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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
Delaware46-5543980
( 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: (617714-4096

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of exchange on which registered
Common stock, $0.0001
SURFThe 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 S      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  S    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 filerSSmall reporting companyS
Emerging growth CompanyS  
 
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. S
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  £  No  S
 
As of August 6, 2020, the registrant had 39,906,066 shares of common stock $0.0001 par value per share, outstanding.

Table of Contents
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
Table of Contents
 
  Page
PART I.
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

ii

Table of Contents
PART I—FINANCIAL INFORMATION
Item 1.  Financial Statements.
SURFACE ONCOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share data)
 
June 30,
2020
December 31, 2019
Assets  
Current assets:  
Cash and cash equivalents$93,125  $46,755  
Marketable securities19,414  58,406  
Prepaid expenses and other current assets5,041  2,765  
Total current assets117,580  107,926  
Property and equipment, net6,456  7,286  
Operating lease right-of-use asset28,831  14,858  
Restricted cash1,595  1,595  
Other assets64  28  
Total assets$154,526  $131,693  
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$530  $3,384  
Accrued expenses and other current liabilities5,250  8,012  
Deferred revenue - related party  4,916  
Operating lease liability4,797  2,962  
Total current liabilities10,577  19,274  
Deferred revenue - related party, non-current  33,676  
Operating lease liability, non-current29,692  16,968  
Convertible note payable, non-current15,486  5,109  
Other liabilities1,100    
Total liabilities56,855  75,027  
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized
   at June 30, 2020 and December 31, 2019; no shares
   issued and outstanding at June 30, 2020 and December 31, 2019
    
Common stock, $0.0001 par value; 150,000,000 shares
   authorized at June 30, 2020 and December 31, 2019, respectively;
   39,257,213 and 27,893,337 shares issued and outstanding at June 30, 2020
   and December 31, 2019, respectively
4  3  
Additional paid-in capital211,445  178,155  
Accumulated other comprehensive income54  103  
Accumulated deficit(113,832) (121,595) 
Total stockholders’ equity97,671  56,666  
Total liabilities and stockholders’ equity$154,526  $131,693  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SURFACE ONCOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands, except share and per share data)
 
 Three months ended June 30,Six months ended June 30,
 2020201920202019
Collaboration revenue - related party$  $143  $38,592  $14,577  
Operating expenses:
Research and development9,548  13,236  20,836  27,545  
General and administrative4,995  5,417  9,782  10,510  
Total operating expenses14,543  18,653  30,618  38,055  
Income (loss) from operations(14,543) (18,510) 7,974  (23,478) 
Interest and other income, net(264) 752  (211) 1,521  
Net income (loss)(14,807) (17,758) 7,763  (21,957) 
Net income (loss) per share attributable to common stockholders— basic$(0.44) $(0.64) $0.25  $(0.79) 
Weighted average common shares outstanding— basic33,418,412  27,845,136  30,697,779  27,835,471  
Net income (loss) per share attributable to common stockholders— diluted$(0.44) $(0.64) $0.24  $(0.79) 
Weighted average common shares outstanding— diluted33,418,412  27,845,136  33,763,452  27,835,471  
Comprehensive income (loss):
Net income (loss)$(14,807) $(17,758) $7,763  $(21,957) 
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities, net of tax of $0
(116) 169  (49) 293  
Comprehensive income (loss)$(14,923) $(17,589) $7,714  $(21,664) 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SURFACE ONCOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
 
 Common Stock
 SharesAmountAdditional
Paid-in Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated DeficitTotal
Stockholders’ Equity
Balances at December 31, 201927,893,337  $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 plan49,025  —  83  —  —  83  
Issuance of common stock upon public offering, net of issuance costs91,003  —  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, 202028,061,197  3  180,418  170  (99,025) 81,566  
Issuance of common stock upon exercise
   of stock options
68,426  —  262  —  —  262  
Issuance of common stock upon public offering, net of issuance costs11,127,590  1  28,765  —  —  28,766  
Stock-based compensation expense—  —  2,000  —  —  2,000  
Unrealized loss on marketable securities—  —  —  (116) —  (116) 
Net loss—  —  —  —  (14,807) (14,807) 
Balances at June 30, 202039,257,213  $4  $211,445  $54  $(113,832) $97,671  
 
 
 Common Stock
 SharesAmountAdditional
Paid-in Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated DeficitTotal
Stockholders’ Equity
Balances at December 31, 201827,772,600  $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, 201927,830,682  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, 201927,851,751  $3  $172,908  $174  $(88,763) $84,322  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SURFACE ONCOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
 Six months ended June 30,
 20202019
Cash flows from operating activities:  
Net income (loss)$7,763  $(21,957) 
Adjustments to reconcile net loss to net cash provided by (used in)
   operating activities:
Depreciation and amortization expense852  871  
Stock-based compensation expense3,850  2,880  
Non-cash interest expense related to note payable377    
Net amortization of premiums and discounts on marketable securities(57) (464) 
Loss on disposal of property and equipment1    
Non-cash operating lease cost1,066  578  
Changes in operating assets and liabilities:
Prepaid expenses and other current assets(2,276) 2,526  
Other assets(36) 29  
Accounts payable(2,854) (897) 
Accrued expenses and other current liabilities(2,762) (847) 
Operating lease liability(480) (551) 
Other liabilities1,100    
Deferred revenue - related party(38,592) (14,577) 
Net cash used in operating activities(32,048) (32,409) 
Cash flows from investing activities:
Purchases of property and equipment(23) (1,137) 
Purchases of marketable investments(650) (93,459) 
Proceeds from sales or maturities of marketable securities39,650  81,600  
Net cash provided by (used in) investing activities38,977  (12,996) 
Cash flows from financing activities:
Proceeds from issuance of convertible note payable10,000    
Proceeds from issuance of common stock upon public offering, net29,086    
Proceeds from employee stock purchases83    
Proceeds from exercise of stock options272  244  
Net cash provided by financing activities39,441  244  
Net increase (decrease) in cash and cash equivalents and restricted cash46,370  (45,161) 
Cash and cash equivalents and restricted cash at beginning of period48,350  84,110  
Cash and cash equivalents and restricted cash at end of period$94,720  $38,949  
Supplemental disclosure of cash flow information:
Cash paid for interest$346  $  
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$  $215  
 
The accompanying notes are an integral part of these financial statements.

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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 Demand Sales Agreement (the “2019 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 2019 Sales Agreement, through an “at-the-market” equity offering program under which JonesTrading acted as the Company’s agent and/or principal (the “2019 ATM Facility”). The 2019 ATM Facility provided that JonesTrading was entitled to compensation for its services in an amount of up to 3.0% of the gross proceeds of any shares sold under the 2019 ATM Facility. The Company had no obligation to sell any shares under the 2019 ATM Facility and could, at any time, suspend solicitation and offers under the 2019 Sales Agreement. In the three and six months ended June 30, 2020, the Company sold 11,127,590 and 11,218,593 shares of common stock at-the-market under the 2019 Sales Agreement, resulting in net proceeds of approximately $28,766 and $29,086, respectively. Through June 30, 2020, the Company sold 11,229,174 shares of common stock at-the-market under the 2019 Sales Agreement, resulting in net proceeds of $29,110. As of June 30, 2020, the Company has fully utilized and closed the 2019 ATM Facility.
On May 22, 2020, the Company entered into a Capital on Demand Sales Agreement (the “2020 Sales Agreement”) with JonesTrading to issue and sell shares of the Company’s common stock of up to $50,000 in gross proceeds, from time to time during the term of the 2020 Sales Agreement, through an “at-the-market” equity offering program under which JonesTrading will act as the Company’s agent and/or principal (the “2020 ATM Facility”). The 2020 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 2020 ATM Facility. The Company has no obligation to sell any shares under the 2020 ATM Facility and may, at any time, suspend solicitation and offers under the 2020 Sales Agreement. Through June 30, 2020, the Company has not sold any shares of common stock at-the-market under the 2020 Sales Agreement.
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 June 30, 2020, the Company had an accumulated deficit of $113,832.
The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of August 11, 2020, the issuance date of this Quarterly Report on Form 10-Q, the Company expects that its cash, cash equivalents and marketable securities of $112,539, 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.
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SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
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 the Company cannot predict their scope or the severity of the outbreak, these developments and measures could materially and adversely affect the Company's business, the Company's results of operations and financial condition. The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business and have taken steps to minimize its impact on the Company's business. Although COVID-19 has not yet had a material adverse impact on our operations and our clinical and preclinical programs, the extent to which COVID-19 ultimately impacts the Company's 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 mitigate its impact, among others. Furthermore, for the safety of its employees, the Company has reduced the presence of its scientists in the Company's labs and is relying on third parties to conduct many of the experiments and studies for its research programs.  Certain of the Company's third-party service providers have also experienced shutdowns or other business disruptions.  As a result, the Company's ability to conduct its business in the manner and on the timelines presently planned could be materially or negatively affected, which could have a material adverse impact on the Company's business, results of operations and financial condition.
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 the Company's 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. The Company has made estimates of the impact of COVID-19 within its financial statements and there may be changes to those estimates in future periods. Actual results could differ from the Company’s estimates.
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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 June 30, 2020, the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2020 and 2019, the condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019, and the condensed consolidated statement of stockholders’ equity for the three and six months ended June 30, 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 June 30, 2020 and the results of its operations and its cash flows for the six months ended June 30, 2020 and 2019. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2020 and 2019 are also unaudited. The results for the three and six months ended June 30, 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.
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.
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SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
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 June 30, 2020, the fair value of available-for-sale marketable debt securities by type of security was as follows:
 
 June 30, 2020
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Marketable debt securities:    
U.S. Treasury notes$16,347  $40  $  $16,387  
U.S. Government agency bonds3,013  14    3,027  
 $19,360  $54  $  $19,414  
The amortized cost and fair value of the Company’s available-for-sale debt securities by contractual maturity are summarized as follows:
 
 June 30, 2020
 Amortized
Cost
Fair
Value
Maturing in one year or less$19,360  $19,414  
 $19,360  $19,414  
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 bonds15,508  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 June 30, 2020 and December 31, 2019.
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SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
4. Fair Value of Financial Assets
The following tables present information about the Company’s financial assets that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:
 
 Fair Value Measurements as of June 30, 2020 using:
 Level 1Level 2Level 3Total
Cash equivalents:    
Money market funds$65,719  $  $  $65,719  
Marketable securities:
U.S. Treasury notes  16,387    16,387  
U.S. Government agency bonds  3,027    3,027  
 $65,719  $19,414  $  $85,133  
 
 Fair Value Measurements as of December 31, 2019 using:
 Level 1Level 2Level 3Total
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 June 30, 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 six months ended June 30, 2020 and 2019, there were no transfers between Level 1, Level 2 and Level 3.
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SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
5. Collaboration Agreements
Collaboration Agreement with Novartis
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 and six months ended June 30, 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 (formerly SRF373). 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.
 
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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. 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 January 2020.
For the three and six months ended June 30, 2020 and 2019, the Company recognized the following totals of collaboration revenue – related party:
 
 Three months ended June 30,Six months ended June 30,
 2020201920202019
Collaboration revenue - related party$  $143  $38,592  $14,577  


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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 six months ended June 30, 2020:
 
 December 31, 2019AdditionsDeductionsJune 30, 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 six months ended June 30, 2020, the Company recognized $38,592 of revenue related to the amounts included in contract liability balance at the beginning of the period. During the three months ended June 30, 2020, the Company did not recognize any revenue included in the 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 June 30, 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 June 30, 2020.
As of June 30, 2020 and December 31, 2019, the Company had reserved 22,896,773 and 17,351,095 shares, respectively, of common stock for the exercise of outstanding stock options, common stock for the vesting of restricted stock units, shares to be issued under the 2019 ATM Facility, shares to be issued under the 2020 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 2019 Sales Agreement with JonesTrading to issue and sell up to $30,000 in shares of the Company’s common stock from time to time. In the three and six months ended June 30, 2020, the Company sold 11,127,590 and 11,218,593 shares of common stock at-the-market under the 2019 Sales Agreement, resulting in net proceeds of approximately $28,766 and $29,086, respectively. Through June 30, 2020, the Company has sold 11,229,174 shares of common stock at-the-market under the 2019 Sales Agreement for net proceeds of $29,110. As of June 30, 2020, the Company has fully utilized and closed the 2019 ATM Facility.
In May 2020, the Company entered into the 2020 Sales Agreement with JonesTrading to issue and sell up to $50,000 in shares of the Company's common stock, from time to time. Through June 30, 2020, the Company has not sold any shares of common stock at-the-market under the 2020 Sales Agreement.
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SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
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”).
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 June 30, 2020, 603,143 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, 20195,418,113  $6.11  7.69$690  
Granted1,254,000  3.23  
Exercised(96,258) 2.82  
Forfeited(389,991) 6.61  
Outstanding as of June 30, 20206,185,864  $5.54  7.74$13,419  
Options exercisable at June 30, 20203,403,399  $5.63  6.99$7,397  
Vested and expected to vest at June 30, 20206,185,864  $5.54  7.74$13,419  
 
The weighted average grant-date fair value per share of stock options granted during the six months ended June 30, 2020 and year ended December 31, 2019 was $2.04 and $2.71, respectively.
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SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
As of June 30, 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 June 30, 2020, a total of 764,452 shares of common stock were reserved for issuance under this plan.  
For the six months ended June 30, 2020, the Company issued 49,025 shares of common stock under the ESPP. For the three months ended June 30, 2020 and three and six months ended June 30, 2019, the Company did not issue any shares of common stock under the ESPP.
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 after eighteen-months as long as the individual remains an employee of the Company at such time.