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 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 a proprietary gene
therapy platform 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 active clinical programs in X-linked retinitis
pigmentosa ("XLRP"), achromatopsia ("ACHM") and optogenetics, as well as a
preclinical program in age-related maculardegeneration ("AMD"). In addition to
ophthalmology, we have initiated one preclinical program in otology and two
preclinical programs targeting central nervous system disorders ("CNS"),
including frontotemporal dementia ("FTD") and amyotrophic lateral sclerosis
("ALS"). Our optogenetics program is being developed in collaboration with
Bionic Sight, LLC ("Bionic Sight") and our otology program is being developed in
collaboration with Otonomy, Inc. ("Otonomy"). With a number of important
clinical milestones on the horizon, we believe that we are well
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positioned to advance multiple programs toward pivotal studies. In addition to our product pipeline, we have also developed broad technological and manufacturing capabilities utilizing both our internal scientific resources and collaborations with others, such as our efforts with theUniversity of Florida , which provides us with expertise in vector design and access to novel capsids. Since our inception, we have devoted substantially all of our resources to development efforts relating to our proof-of-concept programs in ophthalmology, otology, CNS, and alpha-1 antitrypsin deficiency, an inherited orphan lung disease, including manufacturing product 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. We have funded our operations to date 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, including theUnited States Food and Drug Administration , or FDA, and by patient advocacy groups such asThe Foundation Fighting Blindness and theAlpha-1 Foundation . 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 inMarch 2019 . For the years endedJune 30, 2021 and 2020, we reported net losses of$57.8 million and$45.9 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 for at least the next several years and anticipate that such expenses will increase substantially in connection with our ongoing activities as we: • continue to conduct preclinical studies and clinical trials for our XLRP and ACHM product candidates and preclinical studies for our other ophthalmology, otology and CNS product candidates;
• continue our research and development efforts, including exploration
through early preclinical studies of potential applications of our gene
therapy platform in:
• orphan ophthalmology indications;
• non-orphan ophthalmology indications, including AMD and other retinal
diseases; and
• other inherited diseases, such as otology and CNS indications;
• manufacture clinical trial materials and develop larger-scalemanufacturing capabilities, including the lease of a new build-to-suit
manufacturing and quality control facility;
• seek regulatory approval for our product candidates;
• further develop our gene therapy platform;
• add personnel to support our scientific, collaboration, product
development and commercialization efforts; and
• continue to operate as a public company.
As of June 30, 2021 , we had cash and cash equivalents and liquid investments
totaling $107.1 million . We do not expect to generate revenue from product sales
unless and until we successfully complete development 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 and investments will be
sufficient to allow us to generate data from our ongoing and planned clinical
programs and fund currently planned research and discovery programs into
calendar year 2023. In order to complete the XLRP Phase 2/3 ("Vista") trial,
move our ACHMB3 product candidate forward, obtain regulatory approval for our
lead product candidates and build the sales, marketing and distribution
infrastructure that we believe will be
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necessary to commercialize our lead product candidates, if approved, we will require substantial additional funding. Also, 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 public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, acquisitions or other business development activities, or a combination of these approaches. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements 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.
Recent Developments
XLRP
InNovember 2020 , we announced a modification to the primary endpoint for our Vista and Phase 1/2 Expansion ("Skyline") trials based on comments received from the FDA. The design of our Vista trial is expected to include approximately 60 patients randomized across three arms: a low-dose group (the 1.2E+11 vg/mL Group 2 dose from the ongoing Phase 1/2 trial), a high-dose group (the 1.1E+12 vg/mL Group 5 dose from the ongoing Phase 1/2 trial) and an untreated control group. The primary endpoint will be visual sensitivity defined as having at least a 7 decibel improvement 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 that, on a patient-by-patient basis, predicts the loci most likely to improve through evaluation of baseline visual sensitivity. The algorithm was developed using the microperimetry data available to date from the Phase 1/2 dose escalation study. Secondary endpoints include mean change in visual sensitivity, improvements in visual acuity and improvements in performance on a visual navigation course. We also plan to include a masked interim analysis at Month 6, with that data expected to be released in the fourth quarter of calendar year 2022, which may provide us with the opportunity to adjust the trial, if necessary, to optimize outcomes. InNovember 2020 , we also provided additional data from our XLRP Phase 1/2 trial that indicated 2 of 8 evaluable centrally dosed patients in Groups 2 and 4 were responders at Month 12. A third patient, who was a responder at Month 6, fell just below the responder criterion. All eight evaluable patients also showed stable or improving visual acuity. In addition, we provided six-month data for the 11 centrally dosed patients in Groups 5 and 6 and reported that 5 of 11 patients were responders at Month 6. Nine of these patients also had stable or improving visual acuity. If we apply the planned Vista trial inclusion criteria, 3 of the 11 patients in Groups 5 and 6 would be removed from the analysis, and 5 of 8 patients, or 62%, would be considered responders. We do not have a control arm in the Phase 1/2 trial, which will be part of our Vista trial and necessary to evaluate efficacy. InMay 2021 , we provided 12-month data from our XLRP Phase 1/2 trial from seven patients in Group 5 and four patients in Group 6. One patient in Group 5 and two patients in Group 6 would not meet the inclusion criteria for the Skyline and Vista trials, resulting in a total of eight patients who were included in the responder analysis. Four of these eight patients (50%) were considered responders, all four of whom met the strict criteria of at least a 7 decibel improvement in at least 5 loci. One additional patient did not meet these criteria but had a statistically significant improvement in retinal sensitivity in the treated eye compared with the untreated eye at 12 months. Consistent with previously reported 6-month data from Groups 2, 4, 5 and 6, assessment of Best Corrected Visual Acuity ("BCVA") in these groups at 12 months continues to provide supportive evidence of improved visual acuity in these patients; the difference between treated and untreated eyes is statistically significant. We believe that these data, together with the favorable safety profile, have the potential to differentiate our XLRP candidate from competitors. Data from three of the seven Group 4 patients were available for analysis at Month 24, including two who were responders at Month 12 (one by the 7 decibel change in at least 5 loci response criteria and the other based on 94
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improved retinal sensitivity in the treated eye compared with the untreated eye). These two patients are still responders at Month 24 according to the same criteria; the third patient who has reached Month 24 was not a responder at Month 12 or Month 24. To the best of our knowledge, this is the first XLRP gene therapy clinical trial to demonstrate continued durability of response at this time point. Data from all 28 patients across six dose groups in the Phase 1/2 trial continue to demonstrate a favorable safety profile with no dose-limiting inflammatory responses observed. This safety profile, which has shown no clinically significant inflammation not manageable with steroids, continues to be observed out to 24 months.
We believe that we have a best-in-class XLRP product candidate that may provide significant benefits to patients with XLRP. We expect to:
• present 12-month trial results from the ongoing Phase 1/2 clinical trial
at the
• provide Skyline trial results from the 3-month masked interim analysis in
the first half of calendar year 2022;
• provide Skyline trial results from the 12-month data in the fourth
quarter of calendar year 2022; and
• provide Vista trial results from the 6-month masked interim analysis in
the fourth quarter of calendar year 2022.
As part of the Skyline trial, we intend to dose a total of 12 additional patients across two dose groups. The Skyline trial is intended to evaluate the correlation of a new mobility navigation course developed for use with retinitis pigmentosa patients, with the primary endpoint of visual sensitivity at pre-specified loci, providing such data within the earliest timeframe. This trial will have the same overall design as the Vista trial.
ACHM
InJanuary 2021 , we reported results based on a patient-by-patient analysis of data from both ACHMB3 and ACHMA3 trials. For ACHMB3, this consisted of 12-month data from 15 patients, 9-month data from five patients, 6-month data from three patients and 3-month data from three patients for a total of 26 patients across all dose groups. Seven of the 16 patients in the three highest dose groups in the ACHMB3 trial showed improvements in visual sensitivity in the treated area, as measured by static perimetry. No consistent results were seen in the other dose groups. In a subset of these patients with evaluable multi-focal electroretinograms ("ERGs"), improvements in electrical signaling were measurable in the same treated area. For ACHMA3, data analysis consisted of 12-month data from 10 patients, 9-month data from four patients, 6-month data from one patient and 2- or 3-month data from three patients for a total of 18 patients across five dose groups. One additional patient did not have evaluable data. In the 16 patients in the four highest dose groups, three patients showed improvements in visual sensitivity in the treated area, as measured by static perimetry. No consistent results were seen in other dose groups. None of these three patients with improvements in visual sensitivity had evaluable ERGs. InJune 2021 , we announced 12-month data from our on-going Phase 1/2 ACHM clinical trials showing biological activity in patients with mutations in the ACHMB3 gene. InJuly 2021 , we hosted a virtual Research Day that provided an expanded analysis of the 12-month data from our ongoing Phase 1/2 clinical trials in ACHM, including a discussion on light sensitivity and ACHM genetics. These data indicated biologic activity in the dose escalation portions in both the ACHMB3 and ACHMA3 trials. The response was more robust in the ACHMB3 patients than the ACHMA3 patients and, therefore, we plan to move forward with planning for late-stage development of the ACHMB3 product candidate.
Retinal sensitivity, as measured by full-field perimetry, improved in four of 11 ACHMB3 patients in the high dose adult and pediatric groups, as well as two patients in the low dose adult groups. There were no notable
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changes in the untreated fellow eyes. The light level in which the patients experienced discomfort, the single most important symptom to patients, also improved in six of the 11 patients with improvement also seen in the fellow eye of those six patients. At our virtual Research Day,Medical College of Wisconsin study investigatorJoseph Carroll , Ph.D., noted that bilateral effects to monocular stimuli are not uncommon in ophthalmology, and he described well-established neuro-anatomical and physiological explanations for this observation. Three of these patients were also responders for visual sensitivity providing more evidence of overall improvement in visual function. Given the evidence of treatment response described above for all adults and the lowest dose group 4 pediatric patients, as well as supportive anecdotal patient reports, we are preparing for an End of Phase 2 (EOP2) submission for our ACHMB3 program and to request a meeting with the FDA in advance of initiating a Phase 2/3 trial. We expect this meeting to occur in the first half of calendar year 2022. We are also collecting novel measures of efficacy including color brightness (CoBri) testing and functional magnetic resonance imaging (fMRI) testing for the recently enrolled and currently enrolling pediatric patients. These additional tests may further support the patient anecdotal reports and the existing evidence of biologic activity of the CNGB3 candidate. For CNGA3, we are focused on analysis of the data from pediatric patients in the Phase 1/2 trial. Preclinical animal data showed a treatment effect in young sheep, which might predict comparable treatment responses in younger pediatric Phase 1/2 patients despite the CNGA3 genetic considerations described above. We recently enrolled six pediatric ACHMB3 patients and five pediatric ACHMA3 patients in higher dose groups 5a and 6a. Three new serious adverse events (SAEs) of significant inflammation that are considered a Suspected Unexpected Serious Adverse Reaction, or SUSAR, occurred in pediatric patients at the highest trial dose concentration (3.2e12 vg/mL); two patients are in the CNGA3 trial, the other is in the CNGB3 trial. An additional CNGB3 pediatric patient at this dose also has presented with significant inflammation during approximately the same post-operative time frame but has not required a subsequent procedure. To address the above safety events in pediatric patients, systemic and local steroid doses have been increased and patients are being monitored closely. No comparable inflammation has been seen in the six pediatric patients across both trials at dose group 5a, nor in any of the adult patients or lowest group 4 pediatric patients on which we previously reported. These new data do not change our plans to continue development of the ACHM product candidates and, as a result, we plan to release 3-month data for high dose pediatric patients, both ACHMB3 and ACHMA3, in the fourth quarter of calendar year 2021. We are currently postponing enrollment of the last pediatric patient in the ACHMA3 trial pending review of longer-term data for the high dose pediatric patients.
Build-To-Suit Manufacturing and Quality Control Facility in
InMay 2021 , we signed a 20-year lease for a build-to-suit 21,250 square foot current Good Manufacturing Practices ("cGMP") manufacturing and quality control facility adjacent to our existingFlorida facility to prepare for late-stage development of our XLRP and ACHM programs. Leasing this cGMP facility is part of our strategy to enable more rapid filing of a Biologics Licensing Application and commercial launch of our XLRP candidate upon potential FDA approval. The cGMP facility is also expected to support more rapid advancement of our product pipeline while providing supply chain redundancy and reducing manufacturing risk. We anticipate that the build-out of the new manufacturing and quality control facility will be completed during the second half 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.
Underwritten Public Offering
On
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price of each share of common stock and accompanying warrant was$4.45 , generating gross proceeds of$74.5 million , before deducting underwriting discounts, commissions and other offering expenses payable by us, which totaled$5.2 million . The warrants have an exercise price of$6.00 per share (subject to certain adjustments), are immediately exercisable and expire onFebruary 1, 2026 . We intend to use the net proceeds from the offering, together with other available funds, to fund our ongoing Skyline and Vista trials and our ongoing Phase 1/2 clinical trials in our ACHMB3 and ACHMA3 programs, and for working capital and other general corporate purposes.
At-The-Market Offering Program
OnApril 2, 2021 , we entered into a Controlled Equity OfferingSM Sales Agreement withCantor Fitzgerald & Co. as sales agent to sell shares of our common stock, from time to time, through an "at-the-market offering" program having an aggregate offering price of up to$50.0 million . However, we have not sold any shares under this agreement and are not obligated to do so in the future.
Long-Term Debt Agreement
EffectiveMay 13, 2021 , our long-term loan agreement was amended (the "Amendment") whereby, among other things: (i) a term loan advance of$10.0 million was authorized by the lenders and advanced to us on such date; (ii) the period that we will make interest-only payments on outstanding borrowings was extended toMarch 31, 2022 ; and (iii) the maturity date of the facility was extended fromDecember 1, 2023 toApril 1, 2024 . Subject to certain conditions provided in the Amendment, the interest-only period and the maturity date can be further extended. Subject to the lenders' investment committee's sole discretion, we have the right to request that the lenders make additional term loan advances in an aggregate principal amount of up to$5.0 million . However, there can be no assurances that any term loan advances will be funded by the lenders in the future. Additional information regarding our long-term loan agreement and the Amendment can be found in Note 8 to our financial statements in this Annual Report on Form 10-K. Strategic Collaborations Bionic Sight DuringFebruary 2017 , we entered into a strategic research and development collaboration agreement with Bionic Sight to develop therapies 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. 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. The product appears to be safe and well tolerated and Bionic Sight 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 adeno-associated virus-based gene therapy to restore hearing in patients with sensorineural 97
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hearing loss caused by a mutation in the gap junction protein beta 2 gene
("GJB2") - the most common cause of congenital hearing loss. Mutations in GJB2
account for approximately 30% of all genetic hearing loss cases. Patients with
this mutation can have severe-to-profound deafness in both ears that is
identified in screening tests routinely performed in newborns. Under the
collaboration agreement, the parties began equally sharing the program costs and
proceeds in January 2020 and can include additional genetic hearing loss targets
in the future. We and Otonomy announced promising preclinical data at the
American Society of Gene and Cell Therapy meeting in May 2021 , demonstrating the
rescue of hearing loss and cochlear morphology in two independent mouse models.
Collectively, we are conducting IND (investigational new drug)-enabling
activities based on pre-IND meeting feedback from the FDA, with an IND filing
anticipated in the first half of calendar year 2023.
Additional information regarding the Bionic Sight and Otonomy collaborative agreements can be found in Note 9 to our financial statements in this Annual Report on Form 10-K.
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, 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, or CROs, and investigative sites that
conduct our clinical trials;
• license and sublicense fees and collaboration expenses;
• the cost 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
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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;
• the countries in which trials are conducted;
• future clinical trial results;
• uncertainties in clinical trial enrollment rates or drop-out or
discontinuation rates of patients;
• potential additional safety monitoring or other studies requested by
regulatory agencies or elected as best practice by us;
• 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-suitmanufacturing and quality control facility;
• significant and changing government regulation; and • the timing and receipt of any regulatory approvals. A change in the outcome of any of these variables 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 development. From our inception and throughJune 30, 2021 , we have incurred approximately$282.6 million in research and development expenses. We expect our research and development expenses to increase for the foreseeable future 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, including 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. 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 our product candidates.
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.
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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, 2021 , investment income, net declined by$1.1 million when compared to the prior year. Such reduction in investment income, net was primarily due to lower interest rates in the marketplace.
Interest expense
Interest expense during the year endedJune 30, 2021 was primarily attributable to the loan agreement that we entered into onJune 30, 2020 and amended inMay 2021 . Additional information regarding our long-term loan agreement can be found in Note 8 to our financial statements in this Annual Report on Form 10-K.
Provision for (benefit from) income taxes
Income tax benefit for the year endedJune 30, 2021 was$2.1 million compared to income tax expense of$83,000 for the year endedJune 30, 2020 . The income tax benefit during the year endedJune 30, 2021 was primarily due to the reversal of our uncertain tax position liabilities, including the related interest and penalties. During the year endedJune 30, 2020 , income tax expense was primarily due to estimated interest and penalties on our then-existing uncertain tax positions. Additional information regarding our income taxes can be found in Note 11 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 in accordance withU.S. generally accepted accounting principles ("U.S. GAAP"). 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.
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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 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 purposes 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
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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 include costs incurred in identifying, developing and testing product candidates and generally comprise compensation and related benefits and non-cash share-based compensation to research-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. 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.
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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.
Income taxes
We use the asset and liability method to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are projected to be recovered or settled. As required byU.S. GAAP, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Interest and penalties related to uncertain tax positions are reflected in the provision for (benefit from) income taxes.
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.
Results of Operations
Comparison of the years ended
Revenue
During the years ended
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 .
During
Additional information regarding the abovementioned license agreement and the
Bionic Sight collaborative agreement can be found in Note 9 to our financial
statements in this Annual Report on Form 10-K.
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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 2021 2020 (Decrease) (Decrease)
External research and development
expenses:
XLRP $ 15,250 $ 6,492 $ 8,758 >100 %
ACHM 4,720 5,956 (1,236 ) (21 )%
XLRS 314 706 (392 ) (56 )%
Research and discovery programs 2,799 1,781 1,018 57 %
Total external research and
development expenses 23,083 14,935 8,148 55 %
Internal research and development
expenses:
Employee-related costs 12,663 12,466 197 2 %
Share-based compensation 1,110 1,451 (341 ) (24 )%
Other 7,544 6,926 618 9 %
Total internal research and
development expenses 21,317 20,843 474 2 %
Total research and development
expenses $ 44,400 $ 35,778 $ 8,622 24 %
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, 2021 and 2020
were $44.4 million and $35.8 million , respectively, an increase of $8.6 million ,
or 24%. Such increase was primarily attributable to:
• $8.8 million of increased external spending for our XLRP trials due toour planned manufacturing, clinical site preparation and other activities
related to our Skyline and Vista trials;
• $1.0 million of increased external spending for our research and
discovery programs, which was primarily due to planned materialproduction costs in connection with our CNS preclinical program targeting
FTD; and
•
expenses for temporary staffing and consultants while we recruit new
employees, partially offset by a reduction in laboratory supply costs due
to the timing of our needs.
Such increases were partially offset by: (i) a$1.2 million decrease in external spending for our ACHM trials; (ii) a$0.4 million decrease in expenses in connection with the wind-down of our X-linked retinoschisis, or XLRS, program; and (iii) a$0.3 million decrease in our share-based compensation expense. The decrease in ACHM expenses was primarily due to reduced patient enrollment, patient visits and new site activations during the year endedJune 30, 2021 when compared to the prior year, all of which reduce our overall clinical programs costs, partially offset by incremental expenses for our mobile vision center. The decline in share-based compensation expense was due to, among other things, the cost attributable to a performance-based stock option award that achieved a milestone during the year endedJune 30, 2020 with no corresponding current year activity. 104
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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 2021 2020 (Decrease) (Decrease)
Employee-related costs $ 5,312 $ 5,746 $ (434 ) (8 )%
Share-based compensation 1,568 1,547 21 1 %
Legal and professional fees 1,636 468 1,168 >100 %
Other 6,035 5,856 179 3 %
Total general and administrative and
other expenses $ 14,551 $ 13,617 $ 934 7 %
General and administrative and other expenses for the years ended June 30, 2021
and 2020 were $14.6 million and $13.6 million , respectively, an increase of
$0.9 million , or 7%. Such increase was primarily due to higher (i) legal fees
resulting from increased reliance on external legal counsel and (ii) recurring
operating and business development costs pertaining to normal operations. Such
increases were partially offset by a reduction in employee-related costs of
$0.4 million that resulted from a lower corporate headcount during the year
ended June 30, 2021 when compared to the prior year.
Liquidity and Capital Resources
We have incurred cumulative losses and negative cash flows from operations since our inception and, as ofJune 30, 2021 , we had an accumulated deficit of$239.3 million . 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 equity offerings, debt financings, other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. Most recently, we received: (i)$34.8 million of proceeds from the issuance of our common stock, net of issuance costs, inFebruary 2020 ; (ii)$9.9 million of loan proceeds, net of debt discounts, during each ofJune 2020 andMay 2021 ; and (iii) net proceeds of$69.3 million inFebruary 2021 from the underwritten public offering that is described above under "Recent Developments." Among other things, theMay 2021 net cash proceeds are expected to partially fund certain equipment and shared building fit out costs, as well as new employee hires, in connection with our lease and operation of a new cGMP build-to-suit manufacturing and quality control facility inAlachua, Florida . Importantly, through a tenant improvement allowance and tiered rental rates, we have structured our third-party leasing costs for such facility in a way that will not significantly impact our cash runway until the fiscal year endingJune 30, 2024 . Additional information regarding the new manufacturing and quality control facility and our long-term loan agreement can be found in Notes 3 and 8, 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, 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, 2021 , our cash and cash equivalents were held in bank accounts and money market funds, while our investments consisted of aU.S. Treasury security that matured inJuly 2021 , consistent with our investment policy. 105
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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 2021 2020 (Decrease) (Decrease)
Cash provided by (used in):
Operating activities $ (51,173 ) $ (41,620 ) $ (9,553 ) (23 )%
Investing activities 38,147 8,399 29,748 >100 %
Financing activities 79,615 44,981 34,634 77 %
Net increase in cash and cash
equivalents $ 66,589 $ 11,760 $ 54,829 >100 %
Operating activities. For both the years ended June 30, 2021 and 2020, 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 $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 . The cash used in operating activities of
$41.6 million during the year ended June 30, 2020 was due to a net loss of
$45.9 million , partially offset by non-cash items in our statement of operations
of $2.2 million and favorable changes in our operating assets and liabilities of
$2.1 million .
Investing activities. Cash provided by investing activities of $38.1 million
during the year ended June 30, 2021 consisted primarily 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 . Cash provided by
investing activities of $8.4 million during the year ended June 30, 2020
consisted primarily of cash proceeds of $72.5 million from maturities of
investments, net of investment purchases of $58.9 million , partially offset by
an equity investment in Bionic Sight of $4.0 million , purchases of property and
equipment of $0.9 million and intellectual property costs of $0.3 million .
Financing activities. Cash provided by financing activities of $79.6 million
during the year ended June 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. Cash provided by financing
activities of $45.0 million during the year ended June 30, 2020 primarily
consisted of: (i) proceeds of $34.8 million from the issuance of common stock,
net of issuance costs; (ii) net cash received of $9.9 million from our
collateralized debt arrangement that closed on June 30, 2020 ; and (iii) proceeds
from exercises of common stock options of $0.4 million . These items were
partially offset by principal payments on a finance lease.
Operating capital requirements
To date, we have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate 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 for the foreseeable future 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 incident 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 and investments, which
totaled
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fund currently planned research and discovery programs into calendar year 2023. 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.
Contractual obligations and commitments
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide this information.
Off-balance sheet arrangements
During the years presented in this Annual Report on Form 10-K and as of
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