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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
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       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 filerAccelerated 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 August 1, 2022, the registrant had 58,034,033 shares of common stock $0.0001 par value per share, outstanding.

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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 (“IND”) application and Biological Licensing Application filings for, and final U.S. Food and Drug Administration approval of, our current product candidates and any other future product candidates;
the timing, scope or likelihood of foreign regulatory filings and approvals;
our ability to use our understanding of the tumor microenvironment to identify product candidates and to match immunotherapies to select patient subsets;
our ability to develop and advance our current product candidates and programs into, and successfully complete, clinical studies;
our ability to develop combination therapies, whether on our own or in collaboration with Novartis Institutes for Biomedical Research, Inc. (“Novartis”), GlaxoSmithKline Intellectual Property (No. 4) Limited (“GSK”) or other third parties;
the he impact of COVID-19 on our business operations and that of our third-party manufacturers, contract research organizations (“CROs”), suppliers, and other service providers and third parties with whom the Company conducts business or otherwise engages, including regulatory authorities;
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 collaborations with Novartis and GSK, 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 ability to raise capital to fund operations;
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.
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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.

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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,
2022
December 31, 2021
Assets  
Current assets:  
Cash and cash equivalents$74,824 $56,045 
Marketable securities81,824 98,104 
Prepaid expenses and other current assets4,857 3,197 
Total current assets161,505 157,346 
Property and equipment, net5,198 5,651 
Operating lease right-of-use asset25,453 25,870 
Restricted cash1,595 1,595 
Other assets228 385 
Total assets$193,979 $190,847 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$486 $1,550 
Accrued expenses and other current liabilities10,722 13,089 
Operating lease liability5,725 5,384 
Convertible note payable2,792  
Total current liabilities19,725 20,023 
Operating lease liability, non-current26,019 26,909 
Convertible note payable, non-current22,519 25,015 
Total liabilities68,263 71,947 
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized
   at June 30, 2022 and December 31, 2021; no shares
   issued and outstanding at June 30, 2022 and December 31, 2021
  
Common stock, $0.0001 par value; 150,000,000 shares
   authorized at June 30, 2022 and December 31, 2021, respectively;
   55,384,868 and 46,958,776 shares issued and outstanding at June 30, 2022
   and December 31, 2021, respectively
6 5 
Additional paid-in capital286,637 259,859 
Accumulated other comprehensive loss(1,170)(221)
Accumulated deficit(159,757)(140,743)
Total stockholders’ equity125,716 118,900 
Total liabilities and stockholders’ equity$193,979 $190,847 
 
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 LOSS (UNAUDITED)
(in thousands, except share and per share data)
 
 Three months ended June 30,Six months ended June 30,
 2022202120222021
License-related revenue$ $515 $30,000 $2,141 
Operating expenses:
Research and development18,198 12,669 34,822 23,213 
General and administrative6,426 6,434 12,967 12,076 
Total operating expenses24,624 19,103 47,789 35,289 
Loss from operations(24,624)(18,588)(17,789)(33,148)
Interest expense(733)(416)(1,415)(1,440)
Other income (expense), net144 23 190 46 
Net loss(25,213)(18,981)(19,014)(34,542)
Net loss per share — basic and diluted$(0.46)$(0.44)$(0.37)$(0.81)
Weighted average common shares outstanding — basic and diluted54,654,822 43,634,346 51,647,148 42,632,421 
Comprehensive loss:
Net loss$(25,213)$(18,981)$(19,014)$(34,542)
Other comprehensive loss:
Unrealized loss on marketable securities, net of tax of $0
(259)(8)(949)(9)
Comprehensive loss$(25,472)$(18,989)(19,963)(34,551)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SURFACE ONCOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
 
 Common Stock
 SharesAmountAdditional
Paid-in Capital
Accumulated
Other
Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
Balances at December 31, 202146,958,776 $5 $259,859 $(221)$(140,743)$118,900 
Issuance of common stock upon exercise
   of stock options
208 — — — —  
Issuance of common stock under stock purchase plan51,329 — 157 — — 157 
Issuance of common stock upon public offering, net of issuance costs7,337,251 1 20,555 — — 20,556 
Stock-based compensation expense— — 1,865 — — 1,865 
Unrealized loss on marketable securities— — — (690)— (690)
Net income— — — — 6,199 6,199 
Balances at March 31, 202254,347,564 $6 $282,436 $(911)$(134,544)$146,987 
Issuance of common stock upon exercise
   of stock options
9,135 — 11 — — 11 
Issuance of common stock under stock purchase plan2,234 — 7 — — 7 
Issuance of common stock upon public offering, net of issuance costs1,025,935 — 2,110 — — 2,110 
Stock-based compensation expense— — 2,073 — — 2,073 
Unrealized loss on marketable securities— — — (259)— (259)
Net loss— — — — (25,213)(25,213)
Balances at June 30, 202255,384,868 $6 $286,637 $(1,170)$(159,757)$125,716 

 Common Stock
 SharesAmountAdditional
Paid-in Capital
Accumulated
Other
Comprehensive Income
Accumulated DeficitTotal
Stockholders’ Equity
Balances at December 31, 202040,707,047 $4 $218,001 $ $(62,258)$155,747 
Issuance of common stock upon exercise
   of stock options
55,761 — 148 — — 148 
Issuance of common stock under stock purchase plan19,377 — 118 — — 118 
Issuance of common stock upon public offering, net of issuance costs1,677,118 1 14,715 — — 14,716 
Issuance of common stock upon conversion of convertible note payable961,538 — 1,500 — — 1,500 
Stock-based compensation expense— — 2,380 — — 2,380 
Unrealized loss on marketable securities— — — (1)— (1)
Net loss— — — — (15,561)(15,561)
Balances at March 31, 202143,420,841 $5 $236,862 $(1)$(77,819)$159,047 
Issuance of common stock upon exercise
   of stock options
358,126 — 1,486 — — 1,486 
Issuance of common stock upon public offering, net of issuance costs556,642 — 4,266 — — 4,266 
Stock-based compensation expense— — 2,279 — — 2,279 
Unrealized loss on marketable securities— — — (8)— (8)
Net loss— — — — (18,981)(18,981)
Balances at June 30, 202144,335,609 $5 $244,893 $(9)$(96,800)$148,089 
 
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,
 20222021
Cash flows from operating activities:  
Net loss$(19,014)$(34,542)
Adjustments to reconcile net loss to net cash provided by (used in)
   operating activities:
Depreciation and amortization expense691 802 
Stock-based compensation expense3,938 4,659 
Non-cash interest expense related to note payable296 816 
Net amortization of premiums and discounts on marketable securities276 357 
Non-cash operating lease cost1,172 1,007 
Changes in operating assets and liabilities:
Prepaid expenses and other current assets(1,660)(1,125)
Other assets157 74 
Accounts payable(1,128)(487)
Accrued expenses and other current liabilities(2,395)(1,704)
Operating lease liability(1,304)(1,086)
Net cash used in operating activities(18,971)(31,229)
Cash flows from investing activities:
Purchases of property and equipment(146) 
Purchases of marketable securities(15,690)(81,311)
Proceeds from sales or maturities of marketable securities30,745  
Net cash provided by (used in) investing activities14,909 (81,311)
Cash flows from financing activities:
Proceeds from issuance of common stock upon public offering, net22,66618,982
Proceeds from employee stock purchases164 118 
Proceeds from exercise of stock options11 1,634 
Net cash provided by financing activities22,841 20,734 
Net increase (decrease) in cash and cash equivalents and restricted cash18,779 (91,806)
Cash and cash equivalents and restricted cash at beginning of period57,640 176,736 
Cash and cash equivalents and restricted cash at end of period$76,419 $84,930 
Supplemental disclosure of cash flow information:
Cash paid for interest$1,097 $636 
Supplemental disclosure of non-cash investing and financing activities:
Additional right-of-use asset and related lease liability$755 $ 
Purchases of property and equipment included in accounts payable and accrued expenses$92 $ 
Conversion of note payable into shares of common stock$ $1,500 
 
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 22, 2020, the Company entered into a Capital on Demand Sales Agreement (the “2020 Sales Agreement”) with JonesTrading Institutional Services LLC (“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 acted as the Company’s agent and/or principal (the “2020 ATM Facility”). The 2020 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 2020 ATM Facility. The Company had no obligation to sell any shares under the 2020 ATM Facility and had the right, at any time, to suspend solicitation and offers under the 2020 Sales Agreement. In the three and six months ended June 30, 2021, the Company sold 556,642 and 2,233,760 shares of common stock, at-the-market, under the 2020 Sales Agreement, resulting in net proceeds of approximately $4,266 and $18,982, respectively. From May 22, 2020 to August 5, 2021, the Company sold 2,303,545 shares of common stock at-the-market under the 2020 ATM Facility for net proceeds of $19,479. On August 5, 2021, the Company closed the 2020 ATM Facility.
On August 5, 2021, the Company entered into an amendment to the 2020 Sales Agreement (as amended, the “Amended Sales Agreement”) with JonesTrading, which amended the 2020 Sales Agreement to allow the issuance and sale of up to $80,000 in gross proceeds, from time to time during the term of the Amended Sales Agreement, through an “at-the-market” equity offering program under which JonesTrading will act as the Company’s sales agent (the “2021 ATM Facility”). The 2021 ATM Facility provides that JonesTrading will continue to 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 2021 ATM Facility. The Company has no obligation to sell any shares under the Amended Sales Agreement and may, at any time, suspend solicitation and offers under the 2021 ATM Facility. In the three and six months ended June 30, 2022, the Company sold 1,025,935 and 8,363,186 shares of common stock, at-the-market under the Amended Sales Agreement, resulting in net proceeds of approximately $2,110 and $22,666, respectively. Since August 5, 2021, the Company has sold 9,796,813 shares of common stock at-the-market under the 2021 ATM Facility for net proceeds of $32,711.
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 private and public sales of its securities, proceeds from a collaboration agreement with Novartis Institutes for Biomedical Research, Inc. (“Novartis”), proceeds from a license agreement with GlaxoSmithKline Intellectual Property (No. 4) Limited (“GSK”) and issuance of a term loan with K2 Health Ventures LLC (“K2HV”). The Company has a history of incurring losses and negative cash flows from operations. As of June 30, 2022, the Company had an accumulated deficit of $159,757.
The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of August 3, 2022, the issuance date of this Quarterly Report on Form 10-Q, the Company expects that its cash, cash equivalents and marketable securities will be sufficient to fund its operating expenses, 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 and spread of the novel coronavirus disease and its variants (collectively, “COVID-19”) and significant governmental and related measures implemented or reimplemented to help control the spread of the virus have impacted and could materially and adversely impact the Company's business, results of operations and financial condition. The Company is closely monitoring the impact of the COVID-19 pandemic and has taken steps to identify and help minimize its adverse impact on, and risks to, the Company's business, although there can be no assurance that the Company will be able to identify all such steps or that any identified steps will be effective. Although COVID-19 has not had a material adverse impact on the Company’s operations and its clinical and preclinical programs, the extent to which COVID-19 will ultimately impact 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 COVID-19 and the severity of its variants or the effectiveness over time of the measures implemented or reimplemented to help contain the pandemic or mitigate against its impact, among others. Certain of the Company’s third-party service providers have 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 2, 2022.
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. 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 financial statements 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, 2022 and the results of its operations and its cash flows for the six months ended June 30, 2022 and 2021. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2022 and 2021 are also unaudited. The condensed balance sheet at December 31, 2021, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. The results for the three and six months ended June 30, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, or any future year period.
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. 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 June 30, 2022, the fair value of available-for-sale marketable debt securities by type of security was as follows:
 
 June 30, 2022
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Marketable debt securities:    
U.S. Treasury notes$66,153 $ (972)$65,181 
U.S. government agency bonds11,940  (189)11,751 
Corporate bonds$4,901 $5 $(14)$4,892 
 $82,994 $5 $(1,175)$81,824 
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SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
The amortized cost and fair value of the Company’s available-for-sale debt securities by contractual maturity are summarized as follows:
 
 June 30, 2022
 Amortized
Cost
Fair
Value
Maturing in one year or less$59,101 $58,433 
Maturing after one year23,893 23,391 
 $82,994 $81,824 

As of December 31, 2021, the fair value of available-for-sale marketable debt securities by type of security was as follows:
 December 31, 2021
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Marketable debt securities:    
U.S. Treasury notes$77,550 $ (188)$77,362 
U.S. government agency bonds20,775  (33)20,742 
 $98,325 $ $(221)$98,104 
The amortized cost and fair value of the Company’s available-for-sale debt securities by contractual maturity are summarized as follows:
 December 31, 2021
 Amortized
Cost
Fair
Value
Maturing in one year or less$60,462 $60,406 
Maturing after one year37,863 37,698 
 $98,325 $98,104 
The Company has the intent and ability to hold investments in an unrealized loss position until recovery, which may be at maturity. The Company determined it is more likely than not it would not be required to sell these securities before recovery of their amortized cost. 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, 2022 and December 31, 2021.
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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, 2022 using:
 Level 1Level 2Level 3Total
Cash equivalents:    
Money market funds$32,389 $ $ $32,389 
Marketable securities:
U.S. Treasury notes 65,181  65,181 
U.S. government agency bonds 11,751  11,751 
Corporate bonds$ $4,892 $ 4,892 
 $32,389 $81,824 $ $114,213 
 
 Fair Value Measurements as of December 31, 2021 using:
 Level 1Level 2Level 3Total
Cash equivalents:    
Money market funds$20,309 $ $ $20,309 
Marketable securities:
U.S. Treasury notes$ $77,362 $ $77,362 
U.S. Government agency bonds$ $20,742 $ $20,742 
 $20,309 $98,104 $ $118,413 
 
As of June 30, 2022 and December 31, 2021, the Company’s cash equivalents were invested in money market funds, U.S. Treasury notes, U.S. government agency bonds and corporate bonds and were valued based on Level 1 and Level 2 inputs. During the six months ended June 30, 2022 and 2021, there were no transfers between Level 1, Level 2 and Level 3.
5. Collaboration and License Agreements
Novartis Agreement
In January 2016, the Company entered into a collaboration agreement with Novartis, which was subsequently amended in May 2016, July 2017, September 2017, and October 2018 (as amended, the “Novartis Agreement”). Pursuant to the Novartis 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, pursuant to which, Novartis initially had the right to exercise up to three purchased Options. Accordingly, Novartis had the ability to exclusively license the development, manufacturing and commercial rights for up to four targets (inclusive of CD73). As of January 2020, there were no Options remaining for purchase and exercise, and accordingly the Company’s performance obligations under the Novartis Agreement ended. Under the Novartis Agreement, the Company is currently entitled to potential development milestones of $325,000 and sales milestones of $200,000, 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). Due to the uncertainty of pharmaceutical development and the historical failure rates generally associated with drug development, the Company may not receive any milestone payments or any royalty payments under the Novartis Agreement.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
Termination
Unless terminated earlier, the Novartis Agreement will continue in effect until neither the Company nor Novartis is researching, developing, manufacturing or commercializing NZV930. Novartis may terminate the Novartis Agreement for any or no reason upon prior notice to the Company within a specified time period. Either party may terminate the Novartis 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’ uncured 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 accounted 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 Novartis Agreement. Novartis’ right to purchase exclusive options to obtain certain development, manufacturing and commercialization rights would have been accounted for separately as they did 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 have used a separate cost-to-cost model for purposes of revenue recognition under ASC 606.
The Company did not recognize any revenue relating to the Novartis Agreement during the three and six months ended June 30, 2022 and 2021 as it does not have any remaining performance obligations under the agreement.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
GSK Agreement
In December 2020, the Company entered into a license agreement with GSK, which was subsequently amended in August 2021 (as amended, the “GSK Agreement”). Pursuant to the GSK Agreement, the Company granted GSK a worldwide exclusive, sublicensable license to develop, manufacture and commercialize antibodies that target the antibody GSK4381562 (formerly SRF813), targeting CD112R, also known as PVRIG (the “Licensed Antibodies”). GSK is responsible for the development, manufacturing and commercialization of the Licensed Antibodies and a joint development committee was formed to facilitate information sharing between the Company and GSK. GSK is responsible for all costs and expenses of such development, manufacturing and commercialization and is obligated to provide the Company with updates on its development, manufacturing and commercialization activities through the joint development committee. Under the terms of the GSK Agreement, GSK made a one-time upfront payment of $85,000 and was required to make additional payments to the Company for supply services and transition services of $4,314 and $950, respectively. In November 2021, GSK notified the Company it received clearance from the FDA for GSK4381562 to proceed into a first-in-human clinical trial, and as a result, the Company’s performance obligations under the GSK Agreement ended. In March 2022, the Company earned a $30,000 milestone payment from GSK upon the dosing of the first patient in the Phase 1 trial of GSK4381562, which it received in the second quarter 2022. The Company is currently eligible to receive up to $60,000 in clinical and $155,000 in regulatory milestones. In addition, the Company may receive up to $485,000 in sales milestone payments. The Company is also eligible to receive royalties on global net sales of any approved products based on the licensed antibodies, ranging in percentages from high single digits to mid-teens. Due to the uncertainty of pharmaceutical development and the historical failure rates generally associated with drug development, the Company may not receive any milestone payments or any royalty payments under the GSK Agreement.
Termination
Unless terminated earlier, the GSK Agreement expires on a licensed product-by-licensed product and country-by-country basis on the later of ten years from the date of first commercial sale or when there is no longer a valid patent claim or regulatory exclusivity covering such licensed product in such country. Either party may terminate the GSK Agreement for an uncured material breach by the other party or upon the bankruptcy or insolvency of the other party. GSK may terminate the GSK Agreement for its convenience. The Company may terminate the GSK Agreement if GSK institutes certain actions related to the licensed patents or if GSK ceases development activities, other than for certain specified technical or safety reasons. In the event of termination, the Company would regain worldwide rights to the terminated program.
Revenue Recognition – License-Related Revenue
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.
The Company assessed the GSK Agreement in accordance with ASC 606 and concluded that GSK is a customer. The Company identified the following promises under the contract: (i) a worldwide exclusive, sublicensable license to develop, manufacture and commercialize the Licensed Antibodies; (ii) supplying Licensed Antibodies until an IND is accepted by a regulatory authority (iii) transition services until an IND is accepted by a regulatory authority; and (iv) participation on the joint development and joint patent committees. The Company assessed the above promises and determined that the worldwide exclusive, sublicensable license to develop, manufacture and commercialize the Licensed Antibodies is considered functional intellectual property and distinct from other promises under the contract. This functional license is distinct in the context of the GSK Agreement as GSK can benefit from the license on its own or together with other readily available resources. In addition, the supply and transition services are not complex or specialized, could be performed by another qualified third party, are not expected to significantly modify or customize the license to GSK4381562 (formerly SRF813), and are expected to be performed only for a short period of time. The Company determined that the impact of participation on the joint development and joint patent committees was insignificant and had an immaterial impact on the accounting model. Based on these assessments, the Company identified three distinct performance obligations at the outset of the GSK Agreement.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
The Company determined the transaction price of the GSK Agreement, under ASC 606, to be $90,264, consisting of the upfront payment of $85,000 plus $4,314 for supply of the Licensed Antibodies and $950 for the transition services. The Company evaluated how much variable consideration related to clinical and regulatory milestones to include in the transaction price using the most likely amount approach and concluded that no amount should be included in the transaction price due to the high degree of uncertainty and risk associated with these potential payments. The Company also determined that royalties and sales milestones relate solely to the licenses of intellectual property and are therefore excluded from the transaction price under the sales- or usage-based royalty exception of ASC 606. Revenue related to these royalties and sales milestones will only be recognized when the associated sales occur, and relevant thresholds are met.
As noted above, the Company identified three performance obligations in the GSK Agreement: (i) the delivery of the worldwide exclusive, sublicensable license to develop, manufacture and commercialize the Licensed Antibodies; (ii) supply of Licensed Antibodies until an IND is accepted by a regulatory authority; and (iii) transition services until an IND is accepted by a regulatory authority. The selling price of each performance obligation in the GSK Agreement was determined based on the Company’s standalone selling price with the objective of determining the price at which it would sell such an item if it were to be sold regularly on a standalone basis. The Company recognized revenue for the license performance obligation upon transfer of the license to GSK. As control of the license was transferred on the effective date of December 16, 2020, and GSK could begin to use and benefit from the license, the Company recognized $85,000 of license-related revenue during the year ended December 31, 2020. The Company recognized the costs allocated to supply services and transition services over time as the Company transferred control of these services and GSK received and consumed the benefit as the Company performed the services. The Company re-evaluated the transaction price at the end of each reporting period and as uncertain events were resolved, or other changes in circumstances occurred, adjusted its estimate of the transaction price as necessary.
In November 2021, GSK notified the Company it received clearance from the FDA for GSK4381562 to proceed into a first-in-human clinical trial and as a result the Company's performance obligations under the GSK Agreement ended. No amount of the transaction price allocated to the performance obligations was unsatisfied as of November 2021.
In March 2022, GSK notified the Company it had dosed the first patient in its in Phase 1 study of GSK4381562 in patients with solid tumors. As a result of this Phase 1 study initiation, the first clinical milestone under the GSK Agreement was achieved. The Company concluded the variable consideration associated with this milestone was no longer constrained and recognized $30,000 in license-related revenue for the six months ended June 30, 2022, as it had no further performance obligations associated with the milestone. The Company did not recognize license-related revenue under the GSK Agreement in the three months ended June 30, 2022.
During the three and six months ended June 30, 2022, the Company did not recognize any license-related revenue related to the transition services or supply services, as the Company's performance obligations under the GSK Agreement had ended. During the three and six months ended June 30, 2021, the Company recognized $299 and $661 of license-related revenue related to the transition services, respectively, and recognized $216 and $1,480 of license-related revenue related to the supply services, respectively, which represents the costs incurred for the manufacturing and transition services that were performed.
For the three and six months ended June 30, 2022 and 2021, the Company recognized the following totals of license-related revenue:
Three months ended June 30,Six months ended June 30,
2022202120222021
License-related revenue$ $515 $30,000 $2,141 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
6. Stockholders’ Equity
Common Stock
As of June 30, 2022 and December 31, 2021, 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, 2022.
As of June 30, 2022 and December 31, 2021, the Company had reserved 27,456,622 and 32,934,776 shares, respectively, of common stock for the exercise of outstanding stock options, shares to be issued under the 2021 ATM Facility, shares to be issued upon the conversion of the Loan Amendment (as defined in Note 8 below), shares to be issued upon the vesting of restricted stock units and the number of shares remaining available for future grant under the Company’s 2018 Stock Option and Incentive Plan, 2021 Inducement Plan and 2018 Employee Stock Purchase Plan.
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. In the three and six months ended June 30, 2021, the Company sold 556,642 and 2,233,760 shares of common stock at-the-market under the 2020 Sales Agreement, resulting in net proceeds of approximately $4,266 and $18,982, respectively. From May 22, 2020 to August 5, 2021, the Company sold 2,303,545 shares of common stock at-the-market under the 2020 ATM Facility for net proceeds of $19,479. On August 5, 2021, the Company closed the 2020 ATM Facility.
In August 2021, the Company entered into the Amended Sales Agreement with JonesTrading, which amended the 2020 Sales Agreement to allow the issuance and sale of up to $80,000 in shares of the Company's common stock, from time to time. In the three and six months ended June 30, 2022, the Company sold 1,025,935 and 8,363,186 shares of common stock, at-the-market under the Amended Sales Agreement, resulting in net proceeds of approximately $2,110 and $22,666, respectively. Since August 5, 2021, the Company has sold 9,796,813 shares of common stock at-the-market under the 2021 ATM Facility for net proceeds of $32,711.
7. Stock-Based Awards
2014 Stock Incentive Plan
The Company’s 2014 Stock Incentive Plan (the “2014 Plan”) provided 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 were 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 could 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 could 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”).
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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, the reserved shares 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, 2022, 322,608 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 December 31, 2021:
 
 Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
   (in years) 
Outstanding as of December 31, 20217,057,258 $6.59 6.98$4,678 
Granted2,040,900 3.50 
Exercised(9,343)1.18 
Forfeited(412,284)7.13 
Outstanding as of June 30, 20228,676,531 $5.84 7.26$474 
Options exercisable at June 30, 20225,179,174 $6.20 6.05$472 
Vested and expected to vest at June 30, 20228,676,531 $5.84 7.26$474 
 
The weighted average grant-date fair value per share of stock options granted during the six months ended June 30, 2022 and year ended December 31, 2021 was $2.34 and $6.41, respectively.
As of June 30, 2022 and December 31, 2021, there were outstanding stock options held by non-employees for the purchase of 260,570 and 276,570 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, 2022, a total of 1,500,500 shares of common stock were reserved for issuance under this plan.  
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
For the three and six months ended June 30, 2022, the Company issued 2,234 and 53,563 shares of common stock under the ESPP, respectively. For the six months ended June 30, 2021, the Company issued 19,377 shares of common stock under the ESPP. The Company did not issue shares of common stock under the ESPP in the three months ended June 30, 2021.
2021 Inducement Plan
In December 2021, the Company adopted the Company’s 2021 Inducement Plan (the “Inducement Plan”) pursuant to which the Company reserved 600,000 shares of common stock to be used exclusively for grants of equity-based awards to individuals who were not previously employees or directors of the Company, as an inducement material to the individual’s entry into employment with the Company within the meaning of Rule 5635(c)(4) of the Marketplace Rules of the Nasdaq Stock Market, Inc. The Inducement Plan provides for the grant of equity-based awards in the form of nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, unrestricted stock awards, and dividend equivalent rights. The Inducement Plan was adopted by the Company without stockholder approval pursuant to Rule 5635(c)(4) of the Marketplace Rules of the Nasdaq Stock Market, Inc.
The following table summarizes the Company’s stock option under the Inducement Plan activity since December 31, 2021:

Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(in years)
Outstanding as of December 31, 2021 $ 0.00$ 
Granted291,600 2.94 
Exercised  
Forfeited  
Outstanding as of June 30, 2022291,600 $2.94 9.75$ 
Options exercisable at June 30, 2022 $ 0.00$ 
Vested and expected to vest at June 30, 2022291,600 $2.94 9.75$ 
The weighted average grant-date fair value per share of stock options granted during the six months ended June 30, 2022 was $1.99. As of June 30, 2022, 308,400 shares were available for future issuance under the Inducement Plan.
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 units may not be sold or transferred by the holder. These restrictions lapse according to the service-based vesting conditions of each award. To date, in 2022, the Company has granted 732,000 RSUs, of which 40% vest in August 2022 and 60% vest in August 2023, as long as the individual remains an employee of the Company at such time.
The table below summarizes the Company’s RSU activity since December 31, 2021:
 
 Number of
Shares
Weighted
Average
Grant-Date
Fair Value
Unvested restricted stock units as of December 31, 2021 $ 
Granted732,000 3.64 
Vested  
Forfeited(21,000)3.64 
Unvested restricted stock units as of June 30, 2022711,000 $3.64 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
The expense related to RSUs granted to employees was $610 and $819, and $612 and $1,155 for the three and six months ended June 30, 2022 and 2021, respectively.
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 June 30,Six months ended June 30,
 2022202120222021
Research and development expenses$777 $898 $1,360 $1,687 
General and administrative expenses1,296 1,381 2,578 2,972 
 $2,073 $2,279 $3,938 $4,659 
 
As of June 30, 2022, the Company had an aggregate of $14,658 of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 1.96 years.
8. Debt
On November 22, 2019, the Company entered into a loan and security agreement (the “Loan Agreement”) with K2HV (the “Lender”). The Lender made available to the Company term loans in an aggregate principal amount of up to $25,000 under the Loan Agreement. On October 1, 2021, the Company entered into a first amendment to the Loan Agreement with the Lender (as amended, the “Loan Amendment”). 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 provided for 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 funded on June 5, 2020 (the “Second Tranche Term Loan”), and (iii) a $7,500 term loan facility (the “Third Tranche Term Loan”). All three of these term loans had a maturity date of December 1, 2023.
The Company was 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 Lender was able to, 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 was 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 recognized a beneficial conversion feature of $2,101, which represented 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.
In August 2020, the Lender elected to convert $2,000 of the outstanding term loan amount into 1,282,050 shares of the Company's common stock, in accordance with the Loan Agreement. In February 2021, the Lender elected to convert $1,500 of the outstanding term loan amount into 961,538 shares of the Company's common stock, in accordance with the Loan Agreement. After the conversions, the outstanding principal balance was $14,000.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
In October 2021, the Loan Agreement was amended. Under the Loan Amendment, the Lender made available to the Company term loans in an aggregate principal amount of up to $50,000, in three potential tranches: (i) a $25,000 term loan facility (including refinancing of the Company’s outstanding amounts under the Loan Agreement) funded on October 1, 2021 (the "First Tranche Refinancing Term Loan"), (ii) up to a $15,000 term loan facility (the "Second Tranche Refinancing Term Loan"), and (iii) an up to $10,000 term loan facility (the "Third Tranche Refinancing Term Loan") (together the "Refinancing Term Loans"). All three of these tranches have a maturity date of October 1, 2025.
Borrowings under all three tranches of the term loan facility bear interest at a floating per annum rate equal to the greater of (i) 8.50% and (ii) the sum of (A) the greater of (x) the prime rate last quoted in The Wall Street Journal (or a comparable replacement rate if The Wall Street Journal ceases to quote such rate) or (y) 3.25%, plus (B) 5.25%. In June 2022, the interest rate was increased to 10%. The Company is permitted to make interest-only payments on the outstanding principal balance of the term loan for approximately nineteen months following the funding date. The interest-only period can be extended by an additional nine months, subject to the Company raising net cash proceeds from financing activities (including without limitation sales of the Company's securities and up-front or milestone payments pursuant to existing or new strategic partnerships), in an aggregate amount of at least $100,000. The term of the loan facility is 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.
The Company is obligated to pay a final fee equal to (i) 4.25% 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 and (ii) $779 on the earlier of December 1, 2023 or 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 Amendment. 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 $4,500 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 (i) with respect to the first $500 converted, $1.56 per share and (ii) with respect to any additional amounts converted in excess of $500, $7.81 per share. The effective interest rate of the term loan as of June 30, 2022 is 13.22%.  
The Company’s obligations under the Loan Amendment are secured by a first priority security interest in substantially all of its assets. The Loan Amendment 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 Amendment and under applicable law.
The Loan Amendment was accounted for as a debt modification; as such, the financing costs of $313 were reflected as additional debt discount and is amortized as an adjustment to interest expense over the term of the Loan Amendment. The Company recorded interest expense related to the loan facility of $733 and $1,413, and $413 and $1,437 for the three and six months ended June 30, 2022 and 2021, respectively. The fair value of the loan at June 30, 2022 approximates its face amount.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
Future principal debt payments on the loan payable reflecting the amended terms are as follows:
 
 June 30, 2022
2022$ 
20236,576 
20249,586 
20258,838 
Total principal payments25,000 
Final fee due in 20231,063 
Final fee due at maturity in 2025779 
Total principal payments and final fee26,842 
Unamortized debt discount and final fee(1,531)
Note payable$25,311 
9. Net Loss per Share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
 
 Three months ended June 30,Six months ended June 30,
 2022202120222021
Basic and diluted net loss per share:
Numerator:
Net loss$(25,213)$(18,981)$(19,014)$(34,542)
Denominator:
Weighted average commons shares outstanding — basic and diluted54,654,822 43,634,346 51,647,148 42,632,421 
Net loss per share — basic and diluted$(0.46)$(0.44)$(0.37)$(0.81)
The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share for the three and six months ended June 30, 2022, as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated above because including them would have had an anti-dilutive effect:
June 30,
20222021
Stock options to purchase common stock8,968,131 7,194,670 
Shares to be issued under the 2018 ESPP1,500,500 1,111,998 
RSU's issued and expecting to vest711,000 997,400 
Shares available from conversion of note payable832,677 320,514 
12,012,308 9,624,582 
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SURFACE ONCOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except share and per share data)
10. Income Taxes
The Company did not provide for any income taxes for the three and six months ended June 30, 2022 or 2021.
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of June 30, 2022 and December 31, 2021. Management reevaluates the positive and negative evidence at each reporting period.
As of June 30, 2022 and December 31, 2021, the Company had no accrued interest or tax penalties recorded. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The Company’s tax years are still open under statute from 2018 to present. All years may be examined to the extent the tax credit or net operating loss carryforwards are used in future periods. There are currently no federal or state audits.
11. Leases
 Sublease Agreement with EQRx, Inc.
In May 2022, the Company entered into the second amendment to the Sublease Agreement (as amended, the “Sublease Amendment). The Sublease Amendment extended the term of the sublease for a period of 18 months, with an option to extend the sublease for a further six months upon the expiration of the Sublease Amendment. The Sublease Amendment has been accounted for as a single-modified contract. The Company determined the Sublease Amendment would continue to be accounted for as an operating lease. Consistent with the Company’s policy election for lessor operating leases, each lease component and its associated non-lease components is accounted for as a single lease component.
In the three and six months ended June 30, 2022 and 2021, the Company recognized sublease income of $648 and $1,304, and $656 and $1,313, respectively.
As of June 30, 2022, future undiscounted cash inflows under the sublease are as follows:
 
Year Ending December 31, 
2022