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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 September 30, 2020
or
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: 001-38295
_____________________________________________________________________________________

X4 PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
27-3181608
(I.R.S. Employer
Identification No.)
61 North Beacon Street, 4th Floor
Boston, Massachusetts
(Address of principal executive offices)
02134
(Zip Code)
(857) 529-8300
(Registrant’s telephone number, including area code)

955 Massachusetts Avenue, 4th Floor
Cambridge, Massachusetts 02139
(Former name, former address and former 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 StockXFORThe Nasdaq Stock Market LLC
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 filerSmaller 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 November 2, 2020, the registrant had 16,286,645 shares of common stock outstanding.










CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology, although not all forward looking statements contain these identifying words. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” and elsewhere in this report, regarding, among other things:
the timing, progress and reporting of results of our current trials of X4P-001 (mavorixafor), including our global Phase 3 clinical trial in patients with Warts, Hypogammaglobulinemia, Infections, and Myelokathexis, or WHIM, syndrome, our Phase 1b clinical trial in combination with ibrutinib in patients with Waldenström’s macroglobulinemia, and our Phase 1b clinical trial as monotherapy in patients with Severe Congenital Neutropenia, or SCN;
the initiation, timing, progress and results of our current and future preclinical studies and clinical trials of X4P-002 and X4P-003 or any of our other product candidates or our research and development programs that we pursue;
our expectations regarding the impact of the ongoing coronavirus disease 2019, or COVID-19, pandemic, included the expected duration of disruption and immediate and long-term impact and effect on our business and operations;
the diversion of healthcare resources away from the conduct of clinical trials as a result of the ongoing COVID-19 pandemic, including the diversion of hospitals serving as our clinical trial sites and hospital staff or independent physicians supporting the conduct of our clinical trials;
the interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel, quarantines or social distancing protocols imposed or recommended by federal or state governments, employers and others in connection with the ongoing COVID-19 pandemic;
the potential benefits that may be derived from any of our product candidates;
the timing of and our ability to obtain and maintain regulatory approval of our existing product candidates or any product candidates that we may develop in the future, and any related restrictions, limitations, or warnings in the label of any approved product candidates;
our plans to research, develop, manufacture and commercialize our product candidates;
the timing of our regulatory filings for our product candidates, along with regulatory developments in the United States and other foreign countries;
the size and growth potential of the markets for our product candidates, if approved, and the rate and degree of market acceptance of our product candidates, including reimbursement that may be received from payors;
the benefits of U.S. Food and Drug Administration, or FDA, and European Commission designations such as, including, without limitation, Fast Track, Orphan Drug and Breakthrough Therapy;
our commercialization, marketing and manufacturing capabilities and strategy;
our ability to attract and retain qualified employees and key personnel;
our competitive position;
2


our expectations regarding our ability to obtain and maintain intellectual property protection;
the success of competing therapies that are or may become available;
our estimates and expectations regarding future operations, financial position, revenues, costs, expenses, uses of cash, capital requirements or our need for additional financing;
our ability to raise additional capital; and
our strategies, prospects, plans, expectations or objectives.

You should refer to the section titled “Risk Factors" in this Quarterly Report for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.


3


PART I FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS.
X4 PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
September 30, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$88,812 $126,184 
Research and development incentive receivable629 1,998 
Prepaid expenses and other current assets4,472 1,096 
Total current assets93,913 129,278 
Property and equipment, net1,334 403 
Goodwill27,109 27,109 
Right-of-use assets8,222 1,959 
Other assets2,548 1,949 
Total assets$133,126 $160,698 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$3,891 $2,088 
Accrued expenses8,532 6,461 
Current portion of lease liability756 898 
Total current liabilities13,179 9,447 
Long-term debt, including accretion, net of discount25,537 20,097 
Lease liabilities4,677 1,918 
Other liabilities25 16 
Total liabilities43,418 31,478 
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $0.001 par value, 125,000,000 and 33,333,333 shares authorized as of September 30, 2020 and December 31, 2019, respectively; 16,286,645 and 16,128,862 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
16 16 
Additional paid-in capital265,586 261,367 
Accumulated other comprehensive loss(119)(119)
Accumulated deficit(175,775)(132,044)
Total stockholders’ equity89,708 129,220 
Total liabilities and stockholders’ equity
$133,126 $160,698 





The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4


X4 PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
License revenue$ $ $3,000 $ 
Operating expenses:
Research and development11,381 8,589 29,634 23,098 
General and administrative5,599 4,383 15,585 13,726 
Loss on transfer of non-financial assets 4,004  4,004 
Total operating expenses16,980 16,976 45,219 40,828 
Loss from operations(16,980)(16,976)(42,219)(40,828)
Other income (expense):
Interest income 464 272 927 
Interest expense(697)(688)(1,968)(1,599)
Change in fair value of preferred stock warrant liability   (288)
Change in fair value of derivative liability   183 
Other income228 52 494 201 
Loss on extinguishment of debt (566)(162)(566)
Total other expense, net(469)(738)(1,364)(1,142)
Loss before provision for income taxes(17,449)(17,714)(43,583)(41,970)
Provision for income taxes  148  
Net loss(17,449)(17,714)(43,731)(41,970)
Accruing dividends on Series A convertible preferred stock   (592)
Net loss attributable to common stockholders$(17,449)$(17,714)$(43,731)$(42,562)
Net loss per share attributable to common stockholders—basic and diluted
$(0.87)$(1.22)$(2.18)$(4.31)
Weighted average common shares outstanding—basic and diluted
20,085 14,562 20,035 9,866 

Net loss$(17,449)$(17,714)$(43,731)$(41,970)
Currency translation adjustments (77) (119)
Total comprehensive loss$(17,449)$(17,791)$(43,731)$(42,089)





The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5

X4 PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
(Unaudited)

Common StockAdditional
Paid-In
Capital
Accumulated Other Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201916,128,862 $16 $261,367 $(119)$(132,044)$129,220 
Exercise of stock options13,006 — 96 96 
Stock-based compensation expense613 613 
Net loss(11,138)(11,138)
Balance at March 31, 202016,141,868 16 262,076 (119)(143,182)118,791 
Exercise of stock options407 — 2 2 
Issuance of shares under employee stock purchase plan10,057 — 76 76 
Vesting of restricted stock units, less shares withheld and retired to satisfy tax obligations23,822 (14)(14)
Stock-based compensation expense1,173 1,173 
Net loss(15,144)(15,144)
Balance at June 30, 202016,176,154 16 263,313 (119)(158,326)104,884 
Exercise of stock options4,276 2929
Vesting of restricted stock units, less shares withheld and retired to satisfy tax obligations106,215 0
Stock-based compensation expense2,244 2,244 
Net loss(17,449)(17,449)
Balance at September 30, 202016,286,645 $16 $265,586 $(119)$(175,775)$89,708 








The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6

X4 PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
(Unaudited)
Series Seed, A and B
Convertible Preferred
Redeemable
Common Stock
Common StockAdditional
Paid-In
Capital
Accumulated Other Comprehensive
Income
Accumulated
Deficit
Total
Stockholders’
(Deficit)
SharesAmountSharesAmountSharesAmount
Balance at December 31, 201840,079,567 $64,675 107,364 $734 351,652  $2,151  $(79,237)$(77,086)
Conversion of redeemable common stock into common stock(107,364)(734)107,364  733 733 
Conversion of convertible preferred shares into common stock(40,079,567)(64,675)3,808,430 4 64,671 64,675 
Exchange of common stock in connection with Merger2,440,582 2 45,539 45,541 
Fair value of replacement equity awards817 817 
Reclassification of warrant liability to permanent equity5,235 5,235 
Exercise of stock options16,483 113 113 
Stock-based compensation262 262 
Currency translation adjustment23 23 
Net loss(10,873)(10,873)
Balance at March 31, 2019    6,724,511 6 119,521 23 (90,110)29,440 
Issuance of common stock and prefunded warrants for the purchase of common stock, net of issuance costs of $9315,670,000 6 79,291 79,297 
Exercise of stock options700 5 5 
Exercise of warrants33,846 440 440 
Stock-based compensation433 433 
Currency translation adjustment(65)(65)
Net loss(13,383)(13,383)
Balance at June 30, 2019    12,429,057 12 199,690 (42)(103,493)96,167 
Exercise of stock options7,148 — 40 40 
Stock-based compensation expense691 691 
Currency translation adjustment(77)(77)
Net loss(17,714)(17,714)
Balance at September 30, 2019    12,436,205 $12 $200,421 $(119)$(121,207)$79,107 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7


X4 PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
20202019
Cash flows from operating activities:
Net loss$(43,731)$(41,970)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense4,030 1,386 
Depreciation and amortization expense248 71 
Loss on transfer of non-financial assets 4,004 
Non-cash lease expense588 416 
Accretion of debt discount389 584 
Loss on extinguishment of debt162 566 
Change in fair value of preferred stock warrant liability 288 
Change in fair value of derivative liability (183)
Other(219) 
Changes in operating assets and liabilities:
Prepaid expenses, other current assets and research and development incentive receivable(2,420)290 
Accounts payable121 (3,131)
Accrued expenses1,722 (595)
Lease liabilities(904)(540)
Operating lease right-of-use asset, net of non-cash portion(1,300) 
Net cash used in operating activities(41,314)(38,814)
Cash flows from investing activities:
Cash, cash equivalents and restricted cash acquired in connection with the Merger 26,406 
Proceeds from transfer of non-financial assets 896 
Acquisition of property, equipment and intangible assets(1,060)(91)
Net cash (used in) provided by investing activities(1,060)27,211 
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants468 605 
Employee taxes paid related to net share settlement of vested restricted stock units(278) 
Proceeds from borrowings under loan and security agreements, net of issuance costs4,888 9,849 
Proceeds from sale of common stock and warrants, net of issuance costs(313)79,291 
Repayments of borrowings under loan and security agreement  (9,368)
Net cash provided by financing activities4,765 80,377 
Effect of exchange rate changes on cash, cash equivalents and restricted cash240 (266)
Net (decrease) increase in cash, cash equivalents and restricted cash(37,369)68,508 
Cash, cash equivalents and restricted cash at beginning of period128,086 8,498 
Cash, cash equivalents and restricted cash at end of period$90,717 $77,006 
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of property, equipment and right-of-use assets included in accounts payable and accrued expenses$2,052 $38 
Acquisition of right-of-use asset financed by lease liabilities$4,646 $ 
Issuance costs not yet paid$178 $ 
Conversion of convertible preferred stock into common stock$ $64,675 
Conversion of redeemable common stock into common stock$ $734 
Conversion of convertible preferred stock warrants into common stock warrants$ $5,235 
Fair value of net assets acquired in the Merger$ $46,358 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.    Nature of the Business and Basis of Presentation
X4 Pharmaceuticals, Inc. (together with its subsidiaries, the “Company”) is a late-stage clinical biopharmaceutical company focused on the research, development and commercialization of novel therapeutics for the treatment of rare diseases. The Company’s lead product candidate, mavorixafor, is a potential first-in-class, once-daily, oral inhibitor of CXCR4 and is currently in a Phase 3 clinical trial for the treatment of Warts, Hypogammaglobulinemia, Infections, and Myelokathexis (“WHIM”) syndrome, a rare, inherited, primary immunodeficiency disease caused by genetic mutations in the CXCR4 receptor gene. The Company is also conducting a 14-day, proof-of-concept Phase 1b clinical trial of mavorixafor in patients with severe congenital neutropenia (“SCN”) and a Phase 1b clinical trial of mavorixafor in combination with ibrutinib in Waldenström’s macroglobulinemia (“Waldenström’s”).
Liquidity—As of September 30, 2020, the Company had $88.8 million of cash and cash equivalents and an accumulated deficit of $175.8 million. As of the issuance date of these condensed consolidated financial statements, the Company expects that its cash and cash equivalents will be sufficient to fund its forecasted operating expenses, capital expenditure requirements and debt service payments for at least the next twelve months from the issuance date of these condensed consolidated financial statements.
Since its inception, the Company has incurred significant operating losses and negative cash flows from operations. The Company has not yet commercialized a product and does not expect to generate revenue from the commercial sale of any products for several years, if at all. The Company expects that its research and development and general and administrative expenses will continue to increase and, as a result, will need additional capital to fund its future operations, which it may raise through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. The Company has funded its operations to date primarily with proceeds from sales of common stock, warrants and prefunded warrants for the purchase of shares of preferred stock and shares of common stock, sales of preferred stock, proceeds from the issuance of convertible debt and borrowings under loan and security agreements.
If the Company is unable to obtain future funding when needed, the Company may be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or pre-commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. There is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.
Impact of the COVID-19 Pandemic— The impact of the COVID-19 pandemic has been and is expected to continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world. Impacts to the Company’s business have included temporary closures or postponements of activation of its clinical trial sites or facilities, disruptions or restrictions on its employees’ ability to travel, disruptions to or delays in ongoing clinical trials, including patient enrollment at a slower pace than initially projected and the diversion of healthcare resources away from the conduct of the Company’s clinical trials as a result of the ongoing COVID-19 pandemic, including the diversion of hospitals serving as the Company’s clinical trial sites and hospital staff supporting the conduct of the Company's clinical trials.
Merger with Arsanis— On November 26, 2018, Arsanis, Inc., a publicly held Delaware corporation (“Arsanis”), Artemis AC Corp., a Delaware corporation and a wholly-owned subsidiary of Arsanis (“Merger Sub”), and X4 Therapeutics, Inc. (“X4”) entered into an Agreement and Plan of Merger, as amended on December 20, 2018 and March 8, 2019 (the “Merger Agreement”), pursuant to which the Merger Sub merged with and into X4, with X4 surviving the merger as a wholly-owned subsidiary of Arsanis. The transactions described in the foregoing sentence may be referred to in these condensed consolidated financial statements as “the Merger.”
On March 13, 2019, Arsanis, X4 and Merger Sub completed the Merger pursuant to the terms of the Merger Agreement. Pursuant to the terms of the Merger Agreement, each outstanding share of X4’s common stock and preferred stock was exchanged for 0.5702 shares of Arsanis’ common stock (the “Exchange Ratio”). In addition, all outstanding options exercisable for common stock and warrants exercisable for convertible preferred stock of X4 became options and warrants exercisable for the same number of shares of common stock of Arsanis multiplied by the Exchange Ratio. In connection with the Merger, X4 changed its name to X4 Therapeutics, Inc. Following the closing of the Merger, X4 Therapeutics, Inc. became a wholly-owned
9

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
subsidiary of the Company, which changed its name to X4 Pharmaceuticals, Inc. As used herein, the words “the Company” refers to, for periods following the Merger, X4 Pharmaceuticals, Inc. (formerly Arsanis, Inc.), together with is direct and indirect subsidiaries, and for periods prior to the Merger, X4 Therapeutics, Inc. (formerly X4 Pharmaceuticals, Inc.), and its direct and indirect subsidiaries, as applicable.

2.    Summary of Significant Accounting Policies
Significant Accounting Policies—The Company’s significant accounting policies are disclosed in the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and the notes thereto filed with the U.S. Securities and Exchange Commission (“SEC”) on March 12, 2020. Since the date of those consolidated financial statements, there have been no material changes to the Company's significant accounting policies other than as listed below.
Risks and Uncertainties—With the global spread of the ongoing COVID-19 pandemic in the first half of 2020, the Company has implemented and continues to evaluate business continuity measures designed to address and mitigate the impact of the COVID-19 pandemic on its business. The COVID-19 pandemic has impacted and is expected to continue to impact the clinical development timelines for certain of the Company's clinical programs. The extent to which the COVID-19 pandemic impacts the Company’s business, its clinical development and regulatory efforts, its corporate development objectives and the value of and market for its common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, Europe and other countries, and the effectiveness of actions taken globally to contain and treat the disease. While the Company is experiencing limited financial impacts at this time, the duration and intensity of these impacts and resulting disruption to the Company's operations is uncertain and the Company will continue to assess the financial impact.

In addition, the Company is subject to other challenges and risks specific to its business and its ability to execute on its business plan and strategy, as well as risks and uncertainties common to companies in the biotechnology industry with research and development operations, including, without limitation, risks and uncertainties associated with: obtaining regulatory approval of its product candidates; delays or problems in obtaining clinical supply, loss of single source suppliers or failure to comply with manufacturing regulations; identifying, acquiring or in-licensing additional products or product candidates; product development and the inherent uncertainty of clinical success; and the challenges of protecting and enhancing its intellectual property rights; and the challenges of complying with applicable regulatory requirements. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s business and results of operations, it is expected also to have the effect of heightening many of the other risks and uncertainties discussed above.
Principles of Consolidation— The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including X4 Pharmaceuticals (Austria) GmbH, which is incorporated in Vienna, Austria (“X4 GmbH”), and X4 Therapeutics, Inc. All significant intercompany accounts and transactions have been eliminated.
Unaudited Interim Condensed Consolidated Financial Statements— The condensed consolidated balance sheet at December 31, 2019 that is presented in these interim condensed consolidated financial statements was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying condensed consolidated financial statements are unaudited. The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 12, 2020. In the opinion of management, all adjustments, consisting only of normal recurring adjustments as necessary, for the fair statement of the Company’s condensed financial position, condensed results of its operations and cash flows have been made. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.
10

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Use of Estimates— The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses, the impairment or lack of impairment of long-lived assets including operating lease right-of-use assets and goodwill, and the constraint of variable consideration from contracts with customers. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. The COVID-19 pandemic has impacted and is expected to continue to impact the clinical development timelines for certain of the Company's clinical programs. As of the date of issuance of these condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. Actual results could differ from those estimates, and any such differences may be material to the Company’s condensed consolidated financial statements.
Cash and Cash Equivalents— The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consisted of money market funds as of September 30, 2020 and December 31, 2019.
Restricted Cash—
(in thousands)As of September 30, 2020As of December 31, 2019
Letter of credit security: Cambridge lease$264 $264 
Letter of credit security: Waltham lease250 250 
Letter of credit security: Vienna Austria lease97 94 
Letter of credit security: Boston lease1,144 1,144 
Corporate credit card collateral150 150 
Total restricted cash (non-current)$1,905 $1,902 

In connection with the Company’s lease agreements for its facilities in Massachusetts and Austria, the Company maintains letters of credit, which are secured by restricted cash, for the benefit of the respective landlord.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the sum of the total of amounts shown in the Company’s condensed consolidated statements of cash flows as of September 30, 2020, December 31, 2019, September 30, 2019 and December 31, 2018: 
(in thousands)September 30, 2020December 31, 2019September 30, 2019December 31, 2018
Cash and cash equivalents$88,812 $126,184 $76,251 $8,134 
Restricted cash, non-current1,905 1,902 755 364 
Total cash, cash equivalents and restricted cash$90,717 $128,086 $77,006 $8,498 

Goodwill— Goodwill is tested for impairment at the reporting unit level annually in the fourth quarter, or more frequently when events or changes in circumstances indicate that the asset might be impaired. Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition. The Company has determined that it operates in a single operating segment and has a single reporting unit.
The Company assesses qualitative factors to determine whether the existence of events or circumstances would indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, the Company were to determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company would perform an interim quantitative impairment test, whereby the Company
11

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of its net assets, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than its carrying value, the Company measures the amount of impairment loss, if any, as the excess of the carrying value over the fair value of the reporting unit.
Given the declaration of the COVID-19 pandemic and associated volatility reflected in the global financial markets and uncertain impact on the Company’s operations, management conducted an interim test of its goodwill as of March 31, 2020 and determined that goodwill was not impaired as of that date. There were no additional triggering events during the nine months ended September 30, 2020 that necessitated an interim impairment test of goodwill.

Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, (“ASU 2018-15”). The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The new standard was effective beginning January 1, 2020 and was adopted by the Company on that date. The adoption of ASU 2018-15 did not have an impact on the Company's consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which removes, adds and modifies certain
disclosure requirements for fair value measurements in Topic 820. The Company will no longer be required to disclose the
amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy as well as the valuation processes of Level 3 fair value measurements. The Company will be required to provide additional disclosure related to the changes in
unrealized gains and losses included in other comprehensive loss for recurring Level 3 fair value measurements and the range and weighted average of assumptions used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for the Company on January 1, 2020 and was adopted on that date. The adoption of ASU 2018-13 did not have a significant impact on the Company’s consolidated financial statements and related disclosures.


Recently Issued Accounting Standards Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU
2019-12 simplifies the accounting for income taxes, including the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company does not anticipate that the adoption of ASU 2019-12 will have a material impact on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (“ASU 2016-13"), as amended. ASU 2016-13 requires that financial assets measured at amortized cost, such as trade receivables, be presented net of expected credit losses, which may be estimated based on relevant information such as historical experience, current conditions, and future expectation for each pool of similar financial asset. The new guidance requires enhanced disclosures related to trade receivables and associated credit losses. In accordance with ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivative and Hedging (Topic 815), and Leases (Topic 842)- Effective Dates, as the Company meets the definition of a “smaller reporting company”, the Company has elected to defer the adoption of ASU 2016-13 until January 1, 2023. The Company expects that the adoption of ASU 2016-13 may accelerate the timing and could increase the level of credit loss expense in the consolidated statement of operations and will likely require an increased level of disclosure in the notes to the consolidated financial statements.




12

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.    License, Collaboration and Funding Agreements
There were no material modifications of the Company’s license, collaboration or funding agreements during the three months ended September 30, 2020.
Research and Development Incentive Program
The Company participates in a research and development incentive program provided by the Austrian government whereby the Company is entitled to reimbursement by the Austrian government for a percentage of qualifying research and development expenses incurred by the Company’s subsidiary in Austria. Under the program, the reimbursement rate for qualifying research and development expenses incurred by the Company through its subsidiary in Austria is 14% for the years ended December 31, 2020 and 2019. As of September 30, 2020, the amount due under the program is $0.6 million, which amount was included in research and development incentive receivable in the condensed consolidated balance sheet. During the three and nine months ended September 30, 2020, the Company recorded $97 thousand and $267 thousand of income, respectively, related to the program within the condensed consolidated statements of operations as “other income”.
Abbisko Agreement
In July 2019, the Company entered into a license agreement, (the “Abbisko Agreement”) with Abbisko Therapeutics Co., Ltd., (“Abbisko”). Under the terms of the Abbisko Agreement, the Company granted Abbisko the exclusive right to develop, manufacture and commercialize mavorixafor in mainland China, Taiwan, Hong Kong and Macau, the (“Abbisko Territory”). The agreement provides Abbisko with the exclusive rights in the Abbisko Territory to develop and commercialize mavorixafor in combination with checkpoint inhibitors or other agents in multiple oncology indications. The Company retains the full rest-of-world rights to develop and commercialize mavorixafor outside of the Abbisko Territory for all indications and the Company has the ability to utilize data generated pursuant to the Abbisko collaboration for rest-of-world development. Assuming mavorixafor is developed by Abbisko in six indications, the Company would be entitled to milestone payments of up to $208 million, which will vary based on the ultimate sales, if any, of the approved licensed products. In addition, upon commercialization of mavorixafor in the Abbisko Territory, the Company is eligible to receive a tiered royalty, with a percentage range in the low double-digits, on net sales of approved licensed products. Abbisko is obligated to use commercially reasonable efforts to develop and commercialize mavorixafor in the Abbisko Territory.
Following the closing of a qualified financing (as such term is defined in the Abbisko Agreement), Abbisko was required to pay the Company a one-time, non-refundable, non-creditable financial milestone payment of $3.0 million. Abbisko achieved such qualified financing in March 2020 and, as a result, the Company was eligible to receive the milestone payment, which was received by the Company in April 2020. The Company is also eligible to receive potential development and regulatory milestone payments, which vary based on the number of indications developed, and potential commercial milestone payments based on annual net sales of mavorixafor-based licensed products.
Upon entering into the Abbisko Agreement, the Company evaluated the agreement under Accounting Standards Codification Topic 606 (“ASC 606”) and determined the agreement contained a single performance obligation related to the exclusive license to develop and commercialize mavorixafor and the transfer of know-how that was satisfied at the inception of the arrangement. The transaction price related to the transfer of the license and know-how was fully constrained at the inception of the arrangement and the Company ascribed no transaction price to the development, regulatory and commercial milestones under the “most-likely-amount” method. The Company concluded that any consideration related to the initial transfer of the license and know-how will be recognized when it is probable that Abbisko will achieve the related financial milestone and other operational milestones. As a result of Abbisko’s achievement of the qualified financing, the Company reversed the constraint related to this milestone and recognized $3.0 million of license revenue during the three months ended March 31, 2020.
As of September 30, 2020, Abbisko has not achieved any additional development or regulatory operational milestones, other than as noted above and, therefore, the Company continues to fully constrain the value of any future milestone payments. The Company will continue to re-evaluate the transaction price and associated constrained amounts in each reporting period and as uncertain events are resolved or other changes in circumstances occur.




13

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4.    Fair Value of Financial Assets and Liabilities
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy used to determine such fair values:
Fair Value Measurements as of September 30, 2020 Using:
(in thousands)Level 1Level 2Level 3Total
Assets:
Cash equivalents—money market funds$46,815 $1,843 $ $48,658 
$46,815 $1,843 $ $48,658 
Liabilities:  None

Fair Value Measurements as of December 31, 2019 Using:
(in thousands)Level 1Level 2Level 3Total
Assets:
Cash equivalents—money market funds$23,638 $39,999 $ $63,637 
$23,638 $39,999 $ $63,637 
Liabilities: None
The Company’s cash equivalents consisted of money market funds invested in U.S. Treasury securities. The money market funds were valued based on reported market pricing for the identical assets, which represents a Level 1 measurement, or by using inputs observable in active markets for similar securities, which represents a Level 2 measurement.

During the nine months ended September 30, 2020, the Company refinanced its Amended and Restated Loan and Security Agreement (as defined in Note 7) with Hercules Capital Inc. (“Hercules”). The debt refinancing was deemed to be an extinguishment of the June 2019 Amended and Restated Loan and Security Agreement (the “previous debt”) in exchange for the Amended Loan Agreement (the “new debt”) as further described in Note 7. The loss on extinguishment was calculated as the difference between the carrying amount of the previous debt and the fair value of the new debt, which is a non-recurring Level 3 measure. The fair value of the new debt was calculated based on the cash flows of the new debt, including end-of-term payments, interest payments, principal payments and lender fees, discounted to present value using the appropriate market rate. The market rate is a significant unobservable input. The Company developed a range of market rates in reference to the Company's recent borrowing activities with this lender, which are deemed to be reflective of the market rate. The Company considered a range from 10.5% to 12.5% and determined that 11.5% represented a reasonable rate for purposes of determining the fair value of the new debt, which was $25.3 million.


5.    Property and Equipment, Net
Property and equipment, net consisted of the following:
(in thousands)September 30,
2020
December 31, 2019
Leasehold improvements$216 $299 
Furniture and fixtures913 139 
Computer equipment47 37 
Software33 33 
Lab equipment296 159 
1,505 667 
Less: Accumulated depreciation and amortization(171)(264)
$1,334 $403 
Depreciation and amortization expense related to property and equipment was $248 thousand and $71 thousand for the nine months ended September 30, 2020 and 2019 respectively.

14

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6.    Accrued Expenses
Accrued expenses consisted of the following:
(in thousands)September 30,
2020
December 31,
2019
Accrued employee compensation and benefits$3,968 2,916 
Accrued external research and development expenses3,086 1,977 
Accrued professional fees768 1,347 
Accrued lease construction costs207  
Other503 221 
$8,532 $6,461 

7.    Long-Term Debt
Long-term debt consisted of the following:
(in thousands)September 30,
2020
December 31,
2019
Principal amount of long-term debt$25,000 $20,000 
Debt discount, net of accretion229 (317)
Cumulative accretion of final payment due at maturity308 414 
Long-term debt, including accretion$25,537 $20,097 
Hercules Loan Agreements
In October 2018, the Company entered into the Loan and Security Agreement, as amended in December 2019 (the “Hercules Loan Agreement”), under which the Company borrowed an aggregate of $10.0 million under a term loan. In June 2019, the Company refinanced the Hercules Loan Agreement and entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”) with Hercules. The Amended and Restated Loan Agreement provided for aggregate maximum borrowings of $35.0 million, under which $20.0 million was borrowed, including $10.0 million that was previously outstanding and $10.0 million in new borrowings. Borrowings under the Amended and Restated Agreement accrued interest at a variable rate equal to the greater of (i) 8.75% or (ii) The Wall Street Journal prime rate plus 2.75%. In an event of default and until such event is no longer continuing, the interest rate applicable to borrowings under the Amended and Restated Agreement would be increased by 4.0%.

On March 13, 2020, the Company entered into a First Amendment to the Amended and Restated Loan and Security Agreement dated June 27, 2019 (collectively the “Amended Loan Agreement”) with Hercules, which provides for aggregate maximum borrowings of up to $50.0 million. The Amended Loan Agreement provides for (i) a term loan of $25.0 million, including the $20.0 million previously outstanding under the Amended and Restated Loan Agreement and an additional $5.0 million drawn at the closing of the first amendment on March 13, 2020, (ii) subject to the achievement of certain performance milestones and other conditions, a right of the Company to request that Hercules make additional term loan advances in an aggregate amount of up to $7.5 million through June 30, 2021, (iii) subject to the achievement of certain performance milestones and conditions, a right of the Company to request that Hercules make additional term loan advances in an aggregate amount of up to $7.5 million through June 30, 2022 and (iv) subject to Hercules investment committee’s sole discretion, a right of the Company to request that Hercules make additional term loan advances in an aggregate amount of up to $10.0 million through December 31, 2022.

Borrowings under the Amended Loan Agreement bear interest at a variable rate equal to a per annum rate of interest equal to the greater of either (i) 3.75% plus the prime rate as reported in The Wall Street Journal, and (ii) 8.75%. In an event of default, as defined in the Amended Loan Agreement, and until such event is no longer continuing, the interest rate applicable to borrowings under the Amended Loan Agreement would be increased by 4.0%.

Borrowings under the Amended Loan Agreement are repayable in monthly interest-only payments through January 1, 2022, and in equal monthly payments of principal and accrued interest from February 1, 2022 until the maturity date of the loan, which is July 1, 2023. The Company may prepay all, but not less than all, of the outstanding borrowings, subject to a
15

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
prepayment premium of up to 2.0%, 1.0% or 0.5% of the principal amount outstanding as of the date of repayment, in each case depending on when such repayment is made. In addition, the Amended Loan Agreement provides for payments of (i) $0.8 million payable upon the earlier of November 1, 2021 or the repayment in full of all obligations under the Amended Loan Agreement, and (ii) 4.0% of the aggregate principal amount of all Term Loan Advances drawn under the Amended Loan Agreement, payable upon the earlier of the maturity of the Amended Loan Agreement or the repayment in full of all obligations under the Amended Loan Agreement.

Borrowings under the Amended Loan Agreement are collateralized by substantially all of the Company’s personal property and other assets except for their intellectual property (but including rights to payment and proceeds from the sale, licensing or disposition of the intellectual property). Under the Amended Loan Agreement, the Company has agreed to affirmative and negative covenants to which it will remain subject until maturity or repayment of the loan in full. The covenants include, without limitation:

(a) Effective upon the date the outstanding principal amount of the advances under the Amended Loan Agreement exceeds $25.0 million, which has not yet occurred, the Company at all times thereafter must maintain cash in an account or accounts in which Hercules has a first priority security interest, in an aggregate amount greater than or equal to the greater of (i) $30.0 million or (ii) 6 multiplied by a metric based on prior months’ cash expenditures (“RML”); provided, however, that from and after the Company’s achievement of certain performance milestones, the required level shall be reduced to the greater of (x) $20.0 million, or (y) 3 multiplied by the current RML; and provided further, that subject to the achievement of certain milestones, this covenant shall be extinguished.

(b) Restrictions on the Company’s ability to incur additional indebtedness, pay dividends, encumber its intellectual property, or engage in certain fundamental business transactions, such as mergers or acquisitions of other businesses, with certain exceptions.

The Company’s obligations under the Amended Loan Agreement are subject to acceleration upon the occurrence of specified events of default, including payment default, insolvency and a material adverse change in the Borrower’s business, operations or financial or other condition. In addition, under the Amended Loan Agreement, Hercules has the right to participate, in a cumulative amount of up to $3.0 million in the aggregate, of which $1.0 million has already been exercised, and subject to exceptions as provided in the Amended Loan Agreement, in any future offering of the Company’s equity securities for cash that is solely for financing purposes and is broadly marketed to multiple investors.
The Company concluded that the previous debt under the Amended and Restated Loan Agreement was extinguished based on the difference in the cash flows of the previous and new debt. Accordingly, the difference between the carrying amount of the previous debt, including the unamortized debt discount, and the fair value of the new debt under the Amended Loan Agreement was recorded as a $162 thousand loss on extinguishment of debt for the nine months ended September 30, 2020. Legal and consulting fees paid to third parties directly related to the new debt have been deferred and will be amortized to interest expense over the life of the new debt arrangement using the effective interest method.
The Company recognized aggregate interest expense under its loan agreements with Hercules of $0.7 million and $2.0 million during the three and nine months ended September 30, 2020, respectively, and $0.4 million and $0.7 million for the three and nine months ended September 30, 2019, respectively. Interest expense includes $0.1 million and $0.4 million for the three and nine months ended September 30, 2020, respectively, related to the accretion of the debt discount and the final payment. The annual effective interest rate of the Amended Loan Agreement as of September 30, 2020 is 10.7%. There were no principal payments due or paid under the Amended Loan Agreement during the nine months ended September 30, 2020.
As of September 30, 2020, future principal payments and the final payment due under the Amended Loan Agreement were as follows (in thousands):
Year Ending December 31,Total
2020$ 
2021 
202214,871 
202310,129 
Long-term debt$25,000 
16

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



8.    Leases
The Company has lease agreements for its facilities in Boston, Massachusetts, which is the Company’s principal executive office; Vienna, Austria, which is the Company’s research and development center; and Waltham, Massachusetts, Arsanis' former research offices which the Company has sublet to a third party. The Company terminated its former office lease in Cambridge, Massachusetts as of September 30, 2020 as described below. There are no restrictions or financial covenants associated with any of the lease agreements.
Cambridge Lease— In August 2017, the Company entered into a non-cancellable operating lease agreement for office space of approximately thirteen thousand square feet in Cambridge, Massachusetts (“Cambridge Lease”) which had an original expiration date of July 31, 2022. The Company reached an agreement with the landlord on July 17, 2020 to terminate the lease effective September 30, 2020 in exchange for a fee. The Company accounted for the lease modification prospectively from the date of the termination through the new lease termination date of September 30, 2020. As of September 30, 2020, the right-of-use asset and associated lease liabilities were retired from the condensed consolidated balance sheet. The Company must maintain a letter of credit of $264 thousand, which is secured by restricted cash, for the benefit of the landlord until October 30, 2020.
Waltham Lease— The Company leases approximately six thousand square feet of office space in Waltham, Massachusetts (“Waltham Lease”). The Waltham Lease, as amended, commenced on January 1, 2019, and expires approximately five years from the commencement date. The base rent is approximately $262 thousand annually. In addition to the base rent, the Company is also responsible for its share of operating expenses, electricity and real estate taxes, which costs are not included in the determination of the leases’ right-of-use assets or lease liabilities. The Company is subleasing the space to a third party for the duration of the lease. The right-of-use asset is being amortized to rent expense over the five-year term of the lease.
Vienna Austria Leases— The Company has an operating lease, as amended, for approximately 400 square meters of laboratory and office space in Vienna, Austria ("2019 Vienna Lease"), which commenced on March 1, 2019, as amended, for a term of 2 years and is cancellable by the Company upon three months’ notice with no penalty. The annual base rent for the 2019 Vienna Lease is approximately $155 thousand. The Company classified the 2019 Vienna Lease as a short-term lease as it is not reasonably certain that the Company would not terminate the lease within one year and, accordingly, the lease is not recorded as a right-of-use asset. In September 2020, the Company entered into a new operating lease for approximately 1,200 square meters of laboratory and office space in Vienna, Austria ("Vienna Lease"), which is expected to commence in March 2021 for a term of 7 years and will replace the 2019 Vienna Lease. The Company will contribute approximately $575 thousand to building improvements in connection with the Vienna Lease. The annual base rent for the Vienna Lease, following a 6-month rent free period, will be approximately $300 thousand. The Company will record a right-of-use asset and associated lease liabilities upon the commencement of the Vienna Lease in 2021.
Boston Lease— On November 11, 2019, the Company entered into a lease agreement for approximately 28,000 square feet of office space that was subsequently constructed in a vacant building located in Boston, Massachusetts (“Boston Lease”). The office space is the Company’s current headquarters replacing the Cambridge Lease. Monthly rent payments under the Boston Lease commenced in May 2020. Base rental payments will be approximately $1.0 million annually, plus certain operating expenses. The term of the Boston Lease will continue until November 2026, unless earlier terminated. The Company has the right to sublease the premises, subject to landlord consent and also has the right to renew the Boston Lease for an additional five years at the then prevailing effective market rental rate. The Company is required to maintain a security deposit in the form of a letter of credit for $1.1 million for the benefit of the landlord.

For the Boston lease, the Company participated in the construction of the office space and has incurred construction costs to prepare the office space for its use, which have been partially reimbursed by the landlord. The Company has concluded that these construction costs generate and enhance the landlord’s assets, and, as such, unreimbursed construction costs incurred by the Company to prepare the office space for its use have been classified a part of the right-of-use asset. The commencement date for the Boston Lease was September 1, 2020 upon substantial completion of the landlord's asset. On the commencement date, the Company recognized a lease liability of $4.6 million reflecting the future rent payments for the term of the Boston
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X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Lease discounted at the Company's collateralized borrowing rate, and a right-of-use asset of $8.0 million measured as the lease liability plus rent payments made and unreimbursed construction costs incurred prior to the commencement date. The Company began recognizing rent expense following the commencement date.
As the Company’s leases do not provide an implicit rate, the Company estimated the incremental borrowing rate in calculating the present value of the lease payments. The Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment.
The components of lease expense for the three and nine months ended September 30, 2020 and 2019 were as follows (dollars in thousands):
For the Three Months Ended September 30,For the Nine Months Ended September 30,
Lease Cost2020201920202019
Fixed operating lease cost$413 $225 $847 $610 
Short-term lease costs40 38 116 84 
Total lease expense$453 $263 $963 $694 
Other information
Right-of-use asset obtained in exchange for operating lease liabilities$4,646 
Operating cash flows from operating leases$479 $268 $963 $737 
Sublease income$49 $ $146 $ 
Weighted-average remaining lease term—operating leases5.8 years
Weighted-average discount rate—operating leases11.2 %


Maturities of lease liabilities due under lease agreements that have commenced as of September 30, 2020 are as follows (in thousands):
Maturity of lease liabilitiesOperating
Leases
2020$313 
20211,273 
20221,301 
20231,329 
20241,094 
20251,122 
Thereafter1,052 
Total lease payments7,484 
Less: interest(2,051)
Total operating lease liabilities as of September 30, 2020$5,433 

9.    Commitments and Contingencies
The Company has agreements with clinical research organizations (“CROs”) pursuant to which the Company and the CROs are conducting clinical trials of mavorixafor for the treatment of WHIM syndrome, Waldenström’s and SCN. The Company may terminate these agreements by providing notice pursuant to the contractual provisions of such agreements and would incur early termination fees. The Company also has agreements with contract manufacturing organizations (“CMOs”) for the production of mavorixafor for use in clinical trials.
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X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Indemnification Agreements— In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and its executive officers that will require the Company to, among other things, indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnification obligations. The Company is not currently aware of any indemnification claims and has not accrued any liabilities related to such obligations in its condensed consolidated financial statements as of September 30, 2020 or December 31, 2019.
License Agreements— In February 2017, Arsanis entered into an option and license agreement with Adimab to obtain rights to certain RSV antibodies, which are being used in the ASN500 program. The Company exercised this option for an up-front payment of $250 thousand. In July 2019, the Company transferred the intellectual property related to the ASN500 program through an exclusive, worldwide license with a third party. The third party subsequently cancelled the sublicense agreement effective October 2020. The Company is obligated to make payments to Adimab based on future clinical and regulatory milestones of up to approximately $25.0 million, as well as royalty payments on a product-by-product and country-by-country basis of a mid-single-digit percentage based on net sales of products based on certain RSV antibodies during the applicable term for such product in that country.
Legal Proceedings— The Company is not a party to any litigation and does not have contingency reserves established for any litigation liabilities. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to any legal proceedings.

10.    Preferred and Common Stock Warrants
In connection with its issuance of common stock in public offerings that closed on April 16, 2019 and November 29, 2019, the Company issued 3,900,000 Class A warrants, which are exercisable for the Company’s common stock, and 5,416,667 Class B warrants, which are exercisable for shares of the Company’s common stock or prefunded warrants to purchase shares of the Company's common stock. The Class A warrants have an exercise price of $13.20 per share, expire on April 15, 2024 and were immediately exercisable. The Class B warrants were immediately exercisable upon issuance, have an initial exercise price of $15.00 per share and expire on a date that is the earlier of (a) the date that is 30 calendar days from the date on which the Company issues a press release announcing top-line data from its Phase 3 clinical trial of mavorixafor for the treatment of patients with WHIM syndrome (or, if such date is not a business day, the next business day) and (b) November 28, 2024. The Class B warrants have a contingent price adjustment feature pursuant to which the exercise price of the Class B warrants will be adjusted to the lowest weighted average offering price at which the Company sells its common stock or certain securities convertible into or exercisable for the Company's common stock in one or more subsequent offerings, if the weighted average offering price for such offering is below $15.00. As of September 30, 2020, no such subsequent offerings have occurred but may in the future. In addition, in connection with the April 16, 2019 and November 29, 2019 offerings, the Company issued 2,130,000 and 1,750,000 prefunded warrants, respectively, for proceeds of $10.999 and $11.999 per share, respectively. Each of the prefunded warrants is exercisable into one share of the Company's common stock, has a remaining exercise price of $0.001 per share and was immediately exercisable upon issuance.

Prior to the Merger (see Note 1), the Company issued warrants for the purchase of its convertible preferred stock. Upon the closing of the Merger, pursuant to the Merger Agreement, all of the outstanding X4 preferred stock was converted to Arsanis common stock and the X4 preferred stock warrants converted to warrants for the purchase of common stock.



19

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




The following table provides a roll forward of outstanding warrants for the nine month period ended September 30, 2019:
Number of
warrants
Weighted
Average
Exercise
Price
Weighted
Average
Contractual
Term (Years)
Outstanding and exercisable warrants to purchase preferred shares as of December 31, 20185,146,400 4.23
Conversion of warrants to purchase preferred shares to warrants for the purchase of common stock and adjusted for the Exchange Ratio and Reverse Stock Split
(4,657,350)
Issuance of warrants for the purchase of common stock6,035,000 12.43 
Exercised(33,846)13.20 
Outstanding warrants to purchase common shares as of September 30, 20196,490,204 $13.03 2.98


The following table provides a roll forward of outstanding warrants for the nine month period ended September 30, 2020:
Number of warrantsWeighted Average Exercise PriceWeighted Average Contractual Term (Years)
Outstanding and exercisable warrants to purchase common shares as of December 31, 201913,656,871 $13.684.59
Cancelled(150,831)
Outstanding and exercisable warrants to purchase common shares as of September 30, 202013,506,040 $13.593.90

20

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of September 30, 2020, the Company’s outstanding warrants to purchase shares of common stock consisted of the following:
Issuance DateNumber of
Shares of
Common
Stock Issuable
Exercise
Price
ClassificationExpiration Date
October 25, 20165,155 $19.78 EquityOctober 24, 2026
November 1, 2017130,609 $19.78 EquityOctober 31, 2020
November 17, 20178,442 $19.78 EquityNovember 16, 2020
December 4, 20175,661 $19.78 EquityDecember 3, 2020
December 28, 20176,925 $19.78 EquityDecember 27, 2020
December 28, 2017115,916 $19.78 EquityDecember 28, 2027
September 12, 201825,275 $19.78 EquitySeptember 12, 2021
September 12, 201820,220 $19.78 EquitySeptember 12, 2028
October 19, 201820,016 $19.78 EquityOctober 19, 2028
March 13, 20195,000 $19.80 EquityMarch 12, 2029
April 16, 20193,866,154 $13.20 EquityApril 15, 2024
April 16, 20192,130,000 $11.00 Equityn/a
November 29, 20195,416,667 $15.00 EquityNovember 28, 2024
November 29, 20191,750,000 $12.00 Equityn/a
13,506,040 
 

11.    Common Stock
Common Stock— On June 10, 2020, the Company's stockholders approved an amendment to the Company's Restated Certificate of Incorporation, as amended, to increase the number of the Company's authorized shares of common stock, par value $0.001 per shares, from 33,333,333 shares to 125,000,000 shares. As of September 30, 2020, the Company’s Restated Certificate of Incorporation, as amended through such date (the “Restated Certificate”), authorized the Company to issue 125,000,000 shares of common stock. The voting, dividend and liquidation rights of the holders of the Company’s common stock are subject to and qualified by the rights, powers and preferences of the holders of any preferred stock that may be issued. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any. No cash dividends have been declared or paid to date.
On August 7, 2020, the Company entered into a Controlled Equity OfferingSM Sales Agreement (the "ATM Sales Agreement") with B. Riley Securities, Inc., Cantor Fitzgerald & Co., and Stifel, Nicolaus & Company, Incorporated (collectively the “Sales Agents”), pursuant to which the Company may offer and sell, at the Company's sole discretion through one or more of the Sales Agents, shares of its common stock having an aggregate offering price of up to $50.0 million. The Sales Agents may sell the common stock by any method deemed to be an “at the market offering” as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, including, without limitation, sales made directly on the Nasdaq Capital Market or any other existing trading market for the Company's common stock. Any shares of common stock sold will be issued pursuant to the Company's shelf registration statement on Form S-3 (File No. 33-242372). No shares of common stock were sold pursuant to the ATM Sales Agreement during the three or nine months ended September 30, 2020.
On October 14, 2020, the Company entered into a common stock purchase agreement (the “Aspire Purchase Agreement”) with Aspire Capital Fund, LLC, (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth in the Aspire Purchase Agreement, Aspire Capital is committed to purchase up to an aggregate of $50.0 million of shares of the Company’s common stock at the Company’s request from time to time during the 36-month term of the Purchase Agreement. Concurrently with entry into the Aspire Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”), pursuant to which the Company filed with the SEC a prospectus supplement to the Company’s shelf registration statement on Form S-3 (File No. 333-242372), registering the
21

X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
issuance and sale of common stock that the Company may offer to Aspire Capital from time to time under the Aspire Purchase Agreement.

12.    Stock-Based Compensation
Summary of Plans—