advm-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-36579

 

Adverum Biotechnologies, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware

 

20-5258327

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1035 O’Brien Drive,

Menlo Park, CA

(Address of principal executive offices)

94025

(Zip Code)

(650) 272-6269

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $0.0001 par value

ADVM

The Nasdaq Global Market

As of April 30, 2019 there were 63,434,619 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

 

 


Table of Contents

 

Adverum Biotechnologies, Inc.

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I—FINANCIAL INFORMATION

  

3

 

 

 

Item 1. Financial Statements (unaudited)

  

3

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

  

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019 and 2018

  

4

Condensed Consolidated Statements of Stockholders Equity for the three months ended March 31, 2019 and 2018

 

5

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

  

6

Notes to Condensed Consolidated Financial Statements

  

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

  

13

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

18

Item 4. Controls and Procedures

  

18

 

 

 

PART II—OTHER INFORMATION

  

19

 

 

 

Item 1. Legal Proceedings

  

19

Item 1A. Risk Factors

  

19

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

48

Item 3. Defaults Upon Senior Securities

  

48

Item 4. Mine Safety Disclosures

  

48

Item 5. Other Information

  

48

Item 6. Exhibits

  

49

 

 

 

SIGNATURES

  

50

 

 

 

 

 

 

2


Table of Contents

 

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

Adverum Biotechnologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

144,107

 

 

$

154,949

 

Short-term investments

 

45,381

 

 

 

50,130

 

Prepaid expenses and other current assets

 

3,649

 

 

 

3,675

 

Total current assets

 

193,137

 

 

 

208,754

 

Operating lease right-of-use asset

 

22,592

 

 

 

 

Property and equipment, net

 

4,145

 

 

 

3,586

 

Restricted cash

 

999

 

 

 

999

 

Deposit and other long-term assets

 

174

 

 

 

156

 

Total assets

$

221,047

 

 

$

213,495

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,752

 

 

$

1,707

 

Accrued expenses and other current liabilities

 

5,032

 

 

 

8,784

 

Lease liability, current portion

 

3,826

 

 

 

 

Deferred rent, current portion

 

 

 

 

228

 

Total current liabilities

 

10,610

 

 

 

10,719

 

Deferred rent, net of current portion

 

 

 

 

1,366

 

Lease liability, net of current portion

 

22,078

 

 

 

 

Other noncurrent liabilities

 

216

 

 

 

243

 

Total liabilities

 

32,904

 

 

 

12,328

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

Common stock

 

6

 

 

 

6

 

Additional paid-in capital

 

523,923

 

 

 

522,503

 

Accumulated other comprehensive loss

 

(754

)

 

 

(799

)

Accumulated deficit

 

(335,032

)

 

 

(320,543

)

Total stockholders’ equity

 

188,143

 

 

 

201,167

 

Total liabilities and stockholders' equity

$

221,047

 

 

$

213,495

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

3


Table of Contents

 

Adverum Biotechnologies, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

 

2019

 

 

2018

 

 

 

 

(Unaudited)

Collaboration and license revenue

 

$

 

 

$

216

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,131

 

 

 

12,794

 

 

General and administrative

 

 

5,576

 

 

 

5,368

 

 

Total operating expenses

 

 

15,707

 

 

 

18,162

 

 

Operating loss

 

 

(15,707

)

 

 

(17,946

)

 

Other income, net

 

 

1,218

 

 

 

746

 

 

Net loss

 

 

(14,489

)

 

 

(17,200

)

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Net unrealized gain on marketable securities

 

 

3

 

 

 

17

 

 

Foreign currency translation adjustment

 

 

42

 

 

 

(75

)

 

Comprehensive loss

 

$

(14,444

)

 

$

(17,258

)

 

Net loss per share basic and diluted

 

$

(0.23

)

 

$

(0.30

)

 

Weighted-average common shares used to compute net loss per share - basic and diluted

 

 

63,125

 

 

 

57,420

 

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

 

 

4


Table of Contents

 

Adverum Biotechnologies, Inc.

Condensed Consolidated Statements of Stockholders Equity

(Unaudited, in thousands except share data)

 

 

COMMON STOCK

 

ADDITIONAL PAID-IN

 

ACCUMULATED OTHER COMPRENHENSIVE

 

ACCUMULATED

 

TOTAL STOCKHOLDERS'

 

 

Shares

 

Amount

 

CAPITAL

 

(LOSS)/INCOME

 

DEFICIT

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

62,965,468

 

$

6

 

$

522,503

 

$

(799

)

$

(320,543

)

$

201,167

 

Stock-based compensation expense

 

 

 

 

 

1,762

 

 

 

 

 

 

1,762

 

Issuance of common stock upon exercise of stock options

 

118,482

 

 

 

 

162

 

 

 

 

 

 

162

 

Issuance of common stock upon release of restricted stock units

 

397,302

 

 

 

 

 

 

 

 

 

 

 

Restricted stock unit withholdings

 

(145,603

)

 

 

 

 

 

 

 

 

 

 

Taxes paid for RSUs

 

 

 

 

 

(504

)

 

 

 

 

 

(504

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

42

 

 

 

 

42

 

Unrealized gain on marketable securities, net

 

 

 

 

 

 

 

3

 

 

 

 

3

 

Net loss

 

 

 

 

 

 

 

 

 

(14,489

)

 

(14,489

)

Balance at March 31, 2019

 

63,335,649

 

$

6

 

$

523,923

 

$

(754

)

$

(335,032

)

$

188,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

49,015,339

 

$

5

 

$

439,048

 

$

(963

)

$

(254,062

)

$

184,028

 

Stock-based compensation expense

 

 

 

 

 

3,429

 

 

 

 

 

 

3,429

 

Adoption of Topic 606

 

 

 

 

 

 

 

 

 

6,146

 

 

6,146

 

Issuance of common stock upon follow-on offerings, net of issuance costs

 

11,642,128

 

 

2

 

 

70,189

 

 

 

 

 

 

70,191

 

Issuance of common stock upon exercise of stock options

 

1,361,546

 

 

 

 

308

 

 

 

 

 

 

308

 

Issuance of common stock upon release of restricted stock units

 

328,952

 

 

 

 

 

 

 

 

 

 

 

Restricted stock unit withholdings

 

(115,593

)

 

 

 

 

 

 

 

 

 

 

Taxes paid for RSUs

 

 

 

 

 

(801

)

 

 

 

 

 

(801

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

(75

)

 

 

 

(75

)

Unrealized gain on marketable securities, net

 

 

 

 

 

 

 

17

 

 

 

 

17

 

Net loss

 

 

 

 

 

 

 

 

 

(17,200

)

 

(17,200

)

Balance at March 31, 2018

 

62,232,372

 

$

7

 

$

512,173

 

$

(1,021

)

$

(265,116

)

$

246,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


Table of Contents

 

Adverum Biotechnologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(14,489

)

 

$

(17,200

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

426

 

 

 

459

 

Stock-based compensation expense

 

1,762

 

 

 

3,429

 

Amortization of premium and accrued interest on marketable securities

 

(129

)

 

 

 

Amortization of operating lease right-of-use asset

 

539

 

 

 

 

Other

 

40

 

 

 

183

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

(91

)

 

 

818

 

Other asset

 

(18

)

 

 

 

Accounts payable

 

(136

)

 

 

(1,046

)

Accrued expenses and other current liabilities

 

(2,363

)

 

 

107

 

Deferred revenue

 

 

 

 

292

 

Deferred rent

 

 

 

 

(26

)

Lease liability

 

1,242

 

 

 

 

Net cash used in operating activities

 

(13,217

)

 

 

(12,984

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of marketable securities

 

(22,454

)

 

 

(30,374

)

Maturities of marketable securities

 

27,385

 

 

 

55,973

 

Purchases of property and equipment

 

(2,186

)

 

 

(216

)

Net cash provided by investing activities

 

2,745

 

 

 

25,383

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from offerings of common stock, net of issuance costs

 

 

 

 

70,191

 

Proceeds from issuance of common stock pursuant to option exercises

 

162

 

 

 

308

 

Taxes paid related to net share settlement of restricted stock units

 

(504

)

 

 

(801

)

Proceeds from a financing arrangement

 

 

 

 

100

 

Repayment of loan

 

(28

)

 

 

 

Net cash provided by (used in) financing activities

 

(370

)

 

 

69,798

 

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

 

(10,842

)

 

 

82,197

 

Cash and cash equivalents and restricted cash at beginning of period

 

155,948

 

 

 

70,519

 

Cash and cash equivalents and restricted cash at end of period

$

145,106

 

 

$

152,716

 

Supplemental schedule of noncash investing and financing information

 

 

 

 

 

 

 

Fixed assets in accounts payable, accrued expenses and other current liabilities

$

413

 

 

$

153

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


Table of Contents

 

Adverum Biotechnologies, Inc.

March 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1. Organization and Basis of Presentation

Adverum Biotechnologies, Inc. (the “Company”) is a clinical-stage gene therapy company targeting unmet medical needs in ocular and rare diseases. The Company develops gene therapy product candidates designed to provide durable efficacy by inducing sustained expression of a therapeutic protein. The Company’s core capabilities include clinical development, novel vector discovery, and in-house manufacturing expertise, specifically in scalable process development, assay development, and current Good Manufacturing Practices (“cGMP”) quality control. Since the Company’s inception, it has devoted its efforts to performing research and development activities, filing patent applications, hiring personnel and raising capital to support these activities.

The Company has not generated any revenue from the sale of products since its inception. The Company has experienced net losses since its inception and had an accumulated deficit of $335.0 million as of March 31, 2019. The Company expects to incur losses and have negative net cash flows from operating activities as it engages in further research and development activities. The Company believes that it has sufficient funds to continue operations into 2021.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s consolidated financial information. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of the results to be expected for the full year or any other future period. The balance sheet as of December 31, 2018 is derived from the audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC.

2. Summary of Significant Accounting Policies

Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of expenses in the consolidated financial statements and the accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to clinical trial accruals, fair value of assets and liabilities, income taxes, and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

Leases

The Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (“Topic 842”) on January 1, 2019. For its long-term operating leases, the Company recognizes a right-of-use asset and a lease liability on its condensed consolidated balance sheets. The Company adopted the new standard using the modified retrospective approach and recorded a lease liability of $24.7 million, and a right‑to‑use asset of $23.1 million, and no adjustment to the accumulated deficit. In connection with the lease adoption, the Company also derecognized deferred rent of $1.5 million. The adoption of the new standard did not have an impact on the condensed consolidated statement of operations.

The lease liability is determined as the present value of future lease payments using an estimated rate of interest that the Company would pay to borrow equivalent funds on a collateralized basis at the lease commencement date. In order to estimate the incremental borrowing rate, management estimated its credit rating, adjusted the credit rating for the nature of the collateral, and benchmarked the borrowing rate against observable yields on comparable securities with a similar term.  As of the adoption date, the Company estimated the incremental borrowing rate to be 8.5%. The Company based the right-of-use asset on the liability adjusted for any

7


Table of Contents

 

prepaid or deferred rent. The Company determined the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise. Rent expense for the operating lease is recognized on a straight-line basis over the lease term and included it in operating expenses on the statements of operations and comprehensive loss. Variable lease payments include lease operating expenses.

The Company elected the practical expedients permitted under Topic 842, which among other things, allowed the Company to carry forward the historical lease classification of those leases in place as of January 1, 2019. The Company elected to exclude from its condensed consolidated balance sheets recognition of leases having a term of 12 months or less (short-term leases) and elected to not separate lease components and non-lease components for its long-term real-estate leases.

Share-based payment to nonemployees

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” that expands the scope of ASC Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018–07 on January 1, 2019 and the impact of the adoption resulted in lower stock-based compensation of $0.5 million in the three months ended March 31, 2019.

 

3. Fair Value Measurements and Fair Value of Financial Instruments

The authoritative guidance on the fair value hierarchy for disclosure of fair value measurements is as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value of Level 1 securities is determined using quoted prices in active markets for identical assets. Level 1 securities consist of highly liquid money market funds. Financial assets and liabilities are considered Level 2 when their fair values are determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, Level 2 financial instruments are valued using comparisons to like-kind financial instruments and models that use readily observable market data as their basis. U.S. government and agency securities, commercial paper, corporate bond and certificates of deposit are valued primarily using market prices of comparable securities, bid/ask quotes, interest rate yields and prepayment spreads and are included in Level 2. In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy.

The following is a summary of the Company’s cash equivalents and short-term investments:

 

 

 

March 31, 2019

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Loses

 

 

Estimated

Fair Value

 

 

 

(In thousands)

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

43

 

 

$

 

 

$

 

 

$

43

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

1,795

 

 

 

 

 

 

 

 

 

1,795

 

Commercial paper

 

 

166,194

 

 

 

3

 

 

 

(34

)

 

 

166,163

 

Corporate bonds

 

 

16,920

 

 

 

19

 

 

 

 

 

 

16,939

 

Total cash equivalents and

   short-term investments

 

 

184,952

 

 

 

22

 

 

 

(34

)

 

 

184,940

 

Less: cash equivalents

 

 

(139,585

)

 

 

 

 

 

26

 

 

 

(139,559

)

Total short-term investments

 

$

45,367

 

 

$

22

 

 

$

(8

)

 

$

45,381

 

 

8


Table of Contents

 

 

 

December 31, 2018

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Loses

 

 

Estimated

Fair Value

 

 

 

(In thousands)

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

126

 

 

$

 

 

$

 

 

$

126

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

25,792

 

 

 

1

 

 

 

(4

)

 

 

25,789

 

Commercial paper

 

 

147,606

 

 

 

 

 

 

 

 

 

147,606

 

Corporate bonds

 

 

27,778

 

 

 

5

 

 

 

(17

)

 

 

27,766

 

Certificates of deposit

 

 

1,420

 

 

 

 

 

 

 

 

 

1,420

 

Total cash equivalents and

   short-term investments

 

 

202,722

 

 

 

6

 

 

 

(21

)

 

 

202,707

 

Less: cash equivalents

 

 

(152,577

)

 

 

 

 

 

 

 

 

(152,577

)

Total short-term investments

 

$

50,145

 

 

$

6

 

 

$

(21

)

 

$

50,130

 

There were no transfers within the hierarchy during the three months ended March 31, 2019 or 2018.

The Company’s marketable securities as of March 31, 2019 mature within one year. Management regularly reviews all of the Company’s investments for other-than-temporary declines in estimated fair value. Management’s review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether management has the intent to sell the securities and whether it is more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. Management determined that the gross unrealized losses on the Company’s marketable securities as of March 31, 2019 were temporary in nature. Therefore, none of the Company’s marketable securities were other-than-temporarily impaired as of March 31, 2019.

4. Significant Agreements

Editas— In January 2018, the Company entered into an agreement to amend its collaboration, option and license agreement with Editas.  The Company originally entered into an agreement with Editas in August 2016 pursuant to which the Company and Editas collaborate on certain studies using AAV vectors in connection with Editas’ genome editing technology and the Company grants to Editas an exclusive option to obtain certain exclusive rights to use the Company’s proprietary vectors in up to five ophthalmic indications. In January 2018, the Company and Editas extended the research collaboration, option and license agreement. In consideration for extending the agreement, Editas made a one-time, non-refundable cash payment of $0.5 million to the Company in February 2018. In June 2018, the Company and Editas entered into a subsequent amendment to the agreement to extend the Research Period and First Option Exercise Date (each as defined in the collaboration, option, and license agreement with Editas, as amended).

Under the terms of the agreement, as amended, Editas had until November 2018 to exercise the option with respect to a designated initial indication, which Editas declined to do. With respect to the four other indications, Editas may exercise the option until August 2020, provided that the option will expire on August 2019 if Editas has not exercised one option with respect to any other indication by such date. Upon Editas’ timely exercise of the option with respect to the first additional indication for which Editas timely exercise its options, Editas will pay the Company a $1.5 million fee. Upon each subsequent exercise of the option, Editas will pay the Company a $1.0 million fee per indication. If Editas elects to develop a product using certain of the Company’s proprietary vectors, the Company will be eligible to receive up to $15.5 million in development and commercialization milestone payments for such product, and tiered royalties between the mid-single digits and low teens on net sales of such product, subject to certain adjustments.

Unless earlier terminated, the agreement will be in effect until the later of the expiration of the option exercise period or the expiration of the royalty term of the last product. At any time after the option is first exercised, Editas may terminate the agreement for convenience in its entirety or on an indication-by-indication or country-by-country basis, upon prior written notice to the Company. The Company may also terminate the agreement if Editas challenges the Company’s patents relating to its proprietary vectors and does not withdraw such challenge within a defined period of time. In addition, either party may terminate the agreement with written notice upon a bankruptcy of the other party or upon an uncured material breach by the other party.

Under Topic 606, the transaction price is $1.5 million related to the $1.0 million non-refundable upfront payment for license and research services at contract inception and the one-time, non-refundable cash payment of $0.5 million made by Editas in February 2018 in consideration for extending the agreement. The arrangement provides for additional payments to the Company when certain development and regulatory milestones are achieved. Because these milestone payments are not within the control of the Company and are not considered probable of being achieved until the events occur, the Company did not include them in the transaction price. The transaction price of $1.5 million was allocated to a single performance obligation, research and development.

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During the three months ended March 31, 2018, the Company recognized revenue of $0.2 million associated with Editas. The remaining performance obligations for Editas were completed during 2018. During the three months ended March 31, 2019, the Company had no recognized revenue from the Editas collaboration agreement.

5. Leases

In June 2018, the Company entered into an operating lease agreement for new office and laboratory space which consists of approximately 81,000 square feet located in Redwood City, California. The lease term is 10 years beginning September 2018 through February 2029 with two options to extend the lease term for a period of seven years each. The Company has the right to make tenant improvements, including the addition of laboratory space, with a lease incentive allowance of $8.1 million. The rent payments began on March 1, 2019 with an escalation of rent payments each year after an abatement period. In connection with the lease, the Company has provided the landlord with a letter of credit in the amount of $1.0 million.  The security for the letter of credit of $1.0 million is classified as restricted cash under long term assets on the condensed consolidated balance sheet. The Company also has an operating lease agreement for its Menlo Park office building which expires on May 8, 2020. The Company may extend this lease for up to four years. The lease agreement provides for an escalation of rent payments each year.

The Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (See Note 2) and recorded right to use assets of $23.1 million and a lease liability of $24.7 million as of January 1, 2019. The estimated incremental borrowing rate used to measure the lease liability is 8.5%.

Rent expense recognized under the operating leases, including additional rent charges for utilities, parking, maintenance, and real estate taxes was for the three months ended March 31, 2019 and 2018 was $1.2 million and $0.3 million, respectively. We recognize rent expense on a straight‑line basis over the lease period.

The undiscounted future non-cancellable lease payments under the Company’s operating leases as of March 31, 2019 is as follows:

 

Year ending December 31,

 

(In thousands)

 

2019 (remaining 9 months)

 

$

2,864

 

2020

 

 

4,221

 

2021

 

 

4,683

 

2022

 

 

4,846

 

2023

 

 

5,016

 

Thereafter

 

 

28,837

 

Total undiscounted lease payments

 

 

50,467

 

Less: Present value adjustment

 

 

(17,444

)

Less: Tenant improvement allowance

 

 

(7,119

)

Total

 

$

25,904

 

 

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(In thousands)

 

Accrued professional services

 

$

2,434

 

 

$

2,291

 

Employee compensation

 

 

1,341

 

 

 

2,944

 

Accrued preclinical, clinical and process development costs

 

 

887

 

 

 

1,850

 

Other

 

 

370

 

 

 

1,699

 

Total accrued expenses and other current liabilities

 

$

5,032

 

 

$

8,784

 

 

7. Commitments and Contingencies

The Company was a party to a master services agreement (“MSA”) with Cornell University (“Cornell”) originally established in August 2014 and amended in December 2015. Under the MSA, Cornell provided assistance in regulatory affairs, overall project management, and parameter development. The MSA, as amended, provided for the Company to pay Cornell $13.3 million ratably over four years for these services as services were performed. In December 2016, the Company informed Cornell that the Company decided to terminate the MSA for material breach, effective January 6, 2017. Subsequently, Cornell informed the Company that it

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disputes the validity of the Company’s termination of the MSA.  Although the Company intends to defend the validity of the termination of the MSA, the Company recorded $2.0 million of estimated costs associated with the termination of the MSA during the year ended December 31, 2017. This MSA included services relating to gene therapy programs directed to A1AT deficiency, HAE and severe allergy. The Company’s license agreements with Cornell remained in effect despite the termination of the MSA.

Legal Proceedings

From time to time, the Company may become involved in litigation and other legal actions. The Company estimates the range of liability related to any pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.

There have been no material changes from the legal proceedings described in our annual report on Form 10-K for the period ended December 31, 2018.

8. Equity Incentive Awards

The following table summarizes the Company’s option activity and related information:

 

 

Number of

Options

(in thousands)

 

 

Weighted-

Average

Exercise Price

 

Balance at December 31, 2018

 

6,447

 

 

$

5.83

 

Options granted

 

1,875

 

 

 

3.61

 

Options exercised

 

(118

)

 

 

1.37

 

Options cancelled

 

(235

)

 

 

4.21

 

Balance at March 31, 2019

 

7,969

 

 

$

5.42

 

Exercisable as of March 31, 2019

 

3,760

 

 

$

6.60

 

 

Restricted Stock Units (“RSUs”)

The following table summarizes the Company’s RSUs activity and related information:

 

 

 

Number of Units

(in thousands)

 

 

Weighted-

Average Grant-

Date Fair Value

 

Outstanding at December 31, 2018

 

 

2,397

 

 

$

9.23

 

Granted

 

 

240

 

 

 

3.50

 

Vested and released

 

 

(397

)

 

 

4.72

 

Forfeited

 

 

(511

)

 

 

4.81

 

Outstanding at March 31, 2019

 

 

1,729

 

 

$

4.70

 

Stock-Based Compensation Expense

The following table presents, by operating expense, the Company’s stock-based compensation expense:

 

 

Three Months Ended

 

 

March 31,

 

 

2019

 

 

2018

 

 

(In thousands)

 

Research and development

$

631

 

 

$

2,378

 

General and administrative

 

1,131

 

 

 

1,051

 

Total stock-based compensation expense

$

1,762

 

 

$

3,429

 

 

9. Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period using the treasury stock method. Outstanding stock options, RSUs, employee stock purchase plan (“ESPP”) and

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warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.  

The Company excluded approximately 9.9 million and 9.5 million shares of potentially dilutive securities as of March 31, 2019 and 2018, respectively, from the computations of diluted weighted-shares outstanding because their effect would be anti-dilutive.

 

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

The interim financial statements included in this Quarterly Report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2018, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission (SEC) on March 6, 2019. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These forward-looking statements are subject to risks and uncertainties, including those discussed in the section titled “Risk Factors,” set forth in Part II – Other Information, Item 1A below and elsewhere in this report that could cause actual results to differ materially from historical results or anticipated results.

Overview

Adverum is a clinical-stage gene therapy company targeting unmet medical needs in ocular and rare diseases. We develop gene therapy product candidates designed to provide durable efficacy by inducing sustained expression of a therapeutic protein. Our core capabilities include clinical development, novel vector discovery, and in-house manufacturing expertise, specifically in scalable process development, assay development, and current Good Manufacturing Practices (“cGMP”) quality control.

We are advancing our lead gene therapy product candidate ADVM-022 for the treatment of wet age-related macular degeneration (“wet AMD”). In September 2018, we received Fast Track designation for ADVM-022 for the treatment of wet AMD from the U.S. Food and Drug Administration (“FDA”).

Our investigational new drug (“IND”) application for ADVM-022 for the treatment of wet AMD became active in August 2018. In November 2018 we dosed the first patient in our Phase 1 OPTIC trial for ADVM-022 in patients with wet AMD. The OPTIC trial is designed to be a multi-center, open-label, Phase 1, dose-escalation safety trial in patients with wet AMD who have demonstrated responsiveness to anti-vascular endothelial growth factor (“anti-VEGF”) treatment. The OPTIC trial is expected to enroll 18 patients to evaluate three doses of ADVM-022 administered as a single intravitreal injection. In April 2019 we announced that we had completed enrollment and dosing of patients (n=6) in the first cohort (6 x 10^11 vg/eye) in the OPTIC trial. The independent data monitoring committee (DMC) determined that enrollment and dosing of patients in the second cohort could proceed. This was based on a review of the preliminary safety data from the first cohort of patients, which showed no serious adverse events (SAEs) or dose-limiting toxicities (DLTs). We plan to report data on the 24-week primary and secondary outcomes from this first cohort of patients at a scientific meeting in the second half of this year.  In early April 2019, we received a notification from the FDA requesting additional chemistry, manufacturing, and controls (“CMC”) information and requirements on the ADVM-022 manufacturing process and placing our IND on clinical hold. We subsequently submitted our response and, should the agency decide to lift the clinical hold, we expect to resume dosing patients in the OPTIC trial. Since there are other ocular indications in which VEGF plays a major role in the pathology and for which there are anti-VEGF approved therapies requiring frequent injections, we are evaluating these other ocular diseases with approved anti-VEGF therapies that we may pursue in the future.

In rare diseases, ADVM‑043 is our investigational gene therapy candidate for the treatment of alpha-1 antitrypsin (“A1AT”) deficiency. Based on data from the ADVANCE trial announced in November 2018, we discontinued the development of ADVM‑043 and are conducting additional preclinical studies to evaluate potential paths forward for development of a product candidate for the treatment of A1AT deficiency. We plan to provide an update on this program mid-year 2019.

We have also been developing ADVM‑053, our preclinical gene therapy product candidate for the treatment of hereditary angioedema (“HAE”). We are reviewing the results from the ADVANCE trial to inform further development of gene therapy candidates for the treatment of systemic rare diseases, including ADVM‑053 for the treatment of HAE, and are conducting additional preclinical studies to evaluate potential paths forward for development of a product candidate for the treatment of HAE. We plan to provide an update on this program mid-year 2019.

Our partnered programs include vectors we are developing under collaboration agreements. Under an agreement with Editas Medicine, Inc. (“Editas”) we are leveraging our AAV-vectors for use with Editas’ leading CRISPR-based genome editing technologies to treat up to five inherited retinal diseases. Our agreement with Regeneron Pharmaceuticals, Inc. (“Regeneron”) provides for development of up to eight distinct ocular therapeutic targets, four of which are already identified, including AVA-311 for the treatment of juvenile X-Linked Retinoschisis.

In June 2018, we signed a lease with an initial 10-year term for a new facility in Redwood City, California which we plan to occupy by year end 2019. This facility will serve as our new corporate headquarters and will include approximately 81,000 square feet of office, laboratory, and process development space. We believe this facility will enable us to increase our process development capabilities to the 1000-liter scale.

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Financial Overview

Summary

We have not generated positive cash flow or net income from operations since our inception and, as of March 31, 2019, we had an accumulated deficit of $335.0 million. We expect to incur substantial expenses and increasing losses from operations in the foreseeable future as we continue our research and development efforts, advance our product candidates through preclinical and clinical development, manufacture clinical study materials, seek regulatory approval, and prepare for and, if approved, proceed to commercialization. We are at an early stage of development and may never be successful in developing or commercializing our product candidates.

While we may in the future generate revenue from a variety of sources, including license fees, milestone and research and development payments in connection with strategic partnerships, and potentially revenue from product sales if any of our product candidates are approved, to date we have not generated any revenue from product sales.

We entered into collaboration and license arrangements with Regeneron in May 2014 and Editas in August 2016, which are revenue-generating arrangements. We do not currently have a research plan in place with either company. We currently have no operational clinical or commercial manufacturing facilities, and all of our clinical manufacturing activities are currently contracted out to third parties. Additionally, we use third-party clinical research organizations (“CROs”) to carry out our clinical development and we do not have a sales organization.

We expect to incur substantial and increasing expenditures in the foreseeable future for the development and potential commercialization of our product candidates. We will need substantial additional funding in the future to support our operating activities as we advance our product candidates through preclinical and clinical development, seek regulatory approval and prepare for and, if approved, proceed to commercialization. Adequate funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital, or to do so on acceptable terms, when needed, or to form additional collaboration partnerships to support our efforts, we could be forced to delay, reduce or eliminate our research and development programs or potential commercialization efforts.

As of March 31, 2019, we had $189.5 million in cash, cash equivalents and short-term investments. We believe that we have sufficient funds to continue our operations into 2021.

Revenue

To date we have not generated any revenue from the sale of our products. We generate revenue through research, collaboration and license arrangements with our strategic partners.

Research and Development Expenses

Conducting a significant amount of research and development is central to our business model. Research and development expenses primarily include personnel-related costs, stock-based compensation expense, laboratory supplies, consulting costs, external contract research and development expenses, including expenses incurred under agreements with CROs, the cost of acquiring, developing and manufacturing clinical study materials, and overhead expenses, such as rent, equipment depreciation, insurance and utilities.

We expense research and development costs as incurred. We defer and expense advance payments for goods or services for future research and development activities as the goods are delivered or the related services are performed.

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. We estimate the amounts incurred through communications with third party service providers and our estimates of accrued expenses as of each balance sheet date are based on information available at the time. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly.

At this time, we cannot reasonably estimate the nature, timing or aggregate costs of the efforts that will be necessary to complete the development of any of our product candidates. The successful development and commercialization of a product candidate is highly uncertain, and clinical development timelines, the probability of success, and development and commercialization costs can differ materially from expectations.

General and Administrative Expenses

General and administrative expenses primarily include personnel-related costs, stock-based compensation, professional fees for legal, consulting, audit and tax services, overhead expenses, such as rent, equipment depreciation, insurance and utilities, and other general operating expenses not otherwise included in research and development expenses. Our general and administrative expenses may increase in future periods if and to the extent we elect to increase our investment in infrastructure to support continued research and

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development activities and potential commercialization of our product candidates. We will continue to evaluate the need for such investment in conjunction with our ongoing consideration of our pipeline of product candidates. We anticipate increased expenses related to audit, legal and regulatory functions, as well as director and officer insurance premiums and investor relations costs.

Other Income, Net

Other income, net primarily consists of interest income on our cash equivalents and investments in marketable securities.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP.  The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in 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 these estimates under different assumptions and conditions.  Except as noted below, there have been no material changes to our critical accounting policies from those described in our Annual Report on Form 10-K (Annual Report) as filed with the SEC, on March 6, 2019.

Leases

We adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (“Topic 842”) on January 1, 2019. For our long-term operating leases, we recognize a right-of-use asset and a lease liability on our condensed consolidated balance sheet. We determine the lease liability as the present value of future lease payments using an estimated rate of interest that we would pay to borrow equivalent funds on a collateralized basis at the lease commencement date. In order to estimate the incremental borrowing rate, management estimated its credit rating, adjusted the credit rating for the nature of the collateral, and benchmarked the borrowing rate against observable yields on comparable securities with a similar term.  As of the adoption date, we estimated the incremental borrowing rate to be 8.5%. We based the right-of-use asset on the liability adjusted for any prepaid or deferred rent. We determined the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise. We based the right-of-use asset on the liability adjusted for any prepaid or deferred rent. We determined the lease term at the commencement date by considering whether renewal options and termination options are reasonably assured of exercise.

We recognize rent expense for the operating lease on a straight-line basis over the lease term and included it in operating expenses on the statements of operations and comprehensive loss. Variable lease payments include lease operating expenses.

We elected the practical expedients permitted under Topic 842, which among other things, allowed us to carry forward the historical lease classification of those leases in place as of January 1, 2019. We elected to exclude from our condensed consolidated balance sheet recognition of leases having a term of 12 months or less (short-term leases) and elected to not separate lease components and non-lease components for our long-term real-estate leases.

Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

 

(In thousands)

 

Collaboration and license revenue

 

$

 

 

$

216

 

 

$

(216

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,131

 

 

 

12,794

 

 

 

(2,663

)

General and administrative

 

 

5,576

 

 

 

5,368

 

 

 

208

 

Total operating expenses

 

 

15,707

 

 

 

18,162

 

 

 

(2,455

)

Operating loss

 

 

(15,707

)

 

 

(17,946

)

 

 

2,239

 

Other income, net

 

 

1,218

 

 

 

746

 

 

 

472

 

Net loss

 

$

(14,489

)

 

$

(17,200

)

 

$

2,711

 

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Revenue

We did not generate any revenue for the three months ended March 31, 2019. Our revenue for the three months ended March 31, 2018 was related to license and research services under our collaboration agreements with Regeneron and Editas. We adopted Topic 606, effective January 1, 2018.

Research and Development Expense

Research and development expense decreased $2.7 million to $10.1 million for the three months ended March 31, 2019 from $12.8 million for the three months ended March 31, 2018. This overall decrease in research and development expense was primarily due to the impact of discontinuing our product candidate, ADVM‑043 for the treatment of A1AT deficiency, which failed to show sufficient efficacy in the ADVANCE trial, which lowered our costs by $3.3 million and also due to a decrease of stock-based compensation by $1.7 million. This decrease was partially offset primarily by higher costs associated with the OPTIC Phase 1 clinical trial for ADVM-022 for the treatment of wet AMD of $1.1 million, $0.5 million in higher salaries and benefits, and $0.7 million in higher facilities costs related to our new facility.

For the periods presented, our research and development activities are attributable to our rare disease and wet AMD programs and earlier-stage research programs. We expect that research and development expenses will increase in future periods as we continue to invest in advancing our gene therapy programs and earlier-stage research programs.

General and Administrative Expense

General and administrative expense increased $0.2 million to $5.6 million for the three months ended March 31, 2019 from $5.4 million for the three months ended March 31, 2018. This increase was driven primarily from higher professional services and consulting, facilities costs, and employee compensation and benefits, partially offset by lower severance costs.

We expect that general and administrative expenses will increase in future periods as we continue to support advancing our gene therapy programs. We anticipate increased expenses related to audit, legal and regulatory functions, as well as director and officer insurance premiums and investor relations costs associated with being a public reporting company.

Other Income, Net

The increase of $0.5 million in other income, net was primarily due to higher interest income from our investments in marketable securities as we invested in higher yield securities based on higher average invested balances.

Liquidity and Capital Resources and Plan of Operations

We have not generated positive cash flow or net income from operations since our inception and as of March 31, 2019, we had an accumulated deficit of $335.0 million. As of March 31, 2019, we had $189.5 million in cash, cash equivalents and short-term investments compared to $205.1 million as of December 31, 2018. We believe that our existing cash and cash equivalents as of March 31, 2019 will be sufficient to fund our operations into 2021.

In August 2017, we entered into the 2017 stock offering agreement. Under the terms and conditions of the 2017 stock offering agreement, we may offer to sell our common stock for an aggregate offering price of up to $50.0 million through the agent from time to time. In January 2018, we sold a total of 1,419,893 shares of our common stock at market prices under the 2017 stock offering agreement and raised total net proceeds of $5.7 million, after issuance costs. Since then, we have sold no additional shares under the 2017 stock offering agreement. We have sold a total of 6,550,232 shares of our common stock at market prices pursuant to the 2017 stock offering agreement, raising total net proceeds of $22.5 million, after issuance costs.

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates and ongoing internal research and development programs, and expenses to build out our new facility. At this time, we cannot reasonably estimate the nature, timing or aggregate amount of costs for our development, potential commercialization, and internal research and development programs. However, in order to complete our planned preclinical trials and current and future clinical trials, and to complete the process of obtaining regulatory approval for our product candidates, as well as to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our product candidates, if approved, we will require substantial additional funding in the future.

If and when we seek additional funding, we will do so through equity or debt financings, collaborative or other arrangements with corporate sources or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies. To complete development and commercialization of any of our product candidates, we anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

 

the initiation, progress, timing, costs and results of preclinical studies and any clinical trials for our product candidates;

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the outcome, timing of and costs involved in, seeking and obtaining approvals from the FDA and other regulatory authorities, including the potential for the FDA and other regulatory authorities to require that we perform more studies than those that we currently expect;

 

the ability of our product candidates to progress through clinical development activities successfully;

 

our need to expand our research and development activities;

 

the rate of progress and cost of our commercialization of our products;

 

the cost of preparing to manufacture our products on a larger scale;

 

the costs of commercialization activities including product sales, marketing, manufacturing and distribution;

 

the degree and rate of market acceptance of any products launched by us or future partners;

 

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

our need to implement additional infrastructure and internal systems;

 

our ability to hire additional personnel;

 

our ability to enter into additional collaboration, licensing, commercialization or other arrangements and the terms and timing of such arrangements, and;

 

the emergence of competing technologies or other adverse market developments.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license other technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

Cash Flows

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(13,217

)

 

$

(12,984

)

Net cash provided by investing activities

 

 

2,745

 

 

 

25,383

 

Net cash provided by (used in) financing activities

 

 

(370

)

 

 

69,798

 

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

 

$

(10,842

)

 

$

82,197

 

Cash Used in Operating Activities

During the three months ended March 31, 2019, net cash used in operating activities was $13.2 million, primarily as a result of the net loss of $14.5 million, partially offset by $2.6 million of non-cash charges primarily related to stock-based compensation expense and depreciation and amortization expense, and $1.4 million of net decrease in operating assets and liabilities, which fluctuate due to timing of expenses and payments.

During the three months ended March 31, 2018, net cash used in operating activities was $13.0 million, primarily as a result of the net loss of $17.2 million, partially offset by $4.1 million of non-cash charges primarily related to stock-based compensation expense and depreciation and amortization expense and $0.1 million of net increase in operating assets and liabilities.

Cash Provided by Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2019 consisted of $27.4 million resulting from the maturities of marketable securities, partially offset by $22.5 million of purchases of marketable securities and $2.2 million of purchases of property and equipment.

Net cash provided by investing activities for the three months ended March 31, 2018 consisted of $56.0 million maturities of marketable securities, partially offset by $30.4 million of purchases of marketable securities and $0.2 million of purchases of property and equipment.

Purchases of property and equipment primarily consisted of the leasehold improvements related to the new facility.

Cash Provided by (Used in) Financing Activities

Net cash used in financing activities for three months ended March 31, 2019 consisted of $0.5 million in taxes paid relating to net share settlement of restricted stock units partially offset by $0.1 million of the net proceeds from the exercises of stock options and repayment of loans.

The net cash provided by financing activities for three months ended March 31, 2018 consisted of $70.2 million of the net proceeds from the sales of our common stock, primarily as a result of our February 2018 follow-on offering of our common stock which raised

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$64.5 million in net proceeds, $0.3 million of the proceeds from the exercises of stock options and $0.1 million of the proceeds from our financing arrangement with the Alpha-1 Project, Inc., partially offset by $0.8 million in taxes paid relating to net share settlement of restricted stock units.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Under SEC rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item.

Item 4.

Controls and Procedures

Evaluation of disclosure controls and procedures. Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2019. The evaluation of our disclosure controls and procedures included a review of our processes and implementation and the effect on the information generated for use in this Quarterly Report on Form 10-Q. This type of evaluation is done quarterly so that our conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. The overall goals of these evaluation activities are to monitor our disclosure controls and procedures and to make modifications as necessary. We intend to maintain these disclosure controls and procedures, modifying them as circumstances warrant.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2019, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting during the three months ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures and our internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can only provide reasonable assurances that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adverum have been or will be detected. As these inherent limitations are known features of the financial reporting process, it is possible to design into the process safeguards to reduce, though not eliminate, these risks. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. While our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, there can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis, to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. While our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2019, the design of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, was effective, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

Not applicable.

Item 1A.

Risk Factors

You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. The risks described below are not the only risks facing us. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, results of operations and prospects.

Risks Related to Our Financial Position and Need for Capital

We have incurred significant operating losses since inception, and we expect to incur significant losses for the foreseeable future. We may never become profitable or, if achieved, be able to sustain profitability.

We have incurred significant operating losses since we were founded in 2006 and expect to incur significant losses for the foreseeable future as we continue development of our product candidates. As of March 31, 2019, we had an accumulated deficit of $335.0 million. Losses have resulted principally from costs incurred in our research and development programs and from our general and administrative expenses. In the future, we intend to continue to conduct research and development, clinical testing, regulatory compliance activities and, if any of our product candidates is approved, sales and marketing activities that, together with anticipated general and administrative expenses, will likely result in us incurring significant losses for the next several years.

We currently generate no revenue from sales, and we may never be able to commercialize any of our product candidates. We do not currently have the required approvals to market any of our product candidates, and we may never receive such approvals. We may not be profitable even if we or any of our future development partners succeed in commercializing any of our product candidates. Because of the numerous risks and uncertainties associated with developing and commercializing our product candidates, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

We expect that our cash, cash equivalents, and short-term investments will be sufficient to fund our lead gene therapy programs into 2021. If this expectation proves to be wrong, we may be forced to delay, limit or terminate certain of our development efforts

As of March 31, 2019, our cash, cash equivalents and short-term investments were approximately $189.5 million. We currently expect this cash, cash equivalents and short-term investments to fund our planned operations into 2021. However, this estimate is based on a number of assumptions that may prove to be wrong, including our expectations about the timing of planned clinical trials and expected expenses to be incurred in connection with the build out of our new facility, and changing circumstances beyond our control may cause capital to be consumed more rapidly than currently anticipated. As a result, our operating plan may change, and we may need to seek additional funds sooner than planned, through collaboration agreements and public or private financings. If we run low on capital before we are able to achieve meaningful clinical data for some or all of our product candidates, we may be unable to successfully raise additional funds, and, consequentially, may need to significantly curtail some or all of our development activities.

We will need to raise additional funding, which may not be available on acceptable terms, or at all. If we fail to obtain additional capital necessary to fund our operations, we will be unable to successfully develop and commercialize our product candidates.

We will require substantial future capital in order to complete the preclinical and clinical development for our product candidates and potentially to commercialize these product candidates. Any future clinical trials of our product candidates would cause an increase in our spending levels, as would other corporate activities. The amount and timing of any expenditure needed to implement our development and commercialization programs will depend on numerous factors, including:

 

the type, number, scope, progress, expansion costs, results of and timing of any future preclinical studies and clinical trials of any of our product candidates which we are pursuing or may choose to pursue in the future;

 

the need for, and the progress, costs and results of, any additional clinical trials or nonclinical studies of our product candidates we may initiate based on the results of any clinical trials that we may plan or discussions with the FDA, including any additional clinical trials or nonclinical studies the FDA or other regulatory agencies may require evaluating the safety of our product candidates;

 

the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;

 

the costs and timing for process development scale up and for obtaining or maintaining manufacturing for our product candidates, including commercial manufacturing if any product candidate is approved;

 

the costs and timing of establishing sales and marketing capabilities and enhanced internal controls over financial reporting;

 

the terms and timing of establishing collaborations, license agreements and other partnerships;

 

costs associated with any new product candidates that we may develop, in-license or acquire;

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the effect of competing technological and market developments;

 

our ability to establish and maintain partnering arrangements for development; and

 

the costs associated with being a public company.

Some of these factors are outside of our control. We do not expect our existing capital resources to be sufficient to enable us to fund the completion of our clinical trials and remaining development program through commercial introduction. We expect that we will need to raise additional funds in the future.

We have not sold any products, and we do not expect to sell or derive revenue from any product sales for the foreseeable future. We may seek additional funding through collaboration agreements and public or private financings. Additional funding may not be available to us on acceptable terms or at all and the terms of any financing may adversely affect the holdings or the rights of our stockholders. In addition, the issuance of additional shares by us, or the possibility of such issuance, may cause the market price of our shares to decline.

If we are unable to obtain funding on a timely basis, we will be unable to complete any future clinical trials for our product candidates and we may be required to significantly curtail some or all of our activities. We also could be required to seek funds through arrangements with collaborative partners or otherwise that may require us to relinquish rights to our product candidates or some of our technologies or otherwise agree to terms unfavorable to us.

Risks Related to the Discovery and Development of Our Product Candidates

Our business will depend substantially on the success of one or more of our product candidates. If we are unable to develop, obtain regulatory approval for, or successfully commercialize, any or all of our product candidates, our business will be materially harmed.

Our product candidates are in the early stages of development and will require substantial preclinical and/or clinical development and testing, manufacturing process improvement and validation, bridging studies and regulatory approval prior to commercialization. It is critical to our business to successfully develop and ultimately obtain regulatory approval for one or more of these product candidates. Our ability to commercialize our product candidates effectively will depend on several factors, including the following:

 

successful completion of preclinical studies and clinical trials, including the ability to demonstrate safety and efficacy of our product candidates;

 

receipt of marketing approvals for any future products for which we complete clinical trials, including securing regulatory exclusivity to the extent available;

 

establishing commercial manufacturing capabilities, for example, by engaging third-party manufacturers that can provide products and services to support clinical development and the market demand for our product candidates, if approved;

 

successfully launching and commercial sales of the product, whether alone or in collaboration with potential partners;

 

acceptance of the product as a viable treatment option by patients, the medical community and third-party payers;

 

establishing market share while competing with other therapies;

 

a continued acceptable safety profile of our products following regulatory approval;

 

maintaining compliance with post-approval regulation and other requirements; and

 

qualifying for, identifying, registering, maintaining, enforcing and defending intellectual property rights and claims covering our product candidates.

Our product candidate, ADVM‑043 for the treatment of A1AT deficiency, failed to show sufficient efficacy in the ADVANCE trial, and was discontinued in 2018. For our lead gene therapy candidate, ADVM‑022, we initiated the OPTIC trial in patients with wet AMD in the fourth quarter of 2018 and have subsequently dosed six patients in the first cohort of the OPTIC trial.  In April 2019, the FDA placed the IND application for ADVM-022 for the treatment of wet AMD on clinical hold and requested certain information and requirements related to CMC.  The clinical hold precludes us from enrolling or dosing additional patients in the OPTIC trial until the hold is lifted.  We have responded to the requests made by the FDA.  However, the agency may not lift the clinical hold promptly, if at all.  If the FDA does not lift the clinical hold or maintains the clinical hold for longer than we expect, our business may be harmed. For our rare disease programs, we are conducting additional preclinical studies to evaluate potential paths forward for development of a product candidate for these programs.

If we, or our collaborators, do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to commercialize our product candidates, which would materially and adversely affect our business, financial condition, results of operations and prospects.

Moreover, of the large number of biologics and drugs in development in the pharmaceutical industry, only a small percentage result in the submission of a biologics license application (“BLA”) to the FDA and even fewer are approved for commercialization. Furthermore, even if we do receive regulatory approval to market any of our product candidates, any such approval may be subject to limitations on the indicated uses for which we may market the product, or limitations related to its distribution. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, there can be no assurance that any of our product candidates will be successfully developed or commercialized. If we or any of our future development partners are unable to

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develop, or obtain regulatory approval for, or, if approved, successfully commercialize, any of our product candidates, we may not be able to generate sufficient revenue to continue our business.

Our gene therapy platform is based on a novel technology, which makes it difficult to predict the time and cost of product candidate development and subsequently obtaining regulatory approval.

We have concentrated our research and development efforts on our gene therapy platform and our future success depends on the successful development of product candidates based on this platform. There can be no assurance that any development problems we have experienced or may experience in the future related to our platform will not cause significant delays or unanticipated costs, or that such development problems can be solved. We may also experience delays in developing a sustainable, reproducible and scalable manufacturing process or transferring that process to commercial partners, which may prevent us from completing our clinical trials or commercializing our products on a timely or profitable basis, if at all.

In addition, the clinical trial requirements of the FDA, the European Medicines Agency (“EMA”) and other regulatory agencies and the criteria these regulators may use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of the potential products. The regulatory approval process for novel gene therapy products such as ours can be more expensive and take longer than for other product types, which are better known or more extensively studied to date. As an example, the FDA approved the first gene therapy product, LUXTURNATM (voretigene neparvovec-rzyl) for the treatment of patients with confirmed biallelic RPE65 mutation-associated retinal dystrophy in December 2017. The European Commission (EC) recently approved LUXTURNATM for the treatment of vision loss due to a genetic mutation in both copies of the RPE65 gene and who have enough viable retinal cells.

Regulatory requirements governing gene and cell therapy products have changed and may continue to change in the future; such as the National Institutes of Health (“NIH”) Guidelines for Research Involving Recombinant or Synthetic Nucleic Acid Molecules and the modifications to the roles and responsibilities of the Recombinant DNA Advisory Committee (“RAC”). The FDA decides whether individual gene therapy protocols may proceed, and the FDA can put an IND on clinical hold, as the FDA has done with our IND for ADVM-022 for the treatment of wet AMD in April 2019, as described above.

Also, before a clinical study can begin, that clinical site’s institutional review board (“IRB”) and its Institutional Biosafety Committee will have to review the proposed clinical trial to assess appropriateness to conduct the clinical study at that site. In addition, adverse developments in clinical trials of gene therapy products conducted by others may cause the FDA or other oversight bodies to change the requirements for human research on or for approval of any of our product candidates.

These regulatory review committees and advisory groups and the new guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these treatment candidates or lead to significant post-approval limitations or restrictions. As we advance our product candidates, we may be required to consult with these regulatory and advisory groups and comply with applicable guidelines or recommendations. If we fail to do so, we may be required to delay or discontinue development of our product candidates. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product to market could decrease our ability to generate sufficient product revenue to maintain our business.

We may not be successful in our efforts to identify or discover additional product candidates.

The success of our business depends primarily upon our ability to identify, develop and commercialize products based on our platform. Our research programs may fail to identify other potential product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying potential product candidates or our potential product candidates may be shown to lack efficacy, have harmful side effects, or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.

If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business, financial condition, results of operations, and prospects and could potentially cause us to cease operations. Research programs to identify new product candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that may ultimately prove to be unsuccessful.

Few of our product candidates and proprietary viral vectors have been tested in clinical trials.

Drug development has inherent risk.  Few of our product candidates and proprietary viral vectors have been evaluated in clinical trials in patients. Our lead product candidate, ADVM‑022 for the treatment of wet AMD, uses a proprietary vector with an unknown safety profile in humans and may experience unexpected results in clinical trials in the future. Additionally, we decided to discontinue the development of product candidate ADVM‑043 associated the ADVANCE trial, during the fourth quarter of 2018. Although ADVM‑043 was safely administered and was well tolerated, A1AT protein measurements did not reach clinically meaningful levels of expression, and no dose response was observed between the first three cohorts of patients. We, or any licensee or development partner, will be required to demonstrate through adequate and well-controlled clinical trials that our product candidate or another party’s product candidate containing one of our proprietary viral vectors are safe and effective for use in their target indications before seeking regulatory approvals for commercial sale. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of development, including after commencement of any of our clinical trials or any clinical trials using our

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proprietary viral vectors. Any such delay or failure could significantly harm our business prospects, financial condition and results of operations.

The results of preclinical studies and early clinical trials are not always predictive of future results. Any product candidate we or any of our future development partners advance into clinical trials may not have favorable results in later clinical trials, if any, or receive regulatory approval.

If our product candidates are not shown to be safe and effective, we may not realize the value of our investment in our technology. Promising preclinical results generated with a product candidate in animal models do not guarantee similar results when the candidate is tested in humans.  For example, the levels of protein expression achieved from a vector in a preclinical model, including non-human primate (“NHP”) models, may be significantly higher than the level of protein expression achieved in humans. In addition, even industry-accepted animal models may not accurately replicate human disease. For example, the laser-induced choroidal neovascularization model in NHP is the industry accepted animal model for wet AMD, where efficacy is assessed by reduction of the number of clinically relevant neovascular lesions. Success in pre-clinical studies or in early clinical trials does not mean that later clinical trials will be successful, because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through pre-clinical and initial clinical testing. Further, safety and/or efficacy issues with a product candidate may only become apparent when the candidate is tested in human patients suffering the relevant disease. For example, while pre-clinical testing of ADVM‑043 showed promise, in the ADVANCE trial, A1AT protein did not reach a clinically meaningful level of expression and we decided to discontinue development of ADVM‑043 in the fourth quarter of 2018. Furthermore, any future trials for any of our product candidates will need to demonstrate sufficient safety and efficacy for approval by regulatory authorities in larger patient populations. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. In addition, only a small percentage of products under development result in the submission of a marketing application and even fewer are approved for commercialization.

We cannot guarantee that results from any clinical trials that we plan will be successful, and any safety or efficacy concerns observed in any one of our clinical trials in our targeted indications could limit the prospects for regulatory approval of our product candidates in those and other indications.

Preliminary and interim data from our clinical trials that we may announce or publish from time to time may change as each clinical trial progresses.

From time to time, we may announce or publish preliminary or interim data from our clinical trials. Preliminary and interim results of a clinical trial are not necessarily predictive of final results. Preliminary and interim data are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues or further patient follow up occurs and more patient data become available. For example, although we announced in April 2019 preliminary safety data from the first cohort of patients in our OPTIC trial which showed no SAEs or DLTs, there is no guarantee that SAEs or DLTs will not occur later in our OPTIC trial. As a result, preliminary and interim data should be viewed with caution until the final data from a locked database are available. Material changes in the final data compared to preliminary or interim data, could significantly harm our business prospects, financial condition and results of operations.

Our product candidates are subject to extensive regulation, compliance with which is costly and time consuming, and such regulation may cause unanticipated delays or prevent the receipt of the required approvals to commercialize our product candidates.

The preclinical and clinical development, manufacturing, analytical testing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distribution of our product candidates are subject to extensive regulation by the FDA and by comparable regulatory authorities in foreign markets. In the U.S., we are not permitted to market our product candidates until we receive regulatory approval from the FDA. The process of obtaining regulatory approval is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved, as well as the target indications and patient population. Approval policies or regulations may change, and the regulatory authorities have substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed.

The FDA or comparable foreign regulatory authorities can delay, limit or deny approval of a product candidate for many reasons, including:

 

such authorities may disagree with the design or implementation of our or any of our future development partners’ clinical trials;

 

we or any of our future development partners may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that a product candidate is safe and effective for any indication;

 

such authorities may not accept clinical data from trials which are conducted at multinational clinical facilities or in countries where the standard of care is potentially different from that of the U.S.;

 

the results of clinical trials may not demonstrate the safety or efficacy required by such authorities for approval;

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we or