surf-10q_20180630.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 June 30, 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 August 9, 2018, the registrant had 27,614,463 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 our current product candidates 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 our current product candidates 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 our current product candidates and other product candidates we may develop, if approved;

 

the rate and degree of market acceptance and clinical utility of our current product candidates 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 our current product candidates 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 June 30, 2018 and December 31, 2017

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and 2017

4

 

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Six Months Ended June 30, 2018

5

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017

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

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

30

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

32

Signatures

33

 

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)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

50,765

 

 

$

22,455

 

Marketable securities

 

 

134,789

 

 

 

40,854

 

Restricted cash

 

 

 

 

 

85

 

Prepaid expenses and other current assets

 

 

8,434

 

 

 

7,936

 

Total current assets

 

 

193,988

 

 

 

71,330

 

Property and equipment, net

 

 

6,932

 

 

 

7,326

 

Restricted cash

 

 

1,198

 

 

 

1,000

 

Deferred offering costs

 

 

 

 

 

1,784

 

Other assets

 

 

15

 

 

 

14

 

Total assets

 

$

202,133

 

 

$

81,454

 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,791

 

 

$

3,215

 

Accrued expenses and other current liabilities

 

 

6,968

 

 

 

9,843

 

Deferred revenue - related party

 

 

14,367

 

 

 

9,837

 

Deferred rent

 

 

485

 

 

 

489

 

Total current liabilities

 

 

24,611

 

 

 

23,384

 

Deferred revenue - related party, non-current

 

 

51,081

 

 

 

72,268

 

Deferred rent, non-current

 

 

4,480

 

 

 

4,599

 

Total liabilities

 

 

80,172

 

 

 

100,251

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

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

   value; no shares authorized at June 30, 2018 and 37,100,000 shares authorized

   at December 31, 2017; no shares issued and outstanding at June 30, 2018 and

   37,100,000 shares issued and outstanding at December 31, 2017

 

 

 

 

 

48,517

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized

   at June 30, 2018 and no shares authorized at December 31, 2017; no shares

   issued and outstanding at June 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, $0.0001 par value; 150,000,000 and 53,000,000 shares

   authorized at June 30, 2018 and December 31, 2017, respectively;

   27,600,951 and 2,686,350 shares issued and outstanding at June 30, 2018

   and December 31, 2017, respectively

 

 

3

 

 

 

 

Additional paid-in capital

 

 

167,040

 

 

 

6,877

 

Accumulated other comprehensive loss

 

 

(233

)

 

 

(246

)

Accumulated deficit

 

 

(44,849

)

 

 

(73,945

)

Total stockholders’ equity (deficit)

 

 

121,961

 

 

 

(67,314

)

Total liabilities, redeemable convertible preferred stock and stockholders’ equity

 

$

202,133

 

 

$

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 June 30,

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Collaboration revenue - related party

 

$

2,428

 

 

$

6,195

 

 

$

47,923

 

 

$

7,867

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

15,098

 

 

 

10,720

 

 

 

26,188

 

 

 

19,400

 

General and administrative

 

 

3,913

 

 

 

2,004

 

 

 

7,275

 

 

 

3,550

 

Total operating expenses

 

 

19,011

 

 

 

12,724

 

 

 

33,463

 

 

 

22,950

 

Income (loss) from operations

 

 

(16,583

)

 

 

(6,529

)

 

 

14,460

 

 

 

(15,083

)

Interest and other income (expense), net

 

 

731

 

 

 

120

 

 

 

900

 

 

 

262

 

Net (loss) income before income taxes

 

 

(15,852

)

 

 

(6,409

)

 

 

15,360

 

 

 

(14,821

)

Provision for income taxes

 

 

 

 

 

(164

)

 

 

 

 

 

(378

)

Net (loss) income

 

 

(15,852

)

 

 

(6,573

)

 

 

15,360

 

 

 

(15,199

)

Accretion of redeemable convertible preferred stock to redemption value

 

 

 

 

 

(10

)

 

 

(11

)

 

 

(20

)

Net income attributable to redeemable convertible preferred stockholders

 

 

 

 

 

 

 

 

(7,077

)

 

 

 

Net (loss) income attributable to common stockholders

 

$

(15,852

)

 

$

(6,583

)

 

$

8,272

 

 

$

(15,219

)

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

 

$

(0.73

)

 

$

(2.73

)

 

$

0.68

 

 

$

(6.30

)

Weighted average common shares outstanding—basic

 

 

21,595,586

 

 

 

2,413,879

 

 

 

12,213,717

 

 

 

2,415,662

 

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

 

$

(0.73

)

 

$

(2.73

)

 

$

0.60

 

 

$

(6.30

)

Weighted average common shares outstanding—diluted

 

 

21,595,586

 

 

 

2,413,879

 

 

 

13,805,380

 

 

 

2,415,662

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(15,852

)

 

$

(6,573

)

 

$

15,360

 

 

$

(15,199

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on marketable securities, net of tax of $0

 

 

63

 

 

 

40

 

 

 

13

 

 

 

133

 

Comprehensive income (loss)

 

$

(15,789

)

 

$

(6,533

)

 

$

15,373

 

 

$

(15,066

)

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’ EQUITY (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

 

 

Equity (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

 

 

 

 

 

 

 

 

84,311

 

 

 

 

 

 

159

 

 

 

 

 

 

 

 

 

159

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,781

 

 

 

 

 

 

 

 

 

2,781

 

Accretion of redeemable convertible

   preferred stock to redemption value

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

(11

)

Conversion of redeemable convertible

   preferred stock to common stock

 

 

(37,100,000

)

 

 

(48,528

)

 

 

16,863,624

 

 

 

2

 

 

 

48,526

 

 

 

 

 

 

 

 

 

 

 

48,528

 

Issuance of common stock upon

   completion of initial public offering, net of

   commissions, underwriting discounts and

   offering costs

 

 

 

 

 

 

 

 

 

 

7,200,000

 

 

 

1

 

 

 

97,208

 

 

 

 

 

 

 

 

 

 

 

97,209

 

Issuance of common stock to a related party

 

 

 

 

 

 

 

 

 

 

766,666

 

 

 

 

 

 

11,500

 

 

 

 

 

 

 

 

 

 

 

11,500

 

Adjustment due to the adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,736

 

 

 

13,736

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,360

 

 

 

15,360

 

Balances at June 30, 2018

 

 

 

 

$

 

 

 

27,600,951

 

 

$

3

 

 

$

167,040

 

 

$

(233

)

 

$

(44,849

)

 

$

121,961

 

 

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)

 

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

15,360

 

 

$

(15,199

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

648

 

 

 

395

 

Stock-based compensation expense

 

 

2,781

 

 

 

1,232

 

Net amortization of premiums and discounts on marketable securities

 

 

(22

)

 

 

295

 

Realized losses on marketable securities

 

 

 

 

 

2

 

Loss on disposal of property and equipment

 

 

13

 

 

 

35

 

Deferred income tax benefit

 

 

 

 

 

(1,665

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Amounts due from related party

 

 

 

 

 

5,000

 

Prepaid expenses and other current assets

 

 

(498

)

 

 

(501

)

Other assets

 

 

(1

)

 

 

2

 

Accounts payable

 

 

(12

)

 

 

(667

)

Accrued expenses and other current liabilities

 

 

(2,359

)

 

 

102

 

Deferred rent

 

 

(123

)

 

 

344

 

Deferred revenue - related party

 

 

(2,921

)

 

 

22,133

 

Net cash provided by operating activities

 

 

12,866

 

 

 

11,508

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(611

)

 

 

(1,338

)

Purchases of marketable investments

 

 

(107,258

)

 

 

 

Proceeds from sales or maturities of marketable securities

 

 

13,358

 

 

 

18,591

 

Net cash (used in) provided by investing activities

 

 

(94,511

)

 

 

17,253

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of initial public offering costs

 

 

(2,031

)

 

 

(36

)

Proceeds from initial public offering of common stock, net of commissions

   and underwriting discounts

 

 

100,440

 

 

 

 

Proceeds from issuance of common stock to a related party

 

 

11,500

 

 

 

 

Proceeds from exercise of stock options

 

 

159

 

 

 

37

 

Net cash provided by financing activities

 

 

110,068

 

 

 

1

 

Net increase in cash and cash equivalents and restricted cash

 

 

28,423

 

 

 

28,762

 

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

 

$

51,963

 

 

$

39,842

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

41

 

 

$

93

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock to redemption value

 

$

11

 

 

$

20

 

Purchases of property and equipment included in accounts payable and accrued expenses

 

$

106

 

 

$

8

 

Reclassification of deposit liability for restricted stock upon vesting of shares

 

$

 

 

$

7

 

Landlord incentives for construction of leasehold improvements recorded as deferred rent

 

$

 

 

$

2,191

 

 

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 $97,209 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 June 30, 2018, the Company had an accumulated deficit of $44,849.

The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of August 14, 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 standards 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 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 June 30, 2018, the condensed consolidated statements of operations and comprehensive income (loss)  for the three and six months ended June 30, 2018 and 2017, the condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017, and the condensed consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) for the six months ended June 30, 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 June 30, 2018 and the results of its operations and its cash flows for the six months ended June 30, 2018 and 2017. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2018 and 2017 are also unaudited. The results for the three and six months ended June 30, 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.

8


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

)

 

 

 

June 30, 2018

 

 

 

Under Topic 606

 

 

Under Topic 605

 

 

Effect of Change

 

Deferred revenue - related party

 

$

14,367

 

 

$

14,421

 

 

$

(54

)

Deferred revenue, net of current portion - related party

 

 

51,081

 

 

 

91,465

 

 

 

(40,384

)

Accumulated deficit

 

 

(44,849

)

 

 

(71,553

)

 

 

26,704

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

 

 

Three months ended June 30, 2018

 

 

Six months ended June 30, 2018

 

 

 

Under Topic 606

 

 

Under Topic 605

 

 

Effect of Change

 

 

Under Topic 606

 

 

Under Topic 605

 

 

Effect of Change

 

Collaboration revenue - related party

 

$

2,428

 

 

$

3,595

 

 

$

(1,167

)

 

$

47,923

 

 

$

21,219

 

 

$

26,704

 

Income from operations

 

 

(16,583

)

 

 

(15,416

)

 

 

(1,167

)

 

 

14,460

 

 

 

(12,244

)

 

 

26,704

 

Net income

 

 

(15,852

)

 

 

(14,685

)

 

 

(1,167

)

 

 

15,360

 

 

 

(11,344

)

 

 

26,704

 

Comprehensive income

 

 

(15,789

)

 

 

(14,622

)

 

 

(1,167

)

 

 

15,373

 

 

 

(11,331

)

 

 

26,704

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

Six months ended June 30, 2018

 

 

 

Under Topic 606

 

 

Under Topic 605

 

 

Effect of Change

 

Net income

 

$

15,360

 

 

$

(11,344

)

 

$

26,704

 

Adjustments to reconcile net income (loss) to net

   cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue - related party

 

 

(2,921

)

 

 

23,783

 

 

 

(26,704

)

 

During the six months ended June 30, 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 June 30,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

50,765

 

 

$

38,757

 

Restricted cash included in current assets

 

 

 

 

 

85

 

Restricted cash included in non-current assets

 

 

1,198

 

 

 

1,000

 

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

 

$

51,963

 

 

$

39,842

 

 

9


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. 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, and early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02, ASU 2018-10 and ASU 2018-11 will have on its consolidated financial statements and related disclosures.

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.

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 new standard will be effective beginning January 1, 2019 and early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2018-07 will have on its results of operations.

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 June 30, 2018, the fair value of available-for-sale marketable debt securities by type of security was as follows:

 

 

 

June 30, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Marketable debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

107,410

 

 

$

1

 

 

$

(16

)

 

$

107,395

 

U.S. Government agency bonds

 

 

2,900

 

 

 

 

 

 

(30

)

 

 

2,870

 

Corporate bonds

 

 

24,712

 

 

 

 

 

 

(188

)

 

 

24,524

 

 

 

$

135,022

 

 

$

1

 

 

$

(234

)

 

$

134,789

 

 

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

 

 

 

June 30, 2018

 

 

 

Amortized

Cost

 

 

Fair

Value

 

Maturing in one year or less

 

$

131,913

 

 

$

131,737

 

Maturing after one year but less than two years

 

 

3,109

 

 

 

3,052

 

 

 

$

135,022

 

 

$

134,789

 

 

10


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

 

 

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 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 June 30, 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 June 30, 2018 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

46,570

 

 

$

 

 

$

 

 

$

46,570

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

 

 

 

 

107,395

 

 

 

 

 

 

107,395

 

U.S. Government agency bonds

 

 

 

 

 

2,870

 

 

 

 

 

 

2,870

 

Corporate bonds

 

 

 

 

 

24,524

 

 

 

 

 

 

24,524

 

 

 

$

46,570

 

 

$

134,789

 

 

$

 

 

$

181,359

 

 

 

 

Fair Value Measurements as of December 31, 2017 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents: