Nkarta(NKTX) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited condensed financial statements, including balance sheets, statements of operations, cash flows, and related notes Condensed Balance Sheets Condensed Balance Sheet Highlights (Unaudited) | Metric | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $43,615,739 | $48,411,752 | | Total Current Assets | $22,297,493 | $37,465,044 | | Cash and Cash Equivalents | $17,748,928 | $20,606,849 | | Short-term Investments | $3,897,148 | $16,384,273 | | Total Liabilities | $67,689,801 | $14,079,381 | | Preferred Stock Purchase Right Liability | $41,641,000 | $1,477,645 | | Total Stockholders' Deficit | $(83,888,944) | $(25,482,511) | - Total assets decreased by approximately $4.8 million from December 31, 2019, to June 30, 2020, primarily due to a significant reduction in short-term investments and cash[15] - Total liabilities increased substantially from $14.1 million to $67.7 million, driven mainly by a significant increase in the preferred stock purchase right liability[15] Condensed Statements of Operations and Comprehensive Loss Condensed Statements of Operations and Comprehensive Loss (Unaudited) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Collaboration Revenue | $0 | $2,308 | $0 | $115,385 | | Research and Development Expenses | $7,861,986 | $3,620,858 | $15,121,824 | $5,914,975 | | General and Administrative Expenses | $2,493,595 | $1,052,272 | $4,642,016 | $1,992,110 | | Total Operating Expenses | $10,355,581 | $4,673,130 | $19,763,840 | $7,907,085 | | Loss from Operations | $(10,355,581) | $(4,670,822) | $(19,763,840) | $(7,791,700) | | Change in Fair Value of Preferred Stock Purchase Right Liability | $(40,741,000) | $0 | $(40,163,355) | $0 | | Net Loss | $(51,065,117) | $(4,837,955) | $(59,771,120) | $(7,920,934) | | Net Loss Per Share (Basic and Diluted) | $(30.06) | $(3.39) | $(36.13) | $(5.79) | - Net loss significantly increased for both the three and six months ended June 30, 2020, primarily due to a substantial increase in the fair value of the preferred stock purchase right liability[16] - Research and development expenses more than doubled for both periods year-over-year, reflecting increased investment in product development[16] Condensed Statements of Convertible Preferred Stock and Stockholders' Deficit Stockholders' Deficit Changes (Unaudited) | Metric | December 31, 2019 | June 30, 2020 | | :--- | :--- | :--- | | Total Stockholders' Deficit | $(25,482,511) | $(83,888,944) | | Accumulated Deficit | $(26,659,742) | $(86,430,862) | | Additional Paid-in Capital | $1,179,210 | $2,540,711 | - The total stockholders' deficit worsened significantly from $(25.5) million at December 31, 2019, to $(83.9) million at June 30, 2020, primarily due to the accumulated deficit from net losses[18] - Additional paid-in capital increased due to vesting of common stock, stock option exercises, and share-based compensation expense[18] Condensed Statements of Cash Flows Condensed Statements of Cash Flows (Unaudited) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(18,528,423) | $(7,082,300) | | Net Cash Provided by (Used in) Investing Activities | $7,710,707 | $(704,801) | | Net Cash Provided by Financing Activities | $8,104,173 | $6,013,011 | | Net Decrease in Cash and Cash Equivalents | $(2,713,543) | $(1,774,090) | - Net cash used in operating activities increased significantly from $7.1 million in 2019 to $18.5 million in 2020, reflecting higher net losses and increased operating expenses[22] - Investing activities shifted from a net cash outflow of $0.7 million in 2019 to a net cash inflow of $7.7 million in 2020, primarily due to maturities of short-term investments[22] - Financing activities provided $8.1 million in 2020, mainly from proceeds of Series B preferred stock issuance, compared to $6.0 million in 2019 from convertible notes[22] Notes to Unaudited Condensed Financial Statements 1. Organization and Description of Business - Nkarta, Inc is a biopharmaceutical company developing engineered natural killer (NK) cells to fight cancer, incorporated in Delaware in July 2015[25] - The company completed its Initial Public Offering (IPO) on July 14, 2020, issuing 16.1 million shares at $18.00 per share, generating approximately $265.5 million in net proceeds[26] - As of June 30, 2020, the company had an accumulated deficit of $86.4 million and expects to incur net losses for the foreseeable future, but believes current funds will be sufficient for at least 12 months[27][28] 2. Basis of Presentation and Significant Accounting Policies - The unaudited condensed financial statements are prepared in accordance with U.S. GAAP for interim financial information and Regulation S-X, including only normal and recurring adjustments[29] - On July 1, 2020, the company effected a 1-for-3.7 reverse stock split, retrospectively adjusting all common stock, options, and preferred stock data[33] - The COVID-19 pandemic's impact on the company's operations and financial performance is uncertain, but the company does not expect the CARES Act to have a material impact on its financial condition[34] 3. Net Loss Per Share Net Loss Per Share (Basic and Diluted) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Loss | $(51,065,117) | $(4,837,955) | $(59,771,120) | $(7,920,934) | | Weighted Average Shares Outstanding | 1,698,560 | 1,426,984 | 1,654,304 | 1,367,686 | | Net Loss Per Share | $(30.06) | $(3.39) | $(36.13) | $(5.79) | - Potentially dilutive securities, including convertible preferred stock and stock options, were excluded from diluted net loss per share calculations as their inclusion would be anti-dilutive[37][42] - Immediately prior to the IPO on July 14, 2020, all outstanding convertible preferred stock converted into 14,689,215 shares of common stock[43] 4. Fair Value of Financial Instruments Fair Value of Financial Instruments (June 30, 2020) | Instrument | Total Fair Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Money Market Funds | $6,374,380 | $6,374,380 | — | — | | Corporate Debt Securities | $1,201,596 | — | $1,201,596 | — | | Commercial Paper | $2,695,552 | — | $2,695,552 | — | | Preferred Stock Purchase Right Liability | $41,641,000 | — | — | $41,641,000 | - The preferred stock purchase right liability, classified as Level 3, significantly increased from $1.5 million at December 31, 2019, to $41.6 million at June 30, 2020[44][53] - On July 1, 2020, this liability was revalued and reclassified into equity upon the Series B Milestone Closing, where 27,066,206 shares of Series B convertible preferred stock were issued for $64.4 million[52] 5. Balance Sheet Components Property and Equipment, Net | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Leasehold Improvements | $287,091 | $287,091 | | Furniture and Fixtures | $277,672 | $264,828 | | Research Equipment | $4,751,528 | $2,928,726 | | Computers and Software | $60,768 | $60,768 | | Construction in Progress | $3,300,674 | $183,505 | | Total Property and Equipment | $8,677,733 | $3,724,918 | | Less Accumulated Depreciation | $(926,798) | $(645,393) | | Total Property and Equipment, Net | $7,750,935 | $3,079,525 | - Construction in progress saw a substantial increase from $183,505 to $3,300,674, indicating significant ongoing capital expenditures[55] - Deferred offering costs, included in other long-term assets, increased from $104,030 to $3,595,238, reflecting expenses directly attributable to the IPO[56] 6. Leases - The company has operating leases for corporate office, laboratory space, and a vivarium in South San Francisco, California[59] - Rent expense for the six months ended June 30, 2020, was $0.9 million, up from $0.4 million in the prior year[59] - In May 2020, an amendment was signed for an eight-year non-cancelable lease of additional office and laboratory space, expected to commence in Q1 2021[60] 7. Commitments & Contingencies - The company indemnifies its officers and directors for certain events, with potential unlimited future payments, though limited by a director and officer insurance policy[62] - A $0.4 million letter of credit agreement serves as collateral for the corporate headquarters' operating lease, automatically renewing annually[63] 8. GSK Collaboration and License Agreement - The collaboration agreement with GlaxoSmithKline (GSK) for Engineered NK Cells was terminated on December 10, 2018[64] - Nominal revenue of approximately $0.1 million was recognized for wind-down activities in the six months ended June 30, 2019, with no revenue recorded for the same period in 2020[64] 9. Stockholders' Deficit - The company's authorized capital stock as of August 26, 2019, included 71,919,982 common shares and 54,350,179 preferred shares[65] - On July 1, 2020, the company completed the Series B Milestone Closing, issuing 27,066,206 shares of Series B convertible preferred stock for gross proceeds of $64.4 million[69] - Immediately prior to the IPO on July 14, 2020, all outstanding convertible preferred stock converted into 14,689,215 shares of common stock[70] 10. Share-Based Compensation - The 2020 Performance Incentive Plan became effective upon IPO, authorizing 2,660,371 common shares for awards, with an annual increase provision[74] Stock Option Activity (Six Months Ended June 30, 2020) | Metric | Options | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding at Dec 31, 2019 | 2,329,516 | $3.59 | | Granted | 240,262 | $4.30 | | Exercised | (142,539) | $2.10 | | Forfeited | (2,492) | $4.28 | | Outstanding at June 30, 2020 | 2,424,747 | $3.75 | - Share-based compensation expense was $1.0 million for the six months ended June 30, 2020, a significant increase from $0.2 million in the prior year, with $5.4 million in unrecognized cost remaining[79] 11. Income Taxes - No provision for income taxes was recorded for the three and six months ended June 30, 2020 and 2019, as deferred tax assets are fully offset by a valuation allowance[82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition, operational results, liquidity, and critical accounting policies Overview - Nkarta is a biopharmaceutical company developing allogeneic, off-the-shelf engineered natural killer (NK) cell therapies for cancer, with co-lead product candidates NKX101 and NKX019[85] - The company has incurred significant net losses since inception, with an accumulated deficit of $86.4 million as of June 30, 2020, and expects operating expenses to increase substantially[87][88] - The company completed its IPO on July 14, 2020, raising approximately $265.5 million in net proceeds, which is expected to fund operations for at least 12 months[90][93] Financial Operations Overview Collaboration Revenue - Nkarta has no approved therapeutic products for sale and has not generated product sales revenue; future revenue depends on successful development and commercialization[95] - Prior collaboration revenue from GSK terminated in December 2018, with only nominal wind-down revenue recognized in 2019 and none in the first six months of 2020[95] Operating Expenses Research and Development Expenses (in thousands) | Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | NKX101 | $1,703 | $542 | $3,807 | $945 | | NKX019 | $77 | $15 | $87 | $15 | | Program 3 | $36 | $0 | $57 | $0 | | Personnel related | $3,928 | $1,683 | $7,094 | $2,885 | | Others | $2,118 | $1,381 | $4,077 | $2,070 | | Total R&D Costs | $7,862 | $3,621 | $15,122 | $5,915 | - Research and development expenses increased significantly, with NKX101 program costs rising from $0.9 million to $3.8 million for the six months ended June 30, 2020[100] - General and administrative expenses are expected to increase due to expanded R&D activities and costs associated with operating as a public company[105] Other Income (Expense) - A significant other expense of $40.7 million for the three months and $40.2 million for the six months ended June 30, 2020, was recognized due to the change in fair value of the preferred stock purchase right liability[106][115][120] - Interest income increased due to interest earned on cash, cash equivalents, and short-term investments, while interest expense from convertible promissory notes was nil in 2020[109][110][116][121][122] Results of Operations Summary of Statement of Operations Data (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Collaboration Revenue | $0 | $2 | $0 | $115 | | Research and Development | $7,862 | $3,621 | $15,122 | $5,915 | | General and Administrative | $2,494 | $1,052 | $4,642 | $1,992 | | Total Operating Expenses | $10,356 | $4,673 | $19,764 | $7,907 | | Loss from Operations | $(10,356) | $(4,671) | $(19,764) | $(7,792) | | Change in Fair Value of Preferred Stock Purchase Right Liability | $(40,741) | $0 | $(40,163) | $0 | | Net Loss | $(51,065) | $(4,838) | $(59,771) | $(7,921) | - Net loss for the three months ended June 30, 2020, was $(51.1) million, a significant increase from $(4.8) million in the prior year, primarily due to the $40.7 million change in fair value of preferred stock purchase right liability[112][115] - For the six months ended June 30, 2020, net loss was $(59.8) million, compared to $(7.9) million in 2019, driven by increased R&D and G&A expenses, and the liability adjustment[112][118][119][120] Liquidity and Capital Resources Sources of Liquidity - Nkarta has incurred net losses and negative cash flows since inception and will require substantial additional funding to support operations[123][124] - Funding has primarily come from convertible promissory notes, preferred stock private placements, and the recent IPO, which generated $265.5 million in net proceeds[125][127] - As of June 30, 2020, cash, cash equivalents, restricted cash, and short-term investments totaled $22.1 million, expected to be sufficient for at least 12 months with recent financing[128] Cash Flows Summary of Cash Flows (Six Months Ended June 30) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(18,528,423) | $(7,082,300) | | Net cash provided by (used in) investing activities | $7,710,707 | $(704,801) | | Net cash provided by financing activities | $8,104,173 | $6,013,011 | | Net decrease in cash and cash equivalents | $(2,713,543) | $(1,774,090) | - Operating cash outflow increased due to higher net loss, while investing activities turned positive due to maturities of short-term investments[130][131] - Financing cash inflow was primarily from Series B preferred stock proceeds and stock option exercises in 2020, and convertible notes in 2019[132] Funding Requirements - Future capital requirements depend on clinical trial progress, regulatory review, manufacturing costs, and public company operational expenses[134] - The company's independent auditor expressed substantial doubt about its ability to continue as a going concern for the year ended December 31, 2019, prior to recent financings[135] - Additional funding may be sought through equity or debt financings, or collaborations, which could dilute stockholders or impose restrictive covenants[136] Contractual Obligations and Commitments Contractual Obligations and Commitments (June 30, 2020, in thousands) | Obligation | Total | Less Than 1 Year | 1 to 3 Years | 4 to 5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Lease Commitments | $18,350 | $861 | $3,789 | $4,179 | $9,521 | - Operating lease commitments primarily relate to office, laboratory, and vivarium space in South San Francisco, with terms extending to 2026 and 2021 respectively[137][138] - A second amendment in May 2020 added an eight-year non-cancelable lease for additional space, commencing in Q1 2021 and expiring in 2029[139] Off-Balance Sheet Arrangements - The company did not have any off-balance sheet arrangements during the periods presented[140] Critical Accounting Policies and Significant Judgments and Estimates - Financial statements are prepared in accordance with U.S. GAAP, requiring management estimates and assumptions, particularly for accrued expenses and share-based compensation[141] - No significant changes in critical accounting policies and estimates occurred during the six months ended June 30, 2020[142] Recently Issued Accounting Pronouncements - The company adopted ASU 2016-13 (Financial Instruments—Credit Losses) and ASU 2018-13 (Fair Value Measurement) in Q1 2020, neither of which had a material impact[39][40] Indemnification - The company indemnifies its officers and directors, believing the fair value of these rights and agreements to be minimal, with no recorded liabilities as of June 30, 2020[144] Segment Information - The company operates in one reportable business segment[145] JOBS Act - Nkarta is an 'emerging growth company' and 'smaller reporting company' under the JOBS Act, allowing it to take advantage of certain exemptions from disclosure requirements[146][147] - The company irrevocably opted out of the extended transition period for complying with new or revised accounting standards[146][344] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate and foreign currency exchange rate fluctuations - The company is exposed to market risk from changes in interest rates on its investment portfolio, but believes a 10% change would not have a material effect[148] - Nkarta is exposed to foreign currency exchange rate fluctuations due to contracts with international vendors but does not currently hedge this risk[149] - Inflation, interest rate changes, and exchange rate fluctuations have not had a significant material effect on the company's results of operations[150] Item 4. Controls and Procedures This section details management's evaluation of disclosure controls and procedures and changes in internal control over financial reporting - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2020[151] - No changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2020, that materially affected, or are reasonably likely to materially affect, internal controls[152] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section states the company is not currently involved in any material legal proceedings - Management believes there are no pending claims or actions that would have a material adverse effect on the company's results of operations, financial condition, or cash flows[155] Item 1A. Risk Factors This section outlines significant risks related to the company's financial position, business operations, manufacturing, and intellectual property RISKS RELATED TO OUR FINANCIAL POSITION - Nkarta has a limited operating history since 2015, no approved products, and has incurred significant operating losses, with an accumulated deficit of $86.4 million as of June 30, 2020[157][158] - The company will require substantial additional capital beyond its IPO proceeds to fund operations and development, and failure to raise funds could delay or discontinue programs[166][169] - The COVID-19 pandemic has disrupted economic activity and could adversely affect business operations, preclinical studies, clinical trials, and access to capital[173][175][176] Risks Related to Our Business and Industry - Success depends on the CAR-NK cell technology platform, which is novel and unproven in humans, requiring significant development, regulatory approval, and manufacturing challenges[179][180] - Clinical development is lengthy, expensive, and uncertain, with potential for delays or termination due to safety, efficacy, regulatory issues, or external factors like the COVID-19 pandemic[187][189] - The company faces intense competition from other biopharmaceutical companies developing cellular immunotherapies, some with greater resources or approved products[223] Risks Related to Manufacturing - The manufacturing process for genetically engineered human cells is complex, highly regulated, and susceptible to product loss, failure, or variation[239][240][241] - Reliance on third-party manufacturers for product candidates increases risks of insufficient quantities, unacceptable costs, and non-compliance with cGMP requirements[243][245] - The company is reliant on a sole supplier (Miltenyi) for critical manufacturing steps and reagents, posing a risk of supply disruptions and delays[248][250] Risks Related to Our Intellectual Property - Termination of the license agreement with National University of Singapore and St Jude's Children's Research Hospital could result in loss of rights to key platform components[262] - The patent portfolio, with expiration dates between 2024 and 2041, may be inadequate to protect the company's competitive position[270][271] - The company is involved in two patent re-examination proceedings, which are costly, time-consuming, and could narrow or invalidate patent rights[280] Risks Related to Commercialization - Failure to develop or secure marketing, sales, and distribution capabilities would prevent successful commercialization and revenue generation[303] - Commercial success depends on market acceptance by physicians, patients, and third-party payors, which is uncertain for novel cell therapies[313][314] - Obtaining and maintaining adequate insurance coverage and reimbursement for product candidates, if approved, is uncertain and critical for market access[316][317][320] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details unregistered equity sales and confirms the use of IPO proceeds aligns with disclosed plans - During the six months ended June 30, 2020, the company granted 240,262 stock options and saw 142,539 options exercised, generating approximately $298,961[376] - These sales were exempt from registration under Rule 701 of the Securities Act, relating to compensatory benefit plans[368] - The company completed its IPO on July 14, 2020, issuing 16,100,000 common shares for $265.5 million net proceeds, with no material change in the planned use of proceeds[369][371] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reported period - No defaults upon senior securities occurred during the period[373] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable to the registrant[374] Item 5. Other Information This section states that there is no other information to report - No other information is reported in this section[375] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, incentive plans, and certifications - Exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, 2020 Performance Incentive Plan, and the Second Amendment to Lease Agreement[378] - Certifications from the Principal Executive Officer and Principal Financial Officer are filed herewith, as required by the Sarbanes-Oxley Act[378] SIGNATURES - The report is signed by Paul J Hastings, Chief Executive Officer, and Matthew Plunkett, Chief Financial Officer, on August 20, 2020[383]