The following discussion should be read in conjunction with our financial statements and accompanying footnotes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. Actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, the risks related to the continuing impact of COVID-19 as well as the other risks set forth under the section titled "Risk Factors" in this Quarterly Report on Form 10-Q. Please also see the section entitled "Special Note Regarding Forward-Looking Statements." You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Overview
We are a clinical-stage gene therapy company leveraging breakthroughs in human genetics with the goal of developing and commercializing disease-modifying AAV-based gene therapies for patients with devastating neurodegenerative diseases. We are applying a precision medicine approach to neurodegeneration by studying our gene therapies in genetically defined patient populations. We believe this approach will increase the probability of creating disease-modifying therapies that improve patients' lives. Our lead clinical-stage programs are PR001 for the treatment of PD-GBA and nGD, and PR006 for the treatment of FTD-GRN. We are also focused on developing a broad pipeline of gene therapies for a range of neurodegenerative diseases, including PR004 for the treatment of synucleinopathies, and other programs. The PROPEL trial, our Phase 1/2 clinical trial of PR001 for the treatment of PD-GBA patients, is ongoing. The PROPEL trial is open-label and is investigating the safety and tolerability of PR001 and also measuring key biomarkers and exploratory efficacy endpoints. Two patients enrolled in the PROPEL trial under a previous version of the protocol that included a sham procedure arm, one who received PR001 and another who received the sham procedure. In the patient who received PR001, evidence of central nervous system, or CNS, transduction of PR001 was observed resulting in an increase in cerebrospinal fluid, or CSF, beta-glucocerebrosidase, or GCase, enzyme activity from undetectable at baseline to within the normal range at approximately three months following PR001 treatment. In addition, approximately three months following PR001 administration, this patient developed severe adverse events, or SAEs, that are presumed to have been an immune-mediated response to AAV9. The patient received immunosuppressive treatment and the SAEs resolved. We modified the immunosuppression regimen in the clinical protocol for the PROPEL trial by adding sirolimus and reducing the steroid dose. InNovember 2020 , we continued dosing in the PROPEL trial under the updated clinical protocol. We currently intend to provide the next biomarker and safety analysis on a subset of patients enrolled in the PROPEL trial by mid-2021. The PROVIDE trial, our Phase 1/2 clinical trial of PR001 for the treatment of Type 2 Gaucher disease patients, is recruiting. We currently intend to initiate enrollment in the PROVIDE Phase 1/2 clinical trial for patients with Type 2 Gaucher disease in the fourth quarter of 2020. The PROVIDE trial is open-label and will investigate the safety and tolerability of PR001 as well as key biomarkers and exploratory efficacy endpoints. The optimized immunosuppression regimen used in the amended PROPEL trial has also been implemented in the PROVIDE trial. InJanuary 2020 , we announced that we had granted a compassionate use request for the administration of PR001 to a patient with Type 2 Gaucher disease. Evidence of CNS transduction of PR001 was observed resulting in an increase in CSF GCase enzyme activity from undetectable at baseline to within the normal range at approximately four months following PR001 treatment. Additionally, we announced inAugust 2020 that we granted a second compassionate use request for the administration of PR001 to a patient with nGD, following approval by an international regulatory authority. PR001 administration was well-tolerated in both patients and no PR001-related adverse events have been reported in either patient. Follow-up clinical observation of both patients is ongoing. We currently anticipate that we will provide the next update on PR001 biomarker and safety data for nGD in 2021. The FDA has granted PR001 Orphan Drug designation for the treatment of Gaucher disease and Rare Pediatric Disease Designation for the treatment of nGD. In addition, the FDA has granted Fast Track designation for PR001 for the treatment of PD-GBA, and inOctober 2020 the FDA granted Fast Track designation for PR001 for the treatment of nGD. In our comprehensive preclinical program in both mouse models and non-human primates, PR001 was observed to be well tolerated and demonstrated robust and widespread biodistribution. Additionally, in mouse models, we observed significant increases in enzyme activity, reductions in lipid accumulation and improvements in motor function. 20 -------------------------------------------------------------------------------- The PROCLAIM trial, our Phase 1/2 clinical trial of PR006 for the treatment of FTD-GRN patients, is recruiting, and we anticipate initiating enrollment in the fourth quarter of 2020. The PROCLAIM trial is open-label and will investigate the safety and tolerability of PR006 as well as key biomarkers and exploratory efficacy endpoints. We anticipate that this trial will enroll up to 15 patients. The optimized immunosuppression regimen used in the amended PROPEL trial has also been implemented in the PROCLAIM trial. We currently anticipate that we will provide a biomarker and safety analysis on a subset of patients in the PROCLAIM trial in 2021. The FDA has granted Fast Track designation for PR006 for the treatment of FTD-GRN and Orphan Drug designation for PR006 for the treatment of FTD. In our comprehensive preclinical program in in vitro models, mouse models and non-human primates, PR006 was observed to be well tolerated and demonstrated robust and widespread biodistribution. Additionally, in mouse models, PR006 increased expression of progranulin protein in the brain and CSF, reduced indicators of lysosomal dysfunction in the brain, and suppressed expression of markers of inflammation in the brain. In 2019, we announced our strategic collaboration with Lonza, with whom we have been working since 2018, with an initial focus on process development and good manufacturing practices, or GMP manufacturing of our two lead programs, PR001 and PR006. Under this collaboration, focused on the baculovirus/Sf9 production system for gene therapies, we and Lonza work together closely on process development and scaling up production of PR001 and PR006, and Lonza will manufacture PR001 and PR006 for late-stage clinical and commercial supply at its gene therapy center of excellence inHouston, Texas . The collaboration also has the potential to extend to our future pipeline of AAV-based gene therapy programs. In collaboration with Lonza, we have developed and scaled up a process that demonstrates promising yield and potency, and our GMP manufacturing is underway. We are progressing studies and assessments to evaluate comparability between the material produced in the baculovirus/Sf9 production system and the material produced in the HEK293 production system. The extent of the impact of the COVID-19 pandemic on our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain, and will depend on certain developments such as the continued duration and spread of the outbreak and its impact on our clinical trial enrollment, trial sites, partners, contract research organizations, or CROs, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. For example, in response to the COVID-19 pandemic, patient screening and enrollment at active trial sites for the PROPEL trial were temporarily suspended. Several sites have now resumed patient screening and enrollment activities; however, due to the implementation of the protocol amendment to the PROPEL trial described above, we now anticipate that we will continue enrollment in the second half of 2020. Other closures or delays due to COVID-19, including those that have not yet happened or been reported, could also impact any of our anticipated clinical development timelines. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and employee work locations. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, partners and other third parties with whom we do business. Since our inception, we have focused primarily on organizing and staffing our company, raising capital, establishing and protecting our intellectual property portfolio, in-licensing the rights to AAV9 in particular fields, developing and progressing our gene therapy product candidates through preclinical studies and preparing for, initiating and conducting our clinical trials, and establishing our manufacturing platform to ensure clinical and preclinical supplies are available. We do not have any product candidates approved for sale and have not generated any revenue from product sales as ofSeptember 30, 2020 . OnJune 24, 2019 , we completed our initial public offering, or IPO, whereby we sold an aggregate of 7,353,000 shares of our common stock at a price of$17.00 per share. The aggregate net proceeds received by us from the offering were approximately$113.0 million , after deducting underwriting discounts and commissions and offering expenses payable by us of$12.0 million . Prior to our IPO, we funded our operations primarily through equity and convertible debt financings and raised an aggregate of approximately$129.0 million of gross proceeds through these offerings. InAugust 2020 , we entered into an Open Market Sale AgreementSM, or Sales Agreement, withJefferies LLC , or Jefferies, as sales agent, pursuant to which we may offer and sell, from time to time, through Jefferies, shares of our common stock having an aggregate offering price of up to$75.0 million . 21
-------------------------------------------------------------------------------- We have incurred significant operating losses to date. 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 current or future product candidates and programs. Our net losses were$59.3 million and$45.3 million for the nine months endedSeptember 30, 2020 and 2019, respectively. We expect our expenses and losses to increase as we continue to advance our product candidates from discovery and research, through preclinical development, into human clinical trials and seek regulatory approval of our product candidates. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, audit, accounting, director and officer liability insurance, investor relations and other expenses that we did not incur as a private company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities. We do not have any products approved for sale. We do not expect to generate any 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. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, until such time as we can generate substantial product revenues to support our cost structure, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. 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 when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional capital when needed, we could be forced to delay, limit, reduce or terminate our product candidate development or future commercialization efforts or grant rights to third parties to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.
As of
License Agreements
License Agreement with REGENXBIO Inc. for GBA1
InAugust 2017 , we entered into a license agreement, or the REGENXBIO GBA1 License, with REGENXBIO. Under the REGENXBIO GBA1 License, REGENXBIO granted us an exclusive, worldwide license under certain patents and patent applications to make, have made, use, import, sell and offer for sale products for the treatment of disease, including but not limited to Parkinson's disease and Gaucher disease, whether or not caused by mutations in the gene that produces the GBA1 enzyme in humans by in vivo gene therapy using AAV9 delivering the gene (or any portion thereof) encoding for GBA1. As consideration for the licensed rights under the REGENXBIO GBA1 License, we issued 2,430,000 shares of our common stock in a concurrent private placement to REGENXBIO. We are also obligated, pursuant to the REGENXBIO GBA1 License, to pay REGENXBIO: (1) an annual maintenance fee; (2) mid- to high-single digit royalty percentages on net sales of licensed products, subject to reduction in specified circumstances; and (3) mid-teen to low-twenties royalty percentages of any sublicense fees we receive from sublicensees for the licensed intellectual property rights. See Note 3 to our financial statements appearing elsewhere in this report for additional information regarding this license.
License Agreement with REGENXBIO Inc. for Option Genes
InMay 2018 , we entered into a license agreement, or the REGENXBIO Option Genes License, with REGENXBIO pursuant to which REGENXBIO granted us three distinct exclusive options for specified genes, or the Option Genes, which were exercisable at our sole discretion throughMay 10, 2019 . Each option represented the right to obtain an exclusive, worldwide license under certain patents and patent applications to make, have made, use, import, sell and offer for sale products for the treatment or prevention of disease, including but not limited to Parkinson's disease, whether or not caused by mutations in any Option Gene that is the subject of the applicable license, in humans by in vivo gene therapy using AAV9 delivering the applicable licensed Option Gene and/or RNA interference or antisense modalities that target the applicable licensed Option Gene. InApril 2019 , we exercised all three options, including for AAV9 delivering the genes encoding for progranulin and a-Synuclein, and paid the additional up-front fee of$0.6 million per option, or an aggregate of$1.8 million , to REGENXBIO. In addition, with respect to each licensed Option Gene, we are required to pay REGENXBIO: (1) an annual maintenance fee; (2) mid- to high-single digit royalty percentages on net sales of the licensed product, subject to reduction in specified circumstances; and (3) 22 -------------------------------------------------------------------------------- mid-teen to low-twenties royalty percentages of any sublicense fees we receive from sublicensees for the licensed intellectual property rights. If a licensed product includes the GBA1 gene and otherwise would be subject to royalties under the REGENXBIO GBA1 License, then royalties for that licensed product will only be due under the REGENXBIO Option Genes License. See Note 3 to our financial statements appearing elsewhere in this report for additional information regarding this license.
Financial Operations Overview
Research and Development Expenses
Research and development expenses are recognized as incurred. These costs are comprised of internal and external expenses, including costs incurred for the manufacture of clinical and preclinical supply and process development initiatives, costs incurred in preparation for and conduct of clinical trials, and costs for activities related to regulatory filings for our product candidates and preclinical and discovery work on our gene therapy product candidates. Payments made prior to the receipt of goods or services rendered are capitalized and recognized as expense as the goods are delivered or services are performed. Research and development expenses include or could include:
• Employee and related expenses, including salaries, bonuses, benefits,
stock-based compensation, other related costs for those employees involved
in research and development functions;
• external research and development expenses incurred under agreements with
CROs, investigative sites, consultants and vendors engaged to conduct our
clinical and preclinical studies or provide the research and development
services;
• costs related to manufacturing material for our preclinical studies,
clinical trials, and manufacturing process development efforts, including
fees paid to contract development and manufacturing organizations, or CDMOs; • laboratory supplies, minor equipment and research materials;
• payments made under existing or for new third-party license agreements;
• costs associated with compliance with regulatory requirements; and
• facilities expenses, which includes direct and allocated cost for fixed
and variable lease expense, depreciation and amortization of equipment and
leasehold improvements, and other operating costs.
We expect our research and development expenses to increase as we continue to advance our clinical stage product candidates and manufacturing processes and secure clinical and preclinical supply, as well as continue to conduct discovery and research activities for our preclinical programs. We cannot determine with certainty the timing of the initiation, the duration or the cost to complete current or future clinical trials and preclinical studies of our product candidates and pipeline programs due to the inherently unpredictable nature of clinical and preclinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and the level of funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future clinical trials and preclinical studies, regulatory developments and our ongoing assessments as to each product candidate's commercial potential. We will need to raise substantial additional capital in the future. Our clinical development costs are expected to increase significantly as we initiate and advance our clinical trials. Our future expenses may vary significantly each period based on factors such as: • per patient trial costs; • the number of patients enrolled in each trial; • the number of trials required for regulatory approval; • any follow-up commitment or confirmatory trials; • the number of sites included in the trials; • the countries in which the trials are conducted; • the length of time required to enroll eligible patients; • the drop-out or discontinuation rates of patients;
• potential additional safety monitoring requested by regulatory agencies;
• the duration of patient participation in the trials and follow-up; • the phase of development of the product candidate; and 23
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• the efficacy and safety profile of the product candidate.
General and Administrative Expenses
General and administrative expenses are comprised of employee and related expenses, third-party service provider costs, such as legal, investor relations, audit, finance and accounting, market research and insurance. All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred to general and administrative expense due to the uncertainty about the recovery of the expenditure. Employee costs include salaries, bonuses, benefits, stock-based compensation, and other related costs, for those employees in general and administrative functions. We expect our general and administrative expenses will be higher in 2020 as compared to 2019 as we incur additional costs related to the build out of our internal general and administrative functions to support our operations, incur costs associated with operating as a public company for the full year, and incur additional legal costs associated with the ongoing arbitration matter.
Other Income
In 2020, we received a New York City Biotechnology Tax Credit. Tax credits are recorded when funds are received and are included in other income on the statement of operations and comprehensive loss.
Interest Income
We have institutional money market and investment accounts that pay interest on a monthly basis.
Results of Operations
Comparison of the three months ended
The following table summarizes our results of operations:
Three Months Ended September 30, 2020 2019 Change (in thousands) Operating Expenses: Research and development $ 12,321 $ 16,836$ (4,515 )
General and administrative 6,303 4,452
1,851 Total operating expenses 18,624 21,288 (2,664 ) Operating loss (18,624 ) (21,288 ) 2,664 Interest income, net 37 989 (952 ) Net loss$ (18,587 ) $ (20,299 ) $ 1,712
Research and Development Expenses
Research and development expenses decreased by$4.5 million to$12.3 million for the three months endedSeptember 30, 2020 as compared to the same period in 2019. The decrease was primarily due to a$3.9 million decrease in external manufacturing and costs due to the timing of production of clinical and preclinical supply, a of$1.5 million decrease in direct clinical trial costs related to delays in our PROPEL, PROVIDE, and PROCLAIM clinical trials and startup cost on another clinical trial that has been delayed, and a$0.5 million decrease related to external preclinical and toxicology studies. These decreases were partially offset by a$1.4 million increase in employee-related costs, inclusive of a$0.4 million increase in stock-based compensation expense resulting from an increase in research and development employees hired to execute the development of our clinical stage product candidates and preclinical pipeline.
General and Administrative Expenses
General and administrative expenses increased by$1.9 million to$6.3 million for the three months endedSeptember 30, 2020 as compared to the same period in 2019. The increase was primarily due to a$1.3 million increase in employee and related costs, inclusive of a$0.8 million increase in stock-based compensation expense, resulting from an increase in general and administrative employees to support our expanded operations and establish capabilities to operate as a public company, the grant of annual equity awards to existing employees and a$0.8 million increase in legal fees, primarily the result of legal fees incurred on the ongoing 24
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arbitration matter and intellectual property patent costs. These increases were
partially offset by a
Interest Income, Net
Interest income decreased by$1.0 million to less than$0.1 million during the three months endedSeptember 30, 2020 , as compared to$1.0 million during the three months endedSeptember 30, 2019 . The decrease was primarily due to the reductions in the federal funds interest rate earned on our cash and cash equivalents.
Comparison of the nine months ended
The following table summarizes our results of operations:
Nine Months Ended September 30, 2020 2019 Change (in thousands) Operating Expenses: Research and development $ 36,681 $ 37,202$ (521 )
General and administrative 23,373 10,050
13,323 Total operating expenses 60,054 47,252 12,802 Operating loss (60,054 ) (47,252 ) (12,802 ) Other income 210 - 210 Interest income, net 582 1,905 (1,323 ) Net loss$ (59,262 ) $ (45,347 ) $ (13,915 )
Research and Development Expenses
Research and development expenses decreased by$0.5 million to$36.7 million for the nine months endedSeptember 30, 2020 as compared to$37.2 million for the same period in 2019. The decrease was primarily due to a$7.2 million decrease in external manufacturing costs due to timing of production of clinical and preclinical supply, a$1.9 million decrease in license fees related to licenses entered into with REGENXBIO and a$0.4 million decrease related to external preclinical and toxicology studies. These decreases were partially offset by a$3.0 million increase in direct clinical trial costs related to our PROPEL, PROVIDE, and PROCLAIM clinical trials, a$4.6 million increase in employee-related costs, inclusive of a$1.3 million increase in stock-based compensation expense resulting from an increase in research and development employees to execute the development of our clinical stage product candidates and preclinical pipeline, and a$1.4 million increase in facility and lab operating costs, due to the occupancy of an additional floor of office space inJuly 2019 , which was previously under renovation and being recorded to general and administrative expenses.
General and Administrative Expenses
General and administrative expenses increased by$13.3 million to$23.4 million for the nine months endedSeptember 30, 2020 as compared to$10.1 million for the same period in 2019. The increase was primarily due to an$9.1 million increase in legal fees, primarily the result of legal fees incurred on the ongoing arbitration matter, intellectual property costs and costs to operate as a public company, a$3.4 million increase in employee-related costs, inclusive of a$2.1 million increase in stock-based compensation expense, resulting from an increase in general and administrative employee headcount to support our expanded operations and ability to comply with public company requirements and the classification of certain employees to general and administrative commensurate with our IPO inJune 2019 , an increase of$0.9 million in director and officer's insurance as a result of operating as a publicly traded company and an increase in other professional service costs of$0.6 million . These increases were partially offset by a$0.7 million decrease in facilities costs, due to the occupancy of an additional floor of office space inJuly 2019 , which was previously under renovation and is now primarily recorded to research and development expenses. Other Income In 2020, we received a New York City Biotechnology Tax Credit. This program allows investors and owners of emerging technology companies focused on biotechnology to claim a refundable tax credit for amounts paid or incurred for certain facilities, operations and employee training inNew York City . We recognized$0.2 million of other income during the nine months endedSeptember 30, 2020 . No such transaction occurred during the nine months endedSeptember 30, 2019 . 25
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Interest Income, net Interest income decreased by$1.3 million to$0.6 million for the nine months endedSeptember 30, 2020 as compared to$1.9 million during the nine months endedSeptember 30, 2019 . The decrease was primarily due to the reductions to the federal funds interest rate earned on our cash and cash equivalents.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. Our net losses were$59.3 million and$45.3 million for the nine months endedSeptember 30, 2020 and 2019, respectively. As ofSeptember 30, 2020 andDecember 31, 2019 , we had an accumulated deficit of$143.4 million and$84.1 million , respectively. To date, we have focused primarily on organizing and staffing our company, raising capital, establishing and protecting our intellectual property portfolio, in-licensing the rights to AAV9 in particular fields, developing and progressing our gene therapy product candidates through preclinical studies and clinical trials, and establishing our manufacturing platform. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative expenditures. We do not have any products approved for sale. We do not expect to generate any 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. Since our inception, we have funded our operations primarily through equity and convertible debt financings. InMarch 2019 , we raised an aggregate of approximately$49.8 million of net proceeds from our Series B convertible Preferred Stock financing. InJune 2019 , we completed our IPO whereby we sold an aggregate of 7,353,000 shares of our common stock for aggregate net proceeds of approximately$113.0 million , after deducting underwriting discounts and commissions and offering expenses payable by us of approximately$12.0 million . InAugust 2020 , we entered into a Sales Agreement with Jefferies, as sales agent, pursuant to which we may offer and sell, from time to time, through Jefferies, shares of our common stock having an aggregate offering price of up to$75.0 million . Jefferies receives a commission of up to 3.0% of the gross proceeds from each sale of such shares. As ofSeptember 30, 2020 , we have not sold any shares of our common stock pursuant to the Sales Agreement.
As of
Cash Flows Historical Cash Flows The following table shows a summary of our cash flows for the periods presented: Nine Months Ended September 30, 2020 2019 Change (in thousands) Net cash used in operating activities$ (53,235 ) $ (40,955 ) $ (12,280 ) Net cash used in investing activities (33,222 ) (2,050 ) (31,172 ) Net cash provided by financing activities 138 163,065 (162,927 ) Net increase (decrease) in cash, cash equivalents and restricted cash$ (86,319 ) $ 120,060 $ (206,379 ) Operating Activities Cash used in operating activities for the nine months endedSeptember 30, 2020 was$53.2 million as compared to$41.0 million for the same period in 2019. The increase in cash used was primarily the result of increased operating expenses. Our net loss was$59.3 million , which included non-cash charges of$6.8 million , consisting primarily of$6.4 million of stock-based compensation expense, and$0.4 million of depreciation, amortization and interest accretion expenses. The change in our net operating assets was primarily the result of a$1.4 million increase in prepaid expenses and other long-term assets. The change in net operating assets also included a$0.6 million increase in accounts payable and accrued expenses, along with a$1.0 million non-cash decrease in the operating lease right-of-use asset and a net decrease in operating lease liabilities of$1.0 million . Comparatively, for the nine months endedSeptember 30, 2019 , our net loss was$45.3 million , which included non-cash charges of$3.2 million , consisting primarily of$3.0 million of stock-based compensation expense, and$0.2 million of depreciation and amortization expense. The change in our net operating assets was primarily the result of a$6.9 million increase in prepaid expenses and other current assets, comprised of$4.1 million relating to our external manufacturing services,$1.3 million for director's and 26 -------------------------------------------------------------------------------- officer's insurance,$1.5 million relating to other external research and development activities and allowance on facility space. In addition, the change in net operating assets also included a$7.3 million increase in accounts payable and accrued expenses, primarily associated with research and development expenses, along with a$1.8 million non-cash increase in the operating lease right-of-use-asset and an increase in operating lease liabilities of$2.5 million as a result of theJuly 2019 lease modification.
Investing Activities
Cash used for investing activities was$33.2 million for the nine months endedSeptember 30, 2020 as compared to$2.1 million for the same period in 2019. Cash used for investing activities for the nine months endedSeptember 30, 2020 include purchases of investments of$32.7 million and purchases of$0.5 million of property and equipment in connection with our ongoing lab space build out. The cash used for investing activities of$2.1 million for the nine months endedSeptember 30, 2019 was a result of the purchases of property and equipment in connection with the start of the office and lab space build out.
Financing Activities
Cash provided by financing activities for the nine months endedSeptember 30, 2020 was$0.1 million as compared to$163.1 million for the same period in 2019, resulting from the funds received from the Series B Preferred Stock financing inMarch 2019 , which generated$49.8 million of net proceeds, and our IPO inJune 2019 , which generated$113.0 million , of net proceeds. No such financings took place during the nine months endedSeptember 30, 2020 . Proceeds of approximately$0.1 million were received during the nine months endedSeptember 30, 2020 as a result of option exercises. Funding Requirements We believe our existing cash, cash equivalents and investments will be sufficient to meet our anticipated cash requirements for at least 12 months from the issuance date of these financial statements. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could expend our capital resources sooner than we expect. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.
Our future capital requirements will depend on many factors, including:
• the scope and rate of progress of our preclinical and toxicology studies,
as well as our ongoing and any future clinical trials;
• the scope and costs of manufacturing study materials and manufacturing
process development, both internally and externally, and related clinical
manufacturing activities;
• the cost, timing and outcome of regulatory review of our product candidates;
• the costs of preparing, filing and prosecuting patent applications,
maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims;
• the terms and timing of establishing and maintaining collaborations,
licenses and other similar arrangements;
• our efforts to enhance operational systems and our ability to attract,
hire and retain qualified personnel, including personnel to support the development of our product candidates; • the costs associated with being a public company;
• the results and costs of any litigation or other legal proceedings to
which we or our officers or directors may be a party;
• the timing of any milestone and royalty payments to current and future
licensors, if any;
• the extent to which we acquire or in-license other best-in-class AAV-based
viral vectors, product candidates or technologies; and
• the cost associated with commercializing any product candidates, if and
when they receive marketing approval.
Until such time, if ever, as we can generate substantial product revenues to support our cost structure, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or 27
-------------------------------------------------------------------------------- could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. In addition, our ability to raise necessary financing could be impacted by the COVID-19 pandemic and its effects on the market conditions. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves or potentially discontinue operations.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in theU.S. requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates. We believe that the accounting policies described below involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of our operations.
Research and Development Costs,
Research and development costs are expensed as incurred. Research and development expenses consist principally of personnel costs, including salaries, stock-based compensation, and benefits for employees, third-party license fees and other operational costs related to our research and development activities, including allocated facility-related expenses and external costs of outside vendors, and other direct and indirect costs. Research and development advance payments are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or services are performed. Clinical trial costs are accrued over the service periods specified in the contracts and adjusted as necessary based on an ongoing review of the level of effort and costs actually incurred. The estimate of the work completed is developed through discussions with internal personnel and external service providers as to the progress of stage of completion of the services and the agreed-upon fee to be paid for such services. As actual costs become known, the accrued estimates are adjusted. Such estimates are not expected to be materially different from amounts actually incurred, however our understanding of the status and timing of services performed, the number of subjects enrolled, and the rate of subject enrollment may vary from estimates and could result in reporting amounts that are higher or lower than incurred in any particular period. The estimate of accrued research and development expense is dependent, in part, upon the receipt of timely and accurate reporting from clinical research organizations and other third-party service providers.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use, or ROU, assets, operating lease liabilities, and long-term operating lease liabilities in our balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide a readily determinable implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease prepayments, offset by lease incentives. Our facilities operating leases have lease and non-lease components for which we have elected to apply the practical expedient and account for each lease component and related non-lease component as one single component. Operating lease cost is recognized on a straight-line basis over the lease term. 28 --------------------------------------------------------------------------------
Stock-Based Compensation We measure all stock options and other stock-based awards granted to our employees, directors, consultants and other non-employee service providers based on the fair value on the date of the grant, and we recognize compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. We recognize forfeitures at the time forfeitures occur. We classify stock-based compensation expense in our statement of operations and comprehensive loss in the same way the award recipient's payroll costs are classified or in which the award recipients' service payments are classified. We use the Black-Scholes option-pricing model to estimate the fair value of stock options on the date of grant. Using the Black-Scholes option-pricing model requires management to make significant assumptions and judgments, including with respect to the expected term of the option, risk-free interest rate, stock-price volatility and dividend yield. In addition, prior to the IPO, the fair value of the shares of common stock underlying our stock-based awards was determined by our board of directors with input from management and contemporaneous third-party valuations. Given the absence of a public trading market for our common stock prior to the IPO, our board of directors considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including but not limited to the prices of common or convertible preferred stock sold to third-party investors by us and in secondary transactions or repurchased by us in arms-length transactions, lack of marketability of our common stock, our actual operating and financial performance, current business conditions and projections, the history of our company, hiring of key personnel and the experience of our management, our stage of development, the market performance of comparable publicly traded companies and theU.S. and global capital market conditions. Subsequent to the IPO, fair value of each share of underlying common stock is based on the closing price of our common stock as reported by Nasdaq on the date of grant. We use the Black-Scholes option pricing model to estimate the fair value of stock options on the date of grant. We determined the assumptions for the Black-Scholes option-pricing valuation model as discussed below. Each of these inputs is subjective and generally requires significant judgment to determine. The weighted average fair value and assumptions used to determine the fair value of stock options granted was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Grant date fair value$ 13.53 $ 7.22 $ 16.61 $ 6.19 Expected term 5.9 6.0 6.0 6.0 Risk-free interest rate 0.4 % 1.4 % 1.2 % 2.4 % Expected volatility 86.6 % 81.6 % 86.1 % 79.1 % Dividend rate - - - - Income Taxes We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or our tax returns. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of the assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. If management determines that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. 29 -------------------------------------------------------------------------------- We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions. These reserves are based on a determination of whether and how much of a tax benefit taken by us in our tax filings or positions is more likely than not to be realized following resolution of any potential contingencies related to the tax benefit. Potential interest related to the underpayment of income taxes will be classified as a component of interest expense and any related penalties will be classified in operating expenses in the statement of operations and comprehensive loss.
Emerging Growth Company Status
InApril 2012 , the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
Recently Adopted Accounting Pronouncements
Descriptions of recently issued accounting pronouncements that may potentially impact our financial position, result of operations or cash flows are disclosed in Note 2 to our financial statements included elsewhere in this report.
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 by applicable
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