You should read the following discussion of our financial condition and results of operations in conjunction with our condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as statements of our plans, objectives, expectations, intentions and belief. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled "Risk Factors" under Part II, Item 1A below. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, the impact of the COVID-19 pandemic, business strategy, market size, potential growth opportunities, preclinical and clinical development activities, efficacy and safety profile of our product candidates, use of net proceeds from our offerings, our ability to maintain and recognize the benefits of certain designations received by product candidates, the timing and results of preclinical studies and clinical trials, commercial collaborations with third parties and the receipt and timing of potential regulatory designations, approvals and commercialization of product candidates. The words "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "predict," "target," "intend," "could," "would," "should," "project," "plan," "expect," and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. Overview We are a biopharmaceutical company applying our proprietary insights into integrins to discover and develop a pipeline of potentially first-in-class oral small molecule integrin therapeutics. Integrins are a target class with multiple approved injectable blockbuster drugs for the treatment of serious chronic diseases, including autoimmune, cardiovascular and metabolic diseases, fibrosis and cancer. To date, no oral small molecule integrin therapies have been approved by theU.S. Food and Drug Administration , or FDA. Despite significant unsuccessful efforts by others, we believe tremendous untapped potential remains for us to develop oral integrin therapies. TheMorphic integrin technology platform, or MInT Platform, was created leveraging our unique understanding of integrin structure and function to develop novel product candidates designed to achieve the potency, high selectivity, and pharmaceutical properties required for oral administration. We are advancing our pipeline, including our lead product candidate, MORF-057, an ?4?7-specific integrin inhibitor affecting inflammation, into clinical development for the treatment of inflammatory bowel disease, or IBD. We submitted an investigational new drug application, or IND, for MORF-057 inJuly 2020 , and the FDA permitted the study submitted under the IND to proceed inAugust 2020 . InSeptember 2020 , we initiated a Phase 1 clinical trial of MORF-057 in healthy volunteers comprised of single-ascending dose, or SAD, food effect, and multiple-ascending dose, or MAD, cohorts to establish our clinical program and select doses for our Phase 2 program in IBD with an initial focus on ulcerative colitis, or UC. InMarch 2021 , we announced interim results from the SAD portion of the Phase 1 trial and MORF-057 was found to be generally well tolerated in all five dose cohorts receiving MORF-057 in single doses ranging from 25 mg to 400 mg; no serious or severe adverse events were noted across all subjects in these cohorts. The pharmacokinetic profile exhibited generally dose-proportional and predictable pharmacokinetics, or PK, that continue to support BID (twice-daily) dosing. The key pharmacodynamic, or PD, measurement in the trial was mean ?4?7 receptor occupancy (RO), which indicated the percentage of ?4?7 receptors bound by MORF-057 to be greater than 95% at 12 hours after a single dose across the three highest dose cohorts. InJuly 2021 , we announced complete Phase 1 results that included SAD, MAD and food effect (FE) cohorts evaluating MORF-057 for safety, pharmacokinetic and pharmacodynamic measures. A total of 67 eligible healthy subject were enrolled and 66 subjects completed the study. MORF-057 was well tolerated in all cohorts and no safety signals were identified. MORF-057 also demonstrated a predictable and dose-dependent PK profile. Results from the food effect cohort showed that high fat meal intake did not impact trough levels of MORF-057 and indicated that MORF-057 can be administered without regard to food in planned studies in patients. In the key PD measurement of ?4?7 RO, MORF-057 demonstrated dose and time-dependent receptor occupancy of ?4?7 with complete receptor saturation in all subjects in the 100mg BID cohort. Changes in additional investigational PD biomarkers including ?4?7 specific lymphocyte subsets and CCR9 transcripts were consistent with published literature for other intravenous biologic ?4?7 inhibitors, providing additional mechanistic validation. These results taken as whole provide a basis upon which to select candidate doses for our upcoming Phase 2 ulcerative colitis program. 16
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InAugust 2020 , AbbVie exercised the option and now controls and is responsible for the development and commercialization of our ?v?6-specific integrin inhibitor program. In connection with the option exercise, AbbVie made a one-time$20.0 million payment to us. We are entitled to additional payments upon the achievement of certain milestones and royalties in accordance with the AbbVie Agreement. InFebruary 2019 , we entered into an agreement withJanssen Pharmaceuticals, Inc. , or Janssen, to develop novel integrin therapeutics, or the Janssen Agreement. InFebruary 2021 Janssen paid us$5.0 million to commence work on a third research program. We are entitled to additional payments upon the achievement of certain milestones and royalties in accordance with the Janssen Agreement. We continue to advance additional discovery programs with AbbVie and Janssen as a part of these collaborations. Beyond these targets, we are using our MInT Platform to advance a broad pipeline of preclinical programs across a variety of additional therapeutic areas, all of which aim to harness the potential of inhibition or activation of an integrin receptor. Additional wholly-owned programs have advanced near to or into lead optimization phase of discovery. We presented positive preclinical data from our ?v?8 program at theAmerican Association for Cancer Research Annual Meeting demonstrating anti-tumor activity in checkpoint refractory cancer models and continue our focus on advancing our avb8 program in oncology. InMarch 2021 , we announced an upsized underwritten public offering of 3,500,000 shares of our common stock at a price to the public of$70.00 per share, resulting in net proceeds of approximately$230.0 million , after deducting underwriting discounts, commissions and other offering expenses paid by us. InJuly 2020 , we entered into an Open Market Sale Agreement, or the ATM Agreement, withJefferies LLC , or Jefferies, with respect to an at-the-market offering program, or the Previous ATM, under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, having an aggregate offering price of up to$75,000,000 , referred to as Placement Shares, through Jefferies as its sales agent. During the three months endedJune 30, 2021 , we sold no shares under our ATM Agreement. During the six months endedJune 30, 2021 , we issued and sold 240,704 shares for net proceeds of$7.2 million after deducting offering commissions and offering expenses paid by us. As ofJune 30, 2021 , we had approximately$32.4 million of common stock remaining available for sale under the ATM. The ATM Agreement will be amended upon the filing of this report such that, as of the date hereof a new at-the-market offering, or the New ATM, will be established, with an aggregate offering price of up to$150,000,000 . The Company entered into an Amendment No. 1 to the ATM Agreement with Jefferies in connection with the New ATM. Under the New ATM, the Company may offer and sell, from time to time at its sole discretion, shares of our common stock, referred to as Placement Shares, through Jefferies as its sales agent. The Company may not sell any Placement Shares under the Previous ATM after the date hereof. Since inception, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio, and performing research to discover and develop oral small-molecule integrin therapeutics. Revenue generation activities to date have been limited to payments received from our collaboration agreements with AbbVie and Janssen, discussed further in Note 10 of the accompanying condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We do not have any products approved for sale and have not generated any revenue from product sales. From inception throughJune 30, 2021 , we raised an aggregate of approximately$677.9 million of gross proceeds primarily through the issuance of equity, including our convertible preferred equity securities, our IPO, our underwritten public offering inMarch 2021 , and sales of shares of our common stock pursuant to the ATM Agreement, along with payments received under our collaboration agreements. Since inception, we have incurred significant operating losses. As ofJune 30, 2021 , we had an accumulated deficit of$191.6 million . We expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future, as we advance our current and future product candidates through preclinical and clinical development, seek regulatory approval for them, maintain and expand our intellectual property portfolio, hire additional research and development and business personnel, and operate as a public company. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. In addition, if we obtain regulatory approval for our product candidates and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing, and distribution activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as additional collaboration agreements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when, needed, could have a material adverse effect on our business, results of operations, and financial condition. 17
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As ofJune 30, 2021 , we had cash, cash equivalents, and marketable securities of$431.6 million . We believe that our existing cash and cash equivalents, and marketable securities will enable us to fund our operating expenses and capital expenditure requirements until the end of 2024. Impact of the COVID-19 Pandemic The extent of the ongoing impact of the novel strain of coronavirus, SARS-CoV-2, or COVID-19, on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, including the rise of variants that may be less responsive to existing vaccines, impact on our clinical and preclinical studies, employee or industry events, and effect on our suppliers and manufacturers, all of which are uncertain and cannot be predicted. The COVID-19 pandemic and its adverse effects is prevalent in the locations where we, our collaborators, our contract research organizations, or CROs, suppliers or third-party business partners conduct business. Although we currently have not experienced much of an impact on our business, excluding minor changes to our development timelines, if there are closures or other restrictions in places we or our vendors work or transport supply that may result in constrained supply of our product candidates or delays in our clinical and preclinical studies or planned clinical trials, our business, results of operations and overall financial performance in future periods could be materially adversely impacted. In addition, we have experienced impacts from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including but not limited to restrictions on travel and in-person meetings, delays in future site activations and future enrollment of clinical trials, prioritization of hospital resources toward the COVID-19 pandemic effort, and delays in review by the FDA and comparable foreign regulatory agencies. As of the filing date of this Form 10-Q, the extent to which COVID-19 may impact our financial condition, results of operations or guidance is uncertain. The effects of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q for further discussion of the possible impact of the COVID-19 pandemic on our business. Financial Operations Overview Collaboration Revenue We do not have any products approved for sale, and as a result, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. To date, all of our collaboration revenue has been derived from our agreements with AbbVie and Janssen. We expect that our revenue, until we have a marketed product, will be derived primarily from payments under our collaboration and option agreements with AbbVie and Janssen or other collaboration and license agreements that we may enter into in the future, if any. Collaboration Revenue - AbbVie InOctober 2018 , we entered into a collaboration with AbbVie, an investor that held approximately 5% of our common stock at the time of the agreement, designed to advance a number of our oral integrin therapeutics for fibrosis-related indications. Under the terms of the AbbVie Agreement, AbbVie paid us an upfront payment of$100.0 million for research and development activities, and we provided to AbbVie exclusive license options on product candidates directed at multiple targets. InAugust 2020 , AbbVie exercised its option to license the selective ?v?6-specific integrin inhibitors program and paid us a one-time payment of$20.0 million . For each lead compound against a target under the AbbVie Agreement, we conduct research and development activities through the completion of IND-enabling studies, at which point AbbVie may pay a license fee of$20.0 million , on a target-by-target basis, to exercise its exclusive license option and assume responsibility for global development and commercialization. We are also eligible for clinical and commercial milestone payments and tiered royalties from high single digit to low teens on worldwide net sales for each licensed product. In addition, for certain compounds for which we have completed IND-enabling studies and which meet certain advancement criteria for a liver indication, we have the option to commit to share development costs in exchange for an increased fixed royalty rate. We may exercise this option following completion of the first Phase 2b clinical trial for the relevant product. 18
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Collaboration Revenue - Janssen InFebruary 2019 , we entered into the Janssen Agreement to discover and develop novel integrin therapeutics for patients with conditions not adequately addressed by current therapies. The Janssen Agreement focuses on three integrin targets, each target the subject of a research program, with the ability to substitute up to two integrin targets not explored by us. Upon completing IND-enabling studies, on a research program-by-research program basis, Janssen may exercise an exclusive option to obtain an exclusive license with respect to the target that is the subject of the research program, including all licensed compounds that are the subject of the applicable research program, and then Janssen will be responsible for global clinical development and commercialization. In consideration of the rights granted, during 2019, Janssen paid us an upfront fee of$10.0 million for each of the first two research programs, and inDecember 2020 we agreed with Janssen to commence work on the third research program, and inFebruary 2021 Janssen paid us$5.0 million for the third research program commencement fee. Janssen also funds research activities at agreed upon rates. Pursuant to the terms of the agreement, we are also eligible to receive additional milestone and royalty payments. 19
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Table of Contents Expenses Research and Development Research and development expenses consist primarily of costs incurred for our research and development activities, including our product candidate discovery efforts and preclinical studies under our research programs, which include: ?employee-related expenses, including salaries, benefits, and equity-based compensation expense for our research and development personnel; ?costs of funding research performed by third parties that conduct research and development and preclinical activities on our behalf; ?costs of manufacturing clinical supply related to any of our current or future product candidates; ?expenses incurred under agreements with contract research organizations and investigative sites that conduct our clinical trials; ?costs of conducting preclinical studies of any of our current or future product candidates; ?consulting and professional fees related to research and development activities, including equity-based compensation to non-employees; ?costs of purchasing laboratory supplies and non-capital equipment used in our preclinical studies; ?costs related to compliance with clinical regulatory requirements; ?facility costs and other allocated expenses, which include expenses for rent and maintenance of facilities, insurance, depreciation and other supplies; and ?fees for maintaining licenses and other amounts due under our third-party licensing agreements. Research and development costs are expensed as incurred. Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks using data such as information provided to us by our vendors and analyzing the progress of our preclinical studies or other services performed. Significant judgment and estimates are made in determining the accrued expense balances at the end of any reporting period. Non-refundable advance payments for research and development goods or services to be received in the future from third parties are capitalized and expensed as the related goods are delivered or the services are performed. The successful development of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing, and costs of the efforts that will be necessary to complete our future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of our product candidates, if approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of: ?the scope, rate of progress, and expenses of our ongoing research activities as well as any additional preclinical studies and clinical trials and other research and development activities; ?establishing an appropriate safety profile; ?successful enrollment in and completion of clinical trials; ?whether our product candidates show safety and efficacy in our clinical trials; ?receipt of marketing approvals from applicable regulatory authorities, if any; ?establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers; 20
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?obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates; ?commercializing the product candidates, if and when approved, whether alone or in collaboration with others; and ?continued acceptable safety profile of the products following any regulatory approval. A change in the outcome of any of these variables with respect to the development of our current and future product candidates would significantly change the costs and timing associated with the development of those product candidates. Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as we continue the development of our product candidates. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans. General and Administrative General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits, and equity-based compensation expenses for personnel in executive, finance, accounting, business development, legal, and human resources functions. Other significant general and administrative expenses include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters, and fees for accounting and consulting services. We anticipate that our general and administrative expenses will increase in the future as our business expands to support expected growth in research and development activities, including our future clinical programs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, among other expenses. We also incur expenses associated with being a public company, including costs for audit, legal, regulatory, and tax-related services related to compliance with the rules and regulations of theSecurities and Exchange Commission , ("SEC"), and listing standards applicable to companies listed on Nasdaq, director and officer compensation and insurance premiums, and investor relations costs. In addition, if we obtain regulatory approval for any of our product candidates and do not enter into a third-party commercialization collaboration, we expect to incur significant general and administrative expenses related to supporting product sales, marketing and distribution activities. Interest Income, Net Interest income, net consists primarily of interest income earned on our cash and cash equivalents and marketable securities. Benefit from Income Tax Expense for Interim Periods Benefit from or provision for income tax expense recorded in any interim period is based on the estimated effective tax rate for the fiscal year for those tax jurisdictions that can be reliably estimated. Our calculation of the estimated effective tax rate requires us to estimate pre-tax income by tax jurisdiction as well as total tax expense for the fiscal year. OnMarch 27, 2020 , the Coronavirus Aid Relief and Economic Security, or the CARES Act, was signed into law. The CARES Act included several income tax changes, included allowing for the carryback of net operating losses, expanding interest deductibility, and allowing for accelerated expensing of certain capital improvements. We evaluated the changes and anticipate a full recovery of all federal income tax paid for theDecember 31, 2019 tax period due to the carryback allowance of the net operating loss generated during fiscal year 2020. Based on the anticipated recovery of the federal income tax paid for theDecember 31, 2019 tax period, we recorded a$0.2 million and$0.3 million benefit from income taxes during the three and six months endedJune 30, 2020 . 21
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Results of Operations Comparison of the Three Months EndedJune 30, 2021 andJune 30, 2020 The following table summarizes our results of operations for the three months endedJune 30, 2021 andJune 30, 2020 : Three months ended Change June 30, 2021 June 30, 2020 $ % (in thousands, except percentages) Collaboration revenue$ 3,848 $ 7,693 $ (3,845) (50) % Operating expenses: Research and development 24,552 19,918 4,634 23 % General and administrative 7,139 4,195 2,944 70 % Total operating expenses 31,691 24,113 7,578 31 % Loss from operations (27,843) (16,420) (11,423) 70 % Other income: Interest income, net 35 413 (378) (92) % Other expenses (7) (6) (1) * Total other income, net 28 407 (379) (93) % Loss before benefit from income taxes$ (27,815) $ (16,013) $ (11,802) 74 % Benefit from income taxes - 155 (155) * Net loss$ (27,815) $ (15,858) $ (11,957) 75 % *Percentage not meaningful Collaboration Revenue The decrease in collaboration revenue of$3.8 million is primarily attributable to a decrease in activity under the AbbVie Agreement. In the prior year period, we successfully completed preclinical studies for the ?v?6 program, which resulted in the revision of our estimates to satisfy our performance obligations in the three months endedJune 30, 2020 . The revenue for our collaborations fluctuates based on the timing and magnitude of costs incurred under the collaboration programs, as well as changes to our estimates to complete the remaining performance obligations. Research and Development Expenses Research and development expense increased by$4.6 million , or 23% from$19.9 million for the three months endedJune 30, 2020 to$24.6 million for the three months endedJune 30, 2021 . A significant portion of our research and development costs have been external clinical and preclinical contract research organization ("CRO") costs, which we track on a program-by-program basis related to a clinical product candidate, once the candidate has been identified. Our internal research and development costs are primarily personnel-related costs, depreciation, and other indirect costs. The following table summarizes our research and development expense for three months endedJune 30, 2021 and 2020: 22
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Table of Contents Three months ended Change June 30, 2021 June 30, 2020 $ % (in thousands, except percentages) External costs by program: MORF-057$ 10,523 $ 7,712 $ 2,811 36 % ?v?6 Program - 1,195 (1,195) (100) % Other AbbVie Agreement programs 1,222 1,012 210 21 % Janssen Agreement programs 436 853 (417) (49) % ?v?1 Program 271 892 (621) (70) % ?v?8 Program 1,924 996 928 93 % Other early development candidates and unallocated costs 1,204 216 988 457 % Total external costs 15,580 12,876 2,704 21 % Internal costs: Employee compensation and benefits 7,973 6,107 1,866 31 % Facility and other 999 935 64 7 % Total internal costs 8,972 7,042 1,930 27 %
Total research and development expense
23 % *Percentage not meaningful The changes in research and development expense was primarily attributable to the following: •The$2.7 million increase in external costs from the three months endedJune 30, 2020 to the period endedJune 30, 2021 primarily related to the ongoing Phase 1 clinical study for MORF-057, manufacturing costs to support further development of MORF-057, as well as other external research costs to support our early development candidates, including ?v?8. These increases were partially offset by a decrease in expenditures associated with the ?v?6 program as a result of the option exercise by AbbVie inAugust 2020 . ?The$1.9 million increase in internal costs from the three months endedJune 30, 2020 to the period endedJune 30, 2021 was primarily driven by an increase in headcount to support the ongoing clinical activity for MORF-057 as well as our early stage pipeline candidates. General and Administrative Expenses General and administrative expense increased by$2.9 million , or 70%, from$4.2 million for the three months endedJune 30, 2020 to$7.1 million for the three months endedJune 30, 2021 . The increase in general and administrative expense was primarily attributable to a$1.6 million increase in non-cash stock-based compensation expense, a$0.3 million increase in personnel costs, and a$0.8 million increase in professional and consulting fees. Interest Income, Net Interest income decreased by$0.4 million due to a decrease in marketable securities held during the current period as well as a decrease in yields earned on marketable securities during the three months endedJune 30, 2021 . Benefit from Income Tax OnMarch 27, 2020 , the CARES Act was signed into law. The CARES Act included several income tax changes, included allowing for the carryback of net operating losses, expanding interest deductibility, and allowing for accelerated expensing of certain capital improvements. Based on the anticipated recovery of the federal income tax paid for theDecember 31, 2019 tax period, we recognized an income tax benefit of$0.2 million for the three months endedJune 30, 2020 . 23
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Comparison of the Six Months Ended
Six Months Ended June 30, Change 2021 2020 $ % (in thousands, except percentages) Collaboration revenue$ 7,114 $ 13,287 $ (6,173) (46) % Operating expenses: Research and development 43,165 38,878 4,287 11 % General and administrative 13,091 8,618 4,473 52 % Total operating expenses 56,256 47,496 8,760 18 % Loss from operations (49,142) (34,209) (14,933) 44 % Other income: Interest income, net 63 1,299 (1,236) (95) % Other expenses (20) (6) (14) 233 % Total other income, net 43 1,293 (1,250) (97) % Loss before benefit from income taxes$ (49,099) $ (32,916) $ (16,183) 49 % Benefit from income taxes - 312 (312) * Net loss$ (49,099) $ (32,604) $ (16,495) 51 % *Percentage not meaningful Collaboration Revenue The decrease in collaboration revenue of$6.2 million is primarily attributable to a decrease in activity under the AbbVie Agreement. In the prior year period, we successfully completed preclinical studies for the ?v?6 program, which resulted in the revision of our estimates to satisfy our performance obligations in the six months endedJune 30, 2020 . The revenue for our collaborations fluctuates based on the timing and magnitude of costs incurred under the collaboration programs, as well as changes to our estimates to complete the remaining performance obligations. Research and Development Expenses Research and development expense increased by$4.3 million . A significant portion of our research and development costs have been external clinical and preclinical contract research organization ("CRO") costs, which we track on a program-by-program basis related to a clinical product candidate, once the candidate has been identified. Our internal research and development costs are primarily personnel-related costs, depreciation, and other indirect costs. The following table summarizes our research and development expense for six months endedJune 30, 2021 and 2020: 24
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Table of Contents Six months ended Change June 30, 2021 June 30, 2020 $ % (in thousands, except percentages) External costs by program: MORF-057$ 15,746 $ 12,994 $ 2,752 21 % ?v?6 Program - 3,451 (3,451) (100) % Other AbbVie Agreement programs 1,921 2,114 (193) (9) % Janssen Agreement programs 854 1,493 (639) (43) % ?v?1 Program 1,341 1,858 (517) (28) % ?v?8 Program 3,387 1,758 1,629 93 % Other early development candidates and unallocated costs 2,171 458 1,713 374 % Total external costs 25,420 24,126 1,294 5 % Internal costs: Employee compensation and benefits 15,678 13,294 2,384 18 % Facility and other 2,067 1,458 609 42 % Total internal costs 17,745 14,752 2,993 20 %
Total research and development expense
11 % *Percentage not meaningful The changes in research and development expense was primarily attributable to the following: •The$1.3 million increase in external costs from the six months endedJune 30, 2020 to the period endedJune 30, 2021 primarily related increased volume of research activity in MORF-057 and ?v?8 programs, and initiation of work on other early programs, partially offset by a decrease in expenditures due to the cessation of work on ?v?6 program following the exercise of the option by AbbVie inAugust 2020 . ?The$3.0 million increase in internal costs from the six month endedJune 30, 2020 to the period endedJune 30, 2021 was primarily driven by an increase in headcount to support the ongoing clinical activity for MORF-057 as well as our early stage pipeline candidates. General and Administrative Expenses General and administrative expense increased by$4.5 million , or 52%, from$8.6 million for the six months endedJune 30, 2020 to$13.1 million for the six months endedJune 30, 2021 . The increase in general and administrative expense was primarily attributable to a$3.1 million increase in non-cash stock-based compensation expense, a$0.6 million increase in personnel costs, and a$0.8 million increase in consulting and professional fees. Interest Income, Net Interest income decreased by$1.3 million due to a decrease in marketable securities held during the current period as well as a decrease in yields earned on marketable securities during the six months endedJune 30, 2021 . Benefit from Income Tax OnMarch 27, 2020 , the CARES Act was signed into law. The CARES Act included several income tax changes, included allowing for the carryback of net operating losses, expanding interest deductibility, and allowing for accelerated expensing of certain capital improvements. Based on the anticipated recovery of the federal income tax paid for theDecember 31, 2019 tax period, we recognized an income tax benefit of$0.3 million for the six months endedJune 30, 2020 . 25
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Liquidity and Capital Resources Sources of Liquidity From inception throughJune 30, 2021 , we raised an aggregate of approximately$677.9 million of gross proceeds primarily through the issuance of equity, including our convertible preferred equity securities, our IPO and follow-on equity offering, and sales of shares of our common stock pursuant to the ATM Agreement, along with payments received under our collaboration agreements. The following table provides information regarding our total cash, cash equivalents, and marketable securities, each of which are stated at their respective fair values as ofJune 30, 2021 andDecember 31, 2020 : December 31, June 30, 2021 2020 (in thousands) Cash and cash equivalents $ 331$ 287 Money market funds (included in cash equivalents) 399,073 101,760 Marketable securities 32,214 126,217 Total cash, cash equivalents, and marketable securities $
431,618
Cash Flows The following table provides information regarding our cash flows for the six months endedJune 30, 2021 and 2020: Six Months Ended June 30, 2021 2020 (in thousands) Net cash used in operating activities$ (38,298) $ (35,303) Net cash provided by investing activities 93,595 65,527 Net cash provided by financing activities 242,060 1,338
Net increase in cash and cash equivalents and restricted cash
Net Cash Used in Operating Activities The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities was$38.3 million for the six months endedJune 30, 2021 compared to$35.3 million in cash used in operating activities for the six months endedJune 30, 2020 . The increase in cash used in operating activities was primarily driven primarily by changes in operating assets and liabilities, partially offset by a$4.7 million increase in non-cash compensation. Net Cash Provided by Investing Activities Net cash provided by investing activities was$93.6 million for the six months endedJune 30, 2021 compared to$65.5 million for three months endedJune 30, 2020 . The increase in cash provided by investing activities in the current year is due to maturities of marketable securities which have been reinvested in money market funds, classified as a cash equivalent. Net Cash Provided by Financing Activities Net cash provided by financing activities of$242.1 million for the six months endedJune 30, 2021 primarily resulted from$230.0 million in net proceeds received from the underwritten public offering completed inMarch 2021 ,$7.2 million in net proceeds received from sales of shares of common stock under the ATM Agreement, and$4.8 million in proceeds received from issuance of common shares under ESPP and stock option exercises. During the three months endedJune 30, 2020 , the Company received$1.3 million from issuance of common shares under ESPP and stock option exercises. 26
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Funding Requirements We expect our expenses to increase in connection with our ongoing activities, particularly as we continue research and development, conduct clinical trials, and seek marketing approval for our current and any of our future product candidates. In addition, if we obtain marketing approval for any of our current or our future product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution, which costs we might offset through entry into collaboration agreements with third parties. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on acceptable terms, including, but not limited to, as a result of COVID-19, we would be forced to delay, reduce, or eliminate our research and development programs or future commercialization efforts. We expect our existing cash and cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements until the end of 2024. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including: ?the costs of conducting additional clinical and preclinical studies and future clinical trials; ?the costs of future manufacturing; ?the scope, progress, results and costs of discovery, preclinical development, laboratory testing, and clinical trials for other potential product candidates we may develop, if any; ?the costs, timing, and outcome of regulatory review of our product candidates; ?our ability to establish and maintain collaborations on favorable terms, if at all; ?the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we might have at such time; ?the costs and timing of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval; ?the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval; ?the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining and enforcing our intellectual property rights, and defending intellectual property-related claims; ?our headcount growth and associated costs as we expand our business operations and research and development activities; ?the potential delays in our preclinical studies, our development programs and our current and planned clinical trials due to the effects of the COVID-19 pandemic; and ?the cost of operating as a public company. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. Critical Accounting Policies and Significant Estimates Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our condensed consolidated financial statements. During the quarter endedJune 30, 2021 , there were no material changes to our critical accounting policies as detailed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , which was filed with theSEC onMarch 1, 2021 . 27
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For detailed information regarding recently issued accounting pronouncements and the actual and expected impact on our condensed consolidated financial statements, see Note 2 in the accompanying condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicableSEC rules. Contractual Obligations As ofJune 30, 2021 , our contractual obligations remain consistent with those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Emerging Growth Company and Smaller Reporting Status We will continue to be an "emerging growth company," or EGC, under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act untilDecember 31, 2021 . Section 107 of the JOBS Act provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as private entities.
As an EGC, we may take advantage of certain exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an EGC:
•we will avail ourselves of the exemption from providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
•we will avail ourselves of the exemption from complying with any requirement that may be adopted by thePublic Company Accounting Oversight Board , or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor report on Critical Audit Matters;
•we will provide reduced disclosure about our executive compensation arrangements; and
•we will not require nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments.
We are also a "smaller reporting company," meaning that the market value of our stock held by non-affiliates is less than$700.0 million and our annual revenue is less than$100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than$250.0 million or (ii) our annual revenue is less than$100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than$700.0 million as of the last day of the second quarter of the most recently completed fiscal year. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. 28
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