SUTRO BIOPHARMA, INC. 10-Q

Item 1. Financial Statements. Sutro Biopharma, Inc. Condensed Balance Sheets (In thousands, except share and per share amounts) September 30, December 31, 2021 2020 (Unaudited) Assets Current assets: Cash and cash equivalents $ 30,707 $ 206,152 Marketable securities 159,231 120,341 Investment in equity securities 39,763 41,644 Accounts receivable 12,330 5,559 Prepaid expenses and other current assets 8,698 4,486 Total current assets 250,729 378,182 Property and equipment, net 23,319 12,935 Operating lease right-of-use assets 30,129 — Marketable securities, non-current 64,279 — Other non-current assets 2,144 2,122 Restricted cash 872 872 Total assets $ 371,472 $ 394,111 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 11,173 $ 5,544 Accrued compensation 8,487 8,823 Deferred revenue—current 7,804 14,603 Operating lease liability - current 1,445 — Debt—current 6,250 — Other current liabilities 296 627 Total current liabilities 35,455 29,597 Deferred revenue, non-current 145 6,100 Operating lease liability - non-current 32,073 — Deferred rent — 1,340 Debt—non-current 18,714 24,545 Other noncurrent liabilities 1,505 481 Total liabilities 87,892 62,063 Stockholders’ equity: Preferred stock, $ 0.001 par value — 10,000,000 shares authorized as of September 30, 2021 and December 31, 2020; 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020 — — Common stock, $ 0.001 par value — 300,000,000 shares authorized as of September 30, 2021 and December 31, 2020; 46,261,060 and 45,752,116 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively 46 46 Additional paid-in-capital 578,850 559,746 Accumulated other comprehensive (loss) income ( 30 ) 129 Accumulated deficit ( 295,286 ) ( 227,873 ) Total stockholders’ equity 283,580 332,048 Total Liabilities and Stockholders’ Equity $ 371,472 $ 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenues (including amounts from related parties 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) 8,517 $ 17,823 $ 51,226 $ 34,444 Operating expenses Research and development 26,602 19,361 74,473 54,223 General and administrative 16,589 9,079 40,241 26,435 Total operating expenses 43,191 28,440 114,714 80,658 Loss from operations ( 34,674 ) ( 10,617 ) ( 63,488 ) ( 46,214 ) Interest income 109 295 481 1,320 Unrealized gain (loss) on equity securities 4,483 29,778 ( 1,881 ) 78,638 Interest and other expense, net ( 820 ) ( 2,317 ) ( 2,525 ) ( 6,328 ) Net (loss) income $ ( 30,902 ) $ 17,139 $ ( 67,413 ) $ 27,416 Net (loss) income per share, basic $ ( 0.67 ) $ 0.46 $ ( 1.46 ) $ 0.91 Net (loss) income per share, diluted $ ( 0.67 ) $ 0.45 $ ( 1.46 ) $ 0.90 Weighted-average shares used in computing basic net (loss) income per share 46,162,544 36,887,266 46,060,010 29,994,917 Weighted-average shares used in computing diluted net (loss) income per share 46,162,544 37,877,552 46,060,010 30,349,856 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net (loss) income $ ( 30,902 ) $ 17,139 $ ( 67,413 ) $ 27,416 Other comprehensive (loss) income: Unrealized (loss) gain on available-for-sale securities 15 ( 161 ) ( 159 ) 72 Comprehensive (loss) income $ ( 30,887 ) $ 16,978 $ ( 67,572 ) $ 27,488 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 Exercise of common stock options — — 15,911 — 160 — — 160 Issuance of common stock under Employee Stock Purchase Plan — — 52,463 — 892 — — 892 Vesting of restricted stock units — — 81,375 — — — — — Stock transaction associated with taxes withheld on restricted stock units — — ( 30,143 ) — ( 580 ) — — ( 580 ) Stock-based compensation expense — — — — 6,495 — — 6,495 Net unrealized gain on available-for- sale securities — — — — — 15 — 15 Net loss — — — — — — ( 30,902 ) ( 30,902 ) Balances at September 30, 2021 — $ — 46,261,060 $ 46 $ 578,850 $ ( 30 ) $ ( 295,286 ) $ 283,580 4 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 Exercise of common stock options — — 12,308 — 108 — — 108 Issuance of common stock under Employee Stock Purchase Plan — — 12,527 — 639 — — 639 Vesting of restricted stock units — — 110,676 — — — — — Stock transaction associated with taxes withheld on restricted stock units — — ( 30,461 ) — ( 314 ) — — ( 314 ) Stock-based compensation expense — — — — 3,112 — — 3,112 Issuance of common stock in connection with At-The-Market sale, net of issuance costs of $ 561 — — 2,000,000 2 16,837 — — 16,839 Net unrealized loss on available-for- sale securities — — — — — ( 161 ) — ( 161 ) Net income — — — — — — 17,139 17,139 Balances at September 30, 2020 — $ — 37,983,978 $ 38 $ 412,173 $ 237 $ ( 168,329 ) $ 244,119 See accompanying notes to unaudited interim condensed financial statements. 5 Sutro Biopharma, Inc. Condensed Statements of Cash Flows (Unaudited) (In thousands) Nine Months Ended September 30, 2021 2020 Operating activities Net (loss) income $ ( 67,413 ) $ 27,416 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 3,529 3,125 Amortization of premium on marketable securities 1,982 293 Stock-based compensation 16,354 8,830 Noncash lease expenses 3,841 — Unrealized loss (gain) on equity securities 1,881 ( 78,638 ) Remeasurement of liability awards 73 3,165 Other 406 558 Changes in operating assets and liabilities: Accounts receivable ( 6,771 ) ( 1,185 ) Prepaid expenses and other assets ( 4,534 ) 823 Accounts payable 4,484 ( 716 ) Accrued compensation ( 336 ) ( 127 ) Other liabilities 629 ( 747 ) Deferred rent — ( 129 ) Deferred revenue ( 12,754 ) ( 11,591 ) Change in operating lease liability ( 1,470 ) — Net cash used in operating activities ( 60,099 ) ( 48,923 ) Investing activities Purchases of marketable securities ( 226,109 ) ( 113,999 ) Maturities of marketable securities 106,750 82,300 Sales of marketable securities 14,049 22,000 Purchases of equipment and leasehold improvements ( 12,786 ) ( 5,504 ) Net cash used in investing activities ( 118,096 ) ( 15,203 ) Financing activities Proceeds from public offering — 115,438 Payment of issuance costs — ( 7,188 ) Proceeds from debt refinancing — 25,000 Payment of debt — ( 10,000 ) Proceeds from exercise of common stock options 1,972 172 Taxes paid related to net shares settlement of restricted stock units ( 987 ) ( 314 ) Proceeds from employee stock purchase plan 1,765 1,285 Net cash provided by financing activities 2,750 124,393 Net (decrease) increase in cash, cash equivalents and restricted cash ( 175,445 ) 60,267 Cash, cash equivalents and restricted cash at beginning of period 207,024 4,975 Cash, cash equivalents and restricted cash at end of period $ 31,579 $ 65,242 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,536 $ 1,165 Supplemental disclosure of non-cash investing and financing information: Purchases of equipment included in accounts payable $ 2,165 $ 11 Embedded interest associated with program fees $ 561 $ 1,544 Warrants issued to lenders $ — $ 619 Remeasurement of operating lease right-of-use assets for lease modification $ 4,227 $ — See accompanying notes to unaudited interim condensed financial statements. 6 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 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 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 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. 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. 7 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 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 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. 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 Leases 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 8 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, 2021 2020 (in thousands) Cash and cash equivalents $ 30,707 $ 64,370 Restricted cash 872 872 Total cash, cash equivalents, and restricted cash shown in the statements of cash flows $ 31,579 $ 65,242 Investments in Equity Securities Subsequent to the closing of the initial public offering (“IPO”) of Vaxcyte, Inc. in June 2020, the fair value of Vaxcyte’s common stock became readily determinable. As a result, beginning June 2020, Vaxcyte common stock held by the Company is measured at fair value at each reporting period based on the closing price of Vaxcyte’s common stock on the last trading day of each reporting period, with any unrealized gains and losses recorded in the Company’s statements of operations. Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date and establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The Company determined the fair value of financial assets and liabilities using the fair value hierarchy that describes three levels of inputs that may be used to measure fair value, as follows: Level 1—Quoted prices in active markets for identical assets and liabilities; Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and 9 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, services and materials 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 price is deferred and recognized as revenue over the expected period of performance using a cost-based input methodology. The Company uses judgement to assess the pattern of delivery of the performance obligation. In addition, amounts paid in advance of services being rendered may result in an associated financing component to the upfront payment. Accordingly, the interest on such borrowing cost component will be recorded as interest expense and revenue, based on an appropriate borrowing rate applied to the value of services to be performed by the Company over the estimated service performance period. License Grants: For collaboration arrangements that include a grant of a license to the Company’s intellectual property, the Company considers whether the license grant is distinct from the other performance obligations included in the arrangement. For licenses that are distinct, the Company recognizes revenues from nonrefundable, upfront payments and other consideration allocated to the license when the license term has begun and the Company has provided all necessary information regarding the underlying intellectual property to the customer, which generally occurs at or near the inception of the arrangement. 10 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: September 30, 2021 Total Level 1 Level 2 Level 3 (in thousands) Assets: Money market funds $ 30,108 $ 30,108 $ – $ – Commercial paper 56,568 – 56,568 – Corporate debt securities 70,276 – 70,276 – Equity securities 39,763 39,763 – – Asset-backed securities 37,595 – 37,595 – U.S. government securities 37,631 37,631 – – Supranational debt securities 21,440 – 21,440 – Total $ 293,381 $ 107,502 $ 185,879 $ - 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 $ – 11 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 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 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 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. 4. Cash Equivalents and Marketable Securities Cash equivalents and marketable securities consisted of the following: September 30, 2021 Amortized Cost Basis Unrealized Gains Unrealized (Losses) Fair Value (in thousands) Money market funds $ 30,108 $ – $ – $ 30,108 Commercial paper 56,568 – – 56,568 Corporate debt securities 70,290 7 ( 21 ) 70,276 Asset-based securities 37,607 2 ( 14 ) 37,595 U.S. government securities 37,624 7 – 37,631 Supranational debt securities 21,451 – ( 11 ) 21,440 Total 253,648 16 ( 46 ) 253,618 Less amounts classified as cash equivalents ( 30,108 ) – – ( 30,108 ) Total marketable securities $ 223,540 $ 16 $ ( 46 ) $ 223,510 12 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 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. 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. 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. 13 In accordance with the collaboration agreements, the Company recognized revenue as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) (in thousands) Bristol Myers Squibb Company (“BMS”) $ 1,118 $ 7,119 $ 7,784 $ 10,673 Merck Sharp & Dohme Corporation (“Merck”) (1) 6,414 9,055 38,175 18,837 Merck KGaA, Darmstadt, Germany (operating in the United States and Canada under the name “EMD Serono”) 249 1,507 2,844 4,656 Vaxcyte (2) 736 142 2,423 278 Total revenue $ 8,517 $ 17,823 $ 51,226 $ 34,444 (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 $ 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 nine months ended September 30, 2021: Nine Months Ended September 30, 2021 (in thousands) Deferred revenue—December 31, 2020 $ 20,703 Additions to deferred revenue 19,402 Recognition of revenue in current period ( 32,156 ) Deferred revenue—September 30, 2021 $ 7,949 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 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”). 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 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. 14 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 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) (in thousands) Ongoing performance related to unsatisfied performance obligations $ – $ 1,000 $ – $ 2,974 Research and development services 249 246 762 646 Materials supply 869 5,873 7,022 7,053 Total revenue $ 1,118 $ 7,119 $ 7,784 $ 10,673 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 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. 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. 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 nine-month period ended September 30, 2021. 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 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. 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 nine months ended September 30, 2021. 15 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. 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 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 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) (in thousands) Ongoing performance related to unsatisfied performance obligations $ 3,506 $ 6,907 $ 30,889 $ 13,048 Research and development services 419 1,732 2,328 4,245 Financing component on unearned revenue 149 416 561 1,544 Materials supply 2,340 – 4,397 – Total revenue $ 6,414 $ 9,055 $ 38,175 $ 18,837 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 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. 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 16 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 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 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) (in thousands) Contingent payment earned $ – $ 1,000 $ 2,000 $ 1,000 Research and development services 214 265 503 1,088 Materials supply 35 242 341 2,568 Total revenue $ 249 $ 1,507 $ 2,844 $ 4,656 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) (in thousands) Research and development services $ 247 $ – $ 716 $ – Materials supply 489 142 1,707 278 Total revenue $ 736 $ 142 $ 2,423 $ 278 17 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 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. 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. 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”) 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”). 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 . 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 18 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 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, September 30, 2021 2021 Operating lease cost $ 2,266 $ 6,396 Short-term lease cost 22 73 Variable lease cost 754 1,513 Total lease costs $ 3,042 $ 7,982 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, Amount (in thousands) Remaining in 2021 $ 2,142 2022 (1) 1,643 2023 8,002 2024 9,219 2025 9,533 Thereafter 17,282 Total lease payments 47,821 Less: imputed interest ( 14,303 ) Operating lease liabilities 33,518 Less: current portion ( 1,445 ) Total lease liabilities, non-current $ 32,073 (1) 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. 19 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, Amount (in thousands) 2021 $ 5,742 2022 (1) 5,183 2023 6,310 2024 7,476 2025 and thereafter 24,034 Total future minimum lease payments $ 48,745 (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 . Rent expense was $ 0.9 million and $ 2.7 million for the three and nine months ended September 30, 2020, respectively. 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. 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 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 nine months ended September 30, 2021 and 2020 are described in Note 5. 20 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: September 30, December 31, 2021 2020 Common stock options issued and outstanding 6,533,772 5,439,295 Restricted common stock units issued and outstanding 2,262,776 666,375 Remaining shares reserved for issuance under 2004 and 2018 Equity Incentive Plan 1,681,651 1,710,824 Shares reserved for issuance under 2018 Employee Stock Purchase Plan 673,251 361,539 Warrants to purchase common stock 153,070 153,070 Total 11,304,520 8,331,103 Preferred Stock 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. 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. 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. 21 10. Equity Incentive Plans, Employee Stock Purchase Plan and Stock-Based Compensation 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. 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. 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: 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 1,383,950 $ 20.40 Exercised ( 185,974 ) $ 10.60 Canceled and forfeited ( 103,499 ) $ 10.58 Stock options outstanding at September 30, 2021 6,533,772 $ 13.78 7.65 $ 35,715 Stock options exercisable at September 30, 2021 3,523,838 $ 12.73 6.80 $ 21,959 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 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. 22 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: Nine Months Ended September 30, 2021 2020 Expected term (in years) 5.3-6.1 5.1-7.0 Expected volatility 81.6%-84.9% 73.2%-84.2% Risk-free interest rate 0.6%-1.1% 0.2%-1.6% Expected dividend – – Using the Black-Scholes option-valuation model, the weighted-average estimated grant-date fair value of employee stock options granted during the three 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 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 nine months ended September 30, 2021 is as follows: Number of shares Weighted Average Grant-Date Fair Value Non-vested December 31, 2020 666,375 $ 9.83 Granted 1,913,750 $ 20.56 Vested and released ( 232,474 ) $ 11.06 Canceled and forfeited ( 84,875 ) $ 17.07 Non-vested September 30, 2021 2,262,776 $ 18.50 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. 23 The fair value of the ESPP shares is estimated using the Black-Scholes option pricing model. 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, 2021 2020 Expected term (in years) 0.5 0.5 Expected volatility 65.9-111.4% 94.1 % Risk-free interest rate 0.1 % 0.4 % Expected dividend – – 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 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) (in thousands) Research and development expense: $ 1,933 $ 761 $ 4,882 $ 1,972 General and administrative expense: $ 4,562 2,351 11,472 6,858 Total $ 6,495 $ 3,112 $ 16,354 $ 8,830 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 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 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 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 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. 24 A summary of the status of the call options as of September 30, 2021 and December 31, 2020 is as follows: September 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 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. 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands, except share and per share amounts) Numerator: Net (loss) income, basic and diluted $ ( 30,902 ) $ 17,139 $ ( 67,413 ) $ 27,416 Denominator: Weighted-average shares used to compute basic EPS 46,162,544 36,887,266 46,060,010 29,994,917 Dilutive effect of common stock options – 828,623 – 228,557 Dilutive effect of restricted stock units – 159,788 – 120,649 Dilutive effect of warrants to purchase common stock – 1,875 – 5,733 Weighted-average shares used to compute diluted EPS 46,162,544 37,877,552 46,060,010 30,349,856 Net (loss) income per share: Basic $ ( 0.67 ) $ 0.46 $ ( 1.46 ) $ 0.91 Diluted $ ( 0.67 ) $ 0.45 $ ( 1.46 ) $ 0.90 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, 2021 Common stock options issued and outstanding 6,533,772 Restricted stock units issued and outstanding 2,262,776 Warrants to purchase common stock 153,070 Employee stock purchase plan 6,663 Total 8,956,281 25 12. 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. 26