surf-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________.

 

Commission File Number: 001-38459

 

SURFACE ONCOLOGY, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

46-5543980

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

50 Hampshire Street, 8th Floor

Cambridge, MA

02139

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (617) 714-4096

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No    

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

 

  

Accelerated filer

 

Non-accelerated filer

 

 

(Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

Emerging growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

As of May 25, 2018, the registrant had 27,597,315 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

 

the timing, progress and results of preclinical studies and clinical trials for SRF231 and other product candidates we may develop, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available, and our research and development programs;

 

the timing, scope or likelihood of regulatory filings and approvals, including timing of Investigational New Drug application and Biological Licensing Application filings for, and final U.S. Food and Drug Administration approval of SRF231 and any other future product candidates;

 

the timing, scope or likelihood of foreign regulatory filings and approvals;

 

our ability to use our understanding of the tumor microenvironment to identify product candidates and to match immunotherapies to select patient subsets;

 

our ability to develop and advance our current product candidates and programs into, and successfully complete, clinical studies;

 

our ability to develop combination therapies, whether on our own or in collaboration with Novartis Institutes for Biomedical Research, Inc., or Novartis, and other third parties;

 

our manufacturing, commercialization and marketing capabilities and strategy;

 

the pricing and reimbursement of SRF231 and other product candidates we may develop, if approved;

 

the rate and degree of market acceptance and clinical utility of SRF231 and other product candidates we may develop;

 

the potential benefits of and our ability to maintain our collaboration with Novartis, and establish or maintain future collaborations or strategic relationships or obtain additional funding;

 

our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;

 

our intellectual property position, including the scope of protection we are able to establish and maintain for intellectual property rights covering SRF231 and other product candidates we may develop, the validity of intellectual property rights held by third parties, and our ability not to infringe, misappropriate or otherwise violate any third-party intellectual property rights;

 

our competitive position, and developments and projections relating to our competitors and our industry;

 

our expectations related to the use of our existing cash, cash equivalents and marketable securities and the proceeds from this offering and the concurrent private placement;

 

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and

 

the impact of laws and regulations.

 

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the Securities and Exchange Commission could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

i


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

3

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

4

 

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

PART II.

OTHER INFORMATION

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3.

Defaults Upon Senior Securities

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

61

Signatures

62

 

ii


PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,288

 

 

$

22,455

 

Marketable securities

 

 

34,534

 

 

 

40,854

 

Restricted cash

 

 

85

 

 

 

85

 

Prepaid expenses and other current assets

 

 

7,323

 

 

 

7,936

 

Total current assets

 

 

101,230

 

 

 

71,330

 

Property and equipment, net

 

 

7,072

 

 

 

7,326

 

Restricted cash

 

 

1,000

 

 

 

1,000

 

Deferred offering costs

 

 

2,705

 

 

 

1,784

 

Other assets

 

 

9

 

 

 

14

 

Total assets

 

$

112,016

 

 

$

81,454

 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,793

 

 

$

3,215

 

Accrued expenses and other current liabilities

 

 

4,771

 

 

 

9,843

 

Deferred revenue - related party

 

 

12,127

 

 

 

9,837

 

Deferred rent

 

 

485

 

 

 

489

 

Total current liabilities

 

 

24,176

 

 

 

23,384

 

Deferred revenue - related party, non-current

 

 

55,747

 

 

 

72,268

 

Deferred rent, non-current

 

 

4,544

 

 

 

4,599

 

Total liabilities

 

 

84,467

 

 

 

100,251

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock (Series A and A-1), $0.0001 par

   value; 37,100,000 shares authorized, issued and outstanding at

   March 31, 2018 and December 31, 2017; aggregate liquidation preference of

   $48,600 at March 31, 2018 and December 31, 2017

 

 

48,528

 

 

 

48,517

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 53,000,000 shares authorized at

   March 31, 2018 and December 31, 2017; 2,767,025 and 2,686,350 shares

   issued and outstanding at March 31, 2018 and December 31, 2017,

   respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

8,314

 

 

 

6,877

 

Accumulated other comprehensive loss

 

 

(296

)

 

 

(246

)

Accumulated deficit

 

 

(28,997

)

 

 

(73,945

)

Total stockholders’ deficit

 

 

(20,979

)

 

 

(67,314

)

Total liabilities, redeemable convertible preferred stock and stockholders’ deficit

 

$

112,016

 

 

$

81,454

 

 

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

3


SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In thousands, except share and per share data)

 

 

 

Three months ended March 31,

 

 

 

2018

 

 

2017

 

Collaboration revenue - related party

 

$

45,495

 

 

$

1,672

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

11,090

 

 

 

8,680

 

General and administrative

 

 

3,362

 

 

 

1,546

 

Total operating expenses

 

 

14,452

 

 

 

10,226

 

Income (loss) from operations

 

 

31,043

 

 

 

(8,554

)

Interest and other income (expense), net

 

 

169

 

 

 

142

 

Net income (loss) before income taxes

 

 

31,212

 

 

 

(8,412

)

Provision for income taxes

 

 

 

 

 

(214

)

Net income (loss)

 

 

31,212

 

 

 

(8,626

)

  Accretion of redeemable convertible preferred stock to redemption value

 

 

(11

)

 

 

(10

)

  Net income attributable to redeemable convertible preferred stockholders

 

 

(26,866

)

 

 

 

Net income (loss) attributable to common stockholders

 

$

4,335

 

 

$

(8,636

)

Net income (loss) per share attributable to common stockholders—basic

 

$

1.59

 

 

$

(3.60

)

Weighted average common shares outstanding—basic and diluted

 

 

2,727,606

 

 

 

2,399,265

 

Net income (loss) per share attributable to common stockholders—diluted

 

$

1.05

 

 

$

(3.60

)

Weighted average common shares outstanding—diluted

 

 

4,134,644

 

 

 

2,399,265

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

Net income (loss)

 

$

31,212

 

 

$

(8,626

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Unrealized (loss) gain on marketable securities, net of tax of $0

 

 

(50

)

 

 

93

 

Comprehensive income (loss)

 

$

31,162

 

 

$

(8,533

)

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

4


SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (UNAUDITED)

(In thousands, except share amounts)

 

 

 

Series A and A-1

Redeemable

Convertible

Preferred

Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Deficit

 

Balances at December 31, 2017

 

 

37,100,000

 

 

$

48,517

 

 

 

2,686,350

 

 

 

 

 

$

6,877

 

 

$

(246

)

 

$

(73,945

)

 

$

(67,314

)

Issuance of common stock upon exercise

   of stock options

 

 

 

 

 

 

 

 

80,675

 

 

 

 

 

 

157

 

 

 

 

 

 

 

 

 

157

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,291

 

 

 

 

 

 

 

 

 

1,291

 

Accretion of redeemable convertible

   preferred stock to redemption value

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

(11

)

Adjustment due to the adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,736

 

 

 

13,736

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50

)

 

 

 

 

 

(50

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,212

 

 

 

31,212

 

Balances at March 31, 2018

 

 

37,100,000

 

 

$

48,528

 

 

 

2,767,025

 

 

$

 

 

$

8,314

 

 

$

(296

)

 

$

(28,997

)

 

$

(20,979

)

 

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

5


SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

 

 

Three months ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

31,212

 

 

$

(8,626

)

Adjustments to reconcile net income (loss) to net cash provided by (used in)

   by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

321

 

 

 

158

 

Stock-based compensation expense

 

 

1,291

 

 

 

503

 

Net amortization of premiums and discounts on marketable securities

 

 

70

 

 

 

164

 

Realized losses on marketable securities

 

 

 

 

 

2

 

Loss on disposal of property and equipment

 

 

13

 

 

 

35

 

Deferred income tax benefit

 

 

 

 

 

(946

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Amounts due from related party

 

 

 

 

 

5,000

 

Prepaid expenses and other current assets

 

 

613

 

 

 

(1,016

)

Other assets

 

 

5

 

 

 

 

Accounts payable

 

 

3,693

 

 

 

3,044

 

Accrued expenses and other current liabilities

 

 

(5,653

)

 

 

(449

)

Deferred rent

 

 

(59

)

 

 

315

 

Deferred revenue - related party

 

 

(495

)

 

 

(1,672

)

Net cash provided by (used in) operating activities

 

 

31,011

 

 

 

(3,488

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(480

)

 

 

(1,095

)

Proceeds from sales or maturities of marketable securities

 

 

6,200

 

 

 

14,591

 

Net cash provided by investing activities

 

 

5,720

 

 

 

13,496

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of initial public offering costs

 

 

(55

)

 

 

 

Proceeds from exercise of stock options

 

 

157

 

 

 

 

Net cash provided by financing activities

 

 

102

 

 

 

 

Net increase in cash and cash equivalents and restricted cash

 

 

36,833

 

 

 

10,008

 

Cash and cash equivalents and restricted cash at beginning of period

 

 

23,540

 

 

 

11,080

 

Cash and cash equivalents and restricted cash at end of period

 

$

60,373

 

 

$

21,088

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes (Note 10)

 

$

14

 

 

$

61

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock to redemption value

 

$

11

 

 

$

10

 

Purchases of property and equipment included in accounts payable and

   accrued expenses

 

$

50

 

 

$

167

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

1,450

 

 

$

 

Reclassification of deposit liability for restricted stock upon vesting of shares

 

$

 

 

$

4

 

Landlord incentives for construction of leasehold improvements recorded as

   deferred rent

 

$

 

 

$

1,257

 

 

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

 

6


SURFACE ONCOLOGY, INC.

NOTES TO 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 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 (see Note 6). 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 $97,195 after deducting underwriting discounts, commissions and offering expenses.  Concurrent with the initial public offering, the Company issued Novartis Institutes for Biomedical Research, Inc. (Novartis) in a private placement, 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500.

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 and proceeds from a collaboration agreement with Novartis. The Company has incurred losses and negative cash flows from operations since its inception. As of March 31, 2018, the Company had an accumulated deficit of $28,997.

The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of May 29, 2018, the filing date of this Quarterly Report on Form 10-Q, the Company expects that its cash, cash equivalents and marketable securities will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months from the date that the condensed consolidated financial statements are issued. 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 offerings, 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


2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying 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 1 to the financial statements included in the Company’s final prospectus for its initial public offering of its common stock filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b)(4) of the Securities Act on April 18, 2018, which the Company refers to as the Prospectus, except for the Company’s adoption of the new revenue standard which is 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 common stock and 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.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of March 31, 2018, the condensed consolidated statements of operations and comprehensive income (loss) and of cash flows for the three months ended March 31, 2018 and 2017, and the condensed consolidated statement of redeemable convertible preferred stock and stockholders’ deficit for the three months ended March 31, 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, 2018 and the results of its operations and its cash flows for the three months ended March 31, 2018 and 2017. The financial data and other information disclosed in these notes related to the three months ended March 31, 2018 and 2017 are also unaudited. The results for the three months ended March 31, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018, any other interim periods, or any future year period.

 

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (or FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies how a company identifies promised goods or services and clarifies whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes collected from customers. In December 2016 the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amends certain narrow aspects of the guidance issued in ASU 2014-09 including guidance related to the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples.  ASU 2016-08, ASU 2016-10 and ASU 2016-12 have the same effective dates and transition requirements as ASU 2014-09, all of which collectively are herein referred to as Revenue ASUs.

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The Company adopted the Revenue ASUs effective January 1, 2018 using the modified retrospective method. Under the modified retrospective method, the cumulative effect of adopting the Revenue ASUs is recognized as an adjustment to deferred revenue and accumulated deficit. Under ASC 606, the Company will recognize revenue from its collaboration agreement with Novartis (see Note 5) earlier during the performance period as a result of applying the cost-to-cost method, in contrast to recognizing revenue on a straight-line basis over the estimated ten-year performance period under the previous standard. The following reflects the impact of the cumulative effect of the accounting changes upon the adoption of the Revenue ASUs (in thousands):

Condensed Consolidated Balance Sheets

 

 

 

December 31, 2017

 

 

Cumulative Effect

 

 

January 1,

2018

 

Deferred revenue - related party, current and net of current

   portions

 

$

82,105

 

 

$

(13,736

)

 

$

68,369

 

Accumulated deficit

 

 

(73,945

)

 

 

13,736

 

 

 

(60,209

)

 

 

 

March 31, 2018

 

 

 

Under Topic 606

 

 

Under Topic 605

 

 

Effect of Change

 

Deferred revenue - related party

 

$

12,127

 

 

$

14,421

 

 

$

(2,294

)

Deferred revenue, net of current portion - related party

 

 

55,747

 

 

 

95,060

 

 

 

(39,313

)

Accumulated deficit

 

 

(28,997

)

 

 

(56,869

)

 

 

27,872

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

 

 

Three Months ended March 31, 2018

 

 

 

Under Topic 606

 

 

Under Topic 605

 

 

Effect of Change

 

Collaboration revenue - related party

 

$

45,495

 

 

$

17,623

 

 

$

27,872

 

Income from operations

 

 

31,043

 

 

 

3,171

 

 

 

27,872

 

Net income

 

 

31,212

 

 

 

3,340

 

 

 

27,872

 

Comprehensive income

 

 

31,162

 

 

 

3,290

 

 

 

27,872

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

Three Months ended March 31, 2018

 

 

 

Under Topic 606

 

 

Under Topic 605

 

 

Effect of Change

 

Net income

 

$

31,212

 

 

$

3,340

 

 

$

27,872

 

Adjustments to reconcile net income (loss) to net cash

   provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue - related party

 

 

(495

)

 

 

27,377

 

 

 

(27,872

)

 

During the three months ended March 31, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which addresses diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”). The amendments in this update require that amounts generally described as restricted cash and restricted cash equivalents be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 was effective January 1, 2018.  As a result of adopting ASU 2016-18, the Company includes its restricted cash balance in the cash and cash equivalents reconciliation of operating, investing and financing activities.  The following table provides a reconciliation of cash, cash equivalents, and restricted cash within the balance sheet that sum to the total of the same such amounts shown in the statement of cash flows.

 

 

 

As of March 31,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

59,288

 

 

$

20,003

 

Restricted cash included in current assets

 

 

85

 

 

 

 

Restricted cash included in non-current assets

 

 

1,000

 

 

 

1,085

 

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 

$

60,373

 

 

$

21,088

 

 

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Recently Issued Accounting Pronouncements

In February 2016, the FASB issued 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. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

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. This guidance becomes effective January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2017-11 will have 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 our financial statements upon adoption.

3. Marketable Securities

As of March 31, 2018, the fair value of available-for-sale marketable debt securities by type of security was as follows:

 

 

 

March 31, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Marketable debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency bonds

 

$

7,300

 

 

$

 

 

$

(35

)

 

$

7,265

 

Corporate bonds

 

 

27,530

 

 

 

 

 

 

(261

)

 

 

27,269

 

 

 

$

34,830

 

 

$

 

 

$

(296

)

 

$

34,534

 

 

The amortized cost and fair value of the Company’s available-for-sale debt securities by contractual maturity are summarized as follows:

 

 

 

March 31, 2018

 

 

 

Amortized Cost

 

 

Fair Value

 

Maturing in one year or less

 

$

24,250

 

 

$

24,125

 

Maturing after one year but less than two years

 

 

10,580

 

 

 

10,409

 

 

 

$

34,830

 

 

$

34,534

 

 

As of December 31, 2017, the fair value of available-for-sale marketable debt securities by type of security was as follows:

 

 

 

December 31, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Marketable debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency bonds

 

$

7,300

 

 

$

 

 

$

(38

)

 

$

7,262

 

Corporate bonds

 

 

33,800

 

 

 

 

 

 

(208

)

 

$

33,592

 

 

 

$

41,100

 

 

$

 

 

$

(246

)

 

$

40,854

 

 

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The amortized cost and fair value of the Company’s available-for-sale securities by contractual maturity are summarized as follows:

 

 

 

December 31, 2017

 

 

 

Amortized Cost

 

 

Fair Value

 

Maturing in one year or less

 

$

27,769

 

 

$

27,672

 

Maturing after one year but less than two years

 

 

13,331

 

 

 

13,182

 

 

 

$

41,100

 

 

$

40,854

 

The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of March 31, 2018 and December 31, 2017 was $24,125 and $27,672, respectively. The aggregate fair value of securities held by the Company in an unrealized loss position for more than twelve months as of March 31, 2018 and December 31, 2017 was $10,409 and $13,182, respectively. 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, 2018 and December 31, 2017.

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, 2018 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

45,919

 

 

$

 

 

$

 

 

$

45,919

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency bonds

 

 

 

 

 

7,265

 

 

 

 

 

 

7,265

 

Corporate bonds

 

 

 

 

 

27,269

 

 

 

 

 

 

27,269

 

 

 

$

45,919

 

 

$

34,534

 

 

$

 

 

$

80,453

 

 

 

 

Fair Value Measurements as of December 31, 2017 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

17,409

 

 

$

 

 

$

 

 

$

17,409

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency bonds

 

 

 

 

 

7,262

 

 

 

 

 

 

7,262

 

Corporate bonds

 

 

 

 

 

33,592

 

 

 

 

 

 

33,592

 

 

 

$

17,409

 

 

$

40,854

 

 

$

 

 

$

58,263

 

 

As of March 31, 2018 and December 31, 2017, 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, 2018 and 2017, there were no transfers between Level 1, Level 2 and Level 3.

5. Collaboration Agreement with Novartis

Overview

In January 2016, the Company entered into a collaboration agreement with Novartis, which was subsequently amended in May 2016, July 2017 and September 2017 (the “Novartis Collaboration”). Pursuant to the Novartis Collaboration, the Company granted Novartis a worldwide exclusive license to research, develop, manufacture and commercialize antibodies that target CD73, along with the right to purchase exclusive option rights (each an “Option”) for up to four specified targets (each an “Option Target”) to obtain certain development, manufacturing and commercialization rights. Novartis may exercise up to three purchased Options. Under the Novartis Collaboration, Novartis initially had the ability to exclusively license the development and manufacturing rights for up to four targets (inclusive of CD73), while the Company would retain the U.S. commercial rights to two of such targets. The Novartis Collaboration is governed by a joint steering committee that will be co-chaired by a chairperson designated by each of the Company and Novartis.

Novartis is a related party because it is a principal stockholder of the Company. In January 2016, the Company entered into the Novartis Collaboration and sold 2,000,000 shares of its Series A-1 preferred stock to Novartis. In addition, concurrent with the initial public offering, the Company issued Novartis Institutes for Biomedical Research, Inc. (Novartis) in a private placement, 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500.

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As of March 31, 2018 and December 31, 2017, amounts due to Novartis by the Company totaled $3,437 related to the reimbursement of manufacturing costs incurred by Novartis, which was recorded as a reduction of the total arrangement consideration expected under the Novartis Collaboration and affected the net amount of collaboration revenue-related party recognized in those same periods. During the three months ended March 31, 2018 and 2017, the Company made no cash payments to Novartis related to the Novartis Collaboration.

Research on Targets

Under the Novartis Collaboration, 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. Novartis also has the right, but not the obligation, to conduct research at its own cost on antibodies that bind to CD73 in accordance with the terms of the Novartis Collaboration.

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 filing an IND for an Option Target, Novartis may purchase the Option to obtain certain development, manufacturing and commercialization rights for antibodies that bind to each of the Option Targets. 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 Novartis Collaboration will terminate. Novartis may exercise up to a total of three purchased Options. Each exercised Option will be designated as either a regional or global option, with each such designation determining the development and commercialization rights between the parties with respect to such Option Target, corresponding antibody candidates and licensed products, as summarized below. The Company had the ability to designate the first Option as either regional or global and one of the remaining two Options, with Novartis designating the other remaining Option. 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.

In December 2016, Novartis purchased the Option for antibodies that bind to CD47 for $5,000, and as of December 31, 2017, there were three remaining Options that may be purchased by Novartis.  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 Novartis Collaboration. Accordingly, as of March 31, 2018, Novartis had two Options remaining eligible for purchase, each of which can be exercised.

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

12


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 Novartis Collaboration 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 Novartis Collaboration.

Financial Terms

Upon entering into the Novartis Collaboration 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 each Option for each Option Target and another fee to exercise such purchased Option, which entitles the Company to an aggregate of up to $67,500 in option purchase and option exercise payments, of which $5,000 had been received as of March 31, 2018. 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 Novartis Collaboration, the maximum aggregate amount of potential option purchase, option exercise and milestone payments the Company was entitled to was up to $1,167,500, of which $80,000 had been received as of March 31, 2018. Such amount of potential option purchase, option exercise and milestone payments assumed that Novartis purchased, and exercised, all of the Options available to it pursuant to the Novartis Collaboration as well as the successful clinical development of and achievement of all sales milestones for all targets covered by the Novartis Collaboration. In March 2018, Novartis notified the Company of its decision not to exercise its Option related to CD47. 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 Novartis Collaboration.

 

Termination

Unless terminated earlier, the Novartis Collaboration will continue in effect until neither the Company nor Novartis is researching, developing, manufacturing or commercializing any antibody candidates or licensed products under the Novartis Collaboration. Novartis may terminate the Novartis Collaboration 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 Novartis Collaboration with respect to CD73 for a certain period of time following the effective date. Either party may terminate the Novartis Collaboration 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, 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

On January 1, 2018 the Company adopted ASC 606 under the modified retrospective method. Prior to January 1, 2018 the Company accounted for the collaboration agreement with Novartis under ASC 605-25, Multiple Element Arrangements.

Accounting under ASC 605

The Company determined that the deliverables under the Novartis Collaboration included (i) the worldwide exclusive license to CD73 antibody candidates, which was delivered to Novartis in January 2016 upon entering into the agreement, and (ii) the Company’s research and development and joint steering committee participation obligations under the agreement. The Company also determined that none of these deliverables have standalone value due to the specialized nature of the services to be provided by the Company in connection with the Novartis Collaboration. Therefore, at the inception of the arrangement, the Company concluded that the deliverables were not separable and, accordingly, the Company treated the license and undelivered services as a single unit of accounting and recognized revenue on a straight-line basis over the period that the Company expected to complete its performance obligations under the agreement, which was estimated to be ten years. Accordingly, the Company recognized the upfront payment and milestone payments received over the estimated ten-year period of performance.

 

In December 2016, Novartis purchased an exclusive option right to antibodies that bind to CD47 for $5,000. At that time, the Company concluded that the license and other obligations underlying the exclusive option right held by Novartis represented separate and additional deliverables that Novartis may receive from the Company in future periods. In December 2017, the Company included $5,000 in deferred revenue for the option purchase payment. In March 2018, Novartis decided not to exercise this option.

13


Accounting under ASC 606

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.

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 GLP toxicology study report for 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. The Company recognized $23,424 as collaboration revenue – related party in the first quarter of 2018, based on the ratio of actual costs incurred as of the milestone achievement date to the total estimated costs with respect to performing research on antibodies that bind to CD73 and other specified targets under the Novartis Collaboration. The remaining unrecognized amount of $21,576 is recorded as deferred revenue – related party as of March 31, 2018 and will subsequently be recognized as revenue over the performance period in proportion to the costs incurred under the Novartis Collaboration.

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 Novartis Collaboration. 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, 2018 and 2017, the Company recognized the following totals of collaboration revenue – related party:

 

 

 

Three Months ended March 31,

 

 

 

 

2018

 

 

2017

 

Collaboration revenue - related party

 

$

45,495

 

 

$

1,672

 

The following table presents changes in the Company’s contract assets and liabilities during the three months ended March 31, 2018 (in thousands):

 

 

 

December 31, 2017

 

 

Additions

 

 

Deductions

 

 

March 31, 2018

 

Contract Liabilities (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deferred revenue - related party

 

$

82,105

 

 

$

45,000

 

 

$

(59,231

)

 

$

67,874

 

 

(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 and cumulative catch-up adjustment recognized upon adoption of ASC 606 on January 1, 2018.

 

14


During the three months ended March 31, 2018, the Company recognized $17,071 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 are partially unsatisfied was $67,874.

 

 

 

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.  

7. Stockholders’ Deficit

Common Stock

As of March 31, 2018 and December 31, 2017, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 53,000,000 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 the Redeemable Convertible Preferred Stock. When dividends are declared on shares of common stock, the Company must declare at the same time a dividend payable to the holders of Redeemable Convertible Preferred Stock equivalent to the dividend amount they would receive if each preferred share were converted into common stock. The Company may not pay dividends to common stockholders until all dividends accrued or declared but unpaid on the Redeemable Convertible Preferred Stock have been paid in full. No dividends have been declared or paid by the Company through March 31, 2018.

As of March 31, 2018 and December 31, 2017, the Company had reserved 21,336,774 and 20,703,575 shares, respectively, of common stock for the conversion of the outstanding shares of Redeemable Convertible Preferred Stock, the exercise of outstanding stock options and the number of shares remaining available for future grant under the Company’s 2014 Stock Incentive 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 $97,195.  Concurrent with the initial public offering, the Company issued Novartis in a private placement, 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500.

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.

The total number of shares of common stock that may be issued under the 2014 Plan was 4,489,839 shares as of December 31, 2017. On February 12, 2018, the Company effected an increase in the total number of shares of the Company’s common stock reserved for issuance under the 2014 Plan from 4,489,839 shares to 4,498,930 shares. On March 2, 2018, the Company effected an increase in the total number of shares of the Company’s common stock reserved for issuance under the 2014 Plan from 4,498,930 shares to 5,089,839 shares. On March 9, 2018, the Company effected an increase in the total number of shares of the Company’s common stock reserved for issuance under the 2014 Plan from 5,089,839 shares to 5,203,730 shares.

As of March 31, 2018 and December 31, 2017, there were 83,281 and 733,060 shares, respectively, available for future issuance under the 2014 Plan.

15


Stock options granted under the 2014 Plan to employees generally vest over four years and expire after ten years.

The exercise price for stock options granted is not less than the fair value of common shares as determined by the board of directors as of the date of grant. The board of directors values the Company’s common stock taking into consideration the most recently available third-party valuation of common shares as well as additional factors, which may have changed since the date of the most recent contemporaneous valuation through the date of grant. 

Stock Options

The following table summarizes the Company’s stock option activity since January 1, 2018:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

 

Outstanding as of December 31, 2017

 

 

3,106,891

 

 

$

3.68

 

 

 

8.69

 

 

$

14,361

 

Granted

 

 

1,407,914

 

 

 

11.02

 

 

 

 

 

 

 

 

 

Exercised

 

 

(80,675

)

 

 

1.96

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(44,261

)

 

 

0.40

 

 

 

 

 

 

 

 

 

Outstanding as of March 31, 2018

 

 

4,389,869

 

 

$

6.09

 

 

 

8.92

 

 

$

29,848