Werewolf Therapeutics, Inc. 10-Q

Item 2. 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 condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our Annual Report on Form 10-K for the year ended December 31, 2022, or the 2022 Annual Report on Form 10-K, that was filed with the United States Securities and Exchange Commission, or SEC, on March 23, 2023. 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 Quarterly 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 II, Item 1A of this Quarterly Report. You should carefully read the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly 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 immunotherapy sensitive advanced or metastatic solid tumors who have failed standard of care treatment, including checkpoint inhibitor therapy. In November 2023, we announced preliminary first-in-human clinical data from the initial monotherapy dose-escalation cohorts in the Phase 1/1b clinical trial. The preliminary data established proof of mechanism for WTX-124 and proof of concept for our INDUKINE design, and included assessments of safety and tolerability, pharmacokinetics, relevant biomarkers and preliminary antitumor activity. The preliminary data included data collected as of October 18, 2023, from 16 heavily pretreated patients from the first four monotherapy dose escalation cohorts (1, 3, 6, and 12 mg), and supported continued dose escalation. Dose escalation is ongoing in the monotherapy and combination therapy arms of the trial. Additional data from monotherapy dose-escalation cohorts will inform declaration of recommended dose for expansion and opening of the monotherapy expansion arms. We expect additional interim data from the monotherapy dose escalation arm and the recommended dose for expansion arm in the first half of 2024. In the fourth quarter of 2022, we received clearance from the FDA for our IND for WTX-330. 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. Jazz received IND application clearance for JZP898 in July 2023. 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 18 Table of Contents 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 Leerink Partners LLC, or Leerink (formerly known as SVB Securities LLC),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 September 30, 2023, we 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. Due to our significant research and development expenditures, we have accumulated substantial net losses since our inception. As of September 30, 2023, we had an accumulated deficit of $332.1 million. We expect to continue to incur substantial and increasing expenses and net losses for the foreseeable future, as we continue to advance our current and future product candidates through preclinical and clinical development, manufacture drug product and drug supply, seek regulatory approval for our current and future product candidates, maintain and expand our intellectual property portfolio, hire additional research and development and business personnel and operate as a public company. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as and when needed could have a material adverse effect on our business, results of operations and financial condition. Because of the numerous risks and uncertainties associated with product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to raise capital, maintain our research and development efforts, expand our business or continue our operations at planned levels, and as a result we may be forced to substantially reduce or terminate our operations. 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 nine months ended September 30, 2023, we recognized $18.4 million of revenue related to the Collaboration Agreement, of which $5.9 million related to the $15.0 million upfront payment received in April 2022, $8.1 million related to costs incurred for research services to be reimbursed by Jazz, and $4.4 million related to a variable consideration payment. We had $2.4 million of deferred revenue as of September 30, 2023, which is classified as either current or net of current portion in our condensed consolidated balance sheets based on the period over which the revenue is expected to be recognized. As of September 30, 2023, we had not received any 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. 19 Table of Contents 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 condensed 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 three and nine months ended September 30, 2023 and 2022 were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 WTX-124 $ 1,318 $ 1,644 $ 1,871 $ 6,913 WTX-330 1,839 3,224 2,491 8,586 JZP898 (formerly WTX-613) 791 2,224 6,960 4,406 WTX-712 347 — 965 — Pre-development candidates 760 435 2,189 1,907 Total external development costs $ 5,055 $ 7,527 $ 14,476 $ 21,812 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, complete pre-clinical requirements for WTX-712, 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 will generally be reimbursed by Jazz. The decrease in development costs during the three months ended September 30, 2023, is primarily due to a decrease in manufacturing costs incurred with contract manufacturing organizations to support the production of preclinical, current, and future clinical trial materials for WTX-124 and WTX-330 as more fully described below under “Results of Operations – Research and Development Expenses.” 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; 20 Table of Contents • 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 (Expense) Income, Net Other (expense) 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. Interest Income, Net Interest income, net consists of interest income earned from our cash and cash equivalents, net of interest expense incurred from our Loan Agreement with PWB. Results of Operations Comparison of the Three Months Ended September 30, 2023 and 2022 The following table summarizes our results of operations for the three months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, $ Change 2023 2022 Revenue: Collaboration revenue $ 5,897 $ 4,970 $ 927 Operating expenses: Research and development 10,838 13,070 (2,232) General and administrative 4,310 4,439 (129) Total operating expenses 15,148 17,509 (2,361) Operating loss (9,251) (12,539) 3,288 Other income: Other (expense) income, net (5) 3 (8) Interest income, net 971 593 378 Total other income 966 596 370 Net loss $ (8,285) $ (11,943) $ 3,658 21 Table of Contents Revenue Revenue was $5.9 million for the three months ended September 30, 2023, 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, costs incurred for research services to be reimbursed by Jazz, and revenue related to the achievement of certain variable consideration components. Comparatively, we recognized $5.0 million in collaboration revenue during the three months ended September 30, 2022. This $0.9 million increase in collaboration revenue is primarily driven by a change in the transaction price of $5.0 million during the three months ended September 30, 2023, upon achieving a variable consideration component included in the Collaboration Agreement, which led to an additional recognition of $4.4 million during the period. This increase was partially offset by a decline in revenue recognized as a result of a decrease in research and development activities related to JZP898. Research and Development Expenses The following table summarizes our research and development expenses for the three months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, $ Change 2023 2022 Personnel $ 3,635 $ 3,652 $ (17) Contract research 1,188 863 325 Lab consumables 1,202 1,020 182 Clinical trial costs 1,715 665 1,050 Manufacturing 2,152 5,999 (3,847) Facilities 777 662 115 Other 169 209 (40) Total research and development expenses $ 10,838 $ 13,070 $ (2,232) Research and development expenses for the three months ended September 30, 2023 were $10.8 million, compared to $13.1 million for the three months ended September 30, 2022. The decrease of $2.2 million was primarily due to: • $3.8 million of decreased manufacturing costs driven by a decrease of $2.9 million in contract manufacturing costs associated with candidates WTX-124 and WTX-330 as these costs were higher in the prior period as we prepared for initiation of our clinical trials; likewise, contract manufacturing costs associated with JZP898 decreased by $0.9 million as these costs were higher in the prior period as we prepared for IND submission of JZP898. The decrease was partially offset by: • $1.1 million of increased clinical trial costs, primarily driven by continued expansion of sites and enrollment for both our WTX-124 and WTX-330 trials; • $0.3 million of increased contract research costs driven primarily by proof-of-concept (or “POC”) costs in the current period for WTX-712; and • $0.2 million of increased lab consumables costs primarily related to expanded discovery efforts and headcount. 22 Table of Contents General and Administrative Expenses The following table summarizes our general and administrative expenses for the three months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, $ Change 2023 2022 Personnel $ 2,204 $ 2,214 $ (10) Professional services 1,024 837 187 Corporate insurance 330 701 (371) Facility costs 358 324 34 IT costs 174 142 32 Other 220 221 (1) Total general and administrative expenses $ 4,310 $ 4,439 $ (129) General and administrative expenses were $4.3 million for the three months ended September 30, 2023, compared to $4.4 million for the three months ended September 30, 2022. The decrease of $0.1 million was primarily due a reduction in insurance premiums in the current period, which was offset in part by an increase in costs incurred to protect our intellectual property. Other (Expense) Income, Net Other (expense) income, net for the three months ended September 30, 2023 and 2022 consisted primarily of foreign currency gains and losses related to services performed by foreign vendors. No material foreign currency gains or losses were recognized in either period. Interest Income, Net Interest income was $1.0 million for the three months ended September 30, 2023, compared to $0.6 million for the three months ended September 30, 2022. This increase in interest income was primarily a result of higher interest rates during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Results of Operations Comparison of the Nine Months Ended September 30, 2023 and 2022 The following table summarizes our results of operations for the nine months ended September 30, 2023 and 2022 (in thousands): Nine Months Ended September 30, $ Change 2023 2022 Revenue: Collaboration revenue $ 18,442 $ 9,118 $ 9,324 Operating expenses: Research and development 32,127 37,902 (5,775) General and administrative 13,856 14,093 (237) Total operating expenses 45,983 51,995 (6,012) Operating loss (27,541) (42,877) 15,336 Other income: Other (expense) income, net (1,136) 268 (1,404) Interest income, net 3,312 729 2,583 Total other income 2,176 997 1,179 Net loss $ (25,365) $ (41,880) $ 16,515 Revenue Revenue was $18.4 million for the nine months ended September 30, 2023, 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, costs incurred for research services to be reimbursed by Jazz, and revenue related to the achievement of certain variable consideration components. Comparatively, we recognized $9.1 million in collaboration revenue during the nine months ended September 30, 2022. This $9.3 million increase in collaboration revenue is partially driven by a change in the transaction price of $5.0 million 23 Table of Contents during the nine months ended September 30, 2023, upon achieving a variable consideration component included in the Collaboration Agreement, which led to an additional recognition of $4.4 million during the period. Additionally, we recognized an increase in revenue recognized as a result of an increase in research and development activities related to JZP898. Research and Development Expenses The following table summarizes our research and development expenses for the nine months ended September 30, 2023 and 2022 (in thousands): Nine Months Ended September 30, $ Change 2023 2022 Personnel $ 11,402 $ 10,853 $ 549 Manufacturing 5,803 14,892 (9,089) Clinical trial costs 5,049 3,364 1,685 Contract research organization 3,624 3,556 68 Lab consumables 3,513 2,664 849 Facilities 2,170 2,108 62 Other 566 465 101 Total research and development expenses $ 32,127 $ 37,902 $ (5,775) Research and development expenses for the nine months ended September 30, 2023 were $32.1 million, compared to $37.9 million for the nine months ended September 30, 2022. The decrease of $5.8 million was primarily due to: • $9.1 million of decreased manufacturing costs driven by a decrease of $7.7 million in costs incurred with contract manufacturing organizations to support the production of preclinical, current, and future clinical trial materials associated with candidates WTX-124, WTX-330, WTX-712, and JZP898, and by $1.4 million of favorable adjustments recognized during the current period upon the closeout of completed purchase orders. The decrease was partially offset by: • $1.7 million of increased clinical trial costs, primarily driven by continued expansion of sites and enrollment for both our WTX-124 and WTX-330 trials; • $0.8 million of increased lab consumables costs primarily related to expanded discovery efforts and headcount; and • $0.5 million of increased personnel costs, driven primarily by the timing and valuation of stock-based awards granted to employees. General and Administrative Expenses The following table summarizes our general and administrative expenses for the nine months ended September 30, 2023 and 2022 (in thousands): Nine Months Ended September 30, $ Change 2023 2022 Personnel $ 6,979 $ 6,728 $ 251 Professional services 3,230 2,983 247 Corporate insurance 1,461 2,150 (689) Facilities 954 1,049 (95) IT costs 486 444 42 Other 746 739 7 Total general and administrative expenses $ 13,856 $ 14,093 $ (237) General and administrative expenses were $13.9 million for the nine months ended September 30, 2023, compared to $14.1 million for the nine months ended September 30, 2022. The decrease of $0.2 million was primarily due to: • $0.7 million of decreased corporate insurance costs, driven by a reduction in associated premiums. 24 Table of Contents The decrease was partially offset by: • $0.3 million of increased personnel costs, including $0.1 million of increased stock-based compensation expense, due to increased headcount to support operating as a public company; and • $0.2 million of increased professional services costs, driven by costs incurred to protect our intellectual property. Other (Expense) Income, Net During the nine months ended September 30, 2023, other (expense) income, net primarily consisted of $1.0 million in losses recognized for the change in the fair value of the success payment liability during the period. Comparatively, we recognized a gain of $0.3 million related to the change in the fair value of the success payment liability during the nine months ended September 30, 2022. Interest Income, Net Interest income was $3.3 million for the nine months ended September 30, 2023, compared to $0.7 million for the nine months ended September 30, 2022. This increase in interest income was primarily a result of higher interest rates during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Liquidity and Capital Resources Sources of Liquidity We have funded our operations through September 30, 2023 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, $16.3 million of expense reimbursements and milestone receipts from Jazz pursuant to the Collaboration Agreement, net proceeds from our ATM Offering of $25.0 million and the drawdown of $40.0 million of Term Loans. 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. As of September 30, 2023, we have received $5.0 million in proceeds related to variable consideration components. 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 was 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 August 31, 2026. 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 were obligated to pay PWB a one-time 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, upon the occurrence of a Success Fee Event (as defined in the Loan Agreement). In April 2023, the Success Fee Event occurred and, as such, we became obligated to pay the corresponding 25 Table of Contents Success Fee to PWB, in accordance with the terms of the Loan Agreement. We removed the corresponding financial instrument for the Success Fee liability and paid the total $1.6 million upon occurrence of the Success Fee Event. Upon occurrence of the Success Fee Event, the Amortization Date was extended to August 31, 2024, thereby extending the due date for all unpaid principal and accrued and unpaid interest with respect to the Term Loans to August 31, 2026. 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. We maintain at least $20.0 million of cash in PWB accounts, included within restricted cash and cash equivalents, net of current portion on our condensed consolidated balance sheet as of September 30, 2023, which we are required to maintain at all times pursuant to the terms of the Loan Agreement. 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 the Sales Agreement with Leerink, 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 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, we 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. 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 has had a material effect on our financial statements included elsewhere in this Quarterly Report; however, our operations may be adversely affected by inflation in the future. Due to our significant research and development expenditures, we have accumulated substantial net losses in each period since inception. We have incurred an accumulated deficit of $332.1 million through September 30, 2023. 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 September 30, 2023, we had cash and cash equivalents of $130.1 million. We expect that our existing cash and cash equivalents, will be sufficient to fund our operational expenses and capital expenditure requirements through at least the next twelve months from the date the condensed consolidated financial statements included elsewhere in this Quarterly Report are issued on November 14, 2023. We have based this estimate on assumptions that may prove to be wrong, however, and we could use our capital resources sooner than we expect. The timing and amount of our operating expenditures will depend largely on: • the scope, progress, timing, costs and results of researching and developing our current product candidates or any future product candidates, including with respect to our 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; 26 Table of Contents • 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 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. 27 Table of Contents Cash Flows The following table provides information regarding our cash flows for the nine months ended September 30, 2023 and 2022 (in thousands): Nine Months Ended September 30, 2023 2022 Net cash (used in) provided by: Operating activities $ (28,027) $ (28,726) Investing activities (571) (3,093) Financing activities 49,356 14,650 Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents $ 20,758 $ (17,169) Operating Activities Net cash used in operating activities for the nine months ended September 30, 2023 was $28.0 million, compared to $28.7 million for the nine months ended September 30, 2022. This decrease of $0.7 million was primarily attributable to the $16.1 million difference in the change to deferred revenue during each period. For the nine months ended September 30, 2023, deferred revenue decreased $5.3 million due to the continued progress in Jazz collaboration research, compared to an increase of $10.8 million for the nine months ended September 30, 2022 related to the non-refundable upfront cash payment at the inception of the Collaboration Agreement. This was partially offset by a decrease in net loss for the comparable periods of $16.5 million, primarily driven by increased revenue recorded under the Collaboration Agreement for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Investing Activities Net cash used in investing activities for the nine months ended September 30, 2023 was $0.6 million, compared to $3.1 million for the nine months ended September 30, 2022 . This decrease was driven by high capital expenditures in the second quarter of 2022 related to leasehold improvements for our new headquarters, which was established in May 2022. Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2023 was $49.4 million, compared to $14.7 million for the nine months ended September 30, 2022. Cash provided by financing activities for the nine months ended September 30, 2023 primarily consisted of proceeds from the $40.0 million drawdown of the Term Loans and proceeds of $9.4 million from our ATM Offering during the period. Comparatively, cash provided by financing activities for the nine months ended September 30, 2022 consisted primarily of $14.8 million in proceeds from our ATM Offering during the period. 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 September 30, 2023, we had drawn the Term Loans for a total principal of $40.0 million. Upon achievement of the Loan Agreement’s funding milestone, the maturity date of the Term Loans was extended to August 31, 2026. Interest-only payments are to be made until August 31, 2024, at which point the interest-only period lapses and consecutive equal payments of principal are due along with interest. The Term Loans bear interest at a floating annual rate equal to the 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. 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 $0.5 million. In May 2022, we entered into a sublease agreement with Crossbow Therapeutics, Inc., or Crossbow, a related party, to sublease the entirety of this space. The rent payments we expect 28 Table of Contents to receive over the remaining term of the sublease is approximately $0.6 million, which is greater than the 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 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 $16.1 million. Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these condensed 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 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. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our 2022 Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on March 23, 2023. During the three and nine months ended September 30, 2023, there were no material changes to our critical accounting policies from those previously disclosed. 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. Item 3. 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.