Neurogene Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Neoleukin Therapeutics, Inc. Reports of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) 72 Consolidated balance sheets 73 Consolidated statements of operations 74 Consolidated statements of cash flow 75 Consolidated statements of stockholders’ equity 76 Notes to the consolidated financial statements 77 71 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Neoleukin Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Neoleukin Therapeutics, Inc. (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, stockholders' equity, and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Deloitte & Touche LLP Seattle, Washington March 1, 2022 We have served as the Company's auditor since 2020. 72 Table of Contents NEOLEUKIN THERAPEUTICS, INC. Consolidated Balance Sheets (in thousands, except share and per share amounts) December 31, 2021 2020 Assets Current assets Cash and cash equivalents $ 142,467 $ 192,556 Other current assets 1,522 1,966 Total current assets 143,989 194,522 Property and equipment, net 6,452 3,570 Operating lease right-of-use asset 10,766 10,154 Intangible asset, net 128 347 Other non-current assets 1,928 1,926 Total assets $ 163,263 $ 210,519 Liabilities Current liabilities Accounts payable and other liabilities $ 7,415 $ 7,181 Operating lease liability 1,166 659 Finance lease liability 55 49 Total current liabilities 8,636 7,889 Non-current operating lease liability 11,696 11,306 Non-current finance lease liability 67 108 Total liabilities 20,399 19,303 Stockholders’ equity Common stock, $ 0.000001 par value - authorized, 100,000,000 as of December 31, 2021 and December 31, 2020; issued and outstanding, 42,457,471 as of December 31, 2021 and 42,196,296 as of December 31, 2020. — — Preferred stock, $ 0.000001 par value - authorized, 5,000,000 as of December 31, 2021 and December 31, 2020; issued and outstanding, 0 as of December 31, 2021 and December 31, 2020 — — Additional paid-in capital 536,362 524,022 Accumulated deficit ( 393,498 ) ( 332,806 ) Total stockholders’ equity 142,864 191,216 Total liabilities and stockholders’ equity $ 163,263 $ 210,519 The accompanying notes form an integral part of these consolidated financial statements 73 Table of Contents NEOLEUKIN THERAPEUTICS, INC. Consolidated Statements of Operations (in thousands, except share and per share amounts) Years Ended December 31, 2021 2020 Operating loss Research and development $ 39,162 $ 24,344 General and administrative 21,536 17,210 Gain on sale of Aquinox Canada — ( 7,826 ) Total operating loss 60,698 33,728 Other income, net 6 451 Net loss $ ( 60,692 ) $ ( 33,277 ) Net loss per common stock - basic and diluted $ ( 1.10 ) $ ( 0.64 ) Basic and diluted weighted average number of common stock outstanding 55,041,662 51,825,022 The accompanying notes form an integral part of these consolidated financial statements 74 Table of Contents NEOLEUKIN THERAPEUTICS, INC. Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, 2021 2020 Operating activities Net loss $ ( 60,692 ) $ ( 33,277 ) Adjustments to reconcile net loss used in operating activities: Stock-based compensation 11,557 5,622 Depreciation and amortization 1,306 785 Amortization of right-of-use asset 971 1,036 Loss on disposal of property and equipment — 180 Write-off of right-of-use asset upon lease termination — 113 Changes in operating assets and liabilities: Other current assets and non-current assets 129 ( 2,481 ) Accounts payable and accrued liabilities ( 142 ) 3,018 Operating lease right-of-use assets — ( 169 ) Operating lease liabilities ( 687 ) 598 Net cash used in operating activities ( 47,558 ) ( 24,575 ) Investing activities Purchases of property and equipment ( 3,263 ) ( 2,219 ) Net cash used in investing activities ( 3,263 ) ( 2,219 ) Financing activities Proceeds from issuance of common stock and pre-funded warrants, net of commissions of $ 4.6 million — 71,675 Payment of offering costs — ( 355 ) Proceeds from exercise of stock options 411 5,665 Proceeds from issuance of common stock under Employee Stock Purchase Plan 372 199 Payment on finance lease obligations ( 51 ) ( 49 ) Net cash provided by financing activities 732 77,135 Net change in cash, cash equivalents, and restricted cash during the year ( 50,089 ) 50,341 Cash, cash equivalents, and restricted cash at beginning of year 193,434 143,093 Cash, cash equivalents, and restricted cash at end of year $ 143,345 $ 193,434 Supplemental disclosure of non-cash investing and financing activities: Operating lease liabilities arising from obtaining right-of-use asset $ 1,584 $ 10,364 Purchase of property and equipment unpaid at period end $ 412 $ 36 The accompanying notes form an integral part of these consolidated financial statements 75 Table of Contents NEOLEUKIN THERAPEUTICS, INC. Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders’ Equity Number Amount Amount Amount Amount Amount Balances, December 31, 2019 37,996,849 $ — $ 441,216 $ ( 299,529 ) $ — $ 141,687 Issuance of common stock and pre-funded warrants, net of commissions and offering expenses of $ 4,930 3,262,471 — 71,320 — — 71,320 Common stock issued upon exercises of stock options 882,624 — 5,665 — — 5,665 Common stock issued upon vesting of restricted stock units 36,000 — — — — — Issuance of common stock under Employee Stock Purchase Plan 18,352 — 199 — — 199 Stock-based compensation — — 5,622 — — 5,622 Net loss — — — ( 33,277 ) — ( 33,277 ) Balances, December 31, 2020 42,196,296 $ — $ 524,022 $ ( 332,806 ) $ — $ 191,216 Common stock issued upon exercises of stock options 124,928 — 411 — — 411 Common stock issued upon vesting of restricted stock units 84,500 — — — — — Issuance of common stock under Employee Stock Purchase Plan 51,747 — 372 — — 372 Stock-based compensation — — 11,557 — — 11,557 Net loss — — — ( 60,692 ) — ( 60,692 ) Balances, December 31, 2021 42,457,471 $ — $ 536,362 $ ( 393,498 ) $ — $ 142,864 The accompanying notes form an integral part of these consolidated financial statements 76 Table of Contents NEOLEUKIN THERAPEUTICS, INC. Notes to Consolidated Financial Statements 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. The Company’s lead product candidate, NL-201, is a combined IL-2 and IL-15 agonist designed to eliminate alpha receptor binding. 2. Basis of presentation and summary of significant accounting policies (a) Basis of presentation The accompanying 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”). The financial results are presented on a consolidated basis. All intercompany transactions are eliminated on consolidation. In July 2020, the Company sold all of the issued and outstanding capital stock of Aquinox Pharmaceuticals (Canada) (“Aquinox Canada”) to an unrelated third party, as further described in Note 13, Sale of Aquinox Canada . On December 31, 2020, Neoleukin Corporation, the Company's wholly owned subsidiary, was merged into the Company. As a result, the Company has consisted of a single operating company without any subsidiaries since December 31, 2020. (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, the incremental borrowing rate utilized in the measurement of operating and finance lease liabilities, estimated useful lives utilized in the amortization and depreciation of property, plant and equipment and intangible assets, and pre-clinical, clinical, and other accruals. Actual results could differ from those estimates. (c) Leases At contract inception, the Company determines if the contract is or contains a lease. 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 interest rate implicit in the lease is typically not readily determinable. The related 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 and payments for lessor-owned assets that are not covered by a tenant improvement allowance. The Company includes options to extend the lease in its lease liability and right-of-use asset when it is reasonably certain that it will exercise that option. None of the Company's options to extend the rental term of any of its existing leases were considered reasonably certain as of December 31, 2021. For leases of office space, the Company has elected to not separate the lease components from the non-lease components. For leases of office space with a lease term of 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. (d) Cash, cash equivalents, and restricted cash All highly liquid investments with maturities of three months or less at the date of acquisition are considered to be cash equivalents. Restricted cash, included in Other non-current assets in the consolidated balance sheets, includes cash deposits the Company maintains with its bank as collateral for the irrevocable letters of credits related to its lease obligations. 77 Table of Contents The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands): December 31, 2021 2020 Cash and cash equivalents $ 142,467 $ 192,556 Restricted cash 878 878 Total cash, cash equivalents, and restricted cash $ 143,345 $ 193,434 (e) Property and equipment Property and equipment are recorded at cost and are amortized using the straight-line basis over a range of three to seven years . Expenditures for maintenance and repairs are expensed as incurred. The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on management’s assessment there were no indicators of impairment of property and equipment as of December 31, 2021 and 2020. (f) 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 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 as of December 31, 2021 and 2020 of 12,663,010 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. (g) Intangible assets subject to amortization Long-lived intangible assets are recorded at the acquired cost and amortized using the straight-line method over their estimated useful life. The intangible asset is tested for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company recognizes an impairment loss when carrying amount is not recoverable and the estimated fair value of the intangible asset is less than its carrying value. Based on management’s assessment there were no indicators of impairment of intangible assets as of December 31, 2021 and 2020. (h) Income taxes The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the differences between events that have been recognized in the Company’s consolidated financial statements and the tax bases of assets and liabilities and tax carryforwards recognized at enacted tax rates. The measurement of deferred tax assets is reduced, if necessary, to the amount more likely than not to be realized by a valuation allowance. Investment tax credits relating to scientific research and experimental development are accounted for as a reduction in operating expenses. They are recorded in the period when there is reasonable assurance the credits will be realized. If investment tax credit amounts subsequently received are less or more than originally recorded, the difference is treated as a change in estimate. (i) Research and development costs Research and development costs are charged to expense as incurred and include items such as: employee related expenses, including salaries, stock-based compensation, and benefits, expenses incurred under agreements with contract research organizations that conduct clinical trials and preclinical studies, the cost of acquiring, developing, and manufacturing clinical trial materials, facilities, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, and other supplies and costs associated with clinical trials, preclinical activities, and regulatory operations. 78 Table of Contents Development costs are expensed in the period incurred unless management believes a development project meets generally accepted accounting criteria for deferral and amortization. No product development expenditures have been deferred to date. The Company records costs for certain development activities based on management’s evaluation of the progress to completion of specific tasks or information provided to the Company by vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid or accrued expense. (j) Accounting for stock-based compensation The Company has issued stock options and restricted stock units (“RSUs”). The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Awards subject to performance-based vesting requirements are expensed utilizing a graded vesting model if achievement of the performance criteria is determined to be probable. The Company accounts for forfeitures as they occur. The Company utilizes newly issued shares to satisfy option exercises, the vesting of RSUs, and Employee Stock Purchase Plan purchases. The Company estimates the fair value of options using the Black-Scholes option pricing model on the grant date. This approximation uses assumptions regarding a number of inputs that requires management to make significant estimates and judgments. The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. As the Company does not have sufficient historical experience for determining the expected term of the stock option awards granted, the Company has based its expected term for awards issued to employees on the simplified method, which represents the average period from vesting to the expiration of the stock option. In addition, the Company does not have sufficient trading history for the Company’s common stock, and therefore, the expected stock price volatility for the Company’s common stock was estimated by taking the average historical price volatility for industry peers. The Company has never declared or paid any cash dividends to common stockholders and does not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero. The risk-free interest rate was based on the yields of treasury securities with maturities similar to the expected term of the options for each option group. The fair value of each RSU is measured using the closing price of the Company’s common stock on the date of grant. (k) Segment reporting The Company operates in one segment, the research and development of de novo protein therapeutics using sophisticated computational algorithms and methods to address unmet medical needs. The Company's primary areas of focus are in oncology, inflammation, and autoimmunity. The Company’s operations and its assets are held in the United States. (l) 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 December 31, 2021, and December 31, 2020, the Company had $ 140.9 million and $ 108.3 million in money market funds, respectively. Money market funds are level one financial instruments as they are valued at the closing price reported by the fund sponsor from an actively traded exchange. (m) Concentration of credit risk Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents. Cash and cash equivalents are invested in accordance with the Company’s investment policy. The primary objective for the Company’s investment portfolio is the preservation of capital and maintenance of liquidity and includes guidelines on the quality of financial instruments and defines allowable investments that the Company believes minimizes the exposure to concentration of credit risk. (n) 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 adopted this standard on January 1, 2021 on a prospective basis. The adoption of ASU 2019-12 did not have a material impact on the Company's financial condition, results of operations, cash flows, and financial statement disclosures. 79 Table of Contents 3. Property and equipment, net Property and equipment, net consist of the following (in thousands): December 31, 2021 Cost Accumulated Amortization Net Book Value Laboratory equipment $ 6,237 $ 1,006 $ 5,231 Furniture, fixtures, and IT equipment 1,850 629 1,221 $ 8,087 $ 1,635 $ 6,452 December 31, 2020 Cost Accumulated Amortization Net Book Value Laboratory equipment $ 3,402 $ 426 $ 2,976 Furniture, fixtures, and IT equipment 753 159 594 $ 4,155 $ 585 $ 3,570 Depreciation expense on property and equipment totaled $ 1.1 million and $ 0.6 million for the years ended December 31, 2021 and 2020, respectively. 4. Intangible asset, net The following table summarizes intangible asset (in thousands): December 31, 2021 2020 Cost $ 659 $ 659 Accumulated amortization ( 531 ) ( 312 ) Net intangible asset $ 128 $ 347 Intangible asset, net includes an assembled workforce that was acquired in 2019 and is being amortized over its expected life. Amortization expense was $ 0.2 million for each of the years ended December 31, 2021 and 2020. The amortization period has been established as 3 years based on management's judgement. The Company will recognize $ 0.1 million of amortization expense in fiscal year 2022. 5. Accounts payable and other liabilities Accrued liabilities consist of the following (in thousands): December 31, 2021 2020 Trade accounts payable $ 526 $ 1,323 Accrued clinical and preclinical expenses 2,399 1,687 Accrued compensation and vacation 3,263 3,244 Other accrued liabilities 1,227 927 $ 7,415 $ 7,181 80 Table of Contents 6. Leases The Company enters into lease arrangements for its facilities as well as certain equipment, classified either as operating or finance leases. The Company has an operating lease agreement, as amended by the execution of two subsequent amendments, for approximately 33,300 square feet of office space in Seattle, Washington for the Company’s principal executive offices, a laboratory for research and development, and related uses. 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 lease term commenced on January 15, 2020 and payments of rent obligations began on February 1, 2021. The lease is scheduled to expire on February 1, 2029, with the option to extend the lease for two five-year terms. The lease provides for a tenant improvement allowance of up to $ 9.5 million, which is included in the base rent, and has been fully utilized as of December 31, 2021. The Company will also be responsible for the payment of additional rent to cover the Company’s share of the annual operating, tax expenses, and utilities costs for the building. The Company has an operating lease agreement for approximately 6,272 square feet of laboratory and office space in Seattle, Washington, for research and development and related uses. In March 2021, the Company executed an amendment to this lease pursuant to which the contractual lease term was extended through September 30, 2026, unless terminated earlier, with the option to extend the lease for an additional 28-month term. The execution of this amendment was accounted for as a modification to the lease due to the extension of the lease term and an increase in lease payments, and the Company recorded an increase in the lease liability and related right-of-use asset of $ 1.6 million. On June 30, 2020, the Company terminated its lease agreement for 10,946 square feet of office space in Vancouver, Canada. The lease termination 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 of $ 0.5 million, the Company recognized a loss of $ 0.3 million on the termination of the lease, which was recorded in general and administrative expenses in June 2020. 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 in June 2020. As of December 31, 2021, and December 31, 2020, the Company’s operating lease right-of-use assets were $ 10.8 million and $ 10.2 million, respectively. As of December 31, 2021, and December 31, 2020, the Company's finance lease right-of use-assets, included within property and equipment on the consolidated balance sheet, were $ 0.2 million and $ 0.3 million, respectively. The components of the lease expense were as follows (in thousands): December 31, 2021 2020 Finance lease cost Amortization of right-of-use asset $ 49 $ 46 Interest on lease liabilities 12 14 Operating lease cost 2,535 2,368 Short term lease cost 40 348 Variable lease cost 2,161 321 Total net lease cost $ 4,797 $ 3,097 Supplemental balance sheet information related to leases is as follows: December 31, 2021 2020 Weighted average remaining lease term—finance leases 2.70 years 2.45 years Weighted average remaining lease term—operating leases 6.86 years 7.97 years Weighted average discount rate—finance leases 6.98 % 7.11 % Weighted average discount rate—operating leases 12.42 % 12.88 % 81 Table of Contents Supplemental cash flow information related to leases was as follows (in thousands): December 31, 2021 2020 Cash paid for amounts included in the measurement of operating lease liabilities $ 2,249 $ 460 Cash paid for amounts included in the measurement of finance lease liabilities $ 63 $ 60 The calculation of the present value of the operating lease payments for the Blaine lease did not include the option to extend the lease for two five-year terms. At December 31, 2021, the future payments under the Company’s operating and finance lease liabilities were as follows (in thousands): Finance Lease Operating Lease 2022 $ 64 $ 2,657 2023 64 2,718 2024 4 2,781 2025 4 2,845 2026 1 2,806 Thereafter — 5,391 Total undiscounted lease payments 137 19,198 Less: imputed interest ( 15 ) ( 6,336 ) Total lease liabilities 122 12,862 Less: current portion ( 55 ) ( 1,166 ) Non-current lease liabilities—December 31, 2021 $ 67 $ 11,696 7. Stockholders’ equity (a) Common stock and pre-funded warrants The Company is authorized to issue 100,000,000 shares of common stock with a par value of $ 0.000001 per share as of December 31, 2021. As of December 31, 2021, and 2020, the total number of shares of common stock issued and outstanding was 42,457,471 , and 42,196,296 , respectively. The Company had pre-funded warrants outstanding to purchase an aggregate of 12,663,010 shares of common stock as of December 31, 2021. The pre-funded warrants are exercisable at any time, with 61 days' notice, for an exercise price of $ 0.000001 , except that the pre-funded warrants cannot be exercised by the holders if, after giving effect thereto, the holders would beneficially own more than 9.99 % of the outstanding common stock, subject to certain exceptions. The holders of the pre-funded warrants will not have the right to vote on any matter except to the extent required by Delaware law. On November 4, 2021, the Company entered into an ATM “at-the-market” Equity Offering Sales Agreement (the “Sales Agreement”) with BofA Securities, Inc., as agent (“BofA”), pursuant to which the Company may offer and sell, from time to time through BofA, shares of the Company’s common stock, having an aggregate offering price of up to $ 40.0 million. The offer and sale of the shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus filed on December 11, 2020, and declared effective by the SEC on December 21, 2020, as supplemented by a prospectus supplement dated November 4, 2021. The Company has no obligation to sell any such shares under the Sales Agreement. As of December 31, 2021, no sales of common stock had been made pursuant to the Sales Agreement. 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 prefunded 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 were $ 71.3 million, net of underwriting discounts, commissions, and offering costs of approximately $ 4.9 million. (b) Preferred stock The Company is authorized to issue 5,000,000 shares of preferred stock with a par value of $ 0.000001 per share. As of December 31, 2021 and 2020, 0 shares of preferred stock were issued or outstanding. 82 Table of Contents (c) Stock option plan The 2014 Equity Incentive Plan (“2014 Plan”), as amended and restated on May 13, 2021, became effective in March 2014 and is the successor to and continuation of the Joint Canadian Stock Option Plan (the “2006 Plan”). No further grants will be made under the 2006 Plan. The 2014 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of equity awards to employees, directors, and consultants. As of December 31, 2021, the maximum number of shares of common stock that may be issued under the 2014 Plan was 11,264,787 . The number of shares of common stock reserved for issuance under the 2014 Plan will be increased by the number of shares subject to stock options granted under the 2006 Plan that would have otherwise returned to the 2006 Plan, such as upon the expiration or termination of a stock award prior to vesting. As of December 31, 2021, there were 23,958 shares subject to stock options granted under the 2006 Plan. Additionally, the number of shares of common stock reserved for issuance under the 2014 Plan will automatically increase on January 1 of each year, beginning on January 1, 2022 and ending on and including January 1, 2030, by 4.00 % of the sum of (A) the total number of shares of capital stock and (B) the total number of shares of common stock subject to pre-funded warrants, in each case outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the board of directors. On January 1, 2022, the number of shares of common stock reserved under the 2014 Plan was increased by 2,204,819 shares. All stock options granted pursuant to the 2014 Plan have a contractual term of ten years . All awards granted to date are equity classified and subject to either service or performance based vesting, typically over a period of one to four years . The number of shares available to be granted under the 2014 Plan was 5,040,300 and 6,037,532 as of December 31, 2021 and 2020, respectively. Stock options A summary of the Company's stock option activity and related information for the year ended December 31, 2021 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, 2020 6,846,289 $ 6.42 8.71 $ 53,127 Options granted 3,346,049 $ 8.70 Options exercised ( 124,928 ) $ 3.28 Options cancelled/forfeited ( 1,103,465 ) $ 7.31 Outstanding at December 31, 2021 8,963,945 $ 7.20 8.32 $ 6,912 Exercisable as of December 31, 2021 3,665,224 $ 5.99 7.45 $ 4,729 During the year ended December 31, 2021, 124,928 shares of common stock were issued upon exercise of options with an aggregate intrinsic value of $ 1.3 million. During the year ended December 31, 2020, 882,624 shares of common stock were issued upon exercise of options with an aggregate intrinsic value of $ 6.0 million. The weighted-average grant date fair value of options granted during the years ended December 31, 2021 and 2020 was $ 6.37 and $ 8.70 per share, respectively. The fair value of stock options granted is estimated using the Black-Scholes option pricing model with the following weighted average assumptions: December 31, 2021 2020 Expected volatility 89 % 93 % Expected dividends 0 % 0 % Expected terms (years) 6.03 6.02 Risk free rate 0.93 % 0.42 % 83 Table of Contents Restricted stock units A summary of the Company's restricted stock unit activity and related information for the year ended December 31, 2021 is as follows: Number of Shares Weighted Average Grant Date Fair Value Non-vested at December 31, 2020 186,500 $ 8.19 Restricted stock units granted 70,000 $ 12.94 Restricted stock units vested ( 84,500 ) $ 7.20 Restricted stock units forfeited ( 40,000 ) $ 12.70 Non-vested at December 31, 2021 132,000 $ 9.97 During the year ended December 31, 2021, the Company granted 50,000 RSUs, which vest based on certain performance conditions in two equal tranches. Twenty-five thousand of such performance-based RSUs vested during the year ended December 31, 2021 as the related performance condition was met. Related stock-based compensation expense recognized was $ 0.3 million. The remaining 25,000 RSUs were forfeited prior to December 31, 2021. Each vested RSU entitles the holder to receive one share of the Company's common stock. (d) Stock-based compensation Stock-based compensation expense is classified in the consolidated statements of operations as follows (in thousands): December 31, 2021 2020 Research and development expenses $ 5,095 $ 1,999 General and administrative expenses 6,462 3,623 Total stock-based compensation expense $ 11,557 $ 5,622 Total unrecognized compensation for all stock-based compensation was $ 29.6 million as of December 31, 2021, which is expected to be recognized over a weighted-average period of 2.84 years. (e) 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. During the year ended December 31, 2021, the Company issued 22,972 shares of common stock at a price per share of $ 9.53 and 28,775 of shares of common stock at a price per share of $ 5.33 , respectively, under the 2020 ESPP. During the year ended December 31, 2020, the Company issued 18,352 shares of common stock at a price per share of $ 10.84 . Cash received from the purchases under the 2020 ESPP for the years ended December 31, 2021 and 2020 was $ 0.4 million and $ 0.2 million, respectively. As of December 31, 2021 and 2020, employee contributions included in accounts payable and accrued liabilities in the accompanying consolidated balance sheet were immaterial. 84 Table of Contents 8. Other income, net Other income is presented for all periods (in thousands): December 31 2021 2020 Interest income $ 19 $ 490 Foreign exchange gains (losses) ( 1 ) 5 Other expenses ( 12 ) ( 44 ) $ 6 $ 451 9. Net loss per common stock 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: December 31, 2021 2020 Outstanding stock options 8,963,945 6,848,289 Restricted stock units 132,000 186,500 Shares issuable under 2020 ESPP 53,446 22,521 9,149,391 7,057,310 10. Income taxes Income tax recovery varies from the amounts that would be computed by applying the expected U.S. federal income tax rate (21%) as shown in the following table: December 31, 2021 2020 Statutory federal income tax rate ( 21.0 ) % ( 21.0 ) % Foreign rate differential — ( 0.1 ) Stock-based compensation 2.0 1.8 Disposal of Aquinox Canada — ( 5.2 ) Change in valuation allowance 21.2 26.5 Expiration of NOLs (section 382) — 0.5 Tax credits ( 2.2 ) ( 2.5 ) Income tax recovery — % — % Net loss before taxes (in thousands): Years Ended December 31, 2021 2020 Canada $ — $ ( 522 ) U.S. ( 60,692 ) ( 32,755 ) Total $ ( 60,692 ) $ ( 33,277 ) 85 Table of Contents Deferred income tax assets and liabilities result from the temporary differences between the amount of assets and liabilities recognized for financial statement and income tax purposes. The significant components of the deferred income tax assets are as follows (in thousands): December 31, 2021 2020 Deferred tax assets: U.S. net operating losses $ 22,863 $ 12,328 Research and development deductions and credits 2,414 1,040 Intangibles 457 422 Lease liability 2,701 2,513 Stock-based compensation 1,695 717 Other 186 162 Total deferred tax assets: 30,316 17,182 Deferred income tax liabilities Right-of-use assets 2,261 2,132 Other 287 157 Total deferred tax liabilities 2,548 2,289 Net deferred income tax assets 27,768 14,893 Less: valuation allowance ( 27,768 ) ( 14,893 ) Deferred tax assets, net of valuation allowance $ — $ — On July 31, 2020, the Company sold all issued and outstanding capital stock of its Canadian subsidiary, Aquinox Canada, to an unrelated third party for cash consideration. As of the date of sale, Aquinox Canada’s remaining assets included intellectual property and other assets developed through past research and development activities, all of which had no book value. The transaction resulted in a net gain on sale of $ 7.8 million. The sale of Aquinox Canada triggered a significant capital loss carryforward for tax purposes. However, most of the capital loss carryforward is limited by the prior ownership change under Section 382. The remaining unlimited portion of 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. After the sale, Aquinox Canada's tax attributes of $ 51.7 million including the net operating losses, scientific research and experimental development expenditures and investment tax credits are no longer reflected in the deferred tax assets and valuation allowance. At December 31, 2021 and December 31, 2020, the Company had U.S. federal net operating losses ("NOL") carryforwards for tax purposes of approximately $ 108.2 million and $ 58.1 million, respectively, which were available to reduce taxable income. Of the $ 108.2 million of federal NOL carryforwards, $ 1.7 million will expire between the years 2028 and 2037 and the remaining $ 106.5 million are indefinite. The Company also has U.S. federal research & development tax credits of $ 2.4 million and $ 1.0 million as of December 31, 2021 and December 31, 2020, respectively, that begin to expire in 2039. The Company completed a formal study under IRC Section 382 through 2019 to determine the U.S. tax attributes available for use. The U.S. attributes disclosed reflect the conclusion of that study. However, subsequent ownership changes may further affect the limitation in future years. The Company maintains a full valuation allowance on its net U.S. deferred tax assets. The assessment regarding whether a valuation allowance is required considers both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. In making this assessment, significant weight is given to evidence that can be objectively verified. In its evaluation, the Company considered its cumulative losses and its forecasted losses in the near-term as significant negative evidence. Therefore, the Company determined that the negative evidence outweighed the positive evidence and a full valuation allowance on its assets will be maintained. The Company will continue to assess the realizability of its assets going forward and will adjust the valuation allowance as needed. The valuation allowance increased by $ 12.9 million for the year ended December 31, 2021. The increase is primarily due to an increase in U.S. net operating losses and research and development tax credits. The valuation allowance decreased by $ 42.9 million for the year ended December 31, 2020. The decrease is primarily due to the sale of Aquinox Canada and the write-off of the related tax attributes, and partially offset by an increase in U.S. net operating losses and research and development tax credits. The Company applies judgment in the determination of the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. As of December 31, 2021, the Company had no uncertain tax positions. 86 Table of Contents The Company currently files income tax returns in the United States, the jurisdictions in which the Company believes that it is subject to tax. Further, while the statute of limitations in each jurisdiction where an income tax return has been filed generally limits the examination period, as a result of loss carryforwards, the limitation period for examination generally does not expire until several years after the loss carryforwards are utilized. Other than routine audits by tax authorities for tax credits and tax refunds that the Company has claimed, the Company is not aware of any other material income tax examination currently in progress by any taxing jurisdiction. 11. License and patent agreements On July 8, 2019, Neoleukin Therapeutics, Inc., or Former Neoleukin, entered into an exclusive license agreement with the University of Washington ("UW"), under which UW (on behalf of itself and Stanford University) granted the Company an exclusive worldwide license under certain patent rights, to make, have made, use, offer to sell, sell, offer to lease or lease, import, export or otherwise offer to dispose of licensed products in all fields of use, and a nonexclusive worldwide license to use certain know-how. The foregoing licenses are sublicensable by the Company without UW’s consent, subject to certain limited conditions. The Exclusive License Agreement was amended effective as of July 24, 2020 to, among other things, (i) add a jointly owned de novo cytokine antagonist to the agreement, (ii) specify royalties, milestone payments and sublicense consideration payments payable by Neoleukin for certain jointly licensed products, (iii) specify the term for achievement of performance milestones for certainly jointly licensed products, and (iv) terminate UW’s right to participate in equity financings. The Exclusive License Agreement was amended a second time, effective as of December 15, 2021 to, among other things, add a second jointly owned patent application family directed to de novo cytokine antagonists to the agreement subject to the same terms of the first jointly owned patent application family. As consideration for the licensed rights, Former Neoleukin issued 536,813 shares of common stock to UW. These shares were exchanged for 188,974 shares of common stock of the Company and 4,197 shares of non-voting convertible preferred stock on the completion of the merger of Former Neoleukin into the Company in August 2019. Such convertible preferred shares were subsequently converted into 419,700 shares of common stock in November 2019. Furthermore, the Company is required to pay; (i) an annual maintenance fee starting in January 2022 (but excluding any year in which minimum annual royalties are paid); (ii) up to $ 0.9 million in combined development and regulatory milestone payments with respect to each distinct class of licensed product; (iii) up to $ 10.0 million in combined commercial milestone payments based on cumulative net sales of licensed products within each distinct class of licensed products, beginning when cumulative net sales of the class of licensed products equals or exceeds $ 100.0 million, with the majority payable when cumulative net sales of the class of licensed products equals or exceeds $ 1.0 billion; (iv) a low single-digit royalty on net sales of licensed products sold by the Company and its sublicensees, which may be subject to reductions, and subject to minimum annual royalty payments following the first commercial sale of a licensed product; (v) a certain percentage of any sublicense consideration (other than royalties) the Company receives from sublicensees, based on the stage of development at the time the sublicense is executed; and (vi) a certain percentage of consideration the Company receives from an acquisition of the Company or its assets based on the stage of development at the relevant time. The Company is obligated to pay royalties on a country-by-country basis until the expiration of the last valid claim within the licensed patent rights in such country. The agreement will expire upon the expiration of the last valid claim within the licensed patent rights. The Company may terminate the agreement upon prior written notice to UW. UW may terminate the agreement by a specified number of days’ notice if the Company permanently ceases operations, becomes insolvent or similar, or if the Company challenges the validity of the licensed patent rights. In addition, UW may terminate the agreement for material breach that is not cured within a specified number of days, which cure period is to be at least doubled if the Company is proceeding diligently to cure the default. 12. 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 years ended December 31, 2021 and December 31, 2020, the Company’s total expense for the matching contributions was immaterial. 87 Table of Contents 13. Sale of Aquinox Canada On July 31, 2020, the Company sold all issued and outstanding capital stock of its Canadian subsidiary, Aquinox Canada, to an unrelated third party for cash consideration of $ 8.2 million. The Company concluded that the sale did not meet the criteria for discontinued operations reporting as it did not represent a strategic shift that had a major effect on the Company’s operations and financial results. As of the date of sale, Aquinox Canada’s remaining assets included intellectual property and other assets developed through past research and development activities, all of which had no book value. The transaction resulted in a net gain on sale of $ 7.8 million, after deducting $ 0.4 million in transaction costs, which is recorded as a reduction of operating loss in the Company’s consolidated statement of operations. The sale of Aquinox Canada triggered 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. Refer to Note 10, Income taxes for further information. 88 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.