Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2023.
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 platform to build a pipeline of novel, tumor-activated I-O molecules that are designed to optimize the therapeutic index by localizing anti-tumor activity within the tumor microenvironment, including tumor-activated cytokines, antibodies, bispecifics and immune cell engagers. 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. To date, we have presented data across our clinical-stage programs showing initial clinical validation for each of those molecules and our tumor-activated approach. Our most advanced clinical-stage product candidates are vilastobart (XTX101), an Fc-enhanced, tumor-activated, anti-CTLA-4 monoclonal antibody, or mAb, and XTX301, a tumor-activated, engineered interleukin 12, or IL-12, therapy. On November 7, 2024, we reported initial data from Phase 1C dose escalation for vilastobart in combination with atezolizumab (Tecentriq®) in patients with advanced solid tumors. We are currently advancing clinical development for vilastobart in combination with atezolizumab in a Phase 2 clinical trial in patients with microsatellite stable colorectal cancer, or MSS CRC, under our clinical trial collaboration with F. Hoffmann-La Roche Ltd., or Roche. We expect to report initial Phase 2 data for vilastobart in combination with atezolizumab in approximately 20 patients with MSS CRC in the fourth quarter of 2024 and in a total of approximately 40 patients with MSS CRC in the first quarter of 2025. We are also advancing clinical development for XTX301 in a Phase 1 clinical trial in patients with advanced solid tumors under our exclusive license agreement with Gilead Sciences, Inc., or Gilead, and plan to report safety, pharmacokinetic and pharmacodynamic data from the ongoing Phase 1 clinical trial for XTX301 in the fourth quarter of 2024. In addition to our clinical-stage product candidates, we are continuing to leverage our differentiated research platform and expertise in developing tumor-activated I-O therapies to advance preclinical development for XTX501, our tumor-activated PD-1/IL-2, which is designed to selectively stimulate PD-1 positive antigen-experienced T cells and enhance their function and is currently advancing in initial investigational new drug application, or IND, enabling activities, and to advance preclinical programs for tumor-activated immune cell engagers.
To date, we have financed our operations primarily from proceeds raised through private placements of preferred units and convertible preferred stock, a debt financing, our initial public offering, or IPO, of common stock in October 2021, private placements of our common stock and prefunded warrants, an upfront payment under our license agreement with Gilead and our at-the-market, or ATM, offering program. 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.
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Since inception, we have incurred significant operating losses, including net losses of $45.1 million and $58.7 million for the nine months ended September 30, 2024 and 2023, respectively, and a net loss of $76.4 million for the year ended December 31, 2023. As of September 30, 2024, we had an accumulated deficit of $370.7 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;
● hire additional research, clinical, regulatory, quality, manufacturing and general and administrative personnel;
● establish a commercial and distribution infrastructure to commercialize products for which we may obtain marketing approval, if any;
● continue to discover, validate and develop additional product candidates;
● continue to manufacture increasing quantities of our current or future product candidates for use in preclinical studies, clinical trials and for any potential commercialization;
● acquire or in-license other product candidates, technologies or intellectual property; and
● incur additional costs associated with current and future research, development and commercialization efforts and operations as a public company.
As a result, we will need substantial additional capital to support our continuing operations and pursue our strategy. As of September 30, 2024, we had cash and cash equivalents of $61.3 million. Based on our current operating plans, we anticipate that our existing cash and cash equivalents as of September 30, 2024 will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through the end of the second quarter of 2025. Since these amounts 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. 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 from the sale of products 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, we may generate revenue in the future from product sales. For the foreseeable future, we expect substantially all of our revenue, if any, would be generated from our license agreement with Gilead. For more information on our license agreement with Gilead, please see Note 6 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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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;
● 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, 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 Roche 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 platform technology, 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
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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.
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; and
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● general economic conditions, including inflation.
A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any product candidate we may develop.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, 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 also expect to continue to incur significant expenses associated with operating as a public company, including increased 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 expenses related to intellectual property 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.
Restructuring
In connection with the March 2024 strategic portfolio reprioritization and restructuring, we undertook efforts to reduce our expenses and streamline our operations, including a reduction in headcount of 15 employees, representing approximately 21% of our workforce immediately prior to the workforce reduction. Restructuring expense consists of costs directly incurred as a result of restructuring initiatives, and includes employee severance payments, benefits continuation, outplacement services and related expenses.
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 former debt arrangement with Pacific Western Bank, or PacWest, and amortization of the debt discount related to debt issuance costs.
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Results of Operations
Comparison of the three months ended September 30, 2024 and 2023
The following table summarizes our results of operations for the three months ended September 30, 2024 and 2023 (in thousands):
Three Months Ended
September 30,
2024
2023
Change
Revenue
License revenue
$
2,263
$
—
$
2,263
Total revenue
2,263
—
2,263
Operating expenses
Research and development
$
10,759
$
11,051
$
(292)
General and administrative
6,307
6,310
(3)
Restructuring
(41)
—
(41)
Total operating expenses
17,025
17,361
(336)
Loss from operations
(14,762)
(17,361)
2,599
Other income, net
Other income, net
742
613
129
Total other income, net
742
613
129
Net loss
$
(14,020)
$
(16,748)
$
2,728
License Revenue
We recognized $2.3 million in license revenue for the three months ended September 30, 2024 under the license agreement and stock purchase agreement that we entered into with Gilead in March 2024.
Research and Development Expenses
The following table summarizes our research and development expenses for the three months ended September 30, 2024 and 2023 (in thousands):
Three Months Ended
September 30,
2024
2023
Change
vilastobart (XTX101)
$
5,368
$
(967)
$
6,335
XTX301
1,112
757
355
XTX202
(1,237)
2,741
(3,978)
Other early programs and indirect research and development
1,997
3,744
(1,747)
Personnel-related
3,519
4,776
(1,257)
Total research and development expenses
$
10,759
$
11,051
$
(292)
Research and development expenses decreased by $0.3 million from $11.1 million for the three months ended September 30, 2023 to $10.8 million for the three months ended September 30, 2024. The changes in research and development expenses were primarily due to the following:
● vilastobart costs increased by $6.3 million, primarily driven by $3.5 million in aggregate development milestones that we incurred during the three months ended September 30, 2024 under our CTLA-4 monoclonal antibody license agreement with WuXi Biologics (Hong Kong) Limited, or WuXi Biologics, and our amended and restated exclusive license agreement with City of Hope, as well as a $2.0 million cost-sharing payment earned under our Roche clinical collaboration during the three months ended September 30, 2023, which was recorded as a reduction in research and development expenses;
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● XTX301 costs increased by $0.4 million, primarily driven by an increase in clinical development activities related to our ongoing Phase 1 clinical trial;
● XTX202 costs decreased by $4.0 million, primarily driven by a decrease in clinical development activities as a result of discontinuing further investment in XTX202 as a monotherapy, as well as invoiced investigator costs being lower than previously estimated amounts for the three months ended September 30, 2024;
● other early programs and indirect research and development expenses decreased by $1.7 million, primarily driven by a decrease in external expenses related to preclinical research and development activities; and
● personnel-related costs decreased by $1.3 million, primarily driven by a $1.1 million decrease in salaries, bonuses and benefits due to lower research and development headcount and a $0.2 million decrease in stock-based compensation.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the three months ended September 30, 2024 and 2023 (in thousands):
Three Months Ended
September 30,
2024
2023
Change
Personnel-related
$
3,688
$
3,779
$
(91)
Professional and consulting fees
1,658
1,435
223
Facility-related and other general and administrative expenses
961
1,096
(135)
Total general and administrative expenses
$
6,307
$
6,310
$
(3)
General and administrative expenses were $6.3 million for each of the three months ended September 30, 2024 and 2023. The changes in general and administrative expenses were primarily due to the following:
● personnel-related costs decreased by $0.1 million, primarily driven by a $0.2 million decrease in salaries, bonuses and benefits due to lower general and administrative headcount and a $0.1 million decrease in stock-based compensation, partially offset by a $0.2 million increase in recruiting costs;
● professional and consulting fees increased by $0.2 million, primarily driven by an increase in legal 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.
Restructuring
We recognized a credit of $41,000 in restructuring expenses for the three months ended September 30, 2024, related to a change in estimate for costs of continuation of certain employee benefits related to the workforce reduction announced in March 2024.
Other Income, Net
Other income, net, increased by $0.1 million from $0.6 million for the three months ended September 30, 2023 to $0.7 million for the three months ended September 30, 2024. The increase in other income, net, was primarily due to lower interest expense on our note payable as a result of the repayment of the remaining principal under our loan agreement with PacWest in March 2024.
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Comparison of the nine months ended September 30, 2024 and 2023
The following table summarizes our results of operations for the nine months ended September 30, 2024 and 2023 (in thousands):
Nine Months Ended
September 30,
2024
2023
Change
Revenue
License revenue
$
4,620
$
—
$
4,620
Total revenue
4,620
—
4,620
Operating expenses
Research and development
$
32,375
$
40,400
$
(8,025)
General and administrative
18,261
20,603
(2,342)
Restructuring
937
—
937
Total operating expenses
51,573
61,003
(9,430)
Loss from operations
(46,953)
(61,003)
14,050
Other income, net
Other income, net
1,805
2,254
(449)
Total other income, net
1,805
2,254
(449)
Net loss
$
(45,148)
$
(58,749)
$
13,601
License Revenue
We recognized $4.6 million in license revenue for the nine months ended September 30, 2024 under the license agreement and stock purchase agreement that we entered into with Gilead in March 2024.
Research and Development Expenses
The following table summarizes our research and development expenses for the nine months ended September 30, 2024 and 2023 (in thousands):
Nine Months Ended
September 30,
2024
2023
Change
vilastobart (XTX101)
$
7,160
$
509
$
6,651
XTX301
4,176
5,088
(912)
XTX202
3,364
7,242
(3,878)
Other early programs and indirect research and development
5,695
11,735
(6,040)
Personnel-related
11,980
15,826
(3,846)
Total research and development expenses
$
32,375
$
40,400
$
(8,025)
Research and development expenses decreased by $8.0 million from $40.4 million for the nine months ended September 30, 2023 to $32.4 million for the nine months ended September 30, 2024. The changes in research and development expenses were primarily due to the following:
● vilastobart costs increased by $6.7 million, primarily driven by $4.5 million in aggregate development milestones that we incurred during the nine months ended September 30, 2024 under our CTLA-4 monoclonal antibody license agreement with WuXi Biologics and our amended and restated exclusive license agreement with City of Hope and a $2.0 million increase in clinical development activities related to our ongoing Phase 1/2 clinical trial evaluating vilastobart in combination with atezolizumab;
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● XTX301 costs decreased by $0.9 million, primarily driven by a $2.5 million decrease in manufacturing activities related to the purchase of the initial supply of clinical trial material occurring in the comparable period, which was partially offset by a $1.6 million increase in clinical development activities related to our ongoing Phase 1 clinical trial;
● XTX202 costs decreased by $3.9 million, primarily driven by a decrease in clinical development activities as a result of discontinuing further investment in XTX202 as a monotherapy;
● other early programs and indirect research and development expenses decreased by $6.0 million, primarily driven by a decrease in external expenses related to preclinical research and development activities; and
● personnel-related costs decreased by $3.8 million, primarily driven by a $3.3 million decrease in salaries, bonuses and benefits due to lower research and development headcount and a $0.4 million decrease in stock-based compensation.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the nine months ended September 30, 2024 and 2023 (in thousands):
Nine Months Ended
September 30,
2024
2023
Change
Personnel-related
$
10,894
$
12,010
$
(1,116)
Professional and consulting fees
4,522
5,252
(730)
Facility-related and other general and administrative expenses
2,845
3,341
(496)
Total general and administrative expenses
$
18,261
$
20,603
$
(2,342)
General and administrative expenses decreased by $2.3 million from $20.6 million for the nine months ended September 30, 2023 to $18.3 million for the nine months ended September 30, 2024. The changes in general and administrative expenses were primarily due to the following:
● personnel-related costs decreased by $1.1 million, primarily driven by a $1.0 million decrease in salaries, bonuses and benefits due to lower general and administrative headcount and a $0.1 million decrease in stock-based compensation;
● professional and consulting fees decreased by $0.7 million, primarily driven by a $0.9 million decrease in consulting and other professional related fees, partially offset by a $0.2 million increase in legal fees; and
● facility-related and other general and administrative expenses decreased by $0.5 million, primarily driven by lower costs related to directors’ and officers’ liability insurance and a reduction in other general and administrative expenses.
Restructuring
We recognized $0.9 million in restructuring expenses for the nine months ended September 30, 2024. The restructuring expenses were associated with the workforce reduction announced in March 2024 and consisted of employee severance, benefits continuation and outplacement service costs.
Other Income, Net
Other income, net, decreased by $0.4 million from $2.3 million for the nine months ended September 30, 2023 to $1.8 million for the nine months ended September 30, 2024. The decrease in other income, net was primarily due to a decrease
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in interest income earned on our cash and cash equivalents due to a lower average cash balance and lower interest expense on our note payable as a result of the repayment of the remaining principal under our loan agreement with PacWest in March 2024.
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, convertible preferred stock, common stock and prefunded warrants, a debt financing, our IPO, a license agreement and our ATM offering program. Through September 30, 2024, we have received an aggregate of $430.5 million in gross proceeds from such transactions, including $225.5 million in gross proceeds from the sale and issuance of preferred units and convertible preferred stock, $10.0 million in gross proceeds from our debt financing with PacWest, $129.9 million in gross proceeds from our IPO, the $30.0 million upfront payment under our license agreement with Gilead, $28.1 million in gross proceeds from the sale and issuance of common stock and prefunded warrants to certain existing accredited investors and Gilead in private placements and $7.0 million in gross proceeds from the sale and issuance of common stock under our sales agreement with Cowen and Company LLC for our ATM offering program. As of September 30, 2024, we had cash and cash equivalents of $61.3 million.
In November 2022, we filed a universal shelf registration statement on Form S-3 with the SEC to register for sale up to $250.0 million 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 the sales agreement with Cowen and Company LLC under which we may issue and sell shares of our common stock under such Form S-3, 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. During the three months ended September 30, 2024, we did not sell any shares of our common stock pursuant to the sales agreement. The extent to which we use the sales agreement as a source of additional funding will depend on a number of factors, including the prevailing market price of our common stock, general market conditions, the extent to which we are able to secure funds from other sources, and whether we are then subject to limitations on our ability to use Form S-3 to sell more than one-third of the aggregate market value of our public float in the trailing 12-month period, which limitations will remain in place until such time as our public float exceeds $75 million. Accordingly, we may not be able to sell additional shares under the sales agreement at prices or in amounts that we deem acceptable, and there can be no assurance that we will sell any additional shares of common stock pursuant to the sales agreement.
In addition, subject to the terms and conditions of our stock purchase agreement with Gilead, through March 2025, we may, at our election, cause Gilead to purchase up to approximately $8.2 million of additional shares of common stock (including, at Gilead’s sole election, prefunded warrants in lieu of shares of common stock) in up to two additional private placements, at all times subject to Gilead not being deemed a beneficial owner of greater than 19.9% of our common stock upon the closing of the applicable additional private placement with Gilead.
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Cash Flows
The following table provides information regarding our cash flows for each period presented (in thousands):
Nine Months Ended
September 30,
2024
2023
Net cash provided by (used in):
Operating activities
$
(4,221)
$
(55,193)
Investing activities
(30)
(486)
Financing activities
20,994
(4,916)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
16,743
$
(60,595)
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.
During the nine months ended September 30, 2024, net cash used in operating activities of $4.2 million was primarily driven by our net loss of $45.1 million, partially offset by changes in operating assets and liabilities of $34.8 million, which includes the $39.1 million received from Gilead under the license agreement and stock purchase agreement that was recorded as deferred revenue at the outset of the arrangement, and net non-cash expenses of $6.2 million.
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.
Investing Activities
During the nine months ended September 30, 2024 and 2023, net cash used in investing activities consisted of purchases of property and equipment.
Financing Activities
During the nine months ended September 30, 2024, net cash provided by financing activities of $21.0 million consisted of proceeds from the sale and issuance of common stock and prefunded warrants to certain existing accredited investors and Gilead in private placements and proceeds from the sale and issuance of common stock under our ATM offering program, partially offset by repayments of debt principal under our loan agreement with PacWest and payments on our finance lease for certain lab equipment.
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.
Loan and Security Agreement
In November 2019, Xilio Development entered into a loan and security agreement with PacWest, as amended and restated in May 2023, with us as a guarantor. In November 2019, we borrowed $10.0 million under a term loan pursuant to the loan agreement. Borrowings under the loan agreement were collateralized by substantially all of the assets of Xilio
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Development, excluding intellectual property. Interest on amounts outstanding accrued at a variable annual rate equal to the greater of (i) the prime rate plus 0.25% or (ii) 4.75%. 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. In the first quarter of 2024, we repaid all amounts outstanding under the loan agreement, and PacWest released all security interests in our and our subsidiaries’ assets.
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.
As of September 30, 2024, we had cash and cash equivalents of $61.3 million. Based on our current operating plans, we anticipate that our existing cash and cash equivalents as of September 30, 2024 will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through the end of the second quarter of 2025. 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. In addition, since these amounts 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. Our management has developed plans to fund our operations, which primarily consist of raising additional capital through one or more of the following: additional equity or debt financings; additional 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 additional cost reduction strategies, which could include delaying, limiting, further 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 additional 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.
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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, vilastobart 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;
● 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 vilastobart in combination with atezolizumab, including the cost-sharing arrangements of such collaboration;
● the timing and amount of cost-sharing payments under our clinical collaboration with Roche for vilastobart and milestones, additional equity investments and other contingent payments under our partnership with Gilead for XTX301;
● 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 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, current or future pandemics, or other factors could also adversely impact our ability to access capital as and when needed. To the extent that we raise additional capital through the sale of equity or securities convertible into or exchangeable for equity, the ownership interest
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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 additional warrants, which could potentially dilute the ownership interest of our existing stockholders.
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed 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 or conditions. Except as described in Note 2, Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, there have been no changes to our critical accounting policies appearing in our Annual Report on Form 10-K for the year ended December 31, 2023.
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.