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Table of Contents

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 June 30, 2020

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

02139

(Address of principal executive offices)

(Zip Code)

(857) 259 3860

(Registrant’s telephone number, including area code)

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

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  

The number of outstanding shares of the Registrant’s Common Stock as of August 3, 2020 was 29,874,687.

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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 results, progress and completion of our TOPAZ Phase 2 clinical trial for SRK-015 and any future clinical trials for SRK-015, and the results, and the timing of results, from these trials;
the success, cost and timing of clinical trials for SRK-181, including the results, progress and completion of our DRAGON Phase 1 clinical trial for SRK-181 and any future clinical trials for SRK-181, and the results, and the timing of results, from these trials;
the success, cost and timing of our other product development activities, preclinical studies and clinical trials, and the results, and timing of results, from these studies and trials;
our success in identifying and executing a development program for additional indications for SRK-015, SRK-181 and in identifying product candidates from our other programs;
the clinical utility of our product candidates and their potential advantages over other therapeutic options;
our ability to obtain, generally or on terms acceptable to us, funding for our operations, including funding necessary to complete further development and, upon successful development, if approved, commercialization of SRK-015, SRK-181 or any of our future product candidates;
risks associated with the COVID-19 pandemic, which may adversely impact our business, preclinical studies, clinical trials and financial results;
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 (“FDA”), European Medicines Agency (“EMA”) and other regulatory authorities for SRK-015, 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. (“Gilead”);
our expectations relating to the potential of our proprietary platform technology;

2

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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 new laws and regulations or amendments to existing laws and regulations;
developments and projections relating to our competitors and our industry;
our estimates and expectations regarding expenses, future revenue, capital requirements and needs for additional financing, including our expected use of proceeds from our public offerings;
cash and expense levels, future revenues and liquidity sources;
our expectations regarding the period during which we qualify as an emerging growth company (“EGC”) under the Jumpstart Our Business Startups Act; and
other risks and uncertainties, including those listed under the caption Part II, Item 1A, Risk Factors.

The risks set forth above are not exhaustive. Other sections of this Quarterly 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 Report 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 Quarterly 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.

3

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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 June 30, 2020 and December 31, 2019

5

Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019

6

Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2020 and 2019

7

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

8

Notes to Consolidated Financial Statements

9

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

17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

Item 4. Controls and Procedures

29

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

30

Item 1A. Risk Factors

31

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

89

Item 3. Defaults Upon Senior Securities

89

Item 4. Mine Safety Disclosures

89

Item 5. Other Information

89

Item 6. Exhibits

90

SIGNATURES

91

4

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SCHOLAR ROCK HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

    

June 30, 

    

December 31, 

    

2020

2019

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

115,128

$

36,308

Marketable securities

 

26,048

 

121,140

Accounts receivable

25,000

Prepaid expenses and other current assets

 

4,011

 

2,719

Total current assets

 

145,187

 

185,167

Property and equipment, net

 

3,690

 

4,171

Operating lease right-of-use asset

3,924

4,447

Restricted cash

 

2,498

 

2,498

Other long-term assets

 

1,061

 

98

Total assets

$

156,360

$

196,381

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

2,680

$

1,130

Accrued expenses

 

8,233

 

9,610

Operating lease liability

1,272

1,135

Deferred revenue

20,362

20,923

Other current liabilities

20

16

Total current liabilities

 

32,567

 

32,814

Long-term portion of operating lease liability

3,490

4,168

Other long-term liabilities

 

9

 

9

Long-term portion of deferred revenue

38,120

46,489

Total liabilities

 

74,186

 

83,480

Commitments and contingencies (Note 7)

 

  

 

  

Stockholders’ equity:

Preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2020 and December 31, 2019; no shares issued and outstanding at June 30, 2020 and December 31, 2019

Common stock, $0.001 par value; 150,000,000 shares authorized and 29,874,687 shares issued and outstanding as of June 30, 2020; 150,000,000 shares authorized and 29,792,922 shares issued and outstanding as of December 31, 2019

 

30

 

30

Additional paid-in capital

 

276,294

 

270,682

Accumulated other comprehensive income

 

49

 

37

Accumulated deficit

 

(194,199)

 

(157,848)

Total stockholders’ equity

 

82,174

 

112,901

Total liabilities and stockholders’ equity

$

156,360

$

196,381

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

5

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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 June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Revenue

$

3,900

$

5,039

    

$

8,930

    

$

8,145

Operating expenses:

 

  

 

  

 

  

 

  

Research and development

16,997

13,715

33,899

24,454

General and administrative

 

6,365

 

4,710

 

12,187

8,780

Total operating expenses

 

23,362

 

18,425

 

46,086

 

33,234

Loss from operations

 

(19,462)

 

(13,386)

 

(37,156)

 

(25,089)

Other income (expense), net

 

181

 

861

 

805

 

1,809

Net loss

$

(19,281)

$

(12,525)

$

(36,351)

$

(23,280)

Net loss per share, basic and diluted

$

(0.65)

$

(0.48)

$

(1.23)

$

(0.90)

Weighted average common shares outstanding, basic and diluted

 

29,690,280

 

25,922,833

 

29,608,814

 

25,758,658

Comprehensive loss:

 

 

 

 

Net loss

$

(19,281)

$

(12,525)

$

(36,351)

$

(23,280)

Other comprehensive income (loss):

 

 

 

 

Unrealized gain (loss) on marketable securities

 

(185)

 

42

 

12

 

66

Total other comprehensive income (loss)

 

(185)

 

42

 

12

 

66

Comprehensive loss

$

(19,466)

$

(12,483)

$

(36,339)

$

(23,214)

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

6

Table of Contents

SCHOLAR ROCK HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share and per share data)

  

Accumulated

Additional

Other

Total

Common Stock

Paidin

Comprehensive

Accumulated

Stockholders’

  

Shares

  

Amount

  

Capital

  

Income

  

Deficit

  

Equity

Balance at December 31, 2019

29,792,922

$

30

$

270,682

$

37

$

(157,848)

$

112,901

Unrealized gain on marketable securities

 

 

 

197

 

197

Exercise of stock options

40,252

 

 

405

 

 

405

Equity-based compensation expense

 

 

2,214

 

 

2,214

Net Loss

 

 

 

 

(17,070)

(17,070)

Balance at March 31, 2020

29,833,174

$

30

$

273,301

$

234

$

(174,918)

$

98,647

Unrealized loss on marketable securities

(185)

(185)

Restricted shares forfeited during the period

(42,010)

Exercise of stock options

83,523

598

598

Equity-based compensation expense

2,395

2,395

Net Loss

(19,281)

(19,281)

Balance at June 30, 2020

29,874,687

$

30

$

276,294

$

49

$

(194,199)

$

82,174

  

Accumulated

Additional

Other

Total

Common Stock

Paidin

Comprehensive

Accumulated

Stockholders’

  

Shares

  

Amount

  

Capital

  

Income (Loss)

  

Deficit

  

Equity

Balance at December 31, 2018

26,217,701

$

26

$

213,453

$

(8)

$

(106,848)

$

106,623

Unrealized gain 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

Unrealized gain on marketable securities

42

42

Sale of common shares, net of issuance costs

3,000,000

3

42,019

42,022

Exercise of stock options

12,883

79

79

Equity-based compensation expense

1,814

1,814

Net loss

(12,525)

(12,525)

Balance at June 30, 2019

29,230,330

$

29

$

258,996

$

58

$

(130,128)

$

128,955

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

7

Table of Contents

SCHOLAR ROCK HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Six Months Ended

June 30, 

    

2020

    

2019

Cash flows from operating activities:

  

  

Net loss

$

(36,351)

$

(23,280)

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

 

 

Depreciation and amortization

 

784

 

586

Equity-based compensation

 

4,609

 

3,432

Amortization/accretion of investment securities

(196)

(694)

Non-cash operating lease expense

523

492

Change in operating assets and liabilities:

 

 

Accounts receivable

25,000

Prepaid expenses and other current assets

 

(1,292)

 

(1,091)

Other assets

(963)

Accounts payable

 

1,543

 

(1,028)

Accrued expenses

 

(1,377)

 

(1,771)

Operating lease liabilities

(541)

(378)

Deferred revenue

(8,930)

(8,145)

Other liabilities

(59)

Net cash used in operating activities

 

(17,191)

(31,936)

Cash flows from investing activities:

 

 

Purchases of property and equipment

 

(283)

(1,279)

Purchases of marketable securities

(19,400)

(77,297)

Maturities of marketable securities

 

114,700

67,300

Net cash provided by (used in) investing activities

 

95,017

 

(11,276)

Cash flows from financing activities:

 

 

Principal payments on loan payable

 

(365)

Proceeds from sale of common stock, net of issuance costs

42,220

Proceeds from stock option exercises

1,003

92

Other

(9)

(6)

Net cash provided by financing activities

 

994

 

41,941

Net increase (decrease) in cash and cash equivalents and restricted cash

 

78,820

 

(1,271)

Cash and cash equivalents and restricted cash, beginning of period

 

38,806

115,274

Cash and cash equivalents and restricted cash, end of period

$

117,626

$

114,003

Supplemental disclosure of non-cash items:

 

 

Property and equipment purchases in accounts payable and accrued expenses

$

7

$

27

Offering costs in accounts payable and accrued expenses

$

$

198

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

$

$

5,349

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

8

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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 novel understanding of the molecular mechanisms of growth factor activation enabled the development of a proprietary platform for the discovery and development of monoclonal antibodies that locally and selectively target these signaling proteins at the cellular level. The Company’s first product candidate, SRK-015, is a highly selective fully human, monoclonal antibody, with a unique mechanism of action that results in the inhibition of the activation of the growth factor, myostatin, in skeletal muscle. SRK-015 is being developed as a potential first muscle-directed therapy for the treatment of spinal muscular atrophy (“SMA”). SRK-015 is being evaluated in the Company’s TOPAZ Phase 2 proof-of-concept trial for the treatment of patients with Type 2 and Type 3 SMA. The Company’s second product candidate, SRK-181, is being developed for the treatment of cancers that are resistant to checkpoint inhibitor (“CPI”) therapies, such as anti-PD-1 or anti-PD-(L)1 antibody therapies. SRK-181 is a potent and highly selective inhibitor of the activation of latent transforming growth factor beta-1 (“TGFβ1”). The Company initiated the DRAGON Phase 1 proof-of-concept clinical trial of SRK-181 in patients with locally advanced or metastatic solid tumors that do not respond to anti-PD-(L)1 antibodies in the first quarter of 2020 and patient dosing commenced in April 2020. Additionally, the Company continues 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 neuromuscular disorders, cancer, fibrosis and anemia. 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 financings, including the initial public offering of its common stock (the “IPO”) in May 2018 and a secondary offering of common stock in June 2019, 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 (the “Gilead Collaboration Agreement”), executed in December 2018, was with Gilead Sciences, Inc. (“Gilead”). The Company began recognizing revenue on the Gilead Collaboration Agreement in 2019. No revenues have been recorded from the sale of any commercial product.

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 product candidates. 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 June 30, 2020 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, 2019, and the

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notes thereto, which are included in the Company’s Annual Report on Form 10-K. There have been no 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, 2019.

Cash and Cash Equivalents and Restricted Cash

The following table reconciles cash and cash equivalents and restricted cash per the balance sheet to the statement of cash flows:

    

As of June 30, 

    

2020

    

2019

Cash and cash equivalents

$

115,128

$

113,798

Restricted cash

 

2,498

 

205

$

117,626

$

114,003

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 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

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 aligns 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 are deferred and amortized. The new standard was effective for the Company on January 1, 2020 and was adopted prospectively. As such, there was no transition adjustment. There was no material impact to the Company’s net financial position or disclosures as a result of the adoption of ASU 2018-15.

Recently Issued Accounting Pronouncements

The Company has reviewed all recently issued accounting pronouncements and has determined that such standards do not currently apply to its operations.

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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 June 30, 2020 and December 31, 2019 (in thousands):

Fair Value Measurements at June 30, 2020

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

  

  

  

  

Money market funds, included in cash and cash equivalents

$

109,012

$

109,012

$

$

Marketable securities:

 

  

 

  

 

  

 

  

U.S. Treasury obligations

26,048

26,048

Total assets

$

135,060

$

135,060

$

$

Fair Value Measurements at December 31, 2019

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

  

  

  

  

Money market funds, included in cash and cash equivalents

$

34,896

$

34,896

$

$

Marketable securities:

 

  

 

  

 

  

 

  

U.S. Treasury obligations

 

121,140

 

121,140

 

 

Total assets

$

156,036

$

156,036

$

$

Cash and cash equivalents and marketable securities include investments in money market funds and 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 June 30, 2020 and December 31, 2019. There were no transfers of assets between fair value measurement levels during the three and six months ended June 30, 2020 or 2019.

The carrying amounts reflected in the balance sheets for accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate their fair values at June 30, 2020 and December 31, 2019, due to their short-term nature.

4. Marketable Securities

The following table summarizes the Company’s investments as of June 30, 2020 (in thousands):

Gross

Amortized

Unrealized

Estimated

    

Cost

    

Gains

    

Losses

    

Fair Value

Marketable securities available-for-sale:

  

  

  

U.S. Treasury obligations

$

25,999

$

49

$

$

26,048

Total available-for-sale securities

$

25,999

$

49

$

$

26,048

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

Gross

Amortized

Unrealized

Estimated

    

Cost

    

Gains

    

Losses

    

Fair Value

Marketable securities available-for-sale:

U.S. Treasury obligations

$

121,103

$

39

$

(2)

$

121,140

Total available-for-sale securities

$

121,103

$

39

$

(2)

$

121,140

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5. Accrued Expenses

As of June 30, 2020 and December 31, 2019, accrued expenses consist of the following (in thousands):

As of

June 30, 

    

December 31, 

    

2020

2019

Accrued payroll and related expenses

$

3,580

$

4,380

Accrued external research and development expense

3,277

4,088

Accrued professional and consulting expense

1,233

929

Accrued other

 

143

 

213

$

8,233

$

9,610

6. Equity-Based Compensation

The Company recorded equity-based compensation expense related to all equity-based awards for employees and non-employees, which was allocated as follows in the consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Research and development expense

$

887

$

638

$

1,702

$

1,217

General and administrative expense

 

1,508

 

1,176

 

2,907

 

2,215

$

2,395

$

1,814

$

4,609

$

3,432

Restricted Stock

The following table summarizes the Company’s restricted common stock activity for the current year:

    

    

Weighted

Average Fair

Value per Share

    

Number of Shares

    

at Issuance

Restricted common stock as of December 31, 2019

 

302,360

$

5.77

Granted

 

$

Vested

 

(133,704)

$

5.77

Forfeited

 

(42,010)

$

5.77

Restricted common stock as of June 30, 2020

 

126,646

$

5.77

As of June 30, 2020, the Company had unrecognized equity-based compensation expense of $0.6 million related to restricted stock issued to employees and directors, which is expected to be recognized over a period of 1.0 years.

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Stock Options

The following table summarizes the Company’s stock option activity for the current year:

Weighted

Weighted

Average

Number of 

Average

Remaining

Aggregate

    

Shares

    

Exercise Price

    

Contractual Term

    

Intrinsic Value

(in years)

(in thousands)

Outstanding as of December 31, 2019

 

2,401,382

$

12.63

8.36

$

6,523

Granted

 

1,466,051

$

14.39

Exercised

(123,775)

$

8.10

Cancelled

 

(251,987)

$

13.22

Outstanding as of June 30, 2020

 

3,491,671

$

13.49

8.62

$

18,205

Options exercisable as of June 30, 2020

 

1,064,356

$

12.77

7.64

$

6,629

Using the Black-Scholes option pricing model, the weighted average fair value of options granted during the six months ended June 30, 2020 was $10.10.

The following weighted average assumptions were used in determining the fair value of options granted in the six months ended June 30, 2020:

Risk-free interest rate

1.24

%  

Expected dividend yield

0.0

%  

Expected term (years to liquidity)

6.19

Expected volatility

81.86

%  

As of June 30, 2020, the Company has unrecognized equity-based compensation expense related to its employee stock options of $22.3 million which the Company expects to recognize over the remaining weighted average vesting period of 2.7 years.

7. Commitments and Contingencies

Operating Leases

620 Memorial Facility Lease

In March 2015, the Company entered into a 5-year facility lease for its corporate headquarters (the “Lease”) at 620 Memorial Drive in Cambridge, Massachusetts. The Lease was 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 September 2023. Rent for the facility Lease, including the Expansion Space, increases from $1.4 million a year to $1.7 million a year over the term of the Lease. 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.

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

For Three Months Ended

For Six Months Ended

    

June 30, 

    

June 30, 

2020

2020

Lease Cost:

Operating lease cost

$

344

$

687

Variable lease cost

210

377

Total lease cost

$

554

$

1,064

For Six Months Ended

June 30, 

2020

Other information:

Operating cash flows used for operating leases

$

706

Weighted average remaining lease term

3.25 years

Weighted average incremental borrowing 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 June 30, 2020 (in thousands):

Year Ending December 31, 

    

2020 (excluding the six months ended June 30, 2020)

$

740

2021

 

1,619

2022

 

1,668

2023

 

1,279

Total lease payments

5,306

Less imputed interest

(544)

Total operating lease liabilities

$

4,762

301 Binney Facility Lease

In November 2019, the Company entered into a facility lease at 301 Binney Street in Cambridge, Massachusetts to be used as its new corporate headquarters. The expiration date of the lease is in August 2025 and the Company has the option to extend the term by two years. The base rent is $6.9 million per year, subject to an increase of 3.5%, and the Company is subject to a free-rent period through mid-August 2020. 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 is involved in the construction and design of the space and anticipates that it will incur construction costs of which $14.1 million will be reimbursed through an allowance for tenant improvements. In connection with the facility lease, the Company has secured a letter of credit for $2.3 million which renews automatically each year. The lease commencement date, for accounting purposes, was not reached as of June 30, 2020 and therefore the lease is not included in the Company’s operating lease right-of-use asset or operating lease liabilities as of June 30, 2020.

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Specifica Antibody Library

On December 20, 2019 (the “Effective Date”), the Company entered into a Library Development and Transfer Agreement with Specifica Inc. (“Specifica”), whereby Specifica is responsible for developing and delivering a customized antibody display library (the “Library”) for the Company to use to identify antibodies for further research, development, and commercialization. The Company expects to pay $3.7 million in fees through 2023 related to the Library.

Legal Proceedings

The Company, from time to time, may be party to litigation arising in the ordinary course of its business. The Company was not subject to any material legal proceedings during the six months ended June 30, 2020 and 2019.

8. Loan Payable

In August 2015, the Company entered into a Loan and Security Agreement with Silicon Valley Bank, which provided the Company an equipment line of credit of up to $2.0 million to finance the purchase of eligible equipment. The Company made the final payments on the loan in June 2019.

9. Agreements

Collaboration with Gilead

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 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 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 for a given Gilead Program, or until termination of the Gilead Program, whichever is earlier (the “Option Exercise Period”).

Prior to Gilead’s exercise of an option, the Company has 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.

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 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 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 June 30, 2020. A $25 million preclinical milestone was achieved in December 2019 for the successful demonstration of efficacy in preclinical in vivo proof-of-concept studies. As a result, the associated $25 million was included in the consideration transferred and proportionally allocated to the performance obligations, as it was probable that a future material reversal will not occur.

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In the three and six months ended June 30, 2020, the Company recognized $3.9 million and $8.9 million, respectively, 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 June 30, 2020 is $58.5 million. The Company will recognize the deferred revenue related to the research and development services based on a cost input method, over the remaining research term for each respective Gilead Program, which is a maximum of 1.5 years as of June 30, 2020; 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. The deferred revenue related to the material rights will be recognized as options are exercised by Gilead or at the conclusion of the Option Exercise Period.

10. 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:

Six Months Ended June 30, 

    

2020

    

2019

    

Restricted common stock

126,646

480,663

Warrant

7,614

7,614

Stock options

3,491,671

2,423,561

3,625,931

2,911,838

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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, 2019.

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 upon any such forward-looking statements, 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 dose-limiting safety challenges associated with inhibiting growth factors for therapeutic effect. We also believe our focus on biologically validated growth factors may facilitate a more efficient development path.

Our first product candidate, SRK-015, is a highly selective, fully human, monoclonal antibody, with a unique mechanism of action that results in the inhibition of the activation of the growth factor, myostatin, in skeletal muscle. SRK-015 is being developed as a potential first muscle-directed therapy for the treatment of spinal muscular atrophy (“SMA”). SRK-015 is being evaluated in our TOPAZ Phase 2 proof-of-concept trial for the treatment of patients with Type 2 and Type 3 SMA. Enrollment in the trial was initiated in the second quarter of 2019 and completed in January 2020 with a total of 58 patients enrolled. In November 2019, we announced preliminary pharmacokinetic (“PK”) and pharmacodynamic (“PD”) data from the first 29 patients enrolled in the TOPAZ trial that showed dose-proportional drug exposure and demonstrated target engagement, as evidenced by dose-dependent increases of up to 100-fold in the serum levels of latent myostatin following SRK-015 treatment. An interim efficacy, safety and PK/PD analysis of patients across the three cohorts of the trial who have progressed through at least six months of the treatment period is planned for the fourth quarter of 2020. Top-line data for the 12-month treatment period are expected in the first half of 2021. The ongoing COVID-19 pandemic, including surges and second waves in certain areas previously impacted, may lead to further impacts on dosing of study drug and/or assessments for patients in the trial as well as the timing of data readouts.

Our second product candidate, SRK-181, is being developed for the treatment of cancers that are resistant to checkpoint inhibitor (“CPI”) therapies, such as anti-PD-1 or anti-PD-(L)1 antibody therapies. SRK-181 is a potent and highly selective inhibitor of the activation of latent transforming growth factor beta-1 (“TGFβ1”). We initiated the DRAGON Phase 1 proof-of-concept clinical trial of SRK-181 in patients with locally advanced or metastatic solid tumors that do

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not respond to anti-PD-(L)1 antibodies in the first quarter of 2020 and commenced patient dosing in April 2020. This two-part trial consists of a dose escalation portion (Part A) and a dose expansion portion (Part B). Part A will evaluate SRK-181 as a single-agent and in combination with an approved anti-PD-(L)1 antibody therapy and Part B will evaluate SRK-181 in combination with approved anti-PD-(L)1 antibody therapy in multiple cohorts that are expected to include urothelial carcinoma, cutaneous melanoma, non-small cell lung cancer, amongst other solid tumor types. An update on dose escalation of SRK-181 as a single agent as well as in combination with anti-PD-(L)1 therapy is anticipated in the fourth quarter of 2020 with clinical response and safety data anticipated in 2021. The ongoing COVID-19 pandemic may impact this clinical trial, including the timing of data read-outs.

Utilizing our proprietary platform, we continue 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 neuromuscular disorders, cancer, fibrosis and anemia. As an example, we are discovering and developing potent and selective inhibitors of the activation of TGFβ in collaboration with Gilead Sciences, Inc. (“Gilead”) for the treatment of fibrotic disease. We also intend to nominate a product candidate in 2020 that targets RGMc, a co-receptor of bone morphogenetic protein 6 (“BMP6”), another member of the TGFβ superfamily, to pursue in iron-restricted anemias.

Since inception, we have incurred significant operating losses. Our net losses were $36.4 million and $23.3 million for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, we had an accumulated deficit of $194.2 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 in connection with our ongoing activities, as we:

continue development activities for SRK-015, our first product candidate, including the conduct of our TOPAZ Phase 2 clinical trial;
continue research and development activities for SRK-181, including the conduct of our DRAGON Phase 1 clinical trial;
continue research and development activities to support our collaboration with Gilead;
continue research and development activities to allow us to nominate a product candidate that targets RGMc to pursue in iron-restricted anemias;
continue to discover, validate and develop additional product candidates through the use of our proprietary platform;
maintain, expand and protect our intellectual property portfolio;
hire additional research, development and business personnel; and
continue to build 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.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus, or COVID-19, as a pandemic (the “COVID-19 pandemic”), which continues to spread throughout the U.S. and worldwide. We could be materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic, outbreak, or other public health crisis, such as the COVID-19 pandemic. The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic, outbreak, or other public health crisis and actions taken to contain or prevent the further spread, among others. Accordingly, we cannot predict the extent to which our

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business, including our clinical trials, financial condition and results of operations will be affected. Many clinical trials have been impacted by the COVID-19 pandemic, with clinical trial sites implementing new policies in response to the COVID-19 pandemic, resulting in potential delays to enrollment of clinical trials or changes in the ability to access sites participating in clinical trials. As a result of the COVID-19 pandemic, we have experienced disruptions that have impacted our business, preclinical studies and clinical trials, including disruptions or restrictions on our ability to access and monitor certain clinical trial sites, restrictions on clinical trial participants’ ability to access our clinical trial sites and delays in enrollment. Some clinical trial participants have missed or experienced delays in receiving doses of study drug and completing their clinical trial assessments. This has affected our clinical trials and could result in impacts upon our clinical trials, including delays in or adverse impacts to data readouts from our clinical trials and delays in our ability to identify and enroll patients in current or future clinical trials. Additionally, our laboratory operations have been reduced since the declaration of the pandemic and our research activities will be impacted until our laboratory operations return to normal use. In addition, a recurrence or “second wave” of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest. We continue to monitor developments as we deal with the disruptions and uncertainties relating to the COVID-19 pandemic.

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 which was executed on December 19, 2018 (the “Effective Date”), and we began recognizing associated revenue in 2019. Under the Gilead Collaboration Agreement, 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”). Each 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 for a given Gilead Program, or until termination of the Gilead Program, whichever is earlier (the “Option Exercise Period”).

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. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. The estimated remaining costs is highly subjective, as the research is novel, therefore efforts to be successful may be significantly different than the estimated costs made at the balance sheet date. 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 related to the research and development services based on a cost input method, 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. The deferred revenue related to the material rights will be recognized as options are exercised by Gilead or at the conclusion of the Option Exercise Period.

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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 contract research organizations (“CROs”), that conduct our clinical trials;
manufacturing process-development, manufacturing of clinical supplies and technology-transfer expenses;
consulting and professional fees related to research and development activities;
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, as well as the associated clinical trial material requirements. We expect research and development costs to increase for the foreseeable future as our product candidate development programs progress, and we expect to incur additional costs in connection with our research and development activities under our collaboration with Gilead. 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.

The successful development of SRK-015, SRK-181 and any future product candidates is uncertain. Accordingly, 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

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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, including on account of the COVID-19 pandemic and its impact at clinical trial sites;
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.

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 could 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, consulting services, and corporate expenses.

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 continued 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.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income earned on our cash and cash equivalents and marketable securities, interest expense incurred on our credit facility (which was fully repaid in June 2019), including amortization of debt discount and debt issuance costs, gains and losses on foreign currency invoices.

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Results of Operations

Comparison of the Three Months Ended June 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019 (in thousands, except percentages):

Three Months Ended June 30, 

Change

 

    

2020

    

2019

    

$

    

%

 

Revenue

$

3,900

$

5,039

$

(1,139)

(22.6)

%

Operating expenses:

Research and development

16,997

13,715

3,282

23.9

%

General and administrative

 

6,365

 

4,710

 

1,655

35.1

%

Total operating expenses

 

23,362

 

18,425

 

4,937

26.8

%

Loss from operations

 

(19,462)

 

(13,386)

 

(6,076)

45.4

%

Other income (expense), net

 

181

 

861

 

(680)

(79.0)

%

Net loss

$

(19,281)

$

(12,525)

$

(6,756)

53.9

%

Revenue

Revenue was $3.9 million and $5.0 million for the three months ended June 30, 2020 and June 30, 2019, respectively, a decrease of $1.1 million or 22.6%. The revenue for both of these periods 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. The decrease in revenue was attributable to the change in progress of the programs period over period. The level of activity associated with the Gilead Programs decreased in the three months ended June 30, 2020, due to the laboratory restrictions associated with the COVID-19 pandemic and resulting lower level of internal resources available to the Gilead Programs.

Operating Expenses

Research and Development

Research and development expense was $17.0 million and $13.7 million for the three months ended June 30, 2020 and June 30, 2019, respectively, an increase of $3.3 million or 23.9%. The following table summarizes our research and development expense for the three months ended June 30, 2020 and 2019 (in thousands, except percentages):

Three Months Ended June 30, 

Change

 

    

2020

    

2019

    

$

    

%

 

External costs by program

SRK-015

$

3,544

$

3,218

$

326

10.1

%

SRK-181

3,469

3,657

(188)

(5.1)

%

Other early development candidates and unallocated costs

 

2,886

 

1,383

 

1,503

108.7

%

Total external costs

 

9,899

 

8,258

 

1,641

19.9

%

Internal costs:

 

 

 

  

Employee compensation and benefits

 

5,401

3,644

 

1,757

48.2

%

Facility and other

 

1,697

1,813

 

(116)

(6.4)

%

Total internal costs

 

7,098

 

5,457

 

1,641

30.1

%

Total research and development expense

$

16,997

$

13,715

$

3,282

23.9

%

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The increase in research and development expense was primarily attributable to the following:

An increase in our external research and development costs of $1.6 million, which consisted of:
o$1.5 million increase in other early development candidates and unallocated costs, primarily attributable to $1.2 million related to the acceptance of a customized antibody display library from Specifica Inc. (“Specifica”); and
o$0.3 million increase in costs associated with SRK-015, due primarily to costs associated with our TOPAZ Phase 2 clinical trial; partially offset by
o$0.2 million decrease in costs associated with SRK-181.
$1.6 million increase in internal research and development costs, which was primarily driven by an increase in employee compensation and benefits costs, associated with increased headcount and related overhead, as we continued to expand our research and development functions.

We expect our research and development expenses to increase as we continue to advance the development of our product candidates, including SRK-015 through our TOPAZ Phase 2 clinical trial, and SRK-181, through our DRAGON Phase 1 clinical trial. Additionally, we expect to continue to conduct research under the Gilead collaboration. However, as described above in COVID-19 Pandemic, the ultimate extent of the impact of the COVID-19 pandemic on our results of operations will depend on future developments, which are highly uncertain. Accordingly, we cannot fully predict the extent to which our business and results of operations will be affected.

General and Administrative

General and administrative expense was $6.4 million and $4.7 million for the three months ended June 30, 2020 and June 30, 2019, respectively, an increase of $1.7 million or 35.1%. The increase in general and administrative expense was primarily attributable to an increase of $1.1 million in professional services and $0.6 million in employee compensation and benefits, related to increased headcount.

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. However, as described above in COVID-19 Pandemic, the ultimate extent of the impact of the COVID-19 pandemic on our results of operations will depend on future developments, which are highly uncertain. Accordingly, we cannot fully predict the extent to which our business and results of operations will be affected.

Other Income (Expense), Net

The decrease in other income (expense), net was attributable to a decrease in income earned on our investment portfolio, associated with lower average cash balances and lower interest rates during the three months ended June 30, 2020, as compared to the three months ended June 30, 2019.

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Comparison of the Six Months Ended June 30, 2020 and 2019

The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019 (in thousands, except percentages):

Six Months Ended June 30, 

Change