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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13, OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
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 October 31, 2022 was 38,552,521.



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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)
September 30,December 31,
20222021
Assets
Current assets:
Cash and cash equivalents$84,961 $171,434 
Marketable securities286,799 236,701 
Accounts receivable662 2,307 
Prepaid expenses and other current assets9,988 7,892 
Total current assets382,410 418,334 
Operating lease right-of-use assets3,845 4,806 
Property and equipment, net2,170 2,583 
Restricted cash560 560 
Other assets196 7 
Total assets$389,181 $426,290 
Liabilities
Current liabilities:
Accounts payable$4,367 $4,798 
Accrued expenses10,874 12,838 
Deferred revenue, current portion3,345 20,628 
Total current liabilities18,586 38,264 
Long-term liabilities:
Operating lease liability, net of current portion2,730 3,838 
Deferred revenue, net of current portion2,804 47,489 
Total liabilities24,120 89,591 
Commitments and contingencies (Note 9)
Stockholders’ Equity
Preferred shares, $0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2022 and December 31, 2021
  
Common shares, $0.0001 par value, 400,000,000 shares authorized, 38,532,370 shares issued and outstanding as of September 30, 2022 and 37,085,397 shares issued and outstanding as of December 31, 2021
4 4 
Additional paid‑in capital641,872 575,231 
Accumulated deficit(272,718)(238,054)
Accumulated other comprehensive loss(4,097)(482)
Total stockholders’ equity365,061 336,699 
Total liabilities and stockholders’ equity$389,181 $426,290 


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 September 30,Nine Months Ended September 30,
2022202120222021
Collaboration revenue$2,055 $3,124 $64,673 $10,238 
Operating expenses:
     Research and development25,245 20,966 77,360 64,131 
     General and administrative8,303 7,276 24,128 20,367 
          Total operating expenses33,548 28,242 101,488 84,498 
Loss from operations(31,493)(25,118)(36,815)(74,260)
Other income:
     Interest income, net1,657 77 2,326 140 
     Other expense, net(156) (144)(20)
          Total other income, net1,501 77 2,182 120 
Loss before provision for income taxes(29,992)(25,041)(34,633)(74,140)
     Provision for income taxes(29) (31) 
Net loss$(30,021)$(25,041)$(34,664)$(74,140)
Net loss per share, basic and diluted$(0.78)$(0.69)$(0.91)$(2.09)
Weighted average common shares outstanding, basic and diluted38,490,910 36,547,222 37,961,262 35,392,153 
Comprehensive loss:
     Net loss$(30,021)$(25,041)$(34,664)$(74,140)
Other comprehensive loss:
     Unrealized holding losses on marketable securities, net of tax(1,680)(73)(3,615)(72)
          Total other comprehensive loss(1,680)(73)(3,615)(72)
Comprehensive loss$(31,701)$(25,114)$(38,279)$(74,212)







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 SharesAdditional
Paid‑in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Income (Loss)
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 202137,085,397 $4 $575,231 $(238,054)$(482)$336,699 
Equity‑based compensation expense— — 6,765 — — 6,765 
Vesting of restricted shares1,990     — 
Issuance of common shares upon stock option exercises146,237 — 2,127 — — 2,127 
Issuance of common shares under the Employee Stock Purchase Plan16,845 — 571 — — 571 
Unrealized holding losses on marketable securities— — — — (1,310)(1,310)
Net loss— — — (31,484)— (31,484)
Balance at March 31, 202237,250,469 $4 $584,694 $(269,538)$(1,792)$313,368 
Equity‑based compensation expense— — 7,623 — — 7,623 
Vesting of restricted shares3,681 — — — — — 
Issuance of common shares upon stock option exercises194,442 — 1,573 — — 1,573 
Issuance of common shares through at-the-market offering, net of issuance costs of $1.3 million
1,000,000 — 39,210 — — 39,210 
Unrealized holding losses on marketable securities— — — — (625)(625)
Net income— — — 26,841 — 26,841 
Balance at June 30, 2022 38,448,592 $4 $633,100 $(242,697)$(2,417)$387,990 
Equity‑based compensation expense— — 7,537 — — 7,537 
Issuance of common shares upon stock option exercises70,352 — 921 — — 921 
Issuance of common stock under the Employee Stock Purchase Plan13,426 — 314 — — 314 
Unrealized holding losses on marketable securities— — — — (1,680)(1,680)
Net loss— — — (30,021)— (30,021)
Balance at September 30, 202238,532,370 $4 $641,872 $(272,718)$(4,097)$365,061 

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Common SharesAdditional
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 stock 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 
Equity‑based compensation expense— — 5,791 — — 5,791 
Vesting of restricted shares34,204 — — — — 
Issuance of common shares upon stock option exercises273,624 — 3,683 — — 3,683 
Issuance of common stock under the Employee Stock Purchase Plan9,002 — 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, 202136,892,411 $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 CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended September 30,
20222021
Cash flows from operating activities:
Net loss$(34,664)$(74,140)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization762 754 
Premium amortization and discount accretion on marketable securities1,137 531 
Equity‑based compensation21,925 15,541 
Loss on sale of marketable securities154  
Loss on disposal of equipment 4 
Change in operating assets and liabilities:
Accounts receivable1,645 4,696 
Prepaid expenses and other current assets(2,031)(1,353)
Other assets(189)51 
Operating lease right-of-use assets961 785 
Accounts payable(519)(842)
Accrued expenses(2,215)(1,743)
Deferred revenue(61,968)(6,295)
Operating lease liabilities(857)(865)
Net cash used in operating activities(75,859)(62,876)
Cash flows from investing activities:
Purchases of marketable securities(235,773)(223,803)
Proceeds from maturities of marketable securities173,623 106,000 
Proceeds from sale of marketable securities7,146  
Purchase of property and equipment(301)(563)
Net cash used in investing activities(55,305)(118,366)
Cash flows from financing activities:
Proceeds from issuance of common shares under Employee Stock Purchase Plan885 1,095 
Proceeds from at-the-market offering, net of issuance costs39,250 24,645 
Proceeds from secondary offering, net of issuance costs 229,982 
Proceeds from issuance of common shares upon stock option exercises4,556 7,917 
Net cash provided by financing activities44,691 263,639 
Net (decrease) increase in cash, cash equivalents and restricted cash(86,473)82,397 
Cash and cash equivalents and restricted cash, beginning of period171,994 102,322 
Cash and cash equivalents and restricted cash, end of period$85,521 $184,719 
Non-cash activities:
Purchases of property and equipment included in accounts payable and accrued expenses$48 $173 
Amounts from exercise of stock options included in prepaid expenses and other current assets$65 $ 
Unpaid issuance costs for at-the-market offering included in accounts payable and accrued expenses$40 $ 
Right-of-use assets obtained in exchange for operating lease liabilities$ $4,434 

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 offering program (the “Previous ATM”) under which the Company could offer and sell, from time to time at its sole discretion, shares of our common stock, having an aggregate offering amount of up to $75.0 million, 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 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 program (the “New ATM”) with an aggregate offering amount of up to $150.0 million, 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 nine months ended September 30, 2022, the Company issued and sold 1,000,000 shares under the New ATM for net proceeds of approximately $39.2 million after deducting offering commissions and expenses. As of September 30, 2022, the Company had approximately $97.2 million of common stock remaining available for sale under the New 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.
On March 2, 2022, the Company incorporated Morphic Therapeutic UK Ltd in London, United Kingdom (the “U.K.”), to support Company functions outside of the United States.
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., Morphic Therapeutic UK Ltd, and a Massachusetts Security Corporation, organized in December 2019. 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, 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, 2022 and 2021.
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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, 2021, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2022.
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, 2022 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company’s 2021 Annual Report on Form 10-K, except as described below.
As disclosed in Note 1, on March 2, 2022, the Company incorporated Morphic Therapeutic UK Ltd in London, U.K., to support Company functions outside of the United States. The geographic location of all long-lived assets of the Company continues to be the United States.
The functional reporting currency of Morphic Therapeutic UK Ltd is the United States Dollar. Foreign currency remeasurement is included in other income (expense) in the Company's consolidated statements of operations.
Reclassification
Certain amounts have been reclassified for the nine months ended September 30, 2021 in the current Form 10-Q to conform with current year presentation. As disclosed in Note 2 to the Company's 2021 Annual Report on Form 10-K, in February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with guidance regarding the accounting for and disclosure of leases. As the Company adopted Topic 842 in the annual period ended December 31, 2021 effective January 1, 2021, the Company reclassified certain amounts in the Company's cash flows from operating activities in the current Form 10-Q. Amounts for the nine months ended September 30, 2021 from the change in deferred rent were reclassified as changes in operating lease right-of-use assets and changes in operating lease liabilities. There were no changes to total cash flows or to cash flows from operating activities, investing activities or financing activities as a result of this reclassification.
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, 2022, investments include U.S. Treasury securities, U.S. government-sponsored enterprise securities and corporate debt securities, including corporate bonds and commercial paper, 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, 2022 and December 31, 2021 (in thousands) and indicate the level within the fair value hierarchy where each measurement is classified.
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Fair Value Measurements at September 30, 2022
TotalLevel 1Level 2Level 3
Assets:
Cash equivalents$84,314 $44,484 $39,830 $ 
Marketable securities:
U.S. Treasury securities177,220  177,220  
U.S. government-sponsored enterprise securities9,919  9,919  
Commercial paper9,767  9,767  
Corporate bonds89,893  89,893  
Total assets$371,113 $44,484 $326,629 $ 
Fair Value Measurements at December 31, 2021
TotalLevel 1Level 2Level 3
Assets:
Cash equivalents$171,142 $171,142 $ $ 
Marketable securities:
U.S. Treasury securities16,212  16,212  
Commercial paper99,898  99,898  
Corporate bonds120,591  120,591  
Total assets$407,843 $171,142 $236,701 $ 
Cash equivalents consist of money market funds and U.S. Treasury securities as of September 30, 2022 and money market funds as of December 31, 2021. 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, 2022 and December 31, 2021. The U.S. Treasury securities included in cash equivalents as of September 30, 2022 are considered highly liquid investments and mature within three months from the date of purchase. Marketable securities included in the tables above consist of U.S. Treasury securities, U.S. government-sponsored enterprise securities, commercial paper and corporate bonds, and these securities are categorized as Level 2 as of September 30, 2022 and December 31, 2021. The Company had no liabilities measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021.
The Company believes that the carrying amounts of the Company’s consolidated financial instruments, including prepaid expenses and other current assets, accounts receivable, accounts payable, and accrued expenses approximate fair value due to the short-term nature of those instruments.
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, 2022
MaturityAmortized
cost
Gross
unrealized
holding gains
Gross
unrealized
holding losses
Aggregate
estimated
fair value
Marketable securities:
U.S. Treasury securitieswithin 2 years$179,332 $ $(2,112)$177,220 
U.S. government-sponsored enterprise securitieswithin 2 years10,000  (81)9,919 
Commercial paperless than 1 year9,767   9,767 
Corporate bondswithin 2 years91,772  (1,879)89,893 
Total marketable securities$290,871 $ $(4,072)$286,799 

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As of December 31, 2021
Maturity
Amortized
cost
Gross
unrealized
holding gains
Gross
unrealized
holding losses
Aggregate
estimated
fair value
Marketable securities:
U.S. Treasury securitiesless than 1 year$16,224 $ $(12)$16,212 
Commercial paperless than 1 year99,900  (2)99,898 
Corporate bondswithin 2 years121,034  (443)120,591 
Total marketable securities$237,158 $ $(457)$236,701 
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 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 available-for-sale securities as current assets.
The Company determined that there was no material change in the credit risk of the above investments during the three and nine months ended September 30, 2022. As such, an allowance for credit losses was not recognized. As of September 30, 2022, the Company does not intend to sell such securities and it is not more likely than not that the Company will be required to sell the securities before recovery of its amortized cost basis.
Accrued interest receivable on the Company's available-for-sale debt securities totaled $1.2 million as of September 30, 2022 and December 31, 2021.
5.Cash, Cash Equivalents and Restricted Cash
Restricted cash consists of cash collateralizing a letter of credit in the amount of $560,000 issued to the landlord of the Company’s facility lease. The letter of credit and cash collateralizing it increased from $275,000 in August 2021 due to the operating lease extension. 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,
2022202120212020
Cash and cash equivalents$84,961 $171,434 $184,159 $102,047 
Restricted cash560 560 560 275 
Total cash, cash equivalents, and restricted cash$85,521 $171,994 $184,719 $102,322 
6.Accrued Expenses
At September 30, 2022 and December 31, 2021 accrued expenses consisted of the following (in thousands):
September 30,December 31,
20222021
Payroll and related expenses$4,645 $6,396 
Research and development activities3,985 4,268 
Current portion of operating lease liability1,462 1,211 
Other expenses782 963 
Total$10,874 $12,838 
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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 “Original 2019 Plan”) in June 2019, which replaced the 2018 Stock Incentive Plan. The board of directors adopted the Amended and Restated 2019 Equity Incentive Plan (the “A&R 2019 Plan” and, together with the Original 2019 Plan, the “2019 Plan”) on April 27, 2022, which was subsequently approved by the Company's stockholders on June 8, 2022, to revise the total annual compensation that may be awarded to the Company's non-employee directors thereunder. The A&R 2019 Plan provides for the grant of stock options, restricted stock awards, stock bonus awards, cash awards, stock appreciation right, restricted stock units, 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 A&R 2019 Plan increased by 1.5 million shares in January 2022. As of September 30, 2022, there were a total of 1.7 million shares available for future award grants under the A&R 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,
2022202120222021
Stock options$6,674 $5,403 $19,459 $14,448 
Restricted common stock 71 5 224 
Restricted stock units756 163 2,151 385 
Employee Stock Purchase Plan107 154 310 484 
Total$7,537 $5,791 $21,925 $15,541 
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,
2022202120222021
Research and development expense$3,423 $2,599 $10,316 $7,406 
General and administrative expense4,114 3,192 11,609 8,135 
Total$7,537 $5,791 $21,925 $15,541 
Stock Options
The following table summarizes the Company’s stock option activity during the nine months ended September 30, 2022:
Number of
Shares
Weighted
Average
Exercise Price
Outstanding as of December 31, 20214,781,565 $20.03 
Granted1,470,368 39.94 
Exercised(411,031)11.24 
Forfeited or expired(441,934)33.35 
Outstanding as of September 30, 20225,398,968 $25.04 
Options exercisable as of September 30, 20222,704,979 $18.64 
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Restricted Stock Units
The following table summarizes the restricted stock units activity during the nine months ended September 30, 2022:
Number of SharesWeighted
Average Fair
Value per Share
at Issuance
Unvested restricted stock units as of December 31, 20217,000 $57.73 
Granted291,970 43.98 
Vested(3,500)57.73 
Forfeited(32,200)44.75 
Unvested restricted stock units as of September 30, 2022263,270 $44.07 
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.
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, 2022, the Company forecasts an ordinary pre-tax loss for the year ended December 31, 2022 and, since it maintains a full valuation allowance on its deferred tax assets, the Company did not record an income tax benefit in 2022.
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the “Inflation Act”) into law. The Inflation Act contains certain tax measures, including a corporate alternative minimum tax of 15% on some large corporations and an excise tax of 1% on corporate stock buy-backs. The various provisions of the Inflation Act do not have a material impact on the Company’s condensed consolidated financial statements.
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 other key employees, in addition to the indemnification provided for in the restated certificate of incorporation and restated bylaws, as amended. These agreements, among other things, require the Company to indemnify directors, officers, and certain other 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, 2022, 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 nine months ended September 30, 2022, there were no material changes to our contractual obligations and commitments previously disclosed in Note 11 to the consolidated financial statements appearing in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 24, 2022.
Legal Proceedings
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The Company is not currently a party to any material legal proceedings.
10.Option and License Agreements
A detailed description of contractual terms and the Company’s accounting for agreements described below was included in the Company’s audited financial statements and notes in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on February 24, 2022.
AbbVie Agreement
During the three and nine months ended September 30, 2022 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. In June 2022, AbbVie informed the Company that it had decided to exercise its right to terminate the AbbVie Agreement for convenience, subject to a 180 day notification period. The AbbVie Agreement will terminate effective December 2022 or earlier if agreed to by the Company and AbbVie.
The Company recognizes the $100.0 million up-front payment paid to the Company under the AbbVie Agreement as revenue as work is performed in proportion to the costs incurred. Upon receipt of notification of the exercise of the right to terminate the AbbVie Agreement, the Company concluded that there was a contract modification to an existing contract under ASC 606 because the notification of termination of the AbbVie Agreement resulted in a reduction in scope of the Company’s responsibilities for the three remaining research programs thereunder. The terms of the AbbVie Agreement termination notification did not include any additional promised goods or services. As a result of the notification from AbbVie, the Company recognized revenue of $57.7 million on a cumulative catch-up basis during the three months ended June 30, 2022 using an updated measure of progress towards satisfying the research and development services performance obligations thereunder. These research and development performance obligations will be completed through the effective date of the termination in December 2022.
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, 2022 and 2021 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenue recognized$890 $1,476 $60,140 $5,043 
Costs incurred30 1,206 631 4,374 
In August 2020, pursuant to the AbbVie Agreement, AbbVie exercised its option to exclusively license and control further development and commercialization of the Company's αvβ6–specific integrin program for the treatment of fibrotic diseases including IPF and additional fibrosis-related indications. In connection with the exercise of the option, AbbVie paid the Company $20.0 million. Under this license, AbbVie controls and is responsible for the development and commercialization of this program. AbbVie has informed the Company that it does not intend to advance any of its selective oral αvβ6-specific integrin inhibitors due to a suspected on-target / αvβ6-mediated safety signal that has been observed in pre-clinical testing. Details about these observations are planned to be released in an upcoming scientific publication. As a result, the Company does not expect to receive additional payments for this program under the AbbVie Agreement.
As of September 30, 2022, the Company had $0.4 million of remaining deferred revenue, which is classified as current 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, 2022.
Janssen Agreement
During the three and nine months ended September 30, 2022, 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 Janssen 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 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 under the Janssen Agreement through 2024.
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In December 2021, Janssen informed the Company that it had decided not to exercise its options on the first two integrin targets, thus also discontinuing those two research programs. The Company has focused efforts on the third integrin research program which includes the potential development of integrin antibody activators.
The following table summarizes research and development costs incurred and revenue recognized in connection with Company's performance under the Janssen Agreement during the three and nine months ended September 30, 2022 and 2021 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Reimbursement revenue$662 $1,276 $2,704 $3,914 
Upfront payment revenue503 372 1,829 1,281 
Total revenue recognized$1,165 $1,648 $4,533 $5,195 
Costs incurred$530 $1,118 $2,258 $3,388 
The Company had $0.7 million and $2.3 million due from Janssen included in accounts receivable on the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
As of September 30, 2022, $5.8 million of deferred revenue is classified as either current or long-term deferred revenue in the accompanying condensed consolidated balance sheet based on the period over which the revenue is expected to be recognized. This deferred revenue balance represents the portion of the upfront payment received allocated to the performance obligations that are partially unsatisfied as of September 30, 2022.
11.Net Loss per Share
Basic net loss per share is calculated by dividing net loss allocable to common stockholders by the weighted-average common shares outstanding during the period, without consideration of common stock equivalents.
For periods with net income, diluted net income per share is calculated by adjusting the weighted-average shares outstanding for the dilutive effect of common stock equivalents, including stock options and restricted common stock and stock units outstanding for the period as determined using the treasury stock method.
For purposes of the diluted net loss per share calculation, common stock equivalents are excluded from the calculation if their effect would be anti-dilutive. As such, basic and diluted net loss per share applicable to common stockholders are the same for periods with a net loss.
The following tables illustrate the determination of basic and diluted loss per share for each period presented (in thousands, except share and per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net loss$(30,021)$(25,041)$(34,664)$(74,140)
Weighted average common shares outstanding, basic and diluted38,490,910 36,547,222 37,961,262 35,392,153 
Net loss per share, basic and diluted$(0.78)$(0.69)$(