Xilio Therapeutics, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a clinical-stage biotechnology company 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 antibodies, 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, and 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 to 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. 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. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve profitability. Even if we are able to generate revenue from product sales, we may not become profitable. Liquidity and Going Concern Overview Since inception, we have incurred significant operating losses, including net losses of $58.7 million and $65.8 million for the nine months ended September 30, 2023 and 2022, respectively. Our net loss for the year ended December 31, 2022 was $88.2 million. As of September 30, 2023, we had an accumulated deficit of $307.9 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future, particularly to the extent we: ● continue to advance our current research programs and conduct additional research programs; ● advance our current product candidates and any future product candidates we may develop into preclinical and clinical development; ● seek marketing approvals for product candidates that successfully complete clinical trials, if any; ● obtain, expand, maintain, defend and enforce our intellectual property; 18 Table of Contents ● hire additional clinical, regulatory, quality, manufacturing and general and administrative personnel; ● establish a commercial and distribution infrastructure to commercialize products for which we may obtain marketing approval, if any; ● continue to discover, validate and develop additional product candidates; ● continue to manufacture increasing quantities of our current or future product candidates for use in preclinical studies, clinical trials and for any potential commercialization; ● acquire or in-license other product candidates, technologies or intellectual property; and ● incur additional costs associated with current and future research, development and commercialization efforts and operations as a public company. As a result, we will need substantial additional capital to support our continuing operations and pursue our strategy. As of September 30, 2023, we had cash and cash equivalents of $59.8 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. However, we have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we anticipate. Since our cash and cash equivalents as of September 30, 2023 are not expected to be sufficient to fund our operations for at least twelve months from the date of issuance of the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there is substantial doubt about our ability to continue as a going concern. To continue to fund our operations, our management has developed plans, which in the near term primarily consist of raising additional capital through one or more of the following: equity or debt financings; collaborations, partnerships or licensing transactions; or other sources. However, there can be no assurance that we will be able to complete any such transaction on acceptable terms or otherwise, and we may be unable to obtain sufficient additional capital. If we are not able to secure sufficient additional capital in the near term, we will need to implement cost reduction strategies, which could include delaying, limiting, reducing or eliminating both internal and external costs related to our operations and research and development programs. In addition, if our efforts to secure sufficient additional capital in the near term are unsuccessful, we may in the future need to seek to engage in one or more other strategic alternatives, including without limitation, the sale or divestiture of some or all of our assets or proprietary technologies. For more information, refer to “—Liquidity and Capital Resources—Capital Requirements and Going Concern” below and Note 1 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Financial Operations Overview Revenue We have not generated any revenue since inception and do not expect to generate any revenue from the sale of products for at least the next several years, if at all. If our development efforts for our current or future product candidates are successful and result in regulatory approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from product sales or payments from third-party collaborators or licensors. Operating Expenses Research and Development Expenses Research and development expenses consist primarily of costs incurred for our discovery efforts, research activities and development and testing of our programs and product candidates. These expenses include: ● personnel-related expenses, including salaries, bonuses, benefits and stock-based compensation expense for employees engaged in research and development functions; 19 Table of Contents ● costs incurred with third-party contract development and manufacturing organizations, or CDMOs, to acquire, develop and manufacture materials for both preclinical studies and current or future clinical trials; ● costs of funding research performed by third parties that conduct research and development and preclinical activities on our behalf; ● costs incurred with third-party contract research organizations, or CROs, and other third parties in connection with the conduct of our current or future clinical trials; ● costs of sponsored research agreements and outside consultants, including their fees and related expenses; ● costs incurred to maintain compliance with regulatory requirements; ● 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; and ● depreciation, amortization and other direct and allocated expenses, including rent, insurance, maintenance of facilities and other operating costs, incurred as a result of our research and development activities. We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific deliverables using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our condensed consolidated balance sheets as prepaid expenses or accrued research and development expenses. We record cost-sharing payments under our clinical trial collaboration with F. Hoffmann-La Roche Ltd., which we refer to as the Roche clinical collaboration, as a reduction of research and development costs upon the achievement of each study development event specified in the clinical supply agreement. 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 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. Due to the number of ongoing programs and our ability to use resources across several projects, personnel-related expenses and indirect or shared operating costs incurred for our research and development programs are not recorded or maintained on a program-by-program basis. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will remain approximately the same or will continue to increase for the foreseeable future as we advance our programs and our current or future product candidates into and through the development phase. We expect our discovery research efforts and our related personnel costs to remain consistent with historical levels. In addition, as we progress our most advanced product candidates in clinical development, 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. In the event we are unable to raise sufficient additional capital in the near term to fund our operations, we will be required to adopt cost reduction strategies that seek to maintain our ability to continue the development of our most advanced product candidates in clinical development while otherwise reducing our overall research and development expenses. 20 Table of Contents At this time, we cannot reasonably estimate or know the nature, timing and projected costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates or programs. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of: ● the scope, timing, costs and progress of preclinical and clinical development activities; ● the number and scope of preclinical and clinical programs we decide to pursue; ● our ability to implement and maintain cost reduction strategies, as well as the timing of such cost reductions; ● our ability to maintain our current research and development programs; ● our ability to establish an appropriate safety profile for our product candidates with IND-enabling studies; ● our ability to hire and retain key research and development personnel; ● the costs associated with the development of any additional product candidates we develop or acquire through collaborations; ● 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 U.S. Food and Drug Administration, or the FDA, or any comparable foreign regulatory authority; ● our receipt of regulatory approvals from applicable regulatory authorities; ● our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates; ● our ability to commercialize products, if and when approved, whether alone or in collaboration with others; ● the continued acceptable safety profiles of the product candidates following approval, if any; ● our ability to establish and maintain agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if any of our product candidates are approved; ● 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; and ● 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. We may never succeed in obtaining regulatory approval for any product candidate we may develop. ​ 21 Table of Contents General and Administrative Expenses 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 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 remain consistent with historical levels as we maintain our infrastructure to support our research and development activities. We expect to continue to incur significant expenses associated with operating as a public company, including costs for accounting, audit, legal, regulatory and tax-related services attributable to maintaining compliance with exchange listing standards and U.S. Securities and Exchange Commission, or SEC, requirements, directors’ and officers’ liability insurance costs and investor and public relations costs. We also expect to continue to incur additional intellectual property-related expenses as we file patent applications to protect intellectual property arising from our research and development activities. In the event we are unable to obtain sufficient additional capital in the near term, we will need to implement cost reduction strategies that seek to reduce our general and administrative expenses while maintaining sufficient infrastructure to support our planned research and development activities and operations as a public company. Other Income, Net Other income, 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, 2023 and 2022 The following table summarizes our results of operations for the three months ended September 30, 2023 and 2022 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ September 30, ​ ​ ​ ​ 2023 2022 Change Operating expenses ​ ​ ​ ​ ​ ​ Research and development ​ $ 11,051 ​ $ 13,038 ​ $ (1,987) General and administrative ​ 6,310 ​ 7,168 ​ (858) Total operating expenses ​ 17,361 ​ 20,206 ​ (2,845) Loss from operations ​ (17,361) ​ (20,206) ​ 2,845 Other income, net ​ ​ ​ Other income, net ​ 613 ​ 416 ​ 197 Total other income, net ​ 613 ​ 416 ​ 197 Net loss ​ $ (16,748) ​ $ (19,790) ​ $ 3,042 ​ ​ 22 Table of Contents Research and Development Expenses The following table summarizes our research and development expenses for the three months ended September 30, 2023 and 2022 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ September 30, ​ ​ ​ ​ 2023 2022 Change XTX101 ​ $ (967) ​ $ 1,394 ​ $ (2,361) XTX202 ​ ​ 2,741 ​ ​ 1,452 ​ ​ 1,289 XTX301 ​ ​ 757 ​ ​ 1,974 ​ ​ (1,217) Other early programs and indirect research and development ​ ​ 3,744 ​ ​ 2,861 ​ ​ 883 Personnel-related (including stock-based compensation) ​ ​ 4,776 ​ ​ 5,357 ​ ​ (581) Total research and development expenses ​ $ 11,051 ​ $ 13,038 ​ $ (1,987) ​ Research and development expenses decreased by $2.0 million from $13.0 million for the three months ended September 30, 2022 to $11.1 million for the three months ended September 30, 2023. The changes in research and development expenses were primarily due to the following: ● XTX101 costs decreased by $2.4 million from $1.4 million for the three months ended September 30, 2022 to $(1.0) million for the three months ended September 30, 2023, primarily driven by a $2.0 million cost-sharing payment that we earned under our Roche clinical collaboration during the three months ended September 30, 2023 and recorded as a reduction in research and development expenses and a $0.2 million decrease due to the timing of manufacturing activities in the comparable period; ● XTX202 costs increased by $1.3 million, primarily driven by a $1.8 million increase in clinical development activities related to our ongoing Phase 1/2 clinical trial, partially offset by a $0.4 million decrease due to the timing of manufacturing activities in the comparable period; ● XTX301 costs decreased by $1.2 million, primarily driven by a $1.2 million decrease due to the timing of manufacturing activities in the comparable period and a $0.2 million decrease in preclinical activities, partially offset by a $0.3 million increase in clinical development activities related to our Phase 1 clinical trial; ● other early programs and indirect research and development expenses increased by $0.9 million, primarily driven by an increase in external expenses related to preclinical research and development activities; and ● personnel-related costs decreased by $0.6 million, primarily driven by a decrease in salaries, bonuses and benefits due to lower research and development headcount. General and Administrative Expenses The following table summarizes our general and administrative expenses for the three months ended September 30, 2023 and 2022 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ September 30, ​ ​ ​ ​ 2023 2022 Change Personnel-related (including stock-based compensation) ​ $ 3,779 ​ $ 3,808 ​ $ (29) Professional and consulting fees ​ ​ 1,435 ​ ​ 2,135 ​ ​ (700) Facility-related and other general and administrative expenses ​ ​ 1,096 ​ ​ 1,225 ​ ​ (129) Total general and administrative expenses ​ $ 6,310 ​ $ 7,168 ​ $ (858) 23 Table of Contents ​ General and administrative expenses decreased by $0.9 million from $7.2 million for the three months ended September 30, 2022 to $6.3 million for the three months ended September 30, 2023. The changes in general and administrative expenses were primarily due to the following: ● professional and consulting fees decreased by $0.7 million, primarily driven by a decrease in consulting fees; and ● 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 and a reduction in other general and administrative expenses. Other Income, Net Other income, net, increased by $0.2 million from $0.4 million for the three months ended September 30, 2022 to $0.6 million for the three months ended September 30, 2023. The increase in other income, net was primarily due to an increase in interest income earned on our cash and cash equivalents due to higher interest rates and lower interest expense on our note payable as a result of the commencement of the repayment of principal beginning in January 2023. Comparison of the nine months ended September 30, 2023 and 2022 The following table summarizes our results of operations for the nine months ended September 30, 2023 and 2022 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ September 30, ​ ​ ​ ​ 2023 2022 Change Operating expenses ​ ​ ​ ​ ​ ​ Research and development ​ $ 40,400 ​ $ 44,204 ​ $ (3,804) General and administrative ​ 20,603 ​ 21,778 ​ (1,175) Total operating expenses ​ 61,003 ​ 65,982 ​ (4,979) Loss from operations ​ (61,003) ​ (65,982) ​ 4,979 Other income, net ​ ​ ​ Other income, net ​ 2,254 ​ 226 ​ 2,028 Total other income, net ​ 2,254 ​ 226 ​ 2,028 Net loss ​ $ (58,749) ​ $ (65,756) ​ $ 7,007 Research and Development Expenses The following table summarizes our research and development expenses for the nine months ended September 30, 2023 and 2022 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ September 30, ​ ​ ​ ​ 2023 2022 Change XTX101 ​ $ 509 ​ $ 5,428 ​ $ (4,919) XTX202 ​ ​ 7,242 ​ ​ 4,017 ​ ​ 3,225 XTX301 ​ ​ 5,088 ​ ​ 9,253 ​ ​ (4,165) Other early programs and indirect research and development ​ ​ 11,735 ​ ​ 10,234 ​ ​ 1,501 Personnel-related (including stock-based compensation) ​ ​ 15,826 ​ ​ 15,272 ​ ​ 554 Total research and development expenses ​ $ 40,400 ​ $ 44,204 ​ $ (3,804) ​ 24 Table of Contents Research and development expenses decreased by $3.8 million from $44.2 million for the nine months ended September 30, 2022 to $40.4 million for the nine months ended September 30, 2023. The changes in research and development expenses were primarily due to the following: ● XTX101 costs decreased by $4.9 million, primarily driven by a $2.1 million decrease due to the timing of manufacturing activities in the comparable period, a $2.0 million cost-sharing payment that we earned under our Roche clinical collaboration during the nine months ended September 30, 2023 and recorded as a reduction in research and development expenses and a $0.6 million decrease in clinical development activities related to our ongoing Phase 1 clinical trial; ● XTX202 costs increased by $3.2 million, primarily driven by a $4.4 million increase in clinical development activities related to our ongoing Phase 1/2 clinical trial, partially offset by a $1.0 million decrease due to the timing of manufacturing activities in the comparable period and a $0.2 million decrease in preclinical activities; ● XTX301 costs decreased by $4.2 million, primarily driven by a $3.1 million decrease due to the timing of manufacturing activities in the comparable period, a $2.5 million decrease in preclinical activities and a $0.3 million decrease in regulatory activities, partially offset by a $1.7 million increase in clinical development activities related to our Phase 1 clinical trial; ● other early programs and indirect research and development expenses increased by $1.5 million, primarily driven by an increase in external expenses related to preclinical research and development activities; and ● personnel-related costs increased by $0.6 million, primarily driven by an increase in salaries, bonuses and benefits due to consistent research and development headcount combined with an increase in average compensation. General and Administrative Expenses The following table summarizes our general and administrative expenses for the nine months ended September 30, 2023 and 2022 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ September 30, ​ ​ ​ ​ 2023 2022 Change Personnel-related (including stock-based compensation) ​ $ 12,010 ​ $ 12,612 ​ $ (602) Professional and consulting fees ​ ​ 5,252 ​ ​ 5,221 ​ ​ 31 Facility-related and other general and administrative expenses ​ ​ 3,341 ​ ​ 3,945 ​ ​ (604) Total general and administrative expenses ​ $ 20,603 ​ $ 21,778 ​ $ (1,175) ​ General and administrative expenses decreased by $1.2 million from $21.8 million for the nine months ended September 30, 2022 to $20.6 million for the nine months ended September 30, 2023. The changes in general and administrative expenses were primarily due to the following: ● personnel-related costs decreased by $0.6 million, primarily driven by a $1.0 million decrease in stock-based compensation, as the prior year period included $0.6 million in non-recurring compensation expense resulting from the modification of previously issued stock options, partially offset by a $0.4 million increase in salaries, bonuses and benefits; and ● facility-related and other general and administrative expenses decreased by $0.6 million, primarily driven by lower costs related to directors’ and officers’ liability insurance and a reduction in other general and administrative expenses. 25 Table of Contents Other Income, Net Other income, net, increased by $2.0 million from $0.2 million for the nine months ended September 30, 2022 to $2.3 million for the nine months ended September 30, 2023. The increase in other income, net was primarily due to an increase in interest income earned on our cash and cash equivalents due to higher interest rates and lower interest expense on our note payable as a result of the commencement of the repayment of principal beginning in January 2023. Liquidity and Capital Resources Sources of Liquidity Since our inception, we have incurred significant operating losses and negative cash flows from operations. We have not yet commercialized any of our product candidates, which are in preclinical or early clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. To date, we have financed our operations primarily from proceeds raised through private placements of preferred units and convertible preferred stock, a debt financing and our IPO. Through September 30, 2023, we have received an aggregate of $350.9 million in net proceeds from such transactions, including $116.4 million in net proceeds from our IPO, $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 September 30, 2023, we had cash and cash equivalents of $59.8 million. In November 2022, we filed a universal shelf registration statement on Form S-3 with the SEC, or 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 Form S-3 and the corresponding prospectus related to the issuance and sale of shares of our common stock pursuant to the Sales Agreement. Cash Flows The following table provides information regarding our cash flows for each period presented (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ September 30, ​ 2023 2022 Net cash used in: ​ ​ ​ ​ Operating activities ​ $ (55,193) ​ $ (57,500) Investing activities ​ (486) ​ (1,358) Financing activities ​ (4,916) ​ (48) Net decrease in cash, cash equivalents and restricted cash ​ $ (60,595) ​ $ (58,906) ​ 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, 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 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. 26 Table of Contents During the nine months ended September 30, 2023, net cash used in operating activities of $55.2 million was primarily driven by our net loss of $58.7 million and changes in operating assets and liabilities of $3.5 million, partially offset by net non-cash expenses of $7.0 million. During the nine months ended September 30, 2022, net cash used in operating activities of $57.5 million was primarily driven by 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. Investing Activities During the nine months ended September 30, 2023 and 2022, net cash used in investing activities of $0.5 million and $1.4 million, respectively, consisted of purchases of property and equipment. Financing Activities During the nine months ended September 30, 2023, net cash used in financing activities of $4.9 million consisted of repayments of debt principal and payments on our finance lease for certain lab equipment, partially offset by proceeds from the issuance of common stock under our employee stock purchase plan and the exercise of stock options. 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. Loan and Security Agreement 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, 2023, the interest rate on the term loan was 8.75%. We made interest-only payments on the outstanding balance 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 September 30, 2023, the outstanding principal balance under the loan agreement was $5.0 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 and Going Concern 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 maintain the research efforts and preclinical activities associated with our other existing programs and discovery platform. In addition, we expect to continue to incur additional costs associated with operating as a public company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future. Inflation generally affects us by increasing our cost of labor and certain services. We do not believe that inflation had a material effect on our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. However, the United States has recently experienced historically high levels of inflation. If the inflation rate continues to increase it may affect our expenses, such as employee compensation and research and development charges due to, for example, increases in the costs of labor and supplies. Additionally, the United States is experiencing a workforce shortage, which in turn has created a competitive wage environment that may also increase our operating costs in the future. 27 Table of Contents As of September 30, 2023, we had cash and cash equivalents of $59.8 million. We believe that our existing cash and cash equivalents will be sufficient to enable us to fund our planned operating expenses and capital expenditure requirements into the end of the second quarter of 2024. However, 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. In addition, since our cash and cash equivalents as of September 30, 2023 are not expected to be sufficient to fund our operating expenses and capital expenditures for at least twelve months from the date of issuance of the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there is substantial doubt about our ability to continue as a going concern. We will require substantial additional capital to fund our operations as we continue to advance our product candidates through clinical trials and maintain the infrastructure necessary to support these activities. To continue to fund our operations, our management has developed plans, which in the near term primarily consist of raising additional capital through one or more of the following: equity or debt financings; partnerships or licensing transactions; or other sources. However, there can be no assurance that we will be able to complete any such transaction on acceptable terms or otherwise, and we may be unable to obtain sufficient additional capital. If we are not able to secure sufficient additional capital in the near term, we will need to implement cost reduction strategies, which could include delaying, reducing or eliminating both internal and external costs related to our operations and research and development programs. In addition, if our efforts to secure sufficient additional capital in the near term are unsuccessful, we may in the future need to seek to engage in one or more other strategic alternatives, including without limitation, the sale or divestiture of some or all of our assets or proprietary technologies. The accompanying condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business for the foreseeable future. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. 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 clinical-stage product candidates, XTX101, XTX202 and XTX301, and ongoing preclinical development for our current and future product candidates; ● our ability to implement and maintain cost reduction strategies, as well as the timing of such cost reductions; ● the scope, prioritization and number of our research and development programs; ● the scope, costs, timing and outcome of regulatory review of our product candidates; ● the costs of securing manufacturing materials for use in preclinical studies, clinical trials and, for any product candidates for which we receive regulatory approval, if any, commercial supply; ● the costs and timing of future commercialization activities for any of our product candidates for which we receive regulatory approval; ● the amount and timing of revenue, if any, received from commercial sales of any product candidates for which we receive regulatory approval; ● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights and defending any intellectual property-related claims; 28 Table of Contents ● 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 maintain our clinical collaboration to further develop XTX101, our Fc-enhanced tumor-activated anti-CTLA-4, in combination with atezolizumab, including the cost-sharing arrangements of such collaboration; ● 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; ● the costs of maintaining our operations and continuing to operate as a public company; and ● whether we are able to overcome the substantial doubt about our ability to continue as a going concern. Identifying potential product candidates and conducting preclinical studies and clinical trials is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for several years, if ever. Accordingly, we will need to obtain substantial additional capital to achieve our business objectives. Our expectation with respect to our ability to fund our currently planned operations is based on estimates that are subject to various risks and uncertainties. Our operating plan may change as a result of many factors currently unknown to management and there can be no assurance that our current operating plan will be achieved in the time frame anticipated by us, and we may exhaust our available capital resources sooner than we expect. 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, 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. 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. Critical Accounting Policies and Use of Estimates 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 condensed consolidated 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 29 Table of Contents 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 As an emerging growth company, or EGC, under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, we may delay the adoption of certain accounting standards until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for EGCs include presentation of only two years of audited financial statements in a registration statement for an IPO, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements. In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an EGC to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we can adopt the new or revised standard at the time private companies adopt the new or revised standard and may do so until such time that we either (1) irrevocably elect to “opt out” of such extended transition period or (2) no longer qualify as an emerging growth company. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We are also a “smaller reporting company,” as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an EGC, in which case we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.