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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________________________________________
FORM 10-Q
______________________________________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________to_____________.
Commission File Number 001-40366
______________________________________________________________________________________
WEREWOLF THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________________
Delaware82-3523180
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
200 Talcott Ave, 2nd Floor
Watertown, Massachusetts
(Address of principal executive offices)
02472
(Zip Code)
Registrant’s telephone number, including area code: (617) 952‑0555
1030 Massachusetts Avenue, Suite 210, Cambridge, Massachusetts 02138
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par value per share
HOWL
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non‑accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes No
As of August 5, 2022, there were 29,529,425 shares of common stock, $0.0001 par value per share, outstanding.


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Page
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021


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References to Werewolf
Throughout this Quarterly Report on Form 10-Q, or Quarterly Report, the “Company,” “Werewolf,” “Werewolf Therapeutics,” “we,” “us,” “our,” and similar references, except where the context requires otherwise, refer to Werewolf Therapeutics, Inc. and its consolidated subsidiary, and “board of directors” refers to the board of directors of Werewolf Therapeutics, Inc.
Cautionary Note Regarding Forward-Looking Statements and Industry Data
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements.
The words “aim,” “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” or the negative of these words or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:
the initiation, timing, progress and results of our research and development programs and preclinical studies and planned clinical trials, including the anticipated timing of submission of investigational new drug applications;
our estimates regarding expenses, capital requirements, need for additional financing and the period over which we believe our existing cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements;
our plans to develop and, if approved, subsequently commercialize product candidates;
the timing of and our ability to submit applications and obtain and maintain regulatory approvals for product candidates;
the potential advantages of our PREDATOR platform and our ability to use our platform to identify and develop future product candidates;
our estimates regarding the potential market opportunities for our product candidates;
our commercialization, marketing and manufacturing capabilities and strategy;
our intellectual property position and our expectations regarding our ability to obtain and maintain intellectual property protection;
our ability to identify additional products, product candidates or technologies with significant commercial potential that are consistent with our commercial objectives;
the impact of government laws and regulations;
our competitive position and expectations regarding developments and projections relating to our competitors and any competing therapies that are or become available;
developments and expectations regarding developments and projections relating to our competitors and our industry;
the impact of the COVID-19 pandemic on our business, including our preclinical studies and clinical trials; and
our expectations regarding the time during which we will be an emerging growth company under the Jumpstart our Business Startup Act of 2012.
There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report, particularly in Part II, Item 1A. “Risk Factors”, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.
You should read this Quarterly Report and the documents that we have filed or incorporated by reference as exhibits to this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report are made as of the date of this Quarterly Report, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely on these statements.
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Trademarks and Trade names
We own or have rights to trademarks, service marks and trade names that we use in connection with the operation of our business, including our corporate name, logos and website names. The service marks and trademarks that we own include the marks PREDATOR™ and INDUKINE™. Other trademarks, service marks and trade names appearing in this Quarterly Report are the property of their respective owners. Solely for convenience, some of the trademarks, service marks and trade names referred to in this Quarterly Report are listed without the ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, service marks and trade names.
Risk Factor Summary
Our business is subject to numerous risks that, if realized, could materially and adversely affect our business, financial condition, results of operations and future growth prospects. These risks are discussed more fully in Part II, Item 1A. “Risk Factors” in this Quarterly Report. These risks include, but are not limited to, the following:
We have a limited operating history, have incurred significant operating losses since our inception and expect to incur significant losses for the foreseeable future.
We have no products approved for commercial sale and have not generated any revenue from product sales. We may never generate any revenue or become profitable or, if we achieve profitability, we may not be able to sustain it.
We will need to obtain substantial additional funding to finance our operations and complete the development and any commercialization of WTX-124, WTX-330 and any future product candidates.
We are early in our development efforts and our current product candidates will require successful completion of additional preclinical and clinical development before we can seek regulatory approval for any product candidates.
Our business is highly dependent on the success of our initial INDUKINE molecules, which are in the early stages of development and will require significant additional preclinical and clinical development before we can seek regulatory approval for and launch a product commercially.
Our approach to the discovery and development of product candidates based on our PREDATOR platform is unproven, and we do not know whether we will be able to develop any products of commercial value.
Manufacturing INDUKINE molecules is subject to risk since they are a novel class of multi-domain biologics that include protease cleavable linkers, and they have never been produced on a clinical or commercial scale. We may be unable to manufacture INDUKINE molecules at the scale needed for clinical development and commercial production on a timely basis or at all.
Preclinical studies and clinical trials are expensive, time-consuming and difficult to design and implement, and involve uncertain outcomes.
We may encounter substantial delays in the commencement or completion, or termination or suspension, of our clinical trials, which could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.
If we experience delays or difficulties in the enrollment of patients in clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
We expect to develop WTX-124 and WTX-330, and potentially future product candidates, in combination with third-party drugs, some of which may still be in development, and we will have limited or no control over the safety, supply, regulatory status or regulatory approval of such drugs.
We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.
We rely, and expect to continue to rely, on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines or comply with regulatory requirements, we may not be able to obtain regulatory approval of or commercialize any product candidates.
The manufacturing of biologics is complex and we do not have our own clinical manufacturing capabilities. We will rely on third parties to produce preclinical, clinical and commercial supplies of all current and any future product candidates.
We rely on our license agreement with Harpoon Therapeutics, Inc. for patent rights with respect to our product candidates and may in the future acquire additional third-party intellectual property rights on which we may similarly rely. We face risks with respect to such reliance, including the risk that we could lose these rights that are important to our business if we fail to comply with our obligations under these licenses.
Our proprietary position in part depends upon patents that are manufacturing, formulation or method-of-use patents, which may not prevent a competitor or other third party from using the same product candidate for another use.
In the past, we have identified material weaknesses in our internal control over financial reporting, and if we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our common stock may be materially adversely affected.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Werewolf Therapeutics, Inc.
Condensed Consolidated Balance Sheets (unaudited)
(amounts in thousands, except par value amounts)
June 30,
2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents
$145,712 $157,531 
Prepaid expenses and other current assets
6,233 3,537 
Other receivables2,220  
Total current assets
154,165 161,068 
Property and equipment, net
9,031 2,913 
Restricted cash
1,208 1,208 
Operating lease right of use asset
9,070 13,412 
Other non-current assets
1,855 649 
Total assets
$175,329 $179,250 
Liabilities and Stockholders’ Equity:
Current liabilities:
Accounts payable
$2,590 $2,037 
Accrued expenses and other current liabilities
14,090 8,765 
Operating lease liability, current
1,871 1,072 
Deferred revenue, current
11,817  
Total current liabilities
30,368 11,874 
Operating lease liability, net of current portion
13,675 14,589 
Deferred revenue, net of current portion
1,254  
Other liabilities191  
Total liabilities
45,488 26,463 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value, 5,000 shares authorized at June 30, 2022 and December 31, 2021; no shares issued or outstanding as of June 30, 2022 or December 31, 2021
  
Common stock, $0.0001 par value, 200,000 shares authorized as of June 30, 2022 and December 31, 2021; 28,456 and 27,608 shares issued as of June 30, 2022 and December 31, 2021, respectively; 28,278 and 27,313 shares outstanding as of June 30, 2022 and December 31, 2021, respectively
2 2 
Additional paid-in capital
412,671 405,680 
Accumulated deficit
(282,832)(252,895)
Total stockholders’ equity
129,841 152,787 
Total liabilities and stockholders’ equity
$175,329 $179,250 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 1z
Werewolf Therapeutics, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(amounts in thousands, except per share amounts)
Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
Revenue:
Collaboration revenue$4,148 $ $4,148 $ 
Operating expenses:
Research and development
13,887 7,265 24,832 12,082 
General and administrative
5,233 3,691 9,654 6,326 
Total operating expenses
19,120 10,956 34,486 18,408 
Operating loss
(14,972)(10,956)(30,338)(18,408)
Other income:
Other income (expense), net281 (16)265 (32)
Interest income
97 51 136 84 
Total other income
378 35 401 52 
Net loss
(14,594)(10,921)(29,937)(18,356)
Accretion of redeemable convertible preferred stock to redemption value
 (56,926) (151,942)
Net loss attributable to common stockholders
$(14,594)$(67,847)$(29,937)$(170,298)
Net loss per share attributable to common stockholders, basic and diluted
$(0.53)$(3.82)$(1.09)$(17.86)
Weighted-average common shares outstanding, basic and diluted
27,517 17,750 27,455 9,535 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Werewolf Therapeutics, Inc.
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) (unaudited)
(amounts in thousands)
Series A Redeemable Convertible Preferred Stock
Series B Redeemable Convertible Preferred Stock
Common Stock
Additional Paid-in Capital
Accumulated Deficit
Total Stockholders’Equity
Shares
Amount
Shares
Amount
Shares
Amount
Balance at December 31, 2021 $  $ 27,608 $2 $405,680 $(252,895)$152,787 
Stock-based compensation expense— — — — — — 1,745 — 1,745 
Stock option exercises— — — — 46 — 129 — 129 
Net loss
— — — — — — — (15,343)(15,343)
Balance at March 31, 2022    27,654 2 407,554 (268,238)139,318 
Issuance of common stock from at the market offering, net of issuance costs of $314
— — — — 801 — 3,339 — 3,339 
Stock-based compensation expense— — — — — — 1,777 — 1,777 
Stock option exercises— — — — 1 — 1 — 1 
Net loss
— — — — — — — (14,594)(14,594)
Balance at June 30, 2022 $  $ 28,456 $2 $412,671 $(282,832)$129,841 
Series A Redeemable Convertible Preferred Stock
Series B Redeemable Convertible Preferred Stock
Common Stock
Additional Paid-in Capital
Accumulated Deficit
Total Stockholders’ (Deficit) Equity
Shares
Amount
Shares
Amount
Shares
Amount
Balance at December 31, 202080,247 $69,012 78,222 $72,070 1,746 $2 $ $(51,865)$(51,863)
Accretion of redeemable convertible preferred stock to redemption value— 49,753 — 45,263 — — (560)(94,456)(95,016)
Stock-based compensation expense— — — — — — 539 — 539 
Stock option exercises— — — — 14 — 21 — 21 
Net loss
— — — — — — — (7,435)(7,435)
Balance at March 31, 202180,247 118,765 78,222 117,333 1,760 2  (153,756)(153,754)
Accretion of redeemable convertible preferred stock to redemption value— 29,619 — 27,307 — — (335)(56,591)(56,926)
Conversion of redeemable convertible preferred stock to common stock upon closing of initial public offering(80,247)(148,384)(78,222)(144,640)18,280 — 293,024 — 293,024 
Issuance of common stock from initial public offering, net of issuance costs of $2,379
— — — — 7,500 — 109,221 — 109,221 
Stock-based compensation expense— — — — — — 781 — 781 
Stock option exercises— — — — 28 — 131 — 131 
Net loss
— — — — — — — (10,921)(10,921)
Balance at June 30, 2021 $  $ 27,568 $2 $402,822 $(221,268)$181,556 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Werewolf Therapeutics, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(amounts in thousands)
Six Months Ended
June 30,
20222021
Operating activities:
Net loss
$(29,937)$(18,356)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense
3,522 1,320 
Depreciation expense
283 101 
Non-cash lease expense
961 336 
Change in fair value of derivative liability262  
Changes in operating assets and liabilities:
Prepaid expenses and other current assets    
(2,726)(2,691)
Other receivables(2,220) 
Other non-current assets(1,206) 
Accounts payable
132 1,864 
Accrued expenses and other current liabilities
3,528 (1)
Deferred revenue13,071  
Right of use assets and operating lease liability
(115)(328)
Other liabilities
191 (31)
Net cash used in operating activities
(14,254)(17,786)
Investing activities:
Purchases of property and equipment
(1,139)(124)
Net cash used in investing activities
(1,139)(124)
Financing activities:
Proceeds from at the market offering of common stock3,653  
Proceeds from initial public offering of common stock 111,600 
Payment of equity issuance costs(239)(2,087)
Proceeds from stock option exercises
160 152 
Net cash provided by financing activities
3,574 109,665 
Net (decrease) increase in cash and cash equivalents
(11,819)91,755 
Cash, cash equivalents and restricted cash—beginning of period
158,830 92,777 
Cash, cash equivalents and restricted cash—end of period
$147,011 $184,532 
Non-cash investing and financing activities:
Purchases of property and equipment in accounts payable and accrued expenses$1,881 $15 
Issuance costs in accounts payable and accrued expenses
$75 $318 
Stock option exercise receivables in prepaid expenses and other current assets
$(30)$ 
Non-cash accretion of Series A and Series B redeemable convertible preferred stock
$ $151,942 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Werewolf Therapeutics, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Business
Werewolf Therapeutics, Inc. (“Werewolf” or the “Company”) was incorporated in the state of Delaware in October 2017. The Company is an innovative biopharmaceutical company pioneering the development of therapeutics engineered to stimulate the body’s immune system for the treatment of cancer. The Company’s headquarters are located in Watertown, Massachusetts.
Since inception, the Company has devoted substantially all of its time and efforts to performing research and development activities, raising capital and recruiting management and technical staff to support these operations. The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry including, but not limited to, technical risks associated with the successful research, development and manufacturing of product candidates, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Current and future programs will require significant research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
The Company had cash and cash equivalents of $145.7 million at June 30, 2022. The Company expects that its cash and cash equivalents will enable it to fund its operating expenses and capital expenditure requirements for at least twelve months from the filing date of this Quarterly Report. However, additional funding will be necessary beyond this point to fund future preclinical and clinical activities. The Company expects to finance its future cash needs through a combination of equity or debt financings, collaboration agreements, strategic alliances and licensing arrangements.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements as of June 30, 2022 and December 31, 2021, and for the three and six months ended June 30, 2022 and 2021, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles in the United States of America (“GAAP”) as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”) for condensed consolidated financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these condensed consolidated financial statements reflect all normal recurring adjustments which are necessary for a fair presentation of the Company’s financial position and results of its operations, as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC (the “Annual Report”).
The information presented in the condensed consolidated financial statements and related notes as of June 30, 2022, and for the three and six months ended June 30, 2022 and 2021, is unaudited. The December 31, 2021 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements.
Interim results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022, or any future period.
The accompanying condensed consolidated financial statements include the accounts of Werewolf Therapeutics, Inc. and its wholly-owned subsidiary, Werewolf Therapeutics Mass Securities, Inc. All intercompany transactions and balances have been eliminated in consolidation.
Summary of Significant Accounting Policies
The significant accounting policies and estimates used in the preparation of the condensed consolidated financial statements are described in the Company’s audited financial statements as of and for the year ended December 31, 2021, and the notes thereto, which are included in the Annual Report. There have been no material changes in the Company’s significant accounting policies during the six months ended June 30, 2022.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates which include, but are not limited to, the fair values of common stock and the fair value of the success payment liability. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s condensed consolidated financial statements upon adoption.
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Subsequent Events
The Company has evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the financial statements were issued. The Company did not identify any subsequent events that would have required adjustment to or disclosure in the financial statements.
3. Jazz Collaboration and License Agreement
In April 2022, the Company entered into an exclusive global collaboration and license agreement (the “Collaboration Agreement”) with Jazz Pharmaceuticals Ireland Limited (“Jazz”) pursuant to which the Company granted Jazz certain licenses to develop and commercialize products containing the Company’s Interferon alpha (“IFNα”) INDUKINE™ molecule, WTX-613, as well as products containing certain isolated recombinant polypeptides comprising IFNα that meet specified criteria (each such product, a “Licensed Product”). Under the Collaboration Agreement, the Company is responsible for certain pre-clinical development activities with respect to WTX-613 and other development activities specified in mutually agreed upon development plans. Jazz will generally reimburse the Company for the cost of such activities. Jazz will be responsible for all other development and commercialization activities conducted to exploit the Licensed Products, including submission of an investigational new drug application (“IND”) to the U.S. Food and Drug Administration (the “FDA”).
Under the terms of the Collaboration Agreement, the Company received a non-refundable upfront cash payment of $15.0 million in April 2022.
Milestones and Royalties
The Company is eligible to receive up to $520.0 million in development and regulatory milestones, and up to $740.0 million in sales-based milestones for all Licensed Products. In addition, the Company is eligible to receive tiered mid-single digit royalties based on Jazz’s, and any of its affiliates’ and sublicensees’ annual net sales of Licensed Products, subject to reduction in specified circumstances.
Accounting Analysis under ASC 606
Identification of the Contract(s)
The Company assessed the Collaboration Agreement and concluded that it represents a contract with a customer within the scope of ASC Topic 606, Revenue from Contracts with Customers.
Identification of Promises and Performance Obligations
The Company has concluded that the exclusive license to its intellectual property, WTX-613, and the non-exclusive corresponding “know-how” are not capable of being distinct from the other promises within the contract, and as such, the Company has determined that the license and “know-how” combined with the other research and development services and supply represent a single combined performance obligation.
Determination of Transaction Price
The overall transaction price as of the inception of the contract was determined to be $32.3 million, which is comprised of the nonrefundable upfront payment of $15.0 million and the estimated costs for research services of $17.3 million. Outside of the estimated costs for research services, there is no other variable consideration included in the transaction price at inception. The Company used the most likely amount method to estimate variable consideration and estimated that the most likely amount for each potential development and regulatory milestone payment under this agreement is zero, as achievement of those milestones is uncertain and highly susceptible to factors outside the Company’s control. Accordingly, all such milestone payments were excluded from the transaction price. Management will reevaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, will adjust the transaction price as necessary. Sales based royalties, including milestones based on the level of sales, were also excluded from the transaction price, as the license is deemed to be the predominant item to which the royalties relate. The company will recognize such revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
The upfront payment of $15.0 million was recorded as deferred revenue and, along with payments related to the Company’s conduct of research services under the Collaboration Agreement, will be recognized as revenue over approximately 3.7 years using an input-based measurement of actual costs incurred as a percentage of the estimated total costs expected to be incurred over the expected term of conduct of the research services. The Company believes this input-based method to recognize revenue best reflects the transfer of value to Jazz.
Recognition of Revenue
For the six months ended June 30, 2022, using the cost-to-cost input method, which best depicts the research services performed for the customer, the Company recognized $4.1 million of revenue related to the Collaboration Agreement, of which $1.9 million related to the upfront payment and $2.2 million related to costs incurred for research services. As of June 30, 2022, there is $11.8 million and $1.3 million of current and long-term deferred revenue, respectively, related to the Collaboration Agreement. All costs associated with the Collaboration Agreement are recorded in research and development expense in the condensed consolidated statements of operations.
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The following table presents changes in the Company’s contract liabilities during the six months ended June 30, 2022 (in thousands):
Balance as ofBalance as of
December 31, 2021AdditionsReductionsJune 30, 2022
Contract liabilities:
Deferred revenue$ $15,000 $(1,929)$13,071 
Totals$ $15,000 $(1,929)$13,071 
As of June 30, 2022, the Company had not received any milestone or royalty payments under the Collaboration Agreement.
4. Financial Instruments and Fair Value Measurements
Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The Company’s financial instruments that are measured at fair value on a recurring basis consist of cash equivalents and a success payment liability pursuant to an amended and restated loan and security agreement (the “Loan Agreement”) with Pacific Western Bank (“PWB”) (see Note 9, Term Loan).
The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities.
The carrying amounts reflected in the condensed consolidated balance sheets for cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values, due to their short-term nature.
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 were as follows (in thousands):
Quoted Price in
Active Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
Assets:
Money market funds
$145,712 $ $ $145,712 
Total assets
$145,712 $ $ $145,712 
Liabilities
Success payment liability$ $ $863 $863 
Total liabilities$ $ $863 $863 
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 were as follows (in thousands):
Quoted Price in
Active Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
Assets:
Money market funds
$157,531 $ $ $157,531 
Total assets
$157,531 $ $ $157,531 
Liabilities
Success payment liability$ $ $ $ 
Total liabilities$ $ $ $ 
There were no changes in valuation techniques during the three or six months ended June 30, 2022. There were no liabilities measured at fair value on a recurring basis as of December 31, 2021.
Success Payment Liability
The Company is obligated to pay to PWB a one-time success payment upon the occurrence of the Company achieving certain conditions defined in the Loan Agreement. The maximum aggregate success payment that could be payable by the Company is $1.6 million.
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The following table reconciles the change in fair value of the success payment liability during the six months ended June 30, 2022 based on Level 3 inputs (in thousands):
Six Months Ended
June 30, 2022
Balance at December 31, 2021$ 
Additions1,125 
Change in fair value(262)
Balance at June 30, 2022$863 
The success payment liability is stated at fair value and is considered Level 3 because its fair value measurement is based, in part, on significant inputs not observed in the market. The Company models the value of the liability based on several key variables, including probability of event occurrence and timing of event occurrence.
The fair value of the success payment liability was determined using a probability weighted expected return method, in which the probability and timing of potential future events is considered in order to estimate the fair value of the success payment liability as of each valuation date. Management determined the fair value of the success payment liability as of June 30, 2022 using the following significant unobservable inputs:
June 30, 2022
Probability of Success Fee Event80 %
Expected term (in years)
0.83 - 1.25
Discount rate6.7 %
The Company remeasured the liability at fair value with a corresponding decrease of $0.3 million recorded to other income (expense), net for the six months ended June 30, 2022.
5. Restricted Cash
The Company maintained restricted cash of $1.3 million at each of June 30, 2022 and December 31, 2021. At each of June 30, 2022 and December 31, 2021, $0.1 million of the Company’s restricted cash balance is included within “Prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheets. These amounts are comprised solely of letters of credit required pursuant to the Company’s leased office spaces.
6. Property and Equipment, Net
Property and equipment, net as of June 30, 2022 and December 31, 2021 was comprised as follows (in thousands):
Estimated Useful Life (in years)June 30,
2022
December 31,
2021
Laboratory equipment
5$923$839
Furniture and office equipment
52489
Computer equipment
3361221
Leasehold improvements
Shorter of 7 years or remaining lease term
7,726274
Construction in progress4471,961
Total property and equipment, gross
9,7053,304
Less: accumulated depreciation(674)(391)
Total property and equipment, net$9,031$2,913
Depreciation expense for the six months ended June 30, 2022 and 2021 was $0.3 million and $0.1 million, respectively.
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of June 30, 2022 and December 31, 2021 were comprised as follows (in thousands):
June 30,
2022
December 31,
2021
Manufacturing
$5,452$3,427
Contract research
2,2582,542
Employee compensation and benefits
1,9382,200
Professional fees
1,855433
Leasehold improvements1,295
Success payment liability863  
Other
429 163 
Total accrued expenses and other current liabilities
$14,090$8,765
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8. Leases
The Company’s leases are as follows:
An April 2019 operating lease for approximately 9,949 square feet of office and laboratory space which commenced in April 2019 and terminates in March 2024. The lease is subject to fixed-rate rent escalations and provided for a term extension option, which was not reasonably certain of exercise. In May 2022, the Company entered into a sublease agreement with Crossbow Therapeutics, Inc. (“Crossbow”), to sublease the entirety of this space. The annual rent for the subleased premises will be approximately $1.1 million in the first year and $1.0 million in the second year, which is greater than the annual rent paid by the Company to the landlord for the leased premises. Crossbow is obligated to pay all real estate taxes and costs related to the subleased premises, including cost of operations, maintenance, repair, replacement, and property management.
A March 2021 short-term lease for approximately 7,500 square feet of office and laboratory space which commenced in April 2021 and terminated in May 2022. The Company did not recognize an operating lease right of use asset or a lease liability upon lease commencement. Rent expense for the Company’s short-term lease was recognized as incurred.
A June 2021 operating lease for approximately 25,778 square feet of office and laboratory space, which the Company occupied in May 2022, and terminates in May 2030. The lease is subject to fixed-rate rent escalations and provided for $5.7 million in tenant improvements and a term extension option, which was not reasonably certain of exercise. The Company provided the landlord with a security deposit in the form of a letter of credit in the amount of $1.0 million upon signing, which is included in restricted cash as of June 30, 2022.
Accounting Analysis for operating leases under ASC Topic 842, Leases:
Expected lease term: The expected lease term includes noncancelable lease periods and, when applicable, periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, as well as periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option.
Incremental borrowing rate: As the discount rates in the Company’s lease are not implicit, management estimated the incremental borrowing rate based on the rate of interest the Company would have to pay to borrow a similar amount on a collateralized basis over a similar term.
Lease and non-lease components: The Company is required to pay fees for operating expenses in addition to monthly base rent for certain operating leases (non-lease components). The Company has elected the practical expedient which allows non-lease components to be combined with lease components for all asset classes. Variable non-lease components are not included within the lease right-of-use asset and lease liability on the consolidated balance sheet, and instead are reflected as expense in the period they are paid.
The following table summarizes lease costs for the three and six months ended June 30, 2022 and 2021 (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
Operating lease costs$633 $219 $1,316 $438 
Variable lease costs183 99 281 199 
Short-term lease costs91 137 228 137 
Sublease income(68) (68) 
Total$839 $455 $1,757 $774 
The following table summarizes the lease term and discount rate for operating leases as of June 30, 2022 and December 31, 2021:
June 30,
2022
December 31,
2021
Weighted-average remaining lease term (years)7.47.6
Weighted-average discount rate8.1 %8.1 %
As of June 30, 2022, the future minimum lease payments due under the Company’s leases are as follows (in thousands):
Amount
2022$1,453 
20233,133 
20242,505 
20252,337 
20262,403 
Thereafter8,730 
Total remaining minimum rental payments20,561 
Less: effect of discounting(5,015)
Total lease liability$15,546 
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9. Term Loan
In April 2022, the Company entered into the Loan Agreement with PWB. Under the terms of the Loan Agreement, PWB made available a term loan in an aggregate principal amount of up to $20.0 million (“Tranche I Loan”) available at any time after the closing date until February 28, 2024 as extended to August 31, 2024 upon the satisfaction of certain conditions set forth in the Loan Agreement (such date, the “Amortization Date”). Based on the satisfaction of certain conditions defined in the Loan Agreement, PWB is also obligated to make available an additional term loan in the aggregate principal amount of up to $20.0 million (“Tranche II Loan”, or collectively with the Tranche I Loan, the “Term Loans”) available at any time after the closing date until the Amortization Date upon the acceptance by the U.S. Food and Drug Administration (the “FDA”) of two investigational new drug (“IND”) submissions on or before March 31, 2023. Although the Tranche I Loan was made available to the Company at the closing date, as of June 30, 2022, the Company has elected to defer making a draw. As of June 30, 2022, the Company had not drawn down any Term Loans and had no outstanding borrowings under the Loan Agreement.
The Term Loans will bear interest on the outstanding daily balance at a floating annual rate equal to greater of: (i) 0.5% above the prime rate then in effect or (ii) 4.5%. If the prime rate changes throughout the term, the interest rate will be adjusted effective on the date of the prime rate change. All interest chargeable under the Loan Agreement is computed on a 360-day year for the actual number of days elapsed, with interest payable monthly.
The Company is obligated to pay PWB a fee in the event of certain corporate transactions equal to either (i) the greater of (a) $0.2 million and (b) 2.0% of the amount drawn under the Term Loans, for a transaction occurring on or before March 31, 2023, or (ii) for any transaction occurring thereafter, the greater of (a) $0.4 million and (b) 4.0% of the amount drawn under the Term Loans (the “Success Fee”). The Success Fee will survive ten years from the date of payment of the Term Loans in full, such that, if the Loan Agreement is terminated prior to the payment of the Success Fee the Company will remain obligated to pay the Success Fee upon the occurrence of a Success Fee Event (as defined in the Loan Agreement) during such ten-year period.
The Company determined that the Success Fee constitutes a freestanding financial instrument and should be accounted for as a liability in connection with ASC 815, Derivatives and Hedging. The Company determined that the fair value of the Success Fee upon the closing date of the Loan Agreement and then marked to market the fair value of the Success Fee as of June 30, 2022.
All outstanding obligations under the Loan Agreement are secured by the Company’s personal property (exclusive of any intellectual property) and are subject to acceleration in the event of default. In the event of a late payment or default, the Company is obligated to pay a fee equal to 5.0% of such unpaid amounts. In connection with the Loan Agreement, the Company is required to comply with certain negative covenants, which among other things, restrict the Company from (i) incurring future debt or granting liens, (ii) effectuating a merger or consolidation with or into any other business organization, (iii) paying dividends or making certain other distributions, (iv) selling or otherwise transferring its assets, (v) making investments in any entities or instruments other than certain investments specified in the Loan Agreement and (vi) making capitalized expenditures in excess of 125% of the amount provided for in the annual budget approved by the board of directors. The Loan Agreement also contains standard affirmative covenants, including with respect to the issuance of audited consolidated financial statements, insurance, and maintenance of good standing and government compliance in our state of formation. On or before September 30, 2023, we are required to raise aggregate gross cash process of at least $50.0 million from the sale or issuance of our equity or from strategic partnerships or any similar transaction. From after receipt of those proceeds, we are required to maintain at all times at least $20.0 million of unrestricted cash in accounts with PWB.
PWB has the right to accelerate all outstanding obligations of the Company under the Loan Agreement or terminate any remaining Term Loan commitments in the event of a material adverse effect on (i) the operations, business or financial condition of the Company, (ii) the Company’s ability to repay any portion of the Term Loans or perform any of its other obligations under the Loan Agreement, and (iii) the Company’s interest in, or the value, perfection or priority of PWB’s security interest in the collateral. As of June 30, 2022, the Company had $20.0 million available to draw on the Term Loans and had no outstanding principal.
In connection with this agreement the Company recorded a total of $0.9 million as a success fee liability as of June 30, 2022, that is contingent upon the occurrence of future events and will be payable to PWB upon the occurrence of those events. The initial valuation of the success fee recorded in connection with the Loan Agreement was recorded as a deferred asset on the Company’s balance sheet until the Company draws down on the Term Loans. Upon drawdown of the Term Loans the value of the success fee will be reclassified as a discount to the term loan payable. The unamortized balance of the success fee will be charged to interest expense over the remainder of the borrowing term.
10. Common and Preferred Stock
Common Stock
The Company is authorized to issue 200.0 million shares of common stock. Common stockholders are entitled to dividends if and when declared by the Company’s board of directors. As of June 30, 2022, no dividends on common stock had been declared by the Company.
On May 10, 2022, the Company entered into a Sales Agreement (the “Sales Agreement”) with SVB Securities LLC (“SVB”), pursuant to which the Company may offer and sell shares of its common stock with an aggregate offering price of up to $50.0 million (the “ATM Offering”). The Sales Agreement provides that SVB will be entitled to a sales commission equal to 3.0% of the gross sales price per share of all shares sold under the ATM Offering. As of June 30, 2022, the Company had sold an aggregate of 801,462 shares under the ATM Offering at an average price of $4.70 per share for net proceeds of $3.3 million after deducting sales commissions and offering expenses.
Preferred Stock
The Company is authorized to issue 5.0 million shares of undesignated preferred stock in one or more series. As of June 30, 2022, no shares of preferred stock were issued or outstanding.
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Shares Reserved for Future Issuance
The Company had reserved shares of common stock for issuance as of June 30, 2022 and December 31, 2021 as follows (in thousands):
As of June 30,As of December 31,
20222021
Shares reserved for exercises of outstanding stock options
4,3833,266
Shares reserved for vesting of restricted stock units
236
Shares reserved for exercises of warrants
5959
Shares reserved for future issuance under the 2021 Stock Incentive Plan1,9191,939
Total shares reserved for future issuance
6,5975,264
11. Stock-based Compensation
2017 Stock Incentive Plan
In December 2017, the Company adopted the 2017 Stock Incentive Plan (the “2017 Plan”), as amended and restated, under which it could grant incentive stock options (“ISOs”), non-qualified stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights and other stock-based awards to eligible employees, officers, directors and consultants. The terms of stock options and RSAs, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2017 Plan.
2021 Stock Incentive Plan
In April 2021, the board of directors adopted and the Company’s stockholders approved the 2021 Stock Incentive Plan (the “2021 Plan”), which became effective immediately prior to the effectiveness of the Company’s initial public offering (“IPO”). As a result of the adoption of the 2021 Plan, no further awards will be made under the 2017 Plan.
The 2021 Plan provides for the grant of ISOs, non-qualified stock options, RSAs, RSUs, stock appreciation rights and other stock-based awards. The Company’s employees, officers, directors, consultants and advisors are eligible to receive awards under the 2021 Plan. The terms of awards, including vesting requirements, are determined by the board of directors, subject to the provisions of the 2021 Plan.
The Company initially registered 3,352,725 shares of common stock under the 2021 Plan, pursuant to a Registration Statement on Form S-8 filed with the SEC on April 30, 2021, which was comprised of (i) 2,843,116 shares of common stock reserved for issuance under the 2021 Plan, (ii) 31,884 shares of common stock originally reserved for issuance under the 2017 Plan that became available for issuance under the 2021 Plan upon the completion of the IPO, and (iii) 477,725 shares of unvested restricted stock subject to repurchase by us that may become issuable under the 2021 Plan following such repurchase. The 2021 Plan also provides that an additional number of shares will be added annually to the shares authorized for issuance under the 2021 Plan on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2022 and continuing until, and including, the fiscal year ended December 31, 2031. The number of shares added each year will be equal to the lesser of (i) 5% of the number of outstanding common stock on such date and (ii) such amount as determined by the board of directors. Effective January 1, 2022, 1,380,397 additional shares were automatically added to the shares reserved for issuance under the 2021 Plan pursuant to this evergreen provision.
As of June 30, 2022, there were 1,918,600 shares available for future issuance under the 2021 Plan.
2021 Employee Stock Purchase Plan
In April 2021, the board of directors adopted and the Company’s stockholders approved the 2021 Employee Stock Purchase Plan (the “2021 ESPP”), which became effective immediately prior to the effectiveness of the IPO. The Company initially reserved 244,000 shares of common stock for future issuance under the 2021 ESPP. The 2021 ESPP provides that an additional number of shares will automatically be added to the shares reserved for issuance on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2022 and continuing for each fiscal year until, and including, the fiscal year ending on December 31, 2032. The number of shares added each year will be equal to the lowest of (i) 488,000 shares of common stock, (ii) 1% of the number of shares of outstanding common stock on such date, and (iii) such amount as determined by the board of directors. The company had not initiated any offering periods under the 2021 ESPP as of June 30, 2022, and no shares were added on January 1, 2022, pursuant to the evergreen provision.
Stock-Based Compensation Expense
Total stock-based compensation expense recognized in the condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 was as follows (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
Research and development
$806 $212 $1,587 $352 
General and administrative
971 569 1,935 968 
Total stock-based compensation
$1,777 $781 $3,522 $1,320 
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RSA Activity
The Company may, at its discretion, repurchase unvested shares of restricted stock issued pursuant to the 2017 Plan at the initial purchase price if the employees or non-employees terminate their service relationship with the Company.
The following table summarizes RSA activity during the six months ended June 30, 2022 (in thousands, except per share amounts):
Shares/UnitsWeighted-Average
Grant Date Fair
Value Per Share
Unvested at December 31, 2021295 $1.35 
Granted
 $ 
Vested
(117)$1.33 
Forfeited
 $ 
Unvested at June 30, 2022178$1.36 
As of June 30, 2022, there was unrecognized stock-based compensation expense related to unvested RSAs of $0.2 million, which the Company expects to recognize over a weighted-average period of approximately 0.9 years.
The aggregate fair value of RSAs that vested during the three months ended June 30, 2022 and 2021, based upon the fair values of the stock underlying the RSAs on the day of vesting, was $0.3 million and $0.8 million, respectively. The aggregate fair value of RSAs that vested during the six months ended June 30, 2022 and 2021, based upon the fair values of the stock underlying the RSAs on the day of vesting, was $0.8 million and $1.1 million, respectively.
RSU Activity
The Company has also granted RSUs to its employees under the 2021 Plan. The following table summarizes RSU activity during the six months ended June 30, 2022 (in thousands, except per share amounts):
Shares/UnitsWeighted-Average
Grant Date Fair
Value Per Share
Unvested at December 31, 2021 $ 
Granted
259 $4.97 
Vested
 $ 
Forfeited
(23)$4.97 
Unvested at June 30, 2022236$4.97 
As of June 30, 2022, there was unrecognized stock-based compensation expense related to unvested RSUs of $1.1 million, which the Company expects to recognize over a weighted-average period of approximately 1.94 years.
No RSUs vested during the three or six months ended June 30, 2022 or 2021.
Stock Option Activity
The fair value of stock options granted during the three and six months ended June 30, 2022 and 2021 was calculated on the date of grant using the following weighted-average assumptions:
Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
Risk-free interest rate
3.0 %1.1 %1.9 %1.0 %
Expected term (in years)
5.86.06.06.0
Dividend yield
 % % % %
Expected volatility
77.5 %78.9 %76.3 %79.3 %
Using the Black-Scholes option pricing model, the weighted-average grant date fair value of stock options granted during the three months ended June 30, 2022 and 2021 was $2.48 and $10.80 per share, respectively. The weighted-average grant date fair value of stock options granted during the six months ended June 30, 2022 and 2021 was $6.25 and $8.15 per share, respectively.
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The following table summarizes stock option activity during the six months ended June 30, 2022 (in thousands, except per share amounts): 
Options Outstanding
Number of OptionsWeighted-Average Exercise PriceWeighted-Average Remaining
Contractual Life
(in years)
Outstanding at December 31, 20213,266 $8.24 9.02
Granted
1,247 $9.37 
Exercised
(47)$2.81 
Cancelled
(83)$7.25 
Outstanding at June 30, 20224,383 $8.64 8.78
Exercisable at June 30, 20221,165 $7.40 8.29
The aggregate intrinsic fair value of stock options exercised during the three months ended June 30, 2022 and 2021 was less than $0.1 million and $0.2 million, respectively. The aggregate intrinsic fair value of stock options exercised during each of the six months ended June 30, 2022 and 2021 was $0.3 million.
As of June 30, 2022, there was unrecognized stock-based compensation expense related to unvested stock options of $18.8 million, which the Company expects to recognize over a weighted-average period of approximately 2.7 years.
12. Related Parties
In May 2022, the Company entered into a sublease agreement with Crossbow, for which entities affiliated with MPM Capital (“MPM Capital”) are also beneficial owners, to sublease the entirety of its office and laboratory space in Cambridge, Massachusetts. Luke Evnin, Ph.D., the chair of the Company’s board of directors, co-founded MPM Capital and serves as Managing Director of MPM Capital. Briggs Morrison, who serves on the Company’s board of directors, serves as Executive Partner of MPM Capital. The term of the sublease agreement commenced in June 2022 and ends in March 2024, with no option to extend (see Note 8, Leases). The Company received cash payments under its sublease of approximately $0.1 million during the six months ended June 30, 2022. In addition, the Company received $0.2 million from Crossbow in June 2022 as a security deposit that is included within “Other liabilities” in the accompanying condensed consolidated balance sheets as of June 30, 2022.
13. Net Loss Attributable to Common Stockholders per Share
For purposes of the diluted net loss attributable to common stockholders per share calculation, outstanding stock options, unvested RSAs, unvested RSUs and warrants to purchase common stock are considered to be potentially dilutive securities, however the following weighted-average amounts were excluded from the calculation of diluted net loss attributable to common stockholders per share because their effect would be anti-dilutive (in thousands):
June 30,
20222021
Outstanding stock options
4,383 2,884 
Unvested RSAs178 436 
Unvested RSUs236  
Warrants to purchase common stock
59 59 
Total
4,856 3,379 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is meant to provide material information relevant to an assessment of the financial condition and results of operations of our company, including an evaluation of the amounts and uncertainties of cash flows from operations and from outside resources, so as to allow investors to better view our company from management’s perspective. The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our Annual Report on Form 10-K for the year ended December 31, 2021, or the Annual Report on Form 10-K, that was filed with the United States Securities and Exchange Commission, or SEC, on March 24, 2022. In addition to historical information, the discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors we believe could cause or contribute to these differences below and elsewhere in this Quarterly Report, including those factors set forth in the section entitled “Cautionary Note Regarding Forward-Looking Statements and Industry Data” and in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report. You should carefully read the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report.
Overview
We are an innovative biopharmaceutical company pioneering the development of therapeutics engineered to stimulate the body’s immune system for the treatment of cancer. We are leveraging our proprietary PREDATOR platform to design conditionally activated molecules that stimulate both adaptive and innate immunity with the goal of addressing the limitations of conventional proinflammatory immune therapies. Our molecules, which we refer to as INDUKINE molecules, are intended to activate selectively in the tumor microenvironment. Our most advanced product candidates, WTX-124 and WTX-330, are systemically delivered, conditionally activated Interleukin-2 and Interleukin-12, respectively, INDUKINE molecules for the treatment of multiple tumor types. We remain on track as we advance towards clinical development for WTX-124 and WTX-330. In the second quarter of 2022, we received clearance from the U.S. Food and Drug Administration, or the FDA, for our investigational new drug application, or IND, for WTX-124, and we plan to initiate a Phase 1/1b clinical trial to evaluate WTX-124 as a monotherapy and in combination with checkpoint inhibitors in patients with advanced or metastatic solid tumors. We plan to submit an IND for WTX-330 in the second half of 2022.
In April 2022, we entered into a collaboration and license agreement, or the Collaboration Agreement, with Jazz Pharmaceuticals Ireland Limited, or Jazz, pursuant to which we granted Jazz certain licenses to develop and commercialize products containing our Interferon alpha (IFNα) INDUKINE molecule, WTX-613 (now known as JZP898), as well as products containing certain isolated recombinant polypeptides comprising IFNα that meet specified criteria (each such product, a “Licensed Product”). Under the Collaboration Agreement, we are initially responsible for certain pre-clinical development activities with respect to WTX-613 and other development activities specified in mutually agreed upon development plans. Jazz will generally reimburse us for the cost of such activities. Jazz is responsible for all other development and commercialization activities conducted to exploit the Licensed Products, including submission of an IND to the FDA. Under the terms of the Collaboration Agreement, we received an upfront payment of $15.0 million in April 2022, and we are eligible to receive cost reimbursements for research services performed under the Collaboration Agreement. We are also eligible to receive up to $520.0 million in development and regulatory milestones, and up to $740.0 million in sales-based milestones for all Licensed Products. In addition, we are eligible to receive tiered mid-single digit royalties based on Jazz’s, and any of its affiliates’ and sublicensees’, annual net sales of Licensed Products, subject to reduction in specified circumstances.
We were incorporated and commenced operations in 2017. Since inception, we have devoted substantially all of our time and efforts to performing research and development activities, raising capital and recruiting management and technical staff to support these operations. To date, we have financed our operations primarily with proceeds from the sales of our convertible promissory notes and equity securities. From December 2017 to August 2018, we issued convertible promissory notes for aggregate gross cash proceeds of $11.0 million. From August 2019 to June 2020, we issued an aggregate of 80,246,565 shares of Series A preferred stock for aggregate gross cash proceeds of $44.2 million, together with conversion of all of our previously issued convertible promissory notes. In December 2020, we issued 78,222,173 shares of Series B preferred stock at a price of $0.92 per share, resulting in gross cash proceeds of $72.1 million. On May 4, 2021, we completed our initial public offering, or IPO, pursuant to which we issued and sold 7,500,000 shares of our common stock at a public offering price of $16.00 per share. We received net proceeds of approximately $109.2 million, after deducting underwriting discounts and commissions and other offering expenses payable by us.
Due to our significant research and development expenditures, we have accumulated substantial net losses since our inception. As of June 30, 2022, we had an accumulated deficit of $282.8 million. We expect to continue to incur substantial and increasing expenses and net losses for the foreseeable future, as we continue to advance our current and future product candidates through preclinical and clinical development, manufacture drug product and drug supply, seek regulatory approval for our current and future product candidates, maintain and expand our intellectual property portfolio, hire additional research and development and business personnel and operate as a public company.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as and when needed could have a material adverse effect on our business, results of operations and financial condition.
Because of the numerous risks and uncertainties associated with product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we fail to become profitable or are unable to sustain profitability on a
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continuing basis, then we may be unable to raise capital, maintain our research and development efforts, expand our business or continue our operations at planned levels, and as a result we may be forced to substantially reduce or terminate our operations.
Impact of COVID-19 on Our Business
The worldwide COVID-19 pandemic continues to evolve, and we will continue to monitor the COVID-19 pandemic closely. To date, we have not experienced a material financial statement impact or material business disruptions, including with our vendors, or impairments of any of our assets as a result of the pandemic. However, we cannot, at this time, predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our financial statements and operations, including our ongoing and planned preclinical activities and future clinical trials. The extent of the impact of the COVID-19 pandemic, including the emergence of new variants or subvariants of the virus, on our business, operations and clinical development timelines and plans remains uncertain and will depend on certain developments, including the duration and spread of the pandemic and its impact on our contract research organizations, or CROs, third-party manufacturers, and other third parties with which we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. To the extent possible, we are conducting business as usual. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with which we do business.
Furthermore, the COVID-19 pandemic could affect our employees or the employees of research sites and service providers on which we rely, including CROs, as well as those of companies with which we do business, including our suppliers and contract manufacturing organizations, thereby disrupting our business operations. Quarantines and travel restrictions imposed by governments in the jurisdictions in which we and the companies with which we do business operate could materially impact the ability of employees to access preclinical and clinical sites, laboratories, manufacturing site and office. These and other events resulting from the COVID-19 pandemic could disrupt, delay, or otherwise adversely impact our business. Further information relating to the risks and uncertainties related to the ongoing COVID-19 pandemic is contained in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report.
Financial Operations Overview
Revenue
We have not generated any revenue to date from product sales and do not expect to do so in the near future. For the six months ended June 30, 2022, we recognized $4.1 million of revenue related to the Collaboration Agreement, of which $1.9 million related to the $15.0 million upfront payment received in April 2022 and $2.2 million related to costs incurred for research services to be reimbursed by Jazz. We had $13.1 million of deferred revenue as of June 30, 2022, which is classified as either current or net of current portion in our condensed consolidated balance sheets based on the period over which the revenue is expected to be recognized. As of June 30, 2022, we had not received any milestone or royalty payments under the Collaboration Agreement.
In the future, we expect to continue to generate revenue from the Collaboration Agreement and may generate revenue from product sales or other collaboration agreements, strategic alliances and licensing arrangements. We expect that our revenue will fluctuate from quarter-to-quarter and year-to-year based upon our pattern of performance under the Collaboration Agreement and as a result of the timing and amount of milestones, reimbursement of costs incurred and other payments and product sales, to the extent any are successfully commercialized. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our product candidates, and include:
salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;
expenses incurred under agreements with third parties that conduct research and preclinical activities on our behalf;
costs of outside consultants, including their fees, stock-based compensation and related travel expenses;
costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and future clinical trial materials; and
facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks 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 performance of the individual arrangements, which may differ from the pattern of billings incurred, and are reflected in our condensed consolidated financial statements as prepaid or accrued research and development expenses.
We typically use our employee and infrastructure resources across our development programs. We track external development costs by product candidate or development program, but we do not allocate personnel costs, license payments made under our licensing arrangements or other internal costs to specific development programs or product candidates.
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Our external development costs for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2022202120222021
WTX-124
$3,038 $2,020 $5,269 $2,624 
WTX-330
3,229 969 5,362 2,369 
WTX-613
1,180 1,130 2,182 1,638 
Pre-development candidates
995 219 1,472 371 
Total external development costs
$8,442 $4,338 $14,285 $7,002 
Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase substantially for the foreseeable future as we initiate and progress clinical trials of WTX-124 and WTX-330 and continue to discover and develop additional product candidates. As a result of our entry into the Collaboration Agreement, which commenced in April 2022, our external preclinical development costs for WTX-613 will generally be reimbursed by Jazz.
The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. We cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete development of our current or future product candidates. The actual probability of success for our product candidates will depend on a variety of factors, including:
the scope, rate of progress and expenses of our ongoing research activities as well as any preclinical studies and clinical trials and other research and development activities;
establishing an appropriate safety profile;
successful enrollment in and completion of clinical trials;
whether our product candidates show safety and efficacy in our clinical trials;
receipt of marketing approvals from applicable regulatory authorities;
establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;
commercializing product candidates, if and when approved, whether alone or in collaboration with others; and
continued acceptable safety profile of the products following any regulatory approval.
A change in the outcome of any of these variables with respect to the development of our current and future product candidates would significantly change the costs and timing associated with the development of those product candidates and we may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development activities.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel in our executive, finance, business development and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support the increasing size and complexity of our research, development and manufacturing activities.
Other Income
Other Income (Expense), Net
Other income (expense), net consists primarily of remeasurement gains or losses attributable to changes in the fair value of the success payment liability associated with our debt agreement with Pacific Western Bank, or PWB. For more information see “Liquidity and Capital Resources” below.
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Results of Operations
Comparison of the Three Months Ended June 30, 2022 and 2021
The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021 (in thousands):
 Three Months Ended
June 30,
$ Change
20222021
Revenue:
Collaboration revenue$4,148 $— $4,148 
Operating expenses:
Research and development
13,887 7,265 6,622 
General and administrative
5,233 3,691 1,542 
Total operating expenses
19,120 10,956 8,164 
Operating loss
(14,972)(10,956)(4,016)
Other income:
Other income (expense), net
281 (16)297 
Interest income
97 51 46 
Total other income
378 35 343 
Net loss
$(14,594)$(10,921)$(3,673)
 
Research and Development Expenses
The following table summarizes our research and development expenses for the three months ended June 30, 2022 and 2021 (in thousands):
 Three Months Ended
June 30,
$ Change
20222021
Personnel$3,897 $1,831 $2,066 
Manufacturing5,035 3,037 1,998 
Contract research organization3,407 1,301 2,106 
Facilities640 279 361 
Lab consumables753 799 (46)
Other155 18 137 
Total research and development expenses$