APPLIED GENETIC TECHNOLOGIES CORPORATION
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and notes
included in Part IV, Item 15 of this Annual Report on
Form 10-K.
In addition to historical financial information, the following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
81--------------------------------------------------------------------------------
Table of Contents
discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, including, but not limited to, those set forth in "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors."
Overview
We are a clinical-stage biotechnology company that uses our proprietary gene
therapy platform technology to develop transformational genetic therapies for
people suffering from rare and debilitating diseases. Our initial focus is in
the field of ophthalmology, where we have wholly owned
clinical-stage programs in X-linked retinitis pigmentosa
("XLRP") and achromatopsia ("ACHM"), and an optogenetics program through our
collaboration with Bionic Sight, Inc. (previously Bionic Sight, LLC ) ("Bionic
Sight"). Our preclinical pipeline includes a program in dry
age-related macular degeneration
("dAMD"), two programs targeting central nervous system ("CNS") disorders,
including frontotemporal dementia ("FTD") and amyotrophic lateral sclerosis
("ALS"), and a program in otology through our collaboration with Otonomy, Inc.
("Otonomy"). In May 2022 , we released interim, masked, clinical data from the
Skyline trial (as defined below) in our XLRP program and we now have
24-month
data from the XLRP Phase 1/2 trial ("Horizon"). In addition to our product
pipeline, we have also developed broad technological and manufacturing
capabilities, utilizing our internal scientific resources and collaborating with
others.
Since our inception, we have devoted substantially all of our resources to the
development of our clinical and preclinical programs in ophthalmology, otology
and CNS, including manufacturing product candidates in compliance with good
manufacturing practices, preparing to conduct and conducting clinical trials of
our product candidates, providing general and administrative support for these
operations and protecting our intellectual property. We do not have any products
approved for sale and have not generated any revenue from product sales. To
date, we have funded our operations primarily through public offerings of our
common stock and warrants to purchase our common stock, private placements of
our preferred stock, collateralized borrowing and collaborations. We have also
been the recipient, either independently or with our collaborators, of grant
funding administered through federal, state, and local governments and agencies
and by patient advocacy groups such as The Foundation Fighting Blindness .
We have incurred losses from operations in each year since inception, except for
fiscal year 2017, wherein we reported net income of $0.4 million due, in part,
to profits from a collaboration agreement that was ultimately terminated in
March 2019 . For the years ended June 30, 2022 and 2021, we reported net losses
of $68.9 million and $57.8 million , respectively. Substantially all our net
losses resulted from costs incurred in connection with our research and
development programs and general and administrative and other expenses
associated with our operations. We expect to continue to incur significant
operating expenses in connection with our ongoing activities as we, subject to
the availability of additional funding:
• continue to conduct clinical trials for our XLRP and ACHM product
candidates;
• manufacture clinical trial materials and develop larger-scale
manufacturing capabilities, including the lease of our new
build-to-suit
manufacturing and quality control facility;
• continue to develop our gene therapy platform and expand our pipeline by
investing in our preclinical product candidates, including those for:
• additional orphan and
non-orphan
ophthalmology indications, such as dAMD and other retinal diseases; and
• other inherited diseases in CNS and otology;
• seek regulatory approval for our product candidates;
• add personnel to support our scientific, collaboration and product
development efforts; and
• continue to operate as a public company.
82
--------------------------------------------------------------------------------
Table of Contents
As ofJune 30, 2022 , we had cash and cash equivalents totaling$46.4 million . We do not expect to generate revenue from product sales unless and until we successfully complete development of and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and which we believe is subject to significant uncertainty. We believe that our available cash and cash equivalents, along with net proceeds of approximately$9.0 million from an underwritten public offering of our common stock, together with accompanying warrants, which is described in Note 15 to our financial statements in this Annual Report on Form 10-K, will be sufficient to allow us to generate data from our ongoing and planned clinical programs and fund currently planned research and discovery programs through calendar year 2022. We will require substantial additional funding to continue our XLRP Phase 2/3 ("Vista") trial, move our ACHMB3 product candidate forward, obtain regulatory approval for our lead product candidates, build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our lead product candidates, if approved, and execute our plan to open and operate a leased current Good Manufacturing Practices ("cGMP") manufacturing and quality control facility. However, our current operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through various strategic transactions, including a merger, public or private equity or debt financings, government or other third-party funding, or a combination of these approaches. We may be unable to enter into such other arrangements or raise additional funds when needed on favorable terms, or at all. Our failure to enter into such other arrangements or raise capital as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates and continue our research and development efforts.
Program Updates and Recent Developments
AGTC-501
for the Treatment of XLRP
AGTC-501,
our lead gene therapy development program for the treatment of XLRP, is designed
to use an engineered adeno-associated virus ("AAV") vector to insert a
stabilized and functional copy of the Retinitis Pigmentosa GTPase Regulator
("RPGR") gene into a patient's photoreceptor cells.
AGTC-501
is comprised of a stabilized RPGR gene and a promoter that was specifically
selected to drive efficient gene expression in primate rods and cones, maintain
photoreceptor function and delay disease progression in preclinical models of
disease. In addition, published
non-human
primate studies showed that our proprietary AAV capsid had as much as twice the
transfection efficiency in photoreceptors when compared to capsids used in
competing programs.
We are currently conducting multiple clinical trials of
AGTC-501
that are intended to support the potential submission of a Biologics License
Application ("BLA"), including a Phase 1/2 trial, Horizon, which incorporates an
expansion portion that we refer to as the Skyline trial. The
24-month
data from our Horizon trial show
AGTC-501
continues to demonstrate a favorable safety profile and is well tolerated by
patients. No serious adverse events related to
AGTC-501
have been reported through month 24. In addition to safety, Horizon is
evaluating biologic activity by assessing changes in several measures of visual
function. There were clinically meaningful improvements in visual sensitivity,
as measured by microperimetry, that continued through 24 months after treatment
in centrally treated patients. Specifically, a clinically significant treatment
effect in visual sensitivity was seen and sustained 24 months after treatment
when comparing treated eyes to fellow untreated eyes in this trial and
improvements in visual sensitivity continue to correlate with improvements in
retinal structure 24 months after treatment. In addition, improvements in best
corrected visual acuity seen 12 months after treatment continue to show evidence
of a biological response 24 months after treatment. Collectively, these clinical
data are encouraging and continue to inform our clinical development in patients
with XLRP.
The Skyline trial is a 14 patient multi-site, Phase 2 trial in which patients
are randomized to either a high dose of
AGTC-501
(the dose received by patients in Group 5 of Horizon), or a low dose of
AGTC-501
(the dose received by patients in Group 2 of Horizon). The primary endpoint in
the Skyline trial is the proportion of treated eyes with an improvement of 7
decibels ("dB") or greater in visual sensitivity from baseline in at least 5
loci at 12 months as measured by microperimetry. Secondary endpoints include the
proportion of treated eyes with improvements in best corrected visual acuity at
twelve months, a patient's ability to navigate a mobility maze
83--------------------------------------------------------------------------------
Table of Contents
more successfully under varying light and challenge conditions at 12 months, and improvements in retinal structure at twelve months. The Skyline trial is masked in that we, the patients and the sites do not know which patient is in which dose group or which dose group received the high or low dose. Accordingly, we refer to the two groups asDose Group A and Dose Group B. We completed enrollment in the Skyline trial in the first quarter of calendar year 2022 and reported 3-month interim results for 13 of the 14 enrolled patients inMay 2022 . Safety, visual sensitivity, visual acuity and the mobility maze were the only endpoints evaluated at 3 months. Retinal structure improvements, another important endpoint, was not evaluated as changes in retinal structure are not expected until between 9 and 12 months. Similar to safety results reported for Horizon, safety results to date for the Skyline trial support that AGTC-501 is generally well tolerated and there are no clinically significant safety concerns. There were non-serious ocular adverse events (grade 2) related to the study agent that were similar between the two dose groups and two ocular serious adverse events, including an increase in intraocular pressure determined to be related to corticosteroids which has resolved, and one of visual impairment deemed related to the surgical procedure which is resolving. Demographic and baseline characteristics were well balanced between the two dose groups in the Skyline trial. Notably, compared to Horizon, patients in the Skyline trial were younger, with better baseline visual sensitivity and visual acuity. Improvements in visual sensitivity, the primary efficacy endpoint in the Skyline trial, were observed in both dose groups at three months. We define responders as patients who have at least 5 loci increase by at least 7 dB. The response rate in Dose Group A was 25% (1 of 4 patients, as one patient in this group was unevaluable) and in Dose Group B was 62.5% (5 of 8 patients), representing a clear difference between the two groups. Notably, while we did not observe an increase in visual sensitivity of at least 7 dB in 5 pre-specified loci as required based on FDA feedback, we did observe an increase in visual sensitivity of at least 7 dB in 9 to 17 loci in the treated area. These responders also had improvements in mean visual sensitivity across the treated region versus the untreated eye per the repeatability coefficient. The 13 patients in the Skyline trial had better baseline best corrected visual acuity, a mean of 66.9 ETDRS letters on an eye chart, which correlates to a Snellen visual acuity equivalent of approximately 20/40. Because these patients started with better visual acuity, we believe that there was less ability for them to improve relative to patients in the Horizon trial. In addition, there was a correlation between visual sensitivity improvements and trends for patients able to complete the maze more rapidly and with fewer errors. We are working with the maze vendor on potential adjustments to account for the fact that only one eye was treated in this analysis, whereas previous use of the maze has been for patients treated in both eyes. It is possible that the better visual acuity of the patients in the Skyline trial at baseline affected the interpretation of the maze results.
The Skyline trial has a similar design and endpoints to the Vista clinical trial. We believe that if the Vista trial has similar outcomes as both the Horizon and Skyline trials, the body of data will support a BLA submission for AGTC-501.
The Vista trial is a multi-site, Phase 2/3 clinical trial expected to include
approximately 60 patients randomized across three arms: a
low-dose group (the
1.2E+11 vg/mL dose from the ongoing Horizon and Skyline trials), a high-dose
group (the 1.1E+12 vg/mL dose from the ongoing Horizon and Skyline trials) and
an untreated control group. The primary endpoint will be improvement in visual
sensitivity, defined as having at least a 7 dB increase in visual sensitivity in
at
least 5 pre-specified loci at
Month 12. Together with a third-party vendor, we have developed a machine
learning algorithm based on the available microperimetry data from our Horizon
and Skyline trials that,
on a patient-by-patient basis, predicts
the loci most likely to improve through evaluation of baseline visual
sensitivity. Secondary efficacy endpoints in the Vista trial include mean change
in visual sensitivity, improvements in visual acuity and performance on the
mobility maze as well as structural
84--------------------------------------------------------------------------------
Table of Contents
improvements in retinal health as measured by changes in the ellipsoid zone (the "EZ"), a defined region within the photoreceptor layer of the retina that degenerates over time and is eventually lost in patients with XLRP. Subject to the availability of additional funding, we plan to complete a masked interim analysis, with the interim data expected to be released in the first half of calendar year 2023. We believe that the interim analysis, together with data from Horizon, including the Skyline expansion portion, may provide us with the opportunity to discuss with theUnited States Food and Drug Administration (the "FDA") potential amendments to the Vista trial, if necessary, that may support an earlier BLA submission than we would otherwise anticipate, or optimize the design of the trial. To date, we have released a significant amount of preclinical and clinical data including improvements in visual sensitivity and visual acuity, as well as improvements in retinal health that we believe support both the potential safety and biological activity of AGTC-501. These data include the recent release of the interim data from the ongoing Horizon and Skyline trials. Data from the ongoing Horizon trial show improvements in visual sensitivity as measured by Macular Integrity Assessment ("MAIA") and continue to correlate with improvements in retinal structure as measured by EZ up to 24 months after treatment. There was moderate correlation 12 months after treatment and substantial correlation 24 months after treatment. Given the efficacy and safety data generated to date, we believe that AGTC-501 is a potential best-in-class product candidate that may provide significant benefits to patients with XLRP, if approved. Subject to the availability of additional funding and any continuing impact of the COVID-19 pandemic, we expect to achieve the following milestones in the XLRP development program: • provide 12-month data from the Skyline expansion portion of the Horizon clinical trial in the first quarter of calendar year 2023; and • provide interim Vista trial data in the first half of calendar year 2023. AGTC-401 and AGTC-402 for the Treatment of ACHM We have been developing two gene therapy product candidates for the treatment of ACHM. The product candidates are designed to use the same engineered AAV vector to insert a stabilized and functional copy of the Cyclic Nucleotide Gated Channel Subunit Beta 3 (CNGB3) gene in the case of AGTC-401 and a stabilized and functional copy of the Cyclic Nucleotide Gated Channel Subunit Alpha 3 (CNGA3) gene in the case of AGTC-402. The product candidates are designed to use the same proprietary cone-specific promoter that was designed to maximize gene expression into a patient's photoreceptor cells. We chose the promoter based on data from preclinical studies that showed the promoter drove efficient gene expression in all three types of primate cone photoreceptors and restored cone photoreceptor function in dog, mouse and sheep models of ACHM. We are currently conducting a Phase 1/2 clinical trial of AGTC-401 in ACHM patients with mutations of the CNGB3 gene (ACHMB3) and a separate Phase 1/2 clinical trial of AGTC-402 in ACHM patients with mutations of the CNGA3 gene (ACHMA3). Each Phase 1/2 clinical trial is being conducted at multiple clinical sites that specialize in inherited retinal diseases. The primary objective of these trials is to identify a well-tolerated dose that provides clinical benefit to patients. To date, we have enrolled a total of 31 adult and pediatric patients into the ACHMB3 trial of AGTC-401 and 24 adult and pediatric patients in the ACHMA3 trial of AGTC-402 and do not currently plan to enroll any additional patients in either trial. We have data from a portion of the patients in these trials up to 24 months after treatment, including our most recent release inFebruary 2022 of 3-month data for the two highest dose groups of ACHMB3 and ACHMA3 pediatric patients that also included updated adult safety data. These data are consistent with the data previously released in adult and pediatric ACHMB3 and ACHMA3 patients. In the Phase 1/2 dose escalation study of AGTC-401 in ACHMB3 patients, a total of 21 adults were treated over an approximately 80-fold dose range in five groups and a total of 10 pediatric patients were treated at the three highest dose groups. Secondary outcome measures evaluating efficacy were assessed by standard visual function 85
--------------------------------------------------------------------------------
Table of Contents
tests, such as perimetry. We defined two pediatric patients (17 and 7 years old)
in the 1.1E+12 vg/mL dose group as responders based on improvements in visual
sensitivity as measured by the Octopus static perimeter. Therefore, of the three
adults and four children (total n=7) in the 1.1E+12 vg/mL dose group, four
(>50%) were responders based on improvements in visual sensitivity. These
patients also reported improvements in quality of life as measured by a patient
reported outcome survey developed specifically for patients with ACHM.
The two other pediatric patients in the 1.1E+12 vg/mL dose group and three
pediatric patients ages 7 years and younger in the 3.2E+12 vg/mL dose group
(total n=5) could not sufficiently concentrate and consistently complete the
visual sensitivity testing. Similar to other trials where endpoints are adapted
for young children, we plan to work closely with clinicians and regulators to
develop potential adaptations for younger patients for visual sensitivity
testing. Despite their inability to complete the tests, we received anecdotal
feedback from certain patients that indicate improvements in visual sensitivity.
Based on the totality of data generated to date, we believe that the 1.1E+12
vg/mL dose has been well tolerated and has potential in both adult and pediatric
patients.
We also reported updated interim
3-month
pediatric data and adult and pediatric safety data for the 24 patients enrolled
in the Phase 1/2 study of
AGTC-402
targeting CNGA3 mutations in patients with ACHMA3. Data from the five pediatric
patients in the two highest dose groups were consistent with previously reported
results, indicating no evidence of clinical improvements, and do not support
further clinical development. Most patients with CNGA3 mutations express a
mutant protein that is not typically found in patients with CNGB3 mutations,
which we believe may have impacted the results seen in patients that received
AGTC-402.
We will continue to follow the ACHMA3 patients for long-term safety
observations.
As previously reported, in both the ACHMB3 and ACHMA3 trials, treatment with the
highest dose (3.2 E+12vg/ml) of
AGTC-401
and
AGTC-402,
respectively, led to three cases of severe ocular inflammation in pediatric
patients, which were reported as Suspected Unexpected Serious Adverse Reactions,
or SUSARs. No new additional SUSARs in any adult or pediatric patients have been
reported and the inflammation in all previously reported SUSARs improved with an
adjusted steroid regimen. Two SUSARs (ACHMA3) have since fully resolved and one
(ACHMB3) continues to improve, with all three patients' best corrected visual
acuity returning to baseline after initial declines in visual acuity were
observed following the SUSARs. Importantly, we have not yet observed any
comparable inflammation in any of our XLRP clinical trials.
We had a collaborative and productive End of Phase 2 ("EOP2") meeting with the
FDA to discuss the potential future development of
AGTC-401
and received constructive feedback from the FDA on our proposed primary and
secondary endpoints for a Phase 2/3 clinical trial. With respect to the primary
endpoint of improvement in visual sensitivity relative to baseline, the FDA
reiterated that a 7 dB change in at least 5
pre-specified
loci is required. However, they indicated a willingness to review an alternative
approach to perimetry from a model used in other trials, which would need to be
adapted specifically for ACHMB3. The FDA also indicated that improvements in
light discomfort may be an acceptable secondary endpoint in a Phase 2/3 clinical
trial of
AGTC-401.
We are currently working through the details of the future development plan for
AGTC-401,
but we have paused development activities due to funding constraints.
Build-To-Suit
Manufacturing and Quality Control Facility in
InMay 2021 , we signed a 20-year lease (subsequently modified to 20 years and one month) for a build-to-suit 21,250 square foot potential cGMP manufacturing and quality control facility adjacent to our existingFlorida facility to prepare for late-stage development and potential commercialization of our XLRP and ACHMB3 programs. The facility is also intended to provide supply chain redundancy, reduce manufacturing risk and enhance quality controls. We anticipate that the build-out of the new manufacturing and quality control facility will be completed during the fourth quarter of calendar year 2022. Additional information regarding our new cGMP manufacturing and quality control facility can be found in Note 3 to our financial statements in this Annual Report on Form 10-K. 86
--------------------------------------------------------------------------------
Table of Contents
Strategic Collaborations and Preclinical Pipeline
Bionic Sight
DuringFebruary 2017 , we entered into a strategic research and development collaboration agreement with Bionic Sight to develop product candidates for patients with visual deficits and blindness due to retinal disease. Through the AGTC-Bionic Sight collaboration, the companies seek to develop a new optogenetic therapy that leverages AGTC's deep experience in gene therapy and ophthalmology and Bionic Sight's innovative neuro-prosthetic device and algorithm for retinal coding. The collaboration agreement grants to us, subject to achievement by Bionic Sight of certain development milestones, an option to exclusively negotiate for a limited period of time to acquire: (i) a majority equity interest in Bionic Sight; (ii) the Bionic Sight assets to which the collaboration agreement relates; or (iii) an exclusive license with respect to the product to which the collaboration agreement relates. InMarch 2021 , Bionic Sight, which has responsibility for conducting the clinical trial, reported promising results in its first two cohorts of patients in the Phase 1/2 retinitis pigmentosa optogenetics study. Bionic Sight reported that these patients, all of whom have complete or near-complete blindness, can now see light and motion, and, in two cases, can detect the direction of motion. Bionic Sight also announced that the product candidate was well-tolerated and that it is continuing to enroll patients at higher doses.
Otonomy
DuringOctober 2019 , we entered into a strategic collaboration agreement with Otonomy to co-develop and co-commercialize an AAV-based gene therapy product candidate designed to restore hearing in patients with sensorineural hearing loss caused by a mutation in the gap junction protein beta 2 gene - the most common cause of congenital hearing loss. Under the collaboration agreement, the parties began equally sharing the program costs and any proceeds from potential licensing transactions inJanuary 2020 and can include additional genetic hearing loss targets in the future. EffectiveJanuary 1, 2022 , we amended the Otonomy collaboration agreement to increase Otonomy's responsibility for the overall development and commercialization of the program, which resulted in (i) a reduction in our share of future product development costs and (ii) our potential receipt of future payments, and royalties on any product sales in lieu of equal sharing of any potential profits or proceeds related to the program. Additional information regarding the Bionic Sight and Otonomy collaborative agreements can be found in Note 8 to our financial statements in this Annual Report on Form 10-K. Preclinical Pipeline We also have three wholly-owned product candidates in preclinical testing, including AGTC-701 for the treatment of dAMD, AGTC-601 for the treatment of FTD and AGTC-801 for the treatment of ALS.
Financial Operations Review
Revenue
We generate revenue primarily through: (i) collaboration agreements; (ii) sponsored research arrangements with nonprofit organizations for the development and commercialization of product candidates; (iii) federal research and development grant programs; and (iv) licensing arrangements. In the future, we may generate revenue from product sales (if any products are approved), license fees, milestone payments, development services, research and development grants, or from collaboration and royalty payments for the sales of products developed under licenses of our intellectual property.
We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development programs, manufacturing efforts and reimbursements,
87--------------------------------------------------------------------------------
Table of Contents
collaboration milestone payments, and the sale of our products, to the extent that any are approved and successfully commercialized. We do not expect to generate revenue from product sales for the foreseeable future, if at all. If we or our collaborators fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue and our results of operations, financial position and cash flows would be materially adversely affected.
Research and development expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates and include:
• employee-related expenses, including salaries, benefits, travel and
share-based compensation expense;
• expenses incurred under agreements with academic research centers,contract research organizations and investigative sites that conduct our
clinical trials;
• license and sublicense fees and collaboration expenses;
• costs of acquiring, developing and manufacturing clinical trial
materials; and
• facilities, depreciation and other expenses, which include direct and
allocated expenses for rent and maintenance of facilities, insurance and
other supplies.
Research and development costs are expensed as incurred. Costs for certain
development activities are recognized based on an evaluation of the progress
toward completion of specific tasks, using information and data provided to us
by our vendors and our clinical sites.
We cannot determine with certainty the duration and completion costs of the
current or future clinical trials of our product candidates or if, when, or to
what extent we will generate revenue from the commercialization and sale of any
of our product candidates that obtain regulatory approval. We may never succeed
in achieving regulatory approval for any of our product candidates. The
duration, costs and timing of clinical trials and development of our product
candidates will depend on a variety of factors, including:
• the scope, rate of progress and expense of our ongoing clinical trials,
as well as any additional clinical trials that we are required to, ordecide to, initiate and other research and development activities;
• the timing and level of activity as determined by us or jointly with our
partners;
• the level of funding, if any, received from our partners;
• whether or not we elect to cost share with our collaborators;
• future clinical trial results;
• uncertainties in clinical trial enrollment rates or
drop-out
or discontinuation rates of patients;
• increased cost and delay associated with manufacturing or testing issues,
including ongoing quality assurance, qualifying new vendors and
developing
in-house
capabilities through, among other things, our lease of a new cGMP
build-to-suit
manufacturing and quality control facility;
• the countries in which trials are conducted;
• potential additional safety monitoring or other studies requested by
regulatory agencies or elected as best practice by us;
• significant and changing government regulation;
• the timing and receipt of any regulatory approvals; and
• broader market forces, such as inflation and wage/salary growth.
88
--------------------------------------------------------------------------------
Table of Contents
Changes in any of these variables over time with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in or execution of any of our clinical trials, which could be adversely impacted by the COVID-19 pandemic, we could be required to expend significant additional financial resources and time on the completion of clinical trial activities and development of our product candidates. From our inception and throughJune 30, 2022 , we have incurred approximately$332.1 million in research and development expenses. We expect our research and development expenses to increase as we continue the development of our product candidates, explore potential applications of our gene therapy platform in other indications and execute our plan to open and operate a leased cGMP manufacturing and quality control facility.
General and administrative and other expenses
General and administrative and other expenses primarily consist of salaries and related costs for personnel, including share-based compensation and travel expenses for our employees in executive, operational, legal, business development, finance and human resource functions. Other general and administrative expenses include costs to support employee training and development, board of directors' costs, depreciation, insurance, facility-related costs not otherwise included in research and development expenses, professional fees for legal services, patent-related expenses, and accounting, investor relations, corporate communications and information technology services. We anticipate that our general and administrative and other expenses will continue to increase in the future as we hire additional employees to support our research and development efforts, collaboration arrangements and the potential commercialization of our product candidates, if approved. Inflation and wage/salary growth could also contribute to higher future costs. Additionally, if and when we believe that regulatory approval of our first product candidate appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of any such product candidate. Our general and administrative expenses are also expected to increase as we execute our plan to open and operate a leased cGMP manufacturing and quality control facility.
Investment income, net
Investment income, net consists of interest earned on cash and cash equivalents and held-to-maturity investments in debt securities. During the year endedJune 30, 2022 , investment income, net declined by$17,000 when compared to the prior year, primarily due to a smaller investment portfolio in the current year that was partially offset by higher interest rates in the marketplace.
Interest expense
Interest expense during the year endedJune 30, 2022 increased by$1.2 million when compared to the prior year. This increase was primarily due to a higher average outstanding balance under our collateralized term loan agreement during the year endedJune 30, 2022 . Additional information regarding our long-term loan agreement can be found in Note 7 to our financial statements in this Annual Report on Form 10-K. OnSeptember 21, 2022 , theFederal Reserve Board announced an increase of 0.75% in the federal funds rate and indicated that further rate increases will be announced in the short-term to combat rising inflation inthe United States . When the prime rate reported in
The Wall Street Journal
increases, as was the case with the most recent federal funds rate increase and is expected to continue in response to projected hikes in the federal funds rate by theFederal Reserve Board , the cost of borrowing and related interest expense on our variable-rate debt also increases. 89
--------------------------------------------------------------------------------
Table of Contents
Benefit from income taxes
The income tax benefit for the year endedJune 30, 2021 was$2.1 million and was primarily due to the reversal of uncertain tax position liabilities, including the related interest and penalties. There was no provision for income taxes during the year endedJune 30, 2022 because, among other things, we had no uncertain tax positions during that reporting period. Additional information regarding our income taxes can be found in Note 10 to our financial statements in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report on Form 10-K is based on our financial statements, which have been prepared assuming that the Company will continue as a going concern and in accordance withU.S. generally accepted accounting principles. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, judgments and methodologies, including those related to accrued expenses and share-based compensation. We base our estimates on historical experience, current conditions, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions. Moreover, we may need to change the assumptions underlying our estimates due to risks and uncertainties related to the COVID-19 pandemic or otherwise and those changes could have a material adverse effect on our statements of operations, financial condition and cash flows. While our significant accounting policies are described in Note 2 to our financial statements in this Annual Report on Form 10-K, we believe that the following accounting policies are most critical to the preparation of our financial statements.
Revenue recognition
We recognize revenue when our customer obtains control of promised goods or
services, in an amount that reflects the consideration that we expect to receive
in exchange for those goods or services. To determine the appropriate amount of
revenue to be recognized for arrangements determined to be within the scope of
Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers
, we perform the following five steps: (i) identification of the contract;
(ii) determination of whether the promised goods or services are performance
obligations; (iii) measurement of the transaction price, including any
constraints on variable consideration; (iv) allocation of the transaction price
to the performance obligations; and (v) recognition of revenue when (or as) we
satisfy each performance obligation. We only apply the five-step model to
contracts if it is probable that we will collect consideration that we are
entitled to in exchange for the goods or services we transfer to the customer.
Performance obligations are promises to transfer distinct goods or services to a
customer. Promised goods or services are considered distinct when (i) the
customer can benefit from the good or service on its own or together with other
readily available resources and (ii) the promised good or service is separately
identifiable from other promises in the contract. When assessing whether
promised goods or services are distinct, we consider factors such as the stage
of development of the underlying intellectual property, the capabilities of a
customer to develop the intellectual property on its own or whether the required
expertise is readily available.
We estimate the transaction price based on the amount expected to be received
for transferring the promised goods or services in the contract. The
consideration may include both fixed consideration and variable
consideration. At the inception of an arrangement that includes variable
consideration and at the end of each reporting period, we evaluate the amount of
potential customer payments and the likelihood that such payments will be
received. We utilize either the most likely amount method or the expected amount
method to estimate the amount to be received based on which method better
predicts the amount expected to be received. If it is
90--------------------------------------------------------------------------------
Table of Contents
probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price. We will assess our revenue generating arrangements to determine whether a significant financing component exists and conclude that a significant financing component does not exist in an arrangement if the: (a) promised consideration approximates the cash selling price of the promised goods and services or any significant difference is due to factors other than financing; and (b) timing of payment approximates the transfer of goods and services and performance is over a relatively short period of time within the context of the entire term of the contract. Our contracts often include development and regulatory milestone payments. At contract inception, we evaluate whether any such milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the customer's control, such as regulatory approvals, are not included in the transaction price. At the end of each subsequent reporting period, we reevaluate the probability of achievement of such development milestones and any related constraint and, if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenue and earnings in the period of adjustment. For arrangements that may include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sale occurs or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our collaboration arrangements. We allocate the transaction price based on the estimated stand-alone selling price of the underlying performance obligation or, in the case of certain variable consideration, to one or more performance obligations. We use assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in a contract. We utilize key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs to complete the related performance obligation. Certain variable consideration is allocated specifically to one or more performance obligation in a contract when the terms of the variable consideration relate to the satisfaction of a performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts we would expect to receive for each performance obligation. For performance obligations consisting of licenses and other promises, we use judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for the purpose of recognizing revenue from upfront fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we will recognize revenue from upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. We receive payments from our customers based on billing terms established in each contract. Such billings generally have 30-day payment terms. Upfront payments and fees are recorded as deferred revenue upon receipt or when due until we perform our obligations under those arrangements. Amounts are recorded as accounts receivable when the right to consideration is unconditional.
Research and development expenses
Research and development expenses are for activities designed to identify,
develop and test product candidates and generally include compensation and
related benefits
and non-cash share-based
compensation for research-
91
--------------------------------------------------------------------------------
Table of Contents
related employees; laboratory costs; animal and laboratory maintenance and supplies; rent; utilities; clinical and preclinical expenses; and payments for sponsored research, scientific and regulatory consulting fees and testing.
As part of the process of preparing our financial statements, estimates of accrued expenses are necessary. The estimation process involves reviewing quotations and contracts, identifying services that have been performed on our behalf, and determining the level of services performed and associated costs incurred for services for which we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice monthly in arrears for services performed or when contractual milestones are met. We estimate our accrued expenses at the end of each reporting period based on the facts and circumstances known at that time. As a result, estimates recorded in our financial statements and disclosed in the accompanying notes may change in the future and such changes in estimates, if any, will be recorded in our operating results in the period they are identified by us. The significant estimates in our accrued research and development expenses primarily relate to expenses incurred with respect to academic research centers, contract research organizations and other vendors in connection with research and development activities for which we have not yet been invoiced. There are instances where our service providers require advance payments at the inception of a contract and other circumstances where our payments to a vendor will exceed the level of services provided, in both cases resulting in a prepayment of research and development expenses. Such prepayments are charged to research and development expense as and when the service is provided or when a specific milestone outlined in the contract is reached.
Share-based compensation
We account for share-based awards issued to employees in accordance with Accounting Standards Codification Topic 718, Compensation-Stock Compensation, and generally recognize share-based compensation expense on a straight-line basis over the period that an employee is required to provide service in exchange for the award. In certain instances, we use a graded vesting schedule to recognize compensation expense. We also award stock options and restricted stock units to nonemployees in exchange for consulting services. The determination of share-based compensation costs for nonemployees is generally consistent with that of employee awards, with expense recognized as services are provided to us over the related service period. For purposes of calculating share-based compensation expense, we estimate the fair value of stock options using a Black-Scholes option-pricing model. The determination of the fair value of a share-based compensation award utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including the expected volatility of our stock, the expected life of the stock option, the risk-free interest rate and expected dividends. Additionally, we use a Monte Carlo simulation model to determine the fair value of restricted stock units with market-based vesting conditions for purposes of calculating share-based compensation expense. The Monte Carlo simulation model incorporates the probability of satisfying a market condition and uses transaction details such as our stock price, contractual terms, maturity and risk-free interest rates, as well as volatility. The fair value of restricted stock units with no performance or market vesting conditions is based on the market value of our common stock on the date of grant. If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. If there is a difference between the assumptions used in determining share-based compensation expense and the actual factors that become known over time, specifically with respect to anticipated forfeitures, we may change the input factors used in determining share-based compensation costs for future awards. These changes, if any, may materially impact our results of operations in the period that such changes are made.
Recent Accounting Pronouncements
See Note 2 to our financial statements in this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business.
92--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Comparison of the years ended
Revenue
Revenue of
EffectiveApril 13, 2021 , we entered into a license agreement with a third party whereby we provided nonexclusive rights to our proprietary cone-specific promoter technology for use in the development of two non-competing products. In connection with this agreement, we recognized$0.5 million of license fee revenue during the year endedJune 30, 2021 . Additional information regarding the license agreement can be found in Note 8 to our financial statements in this Annual Report on Form 10-K.
Research and development expenses
The table below summarizes our research and development expenses by product candidate or program for the years indicated.
Year Ended June 30, Increase % Increase
In thousands 2022 2021 (Decrease) (Decrease)
External research and development
expenses:
XLRP $ 13,489 $ 15,250 $ (1,761 ) (12 )%
ACHM 3,345 4,720 (1,375 ) (29 )%
Research and discovery programs and
X-linked
retinoschisis 4,930 3,113 1,817 58 %
Total external research and
development expenses 21,764 23,083 (1,319 ) (6 )%
Internal research and development
expenses:
Employee-related costs 16,717 12,663 4,054 32 %
Share-based compensation 1,685 1,110 575 52 %
Other 9,349 7,544 1,805 24 %
Total internal research and
development expenses 27,751 21,317 6,434 30 %
Total research and development
expenses $ 49,515 $ 44,400 $ 5,115 12 %
External research and development expenses consist of collaboration, licensing,
manufacturing, testing and other miscellaneous costs that are directly
attributable to our most advanced product candidates and discovery programs. We
do not allocate employee-related costs, including share-based compensation,
costs associated with broad technology platform improvements or other indirect
costs, to specific programs, as they are deployed across multiple projects under
development and, as such, are separately classified as internal research and
development expenses in the table above.
Research and development expenses for the years ended June 30, 2022 and 2021
were $49.5 million and $44.4 million , respectively, an increase of $5.1 million ,
or 12%. The year-over-year increase was due to various factors, including:
(i) higher employee-related costs that were primarily attributable increased
headcount; (ii) increased external spending for our research and discovery
programs, which was primarily for planned material production costs in
connection with our preclinical programs; (iii) higher share-based compensation
costs that were primarily due to restricted stock units granted to certain
employees from May 2021 to July 2021 (the "2021 RSUs"); and (iv) an increase in
internal research and development expenses for certain assay development that we
are now conducting
in-house,
as well as higher costs for rent, travel and consultants. These increases in
research and development expenses were partially offset by: (i) a year-over-year
reduction in manufacturing activities for Vista clinical trial materials; (ii) a
decrease in ACHM expenses due to reduced site
93--------------------------------------------------------------------------------
Table of Contents
activity as our two clinical studies have progressed to a point where they are no longer activating new sites or enrolling new patients; and (iii) lower costs in connection with the wind-down of our X-linked retinoschisis program. Additionally, research and development expenses for the year endedJune 30, 2022 were favorably impacted by changes in estimates that reduced certain vendor accruals during such reporting period.
General and administrative and other expenses
The table below summarizes our general and administrative and other expenses for
the years indicated.
Year Ended June 30, Increase % Increase
In thousands 2022 2021 (Decrease) (Decrease)
Employee-related costs $ 6,301 $ 5,312 $ 989 19 %
Share-based compensation 1,740 1,568 172 11 %
Legal and professional fees 876 1,636 (760 ) (46 )%
Other 8,068 6,035 2,033 34 %
Total general and administrative
and other expenses $ 16,985 $ 14,551 $ 2,434 17 %
General and administrative and other expenses for the years ended June 30, 2022
and 2021 were $17.0 million and $14.6 million , respectively, an increase of
$2.4 million , or 17%. The increase was primarily due to: (i) compensation for
new employees; (ii) incremental share-based compensation costs from the 2021
RSUs;
(iii) start-up
costs for our
build-to-suit manufacturing
and quality control facility; and (iv) higher business development, investor
relations and insurance costs. Lower legal fees during the year ended June 30,
2022 were due to reduced use of external legal counsel.
Liquidity and Capital Resources
We have incurred cumulative losses and negative cash flows from operations since our inception and, as ofJune 30, 2022 , we had an accumulated deficit of$308.2 million . We believe that there is presently insufficient funding available to allow us to generate data from our ongoing and planned clinical programs and fund currently planned research and discovery programs for a period exceeding 12 months from the date of this filing with theSEC . While we expect to generate some revenue from collaborations, sponsored research agreements, grants and licensing of our intellectual property, we believe that we will incur losses and generate negative operating cash flows for the foreseeable future. As such, these circumstances collectively raise substantial doubt about our ability to continue as a going concern. During this 12-month period, our future liquidity needs will be primarily based on the: (i) success and progression of our efforts to complete a strategic transaction, including a merger; (ii) the progress we are able to make on the development of our product candidates; (iii) repayment obligations under our long-term debt agreement; and (iii) costs to operate our leased build-to-suit manufacturing and quality control facility. It will be several years, if ever, before we have a product candidate ready for commercialization. We expect that our research and development expenses and general and administrative and other expenses will continue to increase and, as a result, we anticipate that we will require additional capital to fund our operations, which we may raise through a combination of strategic transactions, including a merger, and equity and debt offerings. Most recently, we received: (i) net proceeds of$9.0 million subsequent toJune 30, 2022 from an underwritten public offering of our common stock, together with accompanying warrants, which is described in Note 15 to our financial statements in this Annual Report on Form 10-K; (ii) net proceeds of$9.2 million and$69.3 million during the years endedJune 30, 2022 and 2021, respectively, from underwritten public offerings and selling our common stock through an "at-the-market offering" program, which are described in Note 13 to our financial statements in this Annual Report on Form 10-K; and (iii)$9.9 million of loan proceeds, net of debt discounts, inMay 2021 . Moreover, through a tenant improvement allowance and tiered rental rates, we have structured the 94
--------------------------------------------------------------------------------
Table of Contents
third-party leasing costs for our build-to-suit manufacturing and quality control facility inAlachua, Florida in a way that will not significantly impact our cash runway until the fiscal year endingJune 30, 2024 . Notwithstanding the foregoing, we used our available cash and cash equivalents to fund approximately$2.9 million of tenant fit out work at such facility inAugust 2022 , which represented our required contribution pursuant to a recent lease amendment. Additional information regarding our new manufacturing and quality control facility and long-term loan agreement can be found in Notes 3 and 7, respectively, to our financial statements in this Annual Report on Form 10-K. We are closely monitoring ongoing developments in connection with the COVID-19 pandemic, which may negatively impact our projected cash position and access to capital. We will continue to assess our cash position and any progress we make towards the completion of one or more strategic transactions and, if circumstances warrant, make appropriate adjustments to our operating plan. Cash in excess of immediate requirements is invested in accordance with our investment policy, which primarily seeks to maintain adequate liquidity and preserve capital by generally limiting investments to certificates of deposit and investment-grade debt securities that mature within twelve months. As ofJune 30, 2022 , our cash and cash equivalents were held in bank accounts and money market funds.
Cash flows
The table below sets forth the primary sources and uses of cash for the years
indicated.
Year Ended June 30, Increase % Increase
In thousands 2022 2021 (Decrease) (Decrease)
Cash provided by (used in):
Operating activities $ (65,748 ) $ (51,173 ) $ (14,575 ) (28 )%
Investing activities (14 ) 38,147 (38,161 ) >(100 )%
Financing activities 7,076 79,615 (72,539 ) (91 )%
Net increase (decrease) in cash
and cash equivalents $ (58,686 ) $ 66,589 $ (125,275 ) >(100 )%
Operating activities.
For both the years ended June 30, 2022 and 2021, cash used in operating
activities was primarily the result of research and development expenses and
general and administrative and other expenses incurred in conducting normal
business operations. Specifically, the cash used in operating activities of
$65.7 million during the year ended June 30, 2022 was due to a net loss of
$68.9 million and unfavorable changes in our operating assets and liabilities of
$3.2 million , partially offset
by non-cash items
in our statement of operations of $$6.4 million. The cash used in operating
activities of $51.2 million during the year ended June 30, 2021 was due to a net
loss of $57.8 million , partially offset by
non-cash
items in our statement of operations of $2.8 million and favorable changes in
our operating assets and liabilities of $3.9 million .
Investing activities.
Cash used in investing activities during the year ended June 30, 2022 , which was
nominal, consisted of purchases of property and equipment of $1.7 million and
intellectual property costs of $0.3 million , partially offset by cash proceeds
of $2.0 million from maturities of investments. Cash provided by investing
activities of $38.1 million during the year ended June 30, 2021 consisted of
cash proceeds of $61.0 million from maturities of investments, net of investment
purchases of $21.0 million , partially offset by purchases of property and
equipment of $1.5 million and intellectual property costs of $0.4 million .
Financing activities.
Cash provided by financing activities of $7.1 million during the year ended
June 30, 2022 consisted of proceeds of $9.2 million from issuances of our common
stock, net of issuance costs, and proceeds from exercises of common stock
options of $0.1 million , partially offset by: (i) principal payments on
long-term debt of $2.2 million ; (ii) payments for taxes related to equity
awards; and (iii) principal payments on a finance
95--------------------------------------------------------------------------------
Table of Contents
lease.
Cash provided by financing activities of$79.6 million during the year endedJune 30, 2021 included: (i) proceeds of$69.3 million from the issuance of common stock and accompanying warrants, net of issuance costs; (ii) net cash received of$9.9 million from a second term loan advance under our collateralized debt arrangement; and (iii) proceeds from exercises of common stock options of$0.8 million . These items were partially offset by (i) payments for deferred financing fees and taxes related to equity awards and (ii) principal payments on a finance lease.
Operating capital requirements
We have not generated any revenue from product sales and we do not know when, or if, we will generate such revenue. We do not expect to have significant revenue from product sales unless and until we obtain regulatory approval of and commercialize one of our current or future product candidates. We anticipate that we will continue to generate losses as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to all of the risks inherent in the development of new gene therapy products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We believe that our available cash and cash equivalents, which totaled$46.4 million onJune 30, 2022 , along with the net proceeds that we received from an underwritten public offering inJuly 2022 , will be sufficient to allow us to generate data from our ongoing and planned clinical programs and fund currently planned research and discovery programs through calendar year 2022. However, we will require substantial additional funding to: (i) finish our Vista trial; (ii) move our ACHMB3 product candidate forward; (iii) complete the process necessary to seek regulatory approval for our lead product candidates; (iv) build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our lead product candidates, if approved; and (v) execute our plan to open and operate a leased cGMP manufacturing and quality control facility. To provide the maximum degree of financial flexibility, we may consider various potential opportunities to fund future operations and/or modulate liquidity needs, including: (i) seeking various strategic transactions, including a merger, that provide funding for our programs; (ii) entering into one or more collaborations to offset the costs of our leased manufacturing and quality control facility; (iii) reducing our expenditures on research and development activities and/or restructuring our operations; and (iv) raising new capital through equity or debt financings or other sources; however, upon the filing of this Annual Report on Form 10-K, we will be limited in our ability to use our shelf registration statement on file with theSEC due to a decrease in our overall market capitalization since the filing of our 2021 Annual Report on Form 10-K. We may be unable to successfully execute any of the plans described above, raise additional funds or enter into such other arrangements when needed on favorable terms, or at all. Additional information regarding our liquidity and related matters can be found in Note 1 to our financial statements in this Annual Report on Form 10-K under the heading "Liquidity and Financial Condition."
Off-balance
sheet arrangements
During the years presented in this Annual Report on Form 10-K and as ofJune 30, 2022 , we did not have any off-balance sheet arrangements, as defined in the rules and regulations of theSecurities and Exchange Commission .
© Edgar Online, source
