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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 June 30, 2020

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: 001-38433

 

Homology Medicines, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

47-3468154

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

One Patriots Park

Bedford, MA

01730

(Address of principal executive offices)

(Zip Code)

 

(781) 301-7277

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address, and former fiscal year, if changed since last report)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

FIXX

Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

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

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

As of August 3, 2020, the registrant had 45,218,124 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, the anticipated impact of the novel coronavirus (“COVID-19”) pandemic on our business, business strategy, prospective products, product approvals, research and development costs, anticipated timing and likelihood of success of clinical trials, expected timing of the release of clinical trial data, the plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”, or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the factors described under the sections in this Quarterly Report titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

2


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

4

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

4

 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (Unaudited)

4

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (Unaudited)

5

 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019 (Unaudited)

6

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019 (Unaudited)

7

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (Unaudited)

8

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

36

 

PART II.

 

OTHER INFORMATION

37

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

82

Item 3.

Defaults Upon Senior Securities

82

Item 4.

Mine Safety Disclosures

82

Item 5.

Other Information

82

Item 6.

Exhibits

83

Signatures

84

 

 

 

 

 

3


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

HOMOLOGY MEDICINES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(UNAUDITED)

 

 

 

As of

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

167,636

 

 

$

53,774

 

Short-term investments

 

 

39,007

 

 

 

208,614

 

Prepaid expenses and other current assets

 

 

3,164

 

 

 

4,189

 

Total current assets

 

 

209,807

 

 

 

266,577

 

Property and equipment, net

 

 

40,771

 

 

 

42,716

 

Right-of-use assets

 

 

6,386

 

 

 

 

Restricted cash

 

 

1,274

 

 

 

1,274

 

Total assets

 

$

258,238

 

 

$

310,567

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,103

 

 

$

2,608

 

Accrued expenses and other liabilities

 

 

9,274

 

 

 

7,644

 

Operating lease liabilities

 

 

2,413

 

 

 

 

Deferred rent

 

 

 

 

 

1,313

 

Deferred revenue

 

 

774

 

 

 

809

 

Total current liabilities

 

 

19,564

 

 

 

12,374

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities, net of current portion

 

 

14,190

 

 

 

 

Deferred rent, net of current portion

 

 

 

 

 

9,544

 

Deferred revenue, net of current portion

 

 

29,780

 

 

 

30,142

 

Total liabilities

 

 

63,534

 

 

 

52,060

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 10,000,000 shares authorized;

   no shares issued and outstanding

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 shares authorized;

   45,215,766 and 45,138,408 shares issued as of June 30, 2020 and

   December 31, 2019, respectively; and 45,210,653 and 45,116,742 shares

   outstanding as of June 30, 2020 and December 31, 2019, respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

465,034

 

 

 

457,994

 

Accumulated other comprehensive gain

 

 

11

 

 

 

183

 

Accumulated deficit

 

 

(270,345

)

 

 

(199,674

)

Total stockholders’ equity

 

 

194,704

 

 

 

258,507

 

Total liabilities and stockholders' equity

 

$

258,238

 

 

$

310,567

 

 

See notes to condensed consolidated financial statements.

 

4


 

HOMOLOGY MEDICINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(UNAUDITED)

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Collaboration revenue

 

$

567

 

 

$

392

 

 

$

1,155

 

 

$

662

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

27,471

 

 

 

22,827

 

 

 

56,780

 

 

 

43,368

 

General and administrative

 

 

8,793

 

 

 

5,538

 

 

 

16,563

 

 

 

10,390

 

Total operating expenses

 

 

36,264

 

 

 

28,365

 

 

 

73,343

 

 

 

53,758

 

Loss from operations

 

 

(35,697

)

 

 

(27,973

)

 

 

(72,188

)

 

 

(53,096

)

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

357

 

 

 

1,703

 

 

 

1,517

 

 

 

2,974

 

Total other income

 

 

357

 

 

 

1,703

 

 

 

1,517

 

 

 

2,974

 

Net loss

 

$

(35,340

)

 

$

(26,270

)

 

$

(70,671

)

 

$

(50,122

)

Net loss per share-basic and diluted

 

$

(0.78

)

 

$

(0.61

)

 

$

(1.56

)

 

$

(1.25

)

Weighted-average common shares outstanding-basic and diluted

 

 

45,207,934

 

 

 

43,075,587

 

 

 

45,180,096

 

 

 

40,230,484

 

 

See notes to condensed consolidated financial statements.

 

5


 

HOMOLOGY MEDICINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(UNAUDITED)

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss

 

$

(35,340

)

 

$

(26,270

)

 

$

(70,671

)

 

$

(50,122

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain (loss) on available for

  sale securities, net

 

 

30

 

 

 

180

 

 

 

(172

)

 

 

263

 

Total other comprehensive gain (loss)

 

 

30

 

 

 

180

 

 

 

(172

)

 

 

263

 

Comprehensive loss

 

$

(35,310

)

 

$

(26,090

)

 

$

(70,843

)

 

$

(49,859

)

 

See notes to condensed consolidated financial statements.

 


 

6


 

HOMOLOGY MEDICINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share and per share amounts)

(UNAUDITED)

 

 

 

 

 

Common Stock

$0.0001 Par Value

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Gain (Loss)

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2019

 

 

37,358,526

 

 

$

3

 

 

$

292,187

 

 

$

(77

)

 

$

(95,758

)

 

$

196,355

 

Vesting of common stock from

   option exercises

 

 

31,584

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

18

 

Issuance of common stock from

   option exercises

 

 

18,876

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

21

 

Issuance of common stock pursuant to

   employee stock purchase plan

 

 

28,311

 

 

 

 

 

 

396

 

 

 

 

 

 

 

 

 

396

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,243

 

 

 

 

 

 

 

 

 

1,243

 

Other comprehensive gain

 

 

 

 

 

 

 

 

 

 

 

83

 

 

 

 

 

 

83

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,852

)

 

 

(23,852

)

Balance at March 31, 2019

 

 

37,437,297

 

 

$

3

 

 

$

293,865

 

 

$

6

 

 

$

(119,610

)

 

$

174,264

 

Issuance of common stock in follow-on offering,

   net of discounts and issuance costs

 

 

6,388,889

 

 

 

1

 

 

 

134,524

 

 

 

 

 

 

 

 

 

134,525

 

Vesting of common stock from

   option exercises

 

 

31,024

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

18

 

Issuance of common stock from

   option exercises

 

 

12,404

 

 

 

 

 

 

55

 

 

 

 

 

 

 

 

 

55

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,970

 

 

 

 

 

 

 

 

 

1,970

 

Other comprehensive gain

 

 

 

 

 

 

 

 

 

 

 

180

 

 

 

 

 

 

180

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,270

)

 

 

(26,270

)

Balance at June 30, 2019

 

 

43,869,614

 

 

$

4

 

 

$

430,432

 

 

$

186

 

 

$

(145,880

)

 

$

284,742

 

 

 

 

 

 

Common Stock

$0.0001 Par Value

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Gain (Loss)

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2020

 

 

45,116,742

 

 

$

4

 

 

$

457,994

 

 

$

183

 

 

$

(199,674

)

 

$

258,507

 

Vesting of common stock from

   option exercises

 

 

15,542

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

Issuance of common stock from

   option exercises

 

 

34,311

 

 

 

 

 

 

135

 

 

 

 

 

 

 

 

 

135

 

Issuance of common stock pursuant to

   employee stock purchase plan

 

 

39,471

 

 

 

 

 

 

537

 

 

 

 

 

 

 

 

 

537

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,883

 

 

 

 

 

 

 

 

 

2,883

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(202

)

 

 

 

 

 

(202

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,331

)

 

 

(35,331

)

Balance at March 31, 2020

 

 

45,206,066

 

 

$

4

 

 

$

461,561

 

 

$

(19

)

 

$

(235,005

)

 

$

226,541

 

Vesting of common stock from

   option exercises

 

 

1,011

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Issuance of common stock from

   option exercises

 

 

3,576

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

16

 

Stock-based compensation

 

 

 

 

 

 

 

 

3,453

 

 

 

 

 

 

 

 

 

3,453

 

Other comprehensive gain

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

30

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,340

)

 

 

(35,340

)

Balance at June 30, 2020

 

 

45,210,653

 

 

$

4

 

 

$

465,034

 

 

$

11

 

 

$

(270,345

)

 

$

194,704

 

 

 

See notes to condensed consolidated financial statements.

 

7


 

HOMOLOGY MEDICINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(UNAUDITED)

 

 

 

Six months ended June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(70,671

)

 

$

(50,122

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

3,899

 

 

 

2,908

 

Noncash lease expense

 

 

450

 

 

 

 

Stock-based compensation expense

 

 

6,336

 

 

 

3,213

 

Amortization of premium on short-term investments

 

 

(193

)

 

 

(1,200

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

1,025

 

 

 

3,975

 

Accounts payable

 

 

4,920

 

 

 

576

 

Accrued expenses and other liabilities

 

 

1,888

 

 

 

302

 

Deferred revenue

 

 

(397

)

 

 

(233

)

Deferred rent

 

 

 

 

 

1,040

 

Operating lease liabilities

 

 

(1,090

)

 

 

 

Net cash used in operating activities

 

 

(53,833

)

 

 

(39,541

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(19,992

)

 

 

(189,475

)

Maturities of short-term investments

 

 

189,620

 

 

 

187,225

 

Purchases of property and equipment

 

 

(2,621

)

 

 

(16,385

)

Net cash provided by investing activities

 

 

167,007

 

 

 

(18,635

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in follow-on public offering,

   net of discounts and issuance costs

 

 

 

 

 

134,552

 

Proceeds from issuance of common stock pursuant to employee stock purchase plan

 

 

537

 

 

 

396

 

Proceeds from issuance of common stock from option exercises

 

 

151

 

 

 

76

 

Net cash provided by financing activities

 

 

688

 

 

 

135,024

 

Net change in cash, cash equivalents and restricted cash

 

 

113,862

 

 

 

76,848

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

55,048

 

 

 

39,992

 

Cash, cash equivalents and restricted cash, end of period

 

$

168,910

 

 

$

116,840

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Reclassification of liability for common stock vested

 

$

16

 

 

$

36

 

Property and equipment additions included in accounts payable

 

$

30

 

 

$

1,126

 

Property and equipment additions included in accrued expenses and other liabilities

 

$

7

 

 

$

 

Unrealized (loss) gain on available for sale securities, net

 

$

(172

)

 

$

263

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

 

 

$

27

 

 

See notes to condensed consolidated financial statements.

 

8


 

HOMOLOGY MEDICINES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(UNAUDITED)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business—Homology Medicines, Inc. (the “Company”) is a clinical stage biopharmaceutical company dedicated to translating proprietary gene editing and gene therapy technology into novel treatments for patients with rare genetic diseases with significant unmet medical needs by curing the underlying cause of the disease. The Company was founded in March 2015 as a Delaware corporation. Its principal offices are in Bedford, Massachusetts.

Since its inception, the Company has devoted substantially all of its resources to recruiting personnel, developing its technology platform and advancing its pipeline of product candidates, developing and implementing manufacturing processes, building out manufacturing and research and development space, and maintaining and building its intellectual property portfolio. The Company is subject to a number of risks similar to those of other companies conducting high-risk, early-stage research and development of product candidates. Principal among these risks are dependency on key individuals and intellectual property, competition from other products and companies, and the technical risks associated with the successful research, development and manufacturing of its product candidates. The Company’s success is dependent upon its ability to continue to raise additional capital in order to fund ongoing research and development, obtain regulatory approval of its products, successfully commercialize its products, generate revenue, meet its obligations, and, ultimately, attain profitable operations.

On April 2, 2018, the Company completed its initial public offering (“IPO”) with the sale of 10,350,000 shares of its common stock, including shares issued upon the exercise in full of the underwriters’ over-allotment option, at a public offering price of $16.00 per share, resulting in net proceeds of $150.8 million, after deducting underwriting discounts and commissions and offering expenses. Upon the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock automatically converted into 24,168,656 shares of common stock at the applicable conversion ratio then in effect.

On April 12, 2019, the Company completed a follow-on public offering of its common stock. The Company sold 5,555,556 shares of its common stock at a public offering price of $22.50 per share and received net proceeds of $116.9 million, after deducting underwriting discounts and commissions and offering expenses. In addition, on April 26, 2019 and May 7, 2019, in connection with the exercise in full of the underwriters’ option to purchase additional shares, the Company issued an aggregate of 833,333 shares of its common stock at a public offering price of $22.50 per share and received net proceeds of $17.6 million, after deducting underwriting discounts and commissions.

On March 12, 2020, the Company filed a Registration Statement on Form S-3 (File No. 333-237131) (the “Shelf”) with the Securities and Exchange Commission (“SEC”) in relation to the registration of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof for a period up to three years from the date of the filing. The Shelf became effective on March 12, 2020. The Company also simultaneously entered into a sales agreement with Cowen and Company, LLC (“Cowen”), as sales agent, providing for the offering, issuance and sale by the Company of up to an aggregate $150.0 million of its common stock from time to time in “at-the-market” offerings under the Shelf (the “ATM”). The Company did not sell any shares of common stock pursuant to the ATM during the six months ended June 30, 2020. At June 30, 2020, there remained $150.0 million of common stock available for sale under the ATM. Simultaneous with the filing of the Shelf, the previous Registration Statement on Form S-3 (File No. 333-230664) filed with the SEC on April 1, 2019, and a prior sales agreement with Cowen providing for the offering, issuance and sale by the Company of up to an aggregate $100.0 million of its common stock from time to time in “at-the-market” offerings, with $76.8 million of remaining capacity, were terminated.

To date, the Company has not generated any revenue from product sales and does not expect to generate any revenue from the sale of product in the foreseeable future. Through June 30, 2020, the Company has financed its operations primarily through public offerings of its common stock, the issuance of convertible preferred stock, and with proceeds from its collaboration and license agreement with Novartis Institutes of BioMedical Research, Inc. (“Novartis”) (see Note 10). During the six months ended June 30, 2020, the Company incurred a net loss of $70.7 million and as of June 30, 2020, had $270.3 million in accumulated deficit. The Company expects to incur additional operating losses and negative operating cash flows for the foreseeable future.

9


 

Based on current projections, management believes that existing cash, cash equivalents and short-term investments will enable the Company to continue its operations into the fourth quarter of 2021. In the absence of a significant source of recurring revenue, the continued viability of the Company beyond that point is dependent on its ability to continue to raise additional capital to finance its operations. There can be no assurance that the Company will be able to obtain sufficient capital to cover its costs on acceptable terms, if at all.

Basis of Presentation— The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the SEC for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2019, included in the Company's Annual Report on Form 10-K on file with the SEC.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments which are necessary for a fair statement of the Company’s financial position as of June 30, 2020, and consolidated results of operations for the three and six months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The Company’s condensed consolidated financial statements include the accounts of the Company and its subsidiary, Homology Medicines Securities Corporation, a wholly owned Massachusetts corporation, for the sole purpose of buying, selling, and holding securities on the Company’s behalf. All intercompany balances and transactions have been eliminated in the condensed consolidated financial statements.

Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and the disclosure of contingent assets and liabilities as of and during the reporting period. The Company bases its estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, revenue recognition, accrued research and development expenses and useful lives assigned to property and equipment. The Company assesses estimates on an ongoing basis; however, actual results could materially differ from those estimates.

Comprehensive Income (Loss) —Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s only element of other comprehensive income (loss) is unrealized gains and losses on available-for-sale investments.

Cash and Cash Equivalents and Restricted Cash—Cash and cash equivalents consist of standard checking accounts, money market accounts and certain investments. The Company considers all highly liquid investments with original or remaining maturities at the time of purchase of 90 days or less to be cash equivalents. Restricted cash consists of cash serving as collateral for letters of credit issued for security deposits for the Company’s facility leases in Bedford, Massachusetts.

The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the condensed consolidated statements of cash flows:

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

167,636

 

 

$

115,566

 

Restricted cash

 

 

1,274

 

 

 

1,274

 

Total cash, cash equivalents and restricted cash

 

$

168,910

 

 

$

116,840

 

 

10


 

Short-Term Investments—Short-term investments represent holdings of available-for-sale marketable securities in accordance with the Company’s investment policy and cash management strategy. Short-term investments mature within one-year from the balance sheet date. Investments in marketable securities are recorded at fair value, with any unrealized gains and losses reported within accumulated other comprehensive income as a separate component of stockholders’ equity until realized or until a determination is made that an other-than-temporary decline in market value has occurred. Any premium or discount arising at purchase is amortized and/or accreted to interest income and/or expense over the life of the of the underlying security. Such amortization and accretion, together with interest on securities, are included in interest income on the Company’s condensed consolidated statements of operations. The cost of marketable securities sold is determined based on the specific identification method and any realized gains or losses on the sale of investments are reflected as a component of other income.

Deferred Offering Costs—The Company capitalizes incremental legal, professional accounting and other third-party fees that are directly associated with equity financings as other current assets until the transactions are completed. After equity financings are complete, these costs are recorded in stockholders’ equity as a reduction of additional paid-in capital generated as a result of the offering.

Leases In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which eliminated the tests for lease classification under prior U.S. GAAP and requires lessees to recognize right-of-use assets and related lease liabilities on the balance sheet. The FASB subsequently issued the following amendments to ASU 2016-02 that have the same effective date and transition date: ASU No. 2018-01 - Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, ASU No. 2018-10 - Codification Improvements to Topic 842, Leases, ASU No. 2018-11 – Leases (Topic 842): Targeted Improvements, ASU No. 2018-20 – Leases (Topic 842): Narrow-Scope Improvements for Lessors, and ASU No. 2019-01 – Leases (Topic 842): Codification Improvements. The Company adopted these amendments with ASU 2016-02 (collectively, the new leasing standards) effective January 1, 2020.

The Company adopted the new leasing standards using the modified retrospective approach, as of January 1, 2020, with no restatement of prior periods or cumulative adjustments to retained earnings. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows the Company to carry forward the historical lease classification. In addition, the Company elected the practical expedient not to apply the recognition requirements in the leasing standards to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option that it is reasonably certain to exercise) and the practical expedient that permits lessees to make an accounting policy election (by class of underlying asset) to not separate lease components of a contract from non-lease components.

The Company determines if an arrangement is a lease at contract inception. The Company’s contracts are determined to contain a lease when all of the following criteria based on the specific circumstances of the arrangement are met: (1) there is an identified asset for which there are no substantive substitution rights; (2) the Company has the right to obtain substantially all of the economic benefits from the identified asset; and (3) the Company has the right to direct the use of the identified asset.

At the commencement date, operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The Company’s lease agreements do not provide an implicit rate. As a result, the Company utilizes an estimated incremental borrowing rate to discount lease payments, which is based on the rate of interest the Company would have to pay to borrow a similar amount on a collateralized basis over a similar term. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or lease incentives received. Operating lease cost is recognized over the expected term on a straight-line basis. Variable lease cost is recognized as incurred.

The Company acts as sublessor related to a sublease of the Company's former headquarters. Fixed sublease payments received are recognized on a straight-line basis over the sublease term. Right-of-use assets are periodically evaluated for impairment.

The expected lease term for those leases commencing prior to January 1, 2020 did not change with the adoption of the new leasing standards. The expected lease term for leases commencing after the adoption of the new leasing standards includes noncancelable lease periods and, when applicable, periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, as well as periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option.

11


 

As a result of the adoption of the new leasing standards, on January 1, 2020, the Company recorded non-cash transactions to recognize a right-of-use asset of $6.8 million, operating lease liabilities of $17.7 million and the derecognition of deferred rent of $10.9 million originally accounted for under legacy guidance. The adoption did not have a material impact on the condensed consolidated statement of operations. For additional information on the adoption of the new leasing standards, refer to Note 7.

 

 

 

January 1, 2020

(in thousands)

 

 

 

Prior to adoption

of new leasing

standards

 

 

Adjustment for

adoption

of new leasing

standards

 

 

As Adjusted

 

Right-of-use assets (1)(2)

 

$

 

 

$

6,835

 

 

$

6,835

 

Deferred rent (2)

 

$

1,313

 

 

$

(1,313

)

 

$

 

Deferred rent, net of current portion (2)

 

$

9,544

 

 

$

(9,544

)

 

$

 

Operating lease liabilities (3)

 

$

 

 

$

2,251