Surrozen, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Surrozen is a clinical-stage biotechnology company developing Wnt-pathway drug candidates. It has not generated product revenue.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $9.6 million | $10.3 million | $19.0 million | $18.9 million |
| General and administrative expense | $4.5 million | $2.4 million | $9.6 million | $6.8 million |
| Net loss | $13.9 million | $12.7 million | $21.9 million | $25.7 million |
| Operating cash used | Not separately stated | Not separately stated | $29.8 million | $23.2 million |
At June 30, cash and cash equivalents were $16.9 million and marketable securities were $75.8 million, totaling $92.7 million; restricted cash was an additional $0.4 million. Total assets were $104.1 million and stockholders’ equity was $89.7 million. The balance sheet reports lease liabilities of $6.6 million in total, including $2.1 million current; no borrowing or other financial debt is reported. Operating margins are not meaningful because the company has no revenue.
Six-month net loss was lower year over year largely because of $6.9 million of noncash warrant-liability revaluation income, included in $6.6 million of net other income. Excluding this unusual item, operating expenses rose 11% to $28.6 million. Cash and cash equivalents plus restricted cash fell $16.2 million during the first half; marketable-security maturities provided $14.0 million of investing cash.
Material changes and business developments
- Q2 net loss increased 10% year over year. Operating expenses rose 11%, as an 88% increase in G&A more than offset a 7% decline in R&D. Higher G&A reflected staffing and stock compensation, corporate insurance, and professional fees.
- For the first half, R&D was approximately flat: lower SZN-1326 costs, mainly after completion of drug-substance manufacturing, were offset by higher SZN-043 and discovery/preclinical spending. G&A increased 41%.
- The company initiated Phase 1 trials for SZN-1326, being developed initially for ulcerative colitis, and SZN-043, initially for severe alcoholic hepatitis. It nominated SZN-413, a retinal-disease candidate, in Q1 and expects to nominate additional candidates and advance them into the clinic in 2023 and beyond.
- A Lincoln Park equity purchase agreement permits Surrozen, at its discretion, to sell up to $50 million of stock over 36 months. No shares had been sold under the agreement by June 30, 2022. The company issued 100,000 commitment shares.
Outlook, risks, and other notable items
- Management believes available cash, cash equivalents, and marketable securities will fund operations for at least 12 months from the report date. It expects continued losses and rising expenses, particularly for clinical trials, manufacturing development, and research, and expects to need additional long-term capital. Future equity financing may dilute shareholders; unavailable or unfavorable financing could require spending cuts or delays to development programs.
- Clinical, regulatory, enrollment, manufacturing, staffing, intellectual-property, competitive, and third-party execution uncertainties could affect development timelines and costs. Management said COVID-19 and the Russia-Ukraine conflict had not significantly affected operations to date, but future impacts remain uncertain. Inflation may increase costs.
- Available-for-sale securities had $476,000 of unrealized losses, attributed primarily to interest-rate changes; management did not consider them credit-related and reported no impairment. The filing reports no legal proceedings believed likely to have a material adverse effect.
- Disclosure controls were not effective at the reasonable-assurance level because of a continuing material weakness involving insufficient accounting and financial-reporting personnel with GAAP and SEC reporting expertise. Management described remediation efforts, including hiring and training.
- Operating lease commitments totaled $7.4 million in undiscounted payments, with $6.6 million recorded as lease liabilities. License agreements may require future milestone payments and royalties; no milestones had been achieved under the Stanford or UCSF agreements by June 30.
Important facts for investors to verify
- Whether the stated 12-month liquidity runway remains adequate as clinical and operating costs rise, and the timing and terms of any additional financing.
- Progress, safety, enrollment, and costs for the SZN-1326 and SZN-043 Phase 1 trials, and the development plan for SZN-413.
- The size and noncash nature of the warrant revaluation gain, and the resulting effect on comparisons of reported net loss.
- Progress in remediating the material weakness and whether disclosure controls become effective.
- Potential dilution from the Lincoln Park facility, outstanding warrants, and equity compensation.