0001564590-18-029297.txt : 20181113 0001564590-18-029297.hdr.sgml : 20181113 20181113160226 ACCESSION NUMBER: 0001564590-18-029297 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 65 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181113 DATE AS OF CHANGE: 20181113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Homology Medicines, Inc. CENTRAL INDEX KEY: 0001661998 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 473468154 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38433 FILM NUMBER: 181177862 BUSINESS ADDRESS: STREET 1: 45 WIGGINS AVE. CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 857-305-1825 MAIL ADDRESS: STREET 1: 45 WIGGINS AVE. CITY: BEDFORD STATE: MA ZIP: 01730 10-Q 1 fixx-10q_20180930.htm 10-Q fixx-10q_20180930.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 September 30, 2018

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)

 

Registrant’s telephone number, including area code: (781) 301-7277

 

45 Wiggins Avenue, Bedford, MA 01730

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

 

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, 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 November 5, 2018, the registrant had 37,495,773 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, 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 September 30, 2018 and December 31, 2017 (Unaudited)

4

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (Unaudited)

5

 

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017 (Unaudited)

6

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (Unaudited)

7

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

31

 

PART II.

 

OTHER INFORMATION

32

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

73

Item 3.

Defaults Upon Senior Securities

73

Item 4.

Mine Safety Disclosures

73

Item 5.

Other Information

73

Item 6.

Exhibits

74

Signatures

75

 

 

 

 

 

3


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

HOMOLOGY MEDICINES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,038,391

 

 

$

51,574,932

 

Short-term investments

 

 

201,505,628

 

 

 

78,083,604

 

Prepaid expenses and other current assets

 

 

8,322,324

 

 

 

1,944,751

 

Total current assets

 

 

245,866,343

 

 

 

131,603,287

 

Property and equipment, net

 

 

20,740,518

 

 

 

3,154,205

 

Deferred offering costs

 

 

 

 

 

1,000,262

 

Restricted cash

 

 

1,789,962

 

 

 

1,772,587

 

Total assets

 

$

268,396,823

 

 

$

137,530,341

 

Liabilities, convertible preferred stock and stockholders' equity (deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,120,883

 

 

$

2,538,057

 

Accrued expenses and other liabilities

 

 

3,847,760

 

 

 

2,860,025

 

Deferred rent

 

 

 

 

 

122,601

 

Deferred revenue

 

 

3,605,332

 

 

 

3,341,063

 

Total current liabilities

 

 

18,573,975

 

 

 

8,861,746

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Deferred rent, net of current portion

 

 

7,318,684

 

 

 

290,923

 

Deferred revenue, net of current portion

 

 

29,743,989

 

 

 

30,069,563

 

Total liabilities

 

 

55,636,648

 

 

 

39,222,232

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Convertible preferred stock:

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.0001 par value; 62,304,354 shares

   authorized; 62,269,144 shares issued and outstanding and aggregate liquidation

   preference of $44,211,092 as of December 31, 2017

 

 

 

 

 

42,994,550

 

Series B convertible preferred stock, $0.0001 par value; 64,930,561 shares

   authorized, issued and outstanding and aggregate liquidation preference of

   $93,500,008 as of December 31, 2017

 

 

 

 

 

94,767,610

 

Total convertible preferred stock

 

 

 

 

 

137,762,160

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 10,000,000 shares authorized as of

   September 30, 2018 and no shares authorized as of December 31, 2017;

   no shares issued and outstanding at September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 and 170,000,000 shares

   authorized as of September 30, 2018 and December 31, 2017, respectively;

   37,494,061 and 2,902,109 shares issued as of September 30, 2018 and

   December 31, 2017, respectively; and 37,310,063 and 2,637,011 shares

   outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

3,733

 

 

 

264

 

Additional paid-in capital

 

 

291,171,747

 

 

 

799,859

 

Accumulated other comprehensive loss

 

 

(20,878

)

 

 

(73,308

)

Accumulated deficit

 

 

(78,394,427

)

 

 

(40,180,866

)

Total stockholders’ equity (deficit)

 

 

212,760,175

 

 

 

(39,454,051

)

Total liabilities, convertible preferred stock and stockholders' equity (deficit)

 

$

268,396,823

 

 

$

137,530,341

 

 

See notes to condensed consolidated financial statements.

 

4


 

HOMOLOGY MEDICINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Collaboration revenue

 

$

954,149

 

 

$

 

 

$

2,703,998

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,393,759

 

 

 

4,946,611

 

 

 

31,667,396

 

 

 

11,801,872

 

General and administrative

 

 

3,843,343

 

 

 

1,718,159

 

 

 

12,213,329

 

 

 

5,592,937

 

Total operating expenses

 

 

17,237,102

 

 

 

6,664,770

 

 

 

43,880,725

 

 

 

17,394,809

 

Loss from operations

 

 

(16,282,953

)

 

 

(6,664,770

)

 

 

(41,176,727

)

 

 

(17,394,809

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of convertible preferred stock tranche

   liability

 

 

 

 

 

 

 

 

 

 

 

(876,000

)

Interest income

 

 

1,487,190

 

 

 

137,202

 

 

 

2,963,166

 

 

 

185,694

 

Total other income (expense)

 

 

1,487,190

 

 

 

137,202

 

 

 

2,963,166

 

 

 

(690,306

)

Net loss and net loss attributable to common

   stockholders-basic and diluted

 

$

(14,795,763

)

 

$

(6,527,568

)

 

$

(38,213,561

)

 

$

(18,085,115

)

Net loss per share attributable to common

   stockholders-basic and diluted

 

$

(0.40

)

 

$

(2.78

)

 

$

(1.48

)

 

$

(7.43

)

Weighted-average common shares outstanding-basic and diluted

 

 

37,273,402

 

 

 

2,351,398

 

 

 

25,849,608

 

 

 

2,434,651

 

 

See notes to condensed consolidated financial statements.

 

5


 

HOMOLOGY MEDICINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(14,795,763

)

 

$

(6,527,568

)

 

$

(38,213,561

)

 

$

(18,085,115

)

Other comprehensive gain:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain on available for sale securities, net

 

 

27,768

 

 

 

 

 

 

52,430

 

 

 

 

Total other comprehensive gain

 

 

27,768

 

 

 

 

 

 

52,430

 

 

 

 

Comprehensive loss

 

$

(14,767,995

)

 

$

(6,527,568

)

 

$

(38,161,131

)

 

$

(18,085,115

)

 

See notes to condensed consolidated financial statements.

 

 

 

6


 

HOMOLOGY MEDICINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Nine months ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(38,213,561

)

 

$

(18,085,115

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

725,825

 

 

 

483,389

 

Stock-based compensation expense

 

 

1,667,790

 

 

 

116,142

 

Accretion on short-term investments

 

 

(389,431

)

 

 

 

Change in fair value associated with convertible preferred stock tranche liability

 

 

 

 

 

876,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(6,377,573

)

 

 

(267,257

)

Accounts payable

 

 

(571,193

)

 

 

531,357

 

Accrued expenses and other liabilities

 

 

1,831,239

 

 

 

653,947

 

Deferred revenue

 

 

(61,305

)

 

 

 

Deferred rent

 

 

6,905,160

 

 

 

122,549

 

Net cash used in operating activities

 

 

(34,483,049

)

 

 

(15,568,988

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(232,460,163

)

 

 

 

Maturities of short-term investments

 

 

109,480,000

 

 

 

 

Purchases of property and equipment

 

 

(9,008,873

)

 

 

(1,621,265

)

Changes in restricted cash

 

 

(17,375

)

 

 

 

Net cash used in investing activities

 

 

(132,006,411

)

 

 

(1,621,265

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in initial public offering, net of discounts and

    issuance costs

 

 

150,843,215

 

 

 

 

Proceeds from issuance of common stock from option exercises

 

 

45,206

 

 

 

 

Proceeds from issuance of restricted common stock

 

 

64,498

 

 

 

 

Repurchase of unvested common stock

 

 

 

 

 

(17,470

)

Proceeds from issuance of Series A convertible preferred stock, net of issuance costs

 

 

 

 

 

20,479,488

 

Proceeds from issuance of Series B convertible preferred stock, net of issuance costs

 

 

 

 

 

83,105,026

 

Net cash provided by financing activities

 

 

150,952,919

 

 

 

103,567,044

 

Net change in cash and cash equivalents

 

 

(15,536,541

)

 

 

86,376,791

 

Cash and cash equivalents, beginning of period

 

 

51,574,932

 

 

 

11,392,207

 

Cash and cash equivalents, end of period

 

$

36,038,391

 

 

$

97,768,998

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Conversion of Series A convertible preferred stock into common stock upon initial public offering

 

$

42,994,550

 

 

$

 

Conversion of Series B convertible preferred stock into common stock upon initial public offering

 

$

94,767,610

 

 

$

 

Reclassification of liability for common stock vested

 

$

56,986

 

 

$

20,605

 

Property and equipment additions included in accounts payable

 

$

9,470,859

 

 

$

137,095

 

Reclassification of tranche liability upon issuance of convertible preferred stock

 

$

 

 

$

5,123,000

 

 

See notes to condensed consolidated financial statements.

 

7


 

HOMOLOGY MEDICINES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business—Homology Medicines, Inc. (the “Company”) is a pre-clinical stage biopharmaceutical company dedicated to translating proprietary gene editing and gene therapy technology into novel treatments for patients with rare genetic diseases. 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 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 clinical 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.

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 September 30, 2018, the Company has financed its operations primarily through the public offering of its common stock, the issuance of convertible preferred stock, and with proceeds from its collaboration and license agreement with Novartis (see Note 11).

On April 2, 2018, the Company completed an initial public offering (“IPO”) in which the Company issued and sold 10,350,000 shares of its common stock at a public offering price of $16.00 per share, for aggregate gross proceeds of $165.6 million before fees and expenses. The Company expects to incur additional operating losses and negative operating cash flows for the foreseeable future.

In connection with the IPO, the Company effected a one-for-5.263 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the conversion ratios for the Company’s Series A and Series B preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios. The reverse stock split became effective on March 16, 2018.

Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 24,168,656 shares of common stock at the applicable conversion ratio then in effect. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding.

Management believes that existing cash, cash equivalents and short-term investments will allow the Company to continue its operations for at least the next two years. 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 Securities and Exchange Commission (“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, 2017, included in the Company's final prospectus that forms a part of the Company’s Registration Statement on Form S-1 (Reg. No. 333-223409), filed with the SEC pursuant to Rule 424(b)(4) on March 29, 2018.

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

8


 

September 30, 2018, and consolidated results of operations and cash flows for the three and nine months ended September 30, 2018 and 2017, respectively. Such adjustments are of a normal and recurring nature. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2018.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The Company’s condensed consolidated financial statements include the accounts of the Company and 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, useful lives assigned to property and equipment, as well as the fair values of common stock, convertible preferred stock and convertible preferred stock tranche liability. The Company assesses estimates on an ongoing basis; however, actual results could materially differ from those estimates.

Cash and Cash Equivalents—Cash and cash equivalents consist of standard checking accounts, money market accounts and certain investments. The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents.

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 (deficit) until realized or until a determination is made that an other-than-temporary decline in market value has occurred. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. 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 (expense).

Revenue Recognition— The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the Company’s price to the buyer is fixed or determinable; and collectability is reasonably assured. The Company records as deferred revenue any amounts received or billed prior to satisfying the revenue recognition criteria. Deferred revenue not expected to be recognized within the next twelve months is reported as non-current deferred revenue.

In November 2017, the Company entered into a collaboration and license agreement for research, development, manufacturing and commercialization of products using the Company’s gene editing technology for the treatment of certain diseases (see Note 11). Consideration the Company may receive under the collaboration and license agreement include upfront nonrefundable payments, payments for research and manufacturing activities, payments based upon the achievement of certain milestones and royalties on any resulting net product sales.

Multiple Element Arrangements

The terms of the collaboration and license agreement contain multiple deliverables, including licenses, research and development activities, participation on steering committees and manufacturing activities. The Company evaluates the activities in its collaboration agreements to determine if the activities are consistent with a typical vendor-customer relationship, and if so, accounts for them in accordance with Accounting Standards Codification (“ASC”) Topic 605-25, Revenue Recognition – Multiple Element Arrangements. If not, the Company evaluates other applicable guidance.

The Company evaluates multiple element arrangements to determine the deliverables included in the arrangement and whether the individual deliverables represent separate units of accounting, or whether they must be accounted for as a combined unit of accounting. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price method and the appropriate revenue recognition principles are applied to each unit. This evaluation requires the Company to make judgments about the individual deliverables and whether such deliverables (1) have value to the customer on a standalone basis and (2) if the arrangement includes a general right of return with respect to the delivered item, delivery or

9


 

performance of the undelivered item is considered probable and substantially in the Company’s control. In assessing whether an item has standalone value, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can use any other deliverable for its intended purpose without the receipt of the remaining deliverables, whether the value of the deliverable is dependent on any undelivered item, and whether there are other vendors that can provide the undelivered items.

The consideration received under the arrangement that is fixed or determinable is then allocated among the separate units of accounting based on the relative selling prices of the separate units of accounting. For arrangements identified with multiple units of accounting, an allocation of the consideration is performed. The Company determines the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence (“VSOE”), if available; third-party evidence (“TPE”) of selling price if VSOE is not available; or best estimate of selling price (“BESP”), if neither VSOE nor TPE is available. The Company typically uses BESP to estimate the selling price as it generally does not have VSOE or TPE of selling price for its units of accounting. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs.

The Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria are satisfied for that particular unit of accounting. The Company recognizes revenue from a combined unit of accounting over the contractual or estimated performance period for the undelivered items. If there is no discernible pattern of performance or objectively measurable performance measures do not exist for a unit of accounting, then the Company recognizes revenue on a straight-line basis over the period the Company is expected to complete its performance obligations. Conversely, if the pattern of performance over which the service is provided to the customer can be determined and objectively measurable performance measures exist, then the Company recognizes revenue under the arrangement using the proportional performance method. Amounts received prior to satisfying the associated revenue recognition criteria are recorded as deferred revenue on the consolidated balance sheets. Amounts not expected to be recognized within one year following the balance sheet date are classified as non-current deferred revenue.

Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under an arrangement. Steering committee services that are not inconsequential or perfunctory and that are determined to be performance obligations are combined with other research services or performance obligations required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which the Company expects to complete its aggregate performance obligations.

Consideration for development and sales milestones are generally not considered fixed or determinable until the milestone is achieved. Consideration due to or received by the Company for the achievement of milestones are allocated to the units of accounting, if applicable, and recognized as revenue for the portion of the performance obligation that is complete at the time the milestone is achieved. The Company will defer the remaining portion of the milestone payment and recognize it as revenue over the remaining term of the performance obligation. If no such performance obligation exists, milestone payments are recognized as revenue upon achievement, assuming all other revenue recognition criteria are met.

Royalties earned on product sales, if any, are recognized based on contractual terms of the agreement when reported sales are reliably measurable and collectibility is reasonably assured, provided that there are no performance obligations then remaining. To date, none of the Company’s product candidates have been approved and, therefore, the Company has not earned any royalty revenue from product sales.

In the event that the agreement was to be terminated and the Company had no further performance obligations at that time, the Company would recognize as revenue any portion of the upfront payment and other payments that had not previously been recorded as revenue and were classified as deferred revenue at the date of such termination.

Net Loss per Share—Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common shares outstanding during the period and, if dilutive, the weighted-average number of potential shares of common stock. Net loss per share attributable to common stockholders is calculated using the two-class method, which is an earnings allocation formula that determines net loss per share for the holders of the Company’s common shares and participating securities. The Company’s convertible preferred stock contains participation rights in any dividend paid by the Company and is deemed to be a participating security. Net loss attributable to common stockholders and participating preferred shares are allocated to each share on an as-converted basis as if all of the earnings for the period had been distributed. The participating securities do not include a contractual obligation to share in losses of the Company and are not included in the calculation of net loss per share in the periods in which a net loss is recorded.

10


 

Diluted net loss per share is computed using the more dilutive of (a) the two-class method or (b) the if converted method. The Company allocates earnings first to preferred stockholders based on dividend rights and then to common and preferred stockholders based on ownership interests. The weighted-average number of common shares included in the computation of diluted net loss gives effect to all potentially dilutive common equivalent shares, including outstanding stock options, unvested shares of common stock and convertible preferred stock.

Common stock equivalent shares are excluded from the computation of diluted net loss per share if their effect is antidilutive. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is generally the same as basic net loss per share attributable to common stockholders since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the three and nine months ended September 30, 2018 and 2017.

Recent Accounting Pronouncements—The Jumpstart Our Business Startups Act of 2012 permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. As an emerging growth company, the Company has elected to take advantage of this extended transition period.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue (Topic 606): Revenue from Contracts with Customers (“ASU 2014-09”), which will replace existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. The new standard and the subsequent amendments will be effective for the Company beginning on January 1, 2019. The guidance permits two methods of adoption: full retrospective method (retrospective application to each prior reporting period presented) or modified retrospective method (retrospective application with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures). The Company plans to adopt the standard using the full retrospective method.

The Company is in the process of evaluating the impact of the adoption of ASU No. 2014-09 on its condensed consolidated financial statements. Specifically, the Company continues to assess the potential impact that Topic 606 may have on its financial position and results of operations as it relates to the collaboration and license agreement with Novartis (see Note 11). The Company expects that certain accounting conclusions will require further judgment, including, but not limited to, the evaluation of variable consideration, and in particular, milestone payments due from Novartis as the inclusion of milestone payments in the transaction price could accelerate revenue recognized under ASC 606 compared to ASC 605. The Company plans to finalize its assessment during the fourth quarter of 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which eliminates the current tests for lease classification under U.S. GAAP and requires lessees to recognize the right-to-use assets and related lease liabilities in the balance sheet. ASU No. 2016-02 is effective for the Company beginning January 1, 2020 with early application permitted. The new standard provides for a modified retrospective application. The Company is in the process of evaluating the impact of the adoption of ASU No. 2016-02 on its condensed consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes certain aspects of the accounting for share-based payments granted to employees. This update includes multiple provisions intended to simplify various aspects of the accounting for share-based payment transactions including accounting for excess tax benefits and tax deficiencies, classification of excess tax benefits in the statement of cash flows and accounting for award forfeitures.  Upon adoption of ASU 2016-09, the Company’s accounting policy is to recognize forfeitures as they occur. ASU No. 2016-09 was adopted by the Company on January 1, 2018 and the adoption did not have a material impact on its condensed consolidated financial statements.

In December 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which requires that amounts described as restricted cash or cash equivalents must be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for the Company beginning January 1, 2019, with early application permitted. The new standard must be applied retrospectively to all periods presented. The Company does not expect the adoption of this standard will have a material impact on its condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which changes certain aspects of the accounting for share-based payments granted to nonemployees. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. ASU 2018-07 is effective for the Company beginning January 1, 2020. Early application of this standard is permitted however companies may not apply this standard earlier than it applies ASU 2014-09. The Company is evaluating the impact adoption of this standard will have on its condensed consolidated financial statements.

11


 

3. INVESTMENTS

The Company invests its excess cash in fixed income instruments denominated and payable in U.S. dollars including U.S. treasury securities, commercial paper, corporate debt securities and asset-backed securities in accordance with the Company’s investment policy that primarily seeks to maintain adequate liquidity and preserve capital.

 

The Company has designated all investments as available-for-sale and therefore such investments are reported at fair value. Unrealized gains or losses on investments are recorded in accumulated other comprehensive income or loss, a component of stockholders’ equity (deficit), on the Company’s condensed consolidated balance sheets.

The following table summarizes the Company’s investments, which are included in cash equivalents and short-term investments, as of September 30, 2018 and December 31, 2017:

 

As of September 30, 2018

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Money market mutual funds

 

$

11,441,399

 

 

$

 

 

$

 

 

$

11,441,399

 

Asset-backed securities

 

 

19,485,610

 

 

 

367

 

 

 

(3,543

)

 

 

19,482,434

 

Commercial paper

 

 

98,181,285

 

 

 

 

 

 

 

 

 

98,181,285

 

Corporate debt securities

 

 

54,428,208

 

 

 

6,772

 

 

 

(11,505

)

 

 

54,423,475

 

U.S. Treasury securities

 

 

54,440,052

 

 

 

 

 

 

(12,969

)

 

 

54,427,083

 

Total

 

$

237,976,554

 

 

$

7,139

 

 

$

(28,017

)

 

$

237,955,676

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Money market mutual funds

 

$

44,181,756

 

 

$

 

 

$

 

 

$

44,181,756

 

Asset-backed securities

 

 

7,428,021

 

 

 

 

 

 

(6,318

)

 

 

7,421,703

 

Commercial paper

 

 

34,882,298

 

 

 

 

 

 

 

 

 

34,882,298

 

Corporate debt securities

 

 

26,905,815

 

 

 

 

 

 

(49,532

)

 

 

26,856,283

 

U.S. Treasury securities

 

 

8,940,778

 

 

 

 

 

 

(17,458

)

 

 

8,923,320

 

Total

 

$

122,338,668

 

 

$

 

 

$

(73,308

)

 

$

122,265,360

 

 

As of September 30, 2018, the Company does not consider those securities that are in an unrealized loss position to be other-than-temporarily impaired, as it has the ability to hold such investments until recovery of the fair value. The Company utilizes the specific identification method in computing realized gains and losses. The Company had no realized gains and losses on its available-for-sale securities for the three and nine months ended September 30, 2018 and 2017. The contractual maturity dates of all of the Company’s investments are less than one year.

 

12


 

4. FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash and cash equivalents, short-term investments, restricted cash and accounts payable. The carrying amount of cash, restricted cash and accounts payable are each considered a reasonable estimate of fair value due to the short-term maturity.

Assets measured at fair value on a recurring basis were as follows:

 

Description

 

As of

September 30, 2018

 

 

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

 

 

Significant Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

11,441,399

 

 

$

11,441,399

 

 

$

 

 

$

 

U.S. Treasury securities

 

 

25,008,649

 

 

 

 

 

 

25,008,649

 

 

 

 

Total cash equivalents

 

$

36,450,048

 

 

$

11,441,399

 

 

$

25,008,649

 

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

19,482,434

 

 

$

 

 

$

19,482,434

 

 

$

 

Commercial paper

 

 

98,181,285

 

 

 

 

 

 

98,181,285

 

 

 

 

Corporate debt securities

 

 

54,423,475

 

 

 

 

 

 

54,423,475

 

 

 

 

U.S. Treasury securities

 

 

29,418,434

 

 

 

 

 

 

29,418,434

 

 

 

 

Total short-term investments

 

$

201,505,628

 

 

$

 

 

$

201,505,628

 

 

$

 

Total financial assets

 

$

237,955,676

 

 

$

11,441,399

 

 

$

226,514,277

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

As of

December 31, 2017

 

 

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

 

 

Significant Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

$

44,181,756

 

 

$

44,181,756

 

 

$

 

 

$

 

Total cash equivalents

 

$

44,181,756

 

 

$

44,181,756

 

 

$

 

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

7,421,703

 

 

$

 

 

$

7,421,703

 

 

$

 

Commercial paper

 

 

34,882,298

 

 

 

 

 

 

34,882,298

 

 

 

 

Corporate debt securities

 

 

26,856,283

 

 

 

 

 

 

26,856,283

 

 

 

 

U.S. Treasury securities

 

 

8,923,320

 

 

 

 

 

 

8,923,320

 

 

 

 

Total short-term investments

 

$

78,083,604

 

 

$

 

 

$

78,083,604

 

 

$

 

Total financial assets

 

$

122,265,360

 

 

$

44,181,756

 

 

$

78,083,604

 

 

$

 

 

Short-term securities are valued using models or other valuation methodologies that use Level 2 inputs. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, default rates, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

The convertible preferred stock tranche liability was stated at fair value and was measured using a Level 3 input because the fair value measurement was based, in part, on significant inputs not observed in the market.

13


 

The reconciliation of changes in the fair value of financial instruments based on Level 3 inputs for the nine months ended September 30, 2017, consisted of:

 

 

 

 

 

 

Fair value as of January 1, 2017

 

$

4,247,000

 

Change in fair value of convertible preferred stock tranche

   liability

 

 

876,000

 

Reduction in tranche liability due to preferred stock issuance

 

 

(5,123,000

)

Fair value as of September 30, 2017

 

$

 

 

There were no transfers between fair value measure levels during the three and nine months ended September 30, 2018 and 2017.

5. PROPERTY AND EQUIPMENT, NET

Property and equipment, net at September 30, 2018 and December 31, 2017 consists of the following:

 

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Laboratory equipment

 

$

5,387,627

 

 

$

3,713,912

 

Computers and purchased software

 

 

272,842

 

 

 

252,436

 

Furniture and fixtures

 

 

51,379

 

 

 

51,379

 

Leasehold improvements

 

 

15,127,129

 

 

 

34,120

 

Assets not yet in service

 

 

1,525,008

 

 

 

 

 

 

 

22,363,985

 

 

 

4,051,847

 

Less: Accumulated depreciation

 

 

(1,623,467

)

 

 

(897,642

)

Property and equipment, net

 

$

20,740,518

 

 

$

3,154,205

 

 

Depreciation expense for the three and nine months ended September 30, 2018 was approximately $0.3 million and $0.7 million, respectively, compared to $0.2 million and $0.5 million for the same periods in the prior year. No property and equipment was disposed of during the nine months ended September 30, 2018. Leasehold improvements consist primarily of costs associated with the buildout of the Company’s new research and development, manufacturing and general office space in Bedford, Massachusetts, which the Company partially occupied, commencing in October 2018. Assets not yet in service consists of equipment and furniture purchased for the new space that was not in service as of September 30, 2018.

6. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities at September 30, 2018 and December 31, 2017 consist of the following:

 

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Accrued compensation and benefits

 

$

2,407,845

 

 

$

1,435,015

 

Accrued professional fees

 

 

484,358

 

 

 

1,119,959

 

Accrued research and development expenses

 

 

825,494

 

 

 

182,500

 

Accrued unvested common stock subject to repurchase

 

 

130,063

 

 

 

122,551

 

 

 

$

3,847,760

 

 

$

2,860,025

 

 

14


 

7. COMMITMENTS AND CONTINGENCIES

Operating Leases—In September 2016, the Company entered into a noncancelable operating lease beginning in November 2016 for office, laboratory and manufacturing space in Bedford, Massachusetts, that expires in October 2021, with an option for an additional three-year term. In addition to the leased space, the Company has certain rights to expand the lease to include certain adjacent property. As of September 30, 2018, no expansion rights had been exercised. On August 13, 2018, the Company entered into a sublease agreement for the entire leased premises. The rent commencement date of the sublease is estimated to be December 1, 2018, and the sublease will terminate on the scheduled termination date of the original lease. Under the terms of the sublease, the subtenant is obligated to pay the Company aggregate base rent of approximately $2.7 million over the term of the sublease. The Company did not record a loss on the sublease as future payments to its landlord were not materially different from future rent payments expected from the subtenant over the term of the sublease.

In December 2017, the Company entered into a noncancelable operating lease for approximately 67,000 square feet of research and development, manufacturing and general office space in Bedford, Massachusetts. The lease expires in February 2027 with an option for an additional five-year term. Rent is due under the lease in two phases with rent on the first 46,000 square feet starting in September 2018 and with rent on the remaining 21,000 square feet starting in March 2019. The initial annual base rent is $39.50 per square foot and will increase by three percent annually. The Company is obligated to pay, on a pro-rata basis, real estate taxes and operating costs related to the premises.

Future minimum lease payments, net of anticipated sublease payments, as of September 30, 2018 are as follows:

 

Years Ending December 31,

 

Amount

 

2018

 

$

599,858

 

2019

 

 

2,536,599

 

2020

 

 

2,754,891

 

2021

 

 

2,758,192

 

2022

 

 

2,928,014

 

Thereafter

 

 

13,177,338

 

Total future minimum lease payments

 

$

24,754,892

 

 

The lease agreement entered into in December 2017 allows for a tenant improvement allowance not to exceed $10.9 million to be applied to the total cost of tenant improvements to the leased premises. The tenant improvement allowance must be used on or before August 31, 2019 or it will be deemed forfeited with no further obligation by the landlord. Tenant improvement allowances due or received are recorded as deferred rent incentives on the Company’s condensed consolidated balance sheets and are recorded as a reduction to rent expense over the term of the lease. As of September 30, 2018, deferred rent incentives totaled $5.1 million.

The Company recorded rent expense of $0.5 million and $2.3 million for the three and nine months ended September 30, 2018, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2017, respectively. The Company maintains letters of credit, secured by restricted cash, for security deposits totaling $1.8 million as of September 30, 2018 and December 31, 2017, respectively, in conjunction with its current leases.

 

8. STOCK INCENTIVE PLANS

2015 Stock Incentive Plan

In December 2015, the Board of Directors adopted the 2015 Stock Incentive Plan (the “2015 Plan”), which provided for the grant of qualified incentive and nonqualified stock options or restricted stock awards to the Company’s employees, officers, directors, advisors, and outside consultants. In February 2017 and July 2017, the Board of Directors amended the 2015 Plan to increase the number of shares available for issuance under the 2015 Plan to 2,446,323 and 3,225,346, respectively.

Stock options generally vest over a four-year period and expire ten years from the date of grant. Certain options provide for accelerated vesting if there is a change in control, as defined in the 2015 Plan. At September 30, 2018, there were no additional shares available for future grant under the 2015 Plan.

15


 

2018 Incentive Award Plan

In March 2018, the Company’s Board of Directors adopted and the Company’s stockholders approved the Homology Medicines, Inc. 2018 Incentive Award Plan (the “2018 Plan” and, together with the 2015 Plan, the “Plans”), which became effective upon the effectiveness of the registration statement on Form S-1 for the Company’s initial public offering. Upon effectiveness of the 2018 Plan, the Company ceased granting new awards under the 2015 Plan.

The 2018 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. The number of shares of common stock initially available for issuance under the 2018 Plan was 3,186,205 shares of common stock plus the number of shares subject to awards outstanding under the 2015 Plan that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by the Company on or after the effective date of the 2018 Plan. In addition, the number of shares of common stock available for issuance under the 2018 Plan is subject to an annual increase on the first day of each calendar year beginning on January 1, 2019 and ending on and including January 1, 2028 equal to the lesser of (i) 4% of the Company’s outstanding shares of common stock on the final day of the immediately preceding calendar year and (ii) such smaller number of shares of common stock as determined by the Company’s Board of Directors, provided that not more than 20,887,347 shares of common stock may be issued under the 2018 Plan upon the exercise of incentive stock options. At September 30, 2018, there were 2,418,853 shares available for future grant under the 2018 Plan.

 

2018 Employee Stock Purchase Plan

In March 2018, the Company’s Board of Directors adopted and the Company’s stockholders approved the Homology Medicines, Inc. 2018 Employee Stock Purchase Plan (the “ESPP”). The ESPP allows employees to buy Company stock through after-tax payroll deductions at a discount from market value. The number of shares of common stock initially available for issuance under the ESPP was 353,980 shares of common stock plus an annual increase on the first day of each calendar year beginning on January 1, 2019 and ending on and including January 1, 2028 equal to the lesser of (i) 1% of the Company’s outstanding shares of common stock on the final day of the immediately preceding calendar year and (ii) such smaller number of shares of common stock as determined by the Company’s Board of Directors, provided that not more than 4,778,738 shares of common stock may be issued under the ESPP. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.

 The Company commenced offerings under the ESPP on September 1, 2018. Under the ESPP, employees may purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market value on the first trading day of an offering period or the last trading day of an offering period. The ESPP generally provides for offering periods of six months in duration with purchase periods ending on the final trading day of each February and August. Contributions under the ESPP are limited under the provisions of the Internal Revenue Code, unless the plan administrator otherwise determines, to a maximum of 15% of an employee’s eligible compensation.

 

Stock-based compensation expense

Total stock-based compensation expense for employees, directors and non-employees for the three and nine months ended September 30, 2018 and 2017 is as follows:

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

325,466

 

 

$

29,917

 

 

$

625,813

 

 

$

52,040

 

General and administrative

 

 

393,132

 

 

 

27,967

 

 

 

1,041,977

 

 

 

64,102

 

 

 

$

718,598

 

 

$

57,884

 

 

$

1,667,790

 

 

$

116,142

 

 

As of September 30, 2018, there was $9.5 million of unrecognized compensation expense related to unvested employee and non-employee share-based compensation arrangements granted under the Plans. The unrecognized compensation expense is estimated to be recognized over a period of 2.9 years at September 30, 2018.

The Company recognizes compensation expense for awards to employees based on the grant date fair value of stock-based awards on a straight-line basis over the period during which an award holder provides service in exchange for the award, which is generally the vesting period. The fair value of each option award is estimated on the date of grant using the Black-Scholes option- pricing model, with the assumptions noted in the table below. Expected volatility for the Company’s common stock was determined based on an average of the historical volatility of a peer group of publicly traded companies that are similar to the Company. The expected term of options granted to employees was calculated using the simplified method, which represents the average of the

16


 

contractual term of the option and the weighted-average vesting period of the option. The Company uses the simplified method because it does not have sufficient historical option exercise data to provide a reasonable basis upon which to estimate expected term. The contractual life of the option was used for the expected life of nonemployee grants. The assumed dividend yield is based upon the Company’s expectation of not paying dividends in the foreseeable future. The risk-free rate is determined based upon the U.S. Treasury yield curve in effect at the time of grant for periods commensurate with the expected life of the option. The Company recognizes forfeitures as they occur.

In determining the exercise prices for options granted, the Company’s Board of Directors considered the fair value of the common stock as of the measurement date. For the awards that were granted prior to the Company’s IPO, the Board of Directors determined the fair value of the common stock at each award grant date based upon a variety of factors, including the results obtained from an independent third-party valuation, the Company’s financial position and historical financial performance, the status of technological developments within the Company’s proposed products, an evaluation or benchmark of the Company’s competition, the current business climate in the marketplace, the illiquid nature of the common stock, arm’s length sales of the Company’s capital stock, including convertible preferred stock, the effect of the rights and preferences of the preferred shareholders, and the prospects of a liquidity event, among others.

The assumptions used in Black-Scholes option pricing model for the three and nine months ended September 30, 2018 and 2017 are as follows:

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

2018

 

2017

 

2018

 

2017

Expected volatility

 

56.56% - 56.64%

 

54.38%

 

52.80% - 60.12%

 

53.52% - 54.38%

Weighted-average risk-free interest rate

 

2.77% - 3.00%

 

1.76%

 

2.33% - 3.00%

 

1.76% - 2.28%

Expected dividend yield

 

— %

 

— %

 

— %

 

— %

Expected term (in years)

 

6.25

 

6.25

 

5.5 - 7.6

 

6.25

Underlying common stock fair value

 

$15.96 - $20.41

 

$2.89

 

$6.63 - $20.98

 

$0.63 - $2.89

 

A summary of option activity under the Plans for the nine months ended September 30, 2018 is as follows:

 

 

 

Number of

Options

 

 

Weighted-

Average Exercise

Price per Share

 

 

Weighted-

Average

Remaining

Contractual

Term (in Years)

 

 

Aggregate

Intrinsic Value

 

Outstanding at January 1, 2018

 

 

1,971,711

 

 

$

3.61

 

 

 

9.3

 

 

$

5,977,162

 

Granted

 

 

870,059

 

 

$

16.09

 

 

 

 

 

 

 

 

 

Exercised

 

 

(73,296

)

 

$

1.50

 

 

 

 

 

 

 

 

 

Cancelled/Forfeited

 

 

(71,525

)

 

$

2.71

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2018

 

 

2,696,949

 

 

$

7.79

 

 

 

8.9

 

 

$

40,650,382

 

Vested and expected to vest at

   September 30, 2018

 

 

2,696,949

 

 

$

7.79

 

 

 

8.9

 

 

$

40,650,382

 

Exercisable at September 30, 2018

 

 

589,913

 

 

$

3.42

 

 

 

8.3

 

 

$

11,470,476

 

 

The total intrinsic value of options exercised during the nine months ended September 30, 2018 was $1.6 million. There were no option exercises in 2017. The weighted-average grant date fair value per share for options granted during the nine months ended September 30, 2018 and 2017 was $8.51 and $1.19, respectively.

Stock options granted pursuant to the 2015 Plan permit option holders to elect to exercise unvested options in exchange for unvested common stock. Options granted under the 2015 Plan that are exercised prior to vesting will continue to vest according to the respective option agreement, and such unvested shares are subject to repurchase by the Company at the optionee’s original exercise price in the event the optionee’s service with the Company voluntarily or involuntarily terminates.

17


 

A summary of the Company’s unvested common stock from early exercises that is subject to repurchase by the Company is as follows:

 

 

 

Shares

 

Unvested shares - January 1, 2018

 

 

265,098

 

Vested

 

 

(97,250

)

Exercised

 

 

16,150

 

Repurchased

 

 

 

Unvested shares - September 30, 2018

 

 

183,998

 

 

As of September 30, 2018 and December 31, 2017, 183,998 and 265,098 shares, respectively, remained subject to a repurchase right by the Company, with a related liability included in accrued expenses and other liabilities in the condensed consolidated balance sheets of  $0.1 million as of each date.

 

 

9. CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

On April 2, 2018, the Company closed its initial public offering with the sale of 10,350,000 shares of 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.

The following table provides a rollforward of the changes in convertible preferred stock and stockholders’ equity (deficit) for the nine months ended September 30, 2018:

 

 

 

Convertible Preferred

Stock

$0.0001 Par Value

 

 

Common Stock

$0.0001 Par Value

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

Equity

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

(Deficit)

 

Balance, January 1, 2018

 

 

127,199,705

 

 

$

137,762,160

 

 

 

2,637,011

 

 

$

264

 

 

$

799,859

 

 

$

(73,308

)

 

$

(40,180,866

)

 

$

(39,454,051

)

Conversion of convertible preferred stock

   into common stock upon initial

   public offering

 

 

(127,199,705

)

 

 

(137,762,160

)

 

 

24,168,656

 

 

 

2,417