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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number: 001-39343

AKOUOS, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

81-1716654

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

645 Summer Street, Suite 200

Boston, MA

02210

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number, including area code: (857) 410-1818

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange

Title of each class

     

Trading Symbol(s)

    

on which registered

Common Stock, $0.0001 Par Value per Share

AKUS

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of October 30, 2020, there were 34,382,665 shares of the registrant’s common stock, $0.0001 par value per share, outstanding.


Table of Contents

TABLE OF CONTENTS

Page

Part I.

Financial Information

5

Item 1.

Financial Statements (Unaudited)

5

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statements of Operations and Comprehensive Loss

6

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

7

Condensed Consolidated Statements of Cash Flows

9

Notes to Condensed Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

39

Item 4.

Controls and Procedures

39

Part II.

Other Information

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

92

Item 6.

Exhibits

93

Signatures

94

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this Quarterly Report, contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” or the negative of these words or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report include, among other things, statements about:

the initiation, timing, progress, and results of our current and future preclinical studies and clinical trials and our research and development programs, including our expectation that we will submit an investigational new drug application for AK-OTOF, our lead product candidate, for otoferlin-mediated hearing loss to the U.S. Food and Drug Administration in 2021;
our estimates regarding expenses, future revenue, capital requirements, need for additional financing, and the period over which we believe that our existing cash, cash equivalents and investments will be sufficient to fund our operating expenses and capital expenditure requirements;
our plans to develop and, if approved, subsequently commercialize our product candidates;
the timing of and our ability to submit applications for, and obtain and maintain regulatory approvals for, our product candidates;
our expectations regarding our regulatory strategy;
our expectations regarding our ability to fund our operating expenses and capital expenditure requirements with our cash, cash equivalents and marketable securities;
the potential advantages of our product candidates;
the rate and degree of market acceptance and clinical utility of our product candidates;
our estimates regarding the potential addressable patient population for our product candidates;
our commercialization, marketing and manufacturing capabilities and strategy;
our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates;
our intellectual property position;
our ability to identify additional products, product candidates, or technologies with significant commercial potential that are consistent with our commercial objectives;
the impact of government laws and regulations;
our competitive position and expectations regarding developments and projections relating to our competitors and any competing therapies that are or become available;

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developments and expectations regarding developments and projections relating to our competitors and our industry;
the impact of the COVID-19 pandemic on our business, results of operations, and financial condition;
our ability to maintain and establish collaborations or obtain additional funding; and
our expectations regarding the time during which we will be an emerging growth company under the Jumpstart our Business Startup Act of 2012.

We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Moreover, we operate in a competitive and rapidly changing environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures, or investments we may make or enter into.

You should read this Quarterly Report and the documents that we file with the Securities and Exchange Commission, or the SEC, with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report are made as of the date of this Quarterly Report, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

AKOUOS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share amounts)

September 30, 2020

December 31, 2019

Assets

Current assets:

    

  

  

    

Cash and cash equivalents

$

178,622

$

25,078

Marketable securities

141,452

Prepaid expenses and other current assets

 

2,154

 

1,061

Total current assets

 

322,228

 

26,139

Property and equipment, net

 

12,667

 

11,492

Operating lease right‑of‑use assets

 

6,035

 

6,214

Restricted cash

 

1,317

 

1,317

Total assets

$

342,247

$

45,162

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

817

$

339

Accrued expenses and other current liabilities

 

6,730

 

4,962

Operating lease liabilities

 

1,071

 

641

Total current liabilities

 

8,618

 

5,942

Operating lease liabilities, net of current portion

 

12,321

 

13,143

Other long‑term liabilities

 

 

188

Total liabilities

 

20,939

 

19,273

Commitments and contingencies (See Note 11)

 

  

 

  

Convertible preferred stock (Series Seed, Seed 1, A, and B), $0.0001 par value; no shares authorized at September 30, 2020 and 178,349,005 shares authorized at December 31, 2019; no shares issued and outstanding at September 30, 2020 and 178,349,005 shares issued and outstanding at December 31, 2019

 

 

58,690

Stockholders’ equity (deficit):

 

  

 

  

Preferred stock, $0.0001 par value; 5,000,000 shares authorized at September 30, 2020 and no shares authorized at December 31, 2019; no shares issued and outstanding at September 30, 2020 and December 31, 2019

Common stock, $0.0001 par value; 200,000,000 shares authorized at September 30, 2020 and 235,000,000 shares authorized at December 31, 2019; 34,374,348 shares issued and outstanding at September 30, 2020 and 997,165 shares issued and outstanding at December 31, 2019

 

3

 

Additional paid‑in capital

 

390,473

 

323

Accumulated other comprehensive income

$

8

$

Accumulated deficit

 

(69,176)

 

(33,124)

Total stockholders’ equity (deficit)

 

321,308

 

(32,801)

Total liabilities, convertible preferred stock and stockholders’ equity

$

342,247

$

45,162

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

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AKOUOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands, except share and per share amounts)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2020

2019

2020

2019

Operating expenses:

    

  

    

  

    

  

    

  

Research and development

$

8,641

$

4,377

$

26,612

$

11,886

General and administrative

 

4,478

 

887

 

9,646

 

2,267

Total operating expenses

 

13,119

 

5,264

 

36,258

 

14,153

Loss from operations

 

(13,119)

 

(5,264)

 

(36,258)

 

(14,153)

Other income (expense):

 

  

 

  

 

  

 

  

Change in fair value of preferred stock tranche liability

 

 

(3,013)

 

 

(2,260)

Interest income

 

21

 

70

 

201

 

298

Other income (expense), net

 

9

 

(3)

 

5

 

(8)

Total other income (expense), net

 

30

 

(2,946)

 

206

 

(1,970)

Net loss

$

(13,089)

$

(8,210)

$

(36,052)

$

(16,123)

Net loss per share attributable to common stockholders, basic and diluted

$

(0.85)

$

(13.21)

$

(3.01)

$

(27.48)

Weighted‑average common shares outstanding, basic and diluted

 

15,334,241

 

621,581

 

11,991,870

 

586,728

Other comprehensive income:

Unrealized gain on marketable securities

8

8

Total other comprehensive income

8

8

Total comprehensive loss

$

(13,081)

$

(8,210)

$

(36,044)

$

(16,123)

 

  

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

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AKOUOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE

PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

(In thousands, except share amounts)

Accumulated 

Convertible 

Additional

Other

Total 

Preferred Stock

Common Stock

 Paidin

Comprehensive

Accumulated 

Stockholders’ 

Shares

Amount

Shares

Amount

 

 Capital

Income

Deficit

 

Equity (Deficit)

Balances at December 31, 2019

 

178,349,005

$

58,690

 

997,165

$

$

323

$

$

(33,124)

$

(32,801)

Issuance of common stock upon exercise of stock options

 

 

 

13,630

 

 

7

 

 

 

7

Vesting of restricted common stock from early‑exercised stock options and sales of restricted common stock

 

 

 

 

 

12

 

 

 

12

Stock‑based compensation expense

 

 

 

 

 

111

 

 

 

111

Issuance of Series B convertible preferred stock, net of issuance costs of $228

 

221,399,223

104,837

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

(10,440)

 

(10,440)

Balances at March 31, 2020

 

399,748,228

163,527

 

1,010,795

453

(43,564)

(43,111)

Issuance of common stock upon exercise of stock options

15,181

31

31

Vesting of restricted common stock from early‑exercised stock options and sales of restricted common stock

7

7

Stock‑based compensation expense

490

490

Conversion of convertible preferred stock to common stock

(399,748,228)

(163,527)

18,969,672

2

163,510

163,512

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

14,375,000

1

223,849

223,850

Net loss

(12,523)

(12,523)

Balances at June 30, 2020

34,370,648

3

388,340

(56,087)

332,256

Issuance of common stock upon exercise of stock options

 

 

 

3,700

 

 

3

 

 

 

3

Vesting of restricted common stock from early‑exercised stock options and sales of restricted common stock

 

 

 

 

 

54

 

 

 

54

Stock‑based compensation expense

 

 

 

 

 

2,076

 

 

 

2,076

Net loss

 

 

 

 

 

 

 

(13,089)

 

(13,089)

Unrealized gain (loss) on marketable securities

8

8

Balances at September 30, 2020

 

$

 

34,374,348

$

3

$

390,473

$

8

$

(69,176)

$

321,308

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

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AKOUOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE

PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

(In thousands, except share amounts)

Convertible 

Additional

Total 

Preferred Stock

Common Stock

 Paidin

Accumulated 

Stockholders’ 

Shares

Amount

Shares

Amount

 

 Capital

Deficit

 

Equity (Deficit)

Balances at December 31, 2018

    

103,015,190

    

$

27,647

    

935,887

    

$

    

$

154

    

$

(7,383)

    

$

(7,229)

Issuance of common stock upon exercise of stock options

 

 

 

197

 

 

 

 

Vesting of restricted common stock from early‑exercised stock options and sales of restricted common stock

 

 

 

 

 

7

 

 

7

Stock‑based compensation expense

 

 

 

 

 

18

 

 

18

Net loss

 

 

 

 

 

 

(5,909)

 

(5,909)

Balances at March 31, 2019

 

103,015,190

 

27,647

 

936,084

 

 

179

 

(13,292)

 

(13,113)

Issuance of common stock upon exercise of stock options

 

 

 

16,608

 

 

13

 

 

13

Vesting of restricted common stock from early‑exercised stock options and sales of restricted common stock

 

 

 

 

 

(9)

 

 

(9)

Stock‑based compensation expense

 

 

 

 

 

18

 

 

18

Net loss

 

 

 

 

 

(2,004)

 

(2,004)

Balances at June 30, 2019

 

103,015,190

27,647

 

952,692

201

(15,296)

(15,095)

Issuance of common stock upon exercise of stock options

 

 

 

27,545

 

 

43

 

 

43

Vesting of restricted common stock from early‑exercised stock options and sales of restricted common stock

 

 

 

 

 

(36)

 

 

(36)

Stock‑based compensation expense

 

 

 

 

 

21

 

 

21

Issuance of Series A convertible preferred stock, net of issuance costs of $34

75,333,815

25,016

Reclassification of preferred stock tranche liability upon settlement

6,027

Net loss

 

 

 

 

 

 

(8,210)

 

(8,210)

Balances at September 30, 2019

 

178,349,005

$

58,690

 

980,237

$

$

229

$

(23,506)

$

(23,277)

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

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AKOUOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

Nine Months Ended

September 30, 

2020

2019

Cash flows from operating activities:

    

  

    

  

Net loss

$

(36,052)

$

(16,123)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Depreciation and amortization expense

 

1,433

 

172

Net amortization of premiums and accretion of discounts on marketable securities

(10)

Amortization of operating lease right-of-use assets

 

179

 

254

Change in fair value of preferred stock tranche liability

 

 

2,260

Stock‑based compensation expense

 

2,677

 

57

Changes in operating assets and liabilities:

 

  

 

  

Prepaid expenses and other current assets

 

(1,093)

 

(36)

Accounts payable

 

348

 

290

Operating lease liabilities

 

(392)

 

351

Accrued expenses and other current liabilities

 

2,582

 

1,282

Other long-term liabilities

(62)

Net cash used in operating activities

 

(30,328)

 

(11,555)

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(3,234)

 

(929)

Purchases of marketable securities

(141,434)

Net cash used in investing activities

 

(144,668)

 

(929)

Cash flows from financing activities:

 

  

 

  

Proceeds from issuance of convertible preferred stock, net of issuance costs paid

 

104,837

 

25,016

Proceeds from initial public offering of common stock, net of commissions and underwriting discounts

227,269

Payments of finance lease obligations

 

(189)

 

(74)

Proceeds from exercise of stock options and sale of restricted common stock

 

42

 

56

Payments of initial public offering costs

 

(3,419)

 

Net cash provided by financing activities

 

328,540

 

24,998

Net increase in cash, cash equivalents and restricted cash

 

153,544

 

12,514

Cash, cash equivalents and restricted cash at beginning of period

 

26,395

 

24,340

Cash, cash equivalents and restricted cash at end of period

$

179,939

$

36,854

Supplemental cash flow information:

 

  

 

  

Cash paid for interest

$

5

$

8

Supplemental disclosure of noncash investing and financing information:

 

  

 

  

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

$

157

$

Settlement of preferred stock tranche liability

$

$

6,027

Operating lease liabilities arising from obtaining right‑of‑use assets

$

$

6,550

Leasehold improvements paid by lessor

$

$

4,922

Vesting of common stock subject to repurchase

$

73

$

(38)

Reconciliation of cash, cash equivalents and restricted cash:

 

  

 

  

Cash and cash equivalents

$

178,622

$

35,537

Restricted cash

 

1,317

 

1,317

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

$

179,939

$

36,854

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

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AKOUOS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Nature of the Business and Basis of Presentation

Akouos, Inc., together with its consolidated subsidiary (the “Company” or “Akouos”), is a precision genetic medicine company dedicated to its mission of developing gene therapies with the potential to restore, improve, and preserve high-acuity physiologic hearing for individuals worldwide who live with disabling hearing loss. The Company was formed as a limited liability corporation under the laws of the Commonwealth of Massachusetts in March 2016 under the name Akouos, LLC and converted into a corporation under the laws of the State of Delaware in November 2016 under the name Akouos, Inc.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, the impact of the COVID-19 coronavirus, and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure, and extensive compliance-reporting capabilities. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

On June 18, 2020, the Company effected a one-for-21.073 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s convertible preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

On June 30, 2020, the Company completed its initial public offering of its common stock and issued and sold 14,375,000 shares of its common stock, at a public offering price of $17.00 per share, for gross proceeds of $244.4 million, or net proceeds of $223.8 million after deducting underwriting discounts, commissions, and offering expenses.

Upon the closing of the Company’s initial public offering on June 30, 2020, all shares of convertible preferred stock automatically converted into 18,969,672 shares of common stock.

The accompanying condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets, and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has primarily funded its operations with proceeds from sales of convertible preferred stock and proceeds from the Company’s initial public offering of common stock. The Company has incurred losses and negative cash flows from operations since its inception. As of September 30, 2020, the Company had an accumulated deficit of $69.2 million.

The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. The Company expects that its existing cash, cash equivalents and marketable securities will be sufficient to fund its operating expenses and capital expenditure requirements for at least 12 months from the issuance date of the interim condensed consolidated financial statements.

The Company expects to seek additional funding through public and private equity financings, debt financings, collaborations, licensing arrangements, and/or strategic alliances. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborations or other such arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce, or eliminate some or all of its research and development programs, product portfolio expansion, or commercialization efforts, which could adversely

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affect its business prospects. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

Impact of the COVID-19 Coronavirus

The COVID-19 pandemic, which began in December 2019 and has spread worldwide, has caused many governments to implement measures to slow the spread of the outbreak. The outbreak and government measures taken in response have had and will continue to have a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred, supply chains have been disrupted, and facilities and production have been suspended. The future progression of the pandemic and its effects on the Company’s business and operations are uncertain. The COVID-19 pandemic may affect the Company’s ability to initiate and complete preclinical studies, delay the initiation of its planned clinical trial or future clinical trials, disrupt regulatory activities, or have other adverse effects on its business and operations. In particular, the Company and its contract manufacturing organizations (“CMOs”) and contract research organizations (“CROs”) may face disruptions that may affect the Company’s ability to initiate and complete preclinical studies, manufacturing disruptions, and delays at clinical trial sites. The pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact the Company’s ability to raise additional funds to support its operations. Moreover, the pandemic has significantly impacted economies worldwide and could result in adverse effects on the Company’s business and operations.

The Company is monitoring the potential impact of the COVID-19 pandemic on its business and financial statements. To date, the Company has not experienced material business disruptions or incurred impairment losses in the carrying values of its assets as a result of the pandemic and it is not aware of any specific related event or circumstance that would require it to revise its estimates reflected in these condensed consolidated financial statements. The extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including planned and future clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the actions taken to contain or treat it, and the duration and intensity of the related effects.

Basis of Presentation

The accompanying condensed consolidated financial statements reflect the operations of the Company and its wholly owned, domestic subsidiary. Intercompany balances and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

2. Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

The significant accounting policies and estimates used in the preparation of the accompanying consolidated financial statements are described in the Company’s audited consolidated financial statements for the year ended December 31, 2019 included in the Company’s final prospectus for its initial public offering filed pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission, or the SEC, on June 26, 2020. There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2020.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure

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of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses and the valuations of common stock, stock options, and a preferred stock tranche liability. The Company bases its estimates on historical experience, known trends, and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results may differ from those estimates or assumptions.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of September 30, 2020, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2020 and 2019, the condensed consolidated statement of cash flows for the nine months ended September 30, 2020 and 2019 and the condensed consolidated statements of convertible preferred stock and stockholders’ equity (deficit) for the three and nine months ended September 30, 2020 and 2019 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2020 and necessary for the fair statement of the Company’s financial position as of September 30, 2020 and the results of its operations for the three and nine months ended September 30, 2020 and 2019 and its cash flows for the nine months ended September 30, 2020 and 2019. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2020 and 2019 are also unaudited. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period. The accompanying balance sheet as of December 31, 2019 has been derived from the Company’s audited financial statements for the year ended December 31, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s final prospectus for its initial public offering filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on June 26, 2020.

Concentrations of Credit Risk and of Significant Suppliers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company maintains its cash and cash equivalents at one accredited financial institution. The Company’s cash equivalents as of September 30, 2020 and December 31, 2019 consisted of U.S. government money market funds. Marketable securities consist of U.S. Treasury notes with maturities of less than twelve months. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

The Company is dependent on third-party vendors for its product candidates. In particular, the Company relies, and expects to continue to rely, on a small number of vendors to manufacture materials and components required for the production of its product candidates. These programs could be adversely affected by a significant interruption in the manufacturing process.

Cash Equivalents

The Company considers all highly liquid investments with a remaining maturity when purchased of three months or less to be cash equivalents.

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Restricted Cash

In connection with the Company’s lease agreement entered into in December 2018, the Company is required to maintain a letter of credit of $1.3 million for the benefit of the landlord. As of September 30, 2020 and December 31, 2019, this amount was classified as restricted cash (non-current) in the condensed consolidated balance sheets.

The Company is required to maintain a separate cash balance of less than $0.1 million pledged as collateral for a credit card account. As of September 30, 2020 and December 31, 2019, this amount was classified as restricted cash (non-current) on the condensed consolidated balance sheets.

Marketable Securities

Marketable securities represent holdings of available-for-sale marketable debt securities in accordance with the Company’s investment policy. Marketable securities that mature within one-year from the balance sheet date are classified as current in the condensed consolidated balance sheets. Investments in marketable securities are recorded at fair value, with any unrealized gains and losses reported within accumulated other comprehensive income (loss) as a separate component of stockholders’ equity (deficit) until realized or until a determination is made that an other-than-temporary decline in market value has occurred. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, together with interest on securities sold, is determined based on the specific identification method and any realized gains or losses on the sale of investments are reflected as a component of other income (expense).

Fair Value Measurements

Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and financial liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies, and similar techniques.

The Company’s cash equivalents, marketable securities and preferred stock tranche liability are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of the Company’s accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities.

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Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful life of each asset as follows:

    

Estimated Useful Life

Laboratory equipment

 

5 years

Furniture and fixtures

 

4 years

Leasehold improvements

 

Shorter of term of lease or 15 years

Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated once placed into service. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance that do not improve or extend the life of the respective assets are charged to expense as incurred.

Classification and Accretion of Convertible Preferred Stock

The Company’s convertible preferred stock was classified outside of stockholders’ equity (deficit) on the condensed consolidated balance sheets because the holders of such shares had liquidation rights in the event of a deemed liquidation that, in certain situations, was not solely within the control of the Company and would require the redemption of the then-outstanding convertible preferred stock. The Company’s Series Seed, Series Seed 1, Series A, and Series B convertible preferred stock were not redeemable, except in the event of a deemed liquidation. Because the occurrence of a deemed liquidation event was not currently probable, the carrying values of the convertible preferred stock were not being accreted to their redemption values. Subsequent adjustments to the carrying values to the convertible preferred stock would be made only when a deemed liquidation event became probable. Upon the closing of the Company’s initial public offering on June 30, 2020, all outstanding shares of convertible preferred stock automatically converted into 18,969,672 shares of common stock.

Impairment of Long-Lived Assets

Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized in loss from operations when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. Impairment is measured based on the excess of the carrying value of the related assets over the fair value of such assets. The Company did not record any impairment losses on long-lived assets during the three and nine months ended September 30, 2020 and 2019.

Segment Information

The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company’s focus is on developing gene therapies with the potential to restore, improve, and preserve high-acuity physiologic hearing for individuals with hearing loss. All of the Company’s long-lived assets are located in the United States.

Government Contracts

The Company has received funding from government contracts that reimburse the Company for certain allowable costs for funded projects. For contracts with government agencies, when the Company has concluded that it is

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the principal in conducting the research and development expenses but where the funding arrangement is not considered core to the Company’s ongoing operations, the Company classifies the recognized funding received as other income in its condensed consolidated statement of operations and comprehensive loss.

Research and Development Costs

Costs for research and development activities are expensed in the period in which they are incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries and bonuses, stock-based compensation, employee benefits, facilities costs, laboratory supplies, depreciation and amortization, manufacturing expenses, and external costs of vendors engaged to conduct research and preclinical development activities as well as the cost of licensing technology.

Upfront payments under license agreements are expensed upon receipt of the license, and annual maintenance fees under license agreements are expensed in the period in which they are incurred. Milestone payments under license agreements are accrued, with a corresponding expense being recognized, in the period in which the milestone is determined to be probable of achievement and the related amount is reasonably estimable.

Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.

Research, Development, and Manufacturing Contract Costs and Accruals

The Company has entered into various research, development, and manufacturing contracts with research institutions and other companies. These agreements are generally cancelable, and related costs are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research and development costs. When billing terms under these contracts do not coincide with the timing of when the work is performed, the Company is required to make estimates of outstanding obligations to those third parties as of period end. Any accrual estimates are based on a number of factors, including the Company’s knowledge of the progress towards completion of the research, development, and manufacturing activities, invoicing to date under the contracts, communication from the research institutions and other companies of any actual costs incurred during the period that have not yet been invoiced, and the costs included in the contracts. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made by the Company. The historical accrual estimates made by the Company have not been materially different from the actual costs.

Patent Costs

All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.

Stock-Based Compensation

The Company measures stock options with service-based vesting granted to employees, non-employees, and directors based on the fair value on the date of grant using the Black-Scholes option-pricing model. The Company measures restricted common stock awards using the difference, if any, between the purchase price per share of the award and the fair value of the Company’s common stock at the date of grant. Compensation expense for employee awards is recognized over the requisite service period, which is generally the vesting period of the award. Compensation expense for non-employee awards is recognized in the same manner as if the Company had paid cash in exchange for the goods or services, which is generally the vesting period of the award. The Company uses the straight-line method to record the expense of awards with only service-based vesting conditions. The Company has not granted awards with performance- or market-based vesting conditions. The Company accounts for forfeitures of share-based awards as they occur.

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The Company classifies stock-based compensation expense in its condensed consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders, which for the three and nine months ended September 30, 2020 consists of unrealized gains on marketable securities.

Income Taxes

The Company accounts 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 consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no amounts accrued for interest and penalties on its condensed consolidated balance sheets at September 30, 2020 and December 31, 2019.

Net Loss per Share

The Company follows the two-class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income (loss) available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to share in undistributed earnings as if all income (loss) for the period had been distributed.

Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share attributable to common stockholders is computed by adjusting net income (loss) attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period, including potential dilutive common shares. For purposes of this calculation, the Company’s outstanding stock options, unvested restricted common stock, and convertible preferred stock are considered potential dilutive common shares.

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The Company’s participating securities contractually entitle the holders of such securities to participate in dividends but do not contractually require the holders of such securities to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss, such losses are not allocated to such participating securities. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the three and nine months ended September 30, 2020 and 2019.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the existing disclosure requirements for fair value measurements in Topic 820. The new disclosure requirements include disclosure related to changes in unrealized gains or losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of each reporting period and the explicit requirement to disclose the range and weighted-average of significant unobservable inputs used for Level 3 fair value measurements. The other provisions of ASU 2018-13 include eliminated and modified disclosure requirements. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. For all entities, this guidance is required to be adopted for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2018-13 as of the required effective date of January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard-setting bodies that the Company adopts as of the specified effective date. The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected not to “opt out” of the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and non-public companies, the Company can adopt the new or revised standard at the time non-public companies adopt the new or revised standard and can do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. The Company may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for non-public companies.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes may result in earlier recognition of credit losses. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which narrowed the scope and changed the effective date for non-public entities for ASU 2016-13. The FASB subsequently issued supplemental guidance within ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For public entities that are SEC filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on its consolidated financial statements.

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3. Fair Value Measurements

The Company’s financial assets measured at fair value on a recurring basis by level within the fair value hierarchy at September 30, 2020 and December 31, 2019 are summarized as follows (in thousands):

Fair Value Measurements at 

September 30, 2020 Using:

Level 1

Level 2

Level 3

Total

Assets:

    

  

    

  

    

  

    

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

177,940

$

$

$

177,940

Restricted cash:

 

  

 

  

 

  

 

  

Money market funds

 

1,292

 

 

 

1,292

Marketable securities:

U.S. Treasury notes

141,452

141,452

$

179,232

$

141,452

$

$

320,684

Fair Value Measurements at 

December 31, 2019 Using:

Level 1

Level 2

Level 3

Total

Assets:

    

  

    

  

    

  

    

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

24,281

$

$

$

24,281

Restricted cash:

 

  

 

  

 

  

 

  

Money market funds

 

1,292

 

 

 

1,292

$

25,573

$

$

$

25,573

U.S. government money market funds were valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy.

As of September 30, 2020, the Company’s marketable securities consisted of U.S. Treasury notes, which were valued based on Level 2 inputs. In determining the fair value of its U.S. Treasury notes, the Company relied on quoted prices for similar securities in active markets or other inputs that are observable or can be corroborated by observable market data.

During the three and nine months ended September 30, 2020 and 2019 there were no transfers between Level 1, Level 2, and Level 3.

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4. Marketable Securities

As of September 30, 2020, the fair value of available-for-sale marketable debt securities by type of security was as follows (in thousands):

September 30, 2020

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gain

Loss

Value

Assets

Marketable securities:

U.S. Treasury notes

$

141,444

$

8

$

$

141,452

$

141,444

$

8

$

$

141,452

All available-for-sale securities have contractual maturities of less than one year. At December 31, 2019, the Company did not hold any marketable securities.

5. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

September 30, 2020

December 31, 2019

Laboratory equipment

$

4,623

$

2,536

Furniture and fixtures

 

461

 

358

Leasehold improvements

 

8,915

 

8,915

Construction in progress

 

495

 

77

 

14,494

 

11,886

Less: Accumulated depreciation and amortization

 

(1,827)

 

(394)

$

12,667

$

11,492

Depreciation and amortization expense for the three and nine months ended September 30, 2020 was approximately $0.5 million and $1.4 million, respectively.

Depreciation and amortization expense for the three and nine months ended September 30, 2019 was approximately $0.1 million and $0.2 million, respectively.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

September 30, 2020

December 31, 2019

Accrued external research, development, and manufacturing expenses

 

$

3,156

 

$

2,605

 

Accrued employee compensation and benefits

1,581

1,157

Accrued professional fees

 

1,497

 

67

 

Payments due for leasehold improvements

 

 

756

 

Other

 

496

 

377

 

$

6,730

$

4,962

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7. Convertible Preferred Stock

The Company issued Series Seed convertible preferred stock (the “Series Seed preferred stock”), Series Seed 1 convertible preferred stock (the “Series Seed 1 preferred stock”), Series A convertible preferred stock (the “Series A preferred stock”), and Series B convertible preferred stock (the “Series B preferred stock,” and collectively with the Series Seed preferred stock, the Series Seed 1 preferred stock, and the Series A preferred stock, the “Preferred Stock”).

In February 2020, the Company issued and sold 221,399,223 shares of Series B preferred stock, at a price of $0.47455 per share, for gross proceeds of $105.1 million. The Company incurred issuance costs in connection with this transaction of $0.2 million.

Upon the closing of the Company’s initial public offering on June 30, 2020, all outstanding shares of Preferred Stock automatically converted into 18,969,672 shares of common stock.

8. Stockholders’ Equity

Common Stock

As of September 30, 2020 and December 31, 2019, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 200,000,000 and 235,000,000 shares, respectively, of common stock $0.0001 par value per share.

On June 18, 2020, the Company effected a one-for-21.073 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s convertible preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

On June 30, 2020, the Company completed its initial public offering of its common stock and issued and sold 14,375,000 shares of common stock, at a public offering price of $17.00 per share, for gross proceeds of $244.4 million, or net proceeds of $223.8 million after deducting underwriting discounts, commissions, and offering expenses.

Preferred Stock

As of September 30, 2020, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 5,000,000 shares of preferred stock, $0.0001 par value per share. As of September 30, 2020, no shares of preferred stock were issued or outstanding..

9. Stock-Based Compensation

2016 Stock Plan

The Company’s 2016 Stock Plan (the “2016 Plan”) provides for the Company to grant incentive stock options or non-qualified stock options, restricted stock, restricted stock units, and other equity awards to employees, directors, and consultants of the Company. The 2016 Plan is administered by the board of directors or, at the discretion of the board of directors, by a committee of the board of directors. The board of directors may also delegate to one or more officers of the Company the power to grant awards to employees and certain officers of the Company. The exercise prices, vesting, and other restrictions are determined at the discretion of the board of directors, or its committee or any such officer if so delegated.

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Stock options granted under the 2016 Plan with service-based vesting conditions generally vest over four years and expire after ten years.

As of December 31, 2019, the total number of shares of common stock that were issuable under the 2016 Plan was 1,508,669 shares, of which 363,350 shares remained available for future issuance as of December 31, 2019. During the nine months ended September 30, 2020 the Company increased the number of shares of common stock authorized for issuance under the 2016 Plan from 1,508,669 shares to 3,722,685 shares. As of September 30, 2020, no shares remained available for future issuance under the 2016 Plan.

2020 Stock Plan

On May 28, 2020, the Company's board of directors adopted, and on June 17, 2020 its stockholders approved, the 2020 Stock Plan (the "2020 Plan"). The 2020 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock-based awards. The number of shares initially reserved for issuance under the 2020 Plan is the sum of 4,294,594, plus the number of shares (up to 3,622,691 shares) equal to the sum of (i) the number of shares remaining available for issuance under the 2016 Plan upon the effectiveness of the 2020 Plan and (ii) the number of shares of common stock subject to outstanding awards granted under the 2016 Plan that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right. The number of shares of common stock that may be issued under the 2020 Plan will automatically increase on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2021 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2030, equal to the lowest of (i) 2,728,610 shares, (ii) 4% of the number of shares of common stock outstanding on such date, and (iii) an amount determined by the Company's board of directors. The shares of common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, repurchased or are otherwise terminated by the Company under the 2020 Plan will be added back to the shares of common stock available for issuance under the 2020 Plan.

As of September 30, 2020, the total number of shares of common stock available for issuance under the 2020 Plan is 5,035,409 shares.

2020 Employee Stock Purchase Plan

On May 28, 2020, the Company's board of directors adopted, and on June 17, 2020 its stockholders approved, the 2020 Employee Stock Purchase Plan (the "2020 ESPP"). A total of 360,651 shares of common stock were initially reserved for issuance under this plan. The number of shares of common stock that may be issued under the 2020 ESPP will automatically increase on the first day of each fiscal year, beginning with the fiscal year commencing on January 1, 2021 and continuing for each fiscal year until, and including, the fiscal year commencing on January 1, 2031, equal to the lowest of (i) 640,630 shares, (ii) 1% of the number of shares of common stock outstanding on such date, and (iii) an amount determined by the Company's board of directors.

Stock Option Valuation

The fair value of stock option grants is estimated using the Black-Scholes option-pricing model. The Company historically has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. For options with service-based vesting conditions, the expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

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Stock Options

The following table summarizes the Company’s stock option activity since December 31, 2019:

Weighted 

Weighted

Average

Average

Aggregate

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

Shares

Price

 

Term

 

Value

    

    

    

(in years)

    

(in thousands)

Outstanding as of December 31, 2019

 

961,751

$

1.69

 

9.5

$

524

Granted

 

1,989,654

 

8.67

 

  

 

  

Exercised

 

(32,511)

 

1.27

 

  

 

  

Forfeited

 

(57,766)

 

3.32

 

  

 

  

Outstanding as of September 30, 2020

 

2,861,128

$

6.54

 

9.2

$

46,726

Vested and expected to vest as of September 30, 2020

 

2,861,128

$

6.54

 

9.2

$

46,726

Options exercisable as of September 30, 2020

 

349,736

$

3.58

 

8.6

$

6,745

The weighted-average grant-date fair value of stock options granted during the three months ended September 30, 2020 and 2019 was $17.81 per share and $1.22 per share respectively, and during the nine months ended September 30, 2020 and 2019 was $7.08 per share and $1.10 per share, respectively.

Early Exercise of Stock Options into Restricted Stock

Certain option grants permit option holders to elect to exercise unvested options in exchange for unvested common stock. The options that are exercised prior to vesting will continue to vest according to the respective option agreement, and such unvested shares are subject to repurchase by the Company at the optionee’s original exercise price in the event the optionee’s service with the Company voluntarily or involuntarily terminates.

A summary of the Company’s unvested common stock from option early exercises that is subject to repurchase by the Company is as follows:

    

Shares

Unvested restricted common stock as of December 31, 2019

 

102,896

Vested

 

(48,615)

Unvested restricted common stock as of September 30, 2020

 

54,281

Proceeds from the early exercise of options are recorded as a liability within accrued expenses and other current liabilities on the condensed consolidated balance sheet. The liability for unvested common stock subject to repurchase is then reclassified to additional paid-in capital as the Company’s repurchase right lapses. The shares purchased by the employees and directors pursuant to the early exercise of stock options are not deemed, for accounting purposes, to be outstanding until those shares have vested. As of September 30, 2020, the liability related to the payments for unvested shares from early-exercised options was less than $0.1 million. As of December 31, 2019 the liability related to the payments for unvested shares from early-exercised options was $0.1 million.

Restricted Common Stock Awards

The Company has both (i) granted restricted stock awards, with the recipient not paying for the shares of common stock, and (ii) issued and sold restricted stock, with the recipient purchasing the common stock at its fair value per share. In both circumstances, the restricted shares of common stock have service-based vesting conditions and unvested shares are either subject to forfeiture by the employee or subject to repurchase by the Company, at the lesser of holder’s original purchase price or fair value, in the event the holder’s service with the Company voluntarily or involuntarily terminates. Service-based restricted stock awards generally vest over four years.

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Proceeds from the issuance and sale of restricted common stock are recorded as a liability within accrued expenses and other current liabilities on the condensed consolidated balance sheet. The liability for unvested common stock subject to repurchase is then reclassified to additional paid-in capital as the Company’s repurchase right lapses. Shares of restricted common stock granted or sold to employees and directors are not deemed, for accounting purposes, to be outstanding until those shares have vested.

The Company did not grant or sell restricted common stock awards during 2019 or the nine months ended September 30, 2020. As of September 30, 2020 and December 31, 2019, the liability related to the payments received for shares of unvested restricted stock was less than $0.1 million.

The following table summarizes the Company’s restricted common stock award activity for the nine months ended September 30, 2020:

    

    

Weighted

Average

 

GrantDate

Shares

 

Fair Value

Unvested restricted common stock as of December 31, 2019

 

209,742

$

0.0443

Vested

 

(87,986)

 

0.0400

Unvested restricted common stock as of September 30, 2020

 

121,756

$

0.0500

The total fair value of restricted common stock vested during the three and nine months ended September 30, 2020 was less than $0.1 million.

Stock-Based Compensation

The Company records compensation cost for all share-based payment arrangements, including employee, director, and consultant stock options and restricted stock.

The Company recorded stock-based compensation expense in the following expense categories of its consolidated statements of operations and comprehensive loss (in thousands):

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

 

 

Research and development expenses

$

399

$

12

$

617

$

30

General and administrative expenses

 

1,677

 

9

 

2,060

 

27

$

2,076

$

21

$

2,677

$

57

In connection with the termination of an employee in July 2020, the Company accelerated the vesting of 1,541 shares of restricted stock and 60,948 unvested options, of which 22,684 shares are held by such employee. The modification of these awards resulted in the recognition of $1.1 million of stock-based compensation expense during the three and nine months ended September 30, 2020, which was classified as general and administrative expenses.

As of September 30, 2020, there was $13.6 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.25 years.

10. License Agreements

License Agreement with Massachusetts Eye and Ear

In October 2017, the Company entered into a license agreement with Massachusetts Eye and Ear Infirmary and the Schepens Eye Research Institute, Inc. (collectively referred to as “MEE”) (the “MEE License”). Under the MEE License, the Company received an exclusive, non-transferable, sublicensable, worldwide, royalty-bearing license to

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certain patent rights and know-how, including rights related to adeno-associated virus, or AAV, ancestral technology, including AAVAnc80, to use, research, develop, manufacture, and commercialize licensed products in the treatment, diagnosis, and prevention of any and all balance disorders, including hearing disorders of the inner ear, in each case, with a total prevalence in the United States of less than 3,000 patients, and an exclusive, non-transferable, sublicensable right and license under MEE’s rights, title, and interest in certain patents co-owned by MEE and Children’s Medical Center Corporation to use, research, develop, manufacture, and commercialize licensed products. The Company is obligated to use commercially reasonable efforts to develop and commercialize the MEE licensed products, including filing an investigational new drug application (“IND”) in the United States or investigational medicinal product dossier (“IMPD”) in any country in the European Union or an equivalent application in any country within 18 months of completion of specified toxicology studies for a licensed product.

Upon entering into the MEE License in 2017, the Company issued to MEE shares of the Company’s common stock then having a fair value of $0.1 million. The Company is obligated to make aggregate milestone payments to MEE of up to $17.7 million upon the achievement of specified development, regulatory, and sales milestones. The Company is also obligated to pay tiered royalties of a mid to high single-digit percentage based on annual net sales of licensed products by the Company and any of its affiliates and sublicensees. Royalties will be paid by the Company on a licensed product-by-licensed product and country-by-country basis beginning after the first commercial sale of an MEE licensed product and lasting until the later of (i) the expiration of the last valid claim in the licensed patents or (ii) ten years after the first commercial sale of such MEE licensed product (the “MEE Royalty Term”).

The MEE License remains in effect until the last expiration date of the last to expire MEE Royalty Term, unless terminated earlier. The Company has the right to terminate the MEE License at will, with or without cause, by 90 days’ advance written notice to MEE or upon MEE’s material breach of the MEE License, provided that MEE does not cure such material breach within a specified period. MEE has the right to terminate the MEE License in its entirety if (i) the Company fails to make any payment due within a specified period after MEE notifies the Company of such failure, (ii) the Company or its affiliates challenge the validity of the licensed patent rights, (iii) the Company fails to maintain required insurance, or (iv) the Company becomes insolvent or bankrupt. MEE also has the right to terminate the Company’s rights to specific intellectual property rights it has licensed to the Company under the MEE License if the Company materially breaches certain diligence obligations and does not cure within a specified period after written notice from MEE.

During the three and nine months ended September 30, 2020 and 2019 the Company did not make any payments to MEE or recognize any research and development expenses under the MEE License.

Sublicense Agreement with Lonza Houston, Inc.

In October 2017, the Company entered into a sublicense agreement with Lonza Houston, Inc. (“Lonza”), as amended in December 2018 (the “Lonza Sublicense”). Under the agreement, the Company received an exclusive, non-transferable, sublicensable, worldwide, royalty-bearing sublicense to certain patent rights and know-how related to AAV ancestral technology, including AAVAnc80, to use, research, develop, manufacture, and commercialize licensed products for the treatment, diagnosis, and prevention of any and all balance disorders or diseases pertaining to the inner ear and/or any and all hearing diseases or disorders, including hearing disorders of the inner ear, but excluding all such disorders or diseases with a total prevalence in the United States of less than 3,000 patients. The Company is obligated to use commercially reasonable efforts to develop and commercialize the Lonza sublicensed products, including filing an IND in the United States or IMPD in any country in the European Union or an equivalent application in any country within 18 months of completion of specified toxicology studies for a licensed product.

Upon entering into the Lonza Sublicense in 2017, the Company issued to Lonza shares of the Company’s common stock then having a fair value of $0.1 million. The Company is obligated to make aggregate milestone payments to Lonza of up to $18.5 million upon the achievement of specified development, regulatory, and sales milestones. The Company is also obligated to pay tiered royalties of a mid to high single-digit percentage based on annual net sales of licensed products by the Company and any of its affiliates and sublicensees as denoted in the Lonza Sublicense. Royalties will be paid by the Company on a licensed product-by-licensed product and country-by-country basis beginning after the first commercial sale of a Lonza sublicensed product and lasting until the later of (i) the

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expiration of the last valid claim in the patent or (ii) ten years after the first commercial sale of such Lonza sublicensed product (the “Lonza Royalty Term”).

The Lonza Sublicense remains in effect until the last expiration date of the last to expire Lonza Royalty Term, unless terminated earlier. The Company has the right to terminate the Lonza Sublicense at will, with or without cause, by 90 days’ advance written notice to Lonza or upon Lonza’s material breach of the Lonza Sublicense, provided that Lonza does not cure such material breach within a specified period. Lonza has the right to terminate the Lonza Sublicense in its entirety if (i) the Company fails to make any payment due within a specified period after Lonza notifies the Company of such failure, (ii) the Company or its affiliates challenge the validity of the sublicensed patent rights, (iii) the Company fails to maintain required insurance, or (iv) the Company becomes insolvent or bankrupt. Lonza also has the right to terminate the Company’s rights to specific intellectual property rights it has sublicensed to the Company under the Lonza Sublicense if the Company materially breaches certain diligence obligations and does not cure within a specified period after written notice from Lonza.

During the three and nine months ended September 30, 2020 and 2019 the Company did not make any payments to Lonza or recognize any research and development expenses under the Lonza Sublicense.

11. Commitments and Contingencies

401(k) Plan

The Company has a defined-contribution plan under Section 401(k) of the Internal Revenue Code of 1986 (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. As currently established, the Company is not required to make, and to date has not made, any contributions to the 401(k) Plan.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, CROs, business partners, and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and certain of its executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. The Company has not incurred any material costs as a result of such indemnifications and is not currently aware of any indemnification claims.

Legal Proceedings

The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to such legal proceedings.

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12. Net Loss per Share

Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

    

Numerator:

Net loss attributable to common stockholders

$

(13,089)

$

(8,210)

$

(36,052)

$

(16,123)

Denominator:

 

  

 

  

 

  

 

  

Weighted‑average common shares outstanding, basic and diluted

 

15,334,241

621,581

 

11,991,870

 

586,728

Net loss per share attributable to common stockholders, basic and diluted

$

(0.85)

$

(13.21)

$

(3.01)

$

(27.48)

The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

September 30, 

    

2020

    

2019

Convertible preferred stock (as converted to common stock)

 

 

 

18,969,672

 

Unvested restricted common stock

 

 

176,037

 

295,360

 

Stock options to purchase common stock

 

 

2,861,128

 

398,726

 

 

 

3,037,165

 

19,663,758

 

13. Subsequent Events

Grant of stock options under the 2020 Plan

The Company has evaluated subsequent events for recognition, remeasurement and disclosure purposes through the date which the unaudited consolidated financial statements were issued.

On October 1, 2020, the Company granted options for the purchase of an aggregate of 642,780 shares of common stock, at an exercise price of $22.45 per share. The aggregate grant-date fair value of these options was $11.3 million, which is expected to be recognized as stock-based compensation expense over a period of approximately four years.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or this Quarterly Report, and our final prospectus for our initial public offering, or IPO, filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission, or SEC. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business

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and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, 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.

Overview

We are a precision genetic medicine company dedicated to our mission of developing gene therapies with the potential to restore, improve, and preserve high-acuity physiologic hearing for individuals worldwide who live with disabling hearing loss. We have built a precision genetic medicine platform that incorporates a proprietary vector library of a small virus commonly used in gene therapy, known as adeno-associated virus, or AAV, and a novel delivery approach. We are executing on our core strategic initiatives, which include the advancement of our lead product candidate, AK-OTOF, expansion of our pipeline, and development of internal manufacturing capabilities and, ultimately, a commercial infrastructure. Our aim is to leverage our capabilities to become a fully integrated biotechnology company. We believe our platform and our team together provide a unique advantage to efficiently develop potential genetic medicines for a variety of inner ear disorders.

Since our inception, we have focused substantially all of our resources on organizing and staffing our company, business planning, raising capital, conducting research and development activities, filing and prosecuting patent applications, identifying potential product candidates, soliciting input from regulators regarding development of these product candidates, and undertaking preclinical studies. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have funded our operations with proceeds from sales of preferred stock (including borrowings under convertible promissory notes, which converted into preferred stock in 2017) and, most recently, with proceeds from our IPO. Through September 30, 2020, we had received net proceeds of $163.5 million from sales of our preferred stock and we had received net proceeds of $223.8 million from our IPO. Since our inception, we have incurred significant operating losses. Our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates.

We reported net losses of $13.1 million and $36.1 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2020, we had an accumulated deficit of $69.2 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our expenses and capital expenditures will increase substantially in connection with our ongoing activities, particularly if and as we:

submit an investigational new drug application, or IND, and initiate a planned Phase 1/2 clinical trial of our lead product candidate, AK-OTOF, for the treatment of hearing loss due to mutations in the otoferlin, or OTOF, gene;
continue our current research programs and our preclinical development of product candidates from our current research programs;
advance additional product candidates into preclinical and clinical development;
continue to plan and build a current good manufacturing practice manufacturing facility;
expand the capabilities of our genetic medicine platform;
expand our facilities;
seek marketing approvals for any product candidates that successfully complete clinical trials;

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ultimately establish a sales, marketing, and distribution infrastructure; scale up manufacturing capabilities; and commercialize any products for which we may obtain marketing approval;
expand, maintain, and protect our intellectual property portfolio;
hire additional clinical, regulatory, and scientific personnel; 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.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one or more of our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, and distribution. Further, we expect to incur additional costs associated with operating as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, licensing arrangements, and strategic alliances. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of one or more of our product candidates.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

The COVID-19 pandemic, which began in December 2019 and has spread worldwide, may affect our ability to initiate and complete preclinical studies, delay the initiation of our planned clinical trial or future clinical trials, disrupt regulatory activities, or have other adverse effects on our business, results of operations, and financial condition. In addition, the pandemic has caused substantial disruption in the financial markets and may continue to adversely impact economies worldwide, both of which could result in adverse effects on our business and operations and our ability to raise additional funds to support our operations.

We are continuing to monitor the potential impact of the COVID-19 pandemic on our business and financial statements. To date, we have not experienced material business disruptions, including at our contract manufacturing organizations, or CMOs, or contract research organizations, or CROs, and we have not incurred impairment losses in the carrying values of our assets as a result of the pandemic. We are following, and will continue to follow, recommendations from the U.S. Centers for Disease Control and Prevention as well as federal, state, and local governments regarding work-from-home practices for non-essential employees as well as return-to-work policies and procedures. In March 2020, we modified our business practices, including implementing a work-from-home policy for all employees who are able to perform their duties remotely and restricting all non-essential travel, and on May 18, 2020, when Massachusetts began implementation of its staged reopening plan, we commenced implementation of a comprehensive and staged return-to-work plan, in accordance with guidance from, and requirements by, federal and state authorities. We expect to continue to take actions as may be required or recommended by government authorities or as we determine are in the best interests of our employees and other business partners in light of the pandemic.

We cannot be certain what the overall impact of the COVID-19 pandemic will be on our business, and it has the potential to adversely affect our business, financial condition, results of operations, and prospects.

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Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from any sources, including product sales, and do not expect to generate any revenue from the sale of products for the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval or collaboration or license agreements with third parties, we may generate revenue in the future from product sales, payments from collaboration or license agreements that we may enter into with third parties, or any combination thereof.

Operating Expenses

Research and Development Expenses

Research and development expenses consist of costs incurred for our research activities, including our discovery efforts, and the development of our programs. These expenses include:

employee-related expenses, including salaries, related benefits, and stock-based compensation expense for employees engaged in research and development functions;
expenses incurred in connection with the preclinical development of our product candidates and research programs, including under agreements with third parties, such as consultants, contractors, and CROs;
the cost of developing and scaling our manufacturing process and manufacturing drug products for use in our research and preclinical studies, including under agreements with third parties, such as consultants, contractors, and CMOs;
laboratory supplies and research materials;
facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance; and
payments made under third-party licensing agreements.

We expense research and development costs as incurred. Non-refundable advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed, or when it is no longer expected that the goods will be delivered or the services rendered. Upfront payments under license agreements are expensed upon receipt of the license, and annual maintenance fees under license agreements are expensed in the period in which they are incurred. Milestone payments under license agreements are accrued, with a corresponding expense being recognized, in the period in which the milestone is determined to be probable of achievement and the related amount is reasonably estimable.

Our direct external research and development expenses are tracked on a program-by-program basis, including our early-stage programs, and consist of costs that include fees, reimbursed materials, and other costs paid to consultants, contractors, CMOs, and CROs in connection with our preclinical and manufacturing activities. We do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies, and facilities expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple programs and our platform and, as such, are not separately classified.

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 increase substantially in connection with our planned preclinical

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and clinical development activities in the near term and in the future. In particular, we expect that the research and development expenses of our AK-OTOF program will increase substantially in the near term related to our plans to submit an IND for AK-OTOF for OTOF-mediated hearing loss to the U.S. Food and Drug Administration, or FDA, in 2021, and initiate a planned Phase 1/2 clinical trial of AK-OTOF thereafter. We also expect that the research and development expenses of our anti-VEGF, CLRN1, and GJB2 programs will increase in the near term as we initiate clinical development of those product candidates. At this time, we cannot accurately estimate or know the nature, timing, and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. The successful development of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development, including the following:

the timing and progress of preclinical studies, including IND-enabling studies;
the number and scope of preclinical and clinical programs we decide to pursue;
raising additional funds necessary to complete clinical development of our product candidates;
the timing of filing and acceptance of INDs or comparable foreign applications that allow commencement of our planned clinical trial or future clinical trials for our product candidates;
the successful initiation, enrollment, and completion of clinical trials, including under current good clinical practices;
our ability to achieve positive results from our future clinical programs that support a finding of safety and effectiveness and an acceptable risk-benefit profile of our product candidates in the intended populations;
the availability of specialty raw materials for use in production of our product candidates;
our ability to establish arrangements through our own facilities or with third-party manufacturers for clinical supply;
our ability to establish new licensing or collaboration arrangements;
the receipt and related terms of regulatory approvals from the FDA and other applicable regulatory authorities;
our ability to establish and maintain patent, trademark, and trade secret protection or regulatory exclusivity for our product candidates;
our ability to procure intellectual property protection and regulatory exclusivity and enforce and defend our intellectual property rights and claims; and
our ability to maintain a continued acceptable safety, tolerability, and efficacy profile of our product candidates following approval.

A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and personnel-related costs, including stock-based compensation, for our personnel in executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include legal fees relating to patent and corporate

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matters; professional fees paid for accounting, auditing, consulting, and tax services; insurance costs; travel expenses; and facility costs not otherwise included in research and development expenses.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our programs and platform. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance, and investor and public relations expenses associated with operating as a public company.

Other Income (Expense)

Change in Fair Value of Preferred Stock Tranche Liability

Our Series A preferred stock purchase agreement obligated the Series A investors to participate in a subsequent offering of Series A preferred stock upon the achievement of specified development milestones by us or upon the vote of at least 55% of the holders of the Series A preferred stock, which we refer to as the preferred stock tranche right. The preferred stock tranche right was classified as a liability and initially recorded at fair value upon the issuance date of the right. The liability was subsequently remeasured to fair value at each reporting date until settled, and changes in fair value of the preferred stock tranche liability were recognized as a component of other income (expense) in our consolidated statements of operations and comprehensive loss. In September 2019, pursuant to a vote of the holders of Series A preferred stock, the preferred stock tranche right was exercised, upon which we issued additional shares of Series A preferred stock. Immediately prior to the issuance of such shares, the preferred stock tranche right was remeasured to fair value for the last time with the change in fair value recognized as a component of other income (expense). Upon the issuance of the additional shares of preferred stock in September 2019, the preferred stock tranche liability was settled. As a result, we will no longer recognize changes in the fair value of the preferred stock tranche liability in our consolidated statements of operations and comprehensive loss.

Interest Income

Interest income consists of interest earned on our invested cash and marketable securities balances. We expect our interest income will increase as we invest the cash received from the sale of Series B preferred stock in February 2020 and from the net proceeds received from our IPO in June 2020.

Other Income (Expense), Net

Other income (expense), net includes interest expense related to a finance lease, any realized gains or losses on the sale of marketable securities, and miscellaneous other income and expense unrelated to our core operations.

Income Taxes

Since our inception, we have not recorded any income tax benefits for the net losses we have incurred or for the research and development tax credits earned in each year and interim period, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credit carryforwards will not be realized.

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Results of Operations

Comparison of the three months ended September 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended September 30, 2020 and 2019:

Three Months Ended

September 30, 

    

2020

    

2019

    

Change

(in thousands)

Operating expenses:

 

  

 

  

 

  

Research and development

$

8,641

$

4,377

$

4,264

General and administrative

 

4,478

 

887

 

3,591

Total operating expenses

 

13,119

 

5,264

 

7,855

Loss from operations

 

(13,119)

 

(5,264)

 

(7,855)

Other income (expense):

 

  

 

  

 

Change in fair value of preferred stock tranche liability

 

 

(3,013)

 

3,013

Interest income

 

21

 

70

 

(49)

Other income (expense), net

 

9

 

(3)

 

12

Total other income (expense), net

 

30

 

(2,946)

 

2,976

Net loss

$

(13,089)

$

(8,210)

$

(4,879)

Research and Development Expenses

Three Months Ended

September 30, 

    

2020

    

2019

    

Change

(in thousands)

Direct research and development expenses by program: