APPLIED GENETIC TECHNOLOGIES CORP - Quarter Report: 2022 September (Form 10-Q)

APPLIED GENETIC TECHNOLOGIES CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2022

TABLE OF CONTENTS

Notwithstanding the development and rollout of certain vaccines, it is unknown: (i) how long the COVID-19 outbreak will 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 contracted COVID-19. The extent to which the COVID-19 outbreak may impact 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.

Legal Matters

From time to time, the Company may be involved in claims and legal actions that arise in the normal course of business. Management has no reason to believe that the outcome of any such legal actions would have a significant adverse effect on the Company’s financial position, results of operations or cash flows.

Subsequent to September 30, 2022, five complaints have been filed in federal court by purported stockholders of the Company regarding the proposed merger that is described in Note 9 to these Notes to Unaudited Condensed Financial Statements. The complaints generally allege that the Solicitation/Recommendation Statement on Schedule 14D-9, filed by the Company with the Securities and Exchange Commission on October 26, 2022 in connection with the proposed merger (the “Schedule 14D-9”), contains omissions and misrepresentations that render it materially deficient and misleading. On November 2, 2022, Pavanello Simona filed a complaint against the Company and its board of directors in the United States District Court in the Southern District of New York, captioned Pavanello Simona v. Applied Genetic Technologies Corporation, et al., Case No. 1:22-cv-09402; on November 8, 2022, Eric Sabatini filed a complaint against the Company and its board of directors in the United States District Court in the Southern District of New York, captioned Eric Sabatini v. Applied Genetic Technologies Corporation, et al., Case No. 1:22-cv-09529; on November 8, 2022, Patrick Plumley filed a complaint against the Company and its board of directors in the United States District Court in the District of Delaware, captioned Patrick Plumley v. Applied Genetic Technologies Corporation, et al., Case No. 1:22-cv-01470-UNA; on November 10, 2022, Sholom Keller filed a complaint against the Company and its board of directors in the United States District Court in the Southern District of New York, captioned Sholom Keller v. Applied Genetic Technologies Corporation, et al., Case No. 1:22-cv-09615; and on November 14, 2022, Rauf Osman filed a complaint against the Company and its board of directors in the United States District Court in the Southern District of New York, captioned Rauf Osman v. Applied Genetic Technologies Corporation, et al., Case No. 1:22-cv-09707.

Specifically, the five complaints filed in the above-referenced actions allege, among other things, that the Company and its board of directors violated Sections 14(d), 14(e) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 14d-9 promulgated thereunder. As relief, the complaints seek, among other things, (i) to enjoin the Company from consummating the merger, (ii) to enjoin the Company from filing an amendment to the Schedule 14D-9 unless certain information, as requested in the complaints, is included in such amendment, (iii) in the event the merger is consummated, to rescind it, or award rescissory damages, (iv) to declare that the Company and its board of directors violated Sections 14(a) and/or 20(a) of the Exchange Act, (v) an award of costs and expenses related to the actions, and (vi) other relief as the courts may deem just and proper. The Company and its board of directors believe that the complaints lack merit.

As of November 21, 2022, the Company has also received six stockholder demand letters, which generally seek to include certain alleged omitted information in the Schedule 14D-9. The Company believes that the allegations and claims asserted in the demand letters are without merit.

Management intends to vigorously defend the Company against the allegations in these litigation and demand letter matters. However, due to uncertainties inherent in litigation, management can provide no assurances as to the final outcome thereof, and additional lawsuits arising out of or relating to the proposed merger, the tender offer that is described in Note 9 to these Notes to Unaudited Condensed Financial Statements, or the Schedule 14D-9, may be filed in the future. Should an unfavorable outcome occur in some or all of these matters, there could be an adverse effect on the Company’s operating results, financial position and cash flows.

Plan of Merger

On October 23, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Alliance Holdco Limited, a private limited company organized under the laws of England and Wales (the “Parent”), and Alliance Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Parent (the “Purchaser”). The Merger Agreement provides for the acquisition of the Company by the Parent through a tender offer (the “Offer”) by the Purchaser for all of the Company’s outstanding shares of common stock (“Common Stock”) for: (1) $0.34 per share of Common Stock (the “Cash Consideration”); and (2) one contingent value right (each a “CVR”) per share of Common Stock representing the right to receive potential milestone payments pursuant to and subject to the terms of the CVR Agreement (as defined below) (the Cash Consideration plus one CVR, collectively, as such amount may be increased in accordance with the terms of the Merger Agreement, the “Offer Price”).

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The Company’s board of directors unanimously approved the Merger (as defined below) and the Merger Agreement and recommended that the Company’s stockholders accept the Offer and tender their shares of Common Stock pursuant to the Offer. Under the Merger Agreement, the Purchaser commenced the Offer on October 26, 2022. The Offer will expire at 5:00 p.m. Eastern Time on November 28, 2022, unless otherwise agreed to in writing by the Parent and the Company, or extended under certain circumstances as described in the Merger Agreement.

Pursuant to the terms of the Merger Agreement, as of the effective time of the Merger (the “Effective Time”), by virtue of the Merger and without any action on the part of the holders: (i) each issued and outstanding share of Common Stock, other than any shares owned by the Parent, the Purchaser or the Company, or owned by a stockholder who has properly exercised and perfected such stockholder’s demands for appraisal in accordance with Delaware law, will be converted into the right to receive the Offer Price, without interest; (ii) each option to purchase shares of Common Stock from the Company (“Company Options”) with a per share exercise price that is less than the Cash Consideration, whether vested or unvested, will, automatically and without any required action on the part of the holder thereof, be cancelled and converted into only the right to receive (without interest and subject to applicable withholding), as soon as reasonably practicable following the Effective Time, (I) an amount in cash equal to the product of (1) the excess of (A) the Cash Consideration over (B) the exercise price per share of such Company Option and (2) the number of shares of Common Stock underlying such Company Option and (II) one CVR for each share of Common Stock subject to such Company Option, in accordance with and subject to the CVR Agreement and will be of no further force and effect; and (iii) each outstanding and unvested restricted stock unit (“Company RSU”) will, automatically and without any required action on the part of the holder thereof, vest in full and be cancelled and will entitle the holder of such Company RSU to receive (without interest and subject to applicable withholding) as soon as reasonably practicable following the Effective Time, (I) an amount in cash equal to (x) the number of shares of Common Stock subject to such Company RSU immediately prior to the Effective Time multiplied by (y) the Cash Consideration and (II) one CVR for each share of Common Stock subject to such Company RSU in accordance with and subject to the CVR Agreement. Each Company Option that has a per share exercise price that is equal to or exceeds the Cash Consideration shall be cancelled and terminated without any payment or delivery being made in respect thereof (whether in the form of cash or a CVR) and the holder of any such Company Option shall have no further rights with respect thereto.

Under the Merger Agreement, prior to the Effective Time, the Company shall satisfy all of its notification requirements under the terms of each outstanding and unexercised warrant to purchase shares of Common Stock (the “Company Warrants”). The Company Warrants shall each be treated in accordance with their respective terms.

The Purchaser’s obligation to accept shares of Common Stock tendered in the Offer is subject to certain closing conditions, including: (a) that the number of shares of Common Stock validly tendered (and not validly withdrawn) equals at least one share more than 50% of the total number of all shares of Common Stock then outstanding (treating as outstanding the shares of Common Stock underlying the outstanding Company RSUs) plus the aggregate number of shares of Common Stock issuable to holders of Company Options and Company Warrants from which the Company has received notices of exercise prior to expiration of the Offer; (b) the absence of any injunction or legal restraint that has the effect of prohibiting the consummation of the Offer or the Merger or making the Offer or the Merger illegal or prohibiting or making illegal the acquisition of or payment for shares of Common Stock pursuant to the Offer or the consummation of the Merger; (c) that, since the date of the Merger Agreement, there shall not have occurred any Company Material Adverse Effect (as defined in the Merger Agreement); (d) compliance by the Company with its obligations, covenants and agreements under the Merger Agreement; (e) the accuracy of representations and warranties made by the Company in the Merger Agreement; (f) the absence of any pending legal proceeding in which a governmental body is a party challenging the Offer or the Merger; (g) that the aggregate liability of the Company for the Black-Scholes Value (as defined in the warrants issued by the Company in July 2022) potentially payable to holders of the Company Warrants issued in July 2022 shall not exceed $9.5 million as of the time the Offer expires and (h) other customary conditions. The obligations of the Parent and the Purchaser to consummate the Offer and the Merger under the Merger Agreement are not subject to a financing condition.

Following the completion of the Offer, subject to the absence of injunctions or other legal restraints preventing the consummation of the Merger, the Purchaser will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of the Parent, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law, without any additional stockholder approvals (the “Merger”). The Merger will be effected as soon as practicable following the time of purchase by the Purchaser of shares of Common Stock validly tendered and not withdrawn in the Offer. As a result of the consummation of the Merger, the Company will cease to be a publicly traded company.

The Merger Agreement contains customary representations and warranties from both the Company, on the one hand, and the Parent and the Purchaser, on the other hand. It also contains customary covenants, including covenants providing for the Company to: (i) use commercially reasonable efforts to cause the Company to conduct its business and operations in the ordinary course and in accordance

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in all material respects with past practice and all applicable legal requirements; (ii) not to solicit proposals or, subject to certain exceptions, engage in discussions relating to alternative acquisition proposals or change the recommendation of the board of directors to the Company’s stockholders regarding the Merger Agreement; and (iii) use commercially reasonable efforts to preserve intact the material components of its current business organization, keep available the services of its officers and employees and maintain its relations and goodwill with all governmental bodies, suppliers, vendors, licensors, licensees, manufacturers, collaboration partners and other business partners with which it has material business dealings.

The Merger Agreement contains customary termination rights for both the Parent and the Purchaser, on the one hand, and the Company, on the other hand, including, among others, for failure to consummate the Offer on or before February 28, 2023. If the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement (including under specified circumstances in connection with the Company’s entry into an agreement with respect to a superior offer), the Company will be required to pay the Parent a termination fee of $1.5 million.

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which has been filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K that was filed with the Securities and Exchange Commission on October 24, 2022.

Contingent Value Rights Agreement

At or prior to the Acceptance Time (as defined in the Merger Agreement), the Parent will enter into a Contingent Value Rights Agreement (the “CVR Agreement”) with a duly qualified rights agent acceptable to both the Parent and the Company (the “Rights Agent”). The CVRs represent the right to receive contingent payments, payable to the Rights Agent for the benefit of the holders of CVRs, of up to $50.0 million in the aggregate, payable in cash, without interest and less any applicable withholding taxes, and allocated among the outstanding CVRs, if the following milestones are achieved:

The right to the contingent consideration as evidenced by the CVR Agreement is a contractual right only and will not be transferable, except in the limited circumstances specified in the CVR Agreement.

The foregoing description of the CVR Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the CVR Agreement, which has been filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K that was filed with the Securities and Exchange Commission on October 24, 2022.

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The following discussion and analysis provide an overview of our financial condition as of September 30, 2022 and our results of operations for the three months ended September 30, 2022 and 2021. This discussion should be read in conjunction with the Unaudited Condensed Financial Statements and related notes included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended June 30, 2022 (the “2022 Form 10-K”). 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 under the heading “Risk Factors” in Part II, Item 1A, and elsewhere in this report, as well as those set forth in Part I, Item 1A, “Risk Factors,” of the 2022 Form 10-K. 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,” “likely,” “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.

As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” “AGTC” or the “Company” refer to Applied Genetic Technologies Corporation.

Overview

We are a clinical-stage biotechnology company that uses our proprietary gene therapy platform technology 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 wholly owned clinical-stage programs in X-linked retinitis pigmentosa (“XLRP”) and achromatopsia (“ACHM”), and an optogenetics program through our collaboration with Bionic Sight, Inc. (previously Bionic Sight, LLC) (“Bionic Sight”). Our preclinical pipeline includes a program in dry age-related macular degeneration (“dAMD”), two programs targeting central nervous system (“CNS”) disorders, including frontotemporal dementia (“FTD”) and amyotrophic lateral sclerosis (“ALS”), and a program in otology through our collaboration with Otonomy, Inc. (“Otonomy”). In May 2022, we released interim, masked, clinical data from the Skyline trial (as defined below) in our XLRP program and we now have 24-month data from the XLRP Phase 1/2 trial (“Horizon”). In addition to our product pipeline, we have also developed broad technological and manufacturing capabilities, utilizing our internal scientific resources and collaborating with others.

On October 23, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Alliance Holdco Limited, a private limited company organized under the laws of England and Wales (the “Parent”), and Alliance Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Parent (the “Purchaser”). The Merger Agreement provides for the acquisition of us by the Parent through a tender offer by the Purchaser for all of our outstanding shares of common stock (“Common Stock”) for (1) $0.34 per share of Common Stock (the “Cash Consideration”), without interest and less any applicable withholding taxes, and (2) one contingent value right (each a “CVR”) per share of Common Stock representing the right to receive potential milestone payments. Additional information about the pending merger can be found in Note 9 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q.

Since our inception, we have devoted substantially all of our resources to the development of our clinical and preclinical programs in ophthalmology, otology and CNS, including manufacturing product candidates 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. To date, we have funded our operations 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 and by patient advocacy groups such as The Foundation Fighting Blindness.

We have incurred losses from operations in each year since inception, except for fiscal year 2017, wherein we reported net income of $0.4 million due, in part, to profits from a collaboration agreement that was ultimately terminated in March 2019. For the three months ended September 30, 2022 and 2021, we reported net losses of $18.4 million and $17.1 million, respectively. Substantially all our net losses resulted from costs incurred in connection with our research and development programs and general and administrative and other expenses associated with our operations.

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As of September 30, 2022, we had cash and cash equivalents totaling $34.2 million. We do not expect to generate revenue from product sales unless and until we successfully complete development of and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and which we believe is subject to significant uncertainty. We believe that our available cash and cash equivalents will be sufficient to allow us to generate data from our ongoing and planned clinical programs and fund currently planned research and discovery programs through calendar year 2022. We will require substantial additional funding to continue our XLRP Phase 2/3 (“Vista”) trial, move our ACHMB3 product candidate forward, obtain regulatory approval for our lead product candidates, build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our lead product candidates, if approved, and execute our plan to open and operate a leased current Good Manufacturing Practices (“cGMP”) manufacturing and quality control facility.

Given our limited cash resources and the current business and financing environment, we do not believe that we have sufficient funds to allow us to generate additional clinical data from AGTC-501, our product candidate in development for the potential treatment of XLRP, with sufficient time to subsequently seek a suitable collaboration or financing arrangement. As a result, we entered into the Merger Agreement that is described above and in Note 9 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q. If the transaction contemplated by the Merger Agreement is unsuccessful, we will likely need to pursue an orderly wind down of the Company through bankruptcy proceedings.

Program Updates and Recent Developments

AGTC-501 for the Treatment of XLRP

AGTC-501, our lead gene therapy development program for the treatment of XLRP, is designed to use an engineered adeno-associated virus (“AAV”) vector to insert a stabilized and functional copy of the Retinitis Pigmentosa GTPase Regulator (“RPGR”) gene into a patient’s photoreceptor cells. AGTC-501 is comprised of a stabilized RPGR gene and a promoter that was specifically selected to drive efficient gene expression in primate rods and cones, maintain photoreceptor function and delay disease progression in preclinical models of disease. In addition, published non-human primate studies showed that our proprietary AAV capsid had as much as twice the transfection efficiency in photoreceptors when compared to capsids used in competing programs.

We are currently conducting multiple clinical trials of AGTC-501 that are intended to support the potential submission of a Biologics License Application (“BLA”), including a Phase 1/2 trial, Horizon, which incorporates an expansion portion that we refer to as the Skyline trial. The 24-month data from our Horizon trial show AGTC-501 continues to demonstrate a favorable safety profile and is well tolerated by patients. No serious adverse events related to AGTC-501 have been reported through month 24. In addition to safety, Horizon is evaluating biologic activity by assessing changes in several measures of visual function. There were clinically meaningful improvements in visual sensitivity, as measured by microperimetry, that continued through 24 months after treatment in centrally treated patients. Specifically, a clinically significant treatment effect in visual sensitivity was seen and sustained 24 months after treatment when comparing treated eyes to fellow untreated eyes in this trial and improvements in visual sensitivity continue to correlate with improvements in retinal structure 24 months after treatment. In addition, improvements in best corrected visual acuity seen 12 months after treatment continue to show evidence of a biological response 24 months after treatment. Collectively, these clinical data are encouraging and continue to inform our clinical development in patients with XLRP.

The Skyline trial is a 14 patient multi-site, Phase 2 trial in which patients are randomized to either a high dose of AGTC-501 (the dose received by patients in Group 5 of Horizon), or a low dose of AGTC-501 (the dose received by patients in Group 2 of Horizon). The primary endpoint in the Skyline trial is the proportion of treated eyes with an improvement of 7 decibels (“dB”) or greater in visual sensitivity from baseline in at least 5 loci at 12 months as measured by microperimetry. Secondary endpoints include the proportion of treated eyes with improvements in best corrected visual acuity at twelve months, a patient’s ability to navigate a mobility maze more successfully under varying light and challenge conditions at 12 months, and improvements in retinal structure at twelve months. The Skyline trial is masked in that we, the patients and the sites do not know which patient is in which dose group or which dose group received the high or low dose. Accordingly, we refer to the two groups as Dose Group A and Dose Group B. We completed enrollment in the Skyline trial in the first quarter of calendar year 2022 and reported 3-month interim results for 13 of the 14 enrolled patients in May 2022. Safety, visual sensitivity, visual acuity and the mobility maze were the only endpoints evaluated at 3 months. Retinal structure improvements, another important endpoint, was not evaluated as changes in retinal structure are not expected until between 9 and 12 months.

Similar to safety results reported for Horizon, safety results to date for the Skyline trial support that AGTC-501 is generally well tolerated and there are no clinically significant safety concerns. There were non-serious ocular adverse events (grade 2) related to the study agent that were similar between the two dose groups and two ocular serious adverse events, including an increase in intraocular pressure determined to be related to corticosteroids which has resolved, and one of visual impairment deemed related to the surgical procedure which is resolving.

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Demographic and baseline characteristics were well balanced between the two dose groups in the Skyline trial. Notably, compared to Horizon, patients in the Skyline trial were younger, with better baseline visual sensitivity and visual acuity.

Improvements in visual sensitivity, the primary efficacy endpoint in the Skyline trial, were observed in both dose groups at three months. We define responders as patients who have at least 5 loci increase by at least 7 dB. The response rate in Dose Group A was 25% (1 of 4 patients, as one patient in this group was unevaluable) and in Dose Group B was 62.5% (5 of 8 patients), representing a clear difference between the two groups. Notably, while we did not observe an increase in visual sensitivity of at least 7 dB in 5 pre-specified loci as required based on feedback from the United States Food and Drug Administration, or FDA, we did observe an increase in visual sensitivity of at least 7 dB in 9 to 17 loci in the treated area. These responders also had improvements in mean visual sensitivity across the treated region versus the untreated eye per the repeatability coefficient.

The 13 patients in the Skyline trial had better baseline best corrected visual acuity, a mean of 66.9 ETDRS letters on an eye chart, which correlates to a Snellen visual acuity equivalent of approximately 20/40. Because these patients started with better visual acuity, we believe that there was less ability for them to improve relative to patients in the Horizon trial.

In addition, there was a correlation between visual sensitivity improvements and trends for patients able to complete the maze more rapidly and with fewer errors. We are working with the maze vendor on potential adjustments to account for the fact that only one eye was treated in this analysis, whereas previous use of the maze has been for patients treated in both eyes. It is possible that the better visual acuity of the patients in the Skyline trial at baseline affected the interpretation of the maze results. The Skyline trial has a similar design and endpoints to the Vista clinical trial.

The Vista trial is a multi-site, Phase 2/3 clinical trial expected to include approximately 60 patients randomized across three arms: a low-dose group (the 1.2E+11 vg/mL dose from the ongoing Horizon and Skyline trials), a high-dose group (the 1.1E+12 vg/mL dose from the ongoing Horizon and Skyline trials) and an untreated control group. The primary endpoint will be improvement in visual sensitivity, defined as having at least a 7 dB increase in visual sensitivity in at least 5 pre-specified loci at Month 12. Together with a third-party vendor, we have developed a machine learning algorithm based on the available microperimetry data from our Horizon and Skyline trials that, on a patient-by-patient basis, predicts the loci most likely to improve through evaluation of baseline visual sensitivity. Secondary efficacy endpoints in the Vista trial include mean change in visual sensitivity, improvements in visual acuity and performance on the mobility maze as well as structural improvements in retinal health as measured by changes in the ellipsoid zone (the “EZ”), a defined region within the photoreceptor layer of the retina that degenerates over time and is eventually lost in patients with XLRP.

To date, we have released a significant amount of preclinical and clinical data including improvements in visual sensitivity and visual acuity, as well as improvements in retinal health that we believe support both the potential safety and biological activity of AGTC-501. These data include the recent release of the interim data from the ongoing Horizon and Skyline trials. Data from the ongoing Horizon trial show improvements in visual sensitivity as measured by Macular Integrity Assessment (“MAIA”) and continue to correlate with improvements in retinal structure as measured by EZ up to 24 months after treatment. There was moderate correlation 12 months after treatment and substantial correlation 24 months after treatment.

Given the efficacy and safety data generated to date, we believe that AGTC-501 is a potential best-in-class product candidate that may provide significant benefits to patients with XLRP, if approved.

AGTC-401 and AGTC-402 for the Treatment of ACHM

We have been developing two gene therapy product candidates for the treatment of ACHM. The product candidates are designed to use the same engineered AAV vector to insert a stabilized and functional copy of the Cyclic Nucleotide Gated Channel Subunit Beta 3 (CNGB3) gene in the case of AGTC-401 and a stabilized and functional copy of the Cyclic Nucleotide Gated Channel Subunit Alpha 3 (CNGA3) gene in the case of AGTC-402. The product candidates are designed to use the same proprietary cone-specific promoter that was designed to maximize gene expression into a patient’s photoreceptor cells. We chose the promoter based on data from preclinical studies that showed the promoter drove efficient gene expression in all three types of primate cone photoreceptors and restored cone photoreceptor function in dog, mouse and sheep models of ACHM.

We are currently conducting a Phase 1/2 clinical trial of AGTC-401 in ACHM patients with mutations of the CNGB3 gene (ACHMB3) and a separate Phase 1/2 clinical trial of AGTC-402 in ACHM patients with mutations of the CNGA3 gene (ACHMA3). Each Phase 1/2 clinical trial is being conducted at multiple clinical sites that specialize in inherited retinal diseases. The primary objective of these trials is to identify a well-tolerated dose that provides clinical benefit to patients. To date, we have enrolled a total of 31 adult and pediatric patients into the ACHMB3 trial of AGTC-401 and 24 adult and pediatric patients in the ACHMA3 trial of

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AGTC-402 and do not currently plan to enroll any additional patients in either trial. We have data from a portion of the patients in these trials up to 24 months after treatment, including our most recent release in February 2022 of 3-month data for the two highest dose groups of ACHMB3 and ACHMA3 pediatric patients that also included updated adult safety data. These data are consistent with the data previously released in adult and pediatric ACHMB3 and ACHMA3 patients.

In the Phase 1/2 dose escalation study of AGTC-401 in ACHMB3 patients, a total of 21 adults were treated over an approximately 80-fold dose range in five groups and a total of 10 pediatric patients were treated at the three highest dose groups. Secondary outcome measures evaluating efficacy were assessed by standard visual function tests, such as perimetry. We defined two pediatric patients (17 and 7 years old) in the 1.1E+12 vg/mL dose group as responders based on improvements in visual sensitivity as measured by the Octopus static perimeter. Therefore, of the three adults and four children (total n=7) in the 1.1E+12 vg/mL dose group, four (>50%) were responders based on improvements in visual sensitivity. These patients also reported improvements in quality of life as measured by a patient reported outcome survey developed specifically for patients with ACHM.

The two other pediatric patients in the 1.1E+12 vg/mL dose group and three pediatric patients ages 7 years and younger in the 3.2E+12 vg/mL dose group (total n=5) could not sufficiently concentrate and consistently complete the visual sensitivity testing. Similar to other trials where endpoints are adapted for young children, we plan to work closely with clinicians and regulators to develop potential adaptations for younger patients for visual sensitivity testing. Despite their inability to complete the tests, we received anecdotal feedback from certain patients that indicate improvements in visual sensitivity. Based on the totality of data generated to date, we believe that the 1.1E+12 vg/mL dose has been well tolerated and has potential in both adult and pediatric patients.

We also reported updated interim 3-month pediatric data and adult and pediatric safety data for the 24 patients enrolled in the Phase 1/2 study of AGTC-402 targeting CNGA3 mutations in patients with ACHMA3. Data from the five pediatric patients in the two highest dose groups were consistent with previously reported results, indicating no evidence of clinical improvements, and do not support further clinical development. Most patients with CNGA3 mutations express a mutant protein that is not typically found in patients with CNGB3 mutations, which we believe may have impacted the results seen in patients that received AGTC-402. We will continue to follow the ACHMA3 patients for long-term safety observations.

As previously reported, in both the ACHMB3 and ACHMA3 trials, treatment with the highest dose (3.2 E+12vg/ml) of AGTC-401 and AGTC-402, respectively, led to three cases of severe ocular inflammation in pediatric patients, which were reported as Suspected Unexpected Serious Adverse Reactions, or SUSARs. No new additional SUSARs in any adult or pediatric patients have been reported and the inflammation in all previously reported SUSARs improved with an adjusted steroid regimen. Two SUSARs (ACHMA3) have since fully resolved and one (ACHMB3) continues to improve, with all three patients’ best corrected visual acuity returning to baseline after initial declines in visual acuity were observed following the SUSARs. Importantly, we have not yet observed any comparable inflammation in any of our XLRP clinical trials.

We had a collaborative and productive End of Phase 2 (“EOP2”) meeting with the FDA to discuss the potential future development of AGTC-401 and received constructive feedback from the FDA on our proposed primary and secondary endpoints for a Phase 2/3 clinical trial. With respect to the primary endpoint of improvement in visual sensitivity relative to baseline, the FDA reiterated that a 7 dB change in at least 5 pre-specified loci is required. However, they indicated a willingness to review an alternative approach to perimetry from a model used in other trials, which would need to be adapted specifically for ACHMB3. The FDA also indicated that improvements in light discomfort may be an acceptable secondary endpoint in a Phase 2/3 clinical trial of AGTC-401. We are currently working through the details of the future development plan for AGTC-401, but we have paused development activities due to funding constraints.

Build-To-Suit Manufacturing and Quality Control Facility in Alachua, Florida

In May 2021, we signed a 20-year lease (subsequently modified to 20 years and one month) for a build-to-suit 21,250 square foot potential cGMP manufacturing and quality control facility adjacent to our existing Florida facility to prepare for late-stage development and potential commercialization of our XLRP and ACHMB3 programs. We anticipate that the build-out of the new manufacturing and quality control facility will be completed during the first quarter of calendar year 2023.

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 2022 Form 10-K under the heading “Build-To-Suit Manufacturing and Quality Control Facility in Alachua, Florida.”

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Strategic Collaborations and Preclinical Pipeline

Bionic Sight

During February 2017, we entered into a strategic research and development collaboration agreement with Bionic Sight to develop product candidates for patients with visual deficits and blindness due to retinal disease. Through the AGTC-Bionic Sight collaboration, the companies seek to develop a new optogenetic therapy that leverages AGTC’s deep experience in gene therapy and ophthalmology and Bionic Sight’s innovative neuro-prosthetic device and algorithm for retinal coding. The collaboration agreement grants to us, subject to achievement by Bionic Sight of certain development milestones, an option to exclusively negotiate for a limited period of time to acquire: (i) a majority equity interest in Bionic Sight; (ii) the Bionic Sight assets to which the collaboration agreement relates; or (iii) an exclusive license with respect to the product to which the collaboration agreement relates.

In March 2021, Bionic Sight, which has responsibility for conducting the clinical trial, reported promising results in its first two cohorts of patients in the Phase 1/2 retinitis pigmentosa optogenetics study. Bionic Sight reported that these patients, all of whom have complete or near-complete blindness, can now see light and motion, and, in two cases, can detect the direction of motion. Bionic Sight also announced that the product candidate was well-tolerated and that it is continuing to enroll patients at higher doses.

Otonomy

During October 2019, we entered into a strategic collaboration agreement with Otonomy to co-develop and co-commercialize an AAV-based gene therapy product candidate designed to restore hearing in patients with sensorineural hearing loss caused by a mutation in the gap junction protein beta 2 gene – the most common cause of congenital hearing loss. Under the collaboration agreement, the parties began equally sharing the program costs and any proceeds from potential licensing transactions in January 2020 and can include additional genetic hearing loss targets in the future. Effective January 1, 2022, we amended the Otonomy collaboration agreement to increase Otonomy’s responsibility for the overall development and commercialization of the program, which resulted in (i) a reduction in our share of future product development costs and (ii) our potential receipt of future payments, and royalties on any product sales in lieu of equal sharing of any potential profits or proceeds related to the program.

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 on Form 10-Q.

Preclinical Pipeline

We also have three wholly-owned product candidates in preclinical testing, including AGTC-701 for the treatment of dAMD, AGTC-601 for the treatment of FTD and AGTC-801 for the treatment of ALS.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q is based on our financial statements, which have been prepared assuming that the Company will continue as a going concern and in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. The 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 the COVID-19 pandemic or otherwise and those changes could have a material adverse effect on our statements of operations, financial condition and cash flows.

Other than accounting for a certain warrant derivative liability, which required the use of judgment and estimation techniques, there were no significant changes to our critical accounting policies during the three months ended September 30, 2022. Our warrant derivative liability accounting and related assumptions are further discussed at Note 2, Note 4 and Note 7 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q. For a description of the other 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 2022 Form 10-K.

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Financial Operations Review

Revenue

We generate revenue primarily through: (i) collaboration agreements; (ii) sponsored research arrangements with nonprofit organizations for the development and commercialization of product candidates; (iii) federal research and development grant programs; and (iv) licensing arrangements. However, we did not recognize any revenue during the three months ended September 30, 2022 or the same period in the prior year. In the future, we may generate revenue from product sales (if any products are approved), license fees, milestone payments, development services, research and development grants, or from collaboration and royalty payments for the sales of products developed under licenses of our intellectual property.

We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development programs, manufacturing efforts and reimbursements, collaboration milestone payments, and the sale of our products, to the extent that any are approved and successfully commercialized. We do not expect to generate revenue from product sales for the foreseeable future, if at all. If we or our collaborators fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue and our results of operations, financial position and cash flows would be materially adversely affected.

Research and development expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates and include:

Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress toward completion of specific tasks, using information and data provided to us by our vendors and our clinical sites.

We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenue from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

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Changes in any of these variables over time 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 by the COVID-19 pandemic, we could be required to expend significant additional financial resources and time on the completion of clinical trial activities and development of our product candidates.

From our inception and through September 30, 2022, we have incurred approximately $345.0 million in research and development expenses. We expect our research and development expenses to remain stable in the second quarter of our fiscal year as we are not currently enrolling any additional patients in our clinical trials and have worked to reduce our research and development expenses.

General and administrative and other expenses

General and administrative and other expenses primarily consist of salaries and related costs for personnel, including share-based compensation and travel expenses for our employees in executive, operational, legal, business development, finance and human resource roles. Other general and administrative expenses include costs to support employee training and development, board of directors’ costs, depreciation, insurance, facility-related costs not otherwise included in research and development expenses, professional fees for legal services, patent-related expenses, and accounting, investor relations, corporate communications and information technology services. We anticipate that our general and administrative and other expenses will increase in the second quarter of our fiscal year due to the activities to support the negotiation and execution of our proposed merger with the Purchaser, as described above and in Note 9 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q.

Investment income, net

Investment income, net consists of interest earned on cash and cash equivalents. During the three months ended September 30, 2022, investment income, net increased by $183,000 when compared to the prior year, primarily due higher interest rates in the marketplace.

Interest expense

Interest expense during the three months ended September 30, 2022 declined by $12,000 when compared to the prior year. This decrease was primarily due to a lower average outstanding balance under our collateralized term loan agreement during the three months ended September 30, 2022, partially offset by higher interest rates. 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 on Form 10-Q.

On November 2, 2022, the Federal Reserve Board announced an increase of 0.75% in the federal funds rate and indicated that further rate increases will be announced in the short-term to combat persistently high inflation in the United States. When the prime rate reported in The Wall Street Journal increases, as was the case with the most recent federal funds rate increase and is expected to continue in response to projected hikes in the federal funds rate by the Federal Reserve Board, the cost of borrowing and related interest expense on our variable-rate debt also increases.

Costs attributable to the issuance of freestanding warrants

As described in Note 7 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q, we closed an underwritten public offering of the Company’s common stock, together with accompanying warrants, on July 15, 2022. In connection with that equity offering, we expensed $0.3 million of costs that were allocated to the issuance of the warrants.

Change in fair value of derivative liability – warrants

We concluded that the warrants issued on July 15, 2022 met the definition of a derivative and required bifurcation from the related common stock on the date of warrant issuance and thereafter. Accordingly, the corresponding warrant liability is remeasured and recorded at fair value at the end of each reporting period with any adjustment recognized in our statement of operations. For the three months ended September 30, 2022, the related expense was $0.2 million.

Additional information regarding our warrant and the related derivative accounting can be found in Note 2, Note 4 and Note 7 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q.

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Provision for (benefit from) income taxes

There was no provision for (benefit from) income taxes during each of the three months ended September 30, 2022 and 2021 because, among other things, during those reporting periods, (i) the Company had no uncertain tax positions that would require the recognition of interest and penalties and (ii) any net deferred tax assets that were generated were fully offset by a valuation allowance. Additional information regarding our income taxes can be found in Note 10 to the Notes to Financial Statements in the 2022 Form 10-K.

Results of Operations

Comparison of the three months ended September 30, 2022 and 2021

Research and development expenses

The table below summarizes our research and development expenses by product candidate or program for the periods indicated.

External research and development expenses consist of collaboration, licensing, manufacturing, testing and other miscellaneous costs that are directly attributable to our most advanced product candidates and discovery programs. We do not allocate employee-related costs, including share-based compensation, costs associated with broad technology platform improvements or other indirect costs, to specific programs, as they are deployed across multiple projects under development and, as such, are separately classified as internal research and development expenses in the table above.

As part of the process of preparing our financial statements, estimates of accrued expenses are necessary. The estimation process involves reviewing quotations and contracts, identifying services that have been performed on our behalf, and determining the level of services performed and associated costs incurred for services for which we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice monthly in arrears for services performed or when contractual milestones are met. We estimate our accrued expenses at the end of each reporting period based on the facts and circumstances known at that time. As a result, estimates recorded in our financial statements and disclosed in the accompanying notes may change in the future and such changes in estimates, if any, will be recorded in our operating results in the period they are identified by us. The significant estimates in our accrued research and development expenses primarily relate to expenses incurred with respect to academic research centers, contract research organizations and other vendors in connection with research and development activities for which we have not yet been invoiced.

Research and development expenses for the three months ended September 30, 2022 and 2021 were $12.9 million and $12.3 million, respectively, an increase of $0.6 million, or 5%. The year-over-year increase was due to various factors, including: (i) increased external spending for our research and discovery programs, which was primarily for toxicology studies in support of our preclinical programs (i.e., AGTC-701 for the treatment of dAMD and AGTC-601 for the treatment of FTD); (ii) higher employee-related costs that were primarily attributable to increased headcount and routine pay increases; and (iii) an increase in internal research and development expenses related to certain assays for the AGTC-501 development program that we are now conducting in-house, as well as higher costs for consultants. These increases in research and development expenses were partially offset by (i) a year-over-year reduction in manufacturing activities for Vista clinical trial materials and (ii) decreases in Skyline and ACHM expenses due to reduced site activity as those clinical studies have progressed to a point where they are no longer activating new sites or enrolling new patients.

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General and administrative and other expenses

The table below summarizes our general and administrative and other expenses for the periods indicated.

General and administrative and other expenses for the three months ended September 30, 2022 and 2021 were $4.5 million and $4.1 million, respectively, an increase of $0.4 million, or 9%. The increase was primarily due to (i) higher employee-related costs from increased headcount and routine pay increases and (ii) start-up costs for our build-to-suit manufacturing and quality control facility, partially offset by lower legal, business development, investor relations, and consulting costs.

Liquidity and Capital Resources

We have incurred cumulative losses and negative cash flows from operations since our inception and, as of September 30, 2022, we had an accumulated deficit of $326.6 million. We believe that there is presently insufficient funding available to allow us to generate data from our ongoing and planned clinical programs and fund currently planned research and discovery programs for a period exceeding 12 months from the date of this filing with the Securities and Exchange Commission. Additionally, we believe that we will incur losses and generate negative operating cash flows for the foreseeable future. As such, these circumstances collectively raise substantial doubt about our ability to continue as a going concern. We are actively seeking to consummate the proposed merger that is described in Note 9 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q; however, we may be unable to successfully close that pending transaction. If the proposed merger is not completed within a reasonable period of time, or at all, management will likely pursue an orderly wind down of the Company through bankruptcy proceedings.

Most recently, we received: (i) net proceeds of $9.0 million from an underwritten public offering of our common stock, together with accompanying warrants, during the three months ended September 30, 2022, which is described in Note 7 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q; (ii) net proceeds of $9.2 million and $69.3 million during the years ended June 30, 2022 and 2021, respectively, from underwritten public offerings and selling our common stock through an “at-the-market offering” program, which are described in Note 13 to the Notes to Financial Statements in the 2022 Form 10-K; and (iii) $9.9 million of loan proceeds, net of debt discounts, in May 2021. Moreover, through a tenant improvement allowance and tiered rental rates, we have structured the third-party leasing costs for our build-to-suit manufacturing and quality control facility in Alachua, Florida in a way that will not significantly impact our cash runway until the fiscal year ending June 30, 2024. Notwithstanding the foregoing, we used our available cash and cash equivalents to fund approximately $2.9 million of tenant fit out work at such facility in August 2022, which represented our required contribution pursuant to a lease amendment. Additional information regarding our new manufacturing and quality control facility and long-term loan agreement can be found in Notes 3 and 7, respectively, to the Notes to Financial Statements in the 2022 Form 10-K.

We are closely monitoring ongoing developments in connection with the COVID-19 pandemic, which may negatively impact our projected cash position and access to capital. We will continue to assess our cash position and any progress we make towards the completion of one or more strategic transactions and, if circumstances warrant, make appropriate adjustments to our operating plan.

Cash in excess of immediate requirements is invested in accordance with our investment policy, which primarily seeks to maintain adequate liquidity and preserve capital by generally limiting investments to certificates of deposit and investment-grade debt securities that mature within twelve months. As of September 30, 2022, our cash and cash equivalents were held in bank accounts and money market funds.

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Cash flows

The table below sets forth the primary sources and uses of cash, including cash equivalents and restricted cash, for the periods indicated.

Operating activities. For both the three months ended September 30, 2022 and 2021, 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 $16.0 million during the three months ended September 30, 2022 was due to a net loss of $18.4 million, partially offset by favorable changes in our operating assets and liabilities of $0.8 million and non-cash items in our statement of operations of $1.6 million. 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 by non-cash items in our statement of operations of $1.5 million.

Investing activities. Cash used in investing activities of $0.3 million during the three months ended September 30, 2022 consisted of purchases of property and equipment of $0.2 million and intellectual property costs of $0.1 million. Cash provided by investing activities of $1.4 million during the three months ended September 30, 2021 consisted of cash proceeds of $2.0 million from the maturity of an investment, partially offset by purchases of property and equipment of $0.5 million and intellectual property costs of $0.1 million.

Financing activities. Cash provided by financing activities of $7.1 million during the three months ended September 30, 2022 consisted of (i) proceeds of $9.0 million from issuance of our common stock, together with accompanying warrants, net of allocated issuance costs, and (ii) proceeds from the exercise of pre-funded warrants of $0.4 million, partially offset by principal payments on long-term debt of $2.2 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.

Operating capital requirements

We believe that our available cash and cash equivalents, which totaled $34.2 million on September 30, 2022, will only allow us to generate data from our ongoing and planned clinical programs and fund currently planned research and discovery programs through calendar year 2022. As a result, we entered into the Merger Agreement that is described in Note 9 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q. If the merger is not consummated, we will likely need to pursue an orderly wind down of the Company through bankruptcy proceedings. Additional information regarding our liquidity and related matters can be found in Note 1 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q under the heading “Liquidity and Financial Condition.”

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We are a smaller reporting company, as defined by Rule 12b-2 of 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 Rules 13a-15e and 15d-15e 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, 2022.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15f and 15d-15f under the Securities Exchange Act of 1934, as amended) during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Due to the nature of our business, we may be subject to lawsuits or other claims arising at any particular time in the ordinary course of business. For a description of our legal proceedings, see Note 8 to the Unaudited Condensed Financial Statements included in this Quarterly Report on Form 10-Q under the heading “Legal Matters.”

Refer to Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended June 30, 2022 (the “2022 Form 10-K”) for information regarding our risk factors. Except as noted below, there have been no material changes in the risk factors included in the 2022 Form 10-K.

Risks Related to the Pending Transaction with Alliance Holdco Limited and Alliance Acquisition Sub, Inc.

We may not complete the pending transaction with Alliance Holdco Limited and Alliance Acquisition Sub, Inc. within the time frame we anticipate or at all, which could have an adverse effect on our business, financial results and/or operations.

On October 23, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Alliance Holdco Limited, a private limited company organized under the laws of England and Wales (the “Parent”), and Alliance Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Parent (the “Purchaser”). The Merger Agreement provides for, among other things and on the terms and subject to the conditions set forth therein, a two-step transaction in which the first step is a tender offer (the “Offer”) by the Purchaser to purchase all of the Company’s issued and outstanding shares of common stock (“Common Stock”) for (1) $0.34 per share of Common Stock (the “Cash Consideration”), without interest and less any applicable withholding taxes, plus (2) one contingent value right (each a “CVR”) representing the right to receive certain consideration based on the achievement of certain milestones, in an aggregate amount of up to $50.0 million for all Shares, payable in cash, without interest and net of applicable withholding taxes (the Cash Consideration plus one CVR, collectively, as such amount may be increased in accordance with the terms of the Merger Agreement, the “Offer Price”), subject to and in accordance with the terms and conditions of a Contingent Value Rights Agreement (the “CVR Agreement”) to be entered into by the Parent and a duly qualified rights agent acceptable to both the Parent and us (the “Rights Agent”). The Merger Agreement provides that, among other things, as soon as practicable after the consummation of the tender offer, and subject to the satisfaction or waiver of the conditions to the merger, and in accordance with the General Corporation Law of the State of Delaware (the “DGCL”), the Purchaser will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and a wholly owned subsidiary of the Parent. Because the Merger will be governed by Section 251(h) of the DGCL, assuming the requirements of Section 251(h) of the DGCL are met, no stockholder vote by our stockholders will be required to consummate the Merger. We currently expect the Offer and the Merger to be completed in the fourth quarter of calendar year 2022.

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If the transaction is not completed within the expected time frame or at all, we may be subject to a number of material risks in addition to the risks of continuing to operate our business. The price of our Common Stock may decline to the extent that current market prices of our Common Stock reflect a market assumption that the Merger will be completed on a timely basis. We could be required to pay the Parent a termination fee of $1.5 million if the Merger Agreement is terminated under specific circumstances described in the Merger Agreement. The failure to complete the transaction also may result in negative publicity and negatively affect our relationship with our stockholders, employees, strategic partners, suppliers and lender. We may also be required to devote significant time and resources to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against us to perform our obligations under the Merger Agreement.

Our ability to complete the Merger is subject to certain closing conditions that could adversely affect us or cause the Merger to be abandoned.

The Purchaser’s obligation to accept shares of Common Stock tendered in the Offer is subject to certain closing conditions, including: (a) that the number of shares of Common Stock validly tendered (and not validly withdrawn) equals at least one share more than 50% of the total number of all shares of Common Stock then outstanding (treating as outstanding the shares of Common Stock underlying the outstanding and unvested restrict stock unit (“Company RSUs”)) plus the aggregate number of shares of Common Stock issuable to holders of each option to purchase shares of Common Stock from the Company (“Company Options”) and each outstanding and unexercised warrant to purchase shares of Common Stock (“Company Warrants”) from which we have received notices of exercise prior to expiration of the Offer; (b) the absence of any injunction or legal restraint that has the effect of prohibiting the consummation of the Offer or the Merger or making the Offer or the Merger illegal or prohibiting or making illegal the acquisition of or payment for shares of Common Stock pursuant to the Offer or the consummation of the Merger; (c) that, since the date of the Merger Agreement, there shall not have occurred any Company Material Adverse Effect (as defined in the Merger Agreement); (d) compliance by the Company with its obligations, covenants and agreements under the Merger Agreement; (e) the accuracy of representations and warranties made by us in the Merger Agreement; (f) the absence of any pending legal proceeding in which a governmental body is a party challenging the Offer or the Merger; (g) that the aggregate liability of the Company for the Black-Scholes Value (as defined in the warrants issued by the Company in July 2022) potentially payable to holders of the Company Warrants issued in July 2022 shall not exceed $9.5 million as of the time the Offer expires and (h) other customary conditions. We cannot provide any assurance that the conditions to the consummation of the Merger will be satisfied or waived, or will not result in the abandonment or delay of the Merger.

The pendency of the transaction with the Parent and the Purchaser could adversely affect our business, financial results and/or operations.

Our efforts to complete the transaction with the Parent and the Purchaser could cause substantial disruptions in, and create uncertainty surrounding, our business, which may materially adversely affect our results of operation and our business. Uncertainty as to whether the transaction will be completed may affect our ability to retain and motivate employees. Employee retention may be particularly challenging while the transaction is pending because employees may experience uncertainty about their roles following consummation of the transaction. A substantial amount of our management’s and employees’ attention is being directed toward the completion of the transaction and thus is being diverted from our day-to-day operations. Uncertainty as to our future could adversely affect our business and our relationship with strategic partners, suppliers and our lender. Changes to or termination of existing business relationships could adversely affect our results of operations and financial condition, as well as the market price of our common stock. The adverse effects of the pendency of the transaction could be exacerbated by any delays in completion of the transaction or termination of the Merger Agreement.

Stockholder litigation could prevent or delay the consummation of the Offer and the Merger or otherwise negatively impact our business, operating results and financial condition.

We may incur additional costs in connection with the defense or settlement of existing and any future stockholder litigation and demands in connection with the Offer and the Merger. In connection with the Offer and related transactions, as of November 21, 2022, five complaints have been filed by certain of our purported stockholders alleging that the Schedule 14D-9, which we filed with the Securities and Exchange Commission on October 26, 2022 in connection with the Offer and the Merger (the “Schedule 14D-9”), contains omissions and misrepresentations that render it materially deficient and misleading. Specifically, these complaints allege, among other things, that we violated Sections 14(d), 14(e) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 14d-9 promulgated thereunder. As relief, the complaints seek, among other things, (i) to enjoin us from consummating the Merger, (ii) to enjoin us from filing an amendment to the Schedule 14D-9 unless certain information, as requested in the complaints, is included in such amendment, (iii) in the event the Merger is consummated, to rescind it, or award rescissory damages, (iv) to declare that we and our board of directors violated Sections 14(a) and/or 20(a) of the Exchange Act, (v) an award of costs and expenses related to the actions, and (vi) other relief as the courts may deem just and proper. Additionally, as of November 21, 2022, we have received six stockholder demand letters, which generally seek to include certain alleged omitted information in the Schedule 14D-9. We and our board of directors believe that the complaints and demand letters lack merit; however, these complaints and demands or other future litigation may adversely affect our ability to complete the Offer and the Merger. We could incur significant costs in connection with any such litigation and demands, including costs associated with the indemnification

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of our directors and officers and settlement payments. Furthermore, one of the conditions to the consummation of the Offer and the Merger is the absence of any injunction or legal restraint that has the effect of prohibiting the consummation of the Offer or the Merger or making the Offer or the Merger illegal or prohibiting or making illegal the acquisition of or payment for shares of Common Stock pursuant to the Offer or the consummation of the Merger. Consequently, if a plaintiff were to secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting our ability to complete the consummation of the Offer and the Merger, then such injunctive or other relief may prevent the Offer and the Merger from becoming effective within the expected time frame or at all.

If the Merger occurs, our stockholders will not be able to participate in any financial upside to our business after the Merger other than through the CVRs; if the required milestones under the CVRs are not achieved, stockholders will not realize any value from the CVRs.

Upon consummation of the Merger, each issued and outstanding share will be converted into the right to receive the Offer Price. The CVRs represent the right to receive contingent payments, payable to the Rights Agent for the benefit of the holders of CVRs, of up to $50.0 million in the aggregate, payable in cash, without interest and less any applicable withholding taxes, and allocated among the outstanding CVRs, if the following milestones are achieved:

No interest will accrue or be payable in respect of any of the amounts that may become payable on the CVRs. There can be no assurance that any of the milestones will be achieved and the Parent has no obligation to cause any of the milestones to be achieved. If a milestone is not achieved, the associated payment will not be payable to the holders of the CVRs and, if no milestones are achieved, the CVRs will expire valueless.

We have incurred, and will continue to incur, direct and indirect costs as a result of the pending transaction with the Parent.

We have incurred, and will continue to incur, significant costs and expenses, including fees for professional services and other transaction costs, in connection with the pending transaction. We must pay substantially all of these costs and expenses whether or not the transaction is completed. There are a number of factors beyond our control that could affect the total amount or the timing of these costs and expenses.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

The Merger Agreement includes restrictions on the conduct of our business prior to the completion of the Merger, generally requiring us to conduct our business and operations in the ordinary course and in accordance, in all material respects, with past practice and all applicable legal requirements, and otherwise in accordance with the Merger Agreement. Without limiting the generality of the foregoing, we are subject to a variety of specified restrictions. Unless we obtain the Parent’s prior written consent and except (i) as expressly permitted by the Merger Agreement, (ii) as required by applicable law, or (iii) as set forth in the disclosure schedule

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delivered by us to the Parent, we may not, among other things and subject to certain exceptions, pay dividends, complete any stock splits or combinations, issue additional shares of our common stock, hire or terminate any employees, amend our certificate of incorporation or bylaws, form any subsidiaries, enter into any joint venture, partnership, limited liability corporation or similar agreement, acquire or dispose of any rights or assets other than in the ordinary course of business or that are immaterial to our business, make any pledge or mortgage of any material assets, commence any legal proceeding, settle or release certain legal actions or proceedings, commence any new clinical trials or terminate clinical trials in progress, qualify any new site for manufacturing of any product candidate, make any submissions to any governmental body relating to our business, or make or authorize any capital expenditure, including with respect to the purchase of reagent and other materials, except for such expenditures that fall under certain dollar thresholds. We may find that these and other contractual restrictions in the Merger Agreement delay or prevent us from responding, or limit our ability to respond, effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management believes they may be advisable. If any of these effects were to occur, it could materially and adversely impact our operating results, financial position, cash flows and/or the price of our common stock.

The Merger Agreement limits our ability to pursue alternative transactions, which could deter a third party from proposing an alternative transaction.

The Merger Agreement contains provisions that, subject to certain exceptions, preclude us from soliciting alternative Acquisition Proposals (as defined in the Merger Agreement). It is possible that these or other provisions in the Merger Agreement might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the outstanding shares of our common stock from considering or proposing an acquisition or might result in a potential competing acquirer proposing to pay a lower per share price to acquire our common stock than it might otherwise have proposed to pay.

Pursuant to a letter agreement dated as of November 15, 2021, we agreed to issue 30,000 shares of its common stock to Corporate Profile LLC as partial consideration for investor relations services, which shares were issued in three tranches: 15,000 shares were issued on March 10, 2022, 7,500 shares were issued on May 16, 2022 and 7,500 shares were issued on August 15, 2022. Such issuances were deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) thereunder as transactions by an issuer not involving a public offering. The recipient of the securities in these transactions acquired the securities for investment only and not with a view toward the resale or distribution to others, and appropriate legends were affixed to the securities issued in these transactions.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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