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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

OR

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

For the transition period from to

Commission file number: 001-38940

MORPHIC HOLDING, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
Incorporation or Organization)

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

35 Gatehouse Drive, A2
Waltham, MA

(Address of Principal Executive Offices)

02451

(Zip Code)

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

Not Applicable

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

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

MORF

The Nasdaq Global Market

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

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

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

The number of shares outstanding of the registrant’s Common Stock as of August 6, 2020 was 30,658,006.


Table of Contents

TABLE OF CONTENTS

    

Page

Part I—Financial Information

2

Item 1—Condensed Consolidated Financial Statements (unaudited)

2

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

2

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months ended June 30, 2020 and 2019

3

Condensed Consolidated Statements of Preferred Stock and Stockholders’ Equity (Deficit) for the Six Months ended June 30, 2019

4

Condensed Consolidated Statements of Stockholders’ Equity for the Six Months ended June 30, 2020

5

Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2020 and 2019

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

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

18

Item 3—Quantitative and Qualitative Disclosures about Market Risk

30

Item 4—Controls and Procedures

30

Part II—Other Information

32

Item 1—Legal Proceedings

32

Item 1A—Risk Factors

32

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

86

Item 3—Defaults Upon Senior Securities

86

Item 4—Mine Safety Disclosures

86

Item 5—Other Information

86

Item 6—Exhibits

87

Signatures

88

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PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share and per share data)

June 30, 

December 31,

    

2020

    

2019

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

133,121

$

101,559

Marketable securities

69,417

135,457

Accounts receivable

3,531

3,467

Prepaid expenses and other current assets

 

2,541

 

3,090

Total current assets

 

208,610

 

243,573

Property and equipment, net

 

3,024

 

3,446

Restricted cash

 

275

 

275

Other assets

 

90

 

141

Total assets

$

211,999

$

247,435

Liabilities

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

3,878

$

5,167

Accrued expenses

 

8,289

 

6,639

Deferred revenue, current portion

32,996

23,450

Deferred rent, current portion

 

121

 

94

Total current liabilities

 

45,284

 

35,350

Long-term liabilities:

Deferred revenue, net of current portion

51,652

70,954

Deferred rent, net of current portion

 

146

 

213

Total liabilities

 

97,082

 

106,517

Stockholders’ Equity

 

  

 

  

Preferred shares, $0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of June 30, 2020 and December 31, 2019

Common shares, $0.0001 par value, 400,000,000 shares authorized, 30,421,775 shares issued and outstanding as of June 30, 2020 and 30,110,251 shares issued and outstanding as of December 31, 2019

3

3

Additional paidin capital

 

244,807

 

238,384

Accumulated deficit

 

(130,117)

 

(97,513)

Accumulated other comprehensive income

224

44

Total stockholders’ equity

 

114,917

 

140,918

Total liabilities and stockholders’ equity

$

211,999

$

247,435

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

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

(In thousands, except share and per share data)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Collaboration revenue

$

7,693

$

5,567

$

13,287

$

11,635

Operating expenses:

 

 

  

 

  

 

  

Research and development

 

19,918

 

13,907

 

38,878

 

24,278

General and administrative

 

4,195

 

2,077

 

8,618

 

3,908

Total operating expenses

 

24,113

 

15,984

 

47,496

 

28,186

Loss from operations

 

(16,420)

 

(10,417)

 

(34,209)

 

(16,551)

Other income:

 

  

 

  

 

  

 

  

Interest income, net

 

407

 

1,119

 

1,293

 

2,182

Total other income, net

 

407

 

1,119

 

1,293

 

2,182

Loss before benefit from (provision for) income taxes

(16,013)

(9,298)

(32,916)

(14,369)

Benefit from (provision for) income taxes

155

(135)

312

(264)

Net loss

$

(15,858)

$

(9,433)

$

(32,604)

$

(14,633)

Net loss per share, basic and diluted

$

(0.52)

(4.73)

$

(1.08)

(7.54)

Weighted average common shares outstanding, basic and diluted

 

30,360,851

 

1,992,410

 

30,274,713

 

1,940,923

Comprehensive loss:

 

  

 

  

 

  

 

  

Net loss

$

(15,858)

$

(9,433)

$

(32,604)

$

(14,633)

Other comprehensive (loss) income:

 

 

 

 

Unrealized holding (losses) gains on marketable securities

(391)

16

180

41

Total other comprehensive income (loss)

(391)

16

180

41

Comprehensive loss

$

(16,249)

$

(9,417)

$

(32,424)

$

(14,592)

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

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

(In thousands, except share data)

Series Seed

Series A

Series B

Common

Additional

Accumulated

Total

Preferred Shares

Preferred Shares

Preferred Shares

Shares

Paidin

Accumulated

Other

Stockholders’

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Capital

  

Deficit

  

Comprehensive Income

  

Deficit

Balance at December 31, 2018

 

2,045,556

$

8,658

8,411,368

$

51,320

10,553,483

$

79,831

1,832,923

 

$

1,633

$

(54,185)

$

$

(52,552)

Equity-based compensation expense

499

499

Vesting of restricted shares

99,911

Unrealized holding gains on marketable securities

25

25

Net Loss

(5,200)

(5,200)

Balance at March 31, 2019

2,045,556

$

8,658

8,411,368

$

51,320

10,553,483

$

79,831

1,932,834

 

$

2,132

$

(59,385)

$

25

$

(57,228)

Equity-based compensation expense

667

667

Vesting of restricted shares

112,165

Unrealized holding gains on marketable securities

16

16

Net Loss

(9,433)

(9,433)

Balance at June 30, 2019

 

2,045,556

$

8,658

8,411,368

$

51,320

10,553,483

$

79,831

2,044,999

 

$

2,799

$

(68,818)

$

41

$

(65,978)

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

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

(In thousands, except share data)

Common

Additional

Accumulated

Total

Shares

Paidin

Accumulated

Other

Stockholders’

  

Shares

  

Amount

  

Capital

  

Deficit

  

Comprehensive Income

  

Equity

Balance at December 31, 2019

 

30,110,251

$

3

$

238,384

$

(97,513)

$

44

$

140,918

Equity‑based compensation expense

-

2,544

2,544

Vesting of restricted shares

84,247

Issuance of common shares upon stock option exercises

35,822

167

167

Issuance of common stock under the Employee Stock Purchase Plan

53,405

681

681

Unrealized holding gains on marketable securities

-

571

571

Net loss

-

(16,746)

(16,746)

Balance at March 31, 2020

30,283,725

$

3

241,776

$

(114,259)

$

615

$

128,135

Equity‑based compensation expense

-

2,489

2,489

Vesting of restricted shares

57,490

Issuance of common shares upon stock option exercises

80,560

542

542

Unrealized holding gains on marketable securities

-

(391)

(391)

Net loss

-

(15,858)

(15,858)

Balance at June 30, 2020

30,421,775

$

3

$

244,807

$

(130,117)

$

224

$

114,917

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

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

(In thousands)

Six Months Ended June 30, 

    

2020

    

2019

Cash flows from operating activities:

 

  

 

  

Net loss

$

(32,604)

$

(14,633)

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

 

  

 

  

Depreciation and amortization

 

569

 

365

Premium amortization and discount accretion on marketable securities

308

(1,232)

Equity‑based compensation

 

5,033

 

1,166

Change in operating assets and liabilities:

 

 

Accounts receivable

(64)

(945)

Prepaid expenses and other current assets

 

916

 

(214)

Other assets

 

51

 

(14)

Accounts payable

(1,051)

1,161

Accrued expenses

1,335

874

Deferred revenue

(9,756)

(364)

Deferred rent

(40)

(24)

Other long-term liabilities

 

 

(20)

Net cash used in operating activities

 

(35,303)

 

(13,880)

Cash flows from investing activities:

 

  

 

  

Purchases of marketable securities

(9,088)

(169,933)

Proceeds from maturities of marketable securities

75,000

45,000

Purchase of property and equipment

(385)

(1,056)

Net cash provided by (used in) investing activities

 

65,527

 

(125,989)

Cash flows from financing activities:

 

  

 

  

Deferred issuance costs

 

(52)

 

(1,833)

Proceeds from issuance of Common Stock pursuant to stock option exercises

709

Proceeds from issuance of Common Stock under Employee Stock Purchase Plan

681

Net cash provided by (used in) financing activities

 

1,338

 

(1,833)

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

 

31,562

 

(141,702)

Cash and cash equivalents and restricted cash, beginning of period

 

101,834

 

186,176

Cash and cash equivalents and restricted cash, end of period

$

133,396

$

44,474

Non-cash investing activities:

 

  

 

  

Purchases of property and equipment included in accounts payable and accrued expenses

$

31

$

Non-cash financing activities:

Deferred issuance costs included in accrued expenses and prepaid expenses and other current assets

$

315

$

1,104

Supplemental cash flow information:

 

  

 

  

Cash paid for taxes

$

480

$

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Nature of the Business and Basis of Presentation

Organization

Morphic Holding, Inc. (the “Company”) was formed under the laws of the State of Delaware in August 2014. The Company is a biopharmaceutical company applying proprietary insights into integrin medicine to discover and develop first-in-class oral small molecule integrin therapeutics. Integrins are a validated target class with multiple approved drugs for the treatment of serious chronic diseases. Despite significant biopharmaceutical industry investment, no oral integrin therapies have been approved. The Company has created the Morphic integrin technology platform, or MInT Platform, by leveraging its unique understanding of integrin structure and biology, to develop a pipeline of novel product candidates designed to achieve potency, high selectivity, and the pharmaceutical properties required for oral administration.

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

On July 1, 2019, the Company completed its initial public offering (“IPO”), in which the Company issued and sold 6,900,000 shares of its common stock at a public offering price of $15.00 per share, including 900,000 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares of common stock, for aggregate gross proceeds of $103.5 million. The Company raised approximately $93.3 million in net proceeds after deducting underwriting discounts and commissions and offering expenses payable by the Company. Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 21,010,407 shares of common stock; the warrants to purchase 6,825 convertible preferred shares automatically converted into warrants to purchase 6,825 common shares. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding. In connection with the closing of the IPO, the Company amended and restated its Fourth Amended and Restated Certificate of Incorporation to change the authorized capital stock to 400,000,000 shares designated as common stock and 10,000,000 shares designated as preferred stock, all with a par value of $0.0001 per share. The completion of the IPO, as described above, impacts the comparability of certain amounts to the corresponding prior year period, including earnings per share.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

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

The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. These unaudited interim condensed consolidated financial statements, in the

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opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods ended June 30, 2020 and 2019.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2019, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2020.

Use of Estimates and Summary of Significant Accounting Policies

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

Significant accounting policies

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and six months ended June 30, 2020 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2019 Annual Report on Form 10-K, except as described below.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying Accounting for Income Taxes, a new standard intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The Company adopted ASU 2019-12 effective January 1, 2020, using the prospective method. Adoption of the standard did not have a material impact on the condensed consolidated financial statements.

Recently Issued Accounting Pronouncements not yet Adopted

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

In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”), which finalizes effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies as follows:

January 1, 2023 as the effective date for adoption of the Topic 326 for annual and interim reporting periods;
January 1, 2021 and January 1, 2022 as the effective dates for adoption of the Topic 815 amendments for annual and interim periods, respectively; and

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January 1, 2021 and January 1, 2022 as the effective dates for adoption of the Topic 842 for annual and interim periods, respectively.

In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842), which partially superseded the guidance of the ASU 2019-10 described above, and deferred the effective date for adoption of ASC 606 and ASC 842 for certain entities that had not previously adopted these standards. The Company had adopted ASC 606 in a prior period. Under provisions of ASU 2020-05, ASC 842 is effective for the Company for the fiscal years beginning after December 15, 2021, and interim periods within those fiscal years beginning after December 15, 2022.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326) (“ASU 2016-13”), which requires consideration of a broader range of reasonable and supportable information in developing credit loss estimates. In April 2019, the FASB issued ASU 2019-04, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”). Certain provisions of ASU 2019-04 amend the guidance of ASU 2016-13, are applicable to the Company’s investments portfolio, and allow the Company to make certain accounting policy elections regarding establishing allowance for credit losses for the accrued interest receivable and the corresponding disclosures. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (“ASU 2019-11”), which clarifies certain areas of the guidance to ensure all companies and organizations can make a smoother transition to the standard. Following the issuance of ASU 2019-10 described above, the guidance is effective for the Company for the fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and will be adopted using the modified retrospective approach. The Company is currently evaluating the impact of ASU 2019-11 and the related ASU 2019-04 and ASU 2016-13 on the consolidated financial statements, including the impact of the available accounting policy elections.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with guidance regarding the accounting for and disclosure of leases. In general, for lease arrangements exceeding a twelve-month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. This update also requires lessees and lessors to disclose key information about their leasing transactions. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, intended to ease the implementation of the new lease standard for financial statement preparers by, among other things, allowing for an additional transition method. In lieu of presenting transition requirements to comparative periods, as previously required, an entity may now elect to show a cumulative effect adjustment on the date of adoption without the requirement to recast prior period financial statements or disclosures presented in accordance with ASU 2016-02.

The Company currently expects to elect the available package of practical expedients which allows the Company to not reassess previous accounting conclusions around whether arrangements are or contain leases, the classification of leases, and the treatment of initial direct costs. The Company also expects it will make an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company is in the process of assessing the impact of the standard and while not complete, it expects that it will record a material asset and liability related to its current operating lease; however, the full impact of adoption to the Company’s financial statements is yet to be determined. Based on the issuance of ASU 2020-05, described above, this standard is effective for the Company for the annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022.   

3. Fair Value of Financial Assets and Liabilities

The Company has certain financial assets and liabilities that are recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements:

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

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

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

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

The tables below present information about the Company’s financial assets that are measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 (in thousands) and indicate the level within the fair value hierarchy where each measurement is classified.

Fair Value Measurements at June 30, 2020

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

  

 

  

 

  

Money market funds, included in cash and cash equivalents

$

132,874

$

132,874

$

$

U.S. Treasury obligations

 

69,417

 

 

69,417

 

Total assets

$

202,291

$

132,874

$

69,417

$

Fair Value Measurements at December 31, 2019

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

  

 

  

 

  

 

  

Money market funds, included in cash and cash equivalents

$

91,332

$

91,332

$

$

U.S. Treasury obligations, included in cash and cash equivalents

 

9,995

 

 

9,995

 

U.S. Treasury obligations

 

135,457

 

 

135,457

 

Total assets

$

236,784

$

91,332

$

145,452

$

The money market funds included in the table above invest in U.S. government securities that are valued using quoted market prices. Accordingly, money market funds are categorized as Level 1 as of June 30, 2020 and December 31, 2019. Marketable securities included in the table above consist exclusively of U.S. Treasury securities that are valued using prices provided by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk. Accordingly, these securities are categorized as Level 2 as of June 30, 2020 and December 31, 2019. During the six months ended June 30, 2020, no assets were transferred between the fair value hierarchy categories. The Company had no liabilities measured at fair value on recurring basis at June 30, 2020 or December 31, 2019.

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

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4. Marketable securities

The following tables summarize the Company’s investments in marketable securities classified as available for sale (in thousands):

As of June 30, 2020

 

Gross

Gross

Aggregate

Amortized

unrealized

unrealized

estimated

    

Maturity

    

cost

    

holding gains

    

holding losses

    

fair value

U.S. Treasury securities

less than 1 year

$

69,167

$

250

$

$

69,417

As of December 31, 2019

Gross

Gross

Aggregate

Amortized

unrealized

unrealized

estimated

    

Maturity

    

cost

    

holding gains

    

holding losses

    

fair value

U.S. Treasury securities

less than 1 year

$

135,389

$

70

$

(2)

$

135,457

As of June 30, 2020, the Company held no marketable securities in an unrealized loss position. As of December 31, 2019, the aggregate fair value of three securities in an unrealized loss position was $30.2 million and the aggregate unrealized losses were $2,000.   Th

e value.

5. Cash, Cash Equivalents, and Restricted Cash

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

June 30, 

December 31, 

June 30, 

December 31, 

2020

    

2019

             

2019

    

2018

Cash and cash equivalents

$

133,121

$

101,559

$

44,199

$

185,901

Restricted cash

 

275

 

275

 

275

 

275

Total cash, cash equivalents, and restricted cash

$

133,396

$

101,834

$

44,474

$

186,176

6. Accrued Expenses

At June 30, 2020 and December 31, 2019 accrued expenses consist of the following (in thousands):

June 30, 

December 31, 

    

2020

    

2019

Payroll and related expenses

 

2,946

 

3,159

Research and development activities

4,522

2,465

Other expenses

 

821

 

1,015

$

8,289

$

6,639

7. Equity Based Compensation

In connection with the Company’s initial public offering in July 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”) in June 2019, which replaced the 2018 Stock Incentive Plan. The 2019 Plan provides for the grant of stock options, restricted stock awards, stock bonus awards, cash awards, stock appreciation right, RSUs, and performance awards to directors, officers and employees of the Company, as well as consultants and advisors of the

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Company. On January 1, 2020, the number of shares of common stock available for issuance under the 2019 Plan increased by 1,204,410 shares as a result of the automatic increase provision of the 2019 Plan. As of June 30, 2020, there were a total of 1,378,772 shares available for future award grants under the 2019 Plan.

The Company recognized equity-based compensation expense in the condensed consolidated statements of operations and comprehensive loss, by award type, as follows (in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Stock option

$

2,190

$

439

$

4,061

$

751

Restricted stock

192

228

755

415

ESPP

107

217

Total

$

2,489

$

667

$

5,033

$

1,166

The following table summarizes the allocation of equity-based compensation expense in the condensed consolidated statements of operations and comprehensive loss, by expense category:

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Research and development expense

$

1,352

$

403

    

$

3,143

    

$

684

General and administrative expense

 

1,137

 

264

 

1,890

 

482

Total

$

2,489

$

667

$

5,033

$

1,166

Restricted Common Stock

The following table summarizes the restricted stock awards activity during the six months ended June 30, 2020:

Weighted

Average Fair

Value per Share

    

Number of Shares

    

at Issuance

Unvested restricted common stock as of December 31, 2019

 

379,770

$

4.32

Granted

 

 

Vested

 

(141,737)

 

4.32

Forfeited

 

(13,802)

 

4.32

Unvested restricted common stock as of June 30, 2020

 

224,231

$

4.32

As of June 30, 2020, the Company had unrecognized equity-based compensation expense of $608,000 related to the restricted stock awards, which is expected to be recognized over a weighted average period of 0.4 years.

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Restricted Stock Units

During the six months ended June 30, 2020, the Company granted restricted common stock units. The following table summarizes the restricted stock units activity during the six months ended June 30, 2020:

Weighted

Average Fair

Value per Share

Number of Shares

    

at Issuance

Unvested restricted common stock units as of December 31, 2019

$

Granted

66,216

10.84

Vested

Forfeited

Unvested restricted common stock units as of June 30, 2020

66,216

$

10.84

As of June 30, 2020, the Company had unrecognized equity-based compensation expense of $649,000 related to the restricted stock units, which is expected to be recognized over a weighted average period of 2.93 years.

Stock Options

The following table summarizes the Company’s stock option activity during the six months ended June 30, 2020:

Weighted

Weighted

Average

Number of

Average

Remaining

Aggregate

    

Shares

    

Exercise Price

    

Contractual Term

    

Intrinsic Value

(in years)

(in thousands)

Outstanding as of December 31, 2019

 

2,987,403

$

8.67

9.22

$

26,254

Granted

 

1,955,685

 

15.39

 

 

Exercised

 

(116,382)

 

6.07

 

 

Forfeited

 

(132,382)

 

8.44

 

 

Outstanding as of June 30, 2020

 

4,694,324

$

11.54

 

9.13

$

72,798

Options vested and expected to vest as of June 30, 2020

4,694,324

$

11.54

9.13

$

72,798

Options exercisable as of June 30, 2020

 

841,581

$

6.84

 

8.66

$

17,012

As of June 30, 2020, the Company had unrecognized equity-based compensation expense of $30.6 million related to stock options issued to employees and non-employees, which is expected to be recognized over a weighted average period of 2.99 years.

The weighted average grant-date fair value per share of stock options granted to employees and non-employees for stock option awards with service-based vesting conditions during the six months ended June 30, 2020 was $10.50 per share.

The following table summarizes assumptions used in determining the fair value of the options granted during the six months ended June 30, 2020:

Six Months Ended June 30, 

  

Six Months Ended June 30, 

2020

2019

Risk‑free interest rate

0.46%

2.08%

Expected dividend yield

-

-

Expected term (in years)

6.00

5.99

Expected Volatility

80.85%

75.48%

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The Company determined the volatility for options granted in 2020 based on reported data for a guideline group of companies that issued options with substantially similar terms. The risk-free interest rate is based on a zero-coupon United States Treasury instrument with terms consistent with the expected life of the stock options. The expected term of options granted by the Company has been determined based upon the simplified method, because the Company does not have sufficient historical information regarding its options to derive the expected term. Under this approach, the expected term is the mid-point between the weighted average of vesting period and the contractual term. The Company has not paid and does not anticipate paying cash dividends on shares of common stock; therefore, the expected dividend yield is assumed to be zero.

ESPP

In June 2019, the Company adopted the 2019 Employee Stock Purchase Plan (“ESPP”), which became effective on June 26, 2019. The Company initially reserved 300,000 shares of common stock for sale under the ESPP. On January 1, 2020, the number of shares of common stock available for issuance under the ESPP increased by 301,102 shares as a result of the automatic increase provision of the ESPP. The ESPP is a qualified, compensatory plan under Section 423 of the Internal Revenue Code and offers substantially all employees opportunity to purchase up to $25,000 of common stock per year at 15% discount to the lower of the beginning of the offering period price or the end of the offering period price.

Compensation expense for discounted purchases under the ESPP is measured using the Black-Scholes model to compute the fair value of the lookback provision plus the purchase discount and is recognized as compensation expense over the course of the offering period.

During the six months ended June 30, 2020, the Company granted awards with a weighted average grant date fair value of $6.37.

8. Income Taxes

Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using statutory rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company’s ability to use its operating loss carryforwards and tax credits to offset future taxable income is subject to restrictions under Sections 382 and 383 of the United States Internal Revenue Code, or the Internal Revenue Code. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code. Such changes would limit the Company’s use of its operating loss carryforwards and tax credits. In such a situation, the Company may be required to pay income taxes, even though significant operating loss carryforwards and tax credits exist.

On March 27, 2020, the President signed into law the Coronavirus Aid Relief and Economic Security (“CARES”) Act. The CARES Act included several income tax changes, included allowing for the carryback of net operating losses, expanding interest deductibility, and allowing for accelerated expensing of certain capital improvements. 

The Company records a provision or benefit for income taxes on ordinary pre-tax income or loss based on its estimated effective tax rate for the year. Based on the forecasted net operating loss for fiscal year 2020 and the carryback allowance under the CARES Act, the Company anticipates a full recovery of the federal income tax paid for the year ended December 31, 2019. Accordingly, the Company recognized an income tax benefit of $0.2 million and $0.3 million for the three and six months ended June 30, 2020, respectively. The Company recognized an income tax expense of $0.1 million and $0.3 million for the three and six months ended June 30, 2019, respectively, driven largely by the projected tax liability associated with the tax recognition of the upfront AbbVie collaboration payment received in 2018.

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9. Commitments and Contingencies

Guarantees and Indemnifications

The Company entered, and intends to continue to enter, into separate indemnification agreements with directors, officers, and certain of key employees, in addition to the indemnification provided for in the restated certificate of incorporation and restated bylaws. These agreements, among other things, require the Company to indemnify directors, officers, and key employees for certain expenses, including attorneys' fees, judgments, penalties, fines, and settlement amounts actually incurred by these individuals in any action or proceeding arising out of their service to the Company or any of its subsidiaries or any other company or enterprise to which these individuals provide services at the Company’s request. Subject to certain limitations, the indemnification agreements also require the Company to advance expenses incurred by directors, officers, and key employees for the defense of any action for which indemnification is required or permitted.

The Company has standard indemnification arrangements in its leases for laboratory and office space that require it to indemnify the landlord against any liability for injury, loss, accident, or damage from any claims, actions, proceedings, or costs resulting from certain acts, breaches, violations, or non-performance under the Company’s lease.

Through June 30, 2020, the Company had not experienced any losses related to these indemnification obligations, and no material claims were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.

During the three and six months ended June 30, 2020, there were no material changes to our contractual obligations and commitments previously disclosed in Note 10 to the consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The Company recorded approximately $260,000 and $230,000 in rent expense for three months ended June 30, 2020 and 2019, respectively, and $517,000 and $447,000 for the six months ended June 30, 2020 and 2019, respectively.

Legal Proceedings

The Company is not currently a party to any material legal proceedings.

10. Option and License Agreements

Detailed description of contractual terms and the Company’s accounting for agreements described below were included in the Company’s audited financial statements and notes in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2020.

AbbVie Agreement

During the three months ended June 30, 2020, the Company continued to perform under its agreement with AbbVie, pursuant to which the Company recognizes revenues in proportion to the costs incurred. As a result, the Company will recognize the $100 million up-front payment as research and development services are performed, which is expected to be completed through 2024.

During the three months ended June 30, 2020, the Company incurred $3.2 million in research and development costs and recognized revenue of $5.3 million. Based on successful completion of preclinical studies related to MORF-720 during the three months ended June 30, 2020, the Company revised its estimates to satisfy its performance obligations, and as a result the Company recognized additional revenue of $2.4 million during the three months ended June 30, 2020. During the six months ended June 30, 2020, the Company incurred $7.7 million in research and development costs and recognized revenue of $8.7 million. As of June 30, 2020, the Company had $77.2 million of deferred revenue, which is classified as either current or long-term deferred revenue in the accompanying condensed consolidated balance sheets based on the period over which the revenue is expected to be recognized. This deferred revenue balance represents the

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aggregate amount of the transaction price allocated to the performance obligations that are partially unsatisfied as of June 30, 2020.

As the Company progresses towards satisfaction of performance obligations under the AbbVie agreement, the estimated costs associated with the remaining effort required to complete the performance obligations may change, which may materially impact revenue recognition. The Company regularly evaluates and, when necessary, updates the costs associated with the remaining effort pursuant to each performance obligation under the AbbVie agreement. Accordingly, revenue may fluctuate from period to period due to revisions to estimated costs, resulting in a change in the measure of progress for a performance obligation. Such changes can also impact the allocation of deferred revenue between current and long term based on changes in expected timing of the satisfaction of performance obligations.

Janssen Agreement

During the three months ended June 30, 2020, the Company continued to perform under its agreement with Janssen, pursuant to which the Company recognizes revenue in proportion to the costs incurred to date. The Company expects to provide research services and recognize revenue through 2024. During the three months ended June 30, 2020, the Company incurred $1.8 million in research and development costs and recognized revenue of $2.4 million related to research services. During the six months ended June 30, 2020, the Company incurred $3.5 million in research and development costs and recognized revenue of $4.6 million related to research services. The Company had $3.5 million due from Janssen included in accounts receivable on the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively.

As of June 30, 2020, $7.5 million of deferred revenue is classified as either current or long-term deferred revenue in the accompanying consolidated balance sheets based on the period over which the revenue is expected to be recognized. This deferred revenue balance represents the portion of the upfront payment received allocated to the performance obligations that are partially unsatisfied as of June 30, 2020.

11. Net Loss per Unit and Share

Basic and diluted net loss per share is calculated as follows (in thousands, except share and per share data) for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Net loss

$

(15,858)

$

(9,433)

$

(32,604)

$

(14,633)

Weighted average common shares outstanding, basic and diluted

    

30,360,851

    

1,992,410

    

30,274,713

    

1,940,923

Net loss per share, basic and diluted

$

(0.52)

$

(4.73)

$

(1.08)

$

(7.54)

The following table sets forth the outstanding common stock equivalents, presented based on amounts outstanding at each period end, that have been excluded from the calculation of diluted net loss per share for the periods indicated because their inclusion would have been anti-dilutive (in common stock equivalent shares, as applicable):

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Convertible preferred stock

 

    

    

21,010,407

 

    

    

21,010,407

Restricted common stock

 

224,231

540,977

 

224,231

540,977

Restricted stock units

66,216

66,216

Stock options

 

4,694,324

 

2,345,606

 

4,694,324

 

2,345,606

 

4,984,771

 

23,896,990

 

4,984,771

 

23,896,990

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In addition to the securities listed in the table above, as of June 30, 2020 the Company had reserved 548,000 shares of common stock for sale under the ESPP, which, if issued, would be anti-dilutive if included in calculation of diluted net loss per share.

12. Subsequent Events

On July 1, 2020, the Company entered into an Open Market Sale Agreement, or the Agreement, with Jefferies LLC, or Jefferies, with respect to an at-the-market offering program under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $75,000,000, referred to as Placement Shares, through Jefferies as its sales agent. The Company will pay Jefferies a commission equal to 3.0 percent (3.0%) of the gross sales proceeds of any Placement Shares sold through Jefferies under the Agreement, and also has provided Jefferies with customary indemnification and contribution rights. As of June 30, 2020, the Company incurred approximately $0.4 million related to legal, accounting and other fees in connection with the Agreement. The Company has not issued or sold any securities under the Agreement.

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

You should read the following discussion of our financial condition and results of operations in conjunction with our condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as statements of our plans, objectives, expectations, intentions and belief. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below.  These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, the impact of the COVID-19 pandemic, business strategy, market size, potential growth opportunities, preclinical and clinical development activities, efficacy and safety profile of our product candidates, use of net proceeds from our offerings, our ability to maintain and recognize the benefits of certain designations received by product candidates, the timing and results of preclinical studies and clinical trials, commercial collaborations with third parties and the receipt and timing of potential regulatory designations, approvals and commercialization of product candidates. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “predict,” “target,” “intend,” “could,” “would,” “should,” “project,” “plan,” “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements.

Overview

We are a biopharmaceutical company applying our proprietary insights into integrins to discover and develop a pipeline of potentially first-in-class oral small-molecule integrin therapeutics. Integrins are a target class with multiple approved injectable blockbuster drugs for the treatment of serious chronic diseases, including autoimmune, cardiovascular and metabolic diseases, fibrosis and cancer. To date, no oral small-molecule integrin therapies have been approved by the FDA. Despite significant unsuccessful efforts, we believe tremendous untapped potential remains for us to develop oral integrin therapies. We created the Morphic integrin technology platform, or MInT Platform, by leveraging our unique understanding of integrin structure and biology to develop novel product candidates designed to achieve the potency, high selectivity, and pharmaceutical properties required for oral administration. We are advancing our preclinical pipeline, including our wholly-owned program MORF-057, a α4β7 specific integrin inhibitor affecting inflammation, into clinical development for the treatment of inflammatory bowel disease, or IBD. We are also developing MORF-720, our selective oral αvβ6-specific integrin inhibitor affecting fibrosis, toward an Investigational New Drug application, or IND. We submitted the IND for MORF-057, and the FDA activated the IND on August 8, 2020. We expect to initiate a phase 1 clinical trial by the end of the third quarter of 2020. We are positioned to submit the IND for MORF-720 by the end of 2020. As part of our collaboration with AbbVie, they have an option to license our αvβ6 specific integrin inhibitor program for future development and commercialization, and if they exercise this option, they will control development of MORF-720 and a backup molecule. We anticipate AbbVie will make a decision regarding the exercise of the option for MORF-720 in the second half of 2020. If AbbVie exercises its option, we are due a one-time payment of $20.0 million, as well as additional payments upon the achievement of certain milestones and royalties in accordance with the AbbVie agreement. Beyond our current targets, we are using our MInT Platform to create a broad pipeline of programs across a variety of therapeutic areas, all of which aim to harness the potential of inhibition or activation.

On July 1, 2019, we completed the initial public offering, or IPO, of our common stock and issued and sold 6,900,000 shares of common stock at a public offering price of $15.00 per share, which included 900,000 shares sold upon full exercise of the underwriters’ option to purchase additional shares of common stock resulting in net proceeds of $93.3 million after deducting underwriting discounts and commissions and offering expenses.

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Since inception, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio, and performing research to discover and develop oral small-molecule integrin therapeutics. Revenue generation activities have been limited to the following: in October 2018, pursuant to our collaboration and option agreement with AbbVie, or the AbbVie Agreement, we received an upfront payment of $100.0 million for research and development activities, and provided to AbbVie exclusive license options on product candidates directed at multiple targets; in March 2019, pursuant to the Janssen Agreement, we received an upfront payment of $10.0 million and provided Janssen with exclusive license options on product candidates directed at multiple targets; in addition, Janssen will reimburse us for research services at market rates. We do not have any products approved for sale and have not generated any revenue from product sales. Through June 30, 2020, in addition to the foregoing sources of revenue, we have funded our operations primarily through the sale and issuance of our convertible preferred equity securities, borrowings under a loan and security agreement, or the credit facility, with Silicon Valley Bank, or SVB, and our IPO. From inception through June 30, 2020 we raised an aggregate of approximately $242.6 million of gross proceeds through the issuance of equity and debt.

Since inception, we have incurred significant operating losses. As of June 30, 2020, we had an accumulated deficit of $130.1 million. We expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future, as we advance our current and future product candidates through preclinical and clinical development, seek regulatory approval for them, maintain and expand our intellectual property portfolio, hire additional research and development and business personnel, and operate as a public company.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. In addition, if we obtain regulatory approval for our product candidates and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing, and distribution activities.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as additional collaboration agreements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when, needed, could have a material adverse effect on our business, results of operations, and financial condition.

As of June 30, 2020, we had cash, cash equivalents, and marketable securities of $202.5 million. We believe that our existing cash and cash equivalents, marketable securities will enable us to fund our operating expenses and capital expenditure requirements through at least the end of 2022.

Impact of the COVID-19 Pandemic

The extent of the impact of the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”) on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our preclinical studies, employee or industry events, and effect on our suppliers and manufacturers, all of which are uncertain and cannot be predicted. The COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our collaborators, our contract research organizations (“CROs”), suppliers or third-party business partners conduct business. Although we currently have not experienced much impact on our business, including our development timelines, if there are renewed closures of business in China, or other impacted areas, or if clinical locations are not able to open at the time we intend to begin clinical trials, we may experience constrained supply of our product candidates or delays in our preclinical studies or planned clinical trials that could materially adversely impact our business, results of operations and overall financial performance in future periods. In addition, we may experience impact from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including but not limited to restrictions on travel and in-person meetings, delays in future site activations and future enrollment of clinical trials, prioritization of hospital resources toward the COVID-19 pandemic effort, delays in review by the FDA and comparable foreign regulatory agencies, and disruptions in our supply chain for our product candidates. As of the filing date of this Form 10-Q, the extent to which COVID-19 may impact our financial condition, results of operations or guidance is uncertain. The effects of the COVID-19 pandemic will not be fully reflected in our results of operations and

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overall financial performance until future periods. See “Risk Factors” included elsewhere in this report for further discussion of the possible impact of the COVID-19 pandemic on our business.

Financial Operations Overview

Collaboration Revenue

We do not have any products approved for sale, and as a result, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future.

To date, all of our collaboration revenue has been derived from our agreements with AbbVie and Janssen. We expect that our revenue, until we have a marketed product, will be derived primarily from payments under our collaboration and option agreements with AbbVie and Janssen or other collaboration and license agreements that we may enter into in the future, if any.

Collaboration Revenue — AbbVie

In October 2018, we entered into a collaboration with AbbVie, an investor holding in aggregate approximately 3.3% of our common stock as of June 30, 2020, designed to advance a number of our oral integrin therapeutics for fibrosis-related indications. Under the terms of the AbbVie Agreement, AbbVie paid us an upfront payment of $100 million for research and development activities, and we provided to AbbVie exclusive license options on product candidates directed at multiple targets.

For each compound, we will conduct research and development activities through the completion of IND-enabling studies, at which point AbbVie may pay a license fee of $20.0 million, on a target-by-target basis, to exercise its exclusive license option and assume responsibility for global development and commercialization. We are also eligible for clinical and commercial milestone payments and tiered royalties from high single digit to low teens on worldwide net sales for each licensed product. In addition, for certain compounds for which we have completed IND-enabling studies and which meet certain advancement criteria for a liver indication, we have the option to commit to share development costs in exchange for an increased fixed royalty rate. We may exercise this option following completion of the first Phase 2b clinical trial for the relevant product.

Collaboration Revenue — Janssen

In February 2019, we entered into the Janssen Agreement to discover and develop novel integrin therapeutics for patients with conditions not adequately addressed by current therapies. The Janssen Agreement focuses on three integrin targets, each target the subject of a research program, with the ability to substitute up to two integrin targets not explored by us. Upon completing IND-enabling studies, on a research program-by-research program basis, Janssen may exercise an exclusive option to obtain an exclusive license with respect to the target that is the subject of the research program, including all licensed compounds that are the subject of the applicable research program, and then Janssen will be responsible for global clinical development and commercialization. In consideration of the rights granted, Janssen paid us an upfront fee of $10.0 million for each of the first two research programs, will pay us an additional $5.0 million fee upon commencement of the third research program, and will fund research activities. Pursuant to the terms of the agreement, we are also eligible to receive additional milestone and royalty payments.

Expenses

Research and Development

Research and development expenses consist primarily of costs incurred for our research and development activities, including our product candidate discovery efforts and preclinical studies under our research programs, which include:

employee-related expenses, including salaries, benefits, and equity-based compensation expense for our research and development personnel;

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costs of funding research performed by third parties that conduct research and development and preclinical activities on our behalf;
costs of manufacturing clinical supply related to any of our current or future product candidates;
costs of conducting preclinical studies of any of our current or future product candidates;
consulting and professional fees related to research and development activities, including equity-based compensation to non-employees;
costs of purchasing laboratory supplies and non-capital equipment used in our preclinical studies;
costs related to compliance with clinical regulatory requirements;
facility costs and other allocated expenses, which include expenses for rent and maintenance of facilities, insurance, depreciation and other supplies; and
fees for maintaining licenses and other amounts due under our third-party licensing agreements.

Research and development costs are expensed as incurred. Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks using data such as information provided to us by our vendors and analyzing the progress of our preclinical studies or other services performed. Significant judgment and estimates are made in determining the accrued expense balances at the end of any reporting period. Non-refundable advance payments for research and development goods or services to be received in the future from third parties are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

The successful development of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete our future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of our product candidates, if approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:

the scope, rate of progress, and expenses of our ongoing research activities as well as any additional preclinical studies and clinical trials and other research and development activities;
establishing an appropriate safety profile;
successful enrollment in and completion of clinical trials;
whether our product candidates show safety and efficacy in our clinical trials;
receipt of marketing approvals from applicable regulatory authorities, if any;
establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;
obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;
commercializing the product candidates, if and when approved, whether alone or in collaboration with others; and
continued acceptable safety profile of the products following any regulatory approval.

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A change in the outcome of any of these variables with respect to the development of our current and future product candidates would significantly change the costs and timing associated with the development of those product candidates.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as we continue the development of our product candidates. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

General and Administrative

General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits, and equity-based compensation expenses for personnel in executive, finance, accounting, business development, legal, and human resources functions. Other significant general and administrative expenses include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters, and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future as our business expands to support expected growth in research and development activities, including our future clinical programs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, among other expenses. We also anticipate increased expenses associated with being a public company, including costs for audit, legal, regulatory, and tax-related services related to compliance with the rules and regulations of the Securities and Exchange Commission (“SEC”), and listing standards applicable to companies listed on Nasdaq, director and officer compensation and insurance premiums, and investor relations costs. In addition, if we obtain regulatory approval for any of our product candidates and do not enter into a third-party commercialization collaboration, we expect to incur significant expenses related to building a sales and marketing team to support product sales, marketing and distribution activities.

Interest Income, Net

Interest income, net consists primarily of interest income earned on our cash and cash equivalents and marketable securities.

Benefit from (Provision for) Income Tax Expense for Interim Periods

Benefit from or provision for income tax expense recorded in any interim period is based on the estimated effective tax rate for the fiscal year for those tax jurisdictions that can be reliably estimated. Our calculation of the estimated effective tax rate requires us to estimate pre-tax income by tax jurisdiction as well as total tax expense for the fiscal year. Accordingly, the annual estimated effective tax rate is subject to adjustment if there are changes to the initial estimates of total tax expense or pre-tax income.

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Results of Operations

Comparison of the Three Months Ended June 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019:

Three Months Ended June 30, 

Change

 

    

2020

    

2019

    

$

    

%

 

(in thousands, except percentages)

 

Collaboration revenue

7,693

$

5,567

2,126

38

%

Operating expenses:

 

 

  

 

  

  

Research and development

 

19,918

 

13,907

 

6,011

43

%

General and administrative

 

4,195

 

2,077

 

2,118

102

%

Total operating expenses

 

24,113

 

15,984

 

8,129

51

%

Loss from operations

 

(16,420)

 

(10,417)

 

(6,003)

58

%

Other income:

 

  

 

  

 

  

  

Interest income, net

 

407

 

1,119

 

(712)

(64)

%

Total other income, net

 

407

 

1,119

 

(712)

(64)

%

Loss before benefit from (provision for) income taxes

$

(16,013)

$

(9,298)

$

(6,715)

72

%

Benefit from (provision for) income taxes

 

155

 

(135)

 

290

*

Net loss

$

(15,858)

$

(9,433)

$

(6,425)

68

%

*    Percentage not meaningful

Collaboration Revenue

Collaboration revenue increased by $2.1 million, or 38%, from $5.6 million for the three months ended June 30, 2019 to $7.7 million for the three months ended June 30, 2020. The increase in total collaboration revenue during the three months ended June 30, 2020 as compared to three months ended June 30, 2019 is attributable to the increase of $0.9 million in AbbVie collaboration revenue and an increase of $1.2 million in revenue from our collaboration with Janssen. The increase in revenue under our collaboration with AbbVie was attributable to the successful completion of preclinical studies during the three months ended June 30, 2020, which resulted in the revision of our estimates to satisfy our performance obligations. In addition, the extent of research activities performed under our collaboration with Janssen increased, which resulted in additional revenue recognized for the three months ended June 30, 2020. The revenue for our collaborations fluctuates based on the timing and magnitude of costs incurred under the collaboration programs, as well as changes to our estimates to complete the remaining performance obligations.

Research and Development Expenses

Research and development expense increased by $6.0 million, or 43% from $13.9 million for the three months ended June 30, 2019 to $19.9 million for the three months ended June 30, 2020. A significant portion of our research and development costs have been external preclinical contract research organization (“CRO”) costs, which we track on a program-by-program basis related to a clinical product candidate, once the candidate has been identified. Our internal research and development costs are primarily personnel-related costs, depreciation, and other indirect costs. The following table summarizes our research and development expense for three months ended June 30, 2020 and 2019:

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Three Months Ended June 30, 

Change

    

2020

    

2019

    

$

    

%

(in thousands, except percentages)

External costs by program:

 

  

 

  

 

  

  

MORF-720

$

1,195

$

4,022

$

(2,827)

-70%

Other AbbVie Agreement programs

1,012

1,588

(576)

-36%

MORF-057

 

7,712

 

3,382

4,330

128%

Janssen Agreement programs

853

267

586

219%

Other early development candidates and unallocated costs

 

2,104

 

876

1,228

140%

Total external costs

 

12,876

 

10,135

2,741

27%

Internal costs:

 

  

 

  

  

  

Employee compensation and benefits

 

6,107

 

3,326

2,781

84%

Facility and other

 

935

 

446

489

110%

Total internal costs

 

7,042

 

3,772

3,270

87%

Total research and development expense

$

19,918

$

13,907

$

6,011

43%

*    Percentage not meaningful

The increase in research and development expense was primarily attributable to the following:

The $2.7 million increase in external costs from the three months ended June 30, 2019 to the same period in the current year primarily related to increased research and preclinical development and manufacturing costs associated with our product candidate MORF-057, targeting α4β7, and other external research costs associated with our early development candidates, offset by a decrease of $2.8 million in costs related to MORF-720 targeting αvβ6.

The $3.3 million increase in internal costs from the three months ended June 30, 2019 to the same period in the current year was primarily driven by an increase in employee compensation and benefits costs related to increased headcount to support increased activities in our research and development function.

General and Administrative Expenses

General and administrative expense increased by $2.1 million, or 102%, from $2.1 million for the three months ended June 30, 2019 to $4.2 million for the three months ended June 30, 2020. The increase in general and administrative expense was attributable to an increase of $1.5 million in employee cash and non-cash compensation and benefits, an increase of $0.2 million in professional services and consulting fees, and a $0.4 million increase in insurance costs. The increase in these general and administrative expenses was primarily due to operating as a public company during the current year.

Interest Income, Net

Interest income decreased by $0.7 million from $1.1 million for the three months ended June 30, 2019 to $0.4 million for the three months ended June 30, 2020. The decrease in interest income, net was attributable to a decrease in investments held during the three months ended June 30, 2020 as compared to the same period last year, as well as a decrease in yields on marketable securities during the three months ended June 30, 2020.

Benefit from (Provision for) Income Tax

On March 27, 2020, the President signed into law the Coronavirus Aid Relief and Economic Security (“CARES”) Act. The CARES Act included several income tax changes, included allowing for the carryback of net operating losses, expanding interest deductibility, and allowing for accelerated expensing of certain capital improvements. 

We evaluated the changes and anticipate a full recovery of all federal income tax paid for the December 31, 2019 tax period due to the carryback allowance of the forecasted net operating loss generated during fiscal year 2020. Based on

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the anticipated recovery of the federal income tax paid for the December 31, 2019 tax period, we recognized an income tax benefit of $0.2 million for the three months ended June 30, 2020. The income tax expense of $0.1 million recognized for the three months ended June 30, 2019 was driven largely by the projected tax liability associated with the tax recognition of the upfront AbbVie collaboration payment received in 2018.

Comparison of the Six Months Ended June 30, 2020 and 2019

The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019:

 

Six Months Ended June 30, 

Change

 

    

2020

    

2019

    

$

    

%

 

(in thousands, except percentages)

 

Collaboration revenue

13,287

11,635

1,652

14

%

Operating expenses:

 

  

 

  

 

  

  

Research and development

 

38,878

 

24,278

 

14,600

60

%

General and administrative

 

8,618

 

3,908

 

4,710

121

%

Total operating expenses

 

47,496

 

28,186

 

19,310

69

%

Loss from operations

 

(34,209)

 

(16,551)

 

(17,658)

107