What changed in this filing

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Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 186 added, 134 removed, 569 unchanged (36% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

Current assets:

3 unchanged sentences

Accounts receivable (including amounts from related parties of $ 0 and

$ 1,050 as of June 30, 2020 and December 31, 2019, respectively) (1)

$ 1,050 as of September 30, 2020 and December 31, 2019, respectively)

Prepaid expenses and other current assets

18 unchanged sentences

Preferred stock, $ 0.001 par value — 10,000,000 shares authorized

as of June 30, 2020 and December 31, 2019;

as of September 30, 2020 and December 31, 2019;

0 shares issued and

outstanding as of June 30, 2020 and December 31, 2019

outstanding as of September 30, 2020 and December 31, 2019

Common stock, $ 0.001 par value — 300,000,000 shares authorized

as of June 30, 2020 and December 31, 2019;

as of September 30, 2020 and December 31, 2019;

38,092,978 and

23,098,969 shares issued and outstanding as of

June 30, 2020 and December 31, 2019, respectively

September 30, 2020 and December 31, 2019, respectively

Additional paid-in-capital

3 unchanged sentences

Total Liabilities and Stockholders’ Equity

Merck was a related party until the closing of the Company’s public offering on May 14, 2020.

Vaxcyte (formerly SutroVax) was a related party until the closing of its initial public offering on June 16, 2020.

See accompanying notes to unaudited interim condensed financial statements.

3 unchanged sentences

Three Months Ended

Six Months Ended

Revenues (including amounts from related

parties of $ 0 and $ 2,813 during the three and six

months ended June 30, 2020, respectively, and $ 5,497

and $ 10,413 during the three and six months ended

June 30, 2019, respectively) (1) (2)

Nine Months Ended

September 30,

Revenues (including amounts from related parties

of $ 0 and $ 2,813 during the three and nine months

ended September 30, 2020, respectively, and $ 6,274

and $ 16,687 during the three and nine months ended

September 30, 2019, respectively) (1)

Operating expenses

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Net income (loss) per share, diluted

Includes $ 0 and $ 2.8 million, respectively, for the three months and six months ended June 30, 2020 of related party revenue from Merck.

Includes $ 0 and $ 2.8 million, respectively, for the three months and nine months ended September 30, 2020 of related party revenue from Merck.

Merck was a related party until the closing of the Company’s public offering on May 14, 2020.

Includes $ 0 and $ 36,000 , respectively, for the three months and six months ended June 30, 2020 of related party revenue from Vaxcyte (formerly SutroVax).

Vaxcyte was a related party until the closing of its initial public offering on June 16, 2020.

See Notes 2 and 10 for an explanation of the calculations of our basic and diluted net income (loss) per share, basic and diluted and the weighted-average number of shares used in the computation of the per share amounts.

See accompanying notes to unaudited interim condensed financial statements.

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss)

Other comprehensive income:

Unrealized gain on available-for-sale securities

Unrealized (loss) gain on available-for-sale securities

Comprehensive income (loss)

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with debt refinancing

Net unrealized loss on available-for- sale securities

Net unrealized loss on available-for- sale

Balances at March 31, 2020

4 unchanged sentences

public offering, net of issuance costs of $ 6,626

Net unrealized gain on available-for- sale securities

Net unrealized gain on available-for- sale

Balances at June 30, 2020

Exercise of common stock options

Issuance of common stock under Employee Stock

Purchase Plan

Vesting of restricted stock units

Stock transaction associated with taxes withheld

on restricted stock units

Stock-based compensation expense

Issuance of common stock in connection with

At-The-Market sale, net of issuance costs of $ 561

Net unrealized loss on available-for- sale

Balances at September 30, 2020

Preferred Stock

15 unchanged sentences

Balances at June 30, 2019

Exercise of common stock options

Issuance of common stock under Employee Stock

Purchase Plan

Vesting of restricted stock units

Stock transaction associated with taxes withheld on

restricted stock units

Stock-based compensation expense

Net unrealized gain on available-for- sale securities

Balances at September 30, 2019

See accompanying notes to unaudited interim condensed financial statements.

2 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

September 30,

Operating activities

23 unchanged sentences

Financing activities

Proceeds from public offering, net of issuance costs

Proceeds from sales of common stock, net of issuance costs

Proceeds from debt refinancing

Payments of debt

Payment of debt

Proceeds from exercise of common stock options

Taxes paid related to net share settlement of restricted stock units

Proceeds from employee stock purchase plan

18 unchanged sentences

The Company operates in one business segment, the development of biopharmaceutical products.

At-The-Market Sales

During the three months ended September 30, 2020, the Company sold an aggregate of 2,000,000 shares of its common stock through its At-the-Market (“ATM Facility”) pursuant to its Common Stock Sales Agreement dated October 4, 2019 with Cowen and Company, LLC, as sales agent.

The gross proceeds from these sales were approximately $ 17.4 million, before deducting fees of approximately $ 0.6 million, resulting in net proceeds of approximately $ 16.8 million to the Company.

May 2020 Public Offering

On May 14, 2020, the Company closed a public offering of 12,650,000 shares of its common stock at a public offering price of $ 7.75 per share, which included the exercise in full of the underwriters’ option to purchase 1,650,000 shares of common stock.

The gross proceeds from this offering were approximately $ 98.0 million, before deducting approximately $ 6.6 million of underwriting discounts and commissions and other offering expenses, resulting in net proceeds of approximately $ 91.4 M to the Company.

Vaxcyte Equity Ownership

In June 2020, Vaxcyte, formerly known as SutroVax, Inc, closed its initial public offering (“IPO”) of its common stock at a price per share of $ 16.00 .

As of June 30, 2020, the Company held 1,634,005 shares of Vaxcyte common stock, which are subject to a lock-up agreement that expires in December 2020 .

The Vaxcyte common stock held by the Company will be measured at fair value at each reporting period based on the closing price of Vaxcyte’s common stock on the last trading day of each reporting period, adjusted for a discount for lack of marketability (DLOM) due to the lock-up agreement, with any unrealized gains and losses recorded in the Company’s statements of operations.

As of June 30, 2020, the estimated fair value of the Vaxcyte common stock held by the Company was $ 49.1 million.

The Company recognized an unrealized gain related to Vaxcyte common stock of $ 48.9 million for the three and six months ended June 30, 2020, of which $ 49.1 million was from the estimated fair value of Vaxcyte common stock, offset by a $ 0.2 million adjustment related to a revaluation of a prior preferred stock warrant converted to common stock.

See Note 2—“Investment in Equity Securities,” Note 3—“Fair Value Disclosures,” Note 4 — “Cash and Marketable Securities”, and Note 7—“Related Party Transactions”.

The Company has incurred significant losses and has negative cash flows from operations.

As of June 30, 2020, the Company had an accumulated deficit of $ 185.5 million.

As of September 30, 2020, the Company had an accumulated deficit of $ 168.3 million.

Management expects to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities and costs to operate as a public company.

As of June 30, 2020, the Company had unrestricted cash, cash equivalents and marketable securities of $ 207.0 million, which are available to fund future operations.

The Company believes that its unrestricted cash, cash equivalents and marketable securities as of June 30, 2020 will be sufficient for the Company to continue for at least one year from the issuance date of its unaudited interim condensed financial statements.

As of September 30, 2020, the Company had unrestricted cash, cash equivalents and marketable securities of $ 202.4 million, which are available to fund future operations.

The Company believes that its unrestricted cash, cash equivalents and marketable securities as of September 30, 2020 will be sufficient for the Company to continue for at least one year from the issuance date of its unaudited interim condensed financial statements.

The Company will need to raise additional capital to support the completion of its research and development activities and its operations.

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The accompanying interim condensed financial statements of the Company are unaudited.

These interim condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of

America ( “ U.S.

These interim condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.

GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information.

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The amounts of assets and liabilities reported in the Company’s balance sheets and the amount of expenses and income reported for each of the periods presented are affected by estimates and assumptions, which are used for, but are not limited to, determining research and development periods under multiple element arrangements, stock-based compensation expense, income taxes and certain accrued liabilities.

An estimated DLOM to determine the fair value of the Company’s investment in equity securities and related liabilities was also used due to the existence of a lock-up agreement that expires in December 2020.

The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including revenue, expenses, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets.

An estimated DLOM to determine the fair value of the Company’s investment in equity securities and related liabilities was also use d due to the existence of a lock-up agreement that expires in December 2020.

We have made estimates of the impact of COVID-19 within our financial statements and there may be changes to those estimates in future periods.

1 unchanged sentence

The accompanying unaudited interim condensed financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods.

The interim results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or for any other future annual or interim period.

The interim results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or for any other future annual or interim period.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's audited financial statements included in the Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the year ended December 31, 2019.

Change in Estimate

In the quarter ended March 31, 2020, the Company recorded an adjustment to revenue related to a change in estimate in connection with its Exclusive Patent License and Research Collaboration Agreement (the “2018 Merck Agreement”) with Merck, a related party of the Company.

The 2018 Merck Agreement provides for the joint development of up to three research programs focusing on cytokine derivatives for cancer and autoimmune disorders.

2 unchanged sentences

At the inception of the 2018 Merck Agreement, the transaction price of $ 60.0 million was allocated among the performance obligations using the Company’s best estimate of standalone selling price (“SSP”) for each of the associated performance obligations.

Revenue allocated to the first and second target programs, which totaled $ 47.1 million is being recognized on a proportion of performance basis, using the full-time equivalent (“FTE”) cost as the basis of measurement, with such performance expected to occur over an estimated service period of three years for each target program.

Revenue allocated to the first and second target programs, which totaled $ 47.1 million, was being recognized on a proportion of performance basis, using the full-time equivalent (“FTE”) cost as the basis of measurement, with such performance expected to occur over an estimated service period of three years for each target program.

In March 2020, the Company adjusted revenue recognized for the first and second target programs as the parties determined additional resources should be assigned to the first target program with a reduction of resources attributed to the second target program.

This resulted in a decrease in the measure of proportional performance for the first target program and an increase in the measure of proportional performance for the second target program.

These adjustments collectively decreased the Company’s revenues by $ 3.6 million, net income by $ 3.6 million and basic and diluted net income per share by $ 0.14 and $ 0.13 , respectively, for the six months ended June 30, 2020.

These adjustments collectively decreased both the Company’s revenues and net income by $ 0.8 million and basic and diluted net income per share by $ 0.03 and $ 0.03 , respectively, for the nine months ended September 30, 2020.

Adoption of New Accounting Principles

6 unchanged sentences

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, reducing certain disclosures concerning the fair value hierarchy.

The guidance was effective for the Company effective January 1, 2020 and did not have a material impact on the Company’s financial statements.

The guidance was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.

Recently Issued Accounting Pronouncements

17 unchanged sentences

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same amounts shown in the statements of cash flows.

September 30,

(in thousands)

4 unchanged sentences

Investments in Equity Securities

Subsequent to the closing of the Vaxcyte IPO in June 2020 (see Note 1), the fair value of Vaxcyte’s common stock became readily determinable.

As a result, beginning June 2020, the Company accounted for its investment in Vaxcyte’s common stock at an estimated fair value.

At each reporting period, the equity securities will be remeasured to fair value with any unrealized gains or losses being recorded through the statements of operations.

Subsequent to the closing of the initial public offering (“IPO”) of Vaxcyte, Inc.

in June 2020, the fair value of Vaxcyte’s common stock became readily determinable.

As a result, beginning June 2020, Vaxcyte common stock held by the Company is measured at fair value at each reporting period based on the closing price of Vaxcyte’s common stock on the last trading day of each reporting period, adjusted for a discount for lack of marketability (DLOM), due to the lock-up agreement that expires in December 2020 , with any unrealized gains and losses recorded in the Company’s statements of operations.

As of September 30, 2020, the Company held 1,634,005 shares of Vaxcyte common stock with an estimated fair value of $ 78.8 million.

The Company recognized an unrealized gain related to Vaxcyte common stock of $ 29.7 million and $ 78.6 million for the three-month and nine-month periods ended September 30, 2020, respectively.

The unrealized gain for the nine months ended September 30, 2020 was $ 78.8 million from the change in estimated fair value of Vaxcyte common stock, partially offset by a $ 0.2 million adjustment related to a revaluation of a prior preferred stock warrant converted to common stock.

See Note 3—“Fair Value Disclosures,” Note 4 — “Cash and Marketable Securities”, and Note 8—“Related Party Transactions”.

Fair Value Measurements

8 unchanged sentences

The Company’s investments in equity securities are classified as Level 2 within the fair value hierarchy while subject to a lock-up agreement that expires in December 2020.

As a result of the lock up, and upon the closing of Vaxcyte IPO, the Company has applied an estimated DLOM of 5.4 %, which is a Level 2 input.

As a result of the lock up, as of September 30, 2020, the Company has applied an estimated DLOM of 2.25 %, which is a Level 2 input.

Revenue Recognition

4 unchanged sentences

The Company may also perform research and development activities under the collaboration agreements.

Consideration under these contracts generally includes a nonrefundable upfront payment, development, regulatory and commercial milestones and other contingent payments, and royalties based on net sales of approved products.

Consideration under these contracts generally includes a nonrefundable upfront payment, development, regulatory and commercial milestones and other

contingent payments, and royalties based on net sales of approved products.

Additionally, the collaborations may provide options for the customer to acquire from the Company materials and reagents , clinical product supply or additional research and development services under separate agreements.

2 unchanged sentences

At the inception of each agreement, the Company determines the arrangement transaction price, which includes variable consideration, based on the assessment of the probability of achievement of future milestones and contingent payments and other potential consideration.

The Company also evaluates estimates of our resources, which are used as the basis of measurement for revenue to be recognized on a proportion of performance basis.

For arrangements that include multiple performance obligations, the Company allocates the transaction price to the identified performance obligations based on SSP of each distinct performance obligation.

25 unchanged sentences

The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy:

June 30, 2020

September 30, 2020

(in thousands)

5 unchanged sentences

government agency securities

The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by

December 31, 2019

18 unchanged sentences

Cash equivalents and marketable securities consisted of the following:

June 30, 2020

September 30, 2020

(in thousands)

15 unchanged sentences

Total marketable securities

As of June 30, 2020 and December 31, 2019, $ 5.6 million and $ 15.6 million, respectively, of marketable securities had maturities of more than one year and are classified as long-term assets.

There were $ 25.0 million and $ 4.5 million of investments in an unrealized loss position of $ 4,000 and $ 3,000 as of June 30, 2020 and December 31, 2019, respectively.

During the three and six months ended June 30, 2020 and 2019, the Company did no t record any other-than-temporary impairment charges on its available-for-sale securities.

As of September 30, 2020 and December 31, 2019, zero and $ 15.6 million, respectively, of marketable securities had maturities of more than one year and are classified as long-term assets.

There were zero and $ 4.5 million of investments in an unrealized loss position of zero and $ 3,000 as of September 30, 2020 and December 31, 2019, respectively.

During the three and nine months ended September 30, 2020 and 2019, the Company did no t record any other-than-temporary impairment charges on its available-for-sale securities.

Based upon the Company’s impairment review, the Company determined that the unrealized losses were not attributed to credit risk but were primarily associated with changes in interest rates.

5 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

8 unchanged sentences

Vaxcyte was a related party until the closing of its initial public offering on June 16, 2020.

The following table presents the changes in the Company’s deferred revenue balance from collaboration agreements during the six months ended June 30, 2020:

Six Months Ended

June 30, 2020

The following table presents the changes in the Company’s deferred revenue balance from collaboration agreements during the nine months ended September 30, 2020:

Nine Months Ended

September 30, 2020

(in thousands)

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Recognition of revenue in current period

Deferred revenue—June 30, 2020

The Company’s balance of deferred revenue contains the transaction price from collaboration agreements allocated to performance obligations which are partially unsatisfied, including the $ 5.0 million received from Merck to extend the research term of the collaboration’s first cytokine-derivative program by one year , which payment was earned in March 2020 and received in April 2020, and a $ 2.3 million upfront fee billed to BMS in consideration for the Company’s performance of certain development and manufacturing services, which amount may be recognized as revenue in future periods, upon completion of the earning process for such collaboration activities.

Deferred revenue—September 30, 2020

The Company’s balance of deferred revenue contains the transaction price from collaboration agreements allocated to performance obligations which are partially unsatisfied, including the $ 5.0 million received from Merck to extend the research term of the collaboration’s first cytokine-derivative program by one year , which payment was earned in March 2020 and received in April 2020, and a $ 0.2 million upfront fee billed to Vaxcyte in consideration for the Company’s performance of certain development and manufacturing services, which amount may be recognized as revenue in future periods, upon completion of the earning process for such activities.

The Company expects to recognize approximately $ 15.7 million of deferred revenue over the next twelve months .

There have been no material changes to the Company’s collaboration agreements in the six months ended June 30, 2020, except as described below.

There have been no material changes to the Company’s collaboration agreements in the nine months ended September 30, 2020, except as described below.

Collaborations with Celgene

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clinical development and commercialization rights to the other three collaboration programs remain owned by the Company, without any further option to Celgene.

For any products resulting from these three collaboration programs, Celgene will own ex-U.S.

development and commercialization rights and will be obligated to pay the Company development and regulatory contingent payments and tiered royalties ranging from mid to high single digit percentages.

Further, upon the expiration of the research term defined by the Celgene agreement, ex-U.S.

clinical development and commercialization rights to these three collaboration programs reverted to the Company in the third quarter of 2020.

Therefore, the Company now solely holds worldwide rights to the BCMA-CD3, PD1-LAG3, and PD1-TIM3 programs.

The contingent payments under the Celgene Agreement are not considered to be substantive milestones because the receipt of such payments is based solely on the performance of Celgene.

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The Company determined that the portion of the transaction price to be allocated to the third performance obligation, which provided Celgene with an option to acquire worldwide development and commercialization rights to a second collaboration program, was $ 12.3 million.

Although Celgene decided not to exercise this option, the Company still has the continuing performance obligation to provide Celgene access to the Company’s technology.

As such, the Company’s revenue related to such performance obligation will continue to be recognized over the period from August 2017 through September 2020, the estimated term of the use of the technology.

Although Celgene decided not to exercise this option, the Company still had the continuing performance obligation to provide Celgene access to the Company’s technology.

As such, the Company’s revenue related to such performance obligation was recognized over the period from August 2017 through September 2020, the estimated term of the use of the technology.

Upon the adoption of ASC 606 on January 1, 2019, the Company recorded a $ 4.5 million adjustment to decrease its deferred revenue for performance obligations that were satisfied in prior periods, with the corresponding adjustment being a reduction to the Company’s accumulated deficit.

For the three and six months ended June 30, 2020, the Company recognized $ 1.0 million and $ 2.0 million, respectively, of revenue associated with the Company’s ongoing performance related to partially unsatisfied performance obligations, and $ 0.3 million and $ 0.4 million, respectively, from research and development services.

For the three and six months ended June 30, 2019, the Company recognized $ 1.0 million and $ 1.9 million, respectively, of revenue associated with the Company’s ongoing performance related to partially unsatisfied performance obligations, and $ 0.1 million and $ 0.3 million, respectively, from research and development services.

As of June 30, 2020 and December 31, 2019, there was $ 3.3 million and $ 3.0 million, respectively, of deferred revenue related to payments received by the Company under the Celgene Agreement.

For the three and nine months ended September 30, 2020, the Company recognized $ 1.0 million and $ 3.0 million, respectively, of revenue associated with the Company’s ongoing performance related to partially unsatisfied performance obligations, and $ 0.2 million and $ 0.6 million, respectively, from research and development services.

For the three and nine months ended September 30, 2019, the Company recognized $ 1.0 million and $ 2.9 million, respectively, of revenue associated with the Company’s ongoing performance related to partially unsatisfied performance obligations, and $ 0.1 million and $ 0.4 million, respectively, from research and development services.

As of September 30, 2020 and December 31, 2019, there was zero and $ 3.0 million, respectively, of deferred revenue related to payments received by the Company under the Celgene Agreement.

2018 Celgene Master Services Agreement

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Accordingly, the Company will recognize revenue upon the performance of such services.

For the three and six months ended June 30, 2020, the Company earned $ 0.3 million and $ 1.2 million, respectively, under the 2018 Celgene Master Services Agreement.

For the three and six months ended June 30, 2019, the Company earned $ 0.5 million and $ 1.0 million, respectively, under the 2018 Celgene Master Services Agreement.

For the three and nine months ended September 30, 2020, the Company earned $ 5.9 million and $ 7.1 million, respectively, under the 2018 Celgene Master Services Agreement.

For the three and nine months ended September 30, 2019, the Company earned $ 2.2 million and $ 3.2 million, respectively, under the 2018 Celgene Master Services Agreement.

2018 Merck Agreement

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and (5) a material right pertaining to the performance of services related to a contingent third target program upon the payment of an additional amount.

The transaction price of $60.0 million was allocated among the performance obligations using the Company’s best estimate of SSP for each of the associated performance obligations.

Based on its estimated SSP, relative to the estimated total SSP values of all identified performance obligations, the portion of the transaction price allocated to the first performance

obligation was $ 7.3 million.

The transaction price of $60.0 million was allocated among the performance obligations using the Company’s best estimate of

SSP for each of the associated performance obligations.

Based on its estimated SSP, relative to the estimated total SSP values of all identified performance obligations, the portion of the transaction price allocated to the first performance obligation was $ 7.3 million.

It was determined that such performance obligation was satisfied as of the effective date of the 2018 Merck Agreement, and accordingly revenue associated with this performance obligation would, pursuant to ASC 606, have been recorded on the effective date of the Merck Agreement.

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Recognition of the $4.9 million as revenue will begin upon commencement of the third program or upon the determination that the contingent third target program is no longer a performance obligation.

Additionally, under ASC 606, the Company determined there was a financing component associated with the $ 60.0 million upfront payment, and has calculated total interest expense of $ 7.4 million as of June 30, 2020 on the unearned revenue portion beyond one year from the effective date of the agreement, which amount is expected to be recognized as revenue over the estimated service period for the first and second target programs.

Additionally, under ASC 606, the Company determined there was a financing component associated with the $ 60.0 million upfront payment, and has calculated total interest expense of $ 7.3 million as of September 30, 2020 on the unearned revenue portion beyond one year from the effective date of the agreement, which amount is expected to be recognized as revenue over the estimated service period for the first and second target programs.

Upon adoption of ASC 606 on January 1, 2019, the Company recorded a $ 6.3 million adjustment to decrease its deferred revenue for performance obligations that were satisfied in prior periods, with the corresponding adjustment being a reduction to the Company’s accumulated deficit.

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Revenue allocated to the first and second target programs totaled $ 50.5 million, to be recognized on a proportion of performance basis, using the FTE cost as the basis of measurement, with such performance expected to occur over an estimated service period of three years for each target program.

Incremental revenue of $ 1.5 million was recognized in the period.

Incremental revenue of $ 1.5 million was recognized in the quarter ended March 31, 2020.

The Company allocated $5.9 million of the adjusted transaction price to the material right associated with the contingent third program.

3 unchanged sentences

As a result of the change in transaction price, the Company recorded a $ 2.0 million cumulative catch-up in revenue in the quarter ended March 31, 2020.

During the three and six months ended June 30, 2020, the Company recognized revenue of $ 5.2 million and $ 6.1 million, respectively, associated with the Company’s ongoing performance related to the partially unsatisfied performance obligations, $ 0.5 million and $ 1.1 million, respectively, related to the interest component described above, and $ 1.2 million and $ 2.5 million, respectively, for FTE funding provided by Merck.

During the three and six months ended June 30, 2019, the Company recognized revenue of $ 3.7 million and $ 6.7 million, respectively, associated with the Company’s ongoing performance related to the partially unsatisfied performance obligations, $ 0.8 million and $ 1.7 million, respectively, related to the interest component described above, and $ 0.9 million and $ 1.7 million, respectively, for FTE funding provided by Merck.

As of June 30, 2020 and December 31, 2019, there was $ 30.8 million and $ 31.9 million, respectively, of deferred revenue related to the transaction price under the 2018 Merck Agreement.

During the three and nine months ended September 30, 2020, the Company recognized revenue of $ 6.9 million and $ 13.0 million, respectively, associated with the Company’s ongoing performance related to the partially unsatisfied performance obligations, $ 0.4 million and $ 1.5 million, respectively, related to the interest component described above, and $ 1.7 million and $ 4.2 million, respectively, for FTE funding provided by Merck.

During the three and nine months ended September 30, 2019, the Company recognized revenue of $ 3.8 million and $ 10.5 million, respectively, associated with the Company’s ongoing performance related to the partially unsatisfied performance obligations, $ 0.8 million and $ 2.5 million, respectively, related to the interest component described above, and $ 0.9 million and $ 2.6 million, respectively, for FTE funding provided by Merck.

As of September 30, 2020 and December 31, 2019, there was $ 23.9 million and $ 31.9 million, respectively, of deferred revenue related to the transaction price under the 2018 Merck Agreement.

The Company is also eligible to receive aggregate milestone payments of up to $ 1.6 billion, assuming the development and sale of all therapeutic candidates and all possible indications identified under the collaboration.

3 unchanged sentences

Either the Company or Merck has the right to terminate the 2018 Merck Agreement based on the other party’s uncured material breach or bankruptcy.

EMD Serono Agreement

EMD Serono Agreements

The Company signed a Collaboration Agreement and a License Agreement with EMD Serono in May 2014 and September 2014, respectively, which were entered into in contemplation of each other and therefore treated as a single agreement for accounting purposes.

11 unchanged sentences

The Company recorded a $ 0.6 million adjustment to increase its deferred revenue for performance obligations that were unsatisfied in prior periods, with the corresponding adjustment being an increase to the Company’s accumulated deficit.

For the three and six months ended June 30, 2020, the Company earned $ 0.3 million and $ 2.3 million, respectively, from a supply agreement, and $ 0.5 million and $ 0.8 million, respectively, from research and development services.

For the three and six months ended June 30, 2019, the Company earned $ 1.5 million and $ 1.5 million, respectively, from a supply agreement, $ 0.9 million and $ 1.7 million, respectively, from research and development services, and $ 1.0 million and $ 2.3 million, respectively, associated with the Company’s ongoing performance related to partially unsatisfied performance obligations.

Such ongoing performance obligations were fully satisfied in Q3 2019.

As of June 30, 2020 and December 31, 2019, there was zero and $ 0.8 million, respectively, of deferred revenue related to payments received by the Company under the MDA Agreement.

Vaxcyte, Inc.

Supply Agreement

For the three and nine months ended September 30, 2020, the Company earned $ 0.3 million and $ 2.6 million, respectively, from a supply agreement, $ 0.3 million and $ 1.1 million, respectively, from research and development services, and $ 1.0 million and $ 1.0 million, respectively, from a milestone payment.

For the three and nine months ended September 30, 2019, the Company earned $ 0.6 million and $ 2.1 million, respectively, from a supply agreement, $ 0.5 million and $ 2.2 million, respectively, from research and development services, and $ 1.5 million and $ 3.8 million, respectively, associated with the Company’s ongoing performance related to partially unsatisfied performance obligations.

As of September 30, 2020 and December 31, 2019, there was zero and $ 0.8 million, respectively, of deferred revenue related to payments received by the Company under the MDA Agreement.

Vaxcyte Supply Agreement

In May 2018, the Company entered into a Supply Agreement (the “Supply Agreement”) with Vaxcyte, wherein Vaxcyte engaged the Company to supply extracts and custom reagents, as requested by Vaxcyte.

The pricing is based on an agreed upon cost plus arrangement.

For the three and six months ended June 30, 2020, the Company recognized revenue of $ 0.1 million under the Supply Agreement.

For the three and six months ended June 30, 2019, the Company recognized revenue of zero and $ 0.3 million, respectively, under the Supply Agreement.

unit form are recognized as revenue at the time when such supplies are shipped to Vaxcyte , in line with the “right to invoice” practical expedient in ASC 606.

For the three and nine months ended September 30, 2020, the Company recognized revenue of $ 0.2 million and $ 0.3 million, respectively, under the Supply Agreement.

For the three and nine months ended

September 30, 2019, the Company recognized revenue of $ 0.8 million and $ 1.1 million, respectively, under the Supply Agreement.

As the Company has a right to consideration from Vaxcyte in an amount that corresponds directly with the value of the Company’s supplied extracts and custom reagents, the Company’s supply of extracts and custom reagents in discrete unit form are recognized as revenue at the time when such supplies are shipped to Vaxcyte, in line with the “right to invoice” practical expedient in ASC 606.

The Company has not received any returns to date and believes that returns of its products will continue to be minimal.

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In consideration for the funding to the Company under the LLS Agreement, the Company may be required in the future to make payments to LLS, contingent upon reaching certain pre-specified late-stage clinical development, regulatory and commercialization milestones and should the Company enter into certain transactions relating to STRO-001 with a third party, which payments in the aggregate could total up to a maximum of $ 19.5 million, assuming receipt by the Company from LLS of the entire $ 6.0 million in clinical development funding for STRO-001.

As of June 30, 2020, no events have occurred that would require such payments to LLS.

As of September 30, 2020, no events have occurred that would require such payments to LLS.

The LLS Agreement terminates upon the earlier of (a) fulfillment of all payment obligations by both parties or (b) 12 years after the effective date.

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Either the Company or LLS has the right to terminate the LLS Agreement based on the other party’s uncured material breach.

The Company concluded that the contingent payments were an embedded derivative and recorded a related liability of approximately $ 0.1 million as a part of other noncurrent liabilities as of both June 30, 2020 and December 31, 2019, with the corresponding amount recorded in the statements of operations as interest and other expense, net.

The Company concluded that the contingent payments were an embedded derivative and recorded a related liability of approximately $ 0.2 million and $ 0.1 million, respectively, as a part of other noncurrent liabilities as of September 30, 2020 and December 31, 2019, with the corresponding change in estimated fair value recorded in the statements of operations as interest and other expense, net.

The value of the embedded derivative was estimated based on the probability-adjusted and discounted value of future payments.

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The associated unamortized debt discount on the August 2017 Loan and new lender fees from the debt issuance will be amortized as interest expense using the effective interest method until the maturity date of the Term A Loan.

Under the terms of the Loan and Security Agreement, the Company may, at its sole discretion, borrow from the Lenders up to an additional $ 5.0 million (the “Term B Loan” and together with the Term A Loan, the “Term Loans”) upon the Company closing of a new collaboration agreement that includes an upfront payment of at least $ 50.0 million to the Company, as determined by Oxford in its sole and absolute discretion (the “Term B Milestone Event”).

Under the terms of the Loan and Security Agreement, the Company may, at its sole discretion, borrow from the Lenders up to an additional $ 5.0 million (the “Term B Loan” and together with the Term A Loan, the “Term Loans”) upon the Company’s closing of a new collaboration agreement that includes an upfront payment of at least $ 50.0 million to the Company, as determined by Oxford in its sole and absolute discretion (the “Term B Milestone Event”).

The Company may draw the Term B Loan during the period commencing on the date of the occurrence of the Term B Milestone Event and ending on the earliest of (i) December 31, 2020, (ii) the thirtieth (30th) day following the occurrence of the Term B Milestone Event, and (iii) the occurrence of an event of default by the Company.

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The debt discount is being amortized to interest expense over the expected repayment period of the loan using the effective-interest method.

As of June 30, 2020, the Company has classified the outstanding debt balance of $ 25.0 million as non-current, which reflects the scheduled repayment terms under the Loan and Security Agreement.

As of June 30, 2020 and December 31, 2019, accrued interest expense was $ 0.2 million and $ 0.4 million, respectively.

During the three and six months ended June 30, 2020, the Company recorded interest expense related to loans outstanding of $ 0.6 million and $ 1.0 million, respectively, with average interest rates of 8.07 % and 8.08 %, respectively, and interest related to the accretion of debt discount of $ 0.1 million and $ 0.2 million, respectively.

During the three and six months ended June 30, 2019, the Company recorded interest expense related to loans outstanding of $ 0.3 million and $ 0.6 million, respectively, with average interest rates of 8.87 % and 8.88 %, respectively, and interest related to the accretion of debt discount of $ 85,000 and $ 175,000 , respectively.

As of September 30, 2020, the Company has classified the outstanding debt balance of $ 25.0 million as non-current, which reflects the scheduled repayment terms under the Loan and Security Agreement.

As of September 30, 2020 and December 31, 2019, accrued interest expense was $ 0.2 million and $ 0.4 million, respectively.

During the three and nine months ended September 30, 2020, the Company recorded interest expense related to loans outstanding of $ 0.7 million and $ 1.7 million, respectively, with average interest rates of 8.07 % and 8.08 %, respectively, and interest related to the accretion of debt discount of $ 0.1 million and $ 0.3 million, respectively.

During the three and nine months ended September 30, 2019, the Company recorded interest expense related to loans outstanding of $ 0.3 million and $ 0.9 million, respectively, with average interest rates of 8.64 % and 8.80 %, respectively, and interest related to the accretion of debt discount of $ 79,000 and $ 254,000 , respectively.

Commitments and Contingencies

September 2020 Sublease Agreement

On September 3, 2020, the Company entered into a sublease agreement (the “Sublease”) with Five Prime Therapeutics, Inc.

(the “Sublessor”), for approximately 115,466 square feet, located in South San Francisco, California (the “Premises”).

The Company expects to use the Premises as its new corporate headquarters and in which to conduct (or expand) research and development activities.

The commencement date for the first 85,755 square feet of the Premises (“Initial Premises”) is expected to be mid-2021 at which time the Company will occupy the space and commence making monthly payments under the Sublease.

The Company will be provided early access to the Sublease space commencing in the fourth quarter of 2020 to conduct certain planning and tenant improvement work, which the Company expects will result in it recording rent expense prior to space occupancy and making actual lease payments.

The Sublease is subordinate to the lease agreement, effective December 12, 2016, between the Sublessor and HCP Oyster Point III LLC (the “Landlord”).

The commencement date for the remaining 29,711 square feet of the Premises (the “Expansion Premises”) is expected to be 24 months following the commencement date on the Initial Premises, although the Company has the right to accelerate the commencement date on the Expansion Premises to an earlier date upon six months’ prior written notice to the Sublessor.

The Sublease for both the Initial Premises and Expansion Premises will expire on December 31, 2027 .

Assuming a commencement date on the Initial Premises of April 1, 2021, the aggregate estimated base rent payments due over the term of the Sublease are approximately $ 47.7 million, excluding the approximately $ 5.2 million in potential financial benefit to the Company of base rent abatement to be provided by Sublessor for months 7 – 18 of the Sublease period, subject to certain terms contained in the Sublease.

The Sublease contains customary provisions requiring the Company to pay its pro rata share of utilities and a portion of the operating expenses and certain taxes, assessments and fees of the Premises and provisions allowing the Sublessor to terminate the Sublease upon the termination of the lease with the Landlord or if the Company fails to remedy a breach of certain of its obligations within specified time periods.

Additionally, the Company posted a security deposit in the form of a bank standby letter of credit, which is reflected as restricted cash in non-current assets on the Company’s balance sheet as of September 30, 2020.

As of September 30, 2020, the Company’s future minimum payments (excluding potential financial benefit to the Company of base rent abatement, as noted above) under the noncancelable operating sublease are as follows:

Year Ending December 31,

(in thousands)

Total future minimum sublease payments

Related-Party Transactions

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As a result, starting May 14, 2020, the Company ceased to reflect balances and transactions associated with Merck as being with a related party in its financial statements.

Transactions with Merck for the three months and six months ended June 30, 2020 and June 30, 2019 are described in Note 5.

As discussed in Note 1, Vaxcyte closed its IPO of its common stock on June 16, 2020, resulting in the Company’s ownership of Vaxcyte’s outstanding equity interest to less than 4.0 %.

As a result, starting on June 16, 2020, the Company ceased to reflect any balances and transactions associated with Vaxcyte being a related party on its financial statements.

Transactions with Vaxcyte for the three months and six months ended June 30, 2020 and 2019 are described in Note 5.

Transactions with Merck for the three months and nine months ended September 30, 2020 and September 30, 2019 are described in Note 5.

As discussed in Note 2, Vaxcyte closed its IPO of its common stock on June 16, 2020, resulting in the Company’s ownership of Vaxcyte’s outstanding equity interest being less than 4.0 %.

As a result, starting on June 16, 2020, the Company ceased to reflect any balances and transactions associated with Vaxcyte being a related party in its financial statements.

Transactions with Vaxcyte for the three months and nine months ended September 30, 2020 and 2019 are described in Note 5.

Stockholders’ Equity

Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders of the Company.

The Company had reserved common stock, on an if-converted basis, for issuance as follows:

The Company has reserved common stock, on an if-converted basis, for issuance as follows:

September 30,

Common stock options issued and outstanding

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Preferred Stock

Effective October 30, 2018, the Company had 10,000,000 shares of preferred stock authorized with a par value of $ 0.001 .

No shares of preferred stock were outstanding as of June 30, 2020 and December 31, 2019.

As of September 30, 2020 and December 31, 2019, the Company had 10,000,000 shares of preferred stock authorized with a par value of $ 0.001 per share.

No shares of preferred stock were outstanding as of September 30, 2020 and December 31, 2019.

During the period from 2008 to 2012, the Company issued various warrants for the purchase of redeemable convertible preferred stock in connection with debt financings and the issuance of redeemable convertible preferred stock.

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As a result, common stock reserved for issuance under the 2018 Plan was increased by 1,154,948 shares on January 1, 2020.

As of June 30, 2020, the Company had 1,970,938 shares available for grant under the 2018 Plan.

As of September 30, 2020, the Company had 1,918,224 shares available for grant under the 2018 Plan.

The following table summarizes option activity under the Company’s 2004 Plan and 2018 Plan:

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Canceled and forfeited

Stock options outstanding at June 30, 2020

Stock options exercisable at June 30, 2020

Stock options outstanding at September 30, 2020

Stock options exercisable at September 30, 2020

The aggregate intrinsic value was calculated as the difference between the exercise prices of the underlying stock option awards and the estimated fair value of the Company’s common stock on the date of exercise.

For the three and six months ended June 30, 2020, the aggregate intrinsic value of stock options exercised was $ 5,000 and $ 81,000 , respectively, determined at the date of the option exercise.

For the three and six months ended June 30, 2019, the aggregate intrinsic value of stock options exercised was $ 9,000 and $ 55,000 , respectively, determined at the date of the option exercise.

For the three and nine months ended September 30, 2020, the aggregate intrinsic value of stock options exercised was $ 48,000 and $ 129,000 , respectively, determined at the date of the option exercise.

For the three and nine months ended September 30, 2019, the aggregate intrinsic value of stock options exercised was $ 63,000 and $ 119,000 , respectively, determined at the date of the option exercise.

Employee Stock Options Valuation

For determining stock-based compensation expense, the fair-value-based measurement of each employee stock option was estimated as of the date of grant using the Black-Scholes option-pricing model with assumptions as follows:

Six Months Ended

Nine Months Ended

September 30,

Expected term (in years)

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Expected dividend

Using the Black-Scholes option-valuation model, the weighted-average estimated grant-date fair value of employee stock options granted during the three and six months ended June 30, 2020 was $ 5.60 and $ 5.03 per share, respectively, and during the three and six months ended June 30, 2019 was $ 6.79 and $ 6.97 per share, respectively.

Using the Black-Scholes option-valuation model, the weighted-average estimated grant-date fair value of employee stock options granted during the three and nine months ended September 30, 2020 was $ 5.69 and $ 5.09 per share, respectively, and during the three and nine months ended September 30, 2019 was $ 4.88 and $ 6.74 per share, respectively.

Restricted Stock Units

During the six months ended June 30, 2020, the Company granted 497,250 shares of restricted common stock units, or RSUs, to certain employees.

These RSUs will become fully vested over four years in May 2024 .

A summary of the status and activity of non-vested RSUs at June 30, 2020 is as follows:

During the nine months ended September 30, 2020, the Company granted 505,250 shares of restricted common stock units, or RSUs, to certain employees.

These RSUs will become fully vested over four years in August 2024 .

A summary of the status and activity of non-vested RSUs at September 30, 2020 is as follows:

Non-vested December 31, 2019

1 unchanged sentence

Canceled and forfeited

Non-vested June 30, 2020

Non-vested September 30, 2020

2018 Employee Stock Purchase Plan

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The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model.

For the six months ended June 30 , 2020, the fair value of ESPP shares was estimated using the following assumptions:

Six Months Ended

For the nine months ended September 3 0 , 20 20 , the fair value of ESPP shares was estimated using the following assumptions:

Nine Months Ended

September 30,

Expected term (in years)

2 unchanged sentences

Expected dividend

As of June 30 , 2020, 206,404 shares had been purchased and 483,066 shares were available for future issuance under the ESPP.

As of September 30 , 2020, 327,931 shares had been purchased and 361,539 shares were available for future issuance under the ESPP.

Stock-Based Compensation Expense

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

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Restricted stock units

As of June 30 , 2020, unrecognized stock-based compensation expense related to the unvested stock options and RSUs granted was $ 20.1 million and $ 6.2 million, respectively.

The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.6 years and 2.8 years, respectively.

As of June 30 , 2020, there is $ 0.1 million of unrecognized stock-based compensation expense related to the ESPP.

As of June 30, 2019, unrecognized stock-based compensation expense related to the unvested stock options and RSUs granted was $ 21.4 million and $ 1.5 million, respectively.

As of September 30 , 2020, unrecognized stock-based compensation expense related to the unvested stock options and RSUs granted was $ 18.5 million and $ 5.4 million, respectively.

The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.4 years and 2.7 years, respectively.

As of June 30, 2019, there is no unrecognized stock-based compensation expense related to the ESPP.

As of September 30 , 2020, there is $ 0.3 million of unrecognized stock-based compensation expense related to the ESPP.

Non-Employee Stock-Based Compensation Expense

The fair value of options granted to non-employees was estimated using the Black-Scholes method.

The stock-based compensation expense related to non-employees for the three and six months ended June 30, 2020 and 2019 was immaterial.

The stock-based compensation expense related to non-employees for the three and nine months ended September 30, 2020 and 2019 was immaterial.

Call Option Plan

In February 2017, the Company adopted a Call Option Plan to grant selected employees, officers, directors and consultants (collectively, the “Participants”) options to purchase shares of the common stock of Vaxcyte.

As of June 30, 2020, the Company has reserved 266,740 shares of Vaxcyte common stock for issuance under the program, under which call options covering 248,960 and 17,780 shares were granted in February 2017 and August 2019, respectively.

As of September 30, 2020, the Company has reserved 266,724 shares of Vaxcyte common stock for issuance under the program, under which call options covering 248,944 and 17,780 shares were granted in February 2017 and August 2019, respectively.

The call options granted in February 2017 vest 25 % on each of January 1, 2017, 2018, 2019, and 2020, and expire one year from the vesting date.

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Call options covering 248,944 and 17,780 shares have been granted with an exercise price of $ 1.28 per share and $ 2.04 per share, respectively.

A summary of the status of the call options at June 30, 2020 and at December 31, 2019 is as follows:

A summary of the status of the call options at September 30, 2020 and at December 31, 2019 is as follows:

September 30,

Options vested and exercised

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Total options granted

The amounts recognized as compensation expense related to the Call Option Plan for the three and six months ended June 30, 2020 were $ 64,000 and $ 68,000 , respectively.

The amounts recognized as compensation expense related to the Call Option Plan for the three and six months ended June 30, 2019 were $ 17,000 and $ 35,000 , respectively.

The amounts recognized as other expense related to the remeasurement of the vested call options for the three and six months ended June 30, 2020 were $ 1.8 million and $ 2.0 million, respectively.

The amounts recognized as other expense related to the remeasurement of the vested call options for the three and six months ended June 30, 2019 were $ 3,000 and 7,000 , respectively.

As of June 30, 2020 and December 31, 2019, liability attributable to the Call Option Plan was $ 2.1 million and $ 76,000 , respectively.

The amounts recognized as compensation expense related to the Call Option Plan for the three and nine months ended September 30, 2020 were $ 90,000 and $ 158,000 , respectively.

The amounts recognized as compensation expense related to the Call Option Plan for the three and nine months ended September 30, 2019 were $ 24,000 and $ 59,000 , respectively.

The amounts recognized as other expense related to the remeasurement of the vested call options for the three and nine months ended September 30, 2020 were $ 1.1 million and $ 3.1 million, respectively.

The amounts recognized as other expense related to the remeasurement of the vested call options for the three and nine months ended September 30, 2019 were no t material.

As of September 30, 2020 and December 31, 2019, the liability attributable to the Call Option Plan was $ 3.4 million and $ 76,000 , respectively.

Net Income (Loss) Per Share

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss), basic and diluted

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Net income (loss) earnings per share:

The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods ended June 30, 2019, because including them would have been antidilutive:

As of June 30,

The following common stock equivalents were excluded from the computation of diluted net loss per share for the period ended September 30, 2019, because including them would have been antidilutive:

As of September 30,

Common stock options issued and outstanding

1 unchanged sentence

Warrants to purchase common stock

Subsequent Events

The Company has evaluated all events occurring through November 4, 2020, the date on which the condensed financial statements were issued, during which time nothing has occurred outside the normal course of business operations that would require disclosure other than the event disclosed below.

From October 1, 2020 through November 4, 2020, the Company sold an aggregate of 500,000 shares of its common stock through its ATM Facility.

The net proceeds to the Company from these sales after deducting fees was approximately $ 5.0 million.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements