SURFACE ONCOLOGY, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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, 2021 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, represented 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.

NZV930 (formerly SRF373) and SRF617 are antibodies designed to inhibit cluster
of differentiation, or CD, 73 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. NZV930 and SRF617 each aim to reduce the production of immunosuppressive
adenosine, but target different points of the adenosine pathway. In addition to
reducing the production of adenosine, we believe SRF617 will also stimulate
anti-tumor immunity because of its ability to maintain levels of extracellular
adenosine triphosphate, or ATP. In June 2018, a Phase 1 trial of NZV930 was
initiated by our partner, Novartis. SRF617 received orphan drug designation from
the U.S. Food and Drug Administration, or FDA, for the treatment of pancreatic
cancer in March 2021. In December 2021, we presented initial clinical data
demonstrating SRF617's potential in combination with chemotherapy and other
immuno-oncology therapies. We initiated a Phase 2 trial of SRF617 in patients
with advanced prostate cancer in March 2022.

SRF388 is an antibody targeting interleukin 27, or IL-27, an immunosuppressive
cytokine, or protein that is overexpressed in certain cancers, including
hepatocellular, lung and renal cell carcinoma. IL-27 is a cytokine secreted by
macrophages and antigen presenting cells that plays an important physiologic
role in suppressing the immune system, as evidenced by its ability to resolve
tissue inflammation. In addition, one of the subunits of IL-27, EBI3, is highly
expressed during pregnancy and its expression is correlated with maternal-fetal
tolerance. 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. SRF388 received orphan drug designation and fast track designation from
the FDA for the treatment of hepatocellular carcinoma in November 2020. We
initiated a Phase 2 clinical trial evaluating SRF388 in patients with
hepatocellular carcinoma and non-small-cell lung cancer in April 2022. In May
2022, we announced our plans to expand the open-label lead-in of the Phase 2
clinical trial. In June 2022, at the 2022 American Society of Clinical Oncology,
or ASCO, Annual Meeting, we presented initial Phase 1/1b data demonstrating
clinical activity in multiple solid tumor types, with three partial responses
across non-small-cell lung cancer, renal cell carcinoma and hepatocellular
carcinoma.

GSK4381562 (formerly SRF813) is an antibody targeting CD112R, also known as
PVRIG, an inhibitory protein expressed on natural killer, or NK, and T cells.
GSK4381562 blocks the interaction of CD112R with CD112, its binding partner that
is expressed on tumor cells. GSK4381562 can promote the activation of both NK
and T cells, with potential to elicit a strong anti-tumor response and promote
immunological memory. On December 16, 2020, we granted GlaxoSmithKline
Intellectual Property (No. 4) Limited, or GSK, an exclusive license to worldwide
development and commercialization rights of SRF813. In March 2021, GSK initiated
a Phase 1 clinical trial of GSK4381562 in patients with solid tumors.
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SRF114 is designed as a highly specific afucosylated IgG1 antibody targeting CCR8, a chemokine receptor highly expressed on regulatory T cells, or Treg cells, in the TME. SRF114 causes depletion of intratumoral Treg cells, important regulators of immune suppression and tolerance, through antibody-dependent cellular cytotoxicity, or ADCC, leading to antitumor activity in preclinical models. In March 2021we have initiated IND enablement activities for SRF114, with an IND filing expected in the second half of 2022.

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.

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, GSK4381562, and SRF114, 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 public and private sales of our securities,
payments received under our license and collaboration agreements and a debt
financing. As of June 30, 2022, we had cash, cash equivalents and marketable
securities of $156.6 million. 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 $25.2 million and $19.0 million for the three and six months ended
June 30, 2022. Our net loss was $19.0 million and $34.5 million for the three
and six months ended June 30, 2021. As of June 30, 2022, we had an accumulated
deficit of $159.8 million. We expect to continue to incur significant expenses
and operating losses for at least the next several years, particularly as we:

•pursue the clinical development of product candidates;

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

• seek regulatory approvals for any product candidate that successfully completes clinical trials;

•hire additional clinical, quality control and scientific staff;

•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, develop 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 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
licenses and collaborations with third parties or other transactions. 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, 2022 will enable us to fund our operating expenses, debt service
obligations and capital expenditure requirements into 2024, excluding any future
milestone payments from Novartis and GSK. 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.
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We are closely monitoring the ongoing global outbreak and spread of the novel
coronavirus disease and its variants, or collectively COVID-19, and have taken
steps to identify and help mitigate its adverse impact on, and risks to, our
business posed by the spread of the virus and significant governmental and
related measures implemented or reimplemented to address the COVID-19 pandemic.
Although COVID-19 has not had a material adverse impact on our operations and
our clinical and preclinical programs, the extent to which COVID-19 will
ultimately impact our business, results of operations or financial condition
will depend on future developments which are highly uncertain and cannot be
predicted with confidence, such as the duration of COVID-19 and the severity of
its variants or the effectiveness over time of measures implemented or
reimplemented to help contain the pandemic or mitigate against its impact, among
others. Given the fluidity of the COVID-19 pandemic, however, we do not yet know
the full extent of the potential impact of COVID-19 may have on our business
operations.

                    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 we entered into with Novartis Institutes for
Biomedical Research, Inc., or Novartis, which was subsequently amended in May
2016, July 2017, September 2017, and October 2018 and the license agreement with
we entered into with GlaxoSmithKline Intellectual Property (No. 4) Limited, or
GSK, which was subsequently amended in August 2021. 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 with Novartis and the license agreement with
GSK, as well as any additional collaborations or licenses that we may enter into
in the future.

Novartis Agreement

In January 2016, we entered into a collaboration agreement Novartis, which was
subsequently amended in May 2016, July 2017, September 2017, and October 2018
or, as amended, the Novartis Agreement, to develop next-generation cancer
therapies. Under the Novartis Agreement, we were 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.

Upon entering into the Novartis Agreement, we received an upfront payment of
$70.0 million from Novartis and granted Novartis a worldwide exclusive license
to research, develop, manufacture and commercialize antibodies that target CD73.
In addition, we initially granted Novartis the right to purchase exclusive
option rights, each an Option, to up to four specified targets, including
certain research, development, manufacturing and commercialization rights,
pursuant to which, Novartis initially had the right to exercise up to three
purchased Options. As of June 2020, there were no Options remaining for purchase
and exercise by Novartis, and accordingly our performance obligations under the
Novartis Agreement ended. We are currently entitled to potential development
milestones of $325.0 million, potential sales milestones of $200.0 million, as
well as tiered royalties on annual net sales of NZV930 by Novartis ranging from
high single-digit to mid-teens percentages. Such amount of potential milestone
payments assumes the successful clinical development and achievement of all
sales milestones for NZV930.

Under ASC 606 we accounted 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 Novartis 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.

Through June 30, 2022, we had received an aggregate of $150.0 million from
Novartis in upfront payments, milestone payments, and option purchase payments.
As of January 2020, we no longer have any performance obligations under the
Novartis Agreement. We did not recognize any collaboration revenue - related
party in the three and six months ended June 30, 2022 or 2021.
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GSK Agreement

In December 2020, we entered into a license agreement with GSK, which was
subsequently amended in August 2021 or, as amended, the GSK Agreement, under
which we granted GSK a worldwide exclusive, sublicensable license to develop,
manufacture and commercialize antibodies that target the antibody SRF813,
targeting CD112R, also known as PVRIG, or the Licensed Antibodies. GSK is
responsible for the development, manufacturing and commercialization of the
Licensed Antibodies and a joint development committee was formed to facilitate
information sharing between us and GSK. Under the terms of the GSK Agreement,
GSK is obligated to use commercially reasonable efforts to develop and
commercialize the Licensed Antibodies. Pursuant to the August 2021 amendment to
the GSK Agreement, we provided additional transition and supply services related
to the development and manufacturing of the Licensed Antibodies.

Under the terms of the GSK Agreement, GSK made a one-time upfront payment of
$85.0 million and was required to make additional payments to us for supply
services and transition services of $4.3 million and $1.0 million, respectively.
We are eligible to receive up to $60.0 million in clinical and $155.0 million in
regulatory milestones. In addition, we may receive up to $485.0 million in sales
milestone payments. We are also eligible to receive royalties on global net
sales of any approved products based on the licensed antibodies, ranging in
percentages from high single digits to mid-teens.

Under ASC 606 we account for (i) the delivery of the worldwide, exclusive,
sublicensable license to develop, manufacture and commercialize the Licensed
Antibodies; (ii) supply of Licensed Antibodies until an IND is accepted by a
regulatory authority; and (iii) transition services until an IND is accepted by
a regulatory authority as separate and distinct performance obligations. We
determined the transaction price of the GSK Agreement, under ASC 606, to be
$90.3 million, consisting of the upfront payment of $85.0 million plus $4.3
million for supply of the Licensed Antibodies and $1.0 million for the
transition services. We recognized revenue for the license performance
obligation at a point in time, that is upon transfer of the license to GSK. As
control of the license was transferred on the effective date of December 16,
2020 and GSK could begin to use and benefit from the license, we recognized
$85.0 million of license-related revenue during the year ended December 31, 2020
under the GSK Agreement. We recognized the portion of the transaction price
allocated to supply services and transition services over time. We transfer
control of these services over time and GSK receives and consumes the benefit
over time as we perform the services.

In November 2021, GSK received clearance from the FDA for GSK4381562 to proceed
into a first-in-human clinical trial and as a result our performance obligations
under the GSK Agreement ended. No amount of the transaction price allocated to
the performance obligations was unsatisfied as of November 2021.

In March 2022, GSK notified us it had dosed the first patient in their in Phase
1 study of GSK4381562 in patients with solid tumors. As a result of this Phase 1
study initiation, the first clinical milestone under the GSK Agreement was
achieved. We concluded the variable consideration associated with this milestone
was no longer constrained and recognized $30.0 million in license-related
revenue for the six months ended June 30, 2022, as we had no further performance
obligations associated with the milestone. We did not recognize license-related
revenue under the GSK Agreement in the three months ended June 30, 2022.

During the three and six months ended June 30, 2022, we did not recognize any
license-related revenue related to the transition services or supply services as
our performance obligations under the GSK Agreement had ended. During the three
and six months ended June 30, 2021, we recognized $0.3 million and $0.7 million
of license-related revenue related to the transition services, respectively, and
recognized $0.2 million and $1.5 million of license-related revenue related to
the supply services, which represented the costs incurred for the manufacturing
and transition services that were performed.

Through June 30, 2022we received $85.0 million from GSK in upfront payments, $30.0 million in the clinical stages and $5.0 million reimbursement for transition and procurement services.

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Functionnary costs

Research and development costs

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, of 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 CRO;

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

•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 generally 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,
                                             2022                   2021                  2022                  2021

                                                                         (in thousands)
SRF388                                          5,202                4,076          $      10,086          $     5,500
SRF617                                          4,258                2,523                  8,016                4,269
SRF114                                          1,595                  386                  2,930                1,272
GSK4381562 (formerly SRF813)                        -                  398                      4                1,748
Other early-stage programs                         61                   77                    146                  119
Unallocated research and discovery
expenses                                        7,082                5,209                 13,640               10,305
Total research and development
expenses                               $       18,198          $    12,669          $      34,822          $    23,213



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.
We anticipate that our research and development expenses will increase in the
future as we anticipate incurring increased clinical development costs as we
advance our SRF617 and SRF388 Phase 2 clinical trials as well as increased costs
relating to the SRF114 program as we pursue IND-enabling activities.

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:

•the success of clinical trials and preclinical studies;

•the adequacy 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;

• successful enrollment and completion of clinical trials;

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Table of Contents •successful data from our clinical program that support an acceptable risk-benefit profile of our product candidates in the target populations;

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

•obtaining and maintaining 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;

•entering into collaborations, licenses and other agreements to further the development of our product candidates;

•obtain and maintain patent and trade secret protection or regulatory exclusivity for our product candidates;

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

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

• maintain an acceptable continuing safety profile of product candidates after approval;

• effective competition with other therapies; and

•obtaining and maintaining health coverage and adequate reimbursement from third-party payers.

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

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 a result of incurring 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 (expenses), net

Interest and other income consist primarily of interest earned on our cash, cash
equivalents, and marketable securities as well as interest expense incurred on
our loan and security agreement or, as amended, the Loan Amendment with K2
Health Ventures LLC, or K2HV.
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                             Results of Operations

Comparison of the three months ended June 30, 2022 and 2021

The following table summarizes our operating results for the three months ended June 30, 2022 and 2021, as well as changes to these items:

                                                           Three months ended June 30,
                                                            2022                   2021              2022 v 2021
                                                                             (in thousands)
License related revenue                               $            -          $       515          $       (515)
Operating expenses:
Research and development                                      18,198               12,669                 5,529
General and administrative                                     6,426                6,434                    (8)
Total operating expenses                                      24,624               19,103                 5,521
Loss from operations                                         (24,624)             (18,588)               (6,036)
Interest and other income (expense), net                        (589)                (393)                 (196)
Net loss                                              $      (25,213)         $   (18,981)         $     (6,232)


License-Related Revenue

We did not record licensing revenue in the three months ended
June 30, 2022. In the three months ended June 30, 2021we recognized $0.2 million and $0.3 million Licensing revenue related to Provisioning Services and Transition Services, respectively, which represented costs incurred for manufacturing and transition services that were performed.

Research and development costs

The following table summarizes our research and development expenses for the
three months ended June 30, 2022 and 2021, along with the changes in those
items:

                                                           Three months ended June 30,
                                                            2022                   2021              2022 v 2021
                                                                             (in thousands)
Direct research and development expenses by
program:
SRF388                                                $        5,202          $     4,076          $      1,126
SRF617                                                         4,258                2,523                 1,735
SRF114                                                         1,595                  386                 1,209
SRF813                                                             -                  398                  (398)
Other early-stage programs                                        61                   77                   (16)
Research and discovery and unallocated
expenses:
Personnel related (including stock-based
compensation)                                                  4,825                3,463                 1,362
Facility related and other                                     2,257                1,746                   511
Total research and development expenses               $       18,198        

$12,669 $5,529


Research and development expenses were $18.2 million for the three months ended
June 30, 2022, compared to $12.7 million for the three months ended June 30,
2021. The increase of $5.5 million was primarily due to increases of $1.1
million in external costs for our SRF388 program, $1.7 million in external costs
for our SRF617 program, $1.2 million in external costs for our SRF114 program
and $1.9 million for research and discovery and unallocated costs, which were
partially offset by a decrease of $0.4 million in external costs for the
GSK4381562 program.

The increase in research and development expenditure for our SRF388 program is primarily due to continued enrollment in our Phase 1 and Phase 2 trials.

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The increase in research and development expenditure for our SRF617 program is primarily due to continued enrollment in our Phase 1/1b and Phase 2 trials.

The increase in research and development expenses for our SRF114 program was
primarily due to the increased manufacturing expenses and expenses for other
IND-enabling activities as we progress towards an anticipated IND filing in the
second half of 2022.

The increase in research and discovery expenses and unallocated expenses is mainly due to the increase in headcount and consulting expenses in 2022.

The decrease in research and development expenses for the GSK4381562 program was
primarily due to the transfer of responsibility for development of the program
to GSK as part of the GSK Agreement.

General and administrative expenses

General and administrative expenses were $6.4 million for the two months ended June 30, 2022 and 2021. The decrease in legal costs was offset by the increase in personnel costs related to the increase in staff.

Interest and other income (expenses), net

Interest and other income (expense), net were approximately $(0.6) million and
$(0.4) million during the three months ended June 30, 2022 and 2021,
respectively, due primarily to interest expense related to the Loan Amendment
partially offset by interest income on invested balances of our cash, cash
equivalents and marketable securities.

Comparison of the six months ended June 30, 2022 and 2021

The following table summarizes our operating results for the six months ended June 30, 2022 and 2021, as well as changes to these items:

                                                               Six months ended June 30,
                                                             2022                     2021                2022 v 2021
                                                                                 (in thousands)
License-related revenue                                $       30,000          $         2,141          $     27,859
Operating expenses:
Research and development                                       34,822                   23,213                11,609
General and administrative                                     12,967                   12,076                   891
Total operating expenses                                       47,789                   35,289                12,500
Income (loss) from operations                                 (17,789)                 (33,148)               15,359
Interest and other income (expense), net                       (1,225)                  (1,394)                  169
Net income (loss)                                      $      (19,014)         $       (34,542)         $     15,528



License-Related Revenue

During the six months ended June 30, 2022, we recognized $30.0 million related
to the achievement of the first clinical milestone upon GSK dosing the first
patient in their Phase 1 study of GSK4381562 in patients with solid tumors.
During the six months ended June 30, 2021, we recognized $1.5 million and $0.7
million of license-related revenue related to the supply services and transition
services, respectively, which represented the costs incurred for the
manufacturing and transition services that were performed.
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Research and development costs

The following table summarizes our research and development expenses for the six months ended June 30, 2022 and 2021, as well as changes to these items:

                                                              Six months ended June 30,
                                                            2022                    2021                2022 v 2021
                                                                               (in thousands)
Direct research and development expenses by
program:
SRF388                                                $      10,086          $         5,500          $      4,586
SRF617                                                        8,016                    4,269                 3,747
SRF114                                                        2,930                    1,272                 1,658
GSK4381562 (formerly SRF813)                                      4                    1,748                (1,744)
Other early-stage programs                                      146                      119                    27
Research and discovery and unallocated
expenses:
Personnel related (including stock-based
compensation)                                                 9,093                    6,945                 2,148
Facility related and other                                    4,547                    3,360                 1,187
Total research and development expenses               $      34,822         

$23,213 $11,609



Research and development expenses were $34.8 million for the six months ended
June 30, 2022, compared to $23.2 million for the six months ended June 30, 2021.
The increase of $11.6 million was primarily due to increases of $4.6 million in
external costs for our SRF388 program, $3.7 million in external costs for our
SRF617 program, $3.3 million for research and discovery and unallocated costs
and $1.7 million in external costs for our SRF114 program, which were partially
offset by a decrease of $1.7 million in external costs for the GSK4381562
program.

The increase in research and development expenses for our SRF388 program was
primarily due to continued enrollment in our Phase 1 dose escalation trial and
advancement into a Phase 2 trial in 2022.

The increase in research and development expenses for our SRF617 program was
primarily due to continued enrollment in our Phase 1/1b dose escalation trial
and advancement into a Phase 2 trial in 2022.

The increase in research and development expenses for our SRF114 program was
primarily due to the increased manufacturing expenses and expenses for other
IND-enabling activities as we progress towards an anticipated IND filing in the
second half of 2022.

The increase in research and discovery expenses and unallocated expenses is mainly due to the increase in headcount and consulting expenses in 2022.

The decrease in research and development expenses for the GSK4381562 program was
primarily due to the transfer of responsibility for development of the program
to GSK as part of the GSK Agreement.

General and administrative expenses

General and administrative expenses were $13.0 million for the six months ended
June 30, 2022, compared to $12.1 million for the six months ended June 30, 2021.
The increase of $0.9 million was primarily due to increases in personnel related
costs from increased headcount, partially offset by a decrease in legal
expenses.

Interest and other income (expenses), net

Interest and other income (expense), net were approximately $(1.2) million and
$(1.4) million during the six months ended June 30, 2022 and 2021, respectively,
due primarily to interest expense related to the Loan Amendment partially offset
by interest income on invested balances of our cash, cash equivalents and
marketable securities.

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                        Liquidity and Capital Resources

Since our inception, we have incurred significant losses. We have generated
limited revenue to date from the Novartis Agreement and the GSK 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 public and private sales of our
securities, payments received under the Novartis Agreement, payments received
under the GSK Agreement and a debt financing. Through June 30, 2022, we had
received gross proceeds of $238.6 million from public and private sales of our
securities, $25.0 million from our Loan Amendment with K2HV, $120.0 million from
the GSK Agreement and $150.0 million from the Novartis Agreement.

In May 2020, we entered into a Capital on DemandTM sales agreement, or the 2020
Sales Agreement, with JonesTrading to issue and sell up to $50.0 million in
shares of our common stock, from time to time. Since May 2020, we sold 2,303,545
shares of common stock at-the-market under the 2020 Sales Agreement for net
proceeds of $19.5 million.

In August 2021, we entered into an amendment to the 2020 Sales Agreement, or the
Amended Sales Agreement with JonesTrading, which amended the 2020 Sales
Agreement to allow the issuance and sale of up to $80 million in shares of our
common stock, from time to time. Through June 30, 2022, we sold 9,796,813 shares
of common stock at-the-market under the Amended Sales Agreement for net proceeds
of $32.7 million.

From June 30, 2022we had cash, cash equivalents and marketable securities of
$156.6 million.

Future Funding Requirements

We expect our expenses will increase in the future as we anticipate incurring
increased clinical development costs as we advance our SRF617 and SRF388 Phase 2
clinical trials as well as increased costs relating to the SRF114 program as we
pursue IND-enabling activities. Additionally, 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 3, 2022, will enable us to fund our operating expenses, debt
service obligations and capital expenditure requirements into 2024, excluding
any future milestone payments from Novartis and GSK. We have based this estimate
on assumptions that may prove to be wrong, and we could exhaust our capital
resources sooner than we expect.

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 in a timely manner, if at all;

•seek and obtain marketing approvals for any product candidates we develop;

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

•obtain adequate coverage and reimbursement from hospitals, government and third-party payers for the product candidates we develop;

• establish and maintain supply and manufacturing relationships with third parties who can provide adequate products and services, both in quantity and quality, to support clinical development and market demand for the product candidates we are developing, if they are approved;

•achieve market acceptance of the product candidates we develop as viable therapeutic options;

•respond to any competing technological and commercial developments;

• negotiate favorable terms in any collaboration, license or other agreement in which we may enter into and fulfill our obligations under such collaborations, licenses and other agreements;

•maintain, protect and develop our portfolio of intellectual property rights, including patents, trade secrets and know-how;

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

•Attracting, hiring and retaining qualified personnel.

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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 license and collaboration arrangements or other transactions. 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
license and collaboration arrangements or other transactions 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 at all. 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 flow

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

                                                                           Six months ended June 30,
                                                                           2022                  2021
                                                                                (in thousands)
Net cash provided by (used in):
Operating activities                                                 $      (18,971)         $  (31,229)
Investing activities                                                         14,909             (81,311)
Financing activities                                                         22,841              20,734
Net increase (decrease) in cash and cash equivalents and restricted
cash                                                                 $       18,779          $  (91,806)


Operating Activities

During the six months ended June 30, 2022, net cash used in operating activities
was $19.0 million, primarily due to our net loss of $19.0 million and changes in
our operating assets and liabilities of $6.3 million, partially offset by
non-cash charges of $6.4 million. Net cash used in changes in our operating
assets and liabilities for the six months ended June 30, 2022 consisted
primarily of an increase of $1.7 million in prepaid expenses and other current
assets, a $2.4 million decrease in accrued expenses and other current
liabilities, a decrease of $1.3 million in our operating lease liability, and
$1.1 million decrease in accounts payable. The decrease in accrued expenses and
other current liabilities is primarily due to the decrease in accrued bonus and
accrued professional fees. The increase in prepaid expenses and other current
assets is a result of increased clinical expenses and higher insurance premiums.
The decrease in our operating lease liability is a result of rental payments
made on our operating leases, and the decrease in accounts payable is a result
of timing of payments.

During the six months ended June 30, 2021, net cash used in operating activities
was $31.2 million, primarily due to a net loss of $34.5 million and changes in
our operating assets and liabilities of $4.3 million, partially offset by
non-cash charges of $7.6 million. Net cash used in changes in our operating
assets and liabilities for the six months ended June 30, 2021 consisted
primarily of a $1.7 million decrease in accrued expenses and other current
liabilities, a $0.5 million decrease in accounts payable, and an increase of
$1.1 million in prepaid expenses and other current assets. The decrease in
accrued expenses and other current liabilities is primarily due to the decrease
in accrued severance and contact manufacturing costs. The increase in prepaid
expenses and other current assets is primarily due to receivables from GSK
related to reimbursement for the supply and transition services performed.
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Investing activities

During the six months ended June 30, 2022, net cash provided by investing
activities was $14.9 million, consisting of proceeds from sales or maturities of
marketable securities of $30.7 million, which was partially offset by purchases
of marketable securities of $15.7 million and purchases of property and
equipment of $0.1 million.

In the six months ended June 30, 2021the net cash used in investing activities was $81.3 million related to purchases of securities.

Fundraising activities

In the six months ended June 30, 2022net cash provided by financing activities was $22.8 millioncomposed of the product of $22.7 million received from the issuance of our common shares in the market under the Amended Sale Agreement and the proceeds of $0.2 million from the issuance of shares under our 2018 employee share purchase plan.

During the six months ended June 30, 2021, net cash provided by financing
activities was $20.7 million, consisting of proceeds of $19.0 million received
from issuance of our shares of common stock at-the-market under the 2020 Sales
Agreement, proceeds of $0.1 million received from the issuance of shares under
our 2018 Employee Stock Purchase Plan, and proceeds from the exercise of stock
options of $1.6 million.

Contractual Obligations

We have entered into agreements in the normal course of business with contract
research organizations 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 generally cancellable
by us upon prior written notice to the vendor.

During the six months ended June 30, 2022, 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 2, 2022.

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.

Our critical accounting policies and the methodologies and assumptions we apply thereunder have not materially changed since our Annual Report on Form 10-K was filed with the SECOND on March 2, 2022.

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.
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