SUTRO BIOPHARMA, INC. 10-Q

Item 1. Financial Statements. Sutro Biopharma, Inc. Condensed Balance Sheets (In thousands, except share and per share amounts) June 30, December 31, 2021 2020 (Unaudited) Assets Current assets: Cash and cash equivalents $ 56,392 $ 206,152 Marketable securities 167,032 120,341 Investment in equity securities 35,280 41,644 Accounts receivable 9,160 5,559 Prepaid expenses and other current assets 9,751 4,486 Total current assets 277,615 378,182 Property and equipment, net 18,669 12,935 Marketable securities, non-current 60,006 — Other non-current assets 2,626 2,122 Restricted cash 872 872 Total assets $ 359,788 $ 394,111 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 7,642 $ 5,544 Accrued compensation 6,510 8,823 Deferred revenue—current 8,128 14,603 Debt—current 3,125 — Other current liabilities 720 627 Total current liabilities 26,125 29,597 Deferred revenue, non-current 193 6,100 Deferred rent 3,432 1,340 Debt—non-current 21,694 24,545 Other noncurrent liabilities 844 481 Total liabilities 52,288 62,063 Stockholders’ equity: Preferred stock, $ 0.001 par value — 10,000,000 shares authorized as of June 30, 2021 and December 31, 2020; 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020 — — Common stock, $ 0.001 par value — 300,000,000 shares authorized as of June 30, 2021 and December 31, 2020; 46,141,454 and 45,752,116 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively 46 46 Additional paid-in-capital 571,883 559,746 Accumulated other comprehensive (loss) income ( 45 ) 129 Accumulated deficit ( 264,384 ) ( 227,873 ) Total stockholders’ equity 307,500 332,048 Total Liabilities and Stockholders’ Equity $ 359,788 $ 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 Six Months Ended June 30, June 30, 2021 2020 2021 2020 Revenues (including amounts from related parties of $ 0 during both the three and six months ended June 30, 2021, and $ 0 and $ 2,813 during the three and six months ended June 30, 2020, respectively) $ 28,049 $ 9,469 $ 42,709 $ 16,621 Operating expenses Research and development 25,309 17,243 47,871 34,862 General and administrative 12,545 8,643 23,652 17,356 Total operating expenses 37,854 25,886 71,523 52,218 Loss from operations ( 9,805 ) ( 16,417 ) ( 28,814 ) ( 35,597 ) Interest income 175 384 372 1,025 Unrealized gain (loss) on equity securities 4,325 48,860 ( 6,364 ) 48,860 Interest and other expense, net ( 847 ) ( 2,955 ) ( 1,705 ) ( 4,011 ) Net (loss) income $ ( 6,152 ) $ 29,872 $ ( 36,511 ) $ 10,277 Net (loss) income per share, basic $ ( 0.13 ) $ 1.00 $ ( 0.79 ) $ 0.39 Net (loss) income per share, diluted $ ( 0.13 ) $ 0.94 $ ( 0.79 ) $ 0.36 Weighted-average shares used in computing basic net (loss) income per share 46,116,175 29,900,913 46,007,892 26,510,873 Weighted-average shares used in computing diluted net (loss) income per share 46,116,175 31,777,960 46,007,892 28,538,279 See accompanying notes to unaudited interim condensed financial statements. 2 Sutro Biopharma, Inc. Condensed Statements of Comprehensive (Loss) Income (Unaudited) (In thousands) Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Net (loss) income $ ( 6,152 ) $ 29,872 $ ( 36,511 ) $ 10,277 Other comprehensive (loss) income: Unrealized (loss) gain on available-for-sale securities ( 45 ) 370 ( 174 ) 233 Comprehensive (loss) income $ ( 6,197 ) $ 30,242 $ ( 36,685 ) $ 10,510 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 Exercise of common stock options — — 40,902 — 452 — — 452 Return and retirement of common stocks — — ( 6,804 ) — — — — — Vesting of restricted stock units — — 3,750 — — — — — Stock-based compensation expense — — — — 5,907 — — 5,907 Net unrealized loss on available-for- sale securities — — — — — ( 45 ) — ( 45 ) Net loss — — — — — — ( 6,152 ) ( 6,152 ) Balances at June 30, 2021 — $ — 46,141,454 $ 46 $ 571,883 $ ( 45 ) $ ( 264,384 ) $ 307,500 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, 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 Exercise of common stock options — — 1,257 — 8 — — 8 Vesting of restricted stock units — — 250 — — — — — Stock-based compensation expense — — — — 3,011 — — 3,011 Issuance of common stock in connection with public offering, net of issuance costs of $ 6,626 — — 12,650,000 13 91,398 — — 91,411 Net unrealized gain on available-for- sale securities — — — — — 370 — 370 Net income — — — — — — 29,872 29,872 Balances at June 30, 2020 — $ — 35,878,928 $ 36 $ 391,791 $ 398 $ ( 185,468 ) $ 206,757 See accompanying notes to unaudited interim condensed financial statements. 4 Sutro Biopharma, Inc. Condensed Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended June 30, 2021 2020 Operating activities Net (loss) income $ ( 36,511 ) $ 10,277 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 2,411 2,158 Amortization of premium on marketable securities 1,194 54 Stock-based compensation 9,859 5,718 Unrealized loss (gain) on equity securities 6,364 ( 48,860 ) Remeasurement of liability awards 25 1,979 Other 258 322 Changes in operating assets and liabilities: Accounts receivable ( 3,601 ) 1,196 Prepaid expenses and other assets ( 5,265 ) 1,475 Accounts payable 1,742 ( 1,969 ) Accrued compensation ( 2,313 ) ( 1,497 ) Other liabilities 434 ( 413 ) Deferred rent 2,092 ( 79 ) Deferred revenue ( 12,382 ) ( 1,595 ) Net cash used in operating activities ( 35,693 ) ( 31,234 ) Investing activities Purchases of marketable securities ( 202,315 ) ( 91,270 ) Maturities of marketable securities 85,250 63,800 Sales of marketable securities 9,000 14,500 Purchases of equipment and leasehold improvements ( 7,789 ) ( 2,529 ) Net cash used in investing activities ( 115,854 ) ( 15,499 ) Financing activities Proceeds from public offering — 98,038 Payment of issuance costs ( 491 ) ( 6,627 ) Proceeds from debt refinancing — 25,000 Payment of debt — ( 10,000 ) Proceeds from exercise of common stock options 1,812 64 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 1,787 107,121 Net (decrease) increase in cash, cash equivalents and restricted cash ( 149,760 ) 60,388 Cash, cash equivalents and restricted cash at beginning of period 207,024 4,975 Cash, cash equivalents and restricted cash at end of period $ 57,264 $ 65,363 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,020 $ 649 Supplemental disclosure of non-cash investing and financing information: Purchases of equipment included in accounts payable $ 1,376 $ 1,286 Embedded interest associated with program fees $ 412 $ 1,128 Warrants issued to lenders $ — $ 619 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 June 30, 2021, the Company had an accumulated deficit of $ 264.4 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 June 30, 2021, the Company had unrestricted cash, cash equivalents and marketable securities of $ 283.4 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 June 30, 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. The Company has made estimates of the impact of COVID-19 within its financial statements and there may be changes to those estimates in future periods. Actual results could differ from 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 and six months ended June 30 , 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 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 has not yet been adopted. However, on June 30, 2021, the Company’s public float exceeded $700 million, and therefore the Company will lose its “smaller reporting company” and “emerging growth company” status on December 31, 2021, and will instead be considered a large accelerated filer. The Company expects to adopt ASC 842 in the third quarter of 2021, with an effective date of January 1, 2021. 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. 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 was 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 has not yet been adopted. However, on June 30, 2021, the Company’s public float exceeded $700 million, and therefore the Company will lose its “smaller reporting company” and “emerging growth company” status on December 31, 2021, and will instead be considered a large accelerated filer. The Company expects to adopt ASU 2016-13 in the third quarter of 2021. The Company does not expect the adoption of ASU 2016-13 will have a material impact on its financial statements and related disclosures. 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. June 30, 2021 2020 (in thousands) Cash and cash equivalents $ 56,392 $ 65,348 Restricted cash 872 15 Total cash, cash equivalents, and restricted cash shown in the statements of cash flows $ 57,264 $ 65,363 Investments in Equity Securities 7 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. For arrangements that include multiple performance obligations, the Company allocates 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 develops 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 8 price is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology. The Company use s 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. 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: June 30, 2021 Total Level 1 Level 2 Level 3 (in thousands) Assets: Money market funds $ 57,964 $ 57,964 $ – $ – Commercial paper 59,361 – 59,361 – Corporate debt securities 71,419 – 71,419 – Equity securities 35,280 35,280 – – Asset-backed securities 37,792 – 37,792 – U.S. government securities 45,214 45,214 – – Supranational debt securities 13,252 – 13,252 – Total $ 320,282 $ 138,458 $ 181,824 $ - 9 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. As of June 30, 2021 and December 31, 2020, the Company did no t hold any securities that were 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. As of June 30, 2021, the Company held 1,567,324 shares of Vaxcyte common stock with an estimated fair value of $ 35.3 million. Related to Vaxcyte common stock, the Company recognized an unrealized gain of $ 4.3 million for the three months ended June 30, 2021 and unrealized loss of $ 6.4 million for the six months ended June 30, 2021. 10 4. Cash Equivalents and Marketable Securities Cash equivalents and marketable securities consisted of the following: June 30, 2021 Amortized Cost Basis Unrealized Gains Unrealized (Losses) Fair Value (in thousands) Money market funds $ 57,964 $ – $ – $ 57,964 Commercial paper 59,361 – – 59,361 Corporate debt securities 71,451 13 ( 45 ) 71,419 Asset-based securities 37,797 10 ( 15 ) 37,792 U.S. government securities 45,215 4 ( 5 ) 45,214 Supranational debt securities 13,259 – ( 7 ) 13,252 Total 285,047 27 ( 72 ) 285,002 Less amounts classified as cash equivalents ( 57,964 ) – – ( 57,964 ) Total marketable securities $ 227,083 $ 27 $ ( 72 ) $ 227,038 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 ) 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 June 30, 2021 and December 31, 2020, $ 60.0 million and zero , respectively, of marketable securities had maturities of more than one year and are classified as long-term assets. There were $ 93.8 million and $ 14.7 million of investments in an unrealized loss position of $ 72,000 and $ 3,000 as of June 30, 2021 and December 31, 2020, respectively. During the three and six months ended June 30, 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 and supply agreements with various pharmaceutical and biotechnology companies. See “Note 5. Collaboration and License Agreements and Supply Agreements” to the Company’s Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2020, or as further described below, for additional information on each of our collaboration agreements. In accordance with the collaboration agreements, the Company recognized revenue as follows: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) (in thousands) Bristol Myers Squibb Company (“BMS”) $ 5,427 $ 1,509 $ 6,666 $ 3,554 Merck Sharp & Dohme Corporation (“Merck”) (1) 19,878 7,005 31,761 9,782 Merck KGaA, Darmstadt, Germany (operating in the United States and Canada under the name “EMD Serono”) 2,375 855 2,595 3,149 Vaxcyte (2) 369 100 1,687 136 Total revenue $ 28,049 $ 9,469 $ 42,709 $ 16,621 (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 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 $ 8.1 million of the deferred revenue over the next twelve months . The following table presents the changes in the Company’s deferred revenue balance from collaboration agreements during the six months ended June 30, 2021: Six Months Ended June 30, 2021 (in thousands) Deferred revenue—December 31, 2020 $ 20,703 Additions to deferred revenue 16,268 Recognition of revenue in current period ( 28,650 ) Deferred revenue—June 30, 2021 $ 8,321 There have been no material changes to the Company’s collaboration agreements in the three and six months ended June 30, 2021, except as described below. Collaboration with BMS BMS Agreement In September 2014, the Company signed a Collaboration and License Agreement (the “BMS 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”). 12 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. As of both June 30, 2021 and December 31, 2020, there was 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. As of both June 30, 2021 and December 31, 2020, there was $ 1.2 million of deferred revenue under the 2018 BMS Master Services Agreement. Revenues under the BMS Agreement and the 2018 BMS Master Services Agreement were as follows: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) (in thousands) Ongoing performance related to unsatisfied performance obligations $ – $ 990 $ – $ 1,974 Research and development services 211 253 513 400 Materials supply 5,216 266 6,153 1,180 Total revenue $ 5,427 $ 1,509 $ 6,666 $ 3,554 Collaboration with Merck 2018 Merck Agreement In July 2018, the Company entered into an agreement (the “2018 Merck Agreement”) with Merck to jointly develop up to three research programs focusing on cytokine derivatives for cancer and autoimmune disorders with an initial transaction price of $ 60.0 million. 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, 2021 on the unearned revenue portion beyond one year from the effective date of the agreement, which amount is expected to be recognized as interest expense and revenue over the estimated service period for the first and second target programs. I n 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. 13 In the second quarter of 2021, the Company earned a $ 15.0 million contingent payment for the initiation by Merck of the first IND-enabling toxicology study under the first cytokine-derivative program in the collaboration. The $ 15.0 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 $ 65.0 million to $ 80.0 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 $ 9.4 million and incremental revenue of $ 1.6 million was recognized in the current period as this performance obligation was previously completed . Revenue allocated to the first and second target programs totaled $ 60.6 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 $ 9.1 million was recognized in the current period. The Company allocated $ 9.1 million of the adjusted transaction price to the material right associated with the contingent third program and incremental revenue of $ 3.2 million was recognized in the current period as this performance obligation was previously completed. As it pertains to the JSC performance obligation, the incremental transaction price allocation resulted in additional revenue of $ 0.1 million recognized in the current period. As a result of the change in transaction price, due to the $ 15.0 million contingent payment earned in the second quarter of 2021, the Company recorded a $ 14.0 million cumulative catch-up in revenue in the three months ended June 30, 2021. The Company is 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. As of June 30, 2021 and December 31, 2020, there was $ 6.1 million and $ 18.5 million, respectively, of deferred revenue related to the transaction price under the 2018 Merck Agreement. 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. As of both June 30, 2021 and December 31, 2020, there was no deferred revenue under the 2020 Merck Master Services Agreement. Revenues under the 2018 Merck Agreement and the 2020 Merck Master Services Agreement were as follows: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) (in thousands) Ongoing performance related to unsatisfied performance obligations $ 18,322 $ 5,202 $ 27,383 $ 6,141 Research and development services 705 1,275 1,909 2,513 Financing component on unearned revenue 181 528 412 1,128 Materials supply 670 – 2,057 – Total revenue $ 19,878 $ 7,005 $ 31,761 $ 9,782 Collaboration with EMD Serono 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. 14 The Company is eligible to receive up to $ 52.5 million for M1231 under the MDA Agreement, primarily from pre-commercial contingent payments. Relatedly, the Company earned a $ 2.0 million contingent payment in the second quarter of 2021 related to a patient enrollment achievement in the Phase 1 dose escalation portion of a study of M1231. In August 2020, the Company earned a $ 1.0 million clinical supply milestone payment under the MDA Agreement. 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. 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. As of both June 30, 2021 and December 31, 2020, there was no 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. As of both June 30, 2021 and December 31, 2020, there was $ 1.0 million of deferred revenue related to payments received by the Company under the 2019 EMD Serono Supply Agreement. Revenues under the EMD Serono agreements were as follows: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) (in thousands) Contingent payment earned $ 2,000 $ – $ 2,000 $ – Research and development services 126 492 289 823 Materials supply 249 363 306 2,326 Total revenue $ 2,375 $ 855 $ 2,595 $ 3,149 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 margin arrangement. 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, were accounted for by the Company as a reduction to research and development expense. Revenues under the Vaxcyte Supply Agreement were as follows: Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) (in thousands) Research and development services $ 264 $ – $ 469 $ – Materials supply 105 100 1,218 136 Total revenue $ 369 $ 100 $ 1,687 $ 136 15 6. Loan and Security Agreement The Company entered into loan and security agreements with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) in both August 2017 and February 2020. See “Note 7. Loan and Security Agreement” to the Company’s Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2020, or as further described below, for additional information. In connection with entering into the loan and security agreement in February 2020, 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 of the February 2020 loan and security agreement. 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 was 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 June 30, 2021, the Company has classified $ 3.1 million of the outstanding debt balance as current and $ 21.7 million as non-current, which reflects the scheduled repayment terms under the February 2020 loan and security agreement. As of both June 30, 2021 and December 31, 2020, accrued interest expense was $ 0.2 million. During the three and six months ended June 30, 2021, the Company recorded interest expense related to loans outstanding of $ 0.6 million and $ 1.3 million, respectively, with average interest rates of 8.07 % in both periods, and interest related to the accretion of debt discount of $ 0.1 million and $ 0.3 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. 7. Commitments and Contingencies In June 2021, the Company entered into a third amendment (the “Third Amendment”) to its manufacturing facility lease, dated May 18, 2011, as amended, by and between Alemany Plaza LLC, located in San Carlos, California (the “San Carlos Lease”), as an extension to the term of the San Carlos Lease for a period of five years (the “Lease Extension Period”). Pursuant to the Third Amendment, the San Carlos Lease will expire on July 31, 2026 , and it includes an option to renew the San Carlos Lease for an additional five years . The aggregate estimated base rent payments due over the Lease Extension Period is approximately $ 4.2 million, subject to certain terms contained in the San Carlos Lease. In June 2021, the Company entered into a first amendment (the “First Amendment”) to its manufacturing support facility lease, dated May 4, 2015, as amended, by and between 870 Industrial Road LLC, located in San Carlos, California (the “Industrial Lease”), as an extension to the term of the Industrial Lease for a period of five years (the “Industrial Lease Extension Period”). Pursuant to the first Amendment, the Industrial Lease will expire on June 30, 2026 , and it includes an option to renew the Industrial Lease for an additional five years . The aggregate estimated base rent payments due over the Industrial Lease Extension Period is approximately $ 4.3 million, subject to certain terms contained in the Industrial Lease. 16 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”) was in July 2021 at which time the Company commenced making monthly payments under the Sublease, with occupancy of such space expected later in the third quarter of 2021. 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 and $ 2.2 million during the three and six months ended June 30, 2021, prior to making actual lease payments and space occupancy. 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 June 30, 2021 and December 31, 2020. As of June 30, 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 $ 4,538 2022 (1) 6,793 2023 7,969 2024 9,184 2025 9,497 Thereafter 17,265 Total future minimum sublease payments $ 55,246 (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. 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. 17 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 and six months ended June 30, 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 and six months ended June 30, 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: June 30, December 31, 2021 2020 Common stock options issued and outstanding 6,250,931 5,439,295 Restricted common stock units issued and outstanding 1,988,426 666,375 Remaining shares reserved for issuance under 2004 and 2018 Equity Incentive Plan 1,555,985 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 10,674,126 8,331,103 Preferred Stock As of June 30, 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 June 30, 2021 and December 31, 2020. Warrants 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. 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. 18 In February 2020, in connection with entering into a 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 of the February 2020 loan and security agreement. 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 (rounded to the nearest whole share), 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 June 30, 2021, the Company had 1,555,985 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 1,046,950 $ 20.85 Exercised ( 170,063 ) $ 10.65 Canceled and forfeited ( 65,251 ) $ 10.77 Stock options outstanding at June 30, 2021 6,250,931 $ 13.47 7.80 $ 34,469 Stock options exercisable at June 30, 2021 3,166,329 $ 12.57 6.94 $ 19,218 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, 2021, the aggregate intrinsic value of stock options exercised was $ 0.3 million and $ 2.2 million, respectively, determined at the date of the option 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. 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 June 30, 2021 2020 Expected term (in years) 5.3-6.1 2.8-7.0 Expected volatility 84.6%-84.9% 73.2%-84.0% Risk-free interest rate 0.6%-1.1% 0.2%-1.6% Expected dividend – – 19 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, 2021 was $ 12.84 and $ 14.71 per share, respectively, and during the three and six months ended June 30, 2020 was $ 5.60 and $ 5.03 per share, respectively. Restricted Stock Units During the six months ended June 30, 2021, the Company granted 1,511,750 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 six months ended June 30, 2021 is as follows: Number of shares Weighted Average Grant-Date Fair Value Non-vested December 31, 2020 666,375 $ 9.83 Granted 1,511,750 $ 21.02 Vested and released ( 151,099 ) $ 9.03 Canceled and forfeited ( 38,600 ) $ 16.46 Non-vested June 30, 2021 1,988,426 $ 18.27 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 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 1 % of the total number of shares of the Company’s capital stock outstanding on the last day of the preceding year (rounded to the nearest whole share), or a lesser number of shares 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. The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model. For the six months ended June 30, 2021 and 2020 , the fair value of ESPP shares was estimated using the following assumptions: Six Months Ended June 30, 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 June 30, 2021 , 421,277 shares had been purchased and 725,714 shares were available for future issuance under the ESPP. 20 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 Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands) (in thousands) Research and development expense: $ 1,845 $ 696 $ 2,949 $ 1,211 General and administrative expense: $ 4,062 2,315 6,910 4,507 Total $ 5,907 $ 3,011 $ 9,859 $ 5,718 As of June 30, 2021 , unrecognized stock-based compensation expense related to the unvested stock options and RSUs granted was $ 27.5 million and $ 32.5 million, respectively. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.6 years and 3.5 years, respectively. As of June 30, 2021 , there is $ 0.1 million of unrecognized stock-based compensation expense related to the ESPP. 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. 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, 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 June 30, 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. A summary of the status of the call options as of June 30, 2021 and December 31, 2020 is as follows: June 30, 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 21 The amounts recognized as compensation expense related to the Call Option Plan for the three and six months ended June 30, 2021 were $ 26,000 and $ 46,000 , respectively. 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 other expense or income related to the remeasurement of the vested call options for the three and six months ended June 30, 2021 were $ 12,000 of other expense and $ 18,000 of other income, 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. As of June 30, 2021 and December 31, 2020, the liability attributable to the Call Option Plan was $ 137,000 and $ 109,000 , respectively. 11. Net (Loss) Income Per Share The following table sets forth the computation of the Company’s basic and diluted net (loss) income per share. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 (in thousands, except share and per share amounts) Numerator: Net (loss) income, basic and diluted $ ( 6,152 ) $ 29,872 $ ( 36,511 ) $ 10,277 Denominator: Weighted-average shares used to compute basic EPS 46,116,175 29,900,913 46,007,892 26,510,873 Dilutive effect of common stock options – 1,020,799 – 1,124,799 Dilutive effect of restricted stock units – 774,991 – 774,991 Dilutive effect of warrants to purchase common stock – 81,257 – 127,616 Weighted-average shares used to compute diluted EPS 46,116,175 31,777,960 46,007,892 28,538,279 Net (loss) income per share: Basic $ ( 0.13 ) $ 1.00 $ ( 0.79 ) $ 0.39 Diluted $ ( 0.13 ) $ 0.94 $ ( 0.79 ) $ 0.36 The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods ended June 30, 2021, because including them would have been antidilutive: As of June 30, 2021 Common stock options issued and outstanding 6,250,931 Restricted stock units issued and outstanding 1,988,426 Warrants to purchase common stock 153,070 Employee stock purchase plan 36,902 Total 8,429,329 22