Scholar Rock(SRRK) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section details the unaudited financial statements, management's analysis, market risk, and internal controls Financial Statements (Unaudited) The unaudited financial statements reflect the company's financial position, operations, and cash flows, highlighting revenue from Gilead and increased R&D expenses Consolidated Balance Sheets The balance sheet shows increased total assets and stockholders' equity, driven by marketable securities and a stock offering, while liabilities decreased Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $32,641 | $115,069 | | Marketable securities | $143,441 | $60,576 | | Total Assets | $188,542 | $181,336 | | Liabilities & Equity | | | | Total Liabilities | $66,752 | $74,713 | | Total Stockholders' Equity | $121,790 | $106,623 | Consolidated Statements of Operations and Comprehensive Loss The statement of operations reflects new revenue from Gilead, significantly increased operating expenses, and a higher net loss for both the quarter and nine-month period Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $4,774 | $0 | $12,919 | $0 | | Research and development | $15,699 | $8,061 | $40,153 | $26,185 | | General and administrative | $6,181 | $3,173 | $14,961 | $8,947 | | Loss from operations | $(17,106) | $(11,234) | $(42,195) | $(35,132) | | Net loss | $(16,147) | $(10,762) | $(39,427) | $(34,360) | | Net loss per share | $(0.55) | $(0.44) | $(1.46) | $(2.72) | Consolidated Statements of Cash Flows Cash flow statements show increased cash used in operations and investing, offset by significant cash provided by financing activities from a stock sale Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(47,048) | $(30,523) | | Net cash (used in) provided by investing activities | $(83,445) | $708 | | Net cash provided by financing activities | $48,065 | $77,340 | | Net (decrease) increase in cash | $(82,428) | $47,525 | Notes to Consolidated Financial Statements The notes detail the company's business, accounting policies, and financial arrangements, including the Gilead collaboration and a recent public offering - The company's lead product candidate is SRK-015 for Spinal Muscular Atrophy (SMA), currently in a Phase 2 trial, with SRK-181 for cancers resistant to checkpoint blockade therapies planned for a Phase 1 trial in Q1 2020[27] - In December 2018, the company entered a collaboration with Gilead to discover inhibitors of TGFβ for fibrotic diseases, receiving a $50 million upfront payment and a $30 million equity investment, with eligibility for up to $1.425 billion in milestones across three programs[61][62][64] - Revenue from the Gilead agreement is recognized over time using a cost-based input method, with $12.9 million recognized for the nine months ended Sep 30, 2019, and $50.0 million remaining in deferred revenue as of that date[72][73] - In June and July 2019, the company sold 3,450,000 shares of common stock in a public offering, receiving net proceeds of approximately $48.3 million[50][51] - Subsequent to the quarter end, in November 2019, the company entered into a new lease for its corporate headquarters in Cambridge, MA, with base rent of $6.9 million per year and a tenant improvement allowance of up to $14.1 million[76] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, emphasizing new Gilead revenue, increased R&D expenses, and the company's liquidity position following a public offering Results of Operations Operations results show significant revenue from Gilead, substantial increases in R&D and G&A expenses, and a higher net loss Comparison of Operations (Nine Months Ended Sep 30, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $12,919 | $0 | $12,919 | 100.0% | | Research and development | $40,153 | $26,185 | $13,968 | 53.3% | | General and administrative | $14,961 | $8,947 | $6,014 | 67.2% | | Net loss | $(39,427) | $(34,360) | $(5,067) | 14.7% | - The increase in R&D expense was primarily due to a $10.9 million rise in external costs for the SRK-181 program, including manufacturing costs for the planned Phase 1 trial and a one-time option fee[112] - The increase in G&A expense was mainly due to a $4.7 million increase in employee compensation and benefits from higher headcount and separation expenses, plus $0.8 million in public company operating costs[114] Liquidity and Capital Resources The company's liquidity is strong, primarily funded by equity sales and collaboration payments, with sufficient cash to fund operations into late 2021 - As of September 30, 2019, the company had $176.1 million in cash, cash equivalents, and marketable securities[119][163] - The company raised approximately $48.3 million in net proceeds from a secondary public offering of common stock in June and July 2019[120] - The company expects its existing cash and cash equivalents will fund operating expenses and capital expenditure requirements into the fourth quarter of 2021[129][163] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the company is exempt from providing quantitative and qualitative market risk disclosures - As a smaller reporting company, Scholar Rock is exempt from providing quantitative and qualitative disclosures about market risk[151] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[153] - No changes in internal control over financial reporting occurred during Q3 2019 that materially affected, or are reasonably likely to materially affect, internal controls[154] PART II. OTHER INFORMATION This section includes legal proceedings, risk factors, equity sales, and other relevant corporate information Legal Proceedings The company is not currently involved in any material legal proceedings that would adversely affect its business - The company is not currently a party to any material legal proceedings[156] Risk Factors The company faces significant risks including limited operating history, dependence on product candidates, need for capital, and intellectual property challenges - The company has a limited operating history, has incurred net losses every year since inception (accumulated deficit of $146.3 million as of Sep 30, 2019), and expects losses to continue[158] - The business is highly dependent on the success of its lead product candidates, SRK-015 and SRK-181, which require significant additional development and regulatory approval[168] - The company relies on third parties for manufacturing and to conduct clinical trials, which introduces risks related to supply, quality, and regulatory compliance (cGMP, GCP)[352][360] - The company faces risks related to its collaboration with Gilead, including the potential for termination and the fact that Gilead controls development and commercialization post-option exercise[368][372] - Protecting intellectual property is difficult and costly, and the company faces risks of third-party infringement claims and challenges to its own patents[298][317] Unregistered Sales of Equity Securities and Use of Proceeds This section details the use of proceeds from the May 2018 IPO, primarily for R&D activities, with no unregistered sales during the quarter - As of September 30, 2019, the company had used approximately $69.4 million of the net proceeds from its May 2018 IPO[405] - The use of IPO proceeds was primarily to fund R&D for SRK-015, TGFβ1, and other preclinical activities, as well as for working capital and general corporate purposes[405] Other Information The company entered a new lease agreement for its corporate headquarters in Cambridge, Massachusetts, in November 2019 - In November 2019, the company entered into a new lease for its corporate headquarters at 301 Binney Street, Cambridge, MA[408] - The lease is for 51,408 sq. ft. with an annual base rent of $6.9 million and a tenant improvement allowance of up to $14.1 million[408][409] Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents and a new lease agreement - The exhibit index lists key corporate documents and agreements, including the new Lease Agreement dated November 5, 2019[413]