10-Q
0001661998FALSEQ1--12-31MassachusettsNASDAQ2031-12-310001661998us-gaap:ComputerEquipmentMember2024-03-310001661998qttb:UponTheConversionOfAuthorizedSeriesBRedeemableConvertiblePreferredStockMember2023-12-310001661998qttb:ConvertibleNotesMember2024-01-012024-03-310001661998qttb:UponTheConversionOfAuthorizedSeriesARedeemableConvertiblePreferredStockMember2023-12-310001661998us-gaap:AdditionalPaidInCapitalMember2022-12-310001661998us-gaap:WarrantMember2024-03-310001661998qttb:TwoThousandTwentyFourEmployeeStockPurchasePlanMember2024-01-012024-03-310001661998us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MoneyMarketFundsMember2024-03-310001661998us-gaap:EquipmentMember2023-12-310001661998qttb:WalthamMassauchetsMember2021-12-012021-12-310001661998qttb:SeriesARedeemablePreferredStockMemberqttb:LicenseAgreementWithBristolMayersEquibCompanyMember2019-09-012019-12-3100016619982023-01-012023-12-3100016619982023-11-160001661998us-gaap:LeaseholdImprovementsMember2023-12-310001661998us-gaap:RetainedEarningsMember2023-03-310001661998qttb:WalthamMassauchetsMemberqttb:RestrictedCashAndCashEquivalentsNonCurrentMember2022-12-310001661998us-gaap:CommonStockMember2024-01-012024-03-310001661998srt:MinimumMember2024-01-012024-03-310001661998us-gaap:AdditionalPaidInCapitalMember2024-03-310001661998us-gaap:PropertyPlantAndEquipmentMember2024-01-012024-03-310001661998us-gaap:ConvertibleDebtSecuritiesMember2024-03-310001661998qttb:SixthAmendmentAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyThreeTermALoanAdvanceMember2023-07-122023-07-120001661998us-gaap:ConvertibleDebtSecuritiesMember2023-12-310001661998us-gaap:PreferredStockMemberqttb:SeriesAOneConvertiblePreferredStockMember2023-12-310001661998us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2023-12-310001661998us-gaap:PreferredStockMemberqttb:SeriesBConvertiblePreferredStockMember2023-12-310001661998qttb:SeriesBRedeemableConvertiblePreferredStockMemberqttb:ConvertibleDebtAgreementMember2022-05-200001661998us-gaap:WarrantMember2023-01-012023-03-310001661998qttb:LicenseAgreementWithBristolMayersEquibCompanyMemberqttb:CashConsiderationMember2019-01-012019-12-310001661998us-gaap:LeaseholdImprovementsMember2024-03-310001661998qttb:BeforeThirtyFirstOfMarchTwoThousandAndTwentySixMemberqttb:SixthAmendmentAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyThreeTermALoanAdvanceMember2023-07-120001661998us-gaap:PrimeRateMemberqttb:SixthAmendmentAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyThreeTermALoanAdvanceMember2023-07-122023-07-120001661998qttb:ReservedForFutureIssuanceUnderTwoThousandAndTwentyFourEmployeeStockPurchasePlanMember2023-12-310001661998qttb:SeriesATwoRedeemableConvertiblePreferredStockMember2024-03-252024-03-250001661998qttb:MeasurementInputProbabilityOfEachScenarioMemberqttb:ScenarioThreeMember2023-12-310001661998us-gaap:CommonStockMember2024-03-252024-03-250001661998qttb:LicenseAgreementWithBristolMayersEquibCompanyMember2019-09-012019-12-310001661998qttb:LicenseAgreementWithTheUniversityOfColoradoMember2024-01-012024-03-310001661998qttb:LoanAndSecurityAgreementWithSiliconValleyBankMember2020-12-110001661998us-gaap:EmployeeStockOptionMember2023-01-012023-03-310001661998qttb:EighthAmendmentToTheLoanAgreementMemberqttb:TwoThousandAndTwentyThreeTermALoanAdvanceMember2024-03-210001661998qttb:HorizonCollaborationAgreementMember2024-01-012024-03-3100016619982023-12-310001661998qttb:UponTheConversionOfAuthorizedSeriesBRedeemableConvertiblePreferredStockMember2024-03-310001661998qttb:LoanAndSecurityAgreementWithSiliconValleyBankMemberqttb:WarrantsIssuedToSiliconValleyBankMember2020-12-110001661998qttb:TwoThousandSeventeenStockOptionAndGrantPlanMember2024-03-310001661998qttb:TwoThousandAndTwentyTermALoanAdvanceMemberqttb:SixthAmendmentAgreementWithSiliconValleyBankMember2023-07-120001661998qttb:HorizonCollaborationAgreementMember2023-10-012023-10-310001661998us-gaap:AccumulatedOtherComprehensiveIncomeMember2024-01-012024-03-310001661998qttb:SeriesAOneRedeemableConvertiblePreferredStockMember2024-03-252024-03-250001661998qttb:ReservedForFutureIssuanceUnderTwoThousandAndTwentyFourStockPlanMember2024-03-310001661998qttb:TwoThousandAndTwentyTermALoanAdvanceMemberqttb:LoanAndSecurityFifthAmendmentAgreementWithSiliconValleyBankMember2023-04-260001661998qttb:OxbSolutionsMember2024-03-310001661998us-gaap:AccumulatedOtherComprehensiveIncomeMember2024-03-310001661998us-gaap:AdditionalPaidInCapitalMember2024-01-012024-03-310001661998qttb:LegacyQ32Member2024-03-310001661998us-gaap:EmployeeStockOptionMember2023-12-310001661998qttb:SalesBasedMilestoneMemberqttb:HorizonCollaborationAgreementMember2024-01-012024-03-310001661998qttb:TwoThousandAndTwentyAndTwoThousandAndTwentyThreeTermALoanMember2023-01-012023-03-310001661998us-gaap:USTreasurySecuritiesMemberus-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2024-03-310001661998us-gaap:MeasurementInputExpectedDividendRateMemberqttb:ScenarioThreeMember2023-12-310001661998qttb:ConsultingAndAdvisoryAgreementsMemberus-gaap:RelatedPartyMember2024-03-310001661998us-gaap:RetainedEarningsMember2023-12-310001661998qttb:WalthamMassauchetsMember2024-03-3100016619982024-03-310001661998qttb:SixthAmendmentAgreementWithSiliconValleyBankMember2020-12-110001661998us-gaap:PreferredStockMemberqttb:SeriesAConvertiblePreferredStockMember2023-03-310001661998us-gaap:CommonStockMember2023-01-012023-03-310001661998qttb:TwoThousandAndTwentyTermALoanAdvanceMemberqttb:LoanAndSecuritySecondAmendmentAgreementWithSiliconValleyBankMember2022-06-302022-06-3000016619982022-05-202022-05-200001661998us-gaap:ResearchAndDevelopmentExpenseMember2024-01-012024-03-3100016619982022-03-100001661998us-gaap:ChangeDuringPeriodFairValueDisclosureMember2024-01-012024-03-310001661998qttb:LicenseAgreementWithBristolMayersEquibCompanyMember2019-01-012019-12-310001661998qttb:SeriesBConvertiblePreferredStockMember2023-12-310001661998qttb:SixthAmendmentAgreementWithSiliconValleyBankMemberqttb:BeforeThirtyFirstOfMarchTwoThousandAndTwentyFiveMemberqttb:TwoThousandAndTwentyThreeTermALoanAdvanceMember2023-07-120001661998us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2024-03-310001661998qttb:LicenseAgreementWithTheUniversityOfColoradoMember2024-03-310001661998us-gaap:EmployeeStockOptionMember2024-01-012024-03-310001661998qttb:SeventhAmendmentToTheLoanAgreementMemberqttb:BeforeThirtyFirstOfMarchTwoThousandAndTwentyFourMemberqttb:TwoThousandAndTwentyThreeTermALoanAdvanceMember2023-11-022023-11-020001661998us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2024-03-310001661998qttb:TrancheThreeMilestoneMemberqttb:LicenseAgreementWithBristolMayersEquibCompanyMembersrt:MinimumMember2019-09-300001661998us-gaap:MeasurementInputExpectedTermMemberqttb:ScenarioThreeMember2023-12-310001661998qttb:LicenseAgreementWithBristolMayersEquibCompanyMember2019-12-310001661998qttb:MeasurementInputProbabilityOfEachScenarioMemberqttb:ScenarioOneMember2023-12-310001661998us-gaap:FurnitureAndFixturesMember2023-12-310001661998us-gaap:MeasurementInputExpectedDividendRateMemberqttb:ScenarioTwoMember2023-12-310001661998qttb:ConsultingAndAdvisoryAgreementsMember2024-01-012024-03-310001661998us-gaap:GeneralAndAdministrativeExpenseMember2024-01-012024-03-310001661998us-gaap:CommonStockMember2023-12-310001661998qttb:LoanAndSecurityFourthAmendmentAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyTermALoanAdvanceMember2022-12-212022-12-210001661998us-gaap:EstimateOfFairValueFairValueDisclosureMember2024-03-310001661998us-gaap:PreferredStockMemberqttb:SeriesAOneConvertiblePreferredStockMember2023-03-310001661998us-gaap:RetainedEarningsMember2023-01-012023-03-310001661998us-gaap:EmployeeStockOptionMember2024-03-310001661998us-gaap:PreferredStockMemberqttb:SeriesAConvertiblePreferredStockMember2022-12-310001661998qttb:TwoThousandAndTwentyAndTwoThousandAndTwentyThreeTermALoanMember2024-01-012024-03-310001661998qttb:TwoThousandAndTwentyTermALoanAdvanceMemberqttb:LoanAndSecuritySecondAmendmentAgreementWithSiliconValleyBankMember2022-06-300001661998qttb:LoanAndSecurityAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyTermALoanAdvanceMember2020-12-012020-12-310001661998qttb:VentureDebtTwoThousandTwentyAndTwoThousandAndTwentyThreeTermALoanMember2024-03-310001661998us-gaap:RetainedEarningsMember2024-01-012024-03-310001661998us-gaap:PreferredStockMemberqttb:SeriesAConvertiblePreferredStockMember2024-03-310001661998us-gaap:CommonStockMember2024-03-310001661998qttb:VentureDebtTwoThousandTwentyAndTwoThousandAndTwentyThreeTermALoanMember2023-12-310001661998us-gaap:RetainedEarningsMember2022-12-310001661998qttb:SeriesAOneConvertiblePreferredStockMember2024-03-310001661998us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MoneyMarketFundsMember2023-12-310001661998us-gaap:PrimeRateMemberqttb:SixthAmendmentAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyThreeTermALoanAdvanceMember2024-03-310001661998us-gaap:FairValueMeasurementsRecurringMember2024-03-310001661998qttb:LoanAndSecurityAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyTermALoanAdvanceMember2020-12-110001661998qttb:SeriesBConvertiblePreferredStockMember2023-01-012023-03-310001661998qttb:TwoThousandTwentyFourStockOptionAndIncentivePlanMember2024-03-012024-03-310001661998us-gaap:MeasurementInputExpectedDividendRateMemberqttb:ScenarioOneMember2023-12-310001661998us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MoneyMarketFundsMember2023-12-3100016619982023-01-012023-03-310001661998qttb:ConvertibleDebtAgreementMember2024-01-012024-03-310001661998us-gaap:ComputerEquipmentMember2023-12-310001661998qttb:SixthAmendmentAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyThreeTermALoanAdvanceMember2023-07-120001661998us-gaap:PropertyPlantAndEquipmentMember2023-01-012023-03-310001661998qttb:SeriesAConvertiblePreferredStockMember2024-03-310001661998qttb:SeventhAmendmentToTheLoanAgreementMemberqttb:TwoThousandAndTwentyThreeTermALoanAdvanceMemberqttb:BeforeThirtyFirstOfMarchTwoThousandAndTwentyFourMember2023-11-020001661998qttb:SeriesBRedeemableConvertiblePreferredStockMember2024-03-252024-03-250001661998qttb:ConvertibleDebtAgreementMemberqttb:CurrentLiabilitiesMember2024-03-310001661998us-gaap:PreferredStockMemberqttb:SeriesAConvertiblePreferredStockMember2023-12-310001661998us-gaap:PreferredStockMemberqttb:SeriesAOneConvertiblePreferredStockMember2024-03-310001661998qttb:ConvertibleDebtAgreementMember2023-01-012023-03-310001661998qttb:SeriesAConvertiblePreferredStockMember2023-01-012023-03-310001661998us-gaap:PreferredStockMemberqttb:SeriesAConvertiblePreferredStockMember2024-01-012024-03-310001661998us-gaap:PreferredStockMemberqttb:SeriesBConvertiblePreferredStockMember2022-12-310001661998us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2024-03-310001661998qttb:LoanAndSecurityAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyTermALoanAdvanceMember2020-12-310001661998us-gaap:ResearchAndDevelopmentExpenseMember2023-01-012023-03-310001661998qttb:TwoThousandTwentyFourStockOptionAndIncentivePlanMember2024-03-310001661998qttb:SeriesAOneConvertiblePreferredStockMember2023-01-012023-03-310001661998qttb:OxbSolutionsMember2024-01-012024-03-3100016619982024-01-012024-03-310001661998us-gaap:PreferredStockMemberqttb:SeriesBConvertiblePreferredStockMember2023-03-310001661998qttb:LicenseAgreementWithTheUniversityOfColoradoMember2023-01-012023-12-310001661998qttb:SeriesAConvertiblePreferredStockMember2024-01-012024-03-310001661998us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:MoneyMarketFundsMember2024-03-310001661998srt:MaximumMemberqttb:TrancheThreeMilestoneMemberqttb:LicenseAgreementWithBristolMayersEquibCompanyMember2019-09-3000016619982022-12-310001661998qttb:WalthamMassauchetsMember2021-12-310001661998qttb:HomologyMember2024-03-310001661998qttb:SeriesAConvertiblePreferredStockMember2023-12-310001661998qttb:SixthAmendmentAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyThreeTermALoanAdvanceMemberqttb:BeforeThirtyFirstOfMarchTwoThousandAndTwentyFourMember2023-07-1200016619982022-01-012022-12-3100016619982024-05-010001661998us-gaap:PreferredStockMemberqttb:SeriesBConvertiblePreferredStockMember2024-01-012024-03-310001661998qttb:ScenarioTwoMemberqttb:MeasurementInputProbabilityOfEachScenarioMember2023-12-310001661998us-gaap:AdditionalPaidInCapitalMember2023-01-012023-03-310001661998qttb:WalthamMassauchetsMember2022-12-3100016619982024-03-250001661998qttb:SeriesBConvertiblePreferredStockMember2024-01-012024-03-310001661998qttb:HomologyMember2024-03-252024-03-250001661998qttb:TwoThousandAndTwentyTermALoanAdvanceMemberqttb:LoanAndSecurityThirdAmendmentAgreementWithSiliconValleyBankMemberqttb:RestrictedCashNonCurrentMember2022-08-100001661998us-gaap:GeneralAndAdministrativeExpenseMember2023-01-012023-03-310001661998us-gaap:WarrantMember2024-01-012024-03-310001661998us-gaap:EquipmentMember2024-03-310001661998us-gaap:CommonStockMember2023-03-310001661998qttb:ConsultingAndAdvisoryAgreementsMemberus-gaap:RelatedPartyMember2023-12-310001661998us-gaap:FairValueMeasurementsRecurringMember2023-12-310001661998us-gaap:AdditionalPaidInCapitalMember2024-03-252024-03-250001661998us-gaap:CommonStockMember2022-12-310001661998us-gaap:AdditionalPaidInCapitalMember2023-03-310001661998qttb:TwoThousandTwentyFourStockOptionAndIncentivePlanMember2024-03-1500016619982021-01-012021-12-310001661998qttb:UponTheConversionOfAuthorizedSeriesARedeemableConvertiblePreferredStockMember2024-03-310001661998qttb:ReservedForFutureIssuanceUnderTwoThousandAndSeventeenStockPlanMember2024-03-310001661998us-gaap:MeasurementInputExpectedTermMemberqttb:ScenarioTwoMember2023-12-310001661998us-gaap:PreferredStockMemberqttb:SeriesBConvertiblePreferredStockMember2024-03-310001661998us-gaap:MeasurementInputExpectedTermMemberqttb:ScenarioOneMember2023-12-310001661998qttb:ConsultingAndAdvisoryAgreementsMember2023-01-012023-03-310001661998qttb:SixthAmendmentAgreementWithSiliconValleyBankMemberqttb:TrancheTwoMilestoneMember2023-07-1200016619982022-08-052022-08-050001661998qttb:SeriesBConvertiblePreferredStockMember2024-03-310001661998qttb:SeriesAOneConvertiblePreferredStockMember2024-01-012024-03-310001661998qttb:TwoThousandTwentyFourEmployeeStockPurchasePlanMember2024-03-150001661998qttb:TwoThousandTwentyFourEmployeeStockPurchasePlanMember2024-03-152024-03-150001661998us-gaap:WarrantMember2023-12-310001661998us-gaap:USTreasurySecuritiesMemberus-gaap:FairValueMeasurementsRecurringMember2024-03-310001661998us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2023-12-310001661998us-gaap:EmployeeStockOptionMember2024-01-012024-03-310001661998us-gaap:PreferredStockMemberqttb:SeriesAOneConvertiblePreferredStockMember2022-12-310001661998srt:MaximumMember2024-01-012024-03-310001661998us-gaap:RetainedEarningsMember2024-03-3100016619982022-12-232022-12-230001661998qttb:ReservedForFutureIssuanceUnderTwoThousandAndTwentyFourEmployeeStockPurchasePlanMember2024-03-310001661998qttb:ConvertibleDebtAgreementMember2022-05-200001661998us-gaap:USTreasurySecuritiesMember2024-03-310001661998qttb:SixthAmendmentAgreementWithSiliconValleyBankMember2023-07-120001661998qttb:ReservedForFutureIssuanceUnderTwoThousandAndTwentyFourStockPlanMember2023-12-310001661998qttb:TwoThousandTwentyFourStockOptionAndIncentivePlanMember2024-03-152024-03-1500016619982023-03-310001661998qttb:SeriesAOneConvertiblePreferredStockMember2023-12-310001661998qttb:TemporaryEquityMemberqttb:LicenseAgreementWithBristolMayersEquibCompanyMember2019-01-012019-12-310001661998qttb:UponTheConversionOfAuthorizedSeriesA1RedeemableConvertiblePreferredStockMember2024-03-310001661998qttb:HomologyMember2024-03-250001661998qttb:TwoThousandAndTwentyAndTwoThousandAndTwentyThreeTermALoanMember2024-03-310001661998qttb:LoanAndSecurityAgreementWithSiliconValleyBankMemberqttb:TwoThousandAndTwentyTermALoanAdvanceMember2020-12-112020-12-110001661998srt:ParentCompanyMember2024-03-310001661998qttb:TwoThousandAndTwentyAndTwoThousandAndTwentyThreeTermALoanMember2023-12-310001661998us-gaap:AdditionalPaidInCapitalMember2023-12-310001661998us-gaap:FurnitureAndFixturesMember2024-03-310001661998us-gaap:PreferredStockMemberqttb:SeriesAOneConvertiblePreferredStockMember2024-01-012024-03-310001661998qttb:ReservedForFutureIssuanceUnderTwoThousandAndSeventeenStockPlanMember2023-12-310001661998qttb:UponTheConversionOfAuthorizedSeriesA1RedeemableConvertiblePreferredStockMember2023-12-31xbrli:pureutr:sqftxbrli:sharesiso4217:USDiso4217:USDxbrli:shares

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2024

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

 

Q32 Bio 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.)

830 Winter Street

Waltham, MA

02451

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (781) 999-0232

N/A

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

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.0001 per share

 

QTTB

 

The Nasdaq Global Market

 

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

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

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

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

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

As of May 1, 2024, the registrant had 11,942,129 shares of common stock, $0.0001 par value per share, outstanding.

 

 


SUMMARY OF MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS

 

Our ability to implement our business strategy is subject to numerous risks that you should be aware of before making an investment decision. These risks include the following, among others:

We have incurred significant losses since inception, expect to incur significant losses for the foreseeable future and may not be able to achieve or sustain profitability in the future. We have no products for sale, have not generated any product revenue and may never generate product revenue or become profitable.
We will require substantial additional capital to finance our operations in the future. If we are unable to raise such capital when needed, or on acceptable terms, we may be forced to delay, reduce or eliminate clinical trials, product development programs or future commercialization efforts.
We have a limited operating history and no products approved for commercial sale, which may make it difficult for you to evaluate our current business and likelihood of success and viability.
We face competition from entities that have developed or may develop programs for the diseases they plan to address with bempikibart, ADX-097 or other product candidates.
Bempikibart, ADX-097 and our other product candidates are in early stages of development and may fail in development or suffer delays that materially and adversely affect their commercial viability. If we or our current or future collaborators are unable to complete development of, or commercialize, our product candidates, or experience significant delays in doing so, our business will be materially harmed.
We are substantially dependent on the success of our most advanced product candidates, bempikibart and ADX-097, and our clinical trials of such candidates may not be successful.
Our business relies on certain licensing rights from Bristol Myers Squibb Company, or BMS, that can be terminated in certain circumstances. If we breach the BMS License Agreement, or if we are unable to satisfy our obligations related to the intellectual property we have licensed from BMS, we could lose the ability to develop and commercialize bempikibart.
Our ability to protect our patents and other proprietary rights is uncertain, exposing us to the possible loss of competitive advantage.
We and our independent registered public accounting firm have identified a material weakness in our internal control over financial reporting. If we are unable to remediate this material weakness, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and the market price of our common stock.
The market price of our common stock is expected to be volatile, and the market price of our common stock may drop.
We may incur losses for the foreseeable future and might never achieve profitability.
If we fail to attract and retain management and other key personnel, we may be unable to continue to successfully develop or commercialize our product candidates or otherwise implement our business plan.
We will need to raise additional financing in the future to fund our operations, which may not be available to us on favorable terms or at all.

The summary risk factors described above should be read together with the text of the full risk factors below in the section titled “Risk Factors” and the other information set forth in this Quarterly Report on Form 10-Q, or Form 10-Q, including our consolidated financial statements and the related notes, as well as in other documents that we file with the U.S. Securities and Exchange Commission, or SEC. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations, and future growth prospects.

 

i


 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains statements that are not historical facts and are considered forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements include, but are not limited to, statements regarding our or our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward looking statements in this Quarterly Report on Form 10-Q may include, for example, statements about:

our strategies, prospects, plans, expectations or objectives of management for our future operations;
the progress, scope or timing of the development of our product candidates;
our expectations surrounding the potential safety, efficacy, and regulatory and clinical progress of our product candidates, including bempikibart and ADX-097, and our anticipated milestones and timing therefor;
the benefits that may be derived from any of our future products or the commercial or market opportunity with respect to any of our future products;
our ability to protect our intellectual property rights;
our anticipated operations, financial position, ability to raise capital to fund our operations, revenues, costs or expenses;
the statements regarding our future economic conditions or performance, statements of belief and any statement of assumptions underlying any of the foregoing; and
other risks and uncertainties, including those listed under the caption “Risk Factors.”

These forward-looking statements are based on information available to us at the time of this Quarterly Report on Form 10-Q and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and except as otherwise required by applicable law, we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements, including those set forth in this Quarterly Report on Form 10-Q in the section titled “Risk Factors” and in our periodic filings with the SEC. Our SEC filings are available publicly on the SEC’s website at www.sec.gov. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Should one or more of the risks or uncertainties described in this Quarterly Report on Form 10-Q, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

This Quarterly Report on Form 10-Q includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We are responsible for all of the disclosure contained in this Quarterly Report on Form 10-Q, and we believe these industry publications and third-party research, surveys and studies are reliable.

ii


Table of Contents

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

1

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2024 and 2023

2

 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the three months ended March 31, 2024 and 2023

4

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

43

 

 

 

PART II.

OTHER INFORMATION

44

 

 

 

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

87

Item 3.

Defaults Upon Senior Securities

87

Item 4.

Mine Safety Disclosures

87

Item 5.

Other Information

87

Item 6.

Exhibits

88

Signatures

90

 

iii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Q32 BIO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share data)

(UNAUDITED)

 

 

March 31,
2024

 

 

December 31,
2023

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

115,509

 

 

$

25,617

 

Short-term investments

 

 

19,803

 

 

 

 

Prepaid expenses and other current assets

 

 

2,731

 

 

 

3,099

 

Total current assets

 

 

138,043

 

 

 

28,716

 

Equity method investment

 

 

4,724

 

 

 

 

Property and equipment, net

 

 

1,659

 

 

 

1,782

 

Right-of-use asset, operating leases

 

 

6,160

 

 

 

6,301

 

Restricted cash and restricted cash equivalents

 

 

647

 

 

 

5,647

 

Other noncurrent assets

 

 

1,101

 

 

 

4,611

 

Total assets

 

$

152,334

 

 

$

47,057

 

Liabilities, convertible preferred stock and stockholders’ deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

4,960

 

 

$

3,468

 

Accrued expenses and other current liabilities

 

 

19,825

 

 

 

9,763

 

CVR liability

 

 

5,080

 

 

 

 

Venture debt, current portion

 

 

3,088

 

 

 

878

 

Total current liabilities

 

 

32,953

 

 

 

14,109

 

Lease liability, net of current portion

 

 

6,099

 

 

 

6,248

 

Venture debt, net of current portion

 

 

9,400

 

 

 

4,581

 

Convertible notes

 

 

 

 

 

38,595

 

Other noncurrent liabilities

 

 

55,113

 

 

 

55,000

 

Total liabilities

 

 

103,565

 

 

 

118,533

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

Series A convertible preferred stock, $0.0001 par value, no shares and 2,286,873 shares
   authorized, issued and outstanding as of March 31, 2024 and December 31, 2023,
   respectively (liquidation preference of $
47,629 at December 31, 2023)

 

 

 

 

 

47,458

 

Series A-1 convertible preferred stock, $0.0001 par value, no shares and 312,094 shares
   authorized, issued and outstanding at March 31, 2024 and December 31, 2023,
   respectively (liquidation preference of $
5,753 as of December 31, 2023)

 

 

 

 

 

4,132

 

Series B convertible preferred stock, $0.0001 par value, no shares and 2,625,896 shares
   authorized, issued and outstanding at March 31, 2024 and December 31, 2023,
   respectively (liquidation preference of $
60,000 as of December 31, 2023)

 

 

 

 

 

59,855

 

Total convertible preferred stock

 

 

 

 

 

111,445

 

Stockholders’ deficit:

 

 

 

 

 

 

Common stock, $0.0001 par value; 400,000,000 shares authorized,
   
11,929,520 and 359,569 shares issued and outstanding at March 31, 2024
   and December 31, 2023, respectively

 

 

2

 

 

 

1

 

Additional paid-in capital

 

 

234,824

 

 

 

4,159

 

Accumulated other comprehensive loss

 

 

(5

)

 

 

 

Accumulated deficit

 

 

(186,052

)

 

 

(187,081

)

Total stockholders’ equity (deficit)

 

 

48,769

 

 

 

(182,921

)

Total liabilities, convertible preferred stock and stockholders’ deficit

 

$

152,334

 

 

$

47,057

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


Q32 BIO INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except share and per share data)

(UNAUDITED)

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Collaboration arrangement revenue

 

$

 

 

$

2,947

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

9,841

 

 

 

7,910

 

General and administrative

 

 

5,002

 

 

 

2,410

 

Total operating expenses

 

 

14,843

 

 

 

10,320

 

Loss from operations

 

 

(14,843

)

 

 

(7,373

)

Change in fair value of convertible notes

 

 

15,890

 

 

 

(43

)

Other income (expense), net

 

 

158

 

 

 

578

 

Total other income (expense), net

 

 

16,048

 

 

 

535

 

Income (loss) before provision for income taxes

 

 

1,205

 

 

 

(6,838

)

Loss from equity method investment

 

 

(176

)

 

 

 

Net income (loss)

 

$

1,029

 

 

$

(6,838

)

Net income (loss) per share—basic

 

$

1.03

 

 

$

(19.84

)

Net income (loss) per share—diluted

 

$

(6.33

)

 

$

(19.84

)

Weighted-average common shares—basic

 

 

995,280

 

 

 

344,623

 

Weighted-average common shares—diluted

 

 

2,334,180

 

 

 

344,623

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


Q32 BIO INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands, except share and per share data)

(UNAUDITED)

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Net income (loss)

 

$

1,029

 

 

$

(6,838

)

Other comprehensive income (loss):

 

 

 

 

 

 

Change in unrealized gain (loss) on available for
  sale securities, net

 

 

(5

)

 

 

 

Total other comprehensive (loss)

 

 

(5

)

 

 

 

Comprehensive income (loss)

 

$

1,024

 

 

$

(6,838

)

 

3


Q32 BIO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(amounts in thousands, except share data)

(UNAUDITED)

 

 

Series A
Convertible
Preferred Stock

 

 

Series A-1
Convertible
Preferred Stock

 

 

Series B
Convertible
Preferred Stock

 

 

 

Common Stock

 

 

Additional
Paid in

 

 

Accumulated
Other
Comprehensive

 

 

Accumulated

 

 

Total
Stockholders’

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Gain (Loss)

 

 

Deficit

 

 

Equity (Deficit)

 

Balance as of
   December 31, 2023

 

 

2,286,873

 

 

$

47,458

 

 

 

312,094

 

 

$

4,132

 

 

 

2,625,896

 

 

$

59,855

 

 

 

 

359,569

 

 

$

1

 

 

$

4,159

 

 

$

 

 

$

(187,081

)

 

$

(182,921

)

Conversion of convertible preferred stock to
   common stock in connection with the Merger

 

 

(2,286,873

)

 

 

(47,458

)

 

 

(312,094

)

 

 

(4,132

)

 

 

(2,625,896

)

 

 

(59,855

)

 

 

 

5,224,863

 

 

 

1

 

 

 

111,444

 

 

 

 

 

 

 

 

 

111,445

 

Issuance of common stock in the pre-closing
   financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,682,045

 

 

 

 

 

 

42,000

 

 

 

 

 

 

 

 

 

42,000

 

Issuance of common stock for conversion of
   convertible notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,433,410

 

 

 

 

 

 

22,705

 

 

 

 

 

 

 

 

 

22,705

 

Issuance of common stock to Homology
   shareholders in reverse recapitalization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,229,633

 

 

 

 

 

 

64,292

 

 

 

 

 

 

 

 

 

64,292

 

Reverse recapitalization transaction costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,013

)

 

 

 

 

 

 

 

 

(10,013

)

Issuance of CVR at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(180

)

 

 

 

 

 

 

 

 

(180

)

Stock-based compensation
   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

417

 

 

 

 

 

 

 

 

 

417

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

(5

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,029

 

 

 

1,029

 

Balance as of
   March 31, 2024

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

11,929,520

 

 

$

2

 

 

$

234,824

 

 

$

(5

)

 

$

(186,052

)

 

$

48,769

 

 

4


 

Series A
Convertible
Preferred Stock

 

 

Series A-1
Convertible
Preferred Stock

 

 

Series B
Convertible
Preferred Stock

 

 

 

Common Stock

 

 

Additional
Paid in

 

 

Accumulated

 

 

Total
Stockholders’

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance as of
   December 31, 2022

 

 

2,286,874

 

 

$

47,458

 

 

 

312,094

 

 

$

4,132

 

 

 

2,625,896

 

 

$

59,855

 

 

 

 

343,550

 

 

$

1

 

 

$

2,625

 

 

$

(133,338

)

 

$

(130,712

)

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,575

 

 

 

 

 

 

15

 

 

 

 

 

 

15

 

Stock-based compensation
   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

296

 

 

 

 

 

 

296

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,838

)

 

 

(6,838

)

Balance as of
   March 31, 2023

 

 

2,286,874

 

 

$

47,458

 

 

 

312,094

 

 

$

4,132

 

 

 

2,625,896

 

 

$

59,855

 

 

 

 

347,125

 

 

$

1

 

 

$

2,936

 

 

$

(140,176

)

 

$

(137,239

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


Q32 BIO INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(UNAUDITED)

 

 

Three Months Ended
March 31,

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

1,029

 

 

$

(6,838

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

Amortization of debt discount and issuance costs

 

 

29

 

 

 

25

 

Depreciation expense

 

 

123

 

 

 

127

 

Stock-based compensation expense

 

 

417

 

 

 

296

 

Non-cash lease expense

 

 

141

 

 

 

133

 

Loss from equity method investment

 

 

176

 

 

 

 

Change in fair value of convertible notes

 

 

(15,890

)

 

 

43

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

1,332

 

 

 

426

 

Other noncurrent assets

 

 

(600

)

 

 

23

 

Accounts payable

 

 

928

 

 

 

(823

)

Operating lease liability

 

 

(131

)

 

 

(115

)

Accrued expenses and other current liabilities

 

 

(2,218

)

 

 

(2,847

)

Other noncurrent liabilities

 

 

113

 

 

 

 

Deferred revenue

 

 

 

 

 

(2,946

)

Net cash used in operating activities

 

 

(14,551

)

 

 

(12,496

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

 

 

 

(5

)

Maturities of short-term investments

 

 

97

 

 

 

 

Net cash provided by (used in) investing activities

 

 

97

 

 

 

(5

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from borrowings under loan and security agreement

 

 

7,000

 

 

 

 

Proceeds from issuance of common stock in pre-closing financing

 

 

42,000

 

 

 

 

Cash acquired in connection with reverse recapitalization

 

 

53,158

 

 

 

 

Payment of reverse recapitalization transaction costs

 

 

(2,812

)

 

 

 

Proceeds from exercise of common stock options

 

 

 

 

 

15

 

Net cash provided by financing activities

 

 

99,346

 

 

 

15

 

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

 

 

84,892

 

 

 

(12,486

)

Cash, cash equivalents, restricted cash and restricted cash equivalents
   at beginning of period

 

 

31,264

 

 

 

49,540

 

Cash, cash equivalents, restricted cash and restricted cash equivalents
   at end of period

 

$

116,156

 

 

$

37,054

 

Supplemental disclosure of non-cash operating, investing and
   financing activities:

 

 

 

 

 

 

Interest payments on venture debt

 

$

115

 

 

$

119

 

Short-term investments acquired in connection with reverse recapitalization

 

$

19,905

 

 

$

 

Issuance of CVR at fair value

 

$

180

 

 

$

 

Transaction costs related to reverse recapitalization included in
   accounts payable and accrued expenses

 

$

7,201

 

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


Q32 BIO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of the Business

Q32 Bio Inc. (“Q32” or the “Company”) is a clinical stage biotechnology company focused on developing novel biologics to effectively and safely restore healthy immune balance in patients with autoimmune and inflammatory diseases driven by pathological immune dysfunction. Q32 has multiple product candidates across a variety of autoimmune and inflammatory diseases with clinical readouts for its two lead programs expected in 2024 and 2025. The Company was formed in 2017 as Admirx, Inc. under the laws of the state of Delaware and is headquartered in Waltham, Massachusetts. On March 20, 2020, the Company changed its name to Q32 Bio Inc.

Merger with Homology

On March 25, 2024, Kenobi Merger Sub, Inc. (“Merger Sub”), a wholly-owned subsidiary of Homology Medicines, Inc. (“Homology”), completed its merger with and into Q32 Bio Operations Inc. (previously named Q32 Bio Inc. and referred to herein as “Legacy Q32”), with Legacy Q32 continuing as the surviving entity as a wholly-owned subsidiary of Homology. This transaction is referred to as the “Merger.” Homology changed its name to Q32 Bio, Inc., and Legacy Q32, which remains as a wholly-owned subsidiary of the Company, changed its name to Q32 Bio Operations, Inc. The Merger was effected pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of November 16, 2023, by and among Homology, Legacy Q32, and Merger Sub. In connection with the Merger Agreement, certain parties entered into a subscription agreement with the Company to purchase shares of Legacy Q32's common stock for an aggregate purchase price of $42.0 million (the “Pre-Closing Financing”).

On March 25, 2024 (the “Closing Date”), the Pre-Closing Financing closed immediately prior to the consummation of the Merger. Shares of Legacy Q32’s common stock issued pursuant to the Pre-Closing Financing were converted into the right to receive 1,682,045 shares of Homology common stock after taking into account the Reverse Stock Split. On March 25, 2024, Homology effected a one-for-eighteen reverse stock split of its then outstanding common stock (the “Reverse Stock Split”) where all issued and outstanding shares of Legacy Q32’s common stock (including common stock issued upon the conversion of all Legacy Q32’s Series A, Series A-1 and Series B preferred stock, conversion of Legacy Q32 convertible notes, but excluding the common stock issued in Pre-Closing Financing) converted into the right to receive an aggregate of 7,017,842 shares of Homology’s common stock based on the final exchange ratio of 0.0480 (the “Exchange Ratio”). Lastly, each option to purchase the Legacy Q32’s shares that was outstanding and unexercised immediately prior to the Merger was converted into an option to purchase shares of Homology based on the Exchange Ratio. Immediately following the Merger, Legacy Q32 stockholders owned approximately 74.4% of the outstanding common stock of the combined company.

The Merger was accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the United States of America (“GAAP”). For accounting purposes, Legacy Q32 is considered the accounting acquirer and Homology is the acquired company based on the terms of the Merger Agreement and other factors, such as relative voting rights and the composition of the combined company’s board of directors and senior management. Accordingly, the Merger was treated as the equivalent of Legacy Q32’s issuing stock to acquire the net assets of Homology. As a result of the Merger, the net assets of Homology were recorded at their acquisition-date fair value in the financial statements of the combined company and the reported operating results prior to the Merger are those of Legacy Q32. Legacy Q32’s historical financial statements became the historical consolidated financial statements of the combined company. All issued and outstanding Legacy Q32 common stock, convertible preferred stock and options prior to the effective date of the Merger have been retroactively adjusted to reflect the Exchange Ratio, which reflects the impact of the reverse stock split, for all periods presented.

At the effective time of the Merger, each person who as of immediately prior to the effective time of the Merger was a stockholder of record of Homology or had the right to receive Homology’s common stock received a contractual contingent value right (“CVR”) issued by Homology representing the contractual right to receive cash payments from the combined company upon the receipt of certain proceeds from a disposition of Homology’s pre-merger assets (see Note 3 for more details surrounding the accounting for the Merger and the CVRs).

Risks and Uncertainties

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including but not limited to, risks associated with completing preclinical studies and clinical trials, obtaining regulatory approvals for product candidates, development by competitors of new biopharmaceutical products, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Programs currently under development will require significant additional research and development efforts, including preclinical and clinical testing, and

7


will need to obtain regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize revenue from product sales. Since its inception, the Company’s operations have been focused on organizing and staffing, business planning, raising capital, establishing the Company’s intellectual property portfolio and performing research and development of its product candidates, programs and platform. The Company has primarily funded its operations with proceeds from the sale of convertible preferred stock, convertible notes, venture debt and its collaboration arrangement.

Liquidity and Going Concern

In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether they are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued.

As of March 31, 2024, the Company had an accumulated deficit of $186.1 million and cash, cash equivalents and short-term investments of $135.3 million. The Company expects that its cash, cash equivalents and short-term investments will be sufficient to fund its operating expenditures and capital expenditure requirements necessary to advance its research efforts and clinical trials for at least one year from the date of issuance of these unaudited condensed consolidated financial statements.

The Company has incurred recurring operating losses since its inception. On March 25, 2024, the Company closed the Merger with Homology and as part of that transaction, recorded a non-recurring gain of $15.9 million (non-cash) on the change in the fair value prior to the conversion of the Legacy Q32 convertible notes which resulted in net income of $1.0 million for the three months ended March 31, 2024 (see Note 3 for additional information regarding the Merger). The Company expects its operating losses and negative operating cash flows to continue into the foreseeable future. The future viability of the Company is dependent on its ability to raise additional capital to finance its operations. The Company’s inability to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies. There can be no assurance that the current operating plan will be achieved or that additional funding will be available on terms acceptable to the Company, or at all.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in conformity with GAAP and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with 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 unaudited condensed consolidated financial statements should be read in conjunction with Legacy Q32’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2023, included in a Form 8-K filed with the SEC on March 27, 2024.

The unaudited 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 condensed consolidated financial statements contain all adjustments, including those adjustments that are normal and recurring in nature, which are necessary for a fair statement of the Company’s financial position as of March 31, 2024, and consolidated results of operations for the three months ended March 31, 2024 and 2023, and cash flows for the three months ended March 31, 2024 and 2023. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024 or for any future period.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include those of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these unaudited condensed consolidated financial statements.

8


Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. Significant estimates and assumptions reflected in these unaudited condensed consolidated financial statements include, but are not limited to, the fair value of the common stock and convertible notes prior to the effective date of the Merger, the fair value of CVR liability, and the accruals of research and development expenses. Estimates are periodically reviewed considering changes in circumstances, facts and historical experience. Actual results may differ from the Company’s estimates.

Concentrations of Credit Risk and Significant Suppliers

Financial instruments that potentially expose the Company to credit risk primarily consist of cash, cash equivalents, restricted cash and restricted cash equivalents. The Company maintains its cash, cash equivalents, restricted cash and restricted cash equivalents balances with accredited financial institutions and, consequently, the Company does not believe it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

The Company’s cash management limits investment to investment-grade securities with the objective to preserve capital and to maintain liquidity until the funds can be used in business operations. The Company maintains its cash in bank deposit accounts that are Federal Deposit Insurance Corporation (“FDIC”) insured up to $250,000. At times, the Company’s bank accounts may exceed the federal insurance limit.

The Company is dependent on contract development and manufacturing organizations (“CDMOs”) to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients, other raw materials and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients, other raw materials and formulated drugs. The Company is also dependent on contract research organizations (“CROs”) which provide services related to the research and development activities in its programs.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. The Company’s only element of other comprehensive income (loss) is unrealized gains and losses on available-for-sale investments.

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

The Company considers all highly liquid investments that are readily convertible into cash with maturities of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash in bank deposits accounts that are FDIC insured up the $250,000. At times, the Company’s bank accounts may exceed the federal insurance limits. Cash equivalents are comprised of money market accounts invested in U.S. Treasury securities.

Restricted cash and restricted cash equivalents are comprised of deposits held by financial institutions as collateral for the company’s venture debt and used to collateralize letters of credit related to the Company’s lease arrangements.

The Company includes the restricted cash and restricted cash equivalents balance together with its cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows.

Cash, cash equivalents, restricted cash and restricted cash equivalents consisted of the following (in thousands):

 

 

March 31,

 

 

2024

 

 

2023

 

Cash and cash equivalents

 

$

115,509

 

 

$

31,407

 

Restricted cash and cash equivalents

 

 

647

 

 

 

5,647

 

Total cash, cash equivalents, restricted cash and restricted
   cash equivalents

 

$

116,156

 

 

$

37,054

 

 

9


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 have maturities of greater than 90 days at the time of purchase and mature within one year from the balance sheet date. Investments in marketable securities are recorded at fair value, with any unrealized gains and losses reported within accumulated other comprehensive income as a separate component of stockholders’ equity until realized or until a determination is made that an other-than-temporary decline in market value has occurred. Any premium or discount arising at purchase is amortized and/or accreted to interest income and/or expense over the life of the underlying security. Such amortization and accretion, together with interest on securities, are included in interest income in the Company’s condensed consolidated statements of operations. The cost of marketable securities sold is determined based on the specific identification method and any realized gains or losses on the sale of investments are reflected as a component of other income.

Deferred Transaction Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred transaction costs until such financings are consummated. After consummation of an equity financing, these costs are recorded as a reduction of the proceeds from the transaction, either as a reduction of the carrying value of the preferred stock or in stockholders’ deficit as a reduction of additional paid-in capital generated as a result of the transaction. Should the in-process equity financing be abandoned, the deferred transaction costs would be expensed immediately as a charge to operating expenses in the condensed consolidated statements of operations and comprehensive loss.

Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

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

Level 2 – Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

Equity Method Investment

The Company uses the equity method of accounting to account for an investment in an entity that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. The Company's proportionate share of the net income or loss of the entity is included in consolidated net income (loss). Judgments regarding the level of influence over the equity method investment include consideration of key factors such as the Company's ownership interest, representation on the board of directors or other management body and participation in policy-making decisions.

Under the equity method of accounting, the Company’s investment is initially recorded at fair value on the consolidated balance sheets. Upon initial investment, the Company evaluates whether there are basis differences between the carrying value and fair value of the Company’s proportionate share of the investee’s underlying net assets. Typically, the Company amortizes basis differences identified on a straight-line basis over the underlying assets’ estimated useful lives when calculating the attributable earnings or losses, excluding the basis differences attributable to in-process research and development that has no alternative future use. If the Company is unable to attribute all of the basis differences to specific assets or liabilities of the investee, the residual excess of the cost of the investment over the proportional fair value of the investee’s assets and liabilities is considered to be equity method goodwill and is recognized within the equity investment balance, which is tracked separately within the Company’s memo accounts. The Company subsequently records in the statements of operations its share of income or loss of the other entity within other income/expense, which results in an increase or decrease to the carrying value of the investment. If the share of losses exceeds the carrying value of the Company’s investment, the Company will suspend recognizing additional losses and will continue to do so unless it commits to providing additional funding; however, if there are intra-entity profits this can cause the investment balance to go negative.

The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that a decline in value has occurred that is other than temporary. Evidence considered in this evaluation includes, but would not

10


necessarily be limited to, the financial condition and near-term prospects of the investee, recent operating trends and forecasted performance of the investee, market conditions in the geographic area or industry in which the investee operates and the Company’s strategic plans for holding the investment in relation to the period of time expected for an anticipated recovery of its carrying value. If the investment is determined to have a decline in value deemed to be other than temporary it is written down to estimated fair value.

At March 31, 2024, the Company accounted for its investment in Oxford Biomedica (US) LLC (“OXB (US) LLC”) using the equity method of accounting (see Note 6).

Leases

The Company evaluates whether an arrangement is or contains a lease at contract inception. If a contract is or contains a lease, lease classification is determined at lease commencement, which represents the date at which the underlying asset is made available for use by the Company. The Company’s lease terms are generally measured at the respective lease’s noncancelable term and exclude any optional extension terms as the Company is not reasonably certain to exercise such options. The Company elected the short-term lease exemption and therefore does not recognize lease liabilities and right of use assets for lease arrangements with original lease terms of twelve months or less.

Lease liabilities represent the Company’s obligation to make lease payments under a lease arrangement. Lease liabilities are measured as the present value of fixed lease payments, discounted using an incremental borrowing rate, as interest rates implicit in the Company’s lease arrangements are generally not readily determinable. The Company elected the practical expedient to not separate lease and non-lease components for its real estate leases and therefore both are considered when determining the lease payments in a lease arrangement. Variable lease costs are expensed as incurred.

The incremental borrowing rate represents the interest rate at which the Company could borrow a fully collateralized amount equal to the lease payments, over a similar term, in a similar economic environment. The Company determines the incremental borrowing rate at lease commencement, generally using a synthetic credit rating based on the Company’s financial position and negative cash flows, factoring in adjustments for additional risks based on the Company’s economic condition, a survey of comparable companies with similar credit and financial profiles, as well as additional market risks, as may be applicable.

Right-of-use assets represent the Company’s right to use an underlying asset over its lease term. Right-of-use assets are initially measured as the associated lease liability, adjusted for prepaid rent and tenant incentives. The Company remeasures right-of-use assets and lease liabilities when a lease is modified, and the modification is not accounted for as a separate contract. A modification is accounted for as a separate contract if the modification grants the Company an additional right of use not included in the original lease agreement and the increase in lease payments is commensurate with the additional right of use. The Company assesses its right-of-use assets for impairment consistent with its policy for impairment of long-lived assets held and used in operations.

Subsequent Event Considerations

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. The Company has evaluated events occurring after the date of its consolidated balance sheet through the date these condensed consolidated financial statements were issued (see Note 19).

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280: Improvements to Reportable Segment Disclosures (“ASU 2023-07”). The amendments in this update improve reportable segment disclosure requirements through enhanced disclosures about significant segment expenses. All disclosure requirements of the update are required for entities with a single reportable segment. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and should be applied on a retrospective basis to all periods presented. The Company adopted this standard as of January 1, 2024. The Company has determined that the effects of adopting the amendments in ASU 2023-07 will only impact its disclosures and not have a material impact on its consolidated financial position and the results of its operations when such amendment is adopted.

11


Recently Issued Accounting Standards Not Yet Adopted

On December 14, 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740)—Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 provides more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and incomes taxes paid information. For public companies, the amendments are effective for annual periods beginning after December 15, 2024 and should be applied prospectively. The Company has determined that the effects of adopting the amendments in ASU 2023-09 will only impact its disclosures and not have a material impact on its condensed consolidated financial position and the results of its operations when such amendment is adopted.

3. Accounting for the Merger

As described in Note 1, Merger Sub merged with and into Legacy Q32, with Legacy Q32 surviving as a wholly-owned subsidiary of the Company on March 25, 2024. The Merger was accounted for as a reverse recapitalization in accordance with GAAP with Legacy Q32 as the accounting acquirer of Homology. Legacy Q32 was determined to be the accounting acquirer based on the terms of the Merger Agreement and other factors, including: (i) Legacy Q32’s shareholders own a majority of the voting rights in the combined company; (ii) Legacy Q32 designated a majority (seven of nine) of the initial members of the board of directors of the combined company; (iii) the Company’s executive management team became the management team of the combined company; (iv) the pre-combination assets of Homology were primarily cash and cash equivalents, short-term investments, and other non-operating assets; and (v) the combined company was named Q32 Bio Inc. and is headquartered in Legacy Q32’s office in Waltham, Massachusetts.

At the effective time of the Merger, substantially all of the assets of Homology consisted of cash and cash equivalents, short-term investments, as well as other non-operating assets. Under such reverse recapitalization accounting, the assets and liabilities of Homology were recorded at their fair value in the Company’s financial statements at the effective time of the Merger, which approximated book value due to the short-term nature, except for the equity method investment as described below. Homology’s development programs had ceased prior to the Merger and were deemed to be de minimis in value at the transaction date. No goodwill or intangible assets were recognized.

Consequently, the unaudited condensed consolidated financial statements of the Company reflect the operations of Legacy Q32 for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former stockholders Homology, the legal acquirer, and a recapitalization of the equity of Legacy Q32, the accounting acquirer.

As part of the recapitalization, the Company obtained the assets and liabilities listed below:

 

Cash and cash equivalents

 

$

53,158

 

Short-term investments

 

 

19,905

 

Prepaid expenses

 

 

964

 

Equity method investment

 

 

4,900

 

Accounts payable and accrued liabilities

 

 

(7,903

)

CVR liability

 

 

(5,080

)

Net assets acquired

 

$

65,944

 

 

In addition, the Company recognized $2.1 million in personnel cost related to severance payments and retention bonuses to Homology employees and this amount was recorded in general and administrative expense in the accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 2024. The Company also incurred transaction costs of $10.0 million and this amount is recorded in additional paid-in capital in the accompanying unaudited condensed consolidated statements of convertible preferred stock and stockholders’ equity (deficit) for the three months ended March 31, 2024.

With respect to the CVRs issued in connection with the Merger, each CVR represents the contractual right to receive payments from the Company upon the actual receipt by the Company or its subsidiaries of certain contingent proceeds derived from any cash consideration that is paid to the Company or its subsidiaries as a result of the sale, transfer, license, assignment or other divestiture, disposition or commercialization of any of the Company’s assets, rights and interests relating to the following pre-merger assets of Homology: HMI-103, HMI-204, capsids and human hematopoietic stem cell-derived adeno-associated virus vector (“AAVHSC”) platform, including any equity interests held directly or indirectly by the Company in OXB (US) LLC.

The Company believes that the achievement of the milestones outlined in the CVR agreement related to Homology’s HMI-103, HMI-204, capsids and AAVHSC platform are highly susceptible to factors outside the Company's influence that are not expected to be resolved for a long period of time, if at all. In particular, these amounts are primarily influenced by the actions and judgments of third parties and the licensors of such assets and are based on the licensors of such assets progressing the in-process research and

12


development assets, and in the case of one of the draft agreements, to certain milestones. As of March 31, 2024, the Company recorded a CVR liability of $0.2 million on the balance sheet relating to such contingent payments.

For the portion of the CVR agreement that is related to Homology's equity interest in OXB (US) LLC, the Company recorded a CVR liability of $4.9 million representing its estimated fair value. Pursuant to the Amended and Restated Limited Liability Company Agreement of OXB (US) LLC, at any time following the three-year anniversary of the closing of the transaction between OXB (US) LLC and the Company (formerly known as Homology Medicines, Inc.) on March 10, 2022, (i) OXB (US) LLC will have an option to cause the Company to sell and transfer to OXB (US) LLC, and (ii) the Company will have an option to cause OXB (US) LLC to purchase from the Company, in each case, all of the Company’s equity ownership interest in OXB (US) LLC based on a predetermined multiple of revenue for the immediately preceding 12-month period (together, the “Options”), subject to a maximum amount of $74.1 million. The Company utilized a monte carlo simulation model, also known as a probability simulation, to estimate the fair value of the CVR liability. For each simulated path of future revenue, a market approach using the predetermined revenue multiple was employed to determine the future value of the equity interest, which was then discounted to present value using OXB (US) LLC's estimated cost of debt.

4. Short-Term Investments

The Company may invest 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 following table summarizes the Company’s short-term investments as of March 31, 2024 (in thousands):

 

As of March 31, 2024

 

Amortized
Cost

 

 

Unrealized
Gains

 

 

Unrealized
Losses

 

 

Fair Value

 

US Treasury securities

 

$

19,808

 

 

$

 

 

$

(5

)

 

$

19,803

 

Total

 

$

19,808

 

 

$

 

 

$

(5

)

 

$

19,803

 

 

The Company did not have any short-term investments as of December 31, 2023.

 

The Company utilizes the specific identification method in computing realized gains and losses. Unrealized holding gains or losses for the period that have been included in accumulated other comprehensive income, as well as gains and losses reclassified out of accumulated other comprehensive income into other income, net, were not material to the Company’s unaudited condensed consolidated statements of operations. The Company had no realized gains and losses on its available-for-sale securities for the three months ended March 31, 2024. The contractual maturity dates of all of the Company’s investments are less than one year.

5. Fair Value Measurements

The carrying values of the Company’s prepaid expenses and other current assets, accounts payable, and accrued expenses and other current liabilities approximate their fair value due to their short-term nature. The carrying value of the Company’s term loan as of March 31, 2024 (see Note 11) approximated fair value based on interest rates currently available to the Company.

The tables below present information about the Company’s assets and liabilities that are regularly measured and carried at fair value on a recurring basis at March 31, 2024 and December 31, 2023 and indicate the level within the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value, which is described further within Note 2, Summary of Significant Accounting Policies.

13


Financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 are summarized as follows (in thousands):

 

Description

 

Balance as
of March 31,
2024

 

 

Quoted
Prices in
Active
Markets
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Other
Unobservable
Inputs
(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

114,737

 

 

$

114,737

 

 

$

 

 

$

 

Total cash equivalents

 

$

114,737

 

 

$

114,737

 

 

$

 

 

$

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities

 

$

19,803

 

 

$

 

 

$

19,803

 

 

$

 

Total short-term investments

 

$

19,803

 

 

$

 

 

$

19,803

 

 

$

 

Total financial assets

 

$

134,540

 

 

$

114,737

 

 

$

19,803

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

CVR liability

 

$

5,080

 

 

$

 

 

$

 

 

$

5,080

 

Total financial liabilities

 

$

5,080

 

 

$

 

 

$

 

 

$

5,080

 

 

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 are summarized as follows (in thousands):

 

Description

 

Balance as
of December 31,
2023

 

 

Quoted
Prices in
Active
Markets
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Other
Unobservable
Inputs
(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

24,100

 

 

$

24,100

 

 

$

 

 

$

 

Total cash equivalents

 

$

24,100

 

 

$

24,100

 

 

$

 

 

$

 

Restricted cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

5,000

 

 

$

5,000

 

 

$

 

 

$

 

Total restricted cash equivalents

 

$

5,000

 

 

$

5,000

 

 

$

 

 

$

 

Total financial assets

 

$

29,100

 

 

$

29,100

 

 

$

 

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Convertible notes

 

$

38,595

 

 

$

 

 

$

 

 

$

38,595

 

Total financial liabilities

 

$

38,595

 

 

$

 

 

$

 

 

$

38,595

 

 

Money market funds were valued by the Company using quoted prices in active markets for identical securities, which represent a Level 1 measurement within the fair value hierarchy. Short-term investments 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.

As discussed in Note 1, at the effective time of the Merger, each person who as of immediately prior to the effective time of the Merger was a stockholder of record of Homology or had the right to receive Homology’s common stock received a CVR, issued by Homology subject to and in accordance with the terms and conditions of a CVR Agreement, representing the contractual right to receive cash payments from the combined company upon the receipt of certain proceeds from a disposition of Homology’s pre-merger assets, calculated in accordance with the CVR Agreement. The Company concluded that the CVR liability is a derivative liability and is accounted for at fair value. The fair value of the CVR liability is based on significant unobservable inputs, which represent Level 3 measurements within the fair value hierarchy. For the portion of the CVR liability that is related to Homology's equity interest in OXB (US) LLC, the Company utilized a monte carlo simulation model, also known as a probability simulation, to estimate the fair value of the CVR liability. This model requires the use of significant judgment, estimates and assumptions, including estimated future revenues and discount rates. For the portion of the CVR liability related to Homology's HMI-103, HMI-204, capsids and AAVHSC platform, the Company's fair value assessment includes judgments around the probability of progressing the in-process research and development assets, and in the case of one of the draft agreements, to certain milestones.

14


During the three months ended March 31, 2024 and 2023, there were no transfers between Level 1, Level 2 and Level 3. There have been no impairments of the Company’s assets measured and carried at fair value during the three months ended March 31, 2024 and 2023.

Legacy Q32 issued convertible notes (the “Convertible Notes”) totaling $30.0 million during the year ended December 31, 2022. Legacy Q32 concluded that the Convertible Notes and its related features are within the scope of FASB Accounting Standards Codification (ASC) Topic 825, Financial Instruments (ASC 825”), as a combined financial instrument, and Legacy Q32 elected the fair value option where changes in fair value of the Convertible Notes are measured through the accompanying condensed consolidated statement of operations until settlement. The Convertible Notes liability represents a Level 3 measurement within the fair value hierarchy as it has been valued using certain unobservable inputs. These inputs include the underlying fair value of the equity instrument into which the Convertible Notes are convertible. The fair value is based on significant inputs not observable in the market, namely potential financing scenarios, the likelihood of such scenarios, the expected time for each scenario to occur, and the required market rates of return utilized in modeling these scenarios.

 

Year Ended December 31, 2023

 

Scenario 1

 

Scenario 2

 

Scenario 3

Probability of each scenario

 

80%

 

15%

 

5%

Expected Term (years)

 

0.25

 

0.25

 

0.42

Required market rates of return

 

15.0%

 

15.0%

 

15.0%

 

The Convertible Notes had an estimated fair value of $38.6 million as of December 31, 2023. The Company recorded in other income (expense), net, an interest expense of $1.5 million and a charge of $4.7 million on the change in estimated fair value during the year ended December 31, 2023. There was no change in fair value attributable to the instrument-specific credit risk for the year ended December 31, 2023.

Upon closing of the Merger, Legacy Q32 converted the outstanding Convertible Notes plus accrued interest into shares of common stock at 90% of the purchase price of the mandatory conversion event. As the Convertible Notes are recorded at fair value, a gain of $15.9 million on the change in the fair value prior to the conversion of convertible notes is reflected in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2024 (see Note 11).

6. Equity Method Investment

As part of the Merger, the Company obtained Homology's 20% equity interest in OXB (US) LLC, an AAV vector process development and manufacturing services company. The Company has significant influence over, but does not control, OXB (US) LLC through its noncontrolling representation on OXB (US) LLC’s board of directors and the Company’s equity interest in OXB (US) LLC. Accordingly, the Company does not consolidate the financial statements of OXB (US) LLC and accounts for its investment using the equity method of accounting.

The Company recorded its equity method investments in OXB (US) LLC at fair value upon the effective date of the Merger. The fair value of the equity method investment was determined based on the market approach. This approach estimates the fair value of OXB (US) LLC based on the implied value for the entity, including the Options (as defined in Note 3 above), for a controlling interest in OXB (US) LLC at the entity’s formation. As part of its fair value analysis, the Company determined that the Options are embedded in the Company’s ownership units of OXB (US) LLC because the Options are not legally detachable or separately exercisable. Accordingly, the equity method investment and the Options represent one unit of account and the fair value recor