SEC Filing – Morphic Therapeutic

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morf-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended September 30, 2021


☐			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 November 1, 2021 was 36,961,618.

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TABLE OF CONTENTS


			Page

Part I—Financial Information			2
Item 1—Condensed Consolidated Financial Statements (unaudited)			2
Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020			2
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020			3
Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020			4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3—Quantitative and Qualitative Disclosures about Market Risk			30
Item 4—Controls and Procedures			30

Part II—Other Information			31
Item 1—Legal Proceedings			31
Item 1A—Risk Factors			32
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds			83
Item 3—Defaults Upon Senior Securities			83
Item 4—Mine Safety Disclosures			83
Item 5—Other Information			83
Item 6—Exhibits			83
Signatures			84

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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)


	September 30,		December 31,
	2021		2020
Assets
Current assets:
Cash and cash equivalents	$	184,159	$	102,047
Short-term marketable securities	243,417		126,217
Accounts receivable	2,618		7,314
Prepaid expenses and other current assets	5,210		3,857
Total current assets	435,404		239,435


Property and equipment, net	2,584		2,606
Restricted cash	560		275
Other assets	15		66
Total assets	$	438,563	$	242,382

Liabilities
Current liabilities:
Accounts payable	$	3,176	$	3,845
Accrued expenses	8,417		10,160
Deferred revenue, current portion	30,148		25,266
Deferred rent, current portion	23		167
Total current liabilities	41,764		39,438

Long-term liabilities:
Deferred revenue, net of current portion	46,495		57,672
Deferred rent, net of current portion	139		75
Total liabilities	88,398		97,185

Stockholders’ Equity
Preferred shares, $0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2021 and December 31, 2020	—		—
Common shares, $0.0001 par value, 400,000,000 shares authorized, 36,892,411 shares issued and outstanding as of September 30, 2021 and 32,037,686 shares issued and outstanding as of December 31, 2020	4		3
Additional paid‑in capital	566,906		287,727
Accumulated deficit	(216,652)		(142,512)
Accumulated other comprehensive loss	(93)		(21)
Total stockholders’ equity	350,165		145,197
Total liabilities and stockholders’ equity	$	438,563	$	242,382

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 INCOME (LOSS) (Unaudited) (In thousands, except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Collaboration revenue	$	3,124	$	25,757	$	10,238	$	39,044
Operating expenses:
Research and development	20,966		15,998		64,131		54,877
General and administrative	7,276		4,751		20,367		13,368
Total operating expenses	28,242		20,749		84,498		68,245
(Loss) Income from operations	(25,118)		5,008		(74,260)		(29,201)
Other income:
Interest income, net	77		237		140		1,536
Other expense	—		(6)		(20)		(12)
Total other income, net	77		231		120		1,524
(Loss) Income before benefit from income taxes	(25,041)		5,239		(74,140)		(27,677)
Benefit from income taxes	—		115		—		427
Net (loss) income	$	(25,041)	$	5,354	$	(74,140)	$	(27,250)
Net (loss) income per share, basic	$	(0.69)	$	0.18	$	(2.09)	$	(0.90)
Net (loss) income per share, diluted	$	(0.69)	$	0.17	$	(2.09)	$	(0.90)

Weighted average common shares outstanding, basic	36,547,222		30,533,847		35,392,153		30,368,437
Weighted average common shares outstanding, diluted	36,547,222		32,366,141		35,392,153		30,368,437

Comprehensive (loss) income:
Net (loss) income	$	(25,041)	$	5,354	$	(74,140)	$	(27,250)
Other comprehensive loss:
Unrealized holding losses on marketable securities	(73)		(190)		(72)		(10)
Total other comprehensive loss	(73)		(190)		(72)		(10)
Comprehensive (loss) income	$	(25,114)	$	5,164	$	(74,212)	$	(27,260)

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) (In thousands, except share data)


	Common Shares			Additional Paid‑in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2020	32,037,686	$	3	$	287,727	$	(142,512)	$	(21)	$	145,197
Equity‑based compensation expense	—	—		4,442		—		—		4,442
Vesting of restricted shares	46,893	—		—		—		—		—
Issuance of common shares upon stock option exercises	279,431	—		2,657		—		—		2,657
Issuance of common shares under the Employee Stock Purchase Plan	26,561	—		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, 2021	36,131,275	$	4	$	532,700	$	(163,796)	$	(16)	$	368,892
Equity‑based compensation expense	—	—		5,308		—		—		5,308
Vesting of restricted shares	24,080	—		—		—		—		—
Issuance of common shares upon stock option exercises	122,156	—		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, 2021	36,277,511	$	4	$	539,536	$	(191,611)	$	(20)	$	347,909
Equity‑based compensation expense	—	—		5,791		—		—		5,791
Vesting of restricted shares	34,204	—		—		—		—		—
Issuance of common shares upon stock option exercises	273,624	—		3,683		—		—		3,683
Issuance of common stock under the Employee Stock Purchase Plan	9,002	—		482		—		—		482
Issuance of common shares through at-the-market offering, net of issuance costs of $0.9 million	298,070	—		17,414		—		—		17,414
Unrealized holding losses on marketable securities	—	—		—		—		(73)		(73)
Net loss	—	—		—		(25,041)		—		(25,041)
Balance at September 30, 2021	36,892,411	$	4	$	566,906	$	(216,652)	$	(93)	$	350,165

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 Shares			Additional Paid‑in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Shares	Amount
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
Equity-based compensation expense	—	—		2,996		—		—		2,996
Vesting of restricted shares	56,991	—		—		—		—		—
Issuance of common shares through at-the-market offering, net of issuance costs of $0.6 million	256,879	—		6,319		—		—		6,319
Issuance of common shares upon stock option exercises	60,115	—		477		—		—		477
Issuance of common shares under the Employee Stock Purchase Plan	31,893	—		431		—		—		431
Unrealized holding losses on marketable securities	—	—		—		—		(190)		(190)
Net income	—	—		—		5,354		—		5,354
Balance at September 30, 2020	30,827,653	3		$	255,030	$	(124,763)	$	34	$	130,304

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)


	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(74,140)	$	(27,250)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	754		852
Premium amortization and discount accretion on marketable securities	531		429
Equity‑based compensation	15,541		8,029
Loss on disposal of equipment	4		—
Change in operating assets and liabilities:
Accounts receivable	4,696		1,832
Prepaid expenses and other current assets	(1,353)		(530)
Other assets	51		55
Accounts payable	(842)		(1,893)
Accrued expenses	(1,743)		818
Deferred revenue	(6,295)		(13,878)
Deferred rent	(80)		(36)

Net cash used in operating activities	(62,876)		(31,572)
Cash flows from investing activities:
Purchases of marketable securities	(223,803)		(95,049)
Proceeds from maturities of marketable securities	106,000		115,000
Purchase of property and equipment	(563)		(475)
Net cash (used in) provided by investing activities	(118,366)		19,476
Cash flows from financing activities:

Proceeds from issuance of common shares under Employee Stock Purchase Plan	1,095		1,112
Proceeds from at-the-market offering, net of issuance costs	24,645		6,319
Proceeds from secondary offering, net of issuance costs	229,982		—
Proceeds from issuance of common shares upon stock option exercises	7,917		1,186
Net cash provided by financing activities	263,639		8,617
Net increase (decrease) in cash, cash equivalents and restricted cash	82,397		(3,479)
Cash, cash equivalents and restricted cash, beginning of period	102,322		101,834
Cash, cash equivalents and restricted cash, end of period	$	184,719	$	98,355

Non-cash investing activities:
Purchases of property and equipment included in accounts payable and accrued expenses	$	173	$	15



Supplemental cash flow information:
Cash paid for taxes	$	130	$	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 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, 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 Original 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 Original Agreement, and also has provided Jefferies with customary indemnification and contribution rights. On August 11, 2021, the Company entered into an Amendment No. 1 to the Open Market Sale Agreement with Jefferies, establishing a new at-the-market offering (“New ATM”) with an aggregate offering price of up to $150,000,000, also subject to a commission equal to 3.0% of gross sales proceeds from Placement Shares sold through Jefferies. 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.

During the three months ended September 30, 2021, 298,070 shares under the ATM were sold for net proceeds of $17.4 million after deducting offering commissions and offering expenses paid by the Company. During the nine months ended September 30, 2021, the Company issued and sold 538,774 shares for net proceeds of $24.6 million after deducting offering commissions and offering expenses paid by the Company. As of September 30, 2021, the Company had approximately $138.9 million of common stock remaining available for sale under the ATM.

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

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condensed or omitted. These unaudited interim condensed consolidated financial statements, in the 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 September 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 nine months ended September 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

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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.

In August 2021, the Company exercised its one-time extension right for its existing lease for 35,000 square feet of office and laboratory space through May 2025, as provided for under the terms of the lease. The Company is currently evaluating the effect of adopting the requirements of ASU 2016-02 as it relates to its facility lease, as amended in August 2021, and 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.

At September 30, 2021, investments also include corporate debt securities which are valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data.

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 September 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 September 30, 2021
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds, included in cash and cash equivalents	$	143,883	$	143,883	$	—	$	—
Marketable securities:
U.S. Treasury securities	32,087		—		32,087		—

Corporate debt securities	211,330		—		211,330		—


Total assets	$	387,300	$	143,883	$	243,417	$	—



	Fair Value Measurements at December 31, 2020
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds, included in cash and cash equivalents	$	101,760	$	101,760	$	—	$	—

Marketable securities:
U.S. Treasury securities	126,217		—		126,217		—
Total assets	$	227,977	$	101,760	$	126,217	$	—

The money market funds included in the tables 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 September 30, 2021 and December 31, 2020. Marketable securities included in the tables above consist of U.S. Treasury securities and corporate debt securities, and these securities are categorized as Level 2 as of September 30, 2021 and December 31, 2020. During the nine months ended September 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 September 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 September 30, 2021
	Maturity	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Aggregate estimated fair value
Marketable securities:
U.S. Treasury securities	less than 1 year	$	32,084	$	3	$	—	$	32,087

Corporate debt securities	within 2 years	211,400		13		(83)		211,330


Total marketable securities		$	243,484	$	16	$	(83)	$	243,417


	As of December 31, 2020
	Maturity	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Aggregate estimated fair value
Marketable securities:
U.S. Treasury securities	less than 1 year	$	126,212	$	7	$	(2)	$	126,217
Total marketable securities		$	126,212	$	7	$	(2)	$	126,217

All of the Company’s investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income (loss). The Company considers all available-for-sale securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs and therefore classifies all securities with maturity dates beyond 90 days at the date of purchase as current assets.

5.Cash, Cash Equivalents and Restricted Cash

Restricted cash consists of a letter of credit in the amount of $560,000 issued to the landlord of the Company’s facility lease as of September 30, 2021. The letter of credit increased from $275,000 in August 2021 due to the operating lease extension discussed further in Note 2. The terms of the letter of credit extend beyond one year. The following table reconciles cash, cash equivalents and restricted cash per the balance sheet to the statements of cash flows (in thousands):


	September 30,		December 31,		September 30,		December 31,
	2021		2020		2020		2019

Cash and cash equivalents	$	184,159	$	102,047	$	98,080	$	101,559
Restricted cash	560		275		275		275
Total cash, cash equivalents and restricted cash	$	184,719	$	102,322	$	98,355	$	101,834

6.Accrued Expenses

At September 30, 2021 and December 31, 2020 accrued expenses consist of the following (in thousands):



	September 30,		December 31,
	2021		2020
Payroll and related expenses	$	4,390	$	5,148
Research and development activities	3,019		4,335
Other expenses	1,008		677
	$	8,417	$	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 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 September 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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Stock options	$	5,403	$	2,672	$	14,448	$	6,734
Restricted common stock	71		147		224		832
Restricted stock units	163		55		385		124
ESPP	154		122		484		339
Total	$	5,791	$	2,996	$	15,541	$	8,029

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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Research and development expense	$	2,599	$	1,480	$	7,406	$	4,623
General and administrative expense	3,192		1,516		8,135		3,406
Total	$	5,791	$	2,996	$	15,541	$	8,029

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Restricted Common Stock

The following table summarizes the restricted stock awards activity during the nine months ended September 30, 2021:


	Number of Shares	Weighted Average Fair Value per Share at Issuance
Unvested restricted common stock as of December 31, 2020	100,989	$	4.32
Granted	—	—
Vested	(73,056)	4.32
Forfeited	(3,540)	4.32
Unvested restricted common stock as of September 30, 2021	24,393	$	4.32

As of September 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 0.3 years.

Restricted Stock Units

The following table summarizes the restricted stock units activity during the nine months ended September 30, 2021:


	Number of Shares	Weighted Average Fair Value per Share at Issuance
Unvested restricted stock units as of December 31, 2020	66,216	$	10.84
Granted	7,000	57.73
Vested	(32,121)	10.84
Forfeited	—	—
Unvested restricted stock units as of September 30, 2021	41,095	$	18.83

As of September 30, 2021, the Company had unrecognized equity-based compensation expense of $0.5 million related to the restricted stock units, which is expected to be recognized over a weighted average period of 2.2 years.

Stock Options

The following table summarizes the Company’s stock option activity during the nine months ended September 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, 2020	4,352,095	$	12.22	8.68
Granted	1,550,333	35.36		—	—
Exercised	(675,211)	11.73		—	—
Forfeited	(140,722)	17.09		—	—
Outstanding as of September 30, 2021	5,086,495	$	19.20	8.38	$	191,512
Options exercisable as of September 30, 2021	1,729,711	$	12.98	7.97	$	75,513

As of September 30, 2021, the Company had unrecognized equity-based compensation expense of $50.3 million related to stock options issued to employees and non-employees, which is expected to be recognized over a weighted average period of 2.4 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

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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 September 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 $0.1 million and $0.4 million for the three and nine months ended September 30, 2020, respectively.

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 September 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.

In August 2021, the Company exercised its one-time extension right for its existing lease for 35,000 square feet of office and laboratory space through May 2025, as provided for under the terms of the lease. During the three and nine months ended September 30, 2021, there were no other 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.

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Minimum annual rent payments after the exercise of the lease extension right, excluding operating expenses and taxes, which are not fixed for future periods, are as follows (in thousands):


Year ending December 31,	Total Minimum Lease Payments
Remainder of 2021	$	316
2022	1,507
2023	1,700
2024	1,733
2025	727
Total minimum lease payments	$	5,983

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 nine months ended September 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 nine months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue recognized	$	1,476	$	23,647	$	5,043	$	32,328
Costs incurred	1,206		2,480		4,374		10,150

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 recognized as revenue during the three and nine months ended September 30, 2021. 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 September 30, 2021.

As of September 30, 2021, the Company had $66.7 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 September 30, 2021. The Company had $29 thousand and $0.9 million recorded as accounts receivable from AbbVie on the condensed consolidated balance sheet as of September 30, 2021 and December 31. 2020, respectively.

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

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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 nine months ended September 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 following table summarizes research and development costs incurred and revenue recognized in connection with Company's performance under the Janssen Agreement during three and nine months ended September 30, 2021 and 2020 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Reimbursement revenue	$	1,276	$	1,634	$	3,914	$	5,165
Upfront payment revenue	372		476		1,281		1,551
Total revenue recognized	$	1,648	$	2,110	$	5,195	$	6,716
Costs incurred	$	1,118	$	1,439	$	3,388	$	4,540

The Company had $2.6 million and $6.4 million due from Janssen included in accounts receivable on the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021, $10.0 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 September 30, 2021.

11.Net (Loss) Income 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.

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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net (loss) income	$	(25,041)	$	5,354	$	(74,140)	$	(27,250)
Weighted average common shares outstanding, basic	36,547,222		30,533,847		35,392,153		30,368,437
Net (loss) income per share, basic	$	(0.69)	$	0.18	$	(2.09)	$	(0.90)

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net (loss) income	$	(25,041)	$	5,354	$	(74,140)	$	(27,250)
Weighted average common shares outstanding, basic	36,547,222		30,533,847		35,392,153		30,368,437

Dilutive impact from:
Stock options	—