Prime Medicine (PRME) 10-Q2022 Q3 Quarterly report

This Quarterly Report on Form 10-Q includes forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. These statements involve substantial risks, assumptions and uncertainties. All statements, other than statements of historical fact, contained herein, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “contemplate,” “continue” “could,” “estimate,” “estimate,” “expect,” “goal,” “hope,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would,” or the negative of these words or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include statements about:

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and these statements may be affected by inaccurate assumptions or by known or unknown risks and uncertainties. You should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q and in subsequent SEC filings, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Unless otherwise disclosed, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments we may make or enter into.

You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits to our other filings with the SEC completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof, and we do not assume any obligation to update any forward-looking

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business and the markets for our product candidates. Such information is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this data from our own internal estimates and research as well as from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. While we are not aware of any misstatements regarding any third-party information presented in this Quarterly Report on Form 10-Q, their estimates, in particular as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties and are subject to change based on various factors, including those discussed under the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

We are subject to numerous risks and uncertainties, including those further described below in the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q, that represent challenges that we face in connection with the successful implementation of our strategy and the growth of our business. In particular, the following considerations, among others, may offset our competitive strengths or have a negative effect on our business strategy, which could materially adversely affect our business, financial conditions, results of operations, future growth prospects, or cause a decline in the price of our common stock. This summary should be read in conjunction with the “Risk Factors” section and should not be relied upon as an exhaustive summary of the material risks facing our business.

Prime Medicine, Inc., together with its consolidated subsidiary (the “Company”) is a biotechnology company committed to deliver genetic therapies to address diseases by deploying gene editing technology, Prime Editing. The company is deploying Prime Editing technology, a versatile, precise, efficient and broad gene editing technology, which is designed to make only the right edit at the right position within a gene. With the theoretical potential to repair approximately 90 percent of known disease-causing genetic mutations across many organs and cell types, medicines based on Prime Editing, if approved, could offer a one-time curative genetic therapeutic option to a broad set of patients. The Company was incorporated in the State of Delaware in September 2019.

On October 12, 2022, in connection with the Company’s initial public offering (“IPO”), the Company effected a 1-for-3.10880 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios of each series of the Company’s preferred stock (see Note 6). Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this stock split and adjustment of the preferred stock conversion ratios.

Since its inception, the Company has devoted substantially all of our resources to building our Prime editing platform and advancing development of our portfolio of programs, establishing and protecting our intellectual property, conducting research and development activities, organizing and staffing our company, business planning, raising capital and providing general and administrative support for these operations. The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry including, but not limited to, technical risks associated with the successful research, development and manufacturing of product candidates, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Current and future programs will require significant research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

In October 2022, the Company completed its IPO of its common stock. In connection with its IPO, the Company issued and sold 11,721,456 shares of its common stock, including 1,427,338 shares pursuant to the exercise of the underwriters’ option to purchase additional shares, at a price to the public of $17.00 per share. As a result of the IPO, the Company received $180.3 million in net proceeds, after deducting underwriting discounts, commissions and offering costs of $19.0 million. In connection with the IPO, all outstanding shares of redeemable convertible preferred stock converted into 51,923,758 shares of the Company’s common stock.

The Company is subject to risks and uncertainties common to early stage companies in the biotechnology industry, including, but not limited to, completing preclinical studies and clinical trials, obtaining regulatory approval for product candidates, market acceptance of products, development by competitors of new technological innovations, dependence on key personnel, the ability to attract and retain qualified employees, reliance on third-party organizations, protection of proprietary technology, compliance with government regulations, the impact of the COVID-19 pandemic, and the ability to raise additional capital to fund operations. The Company’s product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure, and extensive compliance-reporting capabilities. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

Since its inception, the Company has incurred substantial losses and as of September 30, 2022, the Company had an accumulated deficit of $253.9 million. The Company expects to generate operating losses and negative

The accompanying condensed consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The accompanying condensed consolidated financial statements of Prime Medicine, Inc. are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2022 and the results of its operations for the three and nine months ended September 30, 2022 and 2021, and its cash flows for the nine months ended September 30, 2022 and 2021. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2022 and 2021 are also unaudited. The results for the nine months ended September 30, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year or period. The condensed consolidated balance sheet data as of December 31, 2021 was derived from our audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles, or U.S. GAAP. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2021, and notes thereto, which are included in the Company’s final prospectus for its IPO filed pursuant to Rule 424(b)(4) under the Securities Act with the Securities and Exchange Commission (the “SEC”) on October 21, 2022.

The Company is subject to a number of risks associated with the COVID-19 global pandemic, including potential delays associated with the Company’s ongoing preclinical studies and anticipated clinical trials. COVID-19 may have an adverse impact on the Company’s operations, supply chains and distribution systems or those of its third-party vendors and collaborators, and increase expenses, including as a result of impacts associated with preventive and precautionary measures that are being taken, such as restrictions on travel and border crossings, quarantine policies and social distancing. The Company and its third-party vendors and collaborators may experience disruptions in supply of items that are essential for its research and development activities. The Company cannot predict the scope and severity of any economic recovery after the COVID-19 pandemic abates, including following any additional “waves” or other intensifying of the pandemic will have on its financial condition, operations, and business plans.

The Company's significant accounting policies are disclosed in Note 2, "Summary of significant accounting policies," in the audited consolidated financial statements for the year ended December 31, 2021, and notes thereto, included in the Company’s final prospectus for its IPO filed pursuant to Rule 424(b)(4) under the Securities Act with

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected within these condensed consolidated financial statements include, but are not limited to, revenue recognition, the valuation of the Company’s common stock and stock-based awards, the valuation of preferred stock tranche right liability, the valuation of the anti-dilution obligation and the valuation of the related party forward contract liability. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts and experience. Actual results may differ materially from those estimates or assumptions.

The Company considers all highly liquid investments with an original maturity of three months or less at the time of initial purchase to be cash equivalents. As of September 30, 2022 and December 31, 2021, the amount of cash equivalents included in cash and cash equivalents totaled $28.8 million and $49.5 million, respectively.

Restricted cash consisted of letters of credit totaling $13.5 million and $13.1 million as of September 30, 2022 and December 31, 2021, respectively, that are required to be maintained in connection with the Company’s lease arrangements. Both letters of credit are in the name of the Company’s landlords and are required to fulfill lease requirements in the event the Company should default on its lease obligations. As of both September 30, 2022 and December 31, 2021, the Company classified its restricted cash as non-current on the consolidated balance sheets based on the release dates of the restrictions.

Other accounting standards that have been issued by the Financial Accounting Standards Board or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.    

The following tables present the Company’s fair value hierarchy for its assets and liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value (in thousands):

The Company classifies its U.S. Treasury as short-term based on each instrument’s underlying contractual maturity date. The fair value of the Company’s U.S. Treasury securities and money market funds are classified as Level 2 because they are valued using observable inputs to quoted market prices, benchmark yields, reported trades,

The underlying securities held in the money market funds held by the Company are all government backed securities.

Short-term investments consisted of the following (in thousands):

The preferred stock tranche right liability in the table above is composed of the fair value of rights to purchase Series A Preferred Stock (see Note 6). The fair value of the preferred stock tranche right liability was determined based on significant inputs not observable in the market, which represented a Level 3 measurement within the fair value hierarchy. The fair value of the preferred stock tranche right liability was determined using a Black-Scholes option pricing model, which considered as inputs the estimated fair value of the preferred stocks as of each valuation date, the risk-free interest rate, volatility and estimated time to each tranche closing.

The most significant assumption in the Black-Scholes option pricing model impacting the fair value of the preferred stock tranche right liability is the fair value of the Company’s convertible preferred stock as of each measurement date. The Company determines the fair value per share of the underlying convertible preferred stock by taking into consideration the most recent sales of its convertible preferred stock, results obtained from third-party valuations and additional factors the Company deems relevant. In November 2020, the second tranche of the Series A Preferred Stock closed. The fair value of each Series A Preferred Stock was $0.73 per share upon the closing of the second tranche. As of December 31, 2020, the fair value of Series A Preferred Stock was $0.76 per share. In April 2021, the third and fourth tranches of the Series A Preferred Stock closed. Upon satisfaction of certain conditions and the closing date of the third and fourth tranches, the associated Series A preferred stock tranche right

The preferred stock tranche right liability was initially recorded at fair value upon the date of issuance of the preferred stock tranche right and is subsequently remeasured to fair value at each reporting date, and immediately prior to the closing dates of Series A preferred stock tranches. Changes in the fair value of the preferred stock tranche right liability are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. Changes in the fair value of the preferred stock tranche right liability were recognized until the preferred stock tranche right liability was settled in full upon the satisfaction of certain conditions in April 2021.

The following table provides a roll-forward of the aggregate fair value of the Company’s preferred stock tranche right liability, for which fair value is determined using Level 3 inputs (in thousands):

The anti-dilution obligation was initially recorded at fair value upon entering into the license agreement with Broad Institute and was subsequently remeasured to fair value at each reporting date. Changes in fair value of the anti-dilution obligation were recognized as a component of other income (expense), net in the consolidated statements of operations and comprehensive loss. Changes in the fair value of the anti-dilution obligation were recognized until achievement of $100.0 million in cumulative equity financing is raised by the Company, which was achieved in connection with the fourth Series A Preferred Stock closing, resulting in the issuance of 2,498,850 shares of common stock to Broad Institute with a fair value of $7.5 million.

The following table provides a roll-forward of the aggregate fair value of the Company’s anti-dilution obligation, for which fair value was determined using Level 3 inputs (in thousands):

A reconciliation of the related party forward contract liability measured and recorded at fair value on a recurring basis is as follows (in thousands):

Property and equipment, net consisted of the following (in thousands):

Depreciation and amortization expense of property and equipment for the three and nine months ended September 30, 2022 was $0.6 million and $1.4 million, respectively. Depreciation and amortization expense of

Accrued expenses and other current liabilities consisted of the following (in thousands):

The Company has issued Series A Preferred Stock and Series B convertible preferred stock (the “Series B Preferred Stock” and, together with the Series A Preferred Stock, the “Preferred Stock”).

The Series A preferred stock and Series B preferred stock, described in more detail below, converted into 37,236,772 shares and 14,686,986 shares of common stock, respectively, in October 2022 as part of the Company’s IPO.

In September 2019, the Company completed its first closing of its Series A Preferred Stock and issued and sold 10,000,001 shares of Series A Preferred Stock at a price of $1.00 per share for gross proceeds of $10.0 million (the “2019 Preferred Stock Financing”). The Company incurred issuance costs of $20,000 in connection with this transaction.

The purchase agreement for the Series A Preferred Stock obligated the investors of the 2019 Preferred Stock Financing to purchase an additional 104,999,997 Series A Preferred Stock at a price of $1.00 per share in the subsequent closings upon certain conditions (“Series A Subsequent Closings”). The investors’ obligation to purchase shares in the subsequent closing terminated upon occurrence of a Deemed Liquidation Event (as defined below), the Company’s initial public offering, or bankruptcy by the Company. If an investor did not participate in the subsequent closing when obligated to do so, then any existing Series A Preferred Stock held by that investor would be converted into common shares of the Company on a ten-for-one basis.

The Company concluded that these obligations of investors to participate in the subsequent closing of Series A Preferred Stock met the definition of a freestanding financial instrument that was required to be recorded as a liability at fair value as (i) the instruments are legally detachable and separately exercisable from the Series A Preferred Stock and (ii) the rights will require the Company to transfer assets upon future closings of the Series A Preferred Stock. Upon the first closing of the Series A Preferred Stock in September 2019, the Company recorded a preferred stock tranche right liability of $6.3 million and a corresponding reduction to the carrying value of the Series A Preferred Stock (see Note 3).

In November 2020, the Company completed the second closing of its Series A Preferred Stock, in which the Company issued and sold 34,999,999 shares of Series A Preferred Stock, at a price of $1.00 per share, for gross proceeds of $35.0 million and incurred $46,000 of issuance costs. As the fair value of the Series A Preferred Stock was $0.73 at the time of the second closing, the Company recorded a capital contribution of $9.5 million for the difference between the fair value per share and the $1.00 per share paid by the holders of the Series A Preferred Stock participating in the second closing, which included members of the Company’s board of directors.

In April 2021, the Company completed the third and fourth closings of its Series A Preferred Stock, in which the Company issued and sold an aggregate of 70,761,842 shares of Series A Preferred Stock, at a price of $1.00 per

In April 2021, the Company issued and sold 45,658,957 shares of Series B Preferred Stock, at a price of $4.3803 per share, for gross proceeds of $200.0 million and incurred $0.4 million of issuance costs.

Upon issuance of each series of Preferred Stock, the Company assessed the embedded conversion and liquidation features of the securities and determined that such features did not require the Company to separately account for these features. The Company also concluded that no beneficial conversion feature existed on the issuance date of each series of Preferred Stock.

On October 12, 2022, in connection with the Company’s IPO, the Company effected a 1-for-3.10880 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios of each series of the Company’s preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this stock split and adjustment of the preferred stock conversion ratios.

As of each balance sheet date, the Preferred Stock consisted of the following (in thousands, except share amounts):

The holders of the Preferred Stock have the following rights and preferences:

The holders of the Preferred Stock are entitled to vote, together with the holders of common stock, as a single class, on all matters submitted to the shareholders for a vote and are entitled to the number of votes equal to the number of common stock into which the Preferred Stock could convert on the record date for determination of shareholders entitled to vote. A majority vote of the holders of Preferred Stock is required to, among others, liquidate or dissolve the Company, amend the certificate of incorporation or bylaws, reclassify common stock or establish another class of capital stock, create shares that would rank senior to or authorize additional shares of Preferred Stock, declare a dividend or make a distribution, or change the authorized number of directors constituting the board of directors.

In addition, the holders of shares of Series A Preferred Stock, voting exclusively and as a separate class, are entitled to elect three directors of the Company. The holders of shares of common stock and any other class or series of voting stock (including the Series B Preferred Stock), exclusively and voting together as a single class, are entitled to elect the balance of the total number of directors of the Company.

Each Preferred Stock is convertible into voting common stock, at any time, at the option of the holder, and without the payment of additional consideration, at the applicable conversion ratio then in effect. In addition, each share of Preferred Stock will be automatically converted into shares of common stock at the then-effective applicable conversion ratio upon either (i) the closing of a firm-commitment underwritten public offering of its common stock resulting in at least $50.0 million of gross proceeds, net of underwriting discount and commissions, to the Company, or (ii) the date specified by vote or written consent of the holders of a majority in voting power of the outstanding shares of Preferred Stock, voting as a single class.

The conversion ratio of each class of Preferred Stock is determined by dividing the Original Issue Price of each class of Preferred Stock by the Conversion Price of each class. As of September 30, 2022 and December 31, 2021, the Conversion Price was $3.10880 per share for Series A Preferred Stock and $13.6175 per share for Series B Preferred Stock, each subject to appropriate adjustment in the event of any share dividend, share split, combination or other similar recapitalization with respect to the Preferred Stock.

Upon the closing of the IPO in October 2022, 161,420,799 shares of outstanding convertible preferred stock were automatically converted into 51,923,758 shares of common stock, after the effect of the one-for-3.10880 reverse stock split, with the related carrying value of $395.8 million reclassified to common stock and additional paid-in capital.

There shall be no adjustment in the conversion price of the Series A Preferred Stock as the result of the issuance or deemed issuance of additional shares of Company’s common stock if the Company receives written notice from the holders of at least 65 percent of the then outstanding shares of Series A Preferred Stock agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of additional shares of the Company’s common stock. There shall be no adjustment in the conversion price of the Series B Preferred Stock as the result of the issuance or deemed issuance of additional shares of the Company’s common stock if the Company receives written notice from the holders of at least a majority of the then outstanding shares of Series B Preferred Stock agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such additional shares of the Company’s common stock.

In the event that any holder of shares of Series A Preferred Stock is required to participate in a Series A Subsequent Closing pursuant to the purchase agreement does not purchase the aggregate number of subsequent closing shares, then each share of Series A Preferred Stock held by such holder shall automatically be converted into shares of common stock at a ratio of one share of common stock for every ten shares of Series A Preferred Stock held immediately prior to the consummation of such Series A Subsequent Closing.

The holders of the Series A Preferred Stock are entitled to receive cumulative dividends at a rate of $0.25 per share per annum of the Original Issue Price when, as and if declared by the board of directors (the “Series A Preferred Dividend”). The holders of the series B Preferred Stock are entitled to receive cumulative dividends at a rate of $1.09 per share per annum of the Original Issue Price when, as and if declared by the board of directors (the “Series B Preferred Dividend”, and together with Series A Preferred Dividend, the “Preferred Dividend”).

The Company may not declare, pay or set aside any dividends on common shares of the Company unless the holders of Preferred Stock then outstanding first receive, or simultaneously receive, the Preferred Dividend on each outstanding Preferred Stock and a dividend on each outstanding Preferred Stock in an amount at least equal to the greater of (i) the amount of the aggregate Preferred Dividend then accrued on such share of Preferred Stock and not previously paid and (ii) (a) in the case of a dividend on common stock or any class or series that is convertible into common stock, that dividend per share of Preferred Stock as would equal to the product of (1) the dividend payable

Unless at least the holders of a majority in voting power of the outstanding shares of Preferred Stock, elect otherwise, a Deemed Liquidation Event shall include a merger, consolidation, or share exchange (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) or a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the Company.

As of December 31, 2020, at the written election of at least 65 percent of the holders of the outstanding shares of Series A Preferred Stock, voting together as a single class and on an as-converted to common stock basis, the shares of Series A Preferred Stock outstanding were redeemable, at any time on or after the fifth anniversary of issuance, in three equal annual installments commencing 60 days after receipt of the required vote. Shares of Series A Preferred Stock were redeemable in an amount equal to the Original Issue Price per share plus any accruing dividends accrued but unpaid thereon, whether or not declared.

In April 2021, in connection with the Series B Preferred Stock closing, the Company adopted an amended and restated certificate of incorporation, which removed the redemptions rights of the holders of Series A Preferred Stock. As a result of this amendment, Series A Preferred Stock was no longer redeemable at the option of the holders. The Company determined that the changes to the rights underlying the Series A Preferred Stock was not substantive and did not materially modify the rights and preferences of the holders of Series A Preferred Stock.

Prior to the amendment, the Company recognized changes in the redemption values of its Series A Preferred Stock over the period from the date of issuance to the earliest redemption date and adjusted the carrying value of the instrument to equal the redemption value at the redemption date. During the period from September 19, 2019 (inception) to December 31, 2019, the years ended December 31, 2020 and 2021, the Company recorded adjustments to increase the carrying values of the Series A Preferred Stock by an aggregate of $0.3 million, $1.6 million, and $1.5 million, respectively, which resulted in an increase in redeemable convertible preferred stock by those amounts, offset by charges against additional paid-in-capital, if any, and then in the absence of additional paid-in capital the accretion is charged to the accumulated deficit.

The Company’s articles of the corporation, as amended and restated, does not provide redemption rights to the holders of Series B Preferred Stock.

The voting, dividend and liquidation rights of the holders of the Company’s common stock are subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock set forth above. Each share of common stock entitles the holder to one vote, together with the holders of the Preferred Stock, on all matters submitted to the stockholders for a vote. The holders of common stock are entitled to receive dividends, if any, as declared by the Company’s board of directors, subject to the preferential dividend rights of Preferred Stock.

As of September 30, 2022 the Company had reserved 57,287,852 shares, respectively, of common stock for the potential conversion of shares of Preferred Stock into common stock, the exercise of outstanding stock options for common stock, and the issuance of common stock options and restricted stock awards remaining available for grant under the 2019 Equity Incentive Plan.

The Company’s 2019 Stock Option and Grant Plan (the “2019 Plan”) provides for the Company to grant incentive stock options (“ISO”), non-qualified stock options, unrestricted stock awards, restricted stock awards (“RSA”) and other stock-based awards (collectively, the “Awards”) to the officers, employees, consultants and other key persons of the Company. The 2019 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or its committee if so delegated.

The total number of shares of common stock issuable under the 2019 Plan was 6,171,635. In April 2021, the Company’s board of directors further increased the number of shares of common stock reserved for issuance under the plan from 6,171,635 shares to 11,561,815 shares. As of September 30, 2022 there were 1,392,540 shares remaining available for future grants under the 2019 Plan. Shares of unused common stock underlying any Awards that are forfeited, canceled or reacquired by the Company prior to vesting will again be available for the grant of awards under the 2019 Plan.

The exercise price for stock options granted may not be less than the fair market value of the Company’s common stock on the date of grant, as determined by the board of directors, or at least 110 percent of the fair market value of the Company’s common stock on the date of grant in the case of an ISO granted to an employee who owns stock representing more than 10 percent of the voting power of all classes of stock (“10% Owner”) as determined by the board of directors as of the date of grant. The Company’s board of directors determines the fair market value of the Company’s common stock, taking into consideration its most recently available valuation of common stock performed by third parties as well as additional factors which may have changed since the date of the most recent contemporaneous valuation through the date of grant. Unless otherwise provided, at the time of grant, the options granted pursuant to the 2019 Plan expire ten years from the date of grant, or five years from the date of grant in the case of an ISO that is granted to a 10% Owner. Awards typically vest over four years, with the first 25 percent vesting on the first anniversary of the vesting commencement date and the remainder vesting in 36 equal monthly installments thereafter, contingent on the recipient’s continued employment, service or relationship with the Company.

In October 2022, the Company completed its IPO, and in connection with the closing the Board determined that no further awards would be granted under the 2019 Plan.

On February 9, 2022, the Company’s board of directors adopted, and on October 10, 2022 its stockholders approved, the 2022 Stock Option and Incentive Plan (the “2022 Plan”), which became effective immediately preceding the date on which the registration statement for the Company’s IPO is declared effective by the SEC. The 2022 Plan allows the Company to make equity-based and cash-based incentive awards to its officers, employees, directors, and consultants. The 2022 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. The number of shares initially reserved for issuance under the 2022 Plan is 8,041,688 shares, which includes the number of shares remaining available for grant under the 2019 Plan, as of the effective date, for the issuance of awards under the 2022 Plan. In addition, the number of shares reserved and available for issuance under the 2022 Plan will automatically increase on January 1, 2023 and each January 1 thereafter, by five percent of the outstanding number of shares of common stock on the immediately preceding December 31 or such lesser number of shares as determined by the compensation committee.

The shares of common stock underlying any awards under the 2022 Plan and the 2019 Plan that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of stock, expire, or are otherwise terminated (other than by exercise) will be added back to the shares of common stock available for issuance under the 2022 Plan.

As of September 30, 2022, no options were issued and outstanding under the 2022 Plan.

On February 9, 2022, the Company’s board of directors adopted, and on October 10, 2022 its stockholders approved, the 2022 Employee Stock Purchase Plan (the “2022 ESPP”), which became effective immediately preceding the date on which the registration statement for the Company’s IPO is declared effective by the SEC. A total of 971,350 shares of common stock were initially reserved for issuance under this plan. The number of shares of common stock that may be issued under the 2022 ESPP shall cumulatively increase beginning on January 1, 2023 and each January 1 thereafter through January 1, 2032, by the least of (i) 971,350 shares of common stock, (ii) one percent of the outstanding number of shares of common stock on the immediately preceding December 31, or (iii) such number of shares of common stock as determined by the administrator of the 2022 ESPP.

No shares of the Company’s common stock were issued and no stock-based compensation expense was recognized during the three and nine months ended September 30, 2022 related to the 2022 ESPP.

In June 2022, the Company granted three performance-based stock options to purchase a total of 32,166 shares of common stock. The performance-based options commence vesting upon the achievement of (i) IND acceptance, (ii) consummation of the Company’s IPO and (iii) first regulatory designation granted to Prime Medicine and vest over three equal installments. The grant date of these awards for accounting purposes is the date on which the performance conditions of the award are established by the board of directors and all terms of the award are known by the recipient. As a result, the grant-date fair value for accounting purposes for the first performance-based stock options to purchase 10,722 shares of common stock was determined on June 3, 2022, when the performance-based vesting conditions were established by the board of directors and the terms of the awards were communicated to the recipients. The second and third performance-based vesting conditions for stock options to purchase the remaining 21,444 shares of common stock was not established by the Company’s board of directors until August 4, 2022 and therefore a grant date for accounting purposes had not been established for those stock options as of September 30, 2022 although such stock options are included in the Company’s total stock options outstanding for legal purposes as of September 30, 2022.

In August 2022, the Company granted 90,066 shares of performance-based options, at an exercise price of $7.96 per share. This includes two grants, and 57,900 of the performance-based options vest in three equal installments upon the achievement of (i) IND acceptance, (ii) consummation of the Company’s IPO and (iii) business development deals which generate $100.0 million or more in upfront and near-term unrestricted cash. The remaining 32,166 of the performance-based options vest in three equal installments upon the achievement of (i) IND acceptance, (ii) consummation of the Company’s IPO and (iii) maximize the senior leadership team effectiveness by accomplishment of four criteria through year end 2023. The grant date of these awards for accounting purposes is the date on which the performance conditions of the award are established by the board of directors and all terms of the award are known by the recipient. As a result, the grant-date fair value for accounting purposes was determined on August 4, 2022, when the performance-based vesting conditions were established by the board of directors and the terms of the awards were communicated to the recipients. The aggregate grant-date fair value is $0.5 million.

Through September 30, 2022, the Company concluded that the achievement of all of the performance conditions for such awards was not probable or consummated.

The Company awards restricted common stock to employees and non-employees under its 2019 Plan. The fair value of each share of restricted common stock is based on the market price of the Company's common stock on the date of grant.

For a period of up to six months from a grantee’s termination, the Company has the right and option to repurchase unvested restricted common stock at the lower of (i) the original purchase price per share ($0.00004) or (ii) the fair market value per share as of the date of the Company elects to exercise its repurchase right. In August 2021, the Company repurchased 18,227 unvested shares of the restricted common stock at a price of $0.00004 per share, the original sale price, and the repurchased common shares were restored to the amount of unissued, authorized shares of common stock as of December 31, 2021. In May 2022, the Company repurchased 3,116 unvested shares of the restricted common stock at a price of $0.00004 per share, the original sale price, and the repurchased common shares were restored to the amount of unissued, authorized shares of common stock as of September 30, 2022.

Shares of restricted common stock granted to employees and directors are not deemed, for accounting purposes, to be outstanding until those shares have vested.

Each award type is discussed below.

The majority of the restricted common stock have time-based vesting conditions and vest over a four-year period, subject to the employee’s continued employment with, or service to, the Company on such vesting date. Compensation expense is recognized on a straight-line basis over the vesting period.

In September 2019, a co-founder of the Company was granted a total of 20,835,277 shares of restricted common stock, of which 3,472,545 shares are performance-based restricted common stock as described below. The remaining 17,362,732 shares are subject to service conditions. In February 2020, another co-founder of the Company was granted 694,679 shares of restricted common stock that are subject to service conditions. These awards vest over a four-year period and provide for accelerated vesting of a portion of the unvested awards, as determined in the award agreement, upon the initial or subsequent closings of the Series A Preferred Stock. Upon the grant date, the Company determined the initial and subsequent closings of the Series A Preferred Stock were probable to occur and recognized the compensation expense over the expected service period.

The following table summarizes the Company’s time-based restricted common stock activity since December 31, 2021:

The Company has also granted performance‑based restricted common stock to certain executive officers and key persons of the Company with terms that allow the grantees to vest in a specific number of shares based upon the achievement of performance‑based milestones. The Company granted 3,472,545 shares of performance-based restricted common stock to a co-founder of the Company in 2019, which will vest upon on the dosing of first patient in a Phase II or later-stage clinical trial or FDA approval of compound. The Company granted 694,679 and 385,998 shares of performance-based restricted common stock to certain executive officers in the years ended December 31, 2020 and 2021, respectively. These awards vest in three equal installments upon the achievements of (i) proof of concept in lead indication (which was achieved in May 2022), (ii) IND acceptance and (iii) consummation of the Company’s IPO.

Share‑based compensation expense associated with the performance-based restricted common stock is recognized if the performance condition is considered probable of achievement using the Company’s best estimates of the time to vesting for the achievement of the performance‑based milestones. Each reporting period, the Company updates its assessment of the probability that the performance-based milestones will be achieved. As of December 31, 2020 and 2021, the Company has concluded it was not probable that these performance conditions related to performance-based restricted common stock would be achieved, and as a result no compensation expense related to the performance-based restricted common stock has been recorded. As of September 30, 2022, the Company has concluded that the proof of concept in a lead indication was achieved in May 2022, but it was not probable that the remaining performance conditions related to performance-based restricted common stock would be achieved. As a result, compensation expense of $0.1 million was recorded for the milestone achieved, and no compensation expense related to the remaining performance-based restricted common stock has been recorded. The fair value of the restricted common stock was based on the fair market value of the Company’s common stock on the date of grant.

The following table summarizes the Company’s performance-based restricted common stock activity since December 31, 2021: