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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 June 30, 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 July 29, 2022, there were 36,899,325 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

34

Item 4.

Controls and Procedures

34

Part II.

Other Information

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

91

Item 6.

Exhibits

92

Signatures

93

2

Table of Contents

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 initiation of our planned Phase 1/2 clinical trial for AK-OTOF for otoferlin gene (OTOF)-mediated hearing loss, and the timing of when we will submit an investigational new drug application for our product candidate 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 $20.8 million for the quarter ended June 30, 2022 and $22.7 million for the quarter ended June 30, 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, including conducting analytical testing, 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)

June 30, 2022

December 31, 2021

ASSETS

Current Assets

    

  

  

    

Cash and cash equivalents

$

73,580

$

121,907

Marketable securities

119,315

110,545

Prepaid expenses and other current assets

 

2,021

 

3,711

Total current assets

 

194,916

 

236,163

Property and equipment, net

 

27,329

 

19,803

Operating lease right‑of‑use assets

 

19,813

 

20,341

Restricted cash

 

2,448

 

2,448

Other assets

31

Total assets

$

244,537

$

278,755

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Current Liabilities

 

  

 

  

Accounts payable

$

679

$

1,280

Accrued expenses and other current liabilities

 

13,163

 

14,850

Operating lease liabilities

 

748

 

671

Total current liabilities

 

14,590

 

16,801

Operating lease liabilities, net of current portion

 

31,997

 

28,304

Total liabilities

 

46,587

 

45,105

Commitments and contingencies (See Note 11)

 

  

 

  

Stockholders’ Equity

 

  

 

  

Common stock, $0.0001 par value:
Authorized: 200,000,000 shares at June 30, 2022 and December 31, 2021.
Issued and outstanding: 36,899,325 and 34,498,443 shares at June 30, 2022 and December 31, 2021, respectively.

 

4

 

3

Additional paid‑in capital

 

415,066

 

402,244

Accumulated other comprehensive loss

(911)

(202)

Accumulated deficit

 

(216,209)

 

(168,395)

Total stockholders’ equity

 

197,950

 

233,650

Total liabilities and stockholders’ equity

$

244,537

$

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

Six Months Ended

June 30, 

June 30, 

2022

2021

2022

2021

Operating expenses:

    

  

    

  

    

  

    

  

Research and development

$

14,318

$

17,119

$

34,706

$

28,377

General and administrative

 

6,682

 

5,665

 

13,328

 

10,555

Total operating expenses

 

21,000

 

22,784

 

48,034

 

38,932

Loss from operations

 

(21,000)

 

(22,784)

 

(48,034)

 

(38,932)

Other income (expense):

 

  

 

  

 

  

 

  

Interest income

 

295

 

554

 

552

 

1,063

Other expense, net

 

(126)

 

(510)

 

(332)

 

(957)

Total other income, net

 

169

 

44

 

220

 

106

Net loss

$

(20,831)

$

(22,740)

$

(47,814)

$

(38,826)

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

$

(0.58)

$

(0.66)

$

(1.36)

$

(1.13)

Weighted‑average common shares outstanding, basic and diluted

 

35,837,724

 

34,372,262

 

35,186,973

 

34,324,477

Other comprehensive income (loss):

Unrealized gain (loss) on marketable securities

(176)

(23)

(709)

5

Total other comprehensive income (loss)

(176)

(23)

(709)

5

Total comprehensive loss

$

(21,007)

$

(22,763)

$

(48,523)

$

(38,821)

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

Issuance of common stock upon exercise of stock options

 

7,323

 

 

28

 

 

 

28

Vesting of restricted common stock from earlyexercised stock options

5

5

Stockbased compensation expense

2,456

2,456

Net loss

 

 

 

(22,740)

(22,740)

Unrealized gain (loss) on marketable securities

(23)

(23)

Balances at June 30, 2021

 

34,453,239

$

3

$

397,057

$

18

$

(120,550)

$

276,528

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

Issuance of common stock upon exercise of stock options

21,095

21

21

Issuance of common stock from at the market offering, net of issuance costs of $0.3 million

2,272,727

1

7,188

7,189

Vesting of restricted common stock from earlyexercised stock options

4

4

Stockbased compensation expense

2,759

2,759

Net loss

(20,831)

(20,831)

Unrealized gain (loss) on marketable securities

(176)

(176)

Balances at June 30, 2022

36,899,325

$

4

$

415,066

$

(911)

$

(216,209)

$

197,950

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)

Six Months Ended June 30, 

2022

2021

Cash flows from operating activities:

    

  

    

  

Net loss

$

(47,814)

$

(38,826)

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

 

  

 

  

Depreciation and amortization expense

 

1,513

 

1,065

Net amortization of premiums and accretion of discounts on marketable securities

288

948

Amortization of operating lease right-of-use assets

 

528

 

491

Stock‑based compensation expense

 

5,385

 

4,456

Loss on disposal of property and equipment

8

Changes in operating assets and liabilities:

 

  

 

  

Prepaid expenses and other current assets

 

1,690

 

349

Accounts payable

 

(616)

 

173

Other assets

(31)

9

Operating lease liabilities

 

3,770

 

(50)

Accrued expenses and other current liabilities

 

(1,749)

 

3,366

Net cash used in operating activities

 

(37,036)

 

(28,011)

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(9,039)

 

(6,301)

Purchases of marketable securities

(79,767)

(70,301)

Proceeds from sales or maturities of marketable securities

70,000

168,000

Net cash provided by (used in) investing activities

 

(18,806)

 

91,398

Cash flows from financing activities:

 

  

 

  

Proceeds from at the market equity offering, net of commissions

 

7,274

 

Payments of finance lease obligations

 

 

(126)

Proceeds from exercise of stock options

 

241

 

253

Net cash provided by financing activities

 

7,515

 

127

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

 

(48,327)

 

63,514

Cash, cash equivalents and restricted cash at beginning of period

 

124,355

 

70,249

Cash, cash equivalents and restricted cash at end of period

$

76,028

$

133,763

Supplemental cash flow information:

 

  

 

  

Cash paid for interest

$

$

1

Supplemental disclosure of noncash investing and financing information:

 

  

 

  

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

$

$

568

Offering costs included in accounts payable and accrued expenses

$

85

$

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

$

$

9,893

Vesting of common stock subject to repurchase

$

8

$

26

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

$

73,580

$

131,315

Restricted cash

 

2,448

 

2,448

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

$

76,028

$

133,763

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.

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. During the second quarter of 2022 the Company sold 2,272,727 shares of common stock under the ATM Sales Agreement for net proceeds of approximately $7.2 million.

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 June 30, 2022, the Company had an accumulated deficit of $216.2 million.

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

The Company expects to seek additional funding through public and private equity financings, debt financings, collaborations, licensing arrangements, and/or strategic alliances. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborations or other such arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce, or eliminate some or all of its research and development programs, product portfolio expansion, or commercialization efforts, which could adversely affect its business prospects. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

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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.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 30, 2022, the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2022 and 2021, the

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condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021 and the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 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 June 30, 2022 and the results of its operations for the three and six months ended June 30, 2022 and 2021 and its cash flows for the six months ended June 30, 2022 and 2021. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2022 and 2021 are also unaudited. The results for the three and six months ended June 30, 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 six months ended June 30, 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 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

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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 

June 30, 2022 Using:

(in thousands)

Level 1

Level 2

Level 3

Total

Assets:

    

  

    

  

    

  

    

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

73,288

$

$

$

73,288

Restricted cash:

 

  

 

  

 

  

 

  

Money market funds

 

2,448

 

 

 

2,448

Marketable securities:

U.S. Treasury notes

119,315

119,315

$

75,736

$

119,315

$

$

195,051

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

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 June 30, 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

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for similar securities in active markets or other inputs that are observable or can be corroborated by observable market data.

During the three and six months ended June 30, 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 June 30, 2022 and December 31, 2021, the fair value of available-for-sale marketable debt securities by type of security was as follows:

June 30, 2022

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

(in thousands)

Cost

Gain

Loss

Value

Assets

Marketable securities:

U.S. Treasury notes

$

120,226

$

$

(911)

$

119,315

$

120,226

$

$

(911)

$

119,315

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 June 30, 2022 and December 31, 2021, all available-for-sale marketable securities had contractual maturities of less than two years.

5. Property and Equipment, Net

Property and equipment, net consisted of the following:

(in thousands)

June 30, 2022

December 31, 2021

Laboratory equipment

$

8,398

$

7,595

Furniture and fixtures

 

622

 

600

Leasehold improvements

 

15,871

 

15,871

Construction in progress

 

8,730

 

516

 

33,621

 

24,582

Less: Accumulated depreciation and amortization

 

(6,292)

 

(4,779)

$

27,329

$

19,803

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Depreciation and amortization expense for the three and six months ended June 30, 2022 was approximately $0.8 million and $1.5 million, respectively. Depreciation and amortization expense for the three and six months ended June 30, 2021 was approximately $0.5 million and $1.1 million, respectively.

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

(in thousands)

June 30, 2022

December 31, 2021

Accrued manufacturing expenses

$

6,733

$

8,039

Accrued employee compensation and benefits

 

2,299

 

3,234

 

Accrued external research and development expenses

1,837

2,507

Accrued professional fees

 

2,019

 

983

 

Other

 

275

 

87

 

$

13,163

$

14,850

7. Stockholders’ Equity

Common Stock

As of June 30, 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.

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. During the second quarter of 2022 the Company sold 2,272,727 shares of common stock under the ATM Sales Agreement for net proceeds of approximately $7.2 million.

Preferred Stock

As of June 30, 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 June 30, 2022 and December 31, 2021, no shares of preferred stock were issued or outstanding.

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 June 30, 2022 and December 31, 2021, no shares remained available for future issuance under the 2016 Plan.

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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 June 30, 2022, the total number of shares of common stock available for issuance under the 2020 Plan is 4,385,823 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.

As of June 30, 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. Expected stock price volatility is based on a weighted average of several peer public companies given the limited period the Company’s common stock has traded since the initial public offering. For purposes of identifying peer companies, the Company considered characteristics such as industry, length of trading history and similar vesting terms. For options with service-based vesting conditions, the expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

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Stock Options

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

 

1,885,975

$

5.44

 

  

 

  

Exercised

 

(128,155)

$

1.88

 

  

 

  

Forfeited and cancelled

 

(225,741)

$

13.42

 

  

 

  

Outstanding as of June 30, 2022

 

5,924,915

$

9.89

 

8.5

$

2,210

Vested and expected to vest as of June 30, 2022

 

5,924,915

$

9.89

 

8.5

$

2,210

Options exercisable as of June 30, 2022

 

1,923,836

$

10.45

 

7.8

$

1,470

The weighted-average grant-date fair value of stock options granted during the three months ended June 30, 2022 and 2021 was $2.46 per share and $9.31 per share, respectively. The weighted-average grant-date fair value of stock options outstanding during the six months ended June 30, 2022 and 2021 was $3.86 per share and $11.44 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

 

(7,551)

Unvested restricted common stock as of June 30, 2022

 

6,519

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 June 30, 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

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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 six months ended June 30, 2022. As of June 30, 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 six months ended June 30, 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 June 30, 2022

 

$

No restricted common stock vested during the three months ended June 30, 2022. The total fair value of restricted common stock vested during the six months ended June 30, 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

Six Months Ended

 

June 30, 

June 30, 

 

    

2022

    

2021

    

2022

    

2021

    

Research and development expenses

$

1,113

$

1,232

$

2,110

$

2,185

General and administrative expenses

 

1,646

 

1,224

 

3,275

 

2,271

$

2,759

$

2,456

$

5,385

$

4,456

As of June 30, 2022, there was $26.1 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.8 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

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Center Corporation to use, research, develop, manufacture, and commercialize licensed products. The Company is obligated to use commercially reasonable efforts to develop and commercialize the MEE licensed products, including filing an investigational new drug application (“IND”) in the United States or investigational medicinal product dossier (“IMPD”) in any country in the European Union or an equivalent application in any country within 18 months of completion of specified toxicology studies for a licensed product.

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

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

During the three and six months ended June 30, 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 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

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90 days’ advance written notice to Lonza or upon Lonza’s material breach of the Lonza Sublicense, provided that Lonza does not cure such material breach within a specified period. Lonza has the right to terminate the Lonza Sublicense in its entirety if (i) the Company fails to make any payment due within a specified period after Lonza notifies the Company of such failure, (ii) the Company or its affiliates challenge the validity of the sublicensed patent rights, (iii) the Company fails to maintain required insurance, or (iv) the Company becomes insolvent or bankrupt. Lonza also has the right to terminate the Company’s rights to specific intellectual property rights it has sublicensed to the Company under the Lonza Sublicense if the Company materially breaches certain diligence obligations and does not cure within a specified period after written notice from Lonza.

During the three and six months ended June 30, 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 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 commencement date of the expansion premises in April 2021 (the “Expansion Premises Commencement Date”). Between the Expansion Premises Commencement Date and June 30, 2022, the Company recorded increases of $3.7 million to the operating lease liability and to leasehold improvements as and when such leasehold improvements were paid for by the landlord.

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

(in thousands)

June 30, 2022

Operating lease cost

$

1,109

Variable lease cost

$

284

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

(in thousands)

 

June 30, 2022

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

$

807

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

June 30, 2022

December 31, 2021

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

Operating leases

9.50

 

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 June 30, 2022 were as follows (in thousands):

Years Ending December 31, 

    

Operating Leases

    

2022

$

(1,732)

2023

 

5,020

2024

 

5,611

2025

 

5,786

2026

 

5,959

Thereafter

 

34,419

Total future lease payments

 

55,063

Less: Imputed interest

 

(22,318)

Total lease liabilities