10-Q 1 morf-20190630x10q.htm 10-Q mors_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

 

(Mark One)

 

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

For the quarterly period ended June 30, 2019

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: 001-38940

 

MORPHIC HOLDING, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware
(State or other jurisdiction of
Incorporation or Organization)

47‑3878772
(I.R.S. Employer
Identification No.)

35 Gatehouse Drive, A2
Waltham, MA  02451
(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number, including area code: (781) 996‑0955

 

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 (Section 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 Exchange Act Rule 12b‑2). Yes     No 

 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

MORF

The Nasdaq Global Market

 

The number of shares outstanding of the registrant’s Common Stock as of August 9, 2019 was 2,585,976.

 

 

 

 

MORPHIC HOLDING, INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED June 30, 2019

 

 

 

 

 

    

Page

 

 

 

Part I—Financial Information 

 

2

Item 1—Financial Statements (unaudited) 

 

2

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 

 

2

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2019 and 2018 

 

3

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit for the three and six months ended June 30, 2019 and 2018 

 

4

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 

 

6

Notes to Unaudited Condensed Consolidated Financial Statements 

 

7

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

23

Item 3—Quantitative and Qualitative Disclosures about Market Risk 

 

39

Item 4—Controls and Procedures 

 

39

 

 

 

Part II—Other Information 

 

40

Item 1—Legal Proceedings 

 

40

Item 1A—Risk Factors 

 

40

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds 

 

89

Item 3—Defaults Upon Senior Securities 

 

90

Item 4—Mine Safety Disclosures 

 

90

Item 5—Other Information 

 

90

Item 6—Exhibits 

 

91

Signatures 

 

92

 

 

 

 

 

1

 

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements


CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2019

    

2018

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

44,199

 

$

185,901

Marketable securities

 

 

126,206

 

 

 —

Accounts receivable

 

 

945

 

 

 —

Prepaid expenses and other current assets

 

 

1,436

 

 

1,222

Total current assets

 

 

172,786

 

 

187,123

 

 

 

 

 

 

 

Property and equipment, net

 

 

2,534

 

 

1,843

Restricted cash

 

 

275

 

 

275

Other assets

 

 

3,015

 

 

64

Total assets

 

$

178,610

 

$

189,305

Liabilities

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

2,906

 

$

1,745

Accrued expenses

 

 

5,217

 

 

3,239

Deferred revenue, current portion

 

 

35,334

 

 

29,862

Deferred rent, current portion

 

 

73

 

 

57

Total current liabilities

 

 

43,530

 

 

34,903

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

Deferred revenue, net of current portion

 

 

60,945

 

 

66,781

Deferred rent, net of current portion

 

 

266

 

 

306

Other long-term liabilities

 

 

38

 

 

58

Total liabilities

 

 

104,779

 

 

102,048

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

Preferred shares:

 

 

 

 

 

 

Series Seed preferred shares, $0.0001 par value, 11,967,689 shares authorized, 2,045,556 shares issued and outstanding as of June 30, 2019, and December 31, 2018 (aggregate liquidation preference of $8,980 at June 30, 2019 and December 31, 2018)

 

 

8,658

 

 

8,658

Series A preferred shares, $0.0001 par value, 49,047,619 shares authorized, 8,411,368 shares issued and outstanding as of June 30, 2019 and December 31, 2018 (liquidation preference of $51,500 as of June 30, 2019 and December 31, 2018)

 

 

51,320

 

 

51,320

Series B preferred shares, $0.0001 par value, 61,538,454 shares authorized, 10,553,483 shares issued and outstanding as of June 30, 2019 and December 31, 2018 (liquidation preference of $80,000 as of June 30, 2019 and December 31, 2018)

 

 

79,831

 

 

79,831

Stockholders’ Deficit

 

 

  

 

 

  

Common shares, $0.0001 par value, 151,000,000 shares authorized and 2,044,999 shares issued and outstanding as of June 30, 2019 and 1,832,923 shares issued and outstanding as of December 31, 2018

 

 

 —

 

 

 —

Additional paid‑in capital

 

 

2,799

 

 

1,633

Accumulated deficit

 

 

(68,818)

 

 

(54,185)

Accumulated other comprehensive income

 

 

41

 

 

 —

Total stockholders’ deficit

 

 

(65,978)

 

 

(52,552)

Total liabilities, preferred shares, and stockholders’ deficit

 

$

178,610

 

$

189,305

 

 

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

2

MORPHIC HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

(In thousands, except unit, share, per unit, and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue - related party

 

$

4,395

 

$

 —

 

$

9,964

 

$

 —

Collaboration revenue - other

 

 

1,172

 

 

 —

 

 

1,671

 

 

 —

 

 

 

5,567

 

 

 —

 

 

11,635

 

 

 —

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Research and development

 

 

13,907

 

 

5,293

 

 

24,278

 

 

9,577

General and administrative

 

 

2,077

 

 

972

 

 

3,908

 

 

1,906

Total operating expenses

 

 

15,984

 

 

6,265

 

 

28,186

 

 

11,483

Loss from operations

 

 

(10,417)

 

 

(6,265)

 

 

(16,551)

 

 

(11,483)

Other income:

 

 

  

 

 

  

 

 

  

 

 

  

Interest income, net

 

 

1,119

 

 

34

 

 

2,182

 

 

73

Total other income

 

 

1,119

 

 

34

 

 

2,182

 

 

73

Loss before provision for income taxes

 

 

(9,298)

 

 

(6,231)

 

 

(14,369)

 

 

(11,410)

Provision for income taxes

 

 

(135)

 

 

 

 

 

(264)

 

 

 —

Net loss

 

$

(9,433)

 

$

(6,231)

 

$

(14,633)

 

$

(11,410)

Net loss per share, basic and diluted

 

$

(4.73)

 

 

  

 

$

(7.54)

 

 

  

Net loss per unit, basic and diluted

 

 

 

 

$

(6.16)

 

 

 

 

$

(11.28)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted

 

 

1,992,410

 

 

  

 

 

1,940,923

 

 

  

Weighted average common units outstanding, basic and diluted

 

 

 

 

 

1,011,227

 

 

 

 

 

1,011,227

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

  

 

 

  

 

 

  

 

 

  

Net loss

 

$

(9,433)

 

$

(6,231)

 

$

(14,633)

 

$

(11,410)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

   Unrealized holding gains on marketable securities

 

 

16

 

 

 —

 

 

41

 

 

 —

Comprehensive loss

 

$

(9,417)

 

$

(6,231)

 

$

(14,592)

 

$

(11,410)

 

 

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

 

 

3

MORPHIC HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Unaudited)

(In thousands, except unit and share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series Seed Convertible Preferred

 

Series A Convertible Preferred

 

Series B Convertible Preferred

 

 

Common

 

Additional

 

 

 

 

Total

 

 

Units

 

Units

 

Units

 

 

Units

 

Paid‑in

 

Accumulated

 

Stockholders’

 

  

Units

  

Amount

  

Units

  

Amount

  

Units

  

Amount

  

  

Units

  

Amount

  

Capital

  

Deficit

  

Deficit

Balance at December 31, 2017

 

2,045,556

 

$

8,658

 

6,729,096

 

$

41,029

 

 —

 

$

 —

 

 

1,011,227

 

$

 —

 

$

661

 

$

(30,354)

 

$

(29,693)

Equity‑based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

123

 

 

 

 

 

123

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,179)

 

 

(5,179)

Balance at March 31, 2018

 

2,045,556

 

 

8,658

 

6,729,096

 

 

41,029

 

 —

 

$

 —

 

 

1,011,227

 

 

 —

 

 

784

 

 

(35,533)

 

 

(34,749)

Equity‑based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

135

 

 

 —

 

 

135

Net Loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,231)

 

 

(6,231)

Balance at June 30, 2018

 

2,045,556

 

$

8,658

 

6,729,096

 

$

41,029

 

 —

 

$

 —

 

 

1,011,227

 

$

 —

 

$

919

 

$

(41,764)

 

$

(40,845)

 

 

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

 

4

MORPHIC HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Unaudited) (Continued)

(In thousands, except unit and share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series Seed Convertible Preferred

 

Series A Convertible Preferred

 

Series B Convertible Preferred

 

 

Common

 

Additional

 

 

 

 

Accumulated

 

Total

 

 

Shares

 

Shares

 

Shares

 

 

Shares

 

Paid‑in

 

Accumulated

 

Other

 

Stockholders’

 

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

Amount

  

  

Shares

  

Amount

  

Capital

  

Deficit

  

Comprehensive Income

  

Deficit

Balance at December 31, 2018

 

2,045,556

 

$

8,658

 

8,411,368

 

$

51,320

 

10,553,483

$

79,831

 

 

1,832,923

 

$

 —

 

$

1,633

 

$

(54,185)

 

$

 —

 

$

(52,552)

Vesting of restricted shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Equity‑based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

499

 

 

 

 

 

 

 

 

499

Unrealized holding gains on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

 

25

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,200)

 

 

 

 

 

(5,200)

Balance at March 31, 2019

 

2,045,556

 

 

8,658

 

8,411,368

 

 

51,320

 

10,553,483

 

79,831

 

 

1,932,834

 

 

 —

 

 

2,132

 

 

(59,385)

 

 

25

 

 

(57,228)

Vesting of restricted shares

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

112,165

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity‑based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

667

 

 

 —

 

 

 —

 

 

667

Unrealized holding gains on marketable securities

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

16

 

 

16

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9,433)

 

 

 —

 

 

(9,433)

Balance at June 30, 2019

 

2,045,556

 

$

8,658

 

8,411,368

 

$

51,320

 

10,553,483

$

79,831

 

 

2,044,999

 

$

 —

 

$

2,799

 

$

(68,818)

 

$

41

 

$

(65,978)

 

 

 

 

 

5

MORPHIC HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

    

2019

    

2018

Cash flows from operating activities:

 

 

  

 

 

  

Net loss

 

$

(14,633)

 

$

(11,410)

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

 

 

  

 

 

  

Depreciation and amortization

 

 

365

 

 

260

Premium amortization and discount accretion on marketable securities

 

 

(1,232)

 

 

 —

Equity‑based compensation

 

 

1,166

 

 

258

Non-cash interest expense

 

 

 —

 

 

18

Change in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(945)

 

 

 —

Prepaid expenses and other current assets

 

 

(214)

 

 

157

Other assets

 

 

(14)

 

 

(17)

Accounts payable

 

 

1,161

 

 

113

Accrued expenses

 

 

874

 

 

(274)

Deferred revenue

 

 

(364)

 

 

 —

Deferred rent

 

 

(24)

 

 

(8)

Other long-term liabilities

 

 

(20)

 

 

 —

Net cash used in operating activities

 

 

(13,880)

 

 

(10,903)

Cash flows from investing activities:

 

 

  

 

 

  

Purchases of marketable securities

 

 

(169,933)

 

 

 —

Proceeds from maturities of marketable securities

 

 

45,000

 

 

 —

Purchase of property and equipment

 

 

(1,056)

 

 

(206)

Net cash used in investing activities

 

 

(125,989)

 

 

(206)

Cash flows from financing activities:

 

 

  

 

 

  

Repayment of debt

 

 

 —

 

 

(169)

Deferred issuance costs

 

 

(1,833)

 

 

 —

Net cash used in financing activities

 

 

(1,833)

 

 

(169)

Net decrease in cash and cash equivalents and restricted cash

 

 

(141,702)

 

 

(11,278)

Cash and cash equivalents and restricted cash, beginning of period

 

 

186,176

 

 

21,025

Cash and cash equivalents and restricted cash, end of period

 

$

44,474

 

$

9,747

 

 

 

 

 

 

 

Supplemental disclosure of non‑cash items:

 

 

  

 

 

  

Deferred issuance costs included in accrued expenses

 

$

1,104

 

$

 —

Supplemental cash flow information:

 

 

  

 

 

  

Cash paid for interest

 

$

 —

 

$

13

 

 

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

 

 

6

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Nature of the Business and Basis of Presentation

Organization

Morphic Holding, Inc. was formed under the laws of the State of Delaware in August 2014 under the name Integrin Rock, LLC. The Company subsequently changed its name to Morphic Rock Holding, LLC in October 2014 and then to Morphic Holding, LLC in June 2016. As more fully described in Note 7 below, on December 5, 2018, the Company completed a series of transactions (the “Reorganization”) pursuant to which Morphic Holding, LLC was converted in a tax free reorganization into Morphic Holding, Inc. and three wholly-owned subsidiaries, namely Lazuli, Inc., Tourmaline, Inc, and Phyllite, Inc, were merged with and into another wholly-owned subsidiary, Morphic Therapeutic, Inc. As part of the Reorganization, all convertible preferred units and common units of Morphic Holding, LLC issued and outstanding immediately prior to the Reorganization were exchanged for shares of Morphic Holding Inc. capital stock of the same class or series on a one-for-one basis. Previously outstanding vested and unvested incentive units, irrespective of threshold amounts (defined as the fair value of common unit on the date the incentive unit award is granted) or voting rights, were exchanged for an equal number of shares of common stock or restricted common stock, respectively. The restricted common stock was issued with the same vesting terms as the unvested incentive units held immediately prior to the Reorganization.

Upon consummation of the Reorganization, the historical consolidated financial statements of Morphic Holding, LLC became the historical consolidated financial statements of Morphic Holding Inc. Except as otherwise indicated or the context otherwise requires, all information included in this filing is presented giving effect to the Reorganization. At the time of the Reorganization, the Company created a Massachusetts Securities Corporation (the “Security Corporation”) to take advantage of the favorable tax treatment of income earned on securities held within such entity. As of June 30, 2019, all of the Company’s excess funds were temporarily invested through the Security Corporation.

The Company is a biopharmaceutical company applying proprietary insights into integrin medicine to discover and develop first-in-class oral small molecule integrin therapeutics. Integrins are a validated target class with multiple approved drugs for the treatment of serious chronic diseases. Despite significant biopharmaceutical industry investment, no oral integrin therapies have been approved. The Company has created the Morphic integrin technology platform, or MInT Platform, by leveraging our unique understanding of integrin structure and biology, to develop a pipeline of novel product candidates designed to achieve potency, high selectivity, and the pharmaceutical properties required for oral administration.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and 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 drug development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales. The Company expects to continue to incur losses from operations for the foreseeable future; the Company expects that its cash and cash equivalents and marketable securities and the funds received from the Company’s initial public offering (“IPO”) will be sufficient to fund its operating expenses and capital expenditure requirements through at least the next 12 months from the date these financial statements were issued.

On July 1, 2019, the Company completed an IPO, in which the Company issued and sold 6,900,000 shares of its common stock at a public offering price of $15.00 per share, including 900,000 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares of common stock, for aggregate gross proceeds of $103.5 million. The Company raised approximately $93.4 million in net proceeds after deducting underwriting discounts and commissions and offering expenses payable by the Company. Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 21,017,232 shares of common stock at the applicable

7

conversion ratio then in effect. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding. In connection with the closing of the IPO, the Company amended and restated its Fourth Amended and Restated Certificate of Incorporation to change the authorized capital stock to 400,000,000 shares designated as common stock, and 10,000,000 shares designated as preferred stock, all with a par value of $0.0001 per share. The financial statements as of June 30, 2019, including share and per share amounts, do not give effect to the IPO, as it closed subsequent to June 30, 2019.

Basis of Presentation

The consolidated financial statements include the accounts of Morphic Holding, Inc. and its wholly owned subsidiaries described above. All intercompany balances have been eliminated in consolidation.

These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company's financial position as of June 30, 2019 and the results of its operations for the three and six months ended June 30, 2019 and 2018 and its cash flows for the six months ended June 30, 2019 and 2018. Financial statement disclosures for the six months ended June 30, 2019 and 2018 are condensed and do not include all disclosures required for an annual set of financial statements in accordance with GAAP and should be read in conjunction with the Company’s audited financial statements and notes in the prospectus filed with the Securities and Exchange Commission on June 27, 2019. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ended December 31, 2019, any other interim periods, or any future year or period.

On June 10, 2019, the Company’s board of directors and stockholders approved a 5.8311-to-one reverse stock split of the Company’s issued and outstanding shares of common stock and convertible preferred stock. All unit, per unit, share and per share amounts in the consolidated financial statements and notes thereto have been retrospectively adjusted for all periods presented to give effect to the reverse stock split.

 

2. Summary of Significant Accounting Policies

Use of Estimates and Judgements

The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that may affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the related reporting of revenues and expenses during the reporting period. Significant estimates of accounting reflected in these consolidated financial statements include, but are not limited to, estimates related to revenue recognition, accrued expenses, the valuation of equity‑based compensation, including incentive units, restricted common stock, and stock options, and income taxes. Actual results could differ from those estimates.

Concentration of Credit Risk and Off‑Balance Sheet Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and marketable securities. The Company has all cash and cash equivalents at one accredited financial institution, in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

8

The primary objectives for the Company’s investment portfolio are the preservation of capital and maintenance of liquidity. In 2016, the Company adopted its investment policy which allows funds to be held outside bank accounts, but to be invested only in readily marketable fixed income instruments with readily ascertainable market values, denominated and payable in U.S. dollars including obligations of the U.S. government and its agencies and money market funds registered according to Rule 2a‑7 of the Investment Company Act of 1940. Investments in the money market fund shall be consistent with approved instruments and assets under management must be at least $1 billion.

The Company has no off‑balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign‑hedging arrangements.

Cash and Cash Equivalents and Restricted Cash

The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At June 30, 2019, cash and cash equivalents include bank demand deposits and money market funds that invest primarily in U.S. government‑backed securities and treasuries. Cash equivalents are stated at fair value.

Restricted cash consists of a letter of credit in the amount of $275,000 issued to the landlord of the Company’s facility lease. The terms of the letter of credit extend beyond one year. The following table reconciles cash and cash equivalents and restricted cash per the balance sheet to the statements of cash flows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

June 30, 

 

December 31, 

 

2019

    

2018

 

2018

    

2017

Cash and cash equivalents

$

44,199

 

$

185,901

 

$

9,472

 

$

20,750

Restricted cash

 

275

 

 

275

 

 

275

 

 

275

 

$

44,474

 

$

186,176

 

$

9,747

 

$

21,025

 

 

Marketable securities

 

The Company invests funds in the United States Treasury securities; those securities are classified as available-for-sale and are carried at fair value. Changes in fair value of marketable securities are recorded in other comprehensive income (loss) as net unrealized gains (losses) on marketable securities. The Company recognized $16,000 and $41,000 in unrealized gains, net for the three and six months ended June 30, 2019, respectively. The Company held no marketable securities prior to 2019.

 

Interest income on investments 

 

The Company recognizes interest income from investments in money market funds and available-for-sale securities, including amortization of premium/accretion of discount, on an accrual basis. For the three and six months ended June 30, 2019, the Company recognized $1.1 million and $2.2 million in interest income, respectively. For the three and six months ended June 30, 2018, the Company recognized $48,000 and $103,000 in interest income, respectively.

Interest income is included with other income on the statements of operations and comprehensive loss.

 

 

Fair Value Measurements

ASC Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a

9

liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three‑tier fair value hierarchy that distinguishes between the following:

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

Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves.

Level 3 — Unobservable inputs developed using estimates of assumptions developed by the Company, which reflect those that a market participant would use.

To the extent the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair values requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company believes that the carrying amounts of the Company’s consolidated financial instruments, including prepaid expenses and other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of those instruments.

Comprehensive Loss

Comprehensive loss is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non‑owner sources. Comprehensive loss includes net loss and the change in accumulated other comprehensive loss for the period. For the three and six months ended June 30, 2019, comprehensive loss included $16,000 and $41,000, respectively, of unrealized gains on marketable securities; for the three and six months ended June 30, 2018, comprehensive loss equaled net loss.

Deferred Offering Costs

The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After the consummation of the IPO, these costs were recorded in stockholders' (deficit) equity as a reduction of additional paid-in capital or the associated preferred or common stock account, as applicable. Deferred offering costs as of June 30, 2019 and December 31, 2018 were $2.9 million and $0, respectively. Such costs are classified as other long-term assets in the accompanying consolidated balance sheets.

Recently Adopted Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, ("ASU 2017- 09") which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. The new standard does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if the fair value, vesting conditions, or classification of the award changes as a result of the change in terms or conditions. The Company adopted ASU 2017-09 on January 1, 2018 using the prospective approach. Initial adoption of ASU 2017-09 did not have any impact on the Company's consolidated financial statements. In October 2018, in connection with the Reorganization described in Note 6, the Company modified certain equity-based awards and the effect of such modification has been reflected in the consolidated financial statements for the year ended December 31, 2018.

In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which modifies how all entities recognize revenue, and consolidates into one ASC (ASC Topic 606, Revenue from Contracts with Customers) the current guidance found in ASC Topic 605, and various other revenue accounting standards for specialized transactions and industries. ASU 2014-09 outlines a

10

comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On January 1, 2018, the Company elected to early adopt ASU 2014-09 using the full retrospective approach. As such, the statements of operations and comprehensive loss are presented in accordance with the provisions of ASC 606. 

Recently Issued Accounting Pronouncements not yet Adopted

As an "emerging growth company," or EGC, under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, the Company has made an election under Section 107 of the JOBS Act to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. Thus, the Company follows requirements applicable to the private companies for adopting new and updated accounting standards.

In April 2019, the FASB issued ASU 2019-04, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”). Certain provisions of ASU 2019-04 amend the guidance of ASU 2016-13, are applicable to the Company’s investments portfolio, and allow the Company to make certain accounting policy elections regarding establishing allowance for credit losses for the accrued interest receivable and the corresponding disclosures. The guidance is effective for the fiscal year beginning January 1, 2021, and interim periods within the fiscal year beginning January 2022 and will be adopted using the modified retrospective approach. The Company is currently evaluating the impact of ASU 2019-04 on the consolidated financial statements, including the impact of the available accounting policy elections.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326) ("ASU 2016-13"), which requires consideration of a broader range of reasonable and supportable information in developing credit loss estimates. The guidance is effective for the fiscal year beginning January 1, 2021, and interim periods within the fiscal year beginning January 2022 and has to be adopted using modified-retrospective approach. The Company is currently evaluating the impact of ASU 2016-13, as amended by ASU 2019-04 described above, on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with guidance regarding the accounting for and disclosure of leases. The update requires lessees to recognize all leases, including operating leases, with a term greater than 12 months on the consolidated balance sheet. This update also requires lessees and lessors to disclose key information about their leasing transactions. This standard is effective for public companies for annual and interim periods beginning after December 15, 2018. For all other entities, this standard is effective for annual reporting periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. While the Company expects the implementation of ASU 2016-02 to result in the recognition of right-of-use assets and lease liabilities for leased facilities, the Company does not believe that the adoption of ASU 2016-2 will have a material effect on its consolidated financial statements.

 

The Company has considered other recent accounting pronouncements and concluded that they are either not applicable to the business, or that the effect is not expected to be material to the consolidated financial statements as a result of future adoption

 

11

3. Fair Value of Financial Assets and Liabilities

The following tables summarize the assets and liabilities measured at fair value on a recurring basis at June 30, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2019

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

 

 

 

  

 

 

  

 

 

  

Money market funds, included in cash and cash equivalents

 

$

43,959

 

$

43,959

 

$

 —

 

$

 —

U.S. Treasury obligations

 

 

126,206

 

 

 —

 

 

126,206

 

 

 —

Total assets

 

$

170,165

 

$

43,959

 

$

126,206

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2018

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds, included in cash and cash equivalents

 

$

185,676

 

$

185,676

 

$

 —

 

$

 —

Total assets

 

$

185,676

 

$

185,676

 

$

 —

 

$

 —

 

The money market funds included in the table above invest in U.S. government securities that are valued using quoted market prices. Accordingly, money market funds are categorized as Level 1 as of June 30, 2019 and December 31, 2018. Marketable securities, consisting exclusively of the US Treasury securities are categorized as Level 2 as of June 30, 2019; the Company held no marketable securities as of December 31, 2018 or earlier. Warrants to purchase convertible preferred shares are classified as a  liability within Level 3 of the fair value hierarchy; the change in fair value was immaterial for the three and six months ended June 30, 2019 and the year ended December 31, 2018.

 

4. Marketable securities

 

As of June 30, 2019, the Company had the following investments in marketable securities classified as available for sale (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Aggregate

 

 

 

 

 

 

Amortized

 

 

unrealized

 

 

unrealized

 

 

estimated

 

 

 

Maturity

 

 

cost

 

 

holding gains

 

 

holding losses

 

 

fair value

 U.S. Treasury securities

 

 

less than 1 year

 

$

126,155

 

$

54

 

$

(3)

 

$

126,206

 

 

The Company did not have any investments in marketable securities at December 31, 2018 or in prior periods.

 

All of the Company's investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income (loss), net of related income taxes. The Company recognized net unrealized holding gains related to changes in the securities' fair values of $16,000 and $41,000 for the three and six months ended June 30, 2019, respectively, in accumulated other comprehensive income.

 

As of June 30, 2019, the fair value of one security in an unrealized loss position was $9.0 million and the aggregate unrealized loss was $3,000. No securities have been in an unrealized loss position for more than one year. As of June 30, 2019, no securities are considered to be other than temporarily impaired because the impairments are not severe, have been for a short duration, and are due to normal market and interest rate fluctuations. Furthermore, the Company does not intend to sell the investment securities in an unrealized loss position and it is not more likely than not that the Company will be required to sell these securities before the recovery of the value.

 

12

5. Accrued Expenses

At December 31, 2018 and June 30, 2019, accrued expenses consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2019

    

2018

Payroll and related expenses

 

 

1,240

 

 

2,012

Other expenses

 

 

1,675

 

 

715

Related to the research and development activities

 

 

2,302

 

 

512

 

 

$

5,217

 

$

3,239

 

 

 

6. Stockholders’ Equity

Prior to the Reorganization, all interests of members in distributions and other amounts were represented by their units of membership in the Company as specified in its operating agreement. There were two classes of units, capital units and incentive units. Capital units were comprised of common units and convertible preferred units, which represent a capital interest in the Company, while incentive units represent profits interests within the meaning of IRS Revenue Procedures 93‑27 and 2001‑43. The various classes of capital units are described below.

Convertible Preferred Units

As of December 31, 2017, the total authorized capital units of the Company were 138,035,280 units, which consisted of 77,000,000 Common Units and 61,035,280 Preferred Units, of which 11,987,661 were designated Series Seed Preferred Units and 49,047,619 were designated Series A Preferred Units. During 2018, 61,538,454 units were designated Series B Preferred Units. Issuance of Series Seed Preferred Units, Series A Preferred Units, and Series B Preferred Units (collectively the "Preferred Units") is described below. 

The rights of each class of preferred and common units is presented below:

Conversion 

The Preferred Units are convertible at any time, at the election of each holder thereof, into Common Units at a one-for-one ratio, which ratio may be adjusted for certain dilutive issuances of additional units.

Liquidation Preference 

In the event of a liquidation, including deemed liquidation or dissolution of the Company, distributions shall be made in the following order and priority:

·

First, 100% to the members holding outstanding Series B Preferred Units, if any, in an amount equal to the aggregate original issue price less distributions previously paid to such holders;

·

Second, 100% to the members holding outstanding Series A Preferred Units, if any, in an amount equal to the aggregate original issue price less distributions previously paid to such holders;

·

Third, 100% to the members holding outstanding Series Seed Preferred Units, if any, in an amount equal to the aggregate original issue price less distributions previously paid to such holders; and

·

Fourth, after payment in full to the holders of outstanding Preferred Units, 100% to the members holding outstanding common units and preferred units, in proportion to the respective number of outstanding common units (determined on an as-converted basis) held by such member.

13

No holder of an incentive unit shall participate in any distributions until the cumulative amount distributed to common unit holders exceeds the threshold amount with respect to such incentive unit.

A deemed liquidation event is defined as a merger or consolidation (unless the units outstanding prior to the transaction represent a majority of the post transaction voting rights) or the sale or transfer of substantially all of the assets of the Company, unless the holders of a majority of the then outstanding preferred units, voting together, including at least (i) a majority of the Series A Preferred Units and (ii) 63% of the Series B Preferred Units elect otherwise.

Voting Rights 

An affirmative vote of a majority of the outstanding Preferred Units and Common Units, voting together as a single class on an as converted basis, is required on all matters.

Deemed Redemption 

The Company's Convertible Preferred Units have been classified as temporary equity on the accompanying consolidated balance sheets in accordance with authoritative guidance for the classification and measurement of redeemable securities as the Convertible Preferred Units are redeemable upon the occurrence of a deemed liquidation event. The carrying value of the Company's Convertible Preferred Units was not adjusted because a liquidation event was not probable and did not occur.

Upon issuance, and amendment, of each class of Preferred Unit, the Company assessed the features of the Preferred Unit, including additional issuances, embedded conversion and liquidation features and determined that such features did not require the Company to separately account for these features. The Company also concluded that no beneficial conversion feature existed upon the issuance date of each class of Preferred Units.

Common Units

As of December 31, 2017, the Company had outstanding 1,011,227 common units. There were no additional common units issued during the years ended December 31, 2018 and six months ended March 31, 2019. An affirmative vote of a majority of the outstanding Preferred Units and Common Units, voting together as a single class on an as converted basis, is required on all matters.

Reorganization and Convertible Preferred Stock

On December 5, 2018, the Company completed a series of transactions, or the Reorganization, pursuant to which Morphic Holding, LLC was converted in a tax-free exchange into Morphic Holding Inc. and three subsidiaries, namely Lazuli, Inc., Tourmaline, Inc. and Phyllite, Inc. were merged with and into Morphic Therapeutic, Inc. In connection with the Reorganization:

§

Holders of Morphic Holding, LLC Series B convertible preferred units received one share of Morphic Holding, Inc. Series B convertible preferred stock for each outstanding Series B convertible preferred unit held immediately prior to the Reorganization, with an aggregate of 10,553,483 shares of Morphic Holding, Inc. Series B convertible preferred stock issued in the Reorganization;

§

Holders of Morphic Holding, LLC Series A convertible preferred units received one share of Morphic Holding, Inc. Series A convertible preferred stock for each outstanding Series A convertible preferred unit held immediately prior to the Reorganization, with an aggregate of 8,411,368 shares of Morphic Holding, Inc. Series A convertible preferred stock issued in the Reorganization;

§

Holders of Morphic Holding, LLC Series Seed convertible preferred units received one share of Morphic Holding, Inc. Series Seed convertible preferred stock for each outstanding Series Seed convertible preferred unit held immediately prior to the Reorganization, with an aggregate of 2,045,556 shares of Morphic Holding, Inc. Series Seed convertible preferred stock issued in the Reorganization;

14

§

Holders of Morphic Holding, LLC common units received one share of Morphic Holding, Inc. common stock for each outstanding common unit held immediately prior to the Reorganization, with an aggregate of 1,011,227 shares of common stock issued in the Reorganization;

§

Holders of Morphic Holding, LLC vested and unvested incentive units, exchanged one incentive unit for one share of common stock or restricted common stock, respectively. Threshold amounts on all vested and unvested incentive units were decreased to $0. The restricted common stock was issued with the same vesting terms as the unvested incentive units held immediately prior to the Reorganization. A total of 1,574,749 shares of common stock and restricted common stock were issued to the prior holders of incentive units; and

§

The outstanding warrant to purchase 6,825 Series Seed convertible preferred units at an exercise price of $4.39 per unit was converted to a warrant to purchase 6,825 shares of Series Seed convertible preferred stock at the same exercise price per share. Upon conversion, the warrant retained it’s original contractual term and expiration date of March 31, 2026.

The Company's Series B convertible preferred stock, Series A convertible preferred stock, Series Seed convertible preferred stock are designated as convertible preferred stock under the amended and restated certificate of incorporation. All outstanding shares of convertible preferred stock are convertible into shares of common stock at a one-to-one conversion ratio. The purpose of the Reorganization was to reorganize the Company's corporate structure so that Morphic Holding, Inc. would continue as a corporation and so that the Company's existing investors would own capital stock rather than equity interests in a limited liability company.

The Company evaluated the accounting for the Reorganization and specifically the exchange of (1) preferred and common units for preferred and common shares and (2) the modification to the terms of the incentive units. With respect to the exchange of preferred and common units for preferred and common shares, the Company considered that there were no changes to the ownership interest held by each unit/stockholder as a result of the Reorganization, there was no consideration exchanged to effect the exchange, and the significant terms of the preferred units and common units were substantially the same before and after the Reorganization. Based on these considerations, the Company determined that the exchange of shares occurring in the Reorganization should be accounted for as a modification of equity securities. The accounting for the modification to the terms of the incentive units is described in Note 8.

Convertible Preferred Stock

The terms of the Convertible Preferred Stock, and Common Stock after Reorganization, are as follows:

Liquidation

In the event of any liquidation, dissolution or winding up of affairs of the Company (or upon a deemed liquidation event), distributions are first made to holders of the Series B Convertible Preferred Stock equal to the greater of (i) their original issuance price, plus any declared but unpaid dividends or (ii) the amount that the holder would be entitled upon conversion into common stock. The original issue price of Series B Convertible Preferred Stock is $7.58 per share. After distribution to the Series B Convertible Preferred Stockholders, distributions are made to holders of the Series A Convertible Preferred Stock equal to the greater of (i) their original issue price plus any declared but unpaid dividends or (ii) the amount that the holder would be entitled upon conversion into common stock. The original issue price of the Series A Convertible Preferred Stock is $6.12. After distribution to the Series A Convertible Preferred Stockholders, the holders of the Series Seed Convertible Preferred Stock, as a class, will receive a distribution equal to the greater of (i) their original issue price plus any declared but unpaid dividends or (ii) the amount that the holder would be entitled upon conversion into common stock. The original issue price of the Series Seed Convertible Preferred Stock is $4.39. Upon completion of the preferential payments to holders of Convertible Preferred Stock, all of the remaining assets shall be distributed among the holders Common stock pro rata based on the number of shares of common stock held by each, assuming conversion of all outstanding shares of Convertible Preferred Stock.

15

A deemed liquidation event is defined as a merger (unless the shares of capital stock prior to the transaction represent a majority of the post merger voting rights) or the sale, lease, transfer or license of substantially all of the assets of the Company unless the holders of a majority of the then outstanding shares of preferred stock, voting together, including at least (i) a majority of the Series A Convertible Preferred Stock and (ii) 63% of the Series B Convertible Preferred Stock elect otherwise.

Dividends

The Company shall not declare, pay or set aside any dividends on shares of common stock unless the holders of preferred stock then outstanding shall first receive a dividend on each outstanding share of preferred stock.

Conversion

Shares of Convertible Preferred Stock may be converted, at the option of the holder, at any time into a number of common shares as is determined by dividing the original issue price by the conversion price in effect at the time of conversion. The conversion price is equal to the original issue price for all Convertible Preferred Stock, subject to adjustments in the event of any stock dividend, stock split, combination or other similar recapitalization, and other adjustments as set forth in the Company’s certificate of incorporation.

In addition, upon either the closing of a firm‑commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, or the occurrence of an event, specified by vote of a majority of the then outstanding shares of preferred stock, voting together, including at least (i) a majority of the Series A Convertible Preferred Stock and (ii) 63% of the Series B Convertible Preferred Stock, all outstanding Convertible Preferred Stock will be automatically converted into common shares.

Voting

On any matter to be approved by the stockholders, holders of Convertible Preferred Stock have the right to cast a number of votes equal to the number of shares of common stock into which the shares of Convertible Preferred Stock held by such holder convert.

Redemption

The Company’s Convertible Preferred Stock has been classified as temporary equity on the accompanying consolidated balance sheets in accordance with authoritative guidance for the classification and measurement of redeemable securities as the Convertible Preferred Stock is redeemable upon the occurrence of a deemed liquidation event. The carrying value of the Company’s Convertible Preferred Stock is not being adjusted because a deemed liquidation event is not probable.

Upon issuance, and amendment, if any, of each class of Preferred Shares, the Company assessed the features of the Preferred Shares, including additional issuances, embedded conversion and liquidation features and determined that such features did not require the Company to separately account for these features. The Company also concluded that no beneficial conversion feature existed upon the issuance date of each class of Preferred Stock.

Common Stock

The voting, dividend and liquidation rights of the holders of common stock are subject to and qualified by the rights, powers and preferences of the holders of Convertible Preferred Stock. The common stock has the following characteristics:

Voting

The holders of common stock are entitled to one vote for each share of common stock held.

16

Dividends

The holders of shares of Common stock are entitled to receive dividends, if and when declared by the Company’s board of directors. Cash dividends may not be declared or paid to holders of shares of common stock until all unpaid dividends on Convertible Preferred Stock have been paid in accordance with their terms. No dividends have been declared or paid by the company to the holders of common stock since the issuance of the common stock.

Liquidation

Holders of the Common shares are entitled to receive distributions of cash, including in the event of a liquidation or dissolution of the Company, which preference is junior to the liquidation preference of the Series B Preferred stock holders, Series A Preferred stock holders, and the Series Seed Preferred stock holders.  After all preferred stock holders have received their respective preferred distributions, any assets remaining for distribution shall be distributed to the holders of Preferred or Common shares determined on an as-converted basis.

Shares Reserved For Future Issuance

As of June 30, 2019, the Company had reserved common shares for the conversion of outstanding Convertible Preferred Stock and for future issuance under the 2019 Stock Option and Incentive Plan as follows:

 

 

 

 

 

    

As of

 

 

June 30, 

 

    

2019

Common shares reserved for conversion of convertible preferred stock outstanding

 

21,010,407

Common shares reserved for conversion of convertible preferred shares issuable upon exercise of a warrant

 

6,825

Common shares reserved for exercise of outstanding stock options under the 2019 Plan

 

2,345,606

Common shares reserved for future issuance under the 2019 Plan

 

2,698,383

 

 

26,061,221

 

 

Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 21,010,407 shares of common stock at the applicable conversion ratio then in effect.

7. Equity Based Compensation

2019 Stock Incentive Plan

The 2019 Stock Incentive Plan (the “2019 Plan”) was approved by the Board of Directors on June 10, 2019 and replaced the 2018 Stock Incentive Plan (the “2018 Plan”), previously instituted as part of the Reorganization. The 2018 Plan provided for the grant of incentive stock options, non-qualified stock options and restricted stock awards. As of December 31, 2018, there were 3,818,816 shares authorized under the 2018 Plan and 457,438 shares were reserved for future issuance. The 2019 Plan provides for the grant of stock options, restricted stock awards, stock bonus awards, cash awards, stock appreciation right, RSUs, and performance awards to purchase up to 2.8 million shares of common stock. The number of shares reserved for issuance under the Company’s 2019 Plan will increase automatically on January 1 of each of 2020 through 2029 by the number of shares equal to the lesser of 4% of the aggregate number of outstanding shares of the Company’s common stock as of the immediately preceding December 31, or a number as may be determined by the Company’s board of directors. The 2019 Plan is administered by the Board of Directors, or at the discretion of the Board of Directors, by a committee of the board. The exercise prices, vesting and other restrictions are determined at the discretion of the Board of Directors, or a committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the share of common stock on the date of grant and the term of stock option may not be greater than ten years. The shares of common stock underlying any awards that are forfeited, cancelled, repurchased, or are otherwise terminated by the Company under the 2019 Plan will be added

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back to the shares of common stock available for issuance under the 2019 Plan. Options generally vest over a four year period with the first 25% vesting following 12 months of employment or service and the remaining award vesting in equal quarterly installments over the following 36 months. All options have contractual term of 10 years.

 

2019 Employee Stock Purchase Plan

 

In June 2019, the Company adopted the 2019 Employee Stock Purchase Plan (“ESPP”), which became effective on June 26, 2019. The Company initially reserved 300,000 shares of common stock for sale under the ESPP. The number of

shares reserved for issuance under the ESPP will increase automatically on January 1st of each of the first ten calendar

years following the first offering date by the number of shares equal to the lesser of 1% of the total outstanding shares of

the Company’s common stock as of the immediately preceding December 31 or an amount determined by the Company’s board of directors. The aggregate number of shares issued over the term of the ESPP will not exceed 3,000,000 shares of the Company’s common stock.

 

The following table summarizes the stock and restricted common stock activity under the 2019 Plan during the six months ended June 30, 2019:

 

 

 

 

 

 

 

 

    

 

    

Weighted