SEC Filing – Morphic Therapeutic

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morf-20220930

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


☐			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 October 31, 2022 was 38,552,521.

Table of Contents

TABLE OF CONTENTS


			Page

Part I—Financial Information			2
Item 1—Condensed Consolidated Financial Statements (unaudited)			2
Condensed Consolidated Balance Sheets as of Sept ember 30, 2022 and December 31, 2021			2
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2022 and 2021			3
Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31 , June 30 and September 30, 2022 and three months ended March 31 , June 30 and September 30, 2021			4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021			6
Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3—Quantitative and Qualitative Disclosures about Market Risk			27
Item 4—Controls and Procedures			27

Part II—Other Information			28
Item 1—Legal Proceedings			28
Item 1A—Risk Factors			29
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds			77
Item 3—Defaults Upon Senior Securities			77
Item 4—Mine Safety Disclosures			77
Item 5—Other Information			77
Item 6—Exhibits			77
Signatures			78

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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,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	84,961	$	171,434
Marketable securities	286,799		236,701
Accounts receivable	662		2,307
Prepaid expenses and other current assets	9,988		7,892
Total current assets	382,410		418,334
Operating lease right-of-use assets	3,845		4,806
Property and equipment, net	2,170		2,583
Restricted cash	560		560
Other assets	196		7
Total assets	$	389,181	$	426,290

Liabilities
Current liabilities:
Accounts payable	$	4,367	$	4,798
Accrued expenses	10,874		12,838
Deferred revenue, current portion	3,345		20,628
Total current liabilities	18,586		38,264

Long-term liabilities:
Operating lease liability, net of current portion	2,730		3,838
Deferred revenue, net of current portion	2,804		47,489
Total liabilities	24,120		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 capital	641,872		575,231
Accumulated deficit	(272,718)		(238,054)
Accumulated other comprehensive loss	(4,097)		(482)
Total stockholders’ equity	365,061		336,699
Total liabilities and stockholders’ equity	$	389,181	$	426,290

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

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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,
	2022		2021		2022		2021
Collaboration revenue	$	2,055	$	3,124	$	64,673	$	10,238
Operating expenses:
Research and development	25,245		20,966		77,360		64,131
General and administrative	8,303		7,276		24,128		20,367
Total operating expenses	33,548		28,242		101,488		84,498
Loss from operations	(31,493)		(25,118)		(36,815)		(74,260)
Other income:
Interest income, net	1,657		77		2,326		140
Other expense, net	(156)		—		(144)		(20)
Total other income, net	1,501		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 diluted	38,490,910		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 Shares			Additional Paid‑in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2021	37,085,397	$	4	$	575,231	$	(238,054)	$	(482)	$	336,699
Equity‑based compensation expense	—	—		6,765		—		—		6,765
Vesting of restricted shares	1,990	—		—		—		—		—
Issuance of common shares upon stock option exercises	146,237	—		2,127		—		—		2,127
Issuance of common shares under the Employee Stock Purchase Plan	16,845	—		571		—		—		571
Unrealized holding losses on marketable securities	—	—		—		—		(1,310)		(1,310)
Net loss	—	—		—		(31,484)		—		(31,484)
Balance at March 31, 2022	37,250,469	$	4	$	584,694	$	(269,538)	$	(1,792)	$	313,368
Equity‑based compensation expense	—	—		7,623		—		—		7,623
Vesting of restricted shares	3,681	—		—		—		—		—
Issuance of common shares upon stock option exercises	194,442	—		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 exercises	70,352	—		921		—		—		921
Issuance of common stock under the Employee Stock Purchase Plan	13,426	—		314		—		—		314
Unrealized holding losses on marketable securities	—	—		—		—		(1,680)		(1,680)
Net loss	—	—		—		(30,021)		—		(30,021)
Balance at September 30, 2022	38,532,370	$	4	$	641,872	$	(272,718)	$	(4,097)	$	365,061

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	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 stock 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 CASH FLOWS (Unaudited) (In thousands)


	Nine Months Ended September 30,
	2022		2021
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 amortization	762		754
Premium amortization and discount accretion on marketable securities	1,137		531
Equity‑based compensation	21,925		15,541
Loss on sale of marketable securities	154		—
Loss on disposal of equipment	—		4
Change in operating assets and liabilities:
Accounts receivable	1,645		4,696
Prepaid expenses and other current assets	(2,031)		(1,353)
Other assets	(189)		51
Operating lease right-of-use assets	961		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 securities	173,623		106,000
Proceeds from sale of marketable securities	7,146		—
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 Plan	885		1,095
Proceeds from at-the-market offering, net of issuance costs	39,250		24,645
Proceeds from secondary offering, net of issuance costs	—		229,982
Proceeds from issuance of common shares upon stock option exercises	4,556		7,917
Net cash provided by financing activities	44,691		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 period	171,994		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.



	Fair Value Measurements at September 30, 2022
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	84,314	$	44,484	$	39,830	$	—
Marketable securities:
U.S. Treasury securities	177,220		—		177,220		—
U.S. government-sponsored enterprise securities	9,919		—		9,919		—
Commercial paper	9,767		—		9,767		—
Corporate bonds	89,893		—		89,893		—


Total assets	$	371,113	$	44,484	$	326,629	$	—



	Fair Value Measurements at December 31, 2021
	Total		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	171,142	$	171,142	$	—	$	—
Marketable securities:
U.S. Treasury securities	16,212		—		16,212		—
Commercial paper	99,898		—		99,898		—
Corporate bonds	120,591		—		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
	Maturity	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Aggregate estimated fair value
Marketable securities:
U.S. Treasury securities	within 2 years	$	179,332	$	—	$	(2,112)	$	177,220
U.S. government-sponsored enterprise securities	within 2 years	10,000		—		(81)		9,919
Commercial paper	less than 1 year	9,767		—		—		9,767
Corporate bonds	within 2 years	91,772		—		(1,879)		89,893


Total marketable securities		$	290,871	$	—	$	(4,072)	$	286,799


	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 securities	less than 1 year	$	16,224	$	—	$	(12)	$	16,212
Commercial paper	less than 1 year	99,900		—		(2)		99,898
Corporate bonds	within 2 years	121,034		—		(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,
	2022		2021		2021		2020
Cash and cash equivalents	$	84,961	$	171,434	$	184,159	$	102,047
Restricted cash	560		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,
	2022		2021
Payroll and related expenses	$	4,645	$	6,396
Research and development activities	3,985		4,268
Current portion of operating lease liability	1,462		1,211
Other expenses	782		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,
	2022		2021		2022		2021
Stock options	$	6,674	$	5,403	$	19,459	$	14,448
Restricted common stock	—		71		5		224
Restricted stock units	756		163		2,151		385
Employee Stock Purchase Plan	107		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,
	2022		2021		2022		2021
Research and development expense	$	3,423	$	2,599	$	10,316	$	7,406
General and administrative expense	4,114		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, 2021	4,781,565	$	20.03
Granted	1,470,368	39.94
Exercised	(411,031)	11.24
Forfeited or expired	(441,934)	33.35
Outstanding as of September 30, 2022	5,398,968	$	25.04
Options exercisable as of September 30, 2022	2,704,979	$	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 Shares	Weighted Average Fair Value per Share at Issuance
Unvested restricted stock units as of December 31, 2021	7,000	$	57.73
Granted	291,970	43.98
Vested	(3,500)	57.73
Forfeited	(32,200)	44.75
Unvested restricted stock units as of September 30, 2022	263,270	$	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,
	2022		2021		2022		2021
Revenue recognized	$	890	$	1,476	$	60,140	$	5,043
Costs incurred	30		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,
	2022		2021		2022		2021
Reimbursement revenue	$	662	$	1,276	$	2,704	$	3,914
Upfront payment revenue	503		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,
	2022		2021		2022		2021
Net loss	$	(30,021)	$	(25,041)	$	(34,664)	$	(74,140)
Weighted average common shares outstanding, basic and diluted	38,490,910		36,547,222		37,961,262		35,392,153
Net loss per share, basic and diluted	$	(0.78)	$	(0.69)	$	(0.91)	$	(2.09)

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 Nine Months Ended September 30,
	2022	2021
Restricted common stock	<