Neurogene(NGNE) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION (Unaudited) This section presents the unaudited financial information for Neoleukin Therapeutics, Inc. for the three months ended March 31, 2020 and 2019 Item 1. Condensed Consolidated Financial Statements This section presents Neoleukin Therapeutics' unaudited condensed consolidated financial statements and accompanying notes for Q1 2020 and 2019 Condensed Consolidated Balance Sheets (March 31, 2020 vs. December 31, 2019) | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Total assets | $153,051 | $147,023 | | Total liabilities | $15,931 | $5,336 | | Total shareholders' equity | $137,120 | $141,687 | | Cash and cash equivalents | $139,417 | $143,093 | | Operating lease right-of-use assets | $10,300 | $770 | | Non-current operating lease liabilities | $10,182 | $447 | | Additional paid-in capital | $445,291 | $441,216 | | Accumulated deficit | $(308,171) | $(299,529) | Condensed Consolidated Statements of Operations and Comprehensive Loss (Three Months Ended March 31, 2020 vs. 2019) | Metric | March 31, 2020 (in thousands) | March 31, 2019 (in thousands) | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Research and development expenses | $5,498 | $104 | | General and administrative expenses | $3,573 | $2,555 | | Total operating expenses | $9,071 | $2,659 | | Other income, net | $429 | $451 | | Net loss | $(8,642) | $(2,208) | | Net loss per common stock - basic and diluted | $(0.18) | $(0.09) | | Basic and diluted weighted average common stock outstanding | 49,168,451 | 23,537,368 | Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31, 2020 vs. 2019) | Metric | March 31, 2020 (in thousands) | March 31, 2019 (in thousands) | | :---------------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(6,440) | $(2,756) | | Net cash used in investing activities | $(107) | $0 | | Net cash provided by (used in) financing activities | $3,390 | $(2) | | Net change in cash, cash equivalents and restricted cash | $(3,168) | $(2,759) | | Cash, cash equivalents and restricted cash, end of period | $139,925 | $74,169 | Condensed Consolidated Statements of Stockholders' Equity (Three Months Ended March 31, 2020 vs. 2019) | Metric | March 31, 2020 (in thousands) | March 31, 2019 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Balances, December 31 | $141,687 | $72,672 | | Options exercised | $3,392 | $0 | | Stock-based compensation | $683 | $1,078 | | Net loss | $(8,642) | $(2,208) | | Balances, March 31 | $137,120 | $71,542 | Note 1. Nature of operations This note describes Neoleukin Therapeutics, Inc.'s business as a biopharmaceutical company focused on developing immunotherapies using de novo protein design technology - Neoleukin Therapeutics, Inc. is a biopharmaceutical company developing next-generation immunotherapies for cancer, inflammation, and autoimmunity[22] - The company utilizes de novo protein design technology to create proteins with specific pharmaceutical properties, aiming for superior therapeutic benefits over native proteins[22] - The company was formed on August 8, 2019, through the merger of Aquinox Pharmaceuticals, Inc. and Former Neoleukin Therapeutics, Inc.[23] Note 2. Summary of significant accounting policies This note outlines the significant accounting policies used in preparing the unaudited financial statements, including estimates, lease accounting, and stock-based compensation - Financial statements are unaudited, presented in U.S. dollars, and prepared in accordance with U.S. GAAP and SEC rules for interim financial information[25] - Management makes estimates and assumptions for stock-based compensation, depreciation/amortization, and accruals[27] - Operating and finance leases are recognized as right-of-use assets and liabilities based on the estimated present value of lease payments over the lease term[28][29] - Stock-based compensation for options is estimated using the Black-Scholes model, and RSUs are valued at the closing stock price on the grant date[31][32][33] - Basic and diluted net loss per common stock includes pre-funded warrants due to their full vesting and exercisability for nominal cash[34] - Money market funds totaled $118.2 million as of March 31, 2020, classified as Level 1 financial instruments[36] - The company is assessing the impact of ASU 2019-12 "Simplifying the Accounting for Income Taxes," effective for fiscal years beginning after December 15, 2020[37] Note 3. Cash, cash equivalents and restricted cash This note details the components of cash, cash equivalents, and restricted cash, including changes and specific allocations - Restricted cash of $0.5 million (March 31, 2020) is held as collateral for an irrevocable letter of credit for the New Seattle Lease[38] - Cash, cash equivalents, and restricted cash totaled $139.9 million as of March 31, 2020, compared to $143.093 million cash and cash equivalents at December 31, 2019[10][39] - Money market funds increased from $40.0 million (December 31, 2019) to $118.2 million (March 31, 2020)[36][39] Note 4. Lease liabilities This note describes the company's lease agreements, including existing and new Seattle leases, and their financial impact - The company has an existing office lease in Seattle (6,272 sq ft, expires Oct 2021) and a new Seattle lease (33,300 sq ft, commenced Jan 2020, rent starts Dec 2020, expires Dec 2028)[40][41] - A $0.5 million irrevocable letter of credit was issued for the new Seattle lease security deposit in January 2020[41] - Operating lease right-of-use assets increased from $0.8 million (Dec 31, 2019) to $10.3 million (March 31, 2020), primarily due to the New Seattle Lease[44] Total Net Lease Cost (Three Months Ended March 31, 2020 vs. 2019) | (in thousands) | 2020 | 2019 | | :--------------- | :--- | :--- | | Total net lease cost | $642 | $79 | - Non-current operating lease liabilities increased from $447 thousand (Dec 31, 2019) to $10,182 thousand (March 31, 2020)[10][46] Note 5. Stockholders' equity This note details changes in stockholders' equity, including authorized shares, common stock outstanding, and stock-based compensation - Authorized share capital includes 100,000,000 common stock and 5,000,000 preferred stock[47] - Common stock outstanding increased from 37,996,849 shares (Dec 31, 2019) to 38,386,160 shares (March 31, 2020)[47] - 10,925,481 pre-funded warrants were exchanged for common stock in December 2019, exercisable at $0.000001 per share[48] - 290,700 stock options were granted in Q1 2020 with an average exercise price of $7.63[52] - 376,311 shares of common stock were issued upon exercise of options in Q1 2020, generating $3.392 million in proceeds[18][53] - 75,000 restricted stock units were granted in Q1 2020 with a grant date fair value of $6.44 per share[54] - Total unrecognized stock-based compensation cost was $9.8 million as of March 31, 2020, expected to be recognized over a weighted-average period of 3.36 years[57] Note 6. Restructuring This note outlines the company's restructuring plans and associated charges incurred to reduce operating costs and align the workforce - Restructuring plans in July 2018 and November 2018 aimed to reduce operating costs and align the workforce after the failure of the rosiptor Phase 3 clinical trial[58][59] - Aggregate restructuring charges of $7.4 million (2018-2019) and $1.6 million (2019) were incurred and paid for clinical trial closing, contract cancellations, office closure, and severance[58][59] - Immaterial restructuring costs were incurred and paid for the three months ended March 31, 2020[60] - Restructuring costs in Q1 2019 were $0.1 million for R&D and $0.2 million for G&A[60] Note 7. Other income, net This note provides a breakdown of other income and expenses, including interest income and foreign exchange gains Other Income, Net (Three Months Ended March 31, 2020 vs. 2019) | (in thousands) | 2020 | 2019 | | :--------------- | :--- | :--- | | Interest income | $434 | $450 | | Foreign exchange gains | $15 | $2 | | Other expenses | $(20) | $(1) | | Total other income, net | $429 | $451 | - Interest income decreased due to lower interest rates, partially offset by higher cash and investment balances[81] Note 8. Net loss per common stock This note explains the calculation of basic and diluted net loss per common stock, including the treatment of pre-funded warrants and anti-dilutive securities - Basic and diluted net loss per common stock is computed by dividing net loss by the weighted-average number of common stock outstanding, including 10,925,481 pre-funded warrants[62] - Outstanding stock options (5,344,927) and restricted stock units (134,000) were excluded from the computation for Q1 2020 as their inclusion would be anti-dilutive[63][64] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Neoleukin's financial condition and results for Q1 2020, covering business, COVID-19 impact, operating expenses, liquidity, and capital Overview This overview introduces Neoleukin as a biopharmaceutical company leveraging de novo protein design for immunotherapies, highlighting its lead product candidate NL-201 - Neoleukin is a biopharmaceutical company focused on de novo protein design technology for immunotherapies in cancer, inflammation, and autoimmunity[67] - The lead product candidate, NL-201, is a de novo protein mimicking IL-2 and IL-15 for cancer treatment, showing higher activity and lower toxicity in preclinical studies compared to native IL-2[68] - The company was formed through a merger on August 8, 2019, and its head office is in Seattle, Washington[69] COVID-19 Impact This section details the company's response to the COVID-19 pandemic, including operational adjustments and potential impacts on development timelines - Implemented a work-from-home policy and discontinued work-related travel as of March 9, 2020, due to COVID-19[71] - Business-critical R&D work has continued, adhering to guidelines to ensure employee safety[71] - No expected delay for NL-201 IND application, but potential for impact acknowledged; evaluating geographic diversity for clinical trial sites[72] - Preclinical data on NL-201 and de novo protein technology platform to be presented at AACR Virtual Annual Meeting II in June 2020[73] - Utilizing research and computational bandwidth to investigate de novo protein technology application toward COVID-19[73] Results of Operations This section analyzes the company's operating expenses and other income for the three months ended March 31, 2020, compared to the prior year Operating Expenses (Three Months Ended March 31, 2020 vs. 2019) | Expense Category | March 31, 2020 (in thousands) | March 31, 2019 (in thousands) | | :----------------------- | :----------------------------- | :----------------------------- | | Research and development | $5,498 | $104 | | General and administrative | $3,573 | $2,555 | | Total operating expenses | $9,071 | $2,659 | - Research and development expenses increased significantly due to IND-enabling activities for NL-201 and advancement of other Neoleukin technologies[78] - General and administrative expenses increased primarily due to higher employee count after the merger[80] - Net other income decreased slightly due to lower interest rates, partially offset by higher cash balances[81] Liquidity and Capital Resources This section discusses the company's cash position, funding outlook, and future capital requirements to support operations and growth - Accumulated deficit of $308.2 million as of March 31, 2020[82] - Cash and cash equivalents totaled $139.4 million as of March 31, 2020[75] - Existing cash and cash equivalents are expected to fund operating expenses and capital expenditures through 2022[75][87] - Net cash used in operating activities increased to $6.4 million in Q1 2020 from $2.8 million in Q1 2019, primarily due to increased NL-201 development costs[83][84] - Net cash provided by financing activities was $3.4 million in Q1 2020, mainly from stock option exercises[83][86] - The company will need to raise substantial additional capital through equity, debt, or collaborations to support ongoing operations and growth[74][87] Contractual Obligations and Commitments This section states that there have been no material changes to the company's contractual commitments since the last annual report - No material changes to contractual commitments since the December 31, 2019 Annual Report on Form 10-K[89] Critical Accounting Policies and Significant Judgments and Estimates This section highlights the reliance on estimates and judgments in financial statements and confirms no material changes to accounting policies - Financial statements require estimates and judgments affecting reported amounts of assets, liabilities, revenue, and expenses[90] - No material changes to significant accounting policies during the three months ended March 31, 2020[90] Recent Accounting Pronouncements This section refers to Note 2(g) for details on recently issued and adopted accounting standards - Refer to Note 2(g) for information on recently issued and adopted accounting standards[91] Off-Balance Sheet Arrangements This section confirms that the company has no off-balance sheet arrangements - The company has no off-balance sheet arrangements[92] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risk disclosures since the 2019 10-K, with primary exposures in interest rate and foreign currency risks - No material changes to quantitative and qualitative disclosures about market risks compared to the Annual Report on Form 10-K for the year ended December 31, 2019[93] Interest rate risk This section addresses the company's exposure to interest rate fluctuations, primarily concerning its investment portfolio - Exposure to market risk for changes in interest rates relates primarily to the investment portfolio, with $118.2 million in U.S. government securities as of March 31, 2020[94] - A hypothetical 1% increase in interest rates is estimated to have an immaterial impact on the fair value of the investment portfolio[94] Foreign Currency Risk This section discusses the company's foreign currency risk, mainly from Canadian operations, and its current hedging strategy - Exposure to foreign currency risk primarily relates to Canadian operations, including payments to vendors and suppliers[95] - The company does not currently hedge against foreign currency risk[95] - Foreign exchange gains (losses) were insignificant for the three months ended March 31, 2020 and 2019[95] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2020, while transitioning accounting operations to Seattle Evaluation of disclosure controls and procedures. This section confirms management's conclusion on the effectiveness of disclosure controls and procedures as of March 31, 2020 - Management, with the participation of the principal executive officer and principal financial officer, concluded that disclosure controls and procedures were effective as of March 31, 2020[96][98] - Disclosure controls and procedures are designed to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[98] Changes in internal control over financial reporting. This section addresses changes in internal control, specifically the transition of accounting operations to Seattle - The company is transitioning accounting and financial reporting operations from Vancouver, British Columbia, to its new headquarters in Seattle, Washington[99] - No other changes in internal control over financial reporting were identified that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[99] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, and other disclosures Item 1. Legal Proceedings The company may face legal claims, actions, and complaints, including those related to employment or intellectual property - The company may from time to time be named as a party to legal claims, actions, and complaints, including matters involving employment, intellectual property, or others[101] Item 1A. Risk Factors This section details significant risks to Neoleukin's business, operating results, and financial condition, covering financial, development, third-party, operational, intellectual property, and stock ownership aspects Risks Related to Our Financial Position and Capital Needs This section highlights the company's need for substantial additional capital to fund operations and the risks associated with potential funding shortfalls - The company requires substantial additional capital to finance operations, research and development, preclinical testing, clinical trials, regulatory approvals, manufacturing, marketing, and sales capabilities[103][104] - As of March 31, 2020, the company had $139.4 million in cash and cash equivalents, expected to fund operations through 2022, but future capital requirements are uncertain[104][75] - Failure to obtain necessary financing could lead to delays, reductions, or termination of research and development programs and preclinical studies or clinical trials, or corporate restructuring activities[106] - The company has incurred significant losses in every quarter since inception, with a net loss of $8.6 million for the three months ended March 31, 2020, and an accumulated deficit of $308.2 million[108] - The company currently has no source of product revenue and may never become profitable; its ability to generate revenue depends on the successful commercialization of any products developed[111] Risks Related to Discovery, Development and Commercialization This section details the inherent risks in developing and commercializing product candidates, including preclinical failure, regulatory hurdles, and clinical trial delays - All product candidates, including NL-201, are in preclinical or earlier stages of development, and the risk of failure is high, with no regulatory approvals obtained yet[120] - NL-201 is a de novo protein, and this new class of therapeutics has not been previously tested in humans, posing risks of immunologic reactions or unforeseen interactions[130][136] - Preclinical and clinical development is a lengthy, complex, and expensive process with an uncertain outcome, and results of earlier studies may not be predictive of future trial results[138] - Delays in clinical trials can arise from various factors, including inability to generate sufficient preclinical data, regulatory disagreements, patient enrollment issues, or unforeseen safety concerns, leading to increased costs and delayed revenue generation[140][141][143] - Failure to obtain regulatory approval in international jurisdictions would prevent any future product candidates from being marketed outside the United States[146] - Recently enacted and future legislation, including potentially unfavorable pricing regulations or other healthcare reform initiatives, may increase the difficulty and cost for obtaining marketing approval and affect product prices[147][151] Risks Related to Our Reliance on Third Parties This section addresses risks associated with relying on third parties for clinical trials, manufacturing, and potential collaboration agreements - The company intends to rely on third-party clinical investigators, CROs, and consultants for preclinical studies and clinical trials, which reduces control over timing, quality, and other aspects of these activities[171] - Reliance on third-party contract manufacturers for drug substances, products, and services exposes the company to risks of supply limitations, quality issues, and regulatory non-compliance[174][175] - Manufacturing biopharmaceuticals is complex and susceptible to product loss due to contamination, equipment failure, and scaling difficulties, which could delay clinical trials or commercialization[178][179][180] - Future collaboration agreements may not lead to development or commercialization of product candidates, as collaborators have significant discretion over resource allocation and may pursue competing products[184][187] - Conflicts with collaborators could arise concerning data interpretation, milestone achievement, or intellectual property, potentially delaying or preventing product development and commercialization[189] Risks Related to Our Business and Operations This section covers operational risks, including the impact of COVID-19, organizational growth, personnel retention, regulatory compliance, and cybersecurity - The COVID-19 outbreak could adversely impact preclinical development activities and planned clinical trials due to potential disruptions in the supply chain, regulatory processes, and patient enrollment[193] - The company needs to grow its organization and manage expansion, which requires continuous improvement of operational, financial, and management controls[197] - Success depends on the ability to attract and retain qualified key management and technical personnel in a highly competitive market[198][199] - Relationships with healthcare professionals and third-party payors are subject to extensive anti-kickback, fraud and abuse, privacy, and transparency laws, which could expose the company to significant penalties for non-compliance[200][201][202] - Product liability lawsuits against the company could result in substantial liabilities, decreased demand for products, and significant reputational harm[205] - Future acquisitions could disrupt business, cause dilution to stockholders, and pose numerous operational and financial risks, including integration challenges[207] - Computer system failures or security breaches could adversely affect business operations and result in the loss, misappropriation, or unauthorized access to confidential information[209] - Business disruptions from natural disasters or other events could seriously harm future revenues and financial condition[210] - The ability to use U.S. net operating losses (NOLs) to offset future taxable income will be subject to certain limitations due to historical ownership changes[211] - Recent tax reform legislation (Tax Cuts and Jobs Act) could adversely affect the company's business and financial condition[212] Risks Related to Intellectual Property This section discusses the critical importance of obtaining and maintaining robust patent protection and safeguarding trade secrets for the company's product candidates and technology - The company's success depends on its ability to obtain, maintain, and enforce patent protection for its product candidates, Neoleukin platform technology, and other proprietary technologies[213] - There is no guarantee that pending patent applications will result in issued patents, or that issued patents will not be found invalid, unenforceable, or too narrow to provide meaningful protection[215][216] - The patent prosecution process is expensive, time-consuming, and unpredictable, with varying standards applied by patent offices globally[215][219] - Failure to protect the confidentiality of trade secrets, including unpatented know-how and proprietary information, would harm the company's business and competitive position[225] - Protecting intellectual property rights throughout the world is prohibitively expensive, and foreign laws may not protect these rights to the same extent as U.S. laws[227][228] Risks Related to Ownership of Our Common Stock This section addresses risks related to the volatility of common stock, control by principal stockholders, potential dilution, and anti-takeover provisions - The trading price of the company's common stock has been and will likely continue to be volatile, influenced by factors such as competitive products, regulatory actions, clinical trial results, and general market conditions[231][234] - Principal stockholders, directors, and management beneficially own a majority of the outstanding voting stock, enabling them to exert significant control over matters requiring stockholder approval[236] - Future sales and issuances of common stock or rights to purchase common stock, including under equity incentive plans, could result in additional dilution of existing stockholders' percentage ownership and cause the stock price to fall[247] - Provisions in the company's charter documents and Delaware law may have anti-takeover effects, which could discourage an acquisition even if beneficial to stockholders[249][250] - Exclusive forum provisions in the restated certificate of incorporation and amended and restated bylaws may limit a stockholder's ability to bring claims in a judicial forum they find favorable[251][253] - If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about the business, the stock price and trading volume could decline[254] Item 2. Unregistered Sale of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds during the reporting period - None[255] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - None[256] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[257] Item 5. Other Information No other information is reported under this item - Not applicable[258] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including amended bylaws, an employment agreement, certifications, and XBRL documents - Includes Amended and Restated Bylaws (Exhibit 3.1), Employment Agreement for Robert Ho (Exhibit 10.1), CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1), and XBRL Instance Document and Taxonomy Extensions (Exhibits 101.INS, SCH, CAL, DEF, LAB, PRE)[260] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers - The report was signed on May 6, 2020, by Jonathan G. Drachman, President and Chief Executive Officer, and Robert Ho, Chief Financial Officer[264][265]