UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
☐
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM TO
Commission File Number 001-38459
SURFACE ONCOLOGY, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
50 Hampshire Street, 8th Floor
Cambridge, MA
(Address of principal executive offices)
46-5543980
(I.R.S. Employer
Identification No.)
02139
(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
Common stock, $0.0001
Trading Symbol(s)
SURF
Name of exchange on which registered
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☒
Accelerated filer
Smaller 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 Exchange Act). YES ☐ NO ☒
The aggregate market value of the registrant’s common stock, $0.0001 par value per share (“Common Stock”), held by non-affiliates of the registrant, based on the last sale price of the Common
Stock at the close of business on June 28, 2019, was $56,408,807. For purposes of foregoing calculation only, all directors and executive officers of the registrant are assumed to be affiliates of
the registrant.
The number of shares of registrant’s Common Stock outstanding as of March 5, 2020 was 28,061,197.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on June 10, 2020, are incorporated by reference into Part III of this
Report.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
i
Page
1
1
33
72
72
72
72
73
73
74
76
88
88
89
89
89
90
90
90
90
90
90
91
91
93
94
Item 1. Business.
Overview
PART I
We are a clinical-stage immuno-oncology company focused on using our specialized knowledge of the biological pathways critical to the
immunosuppressive tumor microenvironment, or the TME, for the development of next-generation cancer therapies. While first-generation immuno-
oncology therapies, such as checkpoint inhibitors, represent a remarkable therapeutic advancement, we believe most patients do not achieve durable clinical
benefit primarily because these therapies focus on only one element of the complex and interconnected immunosuppressive TME. We believe there is a
significant opportunity to more broadly engage both the innate and adaptive arms of the immune system in a multi-faceted, coordinated and patient-specific
approach, to meaningfully improve cure rates for patients with a variety of cancers. We aim to identify key components within the TME to gain a deep
understanding of its biology, leverage this understanding to define the optimal therapeutic targets and the patients most likely to benefit, and develop novel
antibody therapeutics with differentiated biologic activity. By utilizing our expertise in immunology, oncology, assay development, antibody selection and
characterization, and translational research, we are developing and advancing a broad pipeline of TME-focused programs that we believe are the next
generation of immuno-oncology therapies. Our programs demonstrate our multi-faceted approach by targeting several critical components of the
immunosuppressive TME.
NZV930 (formerly SRF373) and SRF617 are antibodies inhibiting cluster of differentiation, or CD, 73 and CD39, respectively, and illustrate how
our specialized knowledge of TME biology can be leveraged across programs. CD73 and CD39 are both critical enzymes involved in the production of
extracellular adenosine, a key metabolite with strong immunosuppressive properties within the TME. Elevated adenosine levels in the TME are associated
with a poor prognosis in patients with certain types of cancer. NZV930 and SRF617 each aim to reduce the production of immunosuppressive adenosine,
but target different points of the adenosine pathway. In addition to reducing the production of adenosine, we believe SRF617 will also stimulate anti-tumor
immunity because of its ability to maintain levels of extracellular adenosine triphosphate, or ATP, a proinflammatory molecule and key driver of the
maturation and activation of immune cells. In June 2018, a Phase 1 trial of NZV930 was initiated by our partner, Novartis Institutes for Biomedical
Research, Inc., or Novartis, and we filed an investigational new drug application, or IND, for SRF617 in November 2019, and received permission to
proceed from the U.S. Food and Drug Administration, or FDA, on December 12, 2019.
SRF388 is an antibody targeting interleukin 27, or IL-27, an immunosuppressive cytokine, or protein secreted by cells, in the TME that is
overexpressed in certain cancers, including hepatocellular and renal cell carcinoma. IL-27 is a cytokine secreted by macrophages and antigen presenting
cells that plays an important physiologic role in suppressing the immune system, as evidenced by its ability to resolve tissue inflammation. In addition, one
of the subunits of IL-27, EBI3, is highly expressed during pregnancy and its expression is correlated with maternal-fetal tolerance. Due to its
immunosuppressive nature, there is a rationale for inhibiting IL-27 to treat cancer, as this approach will influence the activity of multiple types of immune
cells that are necessary to recognize and attack a tumor. We filed an IND for SRF388 in December 2019 and received permission to proceed from the FDA
on January 17, 2020.
SRF813 is an antibody targeting CD112R, an inhibitory protein expressed on natural killer, or NK, and T cells. SRF813 binds a distinct portion of
CD112R and blocks the interaction of CD112R with CD112, its binding partner that is expressed on tumor cells. SRF813 can promote the activation of
both NK and T cells, with potential to elicit a strong anti-tumor response and promote immunological memory. In October 2019, we formally declared
SRF813 as a development candidate resulting in the initiation of IND-enabling activities.
SRF231 is an antibody targeting CD47, a protein expressed on many cells and often overexpressed on tumor cells. We initiated a Phase 1 clinical
trial of SRF231 in February 2018. In December 2018, we announced the deprioritization of SRF231 as a result of toxicities seen during the dose escalation
portion of the ongoing Phase 1 trial and the evolving competitive landscape. We expect to conclude the Phase 1 trial in 2020, and do not plan to further
develop SRF231.
We also have an earlier stage program targeting regulatory T cells, another critical component of the TME. We expect that the unique insights
generated in any one of our product programs will accelerate the development of the other programs in a synergistic fashion due to the interconnections
between these TME pathways.
In January 2016, we entered into a strategic collaboration agreement, or the Collaboration Agreement, with Novartis to develop next-generation
cancer therapies. Upon entering into the agreement, we received an upfront payment of $70.0 million from Novartis and granted Novartis a worldwide
exclusive license to research, develop, manufacture, and commercialize antibodies that target CD73. Under the Collaboration Agreement, we are currently
entitled to potential milestone payments upon the achievement of specified development and sales milestones, as well as tiered royalties on
1
annual net sales by Novartis ranging from high single-digit to mid-teens percentages upon successful commercialization of NZV930. In addition, we
initially granted Novartis the right to purchase exclusive option rights (each an “Option”) for up to four specified targets, including certain development,
manufacturing and commercialization rights. As of December 31, 2019, Novartis had one Option remaining eligible for purchase, and potential exercise. In
January 2020, Novartis did not purchase and exercise its single remaining Option under the Collaboration Agreement, and as a result, the option purchase
period expired. Accordingly, there are no Options remaining eligible for purchase and exercise by Novartis and our performance obligations under the
Collaboration Agreement ended. The maximum aggregate amount of milestone payments that the Company is currently entitled to receive under the
Collaboration Agreement is $525.0 million.
We have assembled an outstanding team, including our world-class scientific advisory board, to execute on our mission to create next-generation
immuno-oncology therapies to help patients suffering with cancer. Our scientific founders and members of our management team have extensive
experience in drug discovery and development and are leaders in the immuno-oncology field. Members of our leadership team have helped develop a
number of commercialized therapies, including cancer treatments such as Avastin, Copiktra and Velcade. Our scientific advisory board is co-chaired by
leading immuno-oncology researchers Alexander Y. Rudensky, Ph.D., a world leader in regulatory T cell biology, and Arlene H. Sharpe, M.D., Ph.D., who
led pioneering work related to the ligands for PD-1, including the co-discovery of PD-L2, and has defined functions of the PD-1 pathway as well as other
costimulatory and immune checkpoint molecules. Collectively, we believe our team, industry-leading capabilities and collaboration with Novartis, position
us to build the leading TME company focused on developing next-generation immunotherapies for the tens of millions of cancer patients worldwide.
The Tumor Microenvironment
The TME presents a complex interplay of immunosuppressive biological pathways, cells and other components surrounding the tumor. It
comprises several key components that often act together to profoundly suppress the body’s anticancer immune response through a variety of different
biological mechanisms, allowing the tumor to evade the immune system. Given the complexity of the TME, we believe it is imperative to target more than
one component of this environment in order to provide durable clinical benefit to patients suffering with cancer.
Checkpoint inhibitors are a drug class designed to counteract certain defenses a tumor has against the immune system. Currently approved
checkpoint inhibitors were developed for the treatment of cancer because of the initial belief that inactivation of the immune system by checkpoint proteins
could be reversed to reactivate the immune system to recognize and attack the tumor. These therapies against checkpoint proteins, such as cytotoxic T-
lymphocyte antigen 4, or CTLA-4, programmed cell death protein 1, or PD-1, and programmed death-ligand 1, or PD-L1, have produced impressive results
in the clinic across an array of cancers and have been approved for a number of malignancies. However, the breadth and durability of clinical benefit
achieved has been limited to a subset of patients and tumor types. For example, PD-1 inhibition has doubled three-year survival rates in previously treated
non-small cell lung cancer patients, but more than 80% of patients do not achieve a durable clinical benefit. We believe the primary reason only a relatively
modest number of patients achieve durable response with checkpoint inhibitors is because only one component of the TME, the effector T lymphocyte, is
reactivated while other elements of the TME, including suppressive metabolites and cytokines, macrophages, regulatory T cells, and NK cells, remain
unaffected.
Adenosine is a key metabolite within the TME that accumulates and inhibits the function of important immune cells, including T cells and NK
cells, leading to an environment conducive to tumor growth. CD39 and CD73, two of the enzymes involved in the production of extracellular adenosine,
are both attractive therapeutic targets because inhibiting either of them will reduce the amount of adenosine in the TME. We believe inhibiting CD39 may
have further immunostimulatory effects because this inhibition will increase local amounts of ATP in the TME.
IL-27 is a cytokine that plays an important physiologic role in suppressing the immune system. In preclinical studies, the IL-27 pathway has been
observed to suppress T cell activation within the TME, which may prevent the immune system from recognizing, attacking and killing cancer cells. Due to
its immunosuppressive nature, there is a rationale for inhibiting IL-27 to treat cancer as this approach influences the activity of multiple types of immune
cells, including the reactivation of T cells, that are necessary to recognize and attack the tumor.
NK cells are a type of immune cell that can recognize and lyse, or kill, other cells that need to be destroyed, including cancer cells. These immune
cells are a key component of the immune system that provide a rapid, non-specific response to pathogens. NK and T cells express CD112R, an inhibitory
protein that helps block NK and T cell activation when bound to its binding partner, CD112. Targeting CD112R is an attractive therapeutic strategy for
activating NK and T cells so that they can effectively kill tumor cells.
2
We believe next-generation immuno-oncology therapies need to encompass a multi-faceted, coordinated and patient-specific approach to treating
cancer in order to achieve meaningful increases in patient cure rates. We have developed a pipeline of multiple therapeutic programs to address the
complexity of the TME, as shown in the table below.
Our Pipeline
Modulating the Adenosine Pathway to Treat Cancer with NZV930 and SRF617
Overview of NZV930 and SRF617
Our Programs
Based on our understanding of the adenosine pathway and its role in the TME, we are advancing two programs targeting different enzymes in the
adenosine pathway in order to reduce the immunosuppressive effects of adenosine in the TME.
NZV930 (formerly SRF373) inhibits CD73, an enzyme critical to the production of extracellular adenosine. By reducing the amount of adenosine
in the TME, we believe the immune system will be able to better recognize and attack tumors. In our preclinical studies, NZV930 exhibited potent CD73
enzymatic inhibition, resulting in a reduction of adenosine and increased activity of immune cells, particularly T cells. Further, in combination with a PD-1
inhibitor, our antibodies against CD73 demonstrated potent anti-tumor effects in preclinical animal studies. CD73 is overexpressed in many tumors and can
be shed from the cell surface. We therefore believe CD73 overexpression could be a useful biomarker to identify those patients most likely to benefit from
NZV930. We have granted Novartis a worldwide exclusive license to develop and commercialize NZV930. Novartis advanced NZV930 into clinical
development in June of 2018.
SRF617 inhibits CD39, an enzyme critical both to the production of adenosine and the breakdown of ATP. We believe targeting CD39 will not
only reduce extracellular adenosine, but will also maintain extracellular levels of immunostimulatory ATP, both of which have been observed to promote
anti-tumor immunity. CD39 overexpression also counteracts the effects of chemotherapy, which we believe further supports its importance as a therapeutic
target. In preclinical studies, SRF617 exhibited potent CD39 enzymatic inhibition. We wholly own SRF617. We filed an IND for SRF617 in November
2019 and received permission to proceed from the FDA on December 12, 2019. We expect to begin the Phase 1 trial in the first half of 2020.
3
CD73 and CD39 Background
Within the TME, the adenosine pathway refers to the extracellular conversion of ATP to adenosine and the signaling of adenosine through the
A2A/A2B adenosine receptors on immune cells. Under normal conditions, CD39 and CD73 maintain the balance of extracellular levels of
immunosuppressive adenosine and immunostimulatory ATP. In healthy tissue, ATP is barely detectable in the extracellular environment because ATP is
rapidly broken down by CD39 to generate adenosine monophosphate, or AMP, which is then converted to adenosine by CD73. Under conditions of cellular
stress, including cancer, extracellular ATP levels rise significantly, but ATP is rapidly broken down, subsequently hindering the ability of the immune
system to recognize and attack the tumor due to lower levels of ATP and higher levels of adenosine.
We believe inhibiting CD73 will reduce levels of immunosuppressive adenosine in the TME and allow key immune cells, including T cells, to
attack the tumor. In addition, we believe inhibiting CD39 will maintain extracellular levels of immunostimulatory ATP as well as reduce the amount of
extracellular adenosine in the TME. Because of its role in regulating the immune system, we believe a multi-faceted approach targeting components of the
adenosine pathway is attractive for the treatment of cancer.
Role of Adenosine in the TME
Landscape of Competitive Agents and the Opportunity
There are multiple third-party programs evaluating targets in the adenosine pathway, including inhibitors of CD73, CD39 and the key adenosine
receptors. Due to the relatively high amounts of adenosine in the TME, we believe achieving inhibition of adenosine receptors sufficient to result in a
meaningful clinical response as a monotherapy could prove challenging. CD73 and CD39 are overexpressed in a variety of tumors, making them attractive
targets for cancer therapies. We believe that the potency of CD73 and CD39 enzymatic inhibition will be an important differentiator and may lead to
improved clinical efficacy by reducing adenosine levels in the TME to a greater extent.
Our Adenosine Pathway Programs
NZV930
NZV930 is a fully human immunoglobulin isotype G4, or IgG4, monoclonal antibody that is a potent inhibitor of CD73. We selected NZV930 for
clinical development based on the following key attributes observed in preclinical development:
•
•
•
Potent enzymatic inhibition of soluble and membrane bound CD73, resulting in reduced adenosine levels;
Increased T cell proliferation; and
Inhibition of tumor growth as a monotherapy and more potently in combination with a PD-1 inhibitor.
4
Our Preclinical Studies
We have conducted numerous preclinical studies across a variety of preclinical models to assess the activity of NZV930. We examined the ability
of NZV930 to inhibit CD73 enzymatic activity in an ovarian cancer cell line expressing CD73 and observed that NZV930’s inhibitory activity increased in
a concentration-dependent manner. To compare the enzymatic inhibitory activity of NZV930 against potential competitor antibodies, we engineered an
antibody, Antibody X, that we believe to have the same properties as another CD73 antibody in clinical development. We based our construction of this
antibody on publicly available patent filings. Notably, the peak CD73 enzymatic inhibition achieved using NZV930 was observed to be substantially
greater than Antibody X.
Further, NZV930 was observed to meaningfully reduce adenosine production from cells, and NZV930 treatment in a mouse tumor xenograft
model was observed to reduce levels of plasma adenosine.
CD4+ T cell proliferation is inhibited by adenosine, and high levels of adenosine in the TME enable the tumor to evade these important immune
cells. By reducing the production of adenosine, NZV930 has the potential to increase the proliferation of CD4+ T cells. As depicted in the figure below, in
our preclinical studies, we observed that NZV930 treatment mitigated the immunosuppressive effects of adenosine produced by CD73 and subsequently
increased the proliferation of T cell receptor-stimulated CD4+ T cells in a concentration-dependent fashion. Further, the level of T cell proliferation
achieved using NZV930 was greater than the levels achieved using Antibody X. We have observed similar results in additional studies conducted by us. We
believe the increased T cell proliferation seen with NZV930 is a result of greater enzymatic inhibition of CD73.
NZV930 Effect on CD4+ T Cell Proliferation
Additionally, we have seen compelling preclinical anti-tumor activity when combining a CD73 inhibitor with a PD-1 inhibitor. We developed a
CD73 antibody closely related to NZV930 that cross reacts with murine CD73. In our preclinical studies, we observed that CD73 demonstrated anti-tumor
activity as a monotherapy as well as in combination with a PD-1 inhibitor. Notably, combining the CD73 antibody and the PD-1 inhibitor was observed to
result in synergistic anti-tumor effects. Further, when the same tumor cells were reintroduced into mice treated in the combination group, the anti-tumor
effects were maintained in the absence of additional antibody treatment, demonstrating the potential to establish durable anti-tumor immunity. We have
observed similar results in an additional study conducted by us.
Effect of Targeting CD73 and PD-1 in Combination
5
Clinical Trial
We have granted Novartis worldwide development and commercialization rights to NZV930. An IND for NZV930, was sponsored and filed by
Novartis with the FDA in February 2018, and NZV930 entered clinical trials in June 2018. As depicted below, the Phase 1 trial is anticipated to enroll
approximately 344 patients. Following a monotherapy dose escalation, NZV930 will be tested in combination with a PD-1 inhibitor, Novartis’ PDR001 and
an A2A receptor antagonist, Novartis’ NIR178. A triplet therapeutic regimen, including NZV930, PDR001 and NIR178 will also be tested.
Overview of NZV930 Phase 1 Trial
SRF617
SRF617 is a fully human IgG4 monoclonal antibody that is a potent inhibitor of CD39 enzymatic activity. We selected SRF617 for clinical
development based on the following key attributes observed in preclinical development:
•
Potent enzymatic inhibition of CD39;
• Maintenance of immunostimulatory levels of ATP despite the presence of CD39; and
•
Inhibition of tumor growth as a monotherapy
6
Our Preclinical Studies
In preclinical studies, we observed increased expression of CD39 following treatment with nivolumab, a PD-1 inhibitor. Specifically, peripheral
blood mononuclear cells from five human donors were either treated, or not, with nivolumab. As shown in the figure below, increased CD39 expression
was observed in three cell types, specifically, CD4+ T regulatory cells, or Treg; CD19+ B cells, or B cell; and CD14+ monocytes, or Mono. In clinical trials,
others have shown increased CD39 expression in tumor biopsies from patients with renal cell carcinoma and non-small cell lung cancer that were resistant
to treatment with atezolizumab, a PD-L1 inhibitor. These studies suggest that CD39 expression may contribute to PD-1/PD-L1 resistance and an
immunosuppressive TME.
Effect of Nivolumab on CD39 Expression
As shown in the figure below, we observed that SRF617 inhibited CD39 enzymatic activity in a concentration-dependent fashion in a multiple
myeloma cell line expressing CD39 when compared to a control antibody. We have observed similar results in additional studies conducted by us.
SRF617 Effect on CD39 Enzymatic Activity
Further, we have observed the immunostimulatory effects of SRF617 in a preclinical model. Specifically, in three donor samples as shown below,
SRF617 was observed to enhance the immunostimulatory effects of ATP, resulting in increased maturation of dendritic cells when compared to a control
antibody. Dendritic cell maturation was determined by measuring levels of CD86, a known marker of dendritic cell maturation, following treatment with
SRF617, or a control antibody, and ATP. In the figure below, CD86 expression levels shown for the control and SRF617 treated groups were normalized to
pre-treatment levels of CD86. We have observed similar results in additional studies conducted by us.
7
SRF617 Effect on Dendritic Cell Maturation
Additionally, we have seen preclinical anti-tumor activity with SRF617. In the study shown below, we observed that SRF617 was associated with
significantly inhibited tumor growth, as compared to a control antibody.
Effect of SRF617 on Tumor Growth
8
Clinical Trial
We filed an IND for SRF617 in November 2019 and received permission to proceed from the FDA on December 12, 2019. We expect to begin a
Phase 1 trial in the first half of 2020. As depicted below, the Phase 1 trial is anticipated to enroll approximately 100 patients. Following a monotherapy
dose escalation, SRF617 will be tested in combination with a PD-1 inhibitor and with chemotherapy.
SRF617 Clinical Development Plan – Phase1/1b
Inhibiting the Immunosuppressive Cytokine IL-27 to Activate the Immune System
Overview of SRF388
SRF388 is a fully human IgG1 monoclonal antibody that binds to the p28 subunit of IL-27 and inhibits its activity. We identified SRF388 using
our proprietary suite of research tools, which have allowed us to enhance our deep biological understanding of IL-27 and its receptor. We selected SRF388
for clinical development based on the following key observations in our preclinical studies:
•
•
•
Potent reduction of IL-27 driven immune cell suppression;
Potential for combination therapy including checkpoint inhibitors; and
Strong translational rationale for targeting IL-27 in certain types of cancer.
9
IL-27 Background
IL-27 is a multi-subunit cytokine (P28 and EBI3) secreted by macrophages and antigen presenting cells that plays an important physiologic role in
suppressing the immune system, as evidenced by its role in resolving tissue inflammation and its association with maternal-fetal tolerance. Due to its
immunosuppressive nature, there is an emerging rationale for inhibiting IL-27 to treat cancer, as this approach influences the activity of multiple types of
immune cells that are necessary to recognize and attack the tumor. As shown in the diagram below, IL-27 suppresses T cell activation, which we believe
will prevent the immune system from recognizing, attacking and killing cancerous cells.
IL-27 Role in Immunosuppression
IL-27 Upregulates Checkpoint Receptors, Downregulates Proinflammatory Cytokines
10
Our Preclinical Studies
In several preclinical studies conducted by us, we observed that the treatment of human T cells and monocytes with IL-27 resulted in the
induction of an immunosuppressive phenotype, including increased expression of the checkpoint proteins PD-L1 and TIM3. We observed that treatment
with SRF388 blocked IL-27 signaling and prevented the induction of this phenotype, as shown in the figure below.
SRF388 Effect on IL-27 Induced Immunosuppressive Phenotype
In several preclinical studies conducted by us, we observed that blocking IL-27 with SRF388 in cancer patient-derived human peripheral blood
mononuclear cells, after T cell receptor activation, increased key inflammatory cytokines, TNFα and IL-6, which are indicative of an activated immune
state, as shown in the figure below. Additionally, we conducted several preclinical studies and observed that by combining SRF388 with a PD-1 inhibitor,
expression of these inflammatory cytokines was further increased, also shown in the figure below. Based upon our preclinical studies, we believe that
blocking both PD-1 and IL-27 in certain clinical settings could help to promote tumor-specific immunity.
SRF388 Plus PD-1 Inhibitor Effect on Inflammatory Cytokine Production
11
We have seen compelling monotherapy anti-tumor activity following treatment with SRF388 in our preclinical studies. In the preclinical study
below, SRF388 treatment resulted in a significant reduction in overall lung tumor metastasis, as compared to a control antibody.
Effect of SRF388 on Tumor Metastases
In the preclinical study below, SRF388 monotherapy resulted in a significant reduction in the growth of hepatocellular, or HCC, tumors, as
compared to a control antibody.
Effect of SRF388 on Tumor Growth
12
As shown below, levels of the IL-27 subunit EBI3 are elevated in the serum collected from people with cancer. In particular, high levels are
observed in patients with renal cell carcinoma, or RCC, and HCC.
Levels of EBI3 are Elevated in Serum from Cancer Patients
Clinical Trial
We filed an IND for SRF388 in December 2019 and received permission to proceed from the FDA on January 17, 2020. We expect to begin a
Phase 1 trial in the first half of 2020. As depicted below, the Phase 1 trial is anticipated to enroll approximately 100 patients. Following a monotherapy
dose escalation, SRF388 will be tested in specific cohorts of patients with RCC and HCC.
SRF388 Clinical Development Plan – Phase1/1b
13
Blocking the Inhibitory Receptor CD112R to Promote Immune Cell Activation in the Tumor Microenvironment
Overview of SRF813
SRF813 is a fully human IgG1 monoclonal antibody that binds to the inhibitory receptor CD112R and antagonizes its function on immune cells.
We selected SRF813 for clinical development based on the following key observations in our preclinical studies:
•
Potent blockade of CD112R interaction with its ligand CD112;
• Enhancement of NK and T cell activation; and
•
Inhibition of tumor growth.
CD112R Background
CD112R is an inhibitory receptor primarily expressed on NK cells and T cells. CD112R suppresses immune cell activation through its binding
with CD112. Because CD112 is commonly overexpressed on tumor cells, there is an emerging rationale for disrupting the CD112:CD112R interaction to
promote antitumor immune responses.
CD112:CD112R Binding Inhibits Immune Cell Activation
14
Our Preclinical Studies
In our preclinical studies, we observed that SRF813 potently inhibited CD112 from binding to CD112R expressed on a T cell leukemia cell line
when compared to a control antibody. The ability to block the interaction with CD112 was concentration dependent, as shown in the figure below.
SRF813 Blockade of CD112R:CD112 Binding
In preclinical studies, we observed that blocking CD112R with SRF813 activated NK cells and increased their anti-tumor activity, demonstrated
by increased expression of 4-1BB, an important costimulatory molecule, and enhanced degranulation, when compared to a control antibody. Based upon
our preclinical studies, we believe that blocking CD112R has the potential to promote a potent antitumor immune response.
SRF813 Increases NK Cell Activation and Degranulation
15
We have observed compelling monotherapy anti-tumor activity following treatment with a CD112R antibody in our preclinical studies. In the
preclinical study below, treatment with a CD112R antibody resulted in reduced tumor growth when compared to a control antibody.
Effect of SRF813 on Tumor Growth
We have initiated IND enabling studies for SRF813.
Other Research Programs
We also have an earlier stage program targeting regulatory T cells, another critical component of the TME. We expect that the unique insights
generated in any one of our product programs will accelerate the development of the other programs in a synergistic fashion due to the interconnection
between the pathways of the TME.
Overview
Collaboration Agreement with Novartis
In January 2016, we entered into a strategic collaboration with Novartis to develop next-generation cancer therapies. The Collaboration
Agreement was subsequently amended in May 2016, July 2017, September 2017 and October 2018. Upon entering into the agreement, we received an
upfront payment of $70.0 million from Novartis and granted Novartis a worldwide exclusive license to research, develop, manufacture and commercialize
antibodies that target CD73. In addition, we initially granted Novartis the right to purchase exclusive option rights (each an “Option”) for up to four
specified targets, including certain development, manufacturing and commercialization rights. As of December 31, 2019, Novartis had one Option
remaining eligible for purchase, and potential exercise. In January 2020, Novartis did not purchase and exercise its single remaining Option under the
Collaboration Agreement and, as a result, the option purchase period expired. Accordingly, there are no Options remaining eligible for purchase and
exercise by Novartis (See Note 21 to our consolidated financial statements) and our performance obligations under the Collaboration Agreement have
ended. We are currently entitled to potential milestone payments upon the achievement of specified development and sales milestones of $525.0 million, as
well as tiered royalties on annual net sales of NZV930 by Novartis ranging from high single-digit to mid-teens percentages. Such amount of potential
milestone payments assumes the successful clinical development of and achievement of all sales milestones for NZV930. Through December 31, 2019, we
had received an aggregate of $80.0 million in option purchase and milestone payments from Novartis. In January 2016 and April 2018, we also received
equity investments of $13.5 million and $11.5 million, respectively, from Novartis.
Development and Commercialization of CD73 Products
Novartis has the sole right to develop and commercialize CD73 antibody candidates and corresponding licensed products worldwide pursuant to a
development plan and a commercialization plan, respectively. Novartis is obligated to use commercially reasonable efforts to develop the CD73 antibody
candidates and corresponding licensed products, obtain regulatory approval of such products, including within certain defined markets, and to
commercialize such products following regulatory approval. Novartis is responsible for all costs and expenses of such development and commercialization
and is obligated to provide us with updates on its development and commercialization activities through the joint steering committee, joint development
committee and joint commercialization committee.
16
Exclusivity
Neither party may, alone or with any affiliate or third party develop or commercialize any antibody that specifically binds to CD73. The October
2018 Amendment clarified that Novartis is permitted to research, develop, manufacture or commercialize any diagnostic product that specifically binds to
CD73, subject to Novartis’ compliance with its rights and obligations under the Collaboration Agreement, and provided that where such diagnostic product
is an Adimab diagnostic product, Novartis may research, develop, manufacture or commercialize such Adimab diagnostic product solely for the purpose of
research, development or commercialization of a therapeutic or prophylactic licensed product that specifically binds to the same licensed target.
Termination
Unless terminated earlier, the Collaboration Agreement will continue in effect until neither we nor Novartis is researching, developing,
manufacturing or commercializing any antibody candidate that binds to CD73. Novartis may terminate the Collaboration Agreement for any reason upon
prior notice to us within a specified time period. Either party may terminate the Collaboration Agreement 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 we terminate for
Novartis’ material breach, Novartis will grant us, 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.
Adimab Development and Option Agreement
Other Collaborations and License Agreements
In October 2018, we and Adimab LLC, or Adimab, entered into an amended and restated development and option agreement, or the A&R
Adimab Agreement, which amended and restated the development and option agreement with Adimab dated July 2014, as amended, or the Original
Adimab Agreement, for the discovery and optimization of proprietary antibodies as potential therapeutic product candidates. Under the A&R Adimab
Agreement, we will select biological targets against which Adimab will use its proprietary platform technology to research and develop antibody proteins
using a mutually agreed upon research plan. The A&R Adimab Agreement, among other things, extended the discovery term of the Original Adimab
Agreement, provided access to additional antibodies, and expanded our right to evaluate and use antibodies that were modified or derived using Adimab
technology for diagnostic purposes.
Upon our selection of a target, we and Adimab will initiate a research plan and the discovery term begins. During the discovery term, Adimab will
grant us a non-exclusive, non-sublicenseable license under its technology with respect to the target, to research, design and preclinically develop and use
antibodies that were modified or derived using Adimab technology, solely to evaluate such antibodies, perform our responsibilities under the research plan,
and use such antibodies for certain diagnostic purposes. We also will grant to Adimab a non-exclusive, nontransferable license with respect to the target
under our technology that covers or relates to such target, solely to perform its responsibilities under the research plan during the discovery period. We are
required to pay Adimab at an agreed upon rate for its full-time employees during the discovery period while Adimab performs research on each target
under the applicable research plan.
Adimab granted us an exclusive option to obtain a non-exclusive, worldwide, fully paid-up, sublicensable license under Adimab’s platform
patents and other Adimab technology solely to research up to ten antibodies, chosen by us against a specific biological target for a specified period of time,
or the Research Option. In addition, Adimab granted us an exclusive option to obtain a worldwide, royalty-bearing, sublicensable license under Adimab
platform patents and other Adimab technology to exploit, including commercially, 20 or more antibodies against specific biological targets, or the
Commercialization Option. Upon the exercise of a Commercialization Option, and payment of the applicable option fee to Adimab, Adimab will assign us
the patents that cover the antibodies selected by such Commercialization Option. We will be required to use commercially reasonable efforts to develop,
seek market approval of, and commercialize at least one antibody against the target covered by the Commercialization Option in specified markets upon the
exercise of a Commercialization Option.
17
We are obligated to make milestone payments and specified fees upon the exercise of the Research or Commercialization Options. During the
discovery term, we may be obligated to pay Adimab up to $250,000 for technical milestones achieved against each biological target. Upon exercise of a
Research Option we are obligated to pay a nominal research maintenance fee on each of the next four anniversaries of the exercise. Upon the exercise of
each Commercialization Option, we will be required to pay an option exercise fee of a low seven-digit dollar amount, and we may be responsible for
milestone payments of up to an aggregate of $13.0 million for each licensed product that receives marketing approval. For any licensed product that is
commercialized, we are obligated to pay Adimab tiered royalties of a low to mid single-digit percentage on worldwide net sales of such product. We may
also partially exercise a Commercialization Option with respect to ten antibodies against a biological target by paying 65% of the option fee and later either
(i) paying the balance and choosing additional antibodies for commercialization, up to the maximum number under the Commercialization Option, or
(ii) forgoing the Commercialization Option entirely. For any Adimab diagnostic product that is used with or in connection with any compound or product
other than a licensed antibody or licensed product, we are obligated to pay Adimab up to a low seven digits in regulatory milestone payments and low
single-digit royalties on net sales. No additional payment is due with respect to any companion diagnostic or any diagnostic product that does not contain
any licensed antibody.
The A&R Adimab Agreement will remain in effect until the later of (a) the earlier of (i) the expiration of the Research and Commercialization
Options (if they expire without exercise) and (ii) 12 months from the effective date without us providing materials that pass Adimab’s quality control; or
(b) if a Research Option is exercised but the Commercialization Option is not, then upon the expiration of the last to expire research license term; or
(c) upon commercialization of a product, until the end of the royalty term, which will vary on a product-by-product and country-by-country basis, ending
on the later of (y) the expiration of the last valid claim covering the product in such country as the product is manufactured or sold or (z) ten years after the
first commercial sale of the product in such country.
Either party may terminate the A&R Adimab Agreement for material breach if such breach remains uncured for a specified period of time,
however, if a Research Option or Commercialization Option has been exercised and the breach only applies to the applicable target of such Research
Option or Commercialization Option, then the termination right will only apply to such target. We may also terminate the A&R Adimab Agreement for any
reason with prior notice to Adimab. If Adimab is bankrupt, we will be entitled to a complete duplicate of, or complete access to, all rights and licenses
granted under or pursuant to the A&R Adimab Agreement.
Manufacturing
We rely on and will continue to rely on our contract manufacturing organizations, or CMOs, for both drug substance and drug product. While we
do not plan to develop our own full-scale manufacturing capabilities, we may consider establishing a small, flexible facility for supporting preclinical IND-
enabling studies and early clinical studies. Currently, all of our manufacturing is outsourced to well-established third-party manufacturers. We have entered
into contracts with CMOs for SRF617 and SRF388 related to production of drug substance and drug product for our clinical trials and plan to enter into
additional contracts with these or other manufacturers for additional supply.
Our outsourced approach to manufacturing relies on CMOs to first develop cell lines and manufacturing processes that are compliant with current
Good Manufacturing Practice, or cGMP, then produce material for preclinical and clinical studies. Our agreements with CMOs may obligate them to
develop a production cell line, establish master and working cell banks, develop and qualify upstream and downstream processes, develop drug product
process, validate (and in some cases develop) suitable analytical methods for test and release as well as stability testing, produce drug substance for
preclinical testing, produce cGMP-compliant drug substance, or produce cGMP-compliant drug product. We conduct audits of CMOs prior to initiation of
activities under these agreements and monitor operations to ensure compliance with the mutually agreed process descriptions and to cGMP regulations.
The biotechnology and pharmaceutical industries, and the immuno-oncology subsector, are characterized by rapid evolution of technologies,
fierce competition and strong defense of intellectual property. While we believe that our discovery programs, technology, knowledge, experience, and
scientific resources provide us with competitive advantages, we face competition from major pharmaceutical and biotechnology companies, academic
institutions, governmental agencies and public and private research institutions, among others.
Competition
18
Any product candidates that we successfully develop and commercialize will compete with currently approved therapies and new therapies that
may become available in the future. Key product features that would affect our ability to effectively compete with other therapeutics include the efficacy,
safety and convenience of our products and the ease of use and effectiveness of any complementary diagnostics and/or companion diagnostics. Our
competitors fall primarily into the following groups of treatment:
•
Programs in development targeting the adenosine axis, including those by AbbVie, Arcus Biosciences, Inc., AstraZeneca PLC, Bristol-Myers
Squibb Company, Corvus Pharmaceuticals, Inc., Innate Pharma, S.A., iTeos, Palobiofarma SL, Tizona, and TRACON Pharmaceuticals, Inc.
• Traditional cancer therapies, including chemotherapy, targeted therapies; and
• Approved immunotherapy antibodies such as those targeting CTLA-4 (Yervoy, marketed by Bristol-Myers Squibb Company) and PD-1/PD-
L1 (Opdivo, Keytruda and Tecentriq, marketed by Bristol-Myers Squibb Company, Merck & Co. and Genentech, Inc., respectively).
The availability of reimbursement from government and other third-party payors will also significantly affect the pricing and competitiveness of
our products. Our competitors also may obtain U.S. Food and Drug Administration, or FDA, or other regulatory approval for their products more rapidly
than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.
Many of the companies against which we may compete have significantly greater financial resources and expertise in research and development,
manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Smaller or early-
stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These
competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient
registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
Intellectual Property
Our patents and patent applications are directed to our antibodies and accompanying technologies. We seek patent protection for our development
programs, product candidates and related alternatives by filing and prosecuting patent applications in the U.S. and other countries as appropriate.
As of March 10, 2020, we co-own and have exclusively licensed to Novartis our rights in two patent families that cover compositions of matter
and methods of use for our CD73 therapeutic antibody candidate, NZV930. The first patent family includes two expired U.S. provisional patent
applications, one pending U.S. non-provisional patent application, one expired international (Patent Cooperation Treaty [“PCT”]) patent application, and 42
ex-US applications. The second patent family includes two expired U.S. provisional patent applications and one pending PCT patent application. Foreign
patent applications claiming priority to the PCT patent application from the second patent family will be filed on or before the national phase entry
deadline. Any patents issuing from the first and second patent families would be expected to expire in 2038 or 2039, respectively, absent any applicable
patent term adjustment or extension.
As of March 10, 2020, we co-own one U.S. non-provisional patent application and one corresponding PCT patent application and five U.S.
provisional patent applications related to compositions of matter and methods of use for our CD39 therapeutic antibody candidates, including SRF617. We
have the right to obtain exclusive ownership of these applications. Any patents issuing from these applications would be expected to expire in 2039 and
2040, absent any applicable patent term adjustment or extension.
With respect to our IL-27 therapeutic antibody program, as of March 10, 2020, we own one pending U.S. non-provisional patent application and
two PCT patent applications within two patent families that cover compositions of matter and methods of use for various antibodies. We have one
additional U.S. provisional patent application pending that also relates to our IL-27 program. Any patents issuing from these applications would be
expected to expire in 2039 and 2040, absent any applicable patent term adjustment or extension.
As of March 10, 2020, we co-own one U.S. non-provisional patent application and corresponding PCT patent application directed to compositions
of matter and methods of use for our CD112R therapeutic antibody candidates. We have one pending provisional application also relating to this
program. Any patents issuing from these applications would be expected to expire in 2039 and 2040, absent any applicable patent term adjustment or
extension.
19
As of March 10, 2020, we co-own U.S. Patent Nos. 9,803,016, 9,650,441, 10,442,858 and 10,570,201, which cover composition of matter and the
treatment of cancer using our therapeutic CD47 antibody, SRF231. Additionally, we co-own eleven foreign patent applications within this patent family.
These patent rights are expected to expire in 2036, absent any applicable patent term adjustment or extension.
Government Regulation
Government authorities in the United States at the federal, state and local level and in other countries regulate, among other things, the research,
development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-
approval monitoring and reporting, marketing and export and import of drug and biological products, including any product candidates we develop.
Generally, before a new drug or biologic can be marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into
a format specific for each regulatory authority, submitted for review and approved by the regulatory authority.
U.S. Drug Development
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations and
biologics under the FDCA, the Public Health Service Act, or PHSA, and their implementing regulations. Both drugs and biologics also are subject to other
federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal,
state and local statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S.
requirements at any time during the product development process, approval process or post-market may subject an applicant to administrative or judicial
sanctions. These sanctions could include, among other actions, the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical
hold, untitled or warning letters, product recalls or market withdrawals, product seizures, total or partial suspension of production or distribution,
injunctions, fines, refusals of government contracts, restitution, disgorgement and civil or criminal penalties. Any agency or judicial enforcement action
could have a material adverse effect on us.
All product candidates we develop must be approved by the FDA through either a New Drug Application, or NDA, or Biologics License
Application, or BLA, process before they may be legally marketed in the United States. The process generally involves the following:
• Completion of extensive preclinical studies in accordance with applicable regulations, including studies conducted in accordance with GLP
requirements;
•
Submission to the FDA of an IND, which must become effective before human clinical trials may begin;
• Approval by an Institutional Review Board, or IRB, or independent ethics committee at each clinical trial site before each trial may be
initiated;
•
•
Performance of adequate and well-controlled human clinical trials in accordance with applicable IND regulations, good clinical practice, or
GCP, requirements and other clinical trial-related regulations to establish the safety and efficacy of the investigational product for each
proposed indication;
Submission to the FDA of an NDA or BLA;
• A determination by the FDA within 60 days of its receipt of an NDA or BLA to accept the filing for review;
•
•
•
Satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities where the drug or biologic will be
produced to assess compliance with cGMP requirements to assure that the facilities, methods and controls are adequate to preserve the drug or
biologic’s identity, strength, quality and purity;
Potential FDA audit of the clinical trial sites that generated the data in support of the NDA or BLA; and
FDA review and approval of the NDA or BLA, including consideration of the views of any FDA advisory committee, prior to any commercial
marketing or sale of the drug or biologic in the United States.
The preclinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any
approvals for the product candidates we develop will be granted on a timely basis, or at all.
20
Preclinical Studies and IND
Preclinical studies include laboratory evaluation of product chemistry and formulation, as well as in vitro and animal studies to assess the
potential for adverse events and in some cases to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations
and requirements, including GLP regulations for safety/toxicology studies.
An IND sponsor must submit the results of the preclinical studies, together with manufacturing information, analytical data, any available clinical
data or literature and plans for clinical studies, among other things, to the FDA as part of an IND. An IND is a request for authorization from the FDA to
administer an investigational product to humans and must become effective before human clinical trials may begin. Some long-term preclinical testing,
such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted. An IND automatically becomes effective
30 days after receipt by the FDA, unless before that time, the FDA raises concerns or questions related to one or more proposed clinical trials and places
the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As a result,
submission of an IND may not result in the FDA allowing clinical trials to commence.
Clinical Trials
The clinical stage of development involves the administration of the investigational product to healthy volunteers or patients under the supervision
of qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCP requirements, which include
the requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under
protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria and the parameters to
be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted to the FDA as part
of the IND. Further, each clinical trial must be reviewed and approved by an IRB for each institution at which the clinical trial will be conducted to ensure
that the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the
informed consent form that must be provided to each clinical trial subject or his or her legal representative and must monitor the clinical trial until
completed. There also are requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries.
A sponsor who wishes to conduct a clinical trial outside of the United States may, but need not, obtain FDA authorization to conduct the clinical
trial under an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to the FDA in support of an
NDA or BLA. The FDA will accept a well-designed and well-conducted foreign clinical trial not conducted under an IND if the study was conducted in
accordance with GCP requirements, and the FDA is able to validate the data through an onsite inspection if deemed necessary.
Clinical trials generally are conducted in three sequential phases, known as Phase 1, Phase 2 and Phase 3, and may overlap.
•
•
•
Phase 1 clinical trials generally involve a small number of healthy volunteers or disease-affected patients who are initially exposed to a single
dose and then multiple doses of the product candidate. The primary purpose of these clinical trials is to assess the metabolism, pharmacologic
action, side effect tolerability and safety of the drug.
Phase 2 clinical trials involve studies in disease-affected patients to determine the dose required to produce the desired benefits. At the same
time, safety and further pharmacokinetic and pharmacodynamic information is collected, possible adverse effects and safety risks are
identified, and a preliminary evaluation of efficacy is conducted.
Phase 3 clinical trials generally involve a large number of patients at multiple sites and are designed to provide the data necessary to
demonstrate the effectiveness of the product for its intended use, its safety in use and to establish the overall benefit/risk relationship of the
product and provide an adequate basis for product labeling.
Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are used to
gain additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, the FDA may mandate the performance
of Phase 4 clinical trials as a condition of approval of an NDA or BLA.
21
Progress reports detailing the results of the clinical trials, among other information, must be submitted at least annually to the FDA and written
IND safety reports must be submitted to the FDA and the investigators for serious and unexpected suspected adverse events, findings from other studies or
animal or in vitro testing that suggest a significant risk for human subjects and any clinically important increase in the rate of a serious suspected adverse
reaction over that listed in the protocol or investigator brochure.
Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor may
suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an
unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in
accordance with the IRB’s requirements or if the drug or biologic has been associated with unexpected serious harm to patients. Additionally, some clinical
trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or
committee. This group provides authorization for whether a trial may move forward at designated checkpoints based on access to certain data from the trial.
Concurrent with clinical trials, companies usually complete additional animal studies and also must develop additional information about the chemistry and
physical characteristics of the drug or biologic as well as finalize a process for manufacturing the product in commercial quantities in accordance with
cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product and, among other things,
companies must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be
selected and tested, and stability studies must be conducted to demonstrate that any product candidates a company develops do not undergo unacceptable
deterioration over their shelf life.
NDA/BLA and FDA Review Process
Following completion of the clinical trials, data are analyzed to assess whether the investigational product is safe and effective for the proposed
indicated use or uses. The results of preclinical studies and clinical trials are then submitted to the FDA as part of an NDA or BLA, along with proposed
labeling, chemistry and manufacturing information to ensure product quality and other relevant data. The NDA or BLA is a request for approval to market
the drug or biologic for one or more specified indications and must contain proof of safety and efficacy for a drug or safety, purity and potency for a
biologic. The application may include both negative and ambiguous results of preclinical studies and clinical trials, as well as positive findings. Data may
come from company-sponsored clinical trials intended to test the safety and efficacy of a product’s use or from a number of alternative sources, including
studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and
efficacy of the investigational product to the satisfaction of FDA. FDA approval of an NDA or BLA must be obtained before a drug or biologic may be
marketed in the United States.
Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA or BLA must be accompanied by a user fee. FDA adjusts the
PDUFA user fees on an annual basis. According to the FDA’s fee schedule, effective through September 30, 2020, the user fee for an application requiring
clinical data, such as an NDA or BLA, is $2,942,965. The sponsor of an approved NDA or BLA is also subject to an annual prescription drug program fee,
which for fiscal year 2020 is $325,424. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the
first application filed by a small business. Additionally, no user fees are assessed on NDAs or BLAs for products designated as orphan drugs, unless the
product also includes a non-orphan indication.
The FDA reviews all submitted NDAs and BLAs before it accepts them for filing and may request additional information rather than accepting
the NDA or BLA for filing. The FDA must make a decision on accepting an NDA or BLA for filing within 60 days of receipt. Once the submission is
accepted for filing, the FDA begins an in-depth review of the NDA or BLA. Under the goals and policies agreed to by the FDA under PDUFA, the FDA
has ten months, from the filing date, in which to complete its initial review of a new molecular-entity NDA or original BLA and respond to the applicant,
and six months from the filing date of a new molecular-entity NDA or original BLA designated for priority review. The FDA does not always meet its
PDUFA goal dates for standard and priority NDAs or BLAs, and the review process is often extended by FDA requests for additional information or
clarification.
Before approving an NDA or BLA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for the new product to
determine whether they comply with cGMP requirements. The FDA will not approve the product unless it determines that the manufacturing processes and
facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. The FDA
also may audit data from clinical trials to ensure compliance with GCP requirements. Additionally, the FDA may refer applications for novel drug products
or drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other
experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions, if any. The FDA is not
bound by recommendations of an advisory committee, but it considers
22
such recommendations when making decisions on approval. The FDA likely will reanalyze the clinical trial data, which could result in extensive
discussions between the FDA and the applicant during the review process. After the FDA evaluates an NDA or BLA, it will issue an approval letter or a
Complete Response Letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A
Complete Response Letter indicates that the review cycle of the application is complete, and the application will not be approved in its present form. A
Complete Response Letter usually describes all of the specific deficiencies in the NDA or BLA identified by the FDA. The Complete Response Letter may
require additional clinical data, additional pivotal Phase 3 clinical trial(s) and/or other significant and time-consuming requirements related to clinical trials,
preclinical studies or manufacturing. If a Complete Response Letter is issued, the applicant may either resubmit the NDA or BLA, addressing all of the
deficiencies identified in the letter, or withdraw the application. Even if such data and information are submitted, the FDA may decide that the NDA or
BLA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than
we interpret the same data.
Orphan Drug Designation
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition,
which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United
States and for which there is no reasonable expectation that the cost of developing and making the product available in the United States for this type of
disease or condition will be recovered from sales of the product.
Orphan drug designation must be requested before submitting an NDA or BLA. After the FDA grants orphan drug designation, the identity of the
therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the
duration of the regulatory review and approval process.
If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such
designation, the product is entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications to market the same drug
for the same indication for seven years from the date of such approval, except in limited circumstances, such as a showing of clinical superiority to the
product with orphan exclusivity by means of greater effectiveness, greater safety or providing a major contribution to patient care or in instances of drug
supply issues. Competitors, however, may receive approval of either a different product for the same indication or the same product for a different
indication but that could be used off-label in the orphan indication. Orphan drug exclusivity also could block the approval of one of our products for seven
years if a competitor obtains approval before we do for the same product, as defined by the FDA, for the same indication we are seeking approval, or if a
product is determined to be contained within the scope of the competitor’s product for the same indication or disease. If one of our products designated as
an orphan drug receives marketing approval for an indication broader than that which is designated, it may not be entitled to orphan drug exclusivity.
Orphan drug status in the European Union has similar, but not identical, requirements and benefits.
Expedited Development and Review Programs
The FDA has a fast track program that is intended to expedite or facilitate the process for reviewing new drugs and biologics that meet certain
criteria. Specifically, new drugs and biologics are eligible for fast track designation if they are intended to treat a serious or life-threatening condition and
preclinical or clinical data demonstrate the potential to address unmet medical needs for the condition. Fast track designation applies to both the product
and the specific indication for which it is being studied. The sponsor can request the FDA to designate the product for fast track status any time before
receiving NDA or BLA approval, but ideally no later than the pre-NDA or pre-BLA meeting.
Any product submitted to the FDA for marketing, including under a fast track program, may be eligible for other types of FDA programs intended
to expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it treats a serious or
life-threatening condition and, if approved, would provide a significant improvement in safety and effectiveness compared to available therapies. The FDA
will attempt to direct additional resources to the evaluation of an application for a new drug or biologic designated for priority review in an effort to
facilitate the review.
A product may also be eligible for accelerated approval, if it treats a serious or life-threatening condition and generally provides a meaningful
advantage over available therapies. In addition, it must demonstrate an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or
on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, or IMM, that is reasonably likely to predict an effect on IMM or
other clinical benefit. As a condition of approval, the FDA may require that a sponsor of a drug or biologic receiving accelerated approval perform
adequate and well-controlled post-marketing clinical trials. If the FDA concludes that a drug or biologic shown to be effective can be safely used only if
distribution or use is restricted, it will require such post-marketing restrictions, as it deems necessary to assure safe use of the product.
23
Additionally, a drug or biologic may be eligible for designation as a breakthrough therapy if the product is intended, alone or in combination with
one or more other drugs or biologics, to treat a serious or life-threatening condition and preliminary clinical evidence indicates that the product may
demonstrate substantial improvement over currently approved therapies on one or more clinically significant endpoints. The benefits of breakthrough
therapy designation include the same benefits as fast track designation, plus intensive guidance from the FDA to ensure an efficient drug development
program.
Fast track designation, priority review, accelerated approval and breakthrough therapy designation do not change the standards for approval, but
may expedite the development or approval process.
Pediatric Information
Under the Pediatric Research Equity Act, or PREA, an NDA or BLA or supplement to an NDA or BLA must contain data to assess the safety and
efficacy of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric
subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of pediatric data or full or partial waivers. The Food
and Drug Administration Safety and Innovation Act, or FDASIA, amended the FDCA to require that a sponsor who is planning to submit a marketing
application for a drug that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit
an initial Pediatric Study Plan, or PSP, within 60 days of an end-of-Phase 2 meeting or, if there is no such meeting, as early as practicable before the
initiation of the Phase 3 or Phase 2/3 study. The initial PSP must include an outline of the pediatric study or studies that the sponsor plans to conduct,
including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information,
and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with
supporting information. The FDA and the sponsor must reach an agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial PSP at
any time if changes to the pediatric plan need to be considered based on data collected from preclinical studies, early phase clinical trials and/or other
clinical development programs.
Post-Marketing Requirements
Following approval of a new product, the manufacturer and the approved product are subject to continuing regulation by the FDA, including,
among other things, monitoring and record-keeping activities, reporting of adverse experiences, complying with promotion and advertising requirements,
which include restrictions on promoting drugs for unapproved uses or patient populations (known as “off-label use”) and limitations on industry-sponsored
scientific and educational activities. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not market or
promote such uses. Prescription drug promotional materials must be submitted to the FDA in conjunction with their first use. Further, if there are any
modifications to the drug or biologic, including changes in indications, labeling or manufacturing processes or facilities, the applicant may be required to
submit and obtain FDA approval of a new NDA/BLA or NDA/BLA supplement, which may require the development of additional data or preclinical
studies and clinical trials.
The FDA may also place other conditions on approvals including the requirement for a Risk Evaluation and Mitigation Strategy, or REMS, to
assure the safe use of the product. If the FDA concludes a REMS is needed, the sponsor of the NDA or BLA must submit a proposed REMS. The FDA will
not approve the NDA or BLA without an approved REMS, if required. A REMS could include medication guides, physician communication plans or
elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any of these limitations on
approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product approvals may be withdrawn
for non-compliance with regulatory standards or if problems occur following initial marketing.
FDA regulations require that products be manufactured in specific approved facilities and in accordance with cGMP regulations. We rely, and
expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products in accordance with cGMP regulations.
These manufacturers must comply with cGMP regulations that require, among other things, quality control and quality assurance, the maintenance of
records and documentation and the obligation to investigate and correct any deviations from cGMP. Manufacturers and other entities involved in the
manufacture and distribution of approved drugs or biologics are required to register their establishments with the FDA and certain state agencies and are
subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP requirements and other laws. Accordingly,
manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. The discovery
of violative conditions, including failure to conform to cGMP regulations, could result in enforcement actions, and the discovery of problems with a
product after approval may result in restrictions on a product, manufacturer or holder of an approved NDA or BLA, including recall.
24
Companion Diagnostics and Complementary Diagnostics
We believe that the success of any product candidates we develop will depend, in part, on the development and commercialization of either a
companion diagnostic or complementary diagnostic. Companion diagnostics and complementary diagnostics can identify patients who are most likely to
benefit from a particular therapeutic product; identify patients likely to be at increased risk for serious side effects as a result of treatment with a particular
therapeutic product; or monitor response to treatment with a particular therapeutic product for the purpose of adjusting treatment to achieve improved
safety or effectiveness. Companion diagnostics and complementary diagnostics are regulated as medical devices by the FDA and, as such, require either
clearance or approval prior to commercialization. The level of risk combined with available controls to mitigate risk determines whether a companion
diagnostic device requires Premarket Approval Application, or PMA, approval or is cleared through the 510(k) premarket notification process. For a novel
therapeutic product for which a companion diagnostic device is essential for the safe and effective use of the product, the companion diagnostic device
should be developed and approved or 510(k)-cleared contemporaneously with the therapeutic. The use of the companion diagnostic device will be
stipulated in the labeling of the therapeutic product. This is also true for a complementary diagnostic, although it is not a prerequisite for receiving the
therapeutic.
Other Healthcare Laws and Compliance Requirements
Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities
in the United States in addition to the FDA, including the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and
Human Services, the Department of Justice, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade
Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency and state and local governments.
Healthcare providers, physicians and third-party payors in the United States and elsewhere play a primary role in the recommendation and
prescription of pharmaceutical products. Arrangements with third-party payors and customers can expose pharmaceutical manufactures to broadly
applicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute and the federal False
Claims Act, or FCA, which may constrain the business or financial arrangements and relationships through which such companies sell, market and
distribute pharmaceutical products. In addition, transparency laws and patient privacy regulations by federal and state governments and by governments in
foreign jurisdictions can apply to the manufacturing, sales, promotion and other activities of pharmaceutical manufactures. The applicable federal, state and
foreign healthcare laws and regulations that can affect a pharmaceutical company’s operations include:
• The federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any
remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for,
either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for which payment
may be made, in whole or in part, under the Medicare and Medicaid programs, or other federal healthcare programs. A person or entity can be
found guilty of violating the statute without actual knowledge of the statute or specific intent to violate it. In addition, the government may
assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the FCA. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical
manufacturers on the one hand and prescribers, purchasers, and formulary managers on the other. There are a number of statutory exceptions
and regulatory safe harbors protecting some common activities from prosecution;
• The federal civil and criminal false claims laws and civil monetary penalty laws, including the FCA, which prohibit any person or entity from,
among other things, knowingly presenting, or causing to be presented, a false, fictitious or fraudulent claim for payment to, or approval by, the
federal government or knowingly making, using or causing to be made or used a false record or statement, including providing inaccurate
billing or coding information to customers or promoting a product off-label, material to a false or fraudulent claim to the federal government.
As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money
or property presented to the federal government. In addition, manufacturers can be held liable under the FCA even when they do not submit
claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. The FCA also permits a
private individual acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the FCA and to share
in any monetary recovery;
25
• The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created federal criminal statutes that prohibit
knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false
or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any
healthcare benefit program, regardless of the payor (e.g., public or private), and knowingly and willfully falsifying, concealing or covering up
by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare
benefits, items or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity can be found guilty of
violating HIPAA without actual knowledge of the statute or specific intent to violate it;
• HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective
implementing regulations, which impose, among other things, specified requirements relating to the privacy, security and transmission of
individually identifiable health information held by covered entities and their business associates. HITECH also created new tiers of civil
monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys
general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’
fees and costs associated with pursuing federal civil actions;
• The federal legislation commonly referred to as the Physician Payments Sunshine Act, created under the Patient Protection and Affordable
Care Act, or ACA, and its implementing regulations, which requires manufacturers of drugs, devices, biologics and medical supplies for
which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually
to the Centers for Medicare & Medicaid Services, or CMS, information related to payments or other transfers of value made to physicians
(currently defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and
investment interests held by physicians and their immediate family members. Effective January 1, 2022, these reporting obligations will
extend to include transfers of value made to certain nonphysician providers such as physician assistants and nurse practitioners;
•
Federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm
consumers; and
• Analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing
arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private
insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance
guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to
healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of
value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of
health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA,
thus complicating compliance efforts.
Pricing and rebate programs must comply with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and
more recent requirements in the ACA. If products are made available to authorized users of the Federal Supply Schedule of the General Services
Administration, additional laws and requirements apply. Products must meet applicable child-resistant packaging requirements under the U.S. Poison
Prevention Packaging Act. Manufacturing, sales, promotion and other activities also are potentially subject to federal and state consumer protection and
unfair competition laws.
The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing,
storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.
The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform,
especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of
interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements
in the healthcare industry. Ensuring business arrangements comply with applicable healthcare laws, as well as responding to possible investigations by
government authorities, can be time- and resource-consuming and can divert a company’s attention from the business.
26
The failure to comply with any of these laws or regulatory requirements subjects firms to possible legal or regulatory action. Depending on the
circumstances, failure to meet applicable regulatory requirements can result in civil, criminal and administrative penalties, damages, fines, disgorgement,
individual imprisonment, possible exclusion from participation in federal and state funded healthcare programs, contractual damages and the curtailment or
restricting of our operations, as well as additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other
agreement to resolve allegations of non-compliance with these laws. Any action for violation of these laws, even if successfully defended, could cause a
pharmaceutical manufacturer to incur significant legal expenses and divert management’s attention from the operation of the business. Prohibitions or
restrictions on sales or withdrawal of future marketed products could materially affect business in an adverse way. Changes in regulations, statutes or the
interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing arrangements;
(ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products; or (iv) additional record-keeping requirements. If any
such changes were to be imposed, they could adversely affect the operation of our business.
Healthcare Reform
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payors have
attempted to control costs by limiting coverage and the amount of reimbursement for particular medical products. For example, in March 2010, the
Affordable Care Act, or the ACA, was enacted, which, among other things, increased the minimum Medicaid rebates owed by most manufacturers under
the Medicaid Drug Rebate Program; introduced a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are
calculated for drugs that are inhaled, infused, instilled, implanted or injected; extended the Medicaid Drug Rebate Program to utilization of prescriptions of
individuals enrolled in Medicaid managed care plans; imposed mandatory discounts for certain Medicare Part D beneficiaries as a condition for
manufacturers’ outpatient drugs coverage under Medicare Part D; subjected drug manufacturers to new annual fees based on pharmaceutical companies’
share of sales to federal healthcare programs; created a new Patient Centered Outcomes Research Institute to oversee, identify priorities in and conduct
comparative clinical effectiveness research, along with funding for such research; and established the Center for Medicare Innovation at the Centers for
Medicare & Medicaid Services, or CMS, to test innovative payment and service delivery models to lower Medicare and Medicaid spending.
Since its enactment, there have been numerous judicial, administrative, executive, and legislative challenges to certain aspects of the ACA, and
we expect there will be additional challenges and amendments to the ACA in the future. Various portions of the ACA are currently undergoing legal and
constitutional challenges in the Fifth Circuit Court and the United States Supreme Court; the Trump Administration has issued various Executive Orders
which eliminated cost sharing subsidies and various provisions that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden
on individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices; and Congress has introduced several pieces
of legislation aimed at significantly revising or repealing the ACA. It is unclear whether the ACA will be overturned, repealed, replaced, or further
amended. We cannot predict what affect further changes to the ACA would have on our business.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted, including aggregate reductions to Medicare
payments to providers of 2% per fiscal year through 2029. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012,
which, among other things, further reduced Medicare payments to several providers, and increased the statute of limitations period for the government to
recover overpayments to providers from three to five years.
More recently, there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products,
which have resulted in several recent Congressional inquiries and proposed bills designed to, among other things, bring more transparency to product
pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for
pharmaceutical products. Individual states in the United States have also become increasingly active in enacting legislation and implementing regulations
designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access
and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
CMS has recently proposed and enacted regulations that would give states greater flexibility in setting benchmarks for insurers in the individual
and small group marketplaces, which may have the effect of relaxing the essential health benefits required under the ACA for plans sold through such
marketplaces. In May 2019, CMS issued a final rule to allow Medicare Advantage Plans the option of using step therapy, a type of prior authorization, for
Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change that was effective January 1, 2019. It is unclear whether these
proposed changes we be accepted, and if so, what effect such changes will have on our business.
27
Moreover, on May 30, 2018, the Right to Try Act, was signed into law. The law, among other things, provides a federal framework for certain
patients to access certain investigational new drug products that have completed a Phase I clinical trial and that are undergoing investigation for FDA
approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under
the FDA expanded access program. There is no obligation for a drug manufacturer to make its drug products available to eligible patients as a result of the
Right to Try Act, but the manufacturer must develop an internal policy and respond to patient requests according to that policy. We expect that additional
foreign, federal and state healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments
will pay for healthcare products and services, which could result in limited coverage and reimbursement and reduced demand for our products, once
approved, or additional pricing pressures.
U.S. Patent-Term Restoration and Marketing Exclusivity
Depending upon the timing, duration and specifics of FDA approval of any product candidates we develop, some of our U.S. patents may be
eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-
Waxman Amendments. The Hatch-Waxman Amendments permit restoration of the patent term of up to five years as compensation for patent term lost
during product development and FDA regulatory review process. Patent-term restoration, however, cannot extend the remaining term of a patent beyond a
total of 14 years from the product’s approval date. The patent-term restoration period is generally one-half the time between the effective date of an IND
and the submission date of an NDA or BLA plus the time between the submission date of an NDA or BLA and the approval of that application, except that
the review period is reduced by any time during which the applicant failed to exercise due diligence. Only one patent applicable to an approved drug is
eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. The United States Patent and
Trademark Office, or USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the
future, we may apply for restoration of patent term for our currently owned or licensed patents to add patent life beyond its current expiration date,
depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA or BLA.
Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-
year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug
is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion
responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an Abbreviated New Drug Application,
or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of
reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or
non-infringement. The FDCA also provides three years of marketing exclusivity for a NDA, 505(b)(2) NDA or supplement to an existing NDA if new
clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the
approval of the application, for example, new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions of
use associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent.
Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be
required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate
safety and effectiveness.
An abbreviated approval pathway for biological products shown to be similar to, or interchangeable with, an FDA-licensed reference biological
product was created by the Biologics Price Competition and Innovation Act of 2009, or BPCI Act, as part of the ACA. This amendment to the PHSA, in
part, attempts to minimize duplicative testing. Biosimilarity, which requires that the biological product be highly similar to the reference product
notwithstanding minor differences in clinically inactive components and that there be no clinically meaningful differences between the product and the
reference product in terms of safety, purity and potency, can be shown through analytical studies, animal studies and a clinical trial or trials.
Interchangeability requires that a biological product be biosimilar to the reference product and that the product can be expected to produce the same clinical
results as the reference product in any given patient and, for products administered multiple times to an individual, that the product and the reference
product may be alternated or switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to
exclusive use of the reference biological product without such alternation or switch. Complexities associated with the larger, and often more complex,
structure of biological products as compared to small molecule drugs, as well as the processes by which such products are manufactured, pose significant
hurdles to implementation that are still being worked out by the FDA.
28
A reference biological product is granted 12 years of data exclusivity from the time of first licensure of the product, and the FDA will not accept
an application for a biosimilar or interchangeable product based on the reference biological product until four years after the date of first licensure of the
reference product. “First licensure” typically means the initial date the particular product at issue was licensed in the United States. Date of first licensure
does not include the date of licensure of (and a new period of exclusivity is not available for) a biological product if the licensure is for a supplement for the
biological product or for a subsequent application by the same sponsor or manufacturer of the biological product (or licensor, predecessor in interest, or
other related entity) for a change (not including a modification to the structure of the biological product) that results in a new indication, route of
administration, dosing schedule, dosage form, delivery system, delivery device or strength, or for a modification to the structure of the biological product
that does not result in a change in safety, purity, or potency. Therefore, one must determine whether a new product includes a modification to the structure
of a previously licensed product that results in a change in safety, purity, or potency to assess whether the licensure of the new product is a first licensure
that triggers its own period of exclusivity. Whether a subsequent application, if approved, warrants exclusivity as the “first licensure” of a biological
product is determined on a case-by-case basis with data submitted by the sponsor.
Pediatric exclusivity is another type of regulatory market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to
existing regulatory exclusivity periods. This six-month exclusivity may be granted based on the voluntary completion of a pediatric trial in accordance with
an FDA-issued “Written Request” for such a trial.
European Union Drug Development
In the European Union, or EU, our future products also may be subject to extensive regulatory requirements. As in the United States, medicinal
products can be marketed only if a marketing authorization from the competent regulatory agencies has been obtained.
Similar to the United States, the various phases of preclinical and clinical research in the European Union are subject to significant regulatory
controls. Although the European Union, or EU, Clinical Trials Directive 2001/20/EC has sought to harmonize the EU clinical trials regulatory framework,
setting out common rules for the control and authorization of clinical trials in the EU, the EU Member States have transposed and applied the provisions of
the Directive differently. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be initiated
it must be approved in each of the EU countries where the trial is to be conducted by two distinct bodies: the National Competent Authority, or NCA, and
one or more Ethics Committees, or ECs. Under the current regime all suspected unexpected serious adverse reactions to the investigated drug that occur
during the clinical trial have to be reported to the NCA and ECs of the Member State where they occurred.
The EU clinical trials legislation currently is undergoing a transition process mainly aimed at harmonizing and streamlining clinical-trial
authorization, simplifying adverse-event reporting procedures, improving the supervision of clinical trials and increasing their transparency. Recently
enacted Clinical Trials Regulation EU No 536/2014 ensures that the rules for conducting clinical trials in the EU will be identical.
29
European Union Drug Review and Approval
In the European Economic Area, or EEA, which is comprised of the 27 Member States of the European Union (including Norway but excluding
Croatia), Iceland and Liechtenstein, medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types
of marketing authorizations.
• The Community MA is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for
Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and is valid throughout the entire territory of the
EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal
products, advanced-therapy medicines such as gene-therapy, somatic cell-therapy or tissue-engineered medicines and medicinal products
containing a new active substance indicated for the treatment of HIV, AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and
other immune dysfunctions and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet
authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of
public health in the EU.
• National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are
available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for
marketing in a Member State of the EEA, this National MA can be recognized in another Member States through the Mutual Recognition
Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in
various Member States through the Decentralized Procedure. Under the Decentralized Procedure an identical dossier is submitted to the
competent authorities of each of the Member States in which the MA is sought, one of which is selected by the applicant as the Reference
Member State, or RMS. The competent authority of the RMS prepares a draft assessment report, a draft summary of the product
characteristics, or SPC, and a draft of the labeling and package leaflet, which are sent to the other Member States, referred to as the Member
States Concerned, for their approval. If the Member States Concerned raise no objections, based on a potential serious risk to public health, to
the assessment, SPC, labeling, or packaging proposed by the RMS, the product is subsequently granted a national MA in all the Member
States (i.e., in the RMS and the Member States Concerned).
Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an
assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.
European Union New Chemical Entity Exclusivity
In the European Union, new chemical entities, sometimes referred to as new active substances, qualify for eight years of data exclusivity upon
marketing authorization and an additional two years of market exclusivity. The data exclusivity, if granted, prevents regulatory authorities in the European
Union from referencing the innovator’s data to assess a generic application for eight years, after which generic marketing authorization can be submitted,
and the innovator’s data may be referenced, but not approved for two years. The overall ten-year period will be extended to a maximum of 11 years if,
during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications
which, during the scientific evaluation prior to their authorization, are determined to bring a significant clinical benefit in comparison with currently
approved therapies.
European Union Orphan Designation and Exclusivity
In the European Union, the EMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of
products that are intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than 5 in
10,000 persons in the European Union community (or where it is unlikely that the development of the medicine would generate sufficient return to justify
the investment) and for which no satisfactory method of diagnosis, prevention or treatment has been authorized (or, if a method exists, the product would
be a significant benefit to those affected).
In the European Union, orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of
market exclusivity is granted following medicinal product approval. This period may be reduced to six years if the orphan drug designation criteria are no
longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. Orphan drug designation
must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process.
30
Rest of the World Regulation
For other countries outside of the European Union and the United States, such as countries in Eastern Europe, Latin America or Asia, the
requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. Additionally, the clinical
trials must be conducted in accordance with GCP requirements and the applicable regulatory requirements and the ethical principles that have their origin
in the Declaration of Helsinki.
If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal
of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
Coverage and Reimbursement
Sales of our products, when and if approved, will depend, in part, on the extent to which our products will be covered by third-party payors, such
as government health programs, commercial insurance and managed healthcare organizations. In the United States, no uniform policy of coverage and
reimbursement for drug or biological products exists. Accordingly, decisions regarding the extent of coverage and amount of reimbursement to be provided
for any of our products will be made on a payor-by-payor basis. As a result, the coverage determination process is often a time-consuming and costly
process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage
and adequate reimbursement will be obtained.
The United States government, state legislatures and foreign governments have shown significant interest in implementing cost containment
programs to limit the growth of government-paid health care costs, including price-controls, restrictions on reimbursement and requirements for
substitution of generic products and/or biosimilars for branded prescription drugs. For example, the ACA contains provisions that may reduce the
profitability of drug products through increased rebates for drugs reimbursed by Medicaid programs, extension of Medicaid rebates to Medicaid managed
care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal
healthcare programs. Adoption of general controls and measures, coupled with the tightening of restrictive policies in jurisdictions with existing controls
and measures, could limit payments for pharmaceutical drugs.
The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the
Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for the manufacturer’s outpatient
drugs furnished to Medicaid patients. The ACA made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical
manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs from 15.1% of average manufacturer
price, or AMP, to 23.1% of AMP and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations)
of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. The
ACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid
managed care utilization and by enlarging the population potentially eligible for Medicaid drug benefits.
For a drug product to receive federal reimbursement under the Medicaid or Medicare Part B programs or to be sold directly to U.S. government
agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a
given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer. As of 2010, the ACA expanded the types of
entities eligible to receive discounted 340B pricing, although, under the current state of the law, with the exception of children’s hospitals, these newly
eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs. In addition, as 340B drug pricing is determined based on AMP and
Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase.
This decrease in reimbursement has been challenged in the U.S. District Court for the District of Columbia, and was appealed to the U.S. Court of Appeals;
a decision is expected in early 2020. It is unclear how the invalidation of the formula could affect pharmaceutical manufacturers and hospitals who
prescribe their products.
The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different
treatments for the same illness. The plan for the research was published in 2012 by the Department of Health and Human Services, the Agency for
Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures are made
to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is
not clear what effect, if any, the research will have on the sales of our drug candidates, if any such drug or the condition that they are intended to treat are
the subject of a trial. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s drug could adversely affect the
sales of our drug candidate. If third-party payors do not consider our drugs to be cost-effective compared to other available therapies, they may not cover
our drugs after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our drugs on a profitable
basis.
31
Additional laws have resulted in direct or indirect reimbursement reductions for certain Medicare providers, including:
• The Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on
Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable
to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. These changes included
aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in
effect through 2029 unless additional Congressional action is taken.
• The American Taxpayer Relief Act of 2012, among other things, reduced Medicare payments to several providers, and increased the statute of
limitations period for the government to recover overpayments to providers from three to five years.
Any of these laws, and future state and federal healthcare reform measures may be adopted in the future, may result in additional reductions in
Medicare and other healthcare funding and otherwise affect the prices we may obtain for any product candidates for which we may obtain regulatory
approval or the frequency with which any such product candidate is prescribed or used.
As noted above, the marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and
third-party payors fail to provide coverage and reimbursement. Obtaining coverage and reimbursement for newly approved drugs is a time-consuming and
costly process, and coverage may be more limited than the purposes for which a drug is approved by the FDA or comparable foreign regulatory authorities.
Assuming coverage is obtained for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require
co-payments that patients find unacceptably high. Patients who are prescribed medications for the treatment of their conditions, and their prescribing
physicians, generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs. Patients are unlikely to use
products unless coverage is provided, and reimbursement is adequate to cover all or a significant portion of the cost of prescribed products.
An increasing emphasis on cost containment measures in the United States has increased and we expect will continue to increase the pressure on
pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement
status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be
implemented in the future.
In addition, in most foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements
governing drug pricing and reimbursement vary widely from country to country. For example, the European Union provides options for its member states
to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal
products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect
controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls
or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products.
Historically, products launched in the European Union do not follow price structures of the United States and generally prices tend to be significantly
lower.
Employees
As of March 10, 2020, we had 49 full-time employees, including 32 employees engaged in research and development. We have no collective
bargaining agreements with our employees and we have not experienced any work stoppages. We consider our relations with our employees to be good.
Corporate Information
We were incorporated in Delaware in April 2014. The Company’s website address is www.surfaceoncology.com. The Company’s annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Exchange Act are available free of charge through the Financial Information – SEC Filings section of its website, as soon as reasonably
practicable after the reports are electronically filed or furnished with the SEC. The SEC maintains a file that contains these reports as well as proxy
statements and other information regarding issuers that file electronically. The SEC’s website is www.sec.gov. The Company’s website and its contents are
not deemed incorporated by reference into this report.
32
Item 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other
information in this Annual Report on Form 10-K, including our financial statements and the related notes and “Management’s Discussion and Analysis of
Results of Operations and Financial Condition,” before deciding whether to invest in our common stock. The occurrence of any of the events or
developments described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the market price
of our common stock could decline, and you may lose all or part of your investment.
Risks Related To Our Financial Position And Need For Additional Capital
We are a clinical-stage biopharmaceutical company with a limited operating history. We have incurred significant losses since inception. We expect to
incur losses for at least the next several years and may never achieve or maintain profitability.
Since inception, we have incurred significant net losses. Our net losses were $54.8 million, $6.6 million, and $45.4 million for the years ended
December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019 we had an accumulated deficit of $121.6 million. We have funded our
operations to date primarily with proceeds from the sale of preferred stock and upfront fees received in connection with our collaboration with Novartis
Institutes for Biomedical Research, Inc., or Novartis. To date, we have devoted substantially all of our resources to organizing and staffing our company,
business planning, raising capital, acquiring and discovering development programs, securing related intellectual property rights and conducting discovery,
research and development activities for our programs. We have not yet demonstrated our ability to successfully complete any clinical trials, including
pivotal clinical trials, obtain marketing approvals, manufacture a commercial-scale product, or arrange for a third party to do so on our behalf, or conduct
sales and marketing activities necessary for successful product commercialization. We expect that it will be several years, if ever, before we have a
commercialized product. We expect to continue to incur significant expenses and operating losses for the foreseeable future. The net losses we incur may
fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if, and as, we:
•
•
•
•
•
pursue the clinical development of product candidates;
leverage our programs to advance product candidates into preclinical and clinical development;
seek regulatory approvals for any product candidates that successfully complete clinical trials;
hire additional clinical, quality control and scientific personnel;
expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development,
manufacturing and commercialization efforts and our operations as a public company;
• maintain, expand and protect our intellectual property portfolio;
•
•
establish a sales, marketing, medical affairs and distribution infrastructure to commercialize any products for which we may obtain marketing
approval and intend to commercialize on our own or jointly; and
acquire or in-license other product candidates and technologies.
To become and remain profitable, we, Novartis or any potential future collaborator must develop and eventually commercialize products with
significant market potential. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical
trials, obtaining marketing approval for product candidates, manufacturing, marketing and selling products for which we may obtain marketing approval
and satisfying any post-marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenue
that is significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise
capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could
cause you to lose all or part of your investment.
33
We have never generated revenue from product sales and may never be profitable.
Our ability to generate revenue from product sales and achieve profitability depends on our ability, alone or with our collaborative partners, to
successfully complete the development of, and obtain the regulatory approvals necessary to commercialize, our development programs. We do not
anticipate generating revenue from product sales for the next several years, if ever. Our ability to generate future revenue from product sales depends
heavily on our, Novartis’, or any potential future collaborators’ success in:
•
•
•
•
•
•
•
•
completing clinical and preclinical development of product candidates and programs and identifying and developing new product candidates;
seeking and obtaining marketing approvals for any product candidates that we develop;
launching and commercializing product candidates for which we obtain marketing approval by establishing a sales force, marketing, medical
affairs and distribution infrastructure or, alternatively, collaborating with a commercialization partner;
achieving adequate coverage and reimbursement by hospitals, government and third-party payors for product candidates that we develop;
establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate, in both amount and quality,
products and services to support clinical development and the market demand for product candidates that we develop, if approved;
obtaining market acceptance of product candidates that we develop as viable treatment options;
addressing any competing technological and market developments;
negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter and performing our obligations in
such collaborations;
• maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how;
•
•
defending against third-party interference or infringement claims, if any; and
attracting, hiring and retaining qualified personnel.
Even if one or more of the product candidates that we develop is approved for commercial sale, we anticipate incurring significant costs
associated with commercializing any approved product candidate. Our expenses could increase beyond expectations if we are required by the U.S. Food
and Drug Administration, or the FDA, the European Medicines Agency, or the EMA, or other regulatory agencies to perform clinical trials or studies in
addition to those that we currently anticipate. Even if we are able to generate revenue from the sale of any approved products, we may not become
profitable and may need to obtain additional funding to continue operations.
We will require substantial additional financing, which may not be available on acceptable terms, or at all. A failure to obtain this necessary capital
when needed could force us to delay, limit, reduce or terminate our product development or commercialization efforts.
Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to continue the
preclinical and clinical development of our current and future programs. If we are able to gain marketing approval for product candidates that we develop,
including SRF617 and SRF388, we will require significant additional amounts of cash in order to launch and commercialize such product candidates to the
extent that such launch and commercialization are not the responsibility of Novartis or another collaborator that we may contract with in the future. In
addition, other unanticipated costs may arise. Because the design and outcome of our planned and anticipated clinical trials is highly uncertain, we cannot
reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of any product candidate we develop.
Our future capital requirements depend on many factors, including:
•
•
•
the scope, progress, results and costs of researching and developing our product candidates and programs, and of conducting preclinical
studies and clinical trials;
the timing of, and the costs involved in, obtaining marketing approvals for our current product candidates and any future product candidates
we develop if clinical trials are successful;
the success of our collaboration with Novartis;
34
•
•
•
•
•
•
•
the cost of commercialization activities for our current product candidates and any product candidates we develop, whether alone or with a
collaborator, if any product candidate we develop is approved for sale, including marketing, sales and distribution costs;
the cost of manufacturing our current product candidates for clinical trials in preparation for marketing approval and in preparation for
commercialization;
our ability to establish and maintain strategic licensing or other arrangements and the financial terms of such agreements;
the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs
and the outcome of such litigation;
the timing, receipt and amount of sales of, or royalties on, our future products, if any;
the emergence of competing cancer therapies and other adverse market developments; and
the requirement for, and cost of, developing complementary diagnostics and/or companion diagnostics.
We do not have any committed external source of funds or other support for our development efforts. Until we can generate sufficient product and
royalty revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs through a combination of public or
private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. Based
on our research and development plans, we expect that the net proceeds from our initial public offering and the concurrent private placement, together with
our existing cash, cash equivalents and marketable securities, will enable us to fund our operating expenses, debt service obligations and capital
expenditure requirements into 2022.
If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing
arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or
research programs or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the
terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Further, to the extent that we raise
additional capital through the sale of common stock or securities convertible or exchangeable into common stock, your ownership interest will be diluted.
If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or
restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to
obtain additional funding on favorable terms when needed, we may have to delay, reduce the scope of or suspend one or more of our research and
development programs or clinical trials.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes has been limited by “ownership changes” and may be further
limited.
We have incurred substantial losses during our history. As of December 31, 2019, we had federal and state net operating loss carryforwards of
$71.5 million and $73.0 million, respectively. We do not anticipate generating revenue from sales of products for the foreseeable future, if ever, and we
may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income,
if any, until such unused losses expire. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, and corresponding provisions of
state law, if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage points change (by value) in its equity
ownership over a rolling three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax
attributes to offset its post-change income may be limited. We have in the past experienced, and we may in the future experience ownership changes, some
of which are outside our control. Use of our federal and state net operating loss carryforwards has been limited and could be further limited if we
experience additional ownership changes, which could have an adverse effect on our future results of operations.
Our Loan and Security Agreement contains restrictive and financial covenants that may limit our operating flexibility.
Our Loan and Security Agreement, the Loan and Security Agreement, with K2 HealthVentures LLC, or K2 Health Ventures, contains certain
restrictive covenants that either limit our ability to, or require a mandatory prepayment in the event that, we engage in new lines of business, incur
additional indebtedness or liens, make certain investments, make certain payments, pay cash dividends, merge with other companies or consummate certain
changes of control, acquire other companies, transfer or dispose of certain assets, liquidate or dissolve, amend certain material agreements, enter into
various other specified transactions, executive office or executive management without notice. We, therefore, may not be able to
35
engage in any of the foregoing transactions unless we obtain the consent of K2 Health Ventures or prepay the outstanding amount under the Loan and
Security Agreement. Our obligations under the Credit Agreement are secured by all of our property, with certain exceptions. We may not be able to
generate sufficient cash flow to pay the principal and interest under the Loan and Security Agreement.
Risks Related To Product Development And Regulatory Process
If we are unable to advance our current or future product candidates through clinical trials, obtain marketing approval and ultimately commercialize
any product candidates we develop, or experience significant delays in doing so, our business will be materially harmed.
We are early in our development efforts. One of our product candidates, NZV930 (formerly SRF373), is being investigated in ongoing Phase 1
clinical trials, and we recently received IND clearance for SRF617 and SRF388. The rest of our product candidates are all in preclinical development. We
have invested substantially all of our efforts and financial resources into our clinical studies as well as the identification of targets and preclinical
development of antibodies.
Our ability to generate product revenues, which we do not expect will occur for several years, if ever, will depend heavily on the successful
development and eventual commercialization of the product candidates we develop, which may never occur. Our current product candidates, and any future
product candidates we develop, will require additional preclinical and clinical development, management of clinical, preclinical and manufacturing
activities, marketing approval in the United States and other markets, demonstrating effectiveness to pricing and reimbursement authorities, obtaining
sufficient manufacturing supply for both clinical development and commercial production, building of a commercial organization, and substantial
investment and significant marketing efforts before we generate any revenues from product sales. The success of our current and future product candidates
will depend on several factors, including the following:
•
•
•
•
•
•
•
•
•
•
•
•
successful completion of clinical trials and preclinical studies;
sufficiency of our financial and other resources to complete the necessary preclinical studies and clinical trials;
acceptance of INDs for our planned clinical trials or future clinical trials;
successful enrollment and completion of clinical trials;
successful data from our clinical program that supports an acceptable risk-benefit profile of our product candidates in the intended
populations;
receipt of regulatory and marketing approvals from applicable regulatory authorities;
receipt and maintenance of marketing approvals from applicable regulatory authorities;
establishing agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product
candidate is approved;
entry into collaborations to further the development of our product candidates;
obtaining and maintaining patent and trade secret protection or regulatory exclusivity for our product candidates;
successfully launching commercial sales of our product candidates, if and when approved;
acceptance of the product candidate’s benefits and uses, if and when approved, by patients, the medical community and third-party payors;
• maintaining a continued acceptable safety profile of the product candidates following approval;
•
•
•
effectively competing with other therapies;
obtaining and maintaining healthcare coverage and adequate reimbursement from third-party payors; and
enforcing and defending intellectual property rights and claims.
If we are not successful with respect to one or more of these factors in a timely manner or at all, we could experience significant delays or an
inability to successfully commercialize the product candidates we develop, which would materially harm our business. If we do not receive marketing
approvals for any of our product candidates that we develop, we may not be able to continue our operations.
36
Preclinical development is uncertain. Our preclinical programs may experience delays or may never advance to clinical trials, which would adversely
affect our ability to obtain regulatory approvals or commercialize these programs on a timely basis or at all, which would have an adverse effect on our
business.
In order to obtain FDA approval to market a new biological product we must demonstrate proof of safety, purity and potency or efficacy in
humans. To meet these requirements, we will have to conduct adequate and well-controlled clinical trials. Before we can commence clinical trials for a
product candidate, we must complete extensive preclinical testing and studies that support our planned INDs in the United States. We cannot be certain of
the timely completion or outcome of our preclinical testing and studies and cannot predict if the FDA will accept our proposed clinical programs or if the
outcome of our preclinical testing and studies will ultimately support the further development of our programs. As a result, we cannot be sure that we will
be able to submit INDs or similar applications for our preclinical programs on the timelines we expect, if at all, and we cannot be sure that submission of
INDs or similar applications will result in the FDA or other regulatory authorities allowing clinical trials to begin.
Conducting preclinical testing is a lengthy, time-consuming and expensive process. The length of time may vary substantially according to the
type, complexity and novelty of the program, and often can be several years or more per program. Delays associated with programs for which we are
directly conducting preclinical testing and studies may cause us to incur additional operating expenses. Moreover, we may be affected by delays associated
with the preclinical testing and studies of programs that are the responsibility of Novartis or our potential future partners over which we have no control.
The commencement and rate of completion of preclinical studies and clinical trials for a product candidate may be delayed by many factors, including, for
example:
•
•
•
inability to generate sufficient preclinical or other in vivo or in vitro data to support the initiation of clinical studies;
delays in reaching a consensus with regulatory agencies on study design; and
the FDA not allowing us to rely on previous findings of safety and efficacy for other similar but approved products and published scientific
literature.
Moreover, even if clinical trials do begin for our preclinical programs, our development efforts may not be successful, and clinical trials that we
conduct or that third parties conduct on our behalf may not demonstrate sufficient safety, purity and potency or efficacy to obtain the requisite regulatory
approvals for any of product candidates we develop. Even if we obtain positive results from preclinical studies or initial clinical trials, we may not achieve
the same success in future trials.
The regulatory approval processes of the FDA, the EMA and comparable foreign authorities are lengthy, time-consuming and inherently
unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.
The time required to obtain approval by the FDA, the EMA and comparable foreign authorities is unpredictable but typically takes many years
following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In
addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product
candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible
that none of our current or future product candidates will ever obtain regulatory approval.
Our current and future product candidates could fail to receive regulatory approval for many reasons, including the following:
•
the FDA, the EMA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical trials;
• we may be unable to demonstrate to the satisfaction of the FDA, the EMA or comparable foreign regulatory authorities that a product
candidate is safe, pure and potent or effective for its proposed indication;
•
the results of clinical trials may not meet the level of statistical significance required by the FDA, the EMA or comparable foreign regulatory
authorities for approval;
• we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
•
the FDA, the EMA or comparable foreign regulatory authorities may disagree with our interpretation of data from clinical trials or preclinical
studies;
37
•
•
•
the data collected from clinical trials of our product candidates may not be sufficient to support the submission of a Biologics License
Application, or BLA, to the FDA or other submission or to obtain regulatory approval in the United States, the European Union or elsewhere;
the FDA, the EMA or comparable foreign regulatory authorities may find deficiencies with or fail to approve the manufacturing processes or
facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and
the approval policies or regulations of the FDA, the EMA or comparable foreign regulatory authorities may significantly change in a manner
rendering our clinical data insufficient for approval.
This lengthy approval process as well as the unpredictability of clinical trial results may result in our failing to obtain regulatory approval to
market any product candidate we develop, which would significantly harm our business, results of operations and prospects. The FDA, the EMA and other
comparable foreign authorities have substantial discretion in the approval process and determining when or whether regulatory approval will be obtained
for any product candidate that we develop. Even if we believe the data collected from future clinical trials of our product candidates are promising, such
data may not be sufficient to support approval by the FDA, the EMA or any other regulatory authority.
In addition, even if we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited
indications than we request, may not approve the price we intend to charge for our products, may grant approval contingent on the performance of costly
post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the
successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product
candidates.
Further, we have not previously submitted a BLA to the FDA, or a Marketing Authorization Application, or MAA, to the EMA. We cannot be
certain that any of our programs will be successful in clinical trials or receive regulatory approval. Further, product candidates we develop may not receive
regulatory approval even if they are successful in clinical trials. If we do not receive regulatory approvals for our product candidates, we may not be able to
continue our operations.
Clinical product development involves a lengthy and expensive process, with uncertain outcomes. We may experience delays in completing, or
ultimately be unable to complete, the development and commercialization of our current and future product candidates.
To obtain the requisite regulatory approvals to commercialize any of our product candidates, we must demonstrate through extensive preclinical
studies and clinical trials that our products are safe, pure and potent or effective in humans. Clinical testing is expensive and can take many years to
complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process and our future clinical trial results may not
be successful.
We may experience delays in completing our clinical trials or preclinical studies and initiating or completing additional clinical trials. We may
also experience numerous unforeseen events during our clinical trials that could delay or prevent our ability to receive marketing approval or
commercialize the product candidates we develop, including:
•
regulators or Institutional Review Boards, or IRBs, or ethics committees may not authorize us or our investigators to commence a clinical trial
or conduct a clinical trial at a prospective trial site;
• we may experience delays in reaching, or fail to reach, agreement on acceptable terms with prospective trial sites and prospective contract
research organizations, or CROs;
the number of patients required for clinical trials may be larger than we anticipate;
it may be difficult to enroll a sufficient number of patients with a predictive biomarker or enrollment in these clinical trials may be slower than
we anticipate, or participants may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than we
anticipate;
our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or
at all, or may deviate from the clinical trial protocol or drop out of the trial, which may require that we add new clinical trial sites or
investigators; and
the supply or quality of materials for product candidates we develop or other materials necessary to conduct clinical trials may be insufficient
or inadequate.
•
•
•
•
38
We could encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being
conducted or ethics committees, by the Data Safety Monitoring Board, or DSMB, for such trial or by the FDA or other regulatory authorities. Such
authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with
regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting
in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product, changes in
governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Many of the factors that cause, or lead to, a
delay in the commencement or completion of clinical trials may also ultimately lead to the denial of marketing approval of our product candidates.
If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our
product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. In addition, any
delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our
ability to commence product sales and generate revenues. Significant clinical trial delays could also allow our competitors to bring products to market
before we do or shorten any periods during which we have the exclusive right to commercialize our product candidates and impair our ability to
commercialize our product candidates and may harm our business and results of operations.
Any of these occurrences may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or
lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates
or result in the development of our product candidates being stopped early.
The results of early-stage clinical trials and preclinical studies may not be predictive of future results. Initial success in our ongoing clinical trials may
not be indicative of results obtained when these trials are completed or in later stage trials.
The results of preclinical studies may not be predictive of the results of clinical trials, and the results of any early-stage clinical trials we
commence may not be predictive of the results of the later-stage clinical trials. In addition, initial success in clinical trials may not be indicative of results
obtained when such trials are completed. There can be no assurance that any of our current or future clinical trials will ultimately be successful or support
further clinical development of any of our product candidates. There is a high failure rate for drugs and biologics proceeding through clinical trials. A
number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in clinical development even after achieving
promising results in earlier studies, and any such setbacks in our clinical development could have a material adverse effect on our business and operating
results.
We expect that we will need to develop, or enter into a collaboration or partnership to develop, complementary diagnostics and/or companion
diagnostics for our current or future product candidates. If we, or our future collaborators, are unable to successfully develop such companion
diagnostics or complementary diagnostics, or experience significant delays in doing so, we may not realize the full commercial potential of our future
product candidates.
As one of the key elements of our product development strategy, we seek to identify cancer patient populations who may derive meaningful
benefit from our current or future product candidates. Because predictive biomarkers may be used to identify the right patients for our programs and our
current or future product candidates, we believe that our success may depend, in part, on our ability to develop complementary diagnostics and/or
companion diagnostics in collaboration with partners.
We have little experience in the development of diagnostics and, as such, we expect to rely on future collaborators in developing appropriate
diagnostics to pair with our current or future product candidates. We have not yet begun discussions with any potential partners with respect to the
development of complementary diagnostics and/or companion diagnostics and may be unsuccessful in entering into collaborations for the development of
companion diagnostics for our programs and our current or future product candidates.
39
Complementary diagnostics and/or companion diagnostics are subject to regulation by the FDA and similar regulatory authorities outside the
United States as medical devices and require separate regulatory approval or clearance prior to commercialization. If we, our collaborators, or any third
parties that we engage to assist us, are unable to successfully develop complementary diagnostics and/or companion diagnostics for our product candidates
and any future product candidates, or experience delays in doing so:
•
the development of our product candidates and any other future product candidates may be adversely affected if we are unable to appropriately
select patients for enrollment in our clinical trials; and
• we may not realize the full commercial potential of our product candidates and any other future product candidates that receive marketing
approval if, among other reasons, we are unable to appropriately identify, or it takes us longer to identify, patients who are likely to benefit
from therapy with our products, if approved.
If any of these events were to occur, our business would be harmed, possibly materially.
If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise be adversely
affected.
The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient
number of patients who remain in the trial until its conclusion. We may experience difficulties in patient enrollment in our clinical trials for a variety of
reasons. The enrollment of patients depends on many factors, including:
•
•
•
•
•
•
•
•
•
the patient eligibility criteria defined in the protocol;
our ability to enroll a sufficient number of patients with a predictive biomarker, if any;
the size of the patient population required for analysis of the trial’s primary endpoints;
the proximity of patients to study sites;
the design of the trial;
our ability to recruit clinical trial investigators with the appropriate competencies and experience;
clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available
therapies, including any new products that may be approved for the indications we are investigating;
our ability to obtain and maintain patient consents for participation in our clinical trials and, where appropriate, biopsies for future patient
enrichment efforts; and
the risk that patients enrolled in clinical trials will drop out of the trials before completion or, because they are late-stage cancer patients, will
not survive the full terms of the clinical trials.
In addition, our clinical trials will compete with other clinical trials for product candidates that are in the same therapeutic areas as our current and
potential future product candidates. This competition will reduce the number and types of patients available to us, because some patients who might have
opted to enroll in our trials may instead opt to enroll in a trial conducted by one of our competitors. Since the number of qualified clinical investigators is
limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of
patients who are available for our clinical trials at such sites. Moreover, because our current and potential future product candidates may represent a
departure from more commonly used methods for cancer treatment, potential patients and their doctors may be inclined to use conventional therapies, such
as chemotherapy, rather than enroll patients in our ongoing or any future clinical trial.
Delays in patient enrollment may result in increased costs or may affect the timing or outcome of clinical trials, which could prevent completion
of these trials and adversely affect our ability to advance the development of the product candidates we develop.
40
Our current or future product candidates may cause undesirable side effects or have other properties when used alone or in combination with other
approved products or investigational new drugs that could halt their clinical development, prevent their marketing approval, limit their commercial
potential or result in significant negative consequences.
Undesirable or clinically unmanageable side effects could occur and cause us or regulatory authorities to interrupt, delay or halt clinical trials and
could result in a more restrictive label or the delay or denial of marketing approval by the FDA or comparable foreign regulatory authorities. Results of our
trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics.
If unacceptable toxicities or other undesirable side effects arise in the development of any of our current or future product candidates, we or our
collaborators could suspend or terminate our trials, or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny
approval of the product candidate for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or the ability of
enrolled subjects to complete the trial, or result in potential product liability claims. Any of these occurrences may prevent us from achieving or
maintaining market acceptance of the affected product candidate and may harm our business, financial condition and prospects significantly.
Although our current and future product candidates have undergone and will undergo safety testing to the extent possible and, where applicable,
under such conditions discussed with regulatory authorities, not all adverse effects of drugs can be predicted or anticipated. Immunotherapy, and its method
of action of harnessing the body’s immune system, is powerful and could lead to serious side effects that we only discover in clinical trials. Unforeseen side
effects could arise either during clinical development or, if such side effects are rarer, after our products have been approved by regulatory authorities and
the approved product has been marketed, resulting in the exposure of additional patients. So far, we have not demonstrated that any of our product
candidates are safe in humans, and we cannot predict if ongoing or future clinical trials will do so. If any of our current or future product candidates fail to
demonstrate safety and efficacy in clinical trials or do not gain marketing approval, we will not be able to generate revenue and our business will be
harmed.
Even if we complete the necessary preclinical studies and clinical trials, the marketing approval process is expensive, time-consuming and uncertain
and may prevent us or any of our existing or future collaboration partners from obtaining approvals for the commercialization of any product
candidate we develop.
Any current or future product candidate we may develop and the activities associated with their development and commercialization, including
their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale, and distribution, are subject to
comprehensive regulation by the FDA and other regulatory authorities in the United States and by comparable authorities in other countries. Failure to
obtain marketing approval for a product candidate will prevent us from commercializing the product candidate in a given jurisdiction. We have not received
approval to market any product candidates from regulatory authorities in any jurisdiction and it is possible that none of the product candidates we may seek
to develop in the future will ever obtain regulatory approval. We have no experience in filing and supporting the applications necessary to gain marketing
approvals and expect to rely on third-party CROs or regulatory consultants to assist us in this process. Securing regulatory approval requires the submission
of extensive preclinical and clinical data and supporting information to the various regulatory authorities for each therapeutic indication to establish the
biologic product candidate’s safety, purity, efficacy and potency. Securing regulatory approval also requires the submission of information about the
product manufacturing process to, and inspection of manufacturing facilities by, the relevant regulatory authority. Any product candidates we develop may
not be effective, may be only moderately effective, or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may
preclude our obtaining marketing approval or prevent or limit commercial use.
The process of obtaining marketing approvals, both in the United States and abroad, is expensive, may take many years if additional clinical trials
are required, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity, and novelty of the
product candidates involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or
regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. The
FDA and comparable authorities in other countries have substantial discretion in the approval process and may refuse to accept any application or may
decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data
obtained from preclinical and clinical testing could delay, limit, or prevent marketing approval of a product candidate. Any marketing approval we
ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable.
If we experience delays in obtaining approval or if we fail to obtain approval of any current or future product candidates we may develop, the
commercial prospects for those product candidates may be harmed, and our ability to generate revenues will be materially impaired.
41
Obtaining and maintaining marketing approval of our current and future product candidates in one jurisdiction does not mean that we will be
successful in obtaining marketing approval of our current and future product candidates in other jurisdictions.
Obtaining and maintaining marketing approval of our current and future product candidates in one jurisdiction does not guarantee that we will be
able to obtain or maintain marketing approval in any other jurisdiction, while a failure or delay in obtaining marketing approval in one jurisdiction may
have a negative effect on the marketing approval process in others. For example, even if the FDA grants marketing approval of a product candidate,
comparable regulatory authorities in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those
countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than,
those in the United States, including additional preclinical studies or clinical trials as clinical studies conducted in one jurisdiction may not be accepted by
regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a product candidate must be approved for reimbursement
before it can be approved for sale in that jurisdiction. In some cases, the price that we intend to charge for our products is also subject to approval.
We may also submit marketing applications in other countries. Regulatory authorities in jurisdictions outside of the United States have
requirements for approval of product candidates with which we must comply prior to marketing in those jurisdictions. Obtaining foreign marketing
approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the
introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international markets and/or receive applicable
marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed.
Adverse events in the field of immuno-oncology could damage public perception of our current or future product candidates and negatively affect our
business.
The commercial success of our products will depend in part on public acceptance of the use of cancer immunotherapies. While a number of
cancer immunotherapies have received regulatory approval and are being commercialized, our approach to targeting different components of the tumor
microenvironment is novel and unproven. Adverse events in clinical trials our product candidates or in clinical trials of others developing similar products
and the resulting publicity, as well as any other adverse events in the field of immuno-oncology that may occur in the future, could result in a decrease in
demand for any product that we may develop. If public perception is influenced by claims that the use of cancer immunotherapies is unsafe, whether related
to our therapies or those of our competitors, our products may not be accepted by the general public or the medical community.
Future adverse events in immuno-oncology or the biopharmaceutical industry could also result in greater governmental regulation, stricter
labeling requirements and potential regulatory delays in the testing or approvals of our products. Any increased scrutiny could delay or increase the costs of
obtaining marketing approval for the product candidates we develop.
42
Even if we receive marketing approval of a product candidate, we will be subject to ongoing regulatory obligations and continued regulatory review,
which may result in significant additional expense and we may be subject to penalties if we fail to comply with regulatory requirements or experience
unanticipated problems with our products, if approved.
Any marketing approvals that we receive for any current or future product candidate may be subject to limitations on the approved indicated uses
for which the product may be marketed or the conditions of approval, or contain requirements for potentially costly post-market testing and surveillance to
monitor the safety and efficacy of the product candidate. The FDA may also require a Risk Evaluation and Mitigation Strategy, or REMS, as a condition of
approval of any product candidate, which could include requirements for a medication guide, physician communication plans or additional elements to
ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if the FDA or a comparable foreign
regulatory authority approves a product candidate, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage,
advertising, promotion, import and export and record keeping for the product candidate will be subject to extensive and ongoing regulatory requirements.
These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with
current Good Manufacturing Practice, or cGMP, and Good Clinical Practice, or GCP, for any clinical trials that we conduct post-approval. Later discovery
of previously unknown problems with any approved candidate, including adverse events of unanticipated severity or frequency, or with our third-party
manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
•
•
•
•
•
restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or product recalls;
fines, untitled and warning letters, or holds on clinical trials;
refusal by the FDA to approve pending applications or supplements to approved applications we filed or suspension or revocation of license
approvals;
product seizure or detention, or refusal to permit the import or export of the product; and
injunctions or the imposition of civil or criminal penalties.
The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit
or delay marketing approval of a product. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation
or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new
requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we
may not achieve or sustain profitability.
Even if a current or future product candidate receives marketing approval, it may fail to achieve the degree of market acceptance by physicians,
patients, third-party payors and others in the medical community necessary for commercial success.
If any current or future product candidate we develop receives marketing approval, whether as a single agent or in combination with other
therapies, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors, and others in the medical community. For
example, current approved immunotherapies, and other cancer treatments like chemotherapy and radiation therapy, are well established in the medical
community, and doctors may continue to rely on these therapies. If the product candidates we develop do not achieve an adequate level of acceptance, we
may not generate significant product revenues and we may not become profitable. The degree of market acceptance of any product candidate, if approved
for commercial sale, will depend on a number of factors, including:
•
•
•
•
•
•
•
•
efficacy and potential advantages compared to alternative treatments;
the ability to offer our products, if approved, for sale at competitive prices;
convenience and ease of administration compared to alternative treatments;
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
the strength of marketing and distribution support;
the ability to obtain sufficient third-party coverage and adequate reimbursement, including with respect to the use of the approved product as a
combination therapy;
adoption of a companion diagnostic and/or complementary diagnostic; and
the prevalence and severity of any side effects.
43
The market opportunities for any current or future product candidate we develop, if and when approved, may be limited to those patients who are
ineligible for established therapies or for whom prior therapies have failed, and may be small.
Cancer therapies are sometimes characterized as first-line, second-line, or third-line, and the FDA often approves new therapies initially only for
third-line use. When cancer is detected early enough, first-line therapy, usually chemotherapy, hormone therapy, surgery, radiation therapy or a combination
of these, is sometimes adequate to cure the cancer or prolong life without a cure. Second- and third-line therapies are administered to patients when prior
therapy is not effective. We expect to initially seek approval of any product candidates we develop as a therapy for patients who have received one or more
prior treatments. Subsequently, for those products that prove to be sufficiently beneficial, if any, we would expect to seek approval potentially as a first-line
therapy, but there is no guarantee that product candidates we develop, even if approved, would be approved for first-line therapy, and, prior to any such
approvals, we may have to conduct additional clinical trials.
The number of patients who have the cancers we are targeting may turn out to be lower than expected. Additionally, the potentially addressable
patient population for our current programs or future product candidates may be limited, if and when approved. Even if we obtain significant market share
for any product candidate, if and when approved, if the potential target populations are small, we may never achieve profitability without obtaining
marketing approval for additional indications, including to be used as first- or second-line therapy.
We expect to develop our product candidates in combination with other therapies, which exposes us to additional risks.
We intend to develop our product candidates in combination with one or more currently approved cancer therapies. Even if any product candidate
we develop were to receive marketing approval or be commercialized for use in combination with other existing therapies, we would continue to be subject
to the risks that the FDA or similar regulatory authorities outside of the United States could revoke approval of the therapy used in combination with our
product candidate or that safety, efficacy, manufacturing or supply issues could arise with these existing therapies. Combination therapies are commonly
used for the treatment of cancer, and we would be subject to similar risks if we develop any of our product candidates for use in combination with other
drugs or for indications other than cancer. This could result in our own products being removed from the market or being less successful commercially.
We may also evaluate our product candidates in combination with one or more other cancer therapies that have not yet been approved for
marketing by the FDA or similar regulatory authorities outside of the United States. We will not be able to market and sell any product candidate we
develop in combination with any such unapproved cancer therapies that do not ultimately obtain marketing approval.
If the FDA or similar regulatory authorities outside of the United States do not approve these other drugs or revoke their approval of, or if safety,
efficacy, manufacturing, or supply issues arise with, the drugs we choose to evaluate in combination with any product candidate we develop, we may be
unable to obtain approval of or market any product candidate we develop.
We face significant competition and if our competitors develop and market products that are more effective, safer or less expensive than the product
candidates we develop, our commercial opportunities will be negatively impacted.
The life sciences industry is highly competitive. We are currently developing therapeutics that will compete, if approved, with other products and
therapies that currently exist or are being developed. Products we may develop in the future are also likely to face competition from other products and
therapies, some of which we may not currently be aware. We have competitors both in the United States and internationally, including major multinational
pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies, universities and other research institutions. Many of
our competitors have significantly greater financial, manufacturing, marketing, product development, technical and human resources than we do. Large
pharmaceutical companies, in particular, have extensive experience in clinical testing, obtaining marketing approvals, recruiting patients and manufacturing
pharmaceutical products. These companies also have significantly greater research and marketing capabilities than we do and may also have products that
have been approved or are in late stages of development, and collaborative arrangements in our target markets with leading companies and research
institutions. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license
novel compounds that could make the product candidates that we develop obsolete. Mergers and acquisitions in the pharmaceutical and biotechnology
industries may result in even more resources being concentrated among a smaller number of our competitors. As a result of all of these factors, our
competitors may succeed in obtaining patent protection and/or marketing approval or discovering, developing and commercializing products in our field
before we do.
44
There are a large number of companies developing or marketing treatments for cancer, including many major pharmaceutical and biotechnology
companies. These treatments consist both of large and small molecule drug products. Our commercial opportunity could be reduced or eliminated if our
competitors develop and commercialize products that are safer, more effective, have fewer or less severe effects, are more convenient, have a broader label,
are marketed more effectively, are reimbursed or are less expensive than any products that we may develop. Our competitors also may obtain FDA, EMA
or other marketing approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a
strong market position before we are able to enter the market. Even if the product candidate we develop achieve marketing approval, they may be priced at
a significant premium over competitive products if any have been approved by then, resulting in reduced competitiveness.
Smaller and other early stage companies may also prove to be significant competitors. These third parties compete with us in recruiting and
retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring
technologies complementary to, or necessary for, our programs. In addition, the biopharmaceutical industry is characterized by rapid technological change.
If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological advances or products developed by our
competitors may render our product candidates obsolete, less competitive or not economical.
Even if we are able to commercialize any product candidates, such products may become subject to unfavorable pricing regulations or third-party
coverage and reimbursement policies, which would harm our business.
The regulations that govern marketing approvals, pricing and reimbursement for new products vary widely from country to country. Some
countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins after marketing
approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial
approval is granted. As a result, we might obtain marketing approval for a product candidate in a particular country, but then be subject to price regulations
that delay our commercial launch of the product candidate, possibly for lengthy time periods, and negatively impact the revenues we are able to generate
from the sale of the product candidate in that country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product
candidates, even if our product candidates obtain marketing approval.
Our ability to commercialize any product candidates, whether as a single agent or combination therapy, successfully also will depend in part on
the extent to which coverage and reimbursement for these product candidates and related treatments will be available from government authorities, private
health insurers and other organizations. Government authorities and other third-party payors, such as private health insurers and health maintenance
organizations, decide which medications they will pay for and establish reimbursement levels. It is difficult to predict at this time what government
authorities and third-party payors will decide with respect to coverage and reimbursement for our programs.
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third-party payors have attempted
to control costs by limiting coverage and the amount of reimbursement for particular products and requiring substitutions of generic products and/or
biosimilars. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are
challenging the prices charged for drugs. We cannot be sure that coverage will be available for any product candidate that we commercialize and, if
coverage is available, the level of reimbursement. These third-party payors are also examining the cost-effectiveness of drugs in addition to their safety and
efficacy.
Reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. If reimbursement is
not available or is available only to limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing
approval.
There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, as the process is time-consuming and costly,
and coverage may be more limited than the purposes for which the drug is approved by the FDA or comparable foreign regulatory authorities. Additionally,
no uniform policy requirement for coverage and reimbursement for drug products exists among third-party payors in the United States, which may result in
coverage and reimbursement for drug products that can differ significantly from payor to payor. Moreover, eligibility for reimbursement does not imply
that any drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim
reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may
vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and
may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by
government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where
45
they may be sold at lower prices than in the United States. For example, on December 18, 2019, President Trump, the U.S. Department of Health and
Human Services, and the FDA issued a notice of proposed rulemaking that, if finalized, would allow for the importation of certain prescription drugs from
Canada. FDA also issued a Draft Guidance document outlining a potential pathway for manufacturers to obtain an additional National Drug Code, or NDC,
for an FDA-approved drug that was originally intended to be marketed in a foreign country and that was authorized for sale in that foreign country. The
regulatory and market implications of the notice of proposed rulemaking and Draft Guidance are unknown at this time, but legislation, regulations or
policies allowing the reimportation of drugs, if enacted and implemented, could decrease the price we receive for our products and adversely affect our
future revenues and prospects for profitability. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own
reimbursement policies. Our inability to promptly obtain coverage and profitable payment rates from both government-funded and private payors for any
approved drugs that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize drugs and
our overall financial condition.
We may not be successful in our efforts to identify or discover other product candidates and may fail to capitalize on programs or product candidates
that may present a greater commercial opportunity or for which there is a greater likelihood of success.
The success of our business depends upon our ability to identify, develop and commercialize product candidates. If we do not successfully
develop and eventually commercialize products, we will face difficulty in obtaining product revenue in future periods, resulting in significant harm to our
financial position and adversely affecting our share price. Research programs to identify new product candidates require substantial technical, financial and
human resources, and we may fail to identify potential product candidates for numerous reasons.
Additionally, because we have limited resources, we may forego or delay pursuit of opportunities with certain programs or product candidates or
for indications that later prove to have greater commercial potential. For example, in December 2018, we announced a significant reduction of the
investment in and scope of our SRF231 program and, based on the reallocation of capital, we prioritized SRF617 and SRF388. However, the advancement
of SRF617 and SRF388 may ultimately prove to be unsuccessful or less successful than another program in our pipeline that we might have chosen to
accelerate with our capital resources. Our estimates regarding the potential market for our product candidates could be inaccurate, and our spending on
current and future research and development programs may not yield any commercially viable products. If we do not accurately evaluate the commercial
potential for a particular product candidate, we may relinquish valuable rights to that product candidate through strategic collaboration, licensing or other
arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product
candidate. For example, we licensed worldwide development and commercialization rights with respect to NZV930 to Novartis and we will receive only
milestone payments and royalties on sales of NZV930, if approved. Alternatively, we may allocate internal resources to a product candidate in a therapeutic
area in which it would have been more advantageous to enter into a partnering arrangement.
If any of these events occur, we may be forced to abandon or delay our development efforts with respect to a particular product candidate or fail to
develop a potentially successful product candidate, which could have a material adverse effect on our business, financial condition, results of operations
and prospects.
We may seek Breakthrough Therapy Designation by the FDA for a product candidate that we develop, and we may be unsuccessful. If we are
successful, the designation may not lead to a faster development or regulatory review or approval process, and it does not increase the likelihood that
our product candidates will receive marketing approval.
We may seek Breakthrough Therapy Designation for any product candidate that we develop. A breakthrough therapy is defined as a drug that is
intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence
indicates that the drug may demonstrate substantial improvement over currently approved therapies on one or more clinically significant endpoints, such as
substantial treatment effects observed early in clinical development. For drugs that have been designated as breakthrough therapies, interaction and
communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the
number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the FDA are also eligible for accelerated approval
and priority review.
46
Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if we believe a product candidate we develop meets
the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. In any event, the receipt
of Breakthrough Therapy Designation for a product candidate may not result in a faster development process, review or approval compared to drugs
considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA. In addition, even if the product candidates
we develop qualify as breakthrough therapies, the FDA may later decide that the drugs no longer meet the conditions for qualification and rescind the
designation.
We may seek Fast Track Designation by the FDA for a product candidate that we develop, and we may be unsuccessful. If we are successful, the
designation may not actually lead to a faster development or regulatory review or approval process.
We may seek Fast Track Designation for the product candidates we develop. If a product is intended for the treatment of a serious or life-
threatening condition and preclinical or clinical data demonstrate the potential to address an unmet medical need for this condition, the product sponsor
may apply for Fast Track Designation. The FDA has broad discretion whether or not to grant this designation, so even if we believe a particular product
candidate is eligible for this designation, we cannot assure you that the FDA would decide to grant it. Even if we do receive Fast Track Designation, we
may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may rescind the Fast Track
Designation if it believes that the designation is no longer supported by data from our clinical development program.
We may seek Orphan Drug Designation for other product candidates we develop, and we may be unsuccessful or may be unable to maintain the
benefits associated with Orphan Drug Designation, including the potential for market exclusivity.
As part of our business strategy, we may seek Orphan Drug Designation for our other product candidates we develop, and we may be
unsuccessful. Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small patient
populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a drug as an orphan drug if it is a drug intended to treat a rare disease or
condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States, or a patient population greater
than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United
States. In the United States, Orphan Drug Designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial
costs, tax advantages and user-fee waivers.
Similarly, in Europe, the European Commission grants Orphan Drug Designation after receiving the opinion of the EMA Committee for Orphan
Medicinal Products on an Orphan Drug Designation application. Orphan Drug Designation is intended to promote the development of drugs that are
intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than 5 in 10,000 persons in
Europe and for which no satisfactory method of diagnosis, prevention, or treatment has been authorized (or the product would be a significant benefit to
those affected). Additionally, designation is granted for drugs intended for the diagnosis, prevention, or treatment of a life-threatening, seriously debilitating
or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in Europe would be sufficient to justify the necessary
investment in developing the drug. In Europe, Orphan Drug Designation entitles a party to a number of incentives, such as protocol assistance and
scientific advice specifically for designated orphan medicines, and potential fee reductions depending on the status of the sponsor.
Generally, if a drug with an Orphan Drug Designation subsequently receives the first marketing approval for the indication for which it has such
designation, the drug is entitled to a period of marketing exclusivity, which precludes the EMA or the FDA from approving another marketing application
for the same drug and indication for that time period, except in limited circumstances. The applicable period is seven years in the United States and ten
years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for Orphan Drug Designation or if the
drug is sufficiently profitable such that market exclusivity is no longer justified.
Even if we obtain orphan drug exclusivity for our product candidates, that exclusivity may not effectively protect our product candidates from
competition because different therapies can be approved for the same condition and the same therapies can be approved for different conditions but used
off-label. Even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the
later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. In addition, a designated orphan
drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation.
Moreover, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was
materially defective or if the manufacturer is unable to assure sufficient
47
quantity of the drug to meet the needs of patients with the rare disease or condition. Orphan Drug Designation neither shortens the development time or
regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process. While we may seek Orphan Drug
Designation for applicable indications for our current and any future product candidates, we may never receive such designations. Even if we do receive
such designations, there is no guarantee that we will enjoy the benefits of those designations.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of any approved
products.
We face an inherent risk of product liability as a result of the clinical testing of product candidates and will face an even greater risk if we
commercialize any products. For example, we may be sued if any product candidate we develop causes or is perceived to cause injury or are found to be
otherwise unsuitable during clinical testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in
manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could
also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial
liabilities or be required to limit commercialization of any approved products. Even successful defense would require significant financial and management
resources. Regardless of the merits or eventual outcome, liability claims may result in:
•
•
decreased demand for any approved product;
injury to our reputation;
• withdrawal of clinical trial participants;
•
•
•
•
•
•
•
•
•
initiation of investigations by regulators;
costs to defend the related litigation;
a diversion of management’s time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue;
exhaustion of any available insurance and our capital resources;
the inability to commercialize any product candidate; and
a decline in our share price.
Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent
or inhibit the commercialization of products we develop, alone or with corporate collaborators.
Insurance coverage is increasingly expensive. We may not be able to maintain insurance at a reasonable cost or in an amount adequate to satisfy
any liability that may arise, if at all. Our insurance policy contains various exclusions, and we may be subject to a product liability claim for which we have
no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered
by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Even if our agreements with Novartis or any future
corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.
Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.
In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March
2010, the Affordable Care Act, or the ACA, was passed, which substantially changed the way healthcare is financed by both governmental and private
insurers, and significantly impacts the U.S. pharmaceutical industry. The ACA, among other things, subjects biological products to potential competition by
lower-cost biosimilars, addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for
drugs that are inhaled, infused, instilled, implanted or injected, increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug
Rebate Program and extends the rebate program to individuals enrolled in Medicaid
48
managed care organizations, establishes annual fees and taxes on manufacturers of certain branded prescription drugs, and creates a new Medicare Part D
coverage gap discount program, in which manufacturers must agree to offer 70% (as of January 1, 2019) point-of-sale discounts off negotiated prices of
applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under
Medicare Part D.
The ACA has faced numerous judicial, administrative, executive, and legislative challenges, and we expect there will be additional challenges and
amendments to the ACA in the future. Various portions of the ACA are currently undergoing legal and constitutional challenges in the Fifth Circuit Court
and the United States Supreme Court; the Trump Administration has issued various Executive Orders which eliminated cost sharing subsidies and various
provisions that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers,
or manufacturers of pharmaceuticals or medical devices; and Congress has introduced several pieces of legislation aimed at significantly revising or
repealing the ACA. It is unclear whether the ACA will be overturned, repealed, replaced, or further amended. We cannot predict what affect further
changes to the ACA would have on our business.
Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. On August 2, 2011, the Budget
Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked
with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby
triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of
2% per fiscal year. These reductions went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect
through 2029 unless additional congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which,
among other things, further reduced Medicare payments to several types of providers.
Moreover, payment methodologies may be subject to changes in healthcare legislation and regulatory initiatives. For example, the Middle
Class Tax Relief and Job Creation Act of 2012 required that the Centers for Medicare & Medicaid Services, or CMS, the agency responsible for
administering the Medicare program, reduce the Medicare clinical laboratory fee schedule by 2% in 2013, which served as a base for 2014 and subsequent
years. In addition, effective January 1, 2014, CMS also began bundling the Medicare payments for certain laboratory tests ordered while a patient received
services in a hospital outpatient setting. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which
could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for any
product candidate we develop or complementary diagnostics or companion diagnostics or additional pricing pressures.
Additionally, there has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices.
Specifically, there have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other
things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and
manufacturer patient programs, and reform government program reimbursement methodologies for drugs. The United States government, state legislatures,
and foreign governments have shown significant interest in implementing cost containment programs, including price-controls, restrictions on
reimbursement and requirements for substitution of generic products for branded prescription drugs to limit the growth of government paid health care
costs. For example, the United States government has passed legislation requiring pharmaceutical manufacturers to provide rebates and discounts to certain
entities and governmental payors to participate in federal healthcare programs. Further, Congress and the current administration have each indicated that it
will continue to seek new legislative and/or administrative measures to control drug costs, and the current administration recently released a "Blueprint", or
plan, to reduce the cost of drugs. The current administration’s Blueprint contains certain measures that the U.S. Department of Health and Human Services
has implemented and are working to implement. For example, in May 2019, CMS issued a final rule to allow Medicare Advantage Plans the option of
using step therapy, a type of prior authorization, for Part B drugs beginning January 1, 2020. This final rule codified CMS’s policy change that was
effective January 1, 2019. Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative
measures to control drug costs. Individual states in the United States have also been increasingly passing legislation and implementing regulations designed
to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product
access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk
purchasing.
49
We are subject to certain U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations. We
can face serious consequences for violations.
Among other matters, U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations,
which are collectively referred to as Trade Laws, prohibit companies and their employees, agents, clinical research organizations, legal counsel,
accountants, consultants, contractors, and other partners from authorizing, promising, offering, providing, soliciting, or receiving directly or indirectly,
corrupt or improper payments or anything else of value to or from recipients in the public or private sector. Violations of Trade Laws can result in
substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud
litigation, reputational harm, and other negative consequences. We have direct or indirect interactions with officials and employees of government agencies
or government-affiliated hospitals, universities, and other organizations. We also expect our non-U.S. activities to increase over time. We plan to engage
third parties for clinical trials and/or to obtain necessary permits, licenses, patent registrations, and other regulatory approvals and we can be held liable for
the corrupt or other illegal activities of our personnel, agents, or partners, even if we do not explicitly authorize or have prior knowledge of such activities.
We may fail to comply with evolving European and other privacy laws.
In the event we conduct clinical trials in the European Economic Area, or EEA, we may be subject to additional privacy laws. The General Data
Protection Regulation, (EU) 2016/679, or GDPR, became effective on May 25, 2018, and deals with the processing of personal data and on the free
movement of such data. The GDPR imposes a broad range of strict requirements on companies subject to the GDPR, including requirements relating to
having legal bases for processing personal information relating to identifiable individuals and transferring such information outside the EEA, including to
the United States, providing details to those individuals regarding the processing of their personal information, keeping personal information secure, having
data processing agreements with third parties who process personal information, responding to individuals’ requests to exercise their rights in respect of
their personal information, reporting security breaches involving personal data to the competent national data protection authority and affected individuals,
appointing data protection officers, conducting data protection impact assessments, and record-keeping. The GDPR increases substantially the penalties to
which we could be subject in the event of any non-compliance, including fines of up to 10,000,000 Euros or up to 2% of our total worldwide annual
turnover for certain comparatively minor offenses, or up to 20,000,000 Euros or up to 4% of our total worldwide annual turnover for more serious offenses.
Given the limited enforcement of the GDPR to date, we face uncertainty as to the exact interpretation of the new requirements on our trials and we may be
unsuccessful in implementing all measures required by data protection authorities or courts in interpretation of the new law.
In particular, national laws of member states of the EU are in the process of being adapted to the requirements under the GDPR, thereby
implementing national laws which may partially deviate from the GDPR and impose different obligations from country to country, so we do not expect to
operate in a uniform legal landscape in the EU. Also, as it relates to processing and transfer of genetic data, the GDPR specifically allows national laws to
impose additional and more specific requirements or restrictions, and European laws have historically differed quite substantially in this field, leading to
additional uncertainty. Further On June 23, 2016, the UK held a referendum in which a majority of the eligible members of the electorate voted to leave the
EU. The UK’s withdrawal from the EU is commonly referred to as Brexit. Pursuant to Article 50 of the Treaty on European Union, the UK ceased being a
Member State of the EU on January 31, 2020. However, the terms of the withdrawal have yet to be fully negotiated. The implementation period began
February 1, 2020 and will continue until December 31, 2020. During this 11-month period, the UK will continue to follow all of the EU’s rules and its
trading relationship will remain the same. However, regulations (including data protection laws, health and safety laws and regulations and medicine
licensing and regulations), have yet to be addressed. This lack of clarity on future UK laws and regulations and their interaction with EU laws and
regulations could add legal risk, uncertainty, complexity and cost to our handling of EU personal information and our privacy and data security compliance
programs. It is possible that over time the UK Data Protection Act could become less aligned with the EU General Data Protection Regulation, or GDPR,
which could require us to implement different compliance measures for the UK and the European Union and result in potentially enhanced compliance
obligations for EU personal data. This risk would apply more immediately in the event of a “no-deal” Brexit (including no transition period).
In the event we conduct clinical trials in the EEA, we must also ensure that we maintain adequate safeguards to enable the transfer of personal
data outside of the EEA, in particular to the United States, in compliance with European data protection laws. We expect that we will continue to face
uncertainty as to whether our efforts to comply with our obligations under European privacy laws will be sufficient. In light of Brexit, it is unclear whether
the European Commission, or EC, will grant an adequacy finding to the UK (a finding that the UK privacy legal framework provides an adequate level of
privacy protection to EU individuals). Absent an adequacy finding, transfers of personal data from the EU to the UK would be
50
impermissible without adequate safeguards provided for under EC-approved mechanisms, such as current standard contractual clauses or, if approved in the
future, an EU-UK privacy shield similar to the current framework in place between the EU and the U.S. The extensive authority of UK intelligence and law
enforcement agencies, including to conduct surveillance on personal data flows, could reduce the likelihood that the EC would give the UK an adequacy
finding, and reduce the likelihood that the EC would approve an EU-UK privacy shield. Accordingly, we could be exposed to legal risk for any of our EU-
UK personal data transfers, including those that involve sensitive data such as patient and genetic data.
Risks Related To Reliance On Third Parties
We are fully dependent on our collaboration with Novartis for the development of NZV930 and may depend on additional third parties for the
development and commercialization of our other programs and future product candidates. Our current and future collaborators may control aspects of
our clinical trials, which could result in delays or other obstacles in the commercialization of the product candidates we develop. If our collaborations
are not successful, we may not be able to capitalize on the market potential of these product candidates.
In January 2016, we entered into a strategic collaboration agreement with Novartis, or the Collaboration Agreement, to develop next generation
cancer therapies. Pursuant to the Collaboration Agreement, we granted Novartis a worldwide exclusive license to research, develop, manufacture and
commercialize antibodies that target CD73. In addition, we initially granted Novartis the right to purchase exclusive option rights to up to four specified
targets, including certain research, development, manufacturing and commercialization rights. As of December 31, 2019, Novartis had one Option
remaining eligible for purchase and potential exercise. In January 2020, Novartis did not purchase and exercise its single remaining Option under the
Collaboration Agreement and, as a result, the option purchase period expired. Accordingly, there are no Options remaining eligible for purchase and
exercise by Novartis and our performance obligations under the Collaboration Agreement have ended. The Collaboration Agreement involves a complex
allocation of rights, provides for milestone payments to us based on the achievement of specified clinical development, regulatory and commercial
milestones, provided for additional payments upon Novartis’ election to exercise rights to commercialize additional product candidates, and provides us
with royalty-based revenue if NZV930 is successfully commercialized. Novartis initially had, and any future collaborators could have, substantial ability to
control the development and commercialization of any targets they license. Our lack of control over the clinical development of certain programs with
future collaborators could result in delays or other difficulties in the development and commercialization of product candidates, which may prevent
completion of intended IND filings in a timely fashion, if at all. In particular, Novartis is solely responsible for the development and commercialization of
NZV930 and as such, we are wholly dependent on Novartis for the success of this program. In the event Novartis terminates the Collaboration Agreement,
we would be prevented from receiving any milestone payments, royalty payments and other benefits under that agreement, which would have a materially
adverse effect on our results of operations. Furthermore, as Novartis did not purchase and exercise its last remaining Option, we will not be eligible to
receive any future milestone payments under the Collaboration Agreement, other than from NZV930, which could require us to seek additional funding in
order to avoid further delaying, reducing the scope of, or suspending, one or more of our research and development programs or clinical trials. In addition,
Novartis’ decision not to purchase or exercise its last remaining Option may negatively impact public perception of the program, or all of the programs,
covered by the Collaboration Agreement, which could adversely affect the market price of our common stock. We cannot provide any assurance with
respect to the success of the Collaboration Agreement.
In the future, we may form or seek other strategic alliances, joint ventures, or collaborations, or enter into additional licensing arrangements with
third parties that we believe will complement or augment our development and commercialization efforts with respect to product candidates we develop.
Our current Collaboration Agreement poses, and potential future collaborations involving our product candidates may pose, the following risks to
us:
•
•
•
collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products or
product candidates;
collaborators may not properly enforce, maintain or defend our intellectual property rights or may use our proprietary information in a way
that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or
expose us to potential litigation, or other intellectual property proceedings;
51
•
•
•
disputes may arise between a collaborator and us that cause the delay or termination of the research, development or commercialization of the
product candidate, or that result in costly litigation or arbitration that diverts management attention and resources;
if a present or future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product
development or commercialization program under such collaboration could be delayed, diminished or terminated; and
collaboration agreements may restrict our right to independently pursue new product candidates. For example, under the Collaboration
Agreement, for a certain period of time we may not directly or indirectly research or develop, outside of the collaboration, any antibody with
specified activity against that program’s collaboration target.
As a result, if we enter into additional collaboration agreements and strategic partnerships or license our intellectual property, products or
businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations, which
could delay our timelines or otherwise adversely affect our business. We also cannot be certain that, following a strategic transaction or license, we will
achieve the revenue or specific net income that justifies such transaction. Any delays in entering into new collaborations or strategic partnership agreements
related to any product candidate we develop could delay the development and commercialization of our product candidates, which would harm our
business prospects, financial condition, and results of operations.
We may seek to establish additional collaborations, and, if we are not able to establish them on commercially reasonable terms, we may have to alter
our development and commercialization plans.
The advancement of our product candidates and development programs and the potential commercialization of our current and future product
candidates will require substantial additional cash to fund expenses. For some of our programs, we may decide to collaborate with additional
pharmaceutical and biotechnology companies with respect to development and potential commercialization. Any of these relationships may require us to
incur non-recurring and other charges, increase our near and long term expenditures, issue securities that dilute our existing stockholders, or disrupt our
management and business.
We face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Whether we
reach a definitive agreement for other collaborations will depend, among other things, upon our assessment of the collaborator’s resources and expertise,
the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the
design or results of clinical trials, the progress of our clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the
United States, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to
patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a
challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider
alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be
more attractive than the one with us for our product candidate. Further, we may not be successful in our efforts to establish a strategic partnership or other
alternative arrangements for future product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and
third parties may not view them as having the requisite potential to demonstrate safety and efficacy.
We may also be restricted under existing collaboration agreements from entering into future agreements on certain terms with potential
collaborators. For example, under the Collaboration Agreement, we have granted worldwide exclusive rights to Novartis for antibodies targeting CD73,
and during the term of the agreement we will be restricted from granting similar rights to other parties. This exclusivity could limit our ability to enter into
strategic collaborations with future collaborators.
In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a
reduced number of potential future collaborators.
We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail
the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other
development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and
undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or
commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do
not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.
52
If conflicts arise between us and our collaborators or strategic partners, these parties may act in a manner adverse to us and could limit our ability to
implement our strategies.
If conflicts arise between our corporate or academic collaborators or strategic partners and us, the other party may act in a manner adverse to us
and could limit our ability to implement our strategies. Novartis or future collaborators or strategic partners, may develop, either alone or with others,
products in related fields that are competitive with the products or potential products that are the subject of these collaborations. Competing products, either
developed by the collaborators or strategic partners or to which the collaborators or strategic partners have rights, may result in the withdrawal of partner
support for our product candidates. Our current or future collaborators or strategic partners may preclude us from entering into collaborations with their
competitors, fail to obtain timely regulatory approvals, terminate their agreements with us prematurely, or fail to devote sufficient resources to the
development and commercialization of products. Any of these developments could harm our product development efforts.
We rely on third parties, and will continue to rely on third parties, to conduct our ongoing and planned clinical trials for the product candidates we
develop. If these third parties do not successfully carry out their contractual duties, comply with regulatory requirements or meet expected deadlines,
we may not be able to obtain marketing approval for or commercialize any product candidates we develop and our business could be substantially
harmed.
We do not have the ability to independently conduct clinical trials. We rely on medical institutions, clinical investigators, contract laboratories,
and other third parties, such as CROs, to conduct or otherwise support clinical trials for our product candidates. We rely heavily on these parties for
execution of clinical trials for our product candidates and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that
each of our clinical trials is conducted in accordance with the applicable protocol, legal and regulatory requirements and scientific standards, and our
reliance on CROs and other third parties will not relieve us of our regulatory responsibilities. For any violations of laws and regulations during the conduct
of our clinical trials, we could be subject to untitled and warning letters or enforcement action that may include civil penalties up to and including criminal
prosecution.
We and the third parties on which we rely for clinical trials are required to comply with regulations and requirements, including GCP, for
conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and
that the trial patients are adequately informed of the potential risks of participating in clinical trials and their rights are protected. These regulations are
enforced by the FDA, the Competent Authorities of the Member States of the EEA and comparable foreign regulatory authorities for any drugs in clinical
development. The FDA enforces GCP requirements through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or
these third parties fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or
comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot
assure you that, upon inspection, the FDA will determine that any of our future clinical trials will comply with GCP. In addition, our clinical trials must be
conducted with product candidates produced under cGMP regulations. Our failure or the failure of these third parties to comply with these regulations may
require us to repeat clinical trials, which would delay the marketing approval process and could also subject us to enforcement action. We also are required
to register certain ongoing clinical trials and provide certain information, including information relating to the trial’s protocol, on a government-sponsored
database, ClinicalTrials.gov, within specific timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions.
Although we intend to design the clinical trials for our product candidates, third parties will conduct all of the clinical trials. As a result, many
important aspects of our clinical development, including their conduct and timing, will be outside of our direct control. Our reliance on third parties to
conduct future clinical trials will also result in less direct control over the management of data developed through clinical trials than would be the case if we
were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties
in coordinating activities. Outside parties may:
•
•
•
•
•
have staffing difficulties;
fail to comply with contractual obligations;
experience regulatory compliance issues;
undergo changes in priorities or become financially distressed; or
form relationships with other entities, some of which may be our competitors.
53
These factors may materially adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to
unexpected cost increases that are beyond our control. If the third parties do not perform clinical trials in a satisfactory manner, breach their obligations to
us or fail to comply with regulatory requirements, the development, marketing approval and commercialization of our product candidates may be delayed,
we may not be able to obtain marketing approval and commercialize our product candidates, or our development program may be materially and
irreversibly harmed. If we are unable to rely on clinical data collected by these third parties, we could be required to repeat, extend the duration of, or
increase the size of any clinical trials we conduct and this could significantly delay commercialization and require significantly greater expenditures.
If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative third parties on
commercially reasonable terms, or at all. If third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if
they need to be replaced or if the quality or accuracy of the clinical data they obtain are compromised due to the failure to adhere to our clinical protocols,
regulatory requirements or for other reasons, any clinical trials such third parties are associated with may be extended, delayed or terminated, and we may
not be able to obtain marketing approval for or successfully commercialize our product candidates. As a result, we believe that our financial results and the
commercial prospects for our product candidates in the subject indication would be harmed, our costs could increase and our ability to generate revenue
could be delayed.
We intend to rely on third parties to manufacture product candidates, which increases the risk that we will not have sufficient quantities of such
product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization
efforts.
We do not own or operate manufacturing facilities for the production of clinical or commercial supplies of the product candidates that we are
developing or evaluating in our development programs. We have limited personnel with experience in drug manufacturing and lack the resources and the
capabilities to manufacture any of our product candidates on a clinical or commercial scale. We rely on third parties for supply of our product candidates,
and our strategy is to outsource all manufacturing of our product candidates and products to third parties.
In order to conduct clinical trials of product candidates, we will need to have them manufactured in potentially large quantities. Our third-party
manufacturers may be unable to successfully increase the manufacturing capacity for any of our product candidates in a timely or cost-effective manner, or
at all. In addition, quality issues may arise during scale-up activities and at any other time. For example, ongoing data on the stability of our product
candidates may shorten the expiry of our product candidates and lead to clinical trial material supply shortages, and potentially clinical trial delays. If these
third-party manufacturers are unable to successfully scale up the manufacture of our product candidates in sufficient quality and quantity, the development,
testing and clinical trials of that product candidate may be delayed or infeasible, and regulatory approval or commercial launch of that product candidate
may be delayed or not obtained, which could significantly harm our business.
Our use of new third-party manufacturers increases the risk of delays in production or insufficient supplies of our product candidates as we
transfer our manufacturing technology to these manufacturers and as they gain experience manufacturing our product candidates.
Even after a third-party manufacturer has gained significant experience in manufacturing our product candidates or even if we believe we have
succeeded in optimizing the manufacturing process, there can be no assurance that such manufacturer will produce sufficient quantities of our product
candidates in a timely manner or continuously over time, or at all.
We may be delayed if we need to change the manufacturing process used by a third party. Further, if we change an approved manufacturing
process, then we may be delayed if the FDA or a comparable foreign authority needs to review the new manufacturing process before it may be used.
We do not currently have any agreements with third-party manufacturers for the long-term commercial supply. In the future, we may be unable to
enter into agreements with third-party manufacturers for commercial supplies of any product candidate that we develop, or may be unable to do so on
acceptable terms. Even if we are able to establish and maintain arrangements with third-party manufacturers, reliance on third-party manufacturers entails
risks, including:
•
•
•
•
reliance on the third party for regulatory compliance and quality assurance;
the possible breach of the manufacturing agreement by the third party;
the possible misappropriation of our proprietary information, including our trade secrets and know-how; and
the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.
54
Third-party manufacturers may not be able to comply with cGMP requirements or similar regulatory requirements outside the United States. Our
failure, or the failure of our third-party manufacturers, to comply with applicable requirements could result in sanctions being imposed on us, including
fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products,
operating restrictions and/or criminal prosecutions, any of which could significantly and adversely affect supplies of our product candidates.
Our future product candidates and any products that we may develop may compete with other product candidates and products for access to
manufacturing facilities. There are a limited number of manufacturers that operate under cGMP requirements particularly for the development of
monoclonal antibodies, and that might be capable of manufacturing for us.
If the third parties that we engage to supply any materials or manufacture product for our preclinical tests and clinical trials should cease to
continue to do so for any reason, we likely would experience delays in advancing these tests and trials while we identify and qualify replacement suppliers
or manufacturers and we may be unable to obtain replacement supplies on terms that are favorable to us. In addition, if we are not able to obtain adequate
supplies of our product candidates or the substances used to manufacture them, it will be more difficult for us to develop our product candidates and
compete effectively.
Our third-party manufacturers and clinical reagent suppliers may be subject to damage or interruption from, among other things, fire, natural or
man-made disaster, power loss, telecommunications failure, unauthorized entry, computer viruses, denial-of-service attacks, acts of terrorism, human error,
vandalism or sabotage, financial insolvency, bankruptcy and similar events. For example, in December 2019, a novel strain of coronavirus that causes a
respiratory disease named coronavirus disease 2019 (COVID-19) was reported to have surfaced in Wuhan, China. The extent to which the novel
coronavirus may impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information
which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others
Our current and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit
margins and our ability to develop product candidates and commercialize any products that receive marketing approval on a timely and competitive basis.
Our future relationships with customers and third-party payors in the United States and elsewhere may be subject, directly or indirectly, to applicable
anti-kickback, fraud and abuse, false claims, transparency, health information privacy and security and other healthcare laws and regulations, which
could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, administrative burdens and diminished profits and
future earnings.
Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role in the recommendation and
prescription of any product candidates for which we obtain marketing approval. Our future arrangements with third-party payors and customers may
expose us to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute
and the federal False Claims Act, or FCA, which may constrain the business or financial arrangements and relationships through which we sell, market and
distribute any products for which we obtain marketing approval. In addition, we may be subject to transparency laws and patient privacy regulation by the
U.S. federal and state governments and by governments in foreign jurisdictions in which we conduct our business. The applicable federal, state and foreign
healthcare laws and regulations that may affect our ability to operate include:
•
•
the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any
remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for,
either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for which payment
may be made, in whole or in part, under the Medicare and Medicaid programs or other federal healthcare programs. A person or entity can be
found guilty of violating the statute without actual knowledge of the statute or specific intent to violate it. In addition, the government may
assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent
claim for purposes of the FCA. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical
manufacturers on the one hand and prescribers, purchasers, and formulary managers on the other. There are a number of statutory exceptions
and regulatory safe harbors protecting some common activities from prosecution;
the federal civil and criminal false claims laws and civil monetary penalty laws, including the FCA, which prohibit any person or entity from,
among other things, knowingly presenting, or causing to be presented, a false, fictitious or fraudulent claim for payment to, or approval by, the
federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent
claim to the federal government;
55
•
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created federal criminal statutes that prohibit
knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false
or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any
healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up
by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare
benefits, items or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity can be found guilty of
violating HIPAA without actual knowledge of the statutes or specific intent to violate them;
• HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective
implementing regulations, which impose, among other things, specified requirements relating to the privacy, security and transmission of
individually identifiable health information held by covered entities and their business associates. HITECH also created new tiers of civil
monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys
general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’
fees and costs associated with pursuing federal civil actions;
•
•
•
the federal legislation commonly referred to as the Physician Payments Sunshine Act, created under the ACA, and its implementing
regulations, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under
Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to CMS information related
to payments or other transfers of value made to physicians (currently defined to include doctors, dentists, optometrists, podiatrists and
chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family
members. . Effective January 1, 2022, these reporting obligations will extend to include transfers of value made to certain non-physician
providers such as physician assistants and nurse practitioners;
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm
consumers; and
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing
arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private
insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance
guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made
to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other
transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy
and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance efforts.
Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available under such laws, it is
possible that some of our business activities could be subject to challenge under one or more of such laws. The scope and enforcement of each of these laws
is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and
regulations. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare
providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Ensuring that our business
arrangements with third parties comply with applicable healthcare laws, as well as responding to investigations by government authorities, can be time- and
resource-consuming and can divert management’s attention from the business.
If our operations are found to be in violation of any of the laws described above or any other government regulations that apply to us, we may be
subject to penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from
participation in federal and state funded healthcare programs, contractual damages and the curtailment or restricting of our operations, as well as additional
reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance
with these laws, any of which could harm our ability to operate our business and our financial results. Further, if the physicians or other providers or
entities with whom we expect to do business are found not to be in compliance with applicable laws, they may be subject to criminal, civil or
administrative sanctions, including exclusions from government funded healthcare programs. In addition, the approval and commercialization of any
product candidate we develop outside the United States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among
other foreign laws.
56
A variety of risks associated with operating internationally could materially adversely affect our business.
We currently have limited international operations, but we rely on and will continue to rely on our CMOs, some of which operate internationally,
for both drug substance and drug product, and our business strategy incorporates potentially expanding internationally if any of our product candidates
receive regulatory approval. Doing business internationally involves a number of risks, including but not limited to:
• multiple, conflicting and changing laws and regulations, such as privacy regulations, tax laws, export and import restrictions, employment
laws, regulatory requirements and other governmental approvals, permits and licenses;
•
•
•
•
•
•
•
•
•
•
failure by us to obtain and maintain regulatory approvals for the use of our products in various countries;
additional potentially relevant third-party patent rights;
complexities and difficulties in obtaining protection and enforcing our intellectual property;
difficulties in staffing and managing foreign operations;
complexities associated with managing multiple payor reimbursement regimes, government payors or patient self-pay systems;
limits in our ability to penetrate international markets;
financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on
demand and payment for our products and exposure to foreign currency exchange rate fluctuations;
natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease (e.g., the novel
coronavirus epidemic in China), boycotts, curtailment of trade and other business restrictions;
certain expenses including, among others, expenses for travel, translation and insurance; and
regulatory and compliance risks that relate to maintaining accurate information and control over sales and activities that may fall within the
purview of the U.S. Foreign Corrupt Practices Act, its books and records provisions, or its anti-bribery provisions, or other anti-bribery and
anti-corruption laws.
Any of these factors could significantly harm our future international expansion and operations and, consequently, our results of operations.
Risks Related To Intellectual Property
Intellectual property is critical to our business and our success in part depends on our ability to maintain, protect, and expand our portfolio of
intellectual property rights.
Biotechnology and pharmaceutical companies generally, and we in particular, compete in a crowded competitive space characterized by rapidly
evolving technologies and aggressive defense of intellectual property.
Our patents and patent applications are directed to our antibodies and accompanying technologies. We seek patent protection for our development
programs, product candidates and related alternatives by filing and prosecuting patent applications in the U.S. and other countries as appropriate.
As of March 10, 2020, we co-own and have exclusively licensed to Novartis our rights in two patent families that cover compositions of matter
and methods of use for our CD73 therapeutic antibody candidate, NZV930. The first patent family includes two expired U.S. provisional patent
applications, one pending U.S. non-provisional patent application, one expired international (Patent Cooperation Treaty [“PCT”]) patent application, and 42
ex-US applications. The second patent family includes two expired U.S. provisional patent applications and one pending PCT patent application. Foreign
patent applications claiming priority to the PCT patent application from the second patent family will be filed on or before the national phase entry
deadline. Any patents issuing from the first and second patent families would be expected to expire in 2038 or 2039, respectively, absent any applicable
patent term adjustment or extension.
As of March 10, 2020, we co-own one U.S. non-provisional patent application and one corresponding PCT patent application and five U.S.
provisional patent applications related to compositions of matter and methods of use for our CD39 therapeutic antibody candidates, including SRF617. We
have the right to obtain exclusive ownership of the pending provisional applications. Any patents issuing from these applications would be expected to
expire in 2039 and 2040, absent any applicable patent term adjustment or extension.
57
With respect to our IL-27 therapeutic antibody program, as of March 10, 2020, we own one pending U.S. non-provisional patent application and
two PCT patent applications within two patent families that cover compositions of matter and methods of use for various antibodies. We have one
additional U.S. provisional patent application pending that is also related to our IL-27 program. Any patents issuing from these applications would be
expected to expire in 2039 and 2040, absent any applicable patent term adjustment or extension.
As of March 10, 2020, we co-own one U.S. non-provisional patent application and corresponding PCT patent application directed to compositions
of matter and methods of use for our CD112R therapeutic antibody candidates. We have one pending provisional application also relating to this
program. Any patents issuing from these applications would be expected to expire in 2039 and 2040, absent any applicable patent term adjustment or
extension.
As of March 10, 2020, we co-own U.S. Patent Nos. 9,803,016, 9,650,441, 10,442,858 and 10,570,201, which cover composition of matter and the
treatment of cancer using our therapeutic CD47 antibody, SRF231. Additionally, we co-own eleven foreign patent applications within this patent family.
These patent rights are expected to expire in 2036, absent any applicable patent term adjustment or extension.
If we are unable to obtain and maintain patent protection for any products we develop and for our technology, or if the scope of the patent protection
obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our
ability to commercialize any product candidates we may develop, and our technology may be adversely affected.
Our success depends in large part on our ability to obtain and maintain patent protection in the United States and other countries with respect to
our antibodies and the accompanying technologies we develop that are important to our business. If we are unable to secure or maintain patent protection
with respect to our antibody technology and any proprietary products and technology we develop, our business, financial condition, results of operations,
and prospects could be materially harmed.
Patent positions of life sciences companies can be uncertain and involve complex factual and legal questions. No consistent policy governing the
scope of claims allowable in the field of antibodies has emerged in the United States. The scope of patent protection in jurisdictions outside of the United
States is also uncertain. Changes in either the patent laws or their interpretation in any jurisdiction that we seek patent protection may diminish our ability
to protect our inventions, maintain and enforce our intellectual property rights; and, more generally, may affect the value of our intellectual property,
including the narrowing of the scope of our patents and any that we may license.
The patent prosecution process is complex, expensive, time-consuming, and inconsistent across jurisdictions. We may not be able to file,
prosecute, maintain, enforce, or license all necessary or desirable patent rights at a commercially reasonable cost or in a timely manner. It is possible that
we will fail to identify important patentable aspects of our research and development efforts in time to obtain appropriate or any patent protection. While
we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and
development efforts, including for example, our employees, corporate collaborators, external academic scientific collaborators, CROs, contract
manufacturers, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent
application is filed, thereby endangering our ability to seek patent protection. In addition, publications of discoveries in the scientific and scholarly
literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until
18 months after their earliest priority date, or in some cases not at all. Consequently, we cannot be certain that we were the first to file for patent protection
on the inventions claimed in our patents or pending patent applications.
The issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Further, the scope of the invention
claimed in a patent application can be significantly reduced before the patent is issued, and this scope can be reinterpreted after issuance. Even where patent
applications we currently own or that we may license in the future issue as patents, they may not issue in a form that will provide us with adequate
protection to prevent competitors or other third parties from competing with us, or otherwise provide us with a competitive advantage. Any patents that
eventually issue may be challenged, narrowed or invalidated by third parties. Consequently, we do not know whether any of our product candidates will be
protectable or remain protected by valid and enforceable patent rights. Our competitors or other third parties may be able to evade our patent rights by
developing new antibodies, biosimilar antibodies, or alternative technologies or products in a non-infringing manner.
58
The issuance or grant of a patent is not irrefutable as to its inventorship, scope, validity or enforceability, and our patents may be challenged in the
courts or patent offices in the United States and abroad. There may be prior art of which we are not aware that may affect the validity or enforceability of a
patent claim. There also may be prior art of which we are aware, but which we do not believe affects the validity or enforceability of a claim, which may,
nonetheless, ultimately be found to affect the validity or enforceability of a claim. We may in the future, become subject to a third-party pre-issuance
submission of prior art or opposition, derivation, revocation, re-examination, post-grant and inter partes review, or interference proceeding and other similar
proceedings challenging our patent rights or the patent rights of others in the United States Patent and Trademark Office, or USPTO, or other foreign patent
office. An unfavorable determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third
parties to commercialize our technology or products and compete directly with us, without payment to us, or extinguish our ability to manufacture or
commercialize products without infringing third-party patent rights.
In addition, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting
such candidates might expire before or shortly after such candidates are commercialized. As a result, our intellectual property may not provide us with
sufficient rights to exclude others from commercializing products similar or identical to ours. Moreover, some of our owned and in-licensed patents and
patent applications are, and may in the future be, co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-
owners’ interest in such patents or patent applications, such co-owners may be able to license their rights to other third parties, including our competitors,
and our competitors could market competing products and technology. In addition, we or our licensors may need the cooperation of any such co-owners of
our owned and in-licensed patents in order to enforce such patents against third parties, and such cooperation may not be provided to us or our licensors.
Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations and prospects.
The intellectual property landscape around therapeutic antibodies in oncology is crowded, and third parties may initiate legal proceedings alleging that
we are infringing, misappropriating, or otherwise violating their intellectual property rights, the outcome of which would be uncertain and could have
a material adverse effect on the success of our business. We are aware of certain third-party patents and third-party patent applications in this
landscape that may, if issued as patents, be asserted to encompass current product candidates.
The field of therapeutic antibodies, including CD39 and CD112R antibodies for use in oncology, is crowded, and no such products have reached
the market. Due to the intense research and development undertaken by academic institutions and multiple companies, including us and our competitors, in
this field, the intellectual property landscape is in flux, and it may remain uncertain for the coming years. There may be significant intellectual property-
related litigation and proceedings relating to our own and other third-party intellectual property and proprietary rights in the future.
In the future, we may become party to, or threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect
to our technology and any product candidates we may develop, including interference proceedings, post-grant review, inter-partes review, and derivation
proceedings before the USPTO and similar proceedings in foreign jurisdictions such as oppositions before the European Patent Office, or EPO. Third
parties may assert infringement claims against us based on existing patents or patents that may be granted in the future, regardless of their merit.
We are aware of certain third-party patents and third-party patent applications in this landscape that may, if issued as patents, be asserted to
encompass our current or future product candidates. For example, we are aware of third-party European patents and pending third-party European patent
applications relating to CD39 and CD112R antibody technology that, without invalidation of (in the case of an issued patent), a change in claim scope, or a
license, could materially impair our ability to commercialize our product candidates.
In order to avoid infringing third-party patents, or patents that issue from these third-party patent applications, we may find it necessary or prudent
to obtain licenses from such third-party intellectual property holders. We may be forced to obtain or maintain a license on commercially unreasonable terms
to any third-party patents that cover our product candidates or activities, and such third parties could potentially assert infringement claims against us,
which could have a material adverse effect on the conduct of our business.
If we are found to infringe a third party’s intellectual property rights, and we are unsuccessful in demonstrating that such patents are invalid or
unenforceable, we could be required to obtain a license from such third party to continue developing, manufacturing, and marketing any product candidates
we may develop and our technology. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we
were able to obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to
us, and it could require us to make substantial licensing and royalty payments. We also could be forced, including by court order, to cease developing,
manufacturing, and commercializing the infringing technology or product candidates. In addition, we could be found liable for significant monetary
damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Claims that
we have misappropriated the confidential information or trade secrets of third parties could have a similar material adverse effect on our business, financial
condition, results of operations, and prospects.
59
Our development and commercialization rights to our therapeutic antibodies, current and future product candidates and technology are subject, in
part, to the terms and conditions of licenses granted to us by others.
We are reliant upon licenses to certain patent rights and proprietary technology from third parties that are important or necessary to the
engineering and development of our therapeutic antibodies, and our current and future product candidates. These and other licenses may not provide
exclusive rights to use such intellectual property and technology in all relevant fields of use and in all territories in which we choose to develop or
commercialize our technology and products in the future. As a result, we may not be able to prevent competitors from developing and commercializing
competitive products in territories included in all of our licenses.
We engage in collaborations with scientists at academic and non-profit institutions to access technologies and materials that are not otherwise
available to us. The agreements that govern these collaborations may include an option to negotiate an exclusive license to the institution’s rights in any
inventions that are created in the course of these collaborations, but we may not be able to come to a final agreement with an institution holding rights in an
invention that is relevant to the development and commercialization of our technology.
In addition, we may not have the right to control the preparation, filing, prosecution, maintenance, enforcement, and defense of patents and patent
applications covering the technology that we license from third parties. Therefore, we cannot be certain that these patents and patent applications will be
prepared, filed, prosecuted, maintained, enforced, and defended in a manner consistent with the best interests of our business. If our licensors fail to
prosecute, maintain, enforce, and defend such patents, or lose rights to those patents or patent applications, the rights we have licensed may be reduced or
eliminated, and our right to develop and commercialize any of our products that are the subject of such licensed rights could be adversely affected.
Additionally, we may be required to reimburse our licensors for all of their expenses related to the prosecution, maintenance, enforcement and defense of
patents and patent applications that we in-license from them.
Our licensors may have relied on third-party consultants or collaborators or on funds from third parties such that our licensors are not the sole and
exclusive owners of the patents we in-licensed. If other third parties have ownership rights to our in-licensed patents, they may be able to license such
patents to our competitors, and our competitors could market competing products and technology. This could have a material adverse effect on our
competitive position, business, financial conditions, results of operations, and prospects.
Our licensors might conclude that we have materially breached our license agreements and might therefore terminate the license agreements,
thereby removing our ability to develop and commercialize products and technology covered by these license agreements. If these in-licenses are
terminated, or if the underlying patents fail to provide the intended exclusivity, competitors would have the freedom to seek regulatory approval of, and to
market, products identical to ours. In addition, we may seek to obtain additional licenses from our licensors and, in connection with obtaining such licenses,
we may agree to amend our existing licenses in a manner that may be more favorable to the licensors, including by agreeing to terms that could enable third
parties (potentially including our competitors) to receive licenses to a portion of the intellectual property that is subject to our existing licenses. Any of
these events could have a material adverse effect on our competitive position, business, financial conditions, results of operations, and prospects.
We may become involved in lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive, time-consuming
and unsuccessful.
Competitors may infringe our patents or the patents of our licensing partners, or we may be required to defend against claims of infringement. In
addition, our patents or the patents of our licensing partners also are, and may become, involved in inventorship, priority, or validity disputes. To counter or
defend against such claims can be expensive and time-consuming, and our licensors’ adversaries may have the ability to dedicate substantially greater
resources to prosecuting these legal actions than we or our licensors can. In an infringement proceeding, a court may decide that a patent owned or in-
licensed by us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our owned and in-
licensed patents do not cover the technology in question. Accordingly, despite our or our licensors’ efforts, we or our licensors may not be able to prevent
third parties from infringing upon or misappropriating intellectual property rights we own or control. An adverse result in any litigation proceeding could
put one or more of our owned or in-licensed patents at risk of being invalidated or interpreted narrowly. Further, because of the substantial amount of
discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by
disclosure during this type of litigation.
60
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant
expenses and could distract our personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings,
motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a
substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the
resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other
resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings
more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties
resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the
marketplace.
Intellectual property rights do not necessarily address all potential threats.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and
may not adequately protect our business or permit us to maintain our competitive advantage. For example, others may develop biosimiliar or competing
antibodies to any product candidates that we have or may develop, but that are not covered by the claims of the patents that we own or may own or license
in the future.
We may be subject to claims that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or
former employers or claims asserting ownership of what we regard as our own intellectual property.
Many of our employees, consultants, and advisors are currently or were previously employed at universities or other biotechnology or
pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, and advisors do
not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or
disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may
be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management.
In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual
property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in
fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the
assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to
determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial
condition, results of operations, and prospects.
If we do not obtain patent term extension and data exclusivity for any of our current or future product candidates, our business may be materially
harmed.
Depending upon the timing, duration and specifics of any FDA marketing approval of any of our current or future product candidates, one or
more of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, or
the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent extension term of up to five years as compensation for patent term lost
during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of
product approval, only one patent may be extended and only those claims covering the approved drug, a method for using it, or a method for manufacturing
it may be extended. However, we may not be granted an extension because of, for example, failing to exercise due diligence during the testing phase or
regulatory review process, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfy
applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to
obtain patent term extension or term of any such extension is less than we request, our competitors may obtain approval of competing products following
our patent expiration, and our business, financial condition, results of operations, and prospects could be materially harmed.
61
We may not be able to protect our intellectual property and proprietary rights throughout the world.
Filing, prosecuting, and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and the
laws of foreign countries may not protect our rights to the same extent as the laws of the United States. In addition, our intellectual property license
agreements may not always include worldwide rights. Consequently, we may not be able to prevent third parties from practicing our inventions in all
countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions.
Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export
otherwise infringing products to territories where we have patent protection or licenses but enforcement is not as strong as that in the United States. These
products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from
competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal
systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property
protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing of
competing products in violation of our intellectual property and proprietary rights generally. Proceedings to enforce our intellectual property and
proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put
our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to
assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially
meaningful. Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant
commercial advantage from the intellectual property that we develop or license.
Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition,
many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have
limited remedies, which could materially diminish the value of such patent. If we or any of our licensors is forced to grant a license to third parties with
respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations, and
prospects may be adversely affected.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment, and other
requirements imposed by government patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these
requirements.
Periodic maintenance fees, renewal fees, annuity fees, and various other government fees on patents and applications will be due to be paid to the
USPTO and various government patent agencies outside of the United States over the lifetime of our owned or licensed patents and applications. In certain
circumstances, we rely on our licensing partners to pay these fees due to U.S. and non-U.S. patent agencies. The USPTO and various non-U.S. government
agencies require compliance with several procedural, documentary, fee payment, and other similar provisions during the patent application process. We are
also dependent on our licensors to take the necessary action to comply with these requirements with respect to our licensed intellectual property. In some
cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. There are situations, however,
in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in a partial or complete loss of patent rights in the
relevant jurisdiction. In such an event, potential competitors might be able to enter the market with similar or identical products or technology, which could
have a material adverse effect on our business, financial condition, results of operations, and prospects.
We may not be successful in obtaining necessary rights to our current and future product candidates through acquisitions and in-licenses.
We currently have rights to intellectual property, through licenses from third parties, to identify and develop product candidates. Many
pharmaceutical companies, biotechnology companies, and academic institutions are competing with us in the field of therapeutic antibodies and filing
patent applications potentially relevant to our business. For example, we are aware of third-party patents and patent applications that may be construed to
cover our CD47 antibody product candidates or their uses.
In order to avoid infringing these third-party patents, or patents that issue from these third-party patent applications, we may find it necessary or
prudent to obtain licenses from such third-party intellectual property holders. In addition, with respect to any patents we co-own with third parties, we may
require licenses to such co-owners’ interest to such patents. However, we may be unable to secure such licenses or otherwise acquire or in-license any
compositions, methods of use, processes, or other intellectual property rights from third parties that we identify as necessary for product candidates we may
develop. The licensing or acquisition of third-party intellectual property rights is a competitive area, and other companies
62
may pursue strategies to license or acquire third-party intellectual property rights that we may consider attractive or necessary. These companies may have
a competitive advantage over us due to their size, capital resources and greater clinical development and commercialization capabilities. In addition,
companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire third-party
intellectual property rights on terms that would allow us to make an appropriate return on our investment or at all.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs surrounding
the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability are met, prior to
March 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent
application was entitled to the patent. After March 2013, under the Leahy-Smith America Invents Act, or the America Invents Act, enacted in September
2011, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor
to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. The
America Invents Act also includes a number of significant changes that affect the way patent applications are prosecuted and also may affect patent
litigation. These include allowing third-party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the
validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. The
America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the
enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations,
and prospects.
In addition, the patent positions of companies in the development and commercialization of biologics and pharmaceuticals are particularly
uncertain. Recent rulings from the U.S. Court of Appeals for the Federal Circuit and the U.S. Supreme Court have narrowed the scope of patent protection
available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with
respect to the validity and enforceability of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO,
the laws and regulations governing patents could change in unpredictable ways that could have a material adverse effect on our existing patent portfolio
and our ability to protect and enforce our intellectual property in the future.
The U.S. government may exercise its march-in rights with regards to certain in-licensed patents.
Pursuant to the Bayh-Dole Act, the U.S. government has march-in rights with regards to government-funded technology. The U.S. government
can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the government-funded
technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S.
industry. In addition, our rights in such inventions may be subject to certain requirements to manufacture products embodying such inventions in the United
States. Any exercise by the government of any of the foregoing rights could harm our competitive position, business, financial condition, results of
operations, and prospects.
Our inability to protect our confidential information and trade secrets would harm our business and competitive position.
In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know-how, technology
and other proprietary information, to maintain our competitive position. We seek to protect these trade secrets, in part, by entering into non-disclosure and
confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract
manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our
employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our
trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a
trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts both within and outside the United
States may be less willing or unwilling to protect trade secrets. If a competitor lawfully obtained or independently developed any of our trade secrets, we
would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position.
63
Risks Related To Employee Matters, Managing Our Growth And Other Risks
Related To Our Business
We are highly dependent on our key personnel, and if we are not successful in attracting, motivating and retaining highly qualified personnel, we may
not be able to successfully implement our business strategy.
We are highly dependent on members of our executive team. The loss of the services of any of them may adversely impact the achievement of our
objectives. Any of our executive officers could leave our employment at any time, as all of our employees are “at-will” employees. We currently do not
have “key person” insurance on any of our employees. The loss of the services of one or more of our current employees might impede the achievement of
our research, development and commercialization objectives.
Recruiting and retaining qualified employees, consultants and advisors for our business, including scientific and technical personnel, also will be
critical to our success. Competition for skilled personnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on
acceptable terms given the competition among numerous pharmaceutical and biotechnology companies and academic institutions for skilled individuals. In
addition, failure to succeed in preclinical studies, clinical trials or applications for marketing approval may make it more challenging to recruit and retain
qualified personnel. The inability to recruit, or the loss of services of certain executives, key employees, consultants or advisors, may impede the progress
of our research, development and commercialization objectives and have a material adverse effect on our business, financial condition, results of operations
and prospects.
In addition, we recently announced a restructuring to focus our resources on our SRF617 and SRF388 product candidates, including a reduction in
force program directly impacting approximately 35% of our workforce. This restructuring could lead to increased attrition amongst those employees who
were not directly affected by the reduction in force program.
We will need to grow the size of our organization, and we may experience difficulties in managing this growth.
As of March 10, 2020, we had 49 full-time employees, including 32 employees engaged in research and development. As our development and
commercialization plans and strategies develop, we expect to need additional managerial, operational, sales, marketing, financial and other personnel.
Future growth would impose significant added responsibilities on members of management, including:
•
identifying, recruiting, integrating, maintaining and motivating additional employees;
• managing our internal development efforts effectively, including the clinical and FDA review process for any product candidate we develop,
while complying with our contractual obligations to contractors and other third parties; and
•
improving our operational, financial and management controls, reporting systems and procedures.
Our future financial performance and our ability to advance development of and, if approved, commercialize any product candidate we develop
will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its
attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors and
consultants to provide certain services, including substantially all aspects of marketing approval, clinical management, and manufacturing. We cannot
assure you that the services of independent organizations, advisors and consultants will continue to be available to us on a timely basis when needed, or that
we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services
provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain
marketing approval of any current or future product candidates or otherwise advance our business. We cannot assure you that we will be able to manage our
existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.
If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we
may not be able to successfully implement the tasks necessary to further develop and commercialize our current product candidates and any future product
candidates we develop and, accordingly, may not achieve our research, development and commercialization goals.
64
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could
have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the
handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials,
including chemicals and biological and radioactive materials. Our operations also produce hazardous waste products. We generally contract with third
parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of
contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our
resources. We also could incur significant costs associated with civil or criminal fines and penalties.
Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees
resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance
for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or
radioactive materials.
Our internal computer systems, or those used by our CROs or other contractors or consultants, may fail or suffer security breaches.
Despite the implementation of security measures, our internal computer systems and those of our future CROs and other contractors and
consultants are vulnerable to damage from computer viruses and unauthorized access. While we have not to our knowledge experienced any such material
system failure or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of
our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in
delays in our marketing approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties for the
manufacture of our product candidates and to conduct clinical trials, and similar events relating to their computer systems could also have a material
adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or
inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our
future product candidates could be delayed.
Our employees, independent contractors, vendors, principal investigators, CROs and consultants may engage in misconduct or other improper
activities, including non-compliance with regulatory standards and requirements and insider trading.
We are exposed to the risk that our employees, independent contractors, vendors, principal investigators, CROs and consultants may engage in
fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of
unauthorized activities to us that violate the regulations of the FDA and comparable foreign regulatory authorities, including those laws requiring the
reporting of true, complete and accurate information to such authorities; healthcare fraud and abuse laws and regulations in the United States and abroad; or
laws that require the reporting of financial information or data accurately. In particular, sales, marketing and business arrangements in the healthcare
industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These
laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive
programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of clinical
trials or creating fraudulent data in our preclinical studies or clinical trials, which could result in regulatory sanctions and cause serious harm to our
reputation. We have adopted a code of conduct applicable to all of our employees, but it is not always possible to identify and deter misconduct by
employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or
unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these
laws or regulations. Additionally, we are subject to the risk that a person could allege such fraud or other misconduct, even if none occurred. If any such
actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on
our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in
Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment
of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
65
Legal, political and economic uncertainty surrounding the planned exit of the United Kingdom from the European Union may be a source of instability
in international markets, create significant currency fluctuations and pose additional risks to our business, revenue, financial condition, and results of
operations.
On June 23, 2016, the United Kingdom, or UK, held a referendum in which a majority of the eligible members of the electorate voted for the UK
to leave the European Union, or EU. The UK’s withdrawal from the EU is commonly referred to as Brexit. Pursuant to Article 50 of the Treaty on
European Union, the UK ceased being a member state of the EU on January 31, 2020. During this 11-month period, the UK will continue to follow all of
the EU’s rules and its trading relationship will remain the same. However, regulations (including financial laws and regulations, tax and free trade
agreements, intellectual property rights, data protection laws, supply chain logistics, environmental, health and safety laws and regulations, medicine
licensing and regulations, immigration laws and employment laws), have yet to be addressed. This lack of clarity on future UK laws and regulations and
their interaction with EU laws and regulations may negatively impact foreign direct investment in the UK, increase costs, depress economic activity, and
restrict access to capital. The uncertainty concerning the UK’s legal, political and economic relationship with the EU after Brexit may be a source of
instability in the international markets, create significant currency fluctuations, and/or otherwise adversely affect trading agreements or similar cross-border
co-operation arrangements (whether economic, tax, fiscal, legal, regulatory or otherwise) beyond the date of Brexit.
These developments, or the perception that any of them could occur, may have a significant adverse effect on global economic conditions and the
stability of global financial markets, and could significantly reduce global market liquidity and limit the ability of key market participants to operate in
certain financial markets. In particular, it could also lead to a period of considerable uncertainty in relation to the UK financial and banking markets, as well
as on the regulatory process in Europe. Asset valuations, currency exchange rates and credit ratings may also be subject to increased market volatility.
If the UK and the EU are unable to negotiate acceptable agreements or if other EU Member States pursue withdrawal, barrier-free access between
the UK and other EU Member States or among the European Economic Area overall could be diminished or eliminated. The long-term effects of Brexit
will depend on any agreements (or lack thereof) between the UK and the EU and, in particular, any arrangements for the UK to retain access to EU markets
either during a transitional period or more permanently.
Such a withdrawal from the EU is unprecedented, and it is unclear how the UK’s access to the European single market for goods, capital, services
and labor within the EU, or single market, and the wider commercial, legal and regulatory environment, will impact our current and future operations
(including business activities conducted by third parties and contract manufacturers on our behalf) and clinical activities (including, without limitation,
clinical activities for our product candidates) in the UK. In addition to the foregoing, our future UK operations support our current and future operations
and clinical activities (including, without limitation, clinical activities for our product candidates) in other countries in the EU and European Economic
Area, or EEA, and these operations and clinical activities could be disrupted by Brexit.
We may also face new regulatory costs and challenges that could have an adverse effect on our operations. Depending on the terms of the UK’s
withdrawal from the EU, the UK could lose the benefits of global trade agreements negotiated by the EU on behalf of its members, which may result in
increased trade barriers that could make our doing business in the EU and the EEA more difficult. Furthermore, at present, there are no indications of the
effect Brexit will have on the pathway to obtaining marketing approval for any of our product candidates in the UK, or what, if any, role the EMA may
have in the approval process. Even prior to any change to the UK’s relationship with the EU, the announcement of Brexit has created economic uncertainty
surrounding the terms of Brexit and its consequences could adversely impact customer confidence resulting in customers reducing their spending budgets
on our solutions, which could adversely affect our business, revenue, financial condition, results of operations and could adversely affect the market price
of our common shares.
We have recently reduced the size of our organization, and we may encounter difficulties in managing this development and restructuring, which could
disrupt our operations. In addition, we may not achieve anticipated benefits and savings from the reduction.
We recently announced a restructuring to re-align our workforce to match strategic and financial objectives and optimize resources for long term
growth, including a reduction in force program directly impacting approximately 35% of our workforce. The workforce reduction resulted in the loss of
longer-term employees, the loss of institutional knowledge and expertise and the reallocation and combination of certain roles and responsibilities across
the organization, all of which could adversely affect our operations. Given the complexity of our business, we must continue to implement and improve our
managerial, operational and financial systems, manage our facilities and continue to recruit and retain qualified personnel. This will be made more
challenging given the workforce reduction described above. As a result, our management may need
66
to divert a disproportionate amount of its attention away from our day-to-day activities, and devote a substantial amount of time to managing these
activities. Further, the restructuring and possible additional cost containment measures may yield unintended consequences, such as attrition beyond our
intended workforce reduction and reduced employee morale. In addition, we may not achieve anticipated benefits from the workforce reduction. Due to our
limited resources, we may not be able to effectively manage our operations or recruit and retain qualified personnel, which may result in weaknesses in our
infrastructure and operations, risks that we may not be able to comply with legal and regulatory requirements, and loss of employees and reduced
productivity among remaining employees. For example, the workforce reduction may negatively impact our clinical and regulatory functions, which would
have a negative impact on our ability to successfully develop, and ultimately, commercialize our product candidates. If our management is unable to
effectively manage this transition and workforce reduction and additional cost containment measures, our expenses may be more than expected and we may
not be able to implement our business strategy. As a result, our future financial performance and our ability to commercialize our product candidates
successfully would be negatively affected.
Risks Related To Our Common Stock
The price of our common stock may be volatile and fluctuate substantially.
The stock market in general and the market for biopharmaceutical companies in particular have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:
•
•
•
•
•
•
•
•
•
•
the success of competitive products or technologies;
results of clinical trials and preclinical studies or those of our competitors;
regulatory or legal developments in the United States and other countries;
developments or disputes concerning patent applications, issued patents or other proprietary rights;
the recruitment or departure of key personnel;
the level of expenses related to our product candidates or clinical development programs;
the results of our efforts to discover, develop, acquire or in-license product candidates or companion diagnostics;
actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in the structure of healthcare payment systems;
• market conditions in the pharmaceutical and biotechnology sectors; and
•
general economic, industry and market conditions.
An active trading market for our common stock may not be sustainable, and you may not be able to resell your shares at or above the purchase price.
An active trading market for our shares may not be sustained. If an active market for our common stock does not continue, it may be difficult for
our stockholders to sell their shares without depressing the market price for the shares or sell their shares at or above the prices at which they acquired their
shares or sell their shares at the time they would like to sell. Any inactive trading market for our common stock may also impair our ability to raise capital
to continue to fund our operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as
consideration.
We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate
declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock.
67
We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will
make our common stock less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue
to be an emerging growth company, we may take advantage of exemptions from various reporting requirements, that are applicable to other public
companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from
the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not
previously approved. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary
of the completion of our initial public offering in April 2018, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are
deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed $700.0 million as of the
prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We cannot
predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less
attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore,
will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, changes in
rules of U.S. generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to
changes in our business could significantly affect our financial position and results of operations.
Our executive officers, directors and their affiliates continue to exercise significant influence over our company, which limits your ability to influence
corporate matters and could delay or prevent a change in corporate control.
Our executive officers, directors and their affiliates beneficially own, in the aggregate, approximately 28% of our outstanding common stock. As a
result, these stockholders, if they act together, are able to influence our management and affairs and the outcome of matters submitted to our stockholders
for approval, including the election of directors and any sale, merger, consolidation or sale of all or substantially all of our assets. This concentration of
ownership might adversely affect the market price of our common stock by:
•
•
•
delaying, deferring or preventing a change of control of us;
impeding a merger, consolidation, takeover or other business combination involving us; or
discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
We expect to continue to incur significantly increased costs as a result of operating as a public company, and our management is required to devote
substantial time to new compliance initiatives.
As a public company, and particularly after we are no longer an emerging growth company, as defined in the Jumpstart our Business Startups Act
of 2012, or the JOBS Act, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley
Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of The Nasdaq Global
Market and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of
effective disclosure and financial controls and corporate governance practices. We expect that we will need to hire additional accounting, finance, and other
personnel in connection with our becoming, and our efforts to comply with the requirements of being, a public company and our management and other
personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirements will increase our
legal and financial compliance costs and will make some activities more time-consuming and costly. We are currently evaluating these rules and
regulations, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often
subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new
guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices.
68
Pursuant to Section 404 of the Sarbanes-Oxley Act, or SOX Section 404, we will be required to furnish a report by our management on our
internal control over financial reporting beginning with our second filing of an Annual Report on Form 10-K with the Securities and Exchange
Commission, or the SEC. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal
control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with SOX Section 404 within the
prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and
challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to
assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through
testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial
reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over
financial reporting is effective as required by SOX Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the
financial markets due to a loss of confidence in the reliability of our financial statements.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur could
significantly reduce the market price of our common stock, and impair our ability to raise adequate capital through the sale of additional equity securities.
If securities analysts publish negative evaluations of our stock, the price of our stock could decline.
The trading market for our common stock will rely, in part, on the research and reports that industry or financial analysts publish about us or our
business. If one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or more
of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which, in turn, could cause our stock price to decline.
If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial statements
could be impaired, investors may lose confidence in our financial reporting and the trading price of our common stock may decline.
Pursuant to Section 404 of Sarbanes-Oxley, our management will be required to report upon the effectiveness of our internal control over financial
reporting beginning with the annual report for our fiscal year ending December 31, 2019. When we lose our status as an “emerging growth company,” our
independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. The rules
governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant
documentation, testing and possible remediation. To comply with the requirements of being a reporting company under the Exchange Act, we will need to
implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff.
We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the
future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results
of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered
public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, investors may lose
confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to
sanctions or investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over
financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the
capital markets.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our
stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or
a change in our management. These provisions include a classified board of directors, a prohibition on actions by written consent of our stockholders and
the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of
our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an
69
opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an
offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our
stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which
is responsible for appointing the members of our management.
Our amended and restated bylaws designate the Court of Chancery of the State of Delaware or the United States District Court for the District of
Massachusetts as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to
obtain a favorable judicial forum for disputes with us.
Pursuant to our amended and restated bylaws, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the
State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of
or based on a breach of a fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders, (iii) any
action asserting a claim against us or any of our current or former directors, officers, employees or stockholders arising pursuant to any provision of the
Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or (iv) any action asserting
a claim governed by the internal affairs doctrine. Our amended and restated bylaws further provide that the United States District Court for the District of
Massachusetts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. In addition, our
amended and restated bylaws provide that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to
have notice of and consented to the foregoing provisions. We have chosen the United States District Court for the District of Massachusetts as the exclusive
forum for such causes of action because our principal executive offices are located in Cambridge, Massachusetts. We recognize that the federal district
court forum selection clause may impose additional litigation costs on stockholders who assert the provision is not enforceable and may impose more
general additional litigation costs in pursuing any such claims, particularly if the stockholders do not reside in or near the Commonwealth of
Massachusetts. Additionally, the forum selection clauses in our amended and restated bylaws may limit our stockholders' ability to obtain a favorable
judicial forum for disputes with us. Alternatively, if the federal district court forum selection provision is found inapplicable to, or unenforceable in respect
of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions,
which could have an adverse effect on our business, financial condition or results of operations. The United States District Court for the District of
Massachusetts may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be
located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders. On December 19,
2018, the Court of Chancery of the State of Delaware issued a decision declaring that such federal forum selection provisions purporting to require claims
under the Securities Act be brought in federal court are ineffective and invalid under Delaware law. On January 17, 2019, the decision was appealed to the
Delaware Supreme Court. While the Delaware Supreme Court recently dismissed the appeal on jurisdictional grounds, we expect that the appeal will be re-
filed after the Court of Chancery issues a final judgment. Unless and until the Court of Chancery’s decision is reversed by the Delaware Supreme Court or
otherwise abrogated, we do not intend to enforce our federal forum selection provision designating the District of Massachusetts as the exclusive forum for
Securities Act claims. In the event that the Delaware Supreme Court affirms the Court of Chancery’s decision or otherwise determines that federal forum
selection provisions are invalid, the Company’s Board of Directors intends to amend promptly our amended and restated bylaws to remove our federal
forum selection bylaw provision. As a result of the Court of Chancery’s decision or a decision by the Supreme Court of Delaware affirming the Court of
Chancery’s decision, we may incur additional costs associated with our federal forum selection bylaw provision, which could have an adverse effect on our
business, financial condition or results of operations.
Comprehensive tax reform legislation could adversely affect our business and financial condition.
On December 22, 2017, the U.S. government enacted the TCJA, which significantly reforms the Internal Revenue Code of 1986, as amended. The
TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35%
to a flat rate of 21%, effective January 1, 2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses and
elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such tax losses
may be carried forward indefinitely); and modifying or repealing many business deductions and credits, including reducing the business tax credit for
certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”. The tax rate
change resulted in (i) a reduction in the gross amount of our deferred tax assets recorded as of December 31, 2017, without an impact on the net amount of
our deferred tax assets, which are recorded with a full valuation allowance, and (ii) no income tax expense or benefit being recognized as of the enactment
date of the TCJA. We continue to examine the impact this tax reform legislation may have on our business. However, the effect of the TCJA on us and our
affiliates, whether adverse or favorable, is uncertain and may not become evident for some period of time. We urge investors to consult with their legal and
tax advisers regarding the implications of the TCJA on an investment in our common stock.
70
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Novartis and other third parties;
our manufacturing, commercialization and marketing capabilities and strategy;
the pricing and reimbursement of our current product candidates and other product candidates we may develop, if approved;
the rate and degree of market acceptance and clinical utility of our current product candidates and other product candidates we may develop;
the potential benefits of and our ability to maintain our collaboration with Novartis, and establish or maintain future collaborations or strategic
relationships or obtain additional funding;
our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;
our intellectual property position, including the scope of protection we are able to establish and maintain for intellectual property rights
covering our current product candidates and other product candidates we may develop, the validity of intellectual property rights held by third
parties, and our ability not to infringe, misappropriate or otherwise violate any third-party intellectual property rights;
our competitive position, and developments and projections relating to our competitors and our industry;
our expectations related to the use of our existing cash, cash equivalents and marketable securities and the proceeds from our initial public
offering and the concurrent private placement;
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and
the impact of laws and regulations.
71
All of our forward-looking statements are as of the date of this Annual Report on Form 10-K 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 Annual Report on Form 10-
K 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 Annual Report on Form 10-K, 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 Annual Report on Form 10-K that modify or impact any of the forward-looking statements contained in this Annual Report on Form 10-K
will be deemed to modify or supersede such statements in this Annual Report on Form 10-K.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We lease a facility containing our research and development, laboratory and office space, which consists of approximately 65,000 square feet
located at 50 Hampshire Street, Cambridge, Massachusetts. We sublease 33,526 square feet of this facility to a third party pursuant to a sublease that
expires in December 2023. Our lease expires on December 31, 2029. We believe that our facilities are adequate for our current needs and that suitable
additional or substitute space would be available if needed.
Item 3. Legal Proceedings.
In January 2017, we filed an opposition in the European Patent Office, or EPO, opposing the grant of European Patent No. EP 2242512 to
Stanford University, or the Stanford Patent. We were one of seven parties opposing the grant of the Stanford Patent, which relates generally to CD47
antibodies for use in treating cancer. Stanford filed a response to the seven oppositions and oral arguments were held in August 2018. The Opposition
Division of the EPO maintained an amended version of the patent. As of March 10, 2020, we and three additional opponents, and Stanford, had submitted
notices of appeal to the Opposition Division’s interlocutory decision to the Technical Board of Appeal of the EPO. Accordingly, final resolution of the
oppositions may be several years in the future.
On September 13, 2019, a purported stockholder of the Company filed a putative class action against us, certain of our directors and officers, or
the Individual Defendants, and the underwriters in our initial public offering, collectively, the Defendants, in the Supreme Court of the State of New York,
captioned Ang v. Surface Oncology, Inc., et al., No. 655304/2019 (N.Y. Sup. Ct. Sept. 13, 2019). The complaint was filed on behalf of a putative class of
purchasers of our common stock in and/or traceable to our April 19, 2018 initial public offering (the first day of trading of our common stock on the
Nasdaq Stock Market) and alleged violations of Section 11 (against all Defendants) and 15 (against the Company and the Individual Defendants) of the
Securities Act of 1933, as amended. The complaint alleges that the Defendants made false or misleading statements in our Registration Statement on Form
S-1 for our initial public offering regarding SRF231 and hematologic toxicities allegedly caused by SRF231. The lawsuit sought, among other things,
compensatory damages and interest thereon, and reasonable costs and expenses, including attorneys’ fees. On November 1, 2019, we and the other
Defendants moved to dismiss the Complaint in its entirety on the grounds that the facts and documentary evidence established that our initial public
offering documents were true and accurate in all material respects. Based upon our arguments and confidential discussions between our counsel and
counsel for the Plaintiff, on December 3, 2019, the Plaintiff notified the Court that it wished to voluntarily dismiss the case. As required by Court Order, the
Plaintiff provided notice to all members of the purported class of its intention to voluntarily dismiss the case and following the Court-ordered notice, on
January 14, 2020, the Plaintiff filed a Stipulation of Discontinuance Without Prejudice withdrawing the case. On January 15, 2020 the Court “So-Ordered”
the Stipulation of Discontinuance formally ending the case.
From time to time, we may become involved in other litigation or legal proceedings relating to claims arising from the ordinary course of
business.
Item 4. Mine Safety Disclosures.
Not applicable.
72
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been traded on The Nasdaq Global Market under the symbol “SURF” since April 19, 2018. Prior to this time, there was no
public market for our common stock. The following table shows the high and low sale prices per share of our common stock as reported on The Nasdaq
Global Market for the periods indicated:
PART II
Year Ended December 31, 2019
First Quarter 2019
Second Quarter 2019
Third Quarter 2019
Fourth Quarter 2019
Year Ended December 31, 2018
Second Quarter 2018 (From April 19, 2018)
Third Quarter 2018
Fourth Quarter 2018
High
Low
$
$
$
$
$
$
$
5.88 $
4.89 $
2.84 $
2.33 $
17.41 $
17.83 $
10.69 $
4.11
2.75
1.40
1.17
12.83
8.92
3.65
On March 5, 2020, the last reported sale price for our common stock on the Nasdaq Global Market was $3.11 per share.
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock between April 19, 2018 and December 31,
2019, with the cumulative total return of (a) the Nasdaq Composite Index and (b) the Nasdaq Biotechnology Index, over the same period. This graph
assumes the investment of $100 on April 19, 2018 in our common stock, the Nasdaq Composite Index, and the Nasdaq Biotechnology Index and assumes
the reinvestment of dividends, if any. The graph assumes our closing sales price on April 19, 2018 of $13.33 per share as the initial value of our common
stock and not the initial offering price to the public of $15.00 per share.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below
is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
73
Stockholders
As of March 5, 2020, there were approximately 16 holders of record of our common stock. The actual number of stockholders is greater than this
number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees.
This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividends
We have not paid any cash dividends on our common stock since inception and do not anticipate paying cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item relating to our equity compensation plans will be included in our definitive proxy statement to be filed with
the SEC with respect to our 2020 Annual Meeting of Stockholders and is incorporated herein by reference.
Unregistered Sales of Equity Securities
We had no unregistered sales of securities for the year ended December 31, 2019.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers
We did not purchase any of our registered equity securities during the period covered by this Annual Report on Form 10-K.
Item 6. Selected Consolidated Financial Data.
You should read the following summary consolidated financial data together with our consolidated financial statements and the related notes
appearing at the end of this Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
sections of this Annual Report on Form 10-K. We have derived the consolidated statement of operations data for the years ended December 31, 2019, 2018,
and 2017, and the consolidated balance sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements appearing at the
end of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of results that may be expected in the future.
Statement of Operations Data:
Collaboration revenue - related party
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest and other income, net
Net loss
Accretion of redeemable convertible preferred stock to
redemption value
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders—basic
and diluted (1)
Weighted average common shares outstanding—basic and
diluted (1)
Year Ended December 31,
2019
2018
(in thousands, except per share data)
2017
$
15,360 $
59,417 $
12,826
52,118
20,608
72,726
(57,366)
2,577
(54,789)
52,492
16,076
68,568
(9,151)
2,554
(6,597)
—
(54,789) $
(11)
(6,608) $
47,783
11,033
58,816
(45,990)
613
(45,377)
(40)
(45,417)
(1.97) $
(0.33) $
(18.35)
27,855
19,991
2,475
$
$
74
Balance Sheet Data:
Cash, cash equivalents and marketable securities
Working capital (2)
Total assets
Accounts payable and accrued expenses
Deferred revenue – related party
Total stockholders’ equity (deficit)
2019
As of December 31,
2018
(in thousands)
2017
$
105,161 $
88,652
131,693
11,396
38,592
56,666
158,835 $
137,424
174,065
12,215
53,952
102,862
63,309
47,946
81,454
13,058
82,105
(67,314)
(1)
(2)
See Note 13 to our consolidated financial statements for further details on the calculation of basic and diluted net loss per share attributable to common
stockholders.
We define working capital as current assets less current liabilities.
75
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and operating results should be read together with the section captioned
“Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in the Annual Report on Form
10-K. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in the
section of the Annual Report on Form 10-K captioned “Risk Factors” and elsewhere in this Annual Report on Form 10-K, our actual results may differ
materially from those anticipated in these forward-looking statements.
Overview
We are a clinical-stage immuno-oncology company focused on using our specialized knowledge of the biological pathways critical to the
immunosuppressive tumor microenvironment, or the TME, for the development of next-generation cancer therapies. While first-generation immuno-
oncology therapies, such as checkpoint inhibitors, represent a remarkable therapeutic advancement, we believe most patients do not achieve durable clinical
benefit primarily because these therapies focus on only one element of the complex and interconnected immunosuppressive TME. We believe there is a
significant opportunity to more broadly engage both the innate and adaptive arms of the immune system in a multi-faceted, coordinated and patient-specific
approach, to meaningfully improve cure rates for patients with a variety of cancers.
We aim to identify key components within the TME to gain a deep understanding of its biology, leverage this understanding to define the optimal
therapeutic targets and the patients most likely to benefit, and develop novel antibody therapeutics with differentiated biologic activity. By utilizing our
expertise in immunology, oncology, assay development, antibody selection and characterization, and translational research, we are developing and
advancing a broad pipeline of TME-focused programs that we believe are the next generation of immuno-oncology therapies. Our programs demonstrate
our multi-faceted approach by targeting several critical components of the immunosuppressive TME.
NZV930 (formerly SRF373) and SRF617 are antibodies inhibiting CD73 and CD39, respectively, and illustrate how our specialized knowledge of
TME biology can be leveraged across programs. CD73 and CD39 are both critical enzymes involved in the production of extracellular adenosine, a key
metabolite with strong immunosuppressive properties within the TME. In addition, inhibition of CD39 results in an increase in the pro-inflammatory
metabolite adenosine triphosphate, or ATP, within the TME. In June 2018, a Phase 1 trial of NZV930 was initiated by our partner, Novartis Institutes for
Biomedical Research, Inc., or Novartis, and we filed an investigational new drug application, or IND, for SRF617 in November 2019 and received
permission to proceed from the FDA on December 12, 2019.
SRF388 is an antibody targeting interleukin 27, or IL-27, an immunosuppressive cytokine, or protein secreted by cells, in the TME that is
overexpressed in certain cancers, including hepatocellular and renal cell carcinoma. IL-27 is a cytokine secreted by macrophages and antigen presenting
cells that plays an important physiologic role in suppressing the immune system. Due to its immunosuppressive nature, there is a rationale for inhibiting IL-
27 to treat cancer as this approach will influence the activity of multiple types of immune cells that are necessary to recognize and attack a tumor. We filed
an IND for SRF388 in December 2019 and received permission to proceed from the FDA on January 17, 2020.
SRF813 is an antibody targeting CD112R, an inhibitory protein expressed on natural killer, or NK, and T cells. SRF813 binds a distinct epitope
on CD112R and blocks the interaction of CD112R with CD112, its binding partner that is expressed on tumor cells. SRF813 can promote the activation of
both NK and T cells, with potential to elicit a strong anti-tumor response and promote immunological memory. In October 2019, we formally declared
SRF813 as a development candidate resulting in the initiation of IND-enabling activities.
SRF231 is an antibody targeting CD47, a protein expressed on many cells that is often overexpressed on tumor cells. By targeting CD47, we
believe we can promote macrophage activation to attack such tumors. We initiated a Phase 1 clinical trial of SRF231 in February 2018. In December 2018,
we announced the deprioritization of SRF231 as a result of toxicities seen during the dose escalation portion of the ongoing Phase 1 trial and the evolving
competitive landscape. We expect to conclude the Phase 1 trial in 2020, and do not plan to further develop SRF231.
We also have an earlier stage program targeting regulatory T cells, another critical component of the TME. We expect that the unique insights
generated in any one of our product programs will accelerate the development of the other programs in a synergistic fashion due to the interconnections
between these TME pathways.
76
On April 23, 2018, we completed an initial public offering of our common stock by issuing 7,200,000 shares of our common stock, at $15.00 per
share for net proceeds of $97.2 million. Concurrent with the initial public offering, we issued 766,666 shares of our common stock to Novartis at $15.00
per share for proceeds of $11.5 million in a private placement.
We were incorporated and commenced principal operations in 2014. We have devoted substantially all of our resources to developing our
programs, including NZV930, SRF617, SRF388, SRF813, and SRF231, building our intellectual property portfolio, business planning, raising capital and
providing general and administrative support for these operations. To date, we have financed our operations with proceeds from the sales of preferred stock,
payments received under the Collaboration Agreement with Novartis, a debt financing, and proceeds from our initial public offering of common stock and
concurrent private placement. As of December 31, 2019, we had cash, cash equivalents and marketable securities of $105.2 million. Since our inception,
we have incurred significant losses. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development
and eventual commercialization of one or more of the product candidates we develop. Our net loss was $54.8 million, $6.6 million, and $45.4 million for
the years ended December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019 and 2018 we had an accumulated deficit of $121.6 million and
$66.8 million, respectively. We expect to continue to incur significant expenses and operating losses for at least the next several years, particularly as we:
•
•
•
•
•
pursue the clinical development of product candidates;
leverage our programs to advance product candidates into preclinical and clinical development;
seek regulatory approvals for any product candidates that successfully complete clinical trials;
hire additional clinical, quality control, and scientific personnel;
expand our operational, financial, and management systems and increase personnel, including personnel to support our clinical development,
manufacturing, and commercialization efforts, and our operations as a public company;
• maintain, expand and protect our intellectual property portfolio;
•
•
establish a sales, marketing, medical affairs, and distribution infrastructure to commercialize any products for which we may obtain marketing
approval and intend to commercialize on our own or jointly with a commercial partner; and
acquire or in-license other product candidates and technologies.
As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from
product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may
include collaborations with third parties. We may be unable to raise additional funds or enter into other agreements or arrangements, when needed, on
favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or
discontinue the development or commercialization of one or more of our product candidates.
Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased
expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become
profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at
planned levels and be forced to reduce or terminate our operations.
We believe that our existing cash, cash equivalents and marketable securities, as of December 31, 2019 will enable us to fund our operating
expenses, debt service obligations and capital expenditure requirements into 2022, excluding any future milestone payments from Novartis. We have based
this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.
Components of Our Results of Operations
Revenue
To date, we have not generated any revenue from product sales and do not expect to do so in the near future. All of our revenue to date has been
derived from the Collaboration Agreement. If our development efforts for our programs are successful and result in regulatory approval or additional
license or collaboration agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from
additional collaboration or license agreements that we may enter into with third parties. We expect that our revenue for the next several years will be
derived primarily from the Collaboration Agreement as well as any additional collaborations that we may enter into in the future.
77
Collaboration Agreement with Novartis
In January 2016, we entered into the Collaboration Agreement to develop next-generation cancer therapies. Under the Collaboration Agreement,
as amended, we were responsible for performing research on antibodies that bind to CD73 and four other specified targets. We were responsible for all
costs and expenses incurred by, or on behalf of, us in connection with the research.
Upon entering into the agreement, we received an upfront payment of $70.0 million from Novartis and granted Novartis a worldwide exclusive
license to research, develop, manufacture and commercialize antibodies that target CD73. In addition, we initially granted Novartis the right to purchase
exclusive option rights, each an Option, to up to four specified targets, including certain research, development, manufacturing and commercialization
rights. Pursuant to the Collaboration Agreement, Novartis initially had the right to exercise up to three purchased Options. In March 2018, Novartis notified
us of its decision to not exercise its previously purchased Option for SRF231, our CD47 product candidate. In March 2018, we and Novartis also mutually
agreed to cease development of one of the undisclosed programs subject to the Collaboration Agreement. In February 2019, Novartis notified us of its
decision not to purchase its Option related to IL-27. As of December 31, 2019, Novartis had one Option remaining eligible for purchase and potential
exercise. In January 2020, Novartis did not purchase and exercise its single remaining Option under the Collaboration Agreement and, as a result, the
option purchase period expired. Accordingly, there are no Options remaining eligible for purchase and exercise by Novartis, and our performance
obligations under the Collaboration Arrangement have ended. We are currently entitled to potential milestones of $525.0 million, as well as tiered royalties
on annual net sales of NZV930 by Novartis ranging from high single-digit to mid-teens percentages. Such amount of potential milestone payments assumes
the successful clinical development and achievement of all sales milestones for NZV930.
Under ASC 606 we account for (i) the license conveyed with respect to CD73 and (ii) our obligations to perform research on CD73 and other
specified targets as a single performance obligation under the Collaboration Agreement. We recognize revenue using the cost-to-cost method, which we
believe 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 is
recorded as a percentage of the estimated transaction price based on the extent of progress towards completion.
Through December 31, 2019, we had received an aggregate of $150.0 million from Novartis in upfront payments, milestone payments, and option
purchase payments. During the year ended December 31, 2019, 2018, and 2017, we recognized revenue of $15.4 million, $59.4 million and $12.8 million,
respectively, related to the Collaboration Agreement.
As of January 2020, we no longer have any performance obligations under the Collaboration Agreement. We will remove all costs associated with
the remaining performance obligation for the single remaining Option from the cost-to-cost model in the first quarter of 2020. This will result in our
recognizing the remaining deferred revenue of $38.6 million to collaboration revenue – related party in the first quarter of 2020.
Operating Expenses
Research and Development Expenses
Research and development expenses are expensed as incurred and consist of costs incurred for our research activities, including our discovery
efforts, and the development of our programs. These expenses include:
•
•
•
salaries, benefits and other related costs, including stock-based compensation, for personnel engaged in research and development functions;
expenses incurred in connection with the preclinical development of our programs and clinical trials of our product candidates, including
under agreements with third parties, such as consultants, contractors, and contract research organizations, or CROs;
the cost of manufacturing drug products for use in our preclinical studies and clinical trials, including under agreements with third parties,
such as consultants, contractors, and contract manufacturing organizations, or CMOs;
78
•
•
•
laboratory supplies;
facilities, depreciation and other expenses, which include direct and allocated expenses for depreciation and amortization, rent and
maintenance of facilities, insurance and supplies; and
third-party license fees.
We do not track our internal research and development expenses on a program-by-program basis as they primarily relate to personnel, early
research and consumable costs, which are deployed across multiple projects under development. These costs are included in unallocated research and
development expenses in the table below. A portion of our research and development costs are external costs, which we do track on a program-by-program
basis.
The following table summarizes our research and development expenses by program:
SRF231
NZV930 (formerly SRF373)
SRF388
SRF617
SRF813
Other early-stage programs
Unallocated research and discovery
expenses
Total research and development
expenses
2019
Year Ended December 31,
2018
2017
2019 v 2018
2018 v 2017
$
6,156 $
—
7,295
13,311
1,496
1,218
19,781 $
956
3,981
4,784
—
3,618
22,072 $
2,295
2,767
—
—
4,737
(13,625) $
(956)
3,314
8,527
1,496
(2,400)
22,642
19,372
15,912
3,270
(2,291)
(1,339)
1,214
4,784
—
(1,119)
3,460
$
52,118 $
52,492 $
47,783 $
(374) $
4,709
Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical
development, primarily due to the increased size and duration of later-stage clinical trials. We anticipate that our research and development expenses will
decrease in the future as a result of the strategic restructuring and the reduction in force announced in January 2020, however, we still anticipate incurring
increased clinical development costs as we advance our SRF617 and SRF388 clinical trials.
At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the
development of any of our product candidates that we develop from our programs. We are also unable to predict when, if ever, net cash inflows will
commence from sales of product candidates we develop. This is due to the numerous risks and uncertainties associated with developing product candidates,
including the uncertainty of:
•
•
•
•
•
•
•
•
•
•
•
successful completion of clinical trials and preclinical studies;
sufficiency of our financial and other resources to complete the necessary clinical trials and preclinical studies;
acceptance of INDs for our planned clinical trials or future clinical trials;
successful enrollment and completion of clinical trials;
successful data from our clinical program that supports an acceptable risk-benefit profile of our product candidates in the intended
populations;
receipt of regulatory and marketing approvals from applicable regulatory authorities;
receipt and maintenance of marketing approvals from applicable regulatory authorities;
establishing agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if any of our
product candidates are approved;
entry into collaborations to further the development of our product candidates;
obtaining and maintaining patent and trade secret protection or regulatory exclusivity for our product candidates;
successfully launching commercial sales of our product candidates, if and when approved;
79
•
acceptance of our product candidates’ benefits and uses, if and when approved, by patients, the medical community and third-party payors;
• maintaining a continued acceptable safety profile of the product candidates following approval;
•
•
effectively competing with other therapies; and
obtaining and maintaining healthcare coverage and adequate reimbursement from third-party payors.
A change in the outcome of any of these variables with respect to the development of any of our programs or any product candidate we develop
would significantly change the costs, timing, and viability associated with the development of such program or product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and personnel-related costs, including stock-based compensation, for our
personnel in executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also
include legal fees relating to patent and corporate matters; professional fees paid for accounting, auditing, consulting and tax services; insurance costs;
travel expenses; and facility costs not otherwise included in research and development expenses.
We anticipate that our general and administrative expenses will decrease in the future as a result of the strategic restructuring and the reduction in
force announced in January 2020, however, we still anticipate incurring increased accounting, audit, legal, regulatory, compliance, and director and officer
insurance costs as well as investor and public relations expenses associated with operating as a public company.
Interest and Other Income (Expense), Net
Interest and other income consist primarily of interest earned on our cash, cash equivalents, and marketable securities.
Income Taxes
We have not recorded any income tax benefits for the net losses we incurred or for the research and development tax credits we generated during
the years ended December 31, 2019 and 2018 as we believed, based upon the weight of available evidence, that it was more likely than not that all of the
net operating loss carryforwards and tax credits will not be realized. As of December 31, 2019, we had federal and state net operating loss carryforwards of
$71.5 million and $73.0 million, respectively, which may be available to offset future income tax liabilities and begin to expire in 2034. As of
December 31, 2019, we also had federal and state research and development tax credit carryforwards of $4.5 million and $2.0 million, respectively, which
begin to expire in 2034 and 2030, respectively. Through December 31, 2019, we had recorded a full valuation allowance against our net deferred tax assets
at each balance sheet date.
Results of Operations
Comparison of Years Ended December 31, 2019, 2018, and 2017
The following table summarizes our results of operations for the years ended December 31, 2019, 2018, and 2017, along with the changes in those
items:
Collaboration revenue - related party
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest and other income, net
Net loss
2019
Year Ended December 31,
2018
2017
(in thousands)
2019 v 2018
2018 v 2017
$
15,360 $
59,417 $
12,826 $
(44,057) $
46,591
52,118
20,608
72,726
(57,366)
2,577
(54,789) $
52,492
16,076
68,568
(9,151)
2,554
(6,597) $
47,783
11,033
58,816
(45,990)
613
(45,377) $
(374)
4,532
4,158
(48,215)
23
(48,192) $
4,709
5,043
9,752
36,839
1,941
38,780
$
80
Collaboration Revenue – Related Party
Collaboration revenue – related party was $15.4 million, $59.4 million, and $12.8 million for the years ended December 31, 2019, 2018, and
2017, respectively, all of which was derived from the Collaboration Agreement. The decrease in collaboration revenue – related party during the year ended
December 31, 2019 was primarily due to a reduction in costs incurred in the current year resulting from Novartis’ decision not to purchase its Option
related to IL-27 in February 2019. This decision reduced the number of remaining specified targets in our Collaboration Agreement from two in the year
ended December 31, 2018, to one in the year ended December 31, 2019. The increase in collaboration revenue – related party during the year ended
December 31, 2018 was primarily due to the partial recognition of $27.9 million in revenue related to a milestone payment of $45.0 million that we
received in February 2018 from Novartis upon Novartis’ receipt and acceptance of the first final audited GLP toxicology study report for NZV930.
Additionally, we recognized $5.0 million of revenue upon Novartis’ decision not to exercise its Option relating to CD47 in March 2018. In January 2020,
Novartis did not purchase and exercise its single remaining Option under the Collaboration Agreement and, as a result, the option purchase period expired.
Accordingly, there are no Options remaining eligible for purchase and exercise, and our performance obligations under the Collaboration Arrangement
have ended. As such, the remaining deferred revenue will be recognized as collaboration revenue – related party in the first quarter of 2020.
Research and Development Expenses
Direct research and development expenses
by program:
SRF231
NZV930 (formerly SRF373)
SRF388
SRF617
SRF813
Other early-stage programs
Research and discovery and unallocated
expenses:
Personnel related (including stock
-based compensation)
Facility related and other
Total research and development
expenses
2019
Year Ended December 31,
2018
2017
(in thousands)
2019 v 2018
2018 v 2017
$
6,156 $
—
7,295
13,311
1,496
1,218
19,781 $
956
3,981
4,784
—
3,618
22,072 $
2,295
2,767
—
—
4,737
(13,625) $
(956)
3,314
8,527
1,496
(2,400)
(2,291)
(1,339)
1,214
4,784
—
(1,119)
15,971
6,671
13,646
5,726
10,212
5,700
2,325
945
3,434
26
$
52,118 $
52,492 $
47,783 $
(374) $
4,709
Research and development expenses were $52.1 million for the year ended December 31, 2019, compared to $52.5 million for the year ended
December 31, 2018. The decrease of $0.4 million was primarily due to decreases of $13.6 million in external costs for our SRF231 program, $1.0 million
in external costs for our NZV930 program, and $2.4 million in external costs for our other early-stage programs, which were partially offset by increases of
$3.3 million in external costs for our SRF388 program, $8.5 million in external costs for our SRF617 program, and $3.3 million for research and discovery
and unallocated costs.
The decrease in research and development expenses for our SRF231 program was primarily due to a reduction in contract manufacturing work
completed in 2019 compared to 2018, as well as the deprioritization of SRF231, which we announced in December 2018.
The decrease in research and development expenses for our NZV930 program was primarily due to initiation of the Phase 1 clinical trial by
Novartis in June 2018. Novartis has worldwide exclusive rights to this program, and as a result of the initiation of the Phase 1 clinical by Novartis, we are
no longer incurring expenses for this program.
The decrease in research and development expenses for our other early-stage programs was primarily a result of costs related to SRF813, which
were not tracked as a separate program until 2019, as well as our strategic focus on filing INDs for SRF617 and SRF388 in the fourth quarter of 2019.
81
The increase in research and development expenses for our SRF388 program was primarily due to increased contract manufacturing work and
additional costs incurred in advancing the program, which led to the successful filing of an IND in the December 2019.
The increase in research and development expenses for our SRF617 program was primarily due to increased contract manufacturing work and
additional costs incurred in advancing the program, which led to the successful filing of an IND in the fourth quarter of 2019.
The increase in research and discovery and unallocated expenses was primarily due to the increase of $2.3 million in personnel-related costs due
to increased headcount, and an increase of $0.9 million in facility related costs.
Research and development expenses were $52.5 million for the year ended December 31, 2018, compared to $47.8 million for the year ended
December 31, 2017. The increase of $4.7 million was primarily due to increases of $1.2 million in external costs for our SRF388 program, $4.8 million in
external costs for our SRF617 program, and $3.5 million for research and discovery and unallocated costs, partially offset by decreases of $2.3 million in
external costs for our SRF231 program, $1.3 million in external costs for our SRF373 program, and $1.1 million in external costs for our other early-stage
programs.
The increase in research and development expenses for our SRF388 program was primarily due to a payment made for an exclusive license to the
antibodies related to this program as well as increased contract manufacturing work.
The increase in research and development expenses for our SRF617 program was primarily due to the commencement of contract manufacturing
work.
The increase in research and discovery and unallocated expenses was primarily due to the increase of $3.4 million in personnel-related costs due
to increased headcount.
The decrease in research and development expenses for our NZV930 program was primarily due to initiation of the Phase 1 clinical trial by
Novartis in June 2018. Novartis has worldwide exclusive rights to this program, and as a result of the initiation of the Phase 1 clinical by Novartis, we are
no longer incurring expenses for this program.
The decrease in research and development expenses for our other early-stage programs was primarily a result of costs related to SRF617, which
were not tracked as a separate program until 2018. This decrease was offset by increases relating to the advancement and initiation of new early discovery
programs.
General and Administrative Expenses
General and administrative expenses were $20.6 million for the year ended December 31, 2019, compared to $16.1 million for the year ended
December 31, 2018. The increase of $4.5 million was primarily due to an increase of $2.4 million in personnel-related costs as a result of an increase in
headcount; an increase of $ 0.4 million for professional fees related to legal and audit services, and an increase of $1.3 million in facility costs.
General and administrative expenses were $16.1 million for the year ended December 31, 2018, compared to $11.0 million for the year ended
December 31, 2017. The increase of $5.1 million was primarily due to an increase of $2.6 million in personnel-related costs as a result of an increase in
headcount; an increase of $1.0 million for professional fees related to legal and audit services, and an increase of $1.1 million in facility costs.
Interest and Other Income (Expense), Net
Interest and other income was approximately $2.6 million, $2.6 million, and $0.6 million during the years ended December 31, 2019, 2018, and
2017, respectively, due primarily to interest income on invested balances of our cash, cash equivalents and marketable securities.
82
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We have generated limited revenue to date from the Collaboration Agreement.
We have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years, if at all. To date, we
have financed our operations with proceeds from the sales of preferred stock, payments received under the Collaboration Agreement, debt financing and
proceeds from our initial public offering of common stock and concurrent private placement. Through December 31, 2019, we had received gross proceeds
of $48.6 million from our sales of preferred stock, $7.5 million from our loan and security agreement with K2 HealthVentures (see Note 12 to our
consolidated financial statements), and $150.0 million from the Collaboration Agreement.
On April 23, 2018, we completed an initial public offering of our common stock by issuing 7,200,000 shares of common stock, at $15.00 per
share for gross proceeds of $108.0 million, or net proceeds of $97.2 million. Concurrent with the initial public offering, we issued Novartis 766,666 shares
of our common stock at $15.00 per share for proceeds of $11.5 million, in a private placement.
In May 2019, we entered into a Capital on DemandTM Sales Agreement, or the Sales Agreement, with JonesTrading Institutional Services to issue
and sell up to $30.0 million in shares of our common stock, from time to time. In 2019, we sold 10,581 shares under the ATM Facility for net proceeds of
less than $0.1 million. As of December 31, 2019, we had cash, cash equivalents and marketable securities of $105.2 million.
Future Funding Requirements
We expect our expenses to decrease in connection with our strategic restructuring, in particular as we shift focus to initiating and advancing Phase
1 clinical trials for SRF617 and SRF388, as well as the reduction in our workforce. However, we expect to continue to incur additional costs associated
with operating as a public company.
We believe that our existing cash, cash equivalents, and marketable securities, as of March 10, 2020, will enable us to fund our operating
expenses, debt service obligations and capital expenditure requirements into 2022, excluding any future milestone payments from Novartis. We have based
this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product
candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could
increase significantly as a result of many factors, including:
•
•
•
•
•
•
•
•
completing clinical development of existing product candidates and programs, identifying new product candidates, and completing pre-
clinical and clinical development of such product candidates;
seeking and obtaining marketing approvals for any of product candidates that we develop;
launching and commercializing product candidates for which we obtain marketing approval by establishing a sales force, marketing, medical
affairs and distribution infrastructure or, alternatively, collaborating with a commercialization partner;
achieving adequate coverage and reimbursement by hospitals, government and third-party payors for product candidates that we develop;
establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate, in both amount and quality,
products and services to support clinical development and the market demand for product candidates that we develop, if approved;
obtaining market acceptance of product candidates that we develop as viable treatment options;
addressing any competing technological and market developments;
negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter and performing our obligations in
such collaborations;
• maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how;
•
•
defending against third-party interference or infringement claims, if any; and
attracting, hiring and retaining qualified personnel.
83
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly
change the costs and timing associated with the development of that product candidate. Further, our operating plans may change in the future, and we may
need additional funds to meet operational needs and capital requirements associated with such operating plans.
In addition to the variables described above, if and when any product candidate we develop successfully completes development, we will incur
substantial additional costs associated with regulatory filings, marketing approval, post-marketing requirements, maintaining our intellectual property
rights, and regulatory protection, in addition to other costs. We cannot reasonably estimate these costs at this time.
Until such time, if ever, that we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or
debt financings and collaboration arrangements, including the Collaboration Agreement. To the extent that we raise additional capital through the future
sale of equity or debt, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other
preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through the issuance of debt securities, these
securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts.
Additional capital may not be available on reasonable terms, or at all. If we raise additional funds through collaboration arrangements in the future, we may
have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that may not be favorable to
us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate development or future
commercialization efforts.
Cash Flows
The following table summarizes information regarding our cash flows for each of the periods presented:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash
Operating Activities
2019
Year Ended December 31,
2018
(in thousands)
2017
$
$
(60,140) $
16,965
7,415
(35,760) $
(13,222) $
(36,584)
110,376
60,570 $
(12,422)
25,918
(1,036)
12,460
During the year ended December 31, 2019, net cash used in operating activities was $60.1 million, primarily due to our net loss of $54.8 million
and net cash used in our operating assets and liabilities of $14.3 million, partially offset by non-cash charges of $8.9 million. Net cash used in changes in
our operating assets and liabilities for the year ended December 31, 2019 consisted primarily of a $15.4 million decrease in deferred revenue, a $0.7 million
decrease in accrued expenses and other current liabilities, a decrease of $1.8 million in our lease liability and a $3.0 million decrease in prepaid expenses
and other current assets. The decrease in deferred revenue was due to recognition of revenue under the Collaboration Agreement in 2019. The decrease in
accrued expenses and other current liabilities was primarily due to the reduction of manufacturing costs incurred in the current year offset increased payroll
related accruals. The decrease in our lease liability is a result of rent payments made on our corporate lease in 2019. The decrease in prepaid expenses and
other current assets was primarily due to the collection of the insurance claim in 2019.
During the year ended December 31, 2018, net cash used in operating activities was $13.2 million, primarily due to changes in our operating
assets and liabilities of $12.8 million and our net loss of $6.6 million, partially offset by non-cash charges of $6.2 million. Net cash used in changes in our
operating assets and liabilities for the year ended December 31, 2018 consisted primarily of a $14.4 million decrease in deferred revenue, a $0.5 million
decrease in accrued expenses and other current liabilities, and a $2.2 million decrease in prepaid expenses and other current assets. The decrease in deferred
revenue was due to the cumulative effect adjustment upon the adoption of ASC 606 in January 2018. The decrease in accrued expenses and other current
liabilities was primarily due to the payment of $3.4 million of manufacturing costs to Novartis in the current year offset increased manufacturing costs
incurred to support ongoing clinical trial activities and payroll related accruals. The decrease in prepaid expenses and other current assets was primarily due
to a reduction in prepaid taxes, offset by an increase in other assets resulting from an insurance claim that had not been received as of December 31, 2018.
84
During the year ended December 31, 2017, net cash used in operating activities was $12.4 million, primarily due to our net loss of $45.4 million
partially offset by changes in our operating assets and liabilities of $26.7 million and non-cash charges of $6.2 million. Net cash provided by changes in our
operating assets and liabilities for the year ended December 31, 2017 consisted primarily of a $17.2 million increase in deferred revenue, a $5.0 million
decrease in amounts due from Novartis, a related party, a $2.9 million increase in accrued expenses and other current liabilities, and a $1.1 million decrease
in prepaid expenses and other current assets. The increase in deferred revenue was due to the $35.0 million of aggregate milestone and option purchase
payments received from Novartis during the year ended December 31, 2017, which were not fully recognized as revenue at that time. The increase in
accrued expenses and other current liabilities was primarily due to increased manufacturing costs incurred to support ongoing clinical trial activities and
payroll related accruals. The decrease in prepaid expenses and other current assets was primarily due to a reduction in prepaid taxes.
Investing Activities
During the year ended December 31, 2019, net cash provided by investing activities was $17.0 million, primarily due to $136.9 million in
proceeds from sales or maturities of marketable securities. This was partially offset by purchases of marketable securities of $118.3 million and
$1.5 million of purchases of property and equipment, primarily related to leasehold improvements in our corporate headquarters facility.
During the year ended December 31, 2018, net cash used in investing activities was $36.6 million, primarily due to purchases of marketable
securities of $107.3 million and $ 2.0 million of purchases of property and equipment, primarily related to leasehold improvements in our corporate
headquarters facility. This was partially offset by $72.7 million in proceeds from sales or maturities of marketable securities.
During the year ended December 31, 2017, net cash provided by investing activities was $25.9 million, consisting primarily of $27.9 million of
proceeds from sales or maturities of marketable securities, partially offset by $2.0 million of purchases of property and equipment, primarily related to
leasehold improvements in our corporate headquarters facility.
Financing Activities
During the year ended December 31, 2019, net cash provided by financing activities was $7.4 million, consisting of $7.2 million of net proceeds
received from the debt facility with K2 Health Ventures and $0.3 million proceeds received from the exercise of stock options.
During the year ended December 31, 2018, net cash provided by financing activities was $110.4 million, consisting primarily of $100.4 million of
net proceeds received upon the completion of the initial public offering in April 2018, $11.5 million from a private placement of common stock with
Novartis, a related party, and $0.5 million of proceeds received from the exercise of stock options, partially offset by $2.0 million paid for initial public
offering costs.
During the year ended December 31, 2017, net cash used in financing activities was $1.0 million, consisting primarily of payments of initial
public offering costs of $1.2 million, partially offset by $0.1 million of proceeds received from the exercise of stock options.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2019 and the effects that such obligations are expected to have on
our liquidity and cash flow in future periods:
Total
Less Than
1 Year
Payments Due by Period
1 to 3
Years
(in thousands)
4 to 5
Years
More Than
5 Years
$
$
56,788 $
7,834
5,171
69,793 $
3,541 $
—
4,263
$
7,804
10,474 $
7,834
908
$
19,216
10,946 $
—
—
$
10,946
31,827
—
—
31,827
Operating lease commitments (1)
Note payable commitments (2)
Research and manufacturing commitments (3)
Total
(1)
(2)
(3)
Reflects payments due for leases of office and laboratory space that expire in December 2029.
Reflects payments due under our debt facility with K2 Health Ventures.
Reflects commitments for costs associated with external CMOs and CROs engaged to manufacture clinical trial materials as well as to conduct our clinical trials
and discovery research and preclinical development activities.
85
Under various license and collaboration agreements to which we are a party, we may be required to make milestone payments and pay royalties
and other amounts to third parties. We have not included any such contingent payment obligations in the table above as the amount, timing and likelihood
of such payments are not known.
Under our license agreement with Harbour Antibodies B.V., or Harbour, we are required to pay a nominal annual maintenance fee during the term
of the agreement. In addition, we are obligated to pay up to an aggregate of $4.75 million upon the achievement of specified development and commercial
milestones for each product licensed under the agreement. We are also obligated to pay Harbour royalties of a low single-digit percentage on the worldwide
net sales of any licensed product on a country-by-country basis.
Under our development and option agreement with Adimab LLC, or Adimab, we are obligated to make milestone payments and to pay specified
fees upon the exercise of the research or commercialization options under the agreement. During the discovery term, we may be obligated to pay Adimab
up to $250,000 for technical milestones achieved against each biological target. Upon exercise of a research option, we are obligated to pay a nominal
research maintenance fee on each of the next four anniversaries of the exercise. Upon the exercise of each commercialization option, we will be required to
pay an option exercise fee of a low seven-digit dollar amount, and we may be responsible for milestone payments of up to an aggregate of $13.0 million for
each licensed product that receives marketing approval. For any licensed product that is commercialized, we are obligated to pay Adimab tiered royalties of
a low to mid single-digit percentage on worldwide net sales of such product. We may also partially exercise a commercialization option with respect to ten
antibodies against a biological target by paying 65% of the option fee and later either (i) paying the balance and choosing up to 20 antibodies for
commercialization or (ii) foregoing the commercialization option entirely.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements,
which we have prepared in accordance with the rules and regulations of the SEC, and generally accepted accounting principles in the United States, or
GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenue and expenses during the reporting
period. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we
believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements, we believe that the
accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas
involving management’s judgments and estimates.
Revenue Recognition
Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, using
the modified retrospective transition method. Under this method, we recognized the cumulative effect of initially adopting ASC Topic 606, as an
adjustment to the opening balance of accumulated deficit. Additionally, under this method of adoption, we apply the guidance to all incomplete contracts in
scope as of the date of initial application. This standard applies to all contracts with customers, except for contracts that are within the scope of other
standards, such as leases, insurance, collaboration arrangements and financial instruments.
In accordance with ASC Topic 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that
reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements
that we determine are within the scope of ASC Topic 606, we perform the following five steps:
i.
identify the contract(s) with a customer;
ii.
identify the performance obligations in the contract;
iii. determine the transaction price
iv. allocate the transaction price to the performance obligations within the contract; and
v.
recognize revenue when (or as) the entity satisfies a performance obligation.
86
We only apply the five-step model to contracts when we determine that it is probable that we will collect the consideration we are entitled to in
exchange for the goods or services we transfer to the customer.
At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within the
contract to determine whether each promised good or service is a performance obligation. The promised goods or services in our arrangements typically
consist of a license to our intellectual property and/or research and development services. We may provide options to additional items in such
arrangements, which are accounted for as separate contracts when the customer elects to exercise such options, unless the option provides a material right
to the customer. Performance obligations are promises in a contract to transfer a distinct good or service to the customer that (i) the customer can benefit
from on its own or together with other readily available resources, and (ii) is separately identifiable from other promises in the contract. Goods or services
that are not individually distinct performance obligations are combined with other promised goods or services until such combined group of promises meet
the requirements of a performance obligation.
We determine transaction price based on the amount of consideration we expect to receive for transferring the promised goods or services in the
contract. Consideration may be fixed, variable, or a combination of both. At contract inception for arrangements that include variable consideration, we
estimate the probability and extent of consideration we expect to receive under the contract utilizing either the most likely amount method or expected
amount method, whichever best estimates the amount expected to be received. We then consider any constraints on the variable consideration and includes
in the transaction price variable consideration to the extent it is deemed probable that a significant reversal in the amount of cumulative revenue recognized
will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
We then allocate the transaction price to each performance obligation based on the relative standalone selling price and recognizes as revenue the
amount of the transaction price that is allocated to the respective performance obligation when (or as) control is transferred to the customer and the
performance obligation is satisfied. For performance obligations which consist of licenses and other promises, we utilize judgment to assess the nature of
the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over
time, the appropriate method of measuring progress. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of
performance and related revenue recognition.
We record amounts as accounts receivable when the right to consideration is deemed unconditional. When consideration is received, or such
consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract
liability is recorded for deferred revenue.
Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in our balance sheet. Amounts expected
to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue. Amounts not
expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, non-current.
Our revenue arrangement includes the following:
Up-front License Fees: If a license is determined to be distinct from the other performance obligations identified in the arrangement, we recognize
revenues from nonrefundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit
from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to
determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring
progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if
necessary, adjust the measure of performance and related revenue recognition.
Milestone Payments: At the inception of an agreement that includes research and development milestone payments, we evaluate each milestone to
determine when and how much of the milestone to include in the transaction price. We first estimate the amount of the milestone payment that we could
receive using either the expected value or the most likely amount approach. We primarily use the most likely amount approach as that approach is generally
most predictive for milestone payments with a binary outcome. Then, we consider whether any portion of that estimated amount is subject to the variable
consideration constraint (that is, whether it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty.)
We update the estimate of variable consideration included in the transaction price at each reporting date which includes updating the assessment of the
likely amount of consideration and the application of the constraint to reflect current facts and circumstances.
87
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is
deemed to be the predominant item to which the royalties relate, we will recognize revenue at the later of (i) when the related sales occur, or (ii) when the
performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any
revenue related to sales-based royalties or milestone payments based on the level of sales.
All of our revenues to date have been generated through the Collaboration Agreement with Novartis See Note 8, “Collaboration Agreement with
Novartis” for additional details regarding our Collaboration Agreement.
Accrued Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing
open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level
of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The
majority of our service providers invoice us monthly in arrears for services performed, or when contractual milestones are met; however, some require
advanced payments. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time.
We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our
accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development
activities for which we have not yet been invoiced.
There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the
expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period.
If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses
accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of
services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any
particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable
Securities and Exchange Commission rules.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is
disclosed in Note 2 to our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our cash, cash equivalents and marketable securities as of December 31, 2019 consisted of cash, a money market fund invested primarily in short-
term U.S. Treasury obligations, and U.S. government agency bonds. Interest income is sensitive to changes in the general level of interest rates; however,
due to the nature of these investments, we do not believe that we have any material exposure to changes in the fair value of our investment portfolio as a
result of changes in interest rates.
Item 8. Financial Statements and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in
Item 15 of Part IV of this Annual Report on Form 10-K.
88
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
a. Evaluation of Disclosure Controls and Procedures - Our principal executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our
management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
b. Management's Annual Report on Internal Control Over Financial Reporting - Our management is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d‑15(f) under the Exchange Act). Our
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2019. In making this assessment, it used the criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on such assessment,
our management has concluded that our internal control over financial reporting was effective, as of December 31, 2019.
c. Changes in Internal Controls - There were no changes in our internal control over financial reporting, identified in connection with the
evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
89
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Incorporated by reference from the information in our Proxy Statement for our 2020 Annual Meeting of Stockholders, which we will file with the
SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
Item 11. Executive Compensation.
Incorporated by reference from the information in our Proxy Statement for our 2020 Annual Meeting of Stockholders, which we will file with the
SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference from the information in our Proxy Statement for our 2020 Annual Meeting of Stockholders, which we will file with the
SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Incorporated by reference from the information in our Proxy Statement for our 2020 Annual Meeting of Stockholders, which we will file with the
SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
Item 14. Principal Accounting Fees and Services.
Incorporated by reference from the information in our Proxy Statement for our 2020 Annual Meeting of Stockholders, which we will file with the
SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates.
90
Item 15. Exhibits and Financial Statement Schedules.
(1) Financial Statements
PART IV
The following documents are included on pages F-1 through F-34 attached hereto and are filed as part of this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-6
(2) Financial Statement Schedules:
All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the
financial statements or the notes thereto.
(3) Exhibits.
The following is a list of exhibits filed as part of this Annual Report on Form 10-K.
Exhibit
Number
Description
3.1
Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed
on April 23, 2018 (File No. 001-38459) and incorporated herein by reference)
3.2
Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on April 23, 2018
(File No. 001-38459) and incorporated herein by reference)
4.1
Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018
(File No. 333-223877) and incorporated herein by reference)
4.2
Amended and Restated Investors’ Rights Agreement among the Company and certain of its stockholders, dated November 6, 2014, as
amended on January 9, 2016 (filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018 (File
No. 333-223877) and incorporated herein by reference)
4.3*
Description of the Registrant's Securities
10.1#
2014 Stock Option and Grant Plan, as amended, and forms of award agreements thereunder (filed as Exhibit 10.1 to the Company’s
Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated herein by reference)
10.2#
2018 Stock Option Plan (filed as Exhibit 10.2 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-
223877) and incorporated herein by reference)
10.3#
Form of Incentive Stock Option Agreement under the Company’s 2018 Stock Option and Incentive Plan (filed as Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated herein by reference)
10.4#
Form of Non-Qualified Stock Option Agreement for Company Employees under the Company’s 2018 Stock Option and Incentive Plan (filed
as Exhibit 10.4 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated
herein by reference)
10.5#
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the Company’s 2018 Stock Option and Incentive Plan
(filed as Exhibit 10.5 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated
herein by reference)
91
Exhibit
Number
Description
10.6#
Form of Restricted Stock Award Agreement under the Company’s 2018 Stock Option and Grant Plan (filed as Exhibit 10.6 to the Company’s
Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated herein by reference)
10.7#
Form of Restricted Stock Unit Award Agreement for Company Employees under the Company’s 2018 Stock Option and Incentive Plan (filed
as Exhibit 10.7 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated
herein by reference)
10.8#
Form of Restricted Stock Unit Award Agreement for Non-Employee Directors under the Company’s 2018 Stock Option and Incentive Plan
(filed as Exhibit 10.8 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated
herein by reference)
10.9#
2018 Employee Stock Purchase Plan (filed as Exhibit 10.9 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018
(File No. 333-223877) and incorporated herein by reference)
10.10#
Senior Executive Cash Incentive Bonus Plan (filed as Exhibit 10.10 to the Company’s Registration Statement on Form S-1 filed on March 23,
2018 (File No. 333-223877) and incorporated herein by reference)
10.11#
Employment Agreement between Vito J. Palombella, Ph.D. and the Company, dated April 23, 2018 (filed as Exhibit 10.12 to the Company’s
Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated herein by reference)
10.12#
Employment Agreement between Robert W. Ross, M.D. and the Company, dated April 23, 2018 (filed as Exhibit 10.13 to the Company’s
Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated herein by reference)
10.13#
Employment Agreement between J. Jeffrey Goater and the Company, dated April 23, 2018 (filed as Exhibit 10.15 to the Company’s
Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated herein by reference)
10.14
Lease by and between the Company and BMR-Hampshire LLC, dated May 13, 2016, as amended on February 28, 2017 (filed as Exhibit
10.17 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated herein by
reference)
10.15
Second Amendment to Lease, dated May 22, 2018, by and between BMR-Hampshire LLC and the Company (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on May 24, 2018 (File No.001-3845) and incorporated herein by reference)
10.16†
Collaboration Agreement between Novartis Institutes for BioMedical Research, Inc. and the Company, dated January 9, 2016, as amended on
May 6, 2016, as further amended on July14, 2017, and as further amended on September 18, 2017 (filed as Exhibit 10.18 to the Company’s
Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and incorporated herein by reference)
10.17†
Amendment No. 4 to the Collaboration Agreement between Novartis Institutes for BioMedical Research, Inc. and the Company, dated
October 9, 2018 (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2018 (File No. 001-38459)
and incorporated herein by reference)
10.18†
Exclusive License Agreement between Harbour Antibodies B.V. and the Company, dated September 23, 2015, as amended on January 4,
2016 (filed as Exhibit 10.19 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018 (File No. 333-223877) and
incorporated herein by reference)
10.19#
Form of Director Indemnification Agreement (filed as Exhibit 10.21 to the Company’s Registration Statement on Form S-1 filed on March
23, 2018 (File No. 333-223877) and incorporated herein by reference)
10.20#
Form of Officer Indemnification Agreement (filed as Exhibit 10.22 to the Company’s Registration Statement on Form S-1 filed on March 23,
2018 (File No. 333-223877) and incorporated herein by reference)
10.21†
First Amended and Restated Development and Option Agreement between Adimab, LLC and the Company, dated October 3, 2018 (filed as
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2018 (File No. 001-38459) and incorporated herein by
reference)
10.22*
Sublease Agreement by and between the Company and EQRx, Inc., dated December 16, 2019
92
Exhibit
Number
10.23†
Loan and Security Agreement, dated November 22, 2019, by and among Surface Oncology, Inc., K2 HealthVentures, LLC and Ankura Trust
Company, LLC (filed as Exhibit 10.` to the Company’s Current Report on Form 8-K filed on November 25, 2019 (File No. 001-38459) and
incorporated herein by reference)
Description
21.1
List of Subsidiaries of the Company (filed as Exhibit 21.1 to the Company’s Registration Statement on Form S-1 filed on March 23, 2018
(File No.333-223877) and incorporated herein by reference)
23.1*
Consent of PricewaterhouseCoopers LLP
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+
Certification of Principal Executive Officer a Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2+
Certification of Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
XBRL Instance Document
101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
*
+
†
#
Filed herewith.
Furnished herewith.
Confidential treatment obtained as to certain portions.
A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(a)(3) of Form 10-K
Item 16. Form 10-K Summary.
None.
93
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 10, 2020
Company Name
By: /s/ J. Jeffrey Goater
J. Jeffrey Goater
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned directors and officers of Surface Oncology, Inc. (the “Company”), hereby severally constitute and appoint J. Jeffrey Goater
and Daniel S. Lynch, and each of them singly, our true and lawful attorneys, with full power to them, and to each of them singly, to sign for us and in our
names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K, and to file or cause to be filed the same, with all
exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys, and each of
them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as each of us might or could do in person, and hereby ratifying and confirming all that said attorneys, and each of them, or their
substitute or substitutes, shall do or cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
Name
Title
Date
/s/ J. Jeffrey Goater
J. Jeffrey Goater
/s/ Jessica Fees
Jessica Fees
/s/ Daniel S. Lynch
Daniel S. Lynch
/s/ David S. Grayzel, M.D.
David S. Grayzel, M.D.
/s/ Geoffrey McDonough, M.D.
Geoffrey McDonough, M.D.
/s/ Armen B. Shanafelt, Ph.D
Armen B. Shanafelt, Ph.D
/s/ Elliott Sigal, M.D., Ph.D.
Elliott Sigal, M.D., Ph.D.
/s/ Laurie D. Stelzer
Laurie D. Stelzer
/s/ Ramy Ibrahim M.D.
Ramy Ibrahim M.D.
Chief Executive Officer (Principal Executive Officer and Duly
Authorized Officer)
March 10, 2020
Senior Vice President, Finance (Principal Financial and
Accounting Officer)
Chairman of the Board
Director
Director
Director
Director
Director
Director
94
March 10, 2020
March 10, 2020
March 10, 2020
March 10, 2020
March 10, 2020
March 10, 2020
March 10, 2020
March 10, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Surface Oncology, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Surface Oncology, Inc. and its subsidiary (the “Company”) as of December 31, 2019 and
2018, and the related consolidated statements of operations and comprehensive loss, of redeemable convertible preferred stock and stockholders’ equity
(deficit) and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in
which it accounts for revenues from contracts with customers in 2018.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
Emphasis of Matter
As discussed in Note 1 to the consolidated financial statements, the Company will require additional financing to fund future operations. Management’s
evaluation of the events and conditions and plans to mitigate this matter are also described in Note 1.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
March 10, 2020
We have served as the Company's auditor since 2016.
F-1
SURFACE ONCOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use asset
Restricted cash
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue - related party
Deferred rent
Operating lease liability
Total current liabilities
Deferred revenue - related party, non-current
Deferred rent, non-current
Operating lease liability, non-current
Convertible note payable, non-current
Total liabilities
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized
at December 31, 2019 and December 31, 2018; no shares
issued and outstanding at December 31, 2019 and December 31, 2018
Common stock, $0.0001 par value; 150,000,000 authorized at December 31, 2019
and December 31, 2018; 27,893,337 and 27,772,600 shares issued and
outstanding at December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
December 31,
2019
December 31,
2018
46,755 $
58,406
2,765
107,926
7,286
14,858
1,595
28
131,693 $
3,384 $
8,012
4,916
—
2,962
19,274
33,676
—
16,968
5,109
75,027
82,912
75,923
5,766
164,601
8,226
—
1,198
40
174,065
3,412
8,803
14,610
352
—
27,177
39,342
4,684
—
—
71,203
—
—
3
178,155
103
(121,595)
56,666
131,693 $
3
169,784
(119)
(66,806)
102,862
174,065
$
The accompanying notes are an integral part of these consolidated financial statements.
F-2
SURFACE ONCOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
Collaboration revenue - related party
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest and other income, net
Net loss
Accretion of redeemable convertible preferred stock to redemption
value
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders—basic and
diluted
Weighted average common shares outstanding—basic and diluted
Comprehensive loss:
Net loss
Other comprehensive loss:
Unrealized gain on marketable securities, net of tax
Comprehensive loss
2019
Year Ended December 31,
2018
2017
$
15,360
$
59,417
$
12,826
52,118
20,608
72,726
(57,366)
2,577
(54,789)
52,492
16,076
68,568
(9,151)
2,554
(6,597)
47,783
11,033
58,816
(45,990)
613
(45,377)
—
(54,789)
$
(11)
(6,608)
$
(40)
(45,417)
(1.97)
$
(0.33)
$
(18.35)
27,854,912
19,990,773
2,474,800
$
$
$
(54,789)
$
(6,597)
$
(45,377)
222
(54,567)
$
127
(6,470)
$
107
(45,270)
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SURFACE ONCOLOGY, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
Balances at December 31, 2016
Issuance of common stock upon exercise
of stock options
Vesting of restricted common stock
Stock-based compensation expense
Collection of note receivable from officer
Accretion of redeemable convertible
preferred stock to redemption value
Unrealized gain on marketable securities
Net loss
Balances at December 31, 2017
Issuance of common stock upon exercise
of stock options
Repurchases of unvested restricted stock
Stock-based compensation expense
Accretion of redeemable convertible
preferred stock to redemption value
Conversion of redeemable
convertible preferred stock
to common stock
Issuance of common stock
upon completion of initial
public offering, net of commissions,
underwriting discounts and offering costs
Issuance of common stock to a related party
Adjustment due to the adoption of ASC 606
Unrealized gain on marketable securities
Net loss
Balances at December 31, 2018
Issuance of common stock upon
exercise of stock options
Issuance of common stock upon public
offering, net
of issuance costs
Stock-based compensation expense
Portion of convertible
note payable proceeds allocated to
beneficial conversion feature
Unrealized gain on marketable securities
Net loss
Balances at December 31, 2019
Series A and A-1
Redeemable Convertible
Preferred Stock
Common Stock
Shares
37,100,000
Amount
$
48,477
Shares
2,399,265
Amount
$
—
Additional
Paid-in
Capital
Note
Receivable
From
Officer
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
$
2,040
$
(31)
$
(353)
$
(28,568)
Total
Stockholders’
Equity (Deficit)
(26,912)
$
—
—
—
—
—
—
—
37,100,000
—
—
—
—
—
—
—
—
40
—
—
48,517
—
—
—
11
287,085
—
—
—
—
—
—
2,686,350
272,895
(16,935)
—
—
(37,100,000)
(48,528)
16,863,624
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
—
—
—
—
—
—
—
—
—
7,200,000
766,666
—
—
—
27,772,600
110,156
10,581
—
—
—
—
27,893,337
$
—
—
—
—
—
—
—
—
—
—
—
—
2
1
—
—
—
—
3
—
—
—
—
—
—
3
102
35
4,709
31
(40)
—
—
6,877
467
—
5,217
(11)
48,526
97,208
11,500
—
—
—
169,784
255
24
5,991
2,101
—
—
178,155
$
$
—
—
—
31
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
—
107
—
(246)
—
—
—
—
—
—
—
—
127
—
(119)
—
—
—
222
—
103
—
—
—
—
—
—
(45,377)
(73,945)
—
—
—
—
—
—
—
13,736
—
(6,597)
(66,806)
—
—
—
—
(54,789)
(121,595)
$
$
102
35
4,709
62
(40)
107
(45,377)
(67,314)
467
-
5,217
(11)
48,528
97,209
11,500
13,736
127
(6,597)
102,862
255
24
5,991
2,101
222
(54,789)
56,666
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SURFACE ONCOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share amounts)
2019
Year Ended December 31,
2018
2017
$
(54,789) $
(6,597) $
(45,377)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization expense
Stock-based compensation expense
Non-cash interest expense related to note payable
Net amortization of premiums and discounts on marketable securities
Realized losses on marketable securities
Loss on disposal of property and equipment
Non-cash operating lease cost
Changes in operating assets and liabilities:
Amounts due from related party
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses and other current liabilities
Deferred rent
Operating lease liability
Deferred revenue - related party
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Purchases of marketable securities
Proceeds from sales or maturities of marketable securities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Payments of initial public offering costs
Proceeds from initial public offering of common stock, net of commissions
and underwriting discounts
Proceeds from issuance of common stock to a related party
Collection of note receivable from officer
Proceeds from issuance of convertible note payable, net of issuance costs
Payments of debt issuance costs
Proceeds for issuance of common stock offering, net
Proceeds from exercise of stock options
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents and restricted cash at end of period
Supplemental disclosure of cash flow information:
Cash paid for income taxes
Supplemental disclosure of non-cash investing and financing activities:
Accretion of redeemable convertible preferred stock to redemption value
Purchases of property and equipment included in accounts payable and
accrued expenses
Deferred offering costs included in accrued expenses
Reclassification of restricted cash from non-current assets to current assets
Reclassification of deposit liability for restricted stock upon vesting of shares
Landlord incentives for construction of leasehold improvements recorded
as deferred rent
1,785
5,991
74
(764)
—
1
1,814
—
3,001
12
583
(710)
—
(1,778)
(15,360)
(60,140)
(1,538)
(118,347)
136,850
16,965
1,347
5,217
—
(377)
—
14
—
—
2,170
(26)
23
(524)
(52)
—
(14,417)
(13,222)
(2,019)
(107,257)
72,692
(36,584)
—
(2,031)
964
4,709
—
516
2
35
—
5,000
1,088
(12)
285
2,945
249
—
17,174
(12,422)
(1,973)
—
27,891
25,918
(1,200)
—
—
62
—
—
—
102
(1,036)
12,460
11,080
23,540
—
—
—
7,217
(81)
24
255
7,415
(35,760)
84,110
48,350 $
— $
— $
— $
— $
— $
— $
—
$
$
$
$
$
$
$
$
$
100,440
11,500
—
—
—
—
467
110,376
60,570
23,540
84,110 $
28 $
3,297
11 $
692 $
— $
— $
— $
$
—
40
450
584
85
35
2,377
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1.
Nature of the Business
Surface Oncology, Inc. (the “Company” or “Surface”) is a clinical-stage immuno-oncology company focused on using its specialized knowledge
of the biological pathways critical to the immunosuppressive tumor microenvironment (“TME”) for the development of next-generation cancer therapies.
Surface was incorporated in April 2014 under the laws of the State of Delaware.
The Company is subject to risks common to early-stage companies in the biotechnology industry including, but not limited to, development by
competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations
and the ability to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research
and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require
significant amounts of additional capital, adequate personnel infrastructure and extensive compliance-reporting capabilities. Even if the Company’s
development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
On April 6, 2018, the Company effected a one-for-2.2 reverse stock split of its issued and outstanding shares of common stock and a proportional
adjustment to the existing conversion ratios for each series of the Company’s Redeemable Convertible Preferred Stock. Accordingly, all share and per share
amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where
applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.
On April 23, 2018, the Company completed its initial public offering of its common stock by issuing 7,200,000 shares of common stock, at
$15.00 per share for gross proceeds of $108,000, or net proceeds of $97,209 after deducting underwriting discounts, commissions and offering expenses.
Concurrent with the initial public offering, the Company issued Novartis Institutes for Biomedical Research, Inc. (Novartis) 766,666 shares of its common
stock at $15.00 per share for proceeds of $11,500, in a private placement.
Upon the closing of the Company’s initial public offering on April 23, 2018, all shares of Series A and A-1 redeemable convertible preferred
stock (the “Series A Preferred Stock” and “Series A-1 Preferred Stock”, respectively) automatically converted into 16,863,624 shares of common stock.
On May 1, 2019, the Company entered into a Capital on DemandTM Sales Agreement (the “Sales Agreement”) with JonesTrading Institutional
Services LLC (“JonesTrading”) to issue and sell shares of the Company’s common stock of up to $30,000 in gross proceeds, from time to time during the
term of the a Sales Agreement, through an “at-the-market” equity offering program under which JonesTrading will act as the Company’s agent and/or
principal (the “ATM Facility”). The ATM Facility provides that JonesTrading will be entitled to compensation for its services in an amount of up to 3.0% of
the gross proceeds of any shares sold under the ATM Facility. The Company has no obligation to sell any shares under the ATM Facility and may, at any
time, suspend solicitation and offers under the Sales Agreement. As of December 31, 2019, the Company has sold 10,581 shares under the ATM Facility
for net proceeds of $24.
The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of
liabilities and commitments in the ordinary course of business. The Company has primarily funded its operations with proceeds from the sales of
redeemable convertible preferred stock, proceeds from a collaboration agreement with Novartis, issuance of a debt facility with K2 Health Ventures and
proceeds from the Company’s initial public offering of common stock. The Company has incurred losses and negative cash flows from operations since its
inception, including net losses of $54,789, $6,597, and $45,377 for the years ended December 31, 2019, 2018, and 2017. As of December 31, 2019 and
2018, the Company had an accumulated deficit of $121,595 and $66,806, respectively. The Company expects that its operating losses and negative cash
flows will continue for the foreseeable future. As of March 10, 2020, the issuance date of the consolidated financial statements for the year ended
December 31, 2019, the Company expects that its cash, cash equivalents and marketable securities of $105,161, will be sufficient to fund its operating
expenses and capital expenditure requirements for at least the next 12 months. The future viability of the Company beyond that date is dependent on its
ability to raise additional capital to finance its operations.
F-6
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
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.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying 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.
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.
Cash Equivalents
The Company considers all short-term, highly liquid investments with original maturities of 90 days or less at the acquisition date to be cash
equivalents. Cash equivalents, which consist of money market funds are stated at fair value.
Marketable Securities
Marketable securities consist of investments with original maturities greater than 90 days at their acquisition date. The Company has classified its
investments with maturities beyond one year as current, based on their highly liquid nature and because such marketable securities represent the investment
of cash that is available for current operations.
The Company classifies all of its marketable securities as available-for-sale securities. The Company’s marketable securities are measured and
reported at fair value using quoted prices in active markets for similar securities. Unrealized gains and losses on available-for-sale debt securities are
reported as accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity. The cost of debt securities sold is
determined on a specific identification basis, and realized gains and losses are included in interest and other income (expense), net in the consolidated
statements of operations and comprehensive loss.
The Company evaluates its marketable securities with unrealized losses for other-than-temporary impairment. When assessing marketable
securities for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as
a percentage of the original cost, how long the market value of the investment has been less than its original cost, the Company’s ability and intent to retain
the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. If any adjustment to fair
value reflects a decline in the value of the investment that the Company considers to be “other than temporary,” the Company reduces the investment to fair
value through a charge to the statement of operations and comprehensive loss. No such adjustments were necessary during the periods presented.
F-7
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Restricted Cash
At December 31, 2019 and 2018, restricted cash consisted of cash deposited in a separate bank account as collateral for the Company’s facilities
lease obligations. At December 31, 2019 and 2018, $1,595 and $1,198 of restricted cash was classified as non-current.
Concentration of Credit Risk and of Significant Suppliers
Financial instruments that potentially expose the Company to concentrations of credit risk primarily consist of cash, cash equivalents and
marketable securities. The Company maintains its cash, cash equivalents, and marketable securities at one accredited financial institution in amounts that
exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with
commercial banking relationships.
The Company is dependent on third-party manufacturers to supply products for research and development activities of its programs, including
preclinical testing. These programs could be adversely affected by a significant interruption in the supply of such drug substance products.
Fair Value of Financial Instruments
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of
unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair
value hierarchy, of which the first two are considered observable and the last is considered unobservable:
• Level 1—Quoted prices in active markets for identical assets or liabilities.
• Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted
prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by
observable market data.
• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the
assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
The Company’s cash equivalents and marketable securities are carried at fair value, determined according to the fair value hierarchy described
above. The carrying values of the Company’s prepaid expenses and other current assets, accounts payable, and accrued expenses approximate their fair
values due to the short-term nature of these assets and liabilities.
Deferred Offering Costs
The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity
financings as deferred offering costs (non-current) until such financings are consummated. After consummation of the equity financing, these costs are
recorded in stockholders’ equity as a reduction of additional paid-in capital generated as a result of the offering. Should the planned equity financing be
abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the statement of operations and comprehensive
loss. The Company did not record any deferred offering costs as of December 31, 2019 or 2018.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is recognized
using the straight-line method over the useful life of the asset. Laboratory equipment is depreciated over five years. Computer equipment and furniture and
office equipment are depreciated over three years. Leasehold improvements are amortized over the shorter of the lease term or 10 years. Expenditures for
repairs and maintenance of assets are charged to expense as incurred. Upon retirement or sale, the cost and related accumulated depreciation and
amortization of assets disposed of are removed from the accounts, and any resulting gain or loss is included in loss from operations.
F-8
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Impairment of Long-Lived Assets
Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or
changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in
deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative
industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-
lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition
of the long-lived asset group to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to
result from the use of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the
impaired asset group over its fair value, determined based on discounted cash flows. To date, the Company has not recorded any impairment losses on
long-lived assets.
Revenue Recognition
Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with
Customers, using the modified retrospective transition method. Under this method, the Company recognized the cumulative effect of initially adopting
ASC Topic 606, as an adjustment to the opening balance of accumulated deficit. Additionally, under this method of adoption, the Company applies the
guidance to all incomplete contracts in scope as of the date of initial application. This standard applies to all contracts with customers, except for contracts
that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.
In accordance with ASC Topic 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an
amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for
arrangements that the Company determines are within the scope of ASC Topic 606, it performs the following five steps:
i.
identify the contract(s) with a customer;
ii.
identify the performance obligations in the contract;
iii. determine the transaction price
iv. allocate the transaction price to the performance obligations within the contract; and
v.
recognize revenue when (or as) the entity satisfies a performance obligation.
The Company only applies the five-step model to contracts when it determines that it is probable it will collect the consideration it is entitled to in
exchange for the goods or services it transfers to the customer.
At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised
within the contract to determine whether each promised good or service is a performance obligation. The promised goods or services in the Company’s
arrangements typically consist of a license to the Company’s intellectual property and/or research and development services. The Company may provide
options to additional items in such arrangements, which are accounted for as separate contracts when the customer elects to exercise such options, unless
the option provides a material right to the customer. Performance obligations are promises in a contract to transfer a distinct good or service to the
customer that (i) the customer can benefit from on its own or together with other readily available resources, and (ii) is separately identifiable from other
promises in the contract. Goods or services that are not individually distinct performance obligations are combined with other promised goods or services
until such combined group of promises meet the requirements of a performance obligation.
The Company determines transaction price based on the amount of consideration the Company expects to receive for transferring the promised
goods or services in the contract. Consideration may be fixed, variable, or a combination of both. At contract inception for arrangements that include
variable consideration, the Company estimates the probability and extent of consideration it expects to receive under the contract utilizing either the most
likely amount method or expected amount method, whichever best estimates the amount expected to be received. The Company then considers any
constraints on the variable consideration and includes in the transaction price variable consideration to the extent it is deemed probable that a significant
reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved.
F-9
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The Company then allocates the transaction price to each performance obligation based on the relative standalone selling price and recognizes as
revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) control is transferred to the customer and
the performance obligation is satisfied. For performance obligations which consist of licenses and other promises, the Company utilizes judgment to assess
the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time
and, if over time, the appropriate method of measuring progress. The Company evaluates the measure of progress each reporting period and, if necessary,
adjusts the measure of performance and related revenue recognition.
The Company records amounts as accounts receivable when the right to consideration is deemed unconditional. When consideration is received,
or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a
contract liability is recorded for deferred revenue.
Amounts received prior to satisfying the revenue recognition criteria are recognized as deferred revenue in the Company’s balance
sheet. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred
revenue. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, non-
current.
The Company’s revenue arrangement includes the following:
Up-front License Fees: If a license is determined to be distinct from the other performance obligations identified in the arrangement, the Company
recognizes revenues from nonrefundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use
and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined
performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the
appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of
progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone Payments: At the inception of an agreement that includes research and development milestone payments, the Company evaluates each
milestone to determine when and how much of the milestone to include in the transaction price. The Company first estimates the amount of the milestone
payment that the Company could receive using either the expected value or the most likely amount approach. The Company primarily uses the most likely
amount approach as that approach is generally most predictive for milestone payments with a binary outcome. Then, the Company considers whether any
portion of that estimated amount is subject to the variable consideration constraint (that is, whether it is probable that a significant reversal of cumulative
revenue would not occur upon resolution of the uncertainty.) The Company updates the estimate of variable consideration included in the transaction price
at each reporting date which includes updating the assessment of the likely amount of consideration and the application of the constraint to reflect current
facts and circumstances.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is
deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii)
when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has
not recognized any revenue related to sales-based royalties or milestone payments based on the level of sales.
The Company’s revenues have been generated through the Collaboration Agreement with Novartis See Note 8, “Collaboration Agreement with
Novartis” for additional details regarding the Company’s Collaboration Agreement.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses include salaries, stock-based compensation and
benefits of employees, third-party license fees and other operational costs related to the Company’s research and development activities, including allocated
facility-related expenses and external costs of outside vendors engaged to conduct both preclinical studies and clinical trials.
F-10
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Research Contract Costs and Accruals
The Company has entered into various research and development contracts with research institutions and other companies. These agreements are
generally cancelable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated
ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies, including the phase or
completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end
of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially
different from the actual costs.
Nonrefundable prepayments for goods or services that will be used or rendered for future research and development activities are deferred and
capitalized. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected
that the goods will be delivered or the services rendered.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty
about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses in the accompanying statements of
operations and comprehensive loss.
Stock-Based Compensation
The Company measures all stock options and other stock-based awards granted to employees and directors based on the fair value on the date of
the grant and recognizes compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective
award. Generally, the Company issues stock options and restricted stock awards with only service-based vesting conditions and records the expense for
these awards using the straight-line method.
Following the Company’s adoption of ASU 2018-07, Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share-
Based Payment Accounting (“ASU 2018-07”), on January 1, 2019, for stock-based awards issued to non-employees, the Company no longer revalues non-
employee awards at each reporting date and instead calculates the fair value of the awards as of the grant date using the Black-Scholes option-pricing
model. Compensation expense for these awards is recognized over the related service period.
The Company classifies stock-based compensation expense in its statement of operations and comprehensive loss in the same manner in which
the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.
The fair value of each stock option grant is estimated using the Black- Scholes option-pricing model. The Company has historically been a private
company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the
historical volatility of a publicly traded set of peer companies. The expected term of the Company’s stock options has been determined utilizing the
“simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the
contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of
the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never
paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. The Company elects to account for forfeitures as they occur
rather than apply an estimated forfeiture rate to share based payment expense.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) asset,
operating lease liability, and operating lease liability, non-current in the Company’s consolidated balance sheets.
F-11
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to
make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of
lease payments over the lease term. Many lease agreements include the option to renew or extend the lease term. The exercise of lease renewal options or
extensions is at the Company’s sole discretion, and are only included in the calculation of the operating lease ROU asset and operating lease liability when
it is reasonably certain that the Company would exercise such options. As the Company’s leases do not provide an implicit rate, the Company uses its
incremental borrowing rate, which it calculates based on the credit quality of the Company, and by comparing interest rates available in the market for
similar borrowings, and adjusting this amount based on the impact of collateral over the term of each lease.
The components of a lease are split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area
maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed and in-substance fixed contract
consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components.
Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical
expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component
together as a single component. The Company’s facilities operating leases have lease and non-lease components to which the Company has elected to apply
the practical expedient and account for each lease component and related non-lease component as one single component. The Company also elected the
package of practical expedients, which, among other things, allows the Company to carry forward prior conclusions related to whether any expired or
existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. The Company
also made an accounting policy election not to recognize leases with an initial term of 12 months or less within its consolidated balance sheets and to
recognize those lease payments on a straight-line basis in its consolidated statements of operations and comprehensive loss over the lease term.
Segment Data
The Company manages its operations as a single segment for the purposes of assessing performance and making decisions. The Company’s
singular focus is using its specialized knowledge of the biological pathways critical to the TME for the development of next-generation cancer therapies.
All of the Company’s tangible assets are held in the United States, and all collaboration revenue is derived from the Company’s collaboration partner in the
United States.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in the financial statements or in the Company's tax returns. Deferred taxes
are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company
assesses the likelihood that its deferred tax assets will be and, to the extent it believes, based upon the weight of available evidence, that it is more likely
than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense.
Potential for recovery of deferred tax assets is evaluated by analyzing carryback capacity in periods with taxable income, reversal of existing taxable
temporary differences and estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.
The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine the
amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external
examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the
amount of benefit to recognize in the financial statements. The amount of benefit that may be recognized is the largest amount that has a greater than 50%
likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax
benefits, that are considered appropriate as well as the related net interest and penalties.
F-12
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than
those with stockholders. The Company’s only element of other comprehensive loss in all periods presented was unrealized gains (losses) on marketable
securities.
Net Loss per Share
The Company follows the two-class method when computing net loss per share as the Company has issued shares that meet the definition of
participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends
declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the
period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period
had been distributed.
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders is computed by
adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities, including the
assumed conversion of the Company’s convertible note payable and outstanding options to purchase common stock, except where the results would be
anti-dilutive. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common
stockholders by the weighted average number of shares of common stock outstanding for the period, including potential dilutive common shares assuming
the dilutive effective of the conversion of the convertible note payable and outstanding options to purchase common stock. In the diluted net loss per share
calculation, net loss would also be adjusted for the elimination of interest expense on the convertible note payable (which includes amortization of the
discount created for the beneficial conversion feature), if the impact was not anti-dilutive. For purpose of this calculation, outstanding options to purchase
common stock or redeemable convertible preferred stock are considered potential dilutive common shares.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-
02, Leases (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability.
Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit
bright lines. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which provides
narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11, “Leases (Topic 842) – Targeted
Improvements” (ASU 2018-11), which addresses implementation issues related to the new lease standard. The guidance is effective for annual reporting
periods beginning after December 15, 2018 and interim periods within those fiscal years.
The Company adopted ASC 842 using the modified retrospective approach with an effective date of January 1, 2019 for leases that existed on that
date. Prior period results continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods. The Company
elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows the
Company to carry forward the historical lease classification. In connection with the adoption of ASC 842, the Company recorded an impact of $16,672 on
its assets and $21,708 on its liabilities for the recognition of operating lease right-of-use-assets and operating lease liabilities, respectively, which are
primarily related to the lease of the Company’s corporate headquarters in Cambridge, Massachusetts. The adoption of ASC 842 did not have a material
impact on the Company’s results of operations or cash flows.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging (Part I)
Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-
11”). This guidance is intended to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and
equity. Specifically, a down round feature would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to
be considered “not indexed to an entity’s own stock” and therefore accounted for as a
F-13
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
derivative liability at fair value with changes in fair value recognized in current earnings. Down round features are most often found in warrants and
conversion options embedded in debt or preferred equity instruments. In addition, the guidance re-characterized the indefinite deferral of certain provisions
on distinguishing liabilities from equity to a scope exception with no accounting effect. The Company adopted ASU 2017-11 on January 1, 2019. The
adoption of this guidance did not have a material impact on the Company's financial position or its results of operations.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new
standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees,
with certain exceptions. The Company adopted ASU 2018-07 on January 1, 2019. As a result of adopting this standard, the fair value of outstanding
nonemployee awards as of December 31, 2018 will no longer be remeasured each reporting period. All future expense related to these awards will be
recorded based on the fair value measured as of January 1, 2019. The adoption of this guidance did not have a material impact of the Company’s
consolidated financial statements.
Recently Issued Accounting Pronouncements
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808
and Topic 606, or ASU 2018-18. ASU 2018-18 makes targeted improvements to generally accepted accounting principles for collaborative arrangements,
including: (i) clarification that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606
when the collaborative arrangement participant is a customer in the context of a unit of account, (ii) adding unit-of-account guidance in Topic 808 to align
with the guidance in ASC 606, and (iii) a requirement that in a transaction with a collaborative arrangement participant that is not directly related to sales to
third parties, presenting the transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a
customer. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The Company
does not anticipate ASU No. 2018-18 will have a material impact on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement, (“ASU 2018-13”). The new standard provides for changes to the disclosure requirements for recurring and
nonrecurring fair value measurements under Topic 820. Provisions of ASU 2018-13 including changes in unrealized gains and losses, the range and
weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement
uncertainty are required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All
other amendments in ASU 2018-13 should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective for fiscal
years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently in the
process of evaluating the new standard but does not anticipate ASU 2018-13 will have a material impact on its 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 December 31, 2019, the fair value of available-for-sale marketable debt securities by type of security was as follows:
Marketable debt securities:
U.S. Treasury notes
U.S. government agency bonds
Amortized
Cost
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
42,795 $
15,508
58,303 $
73 $
31
104 $
— $
(1)
(1) $
42,868
15,538
58,406
F-14
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The amortized cost and fair value of the Company’s available-for-sale securities by contractual maturity are summarized as follows:
Maturing in one year or less
December 31, 2019
Amortized
Cost
Fair
Value
$
$
58,303 $
58,303 $
58,406
58,406
As of December 31, 2018, the fair value of available-for-sale marketable securities by type of security was as follows:
Marketable debt securities:
U.S. Treasury notes
U.S. government agency bonds
Corporate bonds
Amortized
Cost
December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
62,866 $
2,900
10,276
76,042 $
— $
—
—
— $
(24) $
(15)
(80)
(119) $
62,842
2,885
10,196
75,923
The amortized cost and fair value of the Company’s available-for-sale securities by contractual maturity are summarized as follows:
Maturing in one year or less
December 31, 2018
Amortized
Cost
Fair
Value
$
$
76,042 $
76,042 $
75,923
75,923
The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. During
the year ended December 31, 2019 realized gain on sales of marketable securities was $7. During the year ended December 31, 2018 there were no realized
gains (losses) on sales of marketable securities. During the year ended December 31, 2017, realized losses on sales of marketable securities were $(2).
There were no marketable securities that required adjustment for other-than-temporary declines in fair value during the years ended December 31, 2019,
2018, and 2017.
The aggregate fair value of securities held by the Company in an unrealized loss position for less than twelve months as of December 31, 2019
and 2018 was $8,031 and $62,842, respectively. There were no securities held in an unrealized loss position for more than twelve months as of
December 31, 2019. The aggregate fair value of securities held by the Company in an unrealized loss position for more than twelve months as of
December 31, 2018 was $13,081. 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 December 31, 2019 and 2018.
F-15
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
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:
Cash equivalents:
Money market funds
U.S. government agency bonds
Marketable securities:
U.S. Treasury notes
U.S. government agency bonds
Cash equivalents:
Money market funds
Marketable securities:
U.S. Treasury notes
U.S. government agency bonds
Corporate bonds
Fair Value Measurements as of December 31, 2019 using:
Level 1
Level 2
Level 3
Total
$
$
30,490 $
— $
—
—
30,490 $
— $
2,500
42,868
15,538
60,906 $
— $
— $
— $
— $
— $
30,490
2,500
42,868
15,538
91,396
Fair Value Measurements as of December 31, 2018 using:
Level 1
Level 2
Level 3
Total
$
77,737
$
—
$
—
$
77,737
—
—
—
77,737 $
62,842
2,885
10,196
75,923 $
$
—
—
—
— $
62,842
2,885
10,196
153,660
As of December 31, 2019 and 2018, the Company’s cash equivalents were invested in money market funds and were valued based on Level 1
inputs. As of December 31, 2019 the Company’s marketable securities consisted of U.S. Treasury notes and U.S. government agency bonds and were
valued based on Level 2 inputs. As of December 31, 2018, the Company’s marketable securities consisted of U.S. Treasury notes, U.S. government agency
bonds and corporate bonds and were valued based on Level 2 inputs. In determining the fair value of its U.S. Treasury notes, U.S. government agency
bonds and corporate bonds, the Company relied on quoted prices for similar securities in active markets or other inputs that are observable or can be
corroborated by observable market data. During the years ended December 31, 2019 and 2018, there were no transfers between Level 1, Level 2 and
Level 3.
5.
Property and Equipment, Net
Property and equipment, net consisted of the following:
Laboratory equipment
Leasehold improvements
Computer equipment
Furniture and office equipment
Construction in progress
Less: Accumulated depreciation and amortization
Year Ended December 31,
2019
2018
$
$
3,583 $
6,632
511
1,074
—
11,800
(4,514)
7,286 $
2,970
6,531
305
1,074
79
10,959
(2,733)
8,226
For the years ended December 31, 2019, 2018, and 2017 depreciation and amortization expense was $1,785, $1,347, and $964 respectively.
F-16
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
During the years ended December 31, 2019, 2018, and 2017 the Company recorded a loss on disposal of property and equipment of $1, $14, and
$35, respectively.
6.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
Prepaid income taxes
Prepaid expenses
Interest receivable on marketable securities
7.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
Accrued external research and development costs
Accrued payroll and payroll-related costs
Accrued professional fees
Other
8.
Collaboration Agreement with Novartis
Overview
Year Ended December 31,
2019
2018
— $
2,429
336
2,765 $
Year Ended December 31,
2019
2018
3,468 $
3,380
410
754
8,012 $
923
4,520
323
5,766
5,011
2,618
634
540
8,803
$
$
$
$
In January 2016, the Company entered into a collaboration agreement with Novartis (the “Collaboration Agreement”), which was subsequently
amended in May 2016, July 2017, September 2017, and October 2018 (the “October 2018 Amendment”). Pursuant to the Collaboration Agreement, the
Company granted Novartis a worldwide exclusive license to research, develop, manufacture and commercialize antibodies that target CD73. In addition,
the Company initially granted Novartis the right to purchase exclusive option rights (each an “Option”) for up to four specified targets (each an “Option
Target”) including certain development, manufacturing and commercialization rights. Novartis initially had the right to exercise up to three purchased
Options. Under the Collaboration Agreement, therefore, Novartis had the ability to exclusively license the development and manufacturing rights for up to
four targets (inclusive of CD73). As of December 31, 2019, Novartis had one Option remaining eligible for purchase, and potential exercise. In January
2020, Novartis did not purchase and exercise its single remaining Option under the Collaboration Agreement and, as a result, the option purchase period
expired. Accordingly, there are no Options remaining eligible for purchase and exercise, and the Company’s performance obligations under the
Collaboration Agreement have ended. (See Note 21).
Novartis is a related party because it is a greater than 5% stockholder of the Company. In January 2016, the Company entered into the
Collaboration Agreement and sold 2,000,000 shares of its Series A-1 preferred stock to Novartis. In addition, concurrent with the Company’s initial public
offering of common stock, the Company issued Novartis 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500 in a private
placement.
During the year ended December 31, 2019, the Company made no cash payments to Novartis related to the Collaboration Agreement. During the
year ended December 31, 2018, the Company made a payment of $3,437 to Novartis for the reimbursement of manufacturing costs incurred by Novartis
prior to December 31, 2017.
F-17
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Development and Commercialization of CD73 Products
Novartis has the sole right to develop and commercialize CD73 antibody candidates and corresponding licensed products worldwide pursuant to a
development plan and a commercialization plan, respectively. Novartis is obligated to use commercially reasonable efforts to develop the CD73 antibody
candidates and corresponding licensed products, obtain regulatory approval of such products, including within certain defined markets, and commercialize
such products following regulatory approval. Novartis is responsible for all costs and expenses of such development and commercialization and is
obligated to provide the Company with updates on its development and commercialization activities through the joint steering committee, joint
development committee and joint commercialization committee.
Exclusivity
Neither the Company nor Novartis may, alone or with any affiliate or third party develop or commercialize any antibody that specifically binds to
CD73. The October 2018 Amendment clarified that Novartis is permitted to research, develop, manufacture or commercialize any diagnostic product that
specifically binds to CD73, subject to Novartis’ compliance with its rights and obligations under the Collaboration Agreement, and provided that where
such diagnostic product is an Adimab diagnostic product, Novartis may research, develop, manufacture or commercialize such Adimab diagnostic product
solely for the purpose of research, development or commercialization of a therapeutic or prophylactic licensed product that specifically binds to the same
licensed target.
Financial Terms
Upon entering into the Collaboration Agreement in January 2016, Novartis made an upfront payment to the Company of $70,000. The Company
is also eligible to receive payments upon the achievement of specified development and sales milestones as well as tiered royalties on annual net sales by
Novartis ranging from high single-digit to mid-teens percentages, upon successful commercialization of NZV930. Under the Collaboration Agreement, as a
result of the option purchase period for the single remaining Option under the Collaboration Agreement expiring in January 2020, the Company is now
entitled to potential milestones of $525,000, as well as tiered royalties on annual net sales by Novartis ranging from high single-digit to mid-teens
percentages upon the successful commercialization of NZV930 (formerly SRF373).
Termination
Unless terminated earlier, the Collaboration Agreement will continue in effect until neither the Company nor Novartis is researching, developing,
manufacturing or commercializing NZV930. Novartis may terminate the Collaboration Agreement for any reason upon prior notice to the Company within
a specified time period. Either party may terminate the Collaboration Agreement in full if an undisputed material breach is not cured within a certain period
of time or upon notice of insolvency of the other party. To the extent Novartis terminates for convenience, or the Company terminates for Novartis’
material breach, Novartis will grant the Company, on mutually agreeable financial terms, an exclusive, worldwide, irrevocable, perpetual and royalty-
bearing license with respect to intellectual property controlled by Novartis that is reasonably necessary to research, develop, manufacture or commercialize
NZV930.
Revenue Recognition - Collaboration Revenue – Related Party
In determining the appropriate amount of revenue to be recognized under ASC 606, the Company performed the following steps: (i) identified the
promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations including whether they are
distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the
transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Under ASC 606, the Company recognized revenue using the cost-to-cost method, which it believes best depicts the transfer of control to the
customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total
estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue will be recorded as a percentage of the
estimated transaction price based on the extent of progress towards completion. Under ASC 606, the estimated transaction price will include variable
consideration. The Company does not include variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative
revenue recognized will occur when any uncertainty associated with the variable consideration is resolved. The estimate of the Company’s measure of
progress and estimate of variable consideration to be included in the transaction price will be updated at each reporting date as a change in estimate. The
amount related to the unsatisfied portion will be recognized as that portion is satisfied over time.
F-18
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Under ASC 606 the Company accounts for (i) the license it conveyed with respect to CD73 and (ii) its obligations to perform research on CD73 and
other specified targets as a single performance obligation under the collaboration agreement with Novartis. Novartis’ right to purchase exclusive options to
obtain certain development, manufacturing and commercialization rights are accounted for separately as they do not represent material rights, based on the
criteria of ASC 606. Upon the exercise of any purchased option by Novartis, the contract promises associated with an option target would use a separate cost-
to-cost model for purposes of revenue recognition under ASC 606.
In February 2018, the Company received an additional milestone payment of $45,000 from Novartis upon Novartis’ receipt and acceptance of the
first final audited Good Laboratory Practices (“GLP”) toxicology study report for NZV930. Upon achieving the milestone, the Company concluded this
variable consideration associated with this milestone was no longer constrained and included the $45,000 in the transaction price. The Company recognized
$4,882 and $27,850 as collaboration revenue – related party in the twelve months ended December 31, 2019 and 2018, respectively, based on the ratio of
actual costs incurred as of the milestone achievement date to the total estimated costs with respect to performing research on antibodies that bind to CD73
and other specified targets under the Collaboration Agreement. The remaining unrecognized amount of $12,268 is recorded as deferred revenue – related
party as of December 31, 2019 and will subsequently be recognized as revenue over the performance period in proportion to the costs incurred under the
Collaboration Agreement.
In March 2018, Novartis notified the Company of its decision not to exercise its Option related to CD47. The Company recognized the $5,000
exclusive option right payment as collaboration revenue – related party in the first quarter of 2018 because the Company no longer has any remaining
performance obligations related to CD47.
In March 2018, the Company and Novartis elected to terminate a specified target under the Collaboration Agreement. Future costs associated with
this target were removed from the estimated total costs in the cost-to-cost model.
In February 2019, Novartis notified the Company of its decision not to purchase the Option related to IL-27. Future costs associated with this
target were removed from the estimated total costs in the cost-to-cost model.
In January 2020, Novartis did not purchase and exercise its single remaining Option under the Collaboration Agreement and, as a result, the
option purchase period expired. Accordingly, there are no Options remaining eligible for purchase and exercise, and the Company’s performance
obligations under the Collaboration Arrangement have ended. The maximum aggregate amount of potential milestone payments that the Company is
currently entitled to receive under the Collaboration Agreement was reduced from $745,000 as of December 31, 2019 to $525,000 in January 2020. The
Company will remove all costs associated with its remaining performance obligation, as of December 31, 2019, for the single remaining Option from the
cost-to-cost model in the first quarter of 2020. This will result in the Company recognizing the remaining deferred revenue of $38,592 to collaboration
revenue - related party in the first quarter of 2020. This represents a non-recognized subsequent event as the Novartis decision was in their control and not
known to the Company as of December 31, 2019.
For the years ended December 31, 2019, 2018, and 2017, the Company recognized the following totals of collaboration revenue – related party:
Collaboration revenue - related party
$
15,360 $
59,417 $
12,826
2019
Year Ended December 31,
2018
2017
The following table presents changes in the Company’s contract liabilities during the year ended December 31, 2019 (in thousands):
Contract Liabilities (1)
Total deferred revenue - related party
$
53,952
—
$
(15,360) $
38,592
December 31, 2018
Additions
Deductions
December 31, 2019
(1)
Additions to contract liabilities relate to consideration from Novartis during the reporting period. Deductions to contract liabilities relate to deferred revenue
recognized as revenue during the reporting period.
F-19
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
During the year ended December 31, 2019, the Company recognized $15,360 of revenue related to the amounts included in the contract liability balance at the
beginning of the period. The aggregate amount of the transaction price allocated to the single performance obligation that is partially unsatisfied was $38,592.
The Company considers the total consideration expected to be earned in the next twelve months for services to be performed as current deferred revenue-related
party, and consideration that is expected to be earned subsequent to twelve months from the balance sheet date as noncurrent deferred revenue-related party.
9.
Redeemable Convertible Preferred Stock
The Company has issued Series A and Series A-1 preferred stock (together, the “Redeemable Convertible Preferred Stock”). The Redeemable
Convertible Preferred Stock is classified outside of stockholders’ deficit because the shares contain redemption features that are not solely within the
control of the Company.
Upon the closing of the Company’s initial public offering on April 23, 2018, all shares of the Redeemable Convertible Preferred Stock
automatically converted into 16,863,624 shares of common stock.
10.
Stockholders’ Equity
Common Stock
As of December 31, 2019 and 2018, 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 December 31, 2019.
As of December 31, 2019 and 2018, the Company had reserved 17,351,095 and 6,083,202 shares, respectively, of common stock for the shares
available for offering under the Sales Agreement with JonesTrading, the exercise of outstanding stock options, and the number of shares remaining
available for future grant under the Company’s 2018 Stock Option and Incentive Plan and the Company’s 2018 Employee Stock Purchase Plan.
Reserved for future issuance
The Company has reserved for future issuance the following number of shares of common stock:
Options to purchase common stock
Shares available for future grant
2018 Employee Stock Purchase Plan
Shares available from ATM offering
Total reserved
As of December 31,
2019
2018
5,418,113
1,409,019
534,544
9,989,419
17,351,095
4,414,225
1,412,159
256,818
—
6,083,202
In May 2019, the Company entered into the Sales Agreement with JonesTrading to issue and sell shares up to $30,000 in shares of the Company’s
common stock from time to time. As of December 31, 2019, the Company has sold 10,581 shares under the ATM Facility for net proceeds of $24.
On April 23, 2018, the Company completed its initial public offering of its common stock by issuing 7,200,000 shares of common stock, at
$15.00 per share for gross proceeds of $108,000, or net proceeds of $97,209. Concurrent with the initial public offering, the Company issued Novartis
766,666 shares of its common stock at $15.00 per share for proceeds of $11,500, in a private placement.
F-20
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
11.
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, 2019 and 2018 all remaining shares available under the 2014 Plan were transferred to the 2018 Plan.
2018 Stock Option and Incentive Plan
On April 3, 2018, the Company’s stockholders approved the 2018 Stock Option and Incentive Plan (the “2018 Plan”), which became effective on
April 18, 2018, the date on which the registration statement for the Company’s initial public offering was declared 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 on 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 December 31, 2019 and 2018, 1,409,019 shares and 1,412,159 shares were available for future issuance under the 2018 Plan, respectively.
Stock options granted under the 2014 Plan and 2018 Plan to employees generally vest over four years and expire after ten years. The Company
does not currently hold any treasury shares. Upon stock option exercise, the Company issues new shares and delivers them to the participant.
Stock Option Valuation
The assumptions that the Company used to determine the fair value of the stock options granted to employees and directors were as follows,
presented on a weighted average basis:
Risk-free interest rate
Expected term (in years)
Expected volatility
Expected dividend yield
2019
Year Ended December 31,
2018
2017
2.46%
6.12
73.62%
0.0%
2.67%
6.18
72.70%
0.0%
2.04%
6.25
78.60%
0.0%
F-21
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Stock Options
The following table summarizes the Company’s stock option activity for the year ended December 31, 2019:
Outstanding as of December 31, 2018
Granted
Exercised
Forfeited
Outstanding as of December 31, 2019
Options exercisable at December 31, 2019
Vested and expected to vest at December 31, 2019
Number of
Shares
Weighted
Average
Exercise
Price
4,414,225 $
1,518,500
(110,156)
(404,456)
5,418,113 $
2,919,360 $
5,418,113 $
6.79
4.06
2.31
6.85
6.11
5.54
6.11
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
8.29 $
2,031
7.69 $
7.02 $
7.69 $
690
665
690
The weighted average grant-date fair value per share of stock options granted during the years ended December 31, 2019 and 2018, was $2.71 and
$7.47, respectively.
The aggregate fair value of stock options vested during the years ended December 31, 2019 and 2018, was $6,634 and $4,493, respectively.
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of
the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. The aggregate
intrinsic value of stock options exercised during the years ended December 31, 2019, 2018, and 2017 was $208, $1,887, and $1,876 respectively.
As of December 31, 2019, and 2018, there were outstanding stock options held by non-employees for the purchase of 272,343 and 317,957 shares
of common stock, respectively, with service-based vesting conditions.
Restricted Common Stock
The Company has granted restricted common stock with service-based vesting conditions. The purchase price of the restricted common stock is
determined by the Company’s board of directors. Unvested shares of restricted common stock may not be sold or transferred by the holder. These
restrictions lapse according to the service-based vesting conditions of each award. The Company has the option to repurchase the restricted stock at the
original purchase price if the grantee terminates its working relationship with the Company prior to the stock becoming vested.
As of December 31, 2019 and 2018 there was no unvested restricted common stock. The aggregate intrinsic value of restricted stock awards that
vested during the year ended December 31, 2018 was $810.
2018 Employee Stock Purchase Plan
On April 3, 2018, the Company’s stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective on April
18, 2018, the date on which the registration statement for the Company’s initial public offering was declared 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 December 31, 2019, a total of 534,544 shares of common stock were reserved for issuance under this plan.
F-22
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
For the years ended December 31, 2019 and 2018, the Company did not issue any shares of common stock under the 2018 ESPP.
Stock-Based Compensation
The Company recorded stock-based compensation expense related to stock options, restricted stock awards, and the ESPP in the following
expense categories of its statements of operations and comprehensive loss:
Research and development expenses
General and administrative expenses
2019
Year Ended December 31,
2018
2017
$
$
2,350
3,641
5,991
$
$
2,557
2,660
5,217
$
$
1,917
2,792
4,709
As of December 31, 2019, the Company had an aggregate of $10,733 of unrecognized stock-based compensation cost, which is expected to be
recognized over a weighted average period of 2.25 years.
12.
Debt
On November 22, 2019, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with K2 HealthVentures LLC (the
“Lender”). The Lender has agreed to make available to the Company term loans in an aggregate principal amount of up to $25,000 under the Loan
Agreement. The Company plans to use the proceeds of the term loans to support clinical development as well as for working capital and general corporate
purposes. The Loan Agreement provides a term loan commitment of $25,000 in three potential tranches: (i) a $7,500 term loan facility funded on
November 22, 2019 (the “First Tranche Term Loan”), (ii) a $10,000 term loan facility (the “Second Tranche Term Loan”), and (iii) a $7,500 term loan
facility (the “Third Tranche Term Loan”). All three of these term loans have a maturity date of December 1, 2023.
Borrowings under all three loan facilities bear interest at a floating per annum rate equal to the greater of (i) 8.65% and (ii) the Prime Rate plus
3.90%. The Company is permitted to make interest-only payments on the First Tranche Term Loan for the first nineteen months following the funding date.
The interest-only period can be extended by an additional seven months, subject to the funding of the Second Tranche Term Loan; and by an additional
seven months, subject to the funding of the Third Tranche Term Loan. The term of the combined facility will be 48 months, with repayment in monthly
installments commencing at the end of the resulting interest-only period as outlined above through the end of the 48-month term.
The Company is obligated to pay a final fee equal to 4.45% of the aggregate amount of the term loans funded, to occur upon the earliest of (i) the
maturity date, (ii) the acceleration of the term loans, and (iii) the prepayment of the term loans. The Company has the option to prepay all, but not less than
all, of the outstanding principal balance of the term loans under the Loan Agreement. If the Company prepays all of the term loans prior to the maturity
date, it will pay the Lender a prepayment penalty fee based on a percentage of the outstanding principal balance, equal to 5% if the payment occurs on or
before 24 months after the initial funding date, 3% if the prepayment occurs more than 24 months after, but on or before 36 months after the initial funding
date, or 1% if the prepayment occurs more than 36 months after the initial funding date.
The Lender may, at their option, elect to convert any portion of no more than $4,000 of the then outstanding term loan amount and all accrued and
unpaid interest thereon into shares of the Company’s common stock at a conversion price of $1.56 per share. The Company determined that the embedded
conversion option is not required to be separated from the term loan. The embedded conversion option meets the derivative accounting scope exception
since the embedded conversion option is indexed to the Company’s own common stock and qualifies for classification within stockholders’ equity. The
Company did recognize a beneficial conversion feature of $2,101, which represents the difference between the commitment date stock price of $2.33 per
share and the conversion price of $1.56 per share. The beneficial conversion feature was recorded as a discount on the term loan and is accreted to interest
expense using the effective interest method over the term of the loan. The effective interest rate of the term loan is 27.84%.
F-23
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The Company’s obligations under the Loan Agreement are secured by a first priority security interest in substantially all of its assets. The Loan
Agreement contains customary representations, warranties and also includes customary events of default, including payment defaults, breaches of
covenants, change of control and a material adverse effect clause.
Upon the occurrence of an event of default, a default interest rate of an addition 5.00% per annum may be applied to the outstanding loan
balances, and the Lender may declare all outstanding obligations immediately due and payable and exercise all of its rights and remedies as set forth in the
Loan Agreement and under applicable law.
The Company recorded interest expense related to the loan facility of $147 for the year ended December 31, 2019. The fair value of the loan at
December 31, 2019 approximates its face amount given the close proximity of the execution to December 31, 2019 and due to the floating interest rate.
Future principal debt payments on the loan payable are as follows (in thousands):
2020
2021
2022
2023
Total principal payments
Final fee due at maturity in 2024
Total principal payments and final fee
Unamortized debt discount and final fee
Note payable
13.
Net Loss per Share
$
$
December 31, 2019
-
1,602
2,947
2,951
7,500
334
7,834
2,725
5,109
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
Basic and Diluted net loss per share attributable to common stockholders:
2019
Year Ended December 31,
2018
2017
Numerator:
Net loss
Accretion of redeemable convertible preferred stock to
redemption value
Net loss attributable to common stockholders
Denominator:
Weighted average commons shares outstanding—basic and diluted
Net loss per share attributable to common stockholders—basic
and diluted
$
$
$
(54,789)
$
(6,597)
$
(45,377)
—
(54,789)
$
(11)
(6,608)
$
(40)
(45,417)
27,854,912
19,990,773
2,474,800
(1.97)
$
(0.33)
$
(18.35)
F-24
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The Company’s potential dilutive securities, which include stock options to purchase common stock and shares issuable upon conversion of the
convertible note payable have been excluded from the computation of diluted net loss per share attributable to common stockholders whenever the effect of
including them would be to reduce the net loss per share. The following potential common shares, presented based on amounts outstanding at each period
end, were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods indicated because including them
would have had an anti-dilutive effect:
Outstanding options to purchase common stock
Shares issuable upon conversion of the convertible note payable
14.
License Agreements
Adimab Development and Option Agreement
Year Ended December 31,
2019
2018
5,418,113
2,564,103
7,982,216
4,414,225
—
4,414,225
In October 2018, the Company and Adimab LLC (“Adimab”), entered into an amended and restated development and option agreement, (“the
A&R Adimab Agreement”), which amended and restated the development and option agreement with Adimab dated July 2014, as amended, (“the Original
Adimab Agreement”), for the discovery and optimization of proprietary antibodies as potential therapeutic product candidates. Under the A&R Adimab
Agreement, the Company will select biological targets against which Adimab will use its proprietary platform technology to research and develop antibody
proteins using a mutually agreed upon research plan. The A&R Adimab Agreement, among other things, extended the discovery term of the Original
Adimab Agreement, provided access to additional antibodies, and expanded the Company’s right to evaluate and use antibodies that were modified or
derived using Adimab technology for diagnostic purposes.
Upon the Company’s selection of a target, the Company and Adimab will initiate a research plan and the discovery term begins. During the
discovery term, Adimab will grant the Company a non-exclusive, non-sublicenseable license under its technology with respect to the target, to research,
design and preclinically develop and use antibodies that were modified or derived using Adimab technology, solely to evaluate such antibodies, perform the
Company’s responsibilities under the research plan, and use such antibodies for certain diagnostic purposes. The Company also will grant to Adimab a non-
exclusive, nontransferable license with respect to the target under the Company’s technology that covers or relates to such target, solely to perform its
responsibilities under the research plan during the discovery period. The Company is required to pay Adimab at an agreed upon rate for its full-time
employees during the discovery period while Adimab performs research on each target under the applicable research plan.
Adimab granted the Company an exclusive option to obtain a non-exclusive, worldwide, fully paid-up, sublicensable license under Adimab’s
platform patents and other Adimab technology solely to research up to ten antibodies, chosen by the Company against a specific biological target for a
specified period of time (the “Research Option”). In addition, Adimab granted the Company an exclusive option to obtain a worldwide, royalty-bearing,
sublicensable license under Adimab platform patents and other Adimab technology to exploit, including commercially, 20 or more antibodies against
specific biological targets (the “Commercialization Option”). Upon the exercise of a Commercialization Option, and payment of the applicable option fee
to Adimab, Adimab will assign the Company the patents that cover the antibodies selected by such Commercialization Option. The Company will be
required to use commercially reasonable efforts to develop, seek market approval of, and commercialize at least one antibody against the target covered by
the Commercialization Option in specified markets upon the exercise of a Commercialization Option.
F-25
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Under the agreement, the Company is obligated to make milestone payments and to pay specified fees upon the exercise of the Research or
Commercialization Options. During the discovery term, the Company may be obligated to pay Adimab up to $250 for technical milestones achieved
against each biological target. Upon exercise of a Research Option, the Company is obligated to pay a nominal research maintenance fee on each of the
next four anniversaries of the exercise. Upon the exercise of each Commercialization Option, the Company will be required to pay an option exercise fee of
a low seven-digit dollar amount, and the Company may be responsible for milestone payments of up to an aggregate of $13,000 for each licensed product
that receives marketing approval. For any licensed product that is commercialized, the Company is obligated to pay Adimab tiered royalties of a low to mid
single-digit percentage on worldwide net sales of such product. The Company may also partially exercise a Commercialization Option with respect to ten
antibodies against a biological target by paying 65% of the option fee and later either (i) paying the balance and choosing additional antibodies for
commercialization, up to the maximum number under the Commercialization Option, or (ii) foregoing the Commercialization Option entirely. For any
Adimab diagnostic product that is used with or in connection with any compound or product other than a licensed antibody or licensed product, the
Company is obligated to pay Adimab up to a low seven digits in regulatory milestone payments and low single-digit royalties on net sales. No additional
payment is due with respect to any companion diagnostic or any diagnostic product that does not contain any licensed antibody.
The A&R Adimab Agreement will remain in effect until (a) the earlier of (i) the expiration of the Research and Commercialization Options (if
they expire without exercise) and (ii) 12 months from the effective date without the Company providing materials that pass Adimab’s quality control; or
(b) if a Research Option is exercised but the Commercialization Option is not, then upon the expiration of the last to expire research license term; or
(c) upon commercialization of a product, until the end of the royalty term, which will vary on a product-by-product and country-by-country basis, ending
on the later of (y) the expiration of the last valid claim covering the licensed product in such country as the product is manufactured or sold, or (z) ten after
the first commercial sale of the licensed product in such country.
Either party may terminate the A&R Adimab Agreement for material breach if such breach remains uncured for a specified period of time,
however, if a Research Option or Commercialization Option has been exercised and the breach only applies to the applicable target of such Research
Option or Commercialization Option, then the termination right will only apply to such target. The Company may also terminate the A&R Adimab
Agreement for any reason with prior notice to Adimab. If Adimab is bankrupt, the Company will be entitled to a complete duplicate of, or complete access
to, all rights and licenses granted under or pursuant to the A&R Adimab Agreement.
During the years ended December 31, 2019, 2018, and 2017, the Company recognized research and development expense under the agreement of
$1,175, $2,480, and $2,172, respectively.
15.
Income Taxes
Income Before Taxes:
Domestic
Foreign
Total income before income taxes
2019
Year Ended December 31,
2018
2017
$
$
$
(54,789)
—
(54,789) $
$
(6,597)
—
(6,597) $
(45,377)
—
(45,377)
F-26
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Income Taxes
During the years ended December 31, 2019, 2018, and 2017, the Company recorded no income tax benefits for the net losses incurred or for the
research and development tax credits generated in each year due to its uncertainty of realizing a benefit from those items.
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Federal statutory income tax rate
State taxes, net of federal benefit
Permanent differences
Stock-based compensation
Research and development tax credits
Increase in deferred tax asset valuation allowance
Other
Change in statutory tax rate
Effective income tax rate
2019
Year Ended December 31,
2018
2017
(21.0)%
(6.2)
0.0
1.0
(7.9)
33.7
0.4
—
—%
(21.0)%
(6.2)
1.1
5.2
(13.7)
34.5
0.1
—
—%
Significant components of Surface Oncology’s deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows:
Deferred tax assets:
Net operating loss carryforwards
Research and development tax credit carryforwards
Deferred revenue
Deferred rent
Intangible assets
Accrued expenses
Stock-based compensation
Lease liability
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets
Deferred tax liabilities:
Right-of-use asset
Depreciation
Deferred revenue tax accounting method change
Beneficial conversion feature on convertible note payable
Other
Total deferred tax liabilities
Net deferred tax assets
December 31,
2019
2018
$
$
$
19,629
6,234
10,543
—
430
843
2,414
5,445
23
45,561
(36,535)
9,026
(4,059)
(1,281)
(3,045)
(559)
(82)
(9,026)
—
$
(35.0)%
(5.2)
0.3
2.6
(0.9)
18.6
—
19.6
—%
5,240
1,945
14,740
1,376
791
687
1,468
—
73
26,320
(18,602)
7,718
—
(1,629)
(6,089)
—
—
(7,718)
—
As of December 31, 2019, the Company had federal and state net operating loss carryforwards of $71,495 and $73,021, respectively, and federal
and state research and development tax credit carryforwards of $4,501 and $2,025, respectively, available to reduce future income tax liabilities. The
federal and state net operating loss carryforwards each begin to expire in 2034. The federal and state research and development tax credit carryforwards
begin to expire in 2034 and 2030, respectively.
F-27
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Utilization of the Company's net operating loss ("NOL") carryforwards and research and development ("R&D") credit carryforwards may be
subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future in accordance
with Section 382 of the Internal Revenue Code of 1986 ("Section 382") as well as similar state provisions. These ownership changes may limit the amount
of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change
as defined by Section 382 results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more
than 50% over a three-year period. Since its formation, the Company has raised capital through the issuance of capital stock on several occasions. These
financings, combined with the purchasing shareholders' subsequent disposition of those shares, could result in a change of control as defined by Section
382. The Company conducted an analysis under Section 382 to determine if historical changes in ownership through December 31, 2018 would limit or
otherwise restrict its ability to utilize its NOL and R&D credit carryforwards. As a result of this analysis, the Company does not believe there are any
significant limitations on its ability to utilize these carryforwards. However, future changes in ownership occurring after December 31, 2018 could affect
the limitation in future years, and any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization.
As required by the provisions of ASC 740, management considers whether it is more likely than not that some portion or all of the net deferred
tax assets will not be realized. Based upon the level of historical U.S. losses, management has determined that it is “more-likely-than-not” that the
Company will not utilize the benefits of federal and state deferred tax assets for financial reporting purposes and, as a result, a full valuation allowance has
been established at December 31, 2019 and 2018. The valuation allowance decrease primarily relates to the decrease in deferred revenue, and were as
follows:
Valuation allowance at beginning of year
Increases recorded to income tax provision
Decreases recorded as a benefit to income
tax provision
Valuation allowance at end of year
2019
Year Ended December 31,
2018
2017
$
$
(18,602)
(17,933)
$
—
(36,535)
$
(19,956)
(5,644)
$
6,998
(18,602)
$
(11,531)
(17,302)
8,877
(19,956)
The Company had no unrecognized tax benefits or related interest and penalties accrued for the years ended December 31, 2019 and 2018. The
Company will recognize interest and penalties related to uncertain tax positions in income tax expense.
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 is currently under examination by the Internal
Revenue Service ("IRS") for the period ended December 31, 2016. The Company's tax years are still open under statute from 2016 to present. All years
may be examined to the extent the tax credit or net operating loss carryforwards are used in future periods.
16.
Leases
The Company leases real estate, primarily its corporate headquarters in Cambridge, Massachusetts. The Company’s leases have remaining terms
ranging from less than 1 year to 10 years. Certain leases include options to renew, exercised at the Company’s sole discretion, with renewal terms that can
extend the lease five years. The Company evaluated the renewal options in its leases to determine if it was reasonably certain that the renewal option would
be exercised, and therefore should be included in the calculation of the operating lease assets and operating lease liabilities. Given the Company’s current
business structure, uncertainty of future growth, and the associated impact to real estate, the Company concluded that it is not reasonably certain that the
renewal option related to its corporate headquarters would be exercised, however, for leases it determined the renewal option was probable to be exercised,
the Company included the renewal period in the calculation of the operating lease right-of-use assets and operating lease liabilities. All of the Company’s
leases qualify as operating leases. With the adoption of the new leasing standard, the Company has recorded a right-of-use asset and corresponding lease
liability, by calculating the present value of future lease payments, discounted at either 9.5% or 10.5%, the Company’s incremental borrowing rates, over
the expected term. The right-of-use asset is reduced by any lease incentives received and the legacy deferred rent balance.
F-28
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
In May 2016, the Company entered into an operating lease agreement for its corporate headquarters in Cambridge, Massachusetts, with a ten-year
term that expires in February 2027. Rental payments related to the lease commenced in April 2017. In connection with this lease, the Company was entitled
to cash incentives from the landlord to be used for the construction of leasehold improvements within the facility. As of January 1, 2019, the Company was
entitled to $4,803 of such incentives, which were recorded as a reduction to the right-of-use asset and included as a straight-line reduction to lease expense
over the lease term.
In May 2018, the Company executed an amendment to lease an additional 33,526 square feet at 50 Hampshire Street in Cambridge,
Massachusetts, with a 10-year term. This additional space became available for occupancy on January 1, 2020. In December 2020, the Company entered
into a sublease agreement with EQRx, Inc. (“EQRx”) to sublease the entire space for three years. The term of the sublease agreement commenced in
January 1, 2020. (See Note 21).
The components of the Company’s lease expense are as follows:
Lease Costs
Operating lease cost
Variable lease costs (1)
Total lease cost
Weighted-average remaining lease term (in months)
Weighted-average discount rate
Classification
Year Ended
December 31, 2019
R&D Expense
G&A Expense
R&D Expense
G&A Expense
2,312
899
707
276
4,194
119.6
10.5%
(1)
Variable lease costs include certain additional charges for operating costs, including insurance, maintenance, taxes, utilities, and other costs incurred, which are
billed based on both usage and as a percentage of the Company’s share of total square footage. Short term lease costs are immaterial.
Cash paid for amounts included in the measurement of the Company’s operating lease liabilities was $4,148 for the year ended December 31,
2019.
As of December 31, 2019, the maturities of the Company’s operating lease liabilities were as follows:
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total future lease payments
Less: Interest
Present value of future lease payments (lease liability)
F-29
3,796
5,529
5,385
5,413
5,533
31,827
57,483
(37,553)
19,930
$
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Future minimum lease payments for the Company’s operating leases as of December 31, 2018 were as follows:
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
2,546
4,258
5,176
5,292
5,376
37,573
60,221
$
Prior to the adoption of ASU 2016-02 and for the years ended December 31, 2018 and 2017, the Company recognized rent expense on a straight-
line basis over the lease period and recorded deferred rent expense for rent expense incurred but not yet paid. The Company also recorded deferred rent
attributable to cash incentives received under its lease agreements which were amortized to rent expense over the lease term. During the years ended
December 31, 2018 and 2017, the Company recognized total rent expense of $1,649 and $1,194, respectively.
In November 2014, the Company entered into an operating sublease agreement with CoStim Pharmaceuticals, Inc. (“CoStim”), a subsidiary of
Novartis, for office and laboratory space that expired in March 2018 (see Note 18). The Company began to sublease this space to a third-party tenant in
April 2017. Sublease payments received from a third-party tenant under a sublease that expired in March 2018 were $231 and $305 for the years ended
December 31, 2018 and 2017, respectively, and were recorded as reduction of rent expense.
17.
Commitments and Contingencies
Lease Agreements
Future minimum lease payments for the Company’s operating leases as of December 31, 2019 were as follows:
Year Ended December 31,
2020
2021
2022
2023
2024
Thereafter
3,541
5,179
5,295
5,413
5,533
31,827
56,788
$
Manufacturing and Research Agreements
The Company has entered into agreements with external contract manufacturing organizations and contract research organizations engaged to
manufacture clinical trial materials as well as to conduct discovery research and preclinical development activities. As of December 31, 2019, the Company
had committed to minimum payments under these arrangements totaling $5,171, of which $4,263 is due in 2020 and $908 is due in 2021.
License Agreements
The Company has entered into license agreements with various parties under which it is obligated to make contingent and non-contingent
payments (see Note 14).
F-30
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Indemnification Agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners
and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property
infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors
and its officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or
service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification
agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company is not
aware of any claims under indemnification arrangements that would have a material effect on its financial position, results of operations or cash flows, and
it has not accrued any liabilities related to such obligations in its financial statements as of December 31, 2019.
Legal Proceedings
On September 13, 2019, a purported stockholder of the Company filed a putative class action against the Company, certain of its directors and
officers, or the Individual Defendants, and the underwriters in its initial public offering, collectively, the Defendants, in the Supreme Court of the State of
New York, captioned Ang v. Surface Oncology, Inc., et al., No. 655304/2019 (N.Y. Sup. Ct. Sept. 13, 2019). The complaint was filed on behalf of a
putative class of purchasers of the Company’s common stock in and/or traceable to its April 19, 2018 initial public offering (the first day of trading of its
common stock on the Nasdaq Stock Market) and alleged violations of Section 11 (against all Defendants) and 15 (against the Company and the Individual
Defendants) of the Securities Act of 1933, as amended. The complaint alleged that the Defendants made false or misleading statements in the Company’s
Registration Statement on Form S-1 for its initial public offering regarding SRF231 and hematologic toxicities allegedly caused by SRF231. The lawsuit
sought, among other things, compensatory damages and interest thereon, and reasonable costs and expenses, including attorneys’ fees. On November 1,
2019, the Company and the other Defendants moved to dismiss the Complaint in its entirety on the grounds that the facts and documentary evidence
established that its initial public offering documents were true and accurate in all material respects. Based upon the Company’s arguments and confidential
discussions between its counsel and counsel for the Plaintiff, on December 3, 2019, the Plaintiff notified the Court that it wished to voluntarily dismiss the
case. As required by Court Order, the Plaintiff provided notice to all members of the purported class of its intention to voluntarily dismiss the case and
following the Court-ordered notice, on January 14, 2020, the Plaintiff filed a Stipulation of Discontinuance Without Prejudice withdrawing the case. On
January 15, 2020, the Court “So-Ordered” the Stipulation of Discontinuance formally ending the case.
18.
Related Party Transactions
Novartis Institutes for BioMedical Research, Inc.
Novartis is a related party because it is a greater than 5% stockholder of the Company. In January 2016, the Company entered into the
Collaboration Agreement and sold 2,000,000 shares of its Series A-1 preferred stock to Novartis for gross proceeds of $13,500. In addition, concurrent with
the Company’s initial public offering of common stock, the Company issued Novartis 766,666 shares of its common stock at $15.00 per share for proceeds
of $11,500 in a private placement. During the year ended December 31, 2019, the Company did not receive any cash payments from Novartis. As of
December 31, 2019 and 2018, no amounts were due from Novartis.
During the year ended December 31, 2019, the Company made no cash payments to Novartis related to the Collaboration Agreement. During the
year ended December 31, 2018, the Company made a payment of $3,437 to Novartis for the reimbursement of manufacturing costs incurred by Novartis
prior to December 31, 2017. During the year ended December 31, 2017, the Company made no cash payments to Novartis related to the Collaboration
Agreement.
Unrelated to the Collaboration Agreement, the Company subleased office and laboratory space from CoStim, a subsidiary of Novartis (see Note
16). No payments were made by the Company to CoStim for this sublease during the year ended December 31, 2019. Payments made by the Company to
CoStim for this sublease during the years ended December 31, 2018, and 2017 totaled $106, and $569, respectively. As of December 31, 2019 and 2018, no
amounts were due by the Company to CoStim for this sublease.
F-31
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Research Agreement with Vaccinex, Inc.
On November 30, 2017, the Company entered into an agreement with Vaccinex, Inc. (“Vaccinex”) whereby Vaccinex will use its technology to
assist the Company with identifying and selecting experimental human monoclonal antibodies against targets selected by the Company. The Company’s
Chief Executive Officer is a member of the board of directors of Vaccinex. During the year ended December 31, 2019, 2018, and 2017, the Company paid
Vaccinex an aggregate of $606, $199 and $250 relating to the agreement. The amount of the payment was recognized as research and development expense
during the years ended December 31, 2019, 2018, and 2017. No amounts were due by the Company to Vaccinex as of December 31, 2019. As of
December 31, 2018, $83 was due by the Company to Vaccinex.
19.
401(k) Savings Plan
The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all
employees who meet minimum age and service requirements. The Company matches 50% of employees’ contributions to the 401(k) Plan up to 6% of
compensation. The Company’s contributions made under the 401(k) Savings Plan for the years ended December 31, 2019, 2018, and 2017 totaled $399,
$339, and $207, respectively.
20.
Selected Quarterly Financial Data (Unaudited)
The following table contains quarterly financial information for 2019 and 2018. The Company believes that the following information reflects all
normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not
necessarily indicative of results for any future period.
(In thousands, except share and per share amounts)
2019
$
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
14,434 $
19,402
(4,968)
(4,199)
143 $
18,653
(18,510)
(17,758)
$
344
17,900
(17,556)
(16,878)
439
16,771
(16,332)
(15,954)
$
(0.15) $
(0.64) $
(0.61)
$
(0.57)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2018
$
$
$
45,495 $
14,452
31,043
31,212
2,428 $
19,011
(16,583)
(15,852)
$
1,730
19,760
(18,030)
(17,222)
1.59 $
(0.73) $
(0.62)
$
1.05 $
(0.73) $
(0.62)
$
9,764
15,345
(5,581)
(4,735)
(0.17)
(0.17)
Collaboration revenue - related party
Total operating expenses
Loss from operations
Net loss
Net loss per share attributable to common
stockholders—basic and diluted
Collaboration revenue - related party
Total operating expenses
Loss from operations
Net loss
Net loss per share attributable to common
stockholders—basic
Net loss per share attributable to common
stockholders— diluted
21.
Subsequent Events
Collaboration Agreement with Novartis
In January 2020, Novartis did not purchase and exercise its single remaining Option under the Collaboration Agreement and, as a result, the
option purchase period expired (see Note 8). Accordingly, there are no Options remaining eligible for purchase and exercise, and the Company’s
performance obligations under the Collaboration Arrangement have ended. The maximum aggregate amount of potential option purchase, option exercise
and milestone payments that the Company is currently entitled to receive under the Collaboration Agreement was reduced from $745,000 at December 31,
F-32
SURFACE ONCOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
2019 to $525,000 in January 2020. The Company will remove all costs associated with its remaining performance obligation for the single remaining
Option from the cost-to-cost model in the first quarter of 2020. This will result in the Company recognizing the remaining deferred revenue of $38,592 to
collaboration revenue - related party in the first quarter of 2020. This represents a non-recognized subsequent event as the Novartis decision was in their
control and was not known to the Company as of December 31, 2019.
Sublease Agreement with EQRx
In May 2018, the Company executed an amendment to lease an additional 33,526 square feet at 50 Hampshire Street in Cambridge,
Massachusetts, with a 10-year term. On the lease commencement date of January 1, 2020, the Company recorded the impact on its consolidated balance
sheet, which increased the Company’s operating lease right-of-use-assets and operating lease liabilities by 15,003. The Company also entered into a
sublease agreement with EQRx to sublease the entire space. The term of the sublease agreement commenced in January 2020 and ends on the last day of
the 36th calendar month following commencement. The annual rent for the subleased premises is greater than the annual rent owed by the Company to the
landlord for the leased premises.
Strategic Restructuring
The U.S. Food and Drug Administration cleared the applications for the Company’s antibody candidates, SRF617 and SRF388, and the Company
is executing on plans to initiate clinical trials to advance both programs in 2020. The Company concurrently announced a strategic restructuring in January
2020, which will reduce the Company’s workforce by approximately 35%. As a result, the Company will incur severance costs of $1,272 in the first quarter
2020, which will be recorded within operating expenses in the consolidated statements of operations and comprehensive loss.
F-33
Exhibit 4.3
DESCRIPTION OF SECURITIES REGISTERED UNDER
SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
The following description of the common stock, $0.0001 par value per share (the “Common Stock”), of Surface Oncology, Inc. (“us,” “our,”
“we” or the “Company”), which is the only security of the Company registered under Section 12 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), summarizes certain information regarding the Common Stock in our certificate of incorporation, our
amended and restated by-laws and applicable provisions of Delaware corporate law, and is qualified by reference to our amended and
restated certificate of incorporation and amended and restated by-laws, which are incorporated by reference as Exhibit 3.1 and Exhibit 3.2,
respectively, to the Annual Report on Form 10-K.
Our authorized capital stock consists of 150,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred
stock, par value $0.0001 per share.
Common Stock
Annual Meeting. Annual meetings of our stockholders are held on the date designated in accordance with our amended and restated by-laws.
Written notice must be mailed to each stockholder entitled to vote not less than ten nor more than 60 days before the date of the meeting. The
presence in person or by proxy of the holders of record of a majority of our issued and outstanding shares entitled to vote at such meeting
constitutes a quorum for the transaction of business at meetings of the stockholders. Special meetings of the stockholders may be called for
any purpose only by the board of directors pursuant to a resolution approved by the affirmative vote of a majority of the directors then in
office. Except as may be otherwise provided by applicable law, our certificate of incorporation or our amended and restated by-laws, all
elections of directors shall be decided by a plurality, and all other questions shall be decided by a majority, of the votes cast by stockholders
entitled to vote thereon at a duly held meeting of stockholders at which a quorum is present.
Voting Rights. Holders of common stock are entitled to one vote for each share held of record on all matters to be voted upon by stockholders
and do not have cumulative voting rights.
Dividends. Subject to the rights, powers and preferences of any outstanding preferred stock that we may designate and issue in the future, and
except as provided by law or in our certificate of incorporation, dividends may be declared and paid or set aside for payment on the Common
Stock out of legally available assets or funds when and as declared by our board of directors.
Liquidation, Dissolution and Winding Up. Subject to the rights, powers and preferences of any outstanding preferred stock that we may
designate and issue in the future, in the event of our liquidation, dissolution or winding up, our net assets will be distributed pro rata to the
holders of Common Stock.
Other Rights. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of Common Stock are subject to and may be adversely affected by the rights of the holders of shares of any series of
preferred stock that we may designate and issue in the future. Holders of Common Stock are not required to make additional capital
contributions.
Preferred Stock
Our board of directors has the authority to designate and issue up to 5,000,000 shares of preferred stock in one or more series. The authorized
shares of our preferred stock are available for issuance without further action by our stockholders, unless such action is required by
applicable law or the rules of any stock exchange on which our
securities may be listed. Our board of directors may also designate the rights, powers, preferences and the relative, participating, optional or
other special rights and any qualifications, limitations and restrictions of the shares of each series of preferred stock.
No shares of preferred stock are outstanding as of the date of our Annual Report on Form 10-K with which this Exhibit 4.3 is filed as an
exhibit.
Provisions of Our Certificate of Incorporation and Amended and Restated By-laws and Delaware Law That May Have Anti-
Takeover Effects
The provisions of Delaware law and our certificate of incorporation and amended and restated by-laws could discourage or make it more
difficult to accomplish a proxy contest or other change in our management or the acquisition of control by a holder of a substantial amount of
our voting stock. It is possible that these provisions could make it more difficult to accomplish, or could deter, transactions that stockholders
may otherwise consider to be in their best interests or in our best interests. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of our board of directors and in the policies formulated by the board of directors and to discourage
certain types of transactions that may involve an actual or threatened change of our control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. Such provisions also
may have the effect of preventing changes in our management.
Board of Directors. Our certificate of incorporation and amended and restated by-laws provide for a board of directors divided as nearly
equally as possible into three classes. Each class is elected to a term expiring at the annual meeting of stockholders held in the third year
following the year of such election. The number of directors comprising our board of directors is fixed from time to time by the board of
directors.
Removal of Directors by Stockholders. Our certificate of incorporation provides that members of our board of directors may only be removed
for cause by a vote of the holders of at least seventy-five percent (75%) of the outstanding shares entitled to vote on the election of the
directors.
Issuance of Preferred Stock. Our board of directors is authorized, without further action by our stockholders, to issue up to 5,000,000 shares
of preferred stock in one or more series, and to fix the designations, powers, preferences and the relative, participating, optional or other
special rights, and any qualifications, limitations and restrictions of the shares of each series of preferred stock. The issuance of preferred
stock could impede the completion of a merger, tender offer or other takeover attempt.
Stockholder Nomination of Directors. Our amended and restated by-laws provide that a stockholder must notify us in writing of any
stockholder nomination of a director not earlier than 5:00 p.m., Eastern Time, on the 120th day and not later than 5:00 p.m., Eastern Time, on
the 90th day prior to the first anniversary of the preceding year’s annual meeting; provided, that if the date of the annual meeting is advanced
by more than 30 days before such anniversary date, delayed by more than 60 days after such anniversary date or if no annual meeting were
held in the prior year, notice by the stockholder to be timely must be so delivered not later than 5:00 p.m., Eastern Time, on the later of (x)
the 90th day prior to the date of such meeting and (y) the 10th day following the day on which public announcement of the date of such
annual meeting is first made by us.
No Action By Written Consent. Our certificate of incorporation provides that our stockholders may not act by written consent and may only
act at duly called meetings of stockholders.
Delaware Business Combination Statute. Section 203 of the General Corporation Law of the State of Delaware, which we refer to as the
DGCL, is applicable to us. Section 203 of the DGCL restricts some types of transactions and business combinations between a corporation
and a 15% stockholder. A 15% stockholder is generally
considered by Section 203 to be a person owning 15% or more of the corporation’s outstanding voting stock. Section 203 refers to a 15%
stockholder as an “interested stockholder.” Section 203 restricts these transactions for a period of three years from the date the stockholder
acquires 15% or more of our outstanding voting stock. With some exceptions, unless the transaction is approved by the board of directors and
the holders of at least two-thirds of the outstanding voting stock of the corporation, Section 203 prohibits significant business transactions
such as:
•
•
a merger with, disposition of significant assets to or receipt of disproportionate financial benefits by the interested stockholder, and
any other transaction that would increase the interested stockholder’s proportionate ownership of any class or series of our capital
stock.
The shares held by the interested stockholder are not counted as outstanding when calculating the two-thirds of the outstanding voting stock
needed for approval.
The prohibition against these transactions does not apply if:
•
•
prior to the time that any stockholder became an interested stockholder, the board of directors approved either the business
combination or the transaction in which such stockholder acquired 15% or more of our outstanding voting stock, or
the interested stockholder owns at least 85% of our outstanding voting stock as a result of a transaction in which such stockholder
acquired 15% or more of our outstanding voting stock. Shares held by persons who are both directors and officers or by some types
of employee stock plans are not counted as outstanding when making this calculation.
Exclusive Forum Selection. Our restated certificate of incorporation provides that the Court of Chancery of the State of Delaware shall be the
sole and exclusive forum for (1) any derivative action or proceeding brought on behalf of our company, (2) any action asserting a claim of
breach of a fiduciary duty owed by any of our directors, officers, or other employees to our company or our stockholders, (3) any action
asserting a claim against our company arising pursuant to any provision of the General Corporation Law of the State of Delaware or our
certificate of incorporation or amended and restated bylaws, or (4) any action asserting a claim against our company governed by the internal
affairs doctrine. Our bylaws further provide that the United States District Court for the District of Massachusetts will be the exclusive forum
for resolving any complaint asserting a cause of action arising under the Securities Act. This exclusive forum provision would not apply to
suits brought to enforce a duty or liability created by the Exchange Act, which provides for exclusive jurisdiction of the federal courts. It
could apply, however, to a suit that falls within one or more of the categories enumerated in the exclusive forum provision and asserts claims
under the Securities Act, inasmuch as Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits
brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. There is uncertainty as to
whether a court would enforce such provision with respect to claims under the Securities Act, and our stockholders will not be deemed to
have waived our compliance with the federal securities laws and the rules and regulations thereunder.
SUBLEASE
Exhibit 10.22
THIS SUBLEASE AGREEMENT (this “Sublease”), made as of December 16, 2019 (the “Effective Date”), by and
between SURFACE ONCOLOGY, INC., a Delaware corporation (“Sublessor”), and EQRX, INC., a Delaware corporation
(hereinafter referred to as “Sublessee”);
W I T N E S S E T H:
WHEREAS, pursuant to that certain Lease Agreement dated as of May 13, 2016, as amended by that certain First
Amendment to Lease dated as of February 28, 2017 and that Second Amendment to Lease dated as of May 22, 2018
(collectively, as the same may have been heretofore further amended, amended and restated, supplemented or modified from time
to time, the “Prime Lease”), BMR-HAMPSHIRE LLC (“Prime Lessor”), as lessor, leases to Sublandlord, as lessee, a portion of
the building located at 50 Hampshire Street, Cambridge, Middlesex County, Massachusetts (the “Premises” or the “Building”),
upon and subject to the terms and conditions set forth in the Prime Lease. A redacted copy of the Prime Lease is attached hereto
as Exhibit A and made a part hereof; and
WHEREAS, Sublessee desires to sublease a portion of the Premises from Sublessor and Sublessor is willing to
sublease the same, all on the terms and conditions hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties covenant and agree as follows:
1.
Sublease of Subleased Premises. For the Rent (as defined herein) and upon the terms and conditions herein,
Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor the following space during the
following periods during the Term (as defined herein) of this Sublease:
Seventh Floor Premises. From the Commencement Date (as defined herein) through the Expiration
Date, the Subleased Premises shall include only the approximately 33,529 rentable square feet of space described in Exhibit B
which shall be referred to herein as the “Subleased Premises”.
(a)
four (24) hours a day, seven (7) days a week, subject to the terms of this Sublease.
(b)
During the term hereof, Sublessee shall have access to and use of the Subleased Premises twenty-
2.
Term; Condition of Premises. Subject to the following provisos, the term of this Sublease (“Term”) shall
commence upon the later of (a) the date on which the Subleased Premises are tendered to Sublessee for its occupancy and use and
(b) the date Sublessor delivers Prime Lessor’s consent to this Sublease to Sublessee containing terms and conditions acceptable to
Sublessee in its sole discretion (the later of (a) and (b), the “Commencement Date”), which is targeted for January 1, 2020
(“Sublease Target Commencement Date”), and shall expire on the date that is thirty-six (36) full calendar months after the
Commencement Date (the “Expiration Date”), unless sooner terminated as set forth herein. Notwithstanding anything in this
Sublease to the contrary, Sublessor’s obligation to timely deliver the Subleased Premises on or before the Sublease Target
Commencement
1
Date shall be subject to extension on a day-for-day basis as a result of Force Majeure (as defined below), and Sublessor shall
incur no liability under this Section for any delay caused by or any action or inaction of Sublessee or its contractors, agents or
employees. Sublessor shall not be liable for the failure to furnish any utility or service, whether or not such failure is caused by
accidents; breakage; casualties (to the extent not caused by the party claiming Force Majeure); Severe Weather Conditions (as
defined below); physical natural disasters (but excluding weather conditions that are not Severe Weather Conditions); strikes,
lockouts or other labor disturbances or labor disputes (other than labor disturbances and labor disputes resulting solely from the
acts or omissions of the party claiming Force Majeure); acts of terrorism; riots or civil disturbances; wars or insurrections;
shortages of materials (which shortages are not unique to the party claiming Force Majeure); government regulations, moratoria
or other governmental actions, inactions or delays; failures by third parties to deliver gas, oil or another suitable fuel supply, or
inability of the party claiming Force Majeure, by exercise of reasonable diligence, to obtain gas, oil or another suitable fuel; or
other causes beyond the reasonable control of the party claiming that Force Majeure has occurred (collectively, “Force
Majeure”). In the event of such failure, Sublessee shall not be entitled to termination of this Sublease or any abatement or
reduction of Rent, nor shall Sublessee be relieved from the operation of any covenant or agreement of this Sublease. “Severe
Weather Conditions” means weather conditions that are materially worse than those that reasonably would be anticipated for the
Premises at the applicable time based on historic meteorological records.
(a)
The Subleased Premises shall be delivered by Sublessor and accepted by Sublessee in “as is”
condition, except that the Subleased Premises shall be in broom clean condition, all the Subleased Premises shall be free of any
and all personal property, occupancies and tenancies. Sublessee shall have the right to use, at no additional cost or expense, the
existing office furniture and audiovisual equipment located within the Premises at the time of delivery by Sublessor, the extent of
which shall be memorialized in an Inventory List to be attached as Exhibit C to this Sublease.
respects, on the Commencement Date as the Premises are in on the Effective Date, reasonable wear and tear excepted.
(c)
Sublessor covenants to Sublessee that the Premises shall be in the same condition, in all material
3.
Appurtenant Rights.
(a)
Sublessee shall have, as appurtenant to the Subleased Premises and without additional charge or
cost, rights to use in common with Sublessor and others entitled thereto, Sublessor’s rights in driveways, walkways, lobbies,
hallways, the loading dock, freight elevators, stairways, passenger elevators convenient for access to the Subleased Premises and
the other Common Areas as set forth in the Prime Lease and all in accordance with the terms of the Prime Lease.
2
4.
Rent.
Rent”). The Base Rent and the Extra Rent (as defined below) shall be collectively referred to in this Sublease as the “Rent”.
(a)
Sublessee shall pay to Sublessor the following base rent for the Subleased Premises (the “Base
Lease Period
Commencement Date through
date that is one (1) month after
the Commencement Date
Rent Commencement Date –
the date that is 12 full calendar
months thereafter
Monthly
Installment
of Base Rent
$0
Annual Base
Rent
N/A
$210,953.29
$2,531,439.50
Month 13 after Rent
Commencement Date – Month 24
$217,281.89
$2,607,382.69
Month 25 after Rent
Commencement Date – Month 36
$223,800.35
$2,685,604.17
(b)
Notwithstanding anything set forth herein to the contrary, Sublessee shall be responsible for paying,
as “Extra Rent,” for the cost of Sublessee’s pro rata share of the Additional Rent set forth in the Prime Lease that is required to
be paid by Sublessor, excluding (i) any such Extra Rent relating solely to any portion of the Premises that does not include the
Subleased Premises or which is solely for Sublessor’s benefit and (ii) any Extra Rent relating to Laboratory Support Expenses.
For clarity, Sublessee, at its expense, shall be responsible to provide janitorial services, telecommunications, information
technology, security and alarm systems to the Subleased Premises. Any systems that pertain to the foregoing that are installed by
Sublessee shall be removed at the end of Sublessee’s occupancy of the Subleased Premises Sublessor’s pro rata share of the
Additional Rent for the Building is [16.60%], which is approximately [51.15%] of Sublessor’s pro rata share of the Additional
Rent. For avoidance of doubt, Sublessee shall not be responsible to pay for any portion of Extra Rent relating to any time prior to
the Rent Commencement Date.
(c)
Sublessee shall begin paying Rent to Sublessor on the date that is one (1) month after the
Commencement Date (the “Rent Commencement Date”), and shall not owe Rent to Sublessor for any period prior to the Rent
Commencement Date. All monthly payments of Rent and Extra Rent are due and payable in advance on the first day of each
calendar month, without demand, deduction, counterclaim or setoff, except as set forth or incorporated herein. Rent for any
partial month shall be prorated and paid on the first business day of such month. Sublessee shall make all payments required by
this Sublease by wire transfer.
3
(d)
Upon the payment of any amount of the Building Allowance (as defined in the Work Letter) for the
Improvements (as defined in the Work Letter), the annual Base Rent shall be increased by the total amount drawn by the
Sublessee (the “Building Allowance Drawn”), amortized (without interest) on a straight-line basis over the balance of the Term
commencing as of the Rent Commencement Date (the aggregate of which is hereinafter referred to as the “Aggregate Building
Allowance Drawn”) such that the full amount of the Aggregate Building Allowance Drawn shall be reimbursed by the Sublessee
to Sublessor as of the last regularly scheduled Base Rent payment of the Term.
5.
Permitted Uses. Sublessee shall use the Subleased Premises only for the Permitted Uses applicable to the
Subleased Premises as set forth in the Prime Lease. Sublessee shall not undertake any activities in the Subleased Premises unless
and until Sublessee has complied with any provisions of the Prime Lease that relate to Sublessee’s use, all applicable laws
(including, but not limited to, having obtain all necessary federal, state or local permits and operating licenses) and insurance
requirements.
6.
Condition of Subleased Premises; Security; Alterations; Parking.
(a)
Sublessee agrees that, except as expressly provided herein, (i) it enters into this Sublease without
relying upon any representations, warranties or promises by Sublessor, its agents, representatives, employees, servants or any
other person in respect of the Building or the Subleased Premises, except as specifically set forth in this Sublease, (ii) no rights,
easements or licenses are acquired by Sublessee by implication or otherwise except as expressly set forth or as incorporated
herein, (iii) Sublessor shall have no obligation to do any work in order to make the Subleased Premises suitable and ready for
occupancy and use by Sublessee. Sublessor represents and warrants that, to Sublessor’s knowledge, all base building systems
serving the Subleased Premises are, as of the date of this Sublease, in good working order.
(b)
Sublessee shall be permitted to install its own security system in the Subleased Premises which is
compatible with the key card access system for the Building, subject to the written approval of Sublessor and Prime Lessor, in
Sublessor’s and Prime Lessor’s reasonable discretion, provided that Prime Lessor shall be given all keys, passcodes and other
measures necessary to ensure that Prime Lessor has access to the Subleased Premises at all times in accordance with the terms of
the Prime Lease. At the end of the Term, Sublessee shall remove such security system.
(c)
Sublessee may cause the Improvements (as set forth in the Work Letter (“Work Letter”) attached to
this Sublease as Exhibit D) to be performed, and otherwise shall keep and maintain the Subleased Premises in at least the same
order, repair and condition as exists on the Commencement Date, reasonable wear and tear and damage by fire or other casualty
excepted.
(d)
Subject to Sublessor’s and Prime Lessor’s reasonable approval, Sublessee shall have the right to
hire and manage a mutually approved architect, contractor and construction manager for all required construction relative to
Sublessee’s Subleased Premises. All of Sublessee’s improvements, including the Improvements, shall be subject to Sublessor’s
and Prime Lessor’s approval, which shall not be unreasonably delayed or withheld. Sublessor shall notify Sublessee of any
restoration obligations upon review and consent of any alteration plans. Sublessee shall also be responsible for any fees charged
by Prime Lessor in connection with Sublessee’s Improvements and any other alterations in accordance with Section 17.10 of the
Prime Lease.
4
During the Term of the Sublease, Sublessee shall be eligible to use twenty-seven (27) parking
spaces allocated to Sublessor pursuant to the Prime Lease at the same cost per space as charged to Sublessor pursuant to the
Prime Lease.
(e)
7.
Insurance. Sublessee shall maintain throughout the Term of this Sublease such insurance in respect of the
Subleased Premises and the conduct and operation of business therein, with Sublessor and Prime Lessor listed as additional
insureds as is required of “Tenant” pursuant to the terms of the Prime Lease, with no penalty to Sublessor or Prime Lessor
resulting from deductibles or self-insured retentions effected in Sublessee’s insurance coverage. If Sublessee fails to procure or
maintain such insurance and to pay all premiums and charges therefor within five (5) days after receipt of written notice from
Sublessor, Sublessor may (but shall not be obligated to) do so, whereupon Sublessee shall reimburse Sublessor upon demand for
such insurance premiums and charges and other reasonable costs incurred by Sublessor. All such Sublessee insurance policies
shall, to the extent obtainable, contain endorsements providing that (i) such policies may not be canceled except upon thirty (30)
days’ prior notice to Sublessor and Prime Lessor, (ii) no act or omission of Sublessee shall affect or limit the obligations of the
insurer with respect to any other named or additional insured and (iii) Sublessee shall be solely responsible for the payment of all
premiums under such policies and Sublessor, notwithstanding that it is or may be a named insured, shall have no obligation for
the payment thereof. On or before the Commencement Date, Sublessee shall deliver to Sublessor and Prime Lessor either a fully
paid-for policy or certificate, at Sublessee’s option, evidencing the foregoing coverages. Any endorsements to such policies or
certificates shall also be delivered to Sublessor and Prime Lessor upon issuance thereof. Sublessee shall procure and pay for
renewals of such insurance from time to time before the expiration thereof, and Sublessee shall deliver to Sublessor and Prime
Lessor such renewal policies or certificates within thirty (30) days after the renewal date of any existing policy. In the event
Sublessee fails to deliver any such renewal policy or certificate within thirty (30) days after the expiration of any existing policy,
Sublessor shall have the right, but not the obligation, to obtain the same after five (5) days’ written notice and opportunity to cure
whereupon Sublessee shall reimburse Sublessor upon demand the fair market cost thereof.
Sublessee shall include in all such insurance policies any clauses or endorsements in favor of Prime Lessor including,
but not limited to, waivers of the right of subrogation, which Sublessor is required to provide pursuant to the provisions of the
Prime Lease. Sublessor and Sublessee shall also obtain from their respective insurers waivers of subrogation riders in favor of
each other and hereby agree to release each other from all claims that may arise that are otherwise covered by insurance or if
would have been covered by insurance that was required to be obtained either herein or in the Prime Lease. Sublessee releases
and waives all claims against Sublessor for loss or damage to Sublessee’s personal property and its alterations in the Subleased
Premises
8.
Indemnification. Subject to Section 7 above and the obligation of each party to first look to insurance and
except to the extent directly caused by the negligence or willful misconduct of Sublessor, Sublessee agrees to defend (with
counsel reasonably approved by Sublessor), indemnify and hold Sublessor and its respective officers, agents and employees
harmless from and against any and all claims, costs, expenses, losses and liabilities arising: (i) from the conduct or management
of or from any work or thing whatsoever done in the Subleased Premises by or on behalf of Sublessee during the Term hereof; (ii)
from any condition arising and any injury to or death of persons, damage to property or other event occurring in the Subleased
Premises during the term hereof by or on behalf of Sublessee; and (iii) from any breach or default on the part of Sublessee in the
performance of any
5
covenant or agreement on the part of Sublessee to be performed pursuant to the terms of this Sublease or from any willful
misconduct or negligence on the part of Sublessee or any of its agents, employees, licensees, invitees or assignees or any person
claiming through or under Sublessee. Sublessee further agrees to indemnify Sublessor and Prime Lessor and their respective
officers, agents and employees from and against any and all damages, liabilities, costs and expenses, including reasonable
attorneys’ fees, incurred in connection with any such indemnified claim or any action or proceeding brought in connection
therewith. The provisions of this Paragraph are intended to supplement any other indemnification provisions contained in this
Sublease and in the Prime Lease to the extent incorporated by reference herein. Any non-liability, indemnity or hold harmless
provisions in the Prime Lease for the benefit of Prime Lessor that are incorporated herein by reference shall be deemed to inure to
the benefit of Sublessor and Prime Lessor for the purpose of incorporation by reference in this Sublease.
9.
No Assignment or Subletting. Other than as set forth in the Prime Lease, Sublessee shall not assign, sell,
mortgage, pledge or in any manner transfer this Sublease or any interest herein, or the term or estate granted hereby or the rentals
hereunder, or sublet the Subleased Premises or any part thereof, or grant any concession or license or otherwise permit occupancy
of all or any part of the Subleased Premises by any person, without the prior written consent of Sublessor and Prime Lessor,
which consent as to Sublessor shall not be unreasonably withheld, conditioned or delayed and as to Prime Lessor shall be granted
or withheld in accordance with the terms and provisions of the Prime Lease.. In addition to the rights set forth in the Prime Lease,
Sublessor may exercise any other remedies available at law or in equity. No subletting or assignment shall release Sublessee of
Sublessee’s obligation or alter the primary liability of Sublessee to pay the Base Rent and Extra Rent and to perform all other
obligations to be performed by Sublessee under the Sublease.
10.
Primacy and Incorporation of Prime Lease.
(a)
This Sublease is and shall be subject and subordinate to the Prime Lease and to all amendments,
modifications and replacements of or to the Prime Lease, but only as such are permitted pursuant to this Sublease. Sublessor
conveys, and Sublessee takes hereby, no greater rights then those accorded to or taken by Sublessor as “Tenant” under the terms
of the Prime Lease, and likewise, except as set forth herein, is granted all benefits afforded “Tenant” under the Prime Lease. To
the extent incorporated herein, Sublessee covenants and agrees that it will perform and observe all of the provisions contained in
the Prime Lease to be performed and observed by the “Tenant” thereunder as applicable to the Subleased Premises, except that
“Rent” shall be defined for purposes of this Sublease as set forth in Section 4 hereof. Notwithstanding the foregoing, Sublessee
shall have no obligation to (i) cure any default of Sublessor under the Prime Lease, (ii) perform any obligation of Sublessor under
the Prime Lease which arose prior to the Commencement Date and Sublessor failed to perform, (iii) repair any damage to the
Subleased Premises caused by Sublessor, (iv) remove any alterations or additions installed within the Subleased Premises by or
for Sublessor, or (v) indemnify Sublessor for any damages that directly result from any gross negligence or willful misconduct by
Sublessor or its agents, employees or contractors. Except to the extent inconsistent with the context hereof, capitalized terms used
and not otherwise defined herein shall have the meanings ascribed to them in the Prime Lease. Further, except as set forth in the
last paragraph of this Section (a), the terms, covenants and conditions of the Prime Lease are incorporated and made a part of this
Sublease as they relate to the Subleased Premises as if such terms, covenants and conditions were stated herein to be the terms,
covenants and conditions of this Sublease, so that except to the extent that they are inconsistent with or modified by the
provisions of this Sublease, for
6
the purpose of incorporation by reference, each and every referenced term, covenant and condition of the Prime Lease binding
upon or inuring to the benefit of the “Landlord” thereunder shall, in respect of this Sublease and the Subleased Premises, be
binding upon or inure to the benefit of Sublessor, and each and every referenced term, covenant and condition of the Prime Lease
binding upon or inuring to the benefit of the “Tenant” thereunder shall, in respect of this Sublease, be binding upon or inure to the
benefit of Sublessee, with the same force and effect as if such terms, covenants and conditions were completely set forth in this
Sublease. It is the intent of the parties that to the extent any terms or provisions of this Sublease are inconsistent or conflict with
the Prime Lease, other than the Base Rent, the terms of the Prime Lease shall control. For purposes of this Sublease, as to such
incorporated terms, covenants and conditions:
deemed to refer to the “Subleased Premises” hereunder;
(i)
references in the Prime Lease to the “Premises” to the “Additional Premises” shall be
references in the Prime Lease to “Landlord” and to “Tenant” shall be deemed to refer to
“Sublessor” and “Sublessee” hereunder, respectively, except that where the term “Landlord” is used in the context of ownership
or management of the entire Building, such term shall be deemed to mean “Prime Lessor”;
(ii)
references in the Prime Lease to “this Lease” shall be deemed to refer to “this Sublease”
(except when such reference in the Prime Lease is, by its terms (unless modified by this Sublease), a reference to any other
section of the Prime Lease, in which event such reference shall be deemed to refer to the particular section of the Prime Lease);
(iii)
refer to the “Commencement Date” hereunder;
(iv)
references in the Prime Lease to the “Term Commencement Date” shall be deemed to
Sublease.
(v)
references in the Prime Lease to “Term” shall be deemed to refer to the Term of this
Sublessor shall have the rights against Sublessee as would be available to Landlord against the Tenant under the Prime
Lease if such breach was by the Tenant thereunder. Sublessee shall have the same rights against Sublessor as would be available
to Tenant against the Landlord under the Prime Lease if such breach was by the landlord thereunder.
Notwithstanding the foregoing, the following provisions of the Prime Lease and Exhibits annexed
thereto are not incorporated herein by reference and shall not, except as to definitions set forth therein, have any applicability to
this Sublease:
(b)
Articles/Paragraphs/Sections 1, 2.1-2.6, 3, 4, 5, 7.1, 8, 9.6, 13.5, 16.8, 17, 41, and 42.
(c)
Notwithstanding anything to the contrary contained in the Prime Lease, the time limits (the “Notice
Periods”) contained in the Prime Lease for the giving of notices, making of demands or performing of any act, condition or
covenant on the part of the “Tenant” thereunder, or for the exercise by the “Tenant” thereunder of any right, remedy or option, are
changed for the purposes of incorporation herein by reference by shortening the same in each instance by five (5) days, so that in
each instance Sublessee shall have five (5) fewer days to observe or perform hereunder than Sublessor has as the “Tenant” under
the Prime Lease; provided, however, that if the
7
Prime Lease allows a Notice Period of five (5) days or less, then Sublessee shall nevertheless be allowed the number of days
equal to one-half of the number of days in each Notice Period to give any such notices, make any such demands, perform any
such acts, conditions or covenants or exercise any such rights, remedies or options; provided, further, that if one-half of the
number of days in the Notice Period is not a whole number, Sublessee shall be allowed the number of days equal to one-half of
the number of days in the Notice Period rounded up to the next whole number.
11.
Sublessor Representations. Notwithstanding anything to the contrary contained in this Sublease (including,
without limitation, the provisions of the Prime Lease incorporated herein by reference), Sublessor makes no representations or
warranties whatsoever with respect to the Subleased Premises, this Sublease, Prime Lease or any other matter, either express or
implied, except as otherwise expressly set forth in this Sublease, except that Sublessor represents and warrants both as of the
Effective Date as follows: (i) that it is the sole holder of the interest of the “Tenant” under the Prime Lease and holds good
leasehold title to the Subleased Premises, (ii) that Sublessor has the legal power, right and authority to enter into this Sublease
and the instruments referenced herein and to consummate the transactions contemplated hereby, and the individual(s) executing
this Sublease and instruments referenced herein on behalf of Sublessor have the legal power, right, and authority to bind
Sublessor to the terms and conditions hereof and that the Sublease is enforceable in accordance with its terms and is in full force
and effect, (iii) that the Prime Lease is in full force and effect, (iv) there currently are no defaults or events of default under the
Prime Lease, and there are no events which, with the passage of time and/or the giving of notice, would constitute a default or
event of default under the Prime Lease, (v) to the Sublessor’s knowledge, Prime Lessor is not in default under the Prime Lease,
(vi) other than those that have been obtained and that are in full force and effect, the execution, delivery, and performance by
Sublessor of this Sublease does not require the consent, waiver, approval, license, or authorization of, or any notice to or filing
with, any person, entity, or governmental authority, except for the Consent, (vii) a true, accurate, and complete copy of the Prime
Lease is attached hereto as Exhibit A, and there have been no modifications, amendments (including amendments to appendices)
or changes to the Prime Lease, and the Prime Lease constitutes the entire agreement between Prime Lessor and Sublessor with
regard to the Subleased Premises, (viii) Sublessor has no defenses, setoffs, or counterclaims to the payment of amounts due from
Sublessor to Prime Lessor under the Prime Lease and no dispute currently exists under the Prime Lease, (ix) the execution and
delivery of this Sublease will not conflict with or constitute a breach or default of any material terms of any note, contract,
mortgage, deed of trust, lease, sublease, or other agreement or instrument to which Sublessor is a party or by which it is bound,
(x) there are no actions, lawsuits, or proceedings pending or threatened against or relating to Sublessor’s ownership or use of the
Subleased Premises, and Sublessor has not received any written notice from any city, county, state, or other governmental agency
claiming a violation of any applicable laws relating to the Subleased Premises, and (xi) Sublessor has not contracted for any
services or goods or created any obligations that will bind Sublessee as successor-in-interest with respect to the Subleased
Premises except as set forth in this Sublease.
12.
Compliance with Prime Lease. Sublessee shall neither do nor permit anything to be done which would
cause the Prime Lease to be terminated or forfeited by reason of any right of termination or forfeiture reserved or vested in Prime
Lessor under the Prime Lease; provided, however, that this provision shall not require Sublessee to act or refrain from acting
where otherwise permitted in this Sublease. Sublessee shall defend, indemnify and hold Sublessor harmless from and against any
and all claims, liabilities, losses, damages, and expenses (including reasonable attorneys’ fees) of any kind whatsoever by reason
of any breach or default by Sublessee of this Section 12.
8
Sublessor shall neither do nor permit anything to be done which would cause the Prime Lease to be terminated or
forfeited voluntarily or by reason of any right of termination or forfeiture reserved or vested in Prime Lessor under the Prime
Lease; provided, however, that this provision shall not require Sublessor to act or refrain from acting where otherwise permitted
in this Sublease. Sublessor shall defend, indemnify, and hold Sublessee harmless from and against any and all claims, liabilities,
losses, damages, and expenses (including reasonable attorneys’ fees) of any kind whatsoever by reason of any breach or default
by Sublessor of this Section 12. Sublessor will not amend, alter or modify any of the provisions of the Prime Lease in a manner
that increases the Rent or other amounts payable by Sublessee pursuant to this Sublease without, in each instance, Sublessee’s
consent in its sole and absolute discretion.
13.
Security Deposit. Within two (2) business days after the Effective Date, Sublessee shall deposit with
Sublessor a letter of credit for the amount of $843,813.17 (the “Security Deposit”) which sum shall be held by Sublessor as
security for the faithful performance by Sublessee of all of the terms, covenants and conditions of this Sublease. Upon Sublessee
providing confirmation in writing of raising a Series A equal to or greater than $100M, the amount of the Security Deposit shall
be reduced to $632,859.88. The provisions of Section 11 of the Prime Lease shall govern the Security Deposit, provided,
however, that the Security Deposit must be in the form of a Letter of Credit pursuant to Section 11 of the Prime Lease delivered
by Sublessee to Sublessor.
14.
Brokerage. Sublessee and Sublessor each represents that it has not dealt with any broker in connection with
this Sublease. Each party agrees to indemnify and hold harmless the other from and against any and all liabilities, claims, suits,
demands, judgments, costs, interest, and expenses (including, without being limited to, reasonable attorneys’ fees and expenses)
which the indemnified party may be subject to or suffer by reason of any breach of the foregoing representations..
(a) Notices. All notices, consents, approvals, demands, bills, statements, and requests which are required or desired to
be given by either party to the other hereunder shall be in writing and shall be governed by Section 24 of the Prime Lease as
incorporated herein by reference.
(a)
Address for Notices to Sublessor:
(b)
Address for Notices to Sublessee:
Prior to the Commencement Date:
Surface Oncology, Inc.
50 Hampshire Street
Cambridge, MA 02139
Attn: General Counsel
EQRX, Inc.
399 Binney St
Cambridge MA 02139
Attn: General Counsel
9
After the Commencement Date:
EQRX, Inc.
50 Hampshire St
Cambridge MA 02139
Attn: General Counsel
15.
Interpretation. This Sublease shall be construed without regard to any presumption or other rule requiring
construction against the party causing this Sublease to be drafted. Each covenant, agreement, obligation or other provision of this
Sublease shall be deemed and construed as a separate and independent covenant of the party bound by, undertaking or making the
same, which covenant, agreement, obligation or other provision shall be construed and interpreted in the context of the Sublease
as a whole. All terms and words used in this Sublease, regardless of the number or gender in which they are used, shall be
deemed to include any other number and any other gender as the context may require. The word “person” as used in this Sublease
shall mean a natural person or persons, a partnership, a corporation or any other form of business or legal association or entity.
Terms used herein and not defined shall have the meaning set forth in the Prime Lease.
16.
directory for Sublessee.
Signage. Sublessor shall obtain for Sublessee a Building-standard listing on the main Building lobby
17.
Right to Cure Defaults. If Sublessee or Sublessor shall at any time fail to make any payment or perform any
other obligation pursuant to this Sublease, then the other shall have the right, but not the obligation, after notice to the defaulting
party in accordance with Section 15 of this Sublease, or without notice to the other in the case of any emergency, and without
waiving or releasing the other from any obligations of the other hereunder, to make such payment or perform such other
obligation of the other in such manner and to such extent as the non-defaulting party shall deem reasonably necessary, and in
exercising any such right, to pay any incidental costs and expenses, employ attorneys, and incur and pay reasonable attorneys’
fees. The defaulting party shall pay to the non-defaulting party ten (10) days after demand all reasonable sums so paid by the
non-defaulting party and all incidental costs and expenses of the non-defaulting party in connection therewith, together with
interest thereon at an annual rate equal to ten percent (10%) per annum, or the highest rate permitted by applicable law,
whichever shall be less. Such interest shall be payable with respect to the period commencing on the date such expenditures are
made by the non-defaulting party and ending on the date such amounts are repaid by the defaulting party. The provisions of this
Paragraph shall survive the Expiration Date or the sooner termination of this Sublease.
18.
Termination of Prime Lease. If for any reason the term of the Prime Lease shall terminate prior to the last
day of the Term of this Sublease (as the case may be), this Sublease shall thereupon automatically terminate as to the premises
demised under the Prime Lease and Sublessor shall not be liable to Sublessee by reason thereof except as otherwise set forth in
this Sublease.
Neither Sublessor nor Sublessee shall do or permit anything to be done which would cause the Prime Lease to be
terminated or forfeited by reason of any right of termination or forfeiture reserved or vested in Prime Lessor or in Sublessor
under the Prime Lease Sublessor and Sublessee each shall defend, indemnify, and hold the other harmless from and against any
and all claims, liabilities, losses, damages, and expenses (including reasonable attorneys’ fees) of any kind whatsoever by reason
of any breach or default on the part of Sublessor or Sublessee (as the case may be) by reason of which the Prime Lease may be
terminated or forfeited.
10
Sublessor shall perform all of its obligations under the Prime Lease, and agrees to keep and maintain the Prime Lease in
full force and effect. In the event that either Sublessor or Sublessee shall receive any notice from Prime Lessor regarding a
default pursuant to any of the provisions of the Prime Lease, the party receiving such notice shall promptly give a copy thereof to
the other party. Further, Sublessor and Sublessee each agrees to give to the other a copy of any notice of default, event of default,
or otherwise under the Prime Lease that said party gives to Prime Lessor.
19.
Sublessee Hazardous Material Activity.
(a)
At all times during the Term, Sublessee shall maintain, at its sole cost and expense, environmental
control and safety management services related to Sublessee’s activities in the Subleased Premises (the “EH&S Services”). The
EH&S Services shall be provided by parties reasonable acceptable to Sublessor and in a manner reasonably acceptable to
Sublessor.
(b)
Without limiting the generality of Section 10 of this Sublease, Sublessee shall (i) at all times during
the Term, comply with the provisions of Section 21 of the Prime Lease regarding the storage and use of Hazardous Materials on
the Subleased Premises, and (ii) prior to the expiration or termination of the Term, comply with the provisions of Section 26,
including, but not limited to the preparation and execution of an Exit Survey (subject to prior approval by Sublessor and Prime
Lessor).
20.
Quiet Enjoyment. Sublessor covenants that if Sublessee is not in default beyond the expiration of any
applicable notice and cure periods, then Sublessee shall quietly enjoy and occupy the full possession of the Subleased Premises
without molestation or hindrance by Sublessor or any party claiming through Sublessor.
21.
No Privity of Estate. Nothing contained in this Sublease shall be construed to create privity of estate or of
contract between Sublessee and Prime Lessor.
22.
No Waiver. The failure of either party to insist in any one or more cases upon the strict performance or
observance of any obligation of the other party hereunder or to exercise any right or option contained herein shall not be
construed as a waiver or relinquishment for the future performance of any such obligation of such party or any right or option of
the other party. Sublessor’s receipt and acceptance of Rent or Sublessor’s acceptance of performance of any other obligation by
Sublessee, with knowledge of Sublessee’s breach of any provision of this Sublease, shall not be deemed a waiver of such breach.
No waiver of any term, covenant or condition of this Sublease shall be deemed to have been made unless expressed in writing
and signed by both parties.
23.
Complete Agreement. This Sublease constitutes the entire agreement between the parties and there are no
representations, agreements, arrangements or understandings, oral or written, between the parties relating to the subject matter of
this Sublease which are not fully expressed in this Sublease. This Sublease cannot be changed or terminated orally or in any
manner other than by a written agreement executed by both parties. This Sublease shall not be binding upon either party unless
and until it is signed and delivered by and to both parties, and is further subject to Section 27.
24.
Successors and Assigns. The provisions of this Sublease, except as herein otherwise specifically provided,
shall extend to, bind, and inure to the benefit of the parties hereto and their respective personal representatives, heirs, successors,
and permitted assigns.
11
25.
Governing Law; Jurisdiction. This Sublease shall be construed in accordance with, and governed in all
respects by, the laws of the Commonwealth of Massachusetts (without giving effect to principles of conflicts of laws that would
require the application of any other law). Sublessor and Sublessee agree to submit to the jurisdiction of the state and federal
courts located in the Commonwealth of Massachusetts, with venue in the County of Middlesex, and waive any defense of
inconvenient forum to the maintenance of any action or proceeding in such courts.
26.
Waiver of Jury Trial and Right to Counterclaim. The parties hereto hereby waive any rights which they
may have to trial by jury in any summary action or other action, proceeding or counterclaim arising out of or in any way
connected with this Sublease, the relationship of Sublessor and Sublessee, the Subleased Premises and the use and occupancy
thereof, and any claim for injury or damages. Sublessee also hereby waives all right to assert or interpose a counterclaim (other
than mandatory counterclaims) in any summary proceeding or other action or proceeding to recover or obtain possession of the
Subleased Premises.
27.
Consent of Prime Lessor. This Sublease is contingent on the approval and consent of Prime Lessor, which
Sublessor agrees to use all reasonable efforts to obtain. This Sublease shall not become effective unless and until a written
approval and consent (the “Consent”) is executed and delivered by the Prime Lessor and Sublessee on terms and conditions
satisfactory to Sublessee in its sole discretion. After the Sublessor receives the Consent as executed by Prime Lessor, Sublessor
agrees to promptly deliver a fully executed original of the Consent to Sublessee. The effect and commencement of this Sublease
is subject to and conditional upon the receipt by Sublessor and Sublessee of the Consent executed by Prime Lessor. Upon
execution of this Sublease by Sublessee, Sublessor will promptly apply to the Prime Lessor for the Consent and Sublessor will
promptly inform Sublessee as to receipt of the Consent (if and when it is received) and deliver to Sublessee a copy of the same.
Sublessee shall reimburse Sublessor for Prime Landlord’s actual costs and expenses, including reasonable attorneys’
fees, charges and disbursements incurred in connection with reviewing the Sublease and processing, drafting and negotiating the
Consent, not to exceed $2,500.
If the Consent is not received within thirty (30) business days after this Sublease is fully executed by both Sublessor
and Sublessee (the “Sunset Date”), then from and after the Sunset Date this Sublease will cease to have any further effect and the
parties hereto will have no further obligations to each other with respect to this Sublease and any funds paid hereunder by
Sublessee shall be promptly refunded by Sublessor.
28.
Holdover. If Sublessee remains in possession of either the Subleased Premises after the last day of the
occupancy of such Subleased Premises as set forth in Section 1 (as the case may be) without the express written consent of
Sublessor, (a) Sublessee shall become a tenant at sufferance upon the terms of this Sublease except that the monthly rental shall
be equal to 150% of Rent in effect during the last 30 days of the Term, and (b) Sublessee shall be responsible for all damages
suffered by Sublessor resulting from or occasioned by Sublessee’s holding over, including consequential damages. No holding
over by Sublessee, whether with or without consent of Sublessor, shall operate to extend this Sublease. Acceptance by Sublessor
of Rent after the expiration of the Term or earlier termination of this Sublease shall not result in a renewal or reinstatement of this
Sublease.
12
29.
Recording. Sublessor and Sublessee agree that neither party may record this Sublease.
30.
Public Statements. Neither party will make any public statements or releases concerning this Sublease, or
use the other party’s name in any form of advertising, promotion or publicity, without obtaining the prior written consent of the
other party, which consent will not be unreasonably withheld or delayed.
31.
Limitation of Liability. Notwithstanding any indemnities or other provisions hereof to the contrary, in no
event shall Sublessor or Sublessee be responsible for any consequential, incidental, special or punitive damages, except as
specifically set forth herein or in the Prime Lease.
32.
Certain Definitions.
Prime Lease.
(a)
(b)
context otherwise indicates.
All capitalized terms not defined in this Sublease shall have the meanings ascribed to them in the
The terms “herein”, “hereunder”, and “hereof” shall refer to this Sublease as a whole unless the
33.
Counterparts. This Sublease may be executed in multiple counterparts, each of which shall be deemed an
original but all of which taken together shall constitute one and the same instrument. The undersigned may rely upon facsimile
counterparts signed by each other, but shall promptly upon the request of the other exchange executed original signature pages.
34.
Time is of the essence. Time is of the essence with respect to each provision of this Sublease.
35.
Notwithstanding the foregoing, (a) Sublessor shall use good faith efforts, under the circumstances, to secure
performance of Prime Lessor’s obligations under the Prime Lease upon Sublessee’s written request to Sublessor to do so and
shall thereafter diligently prosecute such performance on the part of Prime Lessor and (b) if Sublessor shall be entitled to any
abatement of rent by reason of any failure on the part of Prime Lessor to perform its obligations or to provide services to the
Subleased Premises, Sublessee shall be entitled to a proportionate abatement of rent payable to Sublessor to the extent such
abatement is actually made; provided, however, that Sublessee shall reimburse Sublessor for reasonable costs and expenses
incurred by Sublessor in connection with such efforts. As long as this Sublease is in full force and effect, Sublessee shall be
entitled, with respect to the Subleased Premises, to the benefit of Prime Lessor’s obligations and agreements under the Prime
Lease to furnish utilities and other services to the Subleased Premises and to repair and maintain the common areas, roof,
building systems and all other obligations of Prime Lessor under the Master Lease.
13
36.
Notwithstanding anything contained in this Sublease to the contrary, Sublessee shall not be responsible for (i)
any default of Sublessor, its agents, employees or contractors under the Prime Lease unless attributable to a default under this
Sublease or the Prime Lease by Sublessee, its agents, employees, contractors, invitees or anyone claiming by, through or under
Sublessee, (ii) conditions at the Subleased Premises, for which the obligation to maintain and repair resides with Prime Lessor
under the Prime Lease and/or which existed as of the Commencement Date, (iii) any violations of law resulting from such
conditions described by (ii) above, (iv) the payment of any charges, fees and other costs imposed by Prime Lessor on Sublessor
as a result of Sublessor’s default under the Prime Lease (unless due to any default by Sublessee under this Sublease), and (v)
making payment of any sums either to Prime Lessor or Sublessor in satisfaction of any charges accruing under the Prime Lease
(whether denominated as rent, rental, additional rent or otherwise) for any period prior or subsequent to the Term of this
Sublease.
[Remainder of Page Intentionally Left Blank]
14
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease as a sealed instrument as of the date
first written above.
SUBLESSOR:
SURFACE ONCOLOGY, INC.
By: /s/ J. Jeffery Goater
Name: J. Jeffery Goater
Title: Chief Executive Officer
SUBLESSEE:
EQRX, INC.
By: /s/ Melanie Nallicheri
Name: Melanie Nallicheri
Title:
President & COO
15
EXHIBIT A
PRIME LEASE
See attached.
16
EXHIBIT B
SEVENTH FLOOR PREMISES
17
EXHIBIT C
FURNITURE
18
EXHIBIT D
WORK LETTER
19
EXHIBIT D:
PROPOSED WORK LETTER TO BE ATTACHED TO SUBLEASE
SUBLESSEE IMPROVEMENTS
This Work Letter is attached to that certain sublease (“Sublease”) between Surface Oncology, Inc., a Delaware corporation
(“Sublessor”), and EQRx, Inc., a Delaware corporation (hereinafter referred to as “Sublessee”) dated as of December 16, 2019.
Capitalized Terms shall have the meanings ascribed to them in the Sublease unless otherwise defined herein.
1.
Responsibility for Completing Improvements. Sublessee shall prepare the plans and specifications (the
“Drawings”) for, and furnish and install the “Improvements”, to the extent said Improvements are approved by Prime Lessor and
Sublessor in advance pursuant to the plans and specifications prepared pursuant to paragraph 2 hereof. In order to facilitate the
completion of the Improvements, Sublessor agrees to provide Tenant an allowance for the design and construction of the
Improvements equal to $30 per rentable square foot of the Subleased Premises (the “Buildout Allowance”), which may only be
used for fees (including project management fees), costs and expenses of Sublessee associated with the design, preparation,
approval and construction of the Improvements and otherwise in conformance with the uses for the Additional Premises TI
Allowance set forth in the Prime Lease, and specifically in the Second Amendment to Lease dated as of May 22, 2018 (“Second
Amendment”). Sublessee shall be responsible for any Excess Cost (as hereinafter defined).
The Buildout Allowance shall be paid to Sublessee in accordance with this Exhibit “D”. Sublessor and Sublessee shall
each be responsible for a portion of the costs of the Improvements as described below. Once Sublessee enters into a guaranteed
maximum price construction contract (the “GMP”) with General Contractor (defined below), the total Buildout Allowance shall
be compared to the total anticipated amount of the costs of the design and construction of the Improvements as set forth in the
GMP. For each request for payment of the Buildout Allowance, Sublessor shall pay that portion of the request that is equal to the
fraction represented by the ratio of (a) the total Buildout Allowance to (b) the total anticipated cost of the design and construction
of the Improvements as shown on the GMP. For example, if the total Buildout Allowance is $1,005,870 and the total anticipated
cost of the design and construction of the Improvements as shown on the GMP is $2,011,740, then Sublessor shall pay one-half
(i.e., $1,005,870 / $2,011,740 is equal to 1/2) of all requests for the Buildout Allowance until such Buildout Allowance has been
fully expended. Sublessor shall pay the Buildout Allowance to Sublessee within thirty (30) days after the request therefor by
Sublessee and satisfaction of each of the following conditions (“Payment Conditions”): (i) the portion of the Improvements (or
the design thereof) for which Sublessee is seeking reimbursement shall have been substantially completed to the extent required
in accordance with this Exhibit “D” and paid for by Sublessee, (ii) lien waivers and paid invoices and other proof of payment of
all costs related to such Improvements shall have been provided to Sublessor, all in form and substance reasonably satisfactory to
Sublessor, (iii) no default of Sublessee shall have occurred under the Sublease and be continuing, and (iv) Sublessee has
complied with all other applicable provisions of the Prime Lease, including, without limitation, the provisions of the Work Letter
set forth in the Second Amendment including without limitation, the provisions applicable to the Draft Schematic Plans,
Construction Plans, Approved Budget and each Fund Request (each as defined in the Second Amendment).
20
2.
Drawings & Permits. Sublessee will enter into agreements with its architect and engineer and cause them to
prepare drawings and specifications and shall submit the construction plans and specifications consistent with the preliminary test
fit plan of the Subleased Premises prepared for Sublessee, which is attached hereto as Exhibit 1, to Sublessee and Prime Lessor
for approval (“Approved Plans and Specifications”). Sublessee shall cause the Improvements to be constructed in accordance
with the Approved Plans and Specifications. Sublessee shall submit the Approved Plans and Specifications to all governmental
authorities having approval rights over the Improvements and shall apply for all governmental approvals and building permits.
Upon receipt of such approval(s) and permit(s), and subject to the provisions of this Exhibit “D”, Sublessee shall thereafter
commence and proceed with complete construction of the Improvements. No Improvements or other work shall be conducted by
or on behalf of Sublessee until the construction plans and specifications for the Improvements are fully approved in writing by
Sublessor and Prime Lessor and all permits required therefor have been issued. Sublessee shall cooperate diligently with
Sublessor and shall furnish within five (5) days, after request therefor, all information required by Sublessor related to the plans
and specifications submitted to Sublessor for approval, as applicable. Sublessee assumes full and complete responsibility to
ensure that the Improvements and the work related thereto and the plans and specifications, including the Approved Plans and
Specifications, are complete and adequate to fully meet the needs and requirements of Sublessee’s business operations within the
Subleased Premises and to insure that the Improvements as shown on the Approved Plans and Specifications are complete, fully
comply with all statutes, regulations, building codes and other laws and that such Approved Plans and Specifications are accurate
and free of all design errors, defects, omissions and incompleteness. Neither the approval by Sublessee of the Approved Plans
and Specifications, or of any other plans, specifications, drawings or other items associated with the Improvements nor
Sublessor’s performance, supervision or monitoring of the Improvements shall constitute any warranty or covenant by Sublessor
as to the adequacy of the design of the Subleased Premises or as to completeness and accuracy thereof nor as to compliance with
the applicable statues, laws, building codes and other laws nor in any way subject Sublessor to any liability whatsoever.
3.
Contractors. In order to ensure that Sublessor is able to maintain and monitor the quality of the building
construction, the design intent of the systems, including warranties, guarantees, and to further protect the standards of
construction maintained in the Building, it is agreed that the contractor engaged by Sublessee to construct the Improvements
(“General Contractor”) will be subject to reasonable approval by Sublessor and Prime Lessor. General Contractor shall be
directly retained by Sublessee and shall construct all Improvements in compliance with all applicable statutes, regulations,
building codes and other laws, in accordance with the Approved Plans and Specifications. Notwithstanding the foregoing, or any
other provision of the Sublease, Sublessor shall not have any liability or responsibility to Sublessee for any failure of the
Approved Plans and Specifications or Improvements shown thereon, to comply with applicable statutes, regulations, building
codes or other laws nor for any errors, omissions, incompleteness of, and design defects in, the Approved Plans and
Specifications, or in the work or performance of General Contractor for the Improvements and that Sublessee shall be responsible
to correct, at its sole cost and expense, any failure of the Approved Plans and Specifications or the Improvements to comply with
applicable statutes, regulations, codes and other laws and also for the cost of correcting any errors, omissions or incompleteness
of the Approved Plans and Specifications and for any defects, errors, omissions, poor workmanship and other inadequacies in the
Improvements or in the performance of General Contractor.
4.
Excess Costs. Sublessee shall be responsible for any costs of designing and
21
constructing the Improvements in excess of the Buildout Allowance (the “Excess Cost”) within the timeframe required pursuant
to the agreement or agreements between Sublessee and General Contractor and any other parties with respect to the
Improvements.
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Work Letter as a sealed instrument as of the
date first written above.
SUBLESSOR:
SURFACE ONCOLOGY, INC.
By:
Name:
Title:
J. Jeffery Goater
J. Jeffery Goater
Chief Executive Officer
SUBLESSEE:
EQRX, INC.
/s/ Melanie Nallicheri
By:
Name: Melanie Nallicheri
President & COO
Title:
22
CONSENT TO SUBLEASE
This CONSENT TO SUBLEASE (this “Consent”) is entered into as of this 16th day of December, 2019, by
and among BMR-HAMPSHIRE LLC, a Delaware limited liability company (“Landlord”), SURFACE ONCOLOGY, INC., a
Delaware corporation (“Tenant”), and EQRX, INC., a Delaware corporation (“Subtenant”).
RECITALS
A.
WHEREAS, Landlord and Tenant are parties to that certain Lease dated as of May 13, 2016 (as the same may
have been amended, amended and restated, supplemented or otherwise modified from time to time, the “Master Lease”), whereby
Tenant leases certain premises (the “Premises”) from Landlord at 50 Hampshire Street, Cambridge, Massachusetts (the
“Building”); and
B.
WHEREAS, Tenant has applied to Landlord for its consent to that certain Sublease dated as of December 16,
2019 (the “Sublease”), by and between Tenant and Subtenant, whereby Tenant subleases its interest in a portion of the Premises
(such portion, the “Subleased Premises”) to Subtenant.
AGREEMENT
NOW, THEREFORE, Landlord hereby consents to the Sublease, subject to and upon the following terms and
conditions, to each of which Tenant, Subtenant and Landlord expressly agree:
1.
Nothing contained in this Consent shall either:
operate as a consent to or approval by Landlord of any of the provisions of the Sublease or as a
representation or warranty by Landlord, and Landlord shall not be bound or estopped in any way by the provisions of the
Sublease; or
(a)
be construed to modify, waive or affect any of the provisions, covenants or conditions of, or any
rights or remedies of Landlord under, the Master Lease. In the case of any conflict between the provisions of this Consent and
those of the Sublease, the provisions of this Consent shall prevail.
(b)
Notwithstanding the foregoing, Landlord hereby approves the preliminary test fit plan of the Subleased Premises attached hereto
as Exhibit 1, provided that any tenant improvements to or in the Subleased Premises shall comply with the requirements of the
Lease, including without limitation, the Work Letter applicable to the Subleased Premises.
2.
Each of Tenant and Subtenant expressly assumes and agrees that during the term of the Sublease, it shall
perform and comply with each and every obligation of Tenant under the Master Lease; provided that, in the case of Subtenant,
Subtenant shall not violate the Master Lease but shall only be obligated to perform the affirmative obligations of Tenant under the
Master Lease to the extent of Subtenant’s obligations under the Sublease.
3.
If Landlord is entitled to a share of any portion of the rent or other payments that Subtenant is obligated to pay
to Tenant pursuant to the Sublease, Landlord hereby requests that Tenant pay such portion to Landlord, and Tenant hereby
acknowledges and agrees to pay such portion to Landlord on a timely basis.
23
4.
Neither the Sublease nor this Consent shall release or discharge Tenant from any obligation or liability under
the Master Lease, and Tenant shall remain liable and responsible for the full performance of all of the provisions, obligations,
covenants and conditions set forth in the Master Lease. The acceptance of rent by Landlord from Subtenant or from any other
person shall not be deemed a waiver by Landlord of any provisions of the Master Lease. Tenant and Subtenant understand and
represent that by entering into the Sublease, Landlord’s rights, remedies and liabilities under the Master Lease have not in any
way been modified, diminished or waived.
5.
Tenant and Subtenant warrant that the attached Sublease represents the entire agreement between them.
Subtenant further warrants that there was no compensation or consideration paid to either party as a condition of this Consent or
the Sublease other than as stated herein or therein.
6.
The Sublease shall be subject and subordinate at all times to the Master Lease and all of its provisions,
covenants and conditions. In case of a conflict, the provisions of the Master Lease shall prevail, except that with respect to
Subtenant’s obligations to pay rent, the provisions of the Sublease shall prevail.
7.
This Consent shall not constitute consent to any subsequent assignment of the Master Lease or the Sublease or
subletting of the Premises. Neither Tenant nor Subtenant shall voluntarily or by operation of law, directly or indirectly (whether
by merger or otherwise), assign, pledge, hypothecate, or otherwise transfer this Consent or any of such party’s rights, interests or
obligations under this Consent, in whole or in part, without the prior written consent of Landlord in its sole and absolute
discretion, and any such purported assignment, pledge, hypothecation, or transfer without the prior written consent of Landlord
shall be null and void.
8.
In addition to and without limiting any indemnity obligations set forth in the Master Lease, Tenant agrees to
reimburse, indemnify, save, defend (at Landlord’s option and with counsel reasonably acceptable to Landlord) and hold harmless
Landlord and its affiliates and their respective shareholders, partners, directors, officers, employees, lenders and ground lessors
and their respective successors and assigns, and Landlord’s contractors and agents (collectively with Landlord, each a “Landlord
Indemnitee”) for, from and against any and all demands, claims, liabilities, losses, costs, expenses, actions, causes of action,
damages, suits or judgments, and all reasonable expenses (including reasonable attorneys’ fees, charges and disbursements,
regardless of whether the applicable demand, claim, action, cause of action or suit is voluntarily withdrawn or dismissed)
incurred in investigating or resisting the same (collectively, “Claims”) of any kind or nature arising from Subtenant’s failure to
perform or comply with any of Tenant’s or Subtenant’s obligations under the Sublease or this Consent, except to the extent
directly caused by Landlord’s negligence or willful misconduct. Subtenant agrees to reimburse, indemnify, save, defend (at
Landlord’s option and with counsel reasonably acceptable to Landlord) and hold harmless the Landlord Indemnitees for, from
and against any and all Claims of any kind or nature arising from Subtenant’s obligations under the Sublease or this Consent,
except to the extent directly caused by Landlord’s negligence or willful misconduct. Tenant’s and Subtenant’s obligations under
this Section shall not be affected, reduced or limited by any limitation on the amount or type of damages, compensation or
benefits payable by or for Tenant or Subtenant under workers’ compensation acts, disability benefit acts, employee benefit acts or
similar legislation. Tenant’s and Subtenant’s obligations under this Section shall survive the expiration or earlier termination of
this Consent.
24
9.
Subtenant shall reimburse, indemnify, save, defend (at Landlord’s option and with counsel reasonably
acceptable to Landlord) and hold harmless the Landlord Indemnitees for, from and against any and all Claims imposed upon or
incurred by or asserted against a Landlord Indemnitee and directly or indirectly arising out of or in any way relating to
Subtenant’s obligations under the Sublease or this Consent.
10.
In the event of any default by Subtenant under the Master Lease, Landlord may proceed directly against any
or all of Tenant, Subtenant, any guarantors or anyone else liable under the Master Lease without first exhausting Landlord’s
remedies against any other person or entity liable therefor to Landlord.
11.
In the event that Tenant defaults in its obligations under the Master Lease or in the event that the Master
Lease is otherwise terminated prior to its natural expiration, Landlord may, at its option and without being obligated to do so,
require Subtenant to attorn to Landlord with respect to the Subleased Premises. Upon Landlord’s notice to Subtenant, (a)
Subtenant shall thereafter make all payments otherwise due Tenant directly to Landlord, which payments shall be received by
Landlord without any liability being incurred by Landlord, except to credit such payment against amounts due by Tenant under
the Lease and (b) within ten (10) days after such notice, Subtenant shall deposit with Landlord the entire Security Deposit (as
defined in the Sublease), and replenish such Security Deposit from time to time, as necessary to maintain the amount required
under the Sublease. If Landlord elects to require Subtenant to so attorn, then Landlord shall undertake the obligations of Tenant
under the Sublease with respect to the Subleased Premises from the time of the exercise of Landlord’s option under this Section
until termination of the Sublease according to its terms; provided, however, that Landlord shall not be liable for any prepaid rents
or any security deposit paid by Subtenant to Tenant, nor shall Landlord be liable for any other defaults of Tenant under the
Sublease.
12.
Except as otherwise expressly set forth in this Consent, each party shall pay its own costs and expenses
incurred in connection with this Consent and such party’s performance under this Consent, provided, that if any party commences
a proceeding, demand, claim, action, cause of action or suit against another party(ies) arising out of or in connection with this
Consent, then the substantially prevailing party(ies) shall be reimbursed by the other party(ies) for all reasonable costs and
expenses, including reasonable attorneys’ fees and expenses, incurred by the substantially prevailing party(ies) in such
proceeding, demand, claim, action, cause of action or suit, and in any appeal in connection therewith (regardless of whether the
applicable proceeding, demand, claim, action, cause of action, suit or appeal is voluntarily withdrawn or dismissed).
13.
Each of Tenant and Subtenant represents and warrants that it has dealt with no broker, agent or other person
in connection with this transaction and that no broker, agent or other person brought about this transaction, other than CB Richard
Ellis, and Tenant and Subtenant agree to reimburse, indemnify, save, defend (at Landlord’s option and with counsel reasonably
acceptable to Landlord) and hold harmless the Landlord Indemnitees for, from and against any Claims by any broker, agent or
other person claiming a commission or other form of compensation by virtue of having dealt with Tenant or Subtenant with
regard to the Sublease. The provisions of this Section shall survive the expiration or earlier termination of this Consent or the
Master Lease.
25
14.
Except as otherwise stated in this Consent, any notice, consent, demand, invoice, statement or other
communication required or permitted to be given under this Consent shall be in writing and shall be given by (a) personal
delivery, (b) overnight delivery with a reputable international overnight delivery service, such as FedEx, or (c) facsimile or email
transmission, so long as such transmission is followed within one (1) business day by delivery utilizing one of the methods
described in (a) or (b). Any such notice, consent, demand, invoice, statement or other communication shall be deemed delivered
(x) upon receipt, if given in accordance with subsection (a); (y) one (1) business day after deposit with a reputable international
overnight delivery service, if given in accordance with subsection (b); or (z) upon transmission, if given in accordance with
subsection (c). Any notice, consent, demand, invoice, statement or other communication required or permitted to be given under
this Consent shall be addressed to the parties at the following addresses:
Landlord:
BMR-HAMPSHIRE LLC
17190 Bernardo Center Drive
San Diego, California 92128
Attn: Legal Department
Facsimile: (858) 485-9843
Email: legalreview@biomedrealty.com
Tenant:
SURFACE ONCOLOGY, INC.
50 Hampshire Street
Cambridge, Massachusetts 02139
Attn: Jessica Fees
Facsimile:
Email: jfees@surfaceoncology.com
Subtenant:
EQRX, Inc.
50 Hampshire St Cambridge MA 0213
Attn Ken Mullen
Facsimile:
Email: kmullen@eqrx.com
Either party may, by notice to the other(s) given pursuant to this Section, specify additional or different addresses for
notice purposes.
15.
Where applicable in this Consent, the singular includes the plural and the masculine or neuter includes the
masculine, feminine and neuter. The words “include,” “includes,” “included” and “including” mean “‘include,’ etc., without
limitation.” The word “shall” is mandatory and the word “may” is permissive. Landlord, Tenant and Subtenant have each
participated in the drafting and negotiation of this Consent, and the language in all parts of this Consent shall be in all cases
construed as a whole according to its fair meaning and not strictly for or against either Landlord, Tenant or Subtenant.
26
16.
Time is of the essence with respect to the performance of every provision of this Consent.
17.
The terms of this Consent are intended by the parties as a final, complete and exclusive expression of their
agreement with respect to the terms that are included in this Consent, and may not be contradicted or supplemented by evidence
of any other prior or contemporaneous agreement. No provision of this Consent may be modified, amended or supplemented
except by an agreement in writing signed by Landlord, Tenant and Subtenant.
18.
Notwithstanding anything to the contrary contained in this Consent, Tenant’s and Subtenant’s obligations
under this Consent are independent and shall not be conditioned upon performance by Landlord. Each provision of this Consent
performable by Tenant or Subtenant shall be deemed both a covenant and a condition.
19.
Any provision of this Consent that shall prove to be invalid, void or illegal shall in no way affect, impair or
invalidate any other provision hereof, and all other provisions of this Consent shall remain in full force and effect and shall be
interpreted as if the invalid, void or illegal provision did not exist.
20.
Each of the covenants, conditions and agreements contained in this Consent shall inure to the benefit of and
shall apply to and be binding upon the parties hereto and their respective heirs, legatees, devisees, executors, administrators and
permitted successors and assigns. Nothing in this section shall in any way alter the provisions of this Consent restricting
assignment.
21.
This Consent is for the sole benefit of the parties and their respective heirs, legatees, devisees, executors,
administrators and permitted successors and assigns, and nothing in this Consent shall give or be construed to give any other
person or entity any legal or equitable rights.
22.
This Consent shall be governed by and construed and enforced in accordance with the laws of the
Commonwealth of Massachusetts without regard to Massachusetts’ conflict of law principles.
23.
Tenant and Subtenant guaranty, warrant and represent that the individual or individuals signing this Consent
have the power, authority and legal capacity to sign this Consent on behalf of and to bind all entities, corporations, partnerships,
limited liability companies, joint ventures or other organizations and entities on whose behalf such individual or individuals have
signed.
24.
Tenant and Subtenant shall take all such actions and execute all such documents as are reasonable and
necessary to implement or evidence the transactions contemplated by this Consent.
25.
A facsimile or portable document format (PDF) signature on this Consent shall be equivalent to, and have the
same force and effect as, an original signature. This Consent may be executed in one or more counterparts, each of which, when
taken together, shall constitute one and the same document.
27
26.
No waiver of any term, covenant or condition of this Consent shall be binding unless executed in writing by
the party entitled to the benefit of such term, covenant or condition. The waiver of any breach or default of any term, covenant or
condition contained in this Consent shall not be deemed to be a waiver of any preceding or subsequent breach or default of such
term, covenant or condition or any other term, covenant or condition of this Consent. Except as expressly provided in this
Consent, the rights and remedies under this Consent are in addition to and not exclusive of any other rights, remedies, powers and
privileges under this Consent or available at law, in equity or otherwise. No failure to exercise or delay in exercising any right,
remedy, power or privilege shall operate as a waiver thereof, and no single or partial exercise of any right, remedy, power or
privilege shall preclude the exercise of any other right, remedy, power or privilege.
27.
To the extent permitted by applicable laws, the parties waive trial by jury in any action, proceeding or
counterclaim brought by the other party(ies) hereto related to matters arising out of or in any way connected with this Consent or
any claim of injury or damage related to this Consent.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
28
IN WITNESS WHEREOF, Tenant and Subtenant have affixed their respective signatures hereto as evidence of
understanding of and agreement to the above, and Landlord has affixed its signature hereto to convey its consent to the Sublease.
LANDLORD:
BMR-HAMPSHIRE LLC,
a Delaware limited liability company
/s/ Russell Garland
By:
Name: Russell Garland
Title: Vice President, East Coast Facilities
TENANT:
SURFACE ONCOLOGY, INC.,
a Delaware corporation
By:
Name:
Title:
/s/ J Jeffery Goater
J Jeffery Goater
Chief Executive Officer
SUBTENANT:
EQRX, INC.,
a Delaware corporation
/s/ Melanie Nallicheri
By:
Name: Melanie Nallicheri
President & COO
Title:
29
Exhibit 1
TEST FIT PLAN
30
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-224403) of Surface Oncology, Inc. of our report
dated March 10, 2020 relating to the financial statements, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 10, 2020
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, J. Jeffery Goater, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Surface Oncology, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15(d)-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 10, 2020
By: /s/ J. Jeffrey Goater
J. Jeffrey Goater
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jessica Fees, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Surface Oncology, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 10, 2020
By: /s/ Jessica Fees
Jessica Fees
Senior Vice President, Finance
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Surface Oncology, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2019 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906
of the Sarbanes-Oxley Act of 2002, that:
(1).
(2).
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 10, 2020
By: /s/ J. Jeffrey Goater
J. Jeffrey Goater
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Surface Oncology, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2019 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906
of the Sarbanes-Oxley Act of 2002, that:
(1).
(2).
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 10, 2020
By: /s/ Jessica Fees
Jessica Fees
Senior Vice President, Finance
(Principal Financial and Accounting Officer)