APPLIED GENETIC TECHNOLOGIES CORP - Quarter Report: 2021 September (Form 10-Q)

The Unaudited Condensed Financial Statements should be read in conjunction with the Company’s audited financial statements and related notes included in its Annual Report on for the year ended June 30, 2021 (the “2021 The Company’s significant accounting policies are described in Note 2 to the Notes to Financial Statements in the and are updated, as necessary, in subsequent Form filings.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Interest and penalties related to uncertain tax positions are reflected in the provision for income taxes.

In December 2019, the FASB issued . The new standard includes several provisions that simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and increasing consistency and clarity for the users of financial statements. The Company adopted the new standard on July 1, 2021; however, it did not have a significant impact on the Company’s financial statements.

The Company uses stock options, performance service awards, restricted stock awards and restricted stock units to provide long-term incentives to its employees, nonemployee directors and certain consultants. The Company has equity compensation plans under which awards are currently authorized for issuance: the 2013 Employee Stock Purchase Plan and the 2013 Equity and Incentive Plan. No awards have been issued to date under the 2013 Employee Stock Purchase Plan and, as such, all of the 128,571 shares previously authorized under that plan remain available for issuance.

Stock Options

Information about the Company’s stock options that do not have performance conditions is provided below.

		Three Months Ended September 30,
		2021								2020
(In thousands, except per share amounts)		Shares				Weighted Average Exercise Price				Shares				Weighted Average Exercise Price
Outstanding at the beginning of the period			4,186			$	7.69				3,846			$	7.82
Granted			1,467				3.62				1,016				5.34
Exercised			(24	)			3.00				(12	)			3.70
Forfeited			(234	)			4.27				(136	)			4.29
Expired			(348	)			12.93				(42	)			12.08
Outstanding at the end of the period			5,047			$	6.32				4,672			$	7.35
Exercisable at the end of the period			2,667								2,515
Weighted average fair value of options granted during the period		$	2.55							$	3.89

		Three Months Ended September 30,
Assumption		2021				2020
Dividend yield			0.00	%			0.00	%
Expected term			6.00 to 6.25 years				6.25 years
Risk-free interest rate			0.80% to 0.96 %				0.30% to 0.39%
Expected volatility			82.51	%			82.60	%

ctivity described above, the Company also granted

performance-based stock options to a senior officer during July 2019 with an exercise price of $

. That award: (i) was issued under the 2013 Equity and Incentive Plan; (ii) has a term of

; and (iii) includes six separate tranches with performance criteria that will each vest

% upon their achievement, with the remaining

% of the tranche vesting on a monthly basis over a period of

subsequent to achieving the underlying performance objective (assuming continued service by the awardee). Each tranche

represents one-sixth of

the total award. If any of the performance criteria are not satisfied, that corresponding tranche will be forfeited. As of September 30, 2021, one of the six performance criteria has been met and one criterion will likely never be met. The Company used a Black-Scholes stock option pricing model to estimate the grant date fair value of each option to be $

; however, determining the appropriate periodic

,

175,500 $

.

Prior to June 30, 2020, the market condition embedded in the award was met. On August 15, 2021 and

,

54,500

and

restricted stock units vested and the underlying shares were issued to the grantees. A total of

44,500

Cash in excess of immediate requirements is invested in accordance with the Company’s investment policy, which primarily seeks to maintain adequate liquidity and preserve capital. At June 30, 2021, the Company’s investments consisted of security that matured in July 2021 (the $2.0  no investments at September 30, 2021.

The Company is required to disclose information regarding all assets and liabilities reported at fair value that enables an assessment of the inputs used when determining the reported fair values. ASC Topic 820,, establishes a hierarchy of inputs used when available. Observable inputs are inputs that market participants would use when pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use when pricing an asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used when determining the reported fair value of financial instruments and is not a measure of an investment’s credit quality. The three levels of the fair value hierarchy are described below.

The carrying value of cash and cash equivalents approximates fair value because the maturities thereof are less than three months.

The following discussion of the Company’s debt should be read in conjunction with Note 8 to the Notes to Financial Statements in the

Under the agreement, AGTC made an initial $2.0 million payment for an equity interest of approximately 5% 15.54.02.2

During October 2019, the Company entered into a strategic collaboration agreement with Otonomy, Inc. (“Otonomy”) to adeno-associated virus-based gene therapy to restore hearing in patients with sensorineural hearing loss caused by a mutation in the gap junction protein beta 2 gene (“GJB2”) – the most common cause of congenital hearing loss. Mutations in GJB2 account for approximately30January 2020

As of September 30, 2021, the Company had entered into a long-term real property lease agreement that has not yet commenced and, therefore, is not recorded on its balance sheets. This lease, which is discussed in Note 3 to the Notes to Financial Statements in the 2021 under the heading Manufacturing and Quality Control Facility in Alachua, Florida,” requires undiscounted future base rent payments aggregating $26.8 million over twenty years (assuming that the Company does not elect the early termination option).

On January 30, 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus originating in risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the pandemic based on the rapid increase in exposure globally. National, state and local governments in affected regions have implemented, and are likely to continue to implement, safety precautions, including quarantines, border closures, increased border controls, travel restrictions, shelter in place orders and shutdowns, business closures, cancellations of public gatherings and other measures. Organizations and individuals are taking additional steps to avoid or reduce infection, including limiting travel and staying home from work.

Notwithstanding the rapid development and rollout of certain vaccines, it is unknown: (i) how continue before the virus, including newly identified strains and variants, is adequately contained; (ii) the severity of the virus; and (iii) the effectiveness of actions to prevent transmission and treat those who have extent to which the the Company’s financial condition, results of operations or cash flows is uncertain; however, as of the date of these financial statements, management is not aware of any specific event or circumstance that would require the Company to update its estimates or judgments, or adjust the carrying values of its assets or liabilities. Because future events are subject to change, management’s best estimates and judgments may require future modification. Therefore, actual results could differ materially from current estimates. Management is closely monitoring the evolving impact of the pandemic on all aspects of the Company’s business and periodically evaluates its estimates, which are adjusted prospectively based on such evaluations.

The following discussion and analysis provides an overview of our financial condition as of September 30, 2021 and our results of operations for the three months ended September 30, 2021 and 2020. This discussion should be read in conjunction with the Unaudited Condensed Financial Statements and related notes included in this Quarterly Report as well as our Annual Report on for the year ended June 30, 2021 (the “2021 In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, as well as those set forth in Part I, Item 1A, “Risk Factors,” of the 2021 Forward-looking statements include information concerning our possible or assumed future results of operations, including results and timing of our clinical trials and planned clinical trials, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition, as well as assumptions relating to the foregoing. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

We are a clinical-stage biotechnology company that uses a proprietary gene therapy platform to develop transformational genetic therapies for people suffering from rare and debilitating diseases. Our initial focus is in the field of ophthalmology, where we have active clinical (“XLRP”), achromatopsia (“ACHM”) and a partnered optogenetics program, as well as a preclinical program in dry (“dAMD”). In addition to ophthalmology, we have initiated one partnered preclinical program in otology and two preclinical programs targeting central nervous system disorders (“CNS”), including frontotemporal dementia (“FTD”) and amyotrophic lateral sclerosis (“ALS”). Our optogenetics program is being developed in collaboration with Bionic Sight, LLC (“Bionic Sight”) and our otology program is being developed in collaboration with Otonomy, Inc. (“Otonomy”). With a number of important clinical milestones on the horizon, we believe that we are well positioned to advance multiple programs toward pivotal studies. In addition to our product pipeline, we have also developed broad technological and manufacturing capabilities utilizing both our internal scientific resources and through collaborations with others.

Since our inception, we have devoted substantially all of our resources to development efforts relating programs in ophthalmology, otology and CNS, including manufacturing product in compliance with good manufacturing practices, preparing to conduct and conducting clinical trials of our product candidates, providing general and administrative support for these operations and protecting our intellectual property. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date primarily through public offerings of our common stock and warrants to purchase our common stock, private placements of our preferred stock, collateralized borrowing and collaborations. We have also been the recipient, either independently or with our collaborators, of grant funding administered through federal, state, and local governments and agencies, including the United States Food and Drug Administration, or FDA, and by patient advocacy groups such as The Foundation Fighting Blindness.

In November 2020, we announced a modification to the primary endpoint for our Vista and Phase 1/2 Expansion (“Skyline”) trials based on comments received from the FDA. The design of our Vista trial is expected to include approximately 60 patients randomized across three 1.2E+11 vg/mL Group 2 dose from the ongoing Phase 1/2 trial), a high-dose group (the 1.1E+12 vg/mL Group 5 dose from the ongoing Phase 1/2 trial) and an untreated control group. The primary endpoint will be visual sensitivity defined as having at least a 7 decibel improvement in visual sensitivity in at Month 12. Together with a third-party vendor, we have developed a machine learning algorithm that, the loci most likely to improve through evaluation of baseline visual sensitivity. The algorithm was developed using the available microperimetry data from the Phase 1/2 dose escalation study. Secondary endpoints include mean change in visual sensitivity, improvements in visual acuity and improvements in performance on a visual navigation course. We plan to include a masked interim analysis at Month 6, with that data expected to be released in the fourth quarter of calendar year 2022, which may provide us with the opportunity to discuss with the FDA adjustments to the trial, if necessary, to optimize outcomes.

In May 2021, we from our XLRP Phase 1/2 trial from seven patients in Group 5 and four patients in Group 6. One patient in Group 5 and two patients in Group 6 would not meet the inclusion criteria for the Skyline and Vista trials, resulting in a total of eight patients who were included in the responder analysis. Four of these eight patients (50%) were considered responders, all four of whom met the strict criteria of at least a 7 decibel improvement in at least 5 loci. One additional patient did not meet these criteria but had a statistically significant improvement in retinal sensitivity in the treated eye compared with the untreated eye at 12 months. In Group 4, two of six patients that meet the inclusion criteria for Skyline and Vista trials were considered responders that met the strict criteria and an additional two patients did not meet these criteria but had a statistically significant improvement in retinal sensitivity in the treated eye compared to the untreated eye at 12 months.

Consistent with previously from Groups 2, 4, 5 and 6, the assessment of Best Corrected Visual Acuity (“BCVA”) in these groups at 12 months continues to provide supportive evidence of improved visual acuity in these patients and the difference between treated and untreated eyes is statistically significant. We believe that these data, together with the favorable safety profile, have the potential to differentiate our XLRP candidate from competitors.

We believe that we have a potential product candidate that may provide significant benefits to patients with XLRP and we expect to:

As part of the Skyline trial, we intend to dose a total of 12 additional patients across two dose groups. In addition to providing supplementary data on the primary endpoint of visual the Skyline trial is intended to evaluate the correlation of this perimetry data with a new mobility navigation course developed for use with retinitis pigmentosa patients. This trial will have the same overall design as the Vista trial.

In June 2021, we from 1/2 ACHM clinical trials showing biological activity in patients with mutations in the ACHMB3 gene. In July 2021, we hosted a virtual Research Day that provided an expanded analysis of from our ongoing Phase 1/2 clinical trials in ACHM, including a discussion on light sensitivity and ACHM genetics. These data indicated biologic activity in the dose escalation portions in both the ACHMB3 and ACHMA3 trials. The response was more robust in the ACHMB3 patients than the ACHMA3 patients and, therefore, we plan to move forward with planning for late-stage development of the ACHMB3 product candidate.

We recently enrolled six pediatric ACHMB3 patients and five pediatric ACHMA3 patients in higher dose groups 5a and 6a. Three serious adverse events (SAEs) of significant inflammation that are considered a Suspected Unexpected Serious Adverse Reaction, or SUSAR, occurred in pediatric patients at the highest trial dose concentration (3.2e12 vg/mL); two patients are in the ACHMA3 trial, the other is in the ACHMB3 trial. An additional ACHMB3 pediatric patient at this dose also presented with significant inflammation during approximately the same post-operative time frame but has not required a subsequent procedure. To address the above safety events in pediatric patients, increased systemic and local steroid doses have been administered, patients are being monitored closely and the investigators are now tapering these patients to lower doses of steroids. As of their most recent visits, all patients are improving. No comparable inflammation has been seen in the six pediatric patients across both trials at dose group 5a, nor in any of the adult patients or lowest group 4 pediatric patients on which we previously reported. These new data do not change our plans to continue development of the ACHM product candidates and, as a result, we plan to for high dose pediatric patients, both ACHMB3 and ACHMA3, in the fourth quarter of calendar year 2021. We are currently postponing enrollment of the last pediatric patient in the ACHMA3 trial pending review of longer-term data for the high dose pediatric patients.

In May 2021, we signed for square foot current Good Manufacturing Practices (“cGMP”) manufacturing and quality control facility adjacent to our existing Florida facility to prepare for late-stage development of our XLRP and ACHM programs. Leasing this cGMP facility is part of our strategy to enable more rapid filing of a Biologics Licensing Application and commercial launch of our XLRP candidate upon potential FDA approval. The cGMP facility is also expected to support more rapid advancement of our product pipeline while providing supply chain redundancy, reducing manufacturing risk and enhancing quality controls. We anticipate that the new manufacturing and quality control facility will be completed during the second half of calendar year 2022.

Additional information regarding our new cGMP manufacturing and quality control facility can be found in Note 3 to the Notes to Financial Statements in the under the Quality Control Facility in Alachua, Florida.”

During October 2019, we entered into a strategic collaboration agreement with Otonomy adeno-associated virus-based gene therapy to restore hearing in patients with sensorineural hearing loss caused by a mutation in the gap junction protein beta 2 gene (“GJB2”) – the most common cause of congenital hearing loss. Mutations in GJB2 account for approximately 30% of all genetic hearing loss cases. Patients with this mutation both ears that is identified in screening tests routinely performed in newborns. Under the collaboration agreement, the parties began equally sharing the program costs and proceeds in January 2020 and can include additional genetic hearing loss targets in the future. We and Otonomy announced promising preclinical data at the American Society of Gene and Cell Therapy meeting in May 2021, demonstrating the rescue of hearing loss and cochlear morphology in two independent mouse models. Collectively, we are conducting IND (investigational new drug)-enabling activities based feedback from the FDA, with an IND filing anticipated in the first half of calendar year 2023.

Additional information regarding the Bionic Sight and Otonomy collaborative agreements can be found in Note 6 to the Unaudited Condensed Financial Statements included in this Quarterly Report

Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Article 8 of preparation of those financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, judgments and methodologies, including those related to accrued expenses and share-based compensation. We base our estimates on historical experience, current conditions, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions. Moreover, we may need to change the assumptions underlying our estimates due to risks and uncertainties related to or otherwise and those changes could have a material adverse effect on our statements of operations, financial condition and cash flows.

During the three months ended September 30, 2021, there were no significant changes to our critical accounting policies and estimates. For a description of our accounting policies that, in our opinion, involve the most significant application of judgment or involve complex estimations and which could, if different judgments or estimates were made, materially affect our reported results of operations, financial position and cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in the

Refer to Note 2 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form for further information about recently issued accounting standards.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in or execution of any of our clinical trials, which could be adversely impacted could be required to expend significant additional financial resources and time on the completion of clinical trial activities and development of our product candidates.

Investment income, net consists of interest earned on cash and cash debt securities. During the three months ended September 30, 2021, investment income, net declined by $58,000 when compared to the prior year, primarily due to a smaller investment portfolio in the current period.

Interest expense during the three months ended September 30, 2021 and 2020 was $0.7 million and $0.3 million, respectively. The increase was primarily due to a higher average outstanding balance under our collateralized term loan agreement in the current period. Additional information regarding our long-term loan agreement can be found in Note 5 to the Unaudited Condensed Financial Statements included in this Quarterly Report

Such increases were partially offset by (i) a $0.8 million decrease in external spending for our ACHM clinical trials and (ii) a $0.2 million decrease in other internal research and development expenses, which was primarily due to lower costs for temporary staffing and consultants and laboratory supply costs based on the timing of our needs. The decrease in ACHM expenses was primarily due to reduced site activity as our two clinical studies have progressed to a point where they are no longer processing new site activations. Additionally, there was a decrease in research and development expenses in connection with the wind-down program.

Most recently, we received (i) $9.9 million of loan proceeds, net of debt discounts, in May 2021 and (ii) net proceeds of $69.3 million in February 2021 from the underwritten public offering that is described in Note 7 to the Unaudited Condensed Financial Statements included in this Quarterly Report Among other things, the May 2021 loan proceeds are expected to partially fund certain equipment and shared building fit out costs, as well as new employee hires, in connection with our lease and operation of a new and quality control facility in Alachua, Florida. Importantly, through a tenant improvement allowance and tiered rental rates, we have structured our third-party leasing costs for this facility in a way that will not significantly impact our cash runway until the fiscal year ending June 30, 2024. Additional information regarding the new manufacturing and quality control facility and our long-term loan agreement can be found in Notes 3 and 8, respectively, to our financial statements in the

We are closely monitoring ongoing developments in connection with which may negatively impact our projected cash position and access to capital. We will continue to assess our cash position and, if circumstances warrant, make appropriate adjustments to our operating plan.

For both the three months ended September 30, 2021 and 2020, cash used in operating activities was primarily the result of research and development expenses and general and administrative and other expenses incurred in conducting normal business operations. Specifically, the cash used in operating activities of $15.9 million during the three months ended September 30, 2021 was due to a net loss of $17.1 million and unfavorable changes in our operating assets and liabilities of $0.3 million, partially offset in our statement of operations of $1.5 million. The cash used in operating activities of $12.9 million during the three months ended September 30, 2020 was due to a net loss of $15.4 million, partially our statement of operations of $1.2 million and favorable changes in our operating assets and liabilities of $1.2 million.

Cash provided by investing activities of $1.4 million during the three months ended September 30, 2021 consisted primarily of cash proceeds of $2.0 million from maturities of investments, partially offset by purchases of property and equipment of $0.5 million and intellectual property costs of $0.1 million. Cash provided by investing activities of $6.2 million during the three months ended September 30, 2020 consisted primarily of cash proceeds of $16.0 million from maturities of investments, net of investment purchases of $9.0 million, partially offset by purchases of property and equipment of $0.7 million and intellectual property costs of $0.1 million.

The nominal cash provided by financing activities during the three months ended September 30, 2021 consisted of proceeds from exercises of common stock options, partially offset by (i) payments for taxes related to equity awards and (ii) principal payments on a finance lease. Cash used in financing activities of $0.2 million during the three months ended September 30, 2020 consisted of (i) payments for deferred financing fees and taxes related to equity awards and (ii) principal payments on a finance lease, partially offset by proceeds from exercises of common stock options.

We are a smaller reporting company, as defined by the Securities Exchange Act of 1934, as amended, and are not required to provide this information.

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in and under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures were effective as of September 30, 2021.

There were no changes in our internal control over financial reporting (as defined in the Securities Exchange Act of 1934, as amended) during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Refer to Part I, Item 1A, “Risk Factors,” of our Annual Report on the year ended June 30, 2021 for information regarding our risk factors. There have been no material changes in our risk factors since June 30, 2021.

APPLIED GENETIC TECHNOLOGIES CORPORATION (Registrant)
By:		/s/ Jonathan I. Lieber
		Jonathan I. Lieber, Chief Financial Officer
		Date: November 9, 2021