surf-10q_20190930.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 September 30, 2019

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

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of exchange on which registered

Common stock, $0.0001

SURF

The Nasdaq Global Market

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

 

 

  

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 November 7, 2019, the registrant had 27,882,756 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 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;

 

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 September 30, 2019 and December 31, 2018

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018

4

 

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2019 and 2018

5

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

7

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

PART II.

OTHER INFORMATION

35

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

Signatures

37

 

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)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,523

 

 

$

82,912

 

Marketable securities

 

 

73,281

 

 

 

75,923

 

Prepaid expenses and other current assets

 

 

2,504

 

 

 

5,766

 

Total current assets

 

 

114,308

 

 

 

164,601

 

Property and equipment, net

 

 

7,628

 

 

 

8,226

 

Operating lease right-of-use asset

 

 

15,807

 

 

 

 

Restricted cash

 

 

1,198

 

 

 

1,198

 

Other assets

 

 

35

 

 

 

40

 

Total assets

 

$

138,976

 

 

$

174,065

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,647

 

 

$

3,412

 

Accrued expenses and other current liabilities

 

 

8,433

 

 

 

8,803

 

Deferred revenue - related party

 

 

4,236

 

 

 

14,610

 

Deferred rent

 

 

 

 

 

352

 

Operating lease liability

 

 

1,257

 

 

 

 

Total current liabilities

 

 

15,573

 

 

 

27,177

 

Deferred revenue - related party, non-current

 

 

34,795

 

 

 

39,342

 

Deferred rent, non-current

 

 

 

 

 

4,684

 

Operating lease liability, non-current

 

 

19,623

 

 

 

 

Total liabilities

 

 

69,991

 

 

 

71,203

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   at September 30, 2019 and December 31, 2018; no shares

   issued and outstanding at September 30, 2019 and December 31, 2018

 

 

 

 

 

 

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

   authorized at September 30, 2019 and December 31, 2018, respectively;

   27,882,756 and 27,772,600 shares issued and outstanding at September 30, 2019

   and December 31, 2018, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

174,485

 

 

 

169,784

 

Accumulated other comprehensive income (loss)

 

 

138

 

 

 

(119

)

Accumulated deficit

 

 

(105,641

)

 

 

(66,806

)

Total stockholders’ equity

 

 

68,985

 

 

 

102,862

 

Total liabilities and stockholders’ equity

 

$

138,976

 

 

$

174,065

 

 

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

3


SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

(in thousands, except share and per share data)

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Collaboration revenue - related party

 

$

344

 

 

$

1,730

 

 

$

14,921

 

 

$

49,653

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

12,916

 

 

 

15,783

 

 

 

40,461

 

 

 

41,971

 

General and administrative

 

 

4,984

 

 

 

3,977

 

 

 

15,494

 

 

 

11,252

 

Total operating expenses

 

 

17,900

 

 

 

19,760

 

 

 

55,955

 

 

 

53,223

 

Loss from operations

 

 

(17,556

)

 

 

(18,030

)

 

 

(41,034

)

 

 

(3,570

)

Interest and other income, net

 

 

678

 

 

 

808

 

 

 

2,199

 

 

 

1,708

 

Net loss

 

 

(16,878

)

 

 

(17,222

)

 

 

(38,835

)

 

 

(1,862

)

Accretion of redeemable convertible preferred stock to redemption value

 

 

 

 

$

 

 

 

 

 

 

(11

)

Net loss attributable to common stockholders

 

 

(16,878

)

 

 

(17,222

)

 

 

(38,835

)

 

 

(1,873

)

Net loss per share attributable to common stockholders— basic and diluted

 

$

(0.61

)

 

$

(0.62

)

 

$

(1.39

)

 

$

(0.11

)

Weighted average common shares outstanding— basic and diluted

 

 

27,862,544

 

 

 

27,598,251

 

 

 

27,844,591

 

 

 

17,398,249

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(16,878

)

 

$

(17,222

)

 

$

(38,835

)

 

$

(1,862

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(36

)

 

 

43

 

 

 

257

 

 

 

56

 

Comprehensive loss

 

$

(16,914

)

 

$

(17,179

)

 

$

(38,578

)

 

$

(1,806

)

 

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

4


SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENT STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share amounts)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive Income

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Loss)

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2018

 

 

27,772,600

 

 

 

3

 

 

 

169,784

 

 

 

(119

)

 

 

(66,806

)

 

 

102,862

 

Issuance of common stock upon exercise

   of stock options

 

 

58,082

 

 

 

 

 

 

211

 

 

 

 

 

 

 

 

 

211

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,395

 

 

 

 

 

 

 

 

 

1,395

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

124

 

 

 

 

 

 

124

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,199

)

 

 

(4,199

)

Balances at March 31, 2019

 

 

27,830,682

 

 

 

3

 

 

 

171,390

 

 

 

5

 

 

 

(71,005

)

 

 

100,393

 

Issuance of common stock upon exercise

   of stock options

 

 

21,069

 

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

33

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,485

 

 

 

 

 

 

 

 

 

1,485

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

169

 

 

 

 

 

 

169

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,758

)

 

 

(17,758

)

Balances at June 30, 2019

 

 

27,851,751

 

 

 

3

 

 

 

172,908

 

 

 

174

 

 

 

(88,763

)

 

 

84,322

 

Issuance of common stock upon exercise

   of stock options

 

 

31,005

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,566

 

 

 

 

 

 

 

 

 

1,566

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

(36

)

 

 

 

 

 

(36

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,878

)

 

 

(16,878

)

Balances at September 30, 2019

 

 

27,882,756

 

 

 

3

 

 

 

174,485

 

 

 

138

 

 

 

(105,641

)

 

 

68,985

 

 

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

5


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

 

 

 

 

 

 

 

 

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

)

Issuance of common stock upon

  exercise of stock options

 

 

 

 

 

 

 

 

3,636

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,490

 

 

 

 

 

 

 

 

 

1,490

 

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

 

Unrealized gain on marketable

   securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63

 

 

 

 

 

 

63

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,852

)

 

 

(15,852

)

Balances at June 30, 2018

 

 

 

 

 

 

 

 

27,600,951

 

 

 

3

 

 

 

167,040

 

 

 

(233

)

 

 

(44,849

)

 

 

121,961

 

Issuance of common stock upon exercise of stock

   options

 

 

 

 

 

 

 

 

23,197

 

 

 

 

 

 

24

 

 

 

 

 

 

 

 

 

24

 

Repurchases of unvested restricted stock

 

 

 

 

 

 

 

 

(16,935

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,214

 

 

 

 

 

 

 

 

 

1,214

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

43

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,222

)

 

 

(17,222

)

Balances at September 30, 2018

 

 

 

 

 

 

 

 

27,607,213

 

 

 

3

 

 

 

168,278

 

 

 

(190

)

 

 

(62,071

)

 

 

106,020

 

 

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

6


SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

 

Nine months ended September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(38,835

)

 

$

(1,862

)

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

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

1,324

 

 

 

982

 

Stock-based compensation expense

 

 

4,446

 

 

 

3,995

 

Net amortization of premiums and discounts on marketable securities

 

 

(666

)

 

 

(207

)

Loss on disposal of property and equipment

 

 

1

 

 

 

13

 

Non-cash operating lease cost

 

 

865

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

3,262

 

 

 

3,398

 

Other assets

 

 

5

 

 

 

(54

)

Accounts payable

 

 

(1,154

)

 

 

1,144

 

Accrued expenses and other current liabilities

 

 

(301

)

 

 

(1,964

)

Deferred rent

 

 

 

 

 

(73

)

Operating lease liability

 

 

(828

)

 

 

 

Deferred revenue - related party

 

 

(14,921

)

 

 

(4,652

)

Net cash (used in) provided by operating activities

 

 

(46,802

)

 

 

720

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,407

)

 

 

(896

)

Purchases of marketable investments

 

 

(107,784

)

 

 

(107,258

)

Proceeds from sales or maturities of marketable securities

 

 

111,349

 

 

 

16,592

 

Net cash provided by (used in) investing activities

 

 

2,158

 

 

 

(91,562

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of offering costs

 

 

 

 

 

(2,031

)

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

 

 

255

 

 

 

183

 

Net cash provided by financing activities

 

 

255

 

 

 

110,092

 

Net increase (decrease) in cash and cash equivalents and restricted cash

 

 

(44,389

)

 

 

19,250

 

Cash and cash equivalents and restricted cash at beginning of period

 

 

84,110

 

 

 

23,540

 

Cash and cash equivalents and restricted cash at end of period

 

$

39,721

 

 

$

42,790

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

 

 

$

41

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accretion of redeemable convertible preferred stock to redemption value

 

$

 

 

$

11

 

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

 

$

12

 

 

$

322

 

 

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

 

 

7


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

1. Nature of the Business

Surface Oncology, Inc. (the “Company” or “Surface”) is a clinical-stage immuno-oncology company focused on using its specialized knowledge of the biological pathways critical to the immunosuppressive tumor microenvironment (“TME”) for the development of next-generation cancer therapies. Surface was incorporated in April 2014 under the laws of the State of Delaware.

The Company is subject to risks common to early-stage companies in the biotechnology industry including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the ability to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance-reporting capabilities. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

On April 6, 2018, the Company effected a one-for-2.2 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s Redeemable Convertible Preferred Stock. Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements, and notes thereto, have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

On April 23, 2018, the Company completed its initial public offering of its common stock by issuing 7,200,000 shares of common stock, at $15.00 per share for gross proceeds of $108,000, or net proceeds of $97,209 after deducting underwriting discounts, commissions and offering expenses. Concurrent with the initial public offering, the Company issued Novartis Institutes for Biomedical Research, Inc. (“Novartis”) 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500, in a private placement.

Upon the closing of the Company’s initial public offering on April 23, 2018, all shares of Series A and A-1 redeemable convertible preferred stock (the “Series A Preferred Stock” and “Series A-1 Preferred Stock”, respectively) automatically converted into 16,863,624 shares of common stock.

On May 1, 2019, the Company entered into a Capital on DemandTM Sales Agreement (the “Sales Agreement”) with JonesTrading Institutional Services LLC (“JonesTrading”) to issue and sell shares of the Company’s common stock of up to $30,000 in gross proceeds, from time to time during the term of the a Sales Agreement, through an “at-the-market” equity offering program under which JonesTrading will act as the Company’s agent and/or principal (the “ATM Facility”). The ATM Facility provides that JonesTrading will be entitled to compensation for its services in an amount of up to 3.0% of the gross proceeds of any shares sold under the ATM Facility. The Company has no obligation to sell any shares under the ATM Facility and may, at any time, suspend solicitation and offers under the Sales Agreement. As of September 30, 2019, the Company had not sold any shares under the ATM Facility.

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 September 30, 2019, the Company had an accumulated deficit of $105,641.

The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of November 12, 2019, the issuance date of this Quarterly Report on Form 10-Q, the Company expects that its cash, cash equivalents and marketable securities of $111,804, will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months. The future viability of the Company beyond that date is dependent on its ability to raise additional capital to finance its operations.

The Company will seek additional funding through public financings, debt financings, collaboration agreements, strategic alliances, and licensing arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborations or other arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be required to delay, reduce or eliminate research and development programs, product portfolio expansion, or future commercialization efforts, which could adversely affect its business prospects.

Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

 

8


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiary, Surface Securities Corporation, a Massachusetts corporation, after elimination of all intercompany accounts and transactions.

 

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 2 to the financial statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2019, except for the Company’s adoption of the new leasing standard as discussed below.

 

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, the accrual of research and development expenses, and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from the Company’s estimates.

 

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liability, and operating lease liability, non-current in the Company’s condensed consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Many lease agreements include the option to renew or extend the lease term. The exercise of lease renewal options or extensions is at the Company’s sole discretion, and are only included in the calculation of the operating lease ROU asset and operating lease liability when it is reasonably certain that the Company would exercise such options. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which it calculates based on the credit quality of the Company, and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of each lease.

The components of a lease are split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company’s facilities operating leases have lease and non-lease components to which the Company has elected to apply the practical expedient and account for each lease component and related non-lease component as one single component. The Company also elected the package of practical expedients, which, among other things, allows the Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. The Company also made an accounting policy election not to recognize leases with an initial term of 12 months or less within its condensed consolidated balance sheets and to recognize those lease payments on a straight-line basis in its condensed consolidated statements of operations and comprehensive loss over the lease term.

9


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

 

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of September 30, 2019, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2019 and 2018, the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, and the condensed consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three and nine months ended September 30, 2019 and 2018 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2019 and the results of its operations and its cash flows for the nine months ended September 30, 2019 and 2018. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2019 and 2018 are also unaudited. The results for the three and nine months ended September 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods, or any future year period.

 

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit bright lines. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11, “Leases (Topic 842) – Targeted Improvements” (ASU 2018-11), which addresses implementation issues related to the new lease standard. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years.

The Company adopted ASC 842 using the modified retrospective approach with an effective date of January 1, 2019 for leases that existed on that date. Prior period results continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows the Company to carry forward the historical lease classification. In connection with the adoption of ASC 842, the Company recorded an impact of $16,672 on its assets and $21,708 on its liabilities for the recognition of operating lease right-of-use-assets and operating lease liabilities, respectively, which are primarily related to the lease of the Company’s corporate headquarters in Cambridge, Massachusetts. The adoption of ASC 842 did not have a material impact on the Company’s results of operations or cash flows.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). This guidance is intended to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be considered “not indexed to an entity’s own stock” and therefore accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. Down round features are most often found in warrants and conversion options embedded in debt or preferred equity instruments. In addition, the guidance re-characterized the indefinite deferral of certain provisions on distinguishing liabilities from equity to a scope exception with no accounting effect. The Company adopted ASU 2017-11 on January 1, 2019. The adoption of this guidance did not have a material impact on the Company's financial position or its results of operations.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company adopted ASU 2018-07 on January 1, 2019. As a result of adopting this standard, the fair value of outstanding nonemployee awards as of December 31, 2018 will no longer be remeasured each reporting period. All future expense related to these awards will be recorded based on the fair value measured as of January 1, 2019. The adoption of this guidance did not have a material impact of the Company’s consolidated financial statements.

10


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

 

Recently Issued Accounting Pronouncements

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, or ASU 2018-18. ASU 2018-18 makes targeted improvements to generally accepted accounting principles for collaborative arrangements, including: (i) clarification that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (ii) adding unit-of-account guidance in Topic 808 to align with the guidance in ASC 606, and (iii) a requirement that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The Company is currently evaluating the impact of adoption, if any, that this standard may have on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”). The new standard provides for changes to the disclosure requirements for recurring and nonrecurring fair value measurements under Topic 820. Provisions of ASU 2018-13 including changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments in ASU 2018-13 should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the new standard but does not anticipate ASU 2018-13 will have a material impact on its condensed consolidated financial statements and related disclosures.  

Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

3. Marketable Securities

As of September 30, 2019, the fair value of available-for-sale marketable debt securities by type of security was as follows:

 

 

 

September 30, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Marketable debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

57,211

 

 

$

92

 

 

$

(2

)

 

$

57,301

 

U.S. Government agency bonds

 

 

15,932

 

 

 

48

 

 

 

 

 

 

15,980

 

 

 

$

73,143

 

 

$

140

 

 

$

(2

)

 

$