Spruce Biosciences, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The unaudited filing was signed November 18, 2020. Spruce is a clinical-stage biopharmaceutical company developing tildacerfont for rare endocrine disorders, principally classic congenital adrenal hyperplasia (CAH). It had no approved products and generated no revenue.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development expense | $7.8 million | $2.1 million | $18.0 million | $8.0 million |
| General and administrative expense | $1.8 million | $0.5 million | $3.0 million | $2.0 million |
| Total operating expenses / operating loss | $9.6 million | $2.6 million | $21.1 million | $10.0 million |
| Net loss | $9.6 million | $2.6 million | $21.2 million | $9.9 million |
| Net loss per share, basic and diluted | $12.35 | $3.34 | $27.54 | $12.96 |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $18.3 million | $9.7 million |
At September 30, 2020, cash and cash equivalents were $72.2 million, total assets $78.5 million, current liabilities $10.1 million, and accumulated deficit $52.5 million. The company had $4.5 million of term-loan principal outstanding ($4.469 million net of unamortized discount and issuance costs); principal repayments were scheduled to begin in January 2021, with maturity in September 2022. The filing does not provide a meaningful operating margin or profitability measure given the absence of revenue.
For the nine months, financing provided $86.8 million, chiefly from Series B preferred stock; cash, cash equivalents and restricted cash increased $68.5 million to $72.4 million. In October 2020, after quarter-end, the IPO raised approximately $96.3 million net of underwriting discounts and commissions, before offering expenses. Management said September cash plus IPO proceeds would fund planned operations for at least 12 months following issuance of the statements. A pro forma presentation showed cash of $168.4 million after the IPO and related transactions.
Changes versus prior comparable periods
- Q3 net loss increased to $9.6 million from $2.6 million; nine-month net loss rose to $21.2 million from $9.9 million.
- R&D expense rose substantially, primarily with increased clinical development, manufacturing and personnel costs. Nine-month clinical development expense was $9.9 million versus $3.3 million.
- Q3 G&A increased mainly from IPO-related professional fees and personnel costs; nine-month G&A also rose, chiefly due to IPO-related professional fees.
- Operating cash use increased to $18.3 million for the nine months from $9.7 million. The improvement in cash balance primarily reflects Series B financing, not operating cash generation.
Outlook, commentary and risks
- Spruce had initiated two Phase 2b trials in adults with classic CAH: one for patients with poor disease control, with topline results anticipated in Q4 2021 or Q1 2022; and one focused on glucocorticoid reduction in patients with good disease control, with results anticipated in the first half of 2022. Assuming positive results in the latter trial, management planned to discuss registration with regulators in 2022. These are company expectations, not guarantees.
- Management expects significant and increasing losses and R&D spending, and does not expect positive operating cash flow in the foreseeable future. It anticipates needing substantial additional financing beyond the stated near-term runway.
- COVID-19 could disrupt enrollment, trial sites, regulatory reviews, clinical supplies and manufacturing. Remote visits added to trial protocols increased trial costs; the company also reported a hydrocortisone supply shortage that could affect trial timing or success.
- Key risks include dependence on tildacerfont as its sole product candidate; uncertain trial efficacy, safety and regulatory requirements (including possible additional or Phase 3 trials); competition; reliance on third-party CROs and single-source manufacturers; and additional capital needs. The company reported no drug-related serious adverse events across 163 subjects in six trials to date, while noting a liver-enzyme event in one patient in an earlier Phase 2a trial.
- The $4.5 million SVB term loan is secured by substantially all assets other than intellectual property and includes restrictive covenants and default provisions. Management reported covenant compliance at September 30, 2020.
- Disclosure controls were deemed ineffective because of a material weakness in financial-reporting controls, principally inadequate timely review and insufficient accounting personnel and segregation of duties. The company had added a CFO and Controller and expected remediation by the 2020 Form 10-K filing.
- No material legal proceedings were reported. The company has potential Lilly milestone payments of up to $23.0 million and tiered royalties on future product sales; timing and likelihood of milestone payments were not estimable.
Important facts for investors to verify
- Progress, enrollment, safety and final results of both Phase 2b trials, including whether COVID-19 or supply issues alter timelines or costs.
- Whether regulators consider the Phase 2b evidence and safety database sufficient, or require further trials, and the status of the planned 2022 regulatory discussions.
- Actual cash burn and runway after IPO expenses, trial spending and public-company costs, and the timing and terms of any future financing.
- Remediation and independent evaluation of the disclosed material weakness in internal controls.
- Clinical supply continuity, third-party manufacturing capacity, and the term loan’s repayment and covenant status.
- Potential dilution and share-count changes: the IPO issued 6.9 million shares, preferred stock converted into 15,492,019 common shares, and the filing reported 23,214,041 common shares outstanding as of November 9, 2020.