NKARTA, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled "Risk Factors" included under Part I, Item 1A and elsewhere in this Annual Report. See "Cautionary Note Regarding Forward-Looking Statements" in this Annual Report.
Overview
We are a biopharmaceutical company focused on the discovery, development and commercialization of allogeneic, off-the-shelf engineered NK cell therapies to treat cancer. We currently have two lead product candidates, NKX101, a CAR NK product candidate targeting cells that display NKG2D ligands, and NKX019, a CAR NK product candidate targeting the CD19 antigen, in ongoing Phase 1 clinical trials. Both product candidates incorporate proprietary technologies that enable us to generate an abundant supply of NK cells, improve the persistence of these cells for sustained activity in the body, engineer enhanced NK cell recognition of tumor targets, enhance cell fitness and tumor microenvironment evasion, and freeze, store and thaw our engineered NK cells for the treatment of cancer. Our product candidates are designed to be allogeneic and off-the-shelf, which means they are produced using cells from a different person than the patient(s) being treated, and they are produced in quantity, then frozen and therefore available for treating patients without delay, unlike autologous cell therapies, which are derived from a patient's own cells. We believe that engineered NK cells have the potential to be an effective cancer therapy, be well tolerated, and avoid some of the toxicities observed with other cell therapies.
Our modular NK cell engineering platform is designed to address the limitations and challenges of current technologies for engineering T cells and NK cells and is a result of our internal expertise and deep understanding of NK cell biology. Our platform includes proprietary technologies for NK cell expansion, persistence, targeting and cryopreservation. All of our product candidates incorporate each of the four components of our technology platform, which we believe provides the best opportunity for achieving clinically meaningful results in our development program.
NKX101 is currently being studied in a multi-center Phase 1 clinical trial in
the
NKX019 is currently being studied in a multi-center Phase 1 clinical trial in
the
Under the CRISPR Agreement entered into in
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Since the commencement of our operations in 2015, we have devoted substantially
all of our resources in support of our product development efforts, hiring
personnel, raising capital to support and expand such activities and providing
general and administrative support for these operations. We have not generated
any revenue from product sales and have funded our operations primarily from our
initial public offering completed in
We expect our operating expenses to significantly increase as we continue to develop and seek regulatory approvals for our product candidates, engage in other research and development activities to expand our pipeline of product candidates, maintain and expand our intellectual property portfolio, and ultimately establish a commercial organization. We have also incurred increased operating expenses since becoming a public company, which we expect will further increase when we are no longer able to rely on certain "emerging growth company" exemptions we are afforded under the Jumpstart Our Business Startups Act (the "JOBS Act") as further described under "-JOBS Act" below. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials, and our expenditures on other research and development activities.
In
In the third quarter of 2022, we issued and sold 113,213 shares of our common
stock pursuant to the ATM Offering Program, resulting in net proceeds of
approximately
We will need substantial additional funding to support our continuing operations and pursue our long-term development strategy. We may seek additional funding through the issuance of our common stock, including through our ATM Offering Program, other equity or debt financing or collaborations or partnerships with other companies. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts for our product candidates and other research, development and manufacturing activities. We may not be able to raise additional capital on terms acceptable to us, or at all. Any failure to raise capital as and when needed would compromise our ability to execute on our business plan and may cause us to significantly delay, scale back or discontinue the development of some of our programs or curtail any efforts to expand our product pipeline.
Update on COVID-19, Macroeconomic Conditions, and Supply Disruptions
Our operations have been and may in the future be impacted by the COVID-19 pandemic, as well as by global and national economic and market conditions generally.
The COVID-19 pandemic has caused and may in the future cause disruptions in the conduct and enrollment of current and future clinical trials due to, among other things, bed shortages and staffing challenges at our treating hospitals. Hospitals may experience staffing challenges as a result of employee turnover and attrition, the current labor shortage, and/or personnel being pulled off clinical trials to care for patients with COVID-19. In addition, the COVID-19 pandemic has resulted in a significant increase in FDA workload, as well as the need to reprioritize the projects under review, and may do so again in the future. As a result, we may experience delays in FDA timelines along the course of the regulatory process.
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The continuing disruptions in the global supply chain due to COVID-19 outbreaks or other factors have also resulted in limited disruptions in the supply of our product candidates, as well as global supply shortages of certain materials that we and our CDMO partners use for research and cGMP manufacturing, such as certain raw materials, cell culture media, disposable plastics, and equipment. To the extent there is a subsequent outbreak of COVID-19, or if such an outbreak begins to significantly impact essential distribution systems or our third-party manufacturers, contractors or suppliers, we may experience further disruptions in our supply chain and operations with associated delays in the manufacturing and supply of our product candidates.
In addition, we could experience delays in the construction of our commercial-scale cGMP manufacturing facility and future headquarters due to the COVID-19 pandemic or current macroeconomic conditions. We saw significant inflation in construction costs in 2022, which has negatively affected the costs of constructing our new facility, and inflation may continue to impact our future construction and maintenance costs. In addition, global supply chain disruptions, including procurement delays and long lead times on certain materials, have impacted and could in the future further adversely impact the scheduled completion and/or costs of constructing our new facility.
A shortage of fludarabine, an agent commonly used in oncology, including in LD, was initially reported in 2022 and is ongoing. Fludarabine is used in our NKX101 and NKX019 clinical trials prior to treatment with our product candidates. Certain of our clinical trial sites have indicated that they are experiencing a shortage of fludarabine. Although we and our clinical sites are taking steps to try to mitigate any impact of the shortage on our clinical trials, enrollment has been delayed at certain of our clinical trial sites, and we could continue to experience enrollment delays due to the fludarabine shortage in the future.
We continuously monitor the effects of domestic and global events, including but not limited to the current and expected impact of the COVID-19 pandemic, inflation, labor shortages, and supply chain matters on our operations, including continued enrollment in the NKX101 and NKX019 clinical trials, as well as on our CROs, CDMOs, and clinical trial sites, to ensure that we remain responsive and adaptable to the dynamic changes in our operating environment.
Financial Operations Overview
Operating Expenses
Research and Development
Research and development costs consist primarily of costs incurred for the discovery and clinical development of our drug candidates, which include:
•
employee-related expenses, including salaries, related benefits, travel and share-based compensation expenses for employees engaged in research and development functions;
•
expenses incurred in connection with research, laboratory consumables, sponsored research, and preclinical studies;
•
expenses incurred in connection with conducting clinical trials including investigator grants and site payments for time and pass-through expenses and expenses incurred under agreements with CROs, other vendors or central laboratories and service providers engaged to conduct our trials;
•
the cost of consultants engaged in research and development related services;
•
the cost to manufacture drug product candidates for use in our preclinical studies and clinical trials;
•
facilities, depreciation and other expenses, which include allocated expenses for rent and maintenance of facilities, insurance and supplies;
•
costs related to regulatory compliance; and
•
the cost of annual license fees.
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We typically have various early-stage research and drug discovery projects as well as various product candidates undergoing clinical trials. Our internal resources, employees and infrastructure are not directly tied to any one research or drug discovery project and are typically deployed across multiple projects. As such, we do not maintain information regarding the costs incurred for these early-stage research and drug discovery programs on a project-specific basis.
We expense research and development costs as they are incurred. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.
The following table summarizes our research and development expenses for the
years ended
Year Ended December 31,
2022 2021
Direct external development program expenses:
NKX101 $ 19,708 $ 12,456
NKX019 12,527 7,466
CD70 1,839 645
NK+T 179 520
Program 5 241 -
Partner cost sharing (4,163 ) (2,310 )Unallocated internal research and development costs: Personnel related (including share-based compensation) 34,637 29,919 Others
25,929 14,716
Total research and development costs $ 90,897 $ 63,412 Research and development activities are central to our business model. There are numerous factors associated with the successful commercialization of any of our drug candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. In addition, future regulatory factors beyond our control may impact our clinical development programs. Drug candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our drug candidates. However, we expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities in the near term and in the future.
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The successful development of our drug candidates is highly uncertain. A change in the outcome of any of a number of variables with respect to the development of our drug candidates may significantly impact the costs and timing associated with the development of our drug candidates. A discussion of the risks and uncertainties that we face in the development and commercialization of our drug candidates can be found under Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K. We may never succeed in obtaining regulatory approval for any of our drug candidates.
General and Administrative
General and administrative expenses consist primarily of salaries and employee-related costs, including share-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services and facility-related costs.
We expect our general and administrative expenses will increase for the
foreseeable future to support our increased research and development activities
and to reflect increased costs associated with operating as a public company.
These increased costs will likely include increased expenses related to audit,
legal, regulatory and tax-related services associated with maintaining
compliance with exchange listing and
Other Income (Expense)
Interest Income
Interest income consists of interest earned on our cash, cash equivalents and short-term investments and adjustments related to amortization of purchase premiums and accretion of discounts of short-term investments.
Income Taxes
We are subject to corporate
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of net operating losses and credits before utilization. We have not performed an analysis to determine the limitation of our net operating loss carryforwards.
We estimate our income tax provision, including deferred tax assets and liabilities, based on management's judgment. We record a valuation allowance to reduce our deferred tax assets to the amounts that are more likely than not to be realized. We consider future taxable income, ongoing tax planning strategies and our historical financial performance in assessing the need for a valuation allowance. If we expect to realize deferred tax assets for which we have previously recorded a valuation allowance, we will reduce the valuation allowance in the period in which such determination is first made.
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We record liabilities related to uncertain tax positions in accordance with the
guidance that clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements by prescribing a minimum
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. As of
Results of Operations
The following table summarizes our results of operations for the periods
indicated (in thousands):
Year Ended December 31,
2022 2021 Change
Operating expenses:
Research and development 90,897 63,412 27,485
General and administrative 28,058 23,017 5,041
Total operating expenses 118,955 86,429 32,526
Loss from operations (118,955 ) (86,429 ) (32,526 )
Other income (expense), net:
Interest income 5,588 370 5,218
Other expense, net (470 ) (16 ) (454 )
Total other income (expense), net 5,118 354 4,764
Net loss $ (113,837 ) $ (86,075 ) $ (27,762 ) Research and development expenses
Research and development expenses were
General and administrative expenses
General and administrative expenses were
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Interest income
Interest income was
Liquidity and Capital Resources
Sources of Liquidity
As of
On
On
We have incurred net losses and negative cash flows from operations since our inception and anticipate that we will continue to incur net losses for the foreseeable future. We expect to incur substantial expenditures as we develop our product pipeline and advance our drug candidates through clinical development, undergo the regulatory approval process and, if approved, launch commercial activities. Specifically, in the near term we expect to incur substantial expenses relating to initiating and completing our clinical trials, the development and validation of our manufacturing processes, and other development activities. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.
We will need substantial additional funding to support our continuing operations and pursue our long-term development strategy. Until such time as we can generate significant revenue from sales of our drug candidates, if ever, we may seek additional funding through the issuance of our common stock, including through our ATM Offering Program, other equity or debt financing or collaborations or partnerships with other companies. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts for our product candidates and other research, development and manufacturing activities. We may not be able to raise additional capital on terms acceptable to us, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of our drug candidates or delay our efforts to expand our product pipeline. We may also be required to sell or license to other parties' rights to develop or commercialize our drug candidates that we would prefer to retain.
We believe that our current cash, cash equivalents, restricted cash and
short-term investments as of
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Cash Flows
The following table sets forth a summary of our cash flows for the periods indicated (in thousands):
Year Ended December 31,
2022 2021
Net cash used in operating activities $ (57,000 ) $ (67,927 ) Net cash provided by (used in) investing activities (184,689 ) 32,534 Net cash provided by financing activities
219,012 1,202
Net decrease in cash and cash equivalents $ (22,677 ) $ (34,191 )
Operating Activities
The net cash used in operating activities for the year ended
The net cash used in operating activities for the year ended
Investing Activities
The net cash used in investing activities for the year ended
The net cash provided by investing activities for the year ended
Financing Activities
Net cash provided by financing activities for the year ended
Net cash provided by financing activities for the year ended
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million associated with the filing of our Shelf Registration Statement and the establishment of our ATM Offering Program.
Funding Requirements
Based upon our current operating plans, we believe that our existing cash, cash equivalents, restricted cash and short-term investments will be sufficient to fund our operations for at least the next 12 months from the date of issuing this Annual Report on Form 10-K. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of testing therapeutic product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.
Our future capital requirements will depend on many factors, including:
•
the type, number, scope, progress, expansions, results, costs and timing of, our clinical trials and preclinical studies for our product candidates or other potential product candidates or indications which we are pursuing or may choose to pursue in the future;
•
the outcome, timing and costs of regulatory review of our product candidates;
•
the costs and timing of manufacturing for our product candidates, including commercial manufacturing and the costs associated with building our manufacturing facility;
•
our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting;
•
the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase;
•
the costs and timing of establishing or securing sales and marketing capabilities if any product candidate is approved;
•
our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products;
•
patients' willingness or ability to pay out-of-pocket for any approved products in the absence of coverage and/or adequate reimbursement from third-party payors;
•
the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements, including payments required for meeting regulatory and commercial milestones or sales based royalties;
•
the costs of obtaining, maintaining and enforcing our patent and other intellectual property rights; and
•
costs associated with any product candidates, products or technologies that we may in-license or acquire.
Until such time as we can generate significant revenue from sales of our therapeutic product candidates, if ever, we expect to finance our cash needs through public or private equity, including pursuant to the ATM Offering Program, or debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. We may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. There may also be instances where our ability to access a portion of our existing cash, cash equivalents and investments may be threatened due to financial conditions affecting the banking system and financial markets. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams or research programs or may have to
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grant licenses on terms that may not be favorable to us and may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.
Contractual Obligations and Commitments
In
In
In
In
In
In
In
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term of the lease for some of our existing facilities. These allowances are in
addition to the tenant improvement allowances of
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any
off-balance sheet arrangements as defined under the rules and regulations of the
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results
of operations are based on our financial statements, which have been prepared in
accordance with
Recently Issued Accounting Pronouncements
See Recent Accounting Pronouncements in Note 2 to our financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Indemnification
As permitted under
Segment Information
We have one business activity and operate in one reportable segment.
JOBS Act
We are an "emerging growth company" as described under the JOBS Act, and we could have taken advantage of an extended transition period for complying with new or revised accounting standards. This would have allowed us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have chosen irrevocably to "opt out" of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act").
We will remain an emerging growth company until the earliest of (i) the last day
of the fiscal year following the fifth anniversary of the consummation of our
IPO, (ii) the last day of the fiscal year in which we have total annual gross
revenue of at least
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"Exchange Act"), which would occur if the market value of our common stock held
by non-affiliates exceeded
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