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

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in of the Exchange Act).    Yes  ☐    No  ☒

The accompanying Unaudited Condensed Financial Statements have been prepared assuming that the Company will continue as a going concern and in accordance with (i) U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and (ii) the instructions to Form and Article 8 of Regulation Accordingly, such financial statements do not include all the information and footnotes required by U.S. GAAP for a complete set of financial statements. In the opinion of management, the Unaudited Condensed Financial Statements include all adjustments, consisting of normal recurring accruals and other adjustments, considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows as of and for the periods presented. The accompanying Condensed Balance Sheet as of June 30, 2021 was derived from the Company’s audited financial statements at that date but does not include all of the footnote disclosures required by U.S. GAAP.

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 June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) . The new standard requires that financial assets measured at amortized cost be presented at the net amount expected to be collected and separately measure an allowance for credit losses that is deducted from the amortized cost basis of those financial assets. The Company early adopted the new standard on July 1, 2021; however, it did not have a significant impact on the Company’s financial statements.

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.

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 million amortized cost of that investment approximated its fair value on such date). The Company held no investments at March 31, 2022.

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 Company’s investments in debt securities classified as have historically consisted of U.S. Treasury securities that were valued using quoted market prices. Valuation adjustments were not applied.

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

25.010.05.0

Under the agreement, AGTC made an initial $2.0 million payment for an equity interest of approximately 5% in Bionic Sight. During March 2020, the Company’s equity interest in Bionic Sight increased to approximately 15.5% in connection with (i) AGTC’s purchase of additional equity for $4.0 million and (ii) the conversion of certain AGTC-provided research and development support costs which aggregated approximately $2.2 million, to an equity interest in Bionic Sight, in each case, consistent with the provisions of the collaboration agreement. AGTC is not obligated to purchase additional equity in Bionic Sight or make any under the agreement. The Company recorded its initial investment in Bionic Sight using the equity method of accounting for investments. Upon receipt of additional equity in March 2020, management concluded that equity method accounting remained appropriate.

 30% of all genetic hearing loss cases. People with this mutation can deafness in both ears that is identified in screening tests routinely performed on newborns. 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, the Otonomy collaboration agreement was amended to increase Otonomy’s responsibility for the overall development and commercialization of the program, which resulted in (i) a reduction in the Company’s share of future product development costs and (ii) the Company’s 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.

The Company concluded that the Otonomy collaboration agreement is within the scope of ASC Topic 808, (“Topic 808”), which defines collaborative arrangements and addresses the presentation of transactions between the parties in an entity’s statement of operations and the related disclosures. However, Topic 808 does not provide guidance on the recognition of consideration exchanged or accounting for the obligations that may arise between the parties. The Company concluded that ASC Topic 730, should be applied by analogy to payments between the parties during the development activities. As such, payments made to or received from Otonomy for development activities are recorded as research and development expenses. For each of the nine months ended March 31, 2022 and 2021, settlement activity between the parties under the Otonomy agreement had an immaterial effect on the Company’s research and development expenses.

449,000374,000225,000300,000

1.309.81.2329,0001.125

The Company intends to use the net proceeds from the offering, together with other available funds, to fund its ongoing retinitis pigmentosa clinical trials, ongoing Phase 1/2 clinical trials in its achromatopsia program and preclinical development programs, and for working capital and other general corporate purposes.

On April 2, 2021, the Company entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor as sales agent to sell shares of the Company’s common stock, from time to time, with an aggregate offering amount of up to $50.0 million. Cantor is entitled to aggregate compensation equal to 3.0% of the gross sales price of the shares sold through it pursuant to the Sales Agreement. During the nine months ended March 31, 2022, the Company received net proceeds of $519,000 from selling 230,478 shares of its common stock under the Sales Agreement. Neither Cantor nor the Company is obligated to sell additional shares under this program in the future.

On May 13, 2021, the Company entered into for story facility of approximately 21,250 square feet in Alachua, Florida (the “Premises”) for office, research and development, laboratory, light pharmaceutical and medical systems manufacturing and fabrication and distribution use. The new facility will be adjacent to the Company’s corporate headquarters. The landlord is responsible for all permitting, site and infrastructure 

 $4.2 million as of March 31, 2022.

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.

The worldwide a global slowdown of economic activity and decreased demand for a broad variety of goods and services, while also disrupting sales channels and marketing activities and precipitating many corporate bankruptcy filings. As a result Company has experienced delays in enrollment of its clinical trials and may continue to see delays as the rise in and/or related variants causes capacity constraints at various clinical trial sites. The Company could also experience delays resulting from critical under clinical trial protocols, which could increase the cost of those trials and also impact their expected timelines. Management’s ability to fully interpret the trial outcomes and the ability of certain perform their jobs other restrictions result in delays and increase the Company’s operating expenses. Furthermore, third-party vendors, such as raw material suppliers and contract manufacturing, testing or research organizations, have also been impacted and could continue to be impacted, which could result in unavoidable delays and/or increases in the Company’s operating costs.

Notwithstanding the 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 March 31, 2022 and our results of operations for the three and nine months ended March 31, 2022 and 2021. 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 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 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 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 (“XLRP”) and achromatopsia (“ACHM”), and an optogenetics program through our collaboration with Bionic Sight, LLC (“Bionic Sight”). Our preclinical pipeline includes a program in dry (“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”). With the interim, masked, clinical data we recently released from the Skyline trial in our XLRP program and additional 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.

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 GTSase Regulator (“RPGR”) gene into a patient’s photoreceptor cells. 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 primate studies showed that AGTC’s 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 that are intended to support the potential submission of a Biologics License Application (“BLA”) including a Phase 1/2 trial, which incorporates an expansion portion that we refer to as the Skyline trial. The Skyline trial is a 14 patient multi-site, Phase 2 trial in which patients are randomized to either a high dose of (the dose received by patients in Group 5 of the Phase 1/2 trial), or a low dose of (the dose received by patients in Group 2 of the Phase 1/2 trial). 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 twelve months. 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 navigation maze more successfully under varying light and challenge conditions at twelve 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. The primary endpoint in the Skyline trial is the proportion of treated eyes with improvement from baseline in visual sensitivity. Secondary endpoints include improvements in visual acuity, a patient’s ability to navigate a mobility maze more successfully under varying light and challenge conditions, and improvements in retinal structure. We completed enrollment in the Skyline trial in the first quarter of calendar year 2022 and recently reported interim results for 13 of the 14 enrolled patients. 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 the first portion of the Phase 1/2 trial, safety results to date for the Skyline trial support that is generally well tolerated and there are no clinically significant safety concerns. There were ocular adverse events (grade 2) related to the study agent that were similar between the two dose groups and two ocular serious adverse events 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.

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 loci, 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 visual sensitivity across the treated region above the repeatability coefficient for the test that resulted in improved functional vision in a larger area of the retina.

The Skyline trial has a similar design and endpoints to the Vista clinical trial. We believe that if the Vista trial has similar outcomes as both the Phase 1/2 trial and the Skyline trial, the body of data will support a BLA submission for

The Vista trial is a multi-site, Phase 2/3 clinical trial expected to include approximately 60 patients randomized across three 1.2E+11 vg/mL dose from the ongoing Phase 1/2 and Skyline trials), a high-dose group (the 1.1E+12 vg/mL dose from the ongoing Phase 1/2 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 Month 12. Together with a third-party vendor, we have developed a machine learning algorithm based on the available microperimetry data from our Phase 1/2 dose escalation trial that, the loci most likely to improve through evaluation of baseline visual sensitivity. Based on the results of the Skyline trial we will be working with the vendor to fortify the algorithm with the data from those 14 patients. 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. We plan to complete a masked interim analysis, with the interim data expected to be released in the first half of calendar year 2023. We believe the interim analysis, together with data from the Phase 1/2 trial, including the Skyline expansion portion, may provide us with the opportunity to discuss with the United States Food and Drug Administration (the “FDA”) potential amendments to the Vista trial, if necessary, that may support an earlier BLA submission than we would otherwise anticipate, or optimize the design of the trial.

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 These data include the recent release of the interim data from the ongoing Skyline trial and a presentation of data from the ongoing Phase 1/2 trial at the Association for Research in Vision and Ophthalmology (ARVO) 2022 Annual Meeting, by Dr. Paul Yang, Assistant Professor of Ophthalmology at the Casey Eye Institute, Oregon Health & Science University and one of our study investigators. The Phase 1/2 trial data that Dr. Yang presented showed that certain baseline characteristics of the EZ were highly associated with improved outcomes starting as early as nine months after treatment with AGTC-501 and lasting up to 18 months after treatment. Specifically, the data showed a statistically significant association between improvements in visual sensitivity as measured by Macular Integrity Assessment (“MAIA”) and improvements in retinal health as measured by improvement in the EZ in dose Groups 4 to 6. We are continuing to follow these patients and incorporated these findings into the inclusion/exclusion criteria for the Skyline and Vista clinical trials.

Given the efficacy and safety data generated to date, we believe that is a potential candidate that may provide significant benefits to patients with XLRP, if approved. We expect to achieve the following milestones in the XLRP development program, subject to any continuing impact of the pandemic:

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 and a stabilized and functional copy of the Cyclic Nucleotide Gated Channel Subunit Alpha 3 (CNGA3) gene in the case of 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 in ACHM patients with mutations of the CNGB3 gene (ACHMB3) and a separate Phase 1/2 clinical trial of 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 and 24 adult and pediatric patients in the ACHMA3 trial of 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 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 in ACHMB3 patients, a total of 21 adults were treated over an approximately 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.

We also reported updated interim pediatric data and adult and pediatric safety data for the 24 patients enrolled in the Phase 1/2 study of 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 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 and 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 (one in ACHMA3 and one in ACHMB3) have since fully resolved and one (ACHMA3) 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 recently had a collaborative and productive End of Phase 2 (“EOP2”) meeting with the FDA to discuss the potential future development of 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 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. They also indicated that improvements in light discomfort may be an acceptable secondary endpoint in a Phase 2/3 clinical trial of and we intend to provide additional data to support our position that a 1 loglux improvement from baseline is clinically meaningful. We are currently working through the details of the future development plan for including the proposed protocol for a potential Phase 2/3 clinical trial for submission to the FDA. Our anticipated future development plan will be based on the feedback we received from the FDA during the EOP2 meeting and subsequent comments to the full protocol.

In May 2021, we signed for 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. The facility is also intended to provide supply chain redundancy, reduce manufacturing risk and enhance quality controls. We anticipate that the new manufacturing and quality control facility will be completed during the fourth quarter of calendar year 2022.

Additional information regarding our new cGMP manufacturing and quality control facility can be found in Note 8 to the Unaudited Condensed Financial Statements included in this Quarterly Report under the heading “Lease Commitment.”

During October 2019, we entered into a strategic collaboration agreement with Otonomy 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 (“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 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.

We and Otonomy announced promising preclinical data at the American Society of Gene and Cell Therapy meeting in May 2021, which showed that the product candidate was associated with rescue of hearing loss and cochlear morphology in two independent mouse models. Collectively, we are conducting investigational new drug (“IND”)-enabling activities based feedback from the FDA, with an IND submission 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

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

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 assuming that the Company will continue as a going concern and in accordance with (i) U.S. generally accepted accounting principles for interim financial information and (ii) 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 nine months ended March 31, 2022, 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.

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 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 and nine months ended March 31, 2022, investment income, net declined by $4,000 and $85,000, respectively, when compared to the same periods in the prior year, primarily due to a smaller investment portfolio in the current periods.

Interest expense during the three and nine months ended March 31, 2022 increased by $0.3 million and $1.0 million, respectively, when compared to the same periods in the prior year. These increases were primarily due to higher average outstanding balances under our collateralized term loan agreement during each of the three and nine months ended March 31, 2022. 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 May 4, 2022, the Federal Reserve Board announced an increase of 0.50% in the federal funds rate and indicated that further rate increases will be announced in the short-term to combat rising inflation in the United States. When the prime rate reported in 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 Company’s cost of borrowing and related interest expense on its variable-rate debt also increases.

Research and development expenses for the three months ended March 31, 2022 and 2021 were $9.2 million and $11.0 million, respectively, a decrease of $1.8 million, or 16%. The year-over-year decline was due to various factors, including: (i) planned temporary reductions in manufacturing activities relating to our XLRP and preclinical product candidates; (ii) lower external spending related to our Skyline trial for which we are not activating new sites and/or enrolling new patients; (iii) a decrease in ACHM expenses due to reduced site activity as our two clinical studies have progressed to a point where they are no longer activating new sites or enrolling new patients; and (iv) lower costs in connection with the wind-down program. Additionally, research and development expenses for the three months ended March 31, 2022 were favorably impacted by changes in estimates that reduced certain vendor accruals during such reporting period. These reductions in research and development expenses were partially offset by: (i) higher employee-related costs that were primarily attributable to new employees who were hired in connection with our strategic operating plans; (ii) an increase in internal research and development costs for certain assay development that we are now conducting and (iii) higher share-based compensation costs that were primarily due to restricted stock units granted to certain employees from May 2021 to July 2021 (the “2021 RSUs”).

Research and development expenses for the nine months ended March 31, 2022 and 2021 were $35.9 million and $34.4 million, respectively, an increase of $1.5 million, or 4%. The year-over-year increase was due to various factors, including: (i) higher employee-related costs that were primarily attributable to new employees who were hired in connection with our strategic operating plans; (ii) increased external spending for our research and discovery programs, which was primarily for planned material production costs in connection with our preclinical programs; (iii) higher share-based compensation costs that were primarily due to the 2021 RSUs; and (iv) an increase in internal research and development costs for certain assay development that we are now conducting 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; (ii) a decrease in ACHM expenses due to reduced site activity as our two clinical studies have progressed to a point where they are no activating new sites or enrolling new patients; and (iii) lower costs in connection with the wind-down of our XLRS program. Additionally, research and development expenses for the nine months ended March 31, 2022 were favorably impacted by changes in estimates that reduced certain vendor accruals during such reporting period.