What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 112 added, 132 removed, 282 unchanged (46% of the section changed)

16 unchanged sentences

In June 2024, we reported updated interim data from the monotherapy dose-escalation arms of the Phase 1/1b clinical trial, selected a recommended dose for expansion and initiated monotherapy dose expansion arms, and reported initial data from the combination dose escalation cohorts of the Phase 1/1b clinical trial.

We continue to enroll patients in the monotherapy and combination expansion arms of the Phase 1/1b clinical trial and expect to report initial efficacy data from the monotherapy expansion arms in the first half of 2025.

We are also currently evaluating WTX-330 in a Phase 1 clinical trial for the treatment of immunotherapy resistant advanced or metastatic solid tumors or lymphoma, to be followed by expansion arms in relapsed/refractory tumors following treatment with checkpoint inhibitors or tumors for which checkpoint inhibitors are not approved.

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We reported initial data from the Phase 1 clinical trial in June 2024.

During the six months ended June 30, 2024, we received alignment from the U.S.

During the nine months ended September 30, 2024, we received alignment from the U.S.

Food and Drug Administration, or the FDA, on the comparability path for WTX-330 for an improved manufacturing process, which we expect to integrate into our clinical development program.

In April 2022, we entered into a global collaboration and license agreement, or the Collaboration Agreement, with Jazz Pharmaceuticals Ireland Limited, or Jazz, under which Jazz acquired exclusive global development and commercialization rights related to Interferon alpha, or 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).

Pursuant to the terms of the Collaboration Agreement, we were responsible for certain preclinical development activities with respect to JZP898 and in the future could be responsible for other development activities if specified in mutually agreed upon development plans.

Jazz generally agreed to reimburse us for the cost of such activities.

Jazz is responsible for all other development and commercialization activities conducted to exploit the Licensed Products.

Jazz received investigational new drug, or IND, application clearance from the FDA for JZP898 in July 2023 and initiated a Phase 1 clinical trial of JZP898 in the fourth quarter of 2023.

In June 2024, we executed a transfer agreement, or the Transfer Agreement, to assign our rights in a development agreement with a contract manufacturer of JZP898 to Jazz.

The execution of this Transfer Agreement was the last material performance obligation required of us under the Collaboration Agreement.

As of the execution of the Transfer Agreement, we no longer have any material performance obligations under the Collaboration Agreement.

We intend to present updated interim safety and efficacy data from the Phase 1 clinical trial at the Society for Immunotherapy of Cancer Annual Meeting to be held from November 6-10, 2024, in Houston, Texas.

We continue to further the development of our preclinical product candidates, WTX-518, a systemically delivered, conditionally activated Interleukin-18 INDUKINE molecule in development for the treatment of cancer designed to promote activation of immune cells in the tumor microenvironment, resulting in antitumor immunity, and WTX-712, a systemically delivered, conditionally activated Interleukin-21, or IL-21, INDUKINE molecule that is being developed to minimize the severe toxicities that have been observed with recombinant IL-21 therapy and maximize clinical benefit when administered as monotherapy or in combination with checkpoint inhibitors in refractory and/or immunologically unresponsive tumors.

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Our preclinical models demonstrate that WTX-518 exhibits remarkable tumor-selective activation, resistance to IL-18BP and robust immune activation, while WTX-712 acts through a unique mechanism that robustly activates tumor-specific T lymphocytes with an expanded therapeutic window through its selective release of wild-type IL-21 in the tumor microenvironment.

In October 2024, we announced a new development candidate, WTX-921, a novel Interleukin-10

INDUKINE molecule in development for the treatment of inflammatory bowel disease and potentially other inflammatory diseases.

Financial Operations Overview

All of our revenue has been generated from the Collaboration Agreement with Jazz.

For the six months ended June 30, 2024, we recognized $1.9 million of revenue.

For the nine months ended September 30, 2024, we recognized $1.9 million of revenue.

Revenue from the transaction price for the Collaboration Agreement is recognized based on a cost-to-cost input method and includes upfront, milestone, and cost reimbursement payments.

The Collaboration Agreement includes multiple development and regulatory and sales-based milestones, which were excluded from the transaction price at inception of the Collaboration Agreement based on our assessment that there was a high level of uncertainty of achieving the milestones.

During the six months ended June 30, 2024, we re-evaluated this assessment for any milestones that continue to be excluded from the transaction price, and concluded not to recognize any adjustment to the transaction price associated with variable consideration previously excluded from the transaction price.

In June 2024, we executed the Transfer Agreement to assign our rights in a development agreement with a contract manufacturer of JZP898 to Jazz.

The execution of this Transfer Agreement was the last material performance obligation required of us under the Collaboration Agreement.

As of the execution of the Transfer Agreement, we no longer have any material performance obligations under the Collaboration Agreement.

As a result, during the three months ended June 30, 2024, all remaining deferred revenue related to the Collaboration Agreement has been recognized.

In the future, our ability to generate revenue from the Collaboration Agreement will depend on successfully achieving the various development and regulatory and sales-based milestones, as well as incurring costs for research activities that are reimbursable by Jazz.

During the nine months ended September 30, 2024, we re-evaluated this assessment for any milestones that continue to be excluded from the transaction price, and concluded not to recognize any adjustment to the transaction price associated with variable consideration previously excluded from the transaction price.

As of the execution of the Transfer Agreement, we no longer have any material performance obligations under the Collaboration Agreement, and all deferred revenue related to the Collaboration Agreement has been recognized as of September 30, 2024.

In the future, our ability to generate revenue from the Collaboration Agreement will depend on successfully achieving the various development and regulatory and sales-based milestones.

We may also generate revenue from product sales or other collaboration agreements, strategic alliances and licensing arrangements.

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

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

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

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Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors.

Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of performance of the

individual arrangements, which may differ from the pattern of billings incurred, and are reflected in our condensed consolidated financial statements as prepaid or accrued research and development expenses.

Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of performance of the individual arrangements, which may differ from the pattern of billings incurred, and are reflected in our condensed consolidated financial statements as prepaid or accrued research and development expenses.

We typically use our employee and infrastructure resources across our development programs.

2 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2024 2023 2024 2023

2 unchanged sentences

WTX-124 2,526 1,318 8,671 1,871

JZP898 200 4,595 524 6,169

WTX-712 214 347 788 965

WTX-518 68 — 251 —

JZP898 14 791 538 6,960

Pre-development candidates 1,058 760 1,568 2,189

24 unchanged sentences

travel expenses;

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

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

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

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Interest expense represents interest incurred from our loan agreement, or the PWB Loan Agreement, with Pacific Western Bank, or PWB, until the extinguishment of the PWB term loan in May 2024, interest incurred from our loan and security agreement, or the K2HV Loan Agreement, with K2 HealthVentures LLC, or K2HV, and non-cash interest expense related the amortization of debt issuance costs.

Other income, net

Other income, net primarily consists of remeasurement of the embedded derivative associated with the debt covenant in the K2HV Loan Agreement during the current period, as it is marked-to-market on a quarterly basis and reflected as a change in the fair value of the derivative liability and of remeasurement gains or losses attributable to changes in the fair value of the success payment liability that was associated with our debt agreement with Pacific Western Bank, or PWB.

Loss on Extinguishment of Debt

Loss on extinguishment of debt consists of any residual financial impact from the repayment of term loans with lenders, specifically the extinguishment of the PWB term loan in May 2024.

Other Income (Expense), Net

Other income (expense), net primarily consists of the gain or loss recognized on the change in the fair value of the conversion option derivative liability associated with the K2HV Loan Agreement and the gain or loss recognized on the change in the fair value of the success payment liability that was associated with our debt agreement with Pacific Western Bank, or PWB.

Results of Operations

Comparison of the Three Months Ended June 30, 2024 and 2023

Comparison of the Three Months Ended September 30, 2024 and 2023

The following table summarizes our results of operations:

Three Months Ended

June 30, $ Change

September 30, $ Change

(in thousands)

12 unchanged sentences

Interest expense (1,244) (1,002) (242)

Loss on extinguishment of debt (553) — (553)

Other income (expense), net 97 (5) 102

2 unchanged sentences

$ (16,673) $ (8,285) $ (8,388)

Revenue was $1.1 million for the three months ended June 30, 2024, which is comprised of partial recognition of the $15.0 million upfront payment received in April 2022 upon the execution of the Collaboration Agreement with Jazz, costs incurred for research services to be reimbursed by Jazz, and revenue related to the achievement of certain variable consideration components.

In June 2024, we executed the Transfer Agreement to assign our rights in a development agreement with a contract manufacturer of JZP898 to Jazz.

The execution of this Transfer Agreement was the last material performance obligation required of us under the Collaboration Agreement.

As of the execution of the Transfer Agreement, we no longer have any material performance obligations under the Collaboration Agreement.

As a result, during the three months ended June 30, 2024, all remaining deferred revenue related to the Collaboration Agreement has been recognized.

Comparatively, we recognized $8.1 million in collaboration revenue during the three months ended June 30, 2023.

This $6.9 million decrease in collaboration revenue is primarily driven by a higher volume of development activity during the three months ended June 30, 2023 in preparation of IND submission of JZP898.

No revenue was recognized during the three months ended September 30, 2024.

Following the execution of the Transfer Agreement with Jazz in June 2024, the only significant sources of revenue expected to be generated from the Collaboration Agreement are the remaining development and regulatory and sales-based milestones.

Based on our assessment that there continues to be a high level of uncertainty of achieving these milestones, no revenue from the remaining milestones has been recognized during the period.

Research and Development Expenses

1 unchanged sentence

Three Months Ended

June 30, $ Change

September 30, $ Change

(in thousands)

Clinical trial costs $ 4,566 $ 1,817 $ 2,749

Personnel $ 3,642 $ 3,635 $ 7

Clinical trial costs 2,986 1,715 1,271

Manufacturing 2,392 2,152 240

Facility costs 771 705 66

Contract research organization 1,366 1,188 178

Lab consumables 1,081 1,202 (121)

Facility costs 886 777 109

Other 175 169 6

Total research and development expenses $ 12,528 $ 10,838 $ 1,690

Research and development expenses for the three months ended June 30, 2024 were $15.3 million, compared to $9.6 million for the three months ended June 30, 2023.

The increase of $5.7 million was primarily due to:

• $5.9 million of a combined increase in manufacturing costs of $3.1 million and clinical trial costs of $2.7 million.

The increases in both our manufacturing and clinical trial costs are driven by an increase in costs associated with our continued development efforts of WTX-124 and WTX-330, which continue to progress through their respective clinical trials, including manufacturing to support those clinical trials;

• $0.5 million of increased personnel costs due to the timing and valuation of stock-based awards granted to employees, combined with annual cost of living adjustments.

These increases were partially offset by a decrease of $0.4 million in lab consumables and a decrease of $0.4 million in contract research spending, due to a shift in priorities from discovery efforts to a higher focus on furthering the research and development of our existing product candidates.

Research and development expenses for the three months ended September 30, 2024 were $12.5 million, compared to $10.8 million for the three months ended September 30, 2023.

The increase of $1.7 million was primarily due to $1.5 million of combined increases in clinical trial costs of $1.3 million and manufacturing costs of $0.2 million.

The increases in both our clinical trial and manufacturing costs are driven by an increase of $2.2 million in costs associated with our continued development efforts of WTX-124 and WTX-330, which continue to progress through their respective clinical trials, including manufacturing to support those clinical trials.

This increase is partially offset by a decrease of $0.9 million in manufacturing costs associated with JZP898 following the execution of the Transfer Agreement with Jazz.

General and Administrative Expenses

1 unchanged sentence

Three Months Ended

June 30, $ Change

September 30, $ Change

(in thousands)

5 unchanged sentences

Other 202 220 (18)

Total general and administrative expenses $ 4,832 $ 4,565 $ 267

General and administrative expenses were $4.8 million for the three months ended June 30, 2024, compared to $4.6 million for three months ended June 30, 2023.

Significant fluctuations in general and administrative expenses include:

• $0.2 million of increased personnel costs, driven by timing of RSU vesting in the period compared to prior year;

• $0.2 million of increased professional services costs, driven by costs incurred to protect our intellectual property and general corporate matters;

• $0.2 million of decreased corporate insurance costs, driven by a reduction in associated premiums.

$ 4,596 $ 4,310 $ 286

General and administrative expenses were $4.6 million for the three months ended September 30, 2024, compared to $4.3 million for three months ended September 30, 2023.

The increase of $0.3 million was primarily due to an increase in professional services fees of $0.3 million.

The increase in these costs is driven by a combination of higher costs to protect our intellectual property and increased use of external consultants during the period.

Interest Income

Interest income was $1.8 million for the three months ended June 30, 2024, compared to $1.9 million for the three months ended June 30, 2023.

This decrease in interest income was primarily a result of less cash equivalents being held in money market accounts, during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Interest income was $1.6 million for the three months ended September 30, 2024, compared to $2.0 million for the three months ended September 30, 2023.

This decrease in interest income was primarily a result of less cash equivalents being held in money market accounts during the three months ended September 30, 2024 compared to the three months ended September 30, 2023.

Interest Expense

Interest expense was $1.1 million for the three months ended June 30, 2024, compared to $1.0 million for the three months ended June 30, 2023.

Interest expense was $1.2 million for the three months ended September 30, 2024, compared to $1.0 million for the three months ended September 30, 2023.

This increase in interest expense was primarily the result of higher effective interest rates under the K2HV Loan Agreement, which was executed in May 2024 after the extinguishment of the PWB term loan.

Other Income, Net

Other income, net for the three months ended June 30, 2024 consisted of $1.6 million in unrealized gains recognized for the change in fair value of the embedded derivative liability associated with the K2HV Loan Agreement.

Other income, net for the three months ended June 30, 2023 consisted of less than $0.1 million in losses recognized for the change in the fair value of the PWB success payment liability during the period and was settled during the second quarter of 2023, such that we incurred no such losses associated with the PWB success liability during the three months ended June 30, 2024.

Other income, net for the three months ended June 30, 2024 and 2023 also consists of foreign currency gains and losses related to services performed by foreign vendors.

Other Income (Expense), Net

Other income (expense), net for the three months ended September 30, 2024 consisted of $0.1 million of gains recognized for the change in fair value of the conversion option derivative liability associated with the K2HV Loan Agreement.

Other income (expense), net for the three months ended September 30, 2024 and 2023 also consists of foreign currency gains and losses related to services performed by foreign vendors.

No material foreign currency gains or losses were recognized during either period.

Loss on the Extinguishment of Debt

The extinguishment of the PWB term loan during the period resulted in a one-time loss of $0.6 million for the three months ended June 30, 2024.

As no corresponding finance activity occurred for the three months ended June 30, 2023, we did not incur any related gain or loss on a debt extinguishment in the prior year comparative period.

Results of Operations

Comparison of the Six Months Ended June 30, 2024 and 2023

The following table summarizes our results of operations for the six months ended June 30, 2024 and 2023:

Six Months Ended

June 30, $ Change

Comparison of the Nine Months Ended September 30, 2024 and 2023

The following table summarizes our results of operations:

Nine Months Ended

September 30, $ Change

(in thousands)

16 unchanged sentences

(553) — (553)

Other (expense) income, net

Other income (expense), net

1,709 (1,136) 2,845

2 unchanged sentences

$ (50,115) $ (25,365) $ (24,750)

Revenue was $1.9 million for the six months ended June 30, 2024, which is comprised of partial recognition of the $15.0 million upfront payment received in April 2022 upon the execution of the Collaboration Agreement with Jazz, costs incurred for research services to be reimbursed by Jazz, and revenue related to the achievement of certain variable consideration components.

In June 2024, we executed a transfer agreement the Transfer Agreement to assign our rights in a development agreement with a contract manufacturer of JZP898 to Jazz.

The execution of this Transfer Agreement was the last material performance obligation required of us under the Collaboration Agreement.

As of the execution of the Transfer Agreement, we no longer have any material performance obligations under the Collaboration Agreement.

As a result, during the three months ended June 30, 2024, all remaining deferred revenue related to the Collaboration Agreement has been recognized.

Comparatively, we recognized $12.5 million in collaboration revenue during the six months ended June 30, 2023.

This $10.7 million decrease in collaboration revenue is driven by elevated research and development activities related to and in preparation for the IND submission of JZP898 in prior year.

Revenue was $1.9 million for the nine months ended September 30, 2024, which is comprised of partial recognition of the $15.0 million upfront payment received in April 2022 upon the execution of the Collaboration Agreement with Jazz, costs incurred for research services to be reimbursed by Jazz, and revenue related to the achievement of certain variable consideration components.

As a result of the execution of the Transfer Agreement, we no longer have any material performance obligations under the Collaboration Agreement, and all deferred revenue related to the Collaboration Agreement has been recognized as of September 30, 2024.

Comparatively, we recognized $18.4 million in collaboration revenue during the nine months ended September 30, 2023 driven by elevated research and development activities related to and in preparation for the IND submission of JZP898 during the nine months ended September 30, 2023.

Research and Development Expenses

The following table summarizes our research and development expenses for the six months ended June 30, 2024 and 2023:

Six Months Ended

June 30, $ Change

The following table summarizes our research and development expenses:

Nine Months Ended

September 30, $ Change

(in thousands)

3 unchanged sentences

Contract research organization 3,188 3,624 (436)

Facilities 1,664 1,393 271

Lab consumables 2,567 3,513 (946)

Facility costs 2,550 2,170 380

Other 574 566 8

Total research and development expenses $ 40,707 $ 32,127 $ 8,580

Research and development expenses for the six months ended June 30, 2024 were $28.2 million, compared to $21.3 million for the six months ended June 30, 2023.

Research and development expenses for the nine months ended September 30, 2024 were $40.7 million, compared to $32.1 million for the nine months ended September 30, 2023.

The increase of $8.6 million was primarily due to:

• $7.1 million combined increase in manufacturing costs of $4.1 million and increased clinical trial costs of $3.0 million are driven by an increase of in costs associated with our continued development efforts of WTX-124 and WTX-330, which continue to progress through their respective clinical trials, including manufacturing to support those clinical trials;

• $1.0 million of increased personnel costs, driven primarily by the timing and valuation of stock-based awards granted to employees;

The increase was partially offset by:

• $0.8 million of decreased lab consumables costs and $0.6 million of decreased contract research costs, primarily related to reduced discovery efforts in comparison to the first half of 2023.

• $8.6 million of combined increases in manufacturing costs of $4.3 million and clinical trial costs of $4.3 million.

The increases in both our clinical trial and manufacturing costs are driven by an increase of $14.1 million in costs associated with our continued development efforts of WTX-124 and WTX-330, which continue to progress through their respective clinical trials, including manufacturing to support those clinical trials.

This increase was partially offset by a decrease of $5.8 million in manufacturing costs associated with JZP898 leading up to and following the execution of the Transfer Agreement with Jazz;

• $1.0 million of increased personnel costs, driven primarily by the timing and valuation of stock-based awards granted to employees, as well as the increased use of external consultants to help further the development of our product candidates;

• $0.4 million of increased facility costs due to higher costs associated with maintaining our leased office and laboratory space, including higher real estate taxes, utilities, and maintenance costs.

These increases were partially offset by:

• $0.9 million of decreased lab consumables costs and $0.4 million of decreased contract research costs, primarily due to a shift in focus from discovery efforts to furthering the development of existing product candidates in comparison to the prior period.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the six months ended June 30, 2024 and 2023:

Six Months Ended

June 30, $ Change

The following table summarizes our general and administrative expenses:

Nine Months Ended

September 30, $ Change

(in thousands)

6 unchanged sentences

Total general and administrative expenses $ 14,424 $ 13,856 $ 568

General and administrative expenses were $9.8 million for the six months ended June 30, 2024, compared to $9.5 million for the six months ended June 30, 2023.

General and administrative expenses were $14.4 million for the nine months ended September 30, 2024, compared to $13.9 million for the nine months ended September 30, 2023.

The increase of $0.6 million was primarily due to:

• $0.3 million of increased personnel costs, including $0.2 million of increased stock-based compensation expense, due to increased headcount to support operating as a public company;

• $0.4 million of increased professional services costs, driven by costs incurred to facilitate new debt agreements and corresponding legal and consulting needs.

The decrease was partially offset by

• $0.5 million of decreased corporate insurance costs, driven by a reduction in associated premiums in the current period compared to the six months ended June 30, 2023.

• $0.6 million of increased professional services costs, driven by a combination of higher costs to protect our intellectual property, as well as costs incurred to facilitate our new debt agreement and corresponding legal and consulting needs;

• $0.3 million of increased personnel costs driven primarily by the timing and valuation of stock-based awards granted to employees, as well as an increase in headcount throughout both periods in order to support general and administrative needs of our business and annual cost of living adjustments.

These increases were partially offset by

• $0.6 million of decreased corporate insurance costs, driven by a reduction in associated premiums in the current period compared to the prior period.

Interest Income

Interest income was $3.8 million for the six months ended June 30, 2024, compared to $3.5 million for the six months ended June 30, 2023.

This increase in interest income was primarily the result of higher yields on our cash equivalents during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Interest income was $5.4 million for both the nine months ended September 30, 2024 and 2023, but decreased marginally during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

The slight decrease in interest income was primarily a result of less cash equivalents being held in money market accounts during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Interest Expense

Interest expense was $2.1 million for the six months ended June 30, 2024, compared to $1.1 million for the six months ended June 30, 2023.

This increase in interest expense was primarily the result of the timing of the drawdown on the available term loans in each period, as we had a lower average balance on the interest-bearing note payable balance for the first three months of 2023.

Other (expense) income, net

Other (expense) income, net for the six months ended June 30, 2024 primarily consisted of $1.6 million in unrealized gains recognized for the adjusted balance of the embedded derivative liability associated with the K2HV Loan Agreement.

Other (expense) income, net for the six months ended June 30, 2023 consisted of $1.1 million in losses recognized for the change in the fair value of the success payment liability during the period and was settled during the second quarter of 2023, such that we incurred no such losses associated with the success liability in the PWB Loan Agreement during the six months ended June 30, 2024.

The remaining portion of other (expense), net is related to losses on foreign currency exchanges in the period.

Interest expense was $3.4 million for the nine months ended September 30, 2024, compared to $2.1 million for the nine months ended September 30, 2023.

This increase is in part due to the fact that our effective interest rate under the K2HV Loan Agreement is higher than the effective interest rate associated with our previous term loan with PWB.

Additionally, we did not make any draws from the PWB term loan until March 2023, resulting in interest expense being recognized for only a portion of the nine months ended September 30, 2023.

Loss on the Extinguishment of Debt

The extinguishment of the PWB term loan resulted in a one-time loss of $0.6 million for the six months ended June 30, 2024.

As no corresponding finance activity occurred for the six months ended June 30, 2023, we did not incur any related gain or loss on a debt extinguishment in the prior year comparable period.

The extinguishment of the PWB term loan resulted in a one-time loss of $0.6 million for the nine months ended September 30, 2024.

As no corresponding finance activity occurred for the nine months ended September 30, 2023, we did not incur any gain or loss on a debt extinguishment during the prior period.

Other Income (Expense), Net

Other income (expense), net for the nine months ended September 30, 2024 primarily consisted of $1.7 million of gains recognized for the change in fair value of the conversion option derivative liability associated with the K2HV Loan Agreement.

Other income (expense), net for the nine months ended September 30, 2023 consisted of $1.1 million in losses recognized for the change in the fair value of the success payment liability during the period and was settled during the second quarter of 2023, such that we incurred no such losses associated with the success liability in the PWB Loan Agreement during the nine months ended September 30, 2024.

The remaining portion of other income (expense), net for both periods consists of foreign currency gains and losses related to services performed by foreign vendors.

No material foreign currency gains or losses were recognized during either period.

Liquidity and Capital Resources

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and enabling manufacturing for our development programs.

Our net loss was $17.2 million and $5.1 million for the three months ended June 30, 2024 and 2023, respectively.

As of June 30, 2024, we had an accumulated deficit of $377.5 million.

Our net loss was $16.7 million and $8.3 million for the three months ended September 30, 2024 and 2023, respectively.

As of September 30, 2024, we had an accumulated deficit of $394.2 million.

As we have no products that are approved for sale, we have not generated any revenue from product sales to date, and we do not expect to generate any such revenue for the foreseeable future, if at all.

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As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy.

Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements.

Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a

combination of public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements.

We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all.

7 unchanged sentences

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

We recognized interest expense related to the PWB Loan Agreement of $0.3 million and $0.9 million during the three months ended June 30, 2024 and 2023, respectively.

In May 2024, we repaid all amounts outstanding under the PWB Loan Agreement, using $29.5 million in net loan proceeds received under the loan and security agreement (the “K2HV Loan Agreement”) with K2 HealthVentures LLC (“K2HV”), as described below at Note 6, together with $10.5 million in existing cash.

We recognized a total loss on extinguishment of debt in the amount of $0.6 million in the six months ended June 30, 2024 primarily due to the write off of unamortized debt issuance costs.

We recognized interest expense related to the PWB Loan Agreement of $1.3 million during the nine months ended September 30, 2024.

We did not recognize interest expense related to the PWB Loan Agreement during the three months ended September 30, 2024.

In May 2024, we repaid all amounts outstanding under the PWB Loan Agreement, using $29.5 million in net loan proceeds received under the loan and security agreement, or the K2HV Loan Agreement, with K2 HealthVentures LLC, or K2HV, as described below, together with $10.5 million in existing cash.

We recognized a total loss on extinguishment of debt in the amount of $0.6 million during the second quarter of 2024 primarily due to the write off of unamortized debt issuance costs.

K2HV Loan Agreement

In May 2024, we, as borrower, entered into the K2HV Loan Agreement with K2HV (together with any other lender from time to time, the “Lenders”);

In May 2024, we, as borrower, entered into the K2HV Loan Agreement with K2HV (which we refer to, together with any other lender from time to time, as the Lenders);

K2HV, as administrative agent for the Lenders;

1 unchanged sentence

The K2HV Loan Agreement provides up to $60.0 million principal in term loans.

We received $30.0 million in gross loan proceeds at closing, $25.0 million from the first tranche commitment upon closing and $5.0 million from the second tranche commitment.

We received $30.0 million in gross loan proceeds at closing;

$25.0 million from the first tranche commitment upon closing and $5.0 million from the second tranche commitment.

A third tranche commitment of up to $10.0 million is available to be drawn at our option between January 1, 2025 and June 30, 2025, subject to the achievement, as determined by the administrative agent in its discretion, of certain time-based, clinical and regulatory milestones and receipt of not less than $60.0 million in net cash proceeds from certain financing activities, with at least $50.0 million from a single offering of common stock.

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The Final Fee is being accreted to interest expense using the effective interest method over the life of the debt.

Pursuant to the terms of the K2HV Loan Agreement, the lenders thereto may elect, prior to the full repayment of the term loans, to convert up to $5.0 million of the outstanding principal of the term loans into shares of our common stock at a conversion price of the lesser of $6.3182 per share (the “Fixed Price Conversion”) and the lowest effective price per share of our first equity financing following the closing of the K2HV Loan Agreement (the “Variable Price Conversion”), subject to customary adjustments and 9.99% and 19.99% beneficial ownership limitations.

Pursuant to the terms of the K2HV Loan Agreement, the lenders thereto may elect, prior to the full repayment of the term loans, to convert up to $5.0 million of the outstanding principal of the term loans into shares of our common stock at a conversion price of the lesser of $6.3182 per share, or the Fixed Price Conversion, and the lowest effective price per share of our first equity financing following the closing of the K2HV Loan Agreement, or the Variable Price Conversion, subject to customary adjustments and 9.99% and 19.99% beneficial ownership limitations.

There will be no prepayment penalty for any principal amount converted into common stock.

We determined that the Fixed Price Conversion and the Variable Price Conversion within the K2HV Loan Agreement are required to be bifurcated as an embedded derivative under ASC 815 at fair value, and recorded as a discount on the debt on the date of issuance, with subsequent changes in fair value recognized in the accompanying consolidated statements of operations.

See Note 4 for further discussion on this derivative instrument.

As security for our obligations under the K2HV Loan Agreement, we granted the Lenders a first priority security interest on substantially all of our assets (other than intellectual property), subject to certain exceptions.

The Loan Agreement contains customary representations and warranties, events of default and affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, dispose of assets, make changes to the our business, management, ownership or business locations, merge or consolidate, incur additional indebtedness, incur additional liens, pay dividends or other distributions or repurchase equity, make investments, and enter into certain transactions with affiliates, in each case subject to certain exceptions.

and exercise all of its rights and remedies as set forth in the Loan Agreement and under applicable law.

As of June 30, 2024, we are in compliance with all covenants.

distributions or repurchase equity, make investments, and enter into certain transactions with affiliates, in each case subject to certain exceptions.

Upon the occurrence of an event of default, a default interest rate of an additional 5.0% per annum may be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable and exercise all of its rights and remedies as set forth in the Loan Agreement and under applicable law.

As of September 30, 2024, we are in compliance with all covenants.

Subject to certain conditions, we granted the Lenders the right, prior to repayment of the term loans, to invest up to $5.0 million in the aggregate in future offerings of capital stock, at market terms, subject to certain exceptions and conditions.

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Following our filing of the Prospectus Supplement, we are entitled to offer and sell shares of our common stock with an aggregate offering price of up to $75.0 million pursuant to the Sales Agreement.

During the six months ended June 30, 2024, we sold 4,342,320 shares of our common stock at an average price of $5.11 per share for net proceeds of $21.1 million after deducting sales commissions and offering expenses.

During the nine months ended September 30, 2024, we sold 4,350,820 shares of our common stock at an average price of $5.10 per share for net proceeds of $21.1 million after deducting sales commissions and offering expenses.

Jazz Collaboration

As of June 30, 2024, we have received $20.0 million in payments from Jazz, excluding payments for reimbursed costs, under the terms of the Collaboration Agreement.

As of September 30, 2024, we have received $20.0 million in payments from Jazz, excluding payments for reimbursed costs, under the terms of the Collaboration Agreement.

We are eligible to receive up to an additional $515.0 million in development and regulatory milestones, and up to $740.0 million in sales-based milestones for all Licensed Products.

In June 2024, we executed the Transfer Agreement to assign our rights in a development agreement with a contract manufacturer of JZP898 to Jazz.

The execution of this Transfer Agreement was the last material performance obligation required of us under the Collaboration Agreement.

As of the execution of the Transfer Agreement, we no longer have any material performance obligations under the Collaboration Agreement.

As a result, during the three months ended June 30, 2024, all remaining deferred revenue related to the Collaboration Agreement has been recognized.

Plan of Operation and Future Funding Requirements

As of June 30, 2024, we had cash and cash equivalents of $135.3 million.

We also had restricted cash and cash equivalents of $1.2 million as of June 30, 2024.

We expect that our existing cash and cash equivalents will be sufficient to fund our operational expenses and capital expenditure requirements through at least twelve months from the date the condensed consolidated financial statements included elsewhere in this Quarterly Report are issued on August 8, 2024.

We believe that our existing cash and cash equivalents at June 30, 2024, will be sufficient to fund our operational expenses and capital expenditure requirements through at least the first quarter of 2026.

As of September 30, 2024, we had cash and cash equivalents of $122.8 million.

We also had restricted cash and cash equivalents of $1.2 million as of September 30, 2024.

We believe that our existing cash and cash equivalents at September 30, 2024, will be sufficient to fund our operational expenses and capital expenditure requirements through at least the second quarter of 2026.

We have based this estimate on assumptions that may prove to be wrong, however, and we could use our capital resources sooner than we expect.

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The following table provides information regarding our cash flows:

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Operating Activities

Net cash used in operating activities for the six months ended June 30, 2024 was $29.5 million, compared to $20.8 million for the six months ended June 30, 2023.

Net cash used in operating activities for the nine months ended September 30, 2024 was $41.9 million, compared to $28.0 million for the nine months ended September 30, 2023.

This increase of $13.9 million was primarily attributable to a decrease in revenue from our Collaboration Agreement of $16.6 million, combined with an increase in research and development expenses of $8.6 million, primarily driven by our continued development efforts of our product candidates.

The change in net loss outlined above is partially offset by $5.7 million in non-cash charges and changes in operating assets and liabilities.

The change in net loss outlined above is partially offset by an increase of $10.8 million in non-cash charges and changes in operating assets and liabilities.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2024 was $0.1 million, compared to $0.4 million for the six months ended June 30, 2023.

Net cash used in investing activities for the nine months ended September 30, 2024 was $0.1 million, compared to $0.6 million for the nine months ended September 30, 2023.

The activity for both periods represents capital expenditures of property and equipment used in our operations.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2024 was $10.5 million, compared to $49.3 million for the six months ended June 30, 2023.

Cash provided by financing activities for the six months ended June 30, 2024 primarily consisted of net proceeds from our ATM Offering during the period of $21.1 million, as well as the drawdown of the new term loan under the K2HV Loan Agreement of $30.0 million offset by the repayment of the previous PWB term loan of $40.0 million.

Comparatively, cash provided by financing activities for the six months ended June 30, 2023 consisted of proceeds from the $40.0 million drawdown of the PWB term loan combined with $9.3 million in net proceeds from our ATM Offering during the period.

Net cash provided by financing activities for the nine months ended September 30, 2024 was $10.5 million, compared to $49.4 million for the nine months ended September 30, 2023.

Cash provided by financing activities for the nine months ended September 30, 2024 primarily consisted of net proceeds from our ATM Offering during the period of $21.1 million, as well as the drawdown of the new term loan under the K2HV Loan Agreement of $30.0 million offset by the repayment of the previous PWB term loan of $40.0 million.

Comparatively, cash provided by financing activities for the nine months ended September 30, 2023 consisted of proceeds from the $40.0 million drawdown of the PWB term loan combined with $9.3 million in net proceeds from our ATM Offering during the period.

Contractual Obligations

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The preparation of these condensed consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes.

On an ongoing basis, we evaluate our estimates which 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.

We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances.

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Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” in our 2023 Annual Report, which was filed with the SEC on March 7, 2024.

During the three and six months ended June 30, 2024, there were no material changes to our critical accounting policies from those previously disclosed.

During the three and nine months ended September 30, 2024, there were no material changes to our critical accounting policies from those previously disclosed.

Quantitative and Qualitative Disclosures about Market Risk.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis