Surrozen, Inc. Form 8-K Summary
Reporting date: August 11, 2021 closing date; report dated August 17, 2021. The filing reports the completion of the domestication of Consonance-HFW Acquisition Corp. and its merger with Legacy Surrozen. The combined company is named Surrozen, Inc. and trades on Nasdaq under SRZN and SRZNW.
Business Context and Transaction
Surrozen is a biotechnology company developing antibody-based biologic candidates designed to selectively modulate the Wnt pathway for tissue repair and regeneration. Its lead candidates are SZN-1326 for inflammatory bowel disease and SZN-043 for severe alcoholic hepatitis. Both were in preclinical development, with Phase 1 trials planned for 2022.
- The transaction is expected to be accounted for as a reverse recapitalization, with Legacy Surrozen as the accounting predecessor.
- CHFW shareholders redeemed 6,754,242 shares for approximately $67.5 million, or approximately $10.00 per share.
- The PIPE financing issued 12,020,000 units at $10.00 per unit for gross proceeds of $120.2 million. Each unit included one common share and one-third of a warrant exercisable at $11.50 per share.
- Immediately after the transaction and PIPE financing, the filing reported 35,027,475 common shares, 3,211,327 IPO warrants, and 4,006,661 PIPE warrants outstanding. A separate beneficial ownership table reports 36,440,758 shares outstanding, reflecting additional ownership calculation conventions.
Financial Performance and Liquidity
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $10.3 million | $5.4 million | $18.9 million | $10.1 million |
| General and administrative expense | $2.4 million | $1.5 million | $6.8 million | $3.3 million |
| Total operating expenses | $12.7 million | $7.0 million | $25.7 million | $13.3 million |
| Net loss | $12.7 million | $7.0 million | $25.7 million | $13.3 million |
| Cash used in operating activities | Not provided | Not provided | $23.2 million | $12.2 million |
- As of June 30, 2021, accumulated deficit was $113.7 million and cash, cash equivalents, and short-term investments totaled $25.4 million.
- Cash used in investing activities was $7.2 million provided during the first six months of 2021, primarily from marketable securities maturities. Financing activities used $0.1 million.
- The filing states that the Business Combination and PIPE financing generated approximately $144.7 million of gross proceeds. It also estimates a net increase in cash and cash equivalents of approximately $123.1 million after transaction costs of approximately $22.0 million.
- The company had no approved products, no product revenue, and no positive operating cash flow. Profit margins are not meaningful because revenue has not been generated.
- The filing does not report conventional debt financing. Lease obligations totaled approximately $10.0 million through 2025 as of June 30, 2021.
Material Changes Versus the Prior Comparable Period
- Six-month research and development expense increased $8.8 million, or approximately 87%, primarily due to higher external development spending on SZN-1326 and SZN-043 and increased personnel costs.
- Six-month general and administrative expense increased $3.6 million, or approximately 110%, primarily due to higher professional service fees, consulting expenses, headcount, and stock-based compensation.
- Six-month net loss increased $12.4 million to $25.7 million from $13.3 million.
- Cash used in operations increased $11.0 million to $23.2 million.
- The company transitioned from a private operating company and SPAC structure to a Nasdaq-listed public company, with expected additional costs for public-company compliance, insurance, personnel, accounting, legal, and other professional services.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to initiate Phase 1 trials for SZN-1326 and SZN-043 in 2022 and nominate additional candidates for clinical development in 2023 and beyond.
- Management expected continuing losses and negative operating cash flow for the foreseeable future, with substantial additional spending on clinical trials, manufacturing process development, regulatory submissions, and research and development.
- Management stated that available cash, investments, and transaction proceeds were expected to fund operations for at least 12 months from the filing date, but acknowledged that assumptions could be inaccurate and capital could be exhausted sooner.
- Additional financing will likely be required through equity, debt, collaborations, grants, or other strategic transactions. Equity financing could dilute shareholders, while debt could impose restrictive covenants.
- Key risks include clinical or preclinical failure, regulatory delays, manufacturing dependence on third parties, inability to raise capital, intellectual property and licensing obligations, limited operating history, competition, COVID-19 effects, and inability to achieve profitability.
- License arrangements with Stanford, UCSF, and Distributed Bio include milestone payments, royalties, sublicense fees, and potential change-of-control payments. The timing and likelihood of contingent payments were not determinable.
- The company changed its independent registered public accounting firm from Marcum LLP, formerly engaged by CHFW, to Ernst & Young LLP, which had previously audited Legacy Surrozen. The filing reports no disagreements or reportable events with Marcum, except that CHFW had previously identified a material weakness related to warrant accounting and restated prior financial statements.
- The filing also established indemnification agreements, investor registration rights, a 2021 equity incentive plan, an employee stock purchase plan, and a management severance plan.
Important Facts for Investors to Verify
- Reconcile the reported share counts of 35,027,475 immediately after closing and 36,440,758 in the beneficial ownership table.
- Review the pro forma financial statements to confirm the final cash balance, transaction costs, warrant accounting, and reverse recapitalization treatment.
- Verify the expected cash runway against actual quarterly cash burn and the timing and cost of planned Phase 1 trials.
- Assess potential dilution from 3,211,327 IPO warrants, 4,006,661 PIPE warrants, equity awards, and future capital raises.
- Review contingent milestone, royalty, sublicense, lease, and change-of-control obligations under the company’s license agreements.
- Monitor clinical-trial initiation, regulatory progress, manufacturing arrangements, and the effect of COVID-19 or other operational disruptions.