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Item 7. Management’s Discussion and Analysis

2023-03-02 compared with 2022-03-01 · 103 added, 125 removed, 248 unchanged (48% of the section changed)

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You should carefully read the section entitled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.

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 product candidates are currently in clinical development:

XTX101, an anti-cytotoxic T-lymphocyte-associated protein 4, or anti-CTLA 4, monoclonal antibody, or mAb, and XTX202, an interleukin 2, or IL-2, therapy.

We are also advancing our tumor-selective IL-12 product candidate, XTX301, with the goal of submitting an investigational new drug application, or IND, to the U.S.

Food and Drug Administration, or FDA, in the second half of 2022 for evaluation in patients with solid tumors, and we are currently pursuing preclinical studies for our tumor-selective IL-15 product candidate, XTX401.

We also plan to continue to leverage our GPS platform to develop additional immunotherapies, including product candidates with a range of tumor targeting approaches.

Since inception, we have devoted substantially all of our financial resources and efforts to performing research and development activities.

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.

As of December 31, 2021, we had received 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 a debt financing.

On October 26, 2021, we completed our IPO and issued and sold an aggregate of 7,353,000 shares of our common stock at a public offering price of $16.00 per share, and on November 1, 2021, we issued and sold an additional 766,106 shares of common stock at a public offering price of $16.00 per share pursuant to the partial exercise by the underwriters of their option to purchase additional shares.

We received aggregate net proceeds of $116.4 million, after deducting underwriting discounts and commissions and offering expenses payable by us.

Upon the closing of the IPO, all shares of our then outstanding preferred stock automatically converted into an aggregate of 18,398,248 shares of common stock.

In October 2021, we effected a 1-for-9.5 reverse stock split of our common stock.

All historical share and per share information shown herein and in our consolidated financial statements and related notes have been retroactively adjusted to give effect to the reverse stock split.

We are a clinical-stage biotechnology company discovering and developing tumor-activated immuno-oncology, or I-O, therapies with the goal of significantly improving outcomes for people living with cancer without the systemic side effects of current I-O treatments.

We are leveraging our proprietary geographically precise solutions, or GPS, platform to build a pipeline of novel, tumor-activated molecules, including cytokines and other biologics, which are designed to optimize their therapeutic index by localizing anti-tumor activity within the tumor microenvironment.

Current 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.

Our molecules are engineered to localize activity within the tumor microenvironment with minimal systemic effects, resulting in the potential to achieve enhanced anti-tumor activity and increasing the population of patients who may be eligible to receive our medicines.

Our most advanced tumor-activated, clinical-stage product candidates are XTX202, an interleukin 2, or IL-2, therapy, XTX301, an interleukin 12, or IL-12, therapy and XTX101, an Fc-enhanced, anti-CTLA-4 monoclonal antibody, or mAb.

In addition to our clinical-stage product candidates, we are continuing to leverage our GPS platform and expertise in developing tumor-activated I-O therapies as we seek to expand our pipeline of discovery-stage programs and develop additional tumor-activated 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 December 31, 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 are party to a sales agreement with Cowen and Company LLC, or Cowen, under which we may issue and sell shares of our common stock, from time to time, having an aggregate offering price of up to $75.0 million, subject to the terms and conditions of the sales agreement.

As of December 31, 2022, we have not issued or sold any of our common stock pursuant to the sales agreement and $75.0 million of shares of common stock remain available to be sold pursuant to the sales agreement, which sales, if any, would be made under our universal shelf registration statement on Form S-3, or the 2022 Shelf.

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.

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, including net losses of $88.2 million and $75.8 million for the years ended December 31, 2022 and 2021, respectively.

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● advance our current product candidates and any future product candidates we may develop into preclinical and clinical development;

● seek marketing approvals for any product candidates that successfully complete clinical trials;

● seek marketing approvals for product candidates that successfully complete clinical trials, if any;

● 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 any products for which we may obtain marketing approval;

● 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;

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● 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 funding to support our continuing operations and pursue our strategy.

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 funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all.

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.

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As of December 31, 2022, we had cash and cash equivalents of $120.4 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 2024.

Note on the COVID-19 Pandemic

The worldwide COVID-19 pandemic has affected and may affect in the future our ability to initiate and complete preclinical studies, delay the initiation and completion of our current or future clinical trials, disrupt regulatory activities or have other adverse effects on our business, results of operations, financial condition and prospects.

In addition, the pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could adversely affect our business, operations and ability to raise funds to support our operations.

We are following, and plan to continue to follow, recommendations from federal, state and local governments regarding workplace policies, practices and procedures.

In response to the direction from state and local governmental authorities, we have restricted access to our facility to those individuals who must perform critical research, translational medicine, laboratory and other support activities that must be completed on site, limited the number of such people that can be present at our facility at any one time and required that most of our employees work remotely.

In addition, we and the third-party manufacturers, contract research organizations, or CROs, and academic collaborators that we engage have faced in the past and may face in the future disruptions that could affect our ability to initiate and complete preclinical studies or clinical trials, including disruptions in procuring items that are essential for our research and development activities, such as, for example, raw materials used in the manufacture of our product candidates, laboratory supplies for our preclinical studies and clinical trials, or animals that are used for preclinical testing, in each case, for which there may be shortages because of ongoing efforts to address the COVID-19 pandemic.

We cannot be certain what the overall impact of the COVID-19 pandemic will be on our business, and it has the potential to adversely affect our business, financial condition, results of operations and prospects.

Please refer to our Risk Factors in Part I, Item 1A of this Annual Report on Form 10-K for further discussion of risks related to the COVID-19 pandemic.

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 second quarter of 2024.

Note Regarding the COVID-19 Pandemic

The impact of the COVID-19 pandemic continues to be widespread, rapidly-evolving and unpredictable on global societies, economies, financial markets, supply chains and business practices.

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.

For a discussion regarding risks and uncertainties related to the impact of the COVID-19 pandemic and its potential impact on our business and financial results, please refer to our “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Financial Operations Overview

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● costs of funding research performed by third parties that conduct research and development and preclinical activities on our behalf;

● costs incurred with third-party clinical research organizations, or CROs, and other third parties in connection with the conduct of our current or future clinical trials;

● 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;

● fees for maintaining licenses 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;

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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.

We use our personnel and infrastructure resources for our discovery efforts, including the advancement of our GPS 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.

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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 increase and, as a result, we expect our research and development expenses, including costs associated with equity-based compensation, will 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 and option agreements to acquire the rights to future products and 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.

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● the costs associated with the development of any additional product candidates we develop or acquire through collaborations;

● the effects of COVID-19 to our research and development employees, contractors and those who may participate in our planned studies.

● our successful enrollment in and completion of clinical trials;

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● 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;

● our ability to establish and maintain agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;

● the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;

● 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;

● the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder, if any;

● 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;

● general economic conditions, including inflation;

● the impact of public health crises, including epidemics and pandemics such as the COVID-19 pandemic, on our business, operations, strategy, goals and anticipated milestones, as well as our response to such epidemics or pandemics.

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.

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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 consist primarily of personnel-related costs, including salaries, bonuses, 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;

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

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 anticipate that our general and administrative expenses will increase in the future as we increase infrastructure to support the expected growth in our research and development activities.

We also expect to continue 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 Income (Expense), Net

Other income (expense), net consists primarily of gains or losses associated with changes in the fair value of contingent liabilities associated with the consummation of specified transactions, including an initial public offering, interest expense principally on the note payable under our debt arrangement with Pacific Western Bank, or PacWest, and 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.

Other income (expense), net consists primarily of interest income earned from our cash and cash equivalents.

This interest income is partially offset by 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.

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.

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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, 2022, we had federal and state net operating loss, or NOL, carryforwards of $177.5 million and $146.6 million, respectively, which may be available to offset future taxable income.

As of December 31, 2022, federal NOLs of $172.7 million have an indefinite carryforward period.

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Other income (expense), net

Other expense, net

Other income (expense), net

Total other income (expense), net

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The increase in research and development expenses was primarily due to the following:

● $7.8 million increase in personnel-related costs, driven primarily by higher research and development headcount and related increases of approximately $6.8 million in salaries, bonuses and benefits, and an approximately $1.0 million increase in equity-based compensation;

● $5.8 million increase in other early programs and indirect research and development expenses, driven primarily by increases in external expenses related to preclinical research and development activities;

● $5.6 million decrease in expenses incurred to advance our XTX101 program, driven primarily by decreases of approximately $6.3 million in manufacturing activities and approximately $1.2 million in preclinical development activities, partially offset by an increase of approximately $1.9 million in clinical development activities;

● $0.7 million decrease in expenses incurred to advance our XTX202 program, driven primarily by a non-recurring $6.0 million upfront payment incurred during the year ended December 31, 2020 under our license agreement with AskGene Pharma, Inc., or AskGene, partially offset by increases of approximately $2.5 million in manufacturing activities, approximately $1.5 million in preclinical development activities and approximately $1.1 million in clinical development activities.

● $6.8 million increase in expenses incurred in connection with XTX301, primarily driven by an increase of approximately $4.6 million in manufacturing activities, an increase of approximately $1.2 million related to preclinical development activities and an increase of approximately $1.0 million in clinical development activities related to our Phase 1 clinical trial for XTX301;

● $5.3 million increase in personnel-related costs, primarily driven by higher research and development headcount and a corresponding increase of approximately $4.2 million in salaries, bonuses and benefits, and an increase of approximately $1.1 million in equity-based compensation;

● $3.4 million increase in other early programs and indirect research and development expenses, primarily driven by an increase in manufacturing activities and external expenses related to preclinical research and development activities;

● $2.8 million increase in clinical development activities related to our Phase 1 clinical trial for XTX202, which were offset by decreases in manufacturing expenses and preclinical expenses for XTX202 of approximately $6.6 million and $3.8 million, respectively, as the program advanced further into clinical development in 2022.

General and Administrative Expenses

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The increase in general and administrative expenses was primarily due to the following:

● $7.5 million increase in personnel-related costs, driven primarily by higher general and administrative headcount and related increases of approximately $3.8 million in salaries, bonuses and benefits, and an approximately $2.7 million increase in equity-based compensation;

● $4.1 million increase in professional and consulting fees, driven primarily by an increase in accounting, legal and other services related to transitioning to and operating as a publicly traded company;

● $1.6 million increase in facility-related and other general and administrative expenses, driven primarily by increases in directors and officers insurance costs incurred upon becoming a publicly traded company, certain information technology related costs and other corporate related costs associated with increased overall corporate headcount.

● $4.0 million increase in personnel-related costs, primarily driven by higher general and administrative headcount and a corresponding increase of approximately $2.3 million in salaries, bonuses and benefits, and an approximately $2.3 million increase in equity-based compensation, which includes approximately $0.6 million in non-recurring compensation expense resulting from the modification of previously issued stock options, partially offset by a decrease of approximately $0.6 million in recruiting costs;

● $2.8 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 $0.7 million decrease in professional and consulting fees.

Other Income (Expense), Net

Total other income (expense), net was $0.8 million of other expense for the year ended December 31, 2021 compared to other expense of $0.7 million for the year ended December 31, 2020, or a change of $0.1 million.

The change was primarily driven by an increase in the value of certain contingent liabilities associated with the probability of the consummation of our IPO.

Other income (expense), net changed by $1.7 million from other expense of $0.8 million for the year ended December 31, 2021 to other income of $0.9 million for the year ended December 31, 2022.

The change in other income (expense), net was primarily due to an increase in interest income earned from higher interest rates on higher average cash balances as a result of the net proceeds received from our IPO.

Liquidity and Capital Resources

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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.

As of December 31, 2021, we have received 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.

We received aggregate net proceeds of $116.4 million, after deducting underwriting discounts and commissions and offering expenses payable by us.

As of December 31, 2022, we had cash and cash equivalents of $120.4 million.

In November 2022, we entered into a sales agreement with Cowen, under which we may issue and sell shares of our common stock, from time to time, having an aggregate offering price of up to $75.0 million, subject to the terms and conditions of the sales agreement.

The following table provides information regarding our cash flows for each period presented (in thousands):

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Financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

Net (decrease) increase in cash, cash equivalents and restricted cash

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 developing our pipeline, platform, drug discovery efforts and related infrastructure.

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, manufacturing 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 year ended December 31, 2022, net cash used in operating activities of $75.7 million was primarily due to our net loss of $88.2 million, partially offset by net non-cash expenses of $10.5 million and changes in operating assets and liabilities of $2.0 million.

During the year ended December 31, 2021, net cash used in operating activities of $80.8 million was primarily due to our net loss of $75.8 million and changes in operating assets and liabilities of $11.8 million, partially offset by net non-cash expenses of $6.9 million.

During the year ended December 31, 2020, net cash used in operating activities of $36.1 million was primarily due to our net loss of $55.2 million, partially offset by changes in operating assets and liabilities of $16.6 million and net non-cash expenses of $2.5 million.

Investing Activities

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Financing Activities

During the year ended December 31, 2022, net cash used in financing activities of $0.1 million consisted primarily of payments on our finance lease for certain lab equipment, partially offset by proceeds received from the exercise of stock options.

During the year ended December 31, 2021, net cash provided by financing activities of $260.7 million consisted primarily of proceeds from the sale and issuance of our Series B convertible preferred stock, the sale and issuance of our Series C convertible preferred stock and from the sale and issuance of common stock from our IPO.

During the year ended December 31, 2020, net cash provided by financing activities of $10.0 million consisted primarily of proceeds from the sale and issuance of our Series B preferred units.

Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we advance the 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 incur additional costs associated with operating as a public company.

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.

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We do not believe that inflation had a material effect on our financial statements included elsewhere in this Annual Report on Form 10-K.

However, our operations may be adversely affected by inflation in the future.

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.

As of December 31, 2022, we had cash and cash equivalents of $120.4 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 2024.

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 second quarter 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.

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 advancing 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, progress, results and costs of research and development for our current and future product candidates, including our current and planned clinical trials for our clinical-stage cytokine product candidates, XTX202 and XTX301, 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, 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 of securing manufacturing materials for use in preclinical studies, clinical trials and, for any product candidates for which we receive regulatory approval, if any, commercial supply;

● the costs and timing of future commercialization activities for any of our product candidates for which we receive regulatory approval;

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● 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;

● our ability to seek, establish and maintain a collaboration to further develop XTX101, our Fc-enhanced, tumor-activated anti-CTLA-4, with a collaborator, including the financial terms and any cost-sharing arrangements of any such collaboration;

● the costs of continuing to expand our operations and operating as a public company.

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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 funds to achieve our business objectives.

Our expectation with respect to our ability to fund current planned operations is based on estimates that are subject to 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 the current operating plan will be achieved in the time frame anticipated by us, and we may need to seek additional funds sooner than planned.

Adequate additional funds may not be available to us on acceptable terms, or at all.

Market volatility resulting from the COVID-19 pandemic 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 convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of such securities may include liquidation or other preferences that adversely affect the rights of our stockholders.

Additional debt financing and preferred equity financing, if available, may 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 the issuance of warrants, which could potentially dilute the ownership interest of our stockholders.

If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

If we are unable to raise additional funds through equity or debt financings 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 that we would otherwise prefer to develop and market ourselves.

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.

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 domestic and international fiscal, monetary and other 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.

Contractual Obligations

In the normal course of business, we enter into agreements that contain contractual obligations, of which the most significant to date include our loan and security agreement, facility lease and certain licensing agreements.

In the normal course of business, we enter into agreements that contain contractual obligations, of which the most significant to date include our loan and security agreement with PacWest, an operating lease for our corporate headquarters and certain license agreements.

Loan and Security Agreement

In November 2019, we entered into a loan and security agreement with PacWest, as amended by a first amendment, dated March 12, 2021, and a second amendment, dated May 10, 2021, under which we borrowed $10.0 million.

Borrowings under the loan and security agreement are collateralized by substantially all of our assets, excluding intellectual property, with interest on the term loan balance accruing at a variable annual rate equal to the greater of (i) the prime rate, as defined in the loan and security agreement, plus 0.25% or (ii) 5.00%.

Interest-only payments on the term loan balance were required to be paid on a monthly basis through May 21, 2021.

Subsequent to the interest-only period, we made equal monthly payments of principal plus interest and were required to do so until the scheduled loan maturity date of November 2023.

In addition, under the initial loan agreement, as amended, we were obligated to pay a one-time $0.5 million fee to PacWest upon the occurrence of specified liquidation events, including an initial public offering.

In September 2021, we entered into an amendment to our loan and security agreement, pursuant to which we borrowed $10.0 million under a new term loan and used the proceeds of such new term loan to repay the outstanding balance on the prior term loan.

In addition, as a result of the amendment, prior to December 31, 2022, we have the ability to request one or more additional term loans in an aggregate principal amount of $10.0 million.

As a result of the amendment, 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%, and 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 loan matures on June 30, 2024.

In addition, under the loan and security agreement, as amended, the one-time fee we were obligated to pay to PacWest upon the occurrence of specified liquidation events, including an initial public offering, was increased from $0.5 million to an amount between $0.8 million and $1.0 million depending on the timing and occurrence of specified events, including upon the closing of the IPO.

We paid the one-time fee of $0.8 million to PacWest in October 2021 upon the closing of the IPO.

As a result of the amendment, we are also 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, which is approximately one year from the date of the amendment to our loan and security agreement.

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.

In November 2019, we entered into a loan and security agreement with PacWest, as amended, which we refer to as the loan agreement, under which we borrowed $10.0 million under a term loan, which amount remains outstanding.

Borrowings under the loan 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 December 31, 2022, the interest rate on the term loan is 7.75%.

We were required to make interest-only payments on any outstanding balances through December 31, 2022.

We commenced making equal monthly payments of principal plus interest in January 2023, and we will be required to make such payments until the term loan matures on June 30, 2024.

Under the loan agreement, we paid a one-time success fee of $0.8 million to PacWest in the fourth quarter of 2021 upon the closing of our IPO.

The loan agreement contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, a change of control and occurrence of a material adverse effect.

Lease Agreement

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As of December 31, 2022, the remaining required payments for our operating lease, not including the optional extension period, are approximately $13.4 million.

For further information regarding our operating lease agreement, please see Note 8 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

For further information regarding our operating lease agreement, please see Note 8, Leases, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Other Contractual Obligations

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We have not included payments contingent upon the achievement of certain development, regulatory or commercial milestones on our consolidated balance sheets.

For further information regarding certain of our license agreements and amounts that could become payable in the future under those agreements, please see Note 7 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

For further information regarding certain of our license agreements and amounts that could become payable in the future under those agreements, please see Note 7, Intellectual Property Licenses, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

In addition, we are party to certain agreements with contract research organizations for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies and other services and products for operating purposes.

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As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses as of each balance sheet date.

This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost.

The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met.

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Equity-Based Compensation

As described in Note 1 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, in June 2020, we completed a series of transactions resulting in the reorganization of our corporate structure.

Prior to such reorganization, our former parent company, Xilio Therapeutics, LLC, granted incentive units, which we accounted for as equity-classified awards.

In connection with the reorganization, the incentive units were exchanged for shares of our vested and unvested restricted common stock.

We issue equity-based awards to employees, directors and non-employees, generally in the form of stock options.

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Determination of the Fair Value of Equity-Based Awards

We estimate the fair value of our stock options and, prior to our corporate reorganization, incentive units granted with service-based conditions using the Black-Scholes option pricing model, which requires inputs of subjective assumptions, including:

We estimate the fair value of our stock options granted with service-based conditions using the Black-Scholes option pricing model, which requires inputs of subjective assumptions, including:

(i) the expected volatility of our common stock, (ii) the expected term of the award, (iii) the risk-free interest rate, (iv) expected dividends and (v) the fair value of our common stock.

We completed our IPO in October 2021, and as a result there has not been a significant amount of time for which there has been a public market for the trading of our

common stock, including a lack of company-specific historical and implied volatility data, therefore we base the estimate of expected volatility on the historical volatilities of a representative group of publicly traded guideline companies.

We completed our IPO in October 2021, and as a result there has not been a significant amount of time for which there has been a public market for the trading of our common stock, including a lack of company-specific historical and implied volatility data, therefore we base the estimate of expected volatility on the historical volatilities of a representative group of publicly traded guideline companies.

For these analyses, we select companies with comparable characteristics and with historical share price information that approximates the expected term of the equity-based awards.

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We estimate the expected term of our stock options granted to employees and directors using the simplified method, whereby the expected term equals the average of the vesting term and the original contractual term of the option.

We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

The expected dividend yield is assumed to be zero as we have no current plans to pay any dividends on common stock.

We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term and the plain nature of our equity-based awards.

The expected dividend yield is assumed to be

zero as we have no current plans to pay any dividends on common stock.

We have elected to use the expected term for stock options granted to non-employees, using the simplified method, as the basis for the expected term assumption.

However, we may elect to use either the contractual term or the expected term for stock options granted to non-employees on an award-by-award basis.

Determination of Fair Value of Common Units and Common Stock

Determination of Fair Value of Common Stock

Subsequent to the completion of our IPO in October 2021, the fair value of our common stock has been determined based on the share price of our common stock on the Nasdaq Global Select Market.

If applicable, the current share price is adjusted to reflect material nonpublic information known to the company but unavailable to market participants at the time of the grant.

Prior to the completion of our IPO in October 2021, there was no public market for either our common stock, common units or incentive units.

The estimated fair value of our common units and common stock and the strike price of our incentive units was approved by our board of directors, with input from management, as of the date of each award grant, considering the most recently available independent third-party valuations of our common stock and common units and our board of directors assessment, with input from management, of additional objective and subjective factors that we believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant.

Prior to the completion of our IPO in October 2021, there was no public market for our common stock.

The estimated fair value of our common stock was approved by our board of directors, with input from management, as of the date of each award grant, considering the most recently available independent third-party valuations of our common stock and our board of directors assessment, with input from management, of additional objective and subjective factors that we believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant.

These independent third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation .

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The hybrid approach is a scenario-based analysis and where one or more of the scenarios allocate the equity value utilizing the option-pricing method, or OPM.

We allocated equity value to our common units, incentive units and preferred units or to our shares of common stock and shares of our convertible preferred stock, as the case may be, using either an OPM or a hybrid method, which is a hybrid between the OPM and the probability-weighted expected return method.

We allocated equity value to our shares of common stock and shares of our convertible preferred stock, as the case may be, using either an OPM or a hybrid method, which is a hybrid between the OPM and the probability-weighted expected return method.

The OPM treats common securities and preferred securities as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes.

Under this method, the common units and incentive units and common stock have value only if the funds available for distribution to members exceed the value of the preferred security liquidation preference at the time of the liquidity event, such as a strategic sale or a merger.

When using the market approach to determine the equity value, we allocated the equity value to our common units, incentive units and preferred units or to our shares of common stock, warrants and shares of our convertible preferred stock, as the case may be, using the OPM.

Under this method, the common stock has value only if the funds available for distribution to members exceed the value of the preferred security liquidation preference at the time of the liquidity event, such as a strategic sale or a merger.

When using the market approach to determine the equity value, we allocated the equity value to our shares of common stock, warrants and shares of our convertible preferred stock, as the case may be, using the OPM.

When using the hybrid approach, we estimated the probability-weighted value across multiple scenarios but used the OPM to estimate the allocation of value within at least one of the scenarios.

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● the lack of liquidity of our equity as a private company;

● the prices of our preferred units and convertible preferred stock sold to outside investors in arm’s length transactions and the rights, preferences and privileges of our preferred units and convertible preferred stock as compared to those of our common units and common stock, including the liquidation preferences of our convertible preferred stock;

● the prices of our convertible preferred stock sold to outside investors in arm’s length transactions and the rights, preferences and privileges of our convertible preferred stock as compared to those of our common stock, including the liquidation preferences of our convertible preferred stock;

● the progress of our research and development efforts, including the status of preclinical studies for our product candidates;

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● the analysis of initial public offerings and the market performance of similar companies in the biotechnology industry.

For financial statement purposes, we performed common unit valuations at various dates, which resulted in valuation of our common units of $2.09, $4.47 and $5.51 per unit as of May 2019, February 2020, and May 2020, respectively.

We performed common stock valuations at various dates, which resulted in valuation of our common stock of $5.51, $5.89, $6.65, $10.07 and $11.69 per share as of July 2020, January 2021, March 2021, May 2021 and July 2021, respectively.

Each valuation is stated after giving effect to the 1-for-9.5 reverse stock split of our common stock effected on October 15, 2021 in connection with our IPO.

There are significant judgments and estimates inherent in these valuations.

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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.

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.

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.

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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-K

Item 7. Management’s Discussion and Analysis