SUTRO BIOPHARMA, INC. 10-Q

Item 1. Financial Statements. Sutro Biopharma, Inc. Condensed Balance Sheets (In thousands, except share and per share amounts) March 31, December 31, 2021 2020 (Unaudited) Assets Current assets: Cash and cash equivalents $ 55,818 $ 206,152 Marketable securities 164,455 120,341 Investment in equity securities 30,955 41,644 Accounts receivable 7,227 5,559 Prepaid expenses and other current assets 7,546 4,486 Total current assets 266,001 378,182 Property and equipment, net 14,829 12,935 Marketable securities, non-current 74,615 — Other non-current assets 2,211 2,122 Restricted cash 872 872 Total assets $ 358,528 $ 394,111 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 5,891 $ 5,544 Accrued compensation 4,496 8,823 Deferred revenue—current 12,088 14,603 Other current liabilities 185 627 Total current liabilities 22,660 29,597 Deferred revenue, non-current 822 6,100 Deferred rent 2,390 1,340 Debt—non-current 24,680 24,545 Other noncurrent liabilities 638 481 Total liabilities 51,190 62,063 Stockholders’ equity: Preferred stock, $ 0.001 par value — 10,000,000 shares authorized as of March 31, 2021 and December 31, 2020; 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020 — — Common stock, $ 0.001 par value — 300,000,000 shares authorized as of March 31, 2021 and December 31, 2020; 46,103,606 and 45,752,116 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively 46 46 Additional paid-in-capital 565,524 559,746 Accumulated other comprehensive income — 129 Accumulated deficit ( 258,232 ) ( 227,873 ) Total stockholders’ equity 307,338 332,048 Total Liabilities and Stockholders’ Equity $ 358,528 $ 394,111 See accompanying notes to unaudited interim condensed financial statements. 1 Sutro Biopharma, Inc. Condensed Statements of Operations (Unaudited) (In thousands, except share and per share amounts) Three Months Ended March 31, 2021 2020 Revenues (including amounts from related parties of $ 0 during the three months ended March 31, 2021, and $ 2,813 during the three months ended March 31, 2020 $ 14,660 $ 7,152 Operating expenses Research and development 22,562 17,619 General and administrative 11,107 8,713 Total operating expenses 33,669 26,332 Loss from operations ( 19,009 ) ( 19,180 ) Interest income 197 641 Unrealized loss on equity securities ( 10,689 ) — Interest and other expense, net ( 858 ) ( 1,056 ) Net loss $ ( 30,359 ) $ ( 19,595 ) Net loss per share, basic and diluted $ ( 0.66 ) $ ( 0.84 ) Weighted-average shares used in computing basic and diluted net loss per share 45,907,590 23,197,971 See accompanying notes to unaudited interim condensed financial statements. 2 Sutro Biopharma, Inc. Condensed Statements of Comprehensive Loss (Unaudited) (In thousands) Three Months Ended March 31, 2021 2020 Net loss $ ( 30,359 ) $ ( 19,595 ) Other comprehensive income: Unrealized loss on available-for-sale securities ( 129 ) ( 137 ) Comprehensive loss $ ( 30,488 ) $ ( 19,732 ) See accompanying notes to unaudited interim condensed financial statements. 3 Sutro Biopharma, Inc. Condensed Statements of Stockholders’ Equity (Unaudited) (In thousands, except share amounts) Accumulated Additional Other Total Preferred Stock Common Stock Paid-In- Comprehensive Accumulated Stockholders’ Shares Amount Shares Amount Capital Income (Loss) Deficit Equity Balances at December 31, 2020 — $ — 45,752,116 $ 46 $ 559,746 $ 129 $ ( 227,873 ) $ 332,048 Exercise of common stock options — — 129,161 — 1,360 — — 1,360 Issuance of common stock under Employee Stock Purchase Plan — — 93,346 — 873 — — 873 Vesting of restricted stock units — — 147,349 — — — — — Stock transaction associated with taxes withheld on restricted stock units — — ( 18,366 ) — ( 407 ) — — ( 407 ) Stock-based compensation expense — — — — 3,952 — — 3,952 Net unrealized loss on available-for- sale securities — — — — — ( 129 ) — ( 129 ) Net loss — — — — — — ( 30,359 ) ( 30,359 ) Balances at March 31, 2021 — $ — 46,103,606 $ 46 $ 565,524 $ — $ ( 258,232 ) $ 307,338 Accumulated Additional Other Total Preferred Stock Common Stock Paid-In- Comprehensive Accumulated Stockholders’ Shares Amount Shares Amount Capital Loss Deficit Equity Balances at December 31, 2019 — $ — 23,098,969 $ 23 $ 293,346 $ 165 $ ( 195,745 ) $ 97,789 Exercise of common stock options — — 12,937 — 56 — — 56 Issuance of common stock under Employee Stock Purchase Plan — — 74,465 — 646 — — 646 Vesting of restricted stock units — — 41,050 — — — — — Stock-based compensation expense — — — — 2,707 — — 2,707 Issuance of common stock warrants in connection with debt refinancing — — — — 619 — — 619 Net unrealized loss on available-for- sale securities — — — — — ( 137 ) — ( 137 ) Net loss — — — — — — ( 19,595 ) ( 19,595 ) Balances at March 31, 2020 — $ — 23,227,421 $ 23 $ 297,374 $ 28 $ ( 215,340 ) $ 82,085 See accompanying notes to unaudited interim condensed financial statements. 4 Sutro Biopharma, Inc. Condensed Statements of Cash Flows (Unaudited) (In thousands) Three Months Ended March 31, 2021 2020 Operating activities Net loss $ ( 30,359 ) $ ( 19,595 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,291 1,099 Amortization of premium (accretion of discount) on marketable securities 496 ( 41 ) Stock-based compensation 3,952 2,707 Unrealized loss on equity securities 10,689 — Remeasurement of liability awards ( 11 ) 7 Other 39 ( 19 ) Changes in operating assets and liabilities: Accounts receivable ( 1,668 ) ( 2,781 ) Prepaid expenses and other assets ( 3,060 ) 1,417 Accounts payable ( 462 ) — Accrued compensation ( 4,327 ) ( 3,073 ) Other liabilities ( 267 ) ( 745 ) Deferred rent 1,050 ( 36 ) Deferred revenue ( 7,793 ) 2,326 Net cash used in operating activities ( 30,430 ) ( 18,734 ) Investing activities Purchases of marketable securities ( 164,604 ) ( 3,600 ) Maturities of marketable securities 40,250 37,500 Sales of marketable securities 5,000 8,500 Purchases of equipment and leasehold improvements ( 2,376 ) ( 763 ) Net cash (used in) provided by investing activities ( 121,730 ) 41,637 Financing activities Proceeds from debt refinancing — 25,000 Payment of debt — ( 10,000 ) Proceeds from exercise of common stock options 1,360 56 Taxes paid related to net shares settlement of restricted stock units ( 407 ) — Proceeds from employee stock purchase plan 873 646 Net cash provided by financing activities 1,826 15,702 Net (decrease) increase in cash, cash equivalents and restricted cash ( 150,334 ) 38,605 Cash, cash equivalents and restricted cash at beginning of period 207,024 4,975 Cash, cash equivalents and restricted cash at end of period $ 56,690 $ 43,580 Supplemental disclosure of cash flow information: Cash paid for interest $ 331 $ 134 Supplemental disclosure of non-cash investing and financing information: Purchases of equipment included in accounts payable $ 809 $ 255 Embedded interest associated with program fees $ 231 $ 600 See accompanying notes to unaudited interim condensed financial statements. 5 Sutro Biopharma, Inc. Notes to Unaudited Interim Condensed Financial Statements 1. Organization and Principal Activities Description of Business Sutro Biopharma, Inc. (the “Company”), is a clinical stage drug discovery, development and manufacturing company focused on leveraging its integrated cell-free protein synthesis and site-specific conjugation platform, XpressCF ® , to create a broad variety of optimally designed, next-generation protein therapeutics, initially for cancer and autoimmune disorders. The Company was incorporated on April 21, 2003 and is headquartered in South San Francisco , California . The Company operates in one business segment, the development of biopharmaceutical products. Liquidity The Company has incurred significant losses and has negative cash flows from operations. As of March 31, 2021, the Company had an accumulated deficit of $ 258.2 million. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development and other operational activities. As of March 31, 2021, the Company had unrestricted cash, cash equivalents and marketable securities of $ 294.9 million, which is available to fund future operations. The Company will need to raise additional capital to support the completion of its research and development activities and to support its operations. The Company believes that its unrestricted cash, cash equivalents and marketable securities as of March 31, 2021 will enable the Company to maintain its operations for a period of at least 12 months following the filing date of its financial statements. 2. Summary of Significant Accounting Policies Basis of Presentation and Use of Estimates 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. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2020 condensed balance sheet was derived from the audited financial statements as of that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its estimates on historical experience and market-specific or other relevant assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s condensed balance sheets and the amounts 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 collaboration arrangements, stock-based compensation expense, valuation of marketable securities, impairment of long-lived assets, income taxes and certain accrued liabilities. Actual results could differ from such estimates or assumptions. 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 or treat it, as well as the economic impact on local, regional, national and international customers, suppliers, service providers and markets. 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. Actual results could differ from such estimates or assumptions. 6 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 loss, and cash flows for the interim periods. The interim results for the three months ended March 3 1 , 20 2 1 are not necessarily indicative of the results that may be expected for the year ending December 31, 20 2 1 , 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, 2020. Recently Issued Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13 (Topic 326), Financial Instruments Credit Losses, which requires consideration of a broader range of reasonable and supportable information to developing credit loss estimates. For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including all interim periods within those years. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, including all interim periods within those years. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-13 will have a material impact on its financial statements and related disclosures. In February 2016, the FASB issued ASU 2016-02 (Topic 842), Leases (“ASC 842”). ASC 842 supersedes the lease recognition requirements in ASC 840, Leases. ASC 842 clarifies the definition of a lease and requires lessees to recognize right-of-use assets and lease liabilities for all leases, including those classified as operating leases under previous lease accounting guidance. For public entities, ASU 2016-02 was effective for fiscal years beginning after December 15, 2018, including all interim periods within that year. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, ASC 842 will be effective for the Company on January 1, 2022. Originally, entities were required to adopt ASC 842 using a modified retrospective transition method. However, in July 2018, the FASB issued ASU 2018-11 (Topic 842), Leases: Targeted Improvements, which provides entities with an additional transition method. Under ASU 2018-11, entities have the option of initially applying ASC 842 at the adoption date, rather than at the beginning of the earliest period presented, and recognizing the cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. The Company is currently evaluating the impact of adopting this guidance on the Company’s financial statements. The Company currently expects that its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and operating lease liabilities upon adoption of this standard, which will increase the total assets and total liabilities that it reports relative to such amounts presented prior to adoption. Cash, Cash Equivalents and Restricted Cash 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. March 31, 2021 2020 (in thousands) Cash and cash equivalents $ 55,818 $ 43,565 Restricted cash 872 15 Total cash, cash equivalents, and restricted cash shown in the statements of cash flows $ 56,690 $ 43,580 7 Investments in Equity Securities 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, with any unrealized gains and losses recorded in the Company’s statements of operations. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date, and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The Company determined the fair value of financial assets and liabilities using the fair value hierarchy that describes three levels of inputs that may be used to measure fair value, as follows: Level 1—Quoted prices in active markets for identical assets and liabilities; Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The carrying amounts of accounts receivable, prepaid expenses, accounts payable, accrued liabilities and accrued compensation and benefits approximate fair value due to the short-term nature of these items. The fair value of the Company’s outstanding loan (See Note 6) is estimated using the net present value of the payments, discounted at an interest rate that is consistent with market interest rate, which is a Level 2 input. The estimated fair value of the Company’s outstanding loan approximates the carrying amount, as the loan bears a floating rate that approximates the market interest rate. Revenue Recognition The Company has no products approved for commercial sale and has not generated any revenue from commercial product sales. The total revenue to date has been generated principally from collaboration and license agreements and to a lesser extent, from manufacturing, supply and services and products the Company provides to its collaboration partners. Collaboration revenue The Company derives revenue from collaboration arrangements, under which the Company may grant licenses to its collaboration partners to further develop and commercialize its proprietary product candidates. 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. 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. The Company assesses which activities in the collaboration agreements are considered distinct performance obligations that should be accounted for separately. The Company develops assumptions that require judgement to determine whether the license to the Company’s intellectual property is distinct from the research and development services or participation in activities under the collaboration agreements. 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 recognizes revenue over time by measuring its progress towards the complete satisfaction of the relevant performance obligation using an appropriate input or output method based on the nature of the service promised to the customer. 8 For arrangements that include multiple performance obligations, the Company allocate s the transaction price to the identified performance obligations based on the standalone selling price, or SSP , of each distinct performance obligation . In instances where SSP is not directly observable , the Company develop s assumptions that require judgment to determine the SSP for each performance obligation identified in the contract. These key assumptions may include FTE , personnel effort , estimated costs, discount rates and probabilities of clinical development and regulatory success. Upfront Payments : For collaboration arrangements that include a nonrefundable upfront payment, if the license fee and research and development services cannot be accounted for as separate performance obligations, the transaction price is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology. The Company uses judgement to assess the pattern of delivery of the performance obligation. In addition, amounts paid in advance of services being rendered may result in an associated financing component to the upfront payment. Accordingly, the interest on such borrowing cost component will be recorded as interest expense and revenue, based on an appropriate borrowing rate applied to the value of services to be performed by the Company over the estimated service performance period. License Grants: For collaboration arrangements that include a grant of a license to the Company’s intellectual property, the Company considers whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, the Company recognizes revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and the Company has provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement. Milestone and Contingent Payments : At the inception of the arrangement and at each reporting date thereafter, the Company assesses whether it should include any milestone and contingent payments or other forms of variable consideration in the transaction price using the most likely amount method. If it is probable that a significant reversal of cumulative revenue would not occur upon resolution of the uncertainty, the associated milestone value is included in the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of each such milestone and any related constraint and, if necessary, adjusts its estimate of the overall transaction price. Since milestone and contingent payments may become payable to the Company upon the initiation of a clinical study or filing for or receipt of regulatory approval, the Company reviews the relevant facts and circumstances to determine when the Company should update the transaction price, which may occur before the triggering event. When the Company updates the transaction price for milestone and contingent payments, the Company allocates the changes in the total transaction price to each performance obligation in the agreement on the same basis as the initial allocation. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment, which may result in recognizing revenue for previously satisfied performance obligations in such period. The Company’s collaborators generally pay milestones and contingent payments subsequent to achievement of the triggering event. Research and Development Services : For amounts allocated to the Company’s research and development obligations in a collaboration arrangement, the Company recognizes revenue over time using a cost-based input methodology, representing the transfer of goods or services as activities are performed over the term of the agreement. Materials Supply: The Company provides materials and reagents, clinical materials and services to certain of its collaborators under separate agreements. The consideration for such services is generally based on FTE personnel effort used to manufacture those materials reimbursed at an agreed upon rate in addition to agreed-upon pricing for the provided materials. The amounts billed are recognized as revenue as the performance obligations are met by the Company. 9 3. Fair Value Measurements 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: March 31, 2021 Total Level 1 Level 2 Level 3 (in thousands) Assets: Money market funds $ 53,776 $ 53,776 $ – $ – Commercial paper 64,344 – 64,344 – Corporate debt securities 64,678 – 64,678 – Equity securities 30,955 30,955 – – Asset-backed securities 36,889 – 36,889 – U.S. government securities 59,865 59,865 – – Supranational debt securities 13,294 – 13,294 – Total $ 323,801 $ 144,596 $ 179,205 $ - 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: December 31, 2020 Total Level 1 Level 2 Level 3 (in thousands) Assets: Money market funds $ 204,632 $ 204,632 $ – $ – Commercial paper 42,208 – 42,208 – Corporate debt securities 25,716 – 25,716 – Equity securities 41,644 41,644 – – Asset-backed securities 12,632 – 12,632 – U.S. government securities 39,785 39,785 – – Total $ 366,617 $ 286,061 $ 80,556 $ – Where applicable, the Company uses quoted market prices in active markets for identical assets to determine fair value. This pricing methodology applies to Level 1 investments, which are comprised of money market funds, U.S. government securities and the Vaxcyte common stock shares held by the Company. If quoted prices in active markets for identical assets are not available, then the Company uses quoted prices for similar assets or inputs other than quoted prices that are observable, either directly or indirectly. These investments are included in Level 2 and consist of commercial paper, corporate debt securities, asset-backed securities and supranational debt securities. These assets are valued using market prices when available, adjusting for accretion of the purchase price to face value at maturity. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. Investments in Equity Securities Subsequent to the closing of the initial public offering (“IPO”) of Vaxcyte 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, with any unrealized gains and losses recorded in the Company’s statements of operations. 10 As of March 31, 2021, the Company held 1,567,324 shares of Vaxcyte common stock with an estimated fair value of $ 31.0 million. The Company recognized an unrealized loss related to Vaxcyte common stock of $ 10.7 million for the three months ended March 31, 2021. 4. Cash Equivalents and Marketable Securities Cash equivalents and marketable securities consisted of the following: March 31, 2021 Amortized Cost Basis Unrealized Gains Unrealized (Losses) Fair Value (in thousands) Money market funds $ 53,776 $ – $ – $ 53,776 Commercial paper 64,344 – – 64,344 Corporate debt securities 64,708 14 ( 44 ) 64,678 Asset-based securities 36,881 18 ( 10 ) 36,889 U.S. government securities 59,832 33 – 59,865 Supranational debt securities 13,304 – ( 10 ) 13,294 Total 292,845 65 ( 64 ) 292,846 Less amounts classified as cash equivalents ( 53,776 ) – – ( 53,776 ) Total marketable securities $ 239,069 $ 65 $ ( 64 ) $ 239,070 December 31, 2020 Amortized Cost Basis Unrealized Gains Unrealized (Losses) Fair Value (in thousands) Money market funds $ 204,632 $ – $ – $ 204,632 Commercial paper 42,208 – – 42,208 Corporate debt securities 25,669 48 ( 1 ) 25,716 Asset-based securities 12,593 39 – 12,632 U.S. government securities 39,743 44 ( 2.00 ) 39,785 Total 324,845 131 ( 3 ) 324,973 Less amounts classified as cash equivalents ( 204,632 ) – – ( 204,632 ) Total marketable securities $ 120,213 $ 131 $ ( 3 ) $ 120,341 As of March 31, 2021 and December 31, 2020, $ 74.6 million and zero , respectively, of marketable securities had maturities of more than one year and are classified as long-term assets. There were $ 84.6 million and $ 14.7 million of investments in an unrealized loss position of $ 64,000 and $ 3,000 as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021 and 2020, 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. Based on the scheduled maturities of the investments, the Company was more likely than not to hold these investments for a period of time sufficient for a recovery of the Company’s cost basis. As such, the Company concluded that the unrealized losses in the investment securities were not other-than-temporary. 11 5. Collaboration and License Agreements and Supply Agreements The Company has entered into collaboration and license agreements with various pharmaceutical and biotechnology companies. In accordance with the collaboration agreements, the Company recognized revenue as follows: Three Months Ended March 31, 2021 2020 (in thousands) Bristol Myers Squibb Company ("BMS") $ 1,239 $ 2,045 Merck Sharp & Dohme Corporation (“Merck”) (1) 11,883 2,777 Merck KGaA, Darmstadt, Germany (operating in the United States and Canada under the name “EMD Serono”) 220 2,294 Vaxcyte (2) 1,318 36 Total revenue $ 14,660 $ 7,152 (1) Merck was a related party until the closing of the Company’s public offering on May 14, 2020. (2) 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 three months ended March 31, 2021: Three Months Ended March 31, 2021 (in thousands) Deferred revenue—December 31, 2020 $ 20,703 Additions to deferred revenue 1,268 Recognition of revenue in current period ( 9,061 ) Deferred revenue—March 31, 2021 $ 12,910 The Company’s balance of deferred revenue contains the transaction price from collaboration agreements allocated to performance obligations which are partially unsatisfied. The Company expects to recognize approximately $ 12.1 million of the deferred revenue over the next twelve months . There have been no material changes to the Company’s collaboration agreements in the three months ended March 31, 2021, except as described below. Collaborations with BMS In November 2019, BMS acquired Celgene, and Celgene became a wholly owned subsidiary of BMS. In connection with such acquisition, BMS assumed the rights and obligations of the 2014 Celgene Agreement, 2017 Celgene Agreement and 2018 Celgene Master Services Agreement. Throughout this Form 10-Q, the Company refers to Celgene as BMS and its agreements with Celgene as the BMS Agreement and the 2018 BMS Master Services Agreement. BMS Agreement In September 2014, the Company signed a Collaboration and License Agreement with BMS to discover and develop bispecific antibodies and/or antibody-drug conjugates (“ADCs”), focused primarily on the field of immuno-oncology, using the Company’s proprietary integrated cell-free protein synthesis platform, XpressCF ® . In August 2017, the Company entered into an amended and restated collaboration and license agreement with BMS to refocus the collaboration on four programs that were advancing through preclinical development, including an ADC program targeting B cell maturation antigen (“BCMA ADC”). Upon signing the BMS Agreement, the Company received an upfront, nonrefundable payment totaling $ 83.1 million. 12 In March 2015, the Company received a $ 15.0 million contingent payment (“March 2015 payment”) from BMS that provided BMS a right to access certain of the Company’s technology for use in conjunction with certain BMS intellectual property. In June 2016, the Company received a $ 25.0 million milestone (“June 2016 payment”) upon completion of certain preclinical activities. Additionally, in June 2016, the Company earned a $ 10.0 million substantive milestone for certain manufacturing accomplishments. In August 2017, the Company received an option fee payment of $ 12.5 million. In September 2017, the Company earned a $ 10.0 million milestone for certain manufacturing accomplishments, which payment was received from BMS in October 2017. In December 2018, the Company earned a $ 10.0 million milestone for certain manufacturing accomplishments, which payment was received from BMS in the same month. In May 2019, the U.S. Food and Drug Administration cleared the investigational new drug (“IND”) application for the BCMA ADC, which was discovered and manufactured by the Company and is the first collaboration program IND. BMS has worldwide development and commercialization rights with respect to the BCMA ADC. The Company will continue to be responsible for clinical supply manufacturing and certain development services for the BCMA ADC and is eligible to receive from BMS aggregate development and regulatory contingent payments of up to $ 275.0 million, if approved in multiple indications, and tiered royalties ranging from mid to high single digit percentages on worldwide sales of any resulting commercial products. With respect to the remaining three collaboration programs (BCMA-CD3, PD1-LAG3 and PD1-TIM3), during the second quarter of 2019 BMS notified the Company that it decided not to exercise the option to acquire U.S. clinical development and commercialization rights to a second collaboration program. Therefore, BMS was not required to pay the Company the $ 12.5 million option maintenance fee that would have been due upon IND clearance for the first collaboration program, as described above. Consequently, the U.S. clinical development and commercialization rights to the other three collaboration programs remain owned by the Company, without any further option to BMS. Further, upon the expiration of the research term defined by the BMS 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 BMS Agreement are not considered to be substantive milestones because the receipt of such payments is based solely on the performance of BMS. The Company has received financial support for research and development services assigned to the Company by BMS, based on an agreed-upon level of FTE personnel effort and related reimbursement rate, which will be recognized as revenue as the related reimbursable activities approved by BMS and the Company are performed by the Company. BMS may terminate the BMS Agreement at any time with 120 days’ prior written notice. Either the Company or BMS has the right to terminate the BMS Agreement based on the other party’s uncured material breach, challenge of the validity and enforceability of intellectual property, or bankruptcy. In accounting for this arrangement under ASC 606, applying the practical expedients, the BMS Agreement was treated as a single arrangement that had been modified in 2017, in the form it was last modified prior to the adoption of ASC 606. Given the modification of the BMS Agreement in 2017, the Company determined that the remaining deferred revenue balance of $ 8.2 million as of the date of the modification, related to certain prior BMS payments to the Company, together with the $ 12.5 million option fee payment received in August 2017, would comprise the transaction price of $ 20.7 million to be allocated on a relative basis among the Company’s performance obligations based on the Company’s best estimate of each SSP or fair value. The Company identified the three performance obligations relating to the BMS Agreement as: (1) access by BMS to worldwide development and commercialization rights on the first collaboration program to achieve IND clearance; (2) the Company’s estimated future services on the collaboration Joint Steering Committee (“JSC”); and (3) BMS’s use of certain technology and the option to acquire worldwide development and commercialization rights to a second collaboration program. 13 Based on its estimated SSP, relative to the total estimated SSP values of all identified performance obligations, the portion of the transaction price allocated to the first performance obligation was $ 8.2 million, which performance obligation was satisfied as of the modification date of the BMS Agreement, as the BCMA ADC program was the most advanced of the four collaboration programs and estimated by the Company to be the one for which BMS would first achieve IND clearance and gain worldwide development and commercialization rights. The second and third performance obligations identified above were unsatisfied as of the modification date of the BMS Agreement. The Company determined the portion of the transaction price to be allocated to the JSC performance obligation was $ 0.2 million . Revenue related to such performance obligation will be recognized by the Company over the estimated period during which it will perform its JSC services. The Company determined that the portion of the transaction price to be allocated to the third performance obligation, which provided BMS with an option to acquire worldwide development and commercialization rights to a second collaboration program, was $ 12.3 million. Although BMS decided not to exercise th is option, the Company still ha d the continuing performance obligation to provide BMS 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 . For the three months ended March 31, 2021 and 2020, the Company recognized zero and $ 1.0 million, respectively, of revenue associated with the Company’s ongoing performance related to partially unsatisfied performance obligations, and $ 0.3 million and $ 0.1 million, respectively, from research and development services. As of both March 31, 2021 and December 31, 2020, there was a zero balance in deferred revenue related to payments received by the Company under the BMS Agreement. 2018 BMS Master Services Agreement In March 2018, the Company entered into a Master Development and Clinical Manufacturing Services Agreement (the “2018 BMS Master Services Agreement”) with BMS, wherein BMS requested the Company to provide development, manufacturing and supply chain management services, including clinical product supply. The consideration for the services is based on an agreed-upon level of FTE personnel effort and related reimbursement rate in addition to agreed-upon pricing for the clinical product supply. For the three months ended March 31, 2021 and 2020, the Company earned $ 0.9 million and $ 0.9 million, respectively, under the 2018 BMS Master Services Agreement. As of March 31, 2021 and December 31, 2020, there was $ 2.5 million and $ 1.2 million, respectively, of deferred revenue under the 2018 BMS Master Services Agreement. 2018 Merck Agreement In July 2018, the Company entered into the 2018 Merck Agreement with Merck to jointly develop up to three research programs focusing on cytokine derivatives for cancer and autoimmune disorders. Under the 2018 Merck Agreement, the Company received from Merck a non-refundable, non-creditable, upfront payment of $ 60.0 million in August 2018 for access to the Company’s technology and the identification and preclinical research and development of two target programs, with an option for Merck to engage the Company to continue these activities for a third program upon the payment of an additional amount. Under ASC 606, the Company identified the five performance obligations under the 2018 Merck Agreement as: (1) access to certain intellectual property rights; (2) performance of services related to the first target program; (3) performance of services related to the second target program; (4) the Company’s estimated future services on the collaboration JSC; 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. 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. Revenue allocated to the first and second target programs, which totaled $ 47.1 million, was being recognized on an input 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. As it pertains to the JSC performance obligation, the revenue allocated to such performance obligation was $ 0.7 million, which was being recognized as revenue on an input basis using FTE cost as the basis, and such effort is expected to be incurred on a relatively consistent basis throughout the term of the 2018 Merck Agreement. The Company 14 allocated $ 4.9 million of the transaction price to the material right associated with the contingent third program. 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 $ 7.3 million as of March 31, 2021 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. 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 progress for the first target program by $ 6.2 million and an increase in the measure of progress for the second target program of $ 1.1 million for a collective decrease in revenue of $ 5.1 million. Also, in March 2020, Merck exercised its option to extend the research term of the collaboration’s first cytokine-derivative program by one year , which, pursuant to the terms of the 2018 Merck Agreement, triggered a payment of $ 5.0 million. The $ 5.0 million was, in prior periods, considered to be a fully constrained variable consideration. Removal of the constraint on this variable consideration resulted in a change to the total transaction price, from $ 60.0 million to $ 65.0 million. The Company allocated the updated transaction price to all identified performance obligations on the same basis as the initial allocation upon inception of the 2018 Merck Agreement, with any adjustments recorded as a cumulative catch-up in the current period. Based upon the adjusted transaction price, revenue allocated to the access to intellectual property rights was $ 7.8 million and incremental revenue of $ 0.5 million was recognized in the period as this performance obligation was previously completed. Revenue allocated to the first and second target programs totaled $ 50.5 million, to be recognized on an input basis, using 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 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. The option to expand activities to the contingent third target program expired in January 2021. Consequently, the contingent third target program is no longer a performance obligation and the related revenue was recognized during the quarter ended March 31, 2021. As it pertains to the JSC performance obligation, the incremental transaction price allocation was immaterial. 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 months ended March 31, 2021 and 2020, the Company recognized revenue of $ 9.1 million and $ 0.9 million, respectively, associated with the Company’s ongoing performance related to the partially unsatisfied performance obligations, $ 0.2 million and $ 0.6 million, respectively, related to the interest component described above, and $ 1.2 million and $ 1.3 million, respectively, for FTE funding provided by Merck. As of March 31, 2021 and December 31, 2020, there was $ 9.4 million and $ 18.5 million, respectively, of deferred revenue related to the transaction price under the 2018 Merck Agreement. The Company is also eligible to receive aggregate contingent payments of up to approximately $ 0.5 billion for each of the target programs selected by Merck, assuming the development and sale of the therapeutic candidate and all possible indications identified under the collaboration. If one or more products from each of the target programs are developed for non-oncology or a single indication, the Company will be eligible for reduced aggregate milestone payments. In addition, the Company is eligible to receive tiered royalties ranging from mid-single digit to low teen percentages on the worldwide sales of any commercial products that may result from the collaboration. Merck may terminate the 2018 Merck Agreement at any time with 60 days’ prior written notice. 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. 15 2020 Merck Master Services Agreement In August 2020, the Company entered into a Pre-Clinical and Clinical Supply Agreement (the “2020 Merck Master Services Agreement”) with Merck, wherein Merck requested the Company to provide development, manufacturing and supply chain management services, including clinical product supply, upon completion of the research programs under the 2018 Merck Agreement. The consideration for the services is based on an agreed-upon level of FTE personnel effort and related reimbursement rate in addition to agreed-upon pricing for the clinical product supply. Consideration terms are at fair value and materials are to be provided on an agreed upon basis. Accordingly, the Company will recognize revenue upon the performance of such services. During the three months ended March 31, 2021, the Company earned $ 1.4 million under the 2020 Merck Master Services 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. The Collaboration Agreement was subsumed into the License Agreement (the “MDA Agreement”), which agreement is to develop ADCs for multiple cancer targets. Under the MDA Agreement, a novel bispecific ADC product candidate targeting EGFR and MUC1, known as M1231, is undergoing development. Upon signing the Collaboration Agreement, the Company received an upfront, nonrefundable, non-creditable payment totaling $ 10.0 million. Upon signing the MDA Agreement, the Company received an additional upfront, nonrefundable payment totaling $ 10.0 million and will receive financial support for research and development services to be provided by the Company, based on an agreed-upon level of FTE personnel effort and related reimbursement rate. The Company is eligible to receive up to $ 52.5 million for M1231 under the MDA Agreement, primarily from pre-commercial contingent payments. Relatedly, in August 2020, the Company earned a $ 1.0 million clinical supply milestone payment under the MDA Agreement, which payment was received by the Company in October 2020. Additionally, in September 2019, the Company earned a $ 1.5 million contingent payment under the MDA Agreement upon designation by EMD Serono of a specific bispecific antibody drug conjugate as a clinical development candidate with their approval to advance it to IND-enabling studies, which payment was received by the Company in November 2019. In addition, the Company is eligible to receive tiered royalties ranging from low-to-mid single digit percentages, along with certain additional one-time royalties, on worldwide sales of any commercial products that may result from the MDA Agreement. The MDA Agreement term expires on a product-by-product and country-by-country basis. Upon expiration, EMD Serono will have a fully paid-up, royalty-free, perpetual, and irrevocable non-exclusive license, with the right to grant sublicenses, under certain Company intellectual property rights. EMD Serono may terminate the MDA Agreement at any time with 90 days’ prior written notice or upon the inability of the Company to provide EMD Serono access to a specified number of cancer drug targets. Either the Company or EMD Serono has the right to terminate the MDA Agreement based on the other party’s uncured material breach or bankruptcy. During the three months ended March 31, 2021 and 2020, the Company earned $ 0.2 million and $ 0.3 million, respectively, from research and development services. As of both March 31, 2021 and December 31, 2020, there was a zero balance in deferred revenue related to payments received by the Company under the MDA Agreement. 2019 EMD Serono Supply Agreement In April 2019, the Company entered into an ADC Product Preclinical and Phase I Clinical Supply Agreement (the “2019 EMD Serono Supply Agreement”) with EMD Serono, wherein EMD Serono requested the Company to provide development, manufacturing and supply chain management services, including clinical product supply. The consideration for the services is based on an agreed-upon level of FTE personnel effort and related reimbursement rate in addition to agreed-upon pricing for the clinical product supply. Consideration terms are at fair value and materials are to be provided on an agreed upon basis. Accordingly, the Company will recognize revenue upon the performance of such services. During the three months ended March 31, 2021 and 2020, the Company earned $ 0.1 million and $ 2.0 million, respectively, under the 2019 EMD Serono Supply Agreement. As of both March 31, 2021 and December 31, 2020, there was $ 1.0 million, respectively, of deferred revenue related to payments received by the Company under the 2019 EMD Serono Supply Agreement. 16 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 months ended March 31, 2021 and 2020, the Company recognized revenue of $ 1.3 million and $ 36,000 , 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. During 2020, upon Vaxcyte’s request and their agreement to reimburse the related costs, the Company entered into agreements with third-party contract manufacturers (“CMOs”) to conduct process transfers to allow for such CMOs to manufacture and supply extract and custom reagents for Vaxcyte. The agreed-upon reimbursements by Vaxcyte of the costs associated with such arrangements, principally for pass-through costs from the CMOs, which totaled approximately $ 0.2 million, were accounted for by the Company as a reduction to research and development expense. The Leukemia & Lymphoma Society, Inc. In August 2018, the Company entered into a Research, Development and Commercialization Agreement (the “LLS Agreement”) with The Leukemia & Lymphoma Society (“LLS”), under which LLS has agreed to contribute up to $ 6.0 million in clinical development funding for STRO-001, the Company’s CD74-targeting ADC to treat relapsed and/or refractory multiple myeloma and non-Hodgkin lymphoma. The funding will be provided in installments based upon the achievement of funding milestones, with any excess funding above actual expenditures refundable to LLS. The initial payment of $ 0.5 million was received by the Company upon execution of the LLS Agreement. To date, the Company has received total payments from LLS of $ 1.0 million. 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 March 31, 2021, 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. LLS may terminate the LLS Agreement at any time with 60 days’ prior written notice. 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 and $ 0.2 million, respectively, as a part of other noncurrent liabilities as of March 31, 2021 and December 31, 2020, 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. 6. Loan and Security Agreement In August 2017, the Company entered into a loan and security agreement with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) under which it borrowed $ 15.0 million (the “August 2017 Loan”). The loan was due in 30 monthly installments from March 2019 through its repayment in August 2021 , with interest-only monthly payments until March 2019 . The Company commenced repayment of the loan in March 2019. The interest charges on the loan were based on a floating rate that equaled the greater of 7.39 % or the sum of the 30-day U.S. Dollar London Interbank Offered Rate (“LIBOR”) plus 6.40 %. In connection with the August 2017 Loan, the Company issued to Oxford and SVB a warrant to purchase the Company’s Series D-2 redeemable convertible preferred stock (the “2017 Warrant”). The 2017 Warrants were later converted into warrants to purchase Series E redeemable convertible preferred stock in May and July 2018, and upon the Company’s IPO on October 1, 2018, all Series E redeemable convertible preferred stock warrants were converted to warrants to purchase 46,359 shares of common stock. The estimated fair value upon issuance of the 2017 Warrant of $ 0.3 million was recorded as a debt discount on the associated borrowings on the Company’s balance sheet. The debt discount was amortized to interest expense over the expected repayment period of the loan using the effective-interest method. 17 On February 28, 2020, (the “Effective Date”), the Company entered into a loan and security agreement (the “Loan and Security Agreement”) with Oxford as the collateral agent and a lender, and SVB as a lender (together with Oxford, the “Lenders”), pursuant to which the Lenders agreed to lend the Company up to an aggregate of $ 25.0 million in a series of term loans (the “Term A Loan”). Upon entering into the Loan and Security Agreement, the Company borrowed $ 25.0 million from the Lenders, with approximately $ 9.6 million of such amount applied to the repayment of the outstanding principal, interest and final payment fees owed pursuant to the August 2017 Loan. As such, the August 2017 Loan has been paid in full. The Company accounted for the issuance of the Loan and Security Agreement and repayment of the August 2017 Loan as a debt modification. 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. The Company’s obligations under the Loan and Security Agreement are secured by all assets of the Company, other than its intellectual property. The Company has also agreed not to encumber its intellectual property assets, except as permitted by the Loan and Security Agreement. The Term A Loan matures on March 1, 2024 (the “Maturity Date”) and will be interest-only through March 1, 2022 , followed by 24 equal monthly payments of principal and interest. The Term A Loan bears interest at a floating per annum rate equal to the greater of (i) 8.07 % or (ii) the sum of (a) the greater of (1) the thirty (30) day U.S. LIBOR rate reported in the Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (2) 1.67 %, plus (b) 6.40 %. The Company will be required to make a final payment of 3.83 % of the original principal amount of the Term A Loan drawn, or $ 1.0 million, payable on the earlier of (i) the Maturity Date, (ii) the acceleration of the Term A Loan, or (iii) the prepayment of the Term A Loan (the “Final Payment”). The final payment amount is accreted as interest expense until the Maturity Date using the effective interest method. The Company may prepay all, but not less than all, of the Term A Loan upon 30 days’ advance written notice to Oxford, provided that the Company will be obligated to pay a prepayment fee equal to (i) 3.00 % of the principal amount of the Term A Loan prepaid on or before the first anniversary of the applicable funding date, or (ii) 2.00 % of the principal amount of the Term A Loan prepaid between the first and second anniversary of the applicable funding date, or (iii) 1.00 % of the principal amount of the Term A Loan prepaid thereafter, and prior to the Maturity Date (each, a “Prepayment Fee”). The Loan and Security Agreement contains customary affirmative and restrictive covenants, including covenants regarding incurrence of additional indebtedness or liens, investments, transactions with affiliates, delivery of financial statements, maintenance of inventory, payment of taxes, maintenance of insurance, protection of intellectual property rights, dispositions of property, business combinations or acquisitions, among other customary covenants. The Company is also restricted from paying dividends or making other distributions or payments on its capital stock, subject to limited exceptions. The Loan and Security Agreement provides that an event of default will occur if, among other triggers, there occurs any circumstances that could reasonably be expected to result in a material adverse change in the business, or operations or condition (financial or otherwise) of the Company or a material impairment of the prospect of the Company to repay any portion of its obligations under the Agreement. The Agreement also includes customary representations and warranties, other events of default and termination provisions. In connection with entering into the Loan and Security Agreement, the Company issued to the Lenders warrants exercisable for 81,257 shares of the Company’s common stock (the “2020 Warrants”). The 2020 Warrants are exercisable in whole or in part, immediately, and have a per share exercise price of $ 9.23 , which is the closing price of the Company’s common stock reported on the Nasdaq Global Market on the day prior to the Effective Date. The 2020 Warrants will terminate on the earlier of February 28, 2030 or the closing of certain merger or consolidation transactions. The estimated fair value upon issuance of the Warrants of $ 0.6 million is recorded as a debt discount on the associated borrowings on the Company’s balance sheet. The debt discount is being amortized to interest expense over the expected repayment period of the loan using the effective-interest method. As of March 31, 2021, 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 both March 31, 2021 and December 31, 2020, accrued interest expense was $ 0.2 million. During the three months ended March 31, 2021 and 2020, the Company recorded interest expense related to loans outstanding of $ 0.6 million and $ 0.2 million, respectively, with average interest rates of 8.07 % and 8.09 %, respectively, and interest related to the accretion of debt discount of $ 0.1 million in each period. 18 7. Commitments and Contingencies September 2020 Sublease Agreement In September 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 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 by mid-2021 at which time the Company will occupy the space and commence making monthly payments under the Sublease. The Company was provided early access to the Sublease commencing in the fourth quarter of 2020 to conduct certain planning and tenant improvement work, which resulted in the Company recording rent expense of $ 1.1 million in 2020 and $ 1.1 million during the three months ended March 31, 2021, 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 July 1, 2021, the aggregate estimated base rent payments due over the term of the Sublease are approximately $ 45.5 million, excluding the approximately $ 5.2 million in potential financial benefit to the Company of base rent abatement to be provided by Sublessor, 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 of $ 0.9 million, which is reflected as restricted cash in non-current assets on the Company’s balance sheet as of March 31, 2021 and December 31,2020. As of March 31, 2021, the Company’s future minimum payments (excluding potential financial benefit to the Company of base rent abatement, as noted above) under the noncancelable operating leases and sublease are as follows: Year Ending December 31, Amount (in thousands) 2021 $ 4,780 2022 (1) 5,183 2023 6,310 2024 7,476 2025 7,737 Thereafter 16,296 Total future minimum sublease payments $ 47,782 (1) Excludes 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. Indemnification & Other In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, lessors, business partners, board members, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company, negligence or willful misconduct of the Company, violations of law by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees 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, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus, there are no claims that the Company is aware of that could have a material effect on the Company’s balance sheets, statements of operations, or statements of cash flows. The Company currently has directors’ and officers’ liability insurance. 19 In addition, the Company enters into agreements in the normal course of business, including with contract research organizations for clinical trials, contract manufacturing organizations for certain manufacturing services, and vendors for preclinical studies and other services and products for operating purposes, which are generally cancelable upon written notice. 8. Related-Party Transactions Upon the Company’s public offering on May 14, 2020, Merck’s ownership of the Company’s outstanding equity interest decreased to less than 10 %. 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 ended March 31, 2021 and 2020 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 as being with a related party in its financial statements. Transactions with Vaxcyte for the three months ended March 31, 2021 and 2020 are described in Note 5. 9. Stockholders’ Equity Common Stock 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 has reserved common stock, on an if-converted basis, for issuance as follows: March 31, December 31, 2021 2020 Common stock options issued and outstanding 6,118,376 5,439,295 Restricted common stock units issued and outstanding 1,934,501 666,375 Remaining shares reserved for issuance under 2004 and 2018 Equity Incentive Plan 1,787,323 1,710,824 Shares reserved for issuance under 2018 Employee Stock Purchase Plan 725,714 361,539 Warrants to purchase common stock 153,070 153,070 Total 10,718,984 8,331,103 Preferred Stock As of March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020. Warrants 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. In August 2017, the Company issued warrants to Oxford and SVB to purchase an aggregate of 682,230 shares of Series D-2 redeemable convertible preferred stock at an exercise price of $ 0.6596 per share in connection with the issuance of the August 2017 Loan. If there was a subsequent convertible preferred stock or other senior equity securities financing with a per share price less than the Series D-2 redeemable convertible preferred per share price, then the warrant would automatically convert to a warrant to purchase such class of shares, based on the per share price of such equity. Given that the price per share of the Series E redeemable convertible preferred stock was less than the price per share of the Series D-2 redeemable convertible preferred stock, the 2017 Warrant converted into a warrant to purchase a total of 1,682,871 shares of Series E redeemable convertible preferred stock at an exercise price of $ 0.2674 per share. The warrant is exercisable from the original date of issuance and has a 10 -year term. 20 The Company adjusted the warrant liability for changes in fair value until the completion of its IPO on October 1, 2018, at which time certain convertible preferred stock warrants were converted into warrants for the purchase of common stock and the related convertible preferred stock warrant liability was reclassified to additional paid-in capital and others expired. On October 1, 2018, 1,232,220 shares of the Series C redeemable convertible preferred warrants were canceled, and the remaining 687,928 shares were converted on a 1-for-0.0370 basis to warrants to purchase 25,454 shares of common stock. All Series E redeemable convertible preferred warrants were converted on a 1-for-0.0275 basis to warrants to purchase 46,359 shares of common stock. In February 2020, in connection with entering into the Loan and Security Agreement, the Company issued to Oxford and SVB the 2020 Warrants, which are exercisable for 54,171 shares and 27,086 shares, respectively, of the Company’s common stock. The 2020 Warrants are exercisable in whole or in part, immediately, and have a per share exercise price of $ 9.23 , which is the closing price of the Company’s common stock reported on the Nasdaq Global Market on the day prior to the Effective Date. The 2020 Warrants will terminate on the earlier of February 28, 2030 or the closing of certain merger or consolidation transactions. 10. Equity Incentive Plans, Employee Stock Purchase Plan and Stock-Based Compensation 2004 Equity Incentive Plan and 2018 Equity Incentive Plan In September 2018, the Company adopted the 2018 Equity Incentive Plan (“2018 Plan”), which became effective on September 25, 2018. As a result, the Company will not grant any additional awards under the 2004 Equity Incentive Plan (“2004 Plan”). The terms of the 2004 Plan and applicable award agreements will continue to govern any outstanding awards thereunder. In addition to the shares of common stock reserved for future issuance under the 2004 Plan that were added to the 2018 Plan upon its effective date, the Company initially reserved 2,300,000 shares of common stock for issuance under the 2018 Plan. In addition, the number of shares of common stock reserved for issuance under the 2018 Plan will automatically increase on the first day of January for a period of up to ten years , commencing on January 1, 2019, in an amount equal to 5 % of the total number of shares of the Company’s capital stock outstanding on the last day of the preceding year, or a lesser number of shares determined by the Company’s board of directors. As a result, common stock reserved for issuance under the 2018 Plan was increased by 2,287,605 shares on January 1, 2021. As of March 31, 2021, the Company had 1,787,323 shares available for grant under the 2018 Plan. The following table summarizes option activity under the Company’s 2004 Plan and 2018 Plan: Shares Weighted- Average Exercise Price Weighted- Average Remaining Contract Term (Years) Aggregate Intrinsic Value (in thousands) Stock options outstanding at December 31, 2020 5,439,295 $ 11.93 7.75 $ 53,202 Granted 853,950 $ 21.35 Exercised ( 129,161 ) $ 10.53 Canceled and forfeited ( 45,708 ) $ 11.20 Stock options outstanding at March 31, 2021 6,118,376 $ 13.28 7.98 $ 58,149 Stock options exercisable at March 31, 2021 2,779,423 $ 12.53 6.97 $ 28,424 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 months ended March 31, 2021 and 2020, the aggregate intrinsic value of stock options exercised was $ 1.9 million and $ 76,000 , respectively, determined at the date of the option exercise. 21 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: Three Months Ended March 31, 2021 2020 Expected term (in years) 5.8-6.1 5.1-7.0 Expected volatility 84.6-84.9% 73.2%-77.3% Risk-free interest rate 0.6-1.0% 0.8%-1.6% 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 ended March 31, 2021 and 2020 was $ 15.13 and $ 4.94 per share, respectively. Restricted Stock Units During the three months ended March 31, 2021, the Company granted 1,435,750 shares of restricted common stock units (“RSUs”) to certain employees. These RSUs vest annually and will become fully vested over four years . A summary of the status and activity of non-vested RSUs during the three months ended March 31, 2021 is as follows: Number of shares Weighted Average Grant-Date Fair Value Non-vested December 31, 2020 666,375 $ 9.83 Granted 1,435,750 $ 21.11 Vested and released ( 147,349 ) $ 9.02 Canceled and forfeited ( 20,275 ) $ 14.13 Non-vested March 31, 2021 1,934,501 $ 18.22 2018 Employee Stock Purchase Plan In September 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“ESPP”), which became effective on September 26, 2018, in order to enable eligible employees to purchase shares of the Company’s common stock. The Company initially reserved 230,000 shares of common stock for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP will increase automatically on January 1st of each of the first ten calendar years after the effective date by the number of shares equal to the lesser of 1 % of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31 (rounded to the nearest whole share) or a number of shares as may be determined by the Company’s board of directors. As a result, common stock reserved for issuance under the ESPP was increased by 457,521 shares on January 1, 2021. The aggregate number of shares issued over the term of the Company’s ESPP, subject to stock-splits, recapitalizations or similar events, may not exceed 2,300,000 shares of the Company’s common stock. 22 The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model. For the three months ended March 31, 2021 and 2020 , the fair value of ESPP shares was estimated using the following assumptions: Three Months Ended March 31, 2021 2020 Expected term (in years) 0.5 0.5 Expected volatility 72.5-111.4% 63.0 % Risk-free interest rate 0.1 % 1.9 % Expected dividend – – As of March 31, 2021 , 421,277 shares had been purchased and 725,714 shares were available for future issuance under the ESPP. Stock-Based Compensation Expense The Company believes that the fair value of the stock options, RSUs and ESPP shares is more reliably measurable than the fair value of services received. Total stock-based compensation expense recognized was as follows: Three Months Ended March 31, 2021 2020 (in thousands) Research and development expense: $ 1,104 $ 515 General and administrative expense: 2,848 2,192 Total $ 3,952 $ 2,707 As of March 31, 2021 , unrecognized stock-based compensation expense related to the unvested stock options and RSUs granted was $ 28.3 million and $ 33.9 million, respectively. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.9 years and 3.8 years, respectively. As of March 31, 2021 , 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 months ended March 31, 2021 and 2020 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 March 31, 2021, 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 vested 25 % on each of January 1, 2017, 2018, 2019, and 2020, and expire one year from the vesting date. The call options granted in August 2019 vest 25 % on each of January 1, 2019, 2020, 2021, and 2022, and expire one year from the vesting date. 23 A summary of the status of the call options as of March 31, 2021 and December 31, 2020 is as follows: March 31, December 31, 2021 2020 Shares Shares Options vested and exercised 257,834 257,834 Options vested and outstanding 4,445 - Options unvested and outstanding 4,445 8,890 Total options granted 266,724 266,724 The amounts recognized as compensation expense related to the Call Option Plan for the three months ended March 31, 2021 and 2020 were $ 20,000 and $ 138,000 , respectively. The amounts recognized as other expense related to the remeasurement of the vested call options for the three months ended March 31, 2021 and 2020 were $ 30,000 and $ 193,000 , respectively. As of March 31, 2021 and December 31, 2020, the liability attributable to the Call Option Plan was $ 79,000 and $ 109,000 , respectively. 11. Net Loss Per Share The following table sets forth the computation of the Company’s basic and diluted net loss per share. Three Months Ended March 31, 2021 2020 Numerator: Net loss, basic $ ( 30,359 ) $ ( 19,595 ) Denominator: Shares issued in computing net loss per share, basic and diluted 45,907,590 23,197,971 Net loss per share, basic and diluted $ ( 0.66 ) $ ( 0.84 ) The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods ended March 31, 2021 and 2020, because including them would have been antidilutive: As of March 31, 2021 2020 Common stock options issued and outstanding 6,118,376 5,145,635 Restricted stock units issued and outstanding 1,934,501 767,016 Warrants to purchase common stock 153,070 153,070 Total 8,205,947 6,065,721 12. Subsequent Events On April 14, 2021, the Company announced that Merck, known as MSD outside the United States and Canada, will make to the Company a $ 15 million milestone payment for the initiation of an IND enabling toxicology study for the first program in its collaboration to develop novel cytokine derivative therapeutics for cancer and autoimmune disorders. 24