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Item 2. Management’s Discussion and Analysis

2022-04-08 compared with 2021-10-14 · 110 added, 162 removed, 145 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 (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).

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, 2021 included in our Annual Report on Form 10‑K filed on January 28, 2022 (2021 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.

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 other challenging diseases.

We are a clinical stage biopharmaceutical company focused on the discovery, development and commercialization of small molecule and cell therapies based on the modulation of cellular protein levels as a novel treatment approach for cancer and other challenging diseases.

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 Casitas B-lineage lymphoma proto-oncogene B (CBL-B), an E3 ligase that regulates T cell activation.

Our wholly owned pipeline comprises four clinical stage drug candidates including 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 bioavailable 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.

We are currently enrolling patients in the Phase 1a portion of a Phase 1a/1b dose-escalation and cohort expansion study in patients with relapsed or refractory B-cell malignancies.

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 bioavailable CBL-B inhibitor for immuno-oncology indications.

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

We are actively recruiting in the Phase 1a portion of a Phase 1a/1b dose-escalation and cohort expansion study in patients with relapsed or refractory B-cell malignancies.

Our lead drug candidate from our E3 ligase inhibitor portfolio, NX-1607, for which we were awarded an Innovative Passport from the UK Medicines and Healthcare products Regulatory Agency to accelerate time to market and facilitate patient access to novel drugs to treat serious and life-threatening diseases, is an orally bioavailable CBL-B inhibitor for immuno-oncology indications.

We are currently enrolling patients in the Phase 1a portion of a Phase 1a/1b dose-escalation and cohort expansion study in patients with solid tumors and lymphomas.

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.

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

Beyond these clinical candidates, 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.

We are currently enrolling patients in the Phase 1 clinical trial for our first cell therapy candidate, DeTIL-0255, in patients with gynecologic cancers including ovarian cancer, endometrial cancer, and cervical cancer.

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

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

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

During the nine months ended August 31, 2021 and 2020, we incurred net losses of $79.5 million and $23.3 million, respectively.

As of August 31, 2021, we had an accumulated deficit of $183.2 million.

During the three months ended February 28, 2022 and 2021, we incurred net losses of $42.5 million and $24.3 million, respectively.

As of February 28, 2022, we had an accumulated deficit of $263.4 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.

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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 August 31, 2021, we had $465.4 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 $150.2 million, after deducting underwriting discounts and commissions of $9.6 million and expenses of $0.6 million.

As of February 28, 2022, we had $385.7 million in cash, cash equivalents and investments.

In July 2020, we closed our initial public offering (IPO) 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 $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 $150.2 million, after deducting underwriting discounts and commissions of $9.6 million and expenses of $0.6 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.

We will need to raise substantial additional capital to complete the development and commercialization of our drug candidates and pursue our long-term business plan.

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.

In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans.

We are subject to risks and uncertainties as a result of the current coronavirus (COVID-19) pandemic.

The COVID-19 pandemic, which is impacting worldwide economic activity, poses the risk that we or our employees, contractors, suppliers and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities.

While the impact of the COVID-19 pandemic to our current operations has been minimal, 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.

We are subject to risks and uncertainties as a result of the current COVID-19 pandemic.

The COVID-19 pandemic, including the resurgence of cases relating to the spread of new variants, is impacting worldwide economic activity and poses the risk that we or our employees, contractors, suppliers and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities.

While the impact of the COVID-19 pandemic to our current operations has been minimal as we have recently commenced clinical development of our four lead drug candidates, 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.

Collaborations and License Agreements

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

Since the signing of the Gilead Agreement, we have received payments of $13.5 million for research milestones and additional payments, including $2.5 million which was received in the third quarter of 2021.

Additionally, in August 2021, we recognized a research milestone, resulting in a $5.0 million additional payment, which will be received in the fourth quarter of 2021.

As of August 31, 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, from the signing of the Gilead Agreement to February 28, 2022, we received payments of $24.5 million for research milestones and additional payments.

Additionally, we recognized a research milestone in February 2022 and received a payment of $6.0 million in the second fiscal quarter of 2022.

As of February 28, 2022, 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.

We recognized collaboration revenue from the Gilead Agreement of $6.1 million and $12.5 million during the three and nine months ended August 31, 2021, respectively, and $2.1 million and $6.9 million during the three and nine months ended August 31, 2020, respectively.

As of August 31, 2021, there was $39.1 million of deferred revenue related to payments received by us under the Gilead Agreement.

We recognized collaboration revenue from the Gilead Agreement of $6.2 million and $2.7 million during the three months ended February 28, 2022 and 2021, respectively.

As of February 28, 2022 and November 30, 2021, there was $40.9 million and $41.1 million, respectively, of deferred revenue related to payments received by us under the Gilead Agreement.

Sanofi Collaboration and License Agreement

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

In January 2021, we entered into the First Sanofi Amendment to the collaboration agreement with Sanofi to modify the research term on all targets.

In December 2021, we entered into the Second Sanofi Amendment to the collaboration agreement with Sanofi to extend the substitution deadline on certain targets.

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.

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net sales and reduced milestone payments on such optioned products.

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

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

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.

Since the signing of the Sanofi Agreement, we have received a payment of $1.0 million for research milestones, all of which was received in the third quarter of 2021.

As of August 31, 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 $4.2 million and $9.8 million during the three and nine months ended August 31, 2021, respectively, and $2.0 million and $4.2 million during the three and nine months ended August 31, 2020, respectively.

As of August 31, 2021, there was $62.5 million of deferred revenue related to payments received by us under the Sanofi Agreement.

Formation of DeCART Therapeutics Inc.

In June 2020, we established DeCART Therapeutics Inc.

(DeCART), a wholly owned subsidiary, with an investment of $3.0 million and granted DeCART a license to three of our compounds, including NX-0255, for drug-enhanced isolation of T cells exclusively with respect to three CAR-T therapy targets.

DeCART expects to combine our protein modulation technologies with novel CAR-T therapies to address current immunotherapy limitations and improve outcomes for patients with cancer, and subsequently seek equity financing from third parties and become an independent operating entity.

DeCART granted to its external founders stock options to purchase shares of DeCART’s common stock equal to 14% of the fully diluted capitalization of DeCART.

Following either

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

In addition, from the signing of the Sanofi Agreement to February 28, 2022, we received a payment of $1.0 million for a research milestone.

Additionally, we recognized another research milestone in February 2022 and anticipate a payment of $2.0 million in the second fiscal quarter of 2022.

As of February 28, 2022, 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 $3.4 million and $ 2.3 million during the three months ended February 28, 2022 and 2021 , respectively .

As of February 28, 2022 and November 30, 2021 , there was $57.7 million and $59.2 million, respectively, of deferred revenue related to payments received by us under the Sanofi Agreement.

Components of Results of Operations

Collaboration Revenue

We have no products approved for commercial sale and to date have not generated any revenue and do not expect to generate any revenue from the sale of products in the near future.

We have no products approved for commercial sale and to date have not generated any revenue from the sale of products and do not expect to generate any revenue from the sale of products in the near future.

Our revenue to date has been generated from payments received pursuant to collaboration and license arrangements with strategic partners.

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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;

costs to acquire, develop and manufacture supplies for preclinical studies and clinical trials, including fees paid to third parties such as contract manufacturing organizations;

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

costs to acquire, develop and manufacture supplies for clinical trials and preclinical studies, including fees paid to third parties such as contract manufacturing organizations;

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 drug candidates into and through our preclinical studies and clinical trials, pursue regulatory approval of our drug candidates and expand our drug candidate pipeline.

We expect our research and development expenses to increase substantially for the foreseeable future as we conduct clinical trials for our drug candidates, continue to invest in research and development activities for discovery programs and preclinical studies, 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 drug candidates advance and continue to advance into clinical trials, our expenses will increase substantially and may become more variable.

To the extent that our drug candidates advance to and continue to advance through clinical trials, our expenses will continue increasing 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.

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

General and Administrative Expenses

General and A dministrative E xpenses

General and administrative expenses consist primarily of payroll and personnel expenses, including benefits and stock-based compensation, facilities-related expenses and professional fees for legal, consulting, and audit and tax services.

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

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 expect our general and administrative expenses to increase for the foreseeable future as we continue to improve 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.

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We expect interest income to vary each reporting period depending on our average bank deposit, money market fund, and investment balances during the period and market interest rates.

Provision (Benefit) for Income Taxes

The provision for income taxes primarily consists of reserves for unrecognized tax benefits and minimum state taxes.

Provision for Income Taxes

The provision for income taxes primarily consists of reserves for unrecognized tax benefits and state taxes.

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 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.

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 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 2021 Form 10-K.

There have been no significant changes to these policies for the three months ended February 28, 2022.

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.

Results of Operations

Comparison of the Three and Nine Months Ended August 31, 2021 and 2020

Three Months Ended August 31,

Nine Months Ended August 31,

(in thousands)

Comparison of the three months ended February 28, 2022 and 2021

Our results of operations for the three months ended February 28, 2022 and 2021 are summarized as follows (in thousands):

Three Months Ended

Collaboration revenue

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Loss before income taxes

Provision (benefit) for income taxes

Provision for income taxes

Collaboration Revenue

Our collaboration revenue for the three and nine months ended August 31, 2021 and 2020 is summarized as follows:

Three Months Ended August 31,

Nine Months Ended August 31,

(in thousands)

Our collaboration revenue for the three months ended February 28, 2022 and 2021 is summarized as follows (in thousands):

Three Months Ended

Total collaboration revenue

Our collaboration revenue increased by $6.2 million and $11.2 million during the three and nine months ended August 31, 2021, respectively, compared to the three and nine months ended August 31, 2020.

The increase was primarily due to the continued scale up of internal resources and external spending for our collaborations with Sanofi and Gilead as compared to the prior periods, resulting in a higher percentage of completion in the current periods.

The increase was also due to partial revenue recognized during the three and nine months ended August 31, 2021 for the achievement of certain preclinical milestones under our collaborations with Gilead and Sanofi.

Our collaboration revenue increased by $4.6 million during the three months ended February 28, 2022 compared to the three months ended February 28, 2021.

The increase was primarily due to the recognition of revenue as a cumulative catch up for activities satisfied in previous periods as we achieved certain research milestones under our collaborations with Gilead and Sanofi.

The increase was also due to increased effort resulting in a higher percentage of completion of performance obligations under our collaboration with Gilead and Sanofi in the current period.

Research and Development Expenses

Our research and development expenses for the three and nine months ended August 31, 2021 and 2020 are summarized as follows:

Three Months Ended August 31,

Nine Months Ended August 31,

(in thousands)

Our research and development expenses for the three months ended February 28, 2022 and 2021 are summarized as follows (in thousands):

Three Months Ended

Compensation and related personnel costs

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Supplies and contract research

Preclinical activities and contract manufacturing

Preclinical activities

Contract manufacturing

Clinical costs

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Total research and development expenses

Our research and development expenses increased by $12.0 million during the three months ended August 31, 2021, compared to the three months ended August 31, 2020.

The increase was primarily related to an increase of $4.1 million in compensation and related personnel costs attributable to an increase in headcount.

There was also an increase of $1.6 million in non-cash stock-based compensation expense.

There was also an increase of $1.9 million in supplies and contract research, an increase of $1.8 million in preclinical activities and contract manufacturing attributable to increases in our preclinical development activities and drug discovery research and an increase of $1.5 million in clinical costs due to ongoing clinical trial startup and patient enrollment.

Our research and development expenses increased by $33.9 million during the nine months ended August 31, 2021, compared to the nine months ended August 31, 2020.

The increase was primarily related to an increase of $11.3 million in compensation and related personnel costs attributable to an increase in headcount and an increase of $4.5 million in non-cash stock-based compensation expense.

There was also an increase of $9.4 million in supplies and contract research and an increase of $2.7 million in preclinical activities and contract manufacturing attributable to increases in our preclinical development activities and drug discovery research and an increase of $3.3 million in clinical costs due to the start of clinical trial startup and patient enrollment.

There was also an increase in facility and other costs of $2.6 million primarily due to expansion of leased premises and other costs associated with a growing company.

General and Administrative Expenses

Our general and administrative expenses increased by $4.0 million during the three months ended August 31, 2021, compared to the three months ended August 31, 2020.

The increase was primarily related to an increase of $1.2 million in compensation related expenses attributable to a higher headcount and an increase of $1.6 million in non-cash stock-based compensation expense.

There was also an increase of $0.9 million in consultant and other professional service expenses primarily related to becoming a public company.

Our general and administrative expenses increased by $12.3 million during the nine months ended August 31, 2021, compared to the nine months ended August 31, 2020.

The increase was primarily related to an increase of $3.6 million in compensation related expenses attributable to a higher headcount and an increase of $4.7 million in non-cash stock-based compensation expense.

There was also an increase of $3.0 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 $39 thousand and $0.5 million for the three and nine months ended August 31, 2021, respectively, and $0.7 million and $1.1 million for the three and nine months ended August 31, 2020, respectively, and is primarily related to interest earned on our deposits, money market funds and investments.

Provision (Benefit) for Income Taxes

An income tax benefit of $0.1 million and an income tax expense of $0.1 million was recognized for the three and nine months ended August 31, 2021, respectively.

No income tax was recognized during the three months ended August 31, 2020.

For the nine months ended August 31, 2020, an income tax benefit of $20.6 million was recognized 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.

Our research and development expenses increased by $20.1 million during the three months ended February 28, 2022 compared to the three months ended February 28, 2021.

There was an increase in compensation and related personnel costs and in non-cash stock-based compensation expense of $7.6 million and $2.3 million, respectively, that were attributable to higher headcount.

There was also an increase in cost related to supplies and contract research and preclinical activities of $4.4 million and $0.6 million, respectively, as we continued to expand our preclinical development activities and drug discovery research, and an increase in costs related to contract manufacturing and clinical of $1.6 million and $2.0 million, respectively, primarily due to ongoing clinical trial startup and patient enrollment.

General and A dministrative E xpenses

Our general and administrative expenses increased by $2.7 million during the three months ended February 28, 2022 compared to the three months ended February 28, 2021.

There was an increase of $0.4 million in compensation related expenses and an increase of $1.1 million in non-cash stock-based compensation expense, both of which were primarily attributable to higher headcount.

There was also an increase of $1.1 million in professional service expenses, including legal and accounting expenses related to infrastructure improvements.

Liquidity and Capital Resources

Sources of Liquidity

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.

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

333-239651) relating to our IPO of common stock became effective.

The IPO 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 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 primarily been funded through the gross proceeds from equity offerings of $546.0 million and proceeds from collaborations of $289.5 million.

Net proceeds from the IPO were $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 $150.2 million, after deducting underwriting discounts and commissions of $9.6 million and expenses of $0.6 million.

To date, our operations have primarily been funded through the net proceeds from equity offerings of $536.4 million and proceeds from collaborations of $306.5 million.

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

As of August 31, 2021, we had $465.4 million in cash, cash equivalents and investments.

As of February 28, 2022, we had $385.7 million in cash, cash equivalents and investments.

Funding Requirements

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

We expect that our existing cash, cash equivalents and investments are sufficient to meet our cash requirements and continue operating activities, including the clinical trials of our drug candidates NX‑2127, NX‑1607, NX‑5948 and DeTIL‑0255 and the expansion of our intellectual property portfolio and infrastructure, for at least the next 12 months.

We will need substantial additional funding to support our continuing operations and pursue our long-term business plan.

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We agreed to pay Piper Sandler a commission of 3% of the gross sales price of any shares sold pursuant to the Equity Distribution Agreement.

As of August 31, 2021, we have not sold any shares of common stock pursuant to the Equity Distribution Agreement and $150.0 million in shares remained available under the Equity Distribution Agreement.

Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, which may include funding for working capital, financing capital expenditures, research and development, clinical trials, marketing and distribution efforts, and if opportunities arise, for acquisitions or strategic alliances.

Pending such uses, we may invest the net proceeds in interest-bearing securities.

In addition, we may conduct concurrent or other financings at any time.

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 drug candidates NX-2127, NX-1607, NX-5948 and DeTIL-0255 and other drug candidates, and any future clinical development of such drug candidates;

As of February 28, 2022, we have not sold any shares of common stock pursuant to the Equity Distribution Agreement and $150.0 million in shares remained available under the Equity Distribution Agreement.

Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we intend to use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, which may include funding research, clinical and process development, increasing our working capital, reducing indebtedness, acquisitions or investments in businesses, products or technologies that are complementary to our own and capital expenditures.

Pending such uses, we may invest the net proceeds in marketable securities that may include investment-grade interest-bearing securities, money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S.

In the long term, our ability to support our working capital and capital expenditure requirements will depend on many factors, including the following:

the progress, costs and results of our planned and ongoing Phase 1 clinical trials for our lead drug candidates NX-2127, NX-1607, NX-5948 and DeTIL-0255, 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;

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If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

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

Nine Months Ended August 31,

(in thousands)

Cash (used in) provided by operating activities

Cash used in investing activities

Cash provided by financing activities

Net increase in cash, cash equivalents and restricted cash

Operating activities

Net cash used in operating activities was $53.5 million for the nine months ended August 31, 2021 and consisted of our net loss of $79.5 million, offset by a decrease in net assets of $11.8 million and non-cash adjustments of $14.2 million.

The decrease in net assets consisted primarily of an increase in deferred revenue of $8.1 million, a decrease in income tax receivable of $3.6 million due to refunds received, an increase in accrued and other liabilities of $2.8 million and a decrease in contract assets of $2.5 million due to payments received under the Gilead Agreement, offset by an increase in prepaid expenses and other assets of $6.0 million primarily due to increased prepaid clinical costs.

Non-cash adjustments primarily consisted of stock-based compensation expenses of $11.0 million and depreciation and amortization expenses of $2.0 million.

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, offset by an increase in prepaid expenses and other assets of $4.4 million and an increase in income tax receivable of $3.9 million.

Non-cash adjustments primarily consisted of stock-based compensation expenses of $1.8 million and depreciation and amortization expenses of $1.5 million.

Investing activities

Net cash used in investing activities was $71.7 million for the nine months ended August 31, 2021 and consisted of the purchase of investments of $257.8 million and the purchase of property and equipment of $4.8 million, offset by the sale of investments of $7.0 million and the maturity of investments of $183.9 million.

Net cash used in investing activities was $129.8 million for the nine months ended August 31, 2020 and consisted of the purchase of investments of $141.1 million and the purchase of property and equipment of $3.6 million, offset by the maturity of investments of $14.9 million.

Financing activities

Net cash provided by financing activities was $153.4 million for the nine months ended August 31, 2021 and consisted primarily of proceeds from the issuance of common stock from the follow-on offering in March 2021.

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 the 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.

Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations as of August 31, 2021:

As of February 28, 2022, our material cash requirements include the following contractual and other obligations (in thousands):

Payments due by period

(in thousands)

Less than 1 year

More than 5 years

Operating lease obligations

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These payments are not included in the table above.

Off-Balance Sheet Arrangements

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 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:

(i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more;

(ii) the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering;

(iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years;

or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC, which generally is when a company has more than $700.0 million in market value of its stock held by non-affiliates as of the prior May 31, has been a public company for at least 12 months and has filed one annual report on Form 10-K.

Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an EGC or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, the information we provide may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act.

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;

(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);

and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation.

As of November 30, 2021, we will lose our status as an EGC and will no longer be able to take advantage of the exemptions from various reporting requirements beginning with our annual report for the fiscal year ending November 30, 2021 to be filed in 2022.

We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates is less than $700.0 million as of the prior May 31 and our annual revenue is less than $100.0 million during the most recently completed fiscal year.

We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250.0 million as of the prior May 31 or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million as of the prior May 31.

If we are a smaller reporting company at the time we cease to be an EGC, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.

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.

reported revenue generated and expenses incurred during the reporting periods.

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 and nine months ended August 31, 2021.

Recent Accounting Pronouncements

We did not have during the periods presented, and we do not currently have, any commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.

Our cash flows for the three months ended February 28, 2022 and 2021 are summarized as follows (in thousands):

Three Months Ended February 28,

Cash (used in) provided by operating activities

Cash (used in) provided by investing activities

Cash provided by financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash

Operating activities

Net cash used in operating activities was $42.6 million for the three months ended February 28, 2022 and consisted of a net loss of $42.5 million and an increase in net assets of $9.0 million, offset by non-cash adjustments of $8.9 million.

The increase in net assets consisted primarily of a decrease in accrued expenses and other liabilities of $3.3 million primarily related to the payment of annual incentive compensation, an increase in contract assets of $2.0 million related to a milestone recognized pursuant to the Sanofi Agreement, a decrease in deferred revenue of $1.6 million and an increase in prepaid expenses and other assets of $1.5 million primarily related to increased prepaid clinical and contract manufacturing costs.

Non-cash adjustments primarily consisted of stock-based compensation expenses of $6.1 million and amortization of operating lease right-of-use assets of $1.3 million.

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.

0 million and non-cash adjustments of $ 4.3 million, offset by a 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 , amortization of operating lease right-of-use assets of $0.7 million and depreciation and amortization expenses of $0.6 million.

Investing activities

Net cash used in investing activities was $40.0 million for the three months ended February 28, 2022 and consisted of the maturity of investments of $58.7 million, offset by the purchase of investments of $15.2 million and the purchase of property and equipment of $3.5 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.

Financing activities

Net cash provided by financing activities was $1.5 million for the three months ended February 28, 2022 and consisted primarily of proceeds from the issuance of common stock under our Employee Stock Purchase Plan.

Net cash provided by financing activities was $1.4 million for the three months ended February 28, 2021 and consisted primarily of proceeds from the issuance of common stock under our Employee Stock Purchase Plan.

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.

Our market risks, as of February 28, 2022, have not changed materially from those discussed in “Item 7A.

Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended November 30, 2021, filed with the SEC on January 28, 2022.

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