The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
1. Nature of the Business
Surface Oncology, Inc. (the “Company” or “Surface”) is a clinical-stage immuno-oncology company focused on using its specialized knowledge of the biological pathways critical to the immunosuppressive tumor microenvironment (“TME”) for the development of next-generation cancer therapies. Surface was incorporated in April 2014 under the laws of the State of Delaware.
The Company is subject to risks common to early-stage companies in the biotechnology industry including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the ability to obtain additional financing 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 infrastructure and extensive compliance-reporting capabilities. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
On April 6, 2018, the Company effected a one-for-2.2 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s Redeemable Convertible Preferred Stock. Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.
On April 23, 2018, the Company completed its initial public offering of its common stock by issuing 7,200,000 shares of common stock, at $15.00 per share for gross proceeds of $108,000, or net proceeds of $97,209 after deducting underwriting discounts, commissions and offering expenses. Concurrent with the initial public offering, the Company issued
Novartis Institutes for Biomedical Research, Inc. (“Novartis”) 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500, in a private placement.
Upon the closing of the Company’s initial public offering on April 23, 2018, all shares of Series A and A-1 redeemable convertible preferred stock (the “Series A Preferred Stock” and “Series A-1 Preferred Stock”, respectively) automatically converted into 16,863,624 shares of common stock.
The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has primarily funded its operations with proceeds from the sales of redeemable convertible preferred stock, proceeds from a collaboration agreement with Novartis and proceeds from the Company’s initial public offering of common stock. The Company has incurred losses and negative cash flows from operations since its inception. As of March 31, 2019, the Company had an accumulated deficit of $71,005.
The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of May 9, 2019, the issuance date of this Quarterly Report on Form 10-Q, the Company expects that its cash, cash equivalents and marketable securities of $140,174, will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months. The future viability of the Company beyond that date is dependent on its ability to raise additional capital to finance its operations.
The Company will seek additional funding through public financings, debt financings, collaboration agreements, strategic alliances and licensing arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborations or other arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be required to delay, reduce or eliminate research and development programs, product portfolio expansion, or future commercialization efforts, which could adversely affect its business prospects.
Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.
7
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiary, Surface Securities Corporation, a Massachusetts corporation, after elimination of all intercompany accounts and transactions.
The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 2 to the financial statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b)(4) of the Securities Act on March 7, 2019, except for the Company’s adoption of the new leasing standard as discussed below.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, the accrual of research and development expenses, and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from the Company’s estimates.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liability, and operating lease liability, non-current in the Company’s condensed consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Many lease agreements include the option to renew or extend the lease term. The exercise of lease renewal options or extensions is at our sole discretion, and are only included in the calculation of the operating lease ROU asset and operating lease liability when it is reasonably certain that the Company would exercise such options. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which it calculates based on the credit quality of the Company and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of each lease.
The components of a lease are split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company’s facilities operating leases have lease and non-lease components to which the Company has elected to apply the practical expedient and account for each lease component and related non-lease component as one single component. The Company also elected the package of practical expedients, which, among other things, allows the Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. The Company also made an accounting policy election not to recognize leases with an initial term of 12 months or less within its condensed consolidated balance sheets and to recognize those lease payments on a straight-line basis in its condensed consolidated statements of operations and comprehensive income (loss) over the lease term.
8
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheet as of March 31, 2019, the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2019 and 2018, the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018, and the condensed consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three months ended March 31, 2019 and 2018 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2019 and the results of its operations and its cash flows for the three months ended March 31, 2019 and 2018. The financial data and other information disclosed in these notes related to the three months ended March 31, 2019 and 2018 are also unaudited. The results for the three months ended March 31, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods, or any future year period.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit bright lines. In July 2018, the FASB issued
ASU No. 2018-10,
“Codification Improvements to Topic 842, Leases”
(“ASU 2018-10”), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11, “Leases (Topic 842) – Targeted Improvements” (ASU 2018-11), which addresses implementation issues related to the new lease standard. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years.
The Company adopted ASC 842 using the modified retrospective approach with an effective date of January 1, 2019 for leases that existed on that date. Prior period results continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows the Company to carry forward the historical lease classification. In connection with the adoption of ASC 842, the Company recorded an impact of $16,672 on its assets and $21,708 on its liabilities for the recognition of operating lease right-of-use-assets and operating lease liabilities, respectively, which are primarily related to the lease of the Company’s corporate headquarters in Cambridge, Massachusetts. The adoption of ASC 842 did not have a material impact on the Company’s results of operations or cash flows.
In July 2017, the FASB issued
ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial
Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
(“ASU 2017-11”). This guidance is intended to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be considered “not indexed to an entity’s own stock” and therefore accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. Down round features are most often found in warrants and conversion options embedded in debt or preferred equity instruments. In addition, the guidance re-characterized the indefinite deferral of certain provisions on distinguishing liabilities from equity to a scope exception with no accounting effect.
The Company adopted
ASU 2017-11 on January 1, 2019
. The adoption of this guidance did not have a material impact on the Company's financial position or its results of operations.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions.
The Company adopted ASU 2018-07
on January 1, 2019
. As a result of adopting this standard, the fair value of outstanding nonemployee awards as of December 31, 2018 will no longer be remeasured each reporting period. All future expense related to these awards will be recorded based on the fair value measured as of January 1, 2019. The adoption of this guidance did not have a material impact of the Company’s consolidated financial statements.
9
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”).
The new standard removes certain disclosures, modifies certain disclosures and adds additional disclosures related to fair value measurement. The new standard will be effective beginning January 1, 2020 and early adoption is permitted. The Company is currently evaluating the potential impact ASU 2018-13 may have on its disclosures upon adoption.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. The standard is effective on January 1, 2020, with early adoption permitted. The Company is currently evaluating the expected impact of ASU 2016-13 on its consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.
3. Marketable Securities
As of March 31, 2019, the fair value of available-for-sale marketable debt securities by type of security was as follows:
|
|
March 31, 2019
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Marketable debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
$
|
72,545
|
|
|
$
|
27
|
|
|
$
|
(7
|
)
|
|
$
|
72,565
|
|
U.S. Government agency bonds
|
|
|
18,771
|
|
|
|
17
|
|
|
|
(5
|
)
|
|
|
18,783
|
|
Corporate bonds
|
|
|
7,540
|
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
7,513
|
|
|
|
$
|
98,856
|
|
|
$
|
44
|
|
|
$
|
(39
|
)
|
|
$
|
98,861
|
|
The amortized cost and fair value of the Company’s available-for-sale debt securities by contractual maturity are summarized as follows:
|
|
March 31, 2019
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Maturing in one year or less
|
|
$
|
84,496
|
|
|
$
|
84,487
|
|
Maturing after one year but less than two years
|
|
|
14,360
|
|
|
|
14,374
|
|
|
|
$
|
98,856
|
|
|
$
|
98,861
|
|
As of December 31, 2018, the fair value of available-for-sale marketable debt securities by type of security was as follows:
|
|
December 31, 2018
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Marketable debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
$
|
62,866
|
|
|
$
|
—
|
|
|
$
|
(24
|
)
|
|
$
|
62,842
|
|
U.S. Government agency bonds
|
|
|
2,900
|
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
2,885
|
|
Corporate bonds
|
|
|
10,276
|
|
|
|
—
|
|
|
|
(80
|
)
|
|
|
10,196
|
|
|
|
$
|
76,042
|
|
|
$
|
—
|
|
|
$
|
(119
|
)
|
|
$
|
75,923
|
|
10
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
The amortized cost and fair value of the Company’s available-for-sale securities by contractual maturity are summarized as follows:
|
|
December 31, 2018
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Maturing in one year or less
|
|
$
|
76,042
|
|
|
$
|
75,923
|
|
|
|
$
|
76,042
|
|
|
$
|
75,923
|
|
The Company determined that there was no material change in the credit risk of these investments. As a result, the Company determined it did not hold any investments with an other-than-temporary decline in fair value as of March 31, 2019 and December 31, 2018.
4. Fair Value of Financial Assets
The following tables present information about the Company’s financial assets that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
|
|
Fair Value Measurements as of March 31, 2019 using:
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
34,621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,621
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
|
—
|
|
|
|
72,565
|
|
|
|
—
|
|
|
|
72,565
|
|
U.S. Government agency bonds
|
|
|
—
|
|
|
|
18,783
|
|
|
|
—
|
|
|
|
18,783
|
|
Corporate bonds
|
|
|
—
|
|
|
|
7,513
|
|
|
|
—
|
|
|
|
7,513
|
|
|
|
$
|
34,621
|
|
|
$
|
98,861
|
|
|
$
|
—
|
|
|
$
|
133,482
|
|
|
|
Fair Value Measurements as of December 31, 2018 using:
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
77,737
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
77,737
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
|
—
|
|
|
|
62,842
|
|
|
|
—
|
|
|
$
|
62,842
|
|
U.S. Government agency bonds
|
|
|
—
|
|
|
|
2,885
|
|
|
|
—
|
|
|
|
2,885
|
|
Corporate bonds
|
|
|
—
|
|
|
|
10,196
|
|
|
|
—
|
|
|
|
10,196
|
|
|
|
$
|
77,737
|
|
|
$
|
75,923
|
|
|
$
|
—
|
|
|
$
|
153,660
|
|
As of March 31, 2019 and December 31, 2018, the Company’s cash equivalents were invested in money market funds and were valued based on Level 1 inputs. During the three months ended March 31, 2019 and 2018, there were no transfers between Level 1, Level 2 and Level 3.
11
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
5. Collaboration Agreement with Novartis
Overview
In January 2016, the Company entered into a collaboration agreement with Novartis (the “Collaboration Agreement”), which was subsequently amended in May 2016, July 2017, September 2017, and October 2018 (the “October 2018 Amendment”). Pursuant to the Collaboration Agreement, the Company granted Novartis a worldwide exclusive license to research, develop, manufacture and commercialize antibodies that target cluster of differentiation, or CD, 73 (“CD73”). In addition, the Company granted Novartis the right to purchase exclusive option rights (each an “Option”) for up to four specified targets (each an “Option Target”) including certain development, manufacturing, and commercialization rights. Novartis initially had the right to exercise up to three purchased Options. Under the Collaboration Agreement, therefore, Novartis had the ability to exclusively license the development and manufacturing rights for up to four targets (inclusive of CD73). Of these, the Company had the right to retain commercialization rights in the United States to two of such targets. As of March 31, 2019, Novartis has one Option remaining eligible for purchase, and potential exercise. The Collaboration Agreement is governed by a joint steering committee that is co-chaired by a chairperson designated by each of the Company and Novartis. The October 2018 Amendment, among other things, modified certain definitions and provisions of the Collaboration Agreement to make them consistent with the amended and restated development and option agreement the Company entered into with Adimab LLC in October and clarified the parties’ rights and responsibilities relating to the amended agreement with Adimab LLC and diagnostic products.
Novartis is a related party because it is a greater than 5% stockholder of the Company. In January 2016, the Company entered into the Collaboration Agreement and sold 2,000,000 shares of its Series A-1 preferred stock to Novartis. In addition, concurrent with the Company’s initial public offering of common stock, the Company issued
Novartis 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500 in a private placement.
During the three months ended March 31, 2019 and 2018, the Company made no cash payments to Novartis related to the Collaboration Agreement.
Research on Targets
Under the Collaboration Agreement, the Company is responsible for performing preclinical research through the first investigational new drug application (“IND”) acceptance on antibodies that bind to CD73 and each Option Target, pursuant to a research plan directed toward each target. The Company is responsible for all costs and expenses incurred by or on its behalf, in connection with such research.
Development and Commercialization of CD73 Products
Novartis has the sole right to develop and commercialize CD73 antibody candidates and corresponding licensed products worldwide pursuant to a development plan and a commercialization plan, respectively. Novartis is obligated to use commercially reasonable efforts to develop the CD73 antibody candidates and corresponding licensed products, to obtain regulatory approval of such products, including within certain defined markets, and to commercialize such products following regulatory approval. Novartis is responsible for all costs and expenses of such development and commercialization and is obligated to provide the Company with updates on its development and commercialization activities through the joint steering committee, joint development committee, and joint commercialization committee.
Option Targets
Prior to the filing of an IND for an Option Target, Novartis may purchase the Option to obtain certain development, manufacturing and commercialization rights for antibodies that bind to the Option Target. To the extent Novartis does not elect to purchase an Option to an Option Target, the Option for such Option Target will expire and all rights to such Option Target under the Collaboration Agreement will terminate. Novartis had the right to exercise up to a total of three purchased Options. Each exercised Option is to be designated as either a regional or global option, with each such designation determining the development, manufacturing, and commercialization rights between the parties with respect to such Option Target, corresponding antibody candidates, and licensed products, as summarized below. Novartis has the ability to designate the remaining Option as either regional or global. Following Novartis’ exercise of an Option with respect to an Option Target, the Company will grant to Novartis licenses that are necessary to effectuate the development, manufacturing or commercialization rights associated with a regional or global option, as described below.
12
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
In December 2016, Novartis purchased the Option for antibodies that bind to CD47 for $
5,000
. In March 2018, Novartis notified the Company of
its decision not to exercise its purchased Option related to CD47. In March 2018, the Company and Novartis also mutually agreed to cease development of one of the undisclosed programs subject to the Collaboration
Agreement
.
In February 2019, Novartis notif
ied the Company
of
its decision not to purchase the Option related to IL-27.
Development and Commercialization of Regional Licensed Products
To the extent an exercised Option is designated as regional, the Company is primarily responsible for the early clinical development of each corresponding regional antibody candidate and regional licensed product at its own cost. Unless the Company chooses to opt out of its development right, it will collaborate with Novartis on the further clinical development of regional antibody candidates and regional licensed products. Pursuant to a regional development plan for each regional licensed product, the Company will be responsible for development activities related to obtaining regulatory approval in the United States, with Novartis responsible for development activities related to obtaining regulatory approval elsewhere in the world. The development costs of such later clinical development activities will be split evenly among the parties. Thereafter, the Company is responsible for the commercialization of regional licensed products in the United States, and Novartis is responsible for the commercialization of regional licensed products outside of the United States, each pursuant to a commercialization plan. Each party must use commercially reasonable efforts to commercialize such products within their respective territories. The Company is obligated to work with Novartis to agree to a global commercialization strategy with respect to the regional licensed products prior to commercialization.
Development and Commercialization of Global Licensed Products
To the extent an exercised Option is designated as global, the Company is primarily responsible for the early clinical development of each global antibody candidate and global licensed product at the Company’s own cost, and Novartis is solely responsible for the later worldwide clinical development of global antibody candidates and global licensed products, pursuant to a development plan for such global licensed product, at its own cost. Novartis is solely responsible for the worldwide commercialization of global licensed products and must use commercially reasonable efforts to commercialize such products, pursuant to a commercialization plan, at its own cost. Novartis agrees to provide the Company with development and commercialization updates regarding global licensed products through the joint steering committee, joint development committee, and joint commercialization committee.
Exclusivity
Neither the Company nor Novartis may, alone or with any affiliate or third party, (i) research or develop any antibody that specifically binds to an Option Target for a specified period of time outside of the Collaboration Agreement or (ii) develop or commercialize any antibody that specifically binds to CD73 or any Option Target that subsequently becomes a licensed target for a specified period of time outside the Collaboration Agreement. The October 2018 Amendment clarified that Novartis is permitted to research, develop, manufacture or commercialize any diagnostic product that specifically binds to a licensed target, subject to Novartis’ compliance with its rights and obligations under the Collaboration Agreement, and provided that where such diagnostic product is an Adimab diagnostic product, Novartis may research, develop, manufacture or commercialize such Adimab diagnostic product solely for the purpose of research, development or commercialization of a therapeutic or prophylactic licensed product that specifically binds to the same licensed target.
13
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
Financial Terms
Upon entering into the Collaboration Agreement in January 2016, Novartis made an upfront payment to the Company of $70,000. In addition, Novartis is obligated to pay the Company a fee to the extent it desires to purchase an Option for any Option Target and another fee to exercise such purchased Option, which entitles the Company to an aggregate of up to $20,000 in option purchase and option exercise payments for the remaining Option. The Company is also eligible to receive payments on a target-by-target basis upon the achievement of specified development and sales milestones as well as tiered royalties on annual net sales by Novartis of licensed products ranging from high single-digit to mid-teens percentages upon successful commercialization of any products. Under the Collaboration Agreement, the Company is currently entitled to potential milestones in excess of $500,000, as well as tiered royalties on annual net sales by Novartis ranging from high single-digit to mid-teens percentages upon the successful commercialization of NZV930. The maximum aggregate amount of potential option purchase, option exercise, and milestone payments associated with Novartis’ single remaining Option is $220,000. The Company is required to pay Novartis tiered royalties ranging from high single-digit to mid-teens percentages on annual net sales by the Company of regional licensed products in the United States. The royalty payments are subject to reduction under specified conditions set forth in the Collaboration Agreement.
Termination
Unless terminated earlier, the Collaboration Agreement will continue in effect until neither the Company nor Novartis is researching, developing, manufacturing, or commercializing any antibody candidates or licensed products under the Collaboration Agreement. Novartis may terminate the Collaboration Agreement on a target-by-target basis for any reason upon prior notice to the Company within a specified time period. However, Novartis cannot terminate the Collaboration Agreement with respect to CD73 for a certain period of time following the effective date. Either party may terminate the Collaboration Agreement in full, or on a target-by-target basis, if an undisputed material breach is not cured within a certain period of time or upon notice of insolvency of the other party. To the extent Novartis terminates for convenience or for the Company’s material breach or insolvency, Novartis will grant the Company, on mutually agreeable financial terms, an exclusive, worldwide, irrevocable, perpetual and royalty-bearing license with respect to intellectual property controlled by Novartis that is reasonably necessary to research, develop, manufacture or commercialize certain products.
Revenue Recognition – Collaboration Revenue – Related Party
In determining the appropriate amount of revenue to be recognized under ASC 606, the Company performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Under ASC 606, the Company recognized revenue using the cost-to-cost method, which it believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue will be recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. Under ASC 606, the estimated transaction price will include variable consideration. The Company does not include variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will occur when any uncertainty associated with the variable consideration is resolved. The estimate of the Company’s measure of progress and estimate of variable consideration to be included in the transaction price will be updated at each reporting date as a change in estimate. The amount related to the unsatisfied portion will be recognized as that portion is satisfied over time.
Under ASC 606 the Company accounts for (i) the license it conveyed with respect to CD73 and (ii) its obligations to perform research on CD73 and other specified targets as a single performance obligation under the collaboration agreement with Novartis. Novartis’ right to purchase exclusive options to obtain certain development, manufacturing and commercialization rights are accounted for separately as they do not represent material rights, based on the criteria of ASC 606. Upon the exercise of any purchased option by Novartis, the contract promises associated with an option target would use a separate cost-to-cost model for purposes of revenue recognition under ASC 606.
14
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
In
February
2018, the Company
received an additional
milestone payment of $
45,000
from Novartis upon Novartis’ receipt and acceptance of the first final audited
Good Laboratory Practices (“
GLP
”)
toxicology study report for
NZV930 (formally
SRF373
)
. Upon achieving the milestone, the Company concluded this variable consideration associated with this milestone was no longer constrained and included the $
45,000
in the transaction price.
In March 2018, Novartis notified the Company of its decision not to exercise its option related to CD47. The Company recognized the $5,000 exclusive option right payment as collaboration revenue – related party in the first quarter of 2018 because the Company no longer has any remaining performance obligations related to CD47.
In March 2018, the Company and Novartis elected to terminate a specified target under the Collaboration Agreement. Future costs associated with this target were removed from the estimated total costs in the cost-to-cost model.
In February 2019, Novartis notified the Company of its decision not to purchase the Option related to IL-27. Future costs associated with this target were removed from the estimated total costs in the cost-to-cost model.
For the three months ended March 31, 2019 and 2018, the Company recognized the following totals of collaboration revenue – related party:
|
|
Three months ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
Collaboration revenue - related party
|
|
$
|
14,434
|
|
|
$
|
45,495
|
|
The following table presents changes in the Company’s contract assets and liabilities during the three months ended March 31, 2019:
|
|
December 31, 2018
|
|
|
Additions
|
|
|
Deductions
|
|
|
March 31, 2019
|
|
Contract liabilities
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue - related party
|
|
$
|
53,952
|
|
|
$
|
—
|
|
|
$
|
(14,434
|
)
|
|
$
|
39,518
|
|
(1)
|
Additions to contract liabilities relate to consideration from Novartis during the reporting period. Deductions to contract liabilities relate to deferred revenue recognized as revenue during the reporting period.
|
During
the three months ended March 31, 2019,
the Company
recognized
$14,434
of revenue related to the amounts included in contract liability balance at the beginning of the period. The aggregate amount of the transaction price allocated to the single performance obligation that is partially unsatisfied was
$39,518.
The Company
considers
the
total
consideration
expected
to
be
earned
in
the
next
twelve
months
for
services
to
be
performed
as
current
deferred
revenue-related party,
and
consideration
that
is
expected
to
be
earned
subsequent
to
twelve
months
from
the
balance
sheet
date
as noncurrent
deferred
revenue-related party.
6. Redeemable Convertible Preferred Stock
The Company has issued Series A and Series A-1 preferred stock (together, the “Redeemable Convertible Preferred Stock”). The Redeemable Convertible Preferred Stock is classified outside of stockholders’ deficit because the shares contain redemption features that are not solely within the control of the Company.
Upon the closing of the Company’s initial public offering on April 23, 2018, all shares of the Redeemable Convertible Preferred Stock automatically converted into 16,863,624 shares of common stock.
15
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
7.
Stockholders’
Equity (
Deficit
)
Common Stock
As of March 31, 2019 and December 31, 2018, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 150,000,000 shares, of $0.0001 par value common stock.
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to the preferential dividend rights of any outstanding preferred stock. No dividends have been declared or paid by the Company through March 31, 2019.
As of March 31, 2019 and December 31, 2018, the Company had reserved 7,413,750 and 6,083,202 shares, respectively, of common stock for the exercise of outstanding stock options and the number of shares remaining available for future grant under the Company’s 2018 Stock Option and Incentive Plan, and 2018 Employee Stock Purchase Plan.
On April 23, 2018, the Company completed its initial public offering of its common stock by issuing 7,200,000 shares of common stock, at $15.00 per share for gross proceeds of $108,000, or net proceeds of $97,209. Concurrent with the initial public offering, the Company issued
Novartis 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500, in a private placement.
8. Stock-Based Awards
2014 Stock Incentive Plan
The Company’s 2014 Stock Incentive Plan (the “2014 Plan”) provides for the Company to grant incentive stock options or nonqualified stock options, restricted stock awards, unrestricted stock awards or restricted stock units to employees, directors and consultants of the Company. The 2014 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of the stock options may not be less than 100% of the fair market value of a share of the Company’s common stock on the date of grant and the term of the stock options may not be greater than ten years.
As of March 31, 2019 and December 31, 2018, all remaining shares available under the 2014 Plan were transferred to the Company’s 2018 Stock Option and Incentive Plan (the “2018 Plan”).
2018 Stock Option and Incentive Plan
On April 3, 2018, the Company’s stockholders approved the 2018 Plan, which became effective on April 18, 2018, the date on which the registration statement for the Company’s initial public offering was declared effective. The 2018 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards, cash-based awards and dividend equivalent rights to the Company’s officers, employees, non-employee directors and other key persons (including consultants). The number of shares initially reserved for issuance under the 2018 Plan is 1,545,454, plus the shares of common stock remaining available for issuance under the 2014 Plan, which shall be cumulatively increased each January 1 by 4% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation committee of the board of directors. The shares of common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2018 Plan and the 2014 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan.
As of March 31, 2019, 1,466,112 shares were available for future issuance under the 2018 Plan.
Stock options granted under the 2014 Plan and 2018 Plan to employees generally vest over four years and expire after ten years.
16
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
Stock Options
The following table summarizes the Company’s stock option activity since January 1, 2019:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
4,414,225
|
|
|
$
|
6.79
|
|
|
|
8.29
|
|
|
$
|
2,031
|
|
Granted
|
|
|
1,099,050
|
|
|
|
4.28
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(58,082
|
)
|
|
|
3.63
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(42,099
|
)
|
|
|
7.12
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2019
|
|
|
5,413,094
|
|
|
$
|
6.31
|
|
|
|
8.45
|
|
|
$
|
3,594
|
|
Options exercisable at March 31, 2019
|
|
|
1,956,666
|
|
|
$
|
4.81
|
|
|
|
7.54
|
|
|
$
|
2,505
|
|
Vested and expected to vest at March 31, 2019
|
|
|
5,413,094
|
|
|
$
|
6.31
|
|
|
|
8.45
|
|
|
$
|
3,594
|
|
The weighted average grant-date fair value per share of stock options granted during the three months ended March 31, 2019 and year ended December 31, 2018 was $2.90 and $7.47, respectively.
As of March 31, 2019 and December 31, 2018, there were outstanding stock options held by non-employees for the purchase of 278,735 and 317,957 shares of common stock, respectively, with service-based vesting conditions.
2018 Employee Stock Purchase Plan
On April 3, 2018, the Company’s stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective on April 18, 2018, the date on which the registration statement for the Company’s initial public offering was declared effective. A total of 534,544 shares of common stock were reserved for issuance under this plan. In addition, the number of shares of common stock that may be issued under the ESPP automatically increased on January 1, 2019, and shall increase each January 1 thereafter through January 1, 2028, by the lesser of (i) 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 and (ii) such lesser number of shares as determined by the administrator of the Company’s ESPP.
Stock-Based Compensation
The Company recorded stock-based compensation expense related to stock options and restricted stock awards in the following expense categories of its statements of operations and comprehensive loss:
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Research and development expenses
|
|
$
|
565
|
|
|
$
|
841
|
|
General and administrative expenses
|
|
|
830
|
|
|
|
450
|
|
|
|
$
|
1,395
|
|
|
$
|
1,291
|
|
As of March 31, 2019, the Company had an aggregate of $15,522 of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 2.49 years.
17
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
9
.
Net Loss per Share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
|
|
Three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic net income per share attributable to common stockholders:
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,199
|
)
|
|
$
|
31,212
|
|
Accretion of redeemable convertible preferred stock to redemption value
|
|
|
—
|
|
|
|
(11
|
)
|
Net income attributable to redeemable convertible preferred stockholders
|
|
|
—
|
|
|
|
(26,866
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
(4,199
|
)
|
|
$
|
4,335
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average commons shares outstanding — basic
|
|
|
27,825,698
|
|
|
|
2,727,606
|
|
Net income (loss) per share attributable to common stockholders — basic
|
|
$
|
(0.15
|
)
|
|
$
|
1.59
|
|
Diluted net income per share attributable to common stockholders:
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,199
|
)
|
|
$
|
31,212
|
|
Accretion of redeemable convertible preferred stock to redemption value
|
|
$
|
—
|
|
|
$
|
(11
|
)
|
Net income attributable to redeemable convertible preferred stockholders
|
|
$
|
—
|
|
|
$
|
(26,866
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
(4,199
|
)
|
|
$
|
4,335
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average commons shares outstanding — basic
|
|
|
27,825,698
|
|
|
|
2,727,606
|
|
Dilutive effect of common stock equivalents
|
|
|
—
|
|
|
|
1,407,038
|
|
Weighted average common shares outstanding - diluted
|
|
|
27,825,698
|
|
|
|
4,134,644
|
|
Net income (loss) per share attributable to common stockholders — diluted
|
|
|
(0.15
|
)
|
|
|
1.05
|
|
Stock options for the purchase of 623,827 weighted average shares were excluded from the computation of diluted net income per share attributable to common stockholders for the three months ended March 31, 2018 because those options had an anti-dilutive impact due to the assumed proceeds per share using the treasury stock method being greater than the average fair value of the Company’s common shares for those periods.
10. Income Taxes
The Company did not provide for any income taxes for the three months ended March 31, 2019 or 2018.
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of March 31, 2019 and December 31, 2018. Management reevaluates the positive and negative evidence at each reporting period.
As of March 31, 2019 and December 31, 2018, the Company had no accrued interest or tax penalties recorded. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The Company is currently under examination by the Internal Revenue Service ("IRS") for the period ended December 31, 2016. The Company's tax years are still open under statute from 2015 to present. All years may be examined to the extent the tax credit or net operating loss carryforwards are used in future periods.
18
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
1
1
.
Lease
s
The Company leases real estate, primarily its corporate headquarters in Cambridge, Massachusetts. The Company’s leases have remaining terms ranging from less than 1 year to 10 years. Certain leases include options to renew, exercised at the Company’s sole discretion, with renewal terms that can extend the lease five years. The Company evaluated the renewal options in its leases to determine if it was reasonably certain that the renewal option would be exercised, and therefore should be included in the calculation of the operating lease assets and operating lease liabilities. Given the Company’s current business structure, uncertainty of future growth, and the associated impact to real estate, the Company concluded that it is not reasonably certain that the renewal option related to its corporate headquarters would be exercised, however, for leases it determined the renewal option was probable to be exercised, the Company included the renewal period in the calculation of the operating lease assets and operating lease liabilities. All of the Company’s leases qualify as operating leases.
With the adoption of the new leasing standard, the Company has recorded a right-of-use asset and corresponding lease liability, by calculating the present value of future lease payments, discounted at either 9.5% or 10.5%, the Company’s incremental borrowing rates, over the expected term. The right-of-use asset is reduced by any lease incentives received and the legacy deferred rent balance.
The components of the Company’s lease expense are as follows:
Lease Costs
|
|
Classification
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
R&D Expense
|
|
|
586
|
|
|
|
G&A Expense
|
|
|
224
|
|
Variable lease costs
(1)
|
|
R&D Expense
|
|
|
172
|
|
|
|
G&A Expense
|
|
|
66
|
|
Total lease cost
|
|
|
|
|
1,048
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in months)
|
|
|
|
|
127.6
|
|
Weighted-average discount rate
|
|
|
|
|
10.4
|
%
|
(1)
|
Variable lease costs include certain additional charges for operating costs, including insurance, maintenance, taxes, utilities, and other costs incurred, which are billed based on both usage and as a percentage of the Company’s share of total square footage. Short term lease costs are immaterial.
|
Cash paid for amounts included in the measurement of the Company’s operating lease liabilities was $1,031 for the three months ended March 31, 2019.
As of March 31, 2019, the maturities of the Company’s operating lease liabilities were as follows:
Year Ending December 31,
|
|
|
|
|
2019
|
|
|
2,400
|
|
2020
|
|
|
4,922
|
|
2021
|
|
|
5,831
|
|
2022
|
|
|
5,468
|
|
2023
|
|
|
5,376
|
|
Thereafter
|
|
|
37,573
|
|
Total future lease payments
|
|
|
61,570
|
|
Less: Interest
|
|
|
(40,136
|
)
|
Present value of future lease payments (lease liability)
|
|
$
|
21,434
|
|
19
SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
Future minimum lease payments for the Company’s operating leases
as of
December 31, 2018
were as follows:
Year Ending December 31,
|
|
|
|
|
2019
|
|
|
2,546
|
|
2020
|
|
|
4,258
|
|
2021
|
|
|
5,716
|
|
2022
|
|
|
5,292
|
|
2023
|
|
|
5,376
|
|
Thereafter
|
|
|
37,573
|
|
|
|
$
|
60,761
|
|
Prior to the adoption of ASU 2016-02 and for the three months ended March 31, 2018, the Company recognized rent expense on a straight-line basis over the lease period and recorded deferred rent expense for rent expense incurred but not yet paid. The Company also recorded deferred rent attributable to cash incentives received under its lease agreements which were amortized to rent expense over the lease term. During the three months ended March 31, 2018, the Company recognized total rent expense of $660. Sublease payments received from a third-party tenant under a sublease that expired in March 2018 were $224 for the three months ended March 31, 2018 and were recorded as reduction of rent expense.
12. Commitments and Contingencies
Legal Proceedings
The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to its legal proceedings.
13. Related Party Transactions
Novartis Institutes for BioMedical Research, Inc.
Novartis is a related party because it is a greater than 5% stockholder of the Company. In January 2016, the Company entered into the Collaboration Agreement and sold 2,000,000 shares of its Series A-1 preferred stock to Novartis for gross proceeds of $13,500. In addition, concurrent with the Company’s initial public offering of common stock, the Company issued Novartis 766,666 shares of its common stock at $15.00 per share, for proceeds of $11,500 in a private placement. During the three months ended March 31, 2019, the Company recognized $14,434 of collaboration revenue under the Collaboration Agreement. As of March 31, 2019 and 2018, no amounts were due from Novartis.
During the three months ended March 31, 2019 and 2018, the Company made no cash payments to Novartis related to the Collaboration Agreement.
Research Agreement with Vaccinex, Inc.
On November 30, 2017, the Company entered into an agreement with Vaccinex, Inc. (“Vaccinex”) whereby Vaccinex will use its technology to assist the Company with identifying and selecting experimental human monoclonal antibodies against targets selected by the Company. The Company’s Chief Executive Officer is a member of the board of di
rectors of Vaccinex. During the three months ended March 31, 2019, the Company paid Vaccinex an aggregate of $83 relating to the agreement. The Company did not make any payments to Vaccinex in the three months ended March 31, 2018. The amount of the payment was recognized as research and development expense. The amount due by the Company to Vaccinex as of March 31, 2019 and 2018 was $94 and $69, respectively.
20