surf-10q_20200331.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, 2020

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 May 8, 2020, the registrant had 28,321,999 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;

 

the impact of COVID-19 on our business operations and that of our third-party manufacturers and suppliers;

 

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 March 31, 2020 and December 31, 2019

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2020 and 2019

4

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

6

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

PART II.

OTHER INFORMATION

31

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

33

Signatures

34

 

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,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,419

 

 

$

46,755

 

Marketable securities

 

 

33,665

 

 

 

58,406

 

Prepaid expenses and other current assets

 

 

3,209

 

 

 

2,765

 

Total current assets

 

 

93,293

 

 

 

107,926

 

Property and equipment, net

 

 

6,851

 

 

 

7,286

 

Operating lease right-of-use asset

 

 

29,310

 

 

 

14,858

 

Restricted cash

 

 

1,595

 

 

 

1,595

 

Other assets

 

 

166

 

 

 

28

 

Total assets

 

$

131,215

 

 

$

131,693

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

733

 

 

$

3,384

 

Accrued expenses and other current liabilities

 

 

7,545

 

 

 

8,012

 

Deferred revenue - related party

 

 

 

 

 

4,916

 

Operating lease liability

 

 

5,101

 

 

 

2,962

 

Total current liabilities

 

 

13,379

 

 

 

19,274

 

Deferred revenue - related party, non-current

 

 

 

 

 

33,676

 

Operating lease liability, non-current

 

 

29,885

 

 

 

16,968

 

Convertible note payable, non-current

 

 

5,285

 

 

 

5,109

 

Other liabilities

 

 

1,100

 

 

 

 

Total liabilities

 

 

49,649

 

 

 

75,027

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   at March 31, 2020 and December 31, 2019; no shares

   issued and outstanding at March 31, 2020 and December 31, 2019

 

 

 

 

 

 

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

   authorized at March 31, 2020 and December 31, 2019, respectively;

   28,061,197 and 27,893,337 shares issued and outstanding at March 31, 2020

   and December 31, 2019, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

180,418

 

 

 

178,155

 

Accumulated other comprehensive income

 

 

170

 

 

 

103

 

Accumulated deficit

 

 

(99,025

)

 

 

(121,595

)

Total stockholders’ equity

 

 

81,566

 

 

 

56,666

 

Total liabilities and stockholders’ equity

 

$

131,215

 

 

$

131,693

 

 

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,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Collaboration revenue - related party

 

$

38,592

 

 

$

14,434

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

11,288

 

 

 

14,309

 

General and administrative

 

 

4,787

 

 

 

5,093

 

Total operating expenses

 

 

16,075

 

 

 

19,402

 

Income (loss) from operations

 

 

22,517

 

 

 

(4,968

)

Interest and other income, net

 

 

53

 

 

 

769

 

Net income (loss)

 

 

22,570

 

 

 

(4,199

)

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

 

$

0.81

 

 

$

(0.15

)

Weighted average common shares outstanding— basic

 

 

27,977,145

 

 

 

27,825,698

 

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

 

$

0.74

 

 

$

(0.15

)

Weighted average common shares outstanding— diluted

 

 

30,917,452

 

 

 

27,825,698

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

Net income (loss)

 

$

22,570

 

 

$

(4,199

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

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

 

 

67

 

 

 

124

 

Comprehensive income (loss)

 

$

22,637

 

 

$

(4,075

)

 

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

4


SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF 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, 2019

 

 

27,893,337

 

 

$

3

 

 

$

178,155

 

 

$

103

 

 

$

(121,595

)

 

$

56,666

 

Issuance of common stock upon exercise

   of stock options

 

 

27,832

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Issuance of common stock under stock purchase plan

 

 

49,025

 

 

 

 

 

 

83

 

 

 

 

 

 

 

 

 

83

 

Issuance of common stock upon public offering, net of issuance costs

 

 

91,003

 

 

 

 

 

 

320

 

 

 

 

 

 

 

 

 

320

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,850

 

 

 

 

 

 

 

 

 

1,850

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

67

 

 

 

 

 

 

67

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,570

 

 

 

22,570

 

Balances at March 31, 2020

 

 

28,061,197

 

 

$

3

 

 

$

180,418

 

 

$

170

 

 

$

(99,025

)

 

$

81,566

 

 

 

 

 

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

 

 

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,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

22,570

 

 

$

(4,199

)

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

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

457

 

 

 

430

 

Stock-based compensation expense

 

 

1,850

 

 

 

1,395

 

Non-cash interest expense related to note payable

 

 

176

 

 

 

 

Net amortization of premiums and discounts on marketable securities

 

 

(42

)

 

 

(188

)

Loss on disposal of property and equipment

 

 

1

 

 

 

 

Non-cash operating lease cost

 

 

587

 

 

 

291

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(444

)

 

 

1,077

 

Other assets

 

 

(138

)

 

 

(9

)

Accounts payable

 

 

(2,651

)

 

 

902

 

Accrued expenses and other current liabilities

 

 

(467

)

 

 

(3,299

)

Operating lease liability

 

 

17

 

 

 

(274

)

Other liabilities

 

 

1,100

 

 

 

 

Deferred revenue - related party

 

 

(38,592

)

 

 

(14,434

)

Net cash used in operating activities

 

 

(15,576

)

 

 

(18,308

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(23

)

 

 

(876

)

Purchases of marketable investments

 

 

(650

)

 

 

(70,301

)

Proceeds from sales or maturities of marketable securities

 

 

25,500

 

 

 

47,675

 

Net cash provided by (used in) investing activities

 

 

24,827

 

 

 

(23,502

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock upon public offering, net

 

 

320

 

 

 

 

Proceeds from employee stock purchases

 

 

83

 

 

 

 

Proceeds from exercise of stock options

 

 

10

 

 

 

211

 

Net cash provided by financing activities

 

 

413

 

 

 

211

 

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

 

 

9,664

 

 

 

(41,599

)

Cash and cash equivalents and restricted cash at beginning of period

 

 

48,350

 

 

 

84,110

 

Cash and cash equivalents and restricted cash at end of period

 

$

58,014

 

 

$

42,511

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

180

 

 

$

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Additional right-of-use asset and related lease liability

 

$

15,003

 

 

$

 

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

 

$

 

 

$

137

 

 

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

 

 

6


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 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. In the three months ended March 31, 2020, the Company sold 91,003 shares of common stock at-the-market under the Sales Agreement, resulting in net proceeds of approximately $320. Through March 31, 2020, the Company has sold 101,584 shares of common stock at-the-market under the Sales Agreement, resulting in net proceeds of $344.

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 Institutes for Biomedical Research, Inc. (“Novartis”), issuance of a debt facility with K2 Health Ventures LLC and proceeds from the Company’s initial public offering of common stock. The Company has incurred losses and negative cash flows from operations since its inception. As of March 31, 2020, the Company had an accumulated deficit of $99,025.

The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of May 12, 2020, the issuance date of this Quarterly Report on Form 10-Q, the Company expects that its cash, cash equivalents and marketable securities of $90,084, will be sufficient to fund its operating expenses, debt service obligations 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.

The ongoing global outbreak of the novel coronavirus disease (“COVID-19”) has resulted in significant governmental measures being implemented to control the spread of the virus and while we cannot predict their scope and severity, these developments and measures could materially and adversely affect our business, our results of operations and financial condition. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and have taken steps to minimize its impact on our business. However, the extent to which COVID-19 ultimately impacts our business, results of operations or financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 or the effectiveness of actions taken to contain the pandemic or treat its impact, among others. Furthermore, for the safety of our employees, we have reduced the presence of our scientists in our labs and are relying on third parties to conduct many of the experiments and studies for our research programs.  Certain of our third party service providers have also experienced shutdowns or other business disruptions.  As a result, our ability to conduct our business in the manner and on the timelines presently planned could be materially or negatively affected, which could have a material adverse impact on our business, results of operations and financial condition.

7


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

2. Summary of Significant Accounting Policies

Basis of Presentation

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

 

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 2 to the financial statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2020.

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 and the accrual of research and development expenses. 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. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including clinical trials, will depend on future developments that are highly uncertain, including new information that may emerge concerning COVID-19 and the actions taken to contain it or treat its impact and the economic impact. We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods. Actual results could differ from the Company’s estimates.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of March 31, 2020, the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2020 and 2019, the condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019, and the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2020 and 2019 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, 2020 and the results of its operations and its cash flows for the three months ended March 31, 2020 and 2019. The financial data and other information disclosed in these notes related to the three months ended March 31, 2020 and 2019 are also unaudited. The results for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year period.

 

Recently Adopted 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. This standard became effective for the Company on January 1, 2020 and the adoption of ASU 2018-18 did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

8


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

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. This standard became effective for the Company on January 1, 2020, and did not have a material impact on the Company’s disclosures.  

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (‘‘ASU 2016-13’’), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes may result in earlier recognition of credit losses. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which narrowed the scope and changed the effective date for non-public entities for ASU 2016-13. The FASB subsequently issued supplemental guidance within ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (‘‘ASU 2019-05’’). ASU 2019-05 provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For public entities that are Securities and Exchange Commission filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. This standard will be effective for the Company on January 1, 2023. The Company is currently evaluating the potential impact that this standard may have 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 March 31, 2020, the fair value of available-for-sale marketable debt securities by type of security was as follows:

 

 

 

March 31, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Marketable debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

25,833

 

 

$

132

 

 

$

 

 

$

25,965

 

U.S. Government agency bonds

 

 

7,662

 

 

 

38

 

 

 

 

 

 

7,700

 

 

 

$

33,495

 

 

$

170

 

 

$

 

 

$

33,665

 

 

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

 

 

 

March 31, 2020

 

 

 

Amortized

Cost

 

 

Fair

Value

 

Maturing in one year or less

 

$

33,495

 

 

$

33,665

 

 

 

$

33,495

 

 

$

33,665

 

 

9


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

As of December 31, 2019, the fair value of available-for-sale marketable debt securities by type of security was as follows:

 

 

 

December 31, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Marketable debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

$

42,795

 

 

$

73

 

 

$

 

 

$

42,868

 

U.S. Government agency bonds

 

 

15,508

 

 

 

31

 

 

 

(1

)

 

$

15,538

 

 

 

$

58,303

 

 

$

104

 

 

$

(1

)

 

$

58,406

 

 

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

 

 

 

December 31, 2019

 

 

 

Amortized

Cost

 

 

Fair

Value

 

Maturing in one year or less

 

$

58,303

 

 

$

58,406

 

 

 

$

58,303

 

 

$

58,406

 

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, 2020 and December 31, 2019.

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, 2020 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

38,643

 

 

$

 

 

$

 

 

$

38,643

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

 

 

 

 

25,965

 

 

 

 

 

 

25,965

 

U.S. Government agency bonds

 

 

 

 

 

7,700

 

 

 

 

 

 

7,700

 

 

 

$

38,643

 

 

$

33,665

 

 

$

 

 

$

72,308

 

 

 

 

Fair Value Measurements as of December 31, 2019 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

30,490

 

 

$

 

 

$

 

 

$

30,490

 

U.S. Government agency bonds

 

 

 

 

 

2,500

 

 

 

 

 

 

2,500

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

 

 

 

 

42,868

 

 

 

 

 

$

42,868

 

U.S. Government agency bonds

 

 

 

 

 

15,538

 

 

 

 

 

 

15,538

 

 

 

$

30,490

 

 

$

60,906

 

 

$

 

 

$

91,396

 

 

As of March 31, 2020 and December 31, 2019, 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, 2020 and 2019, there were no transfers between Level 1, Level 2 and Level 3.

10


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

5. Collaboration Agreement with Novartis

Overview

In January 2016, the Company entered into a collaboration agreement with Novartis (the “Collaboration Agreement”), which was subsequently amended in May 2016, July 2017, September 2017, and October 2018 (the “October 2018 Amendment”). Pursuant to the Collaboration Agreement, the Company granted Novartis a worldwide exclusive license to research, develop, manufacture and commercialize antibodies that target cluster of differentiation 73 (“CD73”). In addition, the Company initially granted Novartis the right to purchase exclusive option rights (each an “Option”) for up to four specified targets (each an “Option Target”) including certain development, manufacturing, and commercialization rights. Novartis initially had the right to exercise up to three purchased Options. Under the Collaboration Agreement, therefore, Novartis had the ability to exclusively license the development and manufacturing rights for up to four targets (inclusive of CD73). In January 2020, Novartis did not purchase and exercise its single remaining Option under the Collaboration Agreement and, as a result, the option purchase period expired. Therefore, there are no Options remaining eligible for purchase, and potential exercise, and the Company’s performance obligations under the Collaboration Agreement have ended.

Novartis is a related party because it is a greater than 5% stockholder of the Company. In January 2016, the Company entered into the Collaboration Agreement and sold 2,000,000 shares of its Series A-1 redeemable convertible preferred stock (the “Series A-1 Preferred Stock”) to Novartis, which were subsequently converted to common stock. In addition, concurrent with the Company’s initial public offering of common stock, the Company issued Novartis 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500 in a private placement.

During the three months ended March 31, 2020 and 2019, the Company made no cash payments to Novartis related to the Collaboration Agreement.

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, obtain regulatory approval of such products, including within certain defined markets, and 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 a joint steering committee.

Exclusivity

Neither the Company nor Novartis may, alone or with any affiliate or third party, develop or commercialize any antibody that specifically binds to CD73. The October 2018 Amendment clarified that Novartis is permitted to research, develop, manufacture or commercialize any diagnostic product that specifically binds to CD73, subject to Novartis’ compliance with its rights and obligations under the Collaboration Agreement, and provided that where such diagnostic product is an Adimab diagnostic product, Novartis may research, develop, manufacture or commercialize such Adimab diagnostic product solely for the purpose of research, development or commercialization of a therapeutic or prophylactic licensed product that specifically binds to the same licensed target.

Financial Terms

Upon entering into the Collaboration Agreement in January 2016, Novartis made an upfront payment to the Company of $70,000. The Company is also eligible to receive payments upon the achievement of specified development and sales milestones as well as tiered royalties on annual net sales by Novartis ranging from high single-digit to mid-teens percentages, upon successful commercialization of NZV930. Under the Collaboration Agreement, the Company is currently entitled to potential milestones of $525,000, as well as tiered royalties on annual net sales by Novartis ranging from high single-digit to mid-teens percentages upon the successful commercialization of NZV930 (formerly SRF373).

 

11


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Termination

Unless terminated earlier, the Collaboration Agreement will continue in effect until neither the Company nor Novartis is researching, developing, manufacturing, or commercializing NZV930. Novartis may terminate the Collaboration Agreement for any reason upon prior notice to the Company within a specified time period. Either party may terminate the Collaboration Agreement in full if an undisputed material breach is not cured within a certain period of time or upon notice of insolvency of the other party. To the extent Novartis terminates for convenience, or the Company terminates for Novartis’ material breach, 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 NZV930.

Revenue Recognition – Collaboration Revenue – Related Party

In determining the appropriate amount of revenue to be recognized under ASC 606, the Company performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Under ASC 606, the Company recognized revenue using the cost-to-cost method, which it believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue will be recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. Under ASC 606, the estimated transaction price will include variable consideration. The Company does not include variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will occur when any uncertainty associated with the variable consideration is resolved. The estimate of the Company’s measure of progress and estimate of variable consideration to be included in the transaction price will be updated at each reporting date as a change in estimate. The amount related to the unsatisfied portion will be recognized as that portion is satisfied over time.

Under ASC 606 the Company accounts for (i) the license it conveyed with respect to CD73; and (ii) its obligations to perform research on CD73 and other specified targets as a single performance obligation under the collaboration agreement with Novartis. Novartis’ right to purchase exclusive options to obtain certain development, manufacturing and commercialization rights are accounted for separately as they do not represent material rights, based on the criteria of ASC 606. Upon the exercise of any purchased option by Novartis, the contract promises associated with an option target would use a separate cost-to-cost model for purposes of revenue recognition under ASC 606.

In February 2019, Novartis notified the Company of its decision not to purchase the Option related to IL-27. Future costs associated with this target were removed from the estimated total costs in the cost-to-cost model.

In January 2020, Novartis did not purchase and exercise its single remaining Option under the Collaboration Agreement and, as a result, the option purchase period expired. Future costs associated with this target were removed from the estimated total costs in the cost-to-cost model. This resulted in the Company recognizing the remaining deferred revenue of $38,592 to collaboration revenue - related party in the January 2020.

For the three months ended March 31, 2020 and 2019, the Company recognized the following totals of collaboration revenue – related party:

 

 

 

Three months ended March 31,

 

 

 

 

2020

 

 

2019

 

Collaboration revenue - related party

 

$

38,592

 

 

$

14,434

 

 

12


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

The following table presents changes in the Company’s contract liabilities during the three months ended March 31, 2020:

 

 

 

December 31, 2019

 

 

Additions

 

 

Deductions

 

 

March 31, 2020

 

Contract liabilities (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deferred revenue - related party

 

$

38,592

 

 

$

 

 

$

(38,592

)

 

$

 

 

(1)

Additions to contract liabilities relate to consideration from Novartis during the reporting period. Deductions to contract liabilities relate to deferred revenue recognized as revenue during the reporting period.

 

During the three months ended March 31, 2020, the Company recognized $38,592 of revenue related to the amounts included in contract liability balance at the beginning of the period. As there are no Options remaining eligible for purchase and exercise, the Company’s performance obligations under the Collaboration Agreement have ended.

6. Stockholders’ Equity

Common Stock

As of March 31, 2020 and December 31, 2019, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 150,000,000 shares, of $0.0001 par value common stock.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to the preferential dividend rights of any outstanding preferred stock. No dividends have been declared or paid by the Company through March 31, 2020.

As of March 31, 2020 and December 31, 2019, the Company had reserved 18,577,901 and 17,351,095 shares, respectively, of common stock for the exercise of outstanding stock options, shares to be issued under the ATM Facility, and the number of shares remaining available for future grant under the Company’s 2018 Stock Option and Incentive Plan, and 2018 Employee Stock Purchase Plan.

 

In May 2019, the Company entered into the Sales Agreement with JonesTrading to issue and sell shares up to $30,000 in shares of the Company’s common stock from time to time. In the three months ended March 31, 2020, the Company sold 91,003 shares of common stock at-the-market under the Sales Agreement, resulting in net proceeds of approximately $320. Through March 31, 2020, the Company has sold 101,584 shares of common stock at-the-market under the Sales Agreement for net proceeds of $344.

7. Stock-Based Awards

2014 Stock Incentive Plan

The Company’s 2014 Stock Incentive Plan (the “2014 Plan”) provides for the Company to grant incentive stock options or nonqualified stock options, restricted stock awards, unrestricted stock awards or restricted stock units to employees, directors and consultants of the Company. The 2014 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of the stock options may not be less than 100% of the fair market value of a share of the Company’s common stock on the date of grant and the term of the stock options may not be greater than ten years.

As of December 31, 2018, all remaining shares available under the 2014 Plan were transferred to the Company’s 2018 Stock Option and Incentive Plan (the “2018 Plan”).

13


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

2018 Stock Option and Incentive Plan

In April 2018, the Company’s 2018 Plan was approved by its stockholders and became effective. The 2018 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards, cash-based awards and dividend equivalent rights to the Company’s officers, employees, non-employee directors and other key persons (including consultants). The number of shares initially reserved for issuance under the 2018 Plan was 1,545,454, plus the shares of common stock remaining available for issuance under the 2014 Plan, which shall be cumulatively increased each January 1 by 4% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation committee of the board of directors. The shares of common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2018 Plan and the 2014 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan.

As of March 31, 2020, 564,561 shares were available for future issuance under the 2018 Plan.

Stock options granted under the 2014 Plan and 2018 Plan to employees generally vest over four years and expire after ten years.

Stock Options

The following table summarizes the Company’s stock option activity since January 1, 2020:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

 

Outstanding as of December 31, 2019

 

 

5,418,113

 

 

$

6.11

 

 

 

7.69

 

 

$

690

 

Granted

 

 

1,143,800

 

 

 

3.16

 

 

 

 

 

 

 

 

 

Exercised

 

 

(27,832

)

 

 

0.35

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(241,209

)

 

 

6.51

 

 

 

 

 

 

 

 

 

Outstanding as of March 31, 2020

 

 

6,292,872

 

 

$

5.58

 

 

 

7.91

 

 

$

643

 

Options exercisable at March 31, 2020

 

 

3,107,349

 

 

$

5.61

 

 

 

6.98

 

 

$

619

 

Vested and expected to vest at March 31, 2020

 

 

6,292,872

 

 

$

5.58

 

 

 

7.91

 

 

$

643

 

 

 

The weighted average grant-date fair value per share of stock options granted during the three months ended March 31, 2020 and year ended December 31, 2019 was $2.00 and $2.71, respectively.

As of March 31, 2020 and December 31, 2019, there were outstanding stock options held by non-employees for the purchase of 267,372 and 272,343 shares of common stock, respectively, with service-based vesting conditions.

2018 Employee Stock Purchase Plan

In April 2018, the Company’s 2018 Employee Stock Purchase Plan (the “ESPP”) was approved by its stockholders and became effective. A total of 256,818 shares of common stock were initially reserved for issuance under this plan. In addition, the number of shares of common stock that may be issued under the ESPP automatically increased on January 1, 2019, and shall increase each January 1 thereafter through January 1, 2028, by the lesser of (i) 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 and (ii) such lesser number of shares as determined by the administrator of the Company’s ESPP. As of March 31, 2020, a total of 764,452 shares of common stock were reserved for issuance under this plan.  

For the three months ended March 31, 2020, the Company issued 49,025 shares of common stock under the 2018 ESPP. For the three months ended March 31, 2019, the Company did not issue any shares of common stock under the 2018 ESPP.

14


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

Restricted Stock Units

The Company has granted restricted stock units (RSUs) with service-based vesting conditions. RSUs represent the right to receive shares of common stock upon meeting specified vesting requirements. Unvested shares of restricted common stock may not be sold or transferred by the holder. These restrictions lapse according to the service-based vesting conditions of each award. In February 2020, the Company granted 1,060,900 RSUs that vest in full on the eighteen-month anniversary as long as the individual remains an employee of the Company.

 

The table below summarizes the Company’s restricted stock unit activity since December 31, 2019:

 

 

 

Number of

Shares

 

 

Weighted

Average

Grant-Date

Fair Value

 

Unvested restricted stock units as of December 31, 2019

 

 

 

 

$

 

Granted

 

 

1,060,900

 

 

 

3.18

 

Vested

 

 

 

 

 

 

 

Forfeited

 

 

(3,300

)

 

 

3.18

 

Unvested restricted stock units as of March 31, 2020

 

 

1,057,600

 

 

$

3.18

 

 

The expense related to RSUs granted to employees was $430 for the three months ended March 31, 2020.

At March 31, 2020, there was $2,933 of total unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over the remaining weighted-average vesting period of 1.31 years.

Stock-Based Compensation

The Company recorded stock-based compensation expense related to stock options and restricted stock unit awards in the following expense categories of its condensed consolidated statements of operations and comprehensive income (loss):

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

Research and development expenses

 

$

682

 

 

$

565

 

General and administrative expenses

 

 

1,168

 

 

 

830

 

 

 

$

1,850

 

 

$

1,395

 

 

 

As of March 31, 2020, the Company had an aggregate of $14,055 of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 1.69 years.

8. Debt

On November 22, 2019, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with K2 HealthVentures LLC (the “Lender”). The Lender has agreed to make available to the Company term loans in an aggregate principal amount of up to $25,000 under the Loan Agreement. The Company plans to use the proceeds of the term loans to support clinical development as well as for working capital and general corporate purposes. The Loan Agreement provides a term loan commitment of $25,000 in three potential tranches: (i) a $7,500 term loan facility funded on November 22, 2019 (the “First Tranche Term Loan”), (ii) a $10,000 term loan facility (the “Second Tranche Term Loan”), and (iii) a $7,500 term loan facility (the “Third Tranche Term Loan”). All three of these term loans have a maturity date of December 1, 2023.

Borrowings under all three loan facilities bear interest at a floating per annum rate equal to the greater of (i) 8.65% and (ii) the Prime Rate plus 3.90%. The Company is permitted to make interest-only payments on the First Tranche Term Loan for the first nineteen months following the funding date. The interest-only period can be extended by an additional seven months, subject to the funding of the Second Tranche Term Loan; and by an additional seven months, subject to the funding of the Third Tranche Term Loan. The term of the combined facility will be 48 months, with repayment in monthly installments commencing at the end of the resulting interest-only period as outlined above through the end of the 48-month term.

15


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

 

The Company is obligated to pay a final fee equal to 4.45% of the aggregate amount of the term loans funded, such payment to occur upon the earliest of (i) the maturity date, (ii) the acceleration of the term loans, and (iii) the prepayment of the term loans. The Company has the option to prepay all, but not less than all, of the outstanding principal balance of the term loans under the Loan Agreement. If the Company prepays all of the term loans prior to the maturity date, it will pay the Lender a prepayment penalty fee based on a percentage of the outstanding principal balance, equal to 5% if the payment occurs on or before 24 months after the initial funding date, 3% if the prepayment occurs more than 24 months after, but on or before 36 months after the initial funding date, or 1% if the prepayment occurs more than 36 months after the initial funding date.

 

The Lender may, at its option, elect to convert any portion of no more than $4,000 of the then outstanding term loan amount and all accrued and unpaid interest thereon into shares of the Company’s common stock at a conversion price of $1.56 per share. The Company determined that the embedded conversion option is not required to be separated from the term loan. The embedded conversion option meets the derivative accounting scope exception since the embedded conversion option is indexed to the Company’s own common stock and qualifies for classification within stockholders’ equity. The Company did recognize a beneficial conversion feature of $2,101, which represents the difference between the commitment date stock price of $2.33 per share and the conversion price of $1.56 per share. The beneficial conversion feature was recorded as a discount on the term loan and is accreted to interest expense using the effective interest method over the term of the loan. The effective interest rate of the term loan is 27.84%.

 

The Company’s obligations under the Loan Agreement are secured by a first priority security interest in substantially all of its assets. The Loan Agreement contains customary representations, warranties and also includes customary events of default, including payment defaults, breaches of covenants, change of control and a material adverse effect clause.

 

Upon the occurrence of an event of default, a default interest rate of an additional 5.00% per annum may be applied to the outstanding loan balances, and the Lender may declare all outstanding obligations immediately due and payable and exercise all of its rights and remedies as set forth in the Loan Agreement and under applicable law.

 

The Company recorded interest expense related to the loan facility of $340 for the three months ended March 31, 2020. The fair value of the loan at March 31, 2020 approximates its face amount due to the floating interest rate.

 

Future principal debt payments on the loan payable are as follows:

 

 

 

March 31, 2020

 

2020

 

$

-

 

2021

 

 

1,602

 

2022

 

 

2,947

 

2023

 

 

2,951

 

Total principal payments

 

 

7,500

 

Final fee due at maturity in 2024

 

 

334

 

Total principal payments and final fee

 

 

7,834

 

Unamortized debt discount and final fee

 

 

2,549

 

Note payable

 

$

5,285

 

16


SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

9. Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows:

 

 

 

Three months ended March 31,

 

 

 

2020