Surrozen, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 15, 2021. Financial statements are unaudited. Surrozen is a preclinical-stage biotechnology company developing Wnt-pathway therapeutics and has no products approved for sale or product revenue.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| Research and development expense | $10.4 million | $7.0 million | $29.3 million | $17.0 million |
| General and administrative expense | $3.3 million | $1.7 million | $10.1 million | $4.9 million |
| Total operating expenses | $13.7 million | $8.6 million | $39.4 million | $22.0 million |
| Net loss | $14.0 million | $8.6 million | $39.7 million | $21.9 million |
| Basic and diluted loss per share | $0.51 | $0.47 | $1.86 | $1.43 |
| Cash used in operating activities | Not stated for quarter | Not stated for quarter | $37.3 million | $19.8 million |
Margins: Not meaningful because the company reported no revenue. R&D expense rose as investment in SZN-1326 and SZN-043, headcount and related costs increased. G&A growth reflected higher personnel, professional services and public-company-related costs.
Liquidity and capitalization: At September 30, 2021, cash and cash equivalents were $61.1 million; short- and long-term investments totaled $74.3 million; and cash, cash equivalents and investments totaled $135.4 million. Current assets were $114.0 million versus current liabilities of $12.5 million. Total liabilities were $26.9 million, including $8.3 million of warrant liabilities and $8.3 million of operating lease liabilities. The filing reports no borrowings or conventional debt. Accumulated deficit was $127.7 million.
Financing cash flow was $124.5 million for the first nine months, principally from the business combination and PIPE financing; investing cash flow was negative $61.1 million, mainly reflecting purchases of marketable securities. The filing describes $128.3 million of cash consideration after certain transaction fees in one section, $123.8 million in its liquidity discussion, and $124.1 million of net financing proceeds in the cash flow statement. These figures use different descriptions or treatments; the filing text does not provide a single directly reconciled figure across those passages.
Material changes and significant events
- The August 11, 2021 business combination with Consonance-HFW Acquisition Corp. was accounted for as a reverse recapitalization. The PIPE included 12.02 million common shares and warrants; preferred stock converted into common stock. Shares issued and outstanding increased to 35.0 million at September 30, from 18.3 million at December 31, 2020.
- Nine-month operating expenses increased $17.4 million year over year and net loss increased $17.8 million. R&D accounted for $12.3 million of the expense increase and G&A for $5.2 million.
- The company recorded $8.3 million of warrant liabilities, including $4.6 million for PIPE warrants valued using a model with significant unobservable inputs. Warrant-related transaction costs and fair-value changes contributed to $0.3 million of other expense, net.
- The company recognized $0.8 million of NIH grant funding as a reduction of R&D expense during the three- and nine-month periods; it had received $0.9 million under the grant by September 30.
Outlook, risks and other notable disclosures
- Management expected existing cash, cash equivalents and investments to fund operations for at least 12 months from issuance of the financial statements. It expects continued losses and increased spending as it advances its pipeline and prepares for clinical development; additional financing may be needed.
- Management planned to initiate Phase 1 trials in 2022 for SZN-1326, being developed for moderate-to-severe inflammatory bowel disease, and SZN-043, being developed for severe alcoholic hepatitis. Both candidates remained preclinical and had not been tested in humans.
- Key risks include clinical, regulatory and manufacturing uncertainty; dependence on third-party manufacturers and research providers; potential COVID-19-related delays; and the possibility of adverse effects from Wnt-pathway activation, including tumor formation, which the company said had not been observed in its preclinical studies to date.
- Disclosure controls and procedures were deemed ineffective at the reasonable-assurance level due to material weaknesses involving complex transaction accounting and insufficient accounting and financial-reporting expertise. Remediation efforts included hiring, external advisers and additional training.
- The company reported no pending or threatened litigation known to management and no material off-balance-sheet arrangements. Lease payments totaled $9.5 million through 2025; license milestone and royalty obligations are contingent on future events.
Investor verification priorities
- Confirm the reconciliation of business-combination and PIPE proceeds across the filing’s $128.3 million, $123.8 million and $124.1 million descriptions.
- Track actual cash burn, investment balances and whether the stated 12-month runway remains consistent with clinical-development spending and financing plans.
- Verify progress toward IND-enabling work and the planned 2022 Phase 1 starts for SZN-1326 and SZN-043.
- Monitor warrant-liability valuation and potential share dilution, including the 7.2 million outstanding warrants and equity-plan awards.
- Assess remediation of the material weaknesses and the effectiveness of disclosure controls in subsequent filings.