IMNM 8-K/A
Immunome Inc. (IMNM)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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Explanatory Note
As previously reported on October 4, 2023, Immunome, Inc. (the “Company”) completed its previously announced merger transaction in accordance with the terms and conditions of the Agreement and Plan of Merger and Reorganization, dated as of June 29, 2023 (the “Merger Agreement”), by and among the Company, Ibiza Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), and Morphimmune Inc. (“Morphimmune”), pursuant to which Merger Sub merged with and into Morphimmune, with Morphimmune surviving the merger as a wholly owned subsidiary of the Company. This Amendment No. 1 on Form 8-K/A is being filed by the Company to amend the Current Report on Form 8-K filed on October 4, 2023 (the “Original Report”), solely to provide the disclosures required by Item 9.01 of Form 8-K that were not previously filed with the Original Report.
| Item 9.01 | Financial Statements and Exhibits |
(a) Financial Statements of Business Acquired
The financial statements required by Item 9.01(a) and the notes related thereto are filed as Exhibits 99.1 and 99.2 to this report.
(b) Pro Forma Financial Information
The pro forma financial information required by Item 9.01(b) and the notes related thereto are filed as Exhibit 99.3 to this report.
(d) Exhibits
| Exhibit No. | Description | |
| 23.1 | Consent of Independent Auditors | |
| 99.1 | Audited Financial Statements of Morphimmune Inc. for the years ended December 31, 2022 and 2021 | |
| 99.2 | Unaudited Interim Financial Statements of Morphimmune Inc. for the nine months ended September 30, 2023 and 2022 | |
| 99.3 | Unaudited Pro Forma Combined Financial Statements | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| IMMUNOME, INC. | |||
| Date: November 22, 2023 | By: | /s/ Clay Siegall | |
| Clay Siegall, Ph.D. | |||
| President and Chief Executive Officer | |||
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements of Immunome, Inc. (Form S-3 (Nos. 333-275598 and 333-259966); Post-Effective Amendment No. 1 to Form S-4 on Form S-8 (No. 333-273792); Form S-8 (Nos. 333-270598 and 333-254731)) of our report dated August 8, 2023, relating to the financial statements of Morphimmune, Inc., as of and for the years ended December 31, 2022 and 2021 appearing in this Current Report on Form 8-K/A of Immunome, Inc.
/s/ Moss Adams LLP
Seattle, Washington
November 22, 2023
Exhibit 99.1
Report of Independent Auditors
The Board of Directors and the Stockholders
Morphimmune, Inc.
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of Morphimmune, Inc., which comprise the balance sheets as of December 31, 2022 and 2021, and the related statements of operations and comprehensive loss, convertible preferred stock and stockholders’ deficit and cash flows for the years then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Morphimmune, Inc. as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Morphimmune, Inc. and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Morphimmune, Inc.’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS, we:
Exercise professional judgment and maintain professional skepticism throughout the audit.
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
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Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Morphimmune, Inc.’s internal control. Accordingly, no such opinion is expressed.
Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.
Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Morphimmune, Inc.’s ability to continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.
/s/ Moss Adams LLP
Seattle, Washington
August 8, 2023
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MORPHIMMUNE INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 7,151 | $ | 4,426 | ||||
| Prepaid expenses and other current assets | 117 | 45 | ||||||
| Total current assets | 7,268 | 4,471 | ||||||
| Property and equipment, net | 11 | — | ||||||
| Total assets | $ | 7,279 | $ | 4,471 | ||||
| Liabilities, Convertible Preferred Stock and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 439 | $ | 601 | ||||
| Accrued liabilities | 248 | 316 | ||||||
| Convertible notes payable | — | 7,257 | ||||||
| Total current liabilities | 687 | 8,174 | ||||||
| Other noncurrent liabilities | 103 | 10 | ||||||
| Total liabilities | 790 | 8,184 | ||||||
| Commitments and contingencies (Note 5) | ||||||||
| Convertible preferred stock, $0.0001 par value, 11,466,830 and zero shares authorized at December 31, 2022 and 2021, respectively; 10,434,184 and zero shares issued and outstanding at December 31, 2022 and 2021, respectively (aggregate liquidation preference of $17,135 at December 31, 2022) | 17,450 | — | ||||||
| Stockholders’ deficit: | ||||||||
| Common stock, $0.0001 par value; 28,000,000 and 10,000,000 shares authorized at December 31, 2022 and 2021, respectively; 8,391,225 and 8,890,000 shares issued and outstanding at December 31, 2022 and 2021, respectively | 1 | 1 | ||||||
| Additional paid-in capital | 233 | 3 | ||||||
| Accumulated deficit | (11,195 | ) | (3,717 | ) | ||||
| Total stockholders’ deficit | (10,961 | ) | (3,713 | ) | ||||
| Total liabilities, convertible preferred stock and stockholders’ deficit | $ | 7,279 | $ | 4,471 | ||||
The accompanying notes are an integral part of these financial statements.
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MORPHIMMUNE INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands)
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating expenses | ||||||||
| Research and development | $ | 4,172 | $ | 509 | ||||
| General and administrative | 3,256 | 1,560 | ||||||
| Total operating expenses | 7,428 | 2,069 | ||||||
| Loss from operations | (7,428 | ) | (2,069 | ) | ||||
| Change in fair value of convertible notes | (45 | ) | (744 | ) | ||||
| Other expense, net | (5 | ) | — | |||||
| Net loss and comprehensive loss | $ | (7,478 | ) | $ | (2,813 | ) | ||
The accompanying notes are an integral part of these financial statements.
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MORPHIMMUNE INC.
STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ DEFICIT
(in thousands, except share amounts)
| Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balances at December 31, 2020 | — | $ | — | 8,250,000 | $ | 1 | $ | — | $ | (904 | ) | $ | (903 | ) | ||||||||||||||
| Issuance of common stock upon the exercise of options | — | — | 1,065,000 | — | — | — | — | |||||||||||||||||||||
| Issuance of restricted common stock | — | — | 700,000 | — | — | — | — | |||||||||||||||||||||
| Repurchase of unvested restricted common stock | — | — | (1,125,000 | ) | — | — | — | — | ||||||||||||||||||||
| Vesting of early exercised shares and restricted common stock | — | — | — | — | 3 | — | 3 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (2,813 | ) | (2,813 | ) | |||||||||||||||||||
| Balances at December 31, 2021 | — | — | 8,890,000 | 1 | 3 | (3,717 | ) | (3,713 | ) | |||||||||||||||||||
| Issuance of Series A preferred stock, net of issuance costs of $185 | 5,723,349 | 10,148 | — | — | — | — | — | |||||||||||||||||||||
| Issuance of Series A-1 preferred stock upon conversion of notes | 4,710,835 | 7,302 | — | — | — | — | — | |||||||||||||||||||||
| Issuance of restricted common stock | — | — | — | — | — | — | — | |||||||||||||||||||||
| Repurchase of unvested restricted common stock | — | — | (498,775 | ) | — | — | — | — | ||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 225 | — | 225 | |||||||||||||||||||||
| Vesting of early exercised shares and restricted common stock | — | — | — | — | 5 | — | 5 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (7,478 | ) | (7,478 | ) | |||||||||||||||||||
| Balances at December 31, 2022 | 10,434,184 | $ | 17,450 | 8,391,225 | $ | 1 | $ | 233 | $ | (11,195 | ) | $ | (10,961 | ) | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
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MORPHIMMUNE INC.
STATEMENTS
OF CASH FLOWS
(in thousands)
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (7,478 | ) | $ | (2,813 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 2 | — | ||||||
| Acquired in-process research and development | 400 | — | ||||||
| Stock-based compensation expense | 225 | — | ||||||
| Change in fair value of convertible notes | 45 | 744 | ||||||
| Changes in assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | (108 | ) | (5 | ) | ||||
| Accounts payable | (126 | ) | 149 | |||||
| Accrued and other liabilities | (105 | ) | 311 | |||||
| Net cash used in operating activities | (7,145 | ) | (1,614 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (13 | ) | — | |||||
| Acquisition of in-process research and development assets | (200 | ) | — | |||||
| Net cash used in investing activities | (213 | ) | — | |||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of convertible notes payable | — | 5,700 | ||||||
| Proceeds from issuance of restricted common stock and issuance of common stock upon exercise of stock options | — | 18 | ||||||
| Proceeds from issuance of preferred stock, net of issuance costs | 10,088 | — | ||||||
| Repurchase of unvested restricted common stock | (5 | ) | — | |||||
| Net cash provided by financing activities | 10,083 | 5,718 | ||||||
| Net increase in cash | 2,725 | 4,104 | ||||||
| Cash, beginning of the year | 4,426 | 322 | ||||||
| Cash, end of the year | $ | 7,151 | $ | 4,426 | ||||
| Supplemental non-cash investing and financing activities | ||||||||
| In-process research and development asset purchases in accrued liabilities and other noncurrent liabilities | $ | 200 | $ | — | ||||
| Conversion of convertible notes and accrued interest into preferred stock | $ | 7,302 | $ | — | ||||
| Issuance of convertible preferred stock to service provider | $ | 60 | $ | — | ||||
| Deferred issuance costs in accounts payable | $ | — | $ | 36 | ||||
The accompanying notes are an integral part of these financial statements.
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MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
| 1. | Organization and Description of Business |
Morphimmune Inc. (“Morphimmune” or the “Company”) was incorporated in the state of Delaware on January 28, 2020. Morphimmune is a preclinical biotechnology company focused on developing targeted oncology therapeutics. The Company’s Targeted Effector platform uses small molecule ligands to selectively deliver drug payloads to diseased cells. The Company believes this approach reduces toxicity and increases the efficacy of effector molecules, thereby improving outcomes for patients. Through December 31, 2022, the Company has been primarily engaged in business planning, research and development, personnel recruitment, and raising capital.
Liquidity
The Company has incurred significant losses and negative cash flows from operations since inception. As of December 31, 2022, the Company had an accumulated deficit of $11.2 million and cash of $7.2 million. The Company has not generated any product revenue to date and does not expect to generate product revenue until it successfully completes development and obtains regulatory approval for at least one of its product candidates. From inception to date, the Company has financed its operations primarily through the sale and issuance of convertible notes and convertible preferred stock. In May 2023, the Company received aggregate gross proceeds of $15.0 million from the issuance of its Series A-2 preferred stock (See Note 12 — Subsequent Events). The Company anticipates that it will continue to incur net losses and negative operating cash flows for the foreseeable future. Management believes that the Company’s current cash, combined with the net proceeds from its Series A-2 preferred stock financing, are adequate to meet its needs for at least the next twelve months. However, the Company may need to borrow funds or raise additional equity to achieve its longer-term business objectives.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting periods. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates. The most significant estimates in the Company’s financial statements relate to the valuation of convertible preferred stock and common stock, the valuation of stock options, and the fair value of convertible notes.
Risks and Uncertainties
The Company is subject to all of the risks inherent in an early-stage company developing new medical drugs. These risks include, but are not limited to, the need for substantial additional financing, limited management resources, dependence upon medical acceptance of the product in development, regulatory approvals, successful clinical trials, availability and willingness of patients to participate in human trials, and competition in the pharmaceutical industry. The Company’s operating results may be materially affected by the foregoing factors.
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MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash. Cash is deposited in a checking account at one financial institution, which may at times exceed federally insured limits. The Company limits its credit risk associated with cash by placing them with financial institutions that it believes are of high quality. The Company has not experienced any losses on its deposits of cash and believes it is not exposed to significant credit risk on its cash balances.
Fair Value Option
The convertible promissory notes issued in 2020 and 2021 (See Note 7 — Convertible Notes), for which the Company elected the fair value option, are accounted for at fair value on a recurring basis with changes in fair value recognized in the statements of operations and comprehensive loss. The Company’s policy is to report a single non-operating income (expense) line item to record fair value adjustments on convertible notes and does not report interest expense as a separate line item in the statements of operations and comprehensive loss. The portion of the total fair value change attributable to instrument-specific credit risk is recorded through other comprehensive loss. No portion of the total change in fair value resulted from a change in an instrument-specific credit risk. As a result of applying the fair value option, direct costs and fees related to the convertible notes were recognized in earnings as incurred and not deferred.
Property and Equipment, Net
Property and equipment, consisting of computers and equipment, are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations in the period realized. Maintenance and repairs are charged to expense as incurred. Depreciation expense was immaterial during the year ended December 31, 2022.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future net undiscounted cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. No impairment losses have been incurred to date.
Leases
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. For arrangements where the Company is the lessee, it recognizes a right-of-use (“ROU”) asset and operating lease liability on the balance sheet. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of remaining lease payments over the lease term. When the Company’s leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease costs such as common area costs and property taxes are expensed as incurred. For real estate leases, the Company does not separate lease and non-lease components. The Company determines the lease term as the non-cancelable period of the lease and may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet. As of December 31, 2022 and 2021, the Company did not have any leases with a term greater than 12 months. Short-term lease expense for the year ended December 31, 2022 was $26,000 and was not material for the year ended December 31, 2021. Initial direct costs related to obtaining leases during the years ended December 31, 2022 and 2021 were not material.
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MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
Research and Development
To date, research and development expenses have related primarily to discovery and in-licensing efforts and preclinical development of product candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Research and development expenses include expenses related to license and sponsored research and development agreements; personnel-related expenses, including salaries, benefits, and stock-based compensation for personnel contributing to research and development activities; and preclinical costs, including laboratory supplies and costs related to compliance with regulatory requirements.
Acquired In-Process Research and Development
Acquired in-process research and development (“IPR&D”) includes payments made or due in connection with license agreements upon the achievement of development and regulatory milestones. The Company’s acquired IPR&D arose from its license agreement with Purdue University as discussed in Note 4 — License and Other Agreements.
The Company evaluates in-licensed agreements for IPR&D projects to determine if it meets the definition of a business and thus should be accounted for as a business combination. If the in-licensed agreement for IPR&D does not meet the definition of a business and the assets have not reached technological feasibility and therefore have no alternative future use, the Company expenses payments made under such license agreements as research and development expenses in its statements of operations. Payments for milestones achieved and payments for a product license prior to regulatory approval of the product are expensed in the period incurred. Payments made in connection with regulatory and sales-based milestones will be capitalized and amortized to cost of product sales over the remaining useful life of the asset.
Stock-Based Compensation
The Company estimates the fair value of stock options granted to employees and non-employees using the Black-Scholes option-pricing model. The fair value of stock options is recognized as compensation expense on a straight-line basis over the requisite service period. The Company also has restricted stock awards that vest upon the satisfaction of service-based conditions. The fair value of restricted stock awards is estimated based on the fair value of the Company’s common stock on the date of grant which is recognized as compensation expense on a straight-line basis over the requisite service period. Forfeitures are recognized as they occur.
Income Taxes
The Company accounts for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based upon differences between the financial reporting and tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
The Company assesses the likelihood of deferred tax assets being realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. For the Company, the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. Based on the Company’s operations to date and the uncertainty as to the timing and amount of future taxable income, the Company has recorded a full valuation allowance in all periods and for all jurisdictions.
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MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
Financial statement effects of uncertain tax positions are recognized when it is more likely than not, based on the technical merits of the position, that it will be sustained upon examination. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of an audit, and effective settlement of audit issues. Interest and penalties related to unrecognized tax benefits would be included within the income tax provision.
Comprehensive Loss
Comprehensive loss represents the change in the Company’s stockholders’ deficit from all sources other than investments by or distributions to stockholders. The Company has no items of other comprehensive loss; as such, net loss equals comprehensive loss.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be reported as a single liability instrument with no separate accounting for embedded conversion features. This new standard also removes certain settlement conditions that are required for contracts to qualify for equity classification and simplifies the diluted earnings per share calculations by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in diluted earnings per share calculations. This new standard will be effective for the Company on January 1, 2024. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company early adopted this standard on January 1, 2021 using the full retrospective transition method. The adoption did not have a material impact on the Company’s financial statements.
| 3. | Fair Value Measurement |
The Company determines the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
| • | Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities. | |
| • | Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| • | Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The carrying amounts of certain financial instruments, including cash, prepaid expenses and other current assets, accounts payable, and accrued liabilities approximate fair value due to their relatively short maturities.
The Company elected the fair value option to account for its convertible notes issued during 2020 and 2021. The fair value of the convertible notes was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.
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MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
On issuance, the fair values of the 2020 Convertible Notes and 2021 Convertible Notes were determined to be equal to approximately $0.8 million and $5.7 million, respectively, which is the principal amount of the Convertible Notes. The estimated fair value of the Convertible Notes is determined based on a multiple scenario analysis that utilizes Monte Carlo simulations. The model includes assumptions related to the value of the instruments based on the estimated timings and amounts of future rounds of financing, sale of the Company, maturity of the notes, and an imputed discount rate based on estimated market interest rates. Further assumptions used in the Monte Carlo simulations are the equity value and outstanding balance of the notes as of the valuation date and the volatility of the Company’s underlying common stock to determine the market value of the invested capital upon a future financing date or upon a sale of the Company prior to or as of the maturity of the notes.
The following table provides a roll forward of the aggregate fair values of the convertible notes for which fair value was determined using Level 3 inputs (in thousands):
| Balance as of December 31, 2020 | $ | 813 | ||
| Proceeds from issuance of 2021 Convertible Notes | 5,700 | |||
| Change in fair value | 744 | |||
| Balance as of December 31, 2021 | 7,257 | |||
| Change in fair value | 45 | |||
| Conversion into Series A-1 preferred stock | (7,302 | ) | ||
| Balance as of December 31, 2022 | $ | — |
For the periods ended December 31, 2022 and 2021, the total change in fair value of $45,000 and $0.7 million, respectively, was recognized in the change in fair value of convertible notes in the statements of operations and comprehensive loss. No portion of the total change in fair value resulted from a change in an instrument-specific credit risk.
| 4. | License and Other Agreements |
Purdue License Agreement
In January 2022, the Company entered into a license agreement (the “Purdue License Agreement”) with Purdue Research Foundation (“PRF”) pursuant to which the Company obtained a worldwide, royalty-bearing, transferable, exclusive license under certain patents rights to research, develop and commercialize products covered by such licensed patents.
The Company is required to pay PRF an upfront non-refundable fee of $0.4 million of which $0.2 million was paid upon execution of the agreement, $0.1 million will be payable in January 2023, and the remaining $0.1 million will be payable in January 2024. The Company is also required to pay tiered annual non-refundable maintenance fees beginning on the third anniversary of the Purdue License Agreement until commercialization. However, such maintenance fees will be creditable against any funding provided to Purdue University in the same annual period under the Sponsored Research Agreement as further discussed below. The Company is required to pay amounts up to $3.8 million in the aggregate upon achievement of specified events. Following commercialization, the Company will also be required to pay PRF a single-digit royalty on future net sales of licensed products and minimum annual royalty fees which will be creditable against the royalties due to PRF. Unless earlier terminated, the Purdue License Agreement will continue on a product-by-product and country-by-country basis until the expiration of the last valid claim covering the licensed product in such country.
The Company recorded the upfront fee of $0.4 million in research and development expense for the year ended December 31, 2022 as the license did not have alternative future use. As of December 31, 2022, $0.1 million of the unpaid portion of the upfront fee is recorded in accrued liabilities and the remaining $0.1 million is recorded in other noncurrent liabilities. Any potential future milestone or royalty payment amounts have not been accrued as of December 31, 2022 due to the uncertainty related to the successful achievement of these milestones.
| 11 |
MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
Purdue Sponsored Research Agreement
In February 2022, the Company entered into a Sponsored Research Agreement with PRF and Purdue University effective October 2021 (the “Sponsored Research Agreement”). During the years ended December 31, 2022 and 2021, the Company recorded research and development expenses of $1.2 million and $0.2 million, respectively, related to this Sponsored Research Agreement in the accompanying statements of operations and comprehensive loss.
| 5. | Commitments and Contingencies |
Indemnification
In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. In addition, the Company has entered into indemnification agreements with its directors and certain officers that may require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, no demands have been made upon the Company to provide indemnification under these agreements, and thus, there are no indemnification claims that the Company is aware of that could have a material effect on the Company’s balance sheets, statements of operations and comprehensive loss, or statements of cash flows.
Litigation
The Company is not a party to any material legal proceedings and is not aware of any pending or threatened claims. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities.
| 6. | Income Taxes |
The Company’s effective tax rate differs from the U.S. statutory tax rate primarily due to valuation allowances on the Company’s deferred tax assets in all jurisdictions as it is more likely than not that the Company’s deferred tax assets will not be realized.
The income tax provision differs from the amounts computed by applying the federal statutory income tax rate of 21% to pretax loss as follows:
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| U.S. Federal statutory rate on net loss | $ | (1,561 | ) | $ | (496 | ) | ||
| State and local taxes, net of federal benefit | (7 | ) | (82 | ) | ||||
| Change in valuation allowance | 1,584 | 542 | ||||||
| Permanent differences | 11 | 59 | ||||||
| Research and development tax credits | (118 | ) | (30 | ) | ||||
| Other, net | 91 | 7 | ||||||
| Provision for income taxes | $ | — | $ | — | ||||
| 12 |
MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
The following table presents the significant components of the Company’s deferred tax assets and liabilities:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 1,200 | $ | 587 | ||||
| Research and development credits carryforwards | 111 | 22 | ||||||
| Charitable contributions | 121 | 143 | ||||||
| Capitalized research and development costs | 858 | — | ||||||
| Accrued expenses and other | 61 | 15 | ||||||
| Total deferred income tax assets | 2,351 | 767 | ||||||
| Less: valuation allowance | (2,351 | ) | (767 | ) | ||||
| Net deferred tax assets | $ | — | $ | — | ||||
As of December 31, 2022, the Company had federal net operating loss (“NOL”) carryforwards of $5.2 million and state net operating loss carryforwards of $2.5 million, which may be available to reduce future taxable income. The entire federal NOL will carry forward indefinitely while state NOL carryforwards will begin to expire in 2037. As of December 31, 2022, the Company also had $0.1 million in research and development tax credit carryforwards which begin to expire in 2041. Realization of deferred tax assets is dependent upon the generation of future taxable income, if any, the timing and amount of which are uncertain. The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence to ascertain whether it is more likely than not that deferred tax assets will be realized. Due to the Company’s losses, the Company believes that it is not more likely than not that all of the deferred tax assets can be realized as of December 31, 2022 and 2021. Accordingly, the Company has recorded a full valuation allowance against its deferred tax assets. The valuation allowance increased by $1.6 million and $0.5 million during the years ended December 31, 2022 and 2021, respectively.
The Company files income tax returns in the U.S. and various state and local jurisdictions. The statute of limitation is open for 2021 and forward for all jurisdictions, none of which are currently under examination by any tax authorities.
Federal and state laws impose substantial restrictions on the utilization of NOL and tax credit carryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. Depending on the significance of past and future ownership changes, the Company’s ability to realize the potential future benefit of tax losses and tax credits that existed at the time of the ownership change may be significantly reduced.
As of December 31, 2022 and 2021, the Company had gross unrecognized tax benefits of $37,000 and $7,000, respectively. The Company’s policy is to include interest and penalties related to unrecognized tax benefits, if any, within the provision for taxes in the statements of operations and comprehensive loss. Any adjustments to the Company’s uncertain tax positions would result in an adjustment of its deferred tax assets and valuation allowance rather than resulting in an impact on the effective tax rate. It is not expected that there will be any material change in the unrecognized tax benefits within the next 12 months.
Effective for tax years beginning after December 31, 2021, taxpayers are required to capitalize any expenses it incurred that are considered incidental to research and experimentation (R&E) activities under IRC Section 174. While taxpayers historically had the option of deducting these expenses under IRC Section 174, the December 2017 Tax Cuts and Jobs Act mandates capitalization and amortization of R&E expenses for tax years beginning after December 31, 2021. Expenses incurred in connection with R&E activities in the US must be amortized over a 5-year period, and R&E expenses incurred outside of the US must be amortized over a 15-year period. R&E activities are broader in scope than qualified research activities considered under IRC Section 41 (relating to the research tax credit). For the year ended December 31, 2022, the Company performed an analysis based on available guidance and determined that this change in law will decrease its taxable loss. The Company will continue to monitor this issue for future developments and its impact on taxable income. Due to the Company’s net operating loss and tax credit carryforwards, the federal tax return is subject to tax examinations since the Company’s inception.
| 13 |
MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
| 7. | Convertible Notes |
2020 Convertible Notes
In February and December 2020, the Company issued two convertible promissory notes (the “2020 Convertible Notes”) to a new investor with an aggregate principal balance of $0.8 million and an interest rate of 2.8% per annum. The 2020 Convertible Notes had a maturity date of June 30, 2022.
The 2020 Convertible Notes are subject to automatic conversion upon a “Qualified Financing,” whereby the Company issues its equity securities and raises aggregate gross proceeds of at least $2.0 million (“Automatic Conversion”). The 2020 Convertible Notes are also subject to settlement by way of voluntary conversion upon (i) a “Non-Qualified Financing,” whereby the Company issues its equity securities and raises aggregate gross proceeds of less than $2.0 million; or (ii) upon a “Sale of the Company” defined as a merger or consolidation in which the stockholders of the Company own less than 50% voting power, or a sale, lease, transfer, exclusive license or other disposition of substantially all of the Company’s assets (“Optional Conversion”).
In the event of an Automatic Conversion or Optional Conversion, the outstanding principal and accrued interest balance (the “Outstanding Amount”) will be converted into the amount of equity securities sold by the Company in either the Qualified or Non-Qualified Financing, or common stock in the event of a Sale of the Company, as determined by dividing the Outstanding Amount by the conversion price equal to 80% of the price per share of the securities sold by the Company in either the Qualified or Non-Qualified Financing or 80% of the price per share of common stock to be paid in the Sale of the Company.
In June 2021, the 2020 Convertible Notes were amended to remove the voluntary conversion feature upon a Sale of the Company and added a mandatory repayment feature upon a Sale of the Company whereby the repayment amount would equal 150% of the Outstanding Amount.
Due to the various conversion and settlement features embedded within the 2020 Convertible Notes, the Company elected to account for the notes under the fair value option. As such, the 2020 Convertible Notes were initially recognized at their determined fair value of $0.8 million on the date of issuance and subsequently remeasured to fair value each reporting period until settlement (See Note 3 — Fair Value Measurement). Any change in fair value as a result of the June 2021 amendment was included in the fair value remeasurement as of December 31, 2021.
2021 Convertible Notes
During 2021, the Company issued a series of convertible promissory notes (the “2021 Convertible Notes”) to new investors with an aggregate principal balance of $5.7 million and an interest rate of 8.0% per annum. The 2021 Convertible Notes had a maturity date of December 31, 2022.
The 2021 Convertible Notes are subject to automatic conversion upon the next preferred stock financing (“Conversion upon a Preferred Stock Financing”). In the event of a Conversion upon a Preferred Stock Financing, the Outstanding Amount will be converted into the amount of equity securities sold by the Company in the preferred stock financing, as determined by dividing the Outstanding Amount by the conversion price equal to 80% of the price per share of the securities sold by the Company in the preferred stock financing.
| 14 |
MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
The 2021 Convertible Notes are subject to mandatory repayment at 150% of the Outstanding Amount upon a Change in Control, which is defined as (i) a merger, consolidation or reorganization that results in the stockholders of the Company owning less than 50% of the voting power of the surviving entity; (ii) any transaction in which greater than 50% of the Company’s voting power is transferred; (iii) the sale or transfer of substantially all of the Company’s assets; or (iv) the exclusive license of all or substantially all of the Company’s intellectual property.
Due to the various conversion and settlement features embedded within the 2021 Convertible Notes, the Company elected to account for the notes under the fair value option. As such, the 2021 Convertible Notes were initially recognized at their determined fair value of $5.7 million on the date of issuance and subsequently remeasured to fair value each reporting period until settlement (See Note 3 — Fair Value Measurement).
In February 2022, in connection with the Series A preferred stock financing, the 2020 Convertible Notes and 2021 Convertible Notes (collectively the “Convertible Notes”) were automatically converted into shares of Series A-1 convertible preferred stock and the convertible notes liability was extinguished. The Convertible Notes together with interest accrued thereon of $6.8 million were converted into 4,710,835 shares of Series A-1 preferred stock, reflecting a conversion price per share of $1.4442. The carrying value of the Convertible Notes of $7.3 million, which reflects the fair value remeasurement of $0.5 million, was reclassified to convertible preferred stock upon extinguishment of the Convertible Notes.
| 8. | Convertible Preferred Stock |
In February 2022, the Company entered into the Series A and Series A-1 Preferred Stock Purchase Agreement with certain investors and sold an aggregate of 5,723,349 shares of Series A convertible preferred stock at $1.8053 per share for gross cash proceeds of $10.3 million and incurred $0.2 million of issuance costs. Concurrently, the Company converted previously issued and outstanding Convertible Notes into 4,710,835 shares of Series A-1 convertible preferred stock.
Convertible preferred stock consists of the following:
| December 31, 2022 | ||||||||||||||||||||
| Shares Authorized | Shares Outstanding | Price Per Share | Liquidation Preference | Net Carrying Value | ||||||||||||||||
| (in thousands, except share and per share amounts) | ||||||||||||||||||||
| Series A | 6,755,995 | 5,723,349 | $ | 1.8053 | $ | 10,332 | $ | 10,148 | ||||||||||||
| Series A-1 | 4,710,835 | 4,710,835 | $ | 1.4442 | 6,803 | 7,302 | ||||||||||||||
| Total | 11,466,830 | 10,434,184 | $ | 17,135 | $ | 17,450 | ||||||||||||||
The Company recorded its Series A convertible preferred stock at the issuance price on the dates of issuance, net of issuance costs. The Series A-1 convertible preferred stock was recorded at fair value at the issuance date (See Note 3 — Fair Value Measurement).
The holders of the Series A and Series A-1 convertible preferred stock have the following rights and preferences:
Dividends
Holders of convertible preferred stock are entitled to receive, when and if declared by the board of directors, noncumulative dividends at the rate of six percent (6%) of the original issue price on shares of convertible preferred stock. If the Company declares, pays or sets aside any dividends on shares of common stock, the holders of convertible preferred stock are entitled to receive dividends at least equal (on an as if converted to common stock basis) to the dividend payable on the Company’s common stock. No dividends have been declared to date.
| 15 |
MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a deemed liquidation event, as further defined in the Company’s amended and restated certificate of incorporation, the holders of the Series A and Series A-1 convertible preferred stock then outstanding are entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment is made to the holders of the common stock, at an amount per share equal to the greater of: (i) the applicable original issue price, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of Series A and Series A-1 convertible preferred stock been converted into common stock immediately prior to such liquidation, dissolution, winding up or deemed liquidation event.
If the assets of the Company are insufficient to pay the holders of convertible preferred stock the full amount they are entitled to, the holders of convertible preferred stock will share ratably in any distribution of the assets available for distribution in proportion to the respective amounts that would otherwise be due to such holders. After payment of all preferential amounts required to the holders of shares of convertible preferred stock, the remaining assets of the Company available for distribution will be distributed among the holders of the shares of common stock, pro rata based on the number of shares held by each holder.
Redemption
The convertible preferred stock is not redeemable at the option of the holder.
Conversion Rights
Each share of convertible preferred stock is convertible, at the option of the holder, into one share of common stock, subject to certain adjustments for dilution, if any, resulting from future stock issuances. The initial conversion price per share for the Series A and Series A-1 convertible preferred stock is $1.8053 and $1.4442, respectively.
Each share of convertible preferred stock will automatically be converted into shares of common stock at the then effective conversion rate for such share either: (i) upon the closing of the sale of shares of common stock to the public at a price of at least $5.4159 per share in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $50.0 million of gross proceeds; or (ii) by vote or written consent of the holders of at least a majority of the then outstanding shares of convertible preferred stock.
The conversion price for each series of convertible preferred stock will be subject to an adjustment in the event of stock split, stock dividend, combination or other similar recapitalization with respect to the common stock. In addition, if the Company should issue convertible preferred stock or common stock without consideration or for a consideration per share less than the conversion price for the convertible preferred stock, the conversion price for each series shall automatically be adjusted in accordance with anti-dilution provisions contained in the Company’s amended and restated certificate of incorporation.
Voting Rights
Each holder of outstanding shares of convertible preferred stock has voting rights equal to the number of whole shares of common stock into which such shares could be converted as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Company’s amended and restated certificate of incorporation, holders of convertible preferred stock shall vote together with the holders of common stock as a single class. Holders of shares of Series A and Series A-1 convertible preferred stock, voting as a separate class, are entitled to elect one director of the Company. Holders of shares of common stock, voting as a separate class, are entitled to elect two directors of the Company. Holders of a majority of the outstanding shares of common stock and convertible preferred stock, voting as a single class on an as-converted basis, are entitled to elect any remaining directors.
| 16 |
MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
Classification
The Company has classified its convertible preferred stock as temporary equity on the balance sheet as the shares can be redeemed upon the occurrence of certain change in control events that are outside the Company’s control, including liquidation, sale or transfer of the Company. The Company has elected not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because it is uncertain whether or when an event would occur that would obligate the Company to pay the liquidation preferences to holders of shares of convertible preferred stock. Subsequent adjustments to the carrying values to the liquidation preferences will be made only when it becomes probable that such a liquidation will occur.
| 9. | Common Stock |
Each share of common stock entitles the holder to one vote on all matters submitted to a vote for the Company’s stockholders. Common stockholders are not entitled to receive dividends unless declared by the Company’s board of directors. No dividends have been declared or paid by the Company since its inception.
The Company has reserved the following shares of common stock for issuance, on an as-converted basis, as follows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Convertible preferred stock | 10,434,184 | — | ||||||
| Options issued and outstanding under 2020 Plan | 2,561,889 | — | ||||||
| Remaining shares available for issuance under 2020 Plan | 4,591,948 | 85,000 | ||||||
| Total | 17,588,021 | 85,000 | ||||||
| 10. | Stock Based Compensation |
2020 Equity Incentive Plan
In February 2020, the Company’s board of directors adopted the 2020 Equity Incentive Plan (the “2020 Plan”) which provides for the granting of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, and restricted stock units to the Company’s employees, directors and consultants. The number of shares reserved for issuance under the 2020 Plan as of December 31, 2021 was 2,425,000 shares. As of December 31, 2022, the number of shares reserved for issuance under the 2020 Plan was increased to 9,125,610 shares.
Awards granted under the 2020 Plan expire no later than ten years from the date of grant. For incentive stock options and non-statutory stock options, the option price shall not be less than 100% of the estimated fair value on the date of grant. Options granted typically vest over a four-year period but may be granted with different vesting terms. The shares of common stock underlying restricted stock awards typically vest over a four-year period.
| 17 |
MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
Stock Option Activity
The following table summarizes option award activity under the 2020 Plan (in thousands, except share and per share amounts):
| Number of Options Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at December 31, 2020 | — | $ | — | — | $ | — | ||||||||||
| Granted | 1,065,000 | 0.01 | ||||||||||||||
| Exercised | (1,065,000 | ) | 0.01 | |||||||||||||
| Outstanding at December 31, 2021 | — | $ | — | — | $ | — | ||||||||||
| Granted | 2,561,889 | 0.41 | ||||||||||||||
| Outstanding at December 31, 2022 | 2,561,889 | $ | 0.41 | 9.62 | $ | — | ||||||||||
| Exercisable at December 31, 2022 | 1,497,500 | $ | 0.41 | 9.74 | $ | — | ||||||||||
The estimated weighted-average grant date fair value of the options granted during the years ended December 31, 2022 and 2021 was $0.33 and $0.00002 per share, respectively.
Aggregate intrinsic value in the above table is calculated as the difference between the Company’s estimated fair value of its common stock and the exercise price of outstanding options. The total intrinsic value of options exercised was immaterial for the year ended December 31, 2021. No options were exercised during the year ended December 31, 2022.
The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions:
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Expected term (years) | 5.93 – 6.08 | 6.08 | ||||||
| Expected volatility | 96.6% – 98.7% | 99.5 | % | |||||
| Risk-free interest rate | 2.38% – 4.17% | 1.14 | % | |||||
| Expected dividends | —% | —% | ||||||
The valuation assumptions were determined as follows:
Expected Term — The Company’s expected term represents the period that the options granted are expected to be outstanding. The Company used the simplified method, based on the mid-point between the vesting date and the end of the contractual term, to determine the expected term as the Company does not have stock option exercise history.
Expected Volatility — The expected volatility was determined by examining the historical volatilities for industry peers and using an average of historical volatilities of Company’s industry peers as the Company’s stock is not actively traded on any public markets.
Risk-Free Interest Rate — The risk-free interest rate is based on the constant maturity rate of U.S. Treasury securities as of the date of the grant for time periods approximately equal to the expected term of the award.
Expected Dividend — The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.
| 18 |
MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
Grants Outside of the 2020 Equity Incentive Plan
During 2020, the Company issued 1,500,000 shares of common stock outside of the Company’s 2020 Plan to its then President and Chief Executive Officer (“2020 CEO”). The shares were issued under the terms of a restricted stock agreement between the Company and such holder, and the unvested shares are subject to repurchase by the Company upon the termination of the holder’s relationship with the Company. The shares vest monthly over a 48-month period based on the holder’s continued service relationship with the Company. In November 2020, the 2020 CEO was terminated and continued to provide service in an advisory role until a new CEO was hired (the “modification”). In May 2021, when a new CEO was hired, the Company exercised its right to repurchase 1,125,000 shares of unvested common stock at the original issuance price. Incremental fair value related to the award modification was immaterial.
Liability for Early Exercise of Stock Options and Unvested Restricted Stock
Early Exercise of Stock Options
As of December 31, 2022 and 2021, there were 243,750 and 1,065,000 shares of common stock issued to the Company’s then President and Chief Executive Officer (“2021 CEO”) that remain unvested. These shares were issued upon the early exercise of stock options granted in 2021 prior to the vesting of the underlying shares and are subject to repurchase by the Company at the original issuance price upon termination of the services received from the holder of the option. During 2022, the 2021 CEO was terminated and the Company exercised its right to repurchase 498,775 shares of unvested common stock at the original issuance price. The Company modified the remaining shares to accelerate the vesting of 266,225 shares and the remaining 300,000 shares will continue to vest as long as the 2021 CEO continues to provide service as a member of the board of directors. The modification resulted in an incremental fair value of $0.2 million, of which $0.1 million was recognized as stock-based compensation immediately and $0.1 million will be recognized over the remaining service period. As of December 31, 2022 and 2021, the Company recorded $2,400 and $10,700, respectively, within accrued liabilities and other noncurrent liabilities associated with options granted to the 2021 CEO that are subject to repurchase by the Company.
Unvested Restricted Stock
As of December 31, 2022 and 2021, there were 435,938 and 754,688 shares of common stock that remain unvested. These shares were issued under the terms of restricted stock agreements prior to the vesting of the underlying shares and are subject to repurchase by the Company at the original issuance price upon termination of the services received from the holder of the restricted common stock. As of December 31, 2022 and 2021, the Company recorded $2,600 and $4,300, respectively, within accrued liabilities and other noncurrent liabilities associated with restricted common stock that are subject to repurchase by the Company.
Stock-Based Compensation Expense
The total compensation cost recognized in the statements of operations associated with all stock-based compensation awards granted by the Company is as follows:
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| (in thousands) | ||||||||
| Research and development | $ | 13 | $ | — | ||||
| General and administrative | 212 | — | ||||||
| Total stock-based compensation expense | $ | 225 | $ | — | ||||
As of December 31, 2022, the Company had an aggregate of $0.8 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 3.6 years.
| 19 |
MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
| 11. | Related Party Transactions |
The 2020 Convertible Notes (see Note 7 — Convertible Notes), were issued to a related party investor (an entity affiliated with members of the Company’s board of directors) for an aggregate principal amount of $0.8 million. The Convertible Notes were automatically converted into shares of Series A-1 convertible preferred stock in February 2022.
In July 2021, a member of the Company’s board of directors transferred 400,000 shares of common stock originally issued at a purchase price of $0.0001 per share to a related party investor (an entity in which the board member is the President and Chief Executive Officer).
In February 2022, the Company issued Series A convertible preferred stock to a related party investor (an entity affiliated with a member of the Company’s board of directors and an officer of the Company) for aggregate consideration of $8.3 million. See further discussion in Note 8 — Convertible Preferred Stock.
In January and February 2022, the Company entered into a License Agreement and Sponsored Research Agreement with Purdue. The Company’s scientific founder, Dr. Phillip Low, who is also a board member and the largest stockholder of the Company, is the Presidential Scholar for Drug Discovery at Purdue University. In addition, the research and development activities under the agreements are performed at Dr. Low’s laboratory at Purdue University. As of December 31, 2022, the Company had amounts payable to this related party of $0.2 million, of which $0.1 million was included in accrued liabilities and $0.1 million included in other noncurrent liabilities in the accompanying balance sheets. As of December 31, 2021, the Company had amounts payable to this related party of $0.3 million which was included in accrued liabilities in the accompanying balance sheets. See further discussion in Note 4 — License and Other Agreements. During the year ended December 31, 2021, the Company also made a charitable donation to Purdue University of $0.4 million benefiting Dr. Low’s laboratory at Purdue University. The donation was recorded as general and administrative expense in the accompanying statement of operations and comprehensive loss.
| 12. | Subsequent Events |
Management has reviewed and evaluated material subsequent events from the balance sheet date of December 31, 2022 through August 8, 2023, the day the financial statements were available for issuance.
Series A-2 Convertible Preferred Stock Financing
In May 2023, the Company sold 9,890,414 shares of Series A-2 convertible preferred stock at $1.51662 per share to new and existing investors for aggregate gross proceeds of $15.0 million. Each share of Series A-2 convertible preferred stock is convertible into one share of the Company’s common stock. Except for the liquidation preference described below, the rights and privileges of the Series A-2 convertible preferred stock are substantially similar to the rights and privileges of the Series A and Series A-1 preferred stock. In addition, the May 2023 preferred stock issuance triggered the Series A conversion price adjustment feature as provided for in the Company’s amended and restated certificate of incorporation and adjusted the Series A conversion price from $1.8053 to $1.7255. The Company also increased its authorized shares of common stock and convertible preferred stock to 40,000,000 shares and 20,324,598 shares, respectively.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a deemed liquidation event, as further defined in the Company’s amended and restated certificate of incorporation, the holders of convertible preferred stock then outstanding are entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment is made to the holders of the common stock, at an amount per share equal to the greater of: (i)(a) with respect to the Series A-2 convertible preferred stock, one and one-tenth times the original issue price of a share of Series A-2 convertible preferred stock, plus any dividends declared but unpaid thereon, and (b) with respect to the Series A and Series A-1 convertible preferred stock, the applicable original issue price of a share of Series A or Series A-1 convertible preferred stock, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of convertible preferred stock been converted into common stock immediately prior to such liquidation, dissolution, winding up or deemed liquidation event.
| 20 |
MORPHIMMUNE INC.
NOTES TO FINANCIAL STATEMENTS
Merger Agreement
In June 2023, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Immunome, Inc. (“Immunome”) and Ibiza Merger Sub, Inc. (“Merger Sub”), a wholly-owned subsidiary of Immunome. Pursuant to the terms of the Merger Agreement, Merger Sub will merge with and into the Company, with the Company continuing as the surviving entity (the “Merger”). In connection with the Merger, the Company will become a wholly-owned subsidiary of Immunome. Concurrently with the execution and delivery of the Merger Agreement, certain accredited investors (the “PIPE Investors”), entered into subscription agreements with Immunome pursuant to which the PIPE Investors have committed to purchase 21,690,871 shares (the “PIPE Shares”) of Immunome common stock for an aggregate purchase price of $125.0 million. The PIPE Shares will be issued at a price per share equal to (i) $5.75, which was the average closing price of a share of Immunome’s common stock for the five trading days immediately prior to the signing of the subscription agreements, and (ii) in the case of affiliate investors, $5.91, which was the closing price of a share of Immunome’s common stock on the date immediately prior to the signing of the subscription agreements. The purchase of the PIPE Shares is conditioned upon, among other conditions, and will be consummated immediately following, the closing of the Merger.
The Merger Agreement contains certain termination rights. Upon termination of the Merger Agreement in certain circumstances, a termination fee of $3.0 million may be payable by a party, including (i) where such party’s board of directors changes or withdraws its recommendation in favor of the Merger or recommends to enter into an alternative transaction and (ii) in certain circumstances where such party enters into a Subsequent Transaction (as defined in the Merger Agreement) within 12 months of the termination of the Merger Agreement, to the other party. The Company and Immunome have also agreed to reimburse the other party for up to $1.5 million in expenses, as applicable, if the Merger Agreement is terminated in certain circumstances, as further described in the Merger Agreement.
In March 2023, the Board of Directors appointed Clay Siegall as the Company’s CEO and President.
In February 2023, the Company entered into a sublease agreement to sublease approximately 3,837 square feet of lab space in West Lafayette, Indiana (the “Sublease Agreement”) that expires on December 30, 2023. The rent for the Sublease Agreement consists of monthly payments of $6,000.
| 21 |
Exhibit 99.2
Morphimmune Inc.
Condensed Balance Sheets
(unaudited)
(in thousands, except share and per share amounts)
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 10,068 | $ | 7,151 | ||||
| Prepaid expenses and other current assets | 191 | 117 | ||||||
| Total current assets | 10,259 | 7,268 | ||||||
| Property and equipment, net | 646 | 11 | ||||||
| Total assets | $ | 10,905 | $ | 7,279 | ||||
| Liabilities, Convertible Preferred Stock and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,147 | $ | 439 | ||||
| Accrued liabilities | 2,614 | 248 | ||||||
| Total current liabilities | 3,761 | 687 | ||||||
| Other noncurrent liabilities | 10 | 103 | ||||||
| Total liabilities | 3,771 | 790 | ||||||
| Commitments and contingencies (Note 6) | ||||||||
| Convertible preferred stock, $0.0001 par value, 20,324,598 shares authorized, issued and outstanding at September 30, 2023; 11,466,830 shares authorized and 10,434,184 shares issued and outstanding at December 31, 2022 (aggregate liquidation preference of $33,635 at September 30, 2023) | 32,302 | 17,450 | ||||||
| Stockholders’ deficit: | ||||||||
| Common stock, $0.0001 par value; 40,000,000 and 28,000,000 shares authorized at September 30, 2023 and December 31, 2022; 8,456,499 shares and 8,391,225 shares issued and outstanding at September 30, 2023 and December 31, 2022 | 1 | 1 | ||||||
| Additional paid-in capital | 750 | 233 | ||||||
| Accumulated other comprehensive loss | (1 | ) | – | |||||
| Accumulated deficit | (25,918 | ) | (11,195 | ) | ||||
| Total stockholders’ deficit | (25,168 | ) | (10,961 | ) | ||||
| Total liabilities, convertible preferred stock and stockholders’ deficit | $ | 10,905 | $ | 7,279 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 1 |
Morphimmune Inc.
Condensed Statements of Operations and Comprehensive
Loss
(unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Operating expenses: | ||||||||
| Research and development | $ | 8,104 | $ | 2,763 | ||||
| General and administrative | 6,863 | 1,738 | ||||||
| Total operating expenses | 14,967 | 4,501 | ||||||
| Loss from operations | (14,967 | ) | (4,501 | ) | ||||
| Change in fair value of convertible notes | – | (45 | ) | |||||
| Interest income | 105 | – | ||||||
| Other income, net | 139 | (4 | ) | |||||
| Net loss | $ | (14,723 | ) | $ | (4,550 | ) | ||
| Other comprehensive loss: | ||||||||
| Unrealized loss on short-term debt securities | (1 | ) | – | |||||
| Total comprehensive loss | $ | (14,724 | ) | $ | (4,550 | ) | ||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 2 |
Morphimmune Inc.
Condensed Statements of Convertible Preferred
Stock and Stockholders’ Deficit
(unaudited)
(in thousands, except share amounts)
| Convertible Preferred Stock | Common Stock | Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid-in Capital | Comprehensive Loss | Accumulated Deficit | Stockholders’ Deficit | |||||||||||||||||||||||||
| Balances at December 31, 2022 | 10,434,184 | $ | 17,450 | 8,391,225 | $ | 1 | $ | 233 | $ | – | $ | (11,195 | ) | $ | (10,961 | ) | ||||||||||||||||
| Issuance of unvested restricted common stock | – | – | 65,274 | – | – | – | – | – | ||||||||||||||||||||||||
| Issuance of Series A-2 preferred stock, net of issuance costs of $148 | 9,890,414 | 14,852 | – | – | – | – | – | – | ||||||||||||||||||||||||
| Stock-based compensation | – | – | – | – | 504 | – | – | 504 | ||||||||||||||||||||||||
| Vesting of early exercised shares and restricted common stock | – | – | – | – | 13 | – | – | 13 | ||||||||||||||||||||||||
| Unrealized loss on short-term debt securities | – | – | – | – | – | (1 | ) | – | (1 | ) | ||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | (14,723 | ) | (14,723 | ) | ||||||||||||||||||||||
| Balances at September 30, 2023 | 20,324,598 | $ | 32,302 | 8,456,499 | $ | 1 | $ | 750 | $ | (1 | ) | $ | (25,918 | ) | $ | (25,168 | ) | |||||||||||||||
| Convertible Preferred Stock | Common Stock | Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid-in Capital | Comprehensive Loss | Accumulated Deficit | Stockholders’ Deficit | |||||||||||||||||||||||||
| Balances at December 31, 2021 | – | $ | – | 8,890,000 | $ | 1 | $ | 3 | $ | – | $ | (3,717 | ) | $ | (3,713 | ) | ||||||||||||||||
| Issuance of Series A preferred stock, net of issuance costs of $185 | 5,723,349 | 10,148 | – | – | – | – | – | – | ||||||||||||||||||||||||
| Issuance of Series A-1 preferred stock upon conversion of notes | 4,710,835 | 7,302 | – | – | – | – | – | – | ||||||||||||||||||||||||
| Stock-based compensation | – | – | – | – | 35 | – | – | 35 | ||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | (4,550 | ) | (4,550 | ) | ||||||||||||||||||||||
| Balances at September 30, 2022 | 10,434,184 | $ | 17,450 | 8,890,000 | $ | 1 | $ | 38 | $ | – | $ | (8,267 | ) | $ | (8,228 | ) | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 3 |
Morphimmune Inc.
Condensed Statements of Cash Flows
(unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (14,723 | ) | $ | (4,550 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 68 | 1 | ||||||
| Acquired in-process research and development | – | 400 | ||||||
| Stock-based compensation expense | 504 | 35 | ||||||
| Change in fair value of convertible notes | – | 45 | ||||||
| Changes in assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | (75 | ) | (155 | ) | ||||
| Accounts payable | 708 | (92 | ) | |||||
| Accrued and other liabilities | 2,359 | 54 | ||||||
| Net cash used in operating activities | (11,159 | ) | (4,262 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (703 | ) | (13 | ) | ||||
| Acquisition of in-process research and development assets | (100 | ) | (200 | ) | ||||
| Net cash used in investing activities | (803 | ) | (213 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of preferred stock, net of issuance costs | 14,852 | 10,088 | ||||||
| Proceeds from issuance of restricted common stock | 27 | – | ||||||
| Net cash provided by financing activities | 14,879 | 10,088 | ||||||
| Net increase in cash and cash equivalents | 2,917 | 5,613 | ||||||
| Cash and cash equivalents, beginning of the period | 7,151 | 4,426 | ||||||
| Cash and cash equivalents, end of the period | $ | 10,068 | $ | 10,039 | ||||
| Supplemental non-cash investing and financing activities | ||||||||
| In-process research and development asset purchases in accrued liabilities and other noncurrent liabilities | $ | 100 | $ | 200 | ||||
| Deemed dividend on down round provision | $ | 85 | $ | – | ||||
| Conversion of convertible notes and accrued interest into preferred stock | $ | – | $ | 7,302 | ||||
| Issuance of convertible preferred stock to service provider | $ | – | $ | 60 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
| 4 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
| 1. | Organization and Description of Business |
Morphimmune Inc. (“Morphimmune” or the “Company”) was incorporated in the state of Delaware on January 28, 2020. Morphimmune is a preclinical biotechnology company focused on developing targeted oncology therapeutics. The Company’s Targeted Effector platform uses small molecule ligands to selectively deliver drug payloads to diseased cells. The Company believes this approach reduces toxicity and increases the efficacy of effector molecules, thereby improving outcomes for patients. Through September 30, 2023, the Company has been primarily engaged in business planning, research and development, personnel recruitment, and raising capital.
Merger Agreement
In June 2023, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Immunome, Inc. (“Immunome”) and Ibiza Merger Sub, Inc. (“Merger Sub”), a wholly-owned subsidiary of Immunome. Pursuant to the terms of the Merger Agreement, Merger Sub will merge with and into the Company, with the Company continuing as the surviving entity (the “Merger”). In connection with the Merger, the Company will become a wholly-owned subsidiary of Immunome. Concurrently with the execution and delivery of the Merger Agreement, Immunome intends to complete a private placement financing (“PIPE Financing”) with certain accredited investors (the “PIPE Investors”). Immunome has entered into subscription agreements pursuant to which the PIPE Investors have committed to purchase 21,690,871 shares (the “PIPE Shares”) of Immunome common stock for an aggregate purchase price of $125.0 million. The PIPE Shares will be issued at a price per share equal to (i) $5.75, which was the average closing price of a share of Immunome’s common stock for the five trading days immediately prior to the signing of the subscription agreements, and (ii) in the case of affiliate investors, $5.91, which was the closing price of a share of Immunome’s common stock on the date immediately prior to the signing of the subscription agreements. The purchase of the PIPE Shares is conditioned upon, among other conditions, and will be consummated immediately following, the closing of the Merger.
The Merger and PIPE Financing closed on October 2, 2023. Refer to Note 11 – Subsequent Events for additional information.
Liquidity
The Company has incurred significant losses and negative cash flows from operations since inception. As of September 30, 2023, the Company had an accumulated deficit of $25.9 million, and cash and cash equivalents of $10.1 million. The Company has not generated any product revenue to date and does not expect to generate product revenue until it successfully completes development and obtains regulatory approval for at least one of its product candidates. From inception to date, the Company has financed its operations primarily through the sale and issuance of convertible notes and convertible preferred stock. The Company anticipates that it will continue to incur net losses and negative operating cash flows for the foreseeable future. Management believes that the Company’s current cash and cash equivalents are adequate to meet its needs for at least the next twelve months. However, the Company may need to borrow funds or raise additional equity to achieve its longer-term business objectives. Upon completion of the Merger in October 2023, the Company became a wholly-owned subsidiary of Immunome. After the Merger, the combined company of Immunome and Morphimmune will have sufficient cash to meet its needs for at least the next twelve months.
| 5 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The Company’s unaudited condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these unaudited condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2022 and related notes which provide a more complete discussion of the Company’s accounting policies and certain other information. The December 31, 2022 condensed balance sheet was derived from the Company’s audited financial statements. These unaudited condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary for the fair presentation of the Company’s financial position as of September 30, 2023 and its results of operations and cash flows for the nine months ended September 30, 2023 and 2022. The results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for any other future annual or interim period.
Use of Estimates
The preparation of the condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements and the reported amounts of income and expense during the reporting periods. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates. The most significant estimates in the Company’s condensed financial statements relate to the valuation of convertible preferred stock and common stock, and the valuation of stock options.
Risks and Uncertainties
The Company is subject to all of the risks inherent in an early-stage company developing new medical drugs. These risks include, but are not limited to, the need for substantial additional financing, limited management resources, dependence upon medical acceptance of the product in development, regulatory approvals, successful clinical trials, availability and willingness of patients to participate in human trials, and competition in the pharmaceutical industry. The Company’s operating results may be materially affected by the foregoing factors.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are deposited in checking, money market and brokerage accounts at one financial institution, which may at times exceed federally insured limits. The Company limits its credit risk associated with cash and cash equivalents by placing them with financial institutions that it believes are of high quality. The Company has not experienced any losses on its deposits of cash or cash equivalents and believes it is not exposed to significant credit risk on its cash balances.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of 90 days or less at the date of purchase to be cash and cash equivalents. As of September 30, 2023, cash equivalents primarily consisted of U.S. treasury securities and money market funds. The Company did not have any cash equivalents as of December 31, 2022.
Comprehensive Loss
Certain gains and losses are recognized in comprehensive loss but excluded from net loss. Comprehensive loss for the nine months ended September 30, 2023 includes net loss and unrealized gains and losses on short-term debt securities. For the nine months ended September 30, 2022, there were no items of comprehensive loss and net loss was equal to comprehensive loss.
| 6 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
| 3. | Fair Value Measurement |
The Company determines the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:
| ● | Level 1: Inputs which include quoted prices in active markets for identical assets and liabilities. |
| ● | Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The carrying amounts of certain financial instruments, including cash and cash equivalents, prepaid expenses and other current assets, accounts payable, and accrued liabilities approximate fair value due to their relatively short maturities.
Financial assets measured and recognized at fair value are as follows:
September 30, 2023 | ||||||||||||||||||
| Valuation Hierarchy | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||
| (in thousands) | ||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||
| Money market funds | Level 1 | $ | 2,664 | $ | – | $ | – | $ | 2,664 | |||||||||
| U.S. treasury securities | Level 2 | 4,994 | – | (1 | ) | 4,993 | ||||||||||||
| Total financial assets | $ | 7,658 | $ | – | $ | (1 | ) | $ | 7,657 | |||||||||
Money market funds are measured at fair value on a recurring basis using quoted prices and are classified as Level 1. Investments are measured at fair value based on inputs other than quoted prices that are derived from observable market data and are classified as Level 2 inputs. The Company did not have any financial liabilities measured at fair value on a recurring basis at September 30, 2023 and did not have any financial assets and liabilities measured at fair value at December 31, 2022.
As of September 30, 2023, short-term debt securities with an aggregate fair value of $5.0 million were in an unrealized loss position. These securities have been in an unrealized loss position for less than twelve months. The unrealized losses on short-term debt securities as of September 30, 2023 were immaterial.
Convertible Notes
The Company elected the fair value option to account for its convertible notes issued during 2020 and 2021 (collectively the “Convertible Notes”). The Convertible Notes were initially recognized at their determined fair value on the date of issuance and subsequently remeasured to fair value each reporting period until settlement. The fair value of the Convertible Notes was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.
| 7 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
In February 2022, in connection with the Series A preferred stock financing, the Convertible Notes were automatically converted into shares of Series A-1 convertible preferred stock and the liability was extinguished. The Convertible Notes together with interest accrued thereon of $6.8 million were converted into 4,710,835 shares of Series A-1 preferred stock, reflecting a conversion price per share of $1.4442. For the nine months ended September 30, 2022, the total change in fair value of $45,000 was recognized in the change in fair value of convertible notes in the statements of operations and comprehensive loss. No portion of the total change in fair value resulted from a change in an instrument-specific credit risk.
The estimated fair value of the Convertible Notes is determined based on a multiple scenario analysis that utilizes Monte Carlo simulations. The model includes assumptions related to the value of the instruments based on the estimated timings and amounts of future rounds of financing, sale of the Company, maturity of the notes, and an imputed discount rate based on estimated market interest rates. Further assumptions used in the Monte Carlo simulations are the equity value and outstanding balance of the notes as of the valuation date and the volatility of the Company’s underlying common stock to determine the market value of the invested capital upon a future financing date or upon a sale of the Company prior to or as of the maturity of the notes.
| 4. | License and Other Agreements |
Purdue License Agreement
In January 2022, the Company entered into a license agreement (the “Purdue License Agreement”) with Purdue Research Foundation (“PRF”) pursuant to which the Company obtained a worldwide, royalty-bearing, transferable, exclusive license under certain patents rights to research, develop and commercialize products covered by such licensed patents.
The Company is required to pay PRF an upfront non-refundable fee of $0.4 million of which $0.2 million was paid upon execution of the agreement, $0.1 million was paid in January 2023, and the remaining $0.1 million will be payable in January 2024. The Company is also required to pay tiered annual non-refundable maintenance fees beginning on the third anniversary of the Purdue License Agreement until commercialization. However, such maintenance fees will be creditable against any funding provided to Purdue University in the same annual period under the Sponsored Research Agreement as further discussed below. The Company is required to pay amounts up to $3.8 million in the aggregate upon achievement of specified events. Following commercialization, the Company will also be required to pay PRF a single-digit royalty on future net sales of licensed products and minimum annual royalty fees which will be creditable against the royalties due to PRF. Unless earlier terminated, the Purdue License Agreement will continue on a product-by-product and country-by-country basis until the expiration of the last valid claim covering the licensed product in such country.
The Company recorded the upfront fee of $0.4 million in research and development expense for the nine months ended September 30, 2022 as the license did not have alternative future use. As of September 30, 2023, the remaining unpaid portion of the upfront fee of $0.1 million is recorded in accrued liabilities. As of December 31, 2022, $0.1 million of the unpaid portion of the upfront fee is recorded in accrued liabilities and the remaining $0.1 million is recorded in other noncurrent liabilities. Any potential future milestone or royalty payment amounts have not been accrued as of September 30, 2023 due to the uncertainty related to the successful achievement of these milestones.
| 8 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
Purdue Sponsored Research Agreement
In February 2022, the Company entered into a Sponsored Research Agreement with PRF and Purdue University effective October 2021 (the “Sponsored Research Agreement”). During the nine months ended September 30, 2023 and 2022, the Company recorded research and development expenses of $0.6 million and $0.9 million, respectively, related to this Sponsored Research Agreement in the accompanying statements of operations and comprehensive loss.
| 5. | Balance Sheet Components |
Property and Equipment, Net
Property and equipment, net consisted of the following amounts:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Lab equipment | $ | 687 | $ | – | ||||
| Computers and office equipment | 21 | 13 | ||||||
| Internal-use software | 8 | – | ||||||
| Property and equipment at cost | 716 | 13 | ||||||
| Less: accumulated depreciation | (70 | ) | (2 | ) | ||||
| Property and equipment, net | $ | 646 | $ | 11 | ||||
The Company recognized depreciation expense of approximately $68,000 for the nine months ended September 30, 2023 and depreciation expense was not material for the nine months ended September 30, 2022.
Accrued Liabilities
Accrued liabilities consisted of the following amounts:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Accrued preclinical and research and development costs | $ | 1,338 | $ | 108 | ||||
| Accrued employee related expenses | 747 | 37 | ||||||
| Accrued professional and legal fees | 420 | – | ||||||
| Accrued license fees | 100 | 100 | ||||||
| Other accrued liabilities | 9 | 3 | ||||||
| Total accrued liabilities | $ | 2,614 | $ | 248 | ||||
| 9 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
| 6. | Commitments and Contingencies |
Indemnification
In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. In addition, the Company has entered into indemnification agreements with its directors and certain officers that may require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, no demands have been made upon the Company to provide indemnification under these agreements, and thus, there are no indemnification claims that the Company is aware of that could have a material effect on the Company’s condensed balance sheets, condensed statements of operations and comprehensive loss, or condensed statements of cash flows.
Litigation
The Company is not a party to any material legal proceedings and is not aware of any pending or threatened claims. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities.
| 7. | Convertible Preferred Stock |
In May 2023, the Company sold 9,890,414 shares of Series A-2 convertible preferred stock at $1.51662 per share to new and existing investors for aggregate gross proceeds of $15.0 million. Each share of Series A-2 convertible preferred stock is convertible into one share of the Company’s common stock. Except for the liquidation preference described below, the rights and privileges of the Series A-2 convertible preferred stock are substantially similar to the rights and privileges of the Series A and Series A-1 preferred stock. The Company also increased its authorized shares of common stock and convertible preferred stock to 40,000,000 shares and 20,324,598 shares, respectively.
The May 2023 preferred stock issuance triggered the Series A conversion price adjustment feature (down round) as provided for in the Company’s amended and restated certificate of incorporation and adjusted the Series A conversion price from $1.8053 to $1.7255. The incremental fair value resulting from the trigger of the down round feature was $85,000. This amount was recorded as a deemed dividend within additional paid-in capital as the Company has an accumulated deficit.
Convertible preferred stock consists of the following:
September 30, 2023 | ||||||||||||||||||||
| Shares Authorized | Shares Outstanding | Price Per Share | Liquidation Preference | Net Carrying Value | ||||||||||||||||
| (in thousands, except share and per share amounts) | ||||||||||||||||||||
| Series A | 5,723,349 | 5,723,349 | $ | 1.8053 | $ | 10,332 | $ | 10,148 | ||||||||||||
| Series A-1 | 4,710,835 | 4,710,835 | $ | 1.4442 | 6,803 | 7,302 | ||||||||||||||
| Series A-2 | 9,890,414 | 9,890,414 | $ | 1.5166 | 16,500 | 14,852 | ||||||||||||||
| Total | 20,324,598 | 20,324,598 | $ | 33,635 | $ | 32,302 | ||||||||||||||
The Company recorded its Series A-2 convertible preferred stock at the issuance price on the dates of issuance, net of issuance costs.
The holders of the Series A, Series A-1 and Series A-2 convertible preferred stock have the following rights and preferences:
| 10 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
Dividends
Holders of convertible preferred stock are entitled to receive, when and if declared by the board of directors, noncumulative dividends at the rate of six percent of the original issue price on shares of convertible preferred stock. If the Company declares, pays or sets aside any dividends on shares of common stock, the holders of convertible preferred stock are entitled to receive dividends at least equal (on an as if converted to common stock basis) to the dividend payable on the Company’s common stock. No dividends have been declared to date.
Liquidation
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a deemed liquidation event, as further defined in the Company’s amended and restated certificate of incorporation, the holders of convertible preferred stock then outstanding are entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment is made to the holders of the common stock, at an amount per share equal to the greater of: (i)(a) with respect to the Series A-2 convertible preferred stock, one and one-tenth times the original issue price of a share of Series A-2 convertible preferred stock, plus any dividends declared but unpaid thereon, and (b) with respect to the Series A and Series A-1 convertible preferred stock, the applicable original issue price of a share of Series A or Series A-1 convertible preferred stock, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of convertible preferred stock been converted into common stock immediately prior to such liquidation, dissolution, winding up or deemed liquidation event.
If the assets of the Company are insufficient to pay the holders of convertible preferred stock the full amount they are entitled to, the holders of convertible preferred stock will share ratably in any distribution of the assets available for distribution in proportion to the respective amounts that would otherwise be due to such holders. After payment of all preferential amounts required to the holders of shares of convertible preferred stock, the remaining assets of the Company available for distribution will be distributed among the holders of the shares of common stock, pro rata based on the number of shares held by each holder.
Redemption
The convertible preferred stock is not redeemable at the option of the holder.
Conversion Rights
Each share of convertible preferred stock is convertible, at the option of the holder, into one share of common stock, subject to certain adjustments for dilution, if any, resulting from future stock issuances. The initial conversion price per share for the Series A, Series A-1, and Series A-2 convertible preferred stock is $1.8053, $1.4442, and $1.51662, respectively. Upon issuance of the Series A-2 convertible preferred stock, the Series A conversion price was adjusted from $1.8053 to $1.7255 as provided for in the Company’s amended and restated certificate of incorporation and further described below.
Each share of convertible preferred stock will automatically be converted into shares of common stock at the then effective conversion rate for such share either: (i) upon the closing of the sale of shares of common stock to the public at a price of at least $5.4159 per share in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $50.0 million of gross proceeds; or (ii) by vote or written consent of the holders of at least a majority of the then outstanding shares of convertible preferred stock.
The conversion price for each series of convertible preferred stock will be subject to an adjustment in the event of stock split, stock dividend, combination or other similar recapitalization with respect to the common stock. In addition, if the Company should issue convertible preferred stock or common stock without consideration or for a consideration per share less than the conversion price for the convertible preferred stock, the conversion price for each series shall automatically be adjusted in accordance with anti-dilution provisions contained in the Company’s amended and restated certificate of incorporation.
| 11 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
Voting Rights
Each holder of outstanding shares of convertible preferred stock has voting rights equal to the number of whole shares of common stock into which such shares could be converted as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Company’s amended and restated certificate of incorporation, holders of convertible preferred stock shall vote together with the holders of common stock as a single class. Holders of shares of Series A, Series A-1 and Series A-2 convertible preferred stock, voting as a separate class, are entitled to elect one director of the Company. Holders of shares of common stock, voting as a separate class, are entitled to elect two directors of the Company. Holders of a majority of the outstanding shares of common stock and convertible preferred stock, voting as a single class on an as-converted basis, are entitled to elect any remaining directors.
Classification
The Company has classified its convertible preferred stock as temporary equity on the balance sheet as the shares can be redeemed upon the occurrence of certain change in control events that are outside the Company’s control, including liquidation, sale or transfer of the Company. The Company has elected not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because it is uncertain whether or when an event would occur that would obligate the Company to pay the liquidation preferences to holders of shares of convertible preferred stock. Subsequent adjustments to the carrying values to the liquidation preferences will be made only when it becomes probable that such a liquidation will occur.
| 8. | Common Stock |
Each share of common stock entitles the holder to one vote on all matters submitted to a vote for the Company’s stockholders. Common stockholders are not entitled to receive dividends unless declared by the Company’s board of directors. No dividends have been declared or paid by the Company since its inception.
The Company has reserved the following shares of common stock for issuance, on an as-converted basis, as follows:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Convertible preferred stock | 20,589,283 | 10,434,184 | ||||||
| Options issued and outstanding under 2020 Plan | 8,128,096 | 2,561,889 | ||||||
| Remaining shares available for issuance under 2020 Plan | 1,149,709 | 4,591,948 | ||||||
| Total | 29,867,088 | 17,588,021 | ||||||
| 9. | Stock Based Compensation |
2020 Equity Incentive Plan
In February 2020, the Company’s board of directors adopted the 2020 Equity Incentive Plan (the “2020 Plan”) which provides for the granting of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, and restricted stock units to the Company’s employees, directors and consultants. The number of shares reserved for issuance under the 2020 Plan increased from 9,125,610 shares as of December 31, 2022 to 11,184,304 shares as of September 30, 2023.
Upon closing of the Merger on October 2, 2023, the 2020 Plan was assumed by Immunome. Refer to Note 11 – Subsequent Events for additional information.
| 12 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
Stock Option Activity
The following table summarizes option award activity under the 2020 Plan (in thousands, except share and per share amounts):
| Number of Options Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding at December 31, 2022 | 2,561,889 | $ | 0.41 | 9.62 | $ | – | ||||||||||
| Granted | 5,566,207 | 0.38 | ||||||||||||||
| Outstanding at September 30, 2023 | 8,128,096 | $ | 0.39 | 9.22 | $ | – | ||||||||||
| Exercisable at September 30, 2023 | 5,962,260 | $ | 0.41 | 9.19 | $ | – | ||||||||||
The estimated weighted-average grant date fair value of the options granted during the nine months ended September 30, 2023 and 2022 was $0.31 and $0.33 per share, respectively.
No options were exercised during the nine months ended September 30, 2023 and 2022.
The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions:
| Nine
Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Expected term (years) | 5.58 – 6.06 | 5.93 – 6.08 | ||||||
| Expected volatility | 99.0% – 99.8% | 96.6% – 98.7% | ||||||
| Risk-free interest rate | 3.39% – 3.47% | 2.38% – 4.17% | ||||||
| Expected dividends | –% | –% | ||||||
Liability for Early Exercise of Stock Options and Unvested Restricted Stock
Early Exercise of Stock Options
As of September 30, 2023 and December 31, 2022, there were 187,500 and 243,750 shares of common stock issued to the Company’s then President and Chief Executive Officer (“2021 CEO”) that remain unvested. These shares were issued upon the early exercise of stock options granted in 2021 prior to the vesting of the underlying shares and are subject to repurchase by the Company at the original issuance price upon termination of the services received from the holder of the option. During 2022, the 2021 CEO was terminated and the Company exercised its right to repurchase 498,775 shares of unvested common stock at the original issuance price. The Company modified the remaining shares to accelerate the vesting of 266,225 shares and the remaining 300,000 shares will continue to vest as long as the 2021 CEO continues to provide service as a member of the board of directors. The modification resulted in an incremental fair value of $0.2 million, of which $0.1 million was recognized as stock-based compensation immediately in the fourth quarter of 2022 and $0.1 million will be recognized over the remaining service period. As of September 30, 2023 and December 31, 2022, the Company recorded $1,900 and $2,400, respectively, within accrued liabilities and other noncurrent liabilities associated with options granted to the 2021 CEO that are subject to repurchase by the Company.
| 13 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
Unvested Restricted Stock
As of September 30, 2023 and December 31, 2022, there were 234,952 and 435,938 shares of common stock that remain unvested. These shares were issued under the terms of restricted stock agreements prior to the vesting of the underlying shares and are subject to repurchase by the Company at the original issuance price upon termination of the services received from the holder of the restricted common stock. As of September 30, 2023 and December 31, 2022, the Company recorded $16,900 and $2,600, respectively, within accrued liabilities and other noncurrent liabilities associated with restricted common stock that are subject to repurchase by the Company.
Stock-Based Compensation Expense
The total compensation cost recognized in the statements of operations associated with all stock-based compensation awards granted by the Company is as follows:
Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Research and development | $ | 16 | $ | 7 | ||||
| General and administrative | 488 | 28 | ||||||
| Total stock-based compensation expense | $ | 504 | $ | 35 | ||||
As of September 30, 2023, the Company had an aggregate of $2.1 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 3.1 years.
| 10. | Related Party Transactions |
The 2020 convertible notes were issued to a related party investor (an entity affiliated with members of the Company’s board of directors) for an aggregate principal amount of $0.8 million. The 2020 convertible notes were automatically converted into shares of Series A-1 convertible preferred stock in February 2022.
In February 2022 and May 2023, the Company issued Series A and Series A-2 convertible preferred stock to a related party investor (an entity affiliated with a member of the Company’s board of directors and an officer of the Company) for aggregate consideration of $8.3 million and $4.7 million, respectively. The Company also reimbursed this related party investor $50,000 and $25,000 in legal fees related to the Series A and Series A-2 financing, respectively.
In May 2023, the Company issued Series A-2 convertible preferred stock to a member of the board of directors for aggregate consideration of $0.7 million.
| 14 |
Morphimmune Inc.
Notes to Unaudited Condensed Financial Statements
In January and February 2022, the Company entered into a License Agreement and Sponsored Research Agreement with Purdue. The Company’s scientific founder, Dr. Phillip Low, who is also a board member and the largest stockholder of the Company, is the Presidential Scholar for Drug Discovery at Purdue University. In addition, the research and development activities under the agreements are performed at Dr. Low’s laboratory at Purdue University. As of September 30, 2023, the Company had $0.1 million payable to this related party which was included in accrued liabilities in the accompanying unaudited condensed balance sheet. As of December 31, 2022, the Company had $0.2 million payable to this related party, of which $0.1 million was included in accrued liabilities and $0.1 million included in other noncurrent liabilities in the accompanying unaudited condensed balance sheet. See further discussion in Note 4 – License and Other Agreements.
| 11. | Subsequent Events |
Management has reviewed and evaluated material subsequent events from the balance sheet date of September 30, 2023 through November 22, 2023, the day the financial statements were available for issuance.
On October 2, 2023, Immunome, Merger Sub and the Company consummated the transactions contemplated by the Merger Agreement following a special meeting of Immunome’s stockholders on September 29, 2023. Upon closing of the Merger, Merger Sub was merged with and into the Company and the Company became a wholly owned subsidiary of Immunome. At the effective time of the Merger, each outstanding share of Morphimmune capital stock was converted into the right to receive 0.3042 shares of Immunome common stock, which resulted in the issuance by Immunome of an aggregate of 8,835,710 shares of Immunome common stock to the Company’s stockholders. Immediately prior to the effective time of the Merger, all unvested shares of common stock subject to repurchase by the Company vested in full and converted into the right to receive shares of Immunome common stock as discussed above. In addition, immediately prior to the effective time of the Merger, each outstanding and unexercised option under the 2020 Plan, unvested and vested, was converted into and became an option to purchase Immunome common stock equal to 0.3042 multiplied by the number of shares of the Company’s common stock previously represented by such options, and Immunome assumed the 2020 Plan. Certain outstanding and unexercised options of the Company, based on the original terms of the award, included a change in control provision that accelerated vesting upon closing of the Merger. The closing of the PIPE Financing occurred on October 2, 2023, immediately following the consummation of the Merger. The gross proceeds to Immunome from the PIPE Financing were approximately $125.0 million.
| 15 |
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
On June 29, 2023, Immunome, Inc. (Immunome) entered into an Agreement and Plan of Merger and Reorganization (Merger Agreement) with Morphimmune Inc., (Morphimmune) and Ibiza Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Immunome (Merger Sub). Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, Merger Sub will be merged with and into Morphimmune, with Morphimmune surviving as a wholly owned subsidiary of Immunome (Merger).
On October 2, 2023, Immunome, Merger Sub and Morphimmune completed the Merger in accordance with the Merger Agreement whereby each outstanding share of Morphimmune capital stock was converted into the right to receive 0.3042 shares of Immunome common stock, which resulted in the issuance by Immunome of an aggregate of 8,835,710 shares of Immunome common stock to the stockholders of Morphimmune. In addition, there were 8,128,096 options outstanding to purchase shares of Morphimmune capital stock pursuant to the Morphimmune 2020 Equity Incentive Plan (Morphimmune Plan) that were converted into 2,472,563 options to purchase Immunome common stock and with a weighted average exercise price $1.29 per share. Immunome assumed the Morphimmune Plan and each such Morphimmune Option in accordance with the terms of the Morphimmune Plan and the terms of the stock option agreement by which such Morphimmune Option is evidenced.
Immediately following the consummation of the Merger and the PIPE Financing (as defined below), there were 42,729,097 shares of Immunome’s common stock outstanding, with prior Immunome stockholders collectively owning approximately 28.6% of the outstanding shares of Immunome common stock, prior Morphimmune stockholders collectively owning approximately 20.7% of the outstanding shares of Immunome common stock and the PIPE investors owning approximately 50.7% of the outstanding shares of Immunome common stock
As previously disclosed, on June 29, 2023, Immunome entered into subscription agreements (Subscription Agreement) with certain investors (PIPE Investors) pursuant to which upon completion of the Merger on October 2, 2023, Immunome sold 21,690,871 shares of Immunome common stock for an aggregate purchase price of $125.0 million to the PIPE Investors (PIPE Financing). The shares of Immunome common stock were sold to the PIPE Investors at a price per share equal to $5.75 and, in the case of affiliate investors, $5.91 per share, the consolidated closing bid price per share immediately preceding the entry into the Subscription Agreement.
The unaudited pro forma condensed combined financial information is provided for illustrative purposes only, does not necessarily reflect what the actual consolidated results of operations and financial position would have been had the acquisition occurred on the dates assumed and may not be useful in predicting the future consolidated results of operations or financial position.
The unaudited pro forma condensed combined financial information is based on the assumptions and adjustments that are described in the accompanying notes. Accordingly, the pro forma adjustments are preliminary, subject to further revision as additional information becomes available and additional analyses are performed and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. Differences between these preliminary accounting and estimates and the final accounting and estimates may occur as a result of changes in initial assumptions and related accounting, and the amount of cash used in Immunome’s operations, and other changes in Immunome’s assets and liabilities, which are expected to be completed after the closing of the Merger, and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial information and the combined company’s future results of operations and financial position.
The unaudited pro forma condensed combined financial information does not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the integration of the two companies and does not purport to represent the actual results of operations that Immunome and Morphimmune would have achieved had the companies been combined during the periods presented and is not intended to project the future results of operations that the combined company may achieve after the Merger. The unaudited pro forma combined financial information does not reflect any potential cost savings that may be realized as a result of the Merger and also does not reflect any restructuring or integration-related costs to achieve those potential cost savings.
Accounting rules require evaluation of certain assumptions, estimates, or determination of financial statement classifications. During preparation of the unaudited pro forma condensed combined financial information, management is in the process of conducting a review of Morphimmune’s accounting policies and has not noted material differences in accounting policies that would require an adjustment or reclassification of Morphimmunome’s results of operations or reclassification of assets or liabilities to conform to Immunome’s accounting policies and classifications.
The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X under the Securities Act of 1933, as amended (Securities Act) and presents the combined historical consolidated financial position and consolidated results of operations of Immunome and the historical combined financial position and results of operations of Morphimmune, adjusted to give effect to (i) the acquisition of Morphimmune as further described in Note 1 — Description of the Transaction ; and (ii) the pro forma effects of certain assumptions and adjustments described in “Notes to the Unaudited Pro Forma Condensed Combined Financial Information” below
The following unaudited pro forma combined financial information is presented to illustrate the estimated effects of the Merger, based on the historical financial statements and accounting records of Immunome and Morphimmune after giving effect to the Merger and the related pro forma adjustments as described in the notes included below.
The unaudited pro forma combined statements of operations for the nine months ended September 30, 2023 and for the year ended December 31, 2022, combine the historical statements of operations of Immunome and Morphimmune, giving effect to the Merger as if it had occurred on January 1, 2022. The unaudited pro forma condensed combined balance sheet data assumes that the Merger took place on September 30, 2023, and combines the historical balance sheets of Immunome and Morphimmune as of such date.
The unaudited pro forma condensed combined financial information, including the notes thereto, should be read in conjunction with the separate historical financial statements of Immunome for the year ended December 31, 2022 and for the nine months ended September 30, 2023 which are filed in Immunome’s Form 10-K and 10-Q, respectively, and Morphimmune for the year ended December 31, 2022 and the nine months ended September 30, 2023 which are filed as Exhibit 99.1 and 99.2, respectively, to the Current Report on this Form 8-K/A.
Unaudited Pro Forma Condensed Combined Balance
Sheet
As of September 30, 2023
(in thousands)
| Immunone, Inc. | Morphimmune, Inc. | Transaction | Pro Forma | |||||||||||||||||
| (in thousands) | (Historical) | (Historical) | Adjustments | Notes | Combined | |||||||||||||||
| ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 90,641 | $ | 10,068 | $ | 53,675 | A | $ | 154,384 | |||||||||||
| Prepaid expenses and other current assets | 773 | 191 | — | 964 | ||||||||||||||||
| Total current assets | 91,414 | 10,259 | 53,675 | 155,348 | ||||||||||||||||
| Property and equipment, net | 1,172 | 646 | — | 1,818 | ||||||||||||||||
| Operating lease right of use asset, net | 345 | — | — | 345 | ||||||||||||||||
| Restricted cash | 100 | — | — | 100 | ||||||||||||||||
| Deferred offering costs | 130 | — | (130 | ) | B | — | ||||||||||||||
| Total assets | $ | 93,161 | $ | 10,905 | $ | 53,545 | $ | 157,611 | ||||||||||||
| LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | $ | 2,786 | $ | 1,147 | $ | (336 | ) | C | $ | 3,597 | ||||||||||
| Accrued expenses and other current liabilities | 3,369 | 2,614 | (200 | ) | C | 5,783 | ||||||||||||||
| Deferred revenue, current | 16,956 | — | — | 16,956 | ||||||||||||||||
| Total current liabilities | 23,111 | 3,761 | (536 | ) | 26,336 | |||||||||||||||
| Deferred revenue, non-current | 2,852 | — | — | 2,852 | ||||||||||||||||
| Deposit liability | 61,000 | — | (61,000 | ) | D | — | ||||||||||||||
| Other long-term liabilities | 122 | 10 | — | 132 | ||||||||||||||||
| Total liabilities | 87,085 | 3,771 | (61,536 | ) | 29,320 | |||||||||||||||
| Convertible preferred stock | — | 32,302 | (32,302 | ) | E | — | ||||||||||||||
| Stockholders’ equity (deficit): | ||||||||||||||||||||
| Common stock | 1 | 1 | 2 | F | 4 | |||||||||||||||
| Additional paid-in capital | 136,248 | 750 | 202,281 | F | 339,279 | |||||||||||||||
| Accumulated other comprehensive income | — | (1 | ) | 1 | F | — | ||||||||||||||
| Accumulated deficit | (130,173 | ) | (25,918 | ) | (54,901 | ) | F | (210,992 | ) | |||||||||||
| Total stockholders’ equity (deficit) | 6,076 | (25,168 | ) | 147,383 | 128,291 | |||||||||||||||
| Total liabilities, preferred stock and stockholders’ equity (deficit) | $ | 93,161 | $ | 10,905 | $ | 53,545 | $ | 157,611 | ||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements.
3
Unaudited Pro Forma Condensed Combined Statements
of Operations
and Comprehensive Loss
For the Nine Ended September 30, 2023
(in thousands, except share and per share amounts)
| Immunome, Inc. | Morphimmune, Inc. | Transaction | Pro Forma | |||||||||||||||||
| (Historical) | (Historical) | Adjustments | Notes | Combined | ||||||||||||||||
| Collaboration revenue | $ | 10,192 | — | — | $ | 10,192 | ||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development | 13,452 | 8,104 | — | 21,556 | ||||||||||||||||
| General and administrative | 11,617 | 6,863 | — | 18,480 | ||||||||||||||||
| Total operating expenses | 25,069 | 14,967 | — | 40,036 | ||||||||||||||||
| Loss from operations | (14,877 | ) | (14,967 | ) | — | (29,844 | ) | |||||||||||||
| Non-operating income: | ||||||||||||||||||||
| Interest income | 705 | 105 | — | 810 | ||||||||||||||||
| Other income, net | — | 139 | 139 | |||||||||||||||||
| Net loss | $ | (14,172 | ) | $ | (14,723 | ) | $ | — | $ | (28,895 | ) | |||||||||
| Other comprehensive loss: | ||||||||||||||||||||
| Unrealized loss on available-for- sale debt securities | — | (1 | ) | — | (1 | ) | ||||||||||||||
| Total comprehensive loss | (14,172 | ) | (14,724 | ) | — | (28,896 | ) | |||||||||||||
| Per share information: | ||||||||||||||||||||
| Net loss per share – basic and diluted | $ | (1.16 | ) | $ | (0.68 | ) | ||||||||||||||
| Weighted average common shares outstanding, basic and diluted | 12,194,277 | 30,526,581 | H | 42,720,858 | ||||||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements.
4
Unaudited Pro Forma Condensed Combined Statements
of Operations
For the Year Ended December 31, 2022
(in thousands, except share and per share amounts)
| Immunone, Inc. | MorphImmune, Inc. | Transaction | Pro Forma | |||||||||||||||||
| (Historical) | (Historical) | Adjustments | Notes | Combined | ||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development | $ | 23,272 | $ | 4,172 | $ | — | $ | 27,444 | ||||||||||||
| General and administrative | 13,629 | 3,256 | 792 | I | 17,677 | |||||||||||||||
| Total operating expenses | 36,901 | 7,428 | 792 | 45,121 | ||||||||||||||||
| Loss from operations | (36,901 | ) | (7,428 | ) | (792 | ) | (45,121 | ) | ||||||||||||
| Non-operating income (expense): | — | |||||||||||||||||||
| Change in fair value of convertible notes | — | (45 | ) | 45 | G | — | ||||||||||||||
| Interest expense | 5 | — | — | 5 | ||||||||||||||||
| Other expense, net | — | (5 | ) | — | (5 | ) | ||||||||||||||
| Net loss | $ | (36,896 | ) | $ | (7,478 | ) | (747 | ) | $ | (45,121 | ) | |||||||||
| Deemed dividend arising from warrant modification | (622 | ) | — | — | (622 | ) | ||||||||||||||
| Net loss attributable to common stockholders | (37,518 | ) | (45,743 | ) | ||||||||||||||||
| Per share information: Net loss per share, basic and diluted | $ | (3.09 | ) | $ | (1.07 | ) | ||||||||||||||
| Weighted average common shares outstanding, basic and diluted | 12,126,573 | 30,526,581 | H | 42,653,154 | ||||||||||||||||
See accompanying notes to the unaudited pro forma condensed combined financial statements.
5
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED
FINANCIAL INFORMATION
1. Description of Transactions and Basis of Presentation
Description of the Merger
On June 29, 2023, Immunome, Inc. (Immunome) entered into an Agreement and Plan of Merger and Reorganization (Merger Agreement) with Morphimmune Inc., (Morphimmune) and Ibiza Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Immunome (Merger Sub). Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, Merger Sub will be merged with and into Morphimmune, with Morphimmune surviving as a wholly owned subsidiary of Immunome (Merger).
On October 2, 2023, Immunome, Merger Sub and Morphimmune completed the Merger in accordance with the Merger Agreement whereby each outstanding share of Morphimmune capital stock was converted into the right to receive 0.3042 shares of Immunome common stock, which resulted in the issuance by Immunome of an aggregate of 8,835,710 shares of Immunome common stock to the stockholders of Morphimmune. In addition, there were 8,128,096 options outstanding to purchase shares of Morphimmune capital stock pursuant to the Morphimmune 2020 Equity Incentive Plan (Morphimmune Plan) that were converted into 2,472,563 options to purchase Immunome common stock and with a weighted average exercise price $1.29 per share. Immunome assumed the Morphimmune Plan and each such Morphimmune Option in accordance with the terms of the Morphimmune Plan and the terms of the stock option agreement by which such Morphimmune Option is evidenced.
Immediately following the consummation of the Merger and the PIPE Financing (as defined below), there were 42,729,097 shares of Immunome’s common stock outstanding, with prior Immunome stockholders collectively owning approximately 28.6% of the outstanding shares of Immunome common stock, prior Morphimmune stockholders collectively owning approximately 20.7% of the outstanding shares of Immunome common stock and the PIPE investors owning approximately 50.7% of the outstanding shares of Immunome common stock
As previously disclosed, on June 29, 2023, Immunome entered into subscription agreements (Subscription Agreement) with certain investors (PIPE Investors) pursuant to which upon completion of the Merger on October 2, 2023, Immunome sold 21,690,871 shares of Immunome common stock for an aggregate purchase price of $125.0 million to the PIPE Investors (PIPE Financing). The shares of Immunome common stock were sold to the PIPE Investors at a price per share equal to $5.75 and, in the case of affiliate investors, $5.91 per share, the consolidated closing bid price per share immediately preceding the entry into the Subscription Agreement.
Basis of Presentation
The unaudited pro forma condensed combined financial information was prepared with the Merger being accounted for as an asset acquisition by Immunome of Morphimmune. Upon completion of the Merger, Immunome obtained control of Morphimmune’s assets consisting primarily of cash and in-process research and development (IPR&D) associated with Morphimmune’s programs and development candidates. In accordance with U.S. GAAP, Immunome must first assess whether an integrated set of assets and activities should be accounted for as an acquisition of a business or an asset acquisition. An initial screen test is completed to determine if substantially all of the fair value of the gross assets acquired of Morphimmune is concentrated in a single asset or group of similar assets. If that screen is met, the set is not considered a business and is accounted for as an asset acquisition. Immunome will account for the acquisition of Morphimmune as an asset acquisition as substantially all of the fair value of the gross assets being acquired of Morphimmune is concentrated within Morphimmune’s programs and development candidates which are considered a group of similar assets. These programs are deemed to be similar IPR&D assets being acquired based on the similarity of: (i) their current preclinical stage of development, (ii) solid tumor therapeutic indications, (iii) risks for development, (iv) regulatory pathway, and (v) economics of commercialization.
6
Under the asset acquisition method of accounting, the assets acquired and liabilities assumed are recognized and measured at fair value and no goodwill is recorded or recognized. Acquired IPR&D that has no future alternative use is expensed at the time of acquisition.
The pro forma adjustments reflecting the consummation of the Merger and PIPE Financing are based on certain currently available information and certain assumptions and methodologies that Immunome believes are reasonable under the circumstances. The pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is possible that the actual adjustments will differ from the pro forma adjustments, and it is possible the difference may be material. Immunome believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Merger and PIPE Financing based on information available to management at this time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings, or cost savings that may be associated with the Merger.
The unaudited pro forma condensed combined financial information does not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the integration of the two companies and does not purport to represent the actual results of operations that Immunome and Morphimmune would have achieved had the companies been combined during the periods presented and is not intended to project the future results of operations that the combined company may achieve after the Merger.
2. Estimated Consideration and Preliminary Purchase Price Allocation
The fair value of the consideration totaling approximately $88.0 million, inclusive of the estimated Immunome transaction costs incurred after September 30, 2023 in connection with the asset acquisition, is summarized as follows (in thousands):
| (in thousands) | Amount | |||
| Immunome common stock issued to Morphimmune shareholders | $ | 72,453 | ||
| Share-based equity awards allocated to consideration paid | 14,708 | |||
| Transaction costs | 792 | |||
| Total consideration transferred | $ | 87,953 | ||
Total Immunome transaction costs are estimated to be $3.5 million of which $2.7 million was incurred and expensed through September 30, 2023.
For pro forma purposes, the fair value of the consideration transferred was calculated based on the closing stock price of Immunome’s common stock on October 2, 2023, which was $8.20 per share and based upon the vested and unvested balances of Morphimmune share-based awards as of the same date.
Allocation of the consideration transferred to the net assets acquired and based upon the net assets of Morphimmune as of September 30, 2023, was as follows (in thousands):
| (in thousands) | Amount | |||
| Asset acquired: | ||||
| Cash and cash equivalents | $ | 10,068 | ||
| Prepaid expenses and other current assets | 191 | |||
| Property and equipment | 646 | |||
| Total assets acquired | 10,905 | |||
| Liabilities assumed | ||||
| Accounts payable | 1,147 | |||
| Accrued expenses and other liabilities | 2,624 | |||
| Total liabilities assumed | 3,771 | |||
| Net assets acquired | $ | 7,134 | ||
| In process research and development | $ | 80,819 | ||
| Total consideration | $ | 87,953 | ||
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The above allocation of the purchase price is based upon the net assets of Morphimmune as of September 30, 2023 and has not been adjusted for the net assets acquired on October 2, 2023. It is also based upon certain preliminary valuations and other analyses that have not been completed as of the date of this filing. Any changes in the estimated fair values of the net assets recorded for this asset acquisition upon the finalization of more detailed analyses of the facts and circumstances that existed at the date of the Merger will change the allocation of the purchase price. As such, the purchase price allocations for the acquisition are preliminary estimates.
3. Transaction Accounting Adjustments
| A. | Reflects the remaining net proceeds received by Immunome in October 2023 from the concurrent PIPE Financing and the payment of transaction costs associated with the asset acquisition of Morphimmune that were not paid by Immunome as of September 30, 2023: |
| (amounts in thousands) | Immunone, Inc. | |||
| Proceeds from PIPE, net of fees | $ | 54,998 | ||
| Payment of transaction costs | (1,323 | ) | ||
| Pro forma adjustment | $ | 53,675 | ||
| B. | Reclassification of deferred offering costs in connection with the completion of the PIPE Financing. |
| C. | Reflects the elimination of Immunome transaction costs and PIPE Financing costs of $531 and $5, respectively, that were included in Immunome’s accounts payable and accrued expenses as of September 30, 2023. |
| D. | Reclassification of the proceeds from the PIPE Financing that were received by Immunome prior to the closing of the merger and recorded as a deposit liability on Immunome’s September 30, 2023 balance sheet. |
| E. | Elimination of Morphimmune’s convertible preferred stock in exchange for Immunome’s common stock upon consummation of the Merger. |
| F. | Reflects the recording of the (i) elimination of Morphimmune historical equity balances, (ii) issuance of Immunome common stock to Morphimmune stockholders, (iii) issuance of share- based payment awards to Morphimmune option holders, (iv) the immediate expensing of acquired Morphimmune IPR&D as it has no future alternative use, (v) issuance of Immunome common stock in connection with the concurrent PIPE Financing: |
| Additional | ||||||||||||||||||||||||
| Common Stock | paid-in | Accumulated other | Accumulated | |||||||||||||||||||||
| (amounts in thousands) | Shares | Amount | Capital | comprehensive loss | Deficit | Total | ||||||||||||||||||
| Elimination of Morphimmune historical equity balances | — | $ | (1 | ) | $ | (750 | ) | $ | 1 | $ | 25,918 | $ | 25,168 | |||||||||||
| Issuance of common stock to Morphimmune shareholders | 8,835,710 | 1 | 72,452 | — | — | 72,453 | ||||||||||||||||||
| Issuance of share-based payments to Morphimmune | — | — | 14,708 | — | — | 14,708 | ||||||||||||||||||
| Expensing of acquired IPR&D with no future alternative use | — | — | — | — | (80,819 | ) | (80,819 | ) | ||||||||||||||||
| Shares issued in connection with PIPE transaction | 21,690,871 | 2 | 115,871 | — | — | 115,873 | ||||||||||||||||||
| Pro forma adjustment | 30,526,581 | $ | 2 | $ | 202,281 | $ | 1 | $ | (54,901 | ) | $ | 147,383 | ||||||||||||
| G. | Reflects the elimination of the change in fair value of the Morphimmune convertible notes that subsequently converted into preferred stock. |
| H. | The pro forma combined basic and diluted loss per share have been adjusted to reflect the pro forma net loss for the nine months ended September 30, 2023 and the pro forma net loss attributable to common stockholders for the year ended December 31, 2022. In addition, the number of shares used in calculating the pro forma combined basic and diluted loss per share has been adjusted assuming that the estimated total number of shares of common stock of the combined company that will be issued in connection with the Merger and PIPE Financing have been outstanding for the entirety of all periods presented. The following table sets forth the calculation of the pro forma adjustment to the weighted-average number of common shares outstanding — basic and diluted. |
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| Nine Months Ended | Year Ended | |||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Issuance of common stock to Morphimmune shareholders | 8,835,710 | 8,835,710 | ||||||
| Shares issued in connection with PIPE transaction | 21,690,871 | 21,690,871 | ||||||
| Pro forma adjustment | 30,526,581 | 30,526,581 | ||||||
| I. | Reflects the recognition of Immunome’s estimated transaction costs to be incurred after September 30, 2023. The transaction costs are expensed as incurred as substantially all of the value acquired is within the Morphimmune IPR&D asset that has no alternative future use. These transaction costs will not affect the Combined Company’s statement of operations beyond 12 months after the Effective Time. |
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