Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2021.
Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage biotechnology company focused on harnessing the immune system to achieve deep and durable clinical responses to improve the lives of patients with cancer. We have built our geographically precise solutions, or GPS, platform to rapidly engineer novel molecules, including cytokines and other biologics, that are designed to optimize their therapeutic index by geographically localizing their activity inside tumors. Current immuno-oncology, or I-O, therapies have curative potential for patients with cancer; however, their potential is significantly curtailed by systemic toxicity that results from activity of the therapeutic molecule outside the tumor microenvironment, or TME. Our molecules are engineered to localize activity within the TME with minimal systemic effects, resulting in the potential to achieve enhanced anti-tumor activity. We are advancing a number of geographically precise, or tumor-selective, agents through preclinical and clinical development. Our most advanced tumor-selective product candidates are the following: XTX101, an anti-cytotoxic T-lymphocyte-associated protein 4, or anti-CTLA 4, monoclonal antibody, or mAb; XTX202, an interleukin 2, or IL-2, therapy; and XTX301, an interleukin 12, or IL-12, therapy. We are currently evaluating XTX101 and XTX202 in Phase 1 clinical trials for patients with advanced solid tumors, and we plan to submit an investigational new drug application, or IND, to the U.S. Food and Drug Administration, or FDA, in the fourth quarter of 2022 for XTX301 for evaluation in patients with advanced solid tumors. In addition to our most advanced product candidates, we are continuing to leverage our GPS platform with the goal of expanding our pipeline and developing additional tumor-selective immunotherapies, including product candidates with a range of tumor targeting approaches.
To date, we have financed our operations primarily from proceeds raised through private placements of preferred units and convertible preferred stock, a debt financing and our initial public offering, or IPO, of common stock in October 2021. Through June 30, 2022, we have received an aggregate of $350.9 million in net proceeds from such transactions, including aggregate net proceeds of $116.4 million from our IPO, an aggregate of $224.5 million in net proceeds from the sale and issuance of preferred units and convertible preferred stock, and $10.0 million in net proceeds from our debt financing with Pacific Western Bank, or PacWest.
We have not generated any revenue from product sales and do not expect to generate any revenue from product sales for at least the next several years, if at all. All of our programs are in early clinical or preclinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates, if approved. Since inception, we have incurred significant operating losses. Our net losses were $46.0 million and $39.8 million for the six months ended June 30, 2022 and 2021, respectively, and $75.8 million for the year ended December 31, 2021. As of June 30, 2022, we had an accumulated deficit of $206.9 million. We expect to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will continue to increase significantly in connection with our ongoing activities, particularly as we:
● continue to advance our current research programs and conduct additional research programs;
● advance our current product candidates and any future product candidates we may develop into preclinical and clinical development;
● seek marketing approvals for product candidates that successfully complete clinical trials, if any;
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● obtain, expand, maintain, defend and enforce our intellectual property;
● hire additional research, clinical, regulatory, quality, manufacturing and general and administrative personnel;
● establish a commercial and distribution infrastructure to commercialize products for which we may obtain marketing approval, if any;
● continue to discover, validate and develop additional product candidates;
● continue to manufacture increasing quantities of our current or future product candidates for use in preclinical studies, clinical trials and for any potential commercialization;
● acquire or in-license other product candidates, technologies or intellectual property; and
● incur additional costs associated with current and future research, development and commercialization efforts and operations as a public company.
As a result, we will need substantial additional capital to support our continuing operations and pursue our strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings and other sources of funding, such as collaborations, licensing arrangements or other strategic transactions. We may be unable to raise additional capital or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as and when needed could have a material adverse effect on our business, results of operations and financial condition.
Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
As of June 30, 2022, we had cash and cash equivalents of $159.4 million. We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the first half of 2024.
Note on the Ongoing COVID-19 Pandemic
The ongoing COVID-19 pandemic continues to have widespread, rapidly-evolving, and unpredictable impacts on global societies, economies, financial markets, supply chains and business practices. We are closely monitoring the impact of the pandemic, the identification of new variants and related developments, and our focus remains on promoting employee health and safety while continuing to advance the research and development of our product candidates. However, the extent of the impact of the COVID-19 pandemic, including variants of the COVID-19 virus, on our business, operations, and clinical development timelines and plans remains uncertain and will depend on future developments that cannot be predicted with confidence at this time. For a discussion regarding risks and uncertainties related to the COVID-19 pandemic and its potential impact on our business and financial results, please refer to our Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q.
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Financial Operations Overview
Revenue
We have not generated any revenue since inception and do not expect to generate any revenue from the sale of products for at least the next several years, if at all. If our development efforts for our current or future product candidates are successful and result in regulatory approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from product sales or payments from third-party collaborators or licensors.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our discovery efforts, research activities and development and testing of our programs and product candidates. These expenses include:
● personnel-related expenses, including salaries, bonuses, benefits and equity-based compensation expense for employees engaged in research and development functions;
● costs incurred with third-party contract development and manufacturing organizations, or CDMOs, to acquire, develop and manufacture materials for both preclinical studies and current or future clinical trials;
● costs of funding research performed by third parties that conduct research and development and preclinical activities on our behalf;
● costs incurred with third-party contract research organizations, or CROs, and other third parties in connection with the conduct of our current or future clinical trials;
● costs of sponsored research agreements and outside consultants, including their fees, equity-based compensation and related expenses;
● costs incurred to maintain compliance with regulatory requirements;
● fees for maintaining license and other amounts due under our third-party licensing agreements;
● expenses incurred for the procurement of materials, laboratory supplies and non-capital equipment used in the research and development process; and
● depreciation, amortization and other direct and allocated expenses, including rent, insurance, maintenance of facilities and other operating costs, incurred as a result of our research and development activities.
We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific deliverables 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 costs incurred, and are reflected in our financial statements as prepaid expenses or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are capitalized as assets, even when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
We use our personnel and infrastructure resources for our discovery efforts, including the advancement of our platform, developing programs and product candidates and managing external research efforts. A significant portion of our research and development costs have been, and will continue to be, external costs. We track these external costs, such as fees paid to CDMOs, CROs, preclinical study vendors and other third parties in connection with our manufacturing and
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manufacturing process development, clinical trials, preclinical studies and other research activities by program. Due to the number of ongoing programs and our ability to use resources across several projects, personnel-related expenses and indirect or shared operating costs incurred for our research and development programs are not recorded or maintained on a program-by-program basis.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase for the foreseeable future as we advance our programs and product candidates into and through clinical development, and as we continue to develop additional product candidates. We also expect our discovery research efforts and our related personnel costs will continue to increase and, as a result, we expect our research and development expenses, including costs associated with equity-based compensation, will continue to increase above historical levels. In addition, we may incur additional expenses related to milestone and royalty payments payable to third parties with whom we have entered into, or may enter into license, acquisition, option or other agreements to acquire the rights to future products and product candidates.
At this time, we cannot reasonably estimate or know the nature, timing and projected costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates or programs. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of:
● the scope, timing, costs and progress of preclinical and clinical development activities;
● the number and scope of preclinical and clinical programs we decide to pursue;
● our ability to maintain our current research and development programs and to establish new ones;
● our ability to establish an appropriate safety profile for our product candidates with IND-enabling studies;
● our ability to hire and retain key research and development personnel;
● the costs associated with the development of any additional product candidates we develop or acquire through collaborations;
● the effects of the COVID-19 pandemic on our research and development employees, contractors and those who may participate in our planned studies;
● our successful enrollment in and completion of clinical trials;
● our ability to successfully complete clinical trials with safety, potency and purity profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;
● our receipt of regulatory approvals from applicable regulatory authorities;
● our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates;
● our ability to commercialize products, if and when approved, whether alone or in collaboration with others;
● the continued acceptable safety profiles of the product candidates following approval, if any;
● our ability to establish and maintain agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if any of our product candidates are approved;
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● the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder, if any; and
● our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved.
A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any product candidate we may develop.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits, recruiting and equity-based compensation, for personnel in our executive, finance, legal, business development, human resources and other administrative functions. General and administrative expenses also include legal fees relating to corporate matters; professional and consulting fees for accounting, auditing, tax, human resources and administrative consulting services; insurance costs; and facility-related expenses, which include depreciation costs and other allocated expenses for rent, maintenance of facilities, recruiting and other general administrative costs. These costs relate to the operation of the business and are in support of but separate from the research and development function and our individual development programs. Costs to secure and defend our intellectual property are expensed as incurred and are classified as general and administrative expenses.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount and infrastructure to support the expected growth in our research and development activities. We also expect to incur increased expenses associated with operating as a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services attributable to maintaining compliance with exchange listing standards and Securities and Exchange Commission, or SEC, requirements, director and officer insurance costs and investor and public relations costs.
We also expect to incur additional intellectual property-related expenses as we file patent applications to protect intellectual property arising from our research and development activities.
Other Expense, Net
Other expense, net consists primarily of interest expense principally on the note payable under our debt arrangement with PacWest and gains or losses associated with changes in the fair value of contingent liabilities associated with the consummation of specified transactions, including our IPO. These expenses are partially offset by interest income earned from our cash and cash equivalents. Upon completion of our IPO in October 2021, our contingent liability with PacWest and our other contingent derivative liability became due and payable. These fees were paid during the fourth quarter of 2021 and as a result, no further gains or losses will be recognized related to those contingent liabilities.
Income Taxes
Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2021, we had federal and state net operating loss, or NOL, carryforwards of approximately $149.5 million and $141.0 million, respectively, which may be available to offset future taxable income. As of December 31, 2021, federal NOLs of $144.6 million have an indefinite carryforward period. The remaining federal NOL carryforwards and our state NOL carryforward will expire beginning in 2035. These loss carryforwards are available to reduce future federal taxable income, if any. As of December 31, 2021, we also had federal and state research and development carryforwards of approximately $2.8 million and $1.4 million, respectively, which may be available to offset any future income tax and which will begin to expire in 2033. These loss and credit carryforwards are subject to review and possible adjustment by the appropriate taxing authorities.
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Utilization of our NOL carryforwards and research and development credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986, or Section 382, as well as similar state provisions. These ownership changes may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. 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. Since our formation, we have raised capital through the issuance of units and capital stock on several occasions. These financings may have resulted in a change of control as defined by Section 382. We have not yet completed a detailed study of our inception to date ownership change activity.
In addition, we have not yet conducted a study of our research and development credit carry forwards. Such a study may result in an adjustment to our research and development credit carryforwards; however, until a study is completed and any adjustment is known, no amount is being presented as an uncertain tax position. A full valuation allowance has been provided against our research and development credits, and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations and comprehensive loss if an adjustment were required.
Income taxes are determined at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Our income tax provision may be significantly affected by changes to our estimates.
Results of Operations
Comparison of the three months ended June 30, 2022 and 2021
The following tables summarize our results of operations for the three months ended June 30, 2022 and 2021 (in thousands):
Three Months Ended
June 30,
2022
2021
Change
Operating expenses
Research and development
$
16,246
$
17,745
$
(1,499)
General and administrative
8,306
5,262
3,044
Total operating expenses
24,552
23,007
1,545
Loss from operations
(24,552)
(23,007)
(1,545)
Other expense, net
Other expense, net
(61)
(174)
113
Total other expense, net
(61)
(174)
113
Net loss
$
(24,613)
$
(23,181)
$
(1,432)
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Research and Development Expenses
The following tables summarize our research and development expenses for the three months ended June 30, 2022 and 2021 (in thousands):
Three Months Ended
June 30,
2022
2021
Change
XTX101
$
2,776
$
2,179
$
597
XTX202
994
8,718
(7,724)
XTX301
4,115
406
3,709
Other early programs and indirect research and development
3,050
2,518
532
Personnel-related (including equity-based compensation)
5,311
3,924
1,387
Total research and development expenses
$
16,246
$
17,745
$
(1,499)
Research and development expenses decreased by $1.5 million from $17.7 million for the three months ended June 30, 2021 to $16.2 million for the three months ended June 30, 2022. The decrease in research and development expenses was primarily due to decreases of approximately $6.0 million in manufacturing expenses, due to a greater amount of manufacturing activities for XTX202 occurring in the comparable prior year period and a decrease of approximately $2.0 million due to a reduction in preclinical development activities for XTX202.
The decrease in research and development expenses was partially offset by the following:
● $ 3.7 million increase in expenses incurred in connection with XTX301, primarily driven by an increase of approximately $ 2.8 million in manufacturing activities and an increase of approximately $ 0.7 million in preclinical development activities;
● $ 1.4 million increase in personnel-related costs, primarily driven by higher research and development headcount and the corresponding increase of approximately $ 1.0 million in salaries, bonuses and benefits, and an increase of approximately $ 0.3 million in equity-based compensation;
● $ 0.6 million increase in expenses incurred in connection with XTX101, primarily driven by an increase in manufacturing activities and clinical development activities related to our Phase 1 trial for XTX101, partially offset by a decrease in preclinical development activities ;
● $ 0.5 million increase in other early programs and indirect research and development expenses, primarily driven by an increase in external expenses related to preclinical research and development activities; and
● $0.4 million increase in clinical development activities related to our Phase 1 clinical trial for XTX202.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the three months ended June 30, 2022 and 2021 (in thousands):
Three Months Ended
June 30,
2022
2021
Change
Personnel-related (including equity-based compensation)
$
5,169
$
2,345
$
2,824
Professional and consulting fees
1,537
2,293
(756)
Facility-related and other general and administrative expenses
1,600
624
976
Total general and administrative expenses
$
8,306
$
5,262
$
3,044
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General and administrative expenses increased by $3.0 million from $5.3 million for the three months ended June 30, 2021 to $8.3 million for the three months ended June 30, 2022. The increase in general and administrative expenses was primarily due to the following:
● $2.8 million increase in personnel-related costs, primarily driven by higher general and administrative headcount and the corresponding increase of approximately $1.2 million in salaries, bonuses and benefits, and an increase of approximately $1.4 million in equity-based compensation, which includes approximately $0.6 million in non-recurring compensation expense resulting from the modification of previously issued stock options; and
● $1.0 million increase in facility-related and other general and administrative expenses, primarily driven by increases in costs incurred as a result of becoming a publicly traded company, including directors’ and officers’ liability insurance and other corporate related costs associated with increased overall corporate headcount.
These increases were partially offset by a $0.8 million decrease in professional and consulting fees.
Other Expense, Net
Other expense, net, decreased by $0.1 million from $0.2 million for the three months ended June 30, 2021 to $0.1 million for the three months ended June 30, 2022. The decrease in other expense, net was primarily due to an increase in interest income earned from higher average cash balances as a result of the net proceeds received from our IPO.
Comparison of the six months ended June 30, 2022 and 2021
The following tables summarize our results of operations for the six months ended June 30, 2022 and 2021 (in thousands):
Six Months Ended
June 30,
2022
2021
Change
Operating expenses
Research and development
$
31,166
$
29,366
$
1,800
General and administrative
14,610
10,161
4,449
Total operating expenses
45,776
39,527
6,249
Loss from operations
(45,776)
(39,527)
(6,249)
Other expense, net
Other expense, net
(190)
(321)
131
Total other expense, net
(190)
(321)
131
Net loss
$
(45,966)
$
(39,848)
$
(6,118)
Research and Development Expenses
The following tables summarize our research and development expenses for the six months ended June 30, 2022 and 2021 (in thousands):
Six Months Ended
June 30,
2022
2021
Change
XTX101
$
4,034
$
3,913
$
121
XTX202
2,565
12,262
(9,697)
XTX301
7,280
750
6,530
Other early programs and indirect research and development
7,374
5,412
1,962
Personnel-related (including equity-based compensation)
9,913
7,029
2,884
Total research and development expenses
$
31,166
$
29,366
$
1,800
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Research and development expenses increased by $1.8 million from $29.4 million for the six months ended June 30, 2021 to $31.2 million for the six months ended June 30, 2022. The increase in research and development expenses was primarily due to the following:
● $ 6.5 million increase in expenses incurred in connection with XTX301, primarily driven by an increase of approximately $ 4.4 million in manufacturing activities and an increase of approximately $ 2.0 million related to preclinical development activities;
● $ 2.9 million increase in personnel-related costs, primarily driven by higher research and development headcount and the corresponding increase of approximately $ 2.1 million in salaries, bonuses and benefits, and an increase of approximately $ 0.7 million in equity-based compensation;
● $ 2.0 million increase in other early programs and indirect research and development expenses, primarily driven by an increase in external expenses related to preclinical research and development activities; and
● $1.1 million increase in clinical development activities related to our Phase 1 clinical trial for XTX202.
These increases were partially offset by a decrease of approximately $7.6 million in manufacturing expenses due to a greater amount of manufacturing activities for XTX202 occurring in the comparable prior year period and a decrease of approximately $3.0 million due to a reduction in preclinical development activities for XTX202.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the six months ended June 30, 2022 and 2021 (in thousands):
Six Months Ended
June 30,
2022
2021
Change
Personnel-related (including equity-based compensation)
$
8,805
$
4,802
$
4,003
Professional and consulting fees
2,939
4,205
(1,266)
Facility-related and other general and administrative expenses
2,866
1,154
1,712
Total general and administrative expenses
$
14,610
$
10,161
$
4,449
General and administrative expenses increased by $4.4 million from $10.2 million for the six months ended June 30, 2021 to $14.6 million for the six months ended June 30, 2022. The increase in general and administrative expenses was primarily due to the following:
● $4.0 million increase in personnel-related costs, primarily driven by higher general and administrative headcount and the corresponding increase of approximately $1.9 million in salaries, bonuses and benefits, and an increase of approximately $2.2 million in equity-based compensation, which includes approximately $0.6 million in non-recurring compensation expense resulting from the modification of previously issued stock options; and
● $1.7 million increase in facility-related and other general and administrative expenses, primarily driven by increases in costs incurred as a result of becoming a publicly traded company, including directors’ and officers’ liability insurance and other corporate related costs associated with increased overall corporate headcount.
These increases were partially offset by a $1.3 million decrease in professional and consulting fees.
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Other Expense, Net
Other expense, net, decreased by $0.1 million from $0.3 million for the six months ended June 30, 2021 to $0.2 million for the six months ended June 30, 2022. The decrease in other expense, net was primarily due to an increase in interest income earned from higher average cash balances as a result of the net proceeds received from our IPO.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have incurred significant operating losses and negative cash flows from operations. We have not yet commercialized any of our product candidates, which are in preclinical or early clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. To date, we have financed our operations primarily from proceeds raised through private placements of preferred units and convertible preferred stock, a debt financing and our IPO. Through June 30, 2022, we have received an aggregate of $350.9 million in net proceeds from such transactions, including aggregate net proceeds of $116.4 million from our IPO, an aggregate of $224.5 million in net proceeds from the sale and issuance of preferred units and convertible preferred stock, and $10.0 million in net proceeds from our debt financing with PacWest. As of June 30, 2022, we had cash and cash equivalents of $159.4 million.
Cash Flows
The following table provides information regarding our cash flows for each period presented (in thousands):
Six Months Ended
June 30,
2022
2021
Net cash provided by (used in):
Operating activities
$
(37,591)
$
(42,870)
Investing activities
(1,025)
(608)
Financing activities
(26)
144,541
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(38,642)
$
101,063
Operating Activities
Our cash flows from operating activities are greatly influenced by our use of cash for operating expenses and working capital requirements to support our business. We have historically experienced negative cash flows from operating activities as we invested in research and development of our product candidates, including preclinical studies, clinical trials and manufacturing process development. The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges, which are generally due to equity-based compensation, depreciation and amortization, as well as changes in components of operating assets and liabilities, which are generally due to increased expenses and timing of vendor payments.
During the six months ended June 30, 2022, net cash used in operating activities of $37.6 million was primarily due to our net loss of $46.0 million, partially offset by changes in operating assets and liabilities of $2.6 million and net non-cash expenses of $5.7 million.
During the six months ended June 30, 2021, net cash used in operating activities of $42.9 million was primarily due to our net loss of $39.8 million and changes in operating assets and liabilities of $5.7 million, partially offset by net non-cash expenses of $2.7 million.
Investing Activities
During the six months ended June 30, 2022 and 2021, net cash used in investing activities of $1.0 million and $0.6 million, respectively, was primarily due to purchases of property and equipment.
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Financing Activities
During the six months ended June 30, 2022, net cash used in financing activities of less than $0.1 million consisted of payments on our finance lease for certain lab equipment, partially offset by proceeds received from the exercise of stock options.
During the six months ended June 30, 2021, net cash provided by financing activities of $144.5 million consisted primarily of proceeds from the sale and issuance of our Series B and Series C convertible preferred stock.
Loan and Security Agreement
In November 2019, we entered into a loan and security agreement with PacWest, as amended, under which we borrowed $10.0 million under a term loan, which amount remains outstanding. We have the ability to request one or more additional term loans in an aggregate principal amount of $10.0 million prior to December 31, 2022. Borrowings under the loan and security agreement are collateralized by substantially all of our assets, excluding intellectual property. Interest on amounts outstanding accrues at a variable annual rate equal to the greater of (i) the prime rate plus 0.25% or (ii) 4.75%. As of June 30, 2022, the interest rate on the term loan is 5.0%. We are required to make interest-only payments on any outstanding balances through December 31, 2022. Subsequent to the interest-only period, we will be required to make equal monthly payments of principal plus interest until the term loan matures on June 30, 2024. In addition, under the loan and security agreement, as amended, we paid a one-time success fee of $0.8 million to PacWest in October 2021 upon the closing of the IPO. Additionally, we are obligated to pay PacWest a fee of 1.0% of the aggregate principal amounts then outstanding if any term loans are repaid prior to September 17, 2022.
The loan and security agreement, as amended, contains customary representations, warranties and covenants and also include customary events of default, including payment defaults, breaches of covenants, a change of control and occurrence of a material adverse effect.
We have the following minimum aggregate future loan payments under the loan and security agreement, as amended, at June 30, 2022 (in thousands):
Minimum Loan
Payments
2022
$
—
2023
6,667
2024
3,333
Total future principal payments
10,000
Less: unamortized discount
(273)
Total notes payable
$
9,727
Capital Requirements
We expect our future capital requirements to increase substantially over time in connection with our ongoing research and development activities, particularly as we advance our current and planned clinical development of our product candidates and expand the research efforts and preclinical activities associated with our other existing programs and discovery platform. In addition, we expect to continue to incur additional costs associated with operating as a public company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future.
Inflation generally affects us by increasing our cost of labor and certain services. We do not believe that inflation had a material effect on our financial statements included elsewhere in this Quarterly Report on Form 10-Q. However, the United States has recently experienced historically high levels of inflation. If the inflation rate continues to increase it may affect our expenses, such as employee compensation and research and development charges due to, for example, increases in the costs of labor and supplies. Additionally, the United States is experiencing a workforce shortage, which in turn has created a competitive wage environment that may also increase our operating costs in the future.
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As of June 30, 2022, we had cash and cash equivalents of $159.4 million. We believe that our existing cash and cash equivalents will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into the first half of 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.
Because of the numerous risks and uncertainties associated with product development, and because the extent to which we may enter into collaborations with third parties for the development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our funding requirements and timing and amount of our operating expenditures will depend on many factors, including, but not limited to:
● the scope, progress, results and costs of research and development for our current and future product candidates, including our current and planned clinical trials for our most advanced product candidates, XTX101 and XTX202, and ongoing preclinical development for our current and future product candidates;
● the scope, prioritization and number of our research and development programs;
● the scope, costs, timing and outcome of regulatory review of our product candidates;
● the costs of securing manufacturing materials for use in preclinical studies, clinical trials and, for any product candidates for which we receive regulatory approval, if any, use as commercial supply;
● our ability to seek, establish and maintain a collaboration to develop XTX101 with a collaborator, including the financial terms and any cost-sharing arrangements of any such collaboration;
● the costs and timing of future commercialization activities for any of our product candidates for which we receive regulatory approval;
● the amount and timing of revenue, if any, received from commercial sales of any product candidates for which we receive regulatory approval;
● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights and defending any intellectual property-related claims;
● the extent to which we may acquire or in-license other products, product candidates, technologies or intellectual property, as well as the terms of any such arrangements;
● the impacts of the COVID-19 pandemic; and
● the costs of continuing to expand our operations and operating as a public company.
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if ever. Accordingly, we will need to obtain substantial additional capital to achieve our business objectives.
Our expectation with respect to our ability to fund our currently planned operations is based on estimates that are subject to various risks and uncertainties. Our operating plan may change as a result of many factors currently unknown to management and there can be no assurance that our current operating plan will be achieved in the time frame anticipated by us, and we may need to seek additional capital sooner than anticipated.
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Adequate additional capital may not be available to us on acceptable terms, or at all. Market volatility resulting from the COVID-19 pandemic, adverse changes in international policies and political relations, regional or global conflicts, uncertainty around global economic conditions, or other factors could also adversely impact our ability to access capital as and when needed. To the extent that we raise additional capital through the sale of equity or securities convertible into or exchangeable for equity, the ownership interest of our existing stockholders may be diluted, and the terms of such securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Additional debt and preferred equity, if available, may also involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require that we issue warrants, which could potentially dilute the ownership interest of our existing stockholders.
If we raise additional capital through collaborations, partnerships, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or product candidates or products, and we may be required to grant licenses on terms that may not be favorable to us. If we are unable to raise additional capital through equity or debt offerings when needed, we may have to significantly delay, reduce or eliminate some or all of our product development or future commercialization efforts, or grant rights to develop and market product candidates or products that we would have otherwise preferred to develop and market ourselves.
Critical Accounting Policies and Use of Estimates
Our critical accounting policies are those policies that require the most significant judgments and estimates in the preparation of our condensed consolidated financial statements. We believe that our most critical accounting policies are those relating to research and development expenses and related accruals and equity-based compensation. For a description of our critical accounting policies and the associated judgments and estimates related thereto, please see Note 2, Summary of Significant Accounting Policies , of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
There have been no significant changes to our critical accounting policies and use of estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2021.
Emerging Growth Company and Smaller Reporting Company Status
As an emerging growth company, or EGC, under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, we may delay the adoption of certain accounting standards until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for EGCs include presentation of only two years of audited financial statements in a registration statement for an IPO, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements.
In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an EGC to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we can adopt the new or revised standard at the time private companies adopt the new or revised standard and may do so until such time that we either (1) irrevocably elect to “opt out” of such extended transition period or (2) no longer qualify as an emerging growth company. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We are also a “smaller reporting company,” as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company, in which case we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.
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Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2, “Summary of Significant Accounting Policies ” in our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 and our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.