mors_Current_Folio_10Q

Table of Contents

 

 

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 September 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 

(Address of Principal Executive Offices)

 

02451

(Zip Code)

 

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

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

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

 

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 

 

 The number of shares outstanding of the registrant’s Common Stock as of November 11, 2019 was 30,483,521.

 

 

 

 

Table of Contents

MORPHIC HOLDING, INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED September 30, 2019

 

 

 

 

 

    

Page

 

 

 

Part I—Financial Information 

 

2

Item 1—Condensed Consolidated Financial Statements (unaudited) 

 

2

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

 

2

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

 

3

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2019 and 2018 

 

4

Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 

 

20

Item 3—Quantitative and Qualitative Disclosures about Market Risk 

 

36

Item 4—Controls and Procedures 

 

36

 

 

 

Part II—Other Information 

 

38

Item 1—Legal Proceedings 

 

38

Item 1A—Risk Factors 

 

38

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

 

87

Item 3—Defaults Upon Senior Securities 

 

88

Item 4—Mine Safety Disclosures 

 

88

Item 5—Other Information 

 

88

Item 6—Exhibits 

 

89

Signatures 

 

90

 

 

 

 

 

1

Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements (unaudited)


CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

159,807

 

$

185,901

Marketable securities

 

 

91,939

 

 

 —

Accounts receivable

 

 

2,364

 

 

 —

Prepaid expenses and other current assets

 

 

2,926

 

 

1,222

Total current assets

 

 

257,036

 

 

187,123

 

 

 

 

 

 

 

Property and equipment, net

 

 

2,716

 

 

1,843

Restricted cash

 

 

275

 

 

275

Other assets

 

 

52

 

 

64

Total assets

 

$

260,079

 

$

189,305

Liabilities

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

3,285

 

$

1,745

Accrued expenses

 

 

5,051

 

 

3,239

Deferred revenue, current portion

 

 

18,063

 

 

29,862

Deferred rent, current portion

 

 

80

 

 

57

Total current liabilities

 

 

26,479

 

 

34,903

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

Deferred revenue, net of current portion

 

 

74,010

 

 

66,781

Deferred rent, net of current portion

 

 

242

 

 

306

Other long-term liabilities

 

 

 —

 

 

58

Total liabilities

 

 

100,731

 

 

102,048

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

Preferred shares:

 

 

 

 

 

 

Series Seed preferred shares, $0.0001 par value, no shares authorized, issued, and outstanding as of September 30, 2019, and 11,967,689 shares authorized, 2,045,556 shares issued and outstanding as of  December 31, 2018 (aggregate liquidation preference of $8,980 at December 31, 2018)

 

 

 —

 

 

8,658

Series A preferred shares, $0.0001 par value, no shares authorized, issued, and outstanding as of September 30, 2019 and 49,047,619 shares authorized, 8,411,368 shares issued and outstanding as of December 31, 2018 (liquidation preference of $51,500 as of December 31, 2018)

 

 

 —

 

 

51,320

Series B preferred shares, $0.0001 par value, no shares authorized, issued, and outstanding as of September 30, 2019 and 61,538,454 shares authorized, 10,553,483 shares issued and outstanding as of  December 31, 2018 (liquidation preference of $80,000 as of December 31, 2018)

 

 

 —

 

 

79,831

Stockholders’ Equity (Deficit)

 

 

  

 

 

  

Preferred shares, $0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2019 and December 31, 2018

 

 

 —

 

 

 —

Common shares, $0.0001 par value, 400,000,000 shares authorized, 30,034,268 shares issued and outstanding as of September 30, 2019 and 151,000,000 shares authorized and 1,832,923 shares issued and outstanding as of December 31, 2018

 

 

 3

 

 

 —

Additional paid‑in capital

 

 

236,980

 

 

1,633

Accumulated deficit

 

 

(77,682)

 

 

(54,185)

Accumulated other comprehensive income

 

 

47

 

 

 —

Total stockholders’ equity (deficit)

 

 

159,348

 

 

(52,552)

Total liabilities, preferred shares, and stockholders’ equity (deficit)

 

$

260,079

 

$

189,305

 

 

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

2

Table of Contents

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 September 30, 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue - related party

 

$

3,772

 

$

 —

 

$

13,736

 

$

 —

Collaboration revenue - other

 

 

1,903

 

 

 —

 

 

3,575

 

 

 —

 

 

 

5,675

 

 

 —

 

 

17,311

 

 

 —

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Research and development

 

 

12,635

 

 

5,767

 

 

36,912

 

 

15,344

General and administrative

 

 

2,898

 

 

1,405

 

 

6,807

 

 

3,311

Total operating expenses

 

 

15,533

 

 

7,172

 

 

43,719

 

 

18,655

Loss from operations

 

 

(9,858)

 

 

(7,172)

 

 

(26,408)

 

 

(18,655)

Other income:

 

 

  

 

 

  

 

 

  

 

 

  

Interest income, net

 

 

1,392

 

 

111

 

 

3,574

 

 

214

Other expense, net

 

 

(94)

 

 

(16)

 

 

(94)

 

 

(46)

Total other income, net

 

 

1,298

 

 

95

 

 

3,480

 

 

168

Loss before provision for income taxes

 

 

(8,560)

 

 

(7,077)

 

 

(22,928)

 

 

(18,487)

Provision for income taxes

 

 

(304)

 

 

 —

 

 

(569)

 

 

 —

Net loss

 

$

(8,864)

 

$

(7,077)

 

$

(23,497)

 

$

(18,487)

Net loss per share, basic and diluted

 

$

(0.30)

 

 

  

 

$

(2.06)

 

 

  

Net loss per unit, basic and diluted

 

 

 

 

$

(7.00)

 

 

 

 

$

(18.28)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted

 

 

29,999,170

 

 

  

 

 

11,393,192

 

 

  

Weighted average common units outstanding, basic and diluted

 

 

 

 

 

1,011,227

 

 

 

 

 

1,011,227

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

  

 

 

  

 

 

  

 

 

  

Net loss

 

$

(8,864)

 

$

(7,077)

 

$

(23,497)

 

$

(18,487)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

      Unrealized holding gains on marketable
       securities, net of tax

 

 

 6

 

 

 —

 

 

47

 

 

 —

Comprehensive loss

 

$

(8,858)

 

$

(7,077)

 

$

(23,450)

 

$

(18,487)

 

 

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

 

 

3

Table of Contents

MORPHIC HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (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)

Equity‑based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

136

 

 

 —

 

 

136

Net Loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,077)

 

 

(7,077)

Issuance of Series A Preferred Units August 10, 2018, net of offering costs of $9

 

 —

 

 

 —

 

1,682,272

 

 

10,291

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

Issuance of Series B Preferred Units September 25, 2018, net of offering costs of $169

 

 —

 

 

 —

 

 —

 

 

 —

 

10,553,483

 

 

79,831

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Balance at September 30, 2018

 

2,045,556

 

$

8,658

 

8,411,368

 

$

51,320

 

10,553,483

 

$

79,831

 

 

1,011,227

 

$

 —

 

$

1,055

 

$

(48,841)

 

$

(47,786)

 

 

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

 

4

Table of Contents

MORPHIC HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (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)/Equity

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, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

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, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

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)

Conversion of convertible preferred stock into common stock

 

(2,045,556)

 

 

(8,658)

 

(8,411,368)

 

 

(51,320)

 

(10,553,483)

 

(79,831)

 

 

21,010,407

 

 

 2

 

 

139,807

 

 

 —

 

 

 —

 

 

139,809

Reclassification of warrants to purchase preferred shares to stockholders' equity

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

118

 

 

 —

 

 

 —

 

 

118

Issuance of common shares at initial public offering, net of offering costs of $10.2 million

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

6,900,000

 

 

 1

 

 

93,267

 

 

 —

 

 

 —

 

 

93,268

Issuance of common shares upon warrants exercise

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

5,766

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Vesting of restricted shares

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

73,096

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity‑based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

989

 

 

 —

 

 

 —

 

 

989

Unrealized holding gains on marketable securities, net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 6

 

 

 6

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,864)

 

 

 —

 

 

(8,864)

Balance at September 30, 2019

 

 —

 

$

 —

 

 —

 —

$

 —

 

 —

$

 —

 

 

30,034,268

 

$

 3

 

$

236,980

 

$

(77,682)

 

$

47

 

$

159,348

 

 

 

 

 

5

Table of Contents

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

(In thousands)

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

Cash flows from operating activities:

 

 

  

 

 

  

Net loss

 

$

(23,497)

 

$

(18,487)

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

 

 

  

 

 

  

Depreciation and amortization

 

 

576

 

 

395

Premium amortization and discount accretion on marketable securities

 

 

(1,556)

 

 

 —

Equity‑based compensation

 

 

2,155

 

 

394

Non-cash interest expense

 

 

 —

 

 

26

Change in fair value of warrants

 

 

94

 

 

 —

Change in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(2,364)

 

 

 —

Prepaid expenses and other current assets

 

 

(1,704)

 

 

 8

Other assets

 

 

12

 

 

(9)

Accounts payable

 

 

1,540

 

 

864

Accrued expenses

 

 

1,812

 

 

591

Deferred revenue

 

 

(4,570)

 

 

 —

Deferred rent

 

 

(41)

 

 

(17)

Other long-term liabilities

 

 

(33)

 

 

13

Net cash used in operating activities

 

 

(27,576)

 

 

(16,222)

Cash flows from investing activities:

 

 

  

 

 

  

Purchases of marketable securities

 

 

(225,836)

 

 

 —

Proceeds from maturities of marketable securities

 

 

135,500

 

 

 —

Purchase of property and equipment

 

 

(1,449)

 

 

(492)

Net cash used in investing activities

 

 

(91,785)

 

 

(492)

Cash flows from financing activities:

 

 

  

 

 

  

Repayment of debt

 

 

 —

 

 

(247)

Proceeds from issuance of Common Stock, net

 

 

93,267

 

 

 —

Proceeds from issuance of Preferred Stock, net

 

 

 —

 

 

90,122

Net cash provided by financing activities

 

 

93,267

 

 

89,875

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

 

 

(26,094)

 

 

73,161

Cash and cash equivalents and restricted cash, beginning of period

 

 

186,176

 

 

21,025

Cash and cash equivalents and restricted cash, end of period

 

$

160,082

 

$

94,186

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

  

 

 

  

Reclassification of warrants to additional paid-in capital

 

 

118

 

 

 —

Conversion of preferred shares to common stock

 

$

139,807

 

$

 —

Supplemental cash flow information:

 

 

  

 

 

  

Cash paid for taxes

 

 

550

 

 

 —

Cash paid for interest

 

$

 —

 

$

19

 

 

The accompanying notes are an integral part of these condensed 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. 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 September 30, 2019, all of the Company’s excess funds were 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 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 $93.3 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 21,010,407 shares of common stock; the warrants to purchase 6,825 convertible preferred shares automatically converted in to warrants to purchase 6,825 common shares. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding. In connection with the closing

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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.

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 September 30, 2019 and the results of its operations for the three and nine months ended September 30, 2019 and 2018 and its cash flows for the nine months ended September 30, 2019 and 2018. Financial statement disclosures for the nine months ended September 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 nine months ended September 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.

 

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 research and development 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, marketable securities, and accounts receivable under Janssen agreement. 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.

The primary objectives for the Company’s investment portfolio are the preservation of capital and maintenance of liquidity. In 2019, 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.

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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 September 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

September 30, 

 

December 31, 

 

2019

    

2018

             

2018

    

2017

Cash and cash equivalents

$

159,807

 

$

185,901

 

$

93,911

 

$

20,750

Restricted cash

 

275