Werewolf Therapeutics, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023. The term “disclosure controls and 99 Table of Contents procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based on the evaluation of our disclosure controls and procedures as of December 31, 2023, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting as discussed below. Notwithstanding this material weakness, our management, including our principal executive officer and principal financial officer, has concluded that our financial statements in this Annual Report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America. The material weakness did not result in any restatements of consolidated financial statements previously reported by us, nor were there any changes to previously released financial results. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive officer and principal financial officer, or persons performing similar functions, and effected by a company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: • pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of a company’s assets; • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of the company’s management and directors; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision of and with the participation of our principal executive officer and principal financial officer, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment as of December 31, 2023, management concluded that our internal control over financial reporting was not effective due to the material weakness discussed below. In our Form 10-Q for the quarterly period ended June 30, 2023, we reported a material weakness in our internal control related to design and operating deficiencies in our purchasing process, specifically related to the application of invoices to purchase orders and processes to estimate progress on open purchase orders and to identify inaccurate expense estimates within purchase orders. During 2023, we implemented, and are continuing to implement measures designed to improve internal control over financial reporting to remediate the control deficiencies that led to the material weakness, including the efforts outlined below, designed to improve our internal control over financial reporting to remediate this material weakness. These efforts included: • hiring additional qualified accounting personnel, including an Assistant Controller and Senior Accountant; • conducting a review of our procurement process and software, as well as sunsetting the historical software; • engaging a professional accounting services firm to help us assess and commence documentation of our internal controls for complying with the Sarbanes-Oxley Act of 2002; 100 Table of Contents • strengthening, formalizing, documenting, and testing accounting processes and internal controls; • engaging consultants to provide additional technical accounting expertise; and • implementing procedures around our estimation processes with key vendors as well as adding analytical tools to help identify possible material errors. We believe significant progress was made in 2023 to enhance and strengthen our internal control over financial reporting. However, while we believe our internal controls were properly designed and implemented as of December 31, 2023, they were not in all cases in place for a sufficient period of time to demonstrate operating effectiveness as of December 31, 2023. As a result, management has concluded that the material weakness was not fully remediated as of December 31, 2023. The measures we are implementing are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. Management remains committed to remediating these material weaknesses. We will continue to implement measures to remedy our internal control deficiencies, though there can be no assurance that our efforts will be successful or avoid potential future material weaknesses. This Annual Report does not include an attestation report of our independent registered public accounting firm, as it is not required for as long as we remain an emerging growth company or a smaller reporting company with less than $100.0 million in annual revenue. Changes in Internal Control over Financial Reporting Other than the changes intended to remediate the material weaknesses noted above, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fourth quarter of the year ended December 31, 2023 t hat has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None of our directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the fourth quarter of 2023. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item 10 will be included in the sections captioned “Corporate Governance,” “Proposal No. 1” and “Delinquent Section 16(a) Reports” in our definitive proxy statement to be filed with the Securities and Exchange Commission, or the SEC, with respect to our 2024 Annual Meeting of Stockholders within 120 days of December 31, 2023, which information is incorporated herein by reference. Code of Ethics We have adopted a written code of business conduct and ethics that applies to our directors, officers, and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code is posted on the Corporate Governance section of our website, which is located at www.werewolftx.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K. We will provide any person, without charge, a copy of such Code of Business Conduct and Ethics upon written request, which may be mailed to 200 Talcott Ave, 2nd Floor, Watertown, MA 02472, Attn: Corporate Secretary. Item 11. Executive Compensation The information required by this Item 11 will be included in the section captioned “Executive Compensation” in our definitive Proxy Statement for our 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2023, which information, other than the information required by Item 402(v) of Regulation S-K, is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Except to the extent provided below, the information required by this Item 12 will be included in the section captioned “Principal Stockholders” in our definitive Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2023, which information is incorporated herein by reference. 101 Table of Contents Equity Compensation Plan Information The following table contains information about our 2017 Stock Incentive Plan, or the 2017 Plan, our 2021 Stock Incentive Plan, or the 2021 Plan, and our 2021 Employee Stock Purchase Plan, or 2021 ESPP, as of December 31, 2023. As of December 31, 2023 Plan Category Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (a) (b) (c) Equity compensation plans approved by security holders (1) 6,120,474 $ 6.82 2,418,773 Equity compensation plans not approved by security holders — — — Total 6,120,474 $ 6.82 2,418,773 (1) Includes the 2017 Plan, the 2021 Plan and the 2021 ESPP. Weighted average exercise price does not take into account 361,500 shares of common stock subject to outstanding restricted stock units. Such shares of common stock will be issued at the time such awards vest, without any cash consideration payable for those shares. As of December 31, 2023, 1,911,660 shares of our common stock were available for issuance under the 2021 Plan. The number of shares reserved for issuance under the 2021 Plan will be increased on each January 1 through January 1, 2031 by the lesser of (i) 5% of the number of shares of our common stock outstanding on the first day of such year and (ii) an amount determined by our board of directors. The shares of common stock underlying any awards that are expired, forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, repurchased or are otherwise terminated by us under the 2021 Plan or the 2017 Plan are added back to the shares of common stock available for issuance under the 2021 Plan. On January 1, 2024, the shares under the 2021 Plan were increased by 1,955,352 shares pursuant to the annual increase described above. As of December 31, 2023, 507,113 shares of our common stock were reserved for issuance under the 2021 ESPP. The number of shares reserved for issuance under the 2021 ESPP will be increased on each January 1 through January 1, 2032 by the least of (i) 488,000 shares, (ii) 1% of the number of shares of our common stock outstanding on the first day of such year and (iii) an amount determined by our board of directors. Our board of directors determined that the current shares of common stock reserve for issuance under the 2021 ESPP are sufficient to meet the short-term needs of the plan, and accordingly determined not to increase the number of shares of common stock reserve for issuance on January 1, 2024. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item 13 will be included in the sections captioned “Corporate Governance” and “Transactions with Related Persons” in our definitive Proxy Statement for our 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2023, which information is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this Item 14 will be included in the section captioned “Ratification of the Appointment of Ernst & Young, LLP As Our Independent Registered Public Accounting Firm For The Fiscal Year Ending December 31, 2024” in our definitive Proxy Statement for our 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2023, which information is incorporated herein by reference. 102 Table of Contents PART IV Item 15. Exhibit and Financial Statement Schedules (1) Financial Statements The following documents are attached hereto and are filed as part of this Annual Report. Report of the Independent Registered Public Accounting Firm (PCAOB ID No. 42 ) 104 Consolidated Balance Sheets 105 Consolidated Statements of Operations 106 Consolidated Statements of Stockholders’ Equity 107 Consolidated Statements of Cash Flows 108 Notes to Consolidated Financial Statements 109 (2) Financial Statement Schedules Schedules have been omitted since they are either not required or not applicable or the information is otherwise included herein. (3) Exhibits The exhibits filed or furnished as part of this Annual Report are listed in the Exhibit Index immediately preceding the signatures, which Exhibit Index is incorporated herein by reference. Item 16. Form 10-K Summary None. 103 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Werewolf Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Werewolf Therapeutics, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations , consolidated statements of stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2022. Boston, Massachusetts March 7, 2024 104 Table of Contents Werewolf Therapeutics, Inc. Consolidated Balance Sheets (amounts in thousands, except share and per share amounts) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 134,343 $ 129,315 Prepaid expenses and other current assets 2,677 3,957 Other receivables 1,350 6,928 Total current assets 138,370 140,200 Property and equipment, net 7,958 8,988 Restricted cash and cash equivalents, net of current portion 21,023 1,214 Operating lease right of use asset 6,888 8,463 Other assets 594 1,380 Total assets $ 174,833 $ 160,245 Liabilities and stockholders’ equity: Current liabilities: Accounts payable $ 1,336 $ 1,221 Accrued expenses and other current liabilities 8,860 14,152 Operating lease liability, current 1,608 2,084 Deferred revenue, current 907 6,532 Note payable, current 6,667 — Total current liabilities 19,378 23,989 Operating lease liability, net of current portion 10,992 12,600 Deferred revenue, net of current portion 433 1,128 Note payable, net of discount, issuance costs, and current portion 32,656 — Other liabilities — 191 Total liabilities 63,459 37,908 Commitments and contingencies Stockholders’ equity: Preferred stock, $ 0.0001 par value, 5,000,000 shares authorized as of December 31, 2023 and December 31, 2022; no shares issued or outstanding as of December 31, 2023 and December 31, 2022 — — Common stock, $ 0.0001 par value, 200,000,000 shares authorized as of December 31, 2023 and December 31, 2022; 39,107,048 and 31,515,074 shares issued as of December 31, 2023 and December 31, 2022, respectively; 39,107,048 and 31,433,731 shares outstanding as of December 31, 2023 and December 31, 2022, respectively 4 3 Additional paid-in capital 455,443 429,039 Accumulated deficit ( 344,073 ) ( 306,705 ) Total stockholders’ equity 111,374 122,337 Total liabilities and stockholders’ equity $ 174,833 $ 160,245 The accompanying notes are an integral part of these consolidated financial statements. 105 Table of Contents 1z Werewolf Therapeutics, Inc. Consolidated Statements of Operations (amounts in thousands, except share and per share amounts) Year Ended December 31, 2023 2022 Revenue: Collaboration revenue $ 19,943 $ 16,401 Operating expenses: Research and development 41,776 53,761 General and administrative 18,670 18,696 Total operating expenses 60,446 72,457 Operating loss ( 40,503 ) ( 56,056 ) Other income: Interest income 7,416 1,908 Interest expense ( 3,139 ) — Other (expense) income, net ( 1,142 ) 338 Total other income 3,135 2,246 Net loss $ ( 37,368 ) $ ( 53,810 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 1.05 ) $ ( 1.86 ) Weighted-average common shares outstanding, basic and diluted 35,646,572 28,863,935 The accompanying notes are an integral part of these consolidated financial statements. 106 Table of Contents Werewolf Therapeutics, Inc. Consolidated Statements of Stockholders’ Equity (amounts in thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at December 31, 2021 27,607,954 $ 2 $ 405,680 $ ( 252,895 ) $ 152,787 Issuance of common stock from at the market offering, net of issuance costs of $ 956 3,827,567 1 15,735 — 15,736 Stock-based compensation expense — — 7,400 — 7,400 Stock option exercises 79,553 — 224 — 224 Net loss — — — ( 53,810 ) ( 53,810 ) Balance at December 31, 2022 31,515,074 3 429,039 ( 306,705 ) 122,337 Issuance of common stock from at the market offering, net of issuance costs of $ 762 7,431,981 1 18,296 — 18,297 Issuance of common stock, net 157,037 — 93 — 93 Stock-based compensation expense — — 8,008 — 8,008 Stock option exercises 2,956 — 7 — 7 Net loss — — — ( 37,368 ) ( 37,368 ) Balance at December 31, 2023 39,107,048 $ 4 $ 455,443 $ ( 344,073 ) $ 111,374 The accompanying notes are an integral part of these consolidated financial statements. 107 Table of Contents Werewolf Therapeutics, Inc. Consolidated Statements of Cash Flows (amounts in thousands) Year Ended December 31, 2023 2022 Operating activities: Net loss $ ( 37,368 ) $ ( 53,810 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 8,008 7,400 Depreciation expense 1,764 1,104 Non-cash interest expense 273 — Non-cash lease expense 1,575 1,406 Change in fair value of success payment liability ( 1,030 ) 555 Amortization of debt issuance costs 60 203 Loss on disposal of property and equipment — 7 Changes in operating assets and liabilities: Prepaid expenses and other assets 1,267 ( 262 ) Other receivables 5,578 ( 6,928 ) Accounts payable, accrued expenses and other liabilities ( 4,335 ) 3,046 Deferred revenue ( 6,320 ) 7,660 Operating lease liability ( 2,084 ) ( 977 ) Net cash used in operating activities ( 32,612 ) ( 40,596 ) Investing activities: Purchases of property and equipment ( 769 ) ( 3,611 ) Net cash used in investing activities ( 769 ) ( 3,611 ) Financing activities: Proceeds from at the market offering of common stock, net of issuance costs 18,329 15,740 Proceeds from drawdown of term loans 40,000 — Proceeds from issuances under Employee Stock Purchase Plan 93 — Proceeds from stock option exercises 7 254 Payment of deferred financing costs — ( 88 ) Net cash provided by financing activities 58,429 15,906 Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents 25,048 ( 28,301 ) 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 $ 155,577 $ 130,529 Reconciliation of cash, cash equivalents and restricted cash and cash equivalents to the consolidated balance sheets Cash and cash equivalents $ 134,343 $ 129,315 Prepaid expenses and other current assets 211 — Restricted cash and cash equivalents, net of current portion 21,023 1,214 Total cash, cash equivalents and restricted cash and cash equivalents $ 155,577 $ 130,529 Supplemental disclosure of cash flow information: Cash paid for interest $ 2,556 $ — Supplemental disclosure of non-cash investing and financing activities: Purchases of property and equipment in accounts payable and accrued expenses $ 76 $ 111 Issuance costs in accounts payable and accrued expenses $ 36 $ 4 The accompanying notes are an integral part of these consolidated financial statements. 108 Table of Contents Werewolf Therapeutics, Inc. Notes to Consolidated Financial Statements 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 efforts and financial resources to organizing and staffing the company; business planning; raising capital; developing and optimizing its platform technology; identifying potential product candidates; enhancing its intellectual property portfolio; undertaking research, preclinical studies, and clinical trials; and enabling manufacturing for its development programs. 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 $ 134.3 million at December 31, 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 consolidated financial statements included in this Annual Report on Form 10-K. 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. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation and Consolidation The accompanying consolidated financial statements 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”). The accompanying 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. Segment Information The Company operates in one business segment, which focuses on the discovery and development of cancer therapeutics. The Company’s chief operating decision maker, its Chief Executive Officer, makes operating decisions based upon the performance of the enterprise as a whole and utilizes the Company’s consolidated financial statements for decision making. 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. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, those related to revenue recognition, accrued expenses, assumptions used in the valuation of stock-based compensation expense and income taxes. Actual results could differ from those estimates. Fair Value of Financial Instruments ASC Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. ASC 820 defines fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant 109 Table of Contents assumptions in fair value measurements, ASC 820 establishes a three-tiered fair value hierarchy that distinguishes between the following: • Level 1 - Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. • Level 3 - Unobservable inputs for which little or no market data exists and that are significant to the fair value measurement, such as the Company’s own assumptions used to measure assets and liabilities at fair value. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. The classification of a financial asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Cash and Cash Equivalents and Restricted Cash and Cash Equivalents The Company’s cash and cash equivalents consist of cash maintained within standard checking accounts. The Company also maintains cash sweep accounts in which cash from its main operating cash accounts are invested overnight in highly liquid, short-term investments. The Company considers all highly liquid investments with a maturity date of 90 days or less at the date of purchase to be cash equivalents. The Company maintained restricted cash and cash equivalents of $ 21.2 million and $ 1.2 million at December 31, 2023 and December 31, 2022, respectively. At December 31, 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 accounts with Pacific Western Bank (“PWB”). This obligation became effective upon imminent achievement of the funding goal as required by the terms of an amended and restated loan and security agreement (the “Loan Agreement”) with PWB (see Note 7 , Term Loan ). The remaining restricted cash and cash equivalents balance as of December 31, 2023 and the entire restricted cash and cash equivalents balance as of December 31, 2022 are comprised solely of letters of credit required pursuant to the Company’s leased office spaces (see Note 10 , Commitments and Contingencies ). Restricted cash and cash equivalents are presented as current or non-current assets based on when the restrictions are expected to expire. The current portion of restricted cash and cash equivalents is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Property and Equipment Property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the applicable assets. Upon the sale or retirement of an asset, the cost and related accumulated depreciation are eliminated from the respective account, and the resulting gain or loss, if any, is included in current operations. Amortization of leasehold improvements is recorded as depreciation expense using the straight-line method over the shorter of the remaining lease term or the estimated useful life of the related asset. The Company capitalizes property and equipment that are acquired for research and development activities and that have an alternate future use. Expenditures for maintenance and repairs are recorded to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. Property and equipment are depreciated over the following periods: Laboratory equipment 5 years Furniture and office equipment 5 years Computer equipment 3 years Leasehold improvements Shorter of lease term or useful life of asset Costs for property and equipment not yet placed into service are classified as construction in progress and depreciated in accordance with the above guidelines once placed into service. Impairment of Long-lived Assets Long-lived assets consist of property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. If such events or changes in circumstances arise, the Company compares the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated by the long-lived assets. If the estimated aggregate undiscounted cash flows are less than the carrying amount of the long-lived assets, an impairment charge, calculated as the amount by which the carrying amount of the assets exceeds the fair value of the assets, is recorded. The fair value of long-lived assets is determined based on the 110 Table of Contents estimated discounted cash flows expected to be generated from the long-lived assets. The Company has not recorded any material impairment charges during the years ended December 31, 2023 or 2022. Leases At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than twelve months are recognized on the balance sheet as right-of-use assets and current or non-current lease liabilities, as applicable. The Company does not recognize leases with terms of twelve months or less on the balance sheet. The lease term is determined at lease commencement, and includes the noncancellable period during which the Company has the right to use the underlying asset. Any period covered by an option to extend or terminate a lease is included in the lease term if the Company is reasonably certain that the option to extend will be exercised or the option to terminate will not be exercised. The Company monitors its plans to renew its material leases on a quarterly basis. The Company combines lease and non-lease components for its leases. Lease payments included in determining the right-of-use asset and lease liability recognized include fixed payments to be paid over the term of the lease, less any lease incentives to be paid or payable to the Company by the lessor. Variable lease payments are included if they are based on an index or rate. Variable lease payments that are not based on an index or rate are recognized as expense in the period incurred. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate (“IBR”), which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, and in a similar economic environment. The lease liability is measured as the value of the remaining lease payments, discounted to present value using the IBR for the lease. All of the Company’s leases are classified as operating leases. Operating lease expense is recognized over the lease term using the straight-line method. Revenue Recognition The Company analyzes its collaborations to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards dependent on the commercial success of such activities and therefore within the scope of ASC Topic 808, Collaborative Arrangements (“ASC 808”). This assessment is performed throughout the life of the arrangement based on changes in the responsibilities of all parties in the arrangement. For arrangements within the scope of ASC 808 that contain multiple elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and which elements of the collaboration are more reflective of a vendor-customer relationship and therefore within the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). For elements of collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently, either by analogy to authoritative accounting literature or by applying a reasonable and rational policy election. For those elements of the arrangement that are accounted for pursuant to ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. In applying ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the promises and performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligations. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. As part of the assessment, the Company must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. The Company uses key assumptions to determine the standalone selling price, which may include reimbursement rates for personnel costs, development timelines and probabilities of regulatory success. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of promised goods or services to the customer will be one year or less. Arrangements that include upfront payments may require deferral of revenue recognition to a future period until obligations under these arrangements are fulfilled. Event-based milestone payments represent variable consideration, and the Company uses the “most likely amount” method to estimate this variable consideration. Given the high degree of uncertainty around the occurrence of these events, the Company considers the milestones and other contingent amounts to be fully constrained until the uncertainty associated with these payments is resolved. Revenue will be recognized from sales-based royalty payments 111 Table of Contents when or as the sales occur. The Company will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur. Research and Development Expenses Expenditures relating to research and development are expensed as incurred. Research and development expenses include external expenses incurred under arrangements with third parties, academic and non-profit institutions and consultants; salaries and personnel-related costs, including non-cash stock-based compensation expense; license fees to acquire in-process technology and other expenses, which include direct and allocated expenses for laboratory, facilities and other costs. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Intellectual Property Expenses The Company expenses costs associated with intellectual property-related matters as incurred and classifies such costs as general and administrative expenses within the consolidated statements of operations. Stock-based Compensation The Company issues stock-based awards to employees and directors, generally in the form of stock options, restricted stock units (“RSUs”), restricted stock awards (“RSAs”), or as awards under the 2021 Employee Stock Purchase Plan (the “2021 ESPP”). Stock-based compensation is measured at the grant date based on the estimated fair value of the award and recognized as expense over the requisite service period of the award on a straight-line basis. For awards with performance conditions, the Company estimates the likelihood of satisfaction of the performance condition, which affects the period over which the expense is recognized. When the likelihood of satisfying the performance conditions related to an award is determined to be probable, the expense is recognized over the requisite service period. The Company has not granted any awards with market conditions. The Company recognizes forfeitures of stock-based awards as they occur. The grant date fair value of stock options, and awards granted under the 2021 ESPP are measured using the Black-Scholes valuation model, which requires the Company to make assumptions about the fair value of the underlying common stock on the date of grant. The grant date fair value of RSUs and RSAs is estimated to be equal to the closing price of the Company’s common stock on the date of grant. In the event that stock-based awards are granted in contemplation of or shortly before a planned release of material non-public information, and such information is expected to result in a material increase in the share price of the Company’s common stock, the Company may consider whether an adjustment to the observable market price is required when estimating the grant date fair value. Debt Issuance Costs Certain costs associated with the issuance of debt instruments are capitalized and amortized over the term of the respective debt instrument using the effective interest method through the maturity date of the related debt instrument and are recognized as a non-cash component of interest expense. The carrying value of the Company’s debt instruments are presented net of debt issuance costs. Equity Issuance Costs Equity issuance costs represent costs paid to third parties to secure equity financing and generally consist of sales agent commissions, incremental legal fees and other professional fees. Equity issuance costs are capitalized as other assets until the associated equity financing is consummated. Upon consummation of an equity financing, these costs are recorded as a reduction of additional paid-in capital. In the event that a planned equity financing is abandoned, any capitalized equity issuance costs are immediately expensed to operating expenses in the consolidated statement of operations. Income Taxes Income taxes are recorded in accordance with ASC Topic 740, Income Taxes (“ASC 740”) which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance against deferred tax assets is recorded if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company accounts for uncertain tax positions using a more-likely-than-not threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors, including, but not limited to, changes in the law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject 112 Table of Contents to audit, new audit activity and changes in facts or circumstances related to a tax position. The Company recognizes any material interest and penalties related to unrecognized tax benefits in income tax expense. Comprehensive Loss The Company does not have items of other comprehensive loss for the years ended December 31, 2023 and 2022, and therefore does not present a consolidated statement of comprehensive loss. The Company’s comprehensive loss equals its net loss. Basic and Diluted Net Loss per Common Share Basic net loss per share is calculated based upon the weighted-average number of common shares outstanding during the period, excluding outstanding stock options and RSUs that have been issued but are not yet vested. Diluted net loss per share is calculated based upon the weighted-average number of common shares outstanding during the period plus the dilutive impact of weighted-average common equivalent shares outstanding during the period. The potentially dilutive shares of common stock resulting from the assumed exercise of outstanding stock options and the assumed vesting of RSUs are determined under the treasury stock method. Concentration of Credit Risk and Off-Balance Sheet Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. Cash and cash equivalents are primarily held with three reputable financial institutions in the United States. At times, such deposits may be in excess of insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. Recent Accounting Pronouncements In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU No. 2023-09”), which enhances the transparency and decision usefulness of income tax disclosures primarily related to rate reconciliation and income taxes paid. The provisions of ASU No. 2023-09 are effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and are required to be applied on a prospective basis. The Company is currently evaluating the impact that this standard will have on its consolidated financial statements. Other 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 consolidated financial statements upon adoption. Subsequent Events The Company has evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. Other than as described in these financial statements, the Company did not identify any subsequent events that would have required adjustment to or disclosure in the 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 preclinical 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 As of December 31, 2023, the Company is eligible to receive up to $ 515.0 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. 113 Table of Contents As of December 31, 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 606. 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 was 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 was 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 each potential development and regulatory milestone payment under this agreement was zero at 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. Management re-evaluates the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, adjusts the transaction price as necessary. During the year ended December 31, 2023, the overall transaction price was adjusted to include $ 5.0 million in variable consideration that was previously excluded based on the Company’s evaluation of the variable constraint associated with the variable payment. 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. The Company believes this input-based method to recognize revenue best reflects the transfer of value to Jazz. The remaining deferred revenue as of December 31, 2023 is expected to be recognized as revenue over a term of approximately 2.3 years. Recognition of Revenue The Company uses the cost-to-cost input method, which best depicts the research services performed for the customer, to measure the revenue recognized under the Collaboration Agreement. Significant judgements used in the cost-to-cost method include estimated costs for research services and assumptions about the timing of when those costs are expected to be incurred. Differences in these estimates and assumptions can have a significant impact on the measurement and timing of when revenue under the Collaboration Agreement is recognized. For the years ended December 31, 2023 and 2022, the Company recognized $ 19.9 million and $ 16.4 million of revenue related to the Collaboration Agreement, respectively. The measurement of revenue recognized based on the cost-to-cost input method and the timing of payments received under the Collaboration Agreement directly impact the amounts reported as contract liabilities in the Company’s consolidated balance sheets as of December 31, 2023 and 2022. During the year ended December 31, 2023, the total revenue recognized included a cumulative catch-up of revenue of $ 4.2 million related to a variable payment that was previously excluded from the overall transaction price based on the Company’s evaluation of the variable constraint associated with the variable payment. The cumulative catch-up of revenue was recognized based on the cost-to-cost input method discussed above. Costs associated with the Collaboration Agreement are recorded in research and development expense in the consolidated statements of operations, and were $ 8.6 million and $ 9.1 million during the years ended December 31, 2023 and 2022, respectively. Revenue from the reimbursement of costs for research activities were recognized during each of the respective periods in amounts equal to the costs incurred. 114 Table of Contents The following table presents the activity in the Company’s contract liabilities during the year ended December 31, 2023: Beginning of Period Balance Additions Reductions End of Period Balance (in thousands) Contract liabilities: Deferred revenue $ 7,660 $ 5,000 $ ( 11,320 ) $ 1,340 Total contract liabilities $ 7,660 $ 5,000 $ ( 11,320 ) $ 1,340 The following table presents the activity in the Company’s contract liabilities during the year ended December 31, 2022: Beginning of Period Balance Additions Reductions End of Period Balance (in thousands) Contract liabilities: Deferred revenue $ — $ 15,000 $ ( 7,340 ) $ 7,660 Total contract liabilities $ — $ 15,000 $ ( 7,340 ) $ 7,660 Unbilled receivables related to the Collaboration Agreement of $ 0.4 million and $ 4.1 million is included in other receivables in the accompanying consolidated balance sheets as of December 31, 2023 and 2022, respectively. Receivables related to the Collaboration Agreement of $ 0.9 million and $ 2.8 million are included in other receivables in the accompanying consolidated balance sheets as of December 31, 2023 and 2022, respectively. Revenue recognized during the year ended December 31, 2023 includes $ 6.7 million of revenue that was included in deferred revenue as of December 31, 2022. No revenue recognized during the year ended December 31, 2022 was included in deferred revenue as of December 31, 2021. As of December 31, 2023, the Company has not received any royalty payments under the Collaboration Agreement. 4. Financial Instruments and Fair Value Measurements The Company’s assets that are required to be 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 consolidated balance sheets as of December 31, 2023 and 2022 . The Company’s liabilities that were required to be measured at fair value on a recurring basis consist of a success payment liability pursuant to the Loan Agreement with PWB (see Note 7 , Term Loan ) as of December 31, 2022. The Company did not have any liabilities that are required to be measured at fair value on a recurring basis as of December 31, 2023. The carrying amounts reflected in the 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 December 31, 2023 were as follows: Level 1 Level 2 Level 3 Total (in thousands) Assets: Money market funds $ 149,294 $ — $ — $ 149,294 Total assets $ 149,294 $ — $ — $ 149,294 Assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 were as follows: Level 1 Level 2 Level 3 Total (in thousands) Assets: Money market funds $ 128,812 $ — $ — $ 128,812 Total assets $ 128,812 $ — $ — $ 128,812 Liabilities Success payment liability $ — $ — $ 570 $ 570 Total liabilities $ — $ — $ 570 $ 570 115 Table of Contents The success payment liability was included within accrued expenses and other current liabilities in the accompanying consolidated balance sheet as of December 31, 2022. There were no changes in valuation techniques during the year ended December 31, 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 years ended December 31, 2023 and 2022 based on Level 3 inputs (in thousands): Balance at December 31, 2021 $ — Additions 1,125 Change in fair value ( 555 ) Balance at December 31, 2022 570 Change in fair value 1,030 Payment at Success Fee Event ( 1,600 ) Balance at December 31, 2023 $ — The success payment liability is stated at fair value and is considered Level 3 because its fair value measurement is based, in part, on significant inputs not observed in the market. Upon completion of the Success Fee Event, the Company paid the total $ 1.6 million success payment and removed the corresponding success payment liability. The Company remeasured the success payment liability at each reporting date and immediately prior to the Success Fee Event. Changes in the fair value of the success payment liability are included in other (expense) income, net in the accompanying consolidated statements of operations. The fair value of the success payment liability was determined using a probability weighted expected return method, in which the probability and timing of potential future events was considered in order to estimate the fair value of the success payment liability as of each valuation date. Management determined the fair value of the success payment liability immediately prior to the completion of the Success Fee Event and as of December 31, 2022 using the following significant unobservable inputs: Immediately prior to completion of the Success Fee Event As of December 31, 2022 Probability of Success Fee Event 100 % 75 % Expected term (in years) 0.00 0.33 - 0.75 Discount rate — % 7.1 % 5. Property and Equipment, Net Property and equipment, net was comprised as follows: December 31, 2023 2022 (in thousands) Leasehold improvements $ 7,971 $ 7,971 Laboratory equipment 2,339 1,635 Computer equipment 512 418 Furniture and fixtures 306 264 Construction in progress — 106 Total property and equipment, gross 11,128 10,394 Less: accumulated depreciation ( 3,170 ) ( 1,406 ) Total property and equipment, net $ 7,958 $ 8,988 116 Table of Contents 6. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were comprised as follows: December 31, 2023 2022 (in thousands) Employee compensation and benefits $ 3,627 $ 3,135 Manufacturing 2,772 6,674 Contract research 1,049 2,990 Professional fees 655 613 Accrued interest 310 — Success payment liability — 570 Other 447 170 Total accrued expenses and other current liabilities $ 8,860 $ 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 FDA of two IND submissions on or before March 31, 2023. The Company had not drawn down any of the Term Loans as of December 31, 2022 and had no outstanding borrowings under the Loan Agreement. During the year ended December 31, 2023, the Company drew down the entire $ 40.0 million available through the Term Loans. The outstanding notes payable balance under the Term Loans consists of the following: December 31, 2023 (in thousands) Note payable $ 40,000 Unamortized debt discount and issuance costs ( 677 ) Net carrying amount of note payable 39,323 Less: current portion of note payable ( 6,667 ) Note payable, net, less current portion $ 32,656 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 $ 2.9 million during the year ended December 31, 2023. No interest expense related to the Loan Agreement was incurred during the year ended December 31, 2022. 117 Table of Contents The following table presents the total principal payments scheduled to become due during each of the years ended December 31: Principal Payments (in thousands) 2024 $ 6,667 2025 20,000 2026 13,333 $ 40,000 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 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 Company determined that the Success Fee constituted a freestanding financial instrument that was required to be accounted for as a liability in connection with ASC Topic 815, Derivatives and Hedging . The Company determined the fair value of the Success Fee upon the closing date of the Loan Agreement and then marked to market the fair value of the Success Fee as of December 31, 2022. 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 $ 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 its 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 unrestricted cash in accounts with PWB, which is included within restricted cash and cash equivalents, net of current portion on the Company’s consolidated balance sheet as of December 31, 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. 8. Common and Preferred Stock Common Stock The Company is authorized to issue 200,000,000 shares of common stock. Common stockholders are entitled to dividends if and when declared by the Company’s board of directors. As of December 31, 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 Partners”), formerly known as SVB Securities LLC, pursuant to which the Company is entitled to offer and sell shares of its common stock (the “ATM Offering”). The Sales Agreement provides that Leerink Partners 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. In accordance with the terms of the Sales Agreement and a sales agreement prospectus included in the registration statement on Form S-3 that the Company filed with the SEC on May 10, 2022, which was declared effective on May 20, 2022, the Company was initially entitled to offer and sell shares of its common stock having an aggregate offering price of up to $ 50.0 million in the ATM Offering. During the year ended December 31, 2023, the Company sold an aggregate of 7,431,981 shares under the ATM Offering at an average price of $ 2.56 per share for net proceeds of $ 18.3 million after deducting sales commissions and offering 118 Table of Contents expenses. During the year ended December 31, 2022, the Company sold an aggregate of 3,827,567 shares under the ATM Offering at an average price of $ 4.36 per share for net proceeds of $ 15.7 million after deducting sales commissions and offering expenses. On February 9, 2024, the Company filed a prospectus supplement (the “Prospectus Supplement”) under its shelf registration statement for the offer and sale of shares of its common stock having an aggregate offering price of up to $ 25.0 million. Following the Company’s filing of the Prospectus Supplement, the Company is entitled to offer and sell shares of its common stock with an offering price of up to $ 75.0 million pursuant to the Sales Agreement. During the period beginning January 1, 2024 and ending March 1, 2024, the Company sold 3,629,060 shares of its common stock under the ATM Offering, for gross proceeds of $ 17.7 million before deducting sales commissions and issuance costs. The Company had reserved shares of common stock for issuance as follows: As of December 31, 2023 2022 Shares reserved for exercises of outstanding stock options 5,700,070 5,244,121 Shares reserved for vesting of restricted stock units 361,500 322,725 Shares reserved for exercises of warrants 58,904 58,904 Shares reserved for issuance under the 2021 Employee Stock Purchase Plan 507,113 244,000 Shares reserved for future issuance under the 2021 Stock Incentive Plan 1,911,660 938,587 Total shares reserved for future issuance 8,539,247 6,808,337 Preferred Stock The Company is authorized to issue 5,000,000 shares of undesignated preferred stock in one or more series. As of December 31, 2023, no shares of preferred stock were issued or outstanding. 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, RSAs, 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 (the “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 us that may become issuable under the 2021 Stock Incentive 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 ending December 31, 2022 and continuing until, and including, the fiscal year ended 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. As of December 31, 2023, a total of 2,956,150 additional shares have been added to the total shares authorized for issuance under the 2021 Plan in accordance with these terms. As of December 31, 2023, there were 1,911,660 shares available for future issuance under the 2021 Plan. 119 Table of Contents 2021 Employee Stock Purchase Plan The 2021 ESPP permits eligible employees to purchase shares of the Company’s common stock at a discount and consists of consecutive six-month offering periods, each containing a single six-month purchase period. On the first day of each offering period, each employee who is enrolled in the 2021 ESPP will automatically receive an option to purchase up to a whole number of shares of the Company’s common stock. The purchase price of each of the shares purchased, in a given purchase period, will be equal to 85 % of the lesser of the closing price of a share of the Company’s common stock on (i) the first day of the offering period, or (ii) the last day of the offering period. During the year ended December 31, 2023, 52,037 shares of the Company’s common stock were purchased by participants of the 2021 ESPP for total proceeds of $ 0.1 million. No shares of the Company’s common stock were purchased by participants of the 2021 ESPP during year ended December 31, 2022. Stock-Based Compensation Expense Total stock-based compensation expense recognized in the consolidated statements of operations was as follows: Year Ended December 31, 2023 2022 (in thousands) Research and development $ 4,003 $ 3,410 General and administrative 4,005 3,990 Total stock-based compensation $ 8,008 $ 7,400 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 shares are recorded in stockholders’ deficit as they vest. The following table summarizes RSA activity during the year ended December 31, 2023: Shares/Units Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2022 81,343 $ 1.38 Granted — $ — Vested ( 81,343 ) $ 1.38 Forfeited — $ — Unvested at December 31, 2023 — $ — The aggregate fair value of RSAs that vested during the years ended December 31, 2023 and 2022, based upon the fair value of the stock underlying the RSAs on the day of vesting, was $ 0.2 million and $ 1.2 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 year ended December 31, 2023: Shares/Units Weighted-Average Grant Date Fair Value Per Share Unvested at December 31, 2022 322,725 $ 4.32 Granted 150,000 $ 2.45 Vested ( 105,000 ) $ 2.96 Forfeited ( 6,225 ) $ 4.97 Unvested at December 31, 2023 361,500 $ 3.92 120 Table of Contents As of December 31, 2023, there was unrecognized stock-based compensation expense related to unvested RSUs of $ 0.6 million, which the Company expects to recognize over a weighted-average period of approximately 0.63 years. The aggregate fair value of RSUs that vested during the year ended December 31, 2023, based upon the fair value of the stock underlying the RSUs on the day of vesting was $ 0.2 million. No RSUs vested during the year ended December 31, 2022. Stock Option Activity During the year ended December 31, 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 would have vested only upon achievement of specified performance targets related to certain business objectives prior to December 31, 2023. These performance targets were not achieved, and accordingly these awards expired without vesting on December 31, 2023. No stock-based compensation expense has been recognized during the year ended December 31, 2023 or 2022 based on the Company’s assessment about the probability that the performance targets would be achieved prior to expiration. The fair value of stock options granted during the years ended December 31, 2023 and 2022 was calculated on the date of grant using the following weighted-average assumptions: Year Ended December 31, 2023 2022 Risk-free interest rate 3.9 % 2.3 % Expected term (in years) 6.0 6.0 Expected annual dividend yield — % — % Expected volatility 82.7 % 77.0 % The valuation assumptions were determined as follows: • Risk-free interest rate: The yield on zero-coupon U.S. Treasury securities for a period that was commensurate with the expected term of the awards. • Expected term (in years): The expected term of the awards represents the period of time that the awards were expected to be outstanding. The Company uses the simplified method to estimate the expected term due to a lack of sufficient historical exercise data to provide a reasonable basis on which to estimate the expected term. Under this method, the expected term equals the average of the vesting term and the original contractual term of the option. • Expected annual dividend yield: The estimated dividend yield was zero because the Company has no history of paying dividends, and does not intend to do so in the foreseeable future. • Expected volatility: The expected term of stock options granted by the Company is generally longer than the trading history of the Company’s common stock since the IPO on April 30, 2021. Accordingly, the Company estimated the expected volatility based on the historical volatility of a group of publicly-traded companies with similar characteristics to the Company, including stage of product development and therapeutic focus within the life sciences industry. The historical volatility of these companies was calculated over a period of time commensurate with the expected term of the stock option. Using the Black-Scholes option pricing model, the weighted-average grant date fair value of stock options granted during the years ended December 31, 2023 and 2022 was $ 1.56 and $ 5.98 per share, respectively. 121 Table of Contents The following table summarizes stock option activity during the year ended December 31, 2023: Options Outstanding Number of Options Weighted-Average Exercise Price per Share Weighted-Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in millions) Outstanding at December 31, 2022 5,244,121 $ 7.86 Granted 1,618,780 $ 2.16 Exercised ( 2,956 ) $ 1.98 Cancelled ( 1,159,875 ) $ 4.68 Outstanding, December 31, 2023 5,700,070 $ 6.89 7.81 $ 3.6 Exercisable at December 31, 2023 3,169,212 $ 7.60 7.43 $ 1.5 The aggregate intrinsic fair value of stock options exercised during the year ended December 31, 2023 was nominal . The aggregate intrinsic fair value of stock options exercised during the year ended December 31, 2022 was $ 0.4 million. As of December 31, 2023, there was unrecognized stock-based compensation expense related to unvested stock options of $ 9.9 million, which the Company expects to recognize over a weighted-average period of approximately 2.0 years. 10. Commitments and Contingencies Leases The Company’s leases are as follows: • An April 2019 operating lease for approximately 9,949 square feet of office and laboratory space which commenced in April 2019 and terminates in March 2024. The lease is subject to fixed-rate rent escalations and provided for a term extension option, which was not reasonably certain of exercise. In May 2022, the Company entered into a sublease agreement with Crossbow Therapeutics, Inc. (“Crossbow”), to sublease the entirety of this space. The total rent due to the Company for the subleased premises over the term of the sublease is approximately $ 2.1 million, which is greater than the annual rent paid by the Company to the landlord for the leased premises over the same term. Rent expense associated with the April 2019 operating lease is recognized net of the lease income generated from the sublease agreement. Lease income is allocated to either research and development expense or general and administrative expense in the same manner that the associated rent expense is allocated. 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. • A March 2021 short-term lease for approximately 7,500 square feet of office and laboratory space which commenced in April 2021 and terminated in May 2022. The Company did not recognize an operating lease right of use asset or a lease liability upon lease commencement. Rent expense for the short-term lease was recognized as incurred. • A June 2021 operating lease for approximately 25,778 square feet of office and laboratory space, which commenced in May 2022 and terminates in May 2030. The lease is subject to fixed-rate rent escalations and provided for $ 5.7 million in tenant improvements, which the Company fully utilized, and a term extension option, which was not reasonably certain of exercise. The Company provided the landlord with a security deposit in the form of a letter of credit in the amount of $ 1.0 million upon signing, which is included in restricted cash and cash equivalents, net of current portion as of December 31, 2023 and 2022. The following table summarizes operating lease costs: Year Ended December 31, 2023 2022 (in thousands) Operating lease costs $ 2,442 $ 2,537 Variable lease costs 1,210 837 Short-term lease costs — 228 Sublease income ( 1,562 ) ( 834 ) Total $ 2,090 $ 2,768 122 Table of Contents Cash paid for amounts included in the measurement of lease liabilities were $ 3.0 million and $ 2.1 million during the years ended December 31, 2023 and 2022, respectively. The following table summarizes the lease term and discount rate for operating leases: As of December 31, 2023 2022 Weighted-average remaining lease term (years) 6.3 7.0 Weighted-average discount rate 8.0 % 8.1 % As of December 31, 2023, the future minimum lease payments due under the Company’s leases for each of the next five years ended December 31, and thereafter are as follows: Operating Leases (in thousands) 2024 $ 2,505 2025 2,337 2026 2,403 2027 2,471 2028 2,542 Thereafter 3,716 Total future minimum lease payments 15,974 Less: imputed interest ( 3,374 ) Total lease liability $ 12,600 License Agreements Harpoon License In March 2018, the Company entered into a Patent Assignment and License Agreement (the “Harpoon Agreement”) with Harpoon Therapeutics, Inc. (“Harpoon”), a clinical-stage immune-oncology company developing a novel class of T-cell engagers to fight cancer and other diseases. Under the terms of the Harpoon Agreement, Harpoon granted the Company a license to use its intellectual property, solely to make, have made, use, sell, offer for sale and import covered products in the licensed field and Harpoon sold, assigned and transferred other specific patents to the Company (the “Harpoon License”). On October 19, 2018, the Company and Harpoon entered into the First Amended and Restated Assignment and License Agreement which amended certain terms of the original agreement, but did not change the terms of the license to the Company, patent assignments between the parties or payments due to Harpoon. Further, on December 20, 2019, the companies entered into the Second Amended and Restated Assignment and License Agreement, which also amended certain terms of the original agreement to expand the licenses and assignments for specific patents granted to the Company or by the Company to Harpoon. In exchange for these additional terms, Harpoon agreed to reimburse up to $ 75,000 of the Company’s legal costs. Additionally, the Company agreed to pay to Harpoon royalties on future net sales and pay minimum annual royalties of $ 250,000 upon achievement of its first commercial sale. Under the terms of the Harpoon License, the Company paid an upfront fee of $ 500,000 in 2018 and is obligated to reimburse Harpoon for certain legal costs incurred by Harpoon. In addition, the Company is obligated to pay Harpoon royalties based on future net sales and has agreed to pay a minimum annual royalty payment at an amount in the low hundreds of thousands of dollars upon achievement of its first commercial sale. In 2018, the Company recorded the upfront fee as research and development expense upon payment as the intellectual property was acquired prior to regulatory approval and does not have an alternative future use. The royalty payments are contingent upon sales and, as such, the royalty payments made to Harpoon will be considered probable and estimable and treated as cost of sales when incurred. Accordingly, at the commencement of sales, the Company will account for the royalty payments as cost of sales equal to the greater of a percentage in the low-single digits of the net sales of the patent-covered products or a minimum annual royalty payment at an amount in the low hundreds of thousands of dollars. Any legal fees incurred in connection with the Harpoon Agreement will be expensed as incurred. The Harpoon License will expire on a country-by-country basis upon the expiration of the last to expire patent or patent application included in the licensed patents within the applicable country. The Company has the right to terminate the Harpoon License upon 30 days prior written notice to Harpoon, and either party may terminate for a material breach if such breach is not cured within a specified number of days. 123 Table of Contents Adimab 2018 License In March 2018, the Company entered into a Development and Option Agreement (the “Adimab Agreement”) with Adimab LLC (“Adimab”), a company specializing in antibody discovery, humanization and optimization. Under the terms of the Adimab Agreement, Adimab granted the Company the rights to initiate certain research initiatives on a specified number of targets. Adimab also granted to the Company a license to certain Adimab core technologies, antibodies and products applicable to certain targets (“Adimab License”). In August 2020, the Company and Adimab entered into Amendment One to the Development and Option Agreement, which extended the period of time for the Company to evaluate candidate antibodies in advance of electing to exercise the option to acquire exclusive rights to licensed antibodies (the “Evaluation Term”), but did not otherwise change the terms of the Adimab License. The Evaluation Term was then further extended in December 2020 by entering into Amendment Two to the Development and Option Agreement, through delivery of a non-refundable payment of $ 100,000 by the Company to Adimab, which was creditable toward the option fee. The non-refundable payment was recorded immediately as research and development expense in the consolidated statements of operations. In July 2021, the Company and Adimab entered into the First Amended and Restated Development and Option Agreement to extend the target selection time period and to allow for the Company to add additional antibody discovery programs to be covered under the agreement, but otherwise retaining all other material provisions of the Adimab License. Under the terms of the Adimab License, the Company must pay both an upfront fee and final fee of $ 200,000 for all research programs. The Company must also pay Adimab milestone fees with respect to each research program ranging from $ 150,000 to $ 200,000 based on the achievement of technical milestones by Adimab for the applicable research program. In order to exercise any options in the Adimab Agreement, the Company must pay a $ 500,000 fee for each target option exercised. For each target option exercised, the Company is also obligated to pay certain milestones ranging from $ 1.0 million to $ 4.0 million for certain clinical and commercialization achievements. Additionally, for licensed products sold during the applicable royalty term, the Company must pay Adimab royalties at percentages in the low-to-mid single digits. The Adimab Agreement will expire upon the expiration of any options or if an option is exercised, on a country-by-country and licensed product-by-licensed product basis on the expiration of the last royalty term for a licensed product in the particular country. As of December 31, 2023, the Company has not exercised any options and has not made any payments for clinical or sales-based milestones or royalties pursuant to the Adimab Agreement. Adimab 2022 Collaboration In November 2022, the Company entered into a Collaboration Agreement (the “Adimab Collaboration Agreement”) with Adimab. Under the terms of the Adimab Collaboration Agreement, Adimab has agreed to provide the Company with services to help discover, generate, optimize and/or engineer specified proteins. In addition, Adimab will provide the Company with a license to certain Adimab core technologies, patents and products applicable to certain targets (“Adimab Collaboration License”), separate from those provided in the 2018 Adimab Agreement. Under the terms of the Adimab Collaboration Agreement, the Company must pay Adimab milestone fees with respect to each research program ranging from $ 500,000 to $ 1.5 million based on the achievement of certain clinical milestones by the Company. The Adimab Collaboration Agreement provides the Company with an option to obtain any development and commercialization licenses from Adimab used in products. To exercise an option, the Company must pay a $ 500,000 fee for each product option exercised. For each product sold, the Company is also obligated to pay certain milestones ranging from $ 1.0 million to $ 2.0 million based on the achievement of the first commercial sale in certain countries. Additionally, for licensed products sold during the applicable royalty term, the Company must pay Adimab royalties at percentages in the low-to-mid single digits. The Adimab Collaboration Agreement will expire upon the expiration of any options or if an option is exercised, on a country-by-country and licensed product-by-licensed product basis on the expiration of the last royalty term for a licensed product in the particular country. As of December 31, 2023, the Company has not exercised any options and has not made any payments for clinical or sales-based milestones or royalties pursuant to the Adimab Collaboration Agreement. 11. Income Taxes During the years ended December 31, 2023 and 2022, the Company recorded no current or deferred income tax expenses or benefits as the Company has incurred losses since inception and has provided a full valuation allowance against its deferred tax assets. 124 Table of Contents A reconciliation of the expected income tax expense (benefit) computed using the federal statutory income tax rate to the Company’s effective income tax rate is as follows: Year Ended December 31, 2023 2022 Income tax computed at federal statutory rate 21.0 % 21.0 % State taxes 9.4 8.3 Change in valuation allowance ( 12.4 ) ( 30.4 ) R&D credit carryovers 4.5 2.4 Stock-based compensation ( 3.0 ) ( 1.5 ) Permanent differences ( 0.6 ) 0.2 Section 382 net operating loss adjustments ( 20.2 ) 0.0 Other 1.3 0.0 Effective income tax rate 0.0 % 0.0 % The Company’s deferred tax assets and liabilities consist of the following: As of December 31, 2023 2022 (in thousands) Deferred tax assets: Net operating losses $ 23,873 $ 26,234 Tax credit carryforwards 3,168 3,819 Lease liability 3,645 4,180 Other capitalized costs—net of amortization 95 103 Reserves and accruals 1,295 950 Stock-based compensation 2,021 1,448 Capitalized research and experimental expenditures—net of amortization 16,162 9,474 Deferred tax assets 50,259 — 46,208 Valuation allowance ( 47,058 ) ( 42,417 ) Deferred tax assets recognized 3,201 — 3,791 Deferred tax liabilities: Right of use asset ( 1,993 ) ( 2,358 ) Fixed assets and depreciation ( 1,208 ) ( 1,433 ) Deferred tax liabilities ( 3,201 ) ( 3,791 ) Net deferred taxes $ — $ — The Tax Cuts and Jobs Act (“TCJA”) requires taxpayers to capitalize and amortize research and experimental (“R&E”) expenditures under Section 174 for tax years beginning after December 31, 2021. This rule became effective for the Company during 2022 and resulted in the capitalization of R&E expenditures of $ 27.9 million and $ 36.1 million during the years ended December 31, 2023 and 2022, respectively. The Company amortizes these costs for tax purposes over 5 years for research and development (“R&D”) performed in the U.S. and over 15 years for R&D performed outside the U.S. The Company evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets as of December 31, 2023 and 2022. Management considered the Company’s cumulative net losses and concluded as of December 31, 2023 and 2022, that it was more likely than not that the Company would not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance was established against the net deferred tax assets as of December 31, 2023 and 2022. The valuation allowance increased by $ 4.6 million during the year ended December 31, 2023 primarily due to an increase in deferred tax assets related to capitalized R&E expenditures, and as the result of operating losses generated with no corresponding financial statement benefit. These increases were offset by a decrease in deferred tax assets as the result of the Company’s Section 382 study that was completed for the period of January 22, 2018, through December 31, 2022, which resulted in limitations being identified on historical net operating losses and research and development tax credits. The valuation allowance increased by $ 16.3 million during the year ended December 31, 2022. primarily due to the change in the 125 Table of Contents tax regulation described above resulting in the capitalization of R&E expenditures that previously were fully deductible in the year incurred, and as a result of operating losses generated with no corresponding financial statement benefit. The Company has incurred net operating losses since inception. As of December 31, 2023 and 2022, the Company had federal net operating loss carryforwards of $ 96.6 million and $ 92.1 million, respectively, available to reduce future federal taxable income. The carryforwards generated from losses incurred prior to January 1, 2018 will expire in 2037. The carryforwards generated from losses incurred after December 31, 2017 do not expire. As of December 31, 2023, federal net operating loss carryforwards includes $ 96.5 million of carryforwards that do not expire. The TCJA enacted on December 22, 2017 limits a taxpayer’s ability to utilize a net operating loss deduction in a year to 80% taxable income for federal net operating losses arising in tax years beginning after December 31, 2017. As of December 31, 2023 and 2022, the Company had state net operating loss carryforwards of $ 44.9 million and $ 86.1 million, respectively, available to reduce future state taxable income, which expire at various dates beginning in 2037. As of December 31, 2023 and 2022, the Company had federal research and development tax credit carryforwards of $ 2.3 million and $ 2.6 million, respectively, available to reduce future federal tax liabilities, which expire at various dates beginning in 2042. The Company also had state research and development tax credit carryforwards as of December 31, 2023 and 2022 of $ 0.9 million and $ 1.2 million, respectively, available to reduce future state tax liabilities, which expire at various dates beginning in 2037. Utilization of the Company’s net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. The Company completed a Section 382 study for the period of January 22, 2018, through December 31, 2022 and identified three ownership changes that occurred on June 10, 2019, August 2, 2019, and August 31, 2022 for Section 382 purposes. As the Company experienced these ownership changes, all pre-change net operating loss and research and development tax credit carryforwards are subject to limitation. Due to the unlimited carryover period for net operating losses generated after December 31, 2017, none of the Company’s federal net operating losses will expire unused. A portion of the Company’s state net operating losses, and federal and state research and development tax credits are expected to expire unused. The Company has analyzed the impact of these limitations on its attributes and included the impact of these limitations in its deferred tax assets as of December 31, 2023. The Company has not recorded any reserves for uncertain tax positions as of December 31, 2023 and 2022. The Company has conducted a study of research and development tax credit for tax years 2018 through 2020. The amounts of federal and state research and development tax credit carryforwards presented above have reflected the results from the study. A full valuation allowance has been provided against the Company’s research and development credits. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The statute of limitations for assessment by the Internal Revenue Service, or IRS, and state tax authorities is closed for tax years prior to 2020, although carryforward attributes that were generated prior to 2020 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. 12. Related Parties In May 2022, the Company entered into a sublease agreement with 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 (see Note 10, Commitments and Contingencies ). The Company received cash payments under its sublease of $ 1.6 million and $ 0.8 million during the years ended December 31, 2023 and 2022, respectively. In addition, the Company received $ 0.2 million from Crossbow in June 2022 as a security deposit. The security deposit is included within accrued expenses and other current liabilities in the accompanying consolidated balance sheet as of December 31, 2023 and is included within other liabilities in the accompanying consolidated balance sheet as of December 31, 2022. 126 Table of Contents 13. Defined Contribution Benefit Plan The Company sponsors a defined contribution benefit plan under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan covers all employees who meet defined minimum age and service requirements, and allows participants to contribute a portion of their annual compensation, subject to statutory limitations. The Company matches 50 % of each participant’s contribution up to a maximum of 6 % of such participant’s eligible compensation paid in a calendar year. During each of the years ended December 31, 2023 and 2022, the Company recognized expense of $ 0.2 million related to matching contributions. 14. 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, 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: December 31, 2023 2022 Outstanding stock options 5,700,070 5,244,121 Unvested RSUs 361,500 322,725 Warrants to purchase common stock 58,904 58,904 Common stock to be issued under the 2021 ESPP 22,611 29,332 Unvested RSAs — 81,343 Total 6,143,085 5,736,425 127 Table of Contents EXHIBIT INDEX Exhibit No. Description of Exhibit 3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2021, File No. 001-40366). 3.2 Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 27, 2023). 4.1 Specimen Stock Certificate evidencing the shares of common stock of the Registrant (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 4.2 Amended and Restated Investors’ Rights Agreement, dated as of December 23, 2020, by and among the Registrant and the other parties thereto (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 4.3 Description of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (incorporated by reference to Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 24, 2022). 10.1 2017 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.2 Form of Stock Option Agreement under 2017 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.3 Form of Restricted Stock Agreement under 2017 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.4 2021 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.5 Form of Stock Option Agreement under 2021 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.6 Form of Restricted Stock Agreement under 2021 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.7 Form of Restricted Stock Unit Agreement under 2021 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.8 2021 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.9 Form of Indemnification Agreement between the Registrant and each of its Executive Officers and Directors (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 8, 2021, File No. 333-255132). 10.10# Second Amended and Restated Assignment and License Agreement dated as of December 20, 2019, by and between the Registrant and Harpoon Therapeutics, Inc (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 8, 2021, File No. 333-255132). 10.11 Amended and Restated Royalty Transfer Agreement dated as of August 2, 2019, by and among MPM Oncology Impact Fund Charitable Foundation, Inc. and UBS Optimus Foundation (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 8, 2021, File No. 333-255132). 10.12 Lease Agreement dated as of June 1, 2021, by and between the Registrant and ARE-MA Region No. 75, LLC. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 2, 2021, File No. 001-40366). 10.13+ Employment Agreement dated as of April 23, 2021, by and between the Registrant and Daniel J. Hicklin, Ph.D. (incorporated by reference to Exhibit 10.15 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 128 Table of Contents 10.14+ Employment Agreement dated as of April 23, 2021, by and between the Registrant and Randi Isaacs M.D. (incorporated by reference to Exhibit 10.16 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.15+ Employment Agreement dated as of April 23, 2021, by and between the Registrant and Cynthia Seidel-Dugan, Ph.D. (incorporated by reference to Exhibit 10.17 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.16+ Employment Agreement dated as of April 23, 2021, by and between the Registrant and Ellen Lubman, M.B.A. (incorporated by reference to Exhibit 10.19 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.17+ Employment Agreement dated as of April 23, 2021, by and between the Registrant and Timothy W. Trost (incorporated by reference to Exhibit 10.20 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, File No. 333-255132). 10.18+ Employment Agreement dated as of April 30, 2021 by and between the Registrant and Chulani Karunatilake (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 10, 2021, File No. 001-40366). 10.19# Collaboration and License Agreement, dated as of April 6, 2022, by and between the Registrant and Jazz Pharmaceuticals Ireland Limited (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on May 10, 2022). 10.20 Amended and Restated Loan and Security Agreement dated as of April 12, 2022, by and between the Registrant and Pacific Western Bank (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 15, 2022). 1 0.21 First Amendment, dated as of March 16, 2023, to Amended and Restated Loan and Security Agreement dated as of April 12, 2022, by and between the Registrant and Pacific Western Bank (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 22, 2023). 10.2 2 * F orm of Restricted Stock Unit Agreement under 202 1 Stock Incentive Plan 21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on April 26, 2021, Registration No. 333-255132). 23.1* Consent of Ernst & Young LLP, Independent Registered Accounting Firm. 31.1* Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1† Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 9 7* D od d-Frank Compensation Reco very P olicy 101.INS* Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 104* Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) * Filed herewith. † The certifications attached as Exhibit 32.1 that accompany this Annual Report, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Werewolf Therapeutics, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report, irrespective of any general incorporation language contained in such filing. + Indicates management contract. # Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because such information is not material and is the type of information that the registrant treats as private or confidential. 129 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WEREWOLF THERAPEUTICS, INC. Date: March 7, 2024 By: /s/ Daniel J. Hicklin Daniel J. Hicklin, Ph.D. President and Chief Executive Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Daniel J. Hicklin President, Chief Executive Officer and Director (Principal Executive Officer) March 7, 2024 Daniel J. Hicklin, Ph.D. /s/ Timothy W. Trost Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) March 7, 2024 Timothy W. Trost /s/ Luke Evnin Chair of the Board of Directors March 7, 2024 Luke Evnin, Ph.D. /s/ Michael B. Atkins Director March 7, 2024 Michael B. Atkins, M.D. /s/ Meeta Chatterjee Director March 7, 2024 Meeta Chatterjee, Ph.D. /s/ Derek DiRocco Director March 7, 2024 Derek DiRocco, Ph.D. /s/ Alon Lazarus Director March 7, 2024 Alon Lazarus, Ph.D. /s/ Briggs W. Morrison Director March 7, 2024 Briggs W. Morrison, M.D. /s/ Michael A. Sherman Director March 7, 2024 Michael A. Sherman, M.B.A. 130