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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2019

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, 2018, 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 March 31, 2019, and consolidated results of operations and cash flows for the three months ended March 31, 2019 and 2018, respectively. Such adjustments are of a normal and recurring nature. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019.

Principles of Consolidation

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

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, 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.

Comprehensive Income (Loss)

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 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:

	March 31,
	2019		2018
	(in thousands)
Cash and cash equivalents	$	40,839	$	46,213
Restricted cash		1,274		1,772
Total cash, cash equivalents and restricted cash	$	42,113	$	47,985

Short-Term Investments

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), net.

Research and Development Costs

Research and Development Costs—Research and development costs are charged to expense as incurred. Research and development expense consists of expenses incurred in performing research and development activities, including salaries and benefits, materials and supplies, preclinical expenses, stock-based compensation expense, depreciation of equipment, contract services, and other outside expenses.

Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid expense or accrued research and development expense.

Revenue Recognition

Revenue Recognition— 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 amends the guidance for accounting for revenue from contracts with customers. This ASU supersedes the revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition (“ASC 605”), and creates a new Topic 606, Revenue from Contracts with Customers (“ASC 606”). In 2015 and 2016, the FASB issued additional ASUs related to Topic 606 that delayed the effective date of the new guidance, clarified certain aspects including principal versus agent considerations, identifying performance obligations, and licensing, and included other improvements and practical expedients. On January 1, 2019, the Company adopted ASC 606 using the full retrospective transition method.

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, the Company performs the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect consideration it is entitled to in exchange for the goods or services it transfers to the customer.

The promised good or services in the Company’s arrangements would likely consist of a license, rights to the Company’s intellectual property or research, development and manufacturing services. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer and are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised good or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on its own or whether the required expertise is readily available and whether the goods or services are integral or dependent to other goods or services in the contract.

The Company estimates the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract. The consideration may include fixed consideration and variable consideration. At the inception of each arrangement that includes variable consideration, the Company evaluates the amount of consideration to which the Company expects to be entitled to. The Company utilizes either the most likely amount method or expected value method to estimate the amount expected to be received based on which method best predicts the amount expected to be received. The amount of variable consideration that is included in the transaction price may be constrained and is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

The Company’s contracts may include development and regulatory milestone payments that are assessed under the most likely amount method and constrained until it is probable that a significant revenue reversal would not occur. Milestone payments that are not within the Company’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of such development and regulatory milestones and any related constraint, and if necessary, adjust its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenue in the period of adjustment.

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from the Company’s collaboration arrangement.

The Company allocates the transaction price based on the estimated standalone selling price of each performance obligation. The Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company utilizes key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs. Variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated are consistent with the amounts the Company would expect to receive for the satisfaction of each performance obligation.

The consideration allocated to each performance obligation is recognized as revenue when control is transferred for the related goods or services. For performance obligations which consist of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. The Company evaluates the measure of progress for its over-time arrangements at each reporting period and, if necessary, updates the measure of progress and revenue recognized.

The Company adopted ASC 606 effective January 1, 2019, using the full retrospective transition method. Under this method, the Company revised its condensed consolidated financial statements for prior period amounts as if ASC 606 had been effective for such periods. The references "as revised" used herein refer to revisions of data for the three months ended March 31, 2019 and the year ended December 31, 2018 as a result of the adoption of ASC 606. The adoption of ASC 606 did not have an impact on periods prior to January 1, 2018. In addition to revisions to financial statement amounts and related tables, Note 10 has been revised to reflect the adoption of ASC 606.

As part of the adoption, the Company reviewed its collaboration and license agreement with Novartis to determine the cumulative effect impact related to the adoption of ASC 606. (For a complete discussion of the accounting for the Company’s agreement with Novartis, see Note 10.) The adoption of ASC 606 resulted in a change to the pattern of revenue recognition whereby the Company expects to recognize revenue from its collaboration agreement with Novartis as costs are incurred, which likely will not occur evenly over the performance period as a result of applying the cost-to-cost method, in contrast to recognizing revenue on a straight-line basis over the estimated performance period under ASC 605. The impact on previously reported amounts as a result of the adoption of ASC 606 is as follows:

Condensed Consolidated Balance Sheets
	December 31, 2018
	(in thousands)
	As revised under ASC 606			As originally reported under ASC 605			Effect of change
Current portion of deferred revenue	$	770		$	3,684		$	(2,914	)
Long-term portion of deferred revenue	$	30,750		$	29,474		$	1,276
Accumulated deficit	$	(95,758	)	$	(97,396	)	$	1,638

Condensed Consolidated Statements of Operations and Comprehensive Loss
	Three Months Ended March 31, 2018
	(in thousands, except per share amounts)
	As revised under ASC 606			As originally reported under ASC 605			Effect of change
Collaboration revenue	$	1,129		$	823		$	306
Loss from operations	$	(10,696	)	$	(11,002	)	$	306
Net loss	$	(10,217	)	$	(10,523	)	$	306
Net loss per share attributable to common stockholders-basic and diluted	$	(4.09	)	$	(4.21	)	$	0.12

	For the Year Ended December 31, 2018
	(in thousands, except per share amounts)
	As revised under ASC 606			As originally reported under ASC 605			Effect of change
Collaboration revenue	$	5,322		$	3,684		$	1,638
Loss from operations	$	(59,926	)	$	(61,564	)	$	1,638
Net loss	$	(55,577	)	$	(57,215	)	$	1,638
Net loss per share attributable to common stockholders-basic and diluted	$	(1.95	)	$	(2.00	)	$	0.05

Condensed Consolidated Statement of Cash Flows
	Three Months Ended March 31, 2018
	(in thousands)
	As revised under ASC 606			As originally reported under ASC 605			Effect of change
Net loss	$	(10,217	)	$	(10,523	)	$	306
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred revenue	$	(463	)	$	(157	)	$	(306	)
Cash, cash equivalents and restricted cash, beginning of period	$	53,347		$	53,347		$	—
Cash, cash equivalents and restricted cash, end of period	$	47,985		$	47,985		$	—

	For the Year Ended December 31, 2018
	(in thousands)
	As revised under ASC 606			As originally reported under ASC 605			Effect of change
Net loss	$	(55,577	)	$	(57,215	)	$	1,638
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred revenue	$	(1,890	)	$	(252	)	$	(1,638	)
Cash, cash equivalents and restricted cash, beginning of period	$	53,347		$	53,347		$	—
Cash, cash equivalents and restricted cash, end of period	$	39,992		$	39,992		$	—

Net Loss per Share

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.

Diluted net loss per share is computed using 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.

Recent Accounting Pronouncements

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 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 evaluating the impact adoption of this standard will have 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. The Company adopted ASU No. 2016-18 on January 1, 2019, and reclassified restricted cash in the condensed consolidated statements of cash flows to be included in cash and cash equivalents. The reclassification was not material to the periods presented.

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 the application of ASU 2014-09. The Company is evaluating the impact adoption of this standard will have on its condensed consolidated financial statements.