional shares, respectively, were automatically added to the shares reserved for issuance under the 2021 Plan pursuant to this evergreen provision. As of September 30, 2023, there were 1,281,089 shares available for future issuance under the 2021 Plan. 2021 Employee Stock Purchase Plan In April 2021, the board of directors adopted and the Company’s stockholders approved the 2021 Employee Stock Purchase Plan (the “2021 ESPP”), which became effective immediately prior to the effectiveness of the IPO. The Company initially reserved 244,000 shares of common stock for future issuance under the 2021 ESPP. The 2021 ESPP provides that an additional number of shares will automatically be added to the shares reserved for issuance on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2022 and continuing for each fiscal year until, and including, the fiscal year ending on December 31, 2032. The number of shares added each year will be equal to the lowest of (i) 488,000 shares of common stock, (ii) 1 % of the number of shares of outstanding common stock on such date, and (iii) such amount as determined by the board of directors. Effective January 1, 2023, 315,150 additional shares were automatically added to the shares reserved for issuance under the 2021 ESPP pursuant to the evergreen provision. The Company initiated its first offering period under the 2021 ESPP in December 2022. The 2021 ESPP provides that eligible employees may contribute up to 15 % of their eligible earnings toward the semi-annual purchase of the Company’s common stock. The 2021 ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the last date of purchase (or, if not a trading day, on the immediately preceding trading day). The offering period under the 2021 ESPP has a duration of six months , and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85 % of the lesser of (i) the fair market value of the Company’s common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company’s common stock on the purchase date. The Company estimates the fair value of the common stock under the 2021 ESPP using a Black-Scholes valuation model. For the three and nine months ended September 30, 2023, the fair value of common stock awarded was estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following assumptions: risk-free interest rate ( 3.8 %); expected term ( 0.5 years); expected volatility ( 92.7 %); and an expected dividend yield ( 0 %). The Company recorded less than $ 0.1 million of stock-based compensation under the 2021 ESPP for the three and nine months ended September 30, 2023. As of September 30, 2023, there was unrecognized stock-based compensation expense of less than $ 0.1 million related to the most recent ESPP offering period, which ended May 31, 2023. 14 Table of Contents Stock-Based Compensation Expense Total stock-based compensation expense recognized in the condensed consolidated statements of operations was as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Research and development $ 1,008 $ 909 $ 3,047 $ 2,496 General and administrative 1,089 1,027 3,088 2,962 Total stock-based compensation $ 2,097 $ 1,936 $ 6,135 $ 5,458 RSA Activity The Company may, at its discretion, repurchase unvested shares of restricted stock issued pursuant to the 2017 Plan at the initial purchase price if the employees or non-employees terminate their service relationship with the Company. The following table summarizes RSA activity during the nine months ended September 30, 2023 (in thousands, except per share amounts): Shares/Units Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2022 81 $ 1.38 Granted — $ — Vested ( 81 ) $ 1.38 Forfeited — $ — Unvested at September 30, 2023 — $ — As of September 30, 2023, there was no unrecognized stock-based compensation expense related to unvested RSAs. No RSAs vested during the three months ended September 30, 2023. The aggregate fair value of RSAs that vested during the three months ended September 30, 2022, based upon the fair values of the stock underlying the RSAs on the day of vesting, was $ 0.3 million. The aggregate fair value of RSAs that vested during the nine months ended September 30, 2023 and 2022, based upon the fair values of the stock underlying the RSAs on the day of vesting, was $ 0.2 million and $ 1.0 million, respectively. RSU Activity The Company has also granted RSUs to its employees under the 2021 Plan. The following table summarizes RSU activity during the nine months ended September 30, 2023 (in thousands, except per share amounts): Shares/Units Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2022 323 $ 4.32 Granted — $ — Vested — $ — Forfeited ( 6 ) $ 4.97 Unvested at September 30, 2023 317 $ 4.30 As of September 30, 2023, there was unrecognized stock-based compensation expense related to unvested RSUs of $ 0.4 million, which the Company expects to recognize over a weighted-average period of approximately 0.5 year. No RSUs vested during the three or nine months ended September 30, 2023 or 2022. Stock Option Activity During the three months ended September 30, 2022, the Company granted performance-based stock options to certain executive officers for the purchase of an aggregate of 883,352 shares of common stock with a grant date fair value of $ 3.36 per share. These stock options vest only upon achievement of specified performance targets related to certain business objectives on or before December 31, 2023. As of September 30, 2023, none of these options were vested because none of the specified performance targets had been achieved. Because achievement of the specified performance targets was not deemed probable as 15 Table of Contents of September 30, 2023, the Company has not recorded any expense for these stock options from the date of issuance through September 30, 2023. During the second quarter of 2023, 101,447 of the performance-based stock options were forfeited by an executive who retired from the Company. The total unrecognized stock-based compensation expense for the remaining outstanding performance-based stock options is $ 2.6 million as of September 30, 2023. The fair value of stock options granted during the three and nine months ended September 30, 2023 and 2022 was calculated on the date of grant using the following weighted-average assumptions: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Risk-free interest rate 4.3 % 2.9 % 3.9 % 2.3 % Expected term (in years) 6.0 9.8 6.0 7.6 Dividend yield — % — % — % — % Expected volatility 84.8 % 77.9 % 82.7 % 77.0 % Using the Black-Scholes option pricing model, the weighted-average grant date fair value of stock options granted during the three months ended September 30, 2023 and 2022 was $ 1.91 and $ 3.35 per share, respectively. Using the Black-Scholes option pricing model, the weighted-average grant date fair value of stock options granted during the nine months ended September 30, 2023 and 2022 was $ 1.56 and $ 5.00 per share, respectively. The following table summarizes stock option activity during the nine months ended September 30, 2023: Options Outstanding Number of Options (in thousands) Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life (in years) Outstanding at December 31, 2022 5,244 $ 7.86 8.34 Granted 1,616 $ 2.16 Exercised ( 3 ) $ 1.98 Cancelled ( 377 ) $ 5.82 Outstanding at September 30, 2023 6,480 $ 6.56 8.14 Exercisable at September 30, 2023 2,831 $ 7.67 7.64 The aggregate intrinsic fair value of stock options exercised during the three months ended September 30, 2023 and 2022 was less than $ 0.1 million in both periods. The aggregate intrinsic fair value of stock options exercised during the nine months ended September 30, 2023 and 2022 was less than $ 0.1 million and $ 0.4 million, respectively. As of September 30, 2023, there was unrecognized stock-based compensation expense related to unvested stock options of $ 11.2 million, which the Company expects to recognize over a weighted-average period of approximately 1.7 years. 10. Related Parties In May 2022, the Company entered into a sublease agreement with Crossbow Therapeutics, Inc. (“Crossbow”), for which entities affiliated with MPM Capital (“MPM Capital”) are also beneficial owners, to sublease the entirety of its office and laboratory space in Cambridge, Massachusetts. Luke Evnin, Ph.D., the chair of the Company’s board of directors, co-founded MPM Capital and serves as Managing Director of MPM Capital. Briggs Morrison, who serves on the Company’s board of directors, serves as Executive Partner of MPM Capital and Chief Executive Officer of Crossbow. The term of the sublease agreement commenced in June 2022 and ends in March 2024, with no option to extend. The Company received cash payments under its sublease of approximately $ 1.2 million during the nine months ended September 30, 2023. In addition, the Company received $ 0.2 million from Crossbow in June 2022 as a security deposit that is included within accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets as of September 30, 2023. 11. Net Loss Attributable to Common Stockholders per Share For purposes of the diluted net loss attributable to common stockholders per share calculation, outstanding stock options, unvested RSAs, unvested RSUs and warrants to purchase common stock are considered to be potentially dilutive securities, 16 Table of Contents however the following weighted-average amounts were excluded from the calculation of diluted net loss attributable to common stockholders per share because their effect would be anti-dilutive (in thousands): September 30, 2023 2022 Outstanding stock options 6,480 5,279 Unvested RSAs — 126 Unvested RSUs 317 236 Warrants to purchase common stock 59 59 Total 6,856 5,700 17 Table of Contents