srrk_Current_Folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10‑Q


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

 

FOR THE QUARTERLY PERIOD ENDED March 31, 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 001‑38501

______________________________________________

SCHOLAR ROCK HOLDING CORPORATION

(Exact name of registrant as specified in its charter)


 

 

Delaware

82‑3750435

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

620 Memorial Drive, 2nd Floor

Cambridge, Massachusetts

(Address of principal executive offices)

02139

(Zip Code)

 

 

(857) 259‑3860

(Registrant’s telephone number, including area code)

 


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, a 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

☒ 

Smaller 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 Exchange Act).   Yes  ☐    No  ☒

 

 

 

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

SRRK

The Nasdaq Global Select Market

 

The number of outstanding shares of the Registrant’s Common Stock as of May 1, 2019 was 26,226,204.

 


 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10‑Q (“Quarterly Report”), including the documents incorporated by reference, contains forward-looking statements within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe harbor provisions. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology. Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

·

the success, cost and timing of clinical trials for SRK-015, including the progress and completion of our Phase 2 clinical trial and any future clinical trials for SRK015, and the results from these trials;

·

the success, cost and timing of our other product development activities, preclinical studies and clinical trials, including for SRK-181 for the treatment of cancers resistant to checkpoint blockade therapies (“CBTs”) and the timing of the availability of the results of these studies and trials;

·

our success in identifying and executing a development program for additional indications for SRK015, SRK-181 and our other programs;

·

our ability to obtain funding for our operations, including funding necessary to complete further development and, upon successful development, if approved, commercialization of SRK015, SRK-181 or any of our future product candidates;

·

the potential for our identified research priorities to advance our proprietary platform, development programs or product candidates;

·

the timing, scope, or likelihood of our ability to obtain and maintain regulatory approval from the U.S. Food and Drug Administration, European Medicines Agency and other applicable regulatory authorities for SRK015, SRK-181 and any future product candidates, and any related restrictions, limitations or warnings in the label of any approved product candidate;

·

our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates and the duration of such protection;

·

our ability and the potential to successfully manufacture our product candidates for clinical trials and for commercial use, if approved;

·

our ability to establish or maintain collaborations or strategic relationships, including our collaboration with Gilead Sciences, Inc.;

·

our ability to obtain additional funding when necessary;

·

the size and growth potential of the markets for our product candidates, and our ability to serve those markets, either alone or in combination with others;

·

our expectations related to the use of our cash reserves;

·

the impact of the implementation of new laws and regulations or changes to existing laws and regulations;

·

developments and projections relating to our competitors and our industry;

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·

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing, including our expected use of proceeds from our initial public offering; and

·

other risks and uncertainties, including those listed under Part II, Item 1A, Risk Factors.

The risks set forth above are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all risk factors, nor can we assess the impact of all risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our most recent Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q for future periods and Current Reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Current Reports on Form 8-K or otherwise, for a discussion of risks and uncertainties that may cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements. We expressly disclaim any responsibility to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or otherwise, and you should not rely upon these forward-looking statements after the date of this report.

We may from time to time provide estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this Quarterly Report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.

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SCHOLAR ROCK HOLDING CORPORATION

TABLE OF CONTENTS

 

Page

PART I - FINANCIAL INFORMATION 

 

Item 1. Financial Statements (Unaudited) 

5

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 

5

Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018 

6

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2019 and 2018 

7

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 

8

Notes to Consolidated Financial Statements 

9

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

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

28

Item 4. Controls and Procedures 

28

 

 

PART II. OTHER INFORMATION 

 

Item 1. Legal Proceedings 

29

Item 1A. Risk Factors 

30

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

80

Item 3. Defaults Upon Senior Securities 

80

Item 4. Mine Safety Disclosures 

80

Item 5. Other Information 

80

Item 6. Exhibits 

80

SIGNATURES 

82

 

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SCHOLAR ROCK HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

    

2019

 

2018

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

67,004

 

$

115,069

Marketable securities

 

 

92,662

 

 

60,576

Prepaid expenses and other current assets

 

 

2,362

 

 

2,296

Total current assets

 

 

162,028

 

 

177,941

Property and equipment, net

 

 

3,644

 

 

3,190

Operating lease right-of-use asset

 

 

5,105

 

 

 —

Restricted cash

 

 

205

 

 

205

Total assets

 

$

170,982

 

$

181,336

Liabilities and Stockholders’ Equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

3,249

 

$

3,303

Accrued expenses

 

 

4,141

 

 

7,157

Deferred rent

 

 

 —

 

 

16

Operating lease liability

 

 

1,036

 

 

 —

Loan payable

 

 

270

 

 

424

Deferred revenue

 

 

25,364

 

 

20,209

Other current liabilities

 

 

15

 

 

14

Total current liabilities

 

 

34,075

 

 

31,123

Long-term portion of deferred rent

 

 

 —

 

 

871

Long-term portion of operating lease liability

 

 

4,930

 

 

 —

Other long-term liabilities

 

 

20

 

 

24

Long-term portion of deferred revenue

 

 

34,434

 

 

42,695

Total liabilities

 

 

73,459

 

 

74,713

Commitments and contingencies (Note 8)

 

 

  

 

 

  

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2019 and December 31, 2018; no shares issued and outstanding at March 31, 2019 and December 31, 2018

 

 

 —

 

 

 —

Common stock, $0.001 par value; 150,000,000 shares authorized and 26,217,447 shares issued and outstanding as of March 31, 2019; 150,000,000 shares authorized and 26,217,701 shares issued and outstanding as of December 31, 2018

 

 

26

 

 

26

Additional paid-in capital

 

 

215,084

 

 

213,453

Accumulated other comprehensive loss

 

 

16

 

 

(8)

Accumulated deficit

 

 

(117,603)

 

 

(106,848)

Total stockholders’ equity

 

 

97,523

 

 

106,623

Total liabilities and stockholders’ equity

 

$

170,982

 

$

181,336

 

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

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SCHOLAR ROCK HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

Revenue

 

$

3,106

 

$

 —

Operating expenses:

 

 

  

 

 

  

Research and development

 

 

10,739

 

 

6,701

General and administrative

 

 

4,070

 

 

2,315

Total operating expenses

 

 

14,809

 

 

9,016

Loss from operations

 

 

(11,703)

 

 

(9,016)

Other income (expense):

 

 

  

 

 

  

Interest income, net

 

 

948

 

 

144

Other expense, net

 

 

 —

 

 

(20)

Total other income (expense)

 

 

948

 

 

124

Net loss

 

$

(10,755)

 

$

(8,892)

Net loss per share, basic and diluted

 

$

(0.42)

 

$

(3.18)

Weighted average common shares outstanding, basic and diluted

 

 

25,592,659

 

 

2,795,497

 

Comprehensive loss:

 

 

 

 

 

 

Net loss

 

$

(10,755)

 

$

(8,892)

Other comprehensive income (loss):

 

 

 

 

 

 

Unrealized gain on marketable securities

 

 

24

 

 

 1

Total other comprehensive income (loss)

 

 

24

 

 

 1

Comprehensive loss

 

$

(10,731)

 

$

(8,891)

 

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

 

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SCHOLAR ROCK HOLDING CORPORATION

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

(Unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Convertible Preferred

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Stock

 

 

Common Stock

 

Paid‑in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

  

Shares

  

Amount

  

  

Shares

  

Amount

  

Capital

  

Loss

  

Deficit

  

Deficit

Balance at December 31, 2017

 

43,135,911

 

$

109,232

 

 

3,970,586

 

$

 4

 

$

4,001

 

$

(2)

 

$

(57,525)

 

$

(53,522)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

 —

 

 

 1

Equity-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

482

 

 

 —

 

 

 —

 

 

482

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,892)

 

 

(8,892)

Balance at March 31, 2018

 

43,135,911

 

$

109,232

 

 

3,970,586

 

$

 4

 

$

4,483

 

$

(1)

 

$

(66,417)

 

$

(61,931)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Convertible Preferred

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Stock

 

 

Common Stock

 

Paid‑in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

  

Shares

  

Amount

  

  

Shares

  

Amount

  

Capital

  

Loss

  

Deficit

  

Equity

Balance at December 31, 2018

 

 —

 

$

 —

 

 

26,217,701

 

$

26

 

$

213,453

 

$

(8)

 

$

(106,848)

 

$

106,623

Unrealized loss on marketable securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

24

 

 

 —

 

 

24

Restricted shares forfeited during the period

 

 —

 

 

 —

 

 

(2,237)

 

 

 

 

 

 

 

 

 —

 

 

 —

 

 

 —

Exercise of stock options

 

 —

 

 

 —

 

 

1,983

 

 

 

 

 

13

 

 

 —

 

 

 —

 

 

13

Equity-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,618

 

 

 —

 

 

 —

 

 

1,618

Net Loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,755)

 

 

(10,755)

Balance at March 31, 2019

 

 —

 

$

 —

 

 

26,217,447

 

$

26

 

$

215,084

 

$

16

 

$

(117,603)

 

$

97,523

 

 

 

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

 

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SCHOLAR ROCK HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Cash flows from operating activities:

 

 

  

 

 

  

Net loss

 

$

(10,755)

 

$

(8,892)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

271

 

 

179

Equity-based compensation

 

 

1,618

 

 

482

Amortization of investment securities

 

 

(365)

 

 

(31)

Amortization of operating lease right-of-use asset

 

 

244

 

 

 —

Deferred payroll tax credit

 

 

 —

 

 

42

Change in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(206)

 

 

(1,923)

Accounts payable

 

 

(98)

 

 

1,529

Accrued expenses

 

 

(3,016)

 

 

(1,271)

Deferred rent

 

 

 —

 

 

(32)

Operating lease liabilities

 

 

(130)

 

 

 —

Deferred revenue

 

 

(3,106)

 

 

 —

Other liabilities

 

 

13

 

 

33

Net cash used in operating activities

 

 

(15,530)

 

 

(9,884)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property and equipment

 

 

(681)

 

 

(176)

Purchase of marketable securities

 

 

(77,297)

 

 

(23,412)

Sales and maturities of marketable securities

 

 

45,600

 

 

 —

Net cash used in investing activities

 

 

(32,378)

 

 

(23,588)

Cash flows from financing activities:

 

 

 

 

 

 

Principal payments on loan payable

 

 

(167)

 

 

(167)

Proceeds from stock option exercises

 

 

13

 

 

 —

Other

 

 

(3)

 

 

 —

Net cash used in financing activities

 

 

(157)

 

 

(167)

Net decrease in cash and cash equivalents and restricted cash

 

 

(48,065)

 

 

(33,639)

Cash and cash equivalents and restricted cash, beginning of period

 

 

115,274

 

 

56,666

Cash and cash equivalents and restricted cash, end of period

 

$

67,209

 

$

23,027

Supplemental disclosure of non-cash items:

 

 

 

 

 

 

Property and equipment purchases in accounts payable

 

$

483

 

$

13

Deferred offering costs in accounts payable and accrued expenses

 

$

 —

 

$

985

Operating lease right-of-use asset obtained in exchange for operating lease obligation

 

$

5,349

 

$

 —

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

 4

 

$

10

 

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

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SCHOLAR ROCK HOLDING CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of the Business

Scholar Rock Holding Corporation (the “Company”) is a biopharmaceutical company focused on the discovery and development of innovative medicines for the treatment of serious diseases in which signaling by protein growth factors plays a fundamental role. The Company’s lead product candidate, SRK-015, is a highly selective inhibitor of the activation of the growth factor myostatin in skeletal muscle that the Company has advanced into clinical development for the treatment of spinal muscular atrophy. The Company’s second product candidate, SRK-181, is being developed for the treatment of cancers resistant to checkpoint blockade therapies. The Company was originally formed in May 2012. Its principal offices are in Cambridge, Massachusetts.

Since its inception, the Company’s operations have focused on research and development of monoclonal antibodies that selectively inhibit activation of growth factors for therapeutic effect, as well as establishing the Company’s intellectual property portfolio and performing research and development activities. The Company has primarily financed its operations through various equity and debt financings, including the initial public offering of its common stock (the “IPO”) in May 2018, as well as research and development collaboration agreements.

Revenue generation activities have been limited to two collaborations, both containing research services and the issuance of a license. The first agreement, executed in 2013 was with Janssen Biotech, Inc. (“Janssen”), a subsidiary of Johnson & Johnson. The second agreement, executed in December 2018 was with Gilead Sciences, Inc. (“Gilead”), and the Company began recognizing revenue on the Gilead Collaboration Agreement in 2019. No revenues have been recorded from the sale of any commercial product.

During the second quarter of 2018, the Company completed its IPO, in which the Company sold 6,164,000 shares of common stock, including all additional shares available to cover over-allotments, at a price of $14.00 per share. The Company received aggregate net proceeds of approximately $77.8 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. Upon the closing of the IPO, all outstanding shares of convertible preferred stock converted into 15,109,950 shares of common stock and the Company’s outstanding warrant to purchase preferred stock converted into a warrant to purchase 7,614 shares of common stock.

The Company is subject to a number of risks similar to other life science companies, including, but not limited to, successful discovery and development of its drug candidates, raising additional capital, development by its competitors of new technological innovations, protection of proprietary technology and regulatory approval and market acceptance of the Company’s products. The Company anticipates that it will continue to incur significant operating losses for the next several years as it continues to develop its product candidates. The Company believes that its existing cash and cash equivalents, and marketable securities at March 31, 2019 will be sufficient to allow the Company to fund its current operations through at least a period of one year after the date the financial statements are issued. 

2. Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

The significant accounting policies used in preparation of the unaudited consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2018, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K. Material changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 are reflected below.

 

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Leases

 

Effective January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”), Topic 842, Leases (“ASC 842”), using the modified retrospective approach and utilizing the effective date as its date of initial application, for which prior periods are presented in accordance with the previous guidance in ASC 840, Leases.

 

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

 

In accordance with the guidance in ASC 842, components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area 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 the respective relative fair values to the lease components and non-lease components.

 

Reclassifications

 

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.

Unaudited Interim Financial Information

The consolidated financial statements of the Company included herein have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The unaudited consolidated financial statements include the accounts of Scholar Rock Holding Corporation and its wholly owned subsidiaries. All intercompany transactions and balances of the subsidiaries have been eliminated in consolidation. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that may affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the related reporting of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

ASU 2016-02, Leases and ASU 2018-11, Leases, Targeted Improvements

In February 2016, the FASB issued ASU 2016-02, Leases, (“ASU 2016-02”), which superseded the lease accounting requirements in ASC 840, Leases and created a new Topic 842, Leases.

In adopting the new standard, the Company elected to utilize the available package of practical expedients permitted under the transition guidance within the new standard, which removed the requirement to reassess previous accounting

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conclusions around whether arrangements are or contain leases, the classification of leases, and the treatment of initial direct costs. The adoption of this standard resulted in the recognition of operating lease liabilities and right-of-use assets of $6.1 million and $5.3 million, respectively, as of January 1, 2019. There was no cumulative transition adjustment to retained earnings upon adoption of the standard and there was no material effect on the Company’s statements of operations or statement of cash flows. 

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard will align the requirements for capitalizing implementation costs for hosting arrangements (services) with costs for internal-use software (assets). As a result, certain implementation costs incurred in hosting arrangements will be deferred and amortized. The new standard will be effective for the Company on January 1, 2020. Early adoption is permitted. The Company is currently evaluating the potential impact that adoption of this standard may have on the Company's financial position and results of operations.

3. Fair Value of Financial Assets and Liabilities

The following tables summarize the assets and liabilities measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2019

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds, included in cash and cash equivalents

 

$

62,744

 

$

62,744

 

$

 —

 

$

 —

Marketable securities:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Treasury obligations

 

 

92,662

 

 

92,662

 

 

 —

 

 

 —

Total assets

 

$

155,406

 

$

155,406

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2018

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds, included in cash and cash equivalents

 

$

114,593

 

$

114,593

 

$

 —

 

$

 —

Marketable securities:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Treasury obligations

 

 

60,576

 

 

60,576

 

 

 —

 

 

 —

Total assets

 

$

175,169

 

$

175,169

 

$

 —

 

$

 —

 

Cash and cash equivalents and marketable securities include investments in money market funds that invest in U.S. government securities that are valued using quoted market prices. Accordingly, money market funds and government funds are categorized as Level 1 as of March 31, 2019 and December 31, 2018. There were no transfers between fair value measurements levels during the three months ended March 31, 2019 or 2018.

The carrying amounts reflected in the balance sheets for prepaid expenses and other current assets, accounts payable, and accrued expenses approximate their fair values at March 31, 2019 and December 31, 2018, due to their short-term nature. The Company believes the terms of the loan payable reflect current market conditions for an instrument with similar terms and maturity, therefore the carrying value of the Company’s debt approximates its fair value based on Level 2 of the fair value hierarchy.

Upon the completion of the IPO, the Company’s outstanding warrant to purchase preferred stock converted into a warrant to purchase common stock and the Company reclassified the fair value of the warrant to additional paid-in capital. As of March 31, 2019, the warrant is currently exercisable for 7,614 shares of the Company’s common stock at an exercise price of $3.94 per share.

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4. Marketable Securities

The following table summarizes the Company’s investments as of March 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Estimated

 

    

Cost

    

Gains

    

Losses

    

Fair Value

Marketable securities available-for-sale:

 

 

  

 

 

 

 

 

  

 

 

  

U.S. Treasury obligations

 

$

92,646

 

$

18

 

$

(2)

 

$

92,662

Total available-for-sale securities

 

$

92,646

 

$

18

 

$

(2)

 

$

92,662

 

The following table summarizes the Company’s investments as of December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Estimated

 

    

Cost

    

Gains

    

Losses

    

Fair Value

Marketable securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury obligations

 

$

60,584

 

$

 —

 

$

(8)

 

$

60,576

Total available-for-sale securities

 

$

60,584

 

$

 —

 

$

(8)

 

$

60,576

 

 

5. Accrued Expenses

As of March 31, 2019 and December 31, 2018, accrued expenses consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

As of

 

 

March 31, 

    

December 31, 

 

    

2019

 

2018

Accrued external research and development expense

 

$

2,203

 

$

3,284

Accrued payroll and related expenses

 

 

1,110

 

 

2,826

Accrued professional and consulting expense

 

 

629

 

 

890

Accrued other

 

 

199

 

 

157

 

 

$

4,141

 

$

7,157

 

 

6. Common Stock and Preferred Stock

In connection with the consummation of the IPO, on May 29, 2018 the Company filed an amended and restated certificate of incorporation, which increased the number of shares of common stock authorized for issuance thereunder by 90,000,000 shares to 150,000,000 shares and also authorized for issuance 10,000,000 shares of Preferred Stock, par value $0.001. As of March 31, 2019,  no shares of the Preferred Stock were issued or outstanding.

7. Equity-Based Compensation

The Company recorded equity-based compensation expense related to all equity-based awards for employees and nonemployees, which was allocated as follows in the consolidated statements of operations (in thousands):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Research and development expense

 

$

579

 

$

245

General and administrative expense

 

 

1,039

 

 

237

 

 

$

1,618

 

$

482

 

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Restricted Stock

The following table summarizes restricted common stock activity as of March 31, 2019:

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

Average Fair

 

 

 

 

Value per Share

 

    

Number of Shares

    

at Issuance

Restricted common stock as of December 31, 2018

 

664,174

 

$

5.77

Granted

 

 —

 

$

 —

Vested

 

(90,500)

 

$

5.77

Forfeited

 

(2,237)

 

$

5.77

Restricted common stock as of March 31, 2019

 

571,437

 

$

5.77

 

As of March 31, 2019, the Company had unrecognized equity-based compensation expense of $2.5 million related to restricted stock issued to employees and directors, which is expected to be recognized over a period of 1.8 years.

Stock Options

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

Number of 

 

Average

 

Remaining

 

Aggregate

 

    

Shares

    

Exercise Price

    

Contractual Term

    

Intrinsic Value

 

 

 

 

 

 

 

(in years)

 

(in thousands)

Outstanding as of December 31, 2018

 

1,627,947

 

$

10.86

 

9.26

 

$

19,831

Granted

 

660,100

 

 

14.81

 

 

 

 

 

Exercised

 

(1,983)

 

 

6.63

 

 

 

 

 

Cancelled

 

(14,194)

 

 

7.87

 

 

 

 

 

Outstanding as of March 31, 2019

 

2,271,870

 

 

12.03

 

9.24

 

$

16,475

Options exercisable as of March 31, 2019

 

318,576

 

$

10.00

 

8.73

 

$

2,901

 

Using the Black-Scholes option pricing model, the weighted average fair value of options granted to employees and directors during the three months ended March 31, 2019 was $10.60.  

The following assumptions were used in determining the fair value of options granted in the three months ended March 31, 2019:

 

 

 

Risk-free interest rate

2.52

%  

Expected dividend yield

0.0

%  

Expected term (years to liquidity)

6.25

 

Expected volatility

81.62

%  

 

As of March 31, 2019, the Company has unrecognized equity-based compensation expense related to its employee stock options of $16.2 million which the Company expects to recognize over the remaining weighted average vesting period of 3.2 years.

8. Commitments and Contingencies

Operating Leases

Facility Lease

In March 2015, the Company entered into a 5‑year lease for its corporate headquarters (the ‘‘lease’’). The lease was further amended in February 2018, to add an additional space (the ‘‘expansion space’’) at the current location and to extend the lease term (the ‘‘amended lease’’). The amended lease expires in July 2023. Rent for the facility lease, including the expansion space, increases from $1.4 million per year to $1.7 million per year over the term of the lease.

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Variable lease payments include the Company’s allocated share of costs incurred and expenditures made by the landlord in the operation and management of the building. The Company has the option to extend the term of the amended lease for one additional term of 5 years commencing after the amended lease expires.

Other information related to the Company’s lease was as follows (in thousands, except lease term and discount rate):

 

 

 

 

 

 

 

For Three Months Ended

 

 

    

March 31, 

    

 

 

2019

 

Lease Cost:

 

 

 

 

Operating lease cost

 

$

343

 

Variable lease cost

 

 

179

 

Total lease cost

 

$

522

 

Other information:

 

 

 

 

Operating cash flows used for operating leases

 

$

229

 

Weighted average remaining lease term

 

 

4.42 years

 

Weighted average discount rate

 

 

6.47

%  

The following is a maturity analysis of the annual undiscounted cash flows reconciled to the carrying value of the operating lease liabilities as of March 31, 2019 (in thousands):

 

 

 

 

 

    

 

 

 

 

Year Ending December 31, 

    

 

2019 (excluding the three months ended March 31, 2019)

 

$

1,039

2020

 

 

1,447

2021

 

 

1,623

2022

 

 

1,672

2023

 

 

1,137

Thereafter

 

 

 —

Total lease payments

 

 

6,918

Less imputed interest

 

 

(952)

Total operating lease liabilities

 

$

5,966

Legal Proceedings

The Company is not currently a party to any material legal proceedings.

9. Loan Payable

In August 2015, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (‘‘SVB’’), which provided the Company an equipment line of credit of up to $2.0 million to finance the purchase of eligible equipment. The loan balance at March 31, 2019 and December 31, 2018 was $0.3 million and $0.4 million, respectively.

10. Agreements

Collaboration with Gilead

Agreement Summary

On December 19, 2018 (the “Effective Date”), the Company entered into a Master Collaboration Agreement (the “Gilead Collaboration Agreement”) with Gilead to discover and develop specific discover and develop specific inhibitors of TGFβ activation focused on the treatment of fibrotic diseases. Under the collaboration, Gilead has exclusive options to license worldwide rights to product candidates that emerge from three of the Company’s TGFβ programs (each a “Gilead Program”). Pursuant to the Gilead Collaboration Agreement, the Company is responsible for antibody discovery and preclinical research through product candidate nomination, after which, upon exercising the option for a

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Gilead Program, Gilead will be responsible for the program’s preclinical and clinical development and commercialization. Such option may be exercised by Gilead at any time from the Effective Date through a date that is 90 days following the expiration of the Research Collaboration Term (as defined below) for a given Gilead Program, or until termination of the Gilead Program, whichever is earlier (the “Option Exercise Period”).

The Company received a non-refundable upfront payment of $50 million under the Gilead Collaboration Agreement. If Gilead exercises its option to exclusively license a Gilead Program, the Company may earn a total potential aggregate option exercise fee, development, regulatory and commercial milestone payments with respect to each Gilead Program of $475 million, or a total of $1,425 million across all three Gilead Programs. Additionally, in partial consideration of the rights granted to Gilead pursuant to the License Agreement, Gilead shall pay to the Company certain tiered royalties at a rate ranging from the high single-digits to the low double-digits (depending on the amount of net sales) on each Licensed Product in a given calendar year, on a country-by-country basis. In addition, Gilead will pay the Company a one-time milestone payment in the amount of $25 million following achievement of successful demonstration of in vivo proof of concept consistent with certain criteria detailed in the Gilead Collaboration Agreement. None of the payments under the Gilead Collaboration Agreement are refundable.

Simultaneously with the entry into the Gilead Collaboration Agreement, the Company entered into a Share Purchase Agreement with Gilead (the “Gilead Equity Agreement”). Pursuant to the terms of the Gilead Equity Agreement, Gilead purchased 980,392 shares of common stock of the Company (the “Shares”) at a purchase price of $30.60 per share, for an aggregate purchase price of $30 million. The Company did not incur any material costs in connection with the issuance of the Shares.

The Company and Gilead have established a joint steering committee (the “JSC”). The JSC will, among other powers and responsibilities, review, oversee and have decision-making responsibilities for certain strategic activities performed under the Gilead Programs, including reviewing and amending the research plans, reviewing any development candidate nominations, selecting a development candidate, and overseeing the strategic direction of the Gilead Programs. The Company will conduct its activities for each Gilead Program under the Gilead Collaboration Agreement, on a program-by-program basis, during the period beginning on the Effective Date and ending on the earliest to occur of (a) the date that the JSC first approves a selected development candidate for such program, (b) the third anniversary of the Effective Date, or (c) the effective date of termination of the Gilead Collaboration Agreement (the “Research Collaboration Term”). During the Research Collaboration Term, for each Gilead Program, the Company will notify Gilead, through the JSC, of up to two Gilead Program antibodies (in the case that Gilead rejects one, in accordance with the terms of the Gilead Collaboration Agreement) that satisfy the development criteria for such program (the “Development Candidate Nomination”).

This Gilead Collaboration Agreement will remain in effect, unless otherwise earlier terminated in accordance with the terms of the Gilead Collaboration Agreement, on a program-by-program basis, until Gilead exercises its option with respect to a given Gilead Program or until expiration of the applicable Option Exercise Period, whichever is earlier (the “Term”). Unless earlier terminated, the Term shall expire in its entirety upon the expiration of the last to expire Option Exercise Period under the Gilead Collaboration Agreement. Gilead may terminate the Gilead Collaboration Agreement in its entirety or on a program-by-program basis in its sole discretion upon prior written notice to the Company pursuant to the terms of the agreement. The Gilead Collaboration Agreement may also be terminated on a program-by-program basis by either party in the event of an uncured material breach of the Gilead Collaboration Agreement by the other party.

Prior to Gilead’s exercise of an option, the Company will have the lead responsibility for drug discovery and pre-clinical development of all Gilead Programs through to Development Candidate Nomination. Within a certain period of time after receiving a data package for a Development Candidate Nomination, Gilead may exercise its option to enter into a Form of License Agreement for exclusive rights to develop, manufacture and commercialize the licensed antibodies and licensed products of such Gilead Program.

Accounting Treatment

The Company assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, Gilead, is a customer. The Company identified the following material promises under the arrangement: (1) the non-

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exclusive, royalty-free research and development license; (2) the research and development services for the Gilead Programs; and (3) the options to license each of the three Gilead Programs to develop, manufacture and commercialize licensed candidates and resulting products, which were determined to be material rights for each program. The research and development services for each of the three Gilead Programs were determined to not be distinct from the research and development license and have been combined into a single performance obligation for each Gilead Program. Additionally, the option and associated material right for each Gilead Program represent separate performance obligations. The promises under the Gilead Collaboration Agreement relate primarily to the research and development required by the Company for each of the Gilead Programs nominated by Gilead. The Company does not have significant responsibilities subsequent to Gilead’s exercise of each option.

At the commencement of the arrangement, two units of accounting were identified: the issuance of 980,392 of the Company’s common shares and the joint research activities during the three-year research collaboration term. The Company determined the total transaction price to be $80 million, consisting of $17.1 million attributed to the equity sold to Gilead and $62.9 million attributed to the joint research activities. In determining the fair value of the common stock at closing, the Company considered the closing price of the common stock at the time of the transaction and included a lack of marketability discount because the shares were subject to certain restrictions. Of the $30 million equity investment, $12.9 million was determined to be a premium and therefore was included as part of the transaction price to be allocated over the performance obligations. The potential incremental payment of $25 million is due following achievement of successful demonstration of in vivo proof of concept consistent with certain criteria detailed in the Gilead Collaboration Agreement and will be included in the transaction price when it becomes probable that a future material reversal will not occur. The Company will reevaluate the transaction price at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur, and, if necessary, will adjust its estimate of the transaction price. The $62.9 million attributed to the joint research activities was allocated to the performance obligations based on their standalone selling prices (the “SSP”) when the Gilead Collaboration Agreement was executed. The Company made certain estimates when determining the SSP. For the research licenses and related research and development services, the estimated SSP is primarily based on the nature of the services to be performed and estimates of the associated effort and costs of the services.  The Company developed the estimated SSP for the material rights based on the intrinsic value of the license upon exercise of the underlying option, industry standards for product development and estimates for the likelihood of option exercise.

The consideration related to the underlying options will not be included in the transaction price until the options are exercised. Additionally, the subsequent potential development, regulatory and commercial milestones are excluded from the transaction price, until after Gilead exercises its respective options.

Revenue associated with the research and development and license performance obligations relating to the Gilead Programs is recognized as revenue as the research and development services are provided using an input method, according to the costs incurred on each Gilead Program and the costs expected to be incurred in the future to satisfy the performance obligation. The amounts allocated to the three material rights will be recognized when Gilead exercises each respective option and delivers the underlying license and transfer of know-how, or immediately as each option expires unexercised. The transfer of control occurs over time. In management’s judgment, this input method is the best measure of progress towards satisfying the performance obligation. The amounts received that have not yet been recognized as revenue are recorded in deferred revenue on the Company’s consolidated balance sheet.

None of the performance obligations have been fully satisfied as of March 31, 2019. As a result of the joint research activities conducted during the three months ended March 31, 2019, the Company recognized $3.1 million in revenue in the Company’s consolidated statements of operations and comprehensive loss under the Gilead Collaboration Agreement. The aggregate amount of the transaction price allocated to the Company’s unsatisfied performance obligations and recorded in deferred revenue at March 31, 2019 is $59.8 million. The Company will recognize the deferred revenue based on a cost input method, over the remaining research term for each respective Gilead Program, which is a maximum of 2.75 years as of March 31, 2019; each research term is dependent on the timing of Gilead either exercising its options for the Gilead Programs or terminating further development on the Gilead Programs prior to the expiration date of the research term.

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11. Net Loss per Share

The Company calculates basic net loss per share by dividing net loss by the weighted average number of common shares outstanding, excluding restricted common stock. The Company has generated a net loss in all periods presented, so the basic and diluted net loss per share are the same, as the inclusion of the potentially dilutive securities would be anti-dilutive.

The following table sets forth the outstanding common stock equivalents, presented based on amounts outstanding at each period end, that have been excluded from the calculation of diluted net loss per share for the periods indicated because their inclusion would have been anti-dilutive):

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

Convertible preferred stock

 

 —

 

15,109,950

Restricted common stock

 

571,437

 

1,114,089

Warrant

 

7,614

 

7,614

Stock options

 

2,271,870

 

660,319

 

 

2,850,921

 

16,891,972

 

 

12. Related Party Transactions

Licensing Agreement

Pursuant to a license agreement with Children’s Medical Center Corporation (‘‘CMCC’’), a common share holder, the Company has an obligation to pay CMCC an annual license maintenance fee of $10,000 for each year until the agreement is terminated. The Company will also be responsible for up to $1.3 million of development milestone payments through the first regulatory approval of a licensed product, tiered royalty payments of low single-digit percentages on net sales of licensed products in the event that the Company realizes sales from products covered by the license agreement, which are products that the Company develops using its proprietary platform, and between 10% to 20% of non-royalty income attributable to a sublicense of the CMCC rights. The Company recorded research and development expense in the statements of operations of $2,500 for the three months ended March 31, 2019 and 2018. The Company had $0.7 million due to CMCC under this license agreement at March 31, 2019 and December 31, 2018.

Consulting Agreements

The Company entered into consulting agreements on October 10, 2012 with its two scientific co-founders to provide services related to the advancement of the research and development platform of the company.

The consulting arrangements are on a fixed-fee basis, paid quarterly. The initial contract terms were four years and terminated on October 10, 2016. The contracts were extended for an additional four year period. The Company incurred a total of $40,000 of consulting expense related to these contracts, for the three months ended March 31, 2019 and 2018, respectively. There are no amounts due under these consulting agreements at March 31, 2019 or December 31, 2018.

 

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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 consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10‑Q (the “Quarterly Report”), and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. 

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report, including those risks identified under Part II, Item 1A. Risk Factors.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a biopharmaceutical company focused on the discovery and development of innovative medicines for the treatment of serious diseases in which signaling by protein growth factors plays a fundamental role. Our novel understanding of the molecular mechanisms of growth factor activation enabled us to develop a proprietary platform for the discovery and development of monoclonal antibodies that locally and selectively target these signaling proteins at the cellular level. We believe this approach, acting in the disease microenvironment, avoids the historical challenges associated with inhibiting growth factors for therapeutic effect. We believe our focus on biologically validated growth factors may facilitate a more efficient development path. Our lead product candidate, SRK-015, is a highly selective, fully human, monoclonal antibody, with a unique mechanism of action that results in inhibition of the activation of the growth factor, myostatin, in skeletal muscle.  We have advanced SRK-015 as a potential first muscle-directed therapy for the treatment of spinal muscular atrophy (“SMA”) into clinical development. We initiated our Phase 1 clinical trial of SRK-015 in healthy volunteers in May 2018 and reported positive interim results in early 2019. We have initiated a Phase 2 clinical trial in patients with SMA and commenced patient dosing in April 2019. Our second product candidate, SRK-181, is being developed for the treatment of cancers resistant to checkpoint blockade therapies (“CBTs”) such as anti-PD1 or anti-PDL antibodies. SRK-181 is a highly selective inhibitor of the activation of transforming growth factor beta-1 (“TGFβ1”). We intend to initiate a Phase 1 clinical trial of SRK-181 in cancer immunotherapy in mid-2020.  In addition, utilizing our proprietary platform, we are continuing to create a pipeline of novel product candidates with the potential to transform the lives of patients suffering from a wide range of serious diseases, including other neuromuscular disorders, cancer, fibrosis and anemia.

In May 2018, we completed our initial public offering (“IPO”) of our common stock, and issued and sold 6,164,000 shares of common stock, including all additional shares available to cover over-allotments, at a public offering price of $14.00 per share, resulting in net proceeds of $77.8 million after deducting underwriting discounts and commissions and other offering expenses payable by us. Upon the closing of the IPO, all outstanding shares of convertible preferred stock converted into 15,109,950 shares of common stock.

Since inception, we have incurred significant operating losses. Our net losses were $10.8  million and $8.9 million for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, we had an accumulated deficit of

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$117.6 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. In addition, we anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

·

continue development activities for SRK-015, our lead product candidate, as we conduct our Phase 2 clinical trial;

·

continue research and development activities for SRK-181, our program focused on inhibitors of the activation of TGFβ1;

·

continue to discover, validate and develop additional product candidates;

·

maintain, expand and protect our intellectual property portfolio;

·

hire additional research, development and business personnel; and

·

continue to create the infrastructure to support our operations as a public company.

 

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If we successfully complete clinical development and obtain regulatory approval for SRK-015, SRK-181 or any of our future product candidates, we may generate revenue in the future from product sales. In addition, if we obtain regulatory approval for SRK-015, SRK-181 or any of our future product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution activities.

Financial Operations Overview

Revenue

No revenues have been recorded from the sale of any commercial product. Revenue generation activities have been limited to collaborations, containing research services and the issuance of a license. Currently, revenue is being recognized related to the Master Collaboration Agreement (the “Gilead Collaboration Agreement”) with Gilead Sciences, Inc. (“Gilead”) which was executed in December 2018, and we began recognizing associated revenue in 2019.

Revenue associated with the research and development and license performance obligations relating to the Gilead Programs is recognized as revenue as the research and development services are provided using an input method, according to the costs incurred on each Gilead Program and the costs expected to be incurred in the future to satisfy the performance obligation. The transfer of control occurs over time. In management’s judgment, this input method is the best measure of progress towards satisfying the performance obligations. The amounts received that have not yet been recognized as revenue are recorded in deferred revenue on our consolidated balance sheet. We expect to recognize the deferred revenue according to costs incurred, over the remaining research term for each respective Gilead Program, which is up to three years from the execution of the agreement; each research term is dependent on the timing of Gilead either exercising its options for the Gilead Programs or terminating further development on the Gilead Programs prior to the expiration date of the research term.

Operating Expenses

Research and Development

Research and development expenses consist primarily of costs incurred for our research and development activities, including our product candidate discovery efforts, preclinical studies, manufacturing, and clinical trials under our research programs, which include:

·

employee-related expenses, including salaries, benefits and equity-based compensation expense for our research and development personnel;

·

expenses incurred under agreements with third parties that conduct research and development and preclinical activities on our behalf;

·

expenses incurred under agreements related to our clinical trials, including the costs for investigative sites and clinical research organizations (“CROs”), that conduct our clinical trials;

·

manufacturing process-development, clinical supplies and technology-transfer expenses;

·

consulting and professional fees related to research and development activities;

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·

costs of purchasing laboratory supplies and non-capital equipment used in our internal research and development activities;

·

costs related to compliance with clinical regulatory requirements; and

·

facility costs and other allocated expenses, which include expenses for rent and maintenance of facilities, insurance, depreciation and other supplies.

 

Research and development costs are expensed as incurred. Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks. Nonrefundable advance payments for research and development goods and services to be received in the future from third parties are deferred and capitalized. The capitalized amounts are expensed as the related services are performed.

A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis after a clinical product candidate has been identified. However, we do not allocate our internal research and development expenses, consisting primarily of employee related costs, depreciation and other indirect costs, on a program-by-program basis as they are deployed across multiple projects.

Research and development activities are central to our business model. 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 expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans. In addition, we expect to incur additional costs in connection with our research and development activities under our collaboration with Gilead.

The successful development of SRK-015, SRK-181 and any future product candidates is uncertain. As such, 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 remainder of the development of SRK-015, SRK-181 and any future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of our product candidates, if approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:

·

the scope, progress, outcome and costs of our preclinical development activities, clinical trials and other research and development activities;

·

establishing an appropriate safety profile;

·

successful enrollment in and completion of clinical trials;

·

whether our product candidates show safety and efficacy in our clinical trials;

·

receipt of marketing approvals from applicable regulatory authorities, if any;

·

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

·

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

·

significant and changing government regulation;

·

commercializing the product candidates, if and when approved, whether alone or in collaboration with others; and

·

continued acceptable safety profile of the products following any regulatory approval.

 

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A change in the outcome of any of these variables with respect to the development of SRK-015, SRK-181 or any of our future product candidates would significantly change the costs and timing associated with the development of that product candidate.

General and Administrative

General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and equity-based compensation expenses for personnel in executive, finance, business development, investor relations, legal, information technology and human resources functions. Other significant general and administrative expenses include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future as our business expands to support expected growth in research and development activities, including the continued development of our product candidates. These increases will likely include increased costs related to the hiring of additional personnel, as well as fees to outside consultants, among other expenses. We also anticipate increased expenses associated with being a public company, including costs for audit, legal, regulatory and tax-related services, director and officer insurance premiums and investor relations costs.

Interest Income, Net

Interest income, net consists primarily of interest income earned on our cash and cash equivalents and marketable securities, net of interest expense incurred on our credit facility, including amortization of debt discount and debit issuance costs.

Other Expense, Net

Other expense, net consists primarily of non-cash changes in the fair value of the warrant issued in connection with our credit facility.

Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

The following table summarizes our results of operations for the three months ended March 31, 2019 and 2018 (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Change

 

 

    

2019

    

2018

    

$

    

%

 

Revenue

 

$

3,106

 

$

 —

 

$

3,106

 

100.0

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,739

 

 

6,701

 

 

4,038

 

60.3

%

General and administrative

 

 

4,070

 

 

2,315

 

 

1,755

 

75.8

%

Total operating expenses

 

 

14,809

 

 

9,016

 

 

5,793

 

64.3

%

Loss from operations

 

 

(11,703)

 

 

(9,016)

 

 

(2,687)

 

29.8

%

Other income (expense):

 

 

 

 

 

 

 

 

 

 

  

 

Interest income, net

 

 

948

 

 

144

 

 

804

 

NM

*

Other expense, net

 

 

 —

 

 

(20)

 

 

20

 

NM

*

Total other income (expense)

 

 

948

 

 

124

 

 

824

 

NM

*

Net loss

 

$

(10,755)

 

$

(8,892)

 

$

(1,863)

 

21.0

%

 

* NM means not meaningful.

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Revenue

Revenue was $3.1 million for the three months ended March 31, 2019. No revenue was recognized for the three months ended March 31, 2018. The revenue for the three months ended March 31, 2019 was related to the Gilead Collaboration Agreement, which was executed in December 2018. Revenue associated with the research and development and license performance obligations relating to the Gilead Programs is recognized as the research and development services are provided using a cost input method.

Operating Expenses

Research and Development

Research and development expense was $10.7 million for the three months ended March 31, 2019 compared to $6.7 million for the three months ended March  31, 2018, an increase of $4.0 million or 60.3%. The following table summarizes our research and development expense for the three months ended March 31, 2019 and 2018 (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Change

 

 

    

2019

    

2018

    

$

    

%

 

External costs by program:

 

 

 

 

 

 

 

 

 

 

 

 

SRK-015

 

$

1,743

 

$

1,995

 

$

(252)

 

(12.6)

%

SRK-181