SURFACE ONCOLOGY, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes for the year endedDecember 31, 2022 included in our Annual Report on Form 10-K, filed with theSecurities and Exchange Commission , or theSEC . Overview We are a clinical-stage immuno-oncology company focused on using our specialized knowledge of the biological pathways critical to the immunosuppressive tumor microenvironment, or the TME, for the development of next-generation cancer therapies. While first-generation immuno-oncology therapies, such as checkpoint inhibitors, represented a remarkable therapeutic advancement, we believe most patients do not achieve durable clinical benefit primarily because these therapies focus on only one element of the complex and interconnected immunosuppressive TME. We believe there is a significant opportunity to more broadly engage both the innate and adaptive arms of the immune system in a multi-faceted, coordinated and patient-specific approach, to meaningfully improve cure rates for patients with a variety of cancers. We aim to identify key components within the TME to gain a deep understanding of its biology, leverage this understanding to define the optimal therapeutic targets and the patients most likely to benefit, and develop novel antibody therapeutics with differentiated biologic activity. By utilizing our expertise in immunology, oncology, assay development, antibody selection and characterization, and translational research, we are developing and advancing a broad pipeline of TME-focused programs that we believe are the next generation of immuno-oncology therapies. Our programs demonstrate our multi-faceted approach by targeting several critical components of the immunosuppressive TME. Our lead program, SRF388, is an antibody targeting interleukin 27, or IL-27, an immunosuppressive cytokine, or protein that is overexpressed in certain cancers, including hepatocellular, lung and renal cell carcinoma. IL-27 is a cytokine secreted by macrophages and antigen presenting cells that plays an important physiologic role in suppressing the immune system, as evidenced by its ability to resolve tissue inflammation. In addition, one of the subunits of IL-27, EBI3, is highly expressed during pregnancy and its expression is correlated with maternal-fetal tolerance. Due to its immunosuppressive nature, there is a rationale for inhibiting IL-27 to treat cancer, as this approach will influence the activity of multiple types of immune cells that are necessary to recognize and attack a tumor. SRF388 received orphan drug designation and fast track designation from theUnited States Food and Drug Administration , or FDA, for the treatment of hepatocellular carcinoma, or HCC, inNovember 2020 . We initiated Phase 2 clinical trials evaluating SRF388 in patients with HCC and non-small-cell lung cancer, or NSCLC, inApril 2022 . InJune 2022 , at the 2022American Society of Clinical Oncology , or ASCO, Annual Meeting, we presented initial Phase 1/1b data demonstrating clinical activity in multiple solid tumor types. We observed confirmed partial responses in two patients who received SRF388 monotherapy, one in NSCLC and one in clear cell renal cell carcinoma, or RCC. In addition, we observed a partial response in a patient who was treated with SRF388 in combination with pembrolizumab for HCC. In November, we announced that a second patient with NSCLC experienced a confirmed partial response to SRF388 monotherapy treatment, and another patient with highly pretreated NSCLC experienced durable disease stabilization which, at the time, had continued for more than 56 weeks. We anticipate sharing additional data from those trials in the first half of 2023. We are no longer enrolling RCC patients in our Phase 1 SRF388 monotherapy and combination trial in order to focus efforts on NSCLC and HCC based on encouraging data seen in those indications. Our second clinical-stage program, SRF114, is a highly specific afucosylated immunoglobulin isotype G1, or IgG1, antibody targeting CCR8, a chemokine receptor highly expressed on regulatory T cells, or Treg cells, in the TME. SRF114 is designed to cause depletion of intra-tumoral Treg cells, important regulators of immune suppression and tolerance, through antibody-dependent cellular cytotoxicity, or ADCC, and/or antibody-dependent cellular phagocytosis, or ADCP, leading to anti-tumor activity in preclinical models. InJanuary 2023 , we initiated a Phase 1/2 clinical trial investigating SRF114 in patients with advanced solid tumors. Part A, the monotherapy dose-escalation portion of the study, will evaluate the safety, tolerability, pharmacokinetics, pharmacodynamics, and preliminary efficacy of SRF114 in patients with advanced solid tumors. Once Part A is completed, Part B will evaluate SRF114 in up to 40 patients with head and neck squamous cell carcinoma, or HNSCC, as a monotherapy. We expect to provide initial clinical data in 2024. 23
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Our third clinical-stage program, SRF617 is an antibody designed to inhibit cluster of differentiation-39, or CD39. CD39 is a critical enzyme involved in the production of extracellular adenosine, a key metabolite with strong immunosuppressive properties within the TME. SRF617 aims to reduce the production of immunosuppressive adenosine, and we believe SRF617 has the potential to stimulate anti-tumor immunity because of its ability to maintain levels of extracellular adenosine triphosphate, or ATP. InNovember 2022 , we announced the strategic decision to pause further development of the SRF617 program due to business considerations, and we are actively pursuing potential business development opportunities for the program. We expect that the unique insights generated in any one of our product programs will accelerate the development of the other programs in a synergistic fashion due to the interconnections between these TME pathways.
In addition to our internal programs, we have two programs, NZV930 and
GSK4381562, which are exclusively licensed to
InJanuary 2016 , we granted Novartis a worldwide exclusive license to research, develop, manufacture, and commercialize NZV930. NZV930 is an antibody designed to inhibit cluster of differentiation 73, or CD73, which is a critical enzyme involved in the production of extracellular adenosine, a key metabolite with strong immunosuppressive properties within the TME. NZV930 aims to reduce the production of immunosuppressive adenosine within the TME. InDecember 2020 , we granted GSK an exclusive license to the worldwide development and commercialization rights for GSK4381562. GSK4381562 is an antibody targeting CD112R, also known as PVRIG, an inhibitory protein expressed on natural killer, or NK, and T cells. GSK4381562 blocks the interaction of CD112R with CD112, its binding partner that is expressed on tumor cells. GSK4381562 can promote the activation of both NK and T cells, with potential to elicit a strong anti-tumor response and promote immunological memory. EffectiveNovember 1, 2022 , our Board of Directors approved a strategic decision to pause the internal clinical development of SRF617, a novel antibody targeting CD39, and focus resources on the advancement of our SRF388 and SRF114 programs, which we believe hold the greatest near-term potential to provide benefit to patients. We also implemented a corporate restructuring which reduced our workforce by approximately 20%. The majority of the personnel and program restructuring were completed during the fourth quarter of 2022. We recorded a charge in the fourth quarter of 2022 of$4.0 million , consisting of severance, benefits, outplacement services and costs associated with terminating contracts. As a result of the restructuring, we are actively pursuing partnership opportunities to advance our SRF617 program with third-party collaborators or partners. We were incorporated and commenced principal operations in 2014. We have devoted substantially all of our resources to developing our programs, including SRF388, SRF114, SRF617, NZV930 and GSK4381562, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. To date, we have financed our operations with proceeds from public and private sales of our securities, payments received under our collaboration agreement with Novartis and license agreement with GSK and a debt financing. As ofMarch 31, 2023 , we had cash, cash equivalents and marketable securities of$102.1 million . Since our inception, we have incurred significant losses. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of the product candidates we develop. Our net loss was$19.7 million for the three months endedMarch 31, 2023 . Our net income was$6.2 million for the three months endedMarch 31, 2022 . As ofMarch 31, 2023 , we had an accumulated deficit of$224.1 million . We expect to continue to incur significant expenses and operating losses for at least the next several years, particularly as we:
•pursue the clinical development of product candidates;
•leverage our programs to advance product candidates into preclinical and clinical development;
•seek regulatory approvals for any product candidates that successfully complete clinical trials;
•hire additional clinical, quality control, and scientific personnel;
•expand our operational, financial, and management systems and increase personnel, including personnel to support our clinical development, manufacturing, and commercialization efforts, and our operations as a public company;
•maintain, expand and protect our intellectual property portfolio;
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•establish a sales, marketing, medical affairs, and distribution infrastructure
to commercialize any products for which we may obtain marketing approval and
intend to commercialize on our own or jointly with a commercial partner; and
•acquire or in-license other product candidates and technologies.
As a result, we will need additional financing to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity or debt financings or other sources, which may include collaborations with third parties. We may be unable to raise additional funds or enter into other agreements or arrangements, when needed, on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. We believe that our existing cash, cash equivalents and marketable securities, as ofMarch 31, 2023 will enable us to fund our operating expenses, debt service obligations and capital expenditure requirements into the third quarter of 2024, excluding any future milestone payments from Novartis or GSK. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. Components of Our Results of Operations
Revenue
To date, we have not generated any revenue from product sales and do not expect to do so in the near future. All of our revenue to date has been derived from our collaboration agreement with Novartis and our license agreement with GSK. If our development efforts for our programs are successful and result in regulatory approval or additional license or collaboration agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from additional collaboration or license agreements that we may enter into with third parties. We expect that our revenue for the next several years will be derived primarily from our collaboration agreement with Novartis and our license agreement with GSK, as well as any additional collaborations or licenses that we may enter into in the future.
Collaboration Agreement with Novartis
InJanuary 2016 , we entered into a collaboration agreement with Novartis, which was subsequently amended inMay 2016 ,July 2017 ,September 2017 andOctober 2018 , or as amended, the Novartis Agreement, to develop next-generation cancer therapies. Under the Novartis Agreement, as amended, we were responsible for performing research on antibodies that bind to CD73 and four other specified targets. We were responsible for all costs and expenses incurred by, or on behalf of, us in connection with the research. Upon entering into the Novartis Agreement, we received an upfront payment of$70.0 million from Novartis and granted Novartis a worldwide exclusive license to research, develop, manufacture and commercialize antibodies that target CD73. In addition, we initially granted Novartis the right to purchase exclusive option rights, each an Option, to up to four specified targets, including certain research, development, manufacturing and commercialization rights. Pursuant to the Novartis Agreement, Novartis initially had the right to exercise up to three purchased Options. InJanuary 2020 , Novartis did not purchase and exercise its single remaining Option under the Novartis Agreement and, as a result, the option purchase period expired. Accordingly, there are no Options remaining eligible for purchase and exercise by Novartis, and our performance obligations under the Novartis Agreement have ended. We are currently entitled to potential development milestones of$325.0 million ; and potential sales milestones of$200.0 million , as well as tiered royalties on annual net sales of NZV930 by Novartis ranging from high single-digit to mid-teens percentages. Such amounts of potential milestone payments assume the successful clinical development and achievement of all sales milestones for NZV930. 25
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Under ASC 606 we accounted for (i) the license conveyed with respect to CD73 and (ii) our obligations to perform research on CD73 and other specified targets as a single performance obligation under the Novartis Agreement. We recognize revenue using the cost-to-cost method, which we believe best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue is recorded as a percentage of the estimated transaction price based on the extent of progress towards completion. ThroughMarch 31, 2023 , we had received an aggregate of$150.0 million from Novartis in upfront payments, milestone payments, and option purchase payments. As ofJanuary 2020 , we no longer had any performance obligations under the Novartis Agreement. We did not recognize any collaboration revenue - related party in the three months endedMarch 31, 2023 or 2022.
License Agreement with GSK
InDecember 2020 , we entered into a license agreement with GSK, which was subsequently amended inAugust 2021 or, as amended, the GSK Agreement, under which we granted GSK a worldwide exclusive, sublicensable license to develop, manufacture and commercialize antibodies that target the antibody GSK4381562, targeting CD112R, also known as PVRIG, or the Licensed Antibodies. GSK is responsible for the development, manufacturing and commercialization of the Licensed Antibodies and a joint development committee was formed to facilitate information sharing between us and GSK. Under the terms of the GSK Agreement, GSK is obligated to use commercially reasonable efforts to develop and commercialize the Licensed Antibodies. Pursuant to theAugust 2021 amendment to the GSK Agreement, we provided additional transition and supply services related to the development and manufacturing of the Licensed Antibodies. Under the terms of the GSK Agreement, GSK made a one-time upfront payment of$85.0 million and was required to make additional payments to us for supply services and transition services initially estimated to be$4.3 million and$1.0 million , respectively. InMarch 2022 , GSK initiated a Phase 1 clinical trial of GSK4381562 in patients with solid tumors, triggering a$30.0 million milestone payment. We are eligible to receive up to$60.0 million in additional clinical milestones and$155.0 million in regulatory milestones. In addition, we may receive up to$485.0 million in sales milestone payments. We are also eligible to receive royalties on global net sales of any approved products based on the licensed antibodies, ranging in percentages from high single digits to mid-teens. Such amounts of potential milestone payments assumes the successful clinical development and achievement of all sales milestones for GSK4381652. Under ASC 606 we account for (i) the delivery of the worldwide, exclusive, sublicensable license to develop, manufacture and commercialize the Licensed Antibodies; (ii) supply of Licensed Antibodies until an investigational new drug, or IND, application is accepted by a regulatory authority; and (iii) transition services until an IND application is accepted by a regulatory authority as separate and distinct performance obligations. We determined the transaction price under ASC 606 at the inception of the GSK Agreement to be$90.3 million , consisting of the upfront payment of$85.0 million plus$4.5 million for supply of the Licensed Antibodies and$0.8 million for the transition services. We recognized revenue for the license performance obligation at a point in time, that is upon transfer of the license to GSK. As control of the license was transferred on the effective date ofDecember 16, 2020 and GSK could begin to use and benefit from the license, we recognized$85.0 million of license-related revenue during the year endedDecember 31, 2020 under the GSK Agreement. We recognized the portion of the transaction price allocated to supply services and transition services over time. We transfer control of these services over time and GSK receives and consumes the benefit over time as we perform the services. InNovember 2021 , GSK received clearance from the FDA for GSK4381562 to proceed into a first-in-human clinical trial and as a result our performance obligations under the GSK Agreement ended. No amount of the transaction price allocated to the performance obligations was unsatisfied as ofNovember 2021 . InMarch 2022 , GSK notified us it had dosed the first patient in their Phase 1 study of GSK4381562 in patients with solid tumors. As a result of this Phase 1 study initiation, the first clinical milestone under the GSK Agreement was achieved. We concluded the variable consideration associated with this milestone was no longer constrained and recognized$30.0 million in license-related revenue for the three months endedMarch 31, 2022 , as we had no further performance obligations associated with the milestone. We did not recognize license-related revenue under the GSK Agreement in the three months endedMarch 31, 2023 .
Through
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Operating Expenses
Research and Development Expenses
Research and development expenses are expensed as incurred and consist of costs incurred for our research activities, including our discovery efforts, and the development of our programs. These expenses include:
•salaries, benefits and other related costs, including stock-based compensation, for personnel engaged in research and development functions;
•expenses incurred in connection with the preclinical development of our programs and clinical trials of our product candidates, including under agreements with third parties, such as consultants, contractors, and contract research organizations, or CROs;
•the cost of manufacturing drug products for use in our preclinical studies and clinical trials, including under agreements with third parties, such as consultants, contractors, and contract manufacturing organizations, or CMOs;
•laboratory supplies;
•facilities, depreciation and other expenses, which include direct and allocated expenses for depreciation and amortization, rent and maintenance of facilities, insurance and supplies; and
•third-party license fees.
We do not track our internal research and development expenses on a
program-by-program basis as they primarily relate to personnel, early research
and consumable costs, which are deployed across multiple projects under
development. These costs are included in unallocated research and development
expenses in the table below. A portion of our research and development costs are
external costs, which we do track on a program-by-program basis.
The following table summarizes our research and development expenses by program:
Three months ended March 31,
2023 2022
(in thousands)
SRF388 4,204 4,884
SRF114 1,332 1,335
SRF617 1,582 3,758
GSK4381562 - 4
Other early-stage programs 178 86
Unallocated research and discovery expenses 6,481 6,557
Total research and development expenses$ 13,777
Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We anticipate that our research and development expenses will decrease in the future as a result of the strategic decision to pause the SRF617 program as well as the reduction in headcount relating to the corporate restructuring announced inNovember 2022 . This will be partially offset by increased clinical development costs as we advance our SRF388 Phase 2 clinical trials and SRF114 Phase 1/2 clinical trial. At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of any of our product candidates that we develop from our programs. We are also unable to predict when, if ever, net cash inflows will commence from sales of product candidates we develop. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
•successful completion of clinical trials and preclinical studies;
•sufficiency of our financial and other resources to complete the necessary clinical trials and preclinical studies;
•acceptance of INDs for our planned clinical trials or future clinical trials;
•successful enrollment and completion of clinical trials;
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Table of Contents •successful data from our clinical program that supports an acceptable risk-benefit profile of our product candidates in the intended populations;
•receipt of regulatory and marketing approvals from applicable regulatory authorities;
•receipt and maintenance of marketing approvals from applicable regulatory authorities;
•establishing agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if any of our product candidates are approved;
•entry into collaborations to further the development of our product candidates;
•obtaining and maintaining patent and trade secret protection or regulatory exclusivity for our product candidates;
•successfully launching commercial sales of our product candidates, if and when approved;
•acceptance of our product candidates' benefits and uses, if and when approved, by patients, the medical community and third-party payors;
•maintaining a continued acceptable safety profile of the product candidates following approval;
•effectively competing with other therapies; and
•obtaining and maintaining healthcare coverage and adequate reimbursement from third-party payors.
A change in the outcome of any of these variables with respect to the development of any of our programs or any product candidate we develop would significantly change the costs, timing, and viability associated with the development of such program or product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and personnel-related costs, including stock-based compensation, for our personnel in executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees paid for accounting, auditing, consulting and tax services; insurance costs; travel expenses; and facility costs not otherwise included in research and development expenses. We anticipate that our general and administrative expenses will decrease in the future as a result of a reduction in headcount relating to the corporate restructuring announced inNovember 2022 . This will be partially offset by increases in accounting, audit, legal, regulatory, compliance, and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company.
Interest and Other Income (Expense), Net
Interest and other income consist primarily of interest earned on our cash, cash
equivalents, and marketable securities as well as interest paid on our loan and
security agreement, or the Loan Agreement, with K2HV.
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Results of Operations
Comparison of Three Months Ended
The following table summarizes our results of operations for the three months
ended
Three months ended March 31,
2023 2022 2023 v 2022
(in thousands)
License related revenue $ - $ 30,000 $ (30,000)
Operating expenses:
Research and development 13,777 16,624 (2,847)
General and administrative 5,886 6,540 (654)
Total operating expenses 19,663 23,164 (3,501)
Loss from operations (19,663) 6,836 (26,499)
Interest and other income (expense), net (78) (637) 559
Net loss $ (19,741) $ 6,199 $ (25,940)
License-Related Revenue
We did not recognize license-related revenue during the three months ended
March 31, 2023 . During the three months ended March 31, 2022 , we recognized
$30.0 million related to the achievement of the first clinical milestone under
the GSK Agreement as a result of the first patient dosed in GSK's Phase 1 study
of GSK4381562 in patients with solid tumors in March 2022 .
Research and Development Expenses
The following table summarizes our research and development expenses for the three months endedMarch 31, 2023 and 2022, along with the changes in those items: Three months ended March 31, 2023 2022 2023 v 2022 (in thousands) Direct research and development expenses by program: SRF388 $ 4,204$ 4,884 $ (680) SRF114 1,332 1,335 (3) SRF617 1,582 3,758 (2,176) GSK4381562 - 4 (4) Other early-stage programs 178 86 92 Research and discovery and unallocated expenses: Personnel related (including stock-based compensation) 4,392 4,268 124 Facility related and other 2,089 2,289 (200) Total research and development expenses$ 13,777
Research and development expenses were$13.8 million for the three months endedMarch 31, 2023 , compared to$16.6 million for the three months endedMarch 31, 2022 . The decrease of$2.8 million was primarily due to decreases of$0.7 million in external costs for our SRF388 program,$2.2 million in external costs for our SRF617 program and$0.1 million for research and discovery and unallocated costs, which were partially offset by an increase of$0.1 million in external costs for our other early-stage programs.
The decrease in research and development expenses for our SRF388 program was primarily due to a reduction in manufacturing costs.
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The decrease in research and development expenses for our SRF617 program was primarily due to the strategic decision to pause the program as a part of our corporate restructuring inNovember 2022 .
The decrease in research and discovery and unallocated expenses was primarily due to a reduction in consulting costs.
The increase in other early-stage programs was primarily due to preclinical costs for the development of new targets.
General and Administrative Expenses
General and administrative expenses were$5.9 million for the three months endedMarch 31, 2023 , compared to$6.5 million for the three months endedMarch 31, 2022 . The decrease primarily relates to personnel-related costs from reduced headcount and a reduction in professional fees.
Interest and Other Income (Expense), Net
Interest and other income (expense), net was approximately$(0.1) million and$(0.6) million during the three months endedMarch 31, 2023 and 2022, respectively, due primarily to interest expense related to the Loan Agreement, as amended, partially offset by interest income on invested balances of our cash, cash equivalents and marketable securities. Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. We have generated limited revenue to date from the Novartis Agreement and the GSK Agreement. We have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years, if at all. To date, we have financed our operations with proceeds from public and private sales of our securities, payments received under the Novartis Agreement, the GSK Agreement and a debt financing. ThroughMarch 31, 2023 , we had received gross proceeds of$247.3 million from public and private sales of our securities,$25.0 million from the Loan Agreement with K2HV,$120.3 million from the GSK Agreement and$150.0 million from the Novartis Agreement. InNovember 2019 , we entered into the Loan Agreement with K2HV, which was subsequently amended inOctober 2021 andSeptember 2022 , pursuant to which K2HV agreed to make available to us term loans in an aggregate principal amount of up to$50.0 million , in three tranches. To date, we have drawn down$25.0 million in principal balance from the loan. Pursuant to the terms of the Loan Agreement, we are required to maintain a minimum cash balance of$30.0 million , excluding cash held by our wholly owned subsidiary,Surface Securities Corporation , aMassachusetts corporation, in order to maintain any cash withSurface Securities Corporation . InAugust 2021 , we entered into an amendment to our existing Capital on Demand™ Sales Agreement (the "Amended Sales Agreement") withJonesTrading Institutional Services LLC ("JonesTrading"), to allow the issuance and sale of up to$80 million in shares of our common stock, from time to time. As ofMarch 31, 2023 , we have sold 14,611,756 shares of common stock at-the-market under the Amended Sales Agreement for net proceeds of$41.4 million . EffectiveNovember 1, 2022 , our Board of Directors approved a corporate restructuring to pause the internal clinical development of SRF617 and focus resources on the advancement of our SRF388 and SRF114 programs. We recorded a charge of$4.0 million in the fourth quarter of 2022, consisting of severance, benefits, outplacement services and costs associated with terminating contracts.
As of
Effects of Inflation
We do not believe that inflation has had a material impact on our business or
operating results during the periods presented. However, inflation, has had, and
may continue to have, an impact on the labor costs we incur to attract and
retain qualified personnel, costs to conduct clinical trials and other
operational costs. Inflationary costs could adversely affect our business,
financial condition and results of operations. In addition, increased inflation
has had, and may continue to have, an effect on interest rates. Increased
interest rates may adversely affect our borrowing rate and our ability to
obtain, or the terms under which we can obtain, any potential additional
funding.
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Future Funding Requirements
We expect our expenses will decrease in the future as a result of the corporate restructuring and strategic decision to pause the SRF617 program announced inNovember 2022 . This will be partially offset by increased clinical development costs as we advance our SRF388 Phase 2 clinical trials and SRF114 Phase 1/2 clinical trial. Additionally, we expect to continue to incur additional costs associated with operating as a public company. We believe that our existing cash, cash equivalents, and marketable securities, as ofMay 4, 2023 , will enable us to fund our operating expenses, debt service obligations and capital expenditure requirements into the third quarter of 2024, excluding any future milestone payments from Novartis or GSK. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on and could increase significantly as a result of many factors, including: •completing clinical development of existing product candidates and programs, identifying new product candidates, and completing pre-clinical and clinical development of such product candidates;
•seeking and obtaining marketing approvals for any of product candidates that we develop;
•launching and commercializing product candidates for which we obtain marketing approval by establishing a sales force, marketing, medical affairs and distribution infrastructure or, alternatively, collaborating with a commercialization partner;
•achieving adequate coverage and reimbursement by hospitals, government and third-party payors for product candidates that we develop;
•establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate, in both amount and quality, products and services to support clinical development and the market demand for product candidates that we develop, if approved;
•obtaining market acceptance of product candidates that we develop as viable treatment options;
•addressing any competing technological and market developments;
•negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter and performing our obligations in such collaborations;
•maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how;
•defending against third-party interference or infringement claims, if any; and
•attracting, hiring and retaining qualified personnel.
A change in the outcome of any of these or other variables with respect to the
development of any of our product candidates could significantly change the
costs and timing associated with the development of that product candidate.
Further, our operating plans may change in the future, and we may need
additional funds to meet operational needs and capital requirements associated
with such operating plans.
In addition to the variables described above, if and when any product candidate
we develop successfully completes development, we will incur substantial
additional costs associated with regulatory filings, marketing approval,
post-marketing requirements, maintaining our intellectual property rights, and
regulatory protection, in addition to other costs. We cannot reasonably estimate
these costs at this time.
Until such time, if ever, that we can generate substantial product revenue, we
expect to finance our cash needs through a combination of equity or debt
financings and collaboration and license arrangements, including the Novartis
Agreement and GSK Agreement. To the extent that we raise additional capital
through the future sale of equity or debt, the ownership interests of our
stockholders will be diluted, and the terms of these securities may include
liquidation or other preferences that adversely affect the rights of our
existing common stockholders. If we raise additional funds through the issuance
of debt securities, these securities could contain covenants that would restrict
our operations. We may require additional capital beyond our currently
anticipated amounts. Additional capital may not be available on reasonable
terms, or at all. If we raise additional funds through collaboration
arrangements in the future, we may have to relinquish valuable rights to our
technologies, future revenue streams or product candidates, or grant licenses on
terms that may not be favorable to us. If we are unable to raise additional
funds when needed, we may be required to delay, limit, reduce or terminate
development or future commercialization efforts.
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Cash Flows
The following table summarizes information regarding our cash flows for each of
the periods presented:
Three months ended March 31,
2023 2022
(in thousands)
Net cash provided by (used in):
Operating activities $ (23,439) $ (23,566)
Investing activities 1,434 12,465
Financing activities 77 20,713
Net increase (decrease) in cash and cash equivalents and restricted
cash $ (21,928) $ 9,612
Operating Activities
During the three months ended March 31, 2023 , net cash used in operating
activities was $23.4 million , primarily due to our net loss of $19.7 million and
changes in our operating assets and liabilities of $6.3 million , partially
offset by non-cash charges of $2.6 million . Net cash used in changes in our
operating assets and liabilities for the three months ended March 31, 2023
consisted primarily of an increase of $0.8 million in prepaid expenses and other
current assets, a $5.6 million decrease in accrued expenses and other current
liabilities, a decrease of $0.7 million in our operating lease liability, and
$0.9 million increase in accounts payable. The decrease in accrued expenses and
other current liabilities is primarily due to a reduction in manufacturing fees
and professional fees. The increase in prepaid expenses and other current assets
is a result of increased clinical expenses. The decrease in our operating lease
liability is a result of rental payments made on our operating leases, and the
increase in accounts payable is a result of timing of payments.
During the three months ended March 31, 2022 , net cash used in operating
activities was $23.6 million , primarily due to changes in our operating assets
and liabilities of $32.9 million , partially offset by net income of $6.2 million
and non-cash charges of $3.2 million . Net cash used in changes in our operating
assets and liabilities for the three months ended March 31, 2022 consisted
primarily of an increase of $30.0 million in unbilled receivables, a $2.6
million decrease in accrued expenses and other current liabilities and a
decrease of $0.7 million in our operating lease liability. This was partially
offset by a $1.1 million increase in accounts payable. The increase in unbilled
receivables relates to the $30.0 million due from GSK upon the first patient
dosed in the Phase 1 trial of GSK4381562. The decrease in accrued expenses and
other current liabilities is primarily due to the decrease in accrued bonus and
accrued professional fees. The decrease in our operating lease liability is a
result of rental payment made on our operating leases, and the increase in
accounts payable is a result of timing of payments.
Investing Activities
During the three months endedMarch 31, 2023 , net cash provided by investing activities was$1.4 million , consisting of proceeds from sales or maturities of marketable securities of$18.4 million , which was partially offset by purchases of marketable securities of$16.9 million and purchases of property and equipment of$0.0 million . During the three months endedMarch 31, 2022 , net cash provided by investing activities was$12.5 million related to the proceeds from sales or maturities of marketable securities. Financing Activities During the three months endedMarch 31, 2023 , net cash provided by financing activities was$0.1 million , consisting of proceeds of$0.1 million received from the issuance of shares under our 2018 Employee Stock Purchase Plan. During the three months endedMarch 31, 2022 , net cash provided by financing activities was$20.7 million , consisting of proceeds of$20.6 million received from issuance of our shares of common stock at-the-market under the Amended Sales Agreement and proceeds of$0.2 million received from the issuance of shares under our 2018 Employee Stock Purchase Plan.
Contractual Obligations
We have entered into agreements in the normal course of business with contract
research organizations for clinical trials and clinical supply manufacturing and
with vendors for preclinical research studies and other services and products
for operating purposes. These contractual obligations are generally cancellable
by us upon prior written notice to the vendor.
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During the three months endedMarch 31, 2023 , there were no material changes, to our contractual obligations and commitments from those described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations and Commitments" in our Annual Report on Form 10-K filed with theSEC onMarch 9, 2023 .
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we have prepared in accordance with the rules and regulations of theSEC , and generally accepted accounting principles inthe United States , or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenue and expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies and the methodologies and assumptions we apply
under them have not materially changed since our Annual Report on Form 10-K
filed with the
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.
We are a "smaller reporting company," meaning that the market value of our stock held by non-affiliates is less than$700 million and our annual revenue was less than$100 million during our most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than$250 million or (ii) our annual revenue was less than$100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than$700 million . If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. For so long as we remain a smaller reporting company, we are permitted and intend to rely on exemptions from certain disclosure and other requirements that are applicable to other public companies that are not smaller reporting companies. We are also an "emerging growth company." As such, the Jumpstart Our Business Startups Act of 2012 allows us to delay adoption of new or revised accounting standards applicable to public companies until such standards are made applicable to private companies. However, we have irrevocably elected not to avail ourselves of this extended transition period for complying with new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
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