nltx-10q_20200630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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:             001-36327

 

Neoleukin Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

98-0542593

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

360-1616 Eastlake Avenue East

Seattle, Washington 98102

(Address of principal executive offices, including zip code)

(Registrant’s telephone number, including area code): (206) 732-2133

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.000001

NLTX

The Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T 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 filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 7, 2020, there were 41,749,013 shares of the registrant’s common stock outstanding.

 

 

 

 


 

 

Neoleukin Therapeutics, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2020

INDEX

 

 

 

 

 

 

 

 

Page

 

 

PART I. FINANCIAL INFORMATION (Unaudited)

 

 

 

 

 

Item 1.

 

Condensed Consolidated Balance Sheets

2

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

4

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

17

 

 

 

 

Item 4.

 

Controls and Procedures

17

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

19

 

 

 

 

Item 1A.

 

Risk Factors

19

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

56

 

 

 

 

Item 4.

 

Mine Safety Disclosures

56

 

 

 

 

Item 5.

 

Other Information

56

 

 

 

 

Item 6.

 

Exhibits

57

 

 

 

 

SIGNATURES

58

 

Except as otherwise indicated herein or as the context otherwise requires, references in this report to, “the Company,” “we,” “us,” “our” and similar references refer to Neoleukin Therapeutics, Inc. (formerly Aquinox Pharmaceuticals, Inc.), a Delaware corporation. The name “Neoleukin” is a registered trademark of the Company in the United States.  This report also contains references to registered marks, trademarks and trade names of other companies that are property of their respective holders.

 


1


PART I. FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

 

NEOLEUKIN THERAPEUTICS, INC.

Condensed consolidated balance sheets

(Unaudited)

(In thousands of U.S. dollars, except per share and share amounts)

 

 

 

 

JUNE 30,

 

 

DECEMBER 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

129,596

 

 

$

143,093

 

Other current assets

 

 

1,401

 

 

 

503

 

Total current assets

 

 

130,997

 

 

 

143,596

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

3,090

 

 

 

2,060

 

Operating lease right-of-use assets

 

 

9,646

 

 

 

770

 

Intangible asset, net

 

 

458

 

 

 

567

 

Other non-current assets

 

 

1,133

 

 

 

30

 

Total assets

 

$

145,324

 

 

$

147,023

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

6,014

 

 

$

4,125

 

Operating lease liabilities

 

 

212

 

 

 

556

 

Finance lease liabilities

 

 

94

 

 

 

62

 

Total current liabilities

 

 

6,320

 

 

 

4,743

 

 

 

 

 

 

 

 

 

 

Non-current operating lease liabilities

 

 

10,197

 

 

 

447

 

Non-current finance lease liabilities

 

 

108

 

 

 

146

 

Total liabilities

 

 

16,625

 

 

 

5,336

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Share capital:

 

 

 

 

 

 

 

 

Common stock - $0.000001 par value - authorized, 100,000,000 as of June 30, 2020 and December 31, 2019; issued and outstanding, 38,486,542 as of June 30, 2020 and 37,996,849 as of December 31, 2019.

 

-

 

 

-

 

Preferred stock - $0.000001 par value - authorized, 5,000,000 as of June 30, 2020 and December 31, 2019; nil issued and outstanding as of June 30, 2020 and December 31, 2019.

 

-

 

 

-

 

Additional paid-in capital

 

 

446,616

 

 

 

441,216

 

Accumulated deficit

 

 

(317,917

)

 

 

(299,529

)

Total stockholders’ equity

 

 

128,699

 

 

 

141,687

 

Total liabilities and stockholders’ equity

 

$

145,324

 

 

$

147,023

 

 

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

2


NEOLEUKIN THERAPEUTICS, INC.

Condensed consolidated statements of operations

(Unaudited)  

(In thousands of U.S. dollars, except per share and share amounts)

 

 

 

 

THREE MONTHS ENDED

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

JUNE 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,843

 

 

$

(1,995

)

 

$

10,341

 

 

$

(1,891

)

General and administrative

 

 

4,926

 

 

 

2,423

 

 

 

8,499

 

 

 

4,978

 

Total operating expenses

 

 

9,769

 

 

 

428

 

 

 

18,840

 

 

 

3,087

 

Other income, net

 

 

23

 

 

 

427

 

 

 

452

 

 

 

878

 

Net loss

 

$

(9,746

)

 

$

(1

)

 

$

(18,388

)

 

$

(2,209

)

Net loss per common stock – basic and diluted

 

$

(0.20

)

 

$

-

 

 

$

(0.37

)

 

$

(0.09

)

Basic and diluted weighted average number of common stock outstanding

 

 

49,392,533

 

 

 

23,537,368

 

 

 

49,280,492

 

 

 

23,537,368

 

 

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

 

 

3


NEOLEUKIN THERAPEUTICS, INC.

Condensed consolidated statements of cash flows

(Unaudited)

(In thousands of U.S. dollars)

 

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(18,388

)

 

$

(2,209

)

Non-cash items:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,705

 

 

 

1,866

 

Depreciation and amortization

 

 

390

 

 

 

82

 

Loss on disposal of property and equipment

 

 

173

 

 

 

-

 

Amortization of operating lease right-of-use assets

 

 

531

 

 

 

52

 

Write-off of ROU asset upon lease termination

 

 

113

 

 

 

-

 

Unrealized foreign exchange loss (gain)

 

 

(21

)

 

 

21

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Other current assets and other non-current assets

 

 

(870

)

 

 

(246

)

Accounts payable and accrued liabilities

 

 

1,230

 

 

 

(3,792

)

Operating lease right-of-use assets

 

 

(169

)

 

 

-

 

Operating lease liabilities

 

 

72

 

 

 

-

 

Net cash used in operating activities

 

 

(15,234

)

 

 

(4,226

)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,079

)

 

 

-

 

Net cash used in investing activities

 

 

(1,079

)

 

 

-

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

3,695

 

 

 

-

 

Payment on finance lease obligations

 

 

(4

)

 

 

(4

)

Net cash provided by (used in) financing activities

 

 

3,691

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

3

 

 

 

2

 

Net change in cash, cash equivalents and restricted cash during the period

 

 

(12,619

)

 

 

(4,228

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

143,093

 

 

 

76,928

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash, end of period

 

$

130,474

 

 

$

72,700

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Offering costs unpaid at period-end

 

 

255

 

 

 

-

 

Purchases of property and equipment unpaid at period-end

 

 

405

 

 

 

-

 

Operating lease liabilities arising from obtaining ROU asset

 

 

9,614

 

 

 

515

 

 

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

 

4


NEOLEUKIN THERAPEUTICS, INC.

Condensed consolidated statements of stockholders’ equity

(Unaudited)

(In thousands of U.S. dollars, except share amounts)

 

 

 

 

 

 

COMMON STOCK

 

 

ADDITIONAL

PAID-IN

 

 

ACCUMULATED

 

 

TOTAL

STOCKHOLDERS'

 

 

 

NUMBER

 

 

AMOUNT

 

 

CAPITAL

 

 

DEFICIT

 

 

EQUITY

 

Balances, December 31, 2019

 

 

37,996,849

 

 

$

-

 

 

$

441,216

 

 

$

(299,529

)

 

$

141,687

 

Options exercised

 

 

376,311

 

 

 

-

 

 

 

3,392

 

 

 

-

 

 

 

3,392

 

Restricted stock units vested

 

 

13,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

683

 

 

 

-

 

 

 

683

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,642

)

 

 

(8,642

)

Balances, March 31, 2020

 

 

38,386,160

 

 

$

-

 

 

$

445,291

 

 

$

(308,171

)

 

$

137,120

 

Options exercised

 

 

98,882

 

 

 

-

 

 

 

303

 

 

-

 

 

303

 

Restricted stock units vested

 

 

1,500

 

 

-

 

-

 

 

-

 

 

-

 

Stock-based compensation

 

-

 

 

-

 

 

1,022

 

 

-

 

 

 

1,022

 

Net loss

 

-

 

 

-

 

 

-

 

 

 

(9,746

)

 

 

(9,746

)

Balances, June 30, 2020

 

 

38,486,542

 

 

$

-

 

 

$

446,616

 

 

$

(317,917

)

 

$

128,699

 

 

 

 

 

 

COMMON STOCK

 

 

ADDITIONAL

PAID-IN

 

 

ACCUMULATED

 

 

TOTAL

STOCKHOLDERS'

 

 

 

NUMBER

 

 

AMOUNT

 

 

CAPITAL

 

 

DEFICIT

 

 

EQUITY

 

Balances, December 31, 2018

 

 

23,537,368

 

 

$

-

 

 

$

302,759

 

 

$

(230,087

)

 

$

72,672

 

Stock-based compensation

 

-

 

 

-

 

 

 

1,078

 

 

-

 

 

 

1,078

 

Net loss

 

-

 

 

-

 

 

-

 

 

 

(2,208

)

 

 

(2,208

)

Balances, March 31, 2019

 

23,537,368

 

 

$

-

 

 

$

303,837

 

 

$

(232,295

)

 

$

71,542

 

Stock-based compensation

 

-

 

 

-

 

 

788

 

 

 

-

 

 

 

788

 

Net loss

 

-

 

 

-

 

 

-

 

 

 

(1

)

 

 

(1

)

Balances, June 30, 2019

 

 

23,537,368

 

 

$

-

 

 

$

304,625

 

 

$

(232,296

)

 

$

72,329

 

 

 

The accompanying notes form an integral part of these condensed consolidated financial statements.

 

 

 

5


NEOLEUKIN THERAPEUTICS, INC.

Notes to the condensed consolidated financial statements

(Unaudited)

 

 

1. Nature of operations

Neoleukin Therapeutics, Inc. (“Neoleukin” or “the Company”) is a biopharmaceutical company creating next generation immunotherapies for cancer, inflammation and autoimmunity using de novo protein design technology. Neoleukin uses sophisticated computational methods to design proteins that demonstrate specific pharmaceutical properties that provide potentially superior therapeutic benefit over native proteins. 

2. Summary of significant accounting policies

 

(a) Basis of presentation

The accompanying unaudited condensed consolidated financial statements are presented in United States (“U.S.”) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly, these consolidated financial statements do not include all of the information and footnotes required for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 12, 2020.

In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2020, and results of operations and cash flows for all periods presented. The interim results presented are not necessarily indicative of results that can be expected for a full year.

(b) Use of estimates and assumptions

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Significant areas requiring estimates include valuation and recognition of stock-based compensation, leases, amortization and depreciation of property, plant and equipment and intangible assets, and pre-clinical and other accruals. Actual results could differ from those estimates.

(c) Leases

At contract inception, the Company determines if the contract is a lease or contains a lease. Operating leases are recorded as operating lease right-of-use assets, operating lease liabilities and non-current operating lease liabilities. Finance leases are recorded as finance lease right-of-use assets, finance lease liabilities and non-current finance lease liabilities.

Right-of-use assets and lease liabilities are recognized on the lease commencement date based on the estimated present value of lease payments over the lease term.  To determine the present value of the lease payments, the Company utilizes its estimated incremental borrowing rate based on information available at the lease commencement date as the rate implicit in the lease is not readily determinable.  The right-of-use assets are recorded net of any lease incentives received. Variable lease cost primarily includes building operating expenses as charged to the Company by its landlords.

For leases of office space with a lease term 12 months or less and which do not include an option to purchase the underlying asset, the Company has elected to recognize the lease payments in the statement of operations on a straight-line basis over the lease term.  

For leases of office space, the Company has elected to not separate the lease components from the non-lease components.

6


(d) Fair value of financial instruments

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, receivables, accounts payable and other liabilities, approximate their fair values because of their nature and/or short maturities.    

At June 30, 2020, and December 31, 2019, the Company had $110.1 million and $40.0 million in money market funds, respectively. Money market funds are level one financial instruments as they are valued at fair value, which is the closing price reported by the fund sponsor from an actively traded exchange.

(e) Earnings (loss) per share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding for the period, without consideration for common stock equivalents. Common stock equivalents such as outstanding stock options and unvested restricted stock units are included in the calculation of diluted earnings per share only in periods of net income. Such common stock equivalents are excluded in the calculation of diluted net loss per share in periods of net loss as inclusion of such amounts would be anti-dilutive. Outstanding pre-funded warrants of 10,925,481 are considered outstanding as of their issuance date and are included in the basic and diluted net loss per share calculation because they are fully vested and exercisable at any time for a nominal cash consideration.

(f) Recently issued and recently adopted accounting standards

In December 2019, the FASB issued ASU 2019-12 “Simplifying the Accounting for Income Taxes.” The objective of the standard is to improve areas of GAAP by removing certain exceptions permitted by ASC Topic 740 - Income Taxes and clarifying existing guidance to facilitate consistent application. ASU 2019-12 is effective for fiscal years and interim periods beginning after December 15, 2020. The Company is currently assessing the impact of ASU 2019-12 on its financial statements.

In August 2018, FASB issued “ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The objective of the standard is to 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. We adopted this standard on January 1, 2020 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s financial condition, results of operations, cash flows, and financial statement disclosures.

3. Cash, cash equivalents and restricted cash

Restricted cash, included in other assets in the condensed consolidated balance sheets, includes $0.9 million in cash deposits the Company maintains with its bank as collateral for the irrevocable letters of credits related to its lease obligations.

The following table provides a reconciliation of cash, cash equivalents and restricted cash in the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):

 

 

(in thousands)

 

June 30,

2020

 

 

December 31,

2019

 

Cash and cash equivalents

 

$

129,596

 

 

$

143,093

 

Restricted cash

 

878

 

 

-

 

Total cash, cash equivalents, and restricted cash

 

$

130,474

 

 

$

143,093

 

 

 

7


4. Leases

 

The Company enters into lease arrangements for its facilities as well as certain equipment, classified either as operating or finance leases.

 

During the six months ended June 30, 2020, the Company entered into a new lease agreement for approximately 33,300 square feet of office space in Seattle, Washington, for the Company’s future principal executive offices, a laboratory for research and development and related uses (the “New Seattle Lease”). The lease commenced on January 15, 2020 and rent obligations are scheduled to commence on December 1, 2020. The lease expires on December 1, 2028, with the option to extend the lease for two five-year terms.  The lease provides for a tenant improvement allowance of $8.0 million, which is included in the base rent, and an optional additional tenant improvement allowance with a maximum amount of $1.5 million, which will result, if elected, in additional rent amortized over the term of the lease. As of June 30, 2020, there was a tenant improvement allowance receivable of $0.2 million recorded in other current assets related to build-out costs incurred by the Company which are reimbursable by the landlord. The Company will also be responsible for the payment of additional rent to cover the Company’s share of the annual operating and tax expenses and utilities costs for the building. In January 2020, the Company issued an irrevocable letter of credit in the amount of $0.5 million for the security deposit in accordance with the terms of the lease.

 

The Company has a lease agreement for approximately 6,272 square feet of office space in Seattle, Washington, for the Company’s principal executive offices, a laboratory for research and development and related uses. Under the original terms of the agreement, the lease was to expire on October 31, 2021, unless terminated earlier. In June 2020, the Company executed an amendment to this lease pursuant to which the Company has the option to terminate the lease at any point subsequent to November 1, 2020 with 45 days advance written notice. The Company determined that it is not reasonably certain to not exercise this termination option after December 15, 2020. As a result, the Company accounted for the amendment as a modification to reduce the existing lease term and recorded a reduction to the lease liability and related right-of-use asset of $0.3 million.  

The Company has a lease agreement for approximately 10,946 square feet of office space in Vancouver, Canada, which commenced on November 1, 2016 and expires October 31, 2021, with the option to extend the lease to October 31, 2026. In addition to the basic rent, the Company is obligated to pay for taxes, operating costs, utilities and other amounts.  On June 30, 2020, the Company entered into a Lease Amendment Agreement.  Under the amended agreement, the lease term expired on June 30, 2020, and the Company paid an early termination fee of $0.5 million. The Company accounted for the lease amendment as a lease termination which resulted in an extinguishment of the lease liability and the write-off of the related right-of-use asset. After incurring additional expenses included in the termination fee, the Company recognized a loss of $0.3 million on the termination of the lease, which was recorded in general and administrative expenses. In addition, the Company wrote-off leasehold improvements and other property and equipment associated with the lease and incurred a loss on disposal of $0.2 million.

As of June 30, 2020, and December 31, 2019, the Company’s operating lease right-of-use assets were $9.6 million and $0.8 million, respectively.  As of June 30, 2020, and December 31, 2019, the Company’s finance lease right-of-use assets were $0.3 million and $0.3 million, respectively.

5. Stock-based compensation

Stock-based compensation expense is classified in the condensed consolidated statement of operations as follows:

 

 

(in thousands)

 

THREE MONTHS ENDED

JUNE 30,

 

 

SIX MONTHS ENDED

JUNE 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Research and development expenses

 

$

346

 

 

$

-

 

 

$

629

 

 

$

80

 

General and administrative expenses

 

 

676

 

 

 

788

 

 

 

1,076

 

 

 

1,786

 

Total stock-based compensation expense

 

$

1,022

 

 

$

788

 

 

$

1,705

 

 

$

1,866

 

 

Total unrecognized compensation cost for all stock-based compensation plans was $12.6 million as of June 30, 2020. This cost is expected to be recognized over a weighted average remaining vesting period of 3.06 years.

8


The fair values of stock options granted are estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

 

 

THREE MONTHS ENDED

JUNE 30,

 

SIX MONTHS ENDED

JUNE 30,

 

 

2020

 

 

2019

 

2020

 

 

2019

Expected volatility

 

 

93.61

%

 

NA

 

 

92.09

%

 

NA

Expected dividends

 

 

0

%

 

NA

 

 

0

%

 

NA

Expected terms (years)

 

 

5.82

 

 

NA

 

 

5.91

 

 

NA

Risk free rate

 

 

0.41

%

 

NA

 

 

0.56

%

 

NA

 

 

(a) Stock options

A summary of the Company’s stock option activity and related information for the six months ended June 30, 2020 is as follows:

 

 

 

 

NUMBER OF

SHARES

 

 

WEIGHTED

AVERAGE

EXERCISE

PRICE

 

 

WEIGHTED

AVERAGE

REMAINING

CONTRACTUAL

LIFE (IN

YEARS)

 

 

AGGREGATE

INTRINSIC

VALUE

(IN

THOUSANDS)

 

Outstanding at December 31, 2019

 

 

5,840,538

 

 

$

5.11

 

 

 

7.72

 

 

$

45,037

 

Options granted

 

 

711,700

 

 

 

10.58

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(475,193

)

 

 

7.79

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(463,708

)

 

 

15.83

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2020

 

 

5,613,337

 

 

$

4.69

 

 

 

8.65

 

 

$

66,953

 

Exercisable as of June 30, 2020

 

 

983,334

 

 

$

7.66

 

 

 

5.76

 

 

$

8,861

 

 

 

During the six months ended June 30, 2020, the Company granted stock options to purchase 536,700 shares of common stock to employees and 175,000 shares to non-employee directors. The stock options granted to employees have an exercise price per share ranging from $6.44 to $13.58. The stock options granted to non-employee directors during the six months ended June 30, 2020 have an exercise price per share ranging from $12.84 and $13.58.

(b) Restricted stock units

A summary of the Company’s restricted stock unit activity and related information for the six months ended June 30, 2020 is as follows:

 

 

 

 

NUMBER OF

SHARES

 

 

WEIGHTED

AVERAGE

GRANT DATE

FAIR

VALUE

 

Non-vested at December 31, 2019

 

 

72,000

 

 

$

3.47

 

Restricted stock units granted

 

 

75,000

 

 

 

6.44

 

Restricted stock units vested

 

 

(14,500

)

 

 

3.47

 

Restricted stock units forfeited

 

 

(1,500

)

 

 

3.47

 

Non-vested at June 30, 2020

 

 

131,000

 

 

$

5.17

 

 

 

During the six months ended June 30, 2020, the Company granted 75,000 restricted stock units to employees with a grant date fair value per share of $6.44.  

9


(c) Employee stock purchase plan

The Company’s 2020 Employee Stock Purchase Plan (“2020 ESPP”) was adopted by the Company’s Board of Directors in March 2020 and approved by the Company’s stockholders in May 2020. A total of 759,936 shares of common stock have been reserved for issuance under the 2020 ESPP.

Subject to share and dollar limits as described in the plan, the 2020 ESPP allows eligible employees to contribute, through payroll deductions, up to 15% of their earnings for the purchase of the Company’s shares of common stock at the lower of 85% of the closing price of the Company’s common stock on the first trading day of the offering period or 85% of the closing price of the Company’s common stock on the last trading day of the offering period. There are two six-month offering periods during each fiscal year, ending on May 15 and November 15.  The first offering period commenced on May 16, 2020.

6. Restructuring

In July 2018, the Company’s Board of Directors approved a restructuring plan to reduce operating costs and better align the Company’s workforce with the needs of its business following the June 27, 2018 announcement that its Phase 3 Leadership 301 clinical trial evaluating once-daily, oral rosiptor for the treatment of IC/BPS failed to meet its primary endpoint. The Company has halted all further development activities with rosiptor. In 2018 and 2019, the Company incurred and paid aggregate restructuring charges of $7.4 million related to clinical trial closing costs, contract cancellations, closing of its office in San Bruno, California, severance payments and other employee-related costs. During the second quarter of 2019, the Company revised its original estimate of aggregate restructuring charges lower by $2.0 million based upon updated information from its vendors related to a completed project. There were no amounts accrued as of June 30, 2020 or December 31, 2019.

On November 6, 2018, the Company’s Board of Directors approved an additional restructuring plan to further reduce operating costs. In 2019, the Company incurred and paid aggregate restructuring charges of $1.6 million related to severance payments and other employee-related costs.  There were no amounts accrued as of June 30, 2020.  

For the three and six months ended June 30, 2020, the Company incurred and paid an immaterial amount of restructuring charges. For the three months ended June 30, 2019, restructuring recoveries of $2.0 million were recorded in research and development expenses and restructuring costs of $0.2 million in general and administrative expenses. For the six months ended June 30, 2019, restructuring recoveries of $1.9 million were recorded in research and development expenses and restructuring costs of $0.4 million in general and administrative expenses.

7. Earnings (loss) per share

The Company excluded the following potentially dilutive shares from diluted net loss per share as the effect would have been anti-dilutive for all periods presented:

 

 

 

 

THREE MONTHS ENDED

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

JUNE 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Outstanding stock options

 

 

5,613,337

 

 

 

2,631,097

 

 

 

5,613,337

 

 

 

2,631,097

 

Restricted stock units

 

 

131,000

 

 

-

 

 

 

131,000

 

 

-

 

Shares issuable under 2020 ESPP

 

 

18,011

 

 

-

 

 

 

18,011

 

 

-

 

 

 

 

5,762,348

 

 

 

2,631,097

 

 

 

5,762,348

 

 

 

2,631,097

 

 

 

8. 401(k) plan

In May 2020, the Company established a 401(k) plan that allows full-time employees to contribute a portion of their salary, subject to statutory limits.  The Company makes matching cash contributions up to a pre-defined annual maximum contribution per employee per year.  During the three and six months ended June 30, 2020, the Company’s total expense for the matching contributions was immaterial.

10


9. Subsequent events

On July 7, 2020, the Company completed an underwritten public offering of 3,262,471 shares of its common stock at a price of $15.25 per share and pre-funded warrants to purchase 1,737,529 shares of its common stock at a price of $15.249999 per pre-funded warrant.  The pre-funded warrants can be exercised at any time after issuance for an exercise price of $0.000001 per share. The aggregate net proceeds received by the Company from the offering, net of underwriting discounts and commissions and offering costs of approximately $4.9 million, were $71.4 million. 

On July 31, 2020, the Company sold all issued and outstanding capital stock of its Canadian subsidiary, Aquinox Pharmaceuticals (Canada) Inc. (“Aquinox Canada”) to an unrelated third party for cash consideration of $8.2 million. On June 30, 2020, substantially all Aquinox Canada’s remaining property and equipment was disposed of and the lease of Aquinox Canada’s office in Vancouver, Canada, was terminated (see Note 4).  As of the date of sale, Aquinox Canada’s main remaining asset was intellectual property, which had no book value. The sale of Aquinox Canada will trigger a significant capital loss carryforward for tax purposes. However, the deferred tax asset related to the capital loss carryforward will be subject to a full valuation allowance as the Company has determined that it is more likely than not that the benefit of the loss will not be realized.

 

11


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto included elsewhere in this report and our audited consolidated financial statements and notes included as part of our Annual Report on Form 10-K for the year ended December 31, 2019.

Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance and financial guidance. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are only predictions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and other factors, including, among other things, impacts on our business due to health pandemics or other contagious outbreaks, such as the current COVID-19 pandemic. In evaluating these statements, you should specifically consider various factors, including the risks outlined under the caption “Risk Factors” set forth in Item 1A of Part II of this quarterly report on Form 10-Q, as well as those contained from time to time in our other filings with the SEC. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview 

We are a biopharmaceutical company creating next generation immunotherapies for cancer, inflammation and autoimmunity using de novo protein design technology. We use sophisticated computational methods to design proteins that demonstrate specific pharmaceutical properties that provide potentially superior therapeutic benefit over native proteins. Existing protein engineering treatments generally involve the modification of native proteins. With our proprietary platform we design completely new protein structures from the ground up, capable of demonstrating specifically desired biological properties. Through this method we are able to produce proteins that, while resembling native proteins,  may have novel molecular interfaces, differential activation of specific cell types, increased stability, or improved biodistribution compared to native proteins  in order to deliver greater therapeutic benefit. De novo proteins have the capacity to be cytokine receptor agonists, antagonists, or result in conditional activation of specific cytokine receptors such that they may regulate inflammation or the immune response to cancer. We are initially focused on key cytokine mimetics, which we refer to as Neoleukin de novo cytokine mimetics. Neoleukin de novo cytokine mimetics can be modified to adjust affinity, thermodynamic stability, resistance to biochemical modification, pharmacokinetic characteristics, and targeting to tumor or inflamed tissues.

We commenced operations in Canada in December 2003. Aquinox Pharmaceuticals (Canada) Inc., a corporation formed under the Canada Business Corporations Act, is a wholly owned subsidiary of Aquinox Pharmaceuticals, Inc., a Delaware corporation formed in May 2007 (“Aquinox”). On August 8, 2019, upon the merger of Aquinox with Neoleukin Therapeutics, Inc. (“Former Neoleukin”) pursuant to an Agreement and Plan of Merger dated August 5, 2019, Former Neoleukin merged with a wholly owned subsidiary of Aquinox. Upon completion of the transaction, Aquinox was renamed Neoleukin Therapeutics, Inc.

12


NL-201

Our lead product candidate, NL-201, is an IL-2/IL-15 immunotherapy designed to eliminate binding to the alpha subunit of the IL-2 receptor (also known as CD25) while maintaining high-affinity binding to the beta and gamma subunits. The protein portion of NL-201 was subsequently modified via site-specific covalent conjugation to a poly(ethylene glycol), or PEG, molecule with the goal of extending its blood half-life. In samples of isolated human immune cells, NL-201 was shown to be a more selective stimulator of CD8+ T cells and NK, or natural killer, cells versus regulatory T cells, as compared with IL-2. NL-201 significantly increases the ratio of CD8+ T cells to regulatory T cells within the tumor microenvironment and demonstrates significant tumor growth inhibition across multiple preclinical murine tumor models. When compared to the checkpoint inhibitors PD-1 and PD-L1 in the syngeneic CT26 colon cancer model, NL-201 treatment produced greater tumor growth inhibition. We have since completed multi-dose, non-GLP and GLP toxicology studies of NL-201 in rats and non-human primates. This included completion of GLP in-life dosing with no unexpected toxicities observed. In addition, NL-201 induced a detectable immunogenic response in only 4 of 26 non-human primates after repeated weekly doses. When present, anti-drug antibodies, or ADAs, appear to be of low or intermediate titer and did not appreciably alter lymphocyte proliferation compared to that of ADA-negative animals. These results suggest that ADAs did not significantly impact the activity of NL-201. Furthermore, ADA-positive non-human primates did not experience differences in adverse effects or tolerability compared to ADA-negative animals. NL-201 is intended to be used as either a single-agent or in combination with complementary therapeutic modalities, including checkpoint inhibitors. In addition, we believe NL-201 holds promise in combination with allogenic cell therapy to expand and maintain populations of transplanted CAR-T and NK cells.

For our initial clinical development plan, we expect to administer NL-201 as monotherapy by intravenous injection in patients with a variety of relapsed and refractory solid tumors. Dosage and escalation schedules will be determined by evaluation of safety, tolerability, pharmacokinetics, and pharmacodynamic measures to achieve the optimal regimen for outpatient administration. Multiple schedules may be tested during Phase 1. Subsequently, we expect that expansion cohorts will be enrolled using tumor-specific inclusion/exclusion criteria to evaluate both safety and antitumor activity in more uniform patient populations. If the clinical data are considered promising, additional trials will be initiated, which may include combination regimens and trials with registrational intent.

 

We remain focused on our efforts to support an Investigational New Drug, or IND, application for our lead therapeutic, NL-201, and are working with key vendors to assess any potential impacts to these efforts due to the COVID-19 pandemic. At this time, we do not expect a delay in our development plans but acknowledge the potential exists for our timing to be impacted. Further, we are evaluating the potential for geographic diversity of clinical trial sites to minimize regional and/or seasonal effects of COVID-19 recurrences.

On July 7, 2020, a patent issued in the United States in one of the patent families we license with claims encompassing our NL-201 product candidate.  This patent will expire in 2039, absent any patent term extension. There are also additional pending U.S. patent applications in that licensed patent family that may give rise to new patents.

Research Programs

Beyond our initial focus on NL-201, our research team is working on further applying de novo protein design principles to develop therapeutics to address significant unmet medical needs, including but not limited to therapeutic areas such as immuno-oncology, inflammation, and autoimmunity. Our research is powered by the Neoleukin platform, our computational framework for developing highly selective, hyper-stable de novo immunomodulatory proteins. In addition to NL-201, we are developing targeted and conditionally active IL-2/IL-15 mimetics, as well as cytokine mimetic programs for other oncology targets. Our research team is also actively applying the Neoleukin platform to generate de novo receptor agonist and antagonist candidates against multiple targets of interest for inflammatory and autoimmune indications. As we validate additional candidates, they will enter our preclinical pipeline. Finally, due to the COVID-19 public health emergency, we have been investigating the application of our de novo protein technology to prevent or treat SARS-CoV2 infection. To date, we have created a candidate de novo protein that can bind and block the virus in vitro, and we are currently evaluating the possibility of advancing this molecule to clinic.

 

13


Finances

We will need to raise substantial additional capital to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we plan to finance our operations through the sale of equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to secure adequate additional funding, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates or delay our pursuit of potential in‑licenses or acquisitions.

Based upon our current operating plan, and following the completion of our July offering, we believe our cash-on-hand will be sufficient to fund operations into 2023.

COVID-19 Impact

The recent outbreak of the Coronavirus Disease 2019, or COVID-19, which has been declared by the World Health Organization to be a pandemic, has spread across the globe and is impacting worldwide economic activity. During this unprecedented time, protecting the health and well-being of our employees and community is a top priority. In addition, we are focused on maintaining continuity of our research, development and business activities while balancing potential impacts from the COVID-19 pandemic.

As of March 9, 2020, we transitioned to a work from home policy for our employees and discontinued all work-related travel. Business-critical research and development work has continued, adhering to guidelines to ensure employee safety. We continually assess our work policies and monitor guidance from the state and the U.S. Centers for Disease Control and Prevention, or the CDC, in order to determine any changes to current work practices.

Results of Operations

Operating Expenses

The following table summarizes our operating expenses for the three and six months ended June 30, 2020 and 2019 (in thousands):

 

 

 

 

THREE MONTHS ENDED

 

 

 

 

 

 

SIX MONTHS ENDED

 

 

 

 

 

 

 

JUNE 30,

 

 

 

 

 

 

JUNE 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Research and development

 

$

4,843

 

 

$

(1,995

)

 

$

6,838

 

 

$

10,341

 

 

$

(1,891

)

 

$

12,232

 

General and administrative

 

 

4,926

 

 

 

2,423

 

 

 

2,503

 

 

 

8,499

 

 

 

4,978

 

 

 

3,521

 

 

 

$

9,769

 

 

$

428

 

 

$

9,341

 

 

$

18,840

 

 

$

3,087

 

 

$

15,753

 

 

 

Research and Development Expenses

Research and development expenses consists primarily of personnel related costs (including stock-based compensation and travel expenses), facility-related costs, lab supplies, testing services and manufacturing costs.

For the three and six months ended June 30, 2020, research and development expenses were $4.8 million and $10.3 million, respectively, compared to credits to our research and development expenses of $2.0 million and $1.9 million for the three and six months ended June 30, 2019, respectively.  The credits were a result of reductions to accrued research and development expenses following confirmation by vendors that final costs were less than contracted. The increase in research and development expenses during the three and six months ended June 30, 2020 was due to increased expenses incurred from IND-enabling activities related to our lead product candidate, NL-201, and in connection with the advancement of other Neoleukin technologies compared to lower research and development costs during the three and six months ended June 30, 2019 as a result of the suspension of all research and development activities with rosiptor in June 2018.

14


General and Administrative Expenses

General and administrative expenses consist primarily of personnel related costs (including severance, stock-based compensation and travel expenses), facility-related costs, insurance, public company expenses, professional fees for consulting, legal and accounting services, and restructuring costs.

For the three and six months ended June 30, 2020, general and administrative expenses were $4.9 million and $8.5 million, respectively, compared to $2.4 million and $5.0 million for the three and six months ended June 30, 2019, respectively.  The increase in general and administrative expenses during the three and six months ended June 30, 2020 as compared to the three and six months ended June 30, 2019 was primarily due to the increase in personnel related costs and professional service fees as we grew our operations after the merger, along with one-time costs related to the termination of our Vancouver, Canada office lease, compared to lower personnel and overhead costs as a result of the restructurings in the second half of 2018.

Other income, net

 

 

 

 

THREE MONTHS ENDED

 

 

 

 

 

 

SIX MONTHS ENDED

 

 

 

 

 

 

 

JUNE 30,

 

 

 

 

 

 

JUNE 30,

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Interest income

 

$

47

 

 

$

436

 

 

$

(389

)

 

$

480

 

 

$

886

 

 

$

(406

)

Foreign exchange gains/(losses)

 

 

(5

)

 

 

(9

)

 

 

4

 

 

 

11

 

 

 

(7

)

 

 

18

 

Other expenses

 

 

(19

)

 

 

-

 

 

 

(19

)

 

 

(39

)

 

 

(1

)

 

 

(38

)

Total other income, net

 

$

23

 

 

$

427

 

 

$

(404

)

 

$

452

 

 

$

878

 

 

$

(426

)

 

 

Interest income during the three and six months ended June 30, 2020 decreased compared to the same period in 2019 due to a decrease in interest rates partially offset by higher cash and investment balances for the three and six months ended June 30, 2020.

Liquidity and Capital Resources

Since our inception, we have incurred net losses and negative cash flows from our operations. Our operating activities used $15.2 million and $4.2 million of cash flows during the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, we had an accumulated deficit of $317.9 million, working capital of $124.7 million and cash and cash equivalents of $129.6 million. On July 7, 2020, we completed an underwritten public offering of our common stock and pre-funded warrants resulting in aggregate net proceeds, net of underwriting discounts and commissions and offering costs of approximately $4.9 million, totaling $71.4 million.

Cash Flows

The following table summarizes our cash flows for the six months ended June 30, 2020 and 2019 (in thousands):

 

 

 

 

SIX MONTHS ENDED

 

 

 

JUNE 30,

 

 

 

2020

 

 

2019

 

Net cash (used in) provided by:

 

 

 

 

 

 

 

 

Operating activities

 

$

(15,234

)

 

$

(4,226

)

Investing activities

 

 

(1,079

)

 

 

-

 

Financing activities

 

 

3,691

 

 

 

(4

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

3

 

 

 

2

 

Net change in cash, cash equivalents and restricted cash

 

$

(12,619

)

 

$

(4,228

)

 

 

Net cash used in operating activities

Net cash used in operating activities for the six months ended June 30, 2020 increased significantly compared to the six months ended June 30, 2019 due to an increase in operating expenses resulting primarily from expenses incurred in developing our lead product candidate, NL-201, compared to a reduction in costs in the six months ended June 30, 2019 due to the restructuring in the second half of 2018 and the halting of all development activities relating to rosiptor.

15


Net cash used in investing activities

Net cash used in investing activities for the six months ended June 30, 2020 was primarily the result of the acquisition of laboratory and computer equipment. For the six months ended June 30, 2019 there was no net cash used in investing activities as the Company had no acquisitions of laboratory or computer equipment or other investing activities.    

Net cash provided by (used in) financing activities

For the six months ended June 30, 2020, net cash provided by financing activities of $3.7 million consisted of proceeds from the exercise of stock options. For the six months ended June 30, 2019, net cash used in financing activities was the result of the payment of finance lease liabilities.

Operating and Capital Expenditure Requirements

We have not generated product revenue or achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future. As of June 30, 2020, we had approximately $129.6 million in cash and cash equivalents. Subsequently, on July 7, 2020, we completed an underwritten public offering of our common stock and pre-funded warrants resulting in aggregate net proceeds, net of underwriting discounts and commissions and offering costs of approximately $4.9 million, totaling $71.4 million. Based on our current business plans, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents will be sufficient to fund our planned operations into 2023. However, our future capital requirements and the period for which we expect our existing resources to support our operations, fund expansion, develop new or enhanced products, or otherwise respond to competitive pressures, may vary significantly from our expectation and we may need to seek additional funds sooner than planned. Unless and until we generate sufficient revenue to be profitable, we will seek to fund our operations through public or private equity or debt financings or other sources. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a negative impact on our business, results of operations, financial condition, cash flows and future prospects. Our future capital requirements will depend on many factors, including:

 

the number and characteristics of any future product candidates we develop or may acquire;

 

the scope, progress, results and costs of researching and developing our product candidates or any future product candidates, and conducting preclinical studies and clinical trials;

 

the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates;

 

the cost of manufacturing our future product candidates and any products that may achieve regulatory approval;

 

the cost of commercialization activities if any future product candidates are approved for sale, including marketing, sales and distribution costs;

 

the timing, receipt and amount of sales of, or royalties on, future approved products, if any;

 

our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

 

any product liability or other lawsuits related to our products;

 

the potential delays in our preclinical studies, our development programs and our planned clinical trials due to the effects of the COVID-19 pandemic;

 

the expenses needed to attract and retain skilled personnel; and

 

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation.      

Please see Item 1A of Part II of this Quarterly Report titled “Risk Factors” for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

Our future minimum contractual commitments were reported in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC. There have been no material changes from the contractual commitments previously discussed in that Annual Report on Form 10-K.

16


Critical Accounting Policies and Significant Judgments and Estimates

The preparation of these consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies is presented in Part II, Item 8, of our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to our significant accounting policies during the three and six months ended June 30, 2020.

Recent Accounting Pronouncements

See Note 2(g), Recently issued and recently adopted accounting standards in the Notes to Condensed Consolidated Financial Statements included in Part I Item 1 of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Management believes there have been no material changes to our quantitative and qualitative disclosures about market risks during the six months ended June 30, 2020, compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC.

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. As of June 30, 2020, we had cash equivalent holdings in U.S. government money market funds of $110.1 million. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and the low risk profile of these investments, we have estimated the effect on our investment portfolio of a hypothetical increase in interest rates by one percent (100 basis points) to have an immaterial impact in the fair value of our investment portfolio as of June 30, 2020.

Foreign Currency Risk

Our exposure to foreign currency risk relates primarily to our Canadian operations, including payments we make to vendors and suppliers. We currently do not hedge against foreign currency risk. If the Canadian dollar strengthens against the U.S. dollar, it could result in higher expenditures and have a negative impact on our financial results. We also maintain bank balances in foreign currencies such as the Canadian dollar and the Euro. If these foreign currencies decline against the U.S. dollar, it could have a negative impact on our financial positions.  For the three and six months ended June 30, 2020 and 2019, foreign exchange gain (losses) were insignificant as the impact of changes in foreign exchange rates on our foreign currency portfolio was offset by its impact on our foreign currency liabilities.

Item 4.

Controls and Procedures

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our principal executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting. We have completed the transition of accounting and financial reporting operations from our Vancouver, British Columbia office to our new headquarters in Seattle, Washington. We believe we have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during the three and six months ended June 30, 2020 and will evaluate the operating effectiveness of related controls during subsequent periods. There were no other changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1.

Legal Proceedings

We may from time to time be named as a party to legal claims, actions and complaints, including matters involving employment, intellectual property or others.

Item 1A.

Risk Factors

You should carefully consider the following risk factors, in addition to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes. If any of the events described in the following risk factors occurs, our business, operating results and financial condition could be seriously harmed. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this Quarterly Report on Form 10-Q.

Risks Related to Our Financial Position and Capital Needs

We will require substantial additional capital to finance our operations which may not be available to us on acceptable terms, or at all. If we fail to obtain necessary financing, we may be unable to complete the development and potential commercialization of our product candidates.

The development of biopharmaceutical product candidates is capital-intensive. If our product candidates enter and advance through preclinical studies and clinical trials, we will need substantial additional funds to expand or create our development, regulatory, manufacturing, marketing, and sales capabilities. We have used substantial funds to develop our technology and product candidates and will require significant funds to conduct further research and development and preclinical testing and clinical trials of our product candidates, to seek regulatory approvals for our product candidates and to manufacture and market products, if any, which are approved for commercial sale. In addition, we expect to continue incurring costs associated with operating as a public company.

Preclinical studies and clinical trials for our product candidates will require substantial funds to complete. As of June 30, 2020, we had approximately $129.6 million in cash and cash equivalents. We expect to incur substantial expenditures in the foreseeable future as we seek to advance NL-201 and any future product candidates through preclinical and clinical development, the regulatory approval process and, if approved, commercial launch activities. Based on our current operating plan, we believe that our available cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements into 2023. However, our future capital requirements and the period for which we expect our existing resources to support our operations, fund expansion, develop new or enhanced products, or otherwise respond to competitive pressures, may vary significantly from what we expect and we may need to seek additional funds sooner than planned. Our monthly spending levels vary based on new and ongoing research and development and other corporate activities. Because the length of time and activities associated with successful research and development of our product candidates is highly uncertain, we are unable to estimate the actual funds we will require for development and any marketing and commercialization activities for approved products. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

the timing, cost and progress of preclinical and clinical development activities;

 

the number and scope of preclinical and clinical programs we decide to pursue;

 

the progress of the development efforts of parties with whom we have entered or may in the future enter into collaborations and/or research and development agreements;

 

the timing and amount of milestone and other payments we may receive or make under our collaboration agreements;

 

our ability to maintain our current licenses and to establish new collaboration arrangements;

 

the costs involved in prosecuting and enforcing patent and other intellectual property claims;

 

the costs of manufacturing our product candidates by third parties;

 

the cost of regulatory submissions and timing of regulatory approvals;

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the potential delays in our preclinical studies, our development programs and our planned clinical trials due to the effects of the COVID-19 pandemic;

 

the cost of commercialization activities if our product candidates or any future product candidates are approved for sale, including marketing, sales and distribution costs; and

 

our efforts to enhance operational systems and hire additional personnel, including personnel to support development of our product candidates.

If we are unable to obtain funding on a timely basis or on acceptable terms, we may have to delay, reduce or terminate our research and development programs and preclinical studies or clinical trials, limit strategic opportunities or undergo reductions in our workforce or other corporate restructuring activities. We do not expect to realize revenue from sales of commercial products or royalties from licensed products in the foreseeable future, if at all, and, in no event, before our product candidates are clinically tested, approved for commercialization and successfully marketed.

We will be required to seek additional funding in the future and currently intend to do so through additional collaborations and/or licensing agreements, public or private equity offerings or debt financings, credit or loan facilities, or a combination of one or more of these funding sources. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Our future debt financings, if available, are likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets. If we raise additional funds through licensing or collaboration arrangements with third parties, we may have to relinquish valuable rights to our product candidates, or grant licenses on terms that are not favorable to us. We also could be required to seek collaborators for product candidates at an earlier stage than otherwise would be desirable or relinquish our rights to product candidates or technologies that we otherwise would seek to develop or commercialize ourselves. Failure to obtain capital when needed on acceptable terms may force us to delay, limit or terminate our product development and commercialization of our current or future product candidates, which could have a material and adverse effect on our business, financial condition, results of operations, and prospects.

We have incurred significant losses in every quarter since our inception and anticipate that we will continue to incur significant losses in the future.

We are a biotechnology company with a limited operating history. Investment in biotechnology is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval or become commercially viable. We do not have any products approved by regulatory authorities for marketing or commercial sale, we have not generated any revenue from product sales to date, and all of our product candidates are in preclinical development. We continue to incur significant expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in every reporting period since our inception in 2003. For the six-month period ended June 30, 2020, we reported a net loss of $18.4 million.  For the years ended December 31, 2019 and 2018, we reported a net loss of $69.4 million and $31.6 million, respectively. As of June 30, 2020, we had an accumulated deficit since inception of $317.9 million.

We expect to continue to incur significant expenses and operating losses for the foreseeable future as we seek to identify, acquire and conduct research and development of future product candidates, and potentially begin to commercialize any future products that may achieve regulatory approval. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our financial condition. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. Our prior losses and expected future losses have had, and will continue to have, an adverse effect on our financial condition. If any of our future product candidate fails in clinical trials or does not gain regulatory approval, or if approved, fails to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

We have a limited operating history, which may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

Our operations to date have been primarily limited to organizing and staffing our company, acquiring product and technology rights, discovering and developing novel small molecule drug candidates and undertaking preclinical studies and, prior to the merger, clinical trials of rosiptor. We have not yet obtained regulatory approval for any product candidate. Consequently, evaluating our performance, viability or possibility of future success will be more difficult than if we had a longer operating history or approved products on the market.

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We currently have no source of product revenue and may never become profitable.

To date, we have not generated any revenues from commercial product sales, or otherwise. Our ability to generate revenue from product sales and achieve profitability will depend upon our ability, alone or with any future collaborators, to successfully commercialize any products that we may develop, in-license or acquire in the future. Even if we can successfully achieve regulatory approval for any future product candidates, we do not know when any of these products will generate revenue from product sales for us, if at all. Our ability to generate revenue from any of our future product candidates also depends on several additional factors, including our or any future collaborators’ ability to:

 

complete development activities, including the necessary clinical trials;

 

complete and submit BLAs to the U.S. Food and Drug Administration, or FDA, and obtain regulatory approval for indications for which there is a commercial market;

 

complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities;

 

set a commercially viable price for our products;

 

establish and maintain supply and manufacturing relationships with third parties, and ensure adequate and legally compliant manufacturing of bulk drug substances and drug products to maintain that supply;

 

develop a commercial organization capable of sales, marketing and distribution for any products for which we obtain marketing approval and intend to sell ourselves in the markets in which we choose to commercialize on our own;

 

find suitable distribution partners to help us market, sell and distribute our approved products in other markets;

 

obtain coverage and adequate reimbursement from third-party payors, including government and private payors;

 

achieve market acceptance for our products, if any;

 

establish, maintain and protect our intellectual property rights; and

 

attract, hire and retain qualified personnel.

In addition, because of the numerous risks and uncertainties associated with biological product development, any future product candidates may not advance through development or achieve the endpoints of applicable clinical trials. Therefore, we are unable to predict the timing or amount of increased expenses, or when or if we will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we decide, or are required by the FDA or foreign regulatory authorities, to perform studies or trials in addition to those that we currently anticipate. Even if we can complete the development and regulatory process for any future product candidates, we anticipate incurring significant costs associated with commercializing these products.

Even if we can generate revenues from the sale of any future product candidates that may be approved, we may not become profitable and may need to obtain additional funding to continue operations. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce our operations.

We will require additional capital to finance our operations which may not be available to us on acceptable terms, or at all. If we fail to obtain necessary financing, we may be unable to complete the development and potential commercialization of future product candidates.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. Our operations have consumed substantial amounts of cash since inception. If we identify and advance any current or future product candidates into clinical trials and launch and commercialize any product candidates for which we receive regulatory approval, we expect research and clinical development expenses, and our selling, general and administrative expenses to increase substantially. In connection with our ongoing activities, we believe that our existing cash and cash equivalents will be sufficient to fund our operating requirements for at least the next 12 months. However, circumstances may cause us to consume capital more rapidly than we anticipate. We will likely require additional capital for the further development and potential commercialization of future product candidates and may also need to raise additional funds sooner to pursue a more accelerated development of future product candidates.

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If we need to secure additional financing, fundraising efforts may divert our management from our day-to-day activities, which may adversely affect our ability to develop and commercialize future product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we do not raise additional capital when required or on acceptable terms, we may need to:

 

significantly delay, scale back or discontinue clinical trials related to the development or commercialization of any of our future product candidates or cease operations altogether;

 

seek strategic alliances for research and development programs at an earlier stage than we would otherwise desire or on terms less favorable than might otherwise be available; or

 

relinquish, or license on unfavorable terms, our rights to any future product candidates that we otherwise would seek to develop or commercialize ourselves.

If we need to conduct additional fundraising activities and we do not raise additional capital in sufficient amounts or on terms acceptable to us, we may be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on our business, operating results and prospects.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could spend our available capital resources sooner than we currently expect. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

our ability to identify additional product candidates for development;

 

if we in-license or acquire product candidates from third parties, the cost of in-licensing or acquisition;

 

the initiation, progress, timing, costs and results of clinical trials for any future product candidates;

 

the clinical development plans we establish for any future product candidates;

 

the achievement of milestones and our obligation to make milestone payments under our present or any future in-licensing agreements;

 

the number and characteristics of product candidates that we discover, or in-license and develop;

 

the outcome, timing and cost of regulatory review by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies than those that we currently expect;

 

the cost to establish, maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing any patent claims and maintaining and enforcing other intellectual property rights;

 

the effects of COVID-19 on our business and financial results;

 

the effect of competing technological and market developments;

 

the costs and timing of the implementation of commercial-scale outsourced manufacturing activities; and

 

the costs and timing of establishing sales, marketing, distribution and pharmacovigilance capabilities for any product candidates for which we may receive regulatory approval in territories where we choose to commercialize products on our own.

If we are unable to expand our operations or otherwise capitalize on our business opportunities due to a lack of capital, our business, results of operations, financial condition and cash flows and future prospects could be materially adversely affected.

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Risks Related to Discovery, Development and Commercialization

Our product candidates are in early stages of development and may fail in development or suffer delays that materially and adversely affect their commercial viability. If we are unable to complete development of, or commercialize our product candidates, or experience significant delays in doing so, our business will be materially harmed.

We are in the early stages of our development efforts. We have no products on the market and all of our product candidates, including NL-201, are still in the preclinical or drug discovery stages, and we may not ever obtain regulatory approval for any of our product candidates. We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA. Before obtaining regulatory approval for the commercial distribution of our product candidates, we or an existing or future collaborator must conduct extensive preclinical tests and clinical trials to demonstrate the safety and efficacy in humans of our product candidates. We currently expect to submit an Investigational New Drug application, or IND, with respect to NL-201 by the end of 2020. However, it is possible that the FDA may deny our IND or require additional testing before allowing clinical testing in humans. Alternatively, we may obtain data while preparing for an IND that causes us to delay or even abandon clinical testing of NL-201. Additionally, we have a portfolio of targets and programs that are in earlier stages of discovery and preclinical development and may never advance to clinical-stage development. If we do not receive regulatory approvals for clinical testing and commercialization of our product candidates, we may not be able to continue our operations.

We may not have the financial resources to continue development of, or to enter into collaborations for, a product candidate if we experience any issues that delay or prevent regulatory approval of, or our ability to commercialize, product candidates, including:

 

preclinical study results may show the product candidate to be less effective than desired or to have harmful or problematic side effects;

 

negative or inconclusive results from our clinical trials or the clinical trials of others for product candidates similar to ours, leading to a decision or requirement to conduct additional preclinical testing or clinical trials or abandon a program;

 

product-related side effects experienced by patients in our clinical trials or by individuals using drugs or therapeutic biologicals similar to our product candidates;

 

our third-party manufacturers’ inability to successfully manufacture our products or to meet regulatory specifications;

 

inability of any third-party contract manufacturer to scale up manufacturing of our product candidates and those of our collaborators to supply the needs of clinical trials or commercial sales;

 

delays in submitting INDs or comparable foreign applications or delays or failures in obtaining the necessary approvals from regulators to commence a clinical trial, or a suspension or termination of a clinical trial once commenced;

 

conditions imposed by the FDA, the European Medicines Agency, or EMA, or other applicable regulatory authorities regarding the scope or design of our clinical trials;

 

delays in enrolling patients in our clinical trials;

 

high drop-out rates of our clinical trial patients;