Neurogene Inc. (NGNE) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and other factors. We discuss many of these risks, uncertainties and other factors in this Annual Report on Form 10-K in greater detail under the heading “Item 1A—Risk Factors.” We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

We are a biopharmaceutical company creating next generation immunotherapies for cancer, inflammation, and autoimmunity using de novo protein design technology. We use sophisticated computational methods to design proteins that demonstrate specific pharmaceutical properties that provide potentially superior therapeutic benefit over native proteins. Our lead product candidate, NL-201, is a combined IL-2 and IL-15 agonist designed to eliminate alpha receptor binding.

Results of Operations

Operating Loss

The following table summarizes our operating expenses for the years ended December 31, 2021 and 2020 (in thousands):

Research and Development Expenses

Research and development expenses consists primarily of costs incurred under arrangements with third parties, such as CROs, manufacturing organizations, and consultants, personnel related costs (including stock-based compensation and travel expenses), facility-related costs, and lab supplies.

Research and development expenses for the year ended December 31, 2021 were $39.2 million compared to $24.3 million for the year ended December 31, 2020. The increase in research and development expenses during the year ended December 31, 2021 was primarily due to increased expenses incurred from clinical trial activities related to our lead product candidate, NL-201, personnel-related costs, and in connection with the advancement of other Neoleukin technologies. The increase was also due to facility-related costs associated with the build-out of our new headquarters and laboratory in Seattle, Washington.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel related costs (including stock-based compensation and travel expenses), facility-related costs, insurance, and professional fees for consulting, legal, and accounting services.

For the year ended December 31, 2021, general and administrative expenses were $21.5 million compared to $17.2 million for the year ended December 31, 2020. The increase in general and administrative expenses during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to increases in personnel-related costs.

Gain on sale of Aquinox Canada

The gain relates to the sale of Aquinox Canada in July 2020. The gain of $7.8 million recognized is the total consideration of $8.2 million, less transaction costs of $0.4 million.

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Other income, net (in thousands)

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

Liquidity and Capital Resources

Since our inception, we have incurred net losses and negative cash flows from our operations and relied upon sales of common and preferred stock to fund our operations. Our operating activities used $47.6 million and $24.6 million of cash during the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $393.5 million, working capital of $135.4 million, and cash and cash equivalents of $142.5 million. We believe that our existing capital resources will be sufficient to fund our operations into the second half of 2023.

On November 4, 2021, we entered into an ATM “at-the-market” Equity Offering Sales Agreement, or the Sales Agreement, with BofA Securities, Inc.,or BofA, pursuant to which we may, but are not obligated to, offer and sell, from time to time, shares of our common stock with an aggregate offering price up to $40.0 million through BofA, as sales agent. No sales of common stock have been made pursuant to this Sales Agreement to date.

Cash Flows

The following table summarizes our cash flows for the years ended December 31, 2021 and 2020 (in thousands):

Net cash used in operating activities

Net cash used in operating activities was $47.6 million for the year ended December 31, 2021 compared to $24.6 million for the year ended December 31, 2020. Net cash used in operating activities for the year ended December 31, 2021 increased compared to the year ended December 31, 2020 due to an increase in operating expenses resulting primarily from expenses incurred in developing our lead product candidate, NL-201, and in connection with the advancement of other Neoleukin technologies. The increase is also due to personnel-related costs and facility-related costs associated with the build-out of our new headquarters in Seattle, Washington.

Net cash used in investing activities

Net cash used in investing activities was $3.3 million for the year ended December 31, 2021 and consisted primarily of acquiring laboratory equipment and office furnishings. Net cash used in investing activities of $2.2 million in the year ended December 31, 2020 consisted primarily of purchases of laboratory and IT equipment.

Net cash provided by financing activities

Net cash provided by financing activities was $0.7 million for the year ended December 31, 2021 compared to $77.1 million in the year ended December 31, 2020. For the year ended December 31, 2021, net cash provided by financing activities consisted primarily of proceeds from stock option exercises and our Employee Stock Purchase Plan. For the year December 31, 2020, net cash provided by financing activities consisted primarily of net proceeds received in our offering of common stock and pre-funded warrants of $71.3 million, net of underwriting discounts and commissions and offering costs.

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Operating and Capital Expenditure Requirements

We have not generated product revenue or achieved profitability since our inception and we expect to continue to incur net losses for the foreseeable future. As of December 31, 2021, we had approximately $142.5 million in cash and cash equivalents. Based on our current business plans, we believe that our existing cash and cash equivalents will be sufficient to fund our planned operations into the second half of 2023. However, our future capital requirements and the period for which we expect our existing resources to support our operations, fund expansion, develop new or enhanced products, or otherwise respond to competitive pressures, may vary significantly from our expectation and we may need to seek additional funds sooner than planned. Unless and until we generate sufficient revenue to be profitable, we will seek to fund our operations through public or private equity or debt financings or other sources. If we raise additional funds through the issuance of convertible debt securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a negative impact on our business, results of operations, financial condition, cash flows and future prospects. Our future capital requirements will depend on many factors, including:

•the number and characteristics of any future product candidates we develop or may acquire;

•the scope, progress, results and costs of researching and developing our product candidates or any future product candidates, and conducting preclinical studies and clinical trials;

•the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates;

•the cost of manufacturing our future product candidates and any products that may achieve regulatory approval;

•the cost of commercialization activities if any future product candidates are approved for sale, including marketing, sales and distribution costs;

•the timing, receipt and amount of sales of, or royalties on, future approved products, if any;

•our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;

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

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

•the expenses needed to attract and retain skilled personnel; and

•the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation.

Please see Item 1A of this Annual Report on Form 10-K titled “Risk Factors” for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

The following is a summary of our long-term contractual cash obligations as of December 31, 2021 (in thousands):

1.Operating lease obligations reflect remaining minimum commitments for our office and laboratory spaces in Seattle, Washington. Please see Note 6, Leases in the Notes to Consolidated Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K for additional information pertaining to operating lease commitments.

We enter into contracts in the normal course of business with CROs for clinical and preclinical research studies, external manufacturers for product for use in our clinical trials, and other research supplies and other services as part of our operations. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments.

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Milestone, Royalty-Based, and Other Commitments

We have an exclusive license agreement with UW, under which UW (on behalf of itself and Stanford University) granted us an exclusive worldwide license under certain patent rights, to make, have made, use, offer to sell, sell, offer to lease or lease, import, export or otherwise offer to dispose of licensed products in all fields of use, and a nonexclusive worldwide license to use certain know-how. The foregoing licenses are sublicensable without UW’s consent, subject to certain limited conditions.

As consideration for the licensed rights, we issued shares of common stock to UW, which upon the Merger were exchanged for 188,974 shares of our common stock and 4,197 shares of our non-voting convertible preferred stock. Such convertible preferred shares were subsequently converted into 419,700 shares of our common stock in November 2019.

Furthermore, we are required to pay; (i) an annual maintenance fee starting in January 2022 (but excluding any year in which minimum annual royalties are paid); (ii) up to $0.9 million in combined development and regulatory milestone payments with respect to each distinct class of licensed product; (iii) up to $10.0 million in combined commercial milestone payments based on cumulative net sales of licensed products within each distinct class of licensed products, beginning when cumulative net sales of the class of licensed products equals or exceeds $100.0 million, with the majority payable when cumulative net sales of the class of licensed products equals or exceeds $1.0 billion; (iv) a low single-digit royalty on net sales of licensed products sold by us and our sublicensees, which may be subject to reductions, and subject to minimum annual royalty payments following the first commercial sale of a licensed product; (v) a certain percentage of any sublicense consideration (other than royalties) we receive from sublicensees, based on the stage of development at the time the sublicense is executed; and (vi) a certain percentage of consideration we receive from an acquisition of us or our assets based on the stage of development at the relevant time. We are obligated to pay royalties on a country-by-country basis until the expiration of the last valid claim within the licensed patent rights in such country.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of these consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. We evaluate those estimates and judgments on an ongoing basis. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Research and Development Expenses

Research and development costs are charged to expense as incurred and include, but are not limited to, employee-related expenses, including salaries, benefits, and stock-based compensation, expenses incurred under agreements with CROs that conduct clinical trials and preclinical studies, the cost of acquiring, developing and manufacturing clinical trial materials, costs incurred in relation to purchase of technology licenses and patent rights, facilities and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, and other supplies and costs associated with clinical trials, preclinical activities, and regulatory operations.

Development costs are expensed in the period incurred unless we believe a development project meets generally accepted accounting criteria for deferral and amortization. No product development expenditures have been deferred to date. We record costs for certain development activities based on our evaluation of the progress to completion of specific tasks or information provided to us by our vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid or accrued liabilities.

Stock-Based Compensation

We measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period. Share-based payments vest either upon service or performance conditions. We account for forfeitures as they occur. All share-based payments to employees are recognized in the consolidated financial statements based upon their respective grant-date fair values.

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We estimate the fair value of options granted using the Black-Scholes option pricing model. This approximation uses assumptions regarding a number of inputs that required us to make significant estimates and judgments, including the expected term of the options. We also make decisions regarding the method of calculating the expected stock price volatility and the risk-free interest rate used in the model. The expected volatility assumption is based on industry peer information and we expect to continue to do so until it has adequate and relevant historical volatility of its common stock. Additionally, because we have no significant history to calculate the expected term, the simplified method calculation is used.

There is inherent uncertainty in our forecasts and projections and, if we had made different assumptions and estimates than those described previously, the amount of our stock-based compensation expense, net loss and net loss per common stock amounts could have been materially different.

Recent Accounting Pronouncements

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