10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________.

Commission File Number: 001-38459

SURFACE ONCOLOGY, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	46-5543980
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
50 Hampshire Street, 8th Floor Cambridge, MA	02139
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (617) 714-4096

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of exchange on which registered
Common stock, $0.0001	SURF	The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ☒      No ☐   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Small reporting company	☒
Emerging growth Company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

As of August 5, 2019, the registrant had 27,858,000 shares of common stock, $0.0001 par value per share, outstanding.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

• the timing, progress and results of preclinical studies and clinical trials for our current product candidates and other product candidates we may develop, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available, and our research and development programs;

• the timing, scope or likelihood of regulatory filings and approvals, including timing of Investigational New Drug application and Biological Licensing Application filings for, and final U.S. Food and Drug Administration approval of, our current product candidates and any other future product candidates;

• the timing, scope or likelihood of foreign regulatory filings and approvals;

• our ability to use our understanding of the tumor microenvironment to identify product candidates and to match immunotherapies to select patient subsets;

• our ability to develop and advance our current product candidates and programs into, and successfully complete, clinical studies;

• our ability to develop combination therapies, whether on our own or in collaboration with third parties;

• our manufacturing, commercialization and marketing capabilities and strategy;

• the pricing and reimbursement of our current product candidates and other product candidates we may develop, if approved;

• the rate and degree of market acceptance and clinical utility of our current product candidates and other product candidates we may develop;

• the potential benefits of and our ability to maintain our collaboration with Novartis, and establish or maintain future collaborations or strategic relationships or obtain additional funding;

• our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;

• our intellectual property position, including the scope of protection we are able to establish and maintain for intellectual property rights covering our current product candidates and other product candidates we may develop, the validity of intellectual property rights held by third parties, and our ability not to infringe, misappropriate or otherwise violate any third-party intellectual property rights;

• our competitive position, and developments and projections relating to our competitors and our industry;

• our expectations related to the use of our existing cash, cash equivalents and marketable securities;

• our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and

• the impact of laws and regulations.

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the Securities and Exchange Commission could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

i

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2019 and 2018	4
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Six Months Ended June 30, 2019 and 2018	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION	32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

ii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share data)

	June 30,			December 31,
	2019			2018
Assets
Current assets:
Cash and cash equivalents	$	37,751		$	82,912
Marketable securities		88,539			75,923
Prepaid expenses and other current assets		3,240			5,766
Total current assets		129,530			164,601
Property and equipment, net		8,015			8,226
Operating lease right-of-use asset		16,094			—
Restricted cash		1,198			1,198
Other assets		11			40
Total assets	$	154,848		$	174,065
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,069		$	3,412
Accrued expenses and other current liabilities		7,925			8,803
Deferred revenue - related party		3,572			14,610
Deferred rent		—			352
Operating lease liability		1,203			—
Total current liabilities		14,769			27,177
Deferred revenue - related party, non-current		35,803			39,342
Deferred rent, non-current		—			4,684
Operating lease liability, non-current		19,954			—
Total liabilities		70,526			71,203
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized    at June 30, 2019 and December 31, 2018; no shares    issued and outstanding at June 30, 2019 and December 31, 2018		—			—
Common stock, $0.0001 par value; 150,000,000 shares    authorized at June 30, 2019 and December 31, 2018, respectively;    27,851,751 and 27,772,600 shares issued and outstanding at June 30, 2019    and December 31, 2018, respectively		3			3
Additional paid-in capital		172,908			169,784
Accumulated other comprehensive income (loss)		174			(119	)
Accumulated deficit		(88,763	)		(66,806	)
Total stockholders’ equity		84,322			102,862
Total liabilities and stockholders’ equity	$	154,848		$	174,065

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands, except share and per share data)

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Collaboration revenue - related party	$	143		$	2,428		$	14,577		$	47,923
Operating expenses:
Research and development		13,236			15,098			27,545			26,188
General and administrative		5,417			3,913			10,510			7,275
Total operating expenses		18,653			19,011			38,055			33,463
Income (loss) from operations		(18,510	)		(16,583	)		(23,478	)		14,460
Interest and other income, net		752			731			1,521			900
Net income (loss)		(17,758	)		(15,852	)		(21,957	)		15,360
Accretion of redeemable convertible preferred stock to redemption value		—		$	—			—			(11	)
Net income attributable to redeemable convertible preferred stockholders		—		$	—			—			(7,077	)
Net income (loss) attributable to common stockholders		(17,758	)		(15,852	)		(21,957	)		8,272
Net income (loss) per share attributable to common stockholders— basic	$	(0.64	)	$	(0.73	)	$	(0.79	)	$	0.68
Weighted average common shares outstanding— basic		27,845,136			21,595,586			27,835,471			12,213,717
Net income (loss) per share attributable to common stockholders— diluted	$	(0.64	)	$	(0.73	)	$	(0.79	)	$	0.60
Weighted average common shares outstanding— diluted		27,845,136			21,595,586			27,835,471			13,805,380
Comprehensive income (loss):
Net income (loss)	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	15,360
Other comprehensive income:
Unrealized gain on marketable securities, net of tax of $0		169			63			293			13
Comprehensive income (loss)	$	(17,589	)	$	(15,789	)	$	(21,664	)	$	15,373

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)

(in thousands, except share amounts)

	Common Stock				Additional Paid-in		Accumulated Other Comprehensive Income			Accumulated			Total Stockholders’
	Shares		Amount		Capital		(Loss)			Deficit			Equity
Balances at December 31, 2018		27,772,600		3		169,784		(119	)		(66,806	)		102,862
Issuance of common stock upon exercise    of stock options		58,082		—		211		—			—			211
Stock-based compensation expense		—		—		1,395		—			—			1,395
Unrealized gain on marketable securities		—		—		—		124			—			124
Net loss		—		—		—		—			(4,199	)		(4,199	)
Balances at March 31, 2019		27,830,682		3		171,390		5			(71,005	)		100,393
Issuance of common stock upon exercise    of stock options		21,069		—		33		—			—			33
Stock-based compensation expense		—		—		1,485		—			—			1,485
Unrealized gain on marketable securities		—		—		—		169			—			169
Net loss		—		—		—		—			(17,758	)		(17,758	)
Balances at June 30, 2019		27,851,751		3		172,908		174			(88,763	)		84,322

	Series A and A-1 Redeemable Convertible Preferred Stock						Common Stock				Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares			Amount			Shares		Amount		Capital			Loss			Deficit			Equity (Deficit)
Balances at December 31, 2017		37,100,000		$	48,517			2,686,350	$	—	$	6,877		$	(246	)	$	(73,945	)	$	(67,314	)
Issuance of common stock upon    exercise of stock options		—			—			80,675		—		157			—			—			157
Stock-based compensation expense		—			—			—		—		1,291			—			—			1,291
Accretion of redeemable    convertible preferred stock    to redemption value		—			11			—		—		(11	)		—			—			(11	)
Adjustment due to the adoption of    ASC 606		—			—			—		—		—			—			13,736			13,736
Unrealized loss on marketable    securities		—			—			—		—		—			(50	)		—			(50	)
Net income		—			—			—		—		—			—			31,212			31,212
Balances at March 31, 2018		37,100,000			48,528			2,767,025		—		8,314			(296	)		(28,997	)		(20,979	)
Issuance of common stock upon    exercise of stock options		—			—			3,636		—		2			—			—			2
Stock-based compensation expense		—			—			—		—		1,490			—			—			1,490
Conversion of redeemable    convertible preferred stock    to common stock		(37,100,000	)		(48,528	)		16,863,624		2		48,526			—			—			48,528
Issuance of common stock upon    completion of initial public    offering, net of commissions,    underwriting discounts and    offering costs		—			—			7,200,000		1		97,208			—			—			97,209
Issuance of common stock    to a related party		—			—			766,666		—		11,500			—			—			11,500
Unrealized gain on marketable    securities		—			—			—		—		—			63			—			63
Net loss		—			—			—		—		—			—			(15,852	)		(15,852	)
Balances at June 30, 2018		—			—			27,600,951		3		167,040			(233	)		(44,849	)		121,961

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

SURFACE ONCOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Six months ended June 30,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(21,957	)	$	15,360
Adjustments to reconcile net income (loss) to net cash provided by (used in)    operating activities:
Depreciation and amortization expense		871			648
Stock-based compensation expense		2,880			2,781
Net amortization of premiums and discounts on marketable securities		(464	)		(22	)
Loss on disposal of property and equipment		—			13
Non-cash operating lease cost		578			—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		2,526			(498	)
Other assets		29			(1	)
Accounts payable		(897	)		(12	)
Accrued expenses and other current liabilities		(847	)		(2,359	)
Deferred rent		—			(123	)
Operating lease liability		(551	)		—
Deferred revenue - related party		(14,577	)		(2,921	)
Net cash (used in) provided by operating activities		(32,409	)		12,866
Cash flows from investing activities:
Purchases of property and equipment		(1,137	)		(611	)
Purchases of marketable investments		(93,459	)		(107,258	)
Proceeds from sales or maturities of marketable securities		81,600			13,358
Net cash used in investing activities		(12,996	)		(94,511	)
Cash flows from financing activities:
Payments of offering costs		—			(2,031	)
Proceeds from initial public offering of common stock, net of commissions    and underwriting discounts		—			100,440
Proceeds from issuance of common stock to a related party		—			11,500
Proceeds from exercise of stock options		244			159
Net cash provided by financing activities		244			110,068
Net increase (decrease) in cash and cash equivalents and restricted cash		(45,161	)		28,423
Cash and cash equivalents and restricted cash at beginning of period		84,110			23,540
Cash and cash equivalents and restricted cash at end of period	$	38,949		$	51,963
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	—		$	41
Supplemental disclosure of non-cash investing and financing activities:
Accretion of redeemable convertible preferred stock to redemption value	$	—		$	11
Purchases of property and equipment included in accounts payable and accrued expenses	$	215		$	106

The accompanying notes are an integral part of these financial statements.

6

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

1. Nature of the Business

Surface Oncology, Inc. (the “Company” or “Surface”) is a clinical-stage immuno-oncology company focused on using its specialized knowledge of the biological pathways critical to the immunosuppressive tumor microenvironment (“TME”) for the development of next-generation cancer therapies. Surface was incorporated in April 2014 under the laws of the State of Delaware.

The Company is subject to risks common to early-stage companies in the biotechnology industry including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the ability to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance-reporting capabilities. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

On April 6, 2018, the Company effected a one-for-2.2 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s Redeemable Convertible Preferred Stock. Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

On April 23, 2018, the Company completed its initial public offering of its common stock by issuing 7,200,000 shares of common stock, at $15.00 per share for gross proceeds of $108,000, or net proceeds of $97,209 after deducting underwriting discounts, commissions and offering expenses. Concurrent with the initial public offering, the Company issued Novartis Institutes for Biomedical Research, Inc. (“Novartis”) 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500, in a private placement.

Upon the closing of the Company’s initial public offering on April 23, 2018, all shares of Series A and A-1 redeemable convertible preferred stock (the “Series A Preferred Stock” and “Series A-1 Preferred Stock”, respectively) automatically converted into 16,863,624 shares of common stock.

On May 1, 2019, the Company entered into a Capital on Demand^TM Sales Agreement (the “Sales Agreement”) with JonesTrading Institutional Services LLC (“JonesTrading”) to issue and sell shares of the Company’s common stock of up to $30,000 in gross proceeds, from time to time during the term of the a Sales Agreement, through an “at-the-market” equity offering program under which JonesTrading will act as the Company’s agent and/or principal (the “ATM Facility”). The ATM Facility provides that JonesTrading will be entitled to compensation for its services in an amount of up to 3.0% of the gross proceeds of any shares sold under the ATM Facility. The Company has no obligation to sell any shares under the ATM Facility and may, at any time, suspend solicitation and offers under the Sales Agreement. As of June 30, 2019, the Company had not sold any shares under the ATM Facility.

The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has primarily funded its operations with proceeds from the sales of redeemable convertible preferred stock, proceeds from a collaboration agreement with Novartis, and proceeds from the Company’s initial public offering of common stock. The Company has incurred losses and negative cash flows from operations since its inception. As of June 30, 2019, the Company had an accumulated deficit of $88,763.

The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of August 7, 2019, the issuance date of this Quarterly Report on Form 10-Q, the Company expects that its cash, cash equivalents and marketable securities of $126,290, will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months. The future viability of the Company beyond that date is dependent on its ability to raise additional capital to finance its operations.

The Company will seek additional funding through public financings, debt financings, collaboration agreements, strategic alliances, and licensing arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborations or other arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be required to delay, reduce or eliminate research and development programs, product portfolio expansion, or future commercialization efforts, which could adversely affect its business prospects.

Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

7

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiary, Surface Securities Corporation, a Massachusetts corporation, after elimination of all intercompany accounts and transactions.

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 2 to the financial statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2019, except for the Company’s adoption of the new leasing standard as discussed below.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, the accrual of research and development expenses, and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from the Company’s estimates.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liability, and operating lease liability, non-current in the Company’s condensed consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Many lease agreements include the option to renew or extend the lease term. The exercise of lease renewal options or extensions is at the Company’s sole discretion, and are only included in the calculation of the operating lease ROU asset and operating lease liability when it is reasonably certain that the Company would exercise such options. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which it calculates based on the credit quality of the Company, and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of each lease.

The components of a lease are split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company’s facilities operating leases have lease and non-lease components to which the Company has elected to apply the practical expedient and account for each lease component and related non-lease component as one single component. The Company also elected the package of practical expedients, which, among other things, allows the Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. The Company also made an accounting policy election not to recognize leases with an initial term of 12 months or less within its condensed consolidated balance sheets and to recognize those lease payments on a straight-line basis in its condensed consolidated statements of operations and comprehensive income (loss) over the lease term.

8

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 30, 2019, the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018, the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018, and the condensed consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three and six months ended June 30, 2019 and 2018 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2019 and the results of its operations and its cash flows for the six months ended June 30, 2019 and 2018. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2019 and 2018 are also unaudited. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods, or any future year period.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit bright lines. In July 2018, the FASB issuedASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11, “Leases (Topic 842) – Targeted Improvements” (ASU 2018-11), which addresses implementation issues related to the new lease standard. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years.

The Company adopted ASC 842 using the modified retrospective approach with an effective date of January 1, 2019 for leases that existed on that date. Prior period results continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows the Company to carry forward the historical lease classification. In connection with the adoption of ASC 842, the Company recorded an impact of $16,672 on its assets and $21,708 on its liabilities for the recognition of operating lease right-of-use-assets and operating lease liabilities, respectively, which are primarily related to the lease of the Company’s corporate headquarters in Cambridge, Massachusetts. The adoption of ASC 842 did not have a material impact on the Company’s results of operations or cash flows.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). This guidance is intended to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be considered “not indexed to an entity’s own stock” and therefore accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. Down round features are most often found in warrants and conversion options embedded in debt or preferred equity instruments. In addition, the guidance re-characterized the indefinite deferral of certain provisions on distinguishing liabilities from equity to a scope exception with no accounting effect. The Company adopted ASU 2017-11 on January 1, 2019. The adoption of this guidance did not have a material impact on the Company's financial position or its results of operations.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company adopted ASU 2018-07 on January 1, 2019. As a result of adopting this standard, the fair value of outstanding nonemployee awards as of December 31, 2018 will no longer be remeasured each reporting period. All future expense related to these awards will be recorded based on the fair value measured as of January 1, 2019. The adoption of this guidance did not have a material impact of the Company’s consolidated financial statements.

9

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

Recently Issued Accounting Pronouncements

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, or ASU 2018-18. ASU 2018-18 makes targeted improvements to generally accepted accounting principles for collaborative arrangements, including: (i) clarification that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (ii) adding unit-of-account guidance in Topic 808 to align with the guidance in ASC 606, and (iii) a requirement that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The Company is currently evaluating the impact of adoption, if any, that this standard may have on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”). The new standard provides for changes to the disclosure requirements for recurring and nonrecurring fair value measurements under Topic 820. Provisions of ASU 2018-13 including changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments in ASU 2018-13 should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the new standard but does not anticipate ASU 2018-13 will have a material impact on its condensed consolidated financial statements and related disclosures.  

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. The standard is effective on January 1, 2020, with early adoption permitted. The Company is currently evaluating the expected impact of ASU 2016-13 on its consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

3. Marketable Securities

As of June 30, 2019, the fair value of available-for-sale marketable debt securities by type of security was as follows:

	June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Marketable debt securities:
U.S. Treasury notes	$	62,954	$	120	$	—		$	63,074
U.S. Government agency bonds		22,401		61		—			22,462
Corporate bonds		3,010		—		(7	)		3,003
	$	88,365	$	181	$	(7	)	$	88,539

10

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

The amortized cost and fair value of the Company’s available-for-sale debt securities by contractual maturity are summarized as follows:

	June 30, 2019
	Amortized Cost		Fair Value
Maturing in one year or less	$	81,398	$	81,536
Maturing after one year but less than two years		6,967		7,003
	$	88,365	$	88,539

As of December 31, 2018, the fair value of available-for-sale marketable debt securities by type of security was as follows:

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Marketable debt securities:
U.S. Treasury notes	$	62,866	$	—	$	(24	)	$	62,842
U.S. Government agency bonds		2,900		—		(15	)		2,885
Corporate bonds		10,276		—		(80	)		10,196
	$	76,042	$	—	$	(119	)	$	75,923

The amortized cost and fair value of the Company’s available-for-sale securities by contractual maturity are summarized as follows:

	December 31, 2018
	Amortized Cost		Fair Value
Maturing in one year or less	$	76,042	$	75,923
	$	76,042	$	75,923

The Company determined that there was no material change in the credit risk of these investments. As a result, the Company determined it did not hold any investments with an other-than-temporary decline in fair value as of June 30, 2019 and December 31, 2018.

4. Fair Value of Financial Assets

The following tables present information about the Company’s financial assets that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

	Fair Value Measurements as of June 30, 2019 using:
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	24,840	$	—	$	—	$	24,840
Marketable securities:
U.S. Treasury notes		—		22,462		—		22,462
U.S. Government agency bonds		—		63,074		—		63,074
Corporate bonds		—		3,003		—		3,003
	$	24,840	$	88,539	$	—	$	113,379

11

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

	Fair Value Measurements as of December 31, 2018 using:
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	77,737	$	—	$	—	$	77,737
Marketable securities:
U.S. Treasury notes		—		62,842		—	$	62,842
U.S. Government agency bonds		—		2,885		—		2,885
Corporate bonds		—		10,196		—		10,196
	$	77,737	$	75,923	$	—	$	153,660

As of June 30, 2019 and December 31, 2018, the Company’s cash equivalents were invested in money market funds and were valued based on Level 1 inputs. During the six months ended June 30, 2019 and 2018, there were no transfers between Level 1, Level 2 and Level 3.

5. Collaboration Agreement with Novartis

Overview

In January 2016, the Company entered into a collaboration agreement with Novartis (the “Collaboration Agreement”), which was subsequently amended in May 2016, July 2017, September 2017, and October 2018 (the “October 2018 Amendment”). Pursuant to the Collaboration Agreement, the Company granted Novartis a worldwide exclusive license to research, develop, manufacture and commercialize antibodies that target cluster of differentiation, or CD, 73 (“CD73”). In addition, the Company granted Novartis the right to purchase exclusive option rights (each an “Option”) for up to four specified targets (each an “Option Target”) including certain development, manufacturing, and commercialization rights. Novartis initially had the right to exercise up to three purchased Options. Under the Collaboration Agreement, therefore, Novartis had the ability to exclusively license the development and manufacturing rights for up to four targets (inclusive of CD73). Of these, the Company had the right to retain commercialization rights in the United States to two of such targets. As of June 30, 2019, Novartis has one Option remaining eligible for purchase, and potential exercise. The Collaboration Agreement is governed by a joint steering committee that is co-chaired by a chairperson designated by each of the Company and Novartis. The October 2018 Amendment, among other things, modified certain definitions and provisions of the Collaboration Agreement to make them consistent with the amended and restated development and option agreement the Company entered into with Adimab LLC in October and clarified the parties’ rights and responsibilities relating to the amended agreement with Adimab LLC and diagnostic products.

Novartis is a related party because it is a greater than 5% stockholder of the Company. In January 2016, the Company entered into the Collaboration Agreement and sold 2,000,000 shares of its Series A-1 preferred stock to Novartis. In addition, concurrent with the Company’s initial public offering of common stock, the Company issued Novartis 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500 in a private placement.

During the six months ended June 30, 2019, the Company made no cash payments to Novartis related to the Collaboration Agreement. During the six months ended June 30, 2018, the Company made a payment of $3,437 to Novartis for the reimbursement of manufacturing costs incurred by Novartis prior to December 31, 2017.

Research on Targets

Under the Collaboration Agreement, the Company is responsible for performing preclinical research through the first investigational new drug application (“IND”) acceptance on antibodies that bind to CD73 and each Option Target, pursuant to a research plan directed toward each target. The Company is responsible for all costs and expenses incurred by or on its behalf, in connection with such research.

12

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

Development and Commercialization of CD73 Products

Novartis has the sole right to develop and commercialize CD73 antibody candidates and corresponding licensed products worldwide pursuant to a development plan and a commercialization plan, respectively. Novartis is obligated to use commercially reasonable efforts to develop the CD73 antibody candidates and corresponding licensed products, to obtain regulatory approval of such products, including within certain defined markets, and to commercialize such products following regulatory approval. Novartis is responsible for all costs and expenses of such development and commercialization and is obligated to provide the Company with updates on its development and commercialization activities through the joint steering committee, joint development committee, and joint commercialization committee.

Option Targets

Prior to the filing of an IND for an Option Target, Novartis may purchase the Option to obtain certain development, manufacturing and commercialization rights for antibodies that bind to the Option Target. To the extent Novartis does not elect to purchase an Option to an Option Target, the Option for such Option Target will expire and all rights to such Option Target under the Collaboration Agreement will terminate. Novartis had the right to exercise up to a total of three purchased Options. Each exercised Option is to be designated as either a regional or global option, with each such designation determining the development, manufacturing, and commercialization rights between the parties with respect to such Option Target, corresponding antibody candidates, and licensed products, as summarized below. Novartis has the ability to designate the remaining Option as either regional or global. Following Novartis’ exercise of an Option with respect to an Option Target, the Company will grant to Novartis licenses that are necessary to effectuate the development, manufacturing or commercialization rights associated with a regional or global option, as described below.

In December 2016, Novartis purchased the Option for antibodies that bind to CD47 for $5,000. In March 2018, Novartis notified the Company of its decision not to exercise its purchased Option related to CD47. In March 2018, the Company and Novartis also mutually agreed to cease development of one of the undisclosed programs subject to the Collaboration Agreement. In February 2019, Novartis notified the Company of its decision not to purchase the Option related to IL-27.

Development and Commercialization of Regional Licensed Products

To the extent an exercised Option is designated as regional, the Company is primarily responsible for the early clinical development of each corresponding regional antibody candidate and regional licensed product at its own cost. Unless the Company chooses to opt out of its development rights, it will collaborate with Novartis on the further clinical development of regional antibody candidates and regional licensed products. Pursuant to a regional development plan for each regional licensed product, the Company will be responsible for development activities related to obtaining regulatory approval in the United States, with Novartis responsible for development activities related to obtaining regulatory approval elsewhere in the world. The development costs of such later clinical development activities will be split evenly among the parties. Thereafter, the Company is responsible for the commercialization of regional licensed products in the United States, and Novartis is responsible for the commercialization of regional licensed products outside of the United States, each pursuant to a commercialization plan. Each party must use commercially reasonable efforts to commercialize such products within their respective territories. The Company is obligated to work with Novartis to agree to a global commercialization strategy with respect to the regional licensed products prior to commercialization.

Development and Commercialization of Global Licensed Products

To the extent an exercised Option is designated as global, the Company is primarily responsible for the early clinical development of each global antibody candidate and global licensed product at the Company’s own cost, and Novartis is solely responsible for the later worldwide clinical development of global antibody candidates and global licensed products, pursuant to a development plan for such global licensed product, at its own cost. Novartis is solely responsible for the worldwide commercialization of global licensed products and must use commercially reasonable efforts to commercialize such products, pursuant to a commercialization plan, at its own cost. Novartis agrees to provide the Company with development and commercialization updates regarding global licensed products through the joint steering committee, joint development committee, and joint commercialization committee.

13

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

Exclusivity

Neither the Company nor Novartis may, alone or with any affiliate or third party, (i) research or develop any antibody that specifically binds to an Option Target for a specified period of time outside of the Collaboration Agreement or (ii) develop or commercialize any antibody that specifically binds to CD73 or any Option Target that subsequently becomes a licensed target for a specified period of time outside the Collaboration Agreement. The October 2018 Amendment clarified that Novartis is permitted to research, develop, manufacture or commercialize any diagnostic product that specifically binds to a licensed target, subject to Novartis’ compliance with its rights and obligations under the Collaboration Agreement, and provided that where such diagnostic product is an Adimab diagnostic product, Novartis may research, develop, manufacture or commercialize such Adimab diagnostic product solely for the purpose of research, development or commercialization of a therapeutic or prophylactic licensed product that specifically binds to the same licensed target.

Financial Terms

Upon entering into the Collaboration Agreement in January 2016, Novartis made an upfront payment to the Company of $70,000. In addition, Novartis is obligated to pay the Company a fee to the extent it desires to purchase an Option for any Option Target and another fee to exercise such purchased Option, which entitles the Company to an aggregate of up to $20,000 in option purchase and option exercise payments for the remaining Option. The Company is also eligible to receive payments on a target-by-target basis upon the achievement of specified development and sales milestones as well as tiered royalties on annual net sales by Novartis of licensed products ranging from high single-digit to mid-teens percentages upon successful commercialization of any products. Under the Collaboration Agreement, the Company is currently entitled to potential milestones in excess of $500,000, as well as tiered royalties on annual net sales by Novartis ranging from high single-digit to mid-teens percentages upon the successful commercialization of NZV930 (formally SRF373). The maximum aggregate amount of potential option purchase, option exercise, and milestone payments associated with Novartis’ single remaining Option is $220,000, as well as tiered royalties on annual net sales by Novartis ranging from high-single-digit to low double-digit percentages upon the successful commercialization of the remaining Option Target. The Company is required to pay Novartis tiered royalties ranging from high single-digit to mid-teens percentages on annual net sales by the Company of regional licensed products in the United States. The royalty payments are subject to reduction under specified conditions set forth in the Collaboration Agreement.

Termination

Unless terminated earlier, the Collaboration Agreement will continue in effect until neither the Company nor Novartis is researching, developing, manufacturing, or commercializing any antibody candidates or licensed products under the Collaboration Agreement. Novartis may terminate the Collaboration Agreement on a target-by-target basis for any reason upon prior notice to the Company within a specified time period. Either party may terminate the Collaboration Agreement in full, or on a target-by-target basis, if an undisputed material breach is not cured within a certain period of time or upon notice of insolvency of the other party. To the extent Novartis terminates for convenience or the Company terminates for Novartis’ material breach, Novartis will grant the Company, on mutually agreeable financial terms, an exclusive, worldwide, irrevocable, perpetual and royalty-bearing license with respect to intellectual property controlled by Novartis that is reasonably necessary to research, develop, manufacture or commercialize certain products.

Revenue Recognition – Collaboration Revenue – Related Party

In determining the appropriate amount of revenue to be recognized under ASC 606, the Company performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Under ASC 606, the Company recognized revenue using the cost-to-cost method, which it believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue will be recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. Under ASC 606, the estimated transaction price will include variable consideration. The Company does not include variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will occur when any uncertainty associated with the variable consideration is resolved. The estimate of the Company’s measure of progress and estimate of variable consideration to be included in the transaction price will be updated at each reporting date as a change in estimate. The amount related to the unsatisfied portion will be recognized as that portion is satisfied over time.

14

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

Under ASC 606 the Company accounts for (i) the license it conveyed with respect to CD73; and (ii) its obligations to perform research on CD73 and other specified targets as a single performance obligation under the collaboration agreement with Novartis. Novartis’ right to purchase exclusive options to obtain certain development, manufacturing and commercialization rights are accounted for separately as they do not represent material rights, based on the criteria of ASC 606. Upon the exercise of any purchased option by Novartis, the contract promises associated with an option target would use a separate cost-to-cost model for purposes of revenue recognition under ASC 606.

In February 2018, the Company received an additional milestone payment of $45,000 from Novartis upon Novartis’ receipt and acceptance of the first final audited Good Laboratory Practices (“GLP”) toxicology study report for NZV930. Upon achieving the milestone, the Company concluded this variable consideration associated with this milestone was no longer constrained and included the $45,000 in the transaction price.

In March 2018, Novartis notified the Company of its decision not to exercise its Option related to CD47. The Company recognized the $5,000 exclusive option right payment as collaboration revenue – related party in the first quarter of 2018 because the Company no longer has any remaining performance obligations related to CD47.

In March 2018, the Company and Novartis elected to terminate a specified target under the Collaboration Agreement. Future costs associated with this target were removed from the estimated total costs in the cost-to-cost model.

In February 2019, Novartis notified the Company of its decision not to purchase the Option related to IL-27. Future costs associated with this target were removed from the estimated total costs in the cost-to-cost model.

For the three and six months ended June 30, 2019 and 2018, the Company recognized the following totals of collaboration revenue – related party:

	Three months ended June 30,				Six months ended June 30,
		2019	2018			2019	2018
Collaboration revenue - related party	$	143	$	2,428	$	14,577	$	47,923

The following table presents changes in the Company’s contract assets and liabilities during the six months ended June 30, 2019:

	December 31, 2018		Additions		Deductions			June 30, 2019
Contract liabilities (1)
Total deferred revenue - related party	$	53,952	$	—	$	(14,577	)	$	39,375

(1) Additions to contract liabilities relate to consideration from Novartis during the reporting period. Deductions to contract liabilities relate to deferred revenue recognized as revenue during the reporting period.

Duringthe three and six months ended June 30, 2019,the Companyrecognized $143 and $14,577of revenue, respectively, related to the amounts included in contract liability balance at the beginning of the period. The aggregate amount of the transaction price allocated to the single performance obligation that is partially unsatisfied was $39,375.

The Companyconsidersthetotalconsiderationexpectedtobeearnedinthenexttwelvemonthsforservicestobeperformedascurrentdeferredrevenue-related party,andconsiderationthatisexpectedtobeearnedsubsequenttotwelvemonthsfromthebalancesheetdateas noncurrentdeferredrevenue-related party.

6. Redeemable Convertible Preferred Stock

The Company has issued Series A and Series A-1 preferred stock (together, the “Redeemable Convertible Preferred Stock”). The Redeemable Convertible Preferred Stock is classified outside of stockholders’ deficit because the shares contain redemption features that are not solely within the control of the Company.

Upon the closing of the Company’s initial public offering on April 23, 2018, all shares of the Redeemable Convertible Preferred Stock automatically converted into 16,863,624 shares of common stock.

15

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

7.Stockholders’ Equity (Deficit)

Common Stock

As of June 30, 2019 and December 31, 2018, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 150,000,000 shares, of $0.0001 par value common stock.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to the preferential dividend rights of any outstanding preferred stock. No dividends have been declared or paid by the Company through June 30, 2019.

As of June 30, 2019 and December 31, 2018, the Company had reserved 17,392,681 and 6,083,202 shares, respectively, of common stock for the exercise of outstanding stock options, shares to be issued under the ATM Facility, and the number of shares remaining available for future grant under the Company’s 2018 Stock Option and Incentive Plan, and 2018 Employee Stock Purchase Plan.

In May 2019, the Company entered into the Sales Agreement, with JonesTrading to issue and sell shares up to $30,000 in shares of the Company’s common stock from time to time. The Company has not yet issued or sold any securities under the Sales Agreement.

On April 23, 2018, the Company completed its initial public offering of its common stock by issuing 7,200,000 shares of common stock, at $15.00 per share for gross proceeds of $108,000, or net proceeds of $97,209. Concurrent with the initial public offering, the Company issued Novartis 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500, in a private placement.

8. Stock-Based Awards

2014 Stock Incentive Plan

The Company’s 2014 Stock Incentive Plan (the “2014 Plan”) provides for the Company to grant incentive stock options or nonqualified stock options, restricted stock awards, unrestricted stock awards or restricted stock units to employees, directors and consultants of the Company. The 2014 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of the stock options may not be less than 100% of the fair market value of a share of the Company’s common stock on the date of grant and the term of the stock options may not be greater than ten years.

As of June 30, 2019 and December 31, 2018, all remaining shares available under the 2014 Plan were transferred to the Company’s 2018 Stock Option and Incentive Plan (the “2018 Plan”).

2018 Stock Option and Incentive Plan

On April 3, 2018, the Company’s stockholders approved the 2018 Plan, which became effective on April 18, 2018, the date on which the registration statement for the Company’s initial public offering was declared effective. The 2018 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards, cash-based awards and dividend equivalent rights to the Company’s officers, employees, non-employee directors and other key persons (including consultants). The number of shares initially reserved for issuance under the 2018 Plan is 1,545,454, plus the shares of common stock remaining available for issuance under the 2014 Plan, which shall be cumulatively increased each January 1 by 4% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation committee of the board of directors. The shares of common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2018 Plan and the 2014 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan.

As of June 30, 2019, 1,281,681 shares were available for future issuance under the 2018 Plan.

Stock options granted under the 2014 Plan and 2018 Plan to employees generally vest over four years and expire after ten years.

16

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

Stock Options

The following table summarizes the Company’s stock option activity since January 1, 2019:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
						(in years)
Outstanding as of December 31, 2018		4,414,225		$	6.79		8.29	$	2,031
Granted		1,370,550			4.32
Exercised		(79,151	)		3.08
Forfeited		(129,168	)		7.20
Outstanding as of June 30, 2019		5,576,456		$	6.22		8.23	$	1,086
Options exercisable at June 30, 2019		2,253,599		$	5.16		7.36	$	1,040
Vested and expected to vest at June 30, 2019		5,576,456		$	6.22		8.23	$	1,086

The weighted average grant-date fair value per share of stock options granted during the six months ended June 30, 2019 and year ended December 31, 2018 was $2.89 and $7.47, respectively.

As of June 30, 2019 and December 31, 2018, there were outstanding stock options held by non-employees for the purchase of 278,735 and 317,957 shares of common stock, respectively, with service-based vesting conditions.

2018 Employee Stock Purchase Plan

On April 3, 2018, the Company’s stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective on April 18, 2018, the date on which the registration statement for the Company’s initial public offering was declared effective. A total of 256,818 shares of common stock were initially reserved for issuance under this plan. In addition, the number of shares of common stock that may be issued under the ESPP automatically increased on January 1, 2019, and shall increase each January 1 thereafter through January 1, 2028, by the lesser of (i) 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 and (ii) such lesser number of shares as determined by the administrator of the Company’s ESPP. As of June 30, 2019, a total of 534,544 shares of common stock were reserved for issuance under this plan.

Stock-Based Compensation

The Company recorded stock-based compensation expense related to stock options and restricted stock awards in the following expense categories of its statements of operations and comprehensive loss:

	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Research and development expenses	$	607	$	800	$	1,172	$	1,641
General and administrative expenses		878		690		1,708		1,140
	$	1,485	$	1,490	$	2,880	$	2,781

As of June 30, 2019, the Company had an aggregate of $15,776 of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 2.26 years.

17

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

9.Net Income (Loss) per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows:

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Basic net income per share attributable to common stockholders:
Numerator:
Net income (loss)	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	15,360
Accretion of redeemable convertible preferred stock to redemption value		—			—			—			(11	)
Net income attributable to redeemable convertible preferred stockholders		—			—			—			(7,077	)
Net income (loss) attributable to common stockholders	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	8,272
Denominator:
Weighted average commons shares outstanding — basic		27,845,136			21,595,586			27,835,471			12,213,717
Net income (loss) per share attributable to common stockholders — basic	$	(0.64	)	$	(0.73	)	$	(0.79	)	$	0.68
Diluted net income per share attributable to common stockholders:
Numerator:
Net income (loss)	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	15,360
Accretion of redeemable convertible preferred stock to redemption value	$	—		$	—		$	—		$	(11	)
Net income attributable to redeemable convertible preferred stockholders	$	—		$	—		$	—		$	(7,077	)
Net income (loss) attributable to common stockholders	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	8,272
Denominator:
Weighted average commons shares outstanding — basic		27,845,136			21,595,586			27,835,471			12,213,717
Dilutive effect of common stock equivalents		—			—			—			1,591,663
Weighted average common shares outstanding - diluted		27,845,136			21,595,586			27,835,471			13,805,380
Net income (loss) per share attributable to common stockholders — diluted		(0.64	)		(0.73	)		(0.79	)		0.60

There were no outstanding common stock equivalents that had an anti-dilutive impact on net income per share attributable to common stockholders for the three and six months ended June 30, 2019 or for the three months ended June 30, 2018.

Stock options for the purchase of 727,552 weighted average shares were excluded from the computation of diluted net income per share attributable to common stockholders for the six months ended June 30, 2018 because those options had an anti-dilutive impact due to the assumed proceeds per share using the treasury stock method being greater than the average fair value of the Company’s common shares for those periods.

10. Income Taxes

The Company did not provide for any income taxes for the three and six months ended June 30, 2019 or 2018.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of June 30, 2019 and December 31, 2018. Management reevaluates the positive and negative evidence at each reporting period.

As of June 30, 2019 and December 31, 2018, the Company had no accrued interest or tax penalties recorded. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The Company is currently under examination by the Internal Revenue Service ("IRS") for the period ended December 31, 2016. The Company's tax years are still open under statute from 2015 to present. All years may be examined to the extent the tax credit or net operating loss carryforwards are used in future periods.

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SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

11.Leases

The Company leases real estate, primarily its corporate headquarters in Cambridge, Massachusetts. The Company’s leases have remaining terms ranging from less than 1 year to 10 years. Certain leases include options to renew, exercised at the Company’s sole discretion, with renewal terms that can extend the lease five years. The Company evaluated the renewal options in its leases to determine if it was reasonably certain that the renewal option would be exercised, and therefore should be included in the calculation of the operating lease assets and operating lease liabilities. Given the Company’s current business structure, uncertainty of future growth, and the associated impact to real estate, the Company concluded that it is not reasonably certain that the renewal option related to its corporate headquarters would be exercised, however, for leases it determined the renewal option was probable to be exercised, the Company included the renewal period in the calculation of the operating lease right-of-use assets and operating lease liabilities. All of the Company’s leases qualify as operating leases. With the adoption of the new leasing standard, the Company has recorded a right-of-use asset and corresponding lease liability, by calculating the present value of future lease payments, discounted at either 9.5% or 10.5%, the Company’s incremental borrowing rates, over the expected term. The right-of-use asset is reduced by any lease incentives received and the legacy deferred rent balance.

The components of the Company’s lease expense are as follows:

Lease Costs	Classification	Three months ended June 30, 2019		Six months ended June 30, 2019
Operating lease cost	R&D Expense	572			1,158
	G&A Expense	237			461
Variable lease costs (1)	R&D Expense	169			341
	G&A Expense	70			136
Total lease cost			1,048		2,096
Weighted-average remaining lease term (in months)					121.6
Weighted-average discount rate					10.4	%

⁽¹⁾ Variable lease costs include certain additional charges for operating costs, including insurance, maintenance, taxes, utilities, and other costs incurred, which are billed based on both usage and as a percentage of the Company’s share of total square footage. Short term lease costs are immaterial.

Cash paid for amounts included in the measurement of the Company’s operating lease liabilities was $1,038 and $2,069 for the three and six months ended June 30, 2019, respectively.

As of June 30, 2019, the maturities of the Company’s operating lease liabilities were as follows:

Year Ending December 31,
2019		1,600
2020		4,922
2021		5,831
2022		5,468
2023		5,410
Thereafter		37,573
Total future lease payments		60,804
Less: Interest		(39,647	)
Present value of future lease payments (lease liability)	$	21,157

19

SURFACE ONCOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share data)

Future minimum lease payments for the Company’s operating leasesas of December 31, 2018 were as follows:

Year Ending December 31,
2019		2,546
2020		4,258
2021		5,716
2022		5,292
2023		5,376
Thereafter		37,573
	$	60,761

Prior to the adoption of ASU 2016-02 and for the three and six months ended June 30, 2018, the Company recognized rent expense on a straight-line basis over the lease period and recorded deferred rent expense for rent expense incurred but not yet paid. The Company also recorded deferred rent attributable to cash incentives received under its lease agreements which were amortized to rent expense over the lease term. During the three and six months ended June 30, 2018, the Company recognized total rent expense of $677 and $1,337, respectively. Sublease payments received from a third-party tenant under a sublease that expired in March 2018 were $4 and $228 for the three and six months ended June 30, 2018 and were recorded as reduction of rent expense.

12. Commitments and Contingencies

Legal Proceedings

The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to its legal proceedings.

13. Related Party Transactions

Novartis Institutes for BioMedical Research, Inc.

Novartis is a related party because it is a greater than 5% stockholder of the Company. In January 2016, the Company entered into the Collaboration Agreement and sold 2,000,000 shares of its Series A-1 preferred stock to Novartis for gross proceeds of $13,500. In addition, concurrent with the Company’s initial public offering of common stock, the Company issued Novartis 766,666 shares of its common stock at $15.00 per share, for proceeds of $11,500 in a private placement. During the three and six months ended June 30, 2019, the Company recognized $143 and $14,577 of collaboration revenue under the Collaboration Agreement, respectively. As of June 30, 2019 and 2018, no amounts were due from Novartis.

During the six months ended June 30, 2019, the Company made no cash payments to Novartis related to the Collaboration Agreement. During the six months ended June 30, 2018, the Company made a payment of $3,437 to Novartis for the reimbursement of manufacturing costs incurred by Novartis prior to December 31, 2017.

Research Agreement with Vaccinex, Inc.

On November 30, 2017, the Company entered into an agreement with Vaccinex, Inc. (“Vaccinex”) whereby Vaccinex will use its technology to assist the Company with identifying and selecting experimental human monoclonal antibodies against targets selected by the Company. The Company’s Chief Executive Officer is a member of the board of directors of Vaccinex. During the three and six months ended June 30, 2019, the Company paid Vaccinex an aggregate of $94 and $177 relating to the agreement. During the three and six months ended June 30, 2018, the Company paid Vaccinex an aggregate of $69 relating to the agreement. The amount of the payment was recognized as research and development expense. There was no amount due by the Company to Vaccinex as of June 30, 2019. The amount due by the Company to Vaccinex as of June 30, 2018 was $64.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes for the year ended December 31, 2018 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission or SEC.

Overview

We are a clinical-stage immuno-oncology company focused on using our specialized knowledge of the biological pathways critical to the immunosuppressive tumor microenvironment, or the TME, for the development of next-generation cancer therapies. While first-generation immuno-oncology therapies, such as checkpoint inhibitors, are a remarkable therapeutic advancement, we believe most patients do not achieve durable clinical benefit primarily because these therapies focus on only one element of the complex and interconnected immunosuppressive TME. We believe there is a significant opportunity to more broadly engage both the innate and adaptive arms of the immune system in a multi-faceted, coordinated and patient-specific approach, to meaningfully improve cure rates for patients with a variety of cancers.

We aim to identify key components within the TME to gain a deep understanding of its biology, leverage this understanding to define the optimal therapeutic targets and the patients most likely to benefit, and develop novel antibody therapeutics with differentiated biologic activity. By utilizing our expertise in immunology, oncology, assay development, antibody selection and characterization, and translational research, we are developing and advancing a broad pipeline of TME-focused programs that we believe are the next generation of immuno-oncology therapies. Our programs demonstrate our multi-faceted approach by targeting several critical components of the immunosuppressive TME, including metabolites, cytokines, and macrophages.

NZV930 (formerly SRF373) and SRF617 are antibodies inhibiting CD73 and CD39, respectively, and illustrate how our specialized knowledge of TME biology can be leveraged across programs. CD73 and CD39 are both critical enzymes involved in the production of extracellular adenosine, a key metabolite with strong immunosuppressive properties within the TME. In addition, inhibition of CD39 results in an increase in the pro-inflammatory metabolite ATP within the TME. In June 2018, a Phase 1 trial of NZV930 was initiated by our partner, Novartis Institutes for Biomedical Research, Inc., or Novartis, and we expect to file an investigational new drug application, or IND, for SRF617 in the fourth quarter of 2019.

SRF388 is an antibody targeting interleukin 27, or IL-27, an immunosuppressive cytokine in the TME that is overexpressed in certain cancers. IL-27 is a cytokine secreted by macrophages and antigen presenting cells that plays an important physiologic role in suppressing the immune system. Due to its immunosuppressive nature, there is a rationale for inhibiting IL-27 to treat cancer as this approach will influence the activity of multiple types of immune cells that are necessary to recognize and attack a tumor. We expect to file an IND for SRF388 in the fourth quarter of 2019.

SRF231 is an antibody targeting CD47, which is a protein expressed on many cells, but often overexpressed on tumor cells. By targeting CD47, we believe we can promote macrophage activation to attack such tumors. We initiated a Phase 1 clinical trial of SRF231 in February 2018. In December 2018, we announced the deprioritization of SRF231 as a result of toxicities seen during the dose escalation portion of the ongoing Phase 1 trial and the evolving competitive landscape. We are continuing dose exploration in the Phase 1 trial and expect to provide additional data regarding SRF231 in the second half of 2019.

We also have several earlier stage programs that target other critical components of the TME, including regulatory T cells and natural killer, or NK, cells. We expect that the unique insights generated in any one of our product programs will accelerate the development of the other programs in a synergistic fashion due to the interconnections between these TME pathways.

On April 23, 2018, we completed an initial public offering of our common stock by issuing 7,200,000 shares of our common stock, at $15.00 per share for net proceeds of $97.2 million. Concurrent with the initial public offering, we issued to Novartis, 766,666 shares of our common stock at $15.00 per share for proceeds of $11.5 million, in a private placement.

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We were incorporated and commenced principal operations in 2014. We have devoted substantially all of our resources to developing our programs, including NZV930, SRF617, SRF388, and SRF231, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. To date, we have financed our operations with proceeds from the sales of preferred stock, payments received under the Collaboration Agreement with Novartis, and proceeds from the Company’s initial public offering of common stock and concurrent private placement. Through June 30, 2019, we had received gross proceeds of $48.6 million from our sales of preferred stock and $150.0 million from the Collaboration Agreement. As of June 30, 2019, we had cash, cash equivalents and marketable securities of $126.3million. Since our inception, we have incurred significant losses. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of the product candidates we develop. Our net loss was $17.8 million, $22.0 million and $15.9 millionfor the three and six months ended June 30, 2019 and three months ended June 30, 2018, respectively, and our net income was $15.4 million for the six months ended June 30, 2018.As of June 30, 2019, we had an accumulated deficit of $88.8 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially, particularly as we:

• pursue the clinical development of product candidates;

• leverage our programs to advance product candidates into preclinical and clinical development;

• seek regulatory approvals for any product candidates that successfully complete clinical trials;

• hire additional clinical, quality control, and scientific personnel;

• expand our operational, financial, and management systems and increase personnel, including personnel to support our clinical development, manufacturing, and commercialization efforts, and our operations as a public company;

• maintain, expand and protect our intellectual property portfolio;

• establish a sales, marketing, medical affairs, and distribution infrastructure to commercialize any products for which we may obtain marketing approval and intend to commercialize on our own or jointly with a commercial partner; and

• acquire or in-license other product candidates and technologies.

As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. We may be unable to raise additional funds or enter into other agreements or arrangements, when needed, on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

We believe that our existing cash, cash equivalents and marketable securities, as of June 30, 2019 will enable us to fund our operating expenses and capital expenditure requirements into 2021, excluding any future milestone payments from Novartis. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.

Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to do so in the near future. All of our revenue to date has been derived from the Collaboration Agreement. If our development efforts for our programs are successful and result in regulatory approval or additional license or collaboration agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from additional collaboration or license agreements that we may enter into with third parties. We expect that our revenue for the next several years will be derived primarily from the Collaboration Agreement as well as any additional collaborations that we may enter into in the future.

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Collaboration Agreement with Novartis

In January 2016, we entered into the Collaboration Agreement to develop next-generation cancer therapies. Under the Collaboration Agreement, as amended, we are responsible for performing research on antibodies that bind to CD73 and four other specified targets. We were responsible for all costs and expenses incurred by, or on behalf of, us in connection with the research.

Pursuant to the Collaboration Agreement, we granted Novartis a worldwide exclusive license to research, develop, manufacture and commercialize antibodies that target CD73, along with the right to purchase exclusive option rights, each an Option, for up to four specified targets, each an Option Target, including obtaining certain development, manufacturing and commercialization rights. If Novartis purchases an Option, following receipt of the IND acceptance for a candidate with respect to the applicable Option Target, Novartis will be entitled to exercise the Option for such Option Target. Pursuant to the Collaboration Agreement, Novartis initially had the right to exercise up to three purchased Options. In March 2018, Novartis notified us of its decision to not exercise its previously purchased Option for SRF231, our CD47 product candidate. In March 2018, we and Novartis also mutually agreed to cease development of one of the undisclosed programs subject to the Collaboration Agreement. In February 2019, Novartis notified us of its decision not to purchase its Option related to IL-27. As a result, as of June 30, 2019, Novartis has one Option remaining eligible for purchase, and potential exercise.

At the time we entered into the Collaboration Agreement in January 2016, Novartis made an upfront payment to us of $70.0 million. Under the Collaboration Agreement, Novartis is also obligated to pay us a fee to the extent it desires to purchase an Option for any Option Target and another fee to exercise such purchased Option, which entitles us to an aggregate of up to $20.0 million of potential option purchase and option exercise payments for the remaining Option. We are also eligible to receive payments on a target-by-target basis upon the achievement of specified development and sales milestones, as well as tiered royalties on annual net sales by Novartis of licensed products ranging from high single-digit to mid-teens percentages upon successful commercialization of any products. Under the Collaboration Agreement, as of June 30, 2019, we are entitled to potential milestones in excess of $500.0 million, as well as tiered royalties on annual net sales by Novartis ranging from high single-digit to mid-teens percentages upon the successful commercialization of NZV930. The maximum aggregate amount of potential option purchase, option exercise, and milestone payments associated with Novartis’ single remaining Option is $220.0 million, as well as tiered royalties on annual net sales by Novartis ranging from high-single-digit to low double-digit percentages upon the successful commercialization of the remaining Option Target.

In addition, we are required to pay Novartis tiered royalties on annual net sales by us of regional licensed products in the United States ranging from high single-digit to mid-teens percentages. The royalty payments are subject to reduction under specified conditions set forth in the Collaboration Agreement.

Under ASC 606 we account for (i) the license conveyed with respect to CD73 and (ii) our obligations to perform research on CD73 and other specified targets as a single performance obligation under the Collaboration Agreement. We recognize revenue using the cost-to-cost method, which we believe best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue is recorded as a percentage of the estimated transaction price based on the extent of progress towards completion.

In February 2018, we received an additional milestone payment of $45.0 million from Novartis upon Novartis’ receipt and acceptance of the first final audited GLP toxicology study report for NZV930. Upon achieving the milestone, we concluded this variable consideration was no longer constrained and included this amount in the transaction price. We have recognized $32.5 million as collaboration revenue – related party as of June 30, 2019, based on the ratio of our actual costs incurred as of the milestone achievement date to our total estimated costs with respect to performing research on antibodies that bind to CD73 and other specified targets under the Collaboration Agreement. The remaining unrecognized amount was initially recorded as deferred revenue and will subsequently be recognized as revenue over the performance period in proportion to the costs incurredby us under the Collaboration Agreement.

In March 2018, Novartis notified us of its decision not to exercise its option related to CD47. We recognized the $5.0 million exclusive option right payment as collaboration revenue – related party in the first quarter of 2018 because we no longer had any remaining performance obligations related to CD47.

In February 2019, Novartis notified us of its decision not to purchase its Option related to IL-27. The decision by Novartis to terminate the IL-27 target under the Collaboration Agreement resulted in our removing all future costs associated with IL-27 from the estimated total costs in the cost-to-cost model in the first quarter of 2019. This change in the total estimated costs in the cost-to-cost model resulted in our recognizing revenue of $9.8 million in the first quarter of 2019.

Through June 30, 2019, we had received an aggregate of $150.0 million from Novartis in upfront payments, milestone payments, and option purchase payments. During the three and six months ended June 30, 2019 and 2018 we recognized revenue of $0.1 million, $14.6 million, $2.4 million, and $47.9 million, respectively, related to the Collaboration Agreement.

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Operating Expenses

Research and Development Expenses

Research and development expenses are expensed as incurred and consist of costs incurred for our research activities, including our discovery efforts, and the development of our programs. These expenses include:

• salaries, benefits and other related costs, including stock-based compensation, for personnel engaged in research and development functions;

• expenses incurred in connection with the preclinical development of our programs and clinical trials of our product candidates, including under agreements with third parties, such as consultants, contractors, and contract research organizations, or CROs;

• the cost of manufacturing drug products for use in our preclinical studies and clinical trials, including under agreements with third parties, such as consultants, contractors, and contract manufacturing organizations, or CMOs;

• laboratory supplies;

• facilities, depreciation and other expenses, which include direct and allocated expenses for depreciation and amortization, rent and maintenance of facilities, insurance and supplies; and

• third-party license fees.

We do not track our internal research and development expenses on a program-by-program basis as they primarily relate to personnel, early research and consumable costs, which are deployed across multiple projects under development. These costs are included in unallocated research and development expenses in the table below. A portion of our research and development costs are external costs, which we do track on a program-by-program basis.

The following table summarizes our research and development expenses by program:

	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
	(in thousands)
SRF231	$	1,777	$	7,192	$	4,327	$	10,917
SRF373		—		—		—		12
SRF388		1,794		1,443		3,879		1,783
SRF617		3,183		707		6,891		2,165
Other early-stage programs		694		792		1,106		1,635
Unallocated research and discovery expenses		5,788		4,964		11,342		9,676
Total research and development expenses	$	13,236	$	15,098	$	27,545	$	26,188

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect our research and development expenses to increase over the next several years as we initiate clinical trials and pursue later stages of development of SRF617 and SRF388, initiate clinical trials for the product candidates we develop and continue to discover and develop additional product candidates.

At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of any of our product candidates that we develop from our programs. We are also unable to predict when, if ever, net cash inflows will commence from sales of product candidates we develop. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:

• successful completion of clinical trials and preclinical studies;

• sufficiency of our financial and other resources to complete the necessary clinical trials and preclinical studies;

• acceptance of INDs for our planned clinical trials or future clinical trials;

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• successful enrollment and completion of clinical trials;

• successful data from our clinical program that supports an acceptable risk-benefit profile of our product candidates in the intended populations;

• receipt of regulatory and marketing approvals from applicable regulatory authorities;

• receipt and maintenance of marketing approvals from applicable regulatory authorities;

• establishing agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if any of our product candidates are approved;

• entry into collaborations to further the development of our product candidates;

• obtaining and maintaining patent and trade secret protection or regulatory exclusivity for our product candidates;

• successfully launching commercial sales of our product candidates, if and when approved;

• acceptance of our product candidates’ benefits and uses, if and when approved, by patients, the medical community and third-party payors;

• maintaining a continued acceptable safety profile of the product candidates following approval;

• effectively competing with other therapies; and

• obtaining and maintaining healthcare coverage and adequate reimbursement from third-party payors.

A change in the outcome of any of these variables with respect to the development of any of our programs or any product candidate we develop would significantly change the costs, timing, and viability associated with the development of such program or product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and personnel-related costs, including stock-based compensation, for our personnel in executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees paid for accounting, auditing, consulting and tax services; insurance costs; travel expenses; and facility costs not otherwise included in research and development expenses.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support research activities and development of our programs. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance, and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.

Interest and Other Income (Expense), Net

Interest and other income consist primarily of interest earned on our cash, cash equivalents, and marketable securities.

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Results of Operations

Comparison of Three Months Ended June 30, 2019 and 2018

The following table summarizes our results of operations for the three months ended June 30, 2019 and 2018, along with the changes in those items:

	Three months ended June 30,
	2019			2018			2019 v 2018
	(in thousands)
Collaboration revenue - related party	$	143		$	2,428		$	(2,285	)
Operating expenses:
Research and development		13,236			15,098			(1,862	)
General and administrative		5,417			3,913			1,504
Total operating expenses		18,653			19,011			(358	)
Income (loss) from operations		(18,510	)		(16,583	)		(1,927	)
Interest and other income (expense), net		752			731			21
Net income (loss)	$	(17,758	)	$	(15,852	)	$	(1,906	)

Collaboration Revenue

Collaboration revenue was $0.1 million and $2.4 million for the three months ended June 30, 2019 and 2018, respectively, all of which was derived from the Collaboration Agreement. The decrease in collaboration revenue-related party was primarily due to a reduction in costs incurred in the current year resulting from Novartis’ decision not to purchase its Option related to IL-27 in February 2019. This decision reduced the number of remaining specified targets in our Collaboration Agreement from two in the three months ended June 30, 2018 to one in the three months ended June 30, 2019.

Research and Development Expenses

	Three months ended June 30,
	2019		2018		2019 v 2018
	(in thousands)
Direct research and development expenses by program:
SRF231	$	1,777	$	7,192	$	(5,415	)
SRF373		—		—		—
SRF388		1,794		1,443		351
SRF617		3,183		707		2,476
Other early-stage programs		694		792		(98	)
Research and discovery and unallocated expenses:
Personnel related (including stock-based compensation)		4,168		3,562		606
Facility related and other		1,620		1,402		218
Total research and development expenses	$	13,236	$	15,098	$	(1,862	)

Research and development expenses were $13.2 million for the three months ended June 30, 2019, compared to $15.1 million for the three months ended June 30, 2018. The decrease of $1.9 million was primarily due to decreases of $5.4 million in external costs for our SRF231 program and $0.1 million in our early-stage programs partially offset by increases of $2.5 million in external costs for our SRF617 program, $0.4 million in external costs for our SRF388 program, and $0.8 million for research and discovery and unallocated costs.

The decrease in research and development expenses for our SRF231 program was primarily due to a reduction in contract manufacturing work completed in the first half of 2019 compared to 2018.

The increase in research and development expenses for our SRF617 program was primarily due to increased contract manufacturing work and additional costs incurred in advancing the program in anticipation of filing an IND in the fourth quarter of 2019.

The increase in research and development expenses for our SRF388 program was primarily due to increased contract manufacturing work and additional costs incurred in advancing the program in anticipation of filing an IND in the fourth quarter of 2019.

26

The increase in research and discovery and unallocated expenses was primarily due to a $0.6 million increasein personnel-related costs due to increased headcount, as well as a $0.2 million increasein facility and other costs.

General and Administrative Expenses

General and administrative expenses were $5.4 million for the three months ended June 30, 2019, compared to $3.9 million for the three months ended June 30, 2018. The increase of $1.5 million was primarily due to an increase of $0.8 million in personnel-related costs as a result of an increase in headcount, an increase of $0.4 million in facility and other costs, and an increase of $0.1 million for professional fees related to legal and accounting services.

Interest and Other Income (Expense), Net

Interest and other income were approximately $0.8 million and $0.7 million during the three months ended June 30, 2019 and 2018, respectively, due primarily to interest income on invested balances of our cash, cash equivalents and marketable securities.

Comparison of Six Months Ended June 30, 2019 and 2018

The following table summarizes our results of operations for the six months ended June 30, 2019 and 2018, along with the changes in those items:

	Six months ended June 30,
	2019			2018		2019 v 2018
	(in thousands)
Collaboration revenue - related party	$	14,577		$	47,923	$	(33,346	)
Operating expenses:
Research and development		27,545			26,188		1,357
General and administrative		10,510			7,275		3,235
Total operating expenses		38,055			33,463		4,592
Income (loss) from operations		(23,478	)		14,460		(37,938	)
Interest and other income (expense), net		1,521			900		621
Net income (loss)	$	(21,957	)	$	15,360	$	(37,317	)

Collaboration Revenue

Collaboration revenue was $14.6 million and $47.9 million for the six months ended June 30, 2019 and 2018, respectively, all of which was derived from the Collaboration Agreement. The decrease in collaboration revenue-related party was primarily due to the recognition of $24.2 million in revenue in the six months ended June 30, 2018 related to a milestone payment of $45.0 million that we received in February 2018 from Novartis upon Novartis’ receipt and acceptance of the first final audited GLP toxicology study report for NZV930, and $5.0 million related to Novartis’ decision not to exercise its option related to CD47 in February 2018.

Research and Development Expenses

	Six months ended June 30,
	2019		2018		2019 v 2018
	(in thousands)
Direct research and development expenses by program:
SRF231	$	4,327	$	10,917	$	(6,590	)
SRF373		—		12		(12	)
SRF388		3,879		1,783		2,096
SRF617		6,891		2,165		4,726
Other early-stage programs		1,106		1,635		(529	)
Research and discovery and unallocated expenses:
Personnel related (including stock-based compensation)		8,043		6,970		1,073
Facility related and other		3,299		2,706		593
Total research and development expenses	$	27,545	$	26,188	$	1,357

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Research and development expenses were $27.5 million for thesix months ended June 30, 2019, compared to $26.2 million for thesix months ended June 30, 2018. The increase of $1.4 million was primarily due to increases of $2.1 million in external costs for our SRF388 program, $4.7 million in external costs for our SRF617 program,and $1.7 million for research and discovery and unallocated costs, which was partially offset by decreases of $6.6 million in external costs for our SRF231 program, and$0.5 million in our early-stage programs.

The increase in research and development expenses for our SRF617 program was primarily due to increased contract manufacturing work and additional costs incurred in advancing the program in anticipation of filing an IND in the fourth quarter of 2019.

The increase in research and development expenses for our SRF388 program was primarily due to increased contract manufacturing work and additional costs incurred in advancing the program in anticipation of filing an IND in the fourth quarter of 2019.

The increase in research and discovery and unallocated expenses was primarily due to increases of $1.1 million in personnel-related costs due to increased headcount, and an increase of $0.6 million in facility related costs.

The decrease in research and development expenses for our SRF231 program was primarily due to a reduction in contract manufacturing work completed in the second quarter of 2019 compared to 2018.

General and Administrative Expenses

General and administrative expenses were $10.5 million for the six months ended June 30, 2019, compared to $7.3 million for the six months ended June 30, 2018. The increase of $3.2 million was primarily due to increases of $2.1 million in personnel related costs, due to increases in headcount, and an increase of $0.9 million in facility and other costs.

Interest and Other Income (Expense), Net

Interest and other income were approximately $1.5 million and $0.9 million during the six months ended June 30, 2019 and 2018, respectively, due primarily to interest income on invested balances of our cash, cash equivalents and marketable securities.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. We have generated limited revenue to date from the Collaboration Agreement. We have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years, if at all. To date, we have financed our operations with proceeds from the sales of preferred stock, payments received under the Collaboration Agreement, and proceeds from our initial public offering of common stock and concurrent private placement. Through June 30, 2019, we had received gross proceeds of $48.6 million from our sales of preferred stock and $150.0 million from the Collaboration Agreement.

On April 23, 2018, we completed an initial public offering of our common stock by issuing 7,200,000 shares of common stock, at $15.00 per share for gross proceeds of $108.0 million, or net proceeds of $97.2 million. Concurrent with the initial public offering, we issued Novartis 766,666 shares of our common stock at $15.00 per share, for proceeds of $11.5 million, in a private placement.

In May 2019, we entered into a Capital on Demand^TM Sales Agreement, or the Sales Agreement, with JonesTrading Institutional Services to issue and sell up to $30.0 million in shares of our common stock, from time to time. We have not yet issued or sold any securities under the Sales Agreement.

As of June 30, 2019, we had cash, cash equivalents and marketable securities of $126.3 million.

Future Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, in particular as we continue to advance our product candidates and our discovery programs and conduct research under the Collaboration Agreement. In addition, we expect to continue to incur additional costs associated with operating as a public company.

We believe that our existing cash, cash equivalents, and marketable securities, as of August 7, 2019, will enable us to fund our operating expenses and capital expenditure requirements into 2021, excluding any future milestone payments from Novartis. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect.

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Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including:

• completing clinical development of existing product candidates and programs, identifying new product candidates, and completing pre-clinical and clinical development of such product candidates;

• seeking and obtaining marketing approvals for any of product candidates that we develop;

• launching and commercializing product candidates for which we obtain marketing approval by establishing a sales force, marketing, medical affairs and distribution infrastructure or, alternatively, collaborating with a commercialization partner;

• achieving adequate coverage and reimbursement by hospitals, government and third-party payors for product candidates that we develop;

• establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate, in both amount and quality, products and services to support clinical development and the market demand for product candidates that we develop, if approved;

• obtaining market acceptance of product candidates that we develop as viable treatment options;

• addressing any competing technological and market developments;

• negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter and performing our obligations in such collaborations;

• maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how;

• defending against third-party interference or infringement claims, if any; and

• attracting, hiring and retaining qualified personnel.

A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Further, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.

In addition to the variables described above, if and when any product candidate we develop successfully completes development, we will incur substantial additional costs associated with regulatory filings, marketing approval, post-marketing requirements, maintaining our intellectual property rights, and regulatory protection, in addition to other costs. We cannot reasonably estimate these costs at this time.

Until such time, if ever, that we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements, including the Collaboration Agreement. We currently have no credit facility or committed sources of capital. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all. If we raise additional funds through collaboration arrangements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate development or future commercialization efforts.

Cash Flows

The following table summarizes information regarding our cash flows for each of the periods presented:

	Six months ended June 30,
	2019			2018
	(in thousands)
Net cash provided by (used in):
Operating activities	$	(32,409	)	$	12,866
Investing activities		(12,996	)		(94,511	)
Financing activities		244			110,068
Net increase (decrease) in cash and cash equivalents and restricted cash	$	(45,161	)	$	28,423

29

Operating Activities

During the six months ended June 30, 2019, net cash used in operating activities was $32.4 million, primarily due to a net loss of $22.0 million and changes in our operating assets and liabilities of $14.3 million, partially offset by non-cash charges of $3.9 million. Net cash used in operating assets and liabilities for the six months ended June 30, 2019 consisted primarily of a $14.6 million decrease in deferred revenue-related party, a $0.8 million decrease in accrued expenses and other current liabilities, a $0.9 million decrease in accounts payable, a $0.6 million decrease in operating lease liabilities, and a decrease of $2.5 million in prepaid expenses and other current assets. The decrease in deferred revenue-related party was primarily due to the removal of all future costs associated with IL-27 from the estimated total costs in the cost-to-cost model as a result of Novartis’ decision not to purchase the Option related to IL-27. The decrease in accrued expenses and other current liabilities was primarily due to a $1.1 million accrual for a commercial option fee license with Adimab in June 2018. The decrease in operating lease liabilities relates to lease payments made in the current year.

During the six months ended June 30, 2018, net cash provided by operating activities was $12.9 million, primarily due to net income of $15.4 million and non-cash charges of $3.4 million partially offset by net cash used in operating assets and liabilities of $5.9 million. Net cash used in operating assets and liabilities for the six months ended June 30, 2018 consisted primarily of a $2.4 million decrease in accrued expenses and other current liabilities, and a $2.9 million decrease in deferred revenue-related party, offset by a $0.5 million increase in prepaid expenses and other current assets. The decrease in accrued expenses and other current liabilities is primarily due to payments of manufacturing costs incurred to support ongoing clinical trial activities, including a payment to Novartis and the decrease in accounts payable was due to timing of invoices for manufacturing expenses.

Investing Activities

During the six months ended June 30, 2019, net cash used in investing activities was $13.0 million, primarily due to purchases of marketable securities of $93.5 million and $1.1 million of purchases of property and equipment, partially offset by $81.6 million of proceeds from sales or maturities of marketable securities.

During the six months ended June 30, 2018, net cash used in investing activities was $94.5 million, primarily due to purchases of marketable securities of $107.3 million and $0.6 million of purchases of property and equipment, partially offset by $13.4 million of proceeds from sales or maturities of marketable securities.

Financing Activities

During the six months ended June 30, 2019, net cash provided by financing activities was $0.2 million, consisting of proceeds received from the exercise of stock options.

During the six months ended June 30, 2018, net cash provided by financing activities was $110.1 million, consisting primarily of $100.4 million net proceeds received upon the completion of the initial public offering in April 2018, $11.5 million from a private placement of common stock with Novartis, a related party, and $0.2 million of proceeds received from the exercise of stock options, partially offset by $2.0 million paid for initial public offering costs.

Contractual Obligations

We have entered into agreements in the normal course of business with CROs for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies and other services and products for operating purposes. These contractual obligations are cancelable at any time by us, generally upon prior written notice to the vendor.

During the six months ended June 30, 2019, there were no material changes, to our contractual obligations and commitments from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” in our Annual Report on Form 10-K filed with the SEC on March 7, 2019.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with the rules and regulations of the SEC, and generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenue and expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

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Our critical accounting policies and the methodologies and assumptions we apply under them have not materially changed since our Annual Report on Form 10-K filed with the SEC on March 7, 2019, except for our adoption of the new leasing standard which is discussed above.

Off-Balance Sheet Arrangements

We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

Emerging Growth Company Status

As an “emerging growth company,” the Jumpstart Our Business Startups Act of 2012 allows us to delay adoption of new or revised accounting standards applicable to public companies until such standards are made applicable to private companies. However, we have irrevocably elected not to avail ourselves of this extended transition period for complying with new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our cash, cash equivalents and marketable securities as of June 30, 2019 consisted of cash, a money market fund invested primarily in short-term U.S. Treasury obligations, U.S. government agency bonds and corporate bonds. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these investments, we do not believe that we have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.

Item 4. Limitations on Effectiveness of Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934). Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2019.

Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) has occurred during the six months ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

In January 2017, we filed an opposition in the European Patent Office, or EPO, opposing the grant of European Patent No. EP 2242512 to Stanford University, or the Stanford Patent. We were one of seven parties opposing the grant of the Stanford Patent, which relates generally to CD47 antibodies for use in treating cancer. Stanford filed a response to the seven oppositions and oral arguments were held in August 2018. The Opposition Division of the EPO maintained an amended version of the patent. As of August 7, 2019, we and three additional opponents had submitted notices of appeal to the Opposition Division’s interlocutory decision to the Technical Board of Appeal of the EPO. Accordingly, final resolution of the oppositions may be several years in the future.

We are also aware of various pending divisional applications relating to EP 2242512 that are being pursued by Stanford University. Two divisional applications, EP 3056514 and EP 3056515, proceeded to grant on April 17, 2019. According to Article 99 of the European Patent Convention, any person may give notice to the EPO of opposition to these patents within nine months of grant, i.e., by January 17, 2020.

From time to time, we may become involved in other litigation or legal proceedings relating to claims arising from the ordinary course of business.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

32

Item 6. Exhibits.

The exhibits listed on the Exhibit Index immediately preceding such exhibits, which is incorporated herein by reference, are filed or furnished as part of this Quarterly Report on Form 10-Q.

Exhibit Number	Description
31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial and Accounting Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Certification of Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* The certification furnished in Exhibit 32.1 and Exhibit 32.2 hereto is deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference. Such certification will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference.

33

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Surface Oncology, Inc.
Date: August 7, 2019	By:	/s/ J. Jeffrey Goater
		J. Jeffrey Goater
		Chief Executive Officer (Principal Executive Officer)
Date: August 7, 2019	By:	/s/ Jessica Fees
		Jessica Fees
		Treasurer and Senior Vice President, Finance and Business
		Operations (Principal Financial and Accounting Officer)

34

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a)

and 15d-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, J. Jeffrey Goater, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Surface Oncology, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) (Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313);

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 7, 2019	/s/ J. Jeffrey Goater
	J. Jeffrey Goater Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a)

and 15d-14(a), as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, Jessica Fees, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Surface Oncology, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) (Paragraph omitted pursuant to SEC Release Nos. 33-8238/34-47986 and 33-8392/34-49313);

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 7, 2019	/s/ Jessica Fees
	Jessica Fees Senior Vice President, Finance and Business Operations (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Surface Oncology, Inc. (the “Company”) for the period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, J. Jeffrey Goater Chief Executive Officer of the Company, hereby certifies, pursuant to Section 1350 of Chapter 63 of Title 18, United States Code, that to his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 7, 2019	/s/ J. Jeffrey Goater
	J. Jeffrey Goater Chief Executive Officer (Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Surface Oncology, Inc. (the “Company”) for the period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Jessica Fees, Senior Vice President, Finance and Business Operations of the Company, hereby certifies, pursuant to Section 1350 of Chapter 63 of Title 18, United States Code, that to his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 7, 2019	/s/ Jessica Fees
	Jessica Fees Senior Vice President, Finance and Business Operations (Principal Financial and Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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	Jun. 30, 2019	Aug. 05, 2019
Document And Entity Information [Abstract]
Document Type	10-Q
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Document Period End Date	Jun. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q2
Trading Symbol	SURF
Entity Registrant Name	SURFACE ONCOLOGY, INC.
Entity Central Index Key	0001718108
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Entity Current Reporting Status	Yes
Entity Shell Company	false
Entity File Number	001-38459
Entity Tax Identification Number	465543980
Entity Address, Address Line One	50 Hampshire Street
Entity Address, Address Line Two	8th Floor
Entity Address, City or Town	Cambridge
Entity Address, State or Province	MA
Entity Address, Postal Zip Code	02139
City Area Code	617
Local Phone Number	714-4096
Entity Common Stock, Shares Outstanding		27,858,000

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Condensed Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 37,751	$ 82,912
Marketable securities	88,539	75,923
Prepaid expenses and other current assets	3,240	5,766
Total current assets	129,530	164,601
Property and equipment, net	8,015	8,226
Operating lease right-of-use asset	16,094
Restricted cash	1,198	1,198
Other assets	11	40
Total assets	154,848	174,065
Current liabilities:
Accounts payable	2,069	3,412
Accrued expenses and other current liabilities	7,925	8,803
Deferred revenue - related party	3,572	14,610
Deferred rent		352
Operating lease liability	1,203
Total current liabilities	14,769	27,177
Deferred revenue - related party, non-current	35,803	39,342
Deferred rent, non-current		4,684
Operating lease liability, non-current	19,954
Total liabilities	70,526	71,203
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.0001 par value per share; 5,000,000 shares authorized at June 30, 2019 and December 31, 2018; no shares issued and outstanding at June 30, 2019 and December 31, 2018
Common stock, $0.0001 par value; 150,000,000 shares authorized at June 30, 2019 and December 31, 2018, respectively; 27,851,751 and 27,772,600 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively	3	3
Additional paid-in capital	172,908	169,784
Accumulated other comprehensive income (loss)	174	(119)
Accumulated deficit	(88,763)	(66,806)
Total stockholders’ equity	84,322	102,862
Total liabilities and stockholders’ equity	$ 154,848	$ 174,065

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Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares	Jun. 30, 2019	Dec. 31, 2018
Statement Of Financial Position [Abstract]
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, authorized	5,000,000	5,000,000
Preferred stock, issued	0	0
Preferred stock, outstanding	0	0
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, authorized	150,000,000	150,000,000
Common stock, issued	27,851,751	27,772,600
Common stock, outstanding	27,851,751	27,772,600

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Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) (Parenthetical) $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($)
Statement Of Income And Comprehensive Income [Abstract]
Marketable securities tax	$ 0

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Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Statement Of Income And Comprehensive Income [Abstract]
Collaboration revenue - related party	$ 143	$ 2,428	$ 14,577	$ 47,923
Type of Revenue [Extensible List]	us-gaap:CollaborativeArrangementMember	us-gaap:CollaborativeArrangementMember	us-gaap:CollaborativeArrangementMember	us-gaap:CollaborativeArrangementMember
Operating expenses:
Research and development	$ 13,236	$ 15,098	$ 27,545	$ 26,188
General and administrative	5,417	3,913	10,510	7,275
Total operating expenses	18,653	19,011	38,055	33,463
Income (loss) from operations	(18,510)	(16,583)	(23,478)	14,460
Interest and other income, net	752	731	1,521	900
Net income (loss)	(17,758)	(15,852)	(21,957)	15,360
Accretion of redeemable convertible preferred stock to redemption value				(11)
Net income attributable to redeemable convertible preferred stockholders				(7,077)
Net income (loss) attributable to common stockholders	$ (17,758)	$ (15,852)	$ (21,957)	$ 8,272
Net income (loss) per share attributable to common stockholders— basic	$ (0.64)	$ (0.73)	$ (0.79)	$ 0.68
Weighted average common shares outstanding— basic	27,845,136	21,595,586	27,835,471	12,213,717
Net income (loss) per share attributable to common stockholders— diluted	$ (0.64)	$ (0.73)	$ (0.79)	$ 0.60
Weighted average common shares outstanding— diluted	27,845,136	21,595,586	27,835,471	13,805,380
Comprehensive income (loss):
Net income (loss)	$ (17,758)	$ (15,852)	$ (21,957)	$ 15,360
Other comprehensive income:
Unrealized gain on marketable securities, net of tax of $0	169	63	293	13
Comprehensive income (loss)	$ (17,589)	$ (15,789)	$ (21,664)	$ 15,373

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Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders Equity (Deficit) - USD ($) $ in Thousands	Total	Series A and A-1 Redeemable Convertible Preferred Stock	Initial Public Offering	Private Placement Novartis Institutes for Biomedical Research, Inc.	Common Stock	Common Stock Initial Public Offering	Common Stock Private Placement Novartis Institutes for Biomedical Research, Inc.	Additional Paid-in Capital	Additional Paid-in Capital Initial Public Offering	Additional Paid-in Capital Private Placement Novartis Institutes for Biomedical Research, Inc.	Accumulated Other Comprehensive Income (Loss)	Accumulated Deficit
Beginning balance at Dec. 31, 2017	$ (67,314)							$ 6,877			$ (246)	$ (73,945)
Temporary equity beginning balance, share at Dec. 31, 2017		37,100,000
Temporary equity beginning balance at Dec. 31, 2017		$ 48,517
Beginning balance, share at Dec. 31, 2017					2,686,350
Issuance of common stock upon exercise of stock options	157							157
Issuance of common stock upon exercise of stock options, share					80,675
Stock-based compensation expense	1,291							1,291
Accretion of redeemable convertible preferred stockto redemption value		$ 11
Accretion of redeemable convertible preferred stock to redemption value	(11)							(11)
Adjustment due to the adoption of ASC 606	13,736											13,736
Unrealized gain (loss) on marketable securities	(50)										(50)
Net income (loss)	31,212											31,212
Ending balance at Mar. 31, 2018	(20,979)							8,314			(296)	(28,997)
Temporary equity ending balance, share at Mar. 31, 2018		37,100,000
Temporary equity ending balance at Mar. 31, 2018		$ 48,528
Ending balance, share at Mar. 31, 2018					2,767,025
Beginning balance at Dec. 31, 2017	(67,314)							6,877			(246)	(73,945)
Temporary equity beginning balance, share at Dec. 31, 2017		37,100,000
Temporary equity beginning balance at Dec. 31, 2017		$ 48,517
Beginning balance, share at Dec. 31, 2017					2,686,350
Unrealized gain (loss) on marketable securities	13
Net income (loss)	15,360
Ending balance at Jun. 30, 2018	121,961				$ 3			167,040			(233)	(44,849)
Ending balance, share at Jun. 30, 2018					27,600,951
Beginning balance at Mar. 31, 2018	(20,979)							8,314			(296)	(28,997)
Temporary equity beginning balance, share at Mar. 31, 2018		37,100,000
Temporary equity beginning balance at Mar. 31, 2018		$ 48,528
Beginning balance, share at Mar. 31, 2018					2,767,025
Issuance of common stock upon exercise of stock options	2							2
Issuance of common stock upon exercise of stock options, share					3,636
Stock-based compensation expense	1,490							1,490
Conversion of redeemable convertible preferred stock to common stock	48,528				$ 2			48,526
Temporary equity conversion of convertible preferred stock, shares		(37,100,000)
Temporary equity conversion of convertible preferred stock		$ (48,528)
Conversion of convertible preferred stock, shares					16,863,624
Issuance of common stock			$ 97,209	$ 11,500		$ 1			$ 97,208	$ 11,500
Issuance of common stock, shares						7,200,000	766,666
Unrealized gain (loss) on marketable securities	63										63
Net income (loss)	(15,852)											(15,852)
Ending balance at Jun. 30, 2018	121,961				$ 3			167,040			(233)	(44,849)
Ending balance, share at Jun. 30, 2018					27,600,951
Beginning balance at Dec. 31, 2018	$ 102,862				$ 3			169,784			(119)	(66,806)
Beginning balance, share at Dec. 31, 2018	27,772,600				27,772,600
Issuance of common stock upon exercise of stock options	$ 211							211
Issuance of common stock upon exercise of stock options, share					58,082
Stock-based compensation expense	1,395							1,395
Unrealized gain (loss) on marketable securities	124										124
Net income (loss)	(4,199)											(4,199)
Ending balance at Mar. 31, 2019	100,393				$ 3			171,390			5	(71,005)
Ending balance, share at Mar. 31, 2019					27,830,682
Beginning balance at Dec. 31, 2018	$ 102,862				$ 3			169,784			(119)	(66,806)
Beginning balance, share at Dec. 31, 2018	27,772,600				27,772,600
Unrealized gain (loss) on marketable securities	$ 293
Net income (loss)	(21,957)
Ending balance at Jun. 30, 2019	$ 84,322				$ 3			172,908			174	(88,763)
Ending balance, share at Jun. 30, 2019	27,851,751				27,851,751
Beginning balance at Mar. 31, 2019	$ 100,393				$ 3			171,390			5	(71,005)
Beginning balance, share at Mar. 31, 2019					27,830,682
Issuance of common stock upon exercise of stock options	33							33
Issuance of common stock upon exercise of stock options, share					21,069
Stock-based compensation expense	1,485							1,485
Unrealized gain (loss) on marketable securities	169										169
Net income (loss)	(17,758)											(17,758)
Ending balance at Jun. 30, 2019	$ 84,322				$ 3			$ 172,908			$ 174	$ (88,763)
Ending balance, share at Jun. 30, 2019	27,851,751				27,851,751

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Cash flows from operating activities:
Net income (loss)	$ (21,957)	$ 15,360
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization expense	871	648
Stock-based compensation expense	2,880	2,781
Net amortization of premiums and discounts on marketable securities	(464)	(22)
Loss on disposal of property and equipment		13
Non-cash operating lease cost	578
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	2,526	(498)
Other assets	29	(1)
Accounts payable	(897)	(12)
Accrued expenses and other current liabilities	(847)	(2,359)
Deferred rent		(123)
Operating lease liability	(551)
Deferred revenue - related party	(14,577)	(2,921)
Net cash (used in) provided by operating activities	(32,409)	12,866
Cash flows from investing activities:
Purchases of property and equipment	(1,137)	(611)
Purchases of marketable investments	(93,459)	(107,258)
Proceeds from sales or maturities of marketable securities	81,600	13,358
Net cash used in investing activities	(12,996)	(94,511)
Cash flows from financing activities:
Payments of offering costs		(2,031)
Proceeds from initial public offering of common stock, net of commissions and underwriting discounts		100,440
Proceeds from issuance of common stock to a related party		11,500
Proceeds from exercise of stock options	244	159
Net cash provided by financing activities	244	110,068
Net increase (decrease) in cash and cash equivalents and restricted cash	(45,161)	28,423
Cash and cash equivalents and restricted cash at beginning of period	84,110	23,540
Cash and cash equivalents and restricted cash at end of period	38,949	51,963
Supplemental disclosure of cash flow information:
Cash paid for income taxes		41
Supplemental disclosure of non-cash investing and financing activities:
Accretion of redeemable convertible preferred stock to redemption value		11
Purchases of property and equipment included in accounts payable and accrued expenses	$ 215	$ 106

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Nature of the Business

6 Months Ended

Jun. 30, 2019

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Nature of the Business

1. Nature of the Business

Surface Oncology, Inc. (the “Company” or “Surface”) is a clinical-stage immuno-oncology company focused on using its specialized knowledge of the biological pathways critical to the immunosuppressive tumor microenvironment (“TME”) for the development of next-generation cancer therapies. Surface was incorporated in April 2014 under the laws of the State of Delaware.

The Company is subject to risks common to early-stage companies in the biotechnology industry including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the ability to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance-reporting capabilities. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

On April 6, 2018, the Company effected a one-for-2.2 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s Redeemable Convertible Preferred Stock. Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

On April 23, 2018, the Company completed its initial public offering of its common stock by issuing 7,200,000 shares of common stock, at $15.00 per share for gross proceeds of $108,000, or net proceeds of $97,209 after deducting underwriting discounts, commissions and offering expenses. Concurrent with the initial public offering, the Company issued Novartis Institutes for Biomedical Research, Inc. (“Novartis”) 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500, in a private placement.

Upon the closing of the Company’s initial public offering on April 23, 2018, all shares of Series A and A-1 redeemable convertible preferred stock (the “Series A Preferred Stock” and “Series A-1 Preferred Stock”, respectively) automatically converted into 16,863,624 shares of common stock.

On May 1, 2019, the Company entered into a Capital on Demand^TM Sales Agreement (the “Sales Agreement”) with JonesTrading Institutional Services LLC (“JonesTrading”) to issue and sell shares of the Company’s common stock of up to $30,000 in gross proceeds, from time to time during the term of the a Sales Agreement, through an “at-the-market” equity offering program under which JonesTrading will act as the Company’s agent and/or principal (the “ATM Facility”). The ATM Facility provides that JonesTrading will be entitled to compensation for its services in an amount of up to 3.0% of the gross proceeds of any shares sold under the ATM Facility. The Company has no obligation to sell any shares under the ATM Facility and may, at any time, suspend solicitation and offers under the Sales Agreement. As of June 30, 2019, the Company had not sold any shares under the ATM Facility.

The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has primarily funded its operations with proceeds from the sales of redeemable convertible preferred stock, proceeds from a collaboration agreement with Novartis, and proceeds from the Company’s initial public offering of common stock. The Company has incurred losses and negative cash flows from operations since its inception. As of June 30, 2019, the Company had an accumulated deficit of $88,763.

The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of August 7, 2019, the issuance date of this Quarterly Report on Form 10-Q, the Company expects that its cash, cash equivalents and marketable securities of $126,290, will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months. The future viability of the Company beyond that date is dependent on its ability to raise additional capital to finance its operations.

The Company will seek additional funding through public financings, debt financings, collaboration agreements, strategic alliances, and licensing arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborations or other arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be required to delay, reduce or eliminate research and development programs, product portfolio expansion, or future commercialization efforts, which could adversely affect its business prospects.

Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2019

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiary, Surface Securities Corporation, a Massachusetts corporation, after elimination of all intercompany accounts and transactions.

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 2 to the financial statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2019, except for the Company’s adoption of the new leasing standard as discussed below.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, the accrual of research and development expenses, and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from the Company’s estimates.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liability, and operating lease liability, non-current in the Company’s condensed consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Many lease agreements include the option to renew or extend the lease term. The exercise of lease renewal options or extensions is at the Company’s sole discretion, and are only included in the calculation of the operating lease ROU asset and operating lease liability when it is reasonably certain that the Company would exercise such options. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which it calculates based on the credit quality of the Company, and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of each lease.

The components of a lease are split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company’s facilities operating leases have lease and non-lease components to which the Company has elected to apply the practical expedient and account for each lease component and related non-lease component as one single component. The Company also elected the package of practical expedients, which, among other things, allows the Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. The Company also made an accounting policy election not to recognize leases with an initial term of 12 months or less within its condensed consolidated balance sheets and to recognize those lease payments on a straight-line basis in its condensed consolidated statements of operations and comprehensive income (loss) over the lease term.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 30, 2019, the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018, the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018, and the condensed consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three and six months ended June 30, 2019 and 2018 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2019 and the results of its operations and its cash flows for the six months ended June 30, 2019 and 2018. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2019 and 2018 are also unaudited. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods, or any future year period.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit bright lines. In July 2018, the FASB issuedASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11, “Leases (Topic 842) – Targeted Improvements” (ASU 2018-11), which addresses implementation issues related to the new lease standard. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years.

The Company adopted ASC 842 using the modified retrospective approach with an effective date of January 1, 2019 for leases that existed on that date. Prior period results continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows the Company to carry forward the historical lease classification. In connection with the adoption of ASC 842, the Company recorded an impact of $16,672 on its assets and $21,708 on its liabilities for the recognition of operating lease right-of-use-assets and operating lease liabilities, respectively, which are primarily related to the lease of the Company’s corporate headquarters in Cambridge, Massachusetts. The adoption of ASC 842 did not have a material impact on the Company’s results of operations or cash flows.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). This guidance is intended to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be considered “not indexed to an entity’s own stock” and therefore accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. Down round features are most often found in warrants and conversion options embedded in debt or preferred equity instruments. In addition, the guidance re-characterized the indefinite deferral of certain provisions on distinguishing liabilities from equity to a scope exception with no accounting effect. The Company adopted ASU 2017-11 on January 1, 2019. The adoption of this guidance did not have a material impact on the Company's financial position or its results of operations.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company adopted ASU 2018-07 on January 1, 2019. As a result of adopting this standard, the fair value of outstanding nonemployee awards as of December 31, 2018 will no longer be remeasured each reporting period. All future expense related to these awards will be recorded based on the fair value measured as of January 1, 2019. The adoption of this guidance did not have a material impact of the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, or ASU 2018-18. ASU 2018-18 makes targeted improvements to generally accepted accounting principles for collaborative arrangements, including: (i) clarification that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (ii) adding unit-of-account guidance in Topic 808 to align with the guidance in ASC 606, and (iii) a requirement that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The Company is currently evaluating the impact of adoption, if any, that this standard may have on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”). The new standard provides for changes to the disclosure requirements for recurring and nonrecurring fair value measurements under Topic 820. Provisions of ASU 2018-13 including changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments in ASU 2018-13 should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the new standard but does not anticipate ASU 2018-13 will have a material impact on its condensed consolidated financial statements and related disclosures.  

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. The standard is effective on January 1, 2020, with early adoption permitted. The Company is currently evaluating the expected impact of ASU 2016-13 on its consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

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Marketable Securities

6 Months Ended

Jun. 30, 2019

Marketable Securities [Abstract]

Marketable Securities

3. Marketable Securities

As of June 30, 2019, the fair value of available-for-sale marketable debt securities by type of security was as follows:

	June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Marketable debt securities:
U.S. Treasury notes	$	62,954	$	120	$	—		$	63,074
U.S. Government agency bonds		22,401		61		—			22,462
Corporate bonds		3,010		—		(7	)		3,003
	$	88,365	$	181	$	(7	)	$	88,539

The amortized cost and fair value of the Company’s available-for-sale debt securities by contractual maturity are summarized as follows:

	June 30, 2019
	Amortized Cost		Fair Value
Maturing in one year or less	$	81,398	$	81,536
Maturing after one year but less than two years		6,967		7,003
	$	88,365	$	88,539

As of December 31, 2018, the fair value of available-for-sale marketable debt securities by type of security was as follows:

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Marketable debt securities:
U.S. Treasury notes	$	62,866	$	—	$	(24	)	$	62,842
U.S. Government agency bonds		2,900		—		(15	)		2,885
Corporate bonds		10,276		—		(80	)		10,196
	$	76,042	$	—	$	(119	)	$	75,923

The amortized cost and fair value of the Company’s available-for-sale securities by contractual maturity are summarized as follows:

	December 31, 2018
	Amortized Cost		Fair Value
Maturing in one year or less	$	76,042	$	75,923
	$	76,042	$	75,923

The Company determined that there was no material change in the credit risk of these investments. As a result, the Company determined it did not hold any investments with an other-than-temporary decline in fair value as of June 30, 2019 and December 31, 2018.

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Fair Value of Financial Assets

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value of Financial Assets

4. Fair Value of Financial Assets

The following tables present information about the Company’s financial assets that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

	Fair Value Measurements as of June 30, 2019 using:
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	24,840	$	—	$	—	$	24,840
Marketable securities:
U.S. Treasury notes		—		22,462		—		22,462
U.S. Government agency bonds		—		63,074		—		63,074
Corporate bonds		—		3,003		—		3,003
	$	24,840	$	88,539	$	—	$	113,379

	Fair Value Measurements as of December 31, 2018 using:
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	77,737	$	—	$	—	$	77,737
Marketable securities:
U.S. Treasury notes		—		62,842		—	$	62,842
U.S. Government agency bonds		—		2,885		—		2,885
Corporate bonds		—		10,196		—		10,196
	$	77,737	$	75,923	$	—	$	153,660

As of June 30, 2019 and December 31, 2018, the Company’s cash equivalents were invested in money market funds and were valued based on Level 1 inputs. During the six months ended June 30, 2019 and 2018, there were no transfers between Level 1, Level 2 and Level 3.

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Collaboration Agreement with Novartis

6 Months Ended

Jun. 30, 2019

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Collaboration Agreement with Novartis

5. Collaboration Agreement with Novartis

Overview

In January 2016, the Company entered into a collaboration agreement with Novartis (the “Collaboration Agreement”), which was subsequently amended in May 2016, July 2017, September 2017, and October 2018 (the “October 2018 Amendment”). Pursuant to the Collaboration Agreement, the Company granted Novartis a worldwide exclusive license to research, develop, manufacture and commercialize antibodies that target cluster of differentiation, or CD, 73 (“CD73”). In addition, the Company granted Novartis the right to purchase exclusive option rights (each an “Option”) for up to four specified targets (each an “Option Target”) including certain development, manufacturing, and commercialization rights. Novartis initially had the right to exercise up to three purchased Options. Under the Collaboration Agreement, therefore, Novartis had the ability to exclusively license the development and manufacturing rights for up to four targets (inclusive of CD73). Of these, the Company had the right to retain commercialization rights in the United States to two of such targets. As of June 30, 2019, Novartis has one Option remaining eligible for purchase, and potential exercise. The Collaboration Agreement is governed by a joint steering committee that is co-chaired by a chairperson designated by each of the Company and Novartis. The October 2018 Amendment, among other things, modified certain definitions and provisions of the Collaboration Agreement to make them consistent with the amended and restated development and option agreement the Company entered into with Adimab LLC in October and clarified the parties’ rights and responsibilities relating to the amended agreement with Adimab LLC and diagnostic products.

Novartis is a related party because it is a greater than 5% stockholder of the Company. In January 2016, the Company entered into the Collaboration Agreement and sold 2,000,000 shares of its Series A-1 preferred stock to Novartis. In addition, concurrent with the Company’s initial public offering of common stock, the Company issued Novartis 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500 in a private placement.

During the six months ended June 30, 2019, the Company made no cash payments to Novartis related to the Collaboration Agreement. During the six months ended June 30, 2018, the Company made a payment of $3,437 to Novartis for the reimbursement of manufacturing costs incurred by Novartis prior to December 31, 2017.

Research on Targets

Under the Collaboration Agreement, the Company is responsible for performing preclinical research through the first investigational new drug application (“IND”) acceptance on antibodies that bind to CD73 and each Option Target, pursuant to a research plan directed toward each target. The Company is responsible for all costs and expenses incurred by or on its behalf, in connection with such research.

Development and Commercialization of CD73 Products

Novartis has the sole right to develop and commercialize CD73 antibody candidates and corresponding licensed products worldwide pursuant to a development plan and a commercialization plan, respectively. Novartis is obligated to use commercially reasonable efforts to develop the CD73 antibody candidates and corresponding licensed products, to obtain regulatory approval of such products, including within certain defined markets, and to commercialize such products following regulatory approval. Novartis is responsible for all costs and expenses of such development and commercialization and is obligated to provide the Company with updates on its development and commercialization activities through the joint steering committee, joint development committee, and joint commercialization committee.

Option Targets

Prior to the filing of an IND for an Option Target, Novartis may purchase the Option to obtain certain development, manufacturing and commercialization rights for antibodies that bind to the Option Target. To the extent Novartis does not elect to purchase an Option to an Option Target, the Option for such Option Target will expire and all rights to such Option Target under the Collaboration Agreement will terminate. Novartis had the right to exercise up to a total of three purchased Options. Each exercised Option is to be designated as either a regional or global option, with each such designation determining the development, manufacturing, and commercialization rights between the parties with respect to such Option Target, corresponding antibody candidates, and licensed products, as summarized below. Novartis has the ability to designate the remaining Option as either regional or global. Following Novartis’ exercise of an Option with respect to an Option Target, the Company will grant to Novartis licenses that are necessary to effectuate the development, manufacturing or commercialization rights associated with a regional or global option, as described below.

In December 2016, Novartis purchased the Option for antibodies that bind to CD47 for $5,000. In March 2018, Novartis notified the Company of its decision not to exercise its purchased Option related to CD47. In March 2018, the Company and Novartis also mutually agreed to cease development of one of the undisclosed programs subject to the Collaboration Agreement. In February 2019, Novartis notified the Company of its decision not to purchase the Option related to IL-27.

Development and Commercialization of Regional Licensed Products

To the extent an exercised Option is designated as regional, the Company is primarily responsible for the early clinical development of each corresponding regional antibody candidate and regional licensed product at its own cost. Unless the Company chooses to opt out of its development rights, it will collaborate with Novartis on the further clinical development of regional antibody candidates and regional licensed products. Pursuant to a regional development plan for each regional licensed product, the Company will be responsible for development activities related to obtaining regulatory approval in the United States, with Novartis responsible for development activities related to obtaining regulatory approval elsewhere in the world. The development costs of such later clinical development activities will be split evenly among the parties. Thereafter, the Company is responsible for the commercialization of regional licensed products in the United States, and Novartis is responsible for the commercialization of regional licensed products outside of the United States, each pursuant to a commercialization plan. Each party must use commercially reasonable efforts to commercialize such products within their respective territories. The Company is obligated to work with Novartis to agree to a global commercialization strategy with respect to the regional licensed products prior to commercialization.

Development and Commercialization of Global Licensed Products

To the extent an exercised Option is designated as global, the Company is primarily responsible for the early clinical development of each global antibody candidate and global licensed product at the Company’s own cost, and Novartis is solely responsible for the later worldwide clinical development of global antibody candidates and global licensed products, pursuant to a development plan for such global licensed product, at its own cost. Novartis is solely responsible for the worldwide commercialization of global licensed products and must use commercially reasonable efforts to commercialize such products, pursuant to a commercialization plan, at its own cost. Novartis agrees to provide the Company with development and commercialization updates regarding global licensed products through the joint steering committee, joint development committee, and joint commercialization committee.

Exclusivity

Neither the Company nor Novartis may, alone or with any affiliate or third party, (i) research or develop any antibody that specifically binds to an Option Target for a specified period of time outside of the Collaboration Agreement or (ii) develop or commercialize any antibody that specifically binds to CD73 or any Option Target that subsequently becomes a licensed target for a specified period of time outside the Collaboration Agreement. The October 2018 Amendment clarified that Novartis is permitted to research, develop, manufacture or commercialize any diagnostic product that specifically binds to a licensed target, subject to Novartis’ compliance with its rights and obligations under the Collaboration Agreement, and provided that where such diagnostic product is an Adimab diagnostic product, Novartis may research, develop, manufacture or commercialize such Adimab diagnostic product solely for the purpose of research, development or commercialization of a therapeutic or prophylactic licensed product that specifically binds to the same licensed target.

Financial Terms

Upon entering into the Collaboration Agreement in January 2016, Novartis made an upfront payment to the Company of $70,000. In addition, Novartis is obligated to pay the Company a fee to the extent it desires to purchase an Option for any Option Target and another fee to exercise such purchased Option, which entitles the Company to an aggregate of up to $20,000 in option purchase and option exercise payments for the remaining Option. The Company is also eligible to receive payments on a target-by-target basis upon the achievement of specified development and sales milestones as well as tiered royalties on annual net sales by Novartis of licensed products ranging from high single-digit to mid-teens percentages upon successful commercialization of any products. Under the Collaboration Agreement, the Company is currently entitled to potential milestones in excess of $500,000, as well as tiered royalties on annual net sales by Novartis ranging from high single-digit to mid-teens percentages upon the successful commercialization of NZV930 (formally SRF373). The maximum aggregate amount of potential option purchase, option exercise, and milestone payments associated with Novartis’ single remaining Option is $220,000, as well as tiered royalties on annual net sales by Novartis ranging from high-single-digit to low double-digit percentages upon the successful commercialization of the remaining Option Target. The Company is required to pay Novartis tiered royalties ranging from high single-digit to mid-teens percentages on annual net sales by the Company of regional licensed products in the United States. The royalty payments are subject to reduction under specified conditions set forth in the Collaboration Agreement.

Termination

Unless terminated earlier, the Collaboration Agreement will continue in effect until neither the Company nor Novartis is researching, developing, manufacturing, or commercializing any antibody candidates or licensed products under the Collaboration Agreement. Novartis may terminate the Collaboration Agreement on a target-by-target basis for any reason upon prior notice to the Company within a specified time period. Either party may terminate the Collaboration Agreement in full, or on a target-by-target basis, if an undisputed material breach is not cured within a certain period of time or upon notice of insolvency of the other party. To the extent Novartis terminates for convenience or the Company terminates for Novartis’ material breach, Novartis will grant the Company, on mutually agreeable financial terms, an exclusive, worldwide, irrevocable, perpetual and royalty-bearing license with respect to intellectual property controlled by Novartis that is reasonably necessary to research, develop, manufacture or commercialize certain products.

Revenue Recognition – Collaboration Revenue – Related Party

In determining the appropriate amount of revenue to be recognized under ASC 606, the Company performed the following steps: (i) identified the promised goods or services in the contract; (ii) determined whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Under ASC 606, the Company recognized revenue using the cost-to-cost method, which it believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue will be recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. Under ASC 606, the estimated transaction price will include variable consideration. The Company does not include variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will occur when any uncertainty associated with the variable consideration is resolved. The estimate of the Company’s measure of progress and estimate of variable consideration to be included in the transaction price will be updated at each reporting date as a change in estimate. The amount related to the unsatisfied portion will be recognized as that portion is satisfied over time.

Under ASC 606 the Company accounts for (i) the license it conveyed with respect to CD73; and (ii) its obligations to perform research on CD73 and other specified targets as a single performance obligation under the collaboration agreement with Novartis. Novartis’ right to purchase exclusive options to obtain certain development, manufacturing and commercialization rights are accounted for separately as they do not represent material rights, based on the criteria of ASC 606. Upon the exercise of any purchased option by Novartis, the contract promises associated with an option target would use a separate cost-to-cost model for purposes of revenue recognition under ASC 606.

In February 2018, the Company received an additional milestone payment of $45,000 from Novartis upon Novartis’ receipt and acceptance of the first final audited Good Laboratory Practices (“GLP”) toxicology study report for NZV930. Upon achieving the milestone, the Company concluded this variable consideration associated with this milestone was no longer constrained and included the $45,000 in the transaction price.

In March 2018, Novartis notified the Company of its decision not to exercise its Option related to CD47. The Company recognized the $5,000 exclusive option right payment as collaboration revenue – related party in the first quarter of 2018 because the Company no longer has any remaining performance obligations related to CD47.

In March 2018, the Company and Novartis elected to terminate a specified target under the Collaboration Agreement. Future costs associated with this target were removed from the estimated total costs in the cost-to-cost model.

In February 2019, Novartis notified the Company of its decision not to purchase the Option related to IL-27. Future costs associated with this target were removed from the estimated total costs in the cost-to-cost model.

For the three and six months ended June 30, 2019 and 2018, the Company recognized the following totals of collaboration revenue – related party:

	Three months ended June 30,				Six months ended June 30,
		2019	2018			2019	2018
Collaboration revenue - related party	$	143	$	2,428	$	14,577	$	47,923

The following table presents changes in the Company’s contract assets and liabilities during the six months ended June 30, 2019:

	December 31, 2018		Additions		Deductions			June 30, 2019
Contract liabilities (1)
Total deferred revenue - related party	$	53,952	$	—	$	(14,577	)	$	39,375

(1) Additions to contract liabilities relate to consideration from Novartis during the reporting period. Deductions to contract liabilities relate to deferred revenue recognized as revenue during the reporting period.

Duringthe three and six months ended June 30, 2019,the Companyrecognized $143 and $14,577of revenue, respectively, related to the amounts included in contract liability balance at the beginning of the period. The aggregate amount of the transaction price allocated to the single performance obligation that is partially unsatisfied was $39,375.

The Companyconsidersthetotalconsiderationexpectedtobeearnedinthenexttwelvemonthsforservicestobeperformedascurrentdeferredrevenue-related party,andconsiderationthatisexpectedtobeearnedsubsequenttotwelvemonthsfromthebalancesheetdateas noncurrentdeferredrevenue-related party.

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Redeemable Convertible Preferred Stock

6 Months Ended

Jun. 30, 2019

Temporary Equity Disclosure [Abstract]

Redeemable Convertible Preferred Stock

6. Redeemable Convertible Preferred Stock

The Company has issued Series A and Series A-1 preferred stock (together, the “Redeemable Convertible Preferred Stock”). The Redeemable Convertible Preferred Stock is classified outside of stockholders’ deficit because the shares contain redemption features that are not solely within the control of the Company.

Upon the closing of the Company’s initial public offering on April 23, 2018, all shares of the Redeemable Convertible Preferred Stock automatically converted into 16,863,624 shares of common stock.  

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Stockholders' Equity (Deficit)

6 Months Ended

Jun. 30, 2019

Equity [Abstract]

Stockholders' Equity (Deficit)

7. Stockholders’ Equity (Deficit)

Common Stock

As of June 30, 2019 and December 31, 2018, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 150,000,000 shares, of $0.0001 par value common stock.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to the preferential dividend rights of any outstanding preferred stock. No dividends have been declared or paid by the Company through June 30, 2019.

As of June 30, 2019 and December 31, 2018, the Company had reserved 17,392,681 and 6,083,202 shares, respectively, of common stock for the exercise of outstanding stock options, shares to be issued under the ATM Facility, and the number of shares remaining available for future grant under the Company’s 2018 Stock Option and Incentive Plan, and 2018 Employee Stock Purchase Plan.

In May 2019, the Company entered into the Sales Agreement, with JonesTrading to issue and sell shares up to $30,000 in shares of the Company’s common stock from time to time. The Company has not yet issued or sold any securities under the Sales Agreement.

On April 23, 2018, the Company completed its initial public offering of its common stock by issuing 7,200,000 shares of common stock, at $15.00 per share for gross proceeds of $108,000, or net proceeds of $97,209. Concurrent with the initial public offering, the Company issued Novartis 766,666 shares of its common stock at $15.00 per share for proceeds of $11,500, in a private placement.

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Stock-Based Awards

6 Months Ended

Jun. 30, 2019

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock-Based Awards

8. Stock-Based Awards

2014 Stock Incentive Plan

The Company’s 2014 Stock Incentive Plan (the “2014 Plan”) provides for the Company to grant incentive stock options or nonqualified stock options, restricted stock awards, unrestricted stock awards or restricted stock units to employees, directors and consultants of the Company. The 2014 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of the stock options may not be less than 100% of the fair market value of a share of the Company’s common stock on the date of grant and the term of the stock options may not be greater than ten years.

As of June 30, 2019 and December 31, 2018, all remaining shares available under the 2014 Plan were transferred to the Company’s 2018 Stock Option and Incentive Plan (the “2018 Plan”).

2018 Stock Option and Incentive Plan

On April 3, 2018, the Company’s stockholders approved the 2018 Plan, which became effective on April 18, 2018, the date on which the registration statement for the Company’s initial public offering was declared effective. The 2018 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards, cash-based awards and dividend equivalent rights to the Company’s officers, employees, non-employee directors and other key persons (including consultants). The number of shares initially reserved for issuance under the 2018 Plan is 1,545,454, plus the shares of common stock remaining available for issuance under the 2014 Plan, which shall be cumulatively increased each January 1 by 4% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation committee of the board of directors. The shares of common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2018 Plan and the 2014 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan.

As of June 30, 2019, 1,281,681 shares were available for future issuance under the 2018 Plan.

Stock options granted under the 2014 Plan and 2018 Plan to employees generally vest over four years and expire after ten years.

Stock Options

The following table summarizes the Company’s stock option activity since January 1, 2019:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
						(in years)
Outstanding as of December 31, 2018		4,414,225		$	6.79		8.29	$	2,031
Granted		1,370,550			4.32
Exercised		(79,151	)		3.08
Forfeited		(129,168	)		7.20
Outstanding as of June 30, 2019		5,576,456		$	6.22		8.23	$	1,086
Options exercisable at June 30, 2019		2,253,599		$	5.16		7.36	$	1,040
Vested and expected to vest at June 30, 2019		5,576,456		$	6.22		8.23	$	1,086

The weighted average grant-date fair value per share of stock options granted during the six months ended June 30, 2019 and year ended December 31, 2018 was $2.89 and $7.47, respectively.

As of June 30, 2019 and December 31, 2018, there were outstanding stock options held by non-employees for the purchase of 278,735 and 317,957 shares of common stock, respectively, with service-based vesting conditions.

2018 Employee Stock Purchase Plan

On April 3, 2018, the Company’s stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective on April 18, 2018, the date on which the registration statement for the Company’s initial public offering was declared effective. A total of 256,818 shares of common stock were initially reserved for issuance under this plan. In addition, the number of shares of common stock that may be issued under the ESPP automatically increased on January 1, 2019, and shall increase each January 1 thereafter through January 1, 2028, by the lesser of (i) 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 and (ii) such lesser number of shares as determined by the administrator of the Company’s ESPP. As of June 30, 2019, a total of 534,544 shares of common stock were reserved for issuance under this plan.

Stock-Based Compensation

The Company recorded stock-based compensation expense related to stock options and restricted stock awards in the following expense categories of its statements of operations and comprehensive loss:

	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Research and development expenses	$	607	$	800	$	1,172	$	1,641
General and administrative expenses		878		690		1,708		1,140
	$	1,485	$	1,490	$	2,880	$	2,781

As of June 30, 2019, the Company had an aggregate of $15,776 of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 2.26 years.

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Net Income (Loss) per Share

6 Months Ended

Jun. 30, 2019

Earnings Per Share [Abstract]

Net Income (Loss) per Share

9. Net Income (Loss) per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows:

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Basic net income per share attributable to common stockholders:
Numerator:
Net income (loss)	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	15,360
Accretion of redeemable convertible preferred stock to redemption value		—			—			—			(11	)
Net income attributable to redeemable convertible preferred stockholders		—			—			—			(7,077	)
Net income (loss) attributable to common stockholders	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	8,272
Denominator:
Weighted average commons shares outstanding — basic		27,845,136			21,595,586			27,835,471			12,213,717
Net income (loss) per share attributable to common stockholders — basic	$	(0.64	)	$	(0.73	)	$	(0.79	)	$	0.68
Diluted net income per share attributable to common stockholders:
Numerator:
Net income (loss)	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	15,360
Accretion of redeemable convertible preferred stock to redemption value	$	—		$	—		$	—		$	(11	)
Net income attributable to redeemable convertible preferred stockholders	$	—		$	—		$	—		$	(7,077	)
Net income (loss) attributable to common stockholders	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	8,272
Denominator:
Weighted average commons shares outstanding — basic		27,845,136			21,595,586			27,835,471			12,213,717
Dilutive effect of common stock equivalents		—			—			—			1,591,663
Weighted average common shares outstanding - diluted		27,845,136			21,595,586			27,835,471			13,805,380
Net income (loss) per share attributable to common stockholders — diluted		(0.64	)		(0.73	)		(0.79	)		0.60

There were no outstanding common stock equivalents that had an anti-dilutive impact on net income per share attributable to common stockholders for the three and six months ended June 30, 2019 or for the three months ended June 30, 2018.

Stock options for the purchase of 727,552 weighted average shares were excluded from the computation of diluted net income per share attributable to common stockholders for the six months ended June 30, 2018 because those options had an anti-dilutive impact due to the assumed proceeds per share using the treasury stock method being greater than the average fair value of the Company’s common shares for those periods.

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Income Taxes

6 Months Ended

Jun. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

10. Income Taxes

The Company did not provide for any income taxes for the three and six months ended June 30, 2019 or 2018.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been established against the deferred tax assets as of June 30, 2019 and December 31, 2018. Management reevaluates the positive and negative evidence at each reporting period.

As of June 30, 2019 and December 31, 2018, the Company had no accrued interest or tax penalties recorded. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The Company is currently under examination by the Internal Revenue Service ("IRS") for the period ended December 31, 2016. The Company's tax years are still open under statute from 2015 to present. All years may be examined to the extent the tax credit or net operating loss carryforwards are used in future periods.

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Leases

6 Months Ended

Jun. 30, 2019

Leases [Abstract]

Leases

11. Leases

The Company leases real estate, primarily its corporate headquarters in Cambridge, Massachusetts. The Company’s leases have remaining terms ranging from less than 1 year to 10 years. Certain leases include options to renew, exercised at the Company’s sole discretion, with renewal terms that can extend the lease five years. The Company evaluated the renewal options in its leases to determine if it was reasonably certain that the renewal option would be exercised, and therefore should be included in the calculation of the operating lease assets and operating lease liabilities. Given the Company’s current business structure, uncertainty of future growth, and the associated impact to real estate, the Company concluded that it is not reasonably certain that the renewal option related to its corporate headquarters would be exercised, however, for leases it determined the renewal option was probable to be exercised, the Company included the renewal period in the calculation of the operating lease right-of-use assets and operating lease liabilities. All of the Company’s leases qualify as operating leases. With the adoption of the new leasing standard, the Company has recorded a right-of-use asset and corresponding lease liability, by calculating the present value of future lease payments, discounted at either 9.5% or 10.5%, the Company’s incremental borrowing rates, over the expected term. The right-of-use asset is reduced by any lease incentives received and the legacy deferred rent balance.

The components of the Company’s lease expense are as follows:

Lease Costs	Classification	Three months ended June 30, 2019		Six months ended June 30, 2019
Operating lease cost	R&D Expense	572			1,158
	G&A Expense	237			461
Variable lease costs (1)	R&D Expense	169			341
	G&A Expense	70			136
Total lease cost			1,048		2,096
Weighted-average remaining lease term (in months)					121.6
Weighted-average discount rate					10.4	%

⁽¹⁾ Variable lease costs include certain additional charges for operating costs, including insurance, maintenance, taxes, utilities, and other costs incurred, which are billed based on both usage and as a percentage of the Company’s share of total square footage. Short term lease costs are immaterial.

Cash paid for amounts included in the measurement of the Company’s operating lease liabilities was $1,038 and $2,069 for the three and six months ended June 30, 2019, respectively.

As of June 30, 2019, the maturities of the Company’s operating lease liabilities were as follows:

Year Ending December 31,
2019		1,600
2020		4,922
2021		5,831
2022		5,468
2023		5,410
Thereafter		37,573
Total future lease payments		60,804
Less: Interest		(39,647	)
Present value of future lease payments (lease liability)	$	21,157

Future minimum lease payments for the Company’s operating leases as of December 31, 2018 were as follows:

Year Ending December 31,
2019		2,546
2020		4,258
2021		5,716
2022		5,292
2023		5,376
Thereafter		37,573
	$	60,761

Prior to the adoption of ASU 2016-02 and for the three and six months ended June 30, 2018, the Company recognized rent expense on a straight-line basis over the lease period and recorded deferred rent expense for rent expense incurred but not yet paid. The Company also recorded deferred rent attributable to cash incentives received under its lease agreements which were amortized to rent expense over the lease term. During the three and six months ended June 30, 2018, the Company recognized total rent expense of $677 and $1,337, respectively. Sublease payments received from a third-party tenant under a sublease that expired in March 2018 were $4 and $228 for the three and six months ended June 30, 2018 and were recorded as reduction of rent expense.

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2019

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

12. Commitments and Contingencies

Legal Proceedings

The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to its legal proceedings.

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Related Party Transactions

6 Months Ended

Jun. 30, 2019

Related Party Transactions [Abstract]

Related Party Transactions

13. Related Party Transactions

Novartis Institutes for BioMedical Research, Inc.

Novartis is a related party because it is a greater than 5% stockholder of the Company. In January 2016, the Company entered into the Collaboration Agreement and sold 2,000,000 shares of its Series A-1 preferred stock to Novartis for gross proceeds of $13,500. In addition, concurrent with the Company’s initial public offering of common stock, the Company issued Novartis 766,666 shares of its common stock at $15.00 per share, for proceeds of $11,500 in a private placement. During the three and six months ended June 30, 2019, the Company recognized $143 and $14,577 of collaboration revenue under the Collaboration Agreement, respectively. As of June 30, 2019 and 2018, no amounts were due from Novartis.

During the six months ended June 30, 2019, the Company made no cash payments to Novartis related to the Collaboration Agreement. During the six months ended June 30, 2018, the Company made a payment of $3,437 to Novartis for the reimbursement of manufacturing costs incurred by Novartis prior to December 31, 2017.

Research Agreement with Vaccinex, Inc.

On November 30, 2017, the Company entered into an agreement with Vaccinex, Inc. (“Vaccinex”) whereby Vaccinex will use its technology to assist the Company with identifying and selecting experimental human monoclonal antibodies against targets selected by the Company. The Company’s Chief Executive Officer is a member of the board of directors of Vaccinex. During the three and six months ended June 30, 2019, the Company paid Vaccinex an aggregate of $94 and $177 relating to the agreement. During the three and six months ended June 30, 2018, the Company paid Vaccinex an aggregate of $69 relating to the agreement. The amount of the payment was recognized as research and development expense. There was no amount due by the Company to Vaccinex as of June 30, 2019. The amount due by the Company to Vaccinex as of June 30, 2018 was $64.

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2019

Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiary, Surface Securities Corporation, a Massachusetts corporation, after elimination of all intercompany accounts and transactions.

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 2 to the financial statements included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2019, except for the Company’s adoption of the new leasing standard as discussed below.

Use of Estimates

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, revenue recognition, the accrual of research and development expenses, and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from the Company’s estimates.

Leases

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liability, and operating lease liability, non-current in the Company’s condensed consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Many lease agreements include the option to renew or extend the lease term. The exercise of lease renewal options or extensions is at the Company’s sole discretion, and are only included in the calculation of the operating lease ROU asset and operating lease liability when it is reasonably certain that the Company would exercise such options. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which it calculates based on the credit quality of the Company, and by comparing interest rates available in the market for similar borrowings, and adjusting this amount based on the impact of collateral over the term of each lease.

The components of a lease are split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company’s facilities operating leases have lease and non-lease components to which the Company has elected to apply the practical expedient and account for each lease component and related non-lease component as one single component. The Company also elected the package of practical expedients, which, among other things, allows the Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. The Company also made an accounting policy election not to recognize leases with an initial term of 12 months or less within its condensed consolidated balance sheets and to recognize those lease payments on a straight-line basis in its condensed consolidated statements of operations and comprehensive income (loss) over the lease term.

Unaudited Interim Financial Information

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 30, 2019, the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018, the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018, and the condensed consolidated statement of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three and six months ended June 30, 2019 and 2018 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2019 and the results of its operations and its cash flows for the six months ended June 30, 2019 and 2018. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2019 and 2018 are also unaudited. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods, or any future year period.

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit bright lines. In July 2018, the FASB issuedASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11, “Leases (Topic 842) – Targeted Improvements” (ASU 2018-11), which addresses implementation issues related to the new lease standard. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years.

The Company adopted ASC 842 using the modified retrospective approach with an effective date of January 1, 2019 for leases that existed on that date. Prior period results continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allows the Company to carry forward the historical lease classification. In connection with the adoption of ASC 842, the Company recorded an impact of $16,672 on its assets and $21,708 on its liabilities for the recognition of operating lease right-of-use-assets and operating lease liabilities, respectively, which are primarily related to the lease of the Company’s corporate headquarters in Cambridge, Massachusetts. The adoption of ASC 842 did not have a material impact on the Company’s results of operations or cash flows.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). This guidance is intended to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be considered “not indexed to an entity’s own stock” and therefore accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. Down round features are most often found in warrants and conversion options embedded in debt or preferred equity instruments. In addition, the guidance re-characterized the indefinite deferral of certain provisions on distinguishing liabilities from equity to a scope exception with no accounting effect. The Company adopted ASU 2017-11 on January 1, 2019. The adoption of this guidance did not have a material impact on the Company's financial position or its results of operations.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company adopted ASU 2018-07 on January 1, 2019. As a result of adopting this standard, the fair value of outstanding nonemployee awards as of December 31, 2018 will no longer be remeasured each reporting period. All future expense related to these awards will be recorded based on the fair value measured as of January 1, 2019. The adoption of this guidance did not have a material impact of the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, or ASU 2018-18. ASU 2018-18 makes targeted improvements to generally accepted accounting principles for collaborative arrangements, including: (i) clarification that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (ii) adding unit-of-account guidance in Topic 808 to align with the guidance in ASC 606, and (iii) a requirement that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The Company is currently evaluating the impact of adoption, if any, that this standard may have on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”). The new standard provides for changes to the disclosure requirements for recurring and nonrecurring fair value measurements under Topic 820. Provisions of ASU 2018-13 including changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments in ASU 2018-13 should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the new standard but does not anticipate ASU 2018-13 will have a material impact on its condensed consolidated financial statements and related disclosures.  

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for-sale debt securities. The standard is effective on January 1, 2020, with early adoption permitted. The Company is currently evaluating the expected impact of ASU 2016-13 on its consolidated financial statements.

Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

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Marketable Securities (Tables)

6 Months Ended

Jun. 30, 2019

Marketable Securities [Abstract]

Summary of Fair Value of Available-for-sale Marketable Debt Securities by Type of Security

As of June 30, 2019, the fair value of available-for-sale marketable debt securities by type of security was as follows:

	June 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Marketable debt securities:
U.S. Treasury notes	$	62,954	$	120	$	—		$	63,074
U.S. Government agency bonds		22,401		61		—			22,462
Corporate bonds		3,010		—		(7	)		3,003
	$	88,365	$	181	$	(7	)	$	88,539

As of December 31, 2018, the fair value of available-for-sale marketable debt securities by type of security was as follows:

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Marketable debt securities:
U.S. Treasury notes	$	62,866	$	—	$	(24	)	$	62,842
U.S. Government agency bonds		2,900		—		(15	)		2,885
Corporate bonds		10,276		—		(80	)		10,196
	$	76,042	$	—	$	(119	)	$	75,923

Summary of Available-for-sale Debt Securities by Contractual Maturity

The amortized cost and fair value of the Company’s available-for-sale debt securities by contractual maturity are summarized as follows:

	June 30, 2019
	Amortized Cost		Fair Value
Maturing in one year or less	$	81,398	$	81,536
Maturing after one year but less than two years		6,967		7,003
	$	88,365	$	88,539

The amortized cost and fair value of the Company’s available-for-sale securities by contractual maturity are summarized as follows:

	December 31, 2018
	Amortized Cost		Fair Value
Maturing in one year or less	$	76,042	$	75,923
	$	76,042	$	75,923

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

Summary of Financial Assets Measured at Fair Value on Recurring Basis

The following tables present information about the Company’s financial assets that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

	Fair Value Measurements as of June 30, 2019 using:
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	24,840	$	—	$	—	$	24,840
Marketable securities:
U.S. Treasury notes		—		22,462		—		22,462
U.S. Government agency bonds		—		63,074		—		63,074
Corporate bonds		—		3,003		—		3,003
	$	24,840	$	88,539	$	—	$	113,379

	Fair Value Measurements as of December 31, 2018 using:
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	77,737	$	—	$	—	$	77,737
Marketable securities:
U.S. Treasury notes		—		62,842		—	$	62,842
U.S. Government agency bonds		—		2,885		—		2,885
Corporate bonds		—		10,196		—		10,196
	$	77,737	$	75,923	$	—	$	153,660

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Collaboration Agreement with Novartis (Tables)

6 Months Ended

Jun. 30, 2019

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Schedule of Collaboration Revenue Related Party

For the three and six months ended June 30, 2019 and 2018, the Company recognized the following totals of collaboration revenue – related party:

	Three months ended June 30,				Six months ended June 30,
		2019	2018			2019	2018
Collaboration revenue - related party	$	143	$	2,428	$	14,577	$	47,923

Summary of Changes in Contract Assets and Liabilities

The following table presents changes in the Company’s contract assets and liabilities during the six months ended June 30, 2019:

	December 31, 2018		Additions		Deductions			June 30, 2019
Contract liabilities (1)
Total deferred revenue - related party	$	53,952	$	—	$	(14,577	)	$	39,375

(1) Additions to contract liabilities relate to consideration from Novartis during the reporting period. Deductions to contract liabilities relate to deferred revenue recognized as revenue during the reporting period.

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Stock-Based Awards (Tables)

6 Months Ended

Jun. 30, 2019

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Summary of Stock Option Activity

The following table summarizes the Company’s stock option activity since January 1, 2019:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
						(in years)
Outstanding as of December 31, 2018		4,414,225		$	6.79		8.29	$	2,031
Granted		1,370,550			4.32
Exercised		(79,151	)		3.08
Forfeited		(129,168	)		7.20
Outstanding as of June 30, 2019		5,576,456		$	6.22		8.23	$	1,086
Options exercisable at June 30, 2019		2,253,599		$	5.16		7.36	$	1,040
Vested and expected to vest at June 30, 2019		5,576,456		$	6.22		8.23	$	1,086

Summary of Stock-Based Compensation Expense Related to Stock Options and Restricted Stock Awards

The Company recorded stock-based compensation expense related to stock options and restricted stock awards in the following expense categories of its statements of operations and comprehensive loss:

	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Research and development expenses	$	607	$	800	$	1,172	$	1,641
General and administrative expenses		878		690		1,708		1,140
	$	1,485	$	1,490	$	2,880	$	2,781

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Net Income (Loss) per Share (Tables)

6 Months Ended

Jun. 30, 2019

Earnings Per Share [Abstract]

Schedule of Basic and Diluted Net Loss Per Share Attributable to Common Stockholders

Basic and diluted net loss per share attributable to common stockholders was calculated as follows:

	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Basic net income per share attributable to common stockholders:
Numerator:
Net income (loss)	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	15,360
Accretion of redeemable convertible preferred stock to redemption value		—			—			—			(11	)
Net income attributable to redeemable convertible preferred stockholders		—			—			—			(7,077	)
Net income (loss) attributable to common stockholders	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	8,272
Denominator:
Weighted average commons shares outstanding — basic		27,845,136			21,595,586			27,835,471			12,213,717
Net income (loss) per share attributable to common stockholders — basic	$	(0.64	)	$	(0.73	)	$	(0.79	)	$	0.68
Diluted net income per share attributable to common stockholders:
Numerator:
Net income (loss)	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	15,360
Accretion of redeemable convertible preferred stock to redemption value	$	—		$	—		$	—		$	(11	)
Net income attributable to redeemable convertible preferred stockholders	$	—		$	—		$	—		$	(7,077	)
Net income (loss) attributable to common stockholders	$	(17,758	)	$	(15,852	)	$	(21,957	)	$	8,272
Denominator:
Weighted average commons shares outstanding — basic		27,845,136			21,595,586			27,835,471			12,213,717
Dilutive effect of common stock equivalents		—			—			—			1,591,663
Weighted average common shares outstanding - diluted		27,845,136			21,595,586			27,835,471			13,805,380
Net income (loss) per share attributable to common stockholders — diluted		(0.64	)		(0.73	)		(0.79	)		0.60

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Leases (Tables)

6 Months Ended

Jun. 30, 2019

Leases [Abstract]

Summary of Components of Lease Expense

The components of the Company’s lease expense are as follows:

Lease Costs	Classification	Three months ended June 30, 2019		Six months ended June 30, 2019
Operating lease cost	R&D Expense	572			1,158
	G&A Expense	237			461
Variable lease costs (1)	R&D Expense	169			341
	G&A Expense	70			136
Total lease cost			1,048		2,096
Weighted-average remaining lease term (in months)					121.6
Weighted-average discount rate					10.4	%

⁽¹⁾ Variable lease costs include certain additional charges for operating costs, including insurance, maintenance, taxes, utilities, and other costs incurred, which are billed based on both usage and as a percentage of the Company’s share of total square footage. Short term lease costs are immaterial.

Schedule of Maturities of Operating Lease Liabilities

As of June 30, 2019, the maturities of the Company’s operating lease liabilities were as follows:

Year Ending December 31,
2019		1,600
2020		4,922
2021		5,831
2022		5,468
2023		5,410
Thereafter		37,573
Total future lease payments		60,804
Less: Interest		(39,647	)
Present value of future lease payments (lease liability)	$	21,157

Schedule of Future Minimum Lease Payments

Future minimum lease payments for the Company’s operating leases as of December 31, 2018 were as follows:

Year Ending December 31,
2019		2,546
2020		4,258
2021		5,716
2022		5,292
2023		5,376
Thereafter		37,573
	$	60,761

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Nature of the Business - Additional Information (Details)				1 Months Ended		3 Months Ended	6 Months Ended
	May 01, 2019 USD ($)	Apr. 23, 2018 USD ($) $ / shares shares	Apr. 06, 2018	May 31, 2019 USD ($)	Jan. 31, 2016 USD ($) $ / shares shares	Jun. 30, 2018 shares	Jun. 30, 2019 USD ($) shares	Dec. 31, 2018 USD ($) shares
Class Of Stock [Line Items]
State of incorporation							State of Delaware
Common stock, issued							27,851,751	27,772,600
Accumulated deficit | $							$ 88,763,000	$ 66,806,000
Operating expenses and capital expenditure requirements							12 months
Cash, cash equivalents and marketable securities | $							$ 126,290,000
Series A and A-1 Redeemable Convertible Preferred Stock
Class Of Stock [Line Items]
Convertible preferred stock converted into common stock		16,863,624
Initial Public Offering
Class Of Stock [Line Items]
Issuance of common stock (in shares)		7,200,000
Shares issued, price per share | $ / shares		$ 15.00
Gross proceeds from issuance of common stock | $		$ 108,000,000
Net proceeds from issuance of common stock | $		$ 97,209,000
ATM Facility
Class Of Stock [Line Items]
Common stock, issued							0
Novartis Institutes for Biomedical Research, Inc. | Novartis Collaboration | Private Placement
Class Of Stock [Line Items]
Issuance of common stock (in shares)		766,666			766,666
Shares issued, price per share | $ / shares		$ 15.00			$ 15.00
Net proceeds from issuance of common stock | $		$ 11,500,000			$ 11,500,000
JonesTrading Institutional Services LLC | ATM Facility | Maximum
Class Of Stock [Line Items]
Gross proceeds from issuance of common stock | $	$ 30,000,000			$ 30,000,000
Percentage of gross proceeds of shares sold for compensation	3.00%
Common Stock
Class Of Stock [Line Items]
Reverse stock split, conversion ratio			0.4545
Common Stock | Initial Public Offering
Class Of Stock [Line Items]
Issuance of common stock (in shares)						7,200,000
Common Stock | Novartis Institutes for Biomedical Research, Inc. | Private Placement
Class Of Stock [Line Items]
Issuance of common stock (in shares)						766,666

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Summary of Significant Accounting Policies - Additional Information (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jan. 01, 2019
Accounting Policies [Abstract]
Operating lease, right-of-use asset	$ 16,094	$ 16,672
Operating lease, right-of-use liabilities	$ 21,708

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Marketable Securities - Summary of Fair Value of Available-for-sale Marketable Debt Securities by Type of Security (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Schedule Of Available For Sale Securities [Line Items]
Amortized Cost	$ 88,365	$ 76,042
Gross Unrealized Gains	181
Gross Unrealized Losses	(7)	(119)
Fair Value	88,539	75,923
Corporate Bonds
Schedule Of Available For Sale Securities [Line Items]
Amortized Cost	3,010	10,276
Gross Unrealized Losses	(7)	(80)
Fair Value	3,003	10,196
U.S. Treasury Notes
Schedule Of Available For Sale Securities [Line Items]
Amortized Cost	62,954	62,866
Gross Unrealized Gains	120
Gross Unrealized Losses		(24)
Fair Value	63,074	62,842
U.S. Government Agency Bonds
Schedule Of Available For Sale Securities [Line Items]
Amortized Cost	22,401	2,900
Gross Unrealized Gains	61
Gross Unrealized Losses		(15)
Fair Value	$ 22,462	$ 2,885

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Marketable Securities - Summary of Fair Value of Available-for-sale Debt Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Available For Sale Securities [Abstract]
Maturing in one year or less, Amortized Cost	$ 81,398	$ 76,042
Maturing after one year but less than two years, Amortized Cost	6,967
Amortized Cost	88,365	76,042
Maturing in one year or less, Fair Value	81,536	75,923
Maturing after one year but less than two years, Fair Value	7,003
Fair Value	$ 88,539	$ 75,923

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Marketable Securities - Additional Information (Details) - USD ($)	6 Months Ended	12 Months Ended
	Jun. 30, 2019	Dec. 31, 2018
Available For Sale Securities [Abstract]
Investments in other-than-temporary decline in fair value	$ 0	$ 0

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Fair Value of Financial Assets - Summary of Financial Assets Measured at Fair Value on Recurring Basis (Details) - Fair Value, Measurements, Recurring - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	$ 113,379	$ 153,660
Money Market Funds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	24,840	77,737
U.S. Treasury Notes
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	22,462	62,842
U.S. Government Agency Bonds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	63,074	2,885
Corporate Bonds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	3,003	10,196
Level 1
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	24,840	77,737
Level 1 | Money Market Funds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	24,840	77,737
Level 2
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	88,539	75,923
Level 2 | U.S. Treasury Notes
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	22,462	62,842
Level 2 | U.S. Government Agency Bonds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	63,074	2,885
Level 2 | Corporate Bonds
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Assets measured on recurring basis	$ 3,003	$ 10,196

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Fair Value of Financial Assets - Additional Information (Details) - USD ($)	Jun. 30, 2019	Jun. 30, 2018
Fair Value Disclosures [Abstract]
Fair value assets transfers between level 1 to level 2	$ 0	$ 0
Fair value assets transfers between level 2 to level 1	0	0
Fair value assets transfers between level 1 to level 3	0	0
Fair value assets transfers between level 3 to level 1	0	0
Fair value assets transfers between level 2 to level 3	0	0
Fair value assets transfers between level 3 to level 2	$ 0	$ 0

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Collaboration Agreement with Novartis - Additional Information (Details) - USD ($)		1 Months Ended			3 Months Ended			6 Months Ended
	Apr. 23, 2018	Feb. 28, 2018	Dec. 31, 2016	Jan. 31, 2016	Jun. 30, 2019	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Preferred stock shares issued to related party					0			0		0
Proceeds from stock issued to related party in private placement									$ 11,500,000
Collaboration revenue - related party					$ 143,000	$ 2,428,000		$ 14,577,000	47,923,000
ASU 2014-09
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Collaboration revenue - related party								14,577,000	47,923,000
Novartis
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Payment for reimbursement of manufacturing costs incurred								0	3,437,000
Novartis Collaboration
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Proceeds from collaboration arrangement			$ 5,000,000
Revenue performance obligation					39,375,000			39,375,000
Novartis Collaboration | Novartis Institutes for Biomedical Research, Inc.
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Payment for reimbursement of manufacturing costs incurred								0	$ 3,437,000
Collaboration revenue - related party					$ 143,000			14,577,000
Novartis Collaboration | Novartis Institutes for Biomedical Research, Inc. | ASU 2014-09
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Proceeds from collaboration arrangement		$ 45,000,000					$ 5,000,000
Novartis Collaboration | Novartis Institutes for Biomedical Research, Inc. | Up Front Payment Arrangement
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Proceeds from collaboration arrangement				$ 70,000,000
Novartis Collaboration | Novartis Institutes for Biomedical Research, Inc. | Milestone Payment
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Potential milestones payment								220,000,000
Novartis Collaboration | Novartis Institutes for Biomedical Research, Inc. | Minimum
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Percentage of share holding				5.00%
Novartis Collaboration | Novartis Institutes for Biomedical Research, Inc. | Minimum | Milestone Payment
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Potential milestones payment								$ 500,000,000
Novartis Collaboration | Novartis Institutes for Biomedical Research, Inc. | Maximum | Option Purchase and Purchase Exercise Payment
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Maximum aggregate amount of potential option purchase, option exercise and milestone payments to be received				$ 20,000,000
Novartis Collaboration | Series A One Redeemable Convertible Preferred Stock | Novartis Institutes for Biomedical Research, Inc.
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Preferred stock shares issued to related party				2,000,000
Novartis Collaboration | Private Placement | Novartis Institutes for Biomedical Research, Inc.
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Common stock shares issued to related party	766,666			766,666
Share price				$ 15.00
Proceeds from stock issued to related party in private placement				$ 11,500,000

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Collaboration Agreement with Novartis - Schedule of Collaboration Revenue Related Party (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Collaboration revenue - related party	$ 143	$ 2,428	$ 14,577	$ 47,923
ASU 2014-09
Collaborative Arrangements And Noncollaborative Arrangement Transactions [Line Items]
Collaboration revenue - related party			$ 14,577	$ 47,923

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Collaboration Agreement with Novartis - Summary of Changes in Contract Assets and Liabilities (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($)
Change In Contract With Customer Asset And Liability [Abstract]
Deferred revenue - Beginning balance	$ 53,952
Deferred revenue - Deductions	(14,577)
Deferred revenue - Ending balance	$ 39,375

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Redeemable Convertible Preferred Stock - Additional Information (Details)	Apr. 23, 2018 shares
Series A and A-1 Redeemable Convertible Preferred Stock
Temporary Equity [Line Items]
Convertible preferred stock converted into common stock	16,863,624

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Stockholders' Equity (Deficit) - Additional Information (Details)			1 Months Ended		6 Months Ended
	May 01, 2019 USD ($)	Apr. 23, 2018 USD ($) $ / shares shares	May 31, 2019 USD ($)	Jan. 31, 2016 USD ($) $ / shares shares	Jun. 30, 2019 USD ($) Vote $ / shares shares	Dec. 31, 2018 $ / shares shares
Subsidiary Sale Of Stock [Line Items]
Common stock, authorized | shares					150,000,000	150,000,000
Common stock, par value | $ / shares					$ 0.0001	$ 0.0001
Number of votes entitled by each share of common stock holder | Vote					1
Common stock voting rights					Each share of common stock entitles the holder to one vote
Dividends, declared or paid					$ 0
Total reserved | shares					17,392,681	6,083,202
Initial Public Offering
Subsidiary Sale Of Stock [Line Items]
Issuance of common stock (in shares) | shares		7,200,000
Shares issued, price per share | $ / shares		$ 15.00
Gross proceeds from issuance of common stock		$ 108,000,000
Net proceeds from issuance of common stock		$ 97,209,000
JonesTrading Institutional Services LLC | ATM Facility | Maximum
Subsidiary Sale Of Stock [Line Items]
Gross proceeds from issuance of common stock	$ 30,000,000		$ 30,000,000
Novartis Institutes for Biomedical Research, Inc. | Private Placement | Novartis Collaboration
Subsidiary Sale Of Stock [Line Items]
Issuance of common stock (in shares) | shares		766,666		766,666
Shares issued, price per share | $ / shares		$ 15.00		$ 15.00
Net proceeds from issuance of common stock		$ 11,500,000		$ 11,500,000

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Stock-Based Awards - Additional Information (Details) - USD ($) $ / shares in Units, $ in Thousands		6 Months Ended	12 Months Ended
	Apr. 03, 2018	Jun. 30, 2019	Dec. 31, 2018
2018 Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Unrecognized stock-based compensation cost		$ 15,776
Unrecognized stock-based compensation cost, weighted-average period		2 years 3 months 3 days
Employee Stock Option | Non-Employees
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares of common stock converted under option plan		278,735	317,957
2014 Plan | Employee Stock Option
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Percentage of exercise price per share of stock options to fair market value of share of common stock		100.00%
Stock options granted expiry period		10 years
Weighted average grant-date fair value per share of stock options granted		$ 2.89	$ 7.47
2018 Stock Option and Incentive Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares of common stock to be issued	1,545,454
Percentage of authorized number of shares of common stock outstanding	4.00%
Number of shares of common stock converted under option plan		5,576,456	4,414,225
2018 Stock Option and Incentive Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of common stock shares available for further issuance		1,281,681
2018 Stock Option and Incentive Plan | 2018 Employee Stock Purchase Plan
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of shares of common stock to be issued	256,818	534,544
Percentage of authorized number of shares of common stock outstanding	1.00%
2014 Plan and 2018 Plan | Employee Stock Option
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock options granted expiry period		10 years
Stock options granted vesting period		4 years

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Stock-Based Awards - Summary of Stock Option Activity (Details) - 2018 Stock Option and Incentive Plan $ / shares in Units, $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2019 USD ($) $ / shares shares	Dec. 31, 2018 USD ($) $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Number of Shares, Outstanding beginning balance | shares	4,414,225
Number of Shares, Granted | shares	1,370,550
Number of Shares, Exercised | shares	(79,151)
Number of Shares, Forfeited | shares	(129,168)
Number of Shares, Outstanding ending balance | shares	5,576,456	4,414,225
Number of Shares, Options exercisable at June 30, 2019 | shares	2,253,599
Number of Shares, Vested and expected to vest at June 30, 2019 | shares	5,576,456
Weighted Average Exercise Price, Outstanding beginning balance | $ / shares	$ 6.79
Weighted Average Exercise Price, Granted | $ / shares	4.32
Weighted Average Exercise Price, Exercised | $ / shares	3.08
Weighted Average Exercise Price, Forfeited | $ / shares	7.20
Weighted Average Exercise Price, Outstanding ending balance | $ / shares	6.22	$ 6.79
Weighted Average Exercise Price, Options exercisable at June 30, 2019 | $ / shares	5.16
Weighted Average Exercise Price, Vested and expected to vest at June 30, 2019 | $ / shares	$ 6.22
Weighted Average Remaining Contractual Term (in years), Outstanding	8 years 2 months 23 days	8 years 3 months 15 days
Weighted Average Remaining Contractual Term (in years), Options exercisable	7 years 4 months 9 days
Weighted Average Remaining Contractual Term (in years), Vested and expected to vest	8 years 2 months 23 days
Aggregate Intrinsic Value | $	$ 1,086	$ 2,031
Aggregate Intrinsic Value, Options exercisable at June 30, 2019 | $	1,040
Aggregate Intrinsic Value, Vested and expected to vest at June 30, 2019 | $	$ 1,086

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Stock-Based Awards - Summary of Stock-Based Compensation Expense Related to Stock Options and Restricted Stock Awards (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 1,485	$ 1,490	$ 2,880	$ 2,781
Research and Development Expenses
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	607	800	1,172	1,641
General and Administrative Expenses
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Stock-based compensation expense	$ 878	$ 690	$ 1,708	$ 1,140

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Net Income (Loss) per Share - Schedule of Basic and Diluted Net Loss Per Share Attributable to Common Stockholders (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended				6 Months Ended
	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2019	Jun. 30, 2018
Numerator:
Net income (loss)	$ (17,758)	$ (4,199)	$ (15,852)	$ 31,212	$ (21,957)	$ 15,360
Accretion of redeemable convertible preferred stock to redemption value						(11)
Net income attributable to redeemable convertible preferred stockholders						(7,077)
Net income (loss) attributable to common stockholders	$ (17,758)		$ (15,852)		$ (21,957)	$ 8,272
Denominator:
Weighted average common shares outstanding— basic	27,845,136		21,595,586		27,835,471	12,213,717
Net income (loss) per share attributable to common stockholders— basic	$ (0.64)		$ (0.73)		$ (0.79)	$ 0.68
Numerator:
Net income (loss)	$ (17,758)	$ (4,199)	$ (15,852)	$ 31,212	$ (21,957)	$ 15,360
Accretion of redeemable convertible preferred stock to redemption value						(11)
Net income attributable to redeemable convertible preferred stockholders						(7,077)
Net income (loss) attributable to common stockholders	$ (17,758)		$ (15,852)		$ (21,957)	$ 8,272
Denominator:
Weighted average common shares outstanding— basic	27,845,136		21,595,586		27,835,471	12,213,717
Dilutive effect of common stock equivalents						1,591,663
Weighted average common shares outstanding - diluted	27,845,136		21,595,586		27,835,471	13,805,380
Net income (loss) per share attributable to common stockholders— diluted	$ (0.64)		$ (0.73)		$ (0.79)	$ 0.60

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Net Income (Loss) per Share - Additional Information (Details) - shares	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Earnings Per Share [Abstract]
Weighted average shares excluded from computation of diluted net income per share attributable to common stockholders	0	0	0	727,552

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Income Taxes - Additional Information (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Operating Loss Carryforwards [Line Items]
Income tax provision or benefit	$ 0	$ 0	$ 0	$ 0
Interest and penalties accrued	$ 0		$ 0		$ 0
Income tax examination, description			The Company is currently under examination by the Internal Revenue Service ("IRS") for the period ended December 31, 2016. The Company's tax years are still open under statute from 2015 to present. All years may be examined to the extent the tax credit or net operating loss carryforwards are used in future periods
Earliest Tax Year
Operating Loss Carryforwards [Line Items]
Tax year remain open			2015
Internal Revenue Service (IRS)
Operating Loss Carryforwards [Line Items]
Income tax examination, year under examination			2016

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Leases - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Lease Agreements [Line Items]
Cash paid for lease liabilities	$ 1,038		$ 2,069
Total rent expense		$ 677		$ 1,337
Operating sublease, expiration period			2018-03
Sublease payments received from third-party tenant		$ 4		$ 228
MASSACHUSETTS
Lease Agreements [Line Items]
Renewal terms of lease	5 years		5 years
MASSACHUSETTS | Minimum
Lease Agreements [Line Items]
Lease term	1 year		1 year
Operating lease, discount rate	9.50%		9.50%
MASSACHUSETTS | Maximum
Lease Agreements [Line Items]
Lease term	10 years		10 years
Operating lease, discount rate	10.50%		10.50%

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Leases - Summary of Components of Lease Expense (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019 USD ($)		Jun. 30, 2019 USD ($)
Lease Agreements [Line Items]
Operating lease cost			$ 578
Total lease cost	$ 1,048		$ 2,096
Weighted-average remaining lease term (in months)	121 months 18 days		121 months 18 days
Weighted-average discount rate	10.40%		10.40%
Research and Development Expenses
Lease Agreements [Line Items]
Operating lease cost	$ 572		$ 1,158
Variable lease costs	169	[1]	341	[1]
General and Administrative Expenses
Lease Agreements [Line Items]
Operating lease cost	237		461
Variable lease costs	$ 70		$ 136

[1] Variable lease costs include certain additional charges for operating costs, including insurance, maintenance, taxes, utilities, and other costs incurred, which are billed based on both usage and as a percentage of the Company’s share of total square footage. Short term lease costs are immaterial.

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Leases - Schedule of Maturities of Operating Lease Liabilities (Details) $ in Thousands	Jun. 30, 2019 USD ($)
Leases [Abstract]
2019	$ 1,600
2020	4,922
2021	5,831
2022	5,468
2023	5,410
Thereafter	37,573
Total future lease payments	60,804
Less: Interest	(39,647)
Present value of future lease payments (lease liability)	$ 21,157

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Leases - Schedule of Future Minimum Lease Payments (Details) $ in Thousands	Dec. 31, 2018 USD ($)
Leases [Abstract]
2019	$ 2,546
2020	4,258
2021	5,716
2022	5,292
2023	5,376
Thereafter	37,573
Total operating leases	$ 60,761

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Related Party Transactions - Additional Information (Details) - USD ($)		1 Months Ended	3 Months Ended		6 Months Ended
	Apr. 23, 2018	Jan. 31, 2016	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Related Party Transaction [Line Items]
Preferred stock shares issued to related party			0		0		0
Proceeds from private placement						$ 11,500,000
Collaboration revenue			$ 143,000	$ 2,428,000	$ 14,577,000	47,923,000
Novartis Institutes for Biomedical Research, Inc. | Novartis Collaboration
Related Party Transaction [Line Items]
Collaboration revenue			143,000		14,577,000
Amounts due from related party			0	0	0	0
Payment for reimbursement of manufacturing costs incurred					0	3,437,000
Novartis Institutes for Biomedical Research, Inc. | Novartis Collaboration | Minimum
Related Party Transaction [Line Items]
Percentage of share holding		5.00%
Novartis Institutes for Biomedical Research, Inc. | Novartis Collaboration | Series A One Redeemable Convertible Preferred Stock
Related Party Transaction [Line Items]
Preferred stock shares issued to related party		2,000,000
Gross proceeds from issuance of preference stock		$ 13,500,000
Novartis Institutes for Biomedical Research, Inc. | Novartis Collaboration | Private Placement
Related Party Transaction [Line Items]
Common stock shares issued to related party	766,666	766,666
Share price		$ 15.00
Proceeds from private placement		$ 11,500,000
Vaccinex, Inc.
Related Party Transaction [Line Items]
Due to related party			0	64,000	0	64,000
Vaccinex, Inc. | Research and Development Expenses
Related Party Transaction [Line Items]
Payments to related party			$ 94,000	$ 69,000	$ 177,000	$ 69,000