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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13, OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
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: (781996-0955
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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001 per shareMORFThe 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 July 30, 2021 was 36,415,045.



Table of Contents

TABLE OF CONTENTS
Page
Item 1A—Risk Factors
1

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per share data)
June 30,December 31,
20212020
Assets
Current assets:
Cash and cash equivalents$399,404 $102,047 
Marketable securities
32,214 126,217 
Accounts receivable
1,314 7,314 
Prepaid expenses and other current assets
3,914 3,857 
Total current assets
436,846 239,435 
Property and equipment, net2,331 2,606 
Restricted cash275 275 
Other assets31 66 
Total assets
$439,483 $242,382 
Liabilities
Current liabilities:
Accounts payable
$5,254 $3,845 
Accrued expenses
7,693 10,160 
Deferred revenue, current portion
21,799 25,266 
Deferred rent, current portion
166 167 
Total current liabilities
34,912 39,438 
Long-term liabilities:
Deferred revenue, net of current portion
56,662 57,672 
Deferred rent, net of current portion
 75 
Total liabilities
91,574 97,185 
Stockholders’ Equity
Preferred shares, $0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of June 30, 2021 and December 31, 2020
  
Common shares, $0.0001 par value, 400,000,000 shares authorized, 36,277,511 shares issued and outstanding as of June 30, 2021 and 32,037,686 shares issued and outstanding as of December 31, 2020
4 3 
Additional paid‑in capital
539,536 287,727 
Accumulated deficit
(191,611)(142,512)
Accumulated other comprehensive loss(20)(21)
Total stockholders’ equity
347,909 145,197 
Total liabilities and stockholders’ equity
$439,483 $242,382 


The accompanying notes are an integral part of these condensed consolidated financial statements.
2

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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,
2021202020212020
Collaboration revenue$3,848 $7,693 $7,114 $13,287 
Operating expenses:
Research and development24,552 19,918 43,165 38,878 
General and administrative7,139 4,195 13,091 8,618 
Total operating expenses31,691 24,113 56,256 47,496 
Loss from operations(27,843)(16,420)(49,142)(34,209)
Other income:
Interest income, net35 413 63 1,299 
Other expenses(7)(6)(20)(6)
Total other income, net28 407 43 1,293 
Loss before benefit from income taxes(27,815)(16,013)(49,099)(32,916)
Benefit from income taxes 155  312 
Net loss$(27,815)$(15,858)$(49,099)$(32,604)
Net loss per share, basic and diluted$(0.77)$(0.52)$(1.41)$(1.08)
Weighted average common shares outstanding, basic and diluted36,179,085 30,360,851 34,863,056 30,274,713 
Comprehensive loss:
Net loss$(27,815)$(15,858)$(49,099)$(32,604)
Other comprehensive income (loss):
Unrealized holding gains (losses) on marketable securities(4)(391)1 180 
Total other comprehensive income (loss)(4)(391)1 180 
Comprehensive loss$(27,819)$(16,249)$(49,098)$(32,424)
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

Table of Contents

MORPHIC HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands, except share data)
Common
Shares
Additional
Paid‑in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Income
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 201930,110,251 $3 $238,384 $(97,513)$44 $140,918 
Equity-based compensation expense— — 2,544 — — 2,544 
Vesting of restricted shares84,247 — — — — — 
Issuance of common shares upon stock option exercises35,822 — 167 — — 167 
Issuance of common stock under the Employee Stock Purchase Plan53,405 — 681 — — 681 
Unrealized holding gains on marketable securities— — — — 571 571 
Net Loss— — — (16,746)— (16,746)
Balance at March 31, 202030,283,725 $3 $241,776 $(114,259)$615 $128,135 
Equity-based compensation expense— — 2,489 — — 2,489 
Vesting of restricted shares57,490 — — — — — 
Issuance of common shares upon stock option exercises80,560 — 542 — — 542 
Unrealized holding gains on marketable securities— — — — (391)(391)
Net Loss— — — (15,858)— (15,858)
Balance at June 30, 202030,421,775 $3 $244,807 $(130,117)$224 $114,917 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

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MORPHIC HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (Continued)
(In thousands, except share data)
Common
Shares
Additional
Paid‑in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Income (Loss)
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 202032,037,686 $3 $287,727 $(142,512)$(21)$145,197 
Equity‑based compensation expense— — 4,442 — — 4,442 
Vesting of restricted shares46,893     — 
Issuance of common shares upon stock option exercises279,431 — 2,657 — — 2,657 
Issuance of common shares under the Employee Stock Purchase Plan26,561 — 613 — — 613 
Issuance of common shares through at-the-market offering, net of issuance costs of $0.2 million
240,704 — 7,231 — — 7,231 
Issuance of common shares in secondary offering, net of offering costs of $15.0 million
3,500,000 1 230,030 — — 230,031 
Unrealized holding gains on marketable securities— — — — 5 5 
Net loss— — — (21,284)— (21,284)
Balance at March 31, 202136,131,275 $4 $532,700 $(163,796)$(16)$368,892 
Equity‑based compensation expense—  5,308   5,308 
Vesting of restricted shares24,080 — — — — — 
Issuance of common shares upon stock option exercises122,156  1,577   1,577 
Unrealized holding losses on marketable securities— — — — (4)(4)
Offering costs incurred—  (49)  (49)
Net loss—  — (27,815) (27,815)
Balance at June 30, 202136,277,511 $4 $539,536 $(191,611)$(20)$347,909 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

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MORPHIC HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Six Months Ended June 30,
20212020
Cash flows from operating activities:
Net loss$(49,099)$(32,604)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization508 569 
Premium amortization and discount accretion on marketable securities205 308 
Equity‑based compensation9,750 5,033 
Loss on disposal of equipment4  
Change in operating assets and liabilities:
Accounts receivable6,000 (64)
Prepaid expenses and other current assets(57)916 
Other assets35 51 
Accounts payable1,376 (1,051)
Accrued expenses(2,467)1,335 
Deferred revenue(4,477)(9,756)
Deferred rent(76)(40)
Net cash used in operating activities(38,298)(35,303)
Cash flows from investing activities:
Purchases of marketable securities(12,200)(9,088)
Proceeds from maturities of marketable securities106,000 75,000 
Purchase of property and equipment(205)(385)
Net cash provided by investing activities93,595 65,527 
Cash flows from financing activities:
Deferred issuance costs (52)
Proceeds from issuance of common shares under Employee Stock Purchase Plan613 681 
Proceeds from at-the-market offering, net of issuance costs7,231  
Proceeds from secondary offering, net of issuance costs229,982  
Proceeds from issuance of common shares upon stock option exercises4,234 709 
Net cash provided by financing activities242,060 1,338 
Net increase in cash and cash equivalents and restricted cash297,357 31,562 
Cash and cash equivalents and restricted cash, beginning of period102,322 101,834 
Cash and cash equivalents and restricted cash, end of period$399,679 $133,396 
Non-cash investing activities:
Purchases of property and equipment included in accounts payable and accrued expenses$41 $31 
Non-cash financing activities:
Deferred issuance costs included in accrued expenses and prepaid expenses and other current assets$ $315 
Supplemental cash flow information:
Cash paid for taxes$90 $480 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.Nature of the Business and Basis of Presentation
Organization and Liquidity
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.

In July 2020, the Company entered into an Open Market Sale Agreement ("the Agreement") with Jefferies LLC (“Jefferies”) with respect to an at-the-market (“ATM”) offering program under which the Company may offer and sell, from time to time at its sole discretion, shares of our 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 paid Jefferies a commission equal to 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. During the three months ended June 30, 2021, no shares under the ATM were sold. During the six months ended June 30, 2021, the Company issued and sold 240,704 shares for net proceeds of $7.2 million after deducting offering commissions and offering expenses paid by the Company. As of June 30, 2021, the Company had approximately $32.4 million of common stock remaining available for sale under the ATM. The Agreement will be amended upon the filing of this report such that, as of the date hereof a new at-the-market offering (“New ATM”) will be established, with an aggregate offering price of up to $150,000,000. The Company entered into an Amendment No. 1 to the Open Market Sale Agreement with Jefferies with respect to the New ATM. Under the New ATM, the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, referred to as Placement Shares, through Jefferies as its sales agent. The Company may not sell any Placement Shares under the ATM after the date hereof.
In March 2021, the Company completed an underwritten follow-on public offering of 3,500,000 shares of its common stock at a price to the public of $70.00 per share. Gross proceeds from the secondary offering were approximately $245.0 million, before deducting underwriting discounts, commissions and other offering expenses of approximately $15.0 million, paid by the Company, resulting in net proceeds of approximately $230.0 million.
2.Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The unaudited interim condensed consolidated financial statements include the accounts of Morphic Holding, Inc. and its wholly owned subsidiaries, Morphic Therapeutic, Inc. and a Massachusetts Security Corporation, organized in December 2019 to take advantage of the favorable tax treatment of income earned on securities held within such entity. 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 opinion of management,
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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, 2021 and 2020.
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, 2020, 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 March 1, 2021.
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 as of and for the three and six months ended June 30, 2021 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2020 Annual Report on Form 10-K, except as described below.
Recently Issued Accounting Pronouncements not yet Adopted
At IPO, as an “emerging growth company,” or EGC, under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, the Company has made an election under Section 107 of the JOBS Act to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards and has been following requirements applicable to the private companies for adopting new and updated accounting standards. Based on the value of the Company's common stock held by non-affiliates on June 30, 2021, the Company will become a large accelerated filer for the year ending December 31, 2021 and will follow adoption guidance mandated for non-EGC entities.
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.
As of December 31, 2021, the Company will become a large accelerated filer and as a result, the guidance under ASU 2019-04, ASU 2016-13 and ASU 2019-11 is effective for the Company's Annual Report on Form 10-K to be filed for the year ended December 31, 2021. The Company will record a cumulative effect adjustment to retained earnings retroactive to January 1, 2021, the date of adoption. The Company is currently evaluating the impact of ASU 2019-11 and the related ASU 2019-04 and ASU 2016-13 on its consolidated financial statements, including the impact of the available accounting policy elections. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with guidance regarding the accounting for and disclosure of leases. 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
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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 currently evaluating the effect of adopting the requirements of ASU 2016-02 as it relates to its facility lease as discussed 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, 2020. The Company is also performing an evaluation of other material contracts to determine if any contain embedded leases, and has not identified any to date. As of December 31, 2021, the Company will become a large accelerated filer and as a result, the guidance under ASU 2016-02 is effective for the Company's Annual Report on Form 10-K to be filed for the year ended December 31, 2021, with an effective date of adoption of January 1, 2021.

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.
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, 2021 and December 31, 2020 (in thousands) and indicate the level within the fair value hierarchy where each measurement is classified.
Fair Value Measurements at June 30, 2021
TotalLevel 1Level 2Level 3
Assets:
Money market funds, included in cash and cash equivalents$399,073 $399,073 $ $ 
U.S. Treasury obligations32,214  32,214  
Total assets$431,287 $399,073 $32,214 $ 
Fair Value Measurements at December 31, 2020
TotalLevel 1Level 2Level 3
Assets:
Money market funds, included in cash and cash equivalents$101,760 $101,760 $ $ 
U.S. Treasury obligations126,217  126,217  
Total assets$227,977 $101,760 $126,217 $ 
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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, 2021 and December 31, 2020. 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, 2021 and December 31, 2020. During the six months ended June 30, 2021, no assets were transferred between the fair value hierarchy categories. The Company had no liabilities measured at fair value on a recurring basis at June 30, 2021 or December 31, 2020.
The Company believes that the carrying amounts of the Company’s condensed 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.
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, 2021
MaturityAmortized
cost
Gross
unrealized
holding gains
Gross
unrealized
holding losses
Aggregate
estimated
fair value
U.S. Treasury securitiesless than 1 year$32,208 $6 $ $32,214 

As of December 31, 2020
MaturityAmortized
cost
Gross
unrealized
holding gains
Gross
unrealized
holding losses
Aggregate
estimated
fair value
U.S. Treasury securitiesless than 1 year$126,212 $7 $(2)$126,217 
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 (in thousands):
June 30,December 31,June 30,December 31,
2021202020202019
Cash and cash equivalents$399,404 $102,047 $133,121 $101,559 
Restricted cash275 275 275 275 
Total cash, cash equivalents, and restricted cash$399,679 $102,322 $133,396 $101,834 
6.Accrued Expenses
At June 30, 2021 and December 31, 2020 accrued expenses consist of the following (in thousands):
June 30,December 31,
20212020
Payroll and related expenses$3,626 $5,148 
Research and development activities3,100 4,335 
Other expenses967 677 
$7,693 $10,160 
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


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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 Company. As a result of the automatic increase provision of the 2019 Plan, the number of shares of common stock available for issuance under the 2019 Plan increased by 1.3 million shares on January 2021. As of June 30, 2021, there were a total of 1.3 million 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,
2021202020212020
Stock option$4,906 $2,190 $9,045 $4,061 
Restricted common stock72 133 153 686 
Restricted stock units159 59 222 69 
ESPP171 107 330 217 
Total$5,308 $2,489 $9,750 $5,033 
The following table summarizes the allocation of equity-based compensation expense in the condensed consolidated statements of operations and comprehensive loss, by expense category (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Research and development expense$2,542 $1,352 $4,807 $3,143 
General and administrative expense2,766 1,137 4,943 1,890 
Total$5,308 $2,489 $9,750 $5,033 
Restricted Common Stock
The following table summarizes the restricted stock awards activity during the six months ended June 30, 2021:
Number of SharesWeighted
Average Fair
Value per Share
at Issuance
Unvested restricted common stock as of December 31, 2020100,989 $4.32 
Granted  
Vested(49,230)4.32 
Forfeited(3,040)4.32 
Unvested restricted common stock as of June 30, 202148,719 $4.32 
As of June 30, 2021, the Company had unrecognized equity-based compensation expense of $0.1 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 0.5 years.
Restricted Stock Units
The following table summarizes the restricted stock units activity during the six months ended June 30, 2021:
Number of SharesWeighted
Average Fair
Value per Share
at Issuance
Unvested restricted common stock as of December 31, 202066,216 $10.84 
Granted7,000 57.73 
Vested(21,743)10.84 
Forfeited  
Unvested restricted common stock as of June 30, 202151,473 $17.22 
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As of June 30, 2021, the Company had unrecognized equity-based compensation expense of $0.7 million related to the restricted stock units, which is expected to be recognized over a weighted average period of 2.0 years.
Stock Options
The following table summarizes the Company’s stock option activity during the six months ended June 30, 2021:
Number of
Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual Term
Aggregate
Intrinsic Value
(in years)(in thousands)
Outstanding as of December 31, 20204,352,095 $12.22 8.68
Granted1,507,633 34.69 — — 
Exercised(401,587)10.55 — — 
Forfeited(58,334)17.20 — — 
Outstanding as of June 30, 20215,399,807 $18.56 8.48$210,541 
Options exercisable as of June 30, 20211,642,213 $12.39 7.91$73,894 
As of June 30, 2021, the Company had unrecognized equity-based compensation expense of $54.8 million related to stock options issued to employees and non-employees, which is expected to be recognized over a weighted average period of 2.6 years.
ESPP
In 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. As a result of the automatic increase provision of the ESPP, the number of shares of common stock available for issuance under the ESPP increased by 0.3 million shares on January 1, 2021. 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.
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 Coronavirus Aid Relief and Economic Security (“CARES”) Act was signed into law. 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. As of June 30, 2021, the Company forecasts an ordinary pre-tax loss for the year ended December 31, 2021 and, since it maintains a full valuation allowance on its deferred tax assets, the Company did not record an income tax benefit in 2021. Based on the carryback allowance under the CARES Act, the Company recorded an income tax benefit of $0.2 million and $0.3 million for the three and six months ended June 30, 2020, respectively.
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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, 2021, 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, 2021, 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, 2020.
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 March 1, 2021.
AbbVie Agreement
During the three and six months ended June 30, 2021, the Company continued to perform under its agreement with AbbVie, (the “AbbVie Agreement”) pursuant to which the Company recognizes revenues in proportion to the costs incurred. As a result, the Company recognizes as revenue the $100.0 million up-front payment as research and development services are performed, which is expected to be completed through 2024. The following table summarizes research and development costs incurred and revenue recognized in connection with Company's performance under the AbbVie Agreement during the three and six months ended June 30, 2021 and 2020 (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Revenue recognized$2,070 $5,289 $3,567 $8,681 
Costs incurred1,847 3,205 3,168 7,670 
On August 25, 2020, AbbVie exercised its option to license and control further development and commercialization of Morphic’s αvβ6–specific integrin inhibitors for the treatment of fibrotic diseases including idiopathic pulmonary fibrosis (IPF) and additional indications. In connection with the exercise of the option, AbbVie paid the Company $20.0 million, which was
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recognized as revenue during the year ended December 31, 2020.The Company is eligible to receive potential milestones and royalties on future development and commercialization of Morphic’s αvβ6–specific integrin inhibitors, as further described 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 March 1, 2021, all of which have been fully constrained as of June 30, 2021.
As of June 30, 2021, the Company had $68.1 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 aggregate amount of the transaction price allocated to the performance obligations that are partially unsatisfied as of June 30, 2021. The Company had $0.9 million recorded as accounts receivable from AbbVie on the condensed consolidated balance sheet as of December 31. 2020. No amounts were recorded as accounts receivable from AbbVie as of June 30, 2021.
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 and six months ended June 30, 2021, the Company continued to perform under its agreement with Janssen (the "Janssen Agreement"), pursuant to which the Company recognizes revenue in proportion to the costs incurred to date.
Under the terms of the agreement, Janssen paid the Company an upfront fee of $10.0 million for the first two research programs in 2019 and in December 2020 the Company reached an agreement with Janssen to commence work on the third research program, and Janssen paid to the Company $5.0 million for the third research program commencement fee in February 2021. The Company expects to provide research services and recognize revenue through 2024.
The follow table summarizes research and development costs incurred and revenue recognized in connection with Company's performance under the Janssen Agreement during three and six months ended June 30, 2021 and 2020 (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Reimbursement revenue$1,313 $1,843 $2,638 $3,531 
Upfront payment revenue465 561 909 1,075 
Total revenue recognized$1,778 $2,404 $3,547 $4,606 
Costs incurred$1,131 $1,634 $2,270 $3,101 
The Company had $1.3 million and $6.4 million due from Janssen included in accounts receivable on the condensed consolidated balance sheets as of June 30, 2021 and December 31, 2020, respectively.
As of June 30, 2021, $10.4 million of deferred revenue is classified as either current or long-term deferred revenue in the accompanying condensed consolidated balance sheet 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, 2021.
11.Net Loss per Share
Basic net income (loss) per share is calculated by dividing net income (loss) allocable to common stockholders by the weighted-average common shares outstanding during the period, without consideration of common stock equivalents.
For periods with net income, diluted net income per share is calculated by adjusting the weighted-average shares outstanding for the dilutive effect of common stock equivalents, including stock options and restricted common stock and stock units outstanding for the period as determined using the treasury stock method.
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For purposes of the diluted net loss per share calculation, common stock equivalents are excluded from the calculation if their effect would be anti-dilutive. As such, basic and diluted net loss per share applicable to common stockholders are the same for periods with a net loss.
The following tables illustrate the determination of basic and diluted loss per share for each period presented (in thousands, except share data):

Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Net loss$(27,815)$(15,858)$(49,099)$(32,604)
Weighted average common shares outstanding, basic36,179,085 30,360,851 34,863,056 30,274,713 
Net loss per share, basic$(0.77)$(0.52)$(1.41)$(1.08)
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 and Six Months Ended June 30,
20212020
Restricted common stock48,719 224,231 
Restricted stock units51,473 66,216 
Stock options5,399,807 4,694,324 
5,499,999 4,984,771 
In addition to the securities listed in the table above, as of June 30, 2021 the Company had reserved 810,624 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 for the six months ended June 30, 2021.
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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 U.S. Food and Drug Administration, or FDA. Despite significant unsuccessful efforts by others, we believe tremendous untapped potential remains for us to develop oral integrin therapies. The Morphic integrin technology platform, or MInT Platform, was created leveraging our unique understanding of integrin structure and function to develop novel product candidates designed to achieve the potency, high selectivity, and pharmaceutical properties required for oral administration. We are advancing our pipeline, including our lead product candidate, MORF-057, an α4β7-specific integrin inhibitor affecting inflammation, into clinical development for the treatment of inflammatory bowel disease, or IBD. We submitted an investigational new drug application, or IND, for MORF-057 in July 2020, and the FDA permitted the study submitted under the IND to proceed in August 2020. In September 2020, we initiated a Phase 1 clinical trial of MORF-057 in healthy volunteers comprised of single-ascending dose, or SAD, food effect, and multiple-ascending dose, or MAD, cohorts to establish our clinical program and select doses for our Phase 2 program in IBD with an initial focus on ulcerative colitis, or UC.
In March 2021, we announced interim results from the SAD portion of the Phase 1 trial and MORF-057 was found to be generally well tolerated in all five dose cohorts receiving MORF-057 in single doses ranging from 25 mg to 400 mg; no serious or severe adverse events were noted across all subjects in these cohorts. The pharmacokinetic profile exhibited generally dose-proportional and predictable pharmacokinetics, or PK, that continue to support BID (twice-daily) dosing. The key pharmacodynamic, or PD, measurement in the trial was mean α4β7 receptor occupancy (RO), which indicated the percentage of α4β7 receptors bound by MORF-057 to be greater than 95% at 12 hours after a single dose across the three highest dose cohorts.
In July 2021, we announced complete Phase 1 results that included SAD, MAD and food effect (FE) cohorts evaluating MORF-057 for safety, pharmacokinetic and pharmacodynamic measures. A total of 67 eligible healthy subject were enrolled and 66 subjects completed the study. MORF-057 was well tolerated in all cohorts and no safety signals were identified. MORF-057 also demonstrated a predictable and dose-dependent PK profile. Results from the food effect cohort showed that high fat meal intake did not impact trough levels of MORF-057 and indicated that MORF-057 can be administered without regard to food in planned studies in patients. In the key PD measurement of α4β7 RO, MORF-057 demonstrated dose and time-dependent receptor occupancy of α4β7 with complete receptor saturation in all subjects in the 100mg BID cohort. Changes in additional investigational PD biomarkers including α4β7 specific lymphocyte subsets and CCR9 transcripts were consistent with published literature for other intravenous biologic α4β7 inhibitors, providing additional mechanistic validation. These results taken as whole provide a basis upon which to select candidate doses for our upcoming Phase 2 ulcerative colitis program.
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In August 2020, AbbVie exercised the option and now controls and is responsible for the development and commercialization of our αvβ6-specific integrin inhibitor program. In connection with the option exercise, AbbVie made a one-time $20.0 million payment to us. We are entitled to additional payments upon the achievement of certain milestones and royalties in accordance with the AbbVie Agreement. In February 2019, we entered into an agreement with Janssen Pharmaceuticals, Inc., or Janssen, to develop novel integrin therapeutics, or the Janssen Agreement. In February 2021 Janssen paid us $5.0 million to commence work on a third research program. We are entitled to additional payments upon the achievement of certain milestones and royalties in accordance with the Janssen Agreement. We continue to advance additional discovery programs with AbbVie and Janssen as a part of these collaborations.

Beyond these targets, we are using our MInT Platform to advance a broad pipeline of preclinical programs across a variety of additional therapeutic areas, all of which aim to harness the potential of inhibition or activation of an integrin receptor. Additional wholly-owned programs have advanced near to or into lead optimization phase of discovery. We presented positive preclinical data from our αvβ8 program at the American Association for Cancer Research Annual Meeting demonstrating anti-tumor activity in checkpoint refractory cancer models and continue our focus on advancing our avb8 program in oncology.
In March 2021, we announced an upsized underwritten public offering of 3,500,000 shares of our common stock at a price to the public of $70.00 per share, resulting in net proceeds of approximately $230.0 million, after deducting underwriting discounts, commissions and other offering expenses paid by us.

In July 2020, we entered into an Open Market Sale Agreement, or the ATM Agreement, with Jefferies LLC, or Jefferies, with respect to an at-the-market offering program, or the Previous ATM, under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, having an aggregate offering price of up to $75,000,000, referred to as Placement Shares, through Jefferies as its sales agent. During the three months ended June 30, 2021, we sold no shares under our ATM Agreement. During the six months ended June 30, 2021, we issued and sold 240,704 shares for net proceeds of $7.2 million after deducting offering commissions and offering expenses paid by us. As of June 30, 2021, we had approximately $32.4 million of common stock remaining available for sale under the ATM. The ATM Agreement will be amended upon the filing of this report such that, as of the date hereof a new at-the-market offering, or the New ATM, will be established, with an aggregate offering price of up to $150,000,000. The Company entered into an Amendment No. 1 to the ATM Agreement with Jefferies in connection with the New ATM. Under the New ATM, the Company may offer and sell, from time to time at its sole discretion, shares of our common stock, referred to as Placement Shares, through Jefferies as its sales agent. The Company may not sell any Placement Shares under the Previous ATM after the date hereof.
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 to date have been limited to payments received from our collaboration agreements with AbbVie and Janssen, discussed further in Note 10 of the accompanying condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We do not have any products approved for sale and have not generated any revenue from product sales. From inception through June 30, 2021, we raised an aggregate of approximately $677.9 million of gross proceeds primarily through the issuance of equity, including our convertible preferred equity securities, our IPO, our underwritten public offering in March 2021, and sales of shares of our common stock pursuant to the ATM Agreement, along with payments received under our collaboration agreements.

Since inception, we have incurred significant operating losses. As of June 30, 2021, we had an accumulated deficit of $191.6 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.

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As of June 30, 2021, we had cash, cash equivalents, and marketable securities of $431.6 million. We believe that our existing cash and cash equivalents, and marketable securities will enable us to fund our operating expenses and capital expenditure requirements until the end of 2024.
Impact of the COVID-19 Pandemic
The extent of the ongoing impact of the novel strain of coronavirus, SARS-CoV-2, or COVID-19, on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, including the rise of variants that may be less responsive to existing vaccines, impact on our clinical and 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 is prevalent in the locations where we, our collaborators, our contract research organizations, or CROs, suppliers or third-party business partners conduct business. Although we currently have not experienced much of an impact on our business, excluding minor changes to our development timelines, if there are closures or other restrictions in places we or our vendors work or transport supply that may result in constrained supply of our product candidates or delays in our clinical and preclinical studies or planned clinical trials, our business, results of operations and overall financial performance in future periods could be materially adversely impacted. In addition, we have experienced impacts 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, and delays in review by the FDA and comparable foreign regulatory agencies. 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 overall financial performance until future periods. See “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q 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 that held approximately 5% of our common stock at the time of the agreement, 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 $100.0 million for research and development activities, and we provided to AbbVie exclusive license options on product candidates directed at multiple targets. In August 2020, AbbVie exercised its option to license the selective αvβ6-specific integrin inhibitors program and paid us a one-time payment of $20.0 million.

For each lead compound against a target under the AbbVie Agreement, we 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.
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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, during 2019, Janssen paid us an upfront fee of $10.0 million for each of the first two research programs, and in December 2020 we agreed with Janssen to commence work on the third research program, and in February 2021 Janssen paid us $5.0 million for the third research program commencement fee. Janssen also funds research activities at agreed upon rates. Pursuant to the terms of the agreement, we are also eligible to receive additional milestone and royalty payments.
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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;
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;
expenses incurred under agreements with contract research organizations and investigative sites that conduct our clinical trials;
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 capitalized and 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 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;
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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.
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 incur 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 general and administrative expenses related to supporting 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 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.
On March 27, 2020, the Coronavirus Aid Relief and Economic Security, or the CARES Act, was signed into law. 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 net operating loss generated during fiscal year 2020. Based on the anticipated recovery of the federal income tax paid for the December 31, 2019 tax period, we recorded a $0.2 million and $0.3 million benefit from income taxes during the three and six months ended June 30, 2020.
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Results of Operations
Comparison of the Three Months Ended June 30, 2021 and June 30, 2020
The following table summarizes our results of operations for the three months ended June 30, 2021 and June 30, 2020:
Three months endedChange
June 30, 2021June 30, 2020$%
(in thousands, except percentages)
Collaboration revenue$3,848 $7,693 $(3,845)(50)%
Operating expenses:
Research and development24,552 19,918 4,634 23 %
General and administrative7,139 4,195 2,944 70 %
Total operating expenses31,691 24,113 7,578 31 %
Loss from operations(27,843)(16,420)(11,423)70 %
Other income:
Interest income, net35 413 (378)(92)%
Other expenses(7)(6)(1)*
Total other income, net28 407 (379)(93)%
Loss before benefit from income taxes$(27,815)$(16,013)$(11,802)74 %
Benefit from income taxes— 155 (155)*
Net loss$(27,815)$(15,858)$(11,957)75 %
*Percentage not meaningful
Collaboration Revenue
The decrease in collaboration revenue of $3.8 million is primarily attributable to a decrease in activity under the AbbVie Agreement. In the prior year period, we successfully completed preclinical studies for the αvβ6 program, which resulted in the revision of our estimates to satisfy our performance obligations in 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 $4.6 million, or 23% from $19.9 million for the three months ended June 30, 2020 to $24.6 million for the three months ended June 30, 2021. A significant portion of our research and development costs have been external clinical and preclinical contract research organization (“CRO”) costs, which we track on a program-by-program basis related to a clinical product candidate, once the candidate has been identified. Our internal research and development costs are primarily personnel-related costs, depreciation, and other indirect costs. The following table summarizes our research and development expense for three months ended June 30, 2021 and 2020:
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Three months endedChange
June 30, 2021June 30, 2020$%
(in thousands, except percentages)
External costs by program:
MORF-057$10,523 $7,712 $2,811 36 %
αvβ6 Program— 1,195 (1,195)(100)%
Other AbbVie Agreement programs1,222 1,012 210 21 %
Janssen Agreement programs436 853 (417)(49)%
αvβ1 Program271 892 (621)(70)%
αvβ8 Program1,924 996 928 93 %
Other early development candidates and unallocated costs1,204 216 988 457 %
Total external costs15,580 12,876 2,704 21 %
Internal costs:
Employee compensation and benefits7,973 6,107 1,866 31 %
Facility and other999 935 64 %
Total internal costs8,972 7,042 1,930 27 %
Total research and development expense$24,552 $19,918 $4,634 23 %
*Percentage not meaningful
The changes 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, 2020 to the period ended June 30, 2021 primarily related to the ongoing Phase 1 clinical study for MORF-057, manufacturing costs to support further development of MORF-057, as well as other external research costs to support our early development candidates, including αvβ8. These increases were partially offset by a decrease in expenditures associated with the αvβ6 program as a result of the option exercise by AbbVie in August 2020.
The $1.9 million increase in internal costs from the three months ended June 30, 2020 to the period ended June 30, 2021 was primarily driven by an increase in headcount to support the ongoing clinical activity for MORF-057 as well as our early stage pipeline candidates.
General and Administrative Expenses
General and administrative expense increased by $2.9 million, or 70%, from $4.2 million for the three months ended June 30, 2020 to $7.1 million for the three months ended June 30, 2021. The increase in general and administrative expense was primarily attributable to a $1.6 million increase in non-cash stock-based compensation expense, a $0.3 million increase in personnel costs, and a $0.8 million increase in professional and consulting fees.
Interest Income, Net
Interest income decreased by $0.4 million due to a decrease in marketable securities held during the current period as well as a decrease in yields earned on marketable securities during the three months ended June 30, 2021.
Benefit from Income Tax
On March 27, 2020, the CARES Act was signed into law. 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. Based on 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.


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Comparison of the Six Months Ended June 30, 2021 and 2020
The following table summarizes our results of operations for the six months ended June 30, 2021 and 2020:
Six Months Ended June 30,Change
20212020$%
(in thousands, except percentages)
Collaboration revenue$7,114 $13,287 $(6,173)(46)%
Operating expenses:
Research and development43,165 38,878 4,287 11 %
General and administrative13,091 8,618 4,473 52 %
Total operating expenses56,256 47,496 8,760 18 %
Loss from operations(49,142)(34,209)(14,933)44 %
Other income:
Interest income, net63 1,299 (1,236)(95)%
Other expenses(20)(6)(14)233 %
Total other income, net43 1,293 (1,250)(97)%
Loss before benefit from income taxes$(49,099)$(32,916)$(16,183)49 %
Benefit from income taxes— 312 (312)*
Net loss$(49,099)$(32,604)$(16,495)51 %
*Percentage not meaningful
Collaboration Revenue
The decrease in collaboration revenue of $6.2 million is primarily attributable to a decrease in activity under the AbbVie Agreement. In the prior year period, we successfully completed preclinical studies for the αvβ6 program, which resulted in the revision of our estimates to satisfy our performance obligations in the six 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 $4.3 million. A significant portion of our research and development costs have been external clinical and 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 six months ended June 30, 2021 and 2020:
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