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Item 2. Management’s Discussion and Analysis

2021-04-13 compared with 2020-10-14 · 131 added, 147 removed, 147 unchanged (65% of the section changed)

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our final prospectus (Prospectus) dated July 23, 2020 and filed with the U.S.

Securities and Exchange Commission (SEC) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the Securities Act) on July 24, 2020.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) the unaudited condensed consolidated financial statements and the related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended November 30, 2020 included in our Annual Report on Form 10-K filed on February 16, 2021 (2020 Form 10-K).

As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis contains forward looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward looking statements.

Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our Prospectus.

We are a biopharmaceutical company focused on the discovery, development and commercialization of small molecule therapies designed to modulate cellular protein levels as a novel treatment approach for cancer and immune disorders.

Leveraging our extensive expertise in E3 ligases together with our proprietary DNA-encoded libraries, we have built DELigase, an integrated discovery platform to identify and advance novel drug candidates targeting E3 ligases, a broad class of enzymes that can modulate proteins within the cell.

Our drug discovery approach is to either harness or inhibit the natural function of E3 ligases within the ubiquitin-proteasome system to selectively decrease or increase cellular protein levels.

Our wholly owned pipeline comprises targeted protein degraders of Bruton’s tyrosine kinase (BTK), a B-cell signaling protein, and inhibitors of CBL-B, an E3 ligase that regulates T cell activation.

Our lead drug candidate from our protein degradation portfolio, NX-2127, is an orally available BTK degr ader for the treatment of relapsed or refractory B-cell malignancies.

We expect to file an investigational new drug application (IND) for NX-2127 with the U.S.

Food and Drug Administration (FDA) in late fourth quarter of 2020 or the first quarter of 2021 and to commence a Phase 1 clinical trial thereafter.

Our wholly owned pipeline comprises targeted protein degraders of Bruton’s tyrosine kinase (BTK), a B-cell signaling protein, and inhibitors of Casitas B-lineage lymphoma proto-oncogene B (CBL-B), an E3 ligase that regulates T cell activation.

Our lead drug candidate from our protein degradation portfolio, NX-2127, is an orally available BTK degrader for the treatment of relapsed or refractory B-cell malignancies.

We filed an investigational new drug application (IND) for NX-2127 in December 2020 and received clearance by the U.S.

Food and Drug Administration (FDA) to initiate human clinical trials.

Clinical sites are actively recruiting patients for our Phase 1 clinical trial of NX-2127.

Our second drug candidate from our protein degradation portfolio, NX-5948, is also an orally bioavailable BTK degrader for the treatment of relapsed or refractory B-cell malignancies and potentially autoimmune diseases.

We anticipate commencing a Phase 1 trial for NX-5948 in the second half of 2021.

Our lead drug candidate from our E3 ligase inhibitor portfolio, NX-1607, is an orally available CBL-B inhibitor for immuno-oncology indications.

We expect to file an IND for NX-1607 with the FDA in the third quarter of 2021 and to commence a Phase 1 clinical trial thereafter.

We have two additional clinical candidates, NX-5948, an orally available BTK degrader, and DeTIL-0255, a drug-enhanced tumor infiltrating lymphocyte adoptive cellular therapy, for which we anticipate filing INDs in the second half of 2021.

All expected IND submission timings are based on calendar quarters.

Beyond these preclinical programs, we are advancing additional drug discovery programs, either independently or through our established strategic collaborations with Sanofi S.A.

(Sanofi), Gilead Sciences, Inc.

We expect to commence a Phase 1 clinical trial in the second half of 2021.

We are also advancing the development of a CBL-B inhibitor, NX-0255, for ex vivo use to enhance adoptive T-cell therapy.

We anticipate commencing a Phase 1 clinical trial for our first cell therapy candidate, DeTIL-0255, in the second half of 2021.

Beyond these portfolios, we are advancing additional wholly owned, preclinical programs that may expand our therapeutic areas beyond oncology to autoimmune disease and viral diseases, including COVID-19.

Our therapeutic areas may be further expanded through our established strategic collaborations with Sanofi S.A.

(Sanofi), and Gilead Sciences, Inc.

All expected Phase 1 clinical trial commencements are based on calendar years.

Beyond these preclinical programs, we are advancing additional drug discovery programs, either independently or through our established strategic collaborations with Sanofi and Gilead.

Since the commencement of our operations, we have devoted substantially all of our resources to conducting research and development activities, establishing and maintaining our intellectual property portfolio, establishing our corporate infrastructure, raising capital and providing general and administrative support for these operations.

We have funded our operations to date primarily from proceeds received under collaboration and license agreements with Sanofi, Gilead, and Celgene Corporation (Celgene) and the issuance and sale of common and redeemable convertible preferred stock.

We do not expect to generate product revenue unless and until we successfully develop and obtain approval for the commercialization of a product candidate, and we cannot assure you that we will ever generate significant revenue or profits.

We do not expect to generate product revenue unless and until we successfully develop and obtain approval for the commercialization of a drug candidate, and we cannot assure you that we will ever generate significant revenue or profits.

Since inception, we have generally incurred significant losses and negative cash flows from operations.

We incurred net losses of $18.5 million and $23.3 million during the three and nine months ended August 31, 2020, respectively, and $2.4 million and $8.2 million during the three and nine months ended August 31, 2019, respectively.

As of August 31, 2020, we had an accumulated deficit of $83.8 million.

During the three months ended February 28, 2021 and February 29, 2020, we incurred net losses of $24.3 million and $12.4 million, respectively.

As of February 28, 2021, we had an accumulated deficit of $128.0 million.

These losses have resulted primarily from costs incurred in connection with research and development activities and general and administrative costs associated with our operations.

We do not expect to generate any revenue from commercial product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years.

We expect our expenses will increase substantially as we advance our product candidates through preclinical and into clinical development;

We do not expect to generate any revenue from commercial product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our drug candidates, which we expect will take a number of years.

We expect our expenses will increase substantially as we advance our drug candidates through preclinical and into clinical development;

enter advanced clinical development and scale up external manufacturing capabilities to supply clinical trials;

apply our DELigase platform to advance additional product candidates and expand the capabilities of our platform;

seek marketing approvals for any product candidates that successfully complete clinical trials;

apply our DELigase platform to advance additional drug candidates and expand the capabilities of our platform;

seek marketing approvals for any drug candidates that successfully complete clinical trials;

ultimately establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any products for which we may obtain marketing approval;

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Furthermore, we expect to continue to incur additional costs associated with operating as a public company, including significant legal, accounting, insurance, investor relations and other administrative and professional services expenses.

Our net losses and cash flows may fluctuate significantly from period to period, depending on, among other things, variations in the level of expense related to the ongoing development of our product candidates, our DELigase platform or future development

Our net losses and cash flows may fluctuate significantly from period to period, depending on, among other things, variations in the level of expense related to the ongoing development of our drug candidates, our DELigase platform or future development programs;

the delay, addition or termination of clinical trials;

and the execution of any additional collaboration, licensing or similar arrangements, and the timing of payments we may make or receive under such arr angements.

As of August 31, 2020, we had $395.1 million in cash, cash equivalents and investments.

and the execution of any additional collaboration, licensing or similar arrangements, and the timing of payments we may make or receive under such arrangements.

As of February 28, 2021, we had $380.3 million in cash, cash equivalents and investments.

In July 2020, we closed our initial public offering and issued 12,550,000 shares of our common stock (including the exercise by the underwriters of their option to purchase an additional 1,550,000 shares of common stock in August 2020) at a price to the public of $19.00 per share for net proceeds of approximately $218.1 million, after deducting underwriting discounts and commissions of $16.7 million and expenses of $3.6 million.

In March 2021, we completed a follow-on offering and issued 5,175,000 shares of our common stock (including the exercise by the underwriters of their option to purchase an additional 675,000 shares of common stock) at a price to the public of $31.00 per share for net proceeds of approximately $150.1 million, after deducting underwriting discounts and commissions of $9.6 million and expenses of $0.7 million.

We expect that our existing cash, cash equivalents and investments are sufficient to fund our operations for at least the next 12 months.

See the section titled “—Liquidity and capital resources” for more information.

To finance our operations beyond that point, we will need to raise substantial additional capital to complete the development and commercialization of our product candidates.

To finance our operations beyond that point, we will need to raise substantial additional capital to complete the development and commercialization of our drug candidates.

Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements.

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While the impact of the COVID-19 pandemic to our current operations has been minimal as we have not yet commenced clinical trials, the extent to which the COVID-19 pandemic will impact our business, financial condition, liquidity and results of operations in the future will depend on future developments that are highly uncertain and cannot be predicted at this time.

Collaboration and license agreements

Collaborations and License Agreements

Sanofi Collaboration and License Agreement

In December 2019, we entered into a strategic collaboration with Sanofi, which became effective in January 2020 (the Sanofi Agreement), to discover, develop and commercialize a pipeline of targeted protein degradation drugs for patients with challenging diseases in multiple therapeutic areas using our DELigase platform to identify small molecules designed to induce degradation of three specified initial drug targets, with an option by Sanofi to expand to a total of five targets.

In December 2019, we entered into a strategic collaboration with Genzyme Corporation, a subsidiary of Sanofi, which became effective in January 2020 (as subsequently expanded and amended, the Sanofi Agreement), to discover, develop and commercialize a pipeline of targeted protein degradation drugs for patients with challenging diseases in multiple therapeutic areas using our DELigase platform to identify small molecules designed to induce degradation of three specified initial drug targets.

In January 2021, as part of the existing collaboration, Sanofi paid us $22 million to exercise its option to expand the number of targets in the collaboration agreement from three to a total of five targets.

We also entered into the First Sanofi Amendment to the collaboration agreement with Sanofi in January 2021 to modify the research term on all targets.

Over time and subject to certain limitations, Sanofi may elect to replace the drug targets with other reserved targets.

Under the Sanofi Agreement, Sanofi has exclusive rights and is responsible for the clinical development, commercialization and manufacture of product candidates resulting from the collaboration while we retain the option to co-develop, co-promote and co-commercialize all product candidates in the United States directed to up to two targets under certain conditions.

Under the Sanofi Agreement, Sanofi has exclusive rights and is responsible for the clinical development, commercialization and manufacture of drug candidates resulting from the collaboration while we retain the option to co-develop, co-promote and co-commercialize all drug candidates in the United States directed to up to two targets under certain conditions.

The collaboration excludes our current internal protein degradation programs for which we retain all rights, and also excludes our future internal programs, provided that we have distinguished future programs as excluded from the scope of the collaboration.

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net sales and reduced milestone payments on such optioned products.

Upon signing the Sanofi Agreement, Sanofi agreed to pay us an upfront payment of $55.0 million, which was received in January 2020, and we are eligible to receive additional payments if Sanofi exercises its option to expand the number of targets beyond the initial targets included in the collaboration or exercises an option to extend the license term with respect to a particular target.

In addition, we are eligible to receive up to approximately $2.5 billion in total payments based on certain additional fees, payments and the successful completion of certain research development, regulatory and sales milestones, as well as tiered royalties ranging from mid-single digit to low teen percentages on annual net sales of any commercial products that may result from the collaboration, subject to certain reductions and excluding sales in the United States of any products for which we exercise our option to co-develop and co-promote, for which we share profits and losses evenly.

We recognized collaboration revenue from the Sanofi Agreement of $ 4 .2 million during the nine months ended Aug ust 31, 2020 .

As of August 31, 2020 , there was $5 0 .8 million of deferred revenue related to payments received by us under the Sanofi Agreement.

Upon signing the Sanofi Agreement, Sanofi paid us an upfront payment of $55.0 million in January 2020.

Subsequently in January 2021, Sanofi paid us an additional $22.0 million to exercise its option to expand the number of targets beyond the initial targets included in the collaboration.

We are eligible to receive additional payments if Sanofi exercises an option to extend the license term with respect to a particular target.

As of February 28, 2021, we are eligible to receive up to approximately $2.5 billion in total payments based on certain additional fees, payments and the successful completion of certain research development, regulatory and

sales milestones, as well as tiered royalties ranging from mid-single digit to low teen percentages on annual net sales of any commercial products that may result from the collaboration, subject to certain reductions and excluding sales in the United States of any products for which we exercise our option to co-develop and co-promote, for which we share profits and losses evenly.

We accounted for the First Sanofi Amendment as if it were part of the existing contract with Sanofi as the remaining goods and services to be provided after the contract modification are not distinct from the goods and services already provided and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification.

The contract modification did not have an effect on the contract transaction price.

The effect of the revised research period on our measure of progress toward complete satisfaction of the performance obligation was recognized as an adjustment to revenue at the date of the contract modification on a cumulative catch-up basis.

We recognized collaboration revenue from the Sanofi Agreement of $2.3 million and $0.4 million during the three months ended February 28, 2021 and February 29, 2020, respectively.

As of February 28, 2021, there was $69.0 million of deferred revenue related to payments received by us under the Sanofi Agreement.

Gilead Collaboration, Option and License Agreement

In June 2019, we entered into a global strategic collaboration agreement with Gilead, which was amended in August 2019 (the Gilead Agreement), to discover, develop and commercialize a pipeline of targeted protein degradation drugs for patients with cancer and other challenging diseases using our DELigase platform to identify novel agents that utilize E3 ligases to induce degradation of five specified drug targets.

Under the Gilead Agreement, Gilead has the option to license drug candidates directed to up to five targets resulting from the collaboration and is responsible for the clinical development and commercialization of product candidates resulting from the collaboration.

We retain the option to co-develop and co-promote, under a profit share structure, up to two product candidates in the United States under certain conditions.

We retain the option to co-develop and co-promote, under a profit share structure, up to two drug candidates in the United States under certain conditions.

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net sales and reduced milestone payments.

Pursuant to the Gilead Agreement, we received an upfront payment of $45.0 million, plus $3.0 million in additional fees, and we are eligible to receive up to approximately $2.3 billion in total additional payments based on certain additional fees, payments and the successful completion of certain preclinical, clinical, development and sales milestones.

Upon signing the Gilead Agreement, Gilead paid us an upfront payment of $45.0 million plus $3.0 million in additional fees.

Subsequently, we have received payments of $11.0 million for research milestones and additional payments.

As of February 28, 2021, we are eligible to receive up to approximately $2.3 billion in total additional payments based on certain additional fees, payments and the successful completion of certain preclinical, clinical, development and sales milestones.

In addition, we are eligible to receive tiered royalties from mid-single digit to low tens percentages on annual net sales from any commercial products directed to the optioned collaboration targets, subject to certain reductions and excluding sales in the United States of any products for which we exercise our option to co-develop and co-promote, for which we share profits and losses evenly.

In February 2020, we achieved a research milestone, resulting in a $2.5 million additional payment, which we received in April 2020, and in May 2020, we recorded $1.0 million in additional fees related to a certain target reservation, which we received in June 2020.

We recognized collaboration revenue from the Gilead Agreement of $6.9 million and $0.8 million during the nine months ended August 31, 2020 and 2019, respectively.

As of August 31, 2020 , there was $41.9 million of deferred revenue related to payments received by us under the Gilead Agreement.

Celgene Research and Collaboration Agreement

In September 2015, we entered into a strategic collaboration with Celgene (the Celgene Agreement) with an initial research term of four years pursuant to which we received an upfront payment of $150.0 million.

In addition, in September 2015, Celgene purchased 1,622,222 shares of our Series C redeemable convertible preferred stock at a price of $10.50 per share, resulting in net proceeds of $17.0 million.

In January 2019, Celgene and Bristol-Myers Squibb Company (BMS) entered into a definitive merger agreement pursuant to which Celgene agreed to be acquired by BMS.

Based on our request for notification of the future disposition of our agreement, in June 2019, Celgene notified us that it was terminating the Celgene Agreement.

Upon termination of the Celgene Agreement in June 2019, any rights that Celgene had under the agreement reverted to us and no termination payments were due or payable.

We recognized no collaboration revenue from the Celgene Agreement during the nine months ended August 31, 2020.

During the nine months ended August 31, 2019, we recognized $28.4 million in collaboration revenue under the Celgene Agreement.

As of August 31, 2020, there was no deferred revenue related to payments received by us under the Celgene Agreement.

We recognized collaboration revenue from the Gilead Agreement of $2.7 million and $2.4 million during the three months ended February 28, 2021 and February 29, 2020, respectively.

As of February 28, 2021, there was $41.4 million of deferred revenue related to payments received by us under the Gilead Agreement.

Formation of DeCART Therapeutics Inc.

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Following either the third-party funding or the exercise of the stock option grants, DeCART will no longer be a wholly owned subsidiary.

Financial operations overview

Components of Results of Operations

Collaboration Revenue

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Collaboration revenue consists of revenue received from upfront, milestone and contingent payments received from our collaborators.

Prior to December 1, 2019, we recognized revenue from upfront payments over the term of our estimated period of performance using either a straight-line or input/proportional performance approach, depending on the agreement, in accordance with Accounting Standards Codification (ASC) 605, Revenue Recognition .

Revenue related to the upfront payment received pursuant to the Celgene Agreement was recognized using a straight-line basis.

Effective December 1, 2019, we began recognizing revenue from upfront payments over the contract term using a cost-based input method under Topic 606, Revenue from Contracts with Customers .

Revenue related to the upfront payments received pursuant to the Gilead Agreement was recognized using the input/proportional performance approach prior to December 1, 2019 and the cost-based input method beginning December 1, 2019.

There would have been no difference between the revenue recognized under Topic 606 and the revenue recognized under ASC 605 for the Gilead Agreement.

Revenue related to the upfront payment received pursuant to the Sanofi Agreement was recognized using the cost-based input method.

We recognize revenue from upfront payments over the contract term using the cost-based input method.

The material right to the two additional targets under the Sanofi Agreement was accounted for using the practical alternative and the expected consideration to be received on the options was included for revenue allocation.

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Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the discovery and development of our product candidates.

Research and development expenses consist primarily of costs incurred for the discovery and development of our drug candidates.

We expense both internal and external research and development expenses to operations in the periods in which they are incurred.

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The capitalized amounts are then expensed as the related goods are delivered and as services are performed.

We track the external research and development costs incurred for each of our product candidates.

We track the external research and development costs incurred for each of our drug candidates.

Internal research and development costs include:

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depreciation of research and development equipment, allocated overhead and facilities-related expenses.

External research and development expenses consist primarily of costs incurred for the development of our product candidates and may include:

External research and development expenses consist primarily of costs incurred for the development of our drug candidates and may include:

fees paid to third parties such as consultants, contractors and contract research organizations to conduct our discovery programs, preclinical studies and clinical trials;

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expenses related to laboratory supplies and services.

We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities to advance our product candidates into and through our preclinical studies and clinical trials, pursue regulatory approval of our product candidates and expand our product candidate pipeline.

We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities to advance our drug candidates into and through our preclinical studies and clinical trials, pursue regulatory approval of our drug candidates and expand our drug candidate pipeline.

The process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming.

To the extent that our product candidates advance and continue to advance into clinical trials, our expenses will increase substantially and may become more variable.

The actual probability of success for our product candidates may be affected by a variety of factors, including the safety and efficacy of our product candidates, investment in our clinical programs, the ability of collaborators to successfully develop our licensed product candidates, manufacturing capability, competition with other products and commercial viability.

As a result of these variables, we are unable to determine when and to what extent we will generate revenue from the commercialization and sale of our product candidates.

We may never succeed in achieving regulatory approval for any of our product candidates.

To the extent that our drug candidates advance and continue to advance into clinical trials, our expenses will increase substantially and may become more variable.

The actual probability of success for our drug candidates may be affected by a variety of factors, including the safety and efficacy of our drug candidates, investment in our clinical programs, the ability of collaborators to successfully develop our licensed drug candidates, manufacturing capability, competition with other products and commercial viability.

As a result of these variables, we are unable to determine when and to what extent we will generate revenue from the commercialization and sale of our drug candidates.

We may never succeed in achieving regulatory approval for any of our drug candidates.

General and Administrative Expenses

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We expect our general and administrative expenses to increase substantially for the foreseeable future as we continue to build our infrastructure, increase our headcount and operate as a public company.

This may include expenses related to compliance with the rules and regulations of the Securities and Exchange Commission (SEC) and listing standards applicable to companies listed on a national securities exchange, additional insurance, investor relations activities and other administrative and professional services.

We also expect our intellectual property expenses to increase as we expand our intellectual property portfolio.

This may include expenses related to compliance with the rules and regulations of the SEC and listing standards applicable to companies listed on a national securities exchange, additional insurance, investor relations activities and other administrative and professional services.

We also expect our intellectual property expenses to increase as we

expand our intellectual property portfolio.

Interest and Other Income, Net

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The benefit for income taxes consists of a discrete tax benefit from an adjustment to the net operating loss (NOL) deferred tax asset and valuation allowance.

We have generated net operating losses since inception, and have established a full valuation allowance against our deferred tax assets due to the uncertainty surrounding the realization of such assets.

We have generated NOLs since inception and have established a full valuation allowance against our deferred tax assets due to the uncertainty surrounding the realization of such assets.

Results of Operations

Comparison of the three and nine months ended August 31, 2020 and 2019

Three months ended August 31,

Nine months ended August 31,

Comparison of the Three Months Ended February 28, 2021 and February 29, 2020

Three Months Ended

(in thousands)

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Loss from operations

Interest income and other

Loss before provision (benefit)

for income taxes

Provision (benefit) for income

Collaboration revenue for the three months ended August 31, 2020 and 2019 includes related party revenue of $0 and $9.7 million, respectively.

Collaboration revenue for the nine months ended August 31, 2020 and 2019 includes related party revenue of $0 and $28.4 million, respectively.

Interest income and other income

Loss before income taxes

Provision for income taxes

Collaboration Revenue

Our collaboration revenue was $4.1 million for the three months ended August 31, 2020 and was related to payments received pursuant to the Gilead Agreement and the Sanofi Agreement, and $10.6 million for the three months ended August 31, 2019 and was related to payments received pursuant to the Gilead Agreement and the Celgene Agreement.

The decrease in collaboration revenue was attributable to the termination of the Celgene Agreement in June 2019, which resulted in no revenue recognition in 2020, offset by the revenue recognized related to the Gilead Agreement and the Sanofi Agreement.

Our collaboration revenue was $11.1 million for the nine months ended August 31, 2020 and was related to payments received pursuant to the Gilead Agreement and the Sanofi Agreement, and $29.3 million for the nine months ended August 31, 2019 and was related to payments received pursuant to the Gilead Agreement and the Celgene Agreement.

The decrease in collaboration revenue for the nine months year-over-year was also attributable to the termination of the Celgene Agreement in June 2019, which resulted in no revenue recognition in 2020, offset by the revenue recognized related to the Gilead Agreement and the Sanofi Agreement.

Our collaboration revenue for the three months ended February 28, 2021 and February 29, 2020 is summarized as follows:

Three Months Ended

(in thousands)

Total collaboration revenue

Our collaboration revenue increased by $2.1 million for the three months ended February 28, 2021 compared with the three months ended February 29, 2020.

The increase was primarily due to our collaboration with Sanofi, which continued to scale up resources as compared to the prior period, resulting in a higher percentage of completion in the current period.

Research and Development Expenses

Our research and development expenses for the three and nine months ended August 31, 2020 and 2019 are summarized as follows:

Three months ended August 31,

Nine months ended August 31,

Our research and development expenses for the three months ended February 28, 2021 and February 29, 2020 are summarized as follows:

Three Months Ended

(in thousands)

Compensation and related

personnel costs

Compensation and related personnel costs

Supplies and contract research

Preclinical activities and

contract manufacturing

Preclinical activities and contract manufacturing

Facility and other costs

Total research and

development expenses

Our research and development expenses increased by $7.9 million, or 72%, during the three months ended August 31, 2020, compared to the three months ended August 31, 2019.

The increase was primarily related to an increase of $4.1 million in supplies and contract research attributable to increases in our preclinical development activities and drug discovery research.

There was also an increase of $2.2 million in compensation and related personnel costs attributable to an increase in headcount and higher stock-based

compensation expense d ue to additional stock awards granted since August 31, 2019 .

Preclinical activities and c ontract manufacturing costs increased by $1.3 million, primarily due to preparation for upcoming clinical programs for our lead drug candidates.

Our research and development expenses increased by $13.8 million, or 43%, during the nine months ended August 31, 2020, compared to the nine months ended August 31, 2019.

Supplies and contract research costs increased by $4.6 million primarily due to our drug discovery and cell therapy research activities.

Preclinical activities and contract manufacturing costs increased by $4.4 million, primarily due to preparation for upcoming clinical programs for our lead drug candidates.

Compensation and related personnel costs increased by $4.1 million primarily due to an increase in headcount and higher stock-based compensation due to additional stock awards granted since August 31, 2019.

Total research and development expenses

Our research and development expenses increased by $10.0 million, or 77.4%, for the three months ended February 28, 2021, compared with the three months ended February 29, 2020.

The increase was primarily related to an increase of $4.6 million in compensation and related personnel costs attributable to an increase in headcount and higher non-cash stock-based compensation expense due to additional stock awards granted since February 29, 2020.

There was also an increase of $3.5 million in supplies and contract research attributable to increases in our preclinical development activities and drug discovery research and an increase of $1.1 million in preclinical activities and contract manufacturing costs primarily due to preparation for upcoming clinical programs for our lead drug candidates.

General and Administrative Expenses

Our general and administrative expenses increased by $2.2 million, or 99%, during the three months ended August 31, 2020, compared to the three months ended August 31, 2019.

The increase was primarily related to an increase of $0.9 million in compensation related expenses attributable to a higher headcount, an increase of $0.7 million in legal and accounting expenses mainly related to external audit fees and an increase of $0.2 million in consultant and other professional service expenses primarily related to becoming a public company.

Our general and administrative expenses increased by $4.3 million, or 76%, during the nine months ended August 31, 2020, compared to the nine months ended August 31, 2019.

The increase was primarily related to an increase of $1.7 million in compensation related expenses attributable to an increase in headcount, an increase of $1.5 million in legal and accounting expenses incurred primarily related to external audit fees and an increase of $0.7 million in consultant and other professional service expenses primarily related to becoming a public company.

Our general and administrative expenses increased by $4.1 million, or 166.5%, for the three months ended February 28, 2021, compared with the three months ended February 29, 2020.

The increase was primarily related to an increase of $2.4 million in compensation related expenses attributable to a higher headcount and includes $1.4 million of higher non-cash stock-based compensation expense due to additional stock awards granted since February 29, 2020.

There was also an increase of $1.0 million in consultant and other professional service expenses primarily related to becoming a public company.

Interest and Other Income, Net

Interest and other income, net was $0.7 million and $0.2 million for the three months ended August 31, 2020 and 2019, respectively, and $1.1 million and $0.5 million for the nine months ended August 31, 2020 and 2019, respectively.

The increase was primarily related to interest received as part of the tax refund for the first carryback claim that we filed in April 2020 in connection with the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).

Other than the interest earned on tax refund, interest and other income, net in all periods is mainly related to interest earned on our deposits, money market funds and investments.

Provision (benefit) for income taxes

The provision for income taxes was insignificant during the three months ended August 31, 2020 and 2019.

The benefit for income taxes was $20.6 million during the nine months ended August 31, 2020 and was related to a discrete tax benefit, which consists of carryback claims and the reversal of the uncertain tax liability related to research and development tax credits as a result of the CARES Act that was enacted on March 27, 2020 in response to the COVID-19 pandemic.

The provision for income taxes was insignificant during the nine months ended August 31, 2019.

Critical accounting policies and estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S.

generally accepted accounting principles (U.S.

The preparation of these financial statements requires us 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 financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods.

Our estimates are based on our historical experience and on other relevant assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in the notes to our condensed consolidated financial statements.

Our critical accounting policies and more significant areas involving management’s judgments and estimates used in preparation of our financial statements are discussed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Prospectus, and there have been no significant changes to these policies for the three months and nine months ended August 31, 2020.

Interest and other income, net was insignificant for each of the three months ended February 28, 2021 and February 29, 2020 and is related to interest earned on our deposits, money market funds and investments.

Provision for Income Taxes

Provision for income taxes was insignificant for each of the three months ended February 28, 2021 and February 29, 2020.

Liquidity and Capital Resources

Source of Liquidity

On July 23, 2020, our registration statement on Form S-1 (File No.

333-239651) relating to our initial public offering of common stock became effective.

The initial public offering closed on July 28, 2020 at which time we issued 11,000,000 shares of its common stock at a price to the public of $19.00 per share.

Our initial public offering closed on July 28, 2020 at which time we issued 11,000,000 shares of our common stock at a price to the public of $19.00 per share.

In addition, the underwriters exercised their option to purchase an additional 1,550,000 shares of our common stock on July 31, 2020, and this transaction closed on August 4, 2020.

Net proceeds from the initial public offering and the transaction with the underwriters were approximately $218.1 million, after deducting underwriting discounts and commissions of $16.7 million and expenses of $3.6 million.

Net proceeds from our initial public offering were approximately $218.1 million, after deducting underwriting discounts and commissions of $16.7 million and expenses of $3.6 million.

To date, our operations have been funded through the issuance of common and redeemable convertible preferred stock and proceeds from collaboration agreements.

We do not have any products approved for sale, and we have not generated any revenue from product sales.

As of August 31, 2020, we had $395.1 million in cash, cash equivalents and investments.

In December 2019, we entered into the Sanofi Agreement, pursuant to which we received an upfront payment of $55.0 million in January 2020.

Additionally, in March 2020, we closed a sale of our Series D redeemable convertible preferred stock that resulted in net proceeds of $119.9 million.

Funding requirements

As of February 28, 2021, we had $380.3 million in cash, cash equivalents and investments.

Funding R equirements

We expect that our existing cash, cash equivalents and investments are sufficient to continue operating activities for at least the next 12 months.

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We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements.

Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated pre-clinical studies and clinical trials.

Because of the numerous risks and uncertainties associated with the development and commercialization of our drug candidates and the extent to which we may enter into additional collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated pre-clinical studies and clinical trials.

Our future funding requirements will depend on many factors, including the following:

the progress, costs and results of our planned Phase 1 clinical trials for our lead product candidates NX-2127 and NX-1607 and other drug candidates, and any future clinical development of such product candidates;

the scope, progress, costs and results of preclinical and clinical development for our other product candidates and development programs;

the number and development requirements of other product candidates that we pursue;

the progress, costs and results of our planned Phase 1 clinical trials for our lead drug candidates NX-2127 and NX-1607 and other drug candidates, and any future clinical development of such drug candidates;

the scope, progress, costs and results of preclinical and clinical development for our other drug candidates and development programs;

the number and development requirements of other drug candidates that we pursue;

the scope of, and costs associated with, future advancements to our DELigase platform;

the success of our collaborations with Sanofi, Gilead and any other collaborations we may establish;

the costs, timing and outcome of regulatory review of our product candidates;

the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;

the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;

the costs, timing and outcome of regulatory review of our drug candidates;

the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our drug candidates for which we receive marketing approval;

the revenue, if any, received from commercial sales of our drug candidates for which we receive marketing approval;

the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;

our ability to establish additional collaboration arrangements with other biotechnology or pharmaceutical companies on favorable terms, if at all, for the development or commercialization of our product candidates.

If adequate funds are not available at favorable terms, we may be required to reduce operating expenses, delay or reduce the scope of our product development and commercial expansion programs, obtain funds through arrangements with others that may require us to relinquish rights to certain of our technologies or products that we would otherwise seek to develop or commercialize ourselves, or cease operations.

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The following table summarizes our cash flows during the periods indicated:

Nine months ended August 31,

Three Months Ended

(in thousands)

Cash provided by operating activities

Cash provided by (used in) investing activities

Cash used in investing activities

Cash provided by financing activities

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Operating activities

Net cash provided by operating activities was $20.4 million for the nine months ended August 31, 2020 and consisted of a decrease in net assets of $40.3 million and non-cash adjustments of $3.4 million, offset by our net loss of $23.3 million.

The decrease in net assets consisted primarily of an increase in deferred revenue of $47.4 million related to proceeds received pursuant to the Sanofi Agreement and offset by revenue recognized pursuant to the Sanofi Agreement and the Gilead Agreement.

Net cash provided by operating activities was $8.1 million for the three months ended February 28, 2021 and consisted of a decrease in net assets of $28.8 million and non-cash adjustments of $3.6 million, offset by our net loss of $24.3 million.

The decrease in net assets consisted primarily of an increase in deferred revenue of $17.0 million and a decrease in contract assets of $7.5 million.

Non-cash adjustments primarily consisted of stock-based compensation expenses of $2.7 million and depreciation and amortization expenses of $0.6 million.

Net cash provided by operating activities was $13.3 million for the nine months ended August 31, 2019 and consisted of a decrease in net assets of $19.5 million and non-cash adjustments of $2.0 million, offset by our net loss of $8.2 million.

The decrease in net assets consisted primarily of an increase in deferred revenue of $18.7 million from the payment received under the Gilead Agreement and offset by the recognition of revenue related to the Gilead Agreement and Celgene Agreement.

Non-cash adjustments primarily consisted of depreciation and amortization expenses of $1.8 million and stock-based compensation expenses of $0.3 million.

Net cash provided by operating activities was $41.0 million for the three months ended February 29, 2020 and consisted of a decrease in net assets of $52.7 million and non-cash adjustments of $0.7 million, offset by our net loss of $12.4 million.

The decrease in net assets consisted primarily of an increase in deferred revenue of $54.6 million from the payment received under the Sanofi Agreement, offset by the recognition of revenue related to the Gilead Agreement and Sanofi Agreement.

Non-cash adjustments primarily consisted of depreciation and amortization expenses of $0.5 million.

Investing activities

Net cash used in investing activities was $129.8 million for the nine months ended August 31, 2020 and consisted primarily of the purchase of investments of $141.1 million, offset by the maturity of investments of $14.9 million.

Net cash provided by investing activities was $12.9 million for the nine months ended August 31, 2019 and consisted primarily of the maturity of investments of $19.5 million, offset by the purchase of investments of $5.9 million.

Net cash used in investing activities was $2.4 million for the three months ended February 28, 2021 and consisted primarily of the purchase of investments of $47.7 million, offset by the maturity of investments of $46.2 million.

Net cash used in investing activities was $19.4 million for the three months ended February 29, 2020 and consisted primarily of the purchase of investments of $19.1 million.

Financing activities

Net cash provided by financing activities was $340.2 million for the nine months ended August 31, 2020 and consisted primarily of net proceeds from issuance of common stock related to our initial public offering in July 2020 and the sale of our Series D redeemable convertible preferred stock in March 2020.

Net cash provided by financing activities was insignificant for the nine months ended August 31, 2019.

Net cash provided by financing activities was $1.4 million for the three months ended February 28, 2021 and consisted primarily of proceeds from issuances under the 2020 ESPP.

Net cash provided by financing activities was insignificant for the three months ended February 29, 2020.

Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations as of August 31, 2020:

The following table summarizes our contractual obligations as of February 28, 2021:

Payments due by period

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We have not entered into any off-balance sheet arrangements as defined in Item 303 of Regulation S-K.

Emerging growth company and smaller reporting company status

We are an “emerging growth company,” or EGC, as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the JOBS Act).

Emerging Growth Company and Smaller Reporting Status

We are an “emerging growth company” (EGC), as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the JOBS Act).

We will remain an EGC until the earliest of:

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Subject to certain conditions set forth in the JOBS Act, if as an EGC we intend to rely on such exemptions, we are not required to, among other things:

(i) provide an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act);

(ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act;

(i) provide an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002;

(ii) provide all of the compensation disclosure that may be required of non-EGCs under the Dodd-Frank Wall Street Reform and Consumer Protection Act;

(iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);

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Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to EGCs, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Critical Accounting Policies and Estimates

generally accepted accounting principles (U.S.

Actual results may differ from these estimates under different assumptions or conditions.

Other than the updated policy on revenue recognition disclosed in Note 2, Summary of Significant Accounting Policies , to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there have been no significant changes to these policies for the three months ended February 28, 2021.

Recent Accounting Pronouncements

See Note 2, “Summary of significant accounting policies—Recent accounting pronouncements” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.

Quantitative and Qualitative Disclosures About Market Risk

As a “smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the Exchange Act), we are not required to provide this information.

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-Q

Item 2. Management’s Discussion and Analysis