DECIBEL THERAPEUTICS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our audited financial statements and related notes for the year endedDecember 31, 2020 included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission onMarch 29, 2021 , which we refer to as the 2020 Annual Report on Form 10-K. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled "Risk Factors," our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Please also see the section entitled "Cautionary Note Regarding Forward-Looking Statements and Industry Data" of this Quarterly Report.
Overview
We are a clinical-stage biotechnology company dedicated to discovering and developing transformative treatments for hearing and balance disorders, one of the largest areas of unmet need in medicine. We aim to restore and improve hearing and balance through the restoration and regeneration of functional hair cells and non-sensory support cells within the inner ear. We have built a proprietary platform that integrates single-cell genomics and bioinformatics analyses, precision gene therapy technologies and our expertise in inner ear biology. We are leveraging our platform to advance our pipeline of preclinical gene therapy programs that are designed to selectively replace genes for the treatment of congenital, monogenic hearing loss and to regenerate inner ear hair cells for the treatment of acquired hearing and balance disorders. We are developing our lead gene therapy product candidate, DB-OTO, to provide hearing to individuals born with profound hearing loss due to mutation of the otoferlin, or OTOF, gene. We are also advancing our gene therapy programs designed to restore balance in patients with bilateral vestibulopathy, or BVP, by regenerating lost hair cells within the inner ear. In addition to our gene therapy programs, we are developing DB-020 for the prevention of cisplatin-induced hearing loss, which we are currently evaluating in patients in a Phase 1b clinical trial. We are developing our lead gene therapy product candidate, DB-OTO, to provide hearing to individuals born with profound hearing loss due to an OTOF deficiency. OTOF is a protein expressed in the inner hair cells of the cochlea that enables communication between sensory cells of the inner ear and the auditory nerve by regulating synaptic transmission. We have designed DB-OTO utilizing a proprietary, cell-selective promoter to provide expression of OTOF that is limited to hair cells. In our preclinical studies, the hair cell-selective expression of OTOF provided by DB-OTO enabled restoration of hearing in mice that was more durable than when OTOF was expressed under the control of a ubiquitous promoter, which is designed to drive expression in all cells. In addition to the loss of durability, we observed that use of a ubiquitous promoter in mice resulted in the loss of inner hair cells throughout the cochlea. DB-OTO is an AAV-based gene therapy intended to be delivered to patients using the surgical approach employed by otologists and pediatric otolaryngologists during a standard cochlear implantation procedure. We believe the cell-selective expression of DB-OTO and its delivery by this established surgical procedure will provide a core competitive advantage important to the success of DB-OTO. Based on feedback from theU.S. Food and Drug Administration , or FDA, we are currently conducting preclinical studies of DB-OTO to support our planned submission of an investigational new drug application, or IND, to the FDA. We have solicited feedback from European regulatory authorities to support our planned submission of a CTA within theEuropean Union . We plan to submit an IND or CTA in 2022. Subject to the acceptance of our IND or CTA, we expect to initiate a Phase 1/2 clinical trial in 2022. In addition to DB-OTO, we are advancing AAV.103 and AAV.104, additional gene therapy programs targeting hearing loss resulting from other single gene mutations, or monogenic forms of hearing loss. AAV.103 aims to restore hearing in individuals with mutations in the gap junction beta-2, or GJB2, gene. We anticipate that we will identify a product candidate for our AAV.103 program in 2022. We anticipate that we will announce the target for our AAV.104 program in 2021. We are also using our platform to design and develop a pipeline of gene therapies for hair cell regeneration within the inner ear. We are engineering gene therapies to convert supporting cells, the cells adjacent to hair cells, into both cochlear and vestibular hair cells in order to restore hearing and balance function. These gene therapies are designed to express the developmental or reprogramming factors that regulate cell fate and use our proprietary, cell-selective promoters to control expression spatially and temporally. Our DB-ATO and AAV.201 programs aim to restore balance by promoting regeneration of hair cells in the vestibular system, the sensory system responsible for balance. They are being developed for the treatment of BVP, a debilitating, acquired condition that significantly impairs balance, mobility and stability of vision. DB-ATO is an AAV-based gene therapy that utilizes a proprietary supporting cell-selective promoter to express ATOH1, a transcription factor required for hair cell formation during ear development. In preclinical studies, selective expression of ATOH1 in vestibular supporting cells following treatment with DB-ATO led to conversion of supporting cells into vestibular hair cell-like cells but did not result in significant functional recovery in the in vivo behavioral assays employed in in our preclinical studies. We are continuing to evaluate whether ATOH1 expression alone might be sufficient to restore lost vestibular function. In parallel, we are developing AAV.201, which combines ATOH1 with another reprogramming factor to promote further differentiation of the regenerated cells. We intend to announce the program target for AAV.201 in 2022. In addition, we are advancing our cochlear hair cell regeneration program to treat acquired hearing loss by regenerating cochlear outer hair cells. We plan to announce the targets for our cochlear hair cell regeneration program in 2022. 20
-------------------------------------------------------------------------------- In addition to our gene therapy product candidate and programs, we are developing a clinical-stage product candidate, DB-020, for the prevention of cisplatin-induced hearing loss. DB-020 is a novel formulation of sodium thiosulfate, or STS, that we have optimized for local delivery to the ear. STS inactivates cisplatin, a widely used chemotherapy that often leads to hearing loss and related complications in patients being treated for cancer. We are developing DB-020 to prevent cisplatin-induced hearing loss without impacting the beneficial, anti-tumor effect of cisplatin. In 2019, we completed a randomized, double-blind, placebo-controlled Phase 1 clinical trial of DB-020 in healthy volunteers, in which DB-020 was well tolerated. Following the Phase 1 clinical trial, we initiated a randomized, double-blind, placebo-controlled, multicenter Phase 1b clinical trial in 2020 to evaluate the safety and efficacy of DB-020 for the prevention of cisplatin-induced hearing loss. The report of an interim analysis of our Phase 1b clinical trial of DB-020 was previously delayed due to the impact of the COVID-19 pandemic on the pace of patient screening and enrollment, including delays in site start-up and withdrawal of some sites inthe United States . We expect to report results from an interim analysis of the ongoing Phase 1b clinical trial of DB-020 in the first half of 2022. All remaining sites inthe United States andAustralia are now open. The FDA has granted fast track designation for DB-020 for the prevention of cisplatin-related ototoxicity. Since inception, we have devoted substantially all of our resources on organizing and staffing, business planning, raising capital, establishing our intellectual property portfolio and performing research and development of our product candidates, programs and platform. OnFebruary 5, 2021 , we issued and sold 15,870,209 shares of our Series D convertible preferred stock for$27.4 million of aggregate cash proceeds, net of issuance costs. OnFebruary 17, 2021 , we completed an initial public offering, or IPO, of our common stock in which we issued and sold 7,062,000 shares of our common stock at a public offering price of$18.00 per share, and onFebruary 24, 2021 , we issued and sold an additional 600,000 shares of common stock pursuant to the underwriters' partial exercise of their option to purchase additional shares of common stock, for aggregate net proceeds of$124.8 million . Upon the closing of our IPO, all of our outstanding shares of convertible preferred stock automatically converted into 16,662,011 shares of common stock. Subsequent to the closing of our IPO, there were no shares of preferred stock outstanding. To date, we have financed our operations primarily with proceeds from sales of our convertible preferred stock (including borrowings under convertible promissory notes, which converted into convertible preferred stock in 2015), payments under our license and collaboration agreement with Regeneron Pharmaceuticals, Inc., or Regeneron, and, most recently, from the sale of common stock in our IPO. We have not generated any revenue from product sales, and do not expect to generate any revenue from product sales for at least the next several years. All of our programs are still in preclinical and early-stage clinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates, if approved. Since inception, we have incurred significant operating losses. Our net losses were$22.5 million for the six months endedJune 30, 2021 , and$39.3 million and$42.7 million for the years endedDecember 31, 2020 and 2019, respectively. As ofJune 30, 2021 , we had an accumulated deficit of$185.2 million . We expect to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:
• submit an investigational new drug application, or IND, or clinical trial
application, or CTA, and initiate a planned Phase 1/2 clinical trial of
our lead gene therapy product candidate, DB-OTO, for the treatment of
profound hearing loss due to mutation of the OTOF gene;
• continue our current research programs and our preclinical development of
DB-OTO, AAV.103, AAV.104, AAV.201 and DB-ATO and any product candidates
that may arise from our current or future research programs;
• continue our clinical development of DB-020, including our ongoing Phase
1b clinical trial;
• advance additional product candidates into preclinical and clinical
development;
• expand the capabilities of and invest in our platform;
• seek marketing approvals for any product candidates that successfully
complete clinical trials;
• ultimately establish a sales, marketing and distribution infrastructure to
commercialize any products for which we may obtain marketing approval;
• expand, maintain and protect our intellectual property portfolio;
• hire additional clinical, regulatory, quality control and scientific
personnel;
• establish and maintain agreements with manufacturers for our product
candidates; and
• add operational, legal, compliance, financial and management information
systems and personnel, including personnel to support our research,
product development and future commercialization efforts and support our
operations as a public company.
In addition, as we progress toward marketing approval for any of our product
candidates, we expect to incur significant commercialization expenses related to
product manufacturing, marketing, sales and distribution.
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As a result, we will need substantial additional funding to support our
continuing operations and pursue our strategy. Until such time as we can
generate significant revenue from product sales, if ever, we expect to finance
our operations through a combination of equity offerings, debt financings and
other sources of capital, which may include collaborations with other companies
or other strategic transactions. We may be unable to raise additional funds or
enter into other collaborations, strategic alliances or licensing arrangements
with third parties when needed or on favorable terms, or at all. If we are
unable to raise additional funds through equity or debt financings or enter into
such other agreements when needed, we may have to significantly delay, reduce or
eliminate some or all of our product development or future commercialization
efforts, or grant rights to develop and market product candidates that we would
otherwise prefer to develop and market ourselves.
Because of the numerous risks and uncertainties associated with product
development, we are unable to predict the timing or amount of increased expenses
or when or if we will be able to achieve profitability. Even if we are able to
generate revenue from product sales, we may not become profitable. If we fail to
become profitable or are unable to sustain profitability on a continuing basis,
then we may be unable to continue our operations at planned levels and be forced
to reduce or terminate our operations.
As of June 30, 2021 , we had cash, cash equivalents and available-for-sale
securities of $184.6 million . We believe that our cash, cash equivalents and
available-for-sale securities as of June 30, 2021 will enable us to fund our
operating expenses and capital expenditure requirements into 2024. We have based
this estimate on assumptions that may prove to be wrong, and we could exhaust
our available capital resources sooner than we anticipate.
Impact of COVID-19 on Our Business
The worldwide COVID-19 pandemic has affected and may affect in the future our ability to initiate and complete preclinical studies, delay the initiation and completion of our current and planned clinical trials, disrupt regulatory activities or have other adverse effects on our business, results of operations, financial condition and prospects. In addition, the pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could adversely affect our business, operations and ability to raise funds to support our operations. We are following, and plan to continue to follow, recommendations from federal, state and local governments regarding workplace policies, practices and procedures. In response to the direction from state and local governmental authorities, we have restricted access to our facility to those individuals who must perform critical research, translational medicine and laboratory support activities that must be completed on site, limited the number of such people that can be present at our facility at any one time and required that most of our employees work remotely. In addition, screening and enrollment in our ongoing Phase 1b clinical trial of DB-020 inAustralia andthe United States have been adversely impacted by the COVID-19 pandemic. Patient screening and enrollment were paused in the second quarter of 2020 in bothAustralia andthe United States , and screening for enrollment did not resume until early in the third quarter of 2020 inAustralia and early in the fourth quarter of 2020 inthe United States . We have also experienced delays in site start-up and the withdrawal of some sites inthe United States . In addition, we and the third-party manufacturers, contract research organizations, or CROs, and academic collaborators that we engage have faced in the past and may face in the future disruptions that could affect our ability to initiate and complete preclinical studies or clinical trials. This includes disruptions in procuring items that are essential for our research and development activities, such as, for example, raw materials used in the manufacture of our product candidates, laboratory supplies for our preclinical studies and clinical trials, or animals that are used for preclinical testing, in each case, for which there may be shortages because of ongoing efforts to address the COVID-19 pandemic. We cannot be certain what the overall impact of the COVID-19 pandemic will be on our business. The extent of the impact of COVID-19 on our business will depend on the length and severity of this pandemic, including the extent there is any resurgence of the COVID-19 virus or any variant strains of the virus, the availability and effectiveness of vaccines and the impact of the foregoing on our preclinical studies, current and planned clinical trials, employees and vendors, which is uncertain and cannot be predicted. The pandemic has the potential to adversely affect our business, financial condition, results of operations and prospects.
License and Collaboration Agreement with Regeneron
InNovember 2017 , we entered into a license and collaboration agreement with Regeneron, or the Regeneron Agreement. The Regeneron Agreement has a research term of five years, and Regeneron has the right to extend the research term for up to two years in one-year intervals. The Regeneron Agreement is focused on the discovery and development of new potential therapies directed to a set of defined collaboration targets. We are currently developing DB-OTO, AAV.103 and AAV.104 in collaboration with Regeneron under the Regeneron Agreement. InOctober 2020 , we entered into an amendment to the Regeneron Agreement pursuant to which, among other things, ATOH1, the target of our DB-ATO program, was removed as a collaboration target and the terms and plans for the DB-OTO and AAV.103 programs were modified. We issued 10,000,000 shares of our Series C convertible preferred stock to Regeneron in consideration for its entry into the amendment. 22
-------------------------------------------------------------------------------- Pursuant to the Regeneron Agreement, Regeneron paid us an upfront fee of$25.0 million and purchased 12,500,000 shares of our Series B convertible preferred stock at a price per share of$2.00 . If Regeneron elects to extend the term of the research program, it will be obligated to pay us$10.0 million for each of up to two one-year extensions. On a collaboration-product-by-collaboration-product basis, upon achievement of pre-defined milestones which begin at initiation of manufacturing to support GLP toxicology studies and conclude at initiation of a Phase 2 clinical trial, Regeneron is obligated to pay us milestone payments of up to$35.5 million in aggregate if the collaboration product is a biologic or up to$33.5 million in aggregate if the collaboration product is a small molecule, which is intended to reflect approximately half of the total cost needed to achieve the next milestone. From and after the initiation of a registration-enabling trial, unless Regeneron decides to opt-out, we have agreed to split development and regulatory costs with Regeneron on an equal basis through the registration-enabling trials. Under the Regeneron Agreement, we are required to pay Regeneron tiered royalties on the worldwide net sales of collaboration products at percentages which range from mid-single digit to mid-thirties, with the exact royalty rate depending on the extent to which Regeneron shared in the funding of the collaboration product, the level of net sales of the collaboration product, the nature of any intellectual property contributed by Regeneron included in the collaboration product and whether the product is sold inside or outside the field. In the case of collaboration products for which Regeneron does not opt-out, our obligation to pay tiered royalties on the worldwide net sales ranges from percentages in the mid-twenties to mid-thirties. In the case of collaboration products for which Regeneron opts-out, our obligation to pay tiered royalties on the worldwide net sales ranges from percentages in the mid-single digits to mid-twenties. Our obligation to make royalty payments to Regeneron on account of worldwide net sales of collaboration products continues so long as we, our affiliates, licensees or sublicensees sell collaboration products. To date, we have not made any royalty or other payments to Regeneron under the Regeneron Agreement. Pursuant to the amendment to the Regeneron Agreement, Regeneron agreed to pay us$0.3 million to fund our ongoing research program and$0.5 million to help secure the services of a contract development and manufacturing organization. The$0.5 million payment is creditable against the milestone associated with the initiation of manufacturing to support GLP toxicology studies of DB-OTO. Additionally, Regeneron agreed to reimburse us for up to$10.5 million of third-party costs related to the GLP toxicology studies of DB-OTO as such costs are incurred, and we agreed that the aggregate potential milestone payments for DB-OTO would be reduced by$15.0 million . In addition, notwithstanding its removal from the collaboration, for DB-ATO, we agreed to pay to Regeneron a royalty calculated as a low-to mid-single digit percentage of net sales of DB-ATO, on a country-by-country basis, until the latest of the expiration of the last patent covering DB-ATO in such country, the expiration of all applicable regulatory exclusivities for DB-ATO in such country and the tenth anniversary of the first commercial sale of DB-ATO in such country. InNovember 2020 , we achieved our first milestone in connection with the initiation of manufacturing to support GLP toxicology studies of DB-OTO. For a more detailed description of the Regeneron Agreement and the amendment, see "Business - License and Collaboration Agreements - License and Collaboration Agreement with Regeneron Pharmaceuticals, Inc." in our Annual Report on Form 10-K as filed with theSEC onMarch 29, 2021 . Because we consider Regeneron a collaborative partner that is subject to the significant risks and rewards under the Regeneron Agreement, we have accounted for the Regeneron Agreement under FASB ASC Topic 808, Collaborative Arrangements, or ASC 808. Under ASC 808, we view the$25.0 million upfront payment and any milestone payments as reimbursement of our costs under the Regeneron Agreement. These costs are accounted for as research and development expenses in our condensed consolidated statements of operations and comprehensive loss. As such, we are recognizing the upfront payment, the additional payment of$0.3 million received from Regeneron pursuant to the amendment, the expected reimbursement of$10.5 million of third-party costs related to the GLP toxicology studies of DB-OTO, and the$4.4 million milestone payment received, net of the$4.4 million in fair value of the Series C convertible preferred stock issued to Regeneron, over the research term as a reduction to research and development expenses (contra-research and development expense) in our condensed consolidated statements of operations and comprehensive loss based on our progress toward completion of our research activities under the research plan. Any future milestone payments will be included in the measurement of contra-research and development expense if and when achieved. We recognized$3.8 million and$1.3 million as contra-research and development expenses during the three months endedJune 30, 2021 and 2020, respectively. We recognized$5.7 million and$1.9 million as contra-research and development expenses during the six months endedJune 30, 2021 and 2020, respectively. As ofJune 30, 2021 andDecember 31, 2020 , we had$1.7 million and$1.2 million of accounts receivable due from Regeneron, respectively. As ofJune 30, 2021 , we had deferred collaboration liabilities of$14.2 million on our condensed consolidated balance sheet, which consisted of$8.3 million classified as current deferred collaboration liabilities and$5.9 million classified as long-term collaboration liabilities. See Note 12 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. 23
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Financial Operations Overview
Revenue
We have not generated any revenue since inception and do not expect to generate any revenue from the sale of products for at least the next several years. If our development efforts for our current or future product candidates are successful and result in marketing approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from product sales or payments from third-party collaborators or licensors.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities and development of our programs and product candidates. These expenses include:
• personnel-related expenses, including salaries, benefits and stock-based
compensation expense for employees engaged in research and development
functions;
• expenses incurred under agreements with third parties, such as consultants
and investigative sites that conduct our preclinical studies and clinical
trials and in-licensing arrangements;
• costs incurred to maintain compliance with regulatory requirements;
• costs incurred with third-party contract development and manufacturing
organizations, or CDMOs, to acquire, develop and manufacture materials for
preclinical and clinical studies;
• costs associated with our technology and our intellectual property portfolio;
• expenses incurred for the procurement of materials, laboratory supplies
and non-capital equipment used in the research and development process;
and
• depreciation, amortization and other direct and allocated expenses,
including rent, insurance and other operating costs, incurred as a result
of our research and development activities.
We use our employee and infrastructure resources for the advancement of our
platform and for discovering and developing programs and product candidates. We
track direct research and development costs, consisting primarily of external
costs, such as fees paid to CDMOs, CROs and consultants in connection with our
preclinical studies, clinical trials and experiments by program after a
development candidate has been identified. Due to the number of ongoing programs
and our ability to use resources across several projects, personnel-related
expenses and indirect or shared operating costs incurred for our research and
development programs are not recorded or maintained on a program-by-program
basis, nor are our external program costs incurred for our programs prior to the
identification of a development candidate for such program.
Additionally, consideration we receive under our license and collaboration
agreement with Regeneron is being recognized as a reduction to research and
development expense (contra-research and development expense) in our condensed
consolidated statements of operations and comprehensive income (loss) based on
our progress towards completion of our research activities under the research
plan for the collaboration. The following table reflects our research and
development expense, including direct program-specific expense summarized by
program, personnel-related expenses and indirect or shared operating costs
recognized during each period presented (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
DB-020 $ 1,040 $ 1,383 $ 1,335 $ 2,462
Personnel-related (including stock-based
compensation) 2,443 2,494 4,546 6,412
Other indirect research and development
expenses 3,344 1,422 6,966 3,861
Total research and development expenses
Research and development activities are central to our business model. Product
candidates in later stages of clinical development generally have higher
development costs than those in earlier stages of clinical development,
primarily due to the increased size and duration of later-stage clinical trials.
We expect that our research and development expenses will continue to increase
for the foreseeable future as we advance our programs and product candidates
into and through the development phase, and as we continue to develop additional
product candidates. We also expect our discovery research efforts and our
related personnel costs will increase and, as a result, we expect our research
and development expenses, including costs associated with stock-based
compensation, will increase above historical levels. In addition, we may incur
additional expenses related to milestone and royalty
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payments payable to third parties with whom we may enter into license, acquisition and option agreements to acquire the rights to future product candidates.
At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates or programs. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of:
• the timing and progress of preclinical and clinical development activities;
• the number and scope of preclinical and clinical programs we decide to
pursue;
• our ability to successfully complete clinical trials with safety, potency
and purity profiles that are satisfactory to the FDA or any comparable
foreign regulatory authority;
• our ability to successfully develop, obtain regulatory approval for, and
then successfully commercialize, our product candidates;
• our ability to hire and retain key research and development personnel;
• our successful enrollment in and completion of clinical trials;
• the costs associated with the development of any additional product
candidates we develop or acquire through collaborations;
• our ability to establish and maintain agreements with third-partymanufacturers for clinical supply for our clinical trials and commercial
manufacturing, if our product candidates are approved;
• the terms and timing of any collaboration, license or other arrangement,
including the terms and timing of any milestone payments thereunder;
• our ability to obtain and maintain patent, trade secret and other
intellectual property protection and regulatory exclusivity for our
product candidates if and when approved;
• our receipt of marketing approvals from applicable regulatory authorities;
• our ability to commercialize products, if and when approved, whether alone
or in collaboration with others;
• the continued acceptable safety profiles of the product candidates
following approval; and
• the effects of COVID-19 pandemic on our research and developmentemployees, contractors and those who may participate in our studies.
A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any product candidate we may develop.
General and Administrative Expense
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation, for personnel in our executive, finance, legal, business development, human resources and administrative functions. General and administrative expenses also include legal fees relating to corporate matters and costs to secure and defend our intellectual property; professional fees for accounting, auditing, tax, human resources and administrative consulting services; insurance costs; administrative travel expenses and facility-related expenses, which include direct depreciation costs and allocated expenses for office rent and other operating costs. These costs relate to the operation of the business, unrelated to the research and development function, or any individual program. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance costs and investor and public relations costs. We also expect to incur additional intellectual property-related expenses as we file patent applications to protect innovations arising from our research and development activities. 25
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Interest Income
Interest income consists of interest income earned from our cash, cash equivalents and available-for-sale securities.
Income Taxes
Since our inception, we have not recorded anyU.S. federal or state income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. We have also not recognized any reserves related to uncertain tax positions. We haveU.S. federal and state, as well as foreign net operating loss carryforwards and research and development tax credit carryforwards to offset future taxable income.
Income taxes are determined at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Our income tax provision may be significantly affected by changes to our estimates.
Restructuring In January andMay 2020 , we had a reduction in force that included 45 full-time employees, which represented approximately 52% of our full-time employee workforce. The reduction in force was primarily comprised of positions related to research and general and administrative services and was implemented in connection with our determination to focus and reprioritize our resources on gene therapy programs for hearing and balance disorders and to eliminate our research efforts on other discovery programs for hearing loss. As a result of the reduction, we incurred expenses of approximately$2.9 million during the first quarter of 2020 and$0.6 million during the second quarter of 2020, comprised of termination benefits including severance, benefits and other payroll-related charges. During the first quarter of 2020, we established retention agreements with certain key employees, including one of our executive officers. Under the terms of these agreements, we agreed to make three retention payments to each key employee totaling$1.6 million in the aggregate if they remained employed at the Company through specified milestones. The first payments of$0.7 million in the aggregate were paid upon execution of the retention agreements. The second payments of$0.4 million in the aggregate became due to the key employees upon the closing of the Series D financing inNovember 2020 . The third payments of$0.5 million in the aggregate were paid inJanuary 2021 , including payments to certain employees who are required to remain employed throughJanuary 1, 2022 in order to retain the first and third payments. These prepayments are being amortized over the remaining employee service terms under the retention agreements. During the second quarter of 2020, we established additional employee bonuses in the aggregate amount of$0.4 million for the majority of employees who were not party to a retention agreement. Restructuring expenses are classified as research and development expenses or general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss in the manner in which the respective employee's salary and related costs were classified.
Results of Operations
Comparison of the Three Months Ended
The following tables summarizes our results of operations for each period
presented (in thousands):
Three Months Ended June 30,
2021 2020 Change
Operating expenses:
Research and development $ 6,827 $ 5,299 $ 1,528
General and administrative 4,899 2,555 2,344
Total operating expenses 11,726 7,854 3,872
Loss from operations (11,726 ) (7,854 ) (3,872 )
Other income:
Interest income 75 22 53
Other income, net - 25 (25 )
Total other income, net 75 47 28
Net loss $ (11,651 ) $ (7,807 ) $ (3,844 )
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Research and Development Expenses
The following tables summarizes our research and development expenses for each period presented (in thousands):
Three Months Ended June 30,
2021 2020 Change
DB-020 $ 1,040 $ 1,383 $ (343 )
Personnel-related (including stock-based
compensation) 2,443 2,494 (51 )
Other indirect research and development
expenses 3,344
1,422 1,922
Total research and development expenses
Research and development expenses for the three months endedJune 30, 2021 were$6.8 million , compared to$5.3 million for the three months endedJune 30, 2020 . The increase of$1.5 million was primarily attributable to the following:
•
expenses in the three months ended
increase in manufacturing costs related to toxicology studies. Included as
reductions to other indirect research and development expenses were
for the three months ended June 30, 2021 and 2020, respectively,
recognized pursuant to our collaboration agreement with Regeneron; and
•
30, 2021 to advance our DB-020 program, driven primarily by a decrease in
clinical activity primarily driven by reduced enrollment in our clinical
program as a result of delays due to the COVID-19 pandemic.
General and Administrative Expense
General and administrative expenses for the three months endedJune 30, 2021 were$4.9 million , compared to$2.6 million for the three months endedJune 30, 2020 . The increase of$2.3 million was primarily attributable to the following:
•
30, 2021, driven primarily by expenses related to consulting, accounting
advisory and audit services incurred as a result of becoming a public
company;
•
policy effective upon our initial public offering; and
•
expense.
Interest Income
The increase in interest income in the three months ended June 30, 2021 was
primarily due to an increase in our holdings following receipt of the proceeds
from the issuance and sale of our Series D convertible preferred stock and from
our IPO.
Comparison of the Six Months Ended
The following tables summarizes our results of operations for each period
presented (in thousands):
Six Months Ended June 30,
2021 2020 Change
Operating expenses:
Research and development $ 12,847 $ 12,735 $ 112
General and administrative 9,782 6,733 3,049
Total operating expenses 22,629 19,468 3,161
Loss from operations (22,629 ) (19,468 ) (3,161 )
Other income:
Interest income 108 101 7
Other income - 25 (25 )
Total other income, net 108 126 (18 )
Net loss $ (22,521 ) $ (19,342 ) $ (3,179 )
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Research and Development Expenses
The following tables summarizes our research and development expenses for each period presented (in thousands):
Six Months Ended June 30,
2021 2020 Change
DB-020 $ 1,335 $ 2,462 $ (1,127 )
Personnel-related (including stock-based
compensation) 4,546 6,412 (1,866 )
Other indirect research and development
expenses 6,966
3,861 3,105
Total research and development expenses
Research and development expenses for the six months endedJune 30, 2021 were$12.8 million , compared to$12.7 million for the six months endedJune 30, 2020 . The increase of$0.1 million was primarily attributable to the following:
•
30, 2021 to advance our DB-020 program, driven primarily by a decrease in
clinical activity primarily driven by reduced enrollment in our clinical
program as a result of delays due to the COVID-19 pandemic;
•
in force conducted in
•
expenses in the six months ended
increase in manufacturing costs related to toxicology studies. Included as
reductions to other indirect research and development expenses were
for the six months ended
pursuant to our collaboration agreement with Regeneron.
General and Administrative Expense
General and administrative expenses for the six months endedJune 30, 2021 were$9.8 million , compared to$6.7 million for the six months endedJune 30, 2020 . The increase of$3.1 million was primarily attributable to the following:
•
30, 2021, driven primarily by expenses related to consulting, accounting
advisory and audit services incurred as a result of becoming a public
company; and
•
policy effective upon our initial public offering.
Interest Income
The increase in interest income in the six months endedJune 30, 2021 was primarily due to an increase in our holdings following receipt of the proceeds from the issuance and sale of our Series D convertible preferred stock and from our IPO.
Liquidity and Capital Resources
Sources of Liquidity and Capital
Since our inception, we have incurred significant operating losses and negative cash flows from operations. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. ThroughJune 30, 2021 , we funded our operations primarily from net proceeds of$219.5 million from the issuance and sale of our convertible preferred stock,$33.9 million from our collaboration agreement with Regeneron and$124.8 million from the issuance and sale of our common stock in our IPO. 28
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Cash Flows
The following table provides information regarding our cash flows for each period presented (in thousands):
Six Months Ended June 30,
2021 2020
Net cash provided by (used in):
Operating activities $ (21,955 ) $ (19,830 )
Investing activities (120,753 ) 13,599
Financing activities 152,308 -
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 9,600 $ (6,231 )
Operating Activities
Our cash flows from operating activities are greatly influenced by our use of
cash for operating expenses and working capital requirements to support the
business. We have historically experienced negative cash flows from operating
activities as we invested in developing our pipeline, platform, drug discovery
efforts and related infrastructure. The cash used in operating activities
resulted primarily from our net losses adjusted for non-cash charges, which are
generally attributable to stock-based compensation, depreciation and
amortization and accretion of discounts on available-for-sale securities, as
well as changes in components of operating assets and liabilities, which are
generally attributable to increased expenses, timing of vendor payments and
performance under our collaboration agreement.
During the six months ended June 30, 2021 , net cash used in operating activities
of $22.0 million was primarily due to our net loss of $22.5 million and changes
in operating assets and liabilities of $2.0 million , partially offset by net
non-cash expenses of $2.5 million .
During the six months ended June 30, 2020 , net cash used in operating activities
of $19.8 million was primarily due to our net loss of $19.3 million and changes
in operating assets and liabilities of $1.7 million , partially offset by net
non-cash expenses of $1.3 million .
Investing Activities
During the six months endedJune 30, 2021 , net cash used in investing activities of$120.8 million was primarily due to purchases of available-for-sale securities of$147.2 million and purchases of property and equipment of$0.1 million , partially offset by maturities of available-for-sale securities of$26.5 million .
During the six months ended
Financing Activities
During the six months endedJune 30, 2021 , net cash provided by financing activities of$152.3 million consisted primarily of proceeds from the issuance and sale of common stock, net of cash paid for offering costs, in connection with our IPO of$125.0 million and proceeds from the issuance and sale of our Series D convertible preferred stock of$27.4 million , net of cash paid for offering costs.
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. In addition, we expect to incur additional costs associated with operating as a public company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future. As ofJune 30, 2021 , our cash, cash equivalents and available-for-sale securities totaled$184.6 million . We believe that our cash, cash equivalents and available-for-sale securities as ofJune 30, 2021 will enable us to fund our operating expenses and capital expenditure requirements into 2024. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we anticipate. 29 -------------------------------------------------------------------------------- Because of the numerous risks and uncertainties associated with product development, and because the extent to which we may enter into collaborations with third parties for the development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our funding requirements and timing and amount of our operating expenditures will depend on many factors, including, but not limited to:
• the progress, costs and results of our ongoing preclinical development,
our planned Phase 1/2 clinical trial of DB-OTO and any future clinical
development of DB-OTO;
• the progress, costs and results of clinical development of DB-020,
including our ongoing Phase 1b clinical trial;
• the scope, progress, costs and results of preclinical and clinical
development for our other product candidates and programs, including
AAV.103, AAV.104, AAV.201 and DB-ATO;
• the number of, and development requirements for, other product candidates
that we may identify and develop;
• the scope, costs, timing and outcome of regulatory review of our product
candidates;
• the cost and timing of completion of commercial-scale manufacturing
activities;
• the success of our collaboration with Regeneron;
• the payment or receipt of milestones and of other collaboration-based
revenues, if any;
• our ability to establish and maintain additional strategic collaborations,
licensing or other arrangements and the financial terms of such
arrangements;
• the costs and timing of future commercialization activities, including
product manufacturing, marketing, sales and distribution, for any of our
product candidates for which we receive marketing approval;
• the amount and timing of revenue, if any, received from commercial sales
of our product candidates for which we receive marketing approval;
• the costs and timing of preparing, filing and prosecuting patentapplications, maintaining and enforcing our intellectual property and
proprietary rights and defending any intellectual property-related claims;
• the extent to which we may acquire or in-license other products, product
candidates and technologies;
• the impacts of the COVID-19 pandemic;
• the ability to receive additional non-dilutive funding, including grants
from organizations and foundations; and
• the costs of operating as a public company.
Identifying potential product candidates and conducting preclinical testing and
clinical trials is a time consuming, expensive and uncertain process that takes
years to complete, and we may never generate the necessary data or results
required to obtain marketing approval and achieve product sales. In addition,
our product candidates, if approved, may not achieve commercial success. Our
commercial revenues, if any, will be derived from sales of products that we do
not expect to be commercially available for several years, if ever. Accordingly,
we will need to obtain substantial additional funds to achieve our business
objectives.
Our expectation with respect to our ability to fund current planned operations
is based on estimates that are subject to risks and uncertainties. Our operating
plan may change as a result of many factors currently unknown to management and
there can be no assurance that the current operating plan will be achieved in
the time frame anticipated by us, and we may need to seek additional funds
sooner than planned.
Adequate additional funds may not be available to us on acceptable terms, or at
all. We do not currently have any committed external source of funds, other than
the reimbursements to which we are entitled under the Regeneron Agreement for up
to $6.3 million of third-party costs related to the GLP toxicology studies of
DB-OTO. Market volatility resulting from the COVID-19 pandemic or other factors
could also adversely impact our ability to access capital as and when needed. To
the extent that we raise additional capital through the sale of equity or
convertible debt securities, the ownership interests of our stockholders will be
diluted, and the terms of these securities may include liquidation or other
preferences that adversely affect the rights of holders of our common stock.
Additional debt financing and preferred equity financing, if available, may
involve agreements that include covenants limiting or restricting our ability to
take specific actions, such as incurring additional debt, making capital
expenditures or declaring dividends and may require the issuance of warrants,
which could potentially dilute the ownership interests of holders of our common
stock.
We may be unable to raise additional funds or enter into other collaborations,
strategic alliances or licensing arrangements with third parties when needed on
favorable terms, or at all. If we are unable to raise additional funds through
equity or debt financings or enter into such agreements when needed, we may have
to significantly delay, reduce or eliminate some or all of our product
development or future commercialization efforts, or grant rights to develop and
market product candidates that we would otherwise prefer to develop and market
ourselves or on terms that may not be favorable to us.
30--------------------------------------------------------------------------------
Off-Balance Sheet Arrangements.
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of theU.S. Securities and Exchange Commission .
Critical Accounting Policies and Significant Judgement and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We define our critical accounting policies as those accounting principles generally accepted inthe United States of America that are most critical to the judgments and estimates used in the preparation of our condensed consolidated financial statements. While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements in our 2020 Annual Report on Form 10-K, we believe that our most critical accounting policies are those relating to Collaboration Agreements, Research and Development Expenses and Related Accruals and Stock-Based Compensation, which are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Significant Judgement and Estimates" in our 2020 Annual Report on Form 10-K.
There have been no material changes to our critical accounting policies from those described in our 2020 Annual Report on Form 10-K.
Emerging Growth Company and Smaller Reporting Company Status
We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted inApril 2012 . As a result, we may take advantage of reduced reporting requirements that are otherwise applicable to public companies. In particular, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have elected not to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we can adopt the new or revised standard at the time private companies adopt the new or revised standard and may do so until such time that we either (1) irrevocably elect to "opt out" of such extended transition period or (2) no longer qualify as an emerging growth company. We are also a "smaller reporting company" as defined in Rule 12b-2 under the Exchange Act. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than$250 million or (ii) our annual revenue was less than$100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than$700 million . If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.
Recently Issued Accounting Pronouncements
We have reviewed all recently issued accounting pronouncements and have determined that, other than as disclosed in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 as filed with theSEC onMarch 29, 2021 , such standards will not have a material impact on our financial statements or do not otherwise apply to our current operations.
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