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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 March 31, 2021

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 April 30, 2021, there were 34,449,302 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

6

Item 1.

Financial Statements (Unaudited)

6

Condensed Consolidated Balance Sheets

6

Condensed Consolidated Statements of Operations and Comprehensive Loss

7

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

8

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

28

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

38

Item 4.

Controls and Procedures

38

Part II.

Other Information

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

91

Item 6.

Exhibits

92

Signatures

93

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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 nonclinical studies and clinical trials and our research and development programs, including our timing of when we will submit an investigational new drug application for our product candidates AK-OTOF, for otoferlin gene (OTOF)-mediated hearing loss, and AK-antiVEGF, for vestibular schwannoma, to the U.S. Food and Drug Administration;
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;

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our competitive position and expectations regarding developments and projections relating to our competitors and any competing therapies that are or become available;
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; and
our ability to maintain and establish collaborations or obtain additional funding

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 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.

SUMMARY OF RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report. These risks include, but are not limited to, the following:

we have incurred significant losses during all fiscal periods since our inception, have no products approved for commercial sale, and we expect to incur substantial losses for the foreseeable future. Our net loss was $16.1 million for the quarter ended March 31, 2021 and $10.4 million for the quarter ended March 31, 2020;
we have a limited operating history and are very early in our development efforts, all of our product candidates, including AK-OTOF and AK-antiVEGF, are still in preclinical development, and we may be unable to advance our product candidates to clinical development, obtain regulatory approval and ultimately commercialize our product candidates;
we expect that we will need to raise additional funding before we can expect to complete clinical development of any product candidates or become profitable from any future sales of approved products;
the manufacture of genetic medicine products is complex and difficult, and we could experience manufacturing problems that result in delays in our development or commercialization programs;

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we currently rely, and expect to continue to rely, on third-party manufacturers to produce nonclinical and clinical supply of our product candidates and we have experienced manufacturing delays, including delays related to the COVID-19 pandemic, at our third party manufacturer, and we could experience further delays in the development or commercialization of our product candidates, including delays related to COVID-19 or other natural disasters;
the COVID-19 pandemic could continue to adversely impact our business, including our manufacturing activities, nonclinical studies, and planned clinical trials;
we have not tested any of our product candidates in clinical trials, and the outcome of nonclinical studies and earlier-stage clinical trials may not be predictive of future results or the success of later-stage clinical trials or commercial success;
nonclinical and clinical development involve a lengthy and expensive process with an uncertain outcome, and we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our current product candidates or any future product candidates;
if we do not achieve our projected development goals in the timeframes we announce and expect, we could experience significant delays or an inability to successfully commercialize our product candidates, which would materially harm our business;
our product candidates are based on a relatively novel technology with which there is little clinical experience, which makes it difficult to predict the time and cost development and of subsequently obtaining regulatory approval, if at all;
even if we complete the necessary nonclinical and clinical studies, we cannot predict when or if we will obtain regulatory approval to commercialize a product candidate or the approval may be for a narrower indication than we expect;
the conditions we seek to treat have low prevalence and it may be difficult to identify patients with these diseases, which may lead to delays in enrollment for our trials or slower commercial revenue if approved;
we may not be successful in our efforts to build a pipeline of additional product candidates;
if we are unable to obtain and maintain patent protection for our products and technology, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our products and technology may be adversely affected;
our product candidates may cause undesirable and unforeseen side effects, which could delay or prevent their advancement into clinical trials or regulatory approval, limit the commercial potential or result in significant negative consequences;
if we fail to comply with our obligations under our existing or any future license agreements, we could lose intellectual property rights that are important to our business; and
we may not be successful in our efforts to develop our product candidates or to build a pipeline of additional product candidates if we fail to retain and attract key personnel.

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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)

March 31, 2021

December 31, 2020

Assets

Current assets:

    

  

  

    

Cash and cash equivalents

$

117,653

$

68,932

Marketable securities

168,966

239,078

Prepaid expenses and other current assets

 

4,422

 

2,626

Total current assets

 

291,041

 

310,636

Property and equipment, net

 

16,875

 

15,388

Operating lease right‑of‑use assets

 

11,460

 

5,964

Restricted cash

 

2,448

 

1,317

Other assets

35

45

Total assets

$

321,859

$

333,350

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

992

$

895

Accrued expenses and other current liabilities

 

5,494

 

8,699

Operating lease liabilities

 

571

 

1,115

Total current liabilities

 

7,057

 

10,709

Operating lease liabilities, net of current portion

 

18,000

 

12,027

Total liabilities

 

25,057

 

22,736

Commitments and contingencies (See Note 11)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.0001 par value; 5,000,000 shares authorized at March 31, 2021 and December 31, 2020; no shares issued and outstanding at March 31, 2021 and December 31, 2020

Common stock, $0.0001 par value; 200,000,000 shares authorized at March 31, 2021 and December 31, 2020; 34,445,916 shares issued and outstanding at March 31, 2021 and 34,383,719 shares issued and outstanding at December 31, 2020

 

3

 

3

Additional paid‑in capital

 

394,568

 

392,322

Accumulated other comprehensive income

$

41

$

13

Accumulated deficit

 

(97,810)

 

(81,724)

Total stockholders’ equity

 

296,802

 

310,614

Total liabilities and stockholders’ equity

$

321,859

$

333,350

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

March 31, 

2021

2020

Operating expenses:

    

  

    

  

Research and development

$

11,258

$

8,034

General and administrative

 

4,890

 

2,504

Total operating expenses

 

16,148

 

10,538

Loss from operations

 

(16,148)

 

(10,538)

Other income (expense):

 

  

 

  

Interest income

 

509

 

100

Other expense, net

 

(447)

 

(2)

Total other income, net

 

62

 

98

Net loss

$

(16,086)

$

(10,440)

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

$

(0.47)

$

(14.74)

Weighted‑average common shares outstanding, basic and diluted

 

34,284,419

 

708,204

Other comprehensive income:

Unrealized gain on marketable securities

28

Total other comprehensive income

28

Total comprehensive loss

$

(16,058)

$

(10,440)

 

  

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

 

 

 

 

 

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)

Balances at December 31, 2020

 

$

 

34,383,719

$

3

$

392,322

$

13

$

(81,724)

$

310,614

Issuance of common stock upon exercise of stock options

 

62,197

225

 

225

Vesting of restricted common stock from early‑exercised stock options

 

21

 

21

Stock‑based compensation expense

 

2,000

 

2,000

Net loss

 

(16,086)

 

(16,086)

Unrealized gain on marketable securities

28

28

Balances at March 31, 2021

 

$

 

34,445,916

$

3

$

394,568

$

41

$

(97,810)

$

296,802

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)

Three Months Ended

March 31, 

2021

2020

Cash flows from operating activities:

    

  

    

  

Net loss

$

(16,086)

$

(10,440)

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

 

  

 

  

Depreciation and amortization expense

 

544

 

446

Net amortization of premiums and accretion of discounts on marketable securities

442

Amortization of operating lease right-of-use assets

 

96

 

57

Stock‑based compensation expense

 

2,000

 

111

Loss on disposal of property and equipment

5

Changes in operating assets and liabilities:

 

  

 

  

Prepaid expenses and other current assets

 

(1,796)

 

26

Accounts payable

 

97

 

221

Other assets

10

Operating lease liabilities

 

(163)

 

86

Accrued expenses and other current liabilities

 

(1,071)

 

916

Net cash used in operating activities

 

(15,922)

 

(8,577)

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(4,107)

 

(1,032)

Purchases of marketable securities

(70,302)

Maturities of marketable securities

140,000

Net cash provided by (used in) investing activities

 

65,591

 

(1,032)

Cash flows from financing activities:

 

  

 

  

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

 

 

104,859

Payments of finance lease obligations

 

(63)

 

(61)

Proceeds from exercise of stock options

 

246

 

7

Payments of initial public offering costs

 

 

(101)

Net cash provided by financing activities

 

183

 

104,704

Net increase in cash, cash equivalents and restricted cash

 

49,852

 

95,095

Cash, cash equivalents and restricted cash at beginning of period

 

70,249

 

26,395

Cash, cash equivalents and restricted cash at end of period

$

120,101

$

121,490

Supplemental cash flow information:

 

  

 

  

Cash paid for interest

$

1

$

2

Supplemental disclosure of noncash investing and financing information:

 

  

 

  

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

$

$

756

Deferred offering costs included in accounts payable and accrued expenses

$

$

1,322

Preferred stock issuance costs included in accounts payable and accrued expenses

$

$

22

Remeasurement of operating lease right-of-use asset for lease modification

$

5,592

$

Reconciliation of cash, cash equivalents and restricted cash:

 

  

 

  

Cash and cash equivalents

$

117,653

$

120,173

Restricted cash

 

2,448

 

1,317

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

$

120,101

$

121,490

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 who live with disabling hearing loss worldwide. 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 pandemic, 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 March 31, 2021, the Company had an accumulated deficit of $97.8 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 affect its business prospects. Although management continues to pursue these plans, there is no assurance that the

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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 Pandemic

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 pandemic. The pandemic 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 Company has experienced manufacturing delays at its third-party manufacturer, including delays related to the COVID-19 pandemic, and may experience additional delays in the future, which could further delay product development timelines. The future progression of the pandemic and its continued effects on the Company’s business and operations are uncertain. The COVID-19 pandemic may affect the Company’s ability to initiate and complete nonclinical 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 third-party manufacturers and contract research organizations, or CROs, may face additional disruptions that may affect the Company’s ability to initiate and complete nonclinical studies, obtain nonclinical and clinical supplies, and initiate clinical trial sites. The pandemic may cause significant disruptions in the financial markets, 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.

As described above, to date, the Company has experienced a business disruption at its third-party manufacturer, including delays related to the COVID-19 pandemic. The Company is continuing to monitor the impact of the COVID-19 pandemic on its business and financial statements. To date, the Company has not 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 continue to 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 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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, or the Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or the SEC, on March 29, 2021. There have been no material changes in the Company’s significant accounting policies during the three months ended March 31, 2021.

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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 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. 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 March 31, 2021, the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2021 and 2020, the condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 and the condensed consolidated statements of convertible preferred stock and stockholders’ equity for the three months ended March 31, 2021 and 2020 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 March 31, 2021 and the results of its operations for the three months ended March 31, 2021 and 2020 and its cash flows for the three months ended March 31, 2021 and 2020. The financial data and other information disclosed in these notes related to the three months ended March 31, 2021 and 2020 are also unaudited. The results for the three months ended March 31, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period. The accompanying balance sheet as of December 31, 2020 has been derived from the Company’s audited financial statements for the year ended December 31, 2020. 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 condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K.

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, cash equivalents and marketable securities at one accredited financial institution. The Company’s cash equivalents as of March 31, 2021 and December 31, 2020 consisted of U.S. government money market funds. Marketable securities as of March 31, 2021 and December 31, 2020 consisted of U.S. Treasury notes with maturities of less than 12 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 and lease amendment entered into in January 2021, the Company is required to maintain a letter of credit of $1.3 million and $1.2 million, respectively, for the benefit of the landlord. As of March 31, 2021 and December 31, 2020, these amounts were 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 March 31, 2021 and December 31, 2020, 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. The Company has classified its investments with maturities beyond one year as current, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

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 and marketable securities 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.

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 months ended March 31, 2021 and 2020.

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.

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.

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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.

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. For the three months ended March 31, 2021, comprehensive income (loss) included less than $0.1 million of unrealized gains on marketable securities. For the three months ended March 31, 2020, there was no difference between net loss and comprehensive loss.

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

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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 March 31, 2021 and December 31, 2020.

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.

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 months ended March 31, 2021 and 2020.

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

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required effective date of January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 is effective for annual periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2019-12 as of the required effective date of January 1, 2021, 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 following tables present the Company’s fair value hierarchy for its assets and liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value (in thousands):

Fair Value Measurements at 

March 31, 2021 Using:

Level 1

Level 2

Level 3

Total

Assets:

    

  

    

  

    

  

    

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

116,722

$

$

$

116,722

Restricted cash:

 

  

 

  

 

  

 

  

Money market funds

 

2,423

 

 

 

2,423

Marketable securities:

U.S. Treasury notes

168,966

168,966

$

119,145

$

168,966

$

$

288,111

Fair Value Measurements at 

December 31, 2020 Using:

Level 1

Level 2

Level 3

Total

Assets:

    

  

    

  

    

  

    

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

68,016

$

$

$

68,016

Restricted cash:

 

  

 

  

 

  

 

  

Money market funds

 

1,292

 

 

 

1,292

Marketable securities:

U.S. Treasury notes

239,078

239,078

$

69,308

$

239,078

$

$

308,386

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 March 31, 2021, 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 months ended March 31, 2021 and 2020 there were no transfers between Level 1, Level 2, and Level 3.

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4. Marketable Securities

As of March 31, 2021 and December 31, 2020, the fair value of available-for-sale marketable debt securities by type of security was as follows (in thousands):

March 31, 2021

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gain

Loss

Value

Assets

Marketable securities:

U.S. Treasury notes

$

168,925

$

55

$

(14)

$

168,966

$

168,925

$

55

$

(14)

$

168,966

December 31, 2020

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gain

Loss

Value

Assets

Marketable securities:

U.S. Treasury notes

$

239,065

$

16

$

(3)

$

239,078

$

239,065

$

16

$

(3)

$

239,078

At March 31, 2021 and December 31, 2020, all available-for-sale marketable securities have contractual maturities of less than one year.

5. Property and Equipment, Net

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

March 31, 2021

December 31, 2020

Laboratory equipment

$

4,917

$

4,576

Furniture and fixtures

 

461

 

461

Leasehold improvements

 

8,923

 

8,915

Construction in progress

 

5,437

 

3,755

 

19,738

 

17,707

Less: Accumulated depreciation and amortization

 

(2,863)

 

(2,319)

$

16,875

$

15,388

Depreciation and amortization expense for the three months ended March 31, 2021 and March 30, 2020 was approximately $0.5 million and $0.4 million, respectively.

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6. Accrued Expenses and Other Current Liabilities

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

March 31, 2021

December 31, 2020

Accrued external research, development, and manufacturing expenses

 

$

3,286

 

$

2,442

 

 

Accrued employee compensation and benefits

900

2,438

Accrued professional fees

 

1,098

 

1,175

 

 

Payments due for leasehold improvements

 

 

2,071

 

 

Other

 

210

 

573

 

 

$

5,494

$

8,699

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 March 31, 2021 and December 31, 2020, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 200,000,000 shares 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 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 March 31, 2021, 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 March 31, 2021, no shares of preferred stock were issued or outstanding.

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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 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.

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

During the year ended December 31, 2020 the Company increased the number of shares of common stock authorized for issuance under the 2016 plan from 1,508,669 to 3,722,685 shares. As of March 31, 2021 and December 31, 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, non-statutory 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. On January 1, 2021, the number of shares reserved for issuance under the 2020 Plan increased, pursuant to the terms of the 2020 Plan, by an additional 1,375,348 shares, equal to 4% of the Company’s then-outstanding common stock. 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 March 31, 2021, the total number of shares of common stock available for issuance under the 2020 Plan is 4,843,831 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. On January 1, 2021, the number of shares reserved for issuance under the 2020 ESPP increased, pursuant to the terms of the 2020 ESPP, by an additional 343,837 shares, equal to 1% of the Company’s then-outstanding common stock.

As of March 31, 2021, the total number of shares of common stock available for issuance under the 2020 ESPP is 704,488.

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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.

Stock Options

The following table summarizes the Company’s stock option activity since December 31, 2020:

Weighted 

Weighted

Average

Average

Aggregate

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

Shares

Price

 

Term

 

Value

    

    

    

(in years)

    

(in thousands)

Outstanding as of December 31, 2020

 

3,674,687

$

9.92

 

9.1

$

38,170

Granted

 

911,990

$

17.94

 

  

 

  

Exercised

 

(62,197)

$

3.61

 

  

 

  

Forfeited

 

(167,994)

$

6.64

 

  

 

  

Outstanding as of March 31, 2021

 

4,356,486

$

11.81

 

8.7

$

20,137

Vested and expected to vest as of March 31, 2021

 

4,356,486

$

11.81

 

8.7

$

20,137

Options exercisable as of March 31, 2021

 

786,686

$

6.00

 

8.3

$

6,743

The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2021 and 2020 was $12.14 per share and $2.32 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, 2020

 

47,731

Vested

 

(22,358)

Unvested restricted common stock as of March 31, 2021

 

25,373

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 March 31, 2021 and December 31, 2020, the liability related to the payments for unvested shares from early-exercised options was less than $0.1 million.

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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.

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 2020 or the three months ended March 31, 2021. As of March 31, 2021 and December 31, 2020, 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 three months ended March 31, 2021:

    

    

Weighted

Average

 

GrantDate

Shares

 

Fair Value

Unvested restricted common stock as of December 31, 2020

 

93,908

$

0.0529

Vested

 

(28,437)

 

0.0607

Unvested restricted common stock as of March 31, 2021

 

65,471

$

0.0496

The total fair value of restricted common stock vested during the three months ended March 31, 2021 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

 

March 31, 

 

    

    

2021

    

2020

    

 

 

Research and development expenses

$

954

$

54

General and administrative expenses

 

1,046

 

57

$

2,000

$

111

As of March 31, 2021, there was $32.9 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.4 years.

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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 certain patent rights and know-how, including rights related to adeno-associated virus (“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 months ended March 31, 2021 and 2020, 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.

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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 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 months ended March 31, 2021 and 2020, the Company did not make any payments to Lonza or recognize any research and development expenses under the Lonza Sublicense.

11. Leases

The Company leases its office and laboratory facility in Boston, Massachusetts pursuant to a lease agreement entered into in December 2018 (the “2018 Lease”), which includes a lease incentive, fixed payment escalations, and a rent holiday. The 2018 Lease term commenced in May 2019, which was the point at which the Company obtained control of the leased premises, and expires in February 2028. Under the 2018 lease, the Company is entitled to one option to extend the lease term for an additional five years. The option to extend the lease term was not included in the right-of-use asset and lease liability as it was not reasonably certain of being exercised. The Company classified the 2018 Lease as an operating lease under ASC 842; Leases. The initial annual base rent under the 2018 Lease is $2.3 million, with such base rent increasing annually during the initial term by 3% and with lease payments beginning in February 2020. Additionally, the 2018 Lease requires the Company to pay its portion of real estate taxes and costs related to the premises, including costs of operations, maintenance, repair, replacement, and management of the new leased premises. In connection with the 2018 Lease, the Company is required to maintain a letter of credit for the benefit of the landlord in an amount of approximately $1.3 million, based on a specified formula. The 2018 Lease included a landlord-provided tenant improvement allowance of up to $6.6 million to be applied to the costs of the construction of leasehold improvements. The Company determined that it owns the leasehold improvements related to the 2018 Lease and, as such, reflected the $6.6 million lease incentive as a reduction of the rental payments used to measure the operating lease liability, and, in turn, the operating lease right-of-use asset as of the lease commencement date in May 2019. Between the lease commencement date and December 31, 2019, the Company recorded increases of $6.6 million to the operating lease liability and to leasehold improvements as and when such leasehold improvements were paid for by the lessor.

The Company entered into an agreement in January 2021 that amended the 2018 Lease. Under the amended lease, the Company’s leased space will expand the 2018 leased premises to include an additional 37,500 square feet for a total of approximately 75,000 square feet and extends the term of the 2018 Lease for a new ten-year term. The lease term commenced in April 2021, which was the point at which the Company obtained control of the additional leased premises. The lease disclosures for the three months ended March 31, 2021 in these financial statements have been adjusted for the modification of the current lease.

The Company also leases laboratory equipment under an agreement which is classified as a finance lease.

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The components of the Company’s lease expense are as follows (in thousands):

March 31, 

2021

    

Operating lease cost

$

651

Variable lease cost

$

67

Finance lease cost:

 

  

Amortization of lease assets

$

27

Interest on lease liabilities

 

1

Total finance lease cost

$

28

Supplemental disclosure of cash flow information related to leases was as follows (in thousands):

March 31, 

 

2021

 

Cash paid for amounts included in the measurement of operating lease liabilities (operating cash flows)

$

778

Cash paid for amounts included in the measurement of finance lease liabilities (operating cash flows)

$

1

Cash paid for amounts included in the measurement of finance lease liabilities (financing cash flows)

$

63

The weighted-average remaining lease term and discount rate were as follows:

    

March 31, 

 

    

December 31, 

2021

2020

 

Weighted‑average remaining lease term (in years) used for:

Operating leases

10.75

 

7.17

 

Finance leases

0.50

 

0.75

 

Weighted‑average discount rate used for:

  

 

  

 

Operating leases

10.00

%

 

10.00

%  

Finance leases

1.99

%

 

1.99

%  

Because the interest rate implicit in the lease was not readily determinable, the Company’s incremental borrowing rate was used to calculate the present value of the 2018 Lease. In determining its incremental borrowing rate, the Company considered its credit quality and assessed interest rates available in the market for similar borrowings, adjusted for the impact of collateral over the term of the lease. The present value of the Company’s laboratory equipment lease was calculated using the rate implicit in the lease.

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Future annual lease payments under the 2018 Lease and the laboratory equipment finance lease as of March 31, 2021 were as follows (in thousands):

Years Ending December 31, 

    

Operating Leases

    

Finance Leases

2021

$

1,796

$

126

2022

 

2,457

 

2023

 

2,535

 

2024

 

2,601

 

2025

 

2,684

 

Thereafter

 

19,720

 

Total future lease payments

 

31,793

 

126

Less: Imputed interest

 

(13,223)

 

(1)

Total lease liabilities

$

18,570

$

126

The following table presents lease assets and liabilities and their classification on the consolidated balance sheet (in thousands):

 

March 31, 

December 31, 

Leases

 

Consolidated Balance Sheet Classification (unaudited)

2021

2020

Assets:

Operating lease assets

 

Operating lease right‑of‑use assets

$

11,460

$

5,964

Finance lease assets

 

Property and equipment, net

 

273

 

300

Total lease assets

$

11,733

$

6,264

Liabilities:

  

 

  

 

  

Current:

  

 

  

 

  

Operating lease liabilities

Operating lease liabilities

$

571

$

1,115

Finance lease liabilities

Accrued expenses and other current liabilities

 

126

 

188

Non‑current:

  

 

  

 

  

Operating lease liabilities

Operating lease liabilities, net of current portion

 

18,000

 

12,027

Total lease liabilities

$

18,697

$

13,330

12. 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.

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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.

13. 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 March 31, 

    

    

2021

    

2020

    

Numerator:

Net loss attributable to common stockholders

$

(16,086)

$

(10,440)

Denominator:

 

  

 

  

Weighted‑average common shares outstanding, basic and diluted

 

34,284,419

 

708,204

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

$

(0.47)

$

(14.74)

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:

March 31, 

    

2021

    

2020

Convertible preferred stock (as converted to common stock)

 

 

 

18,969,672

 

Unvested restricted common stock

 

 

90,844

 

272,948

 

Stock options to purchase common stock

 

 

4,356,486

 

1,138,470

 

 

 

4,447,330

 

20,381,090

 

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 audited financial statements and related notes for the year ended December 31, 2020 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 29, 2021. 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, 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.

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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 who live with disabling hearing loss worldwide. We have built a precision genetic medicine platform that incorporates a proprietary vector library consisting of variants 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 to include programs focused on monogenic and inner ear conditions of complex etiology, such as AK-antiVEGF for vestibular schwannoma; 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 conditions.

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 nonclinical 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 primarily 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 initial public offering, or IPO. On June 30, 2020, we completed an IPO of our common stock and issued and sold 14,375,000 shares of common stock at a public offering price of $17.00 per share, resulting in net proceeds of $223.8 million after deducting underwriting discounts and commissions and offering expenses. Upon completion of the IPO, all shares of outstanding convertible preferred stock automatically converted into 18,969,672 shares of common stock. 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 a net loss of $16.1 million for the three months ended March 31, 2021. As of March 31, 2021, we had an accumulated deficit of $97.8 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 otoferlin gene (OTOF)-mediated hearing loss;
the progress, costs, and results of our IND enabling studies to support our planned IND submission for AK-antiVEGF, and any future clinical development of AK-antiVEGF;
continue our current research programs and our nonclinical development of product candidates from our current research programs;
advance additional product candidates into preclinical and clinical development;
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;
ultimately establish a sales, marketing, and distribution infrastructure; scale up manufacturing capabilities; and commercialize any products for which we may obtain marketing approval;

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expand, maintain, and protect our intellectual property portfolio;
hire additional clinical, regulatory, and other scientific personnel; and
add operational, legal, compliance, financial, and management information systems 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 continue to incur 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 nonclinical 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 adversely impacted economies worldwide and could impact the financial markets, both of which could result in adverse effects on our business and operations and our ability to raise additional funds to support our operations.

To date, we have experienced a business disruption at our third-party manufacturer, specifically manufacturing delays, including delays related to the COVID-19 pandemic. We are continuing to monitor the impact of the COVID-19 pandemic on our business and financial statements. 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. As a result, we have 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. In May 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 contract research organizations, or CROs;
the cost of developing and scaling our manufacturing process and manufacturing drug products for use in our research and nonclinical studies, including under agreements with third parties, such as consultants, contractors, and third-party manufacturers;
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, third-party manufacturers, and CROs in connection with our research, nonclinical, 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

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expect that our research and development expenses will increase substantially in connection with our planned preclinical 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 and AK-antiVEGF programs will increase substantially in the near term. These substantial increases in expenses relate to plans to submit an IND for AK-OTOF for otoferlin gene (OTOF)-mediated hearing loss to the U.S. Food and Drug Administration, or FDA, in the first half of 2022, and initiate a planned Phase 1/2 clinical trial of AK-OTOF, and to submit an IND for AK-antiVEGF for vestibular schwannoma to FDA in 2022. We also expect that the research and development expenses of our AK-CLRN1 and GJB2 programs will increase in the near term as we initiate IND-enabling activities for 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 nonclinical 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 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.

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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 intellectual property and corporate 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, and compliance expenses for services associated with maintaining compliance with stock exchange listing and SEC requirements, investor relations costs and director and officer insurance premiums associated with operating as a public company.

Other Income (Expense)

Interest Income

Interest income consists of interest earned on our invested cash and marketable securities balances.

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.

Results of Operations

Comparison of the three months ended March 31, 2021 and 2020

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020:

Three Months Ended

March 31, 

2021

2020

Change

(in thousands)

Operating expenses:

    

  

    

  

    

  

Research and development

$

11,258

$

8,034

$

3,224

General and administrative

 

4,890

 

2,504

 

2,386

Total operating expenses

 

16,148

 

10,538

 

5,610

Loss from operations

 

(16,148)

 

(10,538)

 

(5,610)

Other income (expense):

 

  

 

  

 

  

Interest income

 

509

 

100

 

409

Other expense, net

 

(447)

 

(2)

 

(445)

Total other income, net

 

62

 

98

 

(36)

Net loss

$

(16,086)

$

(10,440)

$

(5,646)

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Research and Development Expenses

Three Months Ended

March 31, 

2021

2020

Change

(in thousands)

Direct research and development expenses by program:

    

  

    

  

    

  

AK‑OTOF

$

2,256

$

1,766

$

490

AK-antiVEGF

1,409

115

1,294

Other early‑stage programs

 

506

 

518

 

(12)

Platform, research and discovery, and unallocated expenses:

 

  

 

 

  

Platform‑related external costs

 

244

 

802

 

(558)

Personnel related (including stock‑based compensation)

 

4,508

 

2,760

 

1,748

Facility related and other

 

2,335

 

2,073

 

262

Total research and development expenses

$

11,258

$

8,034

$

3,224

Research and development expenses were $11.3 million for the three months ended March 31, 2021, compared to $8.0 million for the three months ended March 31, 2020. The increase of $0.5 million in direct costs related to our AK-OTOF program was primarily due to increased manufacturing costs of $1.1 million, partially offset by lower external research costs of $0.8 million. The increase of $1.3 million in direct costs related to our AK-antiVEGF program was primarily due to increased nonclinical toxicology studies and manufacturing costs. Other early-stage program costs remained relatively consistent between periods.

The decrease of $0.6 million in platform-related external costs was primarily due to a reduction in spending related to device design and a reduction in platform spending related to The SING Registry. The increase of $1.7 million in personnel-related costs was primarily due to increased headcount in our research and development function. Personnel-related costs included stock-based compensation expense of $1.0 million for the three months ended March 31, 2021 and $0.1 million for the three months ended March 31, 2020. Facility related and other costs remained relatively consistent between periods.

General and Administrative Expenses

Three Months Ended

March 31, 

2021

2020

Change

(in thousands)

Personnel related (including stock‑based compensation)

    

$

2,836

    

$

1,336

$

1,500

Professional and consultant fees

 

1,103

 

979

 

124

Facility related and other

 

951

 

189

 

762

Total general and administrative expenses

$

4,890

$

2,504

$

2,386

General and administrative expenses for the three months ended March 31, 2021 were $4.9 million, compared to $2.5 million for the three months ended March 31, 2020. Personnel-related costs increased by $1.5 million primarily as a result of the increase in headcount in our general and administrative function. Personnel-related costs included stock-based compensation expense of $1.0 million for the three months ended March 31, 2021 and $0.1 million for the three months ended March 31, 2020. Professional and consultant fees remained relatively consistent between periods. The increase in facility-related and other expenses of $0.8 million was primarily due to an increase of $0.6 million related to director and officer insurance costs as well as increased facility overhead costs.

Other Income (Expense)

Interest Income. Interest income was $0.5 million and $0.1 million, respectively, for each of the three months ended March 31, 2021 and 2020, consisting of interest earned on invested cash balances.

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Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we advance the preclinical and, if successful, the clinical development of our programs. To date, we have funded our operations with proceeds from sales of preferred stock (includin