Neoleukin Therapeutics, Inc. — Q2 2023 Form 10-Q
Entity note: The supplied filing is for Neoleukin Therapeutics, Inc. (ticker NLTX), not Neurogene Inc. Neurogene is the proposed merger partner; the merger had not closed as of the filing date. The reporting period ended June 30, 2023; the filing was signed August 10, 2023. Financial statements are unaudited and amounts below are in U.S. dollars.
Business context and reporting period
Neoleukin had discontinued development of its Phase 1 cancer candidate NL-201 and suspended research and development activities while pursuing strategic alternatives. Workforce reductions of approximately 40% in late 2022 and a further approximately 70% in March 2023 were completed by the end of Q2. The company reported seven full-time employees as of June 30.
On July 17, 2023, Neoleukin agreed to merge with privately held Neurogene. Subject to approvals and other customary conditions, the transaction was expected to close in Q4 2023. The combined company is expected to pursue Neurogene’s business and change its name to Neurogene Inc.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | No product revenue reported | No product revenue reported | No product revenue reported | No product revenue reported |
| Research and development expense | $(0.426) million | $10.956 million | $7.263 million | $21.656 million |
| General and administrative expense | $3.492 million | $4.915 million | $7.519 million | $9.580 million |
| Impairment of property and equipment | — | — | $3.418 million | — |
| Net loss | $(2.085) million | $(15.688) million | $(16.289) million | $(31.039) million |
| Net loss per share, basic and diluted | $(0.04) | $(0.28) | $(0.29) | $(0.56) |
| Net cash used in operating activities | Not stated quarterly | Not stated quarterly | $(17.082) million | $(25.385) million |
Q2 R&D expense was a net credit, which management attributed in part to clinical-trial wind-down credits and a gain on sale of laboratory equipment, as well as lower personnel and facility costs. Operating margins are not meaningful because the company had no product revenue.
At June 30, cash and cash equivalents were $31.110 million, short-term investments were $50.952 million, and working capital was $78.9 million. Cash, cash equivalents and short-term investments totaled approximately $82.1 million. Total assets were $94.005 million and total liabilities were $14.429 million. Liabilities consisted primarily of operating lease obligations; the filing reports no material conventional borrowings. The company had an accumulated deficit of $467.344 million.
Cash, cash equivalents and restricted cash declined by $7.147 million during the first half. Operating activities used $17.082 million; investing activities provided $10.295 million, mainly from investment maturities and property disposals; financing activities used $0.360 million. Neoleukin said its available resources were expected to fund planned operations for at least 12 months after the filing date, based on its then-current standalone plan, which did not include restarting R&D.
Material changes versus the prior comparable period
- First-half net loss narrowed to $16.289 million from $31.039 million, and operating cash use declined to $17.082 million from $25.385 million, primarily reflecting the wind-down of R&D and substantial workforce reductions.
- First-half R&D expense fell by $14.393 million year over year; G&A expense fell by $2.061 million. Q2 R&D expense was negative due to wind-down credits and equipment-sale gains.
- Interest income rose to $1.926 million for the first half from $0.207 million, reflecting higher rates and Treasury investments.
- The company recorded a $3.418 million property and equipment impairment in Q1 2023 following the decision to suspend R&D, and sold certain impaired equipment during Q2.
- Common shares outstanding increased to 44,021,429 from 42,648,346 at year-end 2022. In addition, 11,483,010 pre-funded warrants remained outstanding at June 30 and are included in the filing’s basic and diluted loss-per-share calculation.
Merger, outlook, risks and unusual items
- The merger agreement anticipates that pre-merger Neurogene holders will own approximately 84% and pre-merger Neoleukin holders approximately 16% of the combined company, on an as-converted basis, subject to adjustment based in part on Neoleukin’s net cash at closing. If net cash is below $66 million, the exchange ratio adjusts in Neurogene holders’ favor; the agreement includes a termination right if net cash falls below $60 million.
- Neurogene entered into agreements for a $95 million pre-closing financing, conditioned on the merger closing. Neoleukin stated that the combined company would still need substantial additional capital to fund operations and development.
- Neoleukin common stock and eligible pre-funded warrant holders are to receive contingent value rights (CVRs) tied to potential proceeds from certain legacy-asset dispositions, lease-cost reductions and a Washington sales-tax refund through June 30, 2029. There is no assurance that the CVRs will produce value.
- Specified merger termination circumstances could require Neoleukin to pay Neurogene a $3 million fee and/or up to $1 million of expenses; specified circumstances could require Neurogene to pay Neoleukin a $12 million fee and/or up to $1 million of expenses.
- Key transaction risks include failure to obtain stockholder approvals or satisfy closing conditions, transaction costs and management distraction, dilution, uncertain net-cash-based ownership allocation, and possible adverse effects if the merger fails. The company also disclosed risks around financing, continuing Nasdaq listing compliance and potential alternative outcomes, including dissolution.
- Neoleukin’s Nasdaq bid-price compliance period was extended to October 20, 2023; stockholders had approved a possible 1-for-2 to 1-for-5 reverse split, but the board had not acted on it as of the filing.
- The filing states there were no legal proceedings expected by management to have a material adverse effect. Management concluded disclosure controls and procedures were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the merger closed, whether required stockholder and regulatory approvals were obtained, and whether the $95 million Neurogene financing was completed.
- Neoleukin’s net cash at closing and the resulting exchange ratio, ownership split and any potential impact of the $60 million termination threshold.
- Actual cash burn and remaining liquidity relative to the stated 12-month runway, particularly because that estimate excluded restarting R&D and the combined company was expected to require additional capital.
- The status of the Nasdaq bid-price deficiency and any reverse-split action.
- The potential recoveries, costs and payment terms associated with the CVRs, including legacy assets, lease obligations and the Washington tax refund.
- The company’s share count and dilution exposure, including outstanding pre-funded warrants, merger securities, the pre-closing financing and any future fundraising.