Q32 Bio Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the ‘‘Risk Factors’’ section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied, by these forward-looking statements. Overview We are a clinical-stage genetic medicines company dedicated to transforming the lives of patients suffering from rare genetic diseases with significant unmet medical needs by curing the underlying cause of the disease. Our proprietary platform is designed to utilize our human hematopoietic stem cell derived adeno-associated virus vectors, or AAVHSCs, to precisely and efficiently deliver single administration genetic medicines in vivo either through gene therapy or nuclease-free gene editing across a broad range of genetic disorders. Our diverse set of AAVHSCs allows us to precisely target, via a single injection, a wide range of disease-relevant tissues, including the liver, central nervous system, or CNS, peripheral nervous system, or PNS, bone marrow, muscle and eye. Our genetic medicines platform is designed to provide us the flexibility to choose the method we believe is best suited from either gene therapy or gene editing for each disease we pursue, based on such factors as the targeted disease biology, the biodistribution of our AAVHSCs to key tissues and the rate of cell division the tissues exhibit. Our product development strategy is to continue to develop in parallel both gene therapy and gene editing, while initially leveraging the experience from our gene therapy product candidates to further advance our gene editing. We believe our dual technology platform will allow us to provide transformative cures using either modality. The unique properties of our proprietary family of 15 AAVHSCs enable us to focus on a method of gene editing called gene integration, through the replacement of an entire diseased gene in the genome with a whole functional copy by harnessing the naturally occurring deoxyribonucleic acid, or DNA, repair process of homologous recombination, or HR. We believe our HR-driven gene editing approach will allow us to efficiently perform gene editing at therapeutic levels without unwanted on- and off-target modifications, and to directly measure and confirm those modifications in an unbiased manner to ensure only the intended changes are made. By utilizing the body’s natural mechanism of correcting gene defects, we also avoid the need for exogenous nucleases, or bacteria-derived enzymes used in other gene editing approaches to cut DNA, which are known to significantly increase the risk of unwanted modifications. We have fully integrated process development and Good Manufacturing Practice, or GMP, manufacturing capabilities that support the full breadth and flexibility of our AAVHSC capsid library. Our process development expertise covers all gene therapy and gene editing development functions and incorporates deep characterization and understanding of vector design and their consequences. Our manufacturing process is a versatile system that rapidly delivers high quality vector at scale. The manufacturing capacity within our 25,000-square-foot GMP manufacturing facility includes multi-suite and multi-product capabilities to support our clinical development programs in both gene therapy and gene editing and we are now producing all of the clinical material for the pheNIX trial in this facility. Our ‘plug and play’ manufacturing process and platform is a commercial manufacturing process that has successfully produced several of our product candidates. We are currently operating three 500-liter bioreactors in our internal manufacturing facility and have successfully produced GMP material at the 500-liter scale for multiple pipeline candidates. Additionally, we have successfully executed our manufacturing platform with multiple product candidates at the 2,000-liter bioreactor scale. Our management team has a successful track record of discovering, developing and commercializing therapeutics with a particular focus on rare diseases. We have a robust intellectual property portfolio with issued composition of matter patents in the United States for our family of 15 AAVHSCs and we believe the breadth and depth of our intellectual property is a strategic asset that has the potential to provide us with a significant competitive advantage. We continue to build on our intellectual property estate through our ongoing product and platform development efforts. HMI-102 for the Treatment of PKU in Adult Patients We are currently in Phase 2 of the pheNIX clinical trial with our first and lead product candidate, HMI-102, a gene therapy for the treatment of adults with phenylketonuria, or PKU. In November 2020, we reported positive safety and efficacy clinical data from the dose-escalation phase of the trial. As of the data cutoff date of October 19, 2020, six patients in the dose-escalation phase of the trial had received HMI-102 across three dose cohorts (low-dose Cohort 1, n=2; mid-dose Cohort 2, n=2; high-dose Cohort 3, n=2). The results showed that HMI-102 was generally well-tolerated, and resulted in marked reductions in phenylalanine, or Phe, and the Phe-to-tyrosine, or Tyr, ratio, or the Phe-to-Tyr ratio, at two doses. Phe is a registrable endpoint in PKU, and the Phe-to-Tyr ratio is a clinically relevant diagnostic measurement for PKU. Based on the safety and efficacy results observed in the dose-escalation phase, we have selected and advanced two doses to the randomized, concurrently controlled, dose expansion Phase 2 portion of the pheNIX trial, which has the potential to be converted to a registrational trial. We expect to report initial clinical data from the dose expansion portion of the trial by the end of 2021. 22 Other Product Candidates We are currently progressing two gene therapy product development candidates for the treatment of lysosomal storage diseases: HMI-203 for the treatment of mucopolysaccharidosis type II (MPS II), or Hunter syndrome, and HMI-202 for the treatment of metachromatic leukodystrophy, or MLD. We are in later-stage IND-enabling studies with HMI-203, an in vivo gene therapy product development candidate for the treatment of Hunter syndrome. HMI-203 is a potential one-time AAVHSC treatment designed to deliver functional copies of the IDS gene to multiple target organs, including those in the PNS and CNS, following a single I.V. administration. In preclinical studies, a single I.V. administration of HMI-203 resulted in robust biodistribution and human I2S, or hI2S, enzyme expression, leading to a significant reduction in heparan sulfate glycosaminoglycan, or GAG, levels in the cerebrospinal fluid, brain, liver, heart, spleen, lung and kidney, compared with the vehicle-treated disease model. HMI-203 also led to significant changes in skeletal deformities compared with vehicle. We expect to initiate a Phase 1/2 dose-escalation clinical trial with HMI-203 in 2021. We completed IND-enabling studies with HMI-202, a gene therapy CNS product development candidate for the treatment of MLD. We have generated preclinical data that demonstrate that a single I.V. administration of HMI-202 crossed the blood-brain and blood-nerve-barriers and led to sustained reduction of sulfatides in all brain regions of the disease model. We are applying the learnings from the IND-enabling studies to further optimize an HMI-202 vector that may lead to a better therapeutic profile. We are in later-stage IND-enabling studies with HMI-103, our lead gene editing development candidate for the treatment of PKU in pediatric patients. We have generated in vivo preclinical data demonstrating Phe reduction following a single I.V. administration of the murine surrogate of HMI-103 in the PKU disease model out to 43 weeks (end of study). In addition, using quantitative molecular methods, we have demonstrated achievement of gene integration efficiencies in a humanized murine liver model that corresponded with Phe correction in the PKU murine model. These findings were peer-reviewed and published in PLOS ONE in May 2020. We expect to initiate a Phase 1/2 dose-escalation clinical trial with HMI-103 in adult PKU patients in 2021. In April 2021, we announced a new gene therapy monoclonal antibody platform, GTx-mAb, which is a new way to leverage our AAVHSCs to deliver one-time in vivo gene therapy to produce antibodies in the liver. In support of the GTx-mAb platform, we announced preclinical data targeting complement protein 5, demonstrating proof of concept that our AAVHSCs delivered vectors at a high efficiency to the liver and secreted antibodies throughout the body, resulting in sustained expression levels consistent with C5 antibody therapeutics in a humanized murine model. We plan to name a development candidate in a new therapeutic area from this platform in 2021, demonstrating the broader capability of our AAVHSCs, which we believe may allow us to target diseases with larger patient populations in the future. License Agreements On February 26, 2021, we received notice from Novartis Institutes of BioMedical Research, Inc., or Novartis, that they had elected to terminate the collaboration and license agreement with respect to the ophthalmic target, which was the only remaining target under the agreement. Accordingly, the notice served as notice of Novartis’ termination of the agreement in its entirety, with an effective date of August 26, 2021, which is six months from the date of the notice. Novartis has agreed to work with us to effect the orderly wind-down of activities in accordance with the agreement. Novartis acknowledged that the data we generated support gene editing in retinal cells in a rare ophthalmic disease, providing early proof-of-principle for further research using this approach. See Note 10 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding the Novartis collaboration and license agreement. Financial Overview Since our inception in 2015 through March 31, 2021, we have raised approximately $541 million in aggregate net proceeds through our initial public offering, or IPO, in April 2018, a follow-on public offering of common stock in April 2019, proceeds from the sale of common stock under an “at-the-market” sales agreement, equity investments and preferred stock financings. Included in our net proceeds is $50.0 million from a former collaboration partner, comprised of an up-front payment of $35.0 million and a $15.0 million equity investment, and a $60.0 million equity investment from Pfizer Inc., or Pfizer, through a private placement transaction. We will require additional capital in order to advance HMI-102 and our other product candidates through clinical development and commercialization. We believe that our compelling preclinical data, positive clinical data with HMI-102, scientific expertise, product development strategy, manufacturing capabilities and robust intellectual property position us as a leader in the development of genetic medicines. On April 6, 2021, we completed a follow-on offering of our common stock. We sold 6,596,306 shares of our common stock at a price of $7.58 per share and received net proceeds of approximately $49.4 million, after deducting estimated offering expenses. Under the terms of the underwriters’ agreement, we also granted an option exercisable for 30 days to purchase up to an additional 989,445 shares of our common stock at a price of $7.58 per share. The offering closed on April 9, 2021. The shares were sold pursuant to our effective shelf registration statement on Form S-3, as amended, and a related prospectus supplement filed with the SEC on April 8, 2021. 23 On November 9, 2020, we entered into a stock purchase agreement, or the Stock Purchase Agreement, with Pfizer pursuant to which Pfizer purchased 5,000,000 shares of our common stock through a private placement transaction at a purchase price of $12.00 per share, for an aggregate purchase price of $60.0 million. For additional information, se e “Liquidity and Capital Resources.” We were incorporated and commenced operations in 2015. Since our incorporation, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, developing our technology platform, advancing our lead product candidate, HMI-102 for the treatment of PKU, through IND-enabling studies and into a Phase 1/2 clinical trial, advancing HMI-103, HMI-203, and HMI-202 into IND-enabling studies, researching and identifying additional product candidates, developing and implementing manufacturing processes and internal manufacturing capabilities , building out our manufacturing and research and development space, enhancing our intellectual property portfolio and providing general and administrative support for these operations. To date, we have financed our operations primarily through the sale of common stock, through the sale of preferred stock and through funding from our collaboration partner. To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future, if at all. We recognized $29.3 million and $0.6 million in collaboration revenue for the three months ended March 31, 2021 and 2020, respectively. Collaboration revenue for the three months ended March 31, 2021 includes the recognition of approximately $28.5 million of deferred revenue and reimbursements incurred under the collaboration and license agreement with Novartis, for which Novartis gave written notice of termination on February 26, 2021, and is therefore not expected to continue in future quarters. Since inception, we have incurred significant operating losses. Our net losses for the three months ended March 31, 2021 and 2020 were $1.1 million and $35.3 million, respectively. As of March 31, 2021 and December 31, 2020, we had an accumulated deficit of $329.4 million and $328.4 million, respectively. Our total operating expenses were $30.4 million and $37.1 million for the three months ended March 31, 2021 and 2020, respectively. We expect our operating expenses to increase in connection with our ongoing development activities related to our product candidates. Specifically, we anticipate that our expenses will increase due to costs associated with our Phase 1/2 pheNIX clinical trial with HMI-102, development activities including IND-enabling studies and clinical trials associated with our other product candidates, including HMI-103, our gene editing product candidate for PKU, for which we intend to initiate a Phase 1/2 clinical trial this year, HMI-203, our gene therapy product candidate for Hunter syndrome, for which we intend to initiate a Phase 1/2 clinical trial this year, HMI-202, our gene therapy product candidate for MLD, for which we are focusing on optimization of the vector, and research activities in additional therapeutic areas to expand our pipeline, including the addition of our GTx-mAb platform, hiring additional personnel in manufacturing, research, clinical and regulatory, quality and other functional areas, increased expenses incurred with contract manufacturing organizations, or CMOs, to supply us with product for our clinical studies, costs to manufacture product for preclinical and clinical studies in our internal manufacturing facility and other costs including the maintenance and expansion of our intellectual property portfolio. In addition, we expect to continue to incur additional costs associated with operating as a public company. We have incurred significant capital expenditures for the buildout of a facility we have leased, including research and development labs, office space and manufacturing suites and the procurement of equipment and furniture for this facility and in support of our product development candidates and research initiatives. We expect to incur additional capital expenditures in support of our research and development activities and our manufacturing facility. Because of the numerous risks and uncertainties associated with the development of our current and any future product candidates and our platform and technology and because the extent to which we may enter into collaborations with third parties for development of any of our product candidates is unknown, we are unable to predict the timing and amount of increased operating expenses and capital expenditures associated with completing the research and development of our product candidates. Our future capital requirements will depend on many factors, including: • the costs, timing, and results of our ongoing research and development efforts, including clinical trials, for HMI-102; • the costs, timing, and results of our ongoing research and development efforts for HMI-103, HMI-203 and HMI-202, all of which are in IND-enabling studies; • the costs, timing, and results of our research and development efforts for current and future product candidates in our gene therapy and gene editing pipeline; • the costs and timing of process development and manufacturing scale-up activities, and the adequacy of supply of our product candidates for preclinical studies and clinical trials through CMOs and internal manufacturing; • the costs and timing of capital expenditures for potential additional manufacturing capacity and related equipment and furniture; 24 • the costs and timing of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims, including any claims by third parties that we are infringing upon their intellectual property rights; • the effect of competitors and market developments; and • our ability to establish and maintain strategic collaborations, licensing or other agreements and the financial terms of such agreements for our product candidates. We believe that cash and cash equivalents and short-term investments as of March 31, 2021, together with the approximately $49.4 million in net proceeds received from a follow-on offering of our common stock in April 2021, will enable us to fund our current projected operating expenses and capital expenditure requirements into the first quarter of 2023 including, subject to the impact of the COVID-19 pandemic on our business, additional development activities related to our Phase 1/2 pheNIX clinical trial with HMI-102, the advancement of HMI-103, our lead gene editing product candidate for PKU, through IND-enabling studies and into a Phase 1/2 clinical trial, HMI-203, our lead CNS/PNS gene therapy product candidate for Hunter syndrome, through IND-enabling studies and into a Phase 1/2 clinical trial, and HMI-202, a CNS gene therapy product candidate for MLD, through additional preclinical studies as we focus on optimizing the program’s vector, the continued scale-up of our manufacturing processes and the expansion of our intellectual property portfolio. We have based these estimates on assumptions that may prove to be imprecise, and we may use our available capital resources sooner than we currently expect. See “Liquidity and Capital Resources.” Adequate additional funds may not be available to us on acceptable terms, or at all. For example, the trading prices for our and other biopharmaceutical companies’ stock have been highly volatile as a result of the COVID-19 pandemic. As a result, we may face difficulties raising capital through sales of our common stock and any such sales may be on unfavorable terms. See “Risk Factors—The COVID-19 pandemic caused by the novel strain of coronavirus could adversely impact our business, including our preclinical studies and clinical trials.” in Part II, Item 1A of this Quarterly Report on Form 10-Q. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect rights as a shareholder. Any future debt financing or preferred equity or other financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute the ownership interests of our shareholders. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce, or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Because of the numerous risks and uncertainties associated with drug development, we are unable to predict when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. Impact of the COVID-19 Pandemic We are closely monitoring how the spread of the COVID-19 pandemic is affecting our employees, our Phase 1/2 pheNIX clinical trial, preclinical studies, manufacturing and overall operations. In response to the spread of COVID-19, we have taken steps to minimize the impact on our operations. Operations – To protect the health of our employees and the third parties with whom we interact, most office-based employees continue to work from home, while essential staffing levels in our operations remain in place, including key personnel in our laboratories and manufacturing facility. For those employees on-site, we have developed shift schedules for our laboratories and manufacturing facility and a modified office layout and traffic flow pattern to increase spacing capabilities, reduce inter-office risks and allow for business continuity. We have increased cleaning protocols throughout our entire facility, limited visitors to only those who are critical to our ongoing operations and have cancelled all business travel. In addition, we have developed our own on-site COVID-19 surveillance testing for employees to help promote health and safety. Phase 1/2 pheNIX clinical trial – We are currently in Phase 2 of our Phase 1/2 pheNIX clinical trial and are working with trial sites to mitigate potential COVID-19-related disruptions in order to help ensure the safety of patients and healthcare professionals. In addition, we have deployed home-health services which include home visits for patient monitoring and reporting, as well as the utilization of a centralized laboratory for testing enrolled patients. Despite our best efforts, disruptions caused by the COVID-19 pandemic have resulted, and may continue to result, in delays in enrolling our Phase 1/2 pheNIX clinical trial. In addition, we could experience additional disruptions in conducting or completing this trial or other planned clinical trials and the incurrence of unforeseen costs as a result of these delays. We will continue to evaluate the impact of the ongoing global pandemic on the pheNIX trial and will make adjustments, as needed. 25 Preclinical studies – IND-enabling studies are continuing in support of our HMI-103 and HMI-203 programs and we have made operational changes to mitigate the risk of potential disruptions caused by the COVID-19 pandemic. All of our ongoing and planned preclinical studies at external CROs are progressing and we have accelerated shipments of reagents and supplies to avoid any disruption of activities. However, it is possible that the COVID-19 pandemic may have an impact in the future on our CROs’ ability to complete critical studies required for the progression of these programs. In addition, any planned or potential meetings with the FDA or other regulatory authorities about any of our development programs could be delayed as these regulatory bodies respond to the ongoing pandemic. Manufacturing – We continue to operate our manufacturing facility at or near normal levels. We have on-hand all of the drug product needed for the expansion phase of the pheNIX clinical trial. In addition, during the first quarter of 2020, we began to accelerate the procurement of raw materials for future manufacturing, research and development needs to minimize potential supply chain interruptions. While we currently do not anticipate any interruptions in our manufacturing process, it is possible that the COVID-19 pandemic and response efforts may have an impact in the future on our and/or our third-party suppliers and CMOs’ ability to manufacture our product candidates or materials needed for our preclinical studies and clinical trials. At this time, there is significant uncertainty relating to the trajectory of the COVID-19 pandemic and impact of related responses and as a result, we expect that the COVID-19 pandemic may impact our business, revenues, results of operations and financial condition. The impact of COVID-19 on our future results will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions, the ultimate impact of COVID-19 on financial markets and the global economy, the effectiveness of vaccines and vaccine distribution efforts and the effectiveness of other actions taken in the United States and other countries to contain and treat the disease. See “Risk Factors— The COVID-19 pandemic caused by the novel strain of coronavirus could adversely impact our business, including our preclinical studies and clinical trials.” in Part II, Item 1A of this Quarterly Report on Form 10-Q. Components of Our Results of Operations Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. We recorded $29.3 million in collaboration revenue for the three months ended March 31, 2021, primarily related to the termination of the Novartis collaboration and license agreement (see Notes 10 and 11 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding revenue recognition discussions). Operating Expenses Our operating expenses since inception have consisted solely of research and development costs and general and administrative costs. Research and Development Expenses Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts, and the development of our product candidates, and include: • salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions; • expenses incurred under agreements with third parties, including contract research organizations, or CROs, and other third parties that conduct research, preclinical activities and clinical trials on our behalf as well as CMOs and our internal technical operations team that manufacture our product candidates for use in our preclinical testing, our Phase 1/2 pheNIX clinical trial and additional potential future clinical trials; • costs of outside consultants, including their fees and related travel expenses; • the costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials; and • facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs. 26 We expense research and development costs as incurred. We typically use our employee and infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs, license payments made under our licensing arrangements or other internal costs to specific development programs or product candidates. These costs are included in other research and development expenses in the table below. The following table summarizes our research and development expenses by product candidate or development program: Three months ended March 31, (in thousands) 2021 2020 Change HMI-102 external development costs $ 6,199 $ 11,433 $ (5,234 ) Other development-stage programs' external development costs 3,559 5,814 (2,255 ) Employee-related costs 11,316 10,158 1,158 Other research and development costs 681 1,905 (1,224 ) Total research and development expenses $ 21,755 $ 29,310 $ (7,555 ) Research and development activities are central to our business model. We expect that our research and development expenses will increase for the foreseeable future as we advance clinical trials of HMI-102 for the treatment of PKU, including our Phase 1/2 pheNIX clinical trial, continue to advance HMI-103, HMI-203 and HMI-202 through IND-enabling studies and into clinical trials and continue to discover and develop additional product candidates. We cannot determine with certainty the duration and costs of future clinical trials of HMI-102 and IND-enabling studies and future clinical trials of our other product candidates in development or any other future product candidate we may develop or if, when, or to what extent we will generate revenue from the commercialization and sale of any product candidate for which we obtain marketing approval. We may never succeed in obtaining marketing approval for any product candidate. The duration, costs and timing of clinical trials and development of HMI-102, our other product candidates in development and any other future product candidate we may develop will depend on a variety of factors, including: • the scope, rate of progress, expense and results of clinical trials of HMI-102, HMI-103, HMI-203 and HMI-202, as well as of any future clinical trials of other product candidates and other research and development activities that we may conduct; • uncertainties in clinical trial design and patient enrollment rates; • any delays in clinical trials as a result of the COVID-19 pandemic; • the actual probability of success for our product candidates, including the safety and efficacy results, early clinical data, competition, manufacturing capability and commercial viability; • significant and changing government regulation and regulatory guidance; • the timing and receipt of any marketing approvals; and • the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development. 27 General and Administrative Expenses General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, human resources, business development and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs, rent expense, maintenance of facilities and other operating costs. We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support increased research and development activities relating to HMI-102, HMI-103, HMI-203, HMI-202 and any other product candidates we may develop. We also have incurred and expect to continue to incur increased expenses associated with being a public company, including costs of accounting, audit, compliance with the Sarbanes-Oxley Act of 2002, legal, regulatory and tax-related services associated with maintaining compliance with Nasdaq and SEC requirements; director and officer insurance costs; and investor and public relations costs. Interest Income Interest income consists of interest income earned on our cash, cash equivalents and short-term investments. Our interest income has decreased due to lower yields on invested funds as well as lower invested balances during the three months ended March 31, 2021, as compared to the same period in 2020. Market volatility resulting from the COVID-19 pandemic has and may continue to adversely impact our interest income. Critical Accounting Policies and Use of Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgements that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Use of Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2020 and in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There were no material changes to our critical accounting policies during the three months ended March 31, 2021 from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020. Results of Operations Comparison of Three Months Ended March 31, 2021 and 2020 The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020: Three months ended March 31, (in thousands) 2021 2020 Change Collaboration revenue $ 29,305 $ 588 28,717 Operating expenses: Research and development 21,755 29,310 (7,555 ) General and administrative 8,661 7,770 891 Total operating expenses 30,416 37,080 (6,664 ) Loss from operations (1,111 ) (36,492 ) 35,381 Other income: Interest income 38 1,161 (1,123 ) Net loss $ (1,073 ) $ (35,331 ) $ 34,258 28 Collaboration Revenue Collaboration revenue for the three months ended March 31, 2021 was $29.3 million, compared to $0.6 million for the three months ended March 31, 2020. Collaboration revenue includes the recognition of deferred revenue and reimbursements incurred under the collaboration and license agreement with Novartis, for which Novartis gave written notice of termination on February 26, 2021. As a result, we recognized approximately $28.5 million as collaboration revenue upon receipt of the termination notice. The remaining balance of deferred revenue pursuant to the collaboration and license agreement with Novartis will be recognized as the Company continues to perform the remaining activities under the collaboration and license agreement during the notice period, which ends on August 26, 2021. In addition, we recognized collaboration revenue of $0.8 million related to the Stock Purchase Agreement with Pfizer. Research and Development Expenses Three months ended March 31, (in thousands) 2021 2020 Change HMI-102 external development costs $ 6,199 $ 11,433 $ (5,234 ) Other development-stage programs' external development costs 3,559 5,814 (2,255 ) Employee-related costs 11,316 10,158 1,158 Other research and development costs 681 1,905 (1,224 ) Total research and development expenses $ 21,755 $ 29,310 $ (7,555 ) Research and development expenses for the three months ended March 31, 2021 were $21.8 million, compared to $29.3 million for the three months ended March 31, 2020. The decrease of $7.6 million was primarily due to a decrease of $5.2 million in direct research expenses for HMI-102 due to higher expenses in the prior year related to the accelerated procurement of raw materials and other supplies for manufacturing drug product for the Phase 1/2 pheNIX clinical trial as part of our risk mitigation efforts in response to the COVID-19 pandemic. Additionally, the continued optimization of our ‘plug and play’ manufacturing process and platform has created efficiencies across all of our programs that directly reduced spend for clinical trial and other materials and decreased reliance on outside contract manufacturing organizations. Partially offsetting these decreases was a $1.2 million increase in employee-related costs due to additional employee headcount to support our ongoing development programs, research initiatives, technology platform and manufacturing capabilities resulting in increases in salaries, payroll taxes and stock-based compensation expense. General and Administrative Expenses General and administrative expenses for the three months ended March 31, 2021 were $8.7 million, compared to $7.8 million for the three months ended March 31, 2020. The increase of $0.9 million was primarily due to an increase in employee-related expenses of $1.0 million, which included $0.5 million of increased stock-based compensation expense, an increase in audit and legal costs of $0.3 million, an increase in market research costs of $0.2 million and an increase in insurance of $0.2 million, partially offset by a decrease in consulting expense of $0.5 million and a decrease in facilities costs of $0.5 million. Interest Income Interest income for the three months ended March 31, 2021 was less than $0.1 million, compared to $1.2 million for the three months ended March 31, 2020. The decrease was the result of lower invested balances in cash, cash equivalents and short-term investments for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, as well as lower yields on invested funds. Net Loss Net loss for the three months ended March 31, 2021 was $1.1 million, compared to $35.3 million for the three months ended March 31, 2020. The decrease in net loss was primarily due to the increase in collaboration revenue discussed above. 29 Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we advance the preclinical and clinical development of our product candidates. We expect that our research and development and general and administrative costs and our capital expenditures will increase in connection with conducting preclinical studies and clinical trials for our product candidates, contracting with CMOs producing material in our internal manufacturing facility to support preclinical studies and clinical trials, expanding our research and development laboratories and manufacturing facility, expanding our intellectual property portfolio, and providing general and administrative support for our operations. As a result, we will need additional capital to fund our operations, which we may obtain from additional equity or debt financings, collaborations, licensing arrangements, or other sources. We do not currently have any approved products and have never generated any revenue from product sales. To date, we have financed our operations primarily through the sale of common stock, the sale of preferred stock and through an up-front payment from a collaboration partner. Since our inception in 2015 through March 31, 2021, we have raised approximately $541 million in aggregate net proceeds through our IPO in April 2018, a follow-on public offering of common stock in April 2019, proceeds from the sale of common stock under an “at-the-market” sales agreement, equity investments and preferred stock financings. Included in our net proceeds is $50.0 million from a former collaboration partner, comprised of an up-front payment of $35.0 million and a $15.0 million equity investment, and a $60.0 million equity investment from Pfizer through a private placement transaction. Equity Offerings and ATM Program In March 2020, we entered into a sales agreement, or the Sales Agreement, with Cowen and Company, LLC, or Cowen, as sales agent, pursuant to which we may, from time to time, issue and sell common stock with an aggregate value of up to $150 million in "at-the-market" offerings, or the ATM, under our Registration Statement on Form S-3 (File No. 333-237131) filed with the SEC on March 12, 2020 (as amended, the Shelf). In connection with the filing of certain post-effective amendments to the Shelf, the sales agreement prospectus supplement now covers the offering, issuance and sale by us of up to an aggregate $148.4 million of our common stock. Sales of common stock, if any, pursuant to the Sales Agreement, may be made in sales deemed to be an “at the market offering” as defined in Rule 415(a) of the Securities Act, including sales made directly through the Nasdaq Global Market or on any other existing trading market for our common stock. During the three months ended March 31, 2021, we sold 114,914 shares of common stock under the Sales Agreement, at an average price of approximately $14.00 per share, raising aggregate net proceeds of approximately $1.5 million after deducting an aggregate commission of 3% and issuance costs. As of March 31, 2021, there was $148.4 million of common stock remaining available for sale under the ATM. On April 6, 2021, we completed a follow-on offering of our common stock. We sold 6,596,306 shares of our common stock at a price of $7.58 per share and received net proceeds of approximately $49.4 million, after deducting estimated offering expenses. Under the terms of the underwriting agreement, we also granted the underwriter an option exercisable for 30 days to purchase up to an additional 989,445 shares of our common stock at a price of $7.58 per share. The offering closed on April 9, 2021. The shares were sold pursuant to our effective shelf registration statement on Form S-3, as amended, and a related prospectus supplement filed with the SEC on April 8, 2021. Strategic Collaborations and Investments On November 9, 2020, we entered into the Stock Purchase Agreement with Pfizer, pursuant to which Pfizer purchased 5,000,000 shares of our common stock through a private placement transaction at a purchase price of $12.00 per share, for an aggregate purchase price of $60.0 million. Under the Stock Purchase Agreement, Pfizer was granted an exclusive right of first refusal, or ROFR, for a 30-month period beginning on the date of the closing of the private placement to negotiate a potential collaboration on the development and commercialization of HMI-102 and HMI-103. Pfizer may exercise its right of first refusal under the ROFR one time for each of HMI-102 and HMI-103 during the ROFR period. In addition to the ROFR, the Stock Purchase Agreement provided for an information sharing committee comprised of representatives of each company which will serve as a forum for sharing information regarding the development of HMI-102 and HMI-103 during the ROFR period. Additionally, Pfizer has designated a member to join our Scientific Advisory Board to participate in matters related to the development of these programs. 30 Cash Flows Our cash, cash equivalents, and short-term investments totaled $188.6 million and $217.4 million as of March 31, 2021 and December 31, 2020, respectively. We had no indebtedness as of March 31, 2021 and December 31, 2020. The following table summarizes our sources and uses of cash for each of the periods presented: Three months ended March 31, (in thousands) 2021 2020 Net cash used in operating activities $ (29,823 ) $ (25,846 ) Net cash provided by (used in) investing activities (85,235 ) 114,997 Net cash provided by financing activities 2,043 447 Net change in cash, cash equivalents and restricted cash $ (113,015 ) $ 89,598 Operating Activities Net cash used in operating activities for the three months ended March 31, 2021 was $29.8 million. This was primarily due to a $1.1 million net loss and a decrease of $35.2 million in operating assets and liabilities, which includes the recognition of $28.5 million of deferred revenue during the three months ended March 31, 2021 in connection with Novartis’ decision to terminate the collaboration and license agreement as discussed in Note 10 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. These decreases were partially offset by net non-cash expenses of $6.4 million, which includes $3.9 million of stock-based compensation expense and $2.1 million of depreciation expense. Net cash used in operating activities for the three months ended March 31, 2020 was $25.8 million, driven primarily by our net loss of $35.3 million as we incurred expenses associated with research and development activities on HMI-102, HMI-103 and HMI-202, including the Phase 1/2 pheNIX trial for our HMI-102 program, and research activities on other applications for our technology. The funding of our net loss was partially offset by net non-cash expenses of $4.8 million, including $2.9 million of stock-based compensation expense and $1.9 million of depreciation expense and a decrease in working capital of $5.4 million, including $4.8 million in increased accounts payable. Investing Activities Net cash used in investing activities for the three months ended March 31, 2021 was $85.2 million, attributable to purchases of short-term investments of $84.4 million and purchases of property and equipment of $0.8 million. Net cash provided by investing activities for the three months ended March 31, 2020 was $115.0 million, attributable to maturities of short-term investments of $117.0 million, partially offset by purchases of property and equipment of $2.0 million. Financing Activities Net cash provided by financing activities for the three months ended March 31, 2021 was $2.0 million, primarily due to proceeds from the issuance of common stock pursuant to the ATM and employee stock purchase plan. Net cash provided by financing activities for the three months ended March 31, 2020 was $0.5 million, primarily due to proceeds from the issuance of common stock pursuant to the employee stock purchase plan. Funding Requirements Our operating expenses increased in 2020 and are expected to increase for the remainder of 2021 and in future years in connection with our ongoing activities, particularly as we advance our Phase 1/2 pheNIX clinical trial with HMI-102, and our preclinical activities including IND-enabling studies and expected Phase 1/2 clinical trials, continue to scale-up our manufacturing processes, engage with CMOs, manufacture materials for preclinical and clinical activities in our internal manufacturing facility and initiate additional human clinical trials. In addition, we have incurred, and expect to continue to incur additional costs associated with operating as a public company. We also expect our capital expenditures to increase as we expand our operations. 31 Specifically, our expenses will increase as we: • pursue the preclinical and clinical development of HMI-102, including the ongoing pheNIX Phase 1/2 clinical trial, HMI-103, HMI-203 and HMI-202; • pursue the preclinical and clinical development of other product candidates based on our gene therapy and gene editing technology; • further scale-up our internal manufacturing processes and capabilities, manufacture materials in our internal manufacturing facility and contract with CMOs to support our preclinical studies and clinical trials of our product candidates; • further expand our manufacturing capacity; • operate our business in our facility with expanded research and development labs and manufacturing suites and purchase additional equipment for our operations; • in-license or acquire the rights to other products, product candidates or technologies; • maintain, expand and protect our intellectual property portfolio; • hire additional personnel in research, manufacturing and regulatory and clinical development as well as management personnel; and • expand our operational, financial and management systems and increase personnel, including personnel to support our operations as a public company. We believe that our existing cash and cash equivalents and short-term investments, together with the approximately $49.4 million in net proceeds received from a follow-on offering of our common stock in April 2021, will enable us to fund our current projected operating expenses and capital expenditure requirements into the first quarter of 2023, including, subject to the impact of the COVID-19 pandemic on our business, additional development activities related to our Phase 1/2 pheNIX clinical trial with HMI-102, the advancement of HMI-103 our lead in vivo gene editing product candidate for PKU, through IND-enabling studies and into a Phase 1/2 clinical trial, HMI-203, our lead CNS/PNS gene therapy product candidate for Hunter syndrome, through IND-enabling studies and into a Phase 1/2 clinical trial, and HMI-202, a CNS gene therapy product candidate for MLD, through additional preclinical studies as we focus on optimizing the program’s vector, the continued scale-up of our manufacturing processes and the expansion of our intellectual property portfolio. We have based these estimates on assumptions that may prove to be imprecise, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical drugs, it is difficult to estimate with certainty the amount of our working capital requirements. Our future funding requirements will depend on many factors, including: • the progress, costs and results of our preclinical development and initial clinical trials for HMI-102 including the pheNIX Phase 1/2 clinical trial, HMI-103, HMI-203 and HMI-202; • the progress, costs and results of our additional research and preclinical development programs in gene therapy and gene editing; • the costs, scope and timing of internal process development and manufacturing scale-up activities, the production of materials in our internal manufacturing facility, and outsourcing activities with CMOs associated with our lead product development programs and other programs we advance through preclinical and clinical development; • our ability to establish and maintain strategic collaborations, licensing or other agreements and the financial terms of such agreements; • the scope, progress, results and costs of any product candidates that we may derive from our platform technology or any other product candidates that we may develop; • the extent to which we in-license or acquire rights to other products, product candidates or technologies; and • the costs and timing of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against any intellectual property-related claims. In addition, the magnitude and duration of the COVID-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this Quarterly Report on Form 10-Q, as the pandemic continues to evolve globally. See “Impact of the COVID-19 Pandemic” above and “Risk Factors— The COVID-19 pandemic caused by the novel strain of coronavirus could adversely impact our business, including our preclinical studies and clinical trials.” in Part II, Item 1A of this Quarterly Report on Form 10-Q for a further discussion of the possible impact of the COVID-19 pandemic on our business. 32 Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaboration agreements, other third-party funding, strategic alliances, licensing arrangements and marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our shareholders as common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other third-party funding, collaboration agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves. Contractual Obligations There have been no material changes to our contractual obligations during the three months ended March 31, 2021 from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.