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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________
FORM 10-Q
___________________________________________________________________
(Mark One)
x 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
Commission File No. 001-38551
NEON THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
___________________________________________________________________
Delaware
 
46-3915846
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
40 Erie St., Suite 110
Cambridge, MA
 
02139
(Address of principal executive offices)
 
(Zip Code)
___________________________________________________________________
(617) 337-4701
(Registrant’s telephone number, including area code)
___________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trade Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value per share
NTGN
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o
 
Accelerated Filer o
Non-Accelerated Filer x
 
Smaller Reporting Company x
Emerging Growth Company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x
As of November 8, 2019, there were 28,339,196 shares of common stock, $0.001 par value per share, outstanding.
 


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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:
the success, cost and timing of our product development activities and clinical trials, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available, and our research and development programs;
our ability and the potential to successfully manufacture and supply our product candidates for clinical trials and for commercial use, if approved;
the potential for our identified research priorities to advance our platform, programs or product candidates;
the ability and willingness of our third-party research institution collaborators to continue research and development activities relating to our product candidates;
our ability to obtain and maintain regulatory approval of our lead product candidate, NEO-PV-01, and any other product candidates, and any related restrictions, limitations or warnings in the label of an approved product candidate;
the ability to license additional intellectual property relating to our product candidates and to comply with our existing license agreements;
our ability to commercialize our products in light of the intellectual property rights of others;
our ability to obtain funding for our operations, including funding necessary to complete further development and commercialization of our product candidates;
our plans to research and develop our product candidates;
the commercialization of our product candidates, if approved;
our ability to attract collaborators with development, regulatory and commercialization expertise;
future agreements with third parties in connection with the commercialization of our product candidates and any other approved product;
the size and growth potential of the markets for our product candidates, and our ability to serve those markets;
the rate and degree of market acceptance of our product candidates;
regulatory developments in the United States and foreign countries;
our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;
our ability to produce our products or product candidates with advantages in turnaround times or manufacturing cost in an economically viable manner;
the success of competing therapies that are or may become available and changes in the standard of care;
our ability to attract and retain key scientific or management personnel;
the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
our ability to continue as a going concern;
the impact of laws and regulations;
our use of the proceeds from our initial public offering and our ongoing at-the-market offering program;
our expectations regarding the time during which we will be an “emerging growth company” under the Jumpstart Our Business Startups Act; and
our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates.
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the Securities and Exchange Commission, or the SEC, could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
NOTE REGARDING TRADEMARKS
Neon Therapeutics, Inc. is the owner of the NEON THERAPEUTICS, RECON, NEO-STIM, Precision NEO-STIM and MAPTAC trademarks, as well as certain other trademarks, including design versions of some of these trademarks.  The symbols ™ and ® are not used in connection with the presentation of these trademarks in this report and their absence does not indicate a lack of trademark rights.  Certain other trademarks used in this report are the property of third-party trademark owners and may be presented with or without trademark references.

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
 
September 30, 2019
 
December 31, 2018
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
44,278

 
$
52,700

Marketable securities

 
50,611

Prepaid expenses and other current assets
2,036

 
2,116

Total current assets
46,314

 
105,427

Operating lease, right-of-use assets
7,848

 

Property and equipment, net
7,670

 
8,205

Other long-term assets
485

 
456

Total assets
$
62,317

 
$
114,088

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,935

 
$
4,268

Accrued expenses
6,968

 
8,422

Operating lease liabilities, current
1,196

 

Total current liabilities
10,099

 
12,690

Operating lease liabilities, net of current portion
6,875

 

Other liabilities
9

 
149

Total liabilities
16,983

 
12,839

Commitments and contingencies (Note 8)


 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 150,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 28,339,196 and 28,314,274 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
28

 
28

Additional paid-in capital
281,004

 
275,058

Accumulated other comprehensive loss

 
(75
)
Accumulated deficit
(235,698
)
 
(173,762
)
Total stockholders’ equity
45,334

 
101,249

Total liabilities and stockholders’ equity
$
62,317

 
$
114,088

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(In thousands, except per share amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Operating expenses:
 

 
 

 
 

 
 

Research and development
$
14,120

 
$
14,441

 
$
47,027

 
$
42,403

General and administrative
5,134

 
4,612

 
16,122

 
12,524

Total operating expenses
19,254

 
19,053

 
63,149

 
54,927

Loss from operations
(19,254
)
 
(19,053
)
 
(63,149
)
 
(54,927
)
Other income (expense), net
 
 
 
 
 
 
 
Interest income
278

 
672

 
1,252

 
1,136

Other expense
(4
)
 
(10
)
 
(39
)
 
(20
)
Total other income, net
274

 
662

 
1,213

 
1,116

Net loss
(18,980
)
 
(18,391
)
 
(61,936
)
 
(53,811
)
Accretion of redeemable convertible preferred stock to redemption value

 

 

 
(6,371
)
Net loss attributable to common stockholders
$
(18,980
)
 
$
(18,391
)
 
$
(61,936
)
 
$
(60,182
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.68
)
 
$
(0.67
)
 
$
(2.23
)
 
$
(5.55
)
Weighted average common shares outstanding, basic and diluted
27,935,073

 
27,357,812

 
27,792,148

 
10,833,984

 
 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
 
Net loss
$
(18,980
)
 
$
(18,391
)
 
$
(61,936
)
 
$
(53,811
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gains (losses) on marketable securities

 
(22
)
 
75

 
(11
)
Total other comprehensive income (loss)

 
(22
)
 
75

 
(11
)
Comprehensive loss
$
(18,980
)
 
$
(18,413
)
 
$
(61,861
)
 
$
(53,822
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK, CONTINGENTLY REDEEMABLE RESTRICTED COMMON STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
(In thousands, except share amounts)
 
Redeemable Convertible
Preferred Stock
 
Contingently
Redeemable
Restricted
Common Stock
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
Balance at December 31, 2018

 
$

 
$

 
 
28,314,274

 
$
28

 
$
275,058

 
$
(75
)
 
$
(173,762
)
 
$
101,249

Stock-based compensation expense

 

 

 
 

 

 
1,729

 

 

 
1,729

Exercise of stock options

 

 

 
 
17,070

 

 
45

 

 

 
45

Vesting of restricted common stock

 

 

 
 

 

 
5

 

 

 
5

Unrealized gains on marketable securities

 

 

 
 

 

 

 
67

 

 
67

Net loss

 

 

 
 

 

 

 

 
(21,024
)
 
(21,024
)
Balance at March 31, 2019

 
$

 
$

 
 
28,331,344

 
$
28

 
$
276,837

 
$
(8
)
 
$
(194,786
)
 
$
82,071

Stock-based compensation expense

 

 

 
 

 

 
2,054

 

 

 
2,054

Issuance of restricted common stock

 

 

 
 
25,000

 

 

 

 

 

Vesting of restricted common stock

 

 

 
 

 

 
5

 

 

 
5

Unrealized gains on marketable securities

 

 

 
 

 

 

 
8

 

 
8

Net loss

 

 

 
 

 

 

 

 
(21,932
)
 
(21,932
)
Balance at June 30, 2019

 
$

 
$

 
 
28,356,344

 
$
28

 
$
278,896

 
$

 
$
(216,718
)
 
$
62,206

Stock-based compensation expense

 

 

 
 

 

 
2,034

 

 

 
2,034

Exercise of stock options

 

 

 
 
27,062

 

 
70

 

 

 
70

Cancellation of restricted common stock

 

 

 
 
(44,210
)
 

 

 

 

 

Vesting of restricted common stock

 

 

 
 

 

 
4

 

 

 
4

Net loss

 

 

 
 

 

 

 

 
(18,980
)
 
(18,980
)
Balance at September 30, 2019

 
$

 
$

 
 
28,339,196

 
$
28

 
$
281,004

 
$

 
$
(235,698
)
 
$
45,334

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK, CONTINGENTLY REDEEMABLE RESTRICTED COMMON STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED) - CONTINUED
(In thousands, except share amounts)
 
Redeemable Convertible
Preferred Stock
 
Contingently
Redeemable
Restricted
Common Stock
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Stockholders’
Equity (Deficit)
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
Balance at December 31, 2017
93,222,418

 
$
174,895

 
$
355

 
 
3,302,927

 
$
3

 
$

 
$
(13
)
 
$
(93,562
)
 
$
(93,572
)
Stock-based compensation expense

 

 
99

 
 

 

 
1,551

 

 

 
1,551

Accretion of redeemable convertible preferred stock to redemption value

 
3,186

 

 
 

 

 
(1,557
)
 

 
(1,629
)
 
(3,186
)
Vesting of restricted common stock

 

 

 
 

 

 
6

 

 

 
6

Unrealized gains on marketable securities

 

 

 
 

 

 

 
5

 

 
5

Net loss

 

 

 
 

 

 

 

 
(16,520
)
 
(16,520
)
Balance at March 31, 2018
93,222,418

 
$
178,081

 
$
454

 
 
3,302,927

 
$
3

 
$

 
$
(8
)
 
$
(111,711
)
 
$
(111,716
)
Stock-based compensation expense

 

 
111

 
 

 

 
1,311

 

 

 
1,311

Accretion of redeemable convertible preferred stock to redemption value

 
3,185

 

 
 

 

 
(1,548
)
 

 
(1,638
)
 
(3,186
)
Conversion of redeemable convertible preferred stock and contingently redeemable restricted common stock to common stock
(93,222,418
)
 
(181,266
)
 
(565
)
 
 
18,644,462

 
19

 
181,812

 

 

 
181,831

Issuance of common stock upon completion of initial public offering, net of commissions, underwriting discounts and offering costs

 

 

 
 
6,250,000

 
6

 
89,661

 

 

 
89,667

Exercise of stock options

 

 

 
 
84,444

 

 
228

 

 

 
228

Cancellation of restricted common stock

 

 

 
 
(2,625
)
 

 

 

 

 

Vesting of restricted common stock

 

 

 
 

 

 
6

 

 

 
6

Unrealized gains on marketable securities

 

 

 
 

 

 

 
6

 

 
6

Net loss

 

 

 
 

 

 

 

 
(18,899
)
 
(18,899
)
Balance at June 30, 2018

 
$

 
$

 
 
28,279,208

 
$
28

 
$
271,470

 
$
(2
)
 
$
(132,248
)
 
$
139,248

Stock-based compensation expense

 

 

 
 

 

 
1,643

 

 

 
1,643

Finalization of offering costs related to initial public offering

 

 

 
 

 

 
253

 

 

 
253

Exercise of stock options

 

 

 
 
44,209

 

 
171

 

 

 
171

Cancellation of restricted common stock

 

 

 
 
(10,000
)
 

 

 

 

 

Vesting of restricted common stock

 

 

 
 

 

 
5

 

 

 
5

Unrealized losses on marketable securities

 

 

 
 

 

 

 
(22
)
 

 
(22
)
Net loss

 

 

 
 

 

 

 

 
(18,391
)
 
(18,391
)
Balance at September 30, 2018

 
$

 
$

 
 
28,313,417

 
$
28

 
$
273,542

 
$
(24
)
 
$
(150,639
)
 
$
122,907

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine Months Ended
September 30,
 
2019
 
2018
Cash flows from operating activities:
 

 
 

Net loss
$
(61,936
)
 
$
(53,811
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization expense
1,266

 
1,066

Non-cash lease expense
880

 

Net accretion (amortization) of premiums and discounts on marketable securities
5

 
(4
)
Stock-based compensation expense
5,817

 
4,715

Loss on disposal of property and equipment
39

 
21

Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other current assets
80

 
(493
)
Other long-term assets
(29
)
 
125

Accounts payable
(2,078
)
 
490

Accrued expenses and other liabilities
(1,212
)
 
2,349

Lease liabilities
(781
)
 

Net cash used in operating activities
(57,949
)
 
(45,542
)
Cash flows from investing activities:
 
 
 
Purchases of marketable securities

 
(72,939
)
Sales and maturities of marketable securities
50,681

 
33,250

Purchases of property and equipment
(1,267
)
 
(2,608
)
Net cash provided by (used in) investing activities
49,414

 
(42,297
)
Cash flows from financing activities:
 
 
 
Proceeds from initial public offering of common stock, net of commissions and underwriting discounts

 
93,000

Payment of initial public offering costs

 
(3,030
)
Proceeds from exercise of stock options
115

 
399

Repurchase of unvested restricted common stock
(2
)
 
(1
)
Net cash provided by financing activities
113

 
90,368

Net (decrease) increase in cash, cash equivalents and restricted cash
(8,422
)
 
2,529

Cash, cash equivalents and restricted cash, beginning of period
53,156

 
58,857

Cash, cash equivalents and restricted cash, end of period
$
44,734

 
$
61,386

 
 
 
 
Supplemental disclosure of non-cash items:
 
 
 
Accretion of redeemable convertible preferred stock to redemption value
$

 
$
6,371

Purchases of property and equipment included in accounts payable and accrued expenses
$

 
$
472

Conversion of redeemable convertible preferred stock and contingently redeemable restricted common stock to common stock upon closing of the initial public offering
$

 
$
181,831

The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances as of each of the periods shown above:
 
September 30,
 
2019
 
2018
Cash and cash equivalents
$
44,278

 
$
60,779

Restricted cash included in other long-term assets
456

 
607

Total cash, cash equivalents and restricted cash
$
44,734

 
$
61,386

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEON THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Nature of the Business
Neon Therapeutics, Inc. (the "Company") is a clinical-stage immuno-oncology company and a leader in the field of neoantigen-targeted therapies, dedicated to transforming the treatment of cancer by directing the immune system towards neoantigens. The Company is leveraging its neoantigen platform and over a decade of insights from its founders to develop neoantigen-targeted therapies that use two distinct approaches, NEON / ONE and NEON / SELECT. These approaches focus on targeting a prioritized set of what the Company believes are the most therapeutically-relevant neoantigens. In NEON / ONE, which includes the Company’s NEO-PV-01 and NEO-PTC-01 programs, these neoantigens are specific to each individual. In NEON / SELECT, these neoantigens are shared across subsets of patients or tumor types. The Company is applying these two approaches to develop neoantigen-targeted product candidates using multiple treatment modalities.
NEO-PV-01, the Company's most advanced product candidate, is a personal neoantigen vaccine that is custom-designed and manufactured based on the unique mutational fingerprint of each individual patient. The neoantigen-targeted peptides in NEO-PV-01 are intended to generate an immune response that trains each patient's immune system to target his or her individual tumor's particular neoantigens and kill the cancer cells. NEO-PV-01 is currently being evaluated in multiple Phase 1b clinical trials.
In July 2019, the Company reported top-line results, including at least 12-month median follow-up from NT-001, the Company’s ongoing, multi-center Phase 1b clinical trial evaluating NEO-PV-01 in combination with OPDIVO® (nivolumab) in patients with advanced or metastatic melanoma, smoking-associated non-small cell lung cancer ("NSCLC") and bladder cancer. Across all three distinct tumor types, patients demonstrated prolonged and consistent improvements in progression-free survival and overall survival compared to that observed in checkpoint inhibitor monotherapy, based on historical benchmark data.
In April 2019, the Company completed enrollment in NT-002, the Company’s Phase 1b clinical trial evaluating NEO-PV-01 in combination with the current standard of care, KEYTRUDA® (pembrolizumab) and chemotherapy, in first-line patients with untreated advanced or metastatic smoking-associated NSCLC.
The Company is conducting its NT-003 trial in melanoma to evaluate NEO-PV-01 and OPDIVO in combination with other agents, including a CD40 agonist or a CTLA-4 antagonist, to potentially further enhance NEO-PV-01-induced neoantigen immune response and improve clinical outcomes.
NEO-PTC-01, the Company's personal neoantigen T cell therapy, consists of multiple T cell populations targeting what the Company predicts to be the most therapeutically-relevant neoantigens from each patient’s tumor. NEO-PTC-01 is currently in preclinical development, and the Company expects to file a clinical trial application in Europe by the end of 2019 to evaluate NEO-PTC-01 in solid tumors in patients who are refractory to checkpoint inhibitors.
NEON / SELECT is the Company's precision medicine approach to neoantigen-targeted therapies. The Company's first product candidate using this approach, NEO-SV-01, is a neoantigen vaccine for the treatment of a genetically defined subset of hormone-receptor-positive breast cancer, for which an Investigational New Drug application was cleared by the U.S. Food and Drug Administration in August 2019.
The Company is subject to risks common to early-stage companies in the biotechnology industry including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the ability to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance-reporting capabilities. Even if the Company's development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
Initial Public Offering
On June 29, 2018, the Company completed an initial public offering ("IPO") of its common stock and issued and sold 6,250,000 shares of common stock at a public offering price of $16.00 per share, resulting in net proceeds of $89.9 million after deducting underwriting discounts, commissions and other offering costs. Upon the closing of the IPO in June 2018, all shares of the Company’s outstanding redeemable convertible preferred stock converted into an aggregate of 18,644,462 shares of common stock (see Note 9). In advance of the IPO, the board of directors and the stockholders of the Company approved a one-for-five reverse split of the Company’s issued and outstanding common stock that became effective on June 13, 2018. All common share and per share amounts

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in these condensed consolidated financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split.
Liquidity
In accordance with Accounting Standards Update ("ASU") No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern (Subtopic 205-40), management must evaluate whether there are conditions or events, when considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively implemented, the plans must have been approved before the date that the financial statements are issued.
The Company's financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. Through September 30, 2019, the Company has funded its operations primarily with net proceeds of $89.9 million from its IPO, as well as an aggregate of $161.1 million of net proceeds from sales of the Company’s preferred stock and convertible debt. Since inception, the Company has incurred recurring losses and negative cash flows from operations in each period and on an aggregate basis. As of September 30, 2019 and December 31, 2018, the Company had an accumulated deficit of $235.7 million and $173.8 million, respectively. The Company expects its operating losses and negative operating cash flows to continue into the foreseeable future as it continues to develop, manufacture and commercialize its products.
As of September 30, 2019, the Company had cash and cash equivalents of $44.3 million. The Company expects that, based on its current operating plan, its cash and cash equivalents will be sufficient to fund its operating expenses and capital expenditure requirements into June 2020. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all.
The Company expects that it will continue to incur significant expenses in connection with its ongoing business activities. As a result, the Company will need substantial additional funding to support its continuing operations and pursue its growth strategy. Until such time as the Company can generate significant revenue from product sales, if ever, it expects to finance its operations through the sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. The Company may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If the Company is unable to obtain funding on a timely basis, the Company may be required to curtail, delay or discontinue one or more of its research and development programs or may be unable to expand its operations or otherwise capitalize on its business opportunities, as desired, which could materially affect the Company's business, financial condition and results of operations.
The Company has determined that its cash runway of less than twelve months, along with its accumulated deficit, history of losses and future expected losses, raises substantial doubt about the Company's ability to continue as a going concern within one year from the issuance date of these interim condensed consolidated financial statements. While the Company has plans in place to mitigate this risk, which primarily consist of raising additional capital through a combination of equity or debt financings, and, depending on the availability and level of additional financings, potentially new collaborations and reducing cash expenditures, there is no guarantee that the Company will be successful in these mitigation efforts.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements and the related disclosures are unaudited and have been prepared in conformity with the accounting principles generally accepted in the United States ("GAAP") and include the accounts of Neon Therapeutics, Inc. and its wholly owned subsidiary, Neon Securities Corporation. All intercompany transactions and balances have been eliminated. The Company consolidates entities in which it has a controlling financial interest.
Additionally, certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2018, and notes thereto, which

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are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (the "SEC") on March 11, 2019 (the "Annual Report on Form 10-K").
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position as of September 30, 2019, and the results of its operations for the three and nine months ended September 30, 2019 and 2018, and its cash flows for the nine months ended September 30, 2019 and 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the full year or any other subsequent interim period.
Summary of Significant Accounting Policies
The significant accounting policies and estimates used in the preparation of the condensed consolidated financial statements are described in the Company’s audited financial statements as of and for the year ended December 31, 2018, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K. There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2019, except as discussed below with respect to the adoption of ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), as amended.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates of accounting reflected in these condensed consolidated financial statements include, but are not limited to, estimates related to accrued expenses, the valuation of common stock prior to the completion of the Company's IPO, stock-based compensation, the present value of lease liabilities and the corresponding right-of-use assets and income taxes. The Company bases its estimates on historical experience and other market specific or other relevant assumptions it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts and experience. Actual results could differ from those estimates or assumptions.
Recently Adopted Accounting Pronouncements
ASU No. 2016-02, Leases
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, which requires lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability, as well as provide disclosures with respect to certain qualitative and quantitative information related to a company's leasing arrangements. Leases are classified as either operating or finance based on criteria similar to existing lease accounting, with the classification affecting the pattern and classification of expense recognition in the statement of operations. The FASB subsequently issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which includes certain amendments to ASU 2016-02 intended to provide relief in implementing the new standard. Among these amendments is the option to not restate comparative periods presented in the financial statements. The Company adopted these amendments with ASU 2016-02 (collectively, the "New Leasing Standards") effective January 1, 2019.
The Company adopted the New Leasing Standards as of the effective date of January 1, 2019, with no restatement of prior periods or cumulative adjustment to retained earnings. Comparative periods in the Company's financial statements will be presented in accordance with the existing guidance under Accounting Standards Codification ("ASC") Topic 840, Leases. Upon adoption, the Company took advantage of the transition package of practical expedients permitted within ASU 2016-02, which allowed the Company not to reassess previous accounting conclusions around whether arrangements are, or contain, leases, as well as to carry forward both the historical classification of leases and the treatment of initial direct costs for existing leases. In addition, the Company also has made an accounting policy election to exclude leases with an initial term of twelve months or less from its balance sheet. 
Under the New Leasing Standards, the Company determines whether an arrangement is or contains a lease at the inception of the contract based on the unique facts and circumstances around identified assets, if present, and control over those identified assets. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company uses the implicit rate when readily determinable and uses its estimated incremental borrowing rate when the implicit rate is not readily determinable based upon the information available at the commencement date in determining the present value of the lease payments. The incremental borrowing rate is determined using a secured borrowing rate for the same currency and term as the associated lease.

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The Company recognizes lease costs on a straight-line basis over the lease term, and includes amounts related to short-term leases.
Adoption of the New Leasing Standards resulted in the recognition of operating lease right-of-use assets and operating lease liabilities of approximately $8.7 million and $8.9 million, respectively, as of January 1, 2019. Upon adoption and as of September 30, 2019, the Company did not have any finance leases. The adoption of the New Leasing Standards did not materially impact the Company's condensed consolidated statement of operations.
Refer to Note 7, Leases, for further information on the application of ASU 2016-02 to the Company’s current lease commitments.
ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). The standard expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. Under the amended guidance, equity-classified share-based payment awards issued to nonemployees will be measured at grant date fair value. Upon transition, the entity is required to remeasure these nonemployee awards at fair value as of the adoption date.
The Company adopted this standard as of the effective date of January 1, 2019. Prior to the adoption of ASU 2018-07, for share-based awards granted to nonemployees, compensation expense was recognized over the period during which services were rendered by such nonemployees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards was remeasured using the then-current fair value of the Company's common shares and updated assumption inputs in the Black-Scholes option-pricing model, as applicable. After the adoption of ASU 2018-07, equity-classified share-based payment awards issued to nonemployees are measured at grant date fair value similarly to those of employees and are no longer revalued as the equity instruments vest. The new standard allows entities to use the expected term to measure nonemployee options or elect to use the contractual term as the expected term, on an award-by-award basis. The adoption of the standard did not have a material impact on the Company's condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The new standard requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. It also limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. ASU 2016-13 is effective for the Company on January 1, 2020. Early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of this standard will have on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate a material impact to the condensed consolidated financial statements as a result of the adoption of this standard.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15")which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this amendment will have on its condensed consolidated financial statements.

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3. Fair Value Measurement
The following tables present information about the Company’s assets that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
 
 
 
Fair Value Measurements at September 30, 2019 Using:
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents:
 

 
 

 
 

 
 

Money market funds
$
44,010

 
$
44,010

 
$

 
$

 
$
44,010

 
$
44,010

 
$

 
$

 
 
 
Fair Value Measurements at December 31, 2018 Using:
 
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents:
 

 
 

 
 

 
 

Money market funds
$
53,188

 
$
53,188

 
$

 
$

Marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
46,122

 

 
46,122

 

Commercial paper
4,489

 

 
4,489

 

 
$
103,799

 
$
53,188

 
$
50,611

 
$

There were no changes in valuation techniques or transfers between the fair value measurement levels during the three and nine months ended September 30, 2019 or 2018. There were no liabilities measured at fair value on a recurring basis as of September 30, 2019 or December 31, 2018.
4. Marketable Securities
The Company did not hold any marketable securities at September 30, 2019. Marketable securities consisted of the following at December 31, 2018 (in thousands):
 
December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Short-term investments:
 

 
 

 
 

 
 

Corporate debt securities
$
46,197

 
$

 
$
(75
)
 
$
46,122

Commercial paper
4,489

 

 

 
4,489

 
$
50,686

 
$

 
$
(75
)
 
$
50,611

As of December 31, 2018, the aggregate fair value of securities that were in an unrealized loss position for less than twelve months was $46.1 million. The Company did not intend to sell the investments, and it was not more likely than not that the Company would be required to sell the investments before recovery of their amortized cost bases. As a result, the Company determined that it did not hold any securities with any other-than-temporary impairment as of December 31, 2018.
There were no sales of available-for-sale securities during the three or nine months ended September 30, 2019 or 2018. Net unrealized holding gains or losses for the period that have been included in accumulated other comprehensive loss were not material to the Company’s condensed consolidated results of operations.

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5. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Software
$
1,180

 
$
1,180

Laboratory equipment
9,417

 
8,230

Computer equipment
102

 
102

Furniture and fixtures
317

 
371

Leasehold improvements
680

 
592

Assets under construction

 
511

 
11,696

 
10,986

Less: Accumulated depreciation and amortization
(4,026
)
 
(2,781
)
 
$
7,670

 
$
8,205

Depreciation and amortization expense for the three and nine months ended September 30, 2019 was $0.4 million and $1.3 million, respectively, and for three and nine months ended September 30, 2018 was $0.4 million and $1.1 million, respectively.
6. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
Accrued compensation costs
$
3,378

 
$
3,364

Accrued professional services
653

 
1,262

Accrued external research and manufacturing costs
2,185

 
3,001

Accrued additions of property and equipment

 
243

Other accrued expenses
752

 
552

 
$
6,968

 
$
8,422

7. Leases
On January 21, 2016, the Company entered into an operating lease agreement for office and laboratory space at its current headquarters in Cambridge, Massachusetts. The lease commenced on September 28, 2016 and expires on September 27, 2024. The Company has the right to extend the lease for one additional five-year period at a market rental rate as determined by the landlord and agreed to by the Company. Per the terms of the lease agreement, the Company does not have any residual value guarantees. In connection with the lease agreement, the Company issued a letter of credit to the landlord for $0.5 million. The Company secured the letter of credit for the full amount of the letter with cash on deposit, which is reported as restricted cash, and which is classified within other long-term assets.
The Company identified and assessed the following significant assumptions in recognizing the right-of-use asset and corresponding liability related to the lease:
Expected lease term - The expected lease term includes the contractual lease period. The lease agreement contains a renewal option, which was not included in the calculation of the right-of-use asset and lease liabilities as the renewal is not reasonably certain.
Incremental borrowing rate - As the Company’s lease does not provide a readily determinable implicit rate, nor is it available from the lessor, the Company estimated the incremental borrowing rate based on information available at the commencement date in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date.
The Company recognized the right-of-use asset and corresponding lease liability on January 1, 2019 by calculating the present value of lease payments, discounted at 10%, the Company’s estimated incremental borrowing rate, over the 5.7 years expected remaining lease term. Amortization of the operating lease right-of-use asset for the lease was $0.3 million and $0.9 million for the three and nine months ended September 30, 2019 and was included in operating expenses. The variable lease expense, which includes common area maintenance, utility charges and management fees was $0.2 million and $0.7 million for the three and nine months ended September 30, 2019. As of September 30, 2019 the remaining lease term was 4.90 years.

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The Company also, from time to time, enters into short-term operating lease arrangements for certain laboratory and office equipment. Leases with a term of twelve months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of ASU 2016-02, the Company has elected to combine lease and non-lease components for all classes of underlying assets.
The components of lease expense and related cash flows were as follows (in thousands):
 
Three Months Ended
September 30, 2019
 
Nine Months Ended September 30, 2019
Lease cost
 
 
 
Operating lease cost
$
502

 
$
1,506

Variable lease cost
243

 
720

Short-term lease cost
113

 
326

Total lease cost
$
858

 
$
2,552

 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities
$
469

 
$
1,407

Future lease payments for the Company's operating leases as of September 30, 2019 were as follows (in thousands):
Year Ending December 31,
 
2019 (remaining three months)
$
484

2020
1,948

2021
2,006

2022
2,066

2023
2,128

Thereafter
1,632

Total future minimum lease payments
$
10,264

Less: interest
(2,193
)
Present value of operating lease liabilities
$
8,071

Under the prior lease guidance, future minimum lease payments for the Company's operating leases as of December 31, 2018 were as follows (in thousands):
Year Ending December 31
 
2019
$
1,891

2020
1,948

2021
2,006

2022
2,066

2023
2,129

Thereafter
1,632

Total future minimum lease payments
$
11,672

8. Commitments and Contingencies
Manufacturing Agreements
Peptide and Vaccine Manufacturing Agreement
In December 2015, the Company entered into a manufacturing agreement, as amended in October 2016, January 2017 and November 2018 (collectively as amended, the "Manufacturing Agreement"), with an independent third party (the "Vendor") whereby the Vendor performs manufacturing, analytical testing and quality assurance services related to the manufacture of drug product and/or peptides for use in the Company's preclinical and clinical activities. The Manufacturing Agreement provided for the development and establishment of two manufacturing suites at the Vendor's facility to be used in the manufacturing process to fill orders of peptides ordered by the Company, and requires the Company to reimburse the Vendor for specified manufacturing costs incurred in the manufacture of the peptides, plus a fixed profit margin. The Manufacturing Agreement has a five-year term

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and can be terminated by the Company for convenience with three-months' notice. All amounts incurred under the Manufacturing Agreement are recognized as research and development expense as incurred.
T Cell Manufacturing Agreement
In August 2019, the Company entered into a manufacturing agreement (the "NKI Agreement") with the Netherlands Cancer Institute (the "NKI") whereby the NKI performs manufacturing, analytical testing and quality assurance services related to the manufacture of the Company's autologous T cell therapy drug product for use in the Company's preclinical and clinical activities. The NKI Agreement has a three-year term, which can be extended for an additional six months at the Company's sole discretion, and can be terminated by the Company for convenience with three-months' notice. All amounts incurred under the NKI Agreement are recognized as research and development expense as incurred.
Other Agreements
License Agreement with the Broad Institute, Inc.
On November 13, 2015, the Company entered into a license agreement with the Broad Institute, Inc. (the "Broad"), a related party (see Note 12) and, in January and November 2018, the Company entered into amendments to the license agreement (as amended to date, the "Broad Agreement"). Under the Broad Agreement, the Company has been granted an exclusive worldwide license to certain intellectual property rights owned or controlled by the Broad, Dana-Farber Cancer Institute (the "DFCI") and The General Hospital Corporation d/b/a Massachusetts General Hospital ("MGH") to develop and commercialize any diagnostic, prognostic, preventative or therapeutic product for humans, including any neoantigen vaccine product. In particular, the Company has been granted both exclusive and non-exclusive licenses to a patent portfolio comprised of twelve patent families, including certain granted patents and pending patent applications in the United States and foreign jurisdictions.
Pursuant to the terms of the Broad Agreement, the Company has also been granted (i) a non-exclusive license under each institution's respective interest in certain of its patent rights to exploit the licensed products in the field in the territory during the term of the license and (ii) a non-exclusive license under each institution's licensed know-how, to exploit any diagnostic, prognostic, preventative or therapeutic product in the field in the territory during the term of the license. The Company is also entitled to sub-license the rights granted to it under the Broad Agreement. In connection with the Broad Agreement, the Company has also entered into a non-exclusive software license with the Broad under which it licenses certain object and source codes for several software programs. These licenses and rights are subject to certain limitations and retained rights, including field restrictions.
As consideration for the license, the Company paid the Broad a non-refundable license fee of $0.1 million. As additional consideration for the license, the Company must pay the Broad immaterial annual license maintenance fees. Additionally, the Company granted 60,000 shares of restricted common stock to each of the Broad, DFCI and MGH, which were determined to have an aggregate fair value of $0.2 million, and reimbursed the Broad $0.6 million for a portion of its past patent expenses related to the in-licensed patent rights. In June 2018, to align with institutional policies in place between the Broad, DFCI and MGH, DFCI and MGH transferred certain of the shares of restricted common stock that they had previously received to the Broad. Under the Broad Agreement, the Company agreed to reimburse the Broad for future patent expenses related to the patents covered by the license agreement. The Company could be obligated to make up to $12.6 million of developmental milestone payments to the Broad if certain development milestones are achieved over the term of the license agreement. Additionally, under the terms of the license agreement, the Company could be obligated to make up to an aggregate of $97.5 million of payments upon the achievement of specified sales milestones and to pay tiered royalties of low to mid single-digit percentages on net sales of products licensed under the agreement. The Company is required to pay the Broad a low double-digit percentage of any consideration received by the Company from a sublicensee in consideration for a sublicense. No developmental or commercial milestones have been achieved to date. The Company has the right to terminate the agreement for any reason, with or without cause.
License Agreement with the Dana-Farber Cancer Institute
On August 5, 2016, the Company entered into a license agreement with the DFCI to grant the Company an exclusive, royalty-free license to provide certain licensed know-how. The know-how in this agreement has particular utility in connection with the development of the licensed products referred to in the Broad Agreement. The agreement also grants a non-exclusive, royalty free right to certain clinical data being generated by the DFCI. The Company has the right to terminate the license agreement with the DFCI for any reason, with or without cause.
In consideration for the licenses, the Company granted 120,000 shares of common stock to each of the Broad and the DFCI. The shares issued to the Broad were unrestricted and fully vested. The 120,000 shares issued to the DFCI contained contingent repurchase options whereby, if the DFCI failed to achieve three specific milestones over the subsequent three-year period, the Company could repurchase the shares (one-third for each milestone) at the original purchase price, which is at zero cost. The Company has accounted for these awards consistent with equity awards with performance-based vesting conditions and, upon it being probable that the Company would not repurchase the award associated with a milestone, the associated expense would be

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recognized as incremental stock-based compensation expense and reflected within research and development expenses in the condensed consolidated financial statements. During the three months ended September 30, 2019, the repurchase option on the final one-third of the shares expired and the Company recognized $0.2 million of incremental stock-based compensation expense. During the nine months ended September 30, 2018 and 2017, the first and second repurchase options expired due to the achievement of the respective specified criteria and the Company recognized $0.4 million and $0.2 million of incremental stock-based compensation expense in each period, respectively. Through September 30, 2019, the repurchase option on all 120,000 of these shares has expired.
Indemnification Agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters arising out of the relationship between the parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and certain executive officers and other employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of these indemnification obligations. The Company does not believe that the outcome of any existing claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it had not accrued any liabilities related to its obligations under these agreements in its condensed consolidated financial statements as of September 30, 2019 or December 31, 2018.
Legal Proceedings
The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to its legal proceedings.
9. Preferred Stock and Common Stock
Preferred Stock
The Company's amended and restated certificate of incorporation authorizes the Company to issue up to 10,000,000 shares of undesignated preferred stock, $0.001 par value per share, none of which was issued or outstanding as of September 30, 2019 or December 31 2018.
Upon completion of the Company’s IPO on June 29, 2018, all shares of the Company's previously issued Redeemable Convertible Preferred Stock converted into an aggregate of 18,644,462 shares of common stock. As of September 30, 2019 and December 31, 2018, there were no shares of Redeemable Convertible Preferred Stock issued or outstanding.
Common Stock
As of September 30, 2019 and December 31, 2018, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 150,000,000 shares of common stock with a par value of $0.001 per share.
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the Company’s board of directors, if any. No dividends have been declared or paid during the three or nine months ended September 30, 2019 or 2018.
As of September 30, 2019 and December 31, 2018 the Company has reserved for future issuance the following number of shares of common stock:
 
September 30, 2019
 
December 31, 2018
Shares reserved for exercise of outstanding stock options
3,541,485

 
2,548,073

Shares reserved for vesting of restricted stock units
540,319

 

Shares reserved for future issuance under the 2018 Stock Option and Grant Plan
334,545

 
760,628

Shares reserved for future issuance under the 2018 Employee Stock Purchase Plan
553,142

 
270,000

 
4,969,491

 
3,578,701


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At-the-market equity offering program
In July 2019, the Company filed a registration statement on Form S-3 (File No. 333-232487) with the SEC, which was declared effective on July 8, 2019, or the Shelf Registration Statement, in relation to the registration of common stock, preferred stock, warrants and/or units of any combination thereof for the purposes of selling, from time to time, its common stock, convertible securities or other equity securities in one or more offerings. Simultaneous with the Shelf Registration Statement, the Company entered into a Controlled Equity OfferingSM Sales Agreement (the "Sales Agreement") with Cantor Fitzgerald & Co. ("Cantor") to establish an at-the-market equity offering program (“ATM”). Under the Sales Agreement, Cantor may sell up to $50.0 million of the Company’s common stock by any method permitted by law deemed to be an "at the market" offering as defined in Rule 415 of the Securities Act, subject to the terms of the Sales Agreement. The Company will pay to Cantor cash commissions of 3.0% of the aggregate gross proceeds of sales of common stock under the Sales Agreement. Through September 30, 2019, no shares have been sold under the ATM and no proceeds have been received.
10. Stock-Based Compensation
2015 Stock Option and Grant Plan
The Company’s 2015 Stock Option and Grant Plan, as amended (the "2015 Plan"), provided for the Company to grant incentive or nonqualified stock options, restricted stock awards, unrestricted stock awards or restricted stock units to employees, directors and consultants of the Company. As of June 26, 2018, the effective date of the 2018 Stock Option and Incentive Plan, and as of September 30, 2019 and December 31, 2018, no shares remained available for future issuance under the 2015 Plan.
2018 Stock Option and Incentive Plan
On June 13, 2018, the Company’s stockholders approved the 2018 Stock Option and Incentive Plan (the "2018 Plan"), which became effective on June 26, 2018. The 2018 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards and dividend equivalent rights to the Company’s officers, employees, directors and other key persons (including consultants). The number of shares initially reserved for issuance under the 2018 Plan was 1,215,000 shares, which was cumulatively increased on January 1, 2019 and which will be cumulatively increased each January 1 thereafter by 4% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s compensation committee. Effective January 1, 2019, 1,132,570 additional shares were automatically added to the shares authorized for issuance under the 2018 Plan and these shares were subsequently registered on a Registration Statement on Form S-8.
As of the effective date of the 2018 Plan, the Company will not grant any further awards under the 2015 Plan. However, the shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2018 Plan and the 2015 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan.
The terms of stock options and restricted stock awards, including vesting requirements, are determined by the board of directors or its delegates, subject to the provisions of the 2018 Plan.
As of September 30, 2019, there were 334,545 shares available for future issuance under the 2018 Plan.
2018 Employee Stock Purchase Plan
On June 13, 2018, the Company’s stockholders approved the 2018 Employee Stock Purchase Plan (the "ESPP"), which became effective on June 26, 2018. A total of 270,000 shares of common stock were reserved for issuance under the ESPP. In addition, the number of shares of common stock that may be issued under the ESPP will automatically increase on January 1, 2019, and each January 1 thereafter through January 1, 2028, by the lesser of (i) 405,000 shares of common stock, (ii) 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or (iii) such lesser number of shares determined by the administrator of the Company’s ESPP. Effective January 1, 2019, 283,142 additional shares were automatically added to the shares authorized for issuance under the ESPP and these shares were subsequently registered on a Registration Statement on Form S-8.
The Company initiated its first offering period under the ESPP on July 1, 2019. Stock-based compensation expense related to the ESPP was insignificant for the three and nine months ended September 30, 2019.

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Stock Options
The following table summarizes changes in stock option activity during the nine months ended September 30, 2019:
 
Number
of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Contractual
Term
 
Aggregate
Intrinsic
Value
 
 
 
 
 
(in years)
 
(in thousands)
Outstanding as of December 31, 2018
2,548,073

 
$
7.11

 
8.68
 
$
1,965

Granted
1,235,128

 
6.00

 
 
 
 
Exercised
(44,132
)
 
2.62

 
 
 
 
Forfeited
(197,584
)
 
7.36

 
 
 
 
Outstanding as of September 30, 2019
3,541,485

 
$
6.76

 
8.24
 
$

Options vested or expected to vest as of September 30, 2019
3,541,485

 
$
6.76

 
8.24
 
$

Options exercisable as of September 30, 2019
1,342,524

 
$
6.55

 
7.63
 
$

The weighted average grant-date fair value per share of stock options granted during the three and nine months ended September 30, 2019 was $1.75 per share and $4.64 per share, respectively. The weighted average grant-date fair value per share of stock options granted during the three and nine months ended September 30, 2018 was $9.85 per share and $8.99 per share, respectively.
The aggregate intrinsic value of stock options exercised during the three and nine months ended September 30, 2019 was insignificant and $0.1 million, respectively. The aggregate intrinsic value of stock options exercised during the three and nine months ended September 30, 2018 was $0.3 million and $1.1 million, respectively.
Stock Option Valuation
The assumptions that the Company used to determine the fair value of the stock options granted to employees and directors were as follows, presented on a weighted average basis:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Expected volatility
83.87
%
 
102.45
%
 
94.73
%
 
101.82
%
Risk-free interest rate
1.39
%
 
2.84
%
 
2.37
%
 
2.63
%
Expected dividend yield
%
 
%
 
%
 
%
Expected life (in years)
6.11

 
6.08

 
6.01

 
6.00

There were no stock option awards granted to nonemployees during the three or nine months ended September 30, 2019 or 2018.
Restricted Stock Units
During the nine months ended September 30, 2019, under the 2018 Plan, the Company granted restricted stock units ("RSUs"), as part of the Company's equity compensation program it provides to its employees. Pursuant to the terms of the applicable award agreements, each RSU represents the right to receive one share of the Company’s common stock and the RSUs generally vest in equal annual installments over three years, provided the employee remains continuously employed with the Company through the vesting period. Upon vesting, shares of the Company's common stock are delivered to the employee, subject to the payment of applicable withholding taxes. The fair value of RSUs is based on the market value of the Company's common stock on the date of grant. Compensation expense is recognized over the applicable service period.

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The following table summarizes RSU activity for the nine months ended September 30, 2019:
 
Number of
Shares
 
Weighted
Average Grant-
Date Fair Value
per Share
Unvested as of December 31, 2018

 
$

Granted
594,339

 
$
5.52

Vested

 
$

Cancelled
(54,020
)
 
$
6.34

Unvested as of September 30, 2019
540,319

 
$
5.44

Restricted Stock Awards
Restricted stock awards originally issued under the terms of the 2015 Plan allow the Company, at its discretion, to repurchase unvested shares at the initial purchase price if the employee or nonemployee terminates his or her service relationship with the Company. No restricted stock awards were issued under the 2015 Plan during the three and nine months ended September 30, 2019 or 2018.
The 2018 Plan provides for the grant of restricted stock awards to the Company’s officers, employees, directors and other key persons (including consultants). During the nine months ended September 30, 2019, the Company issued restricted stock awards for 25,000 shares of common stock to certain nonemployee founders and collaborators. The shares were granted under the terms of the 2018 Plan and the respective award agreements governing these awards. These awards vest quarterly over a one-year period.
The following table summarizes the Company’s restricted common stock activity since December 31, 2018:
 
Number of
Shares
 
Weighted
Average Grant-
Date Fair Value
per Share
Unvested restricted common stock as of December 31, 2018
383,964

 
$
1.97

Granted
25,000

 
$
4.64

Cancelled
(44,210
)
 
$
1.25

Vested
(218,460
)
 
$
1.89

Unvested restricted common stock as of September 30, 2019
146,294

 
$
2.77

The aggregate fair value of restricted common stock awards that vested during the three and nine months ended September 30, 2019, based upon the fair values of the stock underlying the restricted stock awards on the applicable vesting dates, was $0.2 million and $1.0 million, respectively. The aggregate fair value of restricted common stock awards that vested during the three and nine months ended September 30, 2018, based upon the fair values of the stock underlying the restricted stock awards on the applicable vesting dates, was $0.9 million and $2.6 million, respectively.
Restricted Stock Awards Issued Outside of Equity Plans
From May 2015 through July 2016, the Company issued 1,510,000 shares of restricted common stock outside of the 2015 Plan to nonemployee founders and collaborators. The shares were issued under the terms of the respective restricted common stock agreements and unvested shares are subject to repurchase by the Company upon the holder’s termination of their relationship with the Company. The unvested shares of restricted common stock are subject to the Company’s right to repurchase at the original purchase price per share. The Company did not issue any shares of restricted common stock outside of the Company's 2015 Plan and 2018 Plan during the three or nine months ended September 30, 2019 and 2018.
Of the total shares of restricted common stock awarded to nonemployee founders and collaborators, 300,000 shares vested immediately upon grant; 910,000 shares vested quarterly over a four-year period based on each grantee’s continued service relationship with the Company in varying advisory capacities; and 180,000 shares are to vest upon the achievement of specified performance milestones. Additionally, 120,000 shares were issued as fully vested awards, but were subject to repurchase options that expired upon the achievement of specified milestones. Through September 30, 2019, the repurchase options on all 120,000 of these shares have expired (see Note 8).
Of these awards, the underlying restricted common stock agreement for 180,000 shares of restricted common stock provided for a put option whereby the recipient was able to sell its vested shares back to the Company at a price per share equal to the fair

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value of the Company’s common stock upon both (i) the termination of the consulting agreement between the recipient and the Company for any reason and (ii) the determination by the recipient’s employer that the ownership of the restricted common stock was in violation of the employer’s conflict of interest policy. Prior to the closing of the Company’s IPO, these awards were classified in the consolidated balance sheet as contingently redeemable common stock and were presented outside of permanent equity. As of December 31, 2017, $0.4 million was recorded in temporary equity related to these awards. Upon the closing of the Company’s IPO, this put option expired and the amount recorded in temporary equity was recorded to additional paid in capital.
A summary of the changes in the Company’s unvested restricted common stock awards granted to founders and collaborators outside of the Company's 2015 Plan or 2018 Plan since December 31, 2018 is as follows:
 
Number of
Shares
 
Weighted
Average Grant-
Date Fair Value
per Share
Unvested restricted common stock as of December 31, 2018
350,625

 
$
1.29

Vested
(170,625
)
 
$
1.29

Unvested restricted common stock as of September 30, 2019
180,000

 
$
1.29

The aggregate fair value of restricted common stock awards issued outside of the Company's 2015 Plan or 2018 Plan that vested during the three and nine months ended September 30, 2019, based upon the fair values of the stock underlying the restricted stock awards on the applicable vesting dates, was $0.2 million and $0.8 million, respectively. The aggregate fair value of restricted common stock awards issued outside of the Company's 2015 Plan or 2018 Plan that vested during the three and nine months ended September 30, 2018, based upon the fair values of the stock underlying the restricted stock awards on the applicable vesting dates, was $0.6 million and $1.9 million, respectively.
Stock-Based Compensation Expense
The Company recorded stock-based compensation expense related to all stock-based awards and the ESPP in the following expense categories of its condensed consolidated statements of operations and comprehensive loss (in thousands):
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2019
 
2018
 
2019
 
2018
Research and development expenses
$
1,115

 
$
896

 
$
2,943

 
$
3,071

General and administrative expenses
919

 
748

 
2,874

 
1,644

 
$
2,034

 
$
1,644

 
$
5,817

 
$
4,715

During the three and nine months ended September 30, 2019, the Company recognized stock-based compensation expense of $0.2 million for awards with performance-based vesting conditions related to the expiration of the final repurchase option on the remaining unvested restricted common shares issued to DFCI. During the nine months ended September 30, 2018, the Company recognized stock-based compensation expense of $0.4 million for awards with performance-based vesting conditions related to the expiration of the second repurchase option on a portion of the unvested restricted common shares issued to DFCI (see Note 8).
As of September 30, 2019, the Company had an aggregate of $11.2 million of unrecognized stock-based compensation expense related to unvested stock option awards, excluding awards with performance-based vesting conditions, which is expected to be recognized over a weighted-average period of approximately 2.43 years. As of September 30, 2019, the Company also had an aggregate of $0.4 million of unrecognized stock-based compensation expense related to unvested restricted common stock awards, excluding awards with performance-based vesting conditions, which is expected to be recognized over a weighted-average period of approximately 0.89 years. Additionally as of September 30, 2019, the Company had an aggregate of $2.4 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately 2.50 years.
11. Net Loss per Share
The Company excluded 326,294 shares of restricted common stock for the three and nine months ended September 30, 2019 and 866,119 shares of restricted common stock for the three and nine months ended September 30, 2018 from the calculation of basic net loss per share because these shares had not vested.

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The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share attributable to common stockholders whenever the effect of including them would be to reduce the net loss per share. In periods where there is a net loss, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The following potential shares of common stock, presented based on amounts outstanding at each period end, were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Outstanding stock options
3,541,485

 
2,273,116

 
3,541,485

 
2,273,116

Unvested restricted stock units
540,319

 

 
540,319

 

Unvested restricted common stock
326,294

 
866,119

 
326,294

 
866,119

ESPP shares issuable and outstanding
49,160

 

 
49,160

 

 
4,457,258

 
3,139,235

 
4,457,258

 
3,139,235

12. Related Parties
A member of the Company’s board of directors is a founding director and the current president of the Broad. In November 2015, the Company entered into the Broad Agreement with the Broad (see Note 8) and, as consideration, the Company granted 60,000 shares of restricted common stock to the Broad, which were determined to have a fair value of $0.1 million. Additionally, the Company must pay the Broad immaterial annual license maintenance fees. At the time the Company entered into the Broad Agreement, the Company reimbursed the Broad $0.6 million for a portion of past patent expenses and, under the terms of the license agreement, the Company is required to reimburse Broad for future patent expenses related to patents covered by the license agreement. The Company could be obligated to make up to $12.6 million of developmental milestone payments to the Broad if certain development milestones are achieved over the term of the license agreement. Additionally, under the terms of the license agreement, the Company could be obligated to make up to an aggregate of $97.5 million of payments upon the achievement of specified sales milestones and to pay tiered royalties of low to mid single-digit percentages on net sales of products licensed under the agreement. The Company is required to pay the Broad a low double-digit percentage of any consideration received by the Company from a sublicensee in consideration for a sublicense. No developmental or commercial milestones have been achieved to date.
In August 2016, the Company entered into a license agreement with the DFCI in connection with the development of licensed products referred to in the 2015 Broad Agreement. As consideration, the Company granted 120,000 shares of restricted common stock to the Broad, which were determined to have a fair value of $0.2 million. In June 2018, to align with institutional policies in place between the Broad, the DFCI and MGH, the DFCI and MGH transferred certain of the shares of restricted common stock that they had previously received to the Broad.
The Company recorded expenses related to payments to the Broad of $0.3 million and $1.4 million during the three and nine months ended September 30, 2019, respectively, and $0.5 million and $1.0 million during the three and nine months ended September 30, 2018, respectively. At September 30, 2019 and December 31, 2018, the Company had $0.4 million and $2.0 million in accounts payable and accrued expenses due to the Broad, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Overview
We are a clinical-stage immuno-oncology company and a leader in the field of neoantigen-targeted therapies, dedicated to transforming the treatment of cancer by directing the immune system towards neoantigens. Genetic mutations, which are a hallmark of cancer, can result in specific immune targets called neoantigens. The presence of neoantigens in cancer cells and their absence in normal cells makes them compelling, untapped targets for cancer therapy. By directing the immune system towards these targets, we believe our neoantigen-targeted therapies will offer a new level of patient and tumor specificity in the field of cancer immunotherapy that will drive a strong risk-benefit profile to dramatically improve patient outcomes.
We are leveraging our neoantigen platform and over a decade of insights from our founders to develop neoantigen-targeted therapies that use two distinct approaches, NEON / ONE and NEON / SELECT. These approaches focus on targeting a prioritized set of what we believe are the most therapeutically-relevant neoantigens. In NEON / ONE, which includes our NEO-PV-01 and NEO-PTC-01 programs, these neoantigens are specific to each individual. In NEON / SELECT, these neoantigens are shared across subsets of patients or tumor types. We are applying these two approaches to develop neoantigen-targeted product candidates using multiple treatment modalities.

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NEO-PV-01, our most advanced product candidate, is a personal neoantigen vaccine that is custom-designed and manufactured based on the unique mutational fingerprint of each individual patient. The neoantigen-targeted peptides in NEO-PV-01 are intended to generate an immune response that trains each patient's immune system to target his or her individual tumor's particular neoantigens and kill the cancer cells. NEO-PV-01 is currently being evaluated in multiple Phase 1b clinical trials.
In July 2019, we reported top-line results, including at least 12-month median follow-up from NT-001, our ongoing, multi-center Phase 1b clinical trial evaluating NEO-PV-01 in combination with OPDIVO® (nivolumab) in patients with advanced or metastatic melanoma, smoking-associated non-small cell lung cancer, or NSCLC, and bladder cancer. Across all three distinct tumor types, patients demonstrated prolonged and consistent improvements in progression-free survival and overall survival compared to that observed in checkpoint inhibitor monotherapy, based on historical benchmark data.
In April 2019, we completed enrollment in NT-002, our Phase 1b clinical trial evaluating NEO-PV-01 in combination with the current standard of care, KEYTRUDA® (pembrolizumab) and chemotherapy, in first-line patients with untreated advanced or metastatic smoking-associated NSCLC.
We are conducting our NT-003 trial in melanoma to evaluate NEO-PV-01 and OPDIVO in combination with other agents, including a CD40 agonist or a CTLA-4 antagonist, to potentially further enhance NEO-PV-01-induced neoantigen immune response and improve clinical outcomes.
NEO-PTC-01, our personal neoantigen T cell therapy, consists of multiple T cell populations, targeting what we predict to be the most therapeutically-relevant neoantigens from each patient's tumor. NEO-PTC-01 is currently in preclinical development, and we expect to file a clinical trial application, or CTA, in Europe by the end of 2019 to evaluate NEO-PTC-01 in solid tumors in patients who are refractory to checkpoint inhibitors.
NEON / SELECT is our precision medicine approach to neoantigen-targeted therapies. Our first product candidate using this approach, NEO-SV-01, is a neoantigen vaccine for the treatment of a genetically defined subset of hormone-receptor-positive breast cancer, for which an Investigational New Drug application, or IND, was cleared by the U.S. Food and Drug Administration, or FDA, in August 2019.
To date, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and discovering product candidates, securing related intellectual property rights and conducting research and development activities related to our product candidates.
On June 29, 2018, we completed our initial public offering, or IPO, in which we issued and sold 6,250,000 shares of our common stock at a public offering price of $16.00 per share in exchange for net proceeds of $89.9 million after deducting underwriting discounts, commissions and other offering costs. Upon the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding converted into an aggregate of 18,644,462 shares of common stock.
From inception through September 30, 2019, we have funded our operations primarily through an aggregate of $89.9 million of net proceeds from our IPO, as well as an aggregate of $161.1 million of net proceeds from sales of our preferred stock and convertible debt. To date, we have not generated any revenue from product sales and do not expect to do so for several years, if at all. Due to our significant research and development expenditures, we have generated substantial operating losses in each period since inception, including net losses of $19.0 million and $61.9 million in the three and nine months ended September 30, 2019, respectively, and $18.4 million and $53.8 million in the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, we had an accumulated deficit of $235.7 million. We expect to incur substantial additional losses in the foreseeable future as we expand our research and development activities.
We expect to continue to incur substantial expenses in connection with our ongoing activities if, and as, we:
advance NEO-PV-01 into later-stage clinical development;
advance our development programs into and through preclinical and clinical development;
seek regulatory approvals for any product candidates that successfully complete clinical trials;
hire additional clinical, quality assurance and scientific personnel;
expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company;
maintain, expand and protect our intellectual property portfolio;
establish a sales, marketing, medical affairs and distribution infrastructure to commercialize any products for which we may obtain marketing approval and intend to commercialize on our own or jointly with third parties; and
acquire or in-license other product candidates and technologies.

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As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, 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 one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.
Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of expenses or the timing of when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
As of September 30, 2019, we had cash and cash equivalents of $44.3 million. We believe that, based on our current operating plan, our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into June 2020. We have based this estimate on assumptions that may prove to be wrong and we could exhaust our available capital resources sooner than we expect. See "—Liquidity and Capital Resources." To finance our operations beyond that point we will need to raise additional capital, which cannot be assured. We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern. See Note 1 to our condensed consolidated financial statements included within Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on our assessment.
Components of Results of Operations
Revenue
We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for several years, if at all. If our development efforts for our current or future product candidates are successful and result in marketing approval or collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from collaboration or license agreements that we may enter into with third parties.
Operating Expenses
Research and Development Expenses
Research and development expenses represent costs incurred by us for the discovery, development and manufacture of our product candidates and include:
expenses incurred under agreements with third parties, including contract research organizations, contract manufacturing organizations and suppliers;
license fees to acquire and maintain in-process technology and data;
costs associated with the development of our Real-time Epitope Computation for ONcology, or RECON, bioinformatics engine;
personnel-related costs, including salaries, benefits and non-cash stock-based compensation expense, for personnel engaged in research and development functions;
costs of outside consultants, including their fees, related travel expenses and stock-based compensation expense;
the costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials;
costs related to compliance with regulatory requirements; and
facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and general support services.
We expense research and development costs as incurred. We recognize costs for certain development activities, such as clinical trials and manufacturing costs, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment or other information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued external research and development expenses. 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. These amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

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We use our employee and infrastructure resources across our multiple research and development programs directed toward developing our NEON / ONE and NEON / SELECT approaches, as well as identifying and developing product candidates. We track outsourced development and manufacturing costs, including external clinical and regulatory costs, by development product candidates, but we do not allocate costs such as personnel costs or other internal costs to specific development of product candidates. These external and unallocated research and development expenses are summarized in the table below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
NEO-PV-01
$
3,505

 
$
6,338

 
$
13,671

 
$
18,328

NEO-PTC-01
985

 
389

 
3,348

 
1,537

Other early-stage development expenses
2,125

 
731

 
6,581

 
1,882

Unallocated expenses
7,505

 
6,983

 
23,427

 
20,656

Total research and development expenses
$
14,120

 
$
14,441

 
$
47,027

 
$
42,403

At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales of our products, if approved. This is due to the numerous risks and uncertainties associated with developing our product candidates, including the uncertainty related to:
the addition and retention of key research and development personnel;
successful enrollment in and completion of our current clinical trials for NEO-PV-01, as well as the cost of future clinical trials;
costs associated with the preclinical development and clinical trials for our early discovery product candidates;
maintaining agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;
receipt of marketing approvals from applicable regulatory authorities;
commercializing products, if and when approved, whether alone or in collaboration with others;
the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our products if and when approved; and
continued acceptable safety profiles of our products following approval.
A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate.
Research and development activities account for a significant portion of our operating expenses. We expect to maintain our research and development expenses over the next several years as we continue to implement our business strategy, which includes advancing clinical development of NEO-PV-01 and progressing NEO-PTC-01 and NEO-SV-01 into clinical development, expanding our research and development efforts, seeking regulatory approvals for any product candidates that successfully complete clinical trials, accessing and developing additional product candidates and maintaining personnel to support our research and development efforts. In addition, product candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect our research and development expenses to increase as our product candidates advance into later stages of clinical development.
General and Administrative Expenses
General and administrative expenses consist of personnel-related costs, including salaries, benefits and non-cash stock-based compensation expense, for our personnel in executive, legal, finance and accounting, human resources, business operations and other administrative functions, legal fees related to patent, intellectual property and corporate matters, fees paid for accounting, regulatory and tax services, insurance costs, consulting fees and facility-related costs not otherwise included in research and development expenses.
We expect to maintain our general and administrative expenses at similar levels in future periods to support our continued research and development activities as well as the costs of operating as a public company.

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Other Income, Net
Other income, net consists primarily of interest income related to our investments in cash equivalents and marketable securities.
Results of Operations
Comparison of the Three Months Ended September 30, 2019 and 2018
The following table summarizes our results of operations for the three months ended September 30, 2019 and 2018, along with the changes in those items in dollars:
 
Three Months Ended
September 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands)
Operating expenses:
 

 
 

 
 

Research and development
$
14,120

 
$
14,441

 
$
(321
)
General and administrative
5,134

 
4,612

 
522

Total operating expenses
19,254

 
19,053

 
201

Loss from operations
(19,254
)
 
(19,053
)
 
(201
)
Other income (expense), net
274

 
662

 
(388
)
Net loss
$
(18,980
)
 
$
(18,391
)
 
$
(589
)
Research and Development
Research and development expenses decreased by $0.3 million from $14.4 million for the three months ended September 30, 2018 to $14.1 million for the three months ended September 30, 2019 due primarily to the following decreases:
$1.9 million for external manufacturing costs to support NEO-PV-01 and NEO-PTC-01;
$0.6 million for external research and development costs to support our ongoing NEO-PV-01 clinical trials; and
$0.3 million for external costs related to advancing our preclinical development candidates.
These decreases were partially offset by the following increases:
$1.7 million for NEO-SV-01 costs, including expenses related to manufacturing, stability studies and the submission of an IND to the FDA;
$0.5 million for personnel-related costs due to increased headcount, including $0.2 million of increased stock-based compensation expense; and
$0.2 million for costs related to the preparation for the planned filing of a CTA in Europe for NEO-PTC-01.
General and Administrative
General and administrative expenses increased by $0.5 million from $4.6 million for the three months ended September 30, 2018 to $5.1 million for the three months ended September 30, 2019 due primarily to $0.4 million of increased personnel-related costs due to increased headcount.
Other Income (Expense), Net
Other income decreased from $0.7 million for the three months ended September 30, 2018 to $0.3 million for the three months ended September 30, 2019 primarily as a result of decreased interest income on our cash, cash equivalents and marketable securities.

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Comparison of the Nine Months Ended September 30, 2019 and 2018
The following table summarizes our results of operations for the nine months ended September 30, 2019 and 2018, along with the changes in those items in dollars:
 
Nine Months Ended
September 30,
 
 
 
2019
 
2018
 
Change
 
(in thousands)
Operating expenses:
 

 
 

 
 

Research and development
$
47,027

 
$
42,403

 
$
4,624

General and administrative
16,122

 
12,524

 
3,598

Total operating expenses
63,149

 
54,927

 
8,222

Loss from operations
(63,149
)
 
(54,927
)
 
(8,222
)
Other income (expense), net
1,213

 
1,116

 
97

Net loss
$
(61,936
)
 
$
(53,811
)
 
$
(8,125
)
Research and Development
Research and development expenses increased by $4.6 million from $42.4 million for the nine months ended September 30, 2018 to $47.0 million for the nine months ended September 30, 2019 due primarily to the following increases:
$4.8 million for NEO-SV-01 costs, including expenses related to manufacturing, stability studies and the submission of an IND to the FDA;
$1.7 million for personnel-related costs due to increased headcount;
$1.7 million for external research and development costs to support our ongoing NEO-PV-01 clinical trials;
$0.6 million for other research costs for the advancement of our product candidates, including purchases of laboratory supplies and consumables, as well as travel-related expenses and license costs;
$0.3 million in facility-related costs, including occupancy costs, as well as depreciation and other maintenance costs; and
$0.2 million for costs related to the preparation for the planned filing of a CTA in Europe for NEO-PTC-01.
These increases were partially offset by the following decreases:
$4.1 million for external manufacturing costs to support NEO-PV-01 and NEO-PTC-01; and
the non-recurrence of a $0.6 million expense incurred during the nine months ended September 30, 2018 related to a one-time milestone payable under one of our collaboration agreements as a result of the closing of our IPO.
General and Administrative
General and administrative expenses increased by $3.6 million from $12.5 million for the nine months ended September 30, 2018 to $16.1 million for the nine months ended September 30, 2019 due primarily to the following:
$2.1 million for increased personnel-related costs due to increased headcount, including $1.2 million of increased stock-based compensation expense;
$0.7 million for increased expenses associated with obtaining and maintaining intellectual property protection; and
$0.7 million for increased other general and administrative costs primarily due to the increased costs of being a public company, as well as additional professional fees, insurance and tax related expenditures.
Other Income (Expense), Net
Other income increased from $1.1 million for the nine months ended September 30, 2018 to $1.2 million for the nine months ended September 30, 2019 primarily as a result of increased interest income on our cash, cash equivalents and marketable securities.

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Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have incurred significant losses in each period and on an aggregate basis. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. We have funded our operations through September 30, 2019 primarily with aggregate net proceeds of $89.9 million from our IPO, as well as an aggregate of $161.1 million of net proceeds from sales of our preferred stock and convertible debt. As of September 30, 2019, we had cash and cash equivalents of $44.3 million.
Historical Cash Flows
The following table provides information regarding our cash flows for each of the periods presented (in thousands):
 
Nine Months Ended September 30,
 
2019
 
2018
 
(in thousands)
Net cash provided by (used in):
 

 
 
Operating activities
$
(57,949
)
 
$
(45,542
)
Investing activities
49,414

 
(42,297
)
Financing activities
113

 
90,368

Net (decrease) increase in cash, cash equivalents and restricted cash
$
(8,422
)
 
$
2,529

Cash Used in Operating Activities
The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital, which are primarily the result of increased expenses and timing of vendor payments.
During the nine months ended September 30, 2019, operating activities used $57.9 million of cash, primarily resulting from our net loss of $61.9 million and net cash used by changes in our operating assets and liabilities of $4.0 million, partially offset by net non-cash charges of $8.0 million. Net cash used by changes in our operating assets and liabilities for the nine months ended September 30, 2019 consisted primarily of a $2.1 million decrease in accounts payable, a $1.2 million decrease in accrued expenses and other liabilities and a $0.8 million decrease in operating lease liabilities.
During the nine months ended September 30, 2018, operating activities used $45.5 million of cash, primarily resulting from our net loss of $53.8 million, partially offset by net non-cash charges of $5.8 million and changes in our operating assets and liabilities of $2.5 million. Net cash provided by changes in our operating assets and liabilities for the nine months ended September 30, 2018 consisted primarily of a $2.3 million increase in accrued expenses and other liabilities and a $0.5 million increase in accounts payable, partially offset by a $0.5 million increase in prepaid expenses and other current assets.
Cash Provided by (Used in) Investing Activities
During the nine months ended September 30, 2019, net cash provided by investing activities was $49.4 million, consisting of proceeds from the sales and maturities of marketable securities of $50.7 million, partially offset by purchases of property and equipment of $1.3 million.
During the nine months ended September 30, 2018, net cash used in investing activities was $42.3 million, consisting of purchases of marketable securities of $72.9 million and purchases of property and equipment of $2.6 million, partially offset by proceeds from the sales and maturities of marketable securities of $33.2 million.
Cash Provided by Financing Activities
During the nine months ended September 30, 2019, net cash provided by financing activities was $0.1 million, consisting primarily of proceeds from the exercise of stock options.
During the nine months ended September 30, 2018, net cash provided by financing activities was $90.4 million, consisting primarily of $93.0 million of net proceeds from our IPO, after deducting underwriting discounts and commissions, and $0.4 million in proceeds from the exercise of stock options, partially offset by payments of initial public offering costs of $3.0 million.

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Funding Requirements
We expect to continue to incur substantial expenses in connection with our ongoing research and development activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future.
Based on our current operating plan, we expect that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into June 2020. However, we have based this estimate on assumptions that may prove to be wrong and we could exhaust our capital resources sooner than we expect.
Because of the numerous risks and uncertainties associated with the development of our product candidates or programs and because the extent to which we may enter into collaborations with third parties for development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our funding requirements, both near and long-term, as well as the timing and amount of our operating expenditures, will depend largely on:
the initiation, progress, scope, timing, costs and results of preclinical or nonclinical testing and studies and clinical trials for our product candidates;
the clinical development plans we establish for these product candidates;
the number and characteristics of product candidates that we develop or may in-license;
the terms of any collaboration agreements we may choose to execute;
the outcome, timing and cost of meeting regulatory requirements established by the FDA, the European Medicines Agency, or the EMA, and other comparable foreign regulatory authorities;
the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;
the cost of defending intellectual property disputes, including any patent infringement actions that may be brought by third parties in the future against us or our product candidates;
the effect of competing technological and market developments;
the cost and timing of formulation development and manufacturing, including the completion of commercial-scale outsourced manufacturing activities; and
the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products on our own.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future and we may need additional funds to meet operational needs and capital requirements associated with these changed operating plans.
In addition to the variables described above, if and when any of our product candidates successfully complete development, we will incur substantial additional costs associated with regulatory filings, marketing approval, post-marketing requirements, maintaining our intellectual property rights and regulatory protection, in addition to other commercial costs. We cannot reasonably estimate these costs at this time.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. We currently have no credit facility or committed sources of capital. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interests of our stockholders will be diluted and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts and additional capital may not be available on reasonable terms, or at all. If we raise additional funds through collaboration arrangements or other strategic transactions in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. 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 development or future commercialization efforts.
Off-Balance Sheet Arrangements
During the periods presented we did not have, and we do not currently have, any off-balance sheet arrangements, as defined under applicable Securities and Exchange Commission, or SEC, rules.

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Contractual Obligations and Commitments
During the nine months ended September 30, 2019, there have been no material changes from the contractual obligations and commitments previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 11, 2019.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these condensed consolidated 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 condensed consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors 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.
Effective January 1, 2019, we adopted Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), or ASU 2016-02, with no restatement of prior periods or cumulative adjustment to retained earnings. Comparative periods in our financial statements will be presented in accordance with the existing guidance under Accounting Standards Codification Topic 840, or ASC 840. Adoption of the new standard resulted in the recognition of operating lease right-of-use assets and operating lease liabilities of approximately $8.7 million and $8.9 million, respectively, as of January 1, 2019. The adoption of the new standard did not materially impact our condensed consolidated statement of operations. See Note 2 and Note 7 to our condensed consolidated financial statements included within Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the application of ASU 2016-02 to our current lease commitments.
During the nine months ended September 30, 2019, there were no other material changes to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 11, 2019.
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As of September 30, 2019, we had cash and cash equivalents of $44.3 million. Our cash and cash equivalents consist primarily of money market funds that are invested in U.S. government-backed securities. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term nature of our cash equivalents, a sudden change in interest rates would not be expected to have material effect on our business, financial condition or results of operations. Because of the short-term nature of the investments in our portfolio, an immediate change by 100 basis points in market interest rates would not have a material impact on the fair market value of our investment portfolio or on our financial position or results of operations.
We are not currently exposed to significant market risk related to changes in foreign currency exchange rates. However, we have contracted with and may continue to contract with vendors that are located in Europe. We may be subject to fluctuations in foreign currency rates in connection with certain of these agreements. Transactions denominated in currencies other than the United States dollar are recorded based on exchange rates at the time such transactions arise. While we have not engaged in the hedging of our foreign currency transactions to date, we are evaluating the costs and benefits of initiating such a program and may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operation and our risk grows.
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the nine months ended September 30, 2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the principal executive officer (our

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Chief Executive Officer) and principal financial and accounting officer (our Chief Financial Officer), to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) as of September 30, 2019. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of