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Table of Contents

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, 2022

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 29, 2022, there were 34,626,156 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 Stockholders’ Equity

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

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

Item 4.

Controls and Procedures

33

Part II.

Other Information

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

89

Item 6.

Exhibits

90

Signatures

91

2

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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 the 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 marketable securities 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;
the potential advantages of our product candidates;
the rate and degree of market acceptance and clinical utility of our product candidates;
our estimates regarding the potential addressable patient population for our product candidates;
our commercialization, marketing and manufacturing capabilities and strategy;
our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates;
our intellectual property position;
our ability to identify additional products, product candidates, or technologies with significant commercial potential that are consistent with our commercial objectives;
the impact of government laws and regulations;
our competitive position and expectations regarding developments and projections relating to our competitors and any competing therapies that are or become available;

3

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

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

You should read this Quarterly Report and the documents that we file with the Securities and Exchange Commission 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 $27.0 million for the quarter ended March 31, 2022 and $16.1 million for the quarter ended March 31, 2021;
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;

4

Table of Contents

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 manufacturers, and we could experience further delays in the development or commercialization of our product candidates, including delays related to COVID-19, other natural disasters, or supply chain shortages or delays;
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;
preclinical 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;
AK-OTOF and our other product candidates will be a biologic-device combination involving a novel delivery approach, which may result in additional regulatory and other risks;
even if we complete the necessary nonclinical studies and clinical trials, 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.

5

Table of Contents

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, 2022

December 31, 2021

ASSETS

Current Assets

    

  

  

    

Cash and cash equivalents

$

54,382

$

121,907

Marketable securities

154,716

110,545

Prepaid expenses and other current assets

 

2,353

 

3,711

Total current assets

 

211,451

 

236,163

Property and equipment, net

 

21,849

 

19,803

Operating lease right‑of‑use assets

 

20,167

 

20,341

Restricted cash

 

2,448

 

2,448

Other assets

43

Total assets

$

255,958

$

278,755

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Current Liabilities

 

  

 

  

Accounts payable

$

1,331

$

1,280

Accrued expenses and other current liabilities

 

16,517

 

14,850

Operating lease liabilities

 

711

 

671

Total current liabilities

 

18,559

 

16,801

Operating lease liabilities, net of current portion

 

28,415

 

28,304

Total liabilities

 

46,974

 

45,105

Commitments and contingencies (See Note 11)

 

  

 

  

Stockholders’ Equity

 

  

 

  

Common stock, $0.0001 par value:
Authorized: 200,000,000 shares at March 31, 2022 and December 31, 2021.
Issued and outstanding: 34,605,503 and 34,498,443 shares at March 31, 2022 and December 31, 2021, respectively.

 

3

 

3

Additional paid‑in capital

 

405,094

 

402,244

Accumulated other comprehensive loss

(735)

(202)

Accumulated deficit

 

(195,378)

 

(168,395)

Total stockholders’ equity

 

208,984

 

233,650

Total liabilities and stockholders’ equity

$

255,958

$

278,755

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

6

Table of Contents

AKOUOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands, except share and per share amounts)

Three Months Ended

March 31, 

2022

2021

Operating expenses:

    

    

  

    

  

Research and development

$

20,388

$

11,258

General and administrative

 

6,646

 

4,890

Total operating expenses

 

27,034

 

16,148

Loss from operations

 

(27,034)

 

(16,148)

Other income (expense):

 

  

 

  

Interest income

 

257

 

509

Other expense, net

 

(206)

 

(447)

Total other income, net

 

51

 

62

Net loss

$

(26,983)

$

(16,086)

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

$

(0.78)

$

(0.47)

Weighted‑average common shares outstanding, basic and diluted

 

34,528,992

 

34,284,419

Other comprehensive income (loss):

Unrealized gain (loss) on marketable securities

(533)

28

Total other comprehensive income (loss)

(533)

28

Total comprehensive loss

$

(27,516)

$

(16,058)

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

7

Table of Contents

AKOUOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands, except share amounts)

Accumulated 

Additional

Other

Total 

Common Stock

 Paidin

Comprehensive

Accumulated 

Stockholders’ 

Shares

Amount

 

 Capital

Income

Deficit

 

Equity

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 earlyexercised stock options

 

 

 

21

 

 

 

21

Stockbased 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

Balances at December 31, 2021

 

34,498,443

$

3

$

402,244

$

(202)

$

(168,395)

$

233,650

Issuance of common stock upon exercise of stock options

 

107,060

220

 

220

Vesting of restricted common stock from earlyexercised stock options

 

4

 

4

Stockbased compensation expense

 

2,626

 

2,626

Net loss

 

(26,983)

 

(26,983)

Unrealized loss on marketable securities

 

(533)

(533)

Balances at March 31, 2022

 

34,605,503

$

3

$

405,094

$

(735)

$

(195,378)

$

208,984

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

8

Table of Contents

AKOUOS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

Three Months Ended March 31, 

2022

2021

Cash flows from operating activities:

    

  

    

  

Net loss

$

(26,983)

$

(16,086)

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

 

  

 

  

Depreciation and amortization expense

 

748

 

544

Net amortization of premiums and accretion of discounts on marketable securities

188

442

Amortization of operating lease right-of-use assets

 

174

 

96

Stock‑based compensation expense

 

2,626

 

2,000

Loss on disposal of property and equipment

5

Changes in operating assets and liabilities:

 

  

 

  

Prepaid expenses and other current assets

 

1,358

 

(1,796)

Accounts payable

 

51

 

97

Other assets

(43)

10

Operating lease liabilities

 

151

 

(163)

Accrued expenses and other current liabilities

 

1,671

 

(1,071)

Net cash used in operating activities

 

(20,059)

 

(15,922)

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(2,794)

 

(4,107)

Purchases of marketable securities

(64,892)

(70,302)

Proceeds from sales or maturities of marketable securities

20,000

140,000

Net cash provided by (used in) investing activities

 

(47,686)

 

65,591

Cash flows from financing activities:

 

  

 

  

Payments of finance lease obligations

 

 

(63)

Proceeds from exercise of stock options

 

220

 

246

Net cash provided by financing activities

 

220

 

183

Net increase (decrease) in cash, cash equivalents and restricted cash

 

(67,525)

 

49,852

Cash, cash equivalents and restricted cash at beginning of period

 

124,355

 

70,249

Cash, cash equivalents and restricted cash at end of period

$

56,830

$

120,101

Supplemental cash flow information:

 

  

 

  

Cash paid for interest

$

$

1

Supplemental disclosure of noncash investing and financing information:

 

  

 

  

Vesting of common stock subject to repurchase

$

4

$

21

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

$

54,382

$

117,653

Restricted cash

 

2,448

 

2,448

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

$

56,830

$

120,101

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 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.

In August 2021, the Company entered into a sales agreement (“the ATM Sales Agreement”) with Cowen and Company, LLC, (“Cowen”) to issue and sell, from time to time at prevailing market prices, shares of the Company’s common stock having aggregate gross proceeds of up to $100.0 million. Sales of common stock under the ATM Sales Agreement may be made by any method that is deemed an “at the market” offering as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended. The Company agreed to pay Cowen a commission of 3.0% of the aggregate gross proceeds of any shares sold by Cowen under the ATM Sales Agreement. As of March 31, 2022, no sales have been made pursuant to the ATM Sales Agreement.

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, 2022, the Company had an accumulated deficit of $195.4 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 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 manufacturers, including delays related to the COVID-19 pandemic, and may experience additional delays in the future, including supply chain delays or shortages, 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 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, which 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 manufacturers, 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 (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

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.

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Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of March 31, 2022, the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2022 and 2021, the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021 and the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2022 and 2021 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, 2022 and the results of its operations for the three months ended March 31, 2022 and 2021 and its cash flows for the three months ended March 31, 2022 and 2021. The financial data and other information disclosed in these notes related to the three months ended March 31, 2022 and 2021 are also unaudited. The results for the three months ended March 31, 2022 and 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period. The accompanying balance sheet as of December 31, 2021 has been derived from the Company’s audited financial statements for the year ended December 31, 2021. 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, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2022 (the “Annual Report on Form 10-K”).

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 Annual Report on Form 10-K. There have been no material changes in the Company’s significant accounting policies during the three months ended March 31, 2022.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC Topic 740, Income Taxes 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 period 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

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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 was 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.

3. Fair Value Measurements

The following tables present the Company’s fair value hierarchy for its assets 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:

Fair Value Measurements at 

March 31, 2022 Using:

(in thousands)

Level 1

Level 2

Level 3

Total

Assets:

    

  

    

  

    

  

    

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

55,895

$

$

$

55,895

Restricted cash:

 

  

 

  

 

  

 

  

Money market funds

 

2,448

 

 

 

2,448

Marketable securities:

U.S. Treasury notes

154,716

154,716

$

58,343

$

154,716

$

$

213,059

Fair Value Measurements at 

December 31, 2021 Using:

(in thousands)

Level 1

Level 2

Level 3

Total

Assets:

    

  

    

  

    

  

    

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

121,018

$

$

$

121,018

Restricted cash:

 

  

 

  

 

  

 

  

Money market funds

 

2,448

 

 

 

2,448

Marketable securities:

U.S. Treasury notes

110,545

110,545

$

123,466

$

110,545

$

$

234,011

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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, 2022, 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, 2022 and 2021, there were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy.

4. Marketable Securities

As of March 31, 2022 and December 31, 2021, the fair value of available-for-sale marketable debt securities by type of security was as follows:

March 31, 2022

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

(in thousands)

Cost

Gain

Loss

Value

Assets

Marketable securities:

U.S. Treasury notes

$

155,451

$

$

(735)

$

154,716

$

155,451

$

$

(735)

$

154,716

December 31, 2021

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

(in thousands)

Cost

Gain

Loss

Value

Assets

Marketable securities:

U.S. Treasury notes

$

110,747

$

$

(202)

$

110,545

$

110,747

$

$

(202)

$

110,545

At March 31, 2022 and December 31, 2021, all available-for-sale marketable securities had contractual maturities of less than two years.

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5. Property and Equipment, Net

Property and equipment, net consisted of the following:

(in thousands)

March 31, 2022

December 31, 2021

Laboratory equipment

$

8,226

$

7,595

Furniture and fixtures

 

611

 

600

Leasehold improvements

 

15,871

 

15,871

Construction in progress

 

2,668

 

516

 

27,376

 

24,582

Less: Accumulated depreciation and amortization

 

(5,527)

 

(4,779)

$

21,849

$

19,803

Depreciation and amortization expense for the three months ended March 31, 2022 and March 31, 2021 was approximately $0.7 million and $0.5 million, respectively.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

(in thousands)

March 31, 2022

December 31, 2021

Accrued manufacturing expenses

$

9,859

$

8,039

Accrued employee compensation and benefits

 

1,325

 

3,234

 

Accrued external research and development expenses

3,671

2,507

Accrued professional fees

 

1,595

 

983

 

Other

 

67

 

87

 

$

16,517

$

14,850

7. Stockholders’ Equity

Common Stock

As of March 31, 2022 and December 31, 2021, 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 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.

In August 2021, the Company entered into the ATM Sales Agreement with Cowen to issue and sell from time to time at prevailing market prices, up to $100.0 million in shares of the Company’s common stock. As of March 31, 2022, the Company has not yet issued or sold any securities under the ATM Sales Agreement.

Preferred Stock

As of March 31, 2022 and December 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, 2022 and December 31, 2021, no shares of preferred stock were issued or outstanding.

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8. Stock-Based Compensation

2016 Stock Plan

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

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

As of March 31, 2022 and December 31, 2021, 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, 2022, the number of shares reserved for issuance under the 2020 Plan increased, pursuant to the terms of the 2020 Plan, by an additional 1,379,937 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, 2022, the total number of shares of common stock available for issuance under the 2020 Plan is 4,606,996 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, 2022, the number of shares reserved for issuance under the 2020 ESPP increased, pursuant to the terms of the 2020 ESPP, by an additional 344,984 shares, equal to 1% of the Company’s then outstanding common stock.

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As of March 31, 2022, the total number of shares of common stock available for issuance under the 2020 ESPP is 1,049,472.

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, 2021:

Weighted 

Weighted

Average

Average

Aggregate

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

Shares

Price

 

Term (in years)

 

Value (in thousands)

Outstanding as of December 31, 2021

 

4,392,836

$

11.71

 

8.3

$

6,801

Granted

 

1,601,700

$

5.80

 

  

 

  

Exercised

 

(107,060)

$

2.05

 

  

 

  

Forfeited and cancelled

 

(158,863)

$

13.98

 

  

 

  

Outstanding as of March 31, 2022

 

5,728,613

$

10.20

 

8.7

$

1,976

Vested and expected to vest as of March 31, 2022

 

5,728,613

$

10.20

 

8.7

$

1,976

Options exercisable as of March 31, 2022

 

1,579,119

$

9.87

 

7.9

$

1,451

The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2022 and 2021 was $4.11 per share and $12.14 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, 2021

 

14,070

Vested

 

(3,775)

Unvested restricted common stock as of March 31, 2022

 

10,295

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

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outstanding until those shares have vested. As of March 31, 2022 and December 31, 2021, the liability related to the payments for unvested shares from early-exercised options was less than $0.1 million at each date.

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 2021 or the three months ended March 31, 2022. As of March 31, 2022, there was no remaining liability related to the payments received for shares of unvested restricted stock. As of December 31, 2021, 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, 2022:

    

    

Weighted

Average

 

GrantDate

Shares

 

Fair Value

Unvested restricted common stock as of December 31, 2021

 

770

$

0.85

Vested

 

(770)

 

0.85

Unvested restricted common stock as of March 31, 2022

 

$

The total fair value of restricted common stock vested during the three months ended March 31, 2022 was less than $0.1 million.

Stock-Based Compensation

The Company records compensation cost for all stock-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, 

 

    

    

2022

    

2021

    

Research and development expenses

$

997

$

954

General and administrative expenses

 

1,629

 

1,046

$

2,626

$

2,000

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As of March 31, 2022, there was $28.5 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.9 years.

9. 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, 2022 and 2021, 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

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IND in the United States or IMPD in any country in the European Union or an equivalent application in any country within 18 months of completion of specified toxicology studies for a licensed product.

Upon entering into the Lonza Sublicense in 2017, the Company issued to Lonza shares of the Company’s common stock then having a fair value of $0.1 million. The Company is obligated to make aggregate milestone payments to Lonza of up to $18.5 million upon the achievement of specified development, regulatory, and sales milestones. The Company is also obligated to pay tiered royalties of a mid to high single-digit percentage based on annual net sales of licensed products by the Company and any of its affiliates and sublicensees as denoted in the Lonza Sublicense. Royalties will be paid by the Company on a licensed product-by-licensed product and country-by-country basis beginning after the first commercial sale of a Lonza sublicensed product and lasting until the later of (i) the 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, 2022 and 2021 the Company did not make any payments to Lonza or recognize any research and development expenses under the Lonza Sublicense.

10. 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 amendment in January 2021 to its 2018 Lease (the “Amended 2018 Lease”). Under the Amended 2018 Lease, the Company’s leased space expanded the 2018 leased premises to include an additional 37,500 square feet for a total of approximately 75,000 square feet and extended the term of the 2018 Lease for a new ten-year term. The term extension of existing square feet under the 2018 Lease is accounted for as a lease modification, which resulted in the remeasurement of the existing right-of-use asset and lease liability of $5.9 million and $13.1 million, respectively, to $11.5 million and $18.7 million, respectively, in January 2021, the effective date of

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the Amended 2018 Lease agreement, and is accounted for as an operating lease. The lease term of the additional leased premises commenced in April 2021, which was the point at which the Company obtained control of the leased premises. On commencement date the Company recorded a right-of-use asset and lease liability of $9.9 million, respectively, and is accounted for as an operating lease. The Amended 2018 Lease included a landlord-provided tenant improvement allowance of up to $7.1 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 amended 2018 Lease and, as such, reflected the $7.1 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 April 2021. As of March 31, 2022, the Company has not yet received any payment reimbursements from the lessor for leasehold improvement costs related to the Amended 2018 Lease.

The components of the Company’s lease expense are as follows:

(in thousands)

March 31, 2022

Operating lease cost

$

1,116

Variable lease cost

$

85

Supplemental disclosure of cash flow information related to leases was as follows:

(in thousands)

 

March 31, 2022

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

$

792

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

March 31, 2022

December 31, 2021

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

Operating leases

9.75

 

10.00

 

Weighted‑average discount rate used for:

  

 

  

 

Operating leases

10.00

%

 

10.00

%  

Because the interest rate implicit in the lease was not readily determinable, the borrowing rate was used to calculate the present value of the Amended 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.

Future annual lease payments under the Amended 2018 Lease as of March 31, 2022 were as follows (in thousands):

Years Ending December 31, 

    

Operating Leases

    

2022

$

(4,597)

2023

 

5,020

2024

 

5,611

2025

 

5,786

2026

 

5,959

Thereafter

 

34,419

Total future lease payments

 

52,198

Less: Imputed interest

 

(23,072)

Total lease liabilities

$

29,126

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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)

2022

2021

Assets:

Operating lease assets

 

Operating lease right‑of‑use assets

$

20,167

$

20,341

Total lease assets

$

20,167

$

20,341

Liabilities:

  

 

  

 

  

Current:

  

 

  

 

  

Operating lease liabilities

Operating lease liabilities

$

711

$

671

Non‑current:

  

 

  

 

  

Operating lease liabilities

Operating lease liabilities, net of current portion

 

28,415

 

28,304

Total lease liabilities

$

29,126

$

28,975

11. Commitments and Contingencies

401(k) Plan

The Company has a defined-contribution plan under Section 401(k) of the Internal Revenue Code of 1986 (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company has made contributions to the 401(k) plan and recorded contribution expense of $0.2 million for the three months ended March 31, 2022. The Company did not make any contributions during the three month period ended March 31, 2021.

Indemnification Agreements

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

Legal Proceedings

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

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12. Net Loss per Share

Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows:

Three Months Ended March 31, 

(in thousands, except share and per share data)

    

2022

    

2021

    

Numerator:

Net loss attributable to common stockholders

$

(26,983)

$

(16,086)

Denominator:

 

  

 

  

Weighted‑average common shares outstanding, basic and diluted

 

34,528,992

 

34,284,419

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

$

(0.78)

$

(0.47)

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, 

    

2022

    

2021

Unvested restricted common stock

 

 

10,295

 

90,844

 

Stock options to purchase common stock

 

 

5,728,613

 

4,356,486

 

 

 

5,738,908

 

4,447,330

 

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, 2021 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 29, 2022. 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.

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. We believe the genetic medicines we

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are developing have the potential to create a new standard of care for the treatment of disabling hearing loss, and to transform the lives of individuals and their families, with disabling hearing loss, by providing a meaningful alternative to the invasive and limited current non-pharmacologic treatments. 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. 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 $27.0 million for the three months ended March 31, 2022. As of March 31, 2022, we had an accumulated deficit of $195.4 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;
conduct IND-enabling studies in preparation for an IND submission for our product candidate AK-antiVEGF for the treatment of vestibular schwannoma;
continue our current research programs and our preclinical development of product candidates from our current research programs;
advance additional product candidates into preclinical and clinical development;
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;
expand, maintain, and protect our intellectual property portfolio;
hire additional clinical, regulatory, manufacturing, and other scientific personnel to support our research, product development, and future commercialization efforts; and

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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 incur additional costs associated with operating as a public company.

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

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

The COVID-19 pandemic 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 caused substantial disruption to supply chains and adversely impacted economies worldwide and could impact the financial markets, each 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 manufacturers, 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 work-from-home and return-to-work policies for employees in accordance with guidance from, and requirements of, 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.

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.

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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 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 OTOF-mediated hearing loss to the U.S. Food and Drug Administration, or FDA, in the first half of 2022, and to 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

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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.

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 continue to incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance, and investor and public relations expenses associated with operating as a public company.

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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, 2022 and 2021

The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31, 

(In thousands)

2022

2021

Change

Operating expenses:

    

  

    

  

    

  

Research and development

$

20,388

$

11,258

$

9,130

General and administrative

 

6,646

 

4,890

 

1,756

Total operating expenses

 

27,034

 

16,148

 

10,886

Loss from operations

 

(27,034)

 

(16,148)

 

(10,886)

Other income (expense):

 

  

 

  

 

  

Interest income

 

257

 

509

 

(252)

Other expense, net

 

(206)

 

(447)

 

241

Total other income, net

 

51