surf-20210331

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 March 31, 2021

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________.

Commission File Number: 001-38459

SURFACE ONCOLOGY, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware			46-5543980
( State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
50 Hampshire Street, 8th Floor Cambridge, MA			02139
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (617) 714-4096

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


Title of each class	Trading Symbol(s)	Name of exchange on which registered
Common stock, $0.0001	SURF	The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 filer	S	Small reporting company	S
Emerging growth Company	S

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 April 30, 2021, the registrant had 43,428,820 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 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 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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		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION	32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

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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)


	March 31, 2021		December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	100,526	$	175,141
Marketable securities	70,491		—
Prepaid expenses and other current assets	8,029		5,368
Total current assets	179,046		180,509
Property and equipment, net	6,258		6,664
Operating lease right-of-use asset	27,409		27,911
Restricted cash	1,595		1,595
Other assets	438		459
Total assets	$	214,746	$	217,138
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,316	$	1,674
Accrued expenses and other current liabilities	5,438		10,448
Convertible note payable	1,620		—
Operating lease liability	5,546		5,529
Total current liabilities	14,920		17,651
Operating lease liability, non-current	28,432		28,981
Convertible note payable, non-current	12,347		14,759
Total liabilities	55,699		61,391
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized at March 31, 2021 and December 31, 2020; no shares issued and outstanding at March 31, 2021 and December 31, 2020	—		—
Common stock, $0.0001 par value; 150,000,000 shares authorized at March 31, 2021 and December 31, 2020, respectively; 43,420,841 and 40,707,047 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	5		4
Additional paid-in capital	236,862		218,001
Accumulated other comprehensive loss	(1)		—
Accumulated deficit	(77,819)		(62,258)
Total stockholders’ equity	159,047		155,747
Total liabilities and stockholders’ equity	$	214,746	$	217,138

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 March 31,
	2021		2020
Collaboration revenue - related party	$	—	$	38,592
License related revenue	1,626		—
Total revenue	$	1,626	$	38,592
Operating expenses:
Research and development	10,544		11,288
General and administrative	5,641		4,787
Total operating expenses	16,185		16,075
Income (loss) from operations	(14,559)		22,517
Interest expense	(1,024)		(340)
Other income (expense), net	22		393
Net income (loss)	(15,561)		22,570
Net income (loss) per share attributable to common stockholders— basic	$	(0.37)	$	0.81
Weighted average common shares outstanding— basic	41,619,362		27,977,145
Net income (loss) per share attributable to common stockholders— diluted	$	(0.37)	$	0.74
Weighted average common shares outstanding— diluted	41,619,362		30,917,452
Comprehensive income (loss):
Net income (loss)	$	(15,561)	$	22,570
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities, net of tax of $0	(1)		67
Comprehensive income (loss)	$	(15,562)	$	22,637

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
	Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
Balances at December 31, 2020	40,707,047	$	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 plan	19,377	—		118		—		—		118
Issuance of common stock upon public offering, net of issuance costs	1,677,118	1		14,715		—		—		14,716
Issuance of common stock upon conversion of convertible note payable	961,538	—		1,500		—		—		1,500
Stock-based compensation expense	—	—		2,380		—		—		2,380
Unrealized gain on marketable securities	—	—		—		(1)		—		(1)
Net loss	—	—		—		—		(15,561)		(15,561)
Balances at March 31, 2021	43,420,841	$	5	$	236,862	$	(1)	$	(77,819)	$	159,047


	Common Stock
	Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total Stockholders’ Equity
Balances at December 31, 2019	27,893,337	$	3	$	178,155	$	103	$	(121,595)	$	56,666
Issuance of common stock upon exercise of stock options	27,832	—		10		—		—		10
Issuance of common stock under stock purchase plan	49,025	—		83		—		—		83
Issuance of common stock upon public offering, net of issuance costs	91,003	—		320		—		—		320
Stock-based compensation expense	—	—		1,850		—		—		1,850
Unrealized gain on marketable securities	—	—		—		67		—		67
Net income	—	—		—		—		22,570		22,570
Balances at March 31, 2020	28,061,197	$	3	$	180,418	$	170	$	(99,025)	$	81,566

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)


	Three months ended March 31,
	2021		2020
Cash flows from operating activities:
Net income (loss)	$	(15,561)	$	22,570
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense	406		457
Stock-based compensation expense	2,380		1,850
Non-cash interest expense related to note payable	708		176
Net amortization of premiums and discounts on marketable securities	142		(42)
Loss on disposal of property and equipment	—		1
Non-cash operating lease cost	502		587
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	(2,661)		(444)
Other assets	21		(138)
Accounts payable	642		(2,651)
Accrued expenses and other current liabilities	(5,010)		(467)
Operating lease liability	(532)		17
Other liabilities	—		1,100
Deferred revenue - related party	—		(38,592)
Net cash used in operating activities	(18,963)		(15,576)
Cash flows from investing activities:
Purchases of property and equipment	—		(23)
Purchases of marketable securities	(70,634)		(650)
Proceeds from sales or maturities of marketable securities	—		25,500
Net cash provided by (used in) investing activities	(70,634)		24,827
Cash flows from financing activities:
Proceeds from issuance of common stock upon public offering, net	14,716		320
Proceeds from employee stock purchases	118		83
Proceeds from exercise of stock options	148		10
Net cash provided by financing activities	14,982		413
Net increase (decrease) in cash and cash equivalents and restricted cash	(74,615)		9,664
Cash and cash equivalents and restricted cash at beginning of period	176,736		48,350
Cash and cash equivalents and restricted cash at end of period	$	102,121	$	58,014
Supplemental disclosure of cash flow information:
Cash paid for interest	$	327	$	180
Supplemental disclosure of non-cash investing and financing activities:
Additional right-of-use asset and related lease liability	$	—	$	15,003
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 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. In the three months ended March 31, 2021, the Company sold 1,677,118 shares of common stock at-the-market under the 2020 Sales Agreement, resulting in net proceeds of approximately $14,716. The Company did not sell any shares of common stock at-the-market under the 2020 Sales Agreement in 2020.

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 ("GSK") and issuance of a debt facility with K2 Health Ventures LLC. The Company has a history of incurring losses and negative cash flows from operations. As of March 31, 2021, the Company had an accumulated deficit of $77,819.

The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of May 5, 2021, 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.

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.

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SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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 has 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 employees in the Company's corporate office and is working with third parties to conduct certain 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 9, 2021.

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 March 31, 2021, the condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2021 and 2020, the condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020, and the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2021 and 2020 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2021 and the results of its operations and its cash flows for the three months ended March 31, 2021 and 2020. The financial data and other information disclosed in these notes related to the three months ended March 31, 2021 and 2020 are also unaudited. The results for the three months ended March 31, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, 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. For public entities that are Securities and Exchange Commission filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. This standard will be effective for the Company on January 1, 2023. The Company is currently evaluating the potential impact that this standard may have on its condensed consolidated financial statements and related disclosures.

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

3. Marketable Securities

As of March 31, 2021, the fair value of available-for-sale marketable debt securities by type of security was as follows:


	March 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Marketable debt securities:
U.S. Treasury notes	$	54,561	$	8	(7)		$	54,562
U.S. government agency bonds	15,931		2		(4)		15,929
	$	70,492	$	10	$	(11)	$	70,491

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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:


	March 31, 2021
	Amortized Cost		Fair Value
Maturing in one year or less	$	25,349	$	25,355
Maturing after one year	45,143		45,136
	$	70,492	$	70,491

As of December 31, 2020, there were no available-for-sale marketable debt securities.

The Company determined that there was no material change in the credit risk of these investments. As a result, the Company determined it did not hold any investments with an other-than-temporary decline in fair value as of March 31, 2021 and December 31, 2020.

4. Fair Value of Financial Assets

The following tables present information about the Company’s financial assets that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:


	Fair Value Measurements as of March 31, 2021 using:
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	68,274	$	—	$	—	$	68,274
Cash	35		—		—		35
Marketable securities:
U.S. Treasury notes	—		54,562		—		54,562
U.S. government agency bonds	—		15,929		—		15,929
	$	68,309	$	70,491	$	—	$	138,800


	Fair Value Measurements as of December 31, 2020 using:
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	139,266	$	—	$	—	$	139,266
	$	139,266	$	—	$	—	$	139,266

As of March 31, 2021 and December 31, 2020, the Company’s cash equivalents were invested in money market funds, U.S Treasury notes and U.S. government agency bonds and were valued based on Level 1 and Level 2 inputs. During the three months ended March 31, 2021 and 2020, 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 and License Agreements

Novartis Agreement

In January 2016, the Company entered into a collaboration agreement with Novartis (the “Novartis Agreement”), which was subsequently amended in May 2016, July 2017, September 2017, and October 2018. 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. Novartis initially had the right to exercise up to three purchased Options. Under the Novartis 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 Novartis 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 Novartis Agreement have 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).

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 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’ 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 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 have used a separate cost-to-cost model for purposes of revenue recognition under ASC 606.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

In January 2020, Novartis did not purchase and exercise its single remaining Option under the Novartis 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 months ended March 31, 2021 and 2020, the Company recognized the following totals of collaboration revenue – related party:


	Three months ended March 31,
	2021		2020
Collaboration revenue - related party	$	—	$	38,592

GSK Agreement

In December 2020, the Company entered into a license agreement (the “GSK Agreement”) with GlaxoSmithKline Intellectual Property (No. 4) Limited (“GSK”). Pursuant to the GSK Agreement, the Company granted GSK a worldwide, exclusive, sublicensable license to develop, manufacture and commercialize antibodies that target the antibody SRF813, targeting CD112R, also known as PVRIG (the “Licensed Antibodies”). GSK will be responsible for the development, manufacturing and commercialization of the Licensed Antibodies and a joint development committee has been formed to facilitate information sharing between the Company and GSK. Under the terms of the GSK Agreement, GSK is obligated to use commercially reasonable efforts to develop and commercialize the Licensed Antibodies.

Development, Manufacturing and Commercialization of Licensed Antibodies

GSK has the sole right to develop, manufacture and commercialize the Licensed Antibodies and corresponding licensed products worldwide. GSK is obligated to use commercially reasonable efforts to develop the Licensed Antibodies and corresponding licensed products. 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.

Exclusivity

During the term of the GSK Agreement, neither the Company, nor any affiliates, will research, develop, manufacture, or commercialize any alternative product.

Financial Terms

Under the terms of the GSK Agreement, GSK made a one-time upfront payment of $85,000 and is required to make additional payments to the Company for supply services and transition services estimated to be $4,499 and $950, respectively. The Company is eligible to receive up to $90,000 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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 Investigational New Drug application is accepted by a regulatory authority (iii) transition services until an Investigational New Drug application 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 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.

The Company determined the transaction price under ASC 606 at the inception of the GSK Agreement to be $90,449, consisting of the upfront payment of $85,000 plus $4,499 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 Investigational New Drug application is accepted by a regulatory authority; and (iii) transition services until an Investigational New Drug application 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 recognizes revenue for the license performance obligation at a point in time, that is 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 under the GSK Agreement. The Company will recognize $4,499 and $950 allocated to the supply services and transition services over time. The Company transfers control of these services over time and GSK receives and consumes the benefit over time as the Company performs the services. During the three months ended March 31, 2021, the Company recognized $1,264 and $362 of license related revenue related to the supply services and transition services, respectively, which represents the costs incurred for the manufacturing and transition services that were performed.

The aggregate amount of the transaction price allocated to the performance obligations that is partially unsatisfied was $1,253. The Company expects to recognize the remaining revenue associated with the GSK Agreement in the year ending December 31, 2021. As of March 31, 2021, the Company did not have a contract liability associated with the GSK Agreement. The Company will re-evaluate the transaction price at the end of each reporting period and as uncertain events are resolved, or other changes in circumstances occur, adjust its estimate of the transaction price if necessary.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

For the three months ended March 31, 2021 and 2020, the Company recognized the following totals of license related revenue:


	Three months ended March 31,
	2021		2020
License related revenue	$	1,626	$	—

6. Stockholders’ Equity

Common Stock

As of March 31, 2021 and December 31, 2020, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 150,000,000 shares, of 0.0001 par value common stock.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to the preferential dividend rights of any outstanding preferred stock. No dividends have been declared or paid by the Company through March 31, 2021.

As of March 31, 2021 and December 31, 2020, the Company had reserved 22,050,548 and 22,728,991 shares, respectively, of common stock for the exercise of outstanding stock options, the vesting of restricted stock units, shares to be issued under the 2020 ATM Facility, shares to be issued upon the conversion of the Loan Agreement (as defined below), 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.

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 up to $30,000 in shares of the Company’s common stock from time to time. In the three months ended March 31, 2020, the Company sold 91,003 shares of common stock at-the-market under the 2019 Sales Agreement, resulting in net proceeds of approximately $320. As of June 30, 2020, the Company sold 11,229,174 shares of common stock at-the-market under the 2019 Sales Agreement for net proceeds of $29,110, and had 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. In the three months ended March 31, 2021, the Company sold 1,677,118 shares of common stock at-the-market under the 2020 Sales Agreement, resulting in net proceeds of approximately $14,716. The Company did not sell any shares of common stock at-the-market under the 2020 Sales Agreement in 2020.

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”).

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SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

2018 Stock Option and Incentive Plan

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

As of March 31, 2021, 1,048,203 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, 2020:


	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
				(in years)
Outstanding as of December 31, 2020	6,011,126	$	5.55	7.28	$	24,912
Granted	1,260,080	9.88
Exercised	(55,761)	2.65
Forfeited	(10,158)	5.66
Outstanding as of March 31, 2021	7,205,287

SEC Form 10-Q filed by Surface Oncology, Inc.