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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-09 · 95 added, 167 removed, 148 unchanged (64% of the section changed)

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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 platform to build a pipeline of novel, tumor-activated molecules, including cytokines and other biologics, which are designed to optimize their therapeutic index and localize anti-tumor activity within the tumor microenvironment.

Our most advanced tumor-activated cytokine product candidates are XTX202, an interleukin 2, or IL-2, therapy and XTX301, an interleukin 12, or IL-12, therapy.

We are currently evaluating XTX202 in monotherapy dose-escalation of an ongoing Phase 1 clinical trial for patients with advanced solid tumors, and we anticipate initiating patient enrollment in a monotherapy expansion cohort of the Phase 1 clinical trial in the fourth quarter of 2022 and initiating patient enrollment in a Phase 2 monotherapy clinical trial in the first half of 2023.

We anticipate reporting preliminary anti-tumor activity and safety data from the Phase 1/2 clinical trial in the third quarter of 2023.

In November 2022, we announced clearance of our investigational new drug application, or IND, by the U.S.

Food and Drug Administration, or FDA, for XTX301 for evaluation in patients with advanced solid tumors.

We anticipate initiating patient enrollment in monotherapy dose-escalation in a Phase 1 clinical trial evaluating XTX301 in patients with advanced solid tumors in the first quarter of 2023, and we anticipate reporting preliminary safety data from the Phase 1 clinical trial in the fourth quarter of 2023.

In addition, we are currently evaluating XTX101, an anti-cytotoxic T-lymphocyte-associated protein 4, or anti-CTLA-4, monoclonal antibody, or mAb, in monotherapy dose-escalation and monotherapy dose expansion of an ongoing Phase 1 clinical trial for patients with advanced solid tumors.

We anticipate completing monotherapy dose-escalation by the end of 2022 and reporting preliminary data from the Phase 1 clinical trial in the second quarter of 2023.

We plan to continue to explore opportunities for strategic collaborations to advance XTX101 and do not plan to initiate an anti-PD-1 combination cohort in the Phase 1 clinical trial or initiate a Phase 2 clinical trial for XTX101 without a partner.

In addition to our clinical-stage product candidates, we are continuing to leverage our platform and expertise in developing tumor-activated I-O therapies to continue to 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.

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 XTX101, an Fc-enhanced, anti-CTLA-4 monoclonal antibody, or mAb, XTX202, an interleukin 2, or IL-2, therapy, XTX301, an interleukin 12, or IL-12, therapy.

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 September 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.

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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 $65.8 million and $56.1 million for the nine months ended September 30, 2022 and 2021, respectively, and $75.8 million for the year ended December 31, 2021.

As of September 30, 2022, we had an accumulated deficit of $226.6 million.

We expect to incur significant expenses and operating losses for the foreseeable

Since inception, we have incurred significant operating losses, including net losses of $22.6 million and $21.4 million for the three months ended March 31, 2023 and 2022, respectively.

Our net loss for the year ended December 31, 2022 was $88.2 million.

As of March 31, 2023, we had an accumulated deficit of $271.8 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:

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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.

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

Our failure to raise capital or enter into such agreements 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.

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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 September 30, 2022, we had cash and cash equivalents of $139.1 million.

We believe that our existing cash and cash equivalents will 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 II, Item 1A of this Quarterly Report on Form 10-Q.

As of March 31, 2023, we had cash and cash equivalents of $93.3 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 end of the second quarter of 2024.

Financial Operations Overview

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These expenses include:

● personnel-related expenses, including salaries, bonuses, benefits and equity-based compensation expense for employees engaged in research and development functions;

● personnel-related expenses, including salaries, bonuses, benefits and stock-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;

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● 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 of sponsored research agreements and outside consultants, including their fees 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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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.

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 condensed consolidated balance sheets 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.

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.

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

manufacturing process development, clinical trials, preclinical studies and other research activities by program.

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 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.

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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 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.

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 stock-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.

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● 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 ability to successfully complete clinical trials with safety, potency and purity profiles that are satisfactory to the U.S.

Food and Drug Administration, or the FDA, or any comparable foreign regulatory authority;

● our receipt of regulatory approvals from applicable regulatory authorities;

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● 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;

● the impact of COVID-19 and its variants on our research and development employees, contractors and those who may participate in our planned studies.

● 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, 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 consist primarily of personnel-related costs, including salaries, bonuses, benefits, recruiting and stock-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;

board of directors’ fees;

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.

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.

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 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 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.

Securities and Exchange Commission, or SEC, requirements, directors’ and officers’ liability 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 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.

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.

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.

Other income (expense), net consists primarily of interest income earned from our cash and cash equivalents, interest expense principally on the note payable under our debt arrangement with Pacific Western Bank, or PacWest, and amortization of the debt discount related to debt issuance costs.

Results of Operations

Comparison of the three months ended September 30, 2022 and 2021

The following tables summarize our results of operations for the three months ended September 30, 2022 and 2021 (in thousands):

Comparison of the three months ended March 31, 2023 and 2022

The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended

September 30,

Operating expenses

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Research and Development Expenses

The following tables summarize our research and development expenses for the three months ended September 30, 2022 and 2021 (in thousands):

The following table summarizes our research and development expenses for the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended

September 30,

Other early programs and indirect research and development

Personnel-related (including equity-based compensation)

Personnel-related (including stock-based compensation)

Total research and development expenses

Research and development expenses increased by $2.6 million from $10.5 million for the three months ended September 30, 2021 to $13.0 million for the three months ended September 30, 2022.

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

● $ 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 $ 0.2 million in equity-based compensation;

● $ 0.6 million increase in expenses incurred in connection with XTX301, primarily driven by preclinical development activities, manufacturing activities and clinical development activities related to our planned Phase 1 clinical trial for XTX301;

● $ 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.

Research and development expenses increased by $1.2 million from $14.9 million for the three months ended March 31, 2022 to $16.1 million for the three months ended March 31, 2023.

The changes in research and development expenses were primarily due to the following:

● XTX101 costs decreased by $0.5 million, primarily driven by a $0.3 million decrease in clinical development activities and a $0.2 million decrease in manufacturing activities;

● XTX202 costs increased by $0.2 million, primarily driven by a $0.8 million increase in clinical development activities related to our Phase 1 clinical trial, partially offset by a $0.5 million decrease in manufacturing activities;

● XTX301 costs were relatively unchanged, as increases of $0.9 million in clinical development activities related to our Phase 1 clinical trial and $0.5 million in manufacturing activities were offset by a $1.4 million decrease in preclinical activities;

● other early programs and indirect research and development expenses increased by $0.3 million, primarily driven by an increase in external expenses related to preclinical research and development activities;

● personnel-related costs increased by $1.3 million, primarily driven by an increase in salaries, bonuses and benefits due to higher research and development headcount.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended September 30, 2022 and 2021 (in thousands):

The following table summarizes our general and administrative expenses for the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended

September 30,

Personnel-related (including equity-based compensation)

Professional and consulting fees

Facility-related and other general and administrative expenses

Total general and administrative expenses

General and administrative expenses increased by $1.7 million from $5.5 million for the three months ended September 30, 2021 to $7.2 million for the three months ended September 30, 2022.

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

● $1.0 million increase in personnel-related costs, primarily driven by higher general and administrative headcount and the corresponding increase of approximately $0.6 million in salaries, bonuses and benefits, and an increase of approximately $0.6 million in equity-based compensation;

● $0.7 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.

Other Income (Expense), Net

Other income (expense), net, changed by $0.7 million from other expense of $0.3 million for the three months ended September 30, 2021 to other income of $0.4 million for the three months ended September 30, 2022.

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

Comparison of the nine months ended September 30, 2022 and 2021

The following tables summarize our results of operations for the nine months ended September 30, 2022 and 2021 (in thousands):

Nine Months Ended

September 30,

Operating expenses

Research and development

General and administrative

Total operating expenses

Loss from operations

Other income (expense), net

Total other income (expense), net

Research and Development Expenses

The following tables summarize our research and development expenses for the nine months ended September 30, 2022 and 2021 (in thousands):

Nine Months Ended

September 30,

Other early programs and indirect research and development

Personnel-related (including equity-based compensation)

Total research and development expenses

Research and development expenses increased by $4.4 million from $39.8 million for the nine months ended September 30, 2021 to $44.2 million for the nine months ended September 30, 2022.

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

● $ 7.1 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 $ 2.1 million related to preclinical development activities and an increase of approximately $0.4 million in clinical development activities related to our planned Phase 1 clinical trial for XTX301;

● $ 4.3 million increase in personnel-related costs, primarily driven by higher research and development headcount and the corresponding increase of approximately $ 3.1 million in salaries, bonuses and benefits, and an increase of approximately $ 1.0 million in equity-based compensation;

● $ 2.4 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;

● $1.7 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 $6.8 million in manufacturing expenses for XTX202 due to a greater amount of manufacturing activities occurring in the comparable prior year period and a decrease of approximately $4.0 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 nine months ended September 30, 2022 and 2021 (in thousands):

Nine Months Ended

September 30,

Personnel-related (including equity-based compensation)

Personnel-related (including stock-based compensation)

Professional and consulting fees

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Total general and administrative expenses

General and administrative expenses increased by $6.1 million from $15.7 million for the nine months ended September 30, 2021 to $21.8 million for the nine months ended September 30, 2022.

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

● $5.0 million increase in personnel-related costs, primarily driven by higher general and administrative headcount and the corresponding increase of approximately $2.5 million in salaries, bonuses and benefits, and an increase of approximately $2.8 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;

● $2.4 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.

General and administrative expenses increased by $1.1 million from $6.3 million for the three months ended March 31, 2022 to $7.4 million for the three months ended March 31, 2023.

The changes in general and administrative expenses were primarily due to the following:

● personnel-related costs increased by $0.6 million, primarily driven by a $0.7 million increase in salaries, bonuses and benefits due to higher general and administrative headcount, partially offset by a $0.2 million decrease in stock-based compensation;

● professional and consulting fees increased by $0.6 million, primarily driven by an increase in consulting fees;

● facility-related and other general and administrative expenses decreased by $0.1 million, primarily driven by lower costs related to directors’ and officers’ liability insurance.

Other Income (Expense), Net

Other income (expense), net, changed by $0.8 million from other expense of $0.6 million for the nine months ended September 30, 2021 to other income of $0.2 million for the nine months ended September 30, 2022.

Other income (expense), net, changed by $1.0 million from other expense of $0.1 million for the three months ended March 31, 2022 to other income of $0.9 million for the three months ended March 31, 2023.

The change in other income (expense), net was primarily due to an increase in interest income earned from higher interest rates.

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.

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 September 30, 2022, we had cash and cash equivalents of $139.1 million.

Through March 31, 2023, 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 March 31, 2023, we had cash and cash equivalents of $93.3 million.

In November 2022, we filed a universal shelf registration statement on Form S-3 with the SEC, or the 2022 Form S-3, to register for sale up to $250,000,000 of our common stock, preferred stock, debt securities, units and warrants, which we may issue and sell from time to time in one or more offerings, which became effective on November 18, 2022 (333-268264).

In November 2022, we also entered into a sales agreement, or the Sales Agreement, with Cowen and Company LLC, 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.

Through the filing date of this Quarterly Report on Form 10-Q, we have not issued or sold any shares of our common stock pursuant to the Sales Agreement.

Issuances or sales of common stock pursuant to the Sales Agreement, if any, would be made under the 2022 Form S-3 and the corresponding prospectus related to the issuance and sale of shares of our common stock pursuant to the Sales Agreement.

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

Nine Months Ended

September 30,

Net cash provided by (used in):

Three Months Ended

Net cash used in:

Operating activities

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Financing activities

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

Net decrease 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 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 nine months ended September 30, 2022, net cash used in operating activities of $57.5 million was primarily due to our net loss of $65.8 million, partially offset by changes in operating assets and liabilities of $0.1 million and net non-cash expenses of $8.1 million.

During the nine months ended September 30, 2021, net cash used in operating activities of $63.6 million was primarily due to our net loss of $56.1 million and changes in operating assets and liabilities of $11.8 million, partially offset by net non-cash expenses of $4.3 million.

The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges, which are generally due to stock-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 three months ended March 31, 2023, net cash used in operating activities of $25.3 million was primarily driven by our net loss of $22.6 million and changes in operating assets and liabilities of $4.9 million, partially offset by net non-cash expenses of $2.3 million.

During the three months ended March 31, 2022, net cash used in operating activities of $20.8 million was primarily driven by our net loss of $21.4 million and changes in operating assets and liabilities of $2.0 million, partially offset by net non-cash expenses of $2.5 million.

Investing Activities

During the nine months ended September 30, 2022 and 2021, net cash used in investing activities of $1.4 million and $0.7 million, respectively, was primarily due to purchases of property and equipment.

During the three months ended March 31, 2023 and 2022, net cash used in investing activities of $0.2 million and $0.3 million, respectively, consisted of purchases of property and equipment.

Financing Activities

During the nine months ended September 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 nine months ended September 30, 2021, net cash provided by financing activities of $144.8 million consisted primarily of proceeds from the sale and issuance of our Series B and Series C convertible preferred stock.

During the three months ended March 31, 2023, net cash used in financing activities of $1.7 million consisted of repayments of debt principal and payments on our finance lease for certain lab equipment.

During the three months ended March 31, 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.

Loan and Security Agreement

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.

Under the loan agreement, 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 agreement are collateralized by substantially all of our assets, excluding intellectual property.

In November 2019, our wholly owned subsidiary, Xilio Development, Inc., entered into a loan and security agreement with PacWest, as amended and restated in May 2023, with us as a guarantor, which we refer to as the loan agreement.

Under the loan agreement, in November 2019, we borrowed $10.0 million under a term loan.

Borrowings under the loan agreement are collateralized by substantially all of the assets of Xilio Development, Inc., 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 September 30, 2022, the interest rate on the term loan is 6.5%.

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.

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

The loan agreement 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 agreement at September 30, 2022 (in thousands):

Total future principal payments

unamortized discount

Total notes payable

As of March 31, 2023, the interest rate on the term loan was 8.25%.

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.

As of March 31, 2023, the outstanding principal balance under the loan agreement was $8.3 million.

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.

Capital Requirements

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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 September 30, 2022, we had cash and cash equivalents of $139.1 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 second quarter of 2024.

As of March 31, 2023, we had cash and cash equivalents of $93.3 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 end of 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.

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:

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● 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;

● 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;

● our ability to seek, establish and maintain a collaboration to develop XTX101, our tumor-activated mAb product candidate, with a collaborator, including the financial terms and any cost-sharing arrangements of any such collaboration;

● 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 impacts of the COVID-19 pandemic;

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

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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 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.

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, instability in the financial markets, or other factors could also adversely impact our ability to access capital.

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.

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.

If we are unable to raise additional capital through equity or debt offerings, 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.

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements during the reporting periods.

These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future.

We base our estimates on historical experience, known trends and events and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Changes in estimates are reflected in reported results for the period in which they become known.

Actual results may differ materially from these estimates under different assumptions or conditions.

There have been no changes to our critical accounting policies appearing in our Annual Report filed on Form 10-K for the year ended December 31, 2022.

Emerging Growth Company and Smaller Reporting Company Status

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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.

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.

We may continue to be a smaller reporting company even after we are no longer an EGC, in which case we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis