What changed in this filing

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Item 1. Financial Statements

2021-11-10 compared with 2021-08-09 · 239 added, 115 removed, 519 unchanged (41% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

Current assets:

6 unchanged sentences

Property and equipment, net

Operating lease right-of-use assets

Marketable securities, non-current

6 unchanged sentences

Deferred revenue—current

Operating lease liability - current

Other current liabilities

1 unchanged sentence

Deferred revenue, non-current

Operating lease liability - non-current

Deferred rent

4 unchanged sentences

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

as of June 30, 2021 and December 31, 2020;

as of September 30, 2021 and December 31, 2020;

0 shares issued and

outstanding as of June 30, 2021 and December 31, 2020

outstanding as of September 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;

as of September 30, 2021 and December 31, 2020;

46,261,060 and

45,752,116 shares issued and outstanding as of June 30, 2021

45,752,116 shares issued and outstanding as of September 30, 2021

and December 31, 2020, respectively

9 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

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)

of $ 0 during both the three and nine months ended

September 30, 2021, and $ 0 and $ 2,813 during the

three and nine months ended September 30, 2020,

respectively)

Operating expenses

18 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net (loss) income

26 unchanged sentences

Balances at June 30, 2021

Exercise of common stock options

Issuance of common stock under Employee Stock

Purchase Plan

Vesting of restricted stock units

Stock transaction associated with taxes withheld

on restricted stock units

Stock-based compensation expense

Net unrealized gain on available-for- sale

Balances at September 30, 2021

Preferred Stock

19 unchanged sentences

Balances at June 30, 2020

Exercise of common stock options

Issuance of common stock under Employee Stock

Purchase Plan

Vesting of restricted stock units

Stock transaction associated with taxes withheld

on restricted stock units

Stock-based compensation expense

Issuance of common stock in connection with

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

Net unrealized loss on available-for- sale

Balances at September 30, 2020

See accompanying notes to unaudited interim condensed financial statements.

2 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

September 30,

Operating activities

5 unchanged sentences

Stock-based compensation

Noncash lease expenses

Unrealized loss (gain) on equity securities

8 unchanged sentences

Deferred revenue

Change in operating lease liability

Net cash used in operating activities

23 unchanged sentences

Warrants issued to lenders

Remeasurement of operating lease right-of-use assets for lease modification

See accompanying notes to unaudited interim condensed financial statements.

8 unchanged sentences

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.

As of September 30, 2021, the Company had an accumulated deficit of $ 295.3 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.

As of September 30, 2021, the Company had unrestricted cash, cash equivalents and marketable securities of $ 254.2 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.

The Company believes that its unrestricted cash, cash equivalents and marketable securities as of September 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.

Summary of Significant Accounting Policies

16 unchanged sentences

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 interim results for the three and nine months ended September 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”).

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2016-13 (Topic 326), Financial Instruments Credit Losses.

The guidance modifies the measurement and recognition of credit losses for most financial assets and certain other instruments.

The amendment updates the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model.

The Company adopted ASU 2016-13 in the third quarter of 2021 using the modified retrospective adoption approach.

As a result of this adoption, the Company presents these financial assets, which include the accounts receivable and available-for-sale debt securities, at the net amount the Company expects to collect.

The amendment also requires the Company to record credit losses related to available-for-sale debt securities as an allowance through net income rather than reducing the carrying amount under the historical, other-than-temporary-impairment model.

The adoption of ASU 2016-13 did not have a material impact on the Company’s financial statements and related disclosures for the quarter ended September 30, 2021.

In February 2016, the FASB issued ASU 2016-02 (Topic 842), Leases (Accounting Standards Codification, or “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.

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.

The Company adopted ASC 842 on July 1, 2021 , effective as of January 1, 2021.

There was no impact on the Company’s accumulated deficit as of January 1, 2021 as a result of the adoption of this standard.

Results for the three and nine months ended September 30, 2021 are presented under Topic 842.

Other prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under previous lease guidance, ASC Topic 840:

Leases (“Topic 840”).

The Company elected the package of practical expedients permitted under the transition guidance of the new standard, which allowed the Company to carry forward its historical assessment on whether a contract is or contains a lease, lease classification, and initial direct costs.

Upon adoption on January 1, 2021, the Company recognized operating lease right-of-use (“ROU”) assets of $ 29.7 million, and current and non-current operating lease liabilities of $ 2.9 million and $ 27.8 million, respectively.

In connection with the adoption of this standard, deferred rent of $ 1.3 million and prepaid rent of $ 0.3 million, which was previously recorded in prepaid expenses and other current assets on the balance sheet as of December 31, 2020, were derecognized.

Finance lease assets and liabilities were not material.

The adoption of ASC 842 did not have a material impact to the Company’s condensed statements of operations and condensed statements of cash flows.

Please see Note 7 for additional information regarding the Company’s leases.

Accounting policies

The Company determines if an arrangement is or contains a lease at contract inception by assessing whether the arrangement contains an identified asset and whether the lessee has the right to control such asset.

The Company is required to classify leases as either finance or operating leases and to record a ROU asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification.

The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight-line basis over the term of the lease.

The Company determines the initial classification and measurement of its ROU assets and lease liabilities at the lease commencement date and thereafter, if modified.

The Company does not have material finance leases.

For leases with a term greater than 12 months, the Company records the related ROU asset and lease liability at the present value of lease payments over the term of the lease.

The term of the Company’s leases equals the non-cancellable

period of the lease, including any rent-free periods provided by the lessor, and also includes options to extend or terminate the lease that the Company is reasonably certain to exercise.

The ROU asset equals the carrying amount of the related lease liability, adjusted for any lease payments made prior to lease commencement and lease incentives provided by the lessor.

Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable ROU asset or lease liability.

The Company has elected, for all classes of underlying assets, not to recognize ROU assets and lease liabilities for leases with a term of 12 months or less.

Lease cost for short-term leases is recognized on a straight-line basis over the lease term.

The Company has also elected to not separate lease and non-lease components for its leases and, as a result, accounts for lease and non-lease components as one component.

The Company’s leases do not provide a readily determinable implicit rate.

Therefore, the Company estimates its incremental borrowing rate to discount the lease payments based on information available at lease commencement.

The Company determines its incremental borrowing rate based on the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.

Lease payments may be fixed or variable;

however, only fixed payments are included in the Company’s lease liability calculation.

Lease costs for the Company’s operating leases are recognized on a straight-line basis within operating expenses over the lease term.

The Company’s lease agreements may contain variable non-lease components such as common area maintenance, operating expenses or other costs, which are expensed as incurred.

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.

September 30,

(in thousands)

18 unchanged sentences

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.

The total revenue to date has been generated principally from collaboration and license agreements and to a lesser extent, from manufacturing, supply, services and materials the Company provides to its collaboration partners.

Collaboration Revenue

11 unchanged sentences

Upfront Payments :

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.

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.

19 unchanged sentences

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

June 30, 2021

September 30, 2021

(in thousands)

24 unchanged sentences

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.

As of September 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.

Subsequent to the closing of the 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.

As of September 30, 2021, the Company held 1,567,324 shares of Vaxcyte common stock with an estimated fair value of $ 39.8 million.

Related to Vaxcyte common stock, the Company recognized an unrealized gain of $ 4.5 million for the three months ended September 30, 2021 and unrealized loss of $ 1.9 million for the nine months ended September 30, 2021.

Cash Equivalents and Marketable Securities

Cash equivalents and marketable securities consisted of the following:

June 30, 2021

September 30, 2021

(in thousands)

16 unchanged sentences

Total marketable securities

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.

As of September 30, 2021 and December 31, 2020, $ 64.3 million and zero , respectively, of marketable securities had maturities of more than one year and are classified as long-term assets.

There were $ 85.7 million and $ 14.7 million of investments in an unrealized loss position of $ 46,000 and $ 3,000 as of September 30, 2021 and December 31, 2020, respectively.

During the three and nine months ended September 30, 2021 and 2020, the Company did no t record any other-than-temporary impairment charges on its available-for-sale securities.

Based on the Company’s procedures under the expected credit loss model, including an assessment of unrealized gains on the portfolio after September 30, 2021, the Company concluded that the unrealized losses for its marketable securities were not attributable to credit and therefore an allowance for credit losses for these securities has not been recorded as of September 30, 2021.

Also, 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.

The Company recognized no material gains or losses on its cash equivalents and current and non-current marketable securities as of September 30, 2021 and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive income for the period then ended.

Collaboration and License Agreements and Supply Agreements

1 unchanged sentence

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.

The Company’s accounts receivable balances may contain billed and unbilled amounts from milestones and other contingent payments, as well as reimbursable costs from collaboration and license agreements and supply agreements.

The Company performs a regular review of its customers’ credit risk and payment histories, including payments made after period end.

Historically, the Company has not experienced credit loss from its accounts receivable and, therefore, has no t recorded a reserve for estimated credit losses as of September 30, 2021.

In accordance with the collaboration agreements, the Company recognized revenue as follows:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

9 unchanged sentences

The Company expects to recognize approximately $ 7.8 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

The following table presents the changes in the Company’s deferred revenue balance from collaboration agreements during the nine months ended September 30, 2021:

Nine Months Ended

September 30, 2021

(in thousands)

2 unchanged sentences

Recognition of revenue in current period

Deferred revenue—June 30, 2021

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.

Deferred revenue—September 30, 2021

There have been no material changes to the Company’s collaboration agreements in the three and nine months ended September 30, 2021, except as described below.

Collaboration with BMS

6 unchanged sentences

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.

As of both September 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.

As of September 30, 2021, and December 31, 2020, there was $ 1.8 million and $ 1.2 million, respectively, 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

Nine Months Ended

September 30,

(in thousands)

8 unchanged sentences

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.

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 September 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.

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.

4 unchanged sentences

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 .

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 nine-month period ended September 30, 2021 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.

Incremental revenue of $ 9.1 million was recognized in the nine-month period ended September 30, 2021.

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 nine-month period ended September 30, 2021 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 nine-month period ended September 30, 2021.

In September 2021, the Company entered into an amendment to the 2018 Merck Agreement (the “2021 Amendment”) to extend the research term for the first program in the 2018 Merck Agreement to discover and develop novel cytokine derivative therapeutics for cancer and autoimmune disorders.

Under the terms of the 2021 Amendment, the Company will receive a payment of $ 2.5 million and may receive up to an additional $ 7.5 million upon the achievement of certain developmental milestones.

Pursuant to ASC 606, the Company concluded that the 2021 Amendment constitutes a contract modification which is to be accounted for as a separate contract from the 2018 Merck Agreement.

The $ 7.5 million is considered to be a fully constrained variable consideration.

The amount of $ 2.5 million was recorded within the Company’s accounts receivable and current deferred revenue as of September 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.

1 unchanged sentence

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.

As of September 30, 2021 and December 31, 2020, there was a total of $ 5.1 million and $ 18.5 million, respectively, of deferred revenue related to the 2018 Merck Agreement and 2021 Amendment.

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.

As of both September 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

Nine Months Ended

September 30,

(in thousands)

6 unchanged sentences

Total revenue

There was no revenue recognized under the 2021 Amendment in the three-month and nine-month periods ended September 30, 2021.

Collaboration with EMD Serono

6 unchanged sentences

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.

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.

As of both September 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.

As of both September 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

Nine Months Ended

September 30,

(in thousands)

11 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

11 unchanged sentences

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.

As of September 30, 2021, the Company has classified $ 6.3 million of the outstanding debt balance as current and $ 18.7 million as non-current, which reflects the scheduled repayment terms under the February 2020 loan and security agreement.

As of both September 30, 2021 and December 31, 2020, accrued interest expense was $ 0.2 million.

During the three and nine months ended September 30, 2021, the Company recorded interest expense related to loans outstanding of $ 0.7 million and $ 1.9 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 $ 0.4 million, respectively.

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

Commitments and Contingencies

8 unchanged sentences

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 commencement date for the first 85,755 square feet of the Premises (“Initial Premises”) per sublease was in July 2021, at which time the Company commenced making monthly payments under the Sublease, with occupancy of such space commencing in August 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.

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

1 unchanged sentence

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.

With 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 $ 39.1 million, including 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:

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 September 3 0 , 202 1 and December 31, 2020 .

The Company recognizes rent expense for these operating leases on a straight-line basis over the lease period.

The components of lease costs, which the Company includes in operating expenses in the condensed statements of operations, were as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Operating lease cost

Short-term lease cost

Variable lease cost

Total lease costs

During the nine months ended September 30, 2021, the Company recorded operating lease expense of $ 6.4 million and paid $ 4.0 million of operating lease payments related to the lease liabilities, which the Company includes in net cash used in operating activities in the condensed statements of cash flows.

As of September 30, 2021, the weighted-average remaining lease term was 5.9 years and the weighted-average discount rate used to determine the operating lease liability was 10.8 %.

As of September 30, 2021, the maturities of the Company’s operating lease liabilities were as follows (in thousands):

Year Ending December 31,

(in thousands)

Total future minimum sublease payments

Remaining in 2021

Total lease payments

imputed interest

Operating lease liabilities

current portion

Total lease liabilities, non-current

Includes 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.

Under the historical guidance of ASC 840, the deferred rent balance on December 31, 2020 totaled $ 1.3 million and our future minimum lease payments for our operating leases on December 31, 2020 were as follows (in thousands):

Year Ending December 31,

(in thousands)

2025 and thereafter

Total future minimum lease payments

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 .

Rent expense was $ 0.9 million and $ 2.7 million for the three and nine months ended September 30, 2020, respectively.

Indemnification & Other

7 unchanged sentences

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.

Transactions with Merck for the three and nine months ended September 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.

Transactions with Vaxcyte for the three and nine months ended September 30, 2021 and 2020 are described in Note 5.

Stockholders’ Equity

1 unchanged sentence

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

September 30,

Common stock options issued and outstanding

6 unchanged sentences

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.

As of September 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 September 30, 2021 and December 31, 2020.

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.

9 unchanged sentences

Equity Incentive Plans, Employee Stock Purchase Plan and Stock-Based Compensation

2004 Equity Incentive Plan and 2018 Equity Incentive Plan

2004 Equity Incentive Plan, 2018 Equity Incentive Plan and 2021 Equity Inducement Plan

In September 2018, the Company adopted the 2018 Equity Incentive Plan (“2018 Plan”), which became effective on September 25, 2018.

4 unchanged sentences

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:

In August 2021, the Company adopted the 2021 Equity Inducement Plan (“2021 Plan”), which became effective on August 4, 2021.

Upon its effective date, the Company initially reserved 750,000 shares of common stock for issuance pursuant to non-qualified stock options and restricted stock units (“RSUs”) under the 2021 Plan.

In accordance with Rule 5635(c)(4) of the Nasdaq listing rules, equity awards under the 2021 Plan may only be made to an employee if he or she is granted such equity awards in connection with his or her commencement of employment with the Company and such grant is an inducement material to his or her entering into employment with the Company or such subsidiary.

In addition, awards under the 2021 Plan may only be made to employees who have not previously been an employee or member of the Board (or any parent or subsidiary of the Company) or following a bona fide period of non-employment of the employee by the Company (or a parent or subsidiary of the Company).

At all times the Company will reserve and keep available a sufficient number of shares as will be required to satisfy the requirements of all outstanding awards granted under the 2021 Plan.

As of September 30, 2021, the Company had a total of 1,681,651 shares available for grant under the 2018 Plan and the 2021 Plan.

The following table summarizes option activity under the Company’s 2004 Plan, 2018 Plan and 2021 Plan:

Exercise Price

4 unchanged sentences

Canceled and forfeited

Stock options outstanding at June 30, 2021

Stock options exercisable at June 30, 2021

Stock options outstanding at September 30, 2021

Stock options exercisable at September 30, 2021

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.

For the three and nine months ended September 30, 2021, the aggregate intrinsic value of stock options exercised was $ 0.1 million and $ 2.3 million, respectively, determined at the date of the option exercise.

For the three and nine months ended September 30, 2020, the aggregate intrinsic value of stock options exercised was $ 48,000 and $ 0.1 million, respectively, determined at the date of the option exercise.

Employee Stock Options Valuation

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

Six Months Ended

Nine Months Ended

September 30,

Expected term (in years)

2 unchanged sentences

Expected dividend

Using the Black-Scholes option-valuation model, the weighted-average estimated grant-date fair value of employee stock options granted during the three and six months ended June 30, 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.

Using the Black-Scholes option-valuation model, the weighted-average estimated grant-date fair value of employee stock options granted during the three and nine months ended September 30, 2021 was $ 13.21 and $ 14.35 per share, respectively, and during the three and nine months ended September 30, 2020 was $ 5.69 and $ 5.09 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.

During the nine months ended September 30, 2021, the Company granted 1,913,750 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:

A summary of the status and activity of non-vested RSUs during the nine months ended September 30, 2021 is as follows:

Non-vested December 31, 2020

1 unchanged sentence

Canceled and forfeited

Non-vested June 30, 2021

Non-vested September 30, 2021

2018 Employee Stock Purchase Plan

5 unchanged sentences

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

For the nine months ended September 30, 2021 and 2020 , the fair value of ESPP shares was estimated using the following assumptions:

Nine Months Ended

September 30,

Expected term (in years)

2 unchanged sentences

Expected dividend

As of June 30, 2021 , 421,277 shares had been purchased and 725,714 shares were available for future issuance under the ESPP.

As of September 30, 2021 , 473,740 shares had been purchased and 673,251 shares were available for future issuance under the ESPP.

Stock-Based Compensation Expense

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands)

2 unchanged sentences

General and administrative expense:

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.

As of September 30, 2021 , unrecognized stock-based compensation expense related to the unvested stock options and RSUs granted was $ 28.1 million and $ 36.6 million, respectively.

The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.6 years and 3.4 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.

As of September 30, 2021 , there was $ 0.3 million of unrecognized stock-based compensation expense related to the ESPP.

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

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

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

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

Non-Employee Stock-Based Compensation Expense

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

The stock-based compensation expense related to non-employees for the three and six months ended June 30, 2021 and 2020 was immaterial.

The stock-based compensation expense related to non-employees for the three and nine months ended September 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.

As of September 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:

A summary of the status of the call options as of September 30, 2021 and December 31, 2020 is as follows:

September 30,

Options vested and exercised

2 unchanged sentences

Total options granted

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.

The amounts recognized as compensation expense related to the Call Option Plan for the three and nine months ended September 30, 2021 were $ 32,000 and $ 78,000 , respectively.

The amounts recognized as compensation expense related to the Call Option Plan for the three and nine months ended September 30, 2020 were $ 90,000 and $ 0.2 million, respectively.

The amounts recognized as other expense or income related to the remeasurement of the vested call options for the three and nine months ended September 30, 2021 were $ 13,000 of other expense and $ 5,000 of other income, respectively.

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

As of September 30, 2021 and December 31, 2020, the liability attributable to the Call Option Plan was $ 182,000 and $ 109,000 , respectively.

Net (Loss) Income Per Share

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands, except share and per share amounts)

6 unchanged sentences

Net (loss) income per share:

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,

The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods ended September 30, 2021, because including them would have been antidilutive:

As of September 30,

Common stock options issued and outstanding

2 unchanged sentences

Employee stock purchase plan

Subsequent Event

On October 9, 2021, the Company entered into an option agreement with BioNova Pharmaceuticals Limited (“BioNova”) (the “BioNova Option Agreement”), to confer BioNova the option to obtain exclusive rights to develop and commercialize STRO-001 in the People’s Republic of China, Taiwan, Hong Kong, and Macau (“Greater China”).

BioNova will pursue the clinical development, regulatory approval, and commercialization of STRO-001 in multiple indications, including non-Hodgkin's lymphoma, multiple myeloma, and leukemia in the licensed territory.

The Company will retain development and commercial rights of STRO-001 globally outside of Greater China, including the United States.

Under the BioNova Option Agreement, BioNova will pay to the Company an initial licensing option payment of $ 4 million, with potential payments totaling up to $ 200 million related to option exercise, development, regulatory, and commercial milestones.

The Company will provide STRO-001 to BioNova under appropriate clinical and commercial supply service agreements.

Upon commercialization, the Company is eligible to receive tiered royalties ranging from low- to mid-teen percentages based on annual net sales of STRO-001 in Greater China for at least ten years following the first commercial sale of STRO-001 in Greater China.

BioNova has the right to terminate the BioNova Option Agreement for convenience or other reasons specified in the BioNova Option Agreement, upon prior written notice.

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

What changed 10-Q

Item 1. Financial Statements