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Item 7. Management’s Discussion and Analysis

2023-03-20 compared with 2022-03-01 · 42 added, 42 removed, 96 unchanged (47% of the section changed)

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Forward-Looking Statements

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties.

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We use sophisticated computational methods to design proteins that demonstrate specific pharmaceutical properties that provide potentially superior therapeutic benefit over native proteins.

Our lead product candidate, NL-201, is a combined IL-2 and IL-15 agonist designed to eliminate alpha receptor binding.

In November 2022, we announced a corporate restructuring as a result of the strategic decision to discontinue development of NL-201 and turn our focus to the next generation of de nov o cytokine mimetics that further widen the therapeutic window.

While we believe that there are promising developments in this field of research, we also continued to evaluate strategic alternatives in light of the challenging capital markets.

In March 2023, we announced a further corporate restructuring to significantly reduce our workforce and suspend o ur research and development activities in order to conserve capital and focus on other strategic alternatives for the Company.

Such alternatives may include a sale, merger, divestiture of assets, licensing or other strategic transaction.

There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms.

Results of Operations

Operating Loss

Operating Expenses

The following table summarizes our operating expenses for the years ended December 31, 2022 and 2021 (in thousands):

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General and administrative 17,968 21,536 (3,568) (17) %

Gain on sale of Aquinox Canada — (7,826) 7,826 (100) %

Total operating loss $ 60,698 $ 33,728 $ 26,970 80 %

Total operating expenses $ 59,097 $ 60,698 $ (1,601) (3) %

Research and Development Expenses

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Research and development expenses for the year ended December 31, 2022 were $41.1 million compared to $39.2 million for the year ended December 31, 2021.

The increase in research and development expenses during the year ended December 31, 2021 was primarily due to increased expenses incurred from clinical trial activities related to our lead product candidate, NL-201, personnel-related costs, and in connection with the advancement of other Neoleukin technologies.

The increase was also due to facility-related costs associated with the build-out of our new headquarters and laboratory in Seattle, Washington.

The increase in research and development expenses during the year ended December 31, 2022 is due to increased expenses incurred from our NL-201 clinical trial, as well as restructuring charges incurred in 2022, discussed further below.

These increases are partially offset by decreases in NL-CVX1 costs due to the suspension of this program in June 2021, as well as decreases NL-201 manufacturing costs.

General and Administrative Expenses

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For the year ended December 31, 2022, general and administrative expenses were $18.0 million compared to $21.5 million for the year ended December 31, 2021.

The increase in general and administrative expenses during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to increases in personnel-related costs.

Gain on sale of Aquinox Canada

The gain relates to the sale of Aquinox Canada in July 2020.

The gain of $7.8 million recognized is the total consideration of $8.2 million, less transaction costs of $0.4 million.

Other income, net (in thousands)

Years Ended December 31,

2021 2020 $ Change % Change

The decrease in general and administrative expenses during the year ended December 31, 2022 as compared to the year ended December 31, 2021 is primarily due to decreases in personnel-related costs.

Workforce Reduction

On November 14, 2022, we announced the strategic decision to halt further clinical development of NL-201 and focus our resources on the next generation of immunotherapies using de novo protein design.

In conjunction with this decision, our Board of Directors approved a restructuring plan that includes a reduction in force of approximately 40% of our workforce.

We expect to incur aggregate restructuring charges consisting of severance payments, benefits, and other employee related costs of $1.8 million, of which $1.4 million was incurred during the year ended December 31, 2022 and the remaining $0.4 million will be incurred during the quarter ended March 31, 2023 due to future service requirements by certain employees to receive severance benefits.

Of the $1.4 million of restructuring charges incurred during the year ended December 31, 2022, $0.2 million is included in general and administrative expenses and $1.2 million is included in research and development expenses in the statement of operations and comprehensive income.

We expect to pay all remaining restructuring charges by the end of 2023.

Interest Income

Foreign exchange losses (1) 5 (6) (120) %

Other expenses (12) (44) 32 (73) %

Total other income, net $ 6 $ 451 $ (445) (99) %

Interest income during the year ended December 31, 2021 decreased compared to the year ended December 31, 2020 due to a decrease in interest rates, partially offset by higher money market fund balances for the year ended December 31, 2021.

Interest income during the year ended December 31, 2022 was $1.6 million as compared to $19.0 thousand during the year ended December 31, 2021.

The increase during the year ended December 31, 2022 is due to broad increases in the interest rate environment resulting in higher interest earned on our investments in money market funds and U.S.

treasury securities.

Liquidity and Capital Resources

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Our operating activities used $45.6 million and $47.6 million of cash during the years ended December 31, 2022 and 2021, respectively.

As of December 31, 2021, we had an accumulated deficit of $393.5 million, working capital of $135.4 million, and cash and cash equivalents of $142.5 million.

We believe that our existing capital resources will be sufficient to fund our operations into the second half of 2023.

On November 4, 2021, we entered into an ATM “at-the-market” Equity Offering Sales Agreement, or the Sales Agreement, with BofA Securities, Inc.,or BofA, pursuant to which we may, but are not obligated to, offer and sell, from time to time, shares of our common stock with an aggregate offering price up to $40.0 million through BofA, as sales agent.

As of December 31, 2022, we had an accumulated deficit of $451.1 million, working capital of $88.1 million, and cash, cash equivalents, and short-term investments of $96.4 million.

We believe that our existing capital resources will be sufficient to fund our operations through at least 12 months following the filing date of this Form 10-K.

On November 4, 2021, we entered into an ATM “at-the-market” Equity Offering Sales Agreement, or the Sales Agreement, with BofA Securities, Inc.("BofA"), pursuant to which we may, but are not obligated to, offer and sell, from time to time, shares of our common stock with an aggregate offering price up to $40.0 million through BofA, as sales agent.

No sales of common stock have been made pursuant to this Sales Agreement to date.

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Net cash used in operating activities

Net cash used in operating activities was $47.6 million for the year ended December 31, 2021 compared to $24.6 million for the year ended December 31, 2020.

Net cash used in operating activities for the year ended December 31, 2021 increased compared to the year ended December 31, 2020 due to an increase in operating expenses resulting primarily from expenses incurred in developing our lead product candidate, NL-201, and in connection with the advancement of other Neoleukin technologies.

The increase is also due to personnel-related costs and facility-related costs associated with the build-out of our new headquarters in Seattle, Washington.

Net cash used in operating activities for the years ended December 31, 2022 and December 31, 2021 consisted of net loss for the period adjusted for non-cash items and changes in components of operating assets and liabilities.

For the year ended December 31, 2022, a net loss of $57.6 million was adjusted for non-cash items of $11.1 million, including stock-based compensation expense of $8.8 million, and a net increase of $0.9 million due to changes in operating assets and liabilities.

For the year ended December 31, 2021, a net loss of $60.7 million was adjusted for non-cash items of $13.8 million, including stock-based compensation expense of $11.6 million, and a net decrease of $0.7 million due to changes in operating assets and liabilities.

Net cash used in investing activities

Net cash used in investing activities was $3.3 million for the year ended December 31, 2021 and consisted primarily of acquiring laboratory equipment and office furnishings.

Net cash used in investing activities of $2.2 million in the year ended December 31, 2020 consisted primarily of purchases of laboratory and IT equipment.

For the year ended December 31, 2022, cash used in investing activities consisted primarily of purchases of available-for-sale securities, net of maturities, and acquiring laboratory equipment.

For the year ended December 31, 2021 consisted primarily of purchases of laboratory equipment and office furnishings.

Net cash provided by financing activities

Net cash provided by financing activities was $0.7 million for the year ended December 31, 2021 compared to $77.1 million in the year ended December 31, 2020.

For the year ended December 31, 2021, net cash provided by financing activities consisted primarily of proceeds from stock option exercises and our Employee Stock Purchase Plan.

For the year December 31, 2020, net cash provided by financing activities consisted primarily of net proceeds received in our offering of common stock and pre-funded warrants of $71.3 million, net of underwriting discounts and commissions and offering costs.

For the years ended December 31, 2022 andDecember 31, 2021, net cash provided by financing activities consisted primarily of proceeds from stock option exercises and our 2020 Employee Stock Purchase Plan.

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 December 31, 2021, we had approximately $142.5 million in cash and cash equivalents.

Based on our current business plans, we believe that our existing cash and cash equivalents will be sufficient to fund our planned operations into the second half of 2023.

As of December 31, 2022, we had approximately $96.4 million in cash, cash equivalents, and short-term investments.

Based on our current business plans, we believe that our existing cash, cash equivalents, and short-term investments will be sufficient to fund our planned operations through at least 12 months following the filing date of this Form 10-K..

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.

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• any product liability or other lawsuits related to our products;

• the potential delays in our preclinical studies, our development programs and our existing and planned clinical trials due to the effects of the COVID-19 pandemic, including the resurgence of cases relating to the spread of the Delta and Omicron variants;

• the potential delays in our preclinical studies, our development programs and our planned clinical trials due to the continued impacts of the COVID-19 pandemic and related economic pressures, including supply chain disruptions, and other disruptions that may occur with any resurgence of acute cases of SARS-CoV-2, including resurgences relating to new variants;

• the expenses needed to attract and retain skilled personnel;

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Operating lease obligations reflect remaining minimum commitments for our office and laboratory spaces in Seattle, Washington.

Please see Note 6, Leases in the Notes to Consolidated Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K for additional information pertaining to operating lease commitments.

Please see Note 7, Leases in the Notes to Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K for additional information pertaining to operating lease commitments.

We enter into contracts in the normal course of business with CROs for clinical and preclinical research studies, external manufacturers for product for use in our clinical trials, and other research supplies and other services as part of our operations.

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Furthermore, we are required to pay;

(i) an annual maintenance fee starting in January 2022 (but excluding any year in which minimum annual royalties are paid);

(i) an annual maintenance fee beginning 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;

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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.

We evaluate those estimates and judgments on an ongoing basis.

The preparation of these 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 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.

While our significant accounting policies are described in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

While our significant accounting policies are described in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Research and Development Expenses

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We record costs for certain development activities based on our evaluation of the progress to completion of specific tasks or information provided to us by our 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 liabilities.

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 financial statements as prepaid or accrued liabilities.

Stock-Based Compensation

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We account for forfeitures as they occur.

All share-based payments to employees are recognized in the consolidated financial statements based upon their respective grant-date fair values.

All share-based payments to employees are recognized in the financial statements based upon their respective grant-date fair values.

We estimate the fair value of options granted using the Black-Scholes option pricing model.

This approximation uses assumptions regarding a number of inputs that required us to make significant estimates and judgments, including the expected term of the options.

This technique uses assumptions regarding a number of inputs that required us to make significant estimates and judgments, including the expected term of the options.

We also make decisions regarding the method of calculating the expected stock price volatility and the risk-free interest rate used in the model.

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Recent Accounting Pronouncements

See Note 2(n), Recently issued and recently adopted accounting standards in the Notes to Consolidated Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K.

See Note 2(p), Recently issued and recently adopted accounting standards in the Notes to Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K.

Quantitative and Qualitative Disclosures About Market Risk.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis