srrk_Current_Folio

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10‑Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2018


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _ TO _

COMMISSION FILE NUMBER 001‑38501

______________________________________________

SCHOLAR ROCK HOLDING CORPORATION

(Exact name of registrant as specified in its charter)


Delaware	82‑3750435
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

620 Memorial Drive, 2nd Floor Cambridge, Massachusetts (Address of principal executive offices)	02139 (Zip Code)

(857) 259‑3860 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

The number of outstanding shares of the Registrant’s Common Stock as of November 1, 2018 was 25,237,160.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10‑Q (“Quarterly Report”), contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

the timing of the completion of, and progress of, our Phase 1 clinical trial and future clinical trials for our lead product candidate, SRK‑015, and the results from these trials;

the success, cost and timing of our other product development activities, preclinical studies and clinical trials, including statements regarding our ability to identity a potential product candidate and lead indication in our TGFβ1 program, the timing of initiation and completion of preclinical studies or clinical trials and related preparatory work, and the timing of the availability of the results of these studies and trials;

our success in identifying and executing a development program for additional indications for SRK‑015 and our TGFβ1 program;

our ability to obtain funding for our operations, including funding necessary to complete further development and, upon successful development, if approved, commercialization of SRK‑015 or any of our future product candidates;

the potential for our identified research priorities to advance our proprietary platform, development programs or product candidates;

our ability to obtain and maintain regulatory approval from the U.S. Food and Drug Administration, European Medicines Agency and other regulatory authorities for SRK‑015 and any future product candidates, and any related restrictions, limitations or warnings in the label of any approved product candidate;

our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates and the duration of such protection;

our ability and the potential to successfully manufacture our product candidates for clinical trials and for commercial use, if approved;

the size and growth potential of the markets for our product candidates, and our ability to serve those markets, either alone or in combination with others;

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing, including our expected use of proceeds from our initial public offering; and

other risks and uncertainties, including those listed under Part II, Item 1A, Risk Factors.

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events and with respect to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A, Risk Factors and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SCHOLAR ROCK HOLDING CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except unit, share, and per share data)


	September 30,		December 31,
	2018		2017
Assets
Current assets:
Cash and cash equivalents	$	103,986	$	56,461
Marketable securities		—		1,498
Prepaid expenses and other current assets		2,201		1,242
Total current assets		106,187		59,201
Property and equipment, net		2,626		2,181
Restricted cash		205		205
Other long-term assets		—		50
Total assets	$	109,018	$	61,637
Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	1,809	$	1,359
Accrued expenses		3,360		2,796
Deferred rent		—		228
Loan payable		578		641
Capital lease payable		14		—
Total current liabilities		5,761		5,024
Long-term portion of deferred rent		886		468
Long-term portion of loan payable		—		398
Long-term portion of capital lease payable		28		—
Warrant to purchase redeemable security		—		37
Total liabilities		6,675		5,927
Commitments and contingencies (Note 9)
Convertible preferred stock (Series A-1, A-2, A-3, A-4, B and C), $0.001 par value; no shares authorized, issued or outstanding as of September 30, 2018; 43,157,651 shares authorized and 43,135,911 shares issued and outstanding as of December 31, 2017 (aggregate liquidation preference of $109,561 as of December 31, 2017).		—		109,232
Stockholders’ equity (deficit):
Preferred stock, $0.001 par value; 10,000,000 and no shares authorized at September 30, 2018 and December 31, 2017, respectively; no shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively		—		—
Common stock, $0.001 par value; 150,000,000 shares authorized and 25,241,766 shares issued and outstanding as of September 30, 2018; 60,000,000 shares authorized and 3,970,586 shares issued and outstanding as of December 31, 2017		25		4
Additional paid-in capital		194,204		4,001
Accumulated other comprehensive loss		—		(2)
Accumulated deficit		(91,886)		(57,525)
Total stockholders’ equity (deficit)		102,343		(53,522)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)	$	109,018	$	61,637

The accompanying notes are an integral part of these consolidated financial statements.

SCHOLAR ROCK HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except unit, share, per unit and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Operating expenses:
Research and development	$	8,061	$	4,778	$	26,185	$	13,057
General and administrative		3,173		1,164		8,947		3,514
Total operating expenses		11,234		5,942		35,132		16,571
Loss from operations		(11,234)		(5,942)		(35,132)		(16,571)
Other income (expense):
Interest income, net		472		9		828		32
Other expense, net		—		4		(56)		1
Total other income		472		13		772		33
Net loss	$	(10,762)	$	(5,929)	$	(34,360)	$	(16,538)
Net loss per share, basic and diluted	$	(0.44)			$	(2.72)
Net loss per unit, basic and diluted			$	(3.70)			$	(10.32)
Weighted average common shares outstanding, basic and diluted		24,310,681				12,647,032
Weighted average common units outstanding, basic and diluted				1,603,088				1,603,088

Comprehensive loss:
Net loss	$	(10,762)	$	(5,929)	$	(34,360)	$	(16,538)
Other comprehensive income:
Unrealized gain on marketable securities		—		13		2		14
Total other comprehensive income		—		13		2		14
Comprehensive loss	$	(10,762)	$	(5,916)	$	(34,358)	$	(16,524)

The accompanying notes are an integral part of these consolidated financial statements.

SCHOLAR ROCK HOLDING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended
	September 30,
	2018		2017
Cash flows from operating activities:
Net loss	$	(34,360)	$	(16,538)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		567		497
Equity-based compensation		3,057		689
Amortization of deferred rent		190		(155)
Deferred payroll tax credit		199		—
Other		95		35
Change in operating assets and liabilities:
Prepaid expenses and other current assets		(1,108)		(1,704)
Accounts payable		294		1,656
Accrued expenses		543		(159)
Net cash used in operating activities		(30,523)		(15,679)
Cash flows from investing activities:
Purchase of property and equipment		(791)		(247)
Sales and maturities of marketable securities		1,499		12,014
Net cash provided by investing activities		708		11,767
Cash flows from financing activities:
Principal payments on loan payable		(500)		(500)
Proceeds from initial public offering of common stock, net of issuance costs		77,839		—
Payment of capital lease obligation		(2)		—
Proceeds from stock option exercises		3		—
Proceeds from issuance of Series B convertible preferred units, net of issuance costs		—		4,285
Net cash provided by financing activities		77,340		3,785
Net increase (decrease) in cash and cash equivalents and restricted cash		47,525		(127)
Cash and cash equivalents and restricted cash, beginning of period		56,666		10,238
Cash and cash equivalents and restricted cash, end of period	$	104,191	$	10,111
Supplemental disclosure of non-cash items:
Property and equipment purchases in accounts payable and accrued liabilities	$	177	$	59
Supplemental cash flow information:
Cash paid for interest	$	27	$	41
Purchase under capital lease	$	44	$	—

The accompanying notes are an integral part of these consolidated financial statements.

SCHOLAR ROCK HOLDING CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

1. Nature of the Business

Scholar Rock Holding Corporation (the “Company”) is a biopharmaceutical company focused on the discovery and development of innovative medicines for the treatment of serious diseases in which signaling by protein growth factors plays a fundamental role. The Company’s lead product candidate, SRK-015, is a selective inhibitor of the activation of the growth factor myostatin in skeletal muscle that the Company has advanced into clinical development for the treatment of spinal muscular atrophy. The Company was originally formed as a Delaware limited liability company in May 2012. In December 2017, the Company converted into a Delaware corporation through a series of transactions (the “Reorganization”). Its principal offices are in Cambridge, Massachusetts.

Since its inception, the Company’s operations have focused on research and development of monoclonal antibodies that selectively inhibit activation of growth factors for therapeutic effect, as well as establishing the Company’s intellectual property portfolio and performing research and development activities. The Company has primarily financed its operations through various equity and debt financings, including the initial public offering of its common stock (the “IPO”) in May 2018.

The Company is subject to a number of risks similar to other life science companies, including, but not limited to, successful discovery and development of its drug candidates, raising additional capital, development by its competitors of new technological innovations, protection of proprietary technology and regulatory approval and market acceptance of the Company’s products.

During the second quarter of 2018, the Company completed its IPO, in which the Company sold 6,164,000 shares of common stock, including all additional shares available to cover over-allotments, at a price of $14.00 per share. The Company received aggregate net proceeds of approximately $77.8 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. Upon the closing of the IPO, all outstanding shares of convertible preferred stock converted into 15,109,950 shares of common stock and the Company’s outstanding warrant to purchase preferred stock converted into a warrant to purchase 7,614 shares of common stock.

The Company has determined that the receipt of the aggregate net proceeds from the IPO has alleviated the substantial doubt about the Company’s ability to continue as a going concern. The Company has incurred annual net operating losses in every year since its inception. The Company had an accumulated deficit of $91.9 million at September 30, 2018, and will require substantial additional capital to fund its operations. The Company has never generated any product revenue. There can be no assurance that the Company will be able to obtain additional debt or equity financing or generate product revenue or revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations, and financial condition.

2. Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b)(4) on May 24, 2018 (the “Prospectus”). There have been no material changes to the significant accounting policies previously disclosed in the Prospectus.

Unaudited Interim Financial Information

The consolidated financial statements of the Company included herein have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report, as is permitted by such rules and regulations.

Accordingly, these consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Prospectus.

The unaudited consolidated financial statements include the accounts of Scholar Rock Holding Corporation and its wholly owned subsidiaries. All intercompany transactions and balances of the subsidiaries have been eliminated in consolidation. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the results for the reported interim periods. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments that may affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the related reporting of revenues and expenses during the reporting period. Significant estimates of accounting reflected in these consolidated financial statements include, but are not limited to, estimates related to accrued expenses, the valuation of equity-based compensation, including incentive units, common stock, restricted common stock and stock options, and income taxes. The Company utilizes significant estimates and assumptions in determining the fair value of its equity-based compensation, including incentive units, common stock, restricted common stock and stock options that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Research and Development Expenses

Research and development expenses are expensed as incurred and consist of costs incurred in performing research and development activities, including compensation related expenses for research and development personnel, preclinical and clinical activities including cost of supply, overhead expenses including facilities expenses, materials and supplies, amounts paid to consultants and outside service providers, and depreciation of equipment. Upfront license payments related to acquired technologies which have not yet reached technological feasibility and have no alternative future use are also included in research and development expense.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update, or ASU, No. 2016‑02, Leases (Topic 842), which supersedes all existing lease guidance. The new standard requires a company to recognize lease assets and liabilities for leases previously classified as operating leases. The new standard will be effective for the Company on January 1, 2019. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients primarily focused on leases that commenced before the effective date of Topic 842, including continuing to account for leases that commence before the effective date in accordance with previous guidance, unless the lease is modified. In July 2018, the FASB issued ASU 2018-11, which provides companies an additional, optional, transition method. This optional method allows companies to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is continuing to evaluate the new lease guidance and is in the process of evaluating its existing population of contracts to ensure the identification of all contracts that meet the definition of a lease contract under the new standard is complete. As a result, the Company is currently assessing the impact that adoption of this guidance will have on its financial statements and footnote disclosures and it anticipates that adoption of this standard will result in an increase in assets and liabilities as the Company recognizes the rights and obligations related to its leases.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new standard will be effective for the Company on January 1, 2019. Early adoption is permitted. The standard expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. Under the

amended guidance, equity-classified share-based payment awards issued to nonemployees will be measured at grant date fair value. Upon transition, the entity is required to remeasure these nonemployee awards at fair value as of the adoption date. The Company is currently evaluating the new guidance but does not expect that adoption of this standard will have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard will align the requirements for capitalizing implementation costs for hosting arrangements (services) with costs for internal-use software (assets). As a result, certain implementation costs incurred in hosting arrangements will be deferred and amortized. The new standard will be effective for the Company on January 1, 2020. Early adoption is permitted. The Company is currently evaluating the potential impact that adoption of this standard may have on the Company's financial position and results of operations.

3. Fair Value of Financial Assets and Liabilities

The following tables summarize the assets and liabilities measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017 (in thousands):


	Fair Value Measurements at September 30, 2018
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds, included in cash and cash equivalents	$	103,137	$	103,137	$		$
Total assets	$	103,137	$	103,137	$	—	$	—


	Fair Value Measurements at December 31, 2017
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds, included in cash and cash equivalents	$	55,291	$	55,291	$	—	$	—
Marketable securities:
U.S. Treasury obligations		1,498		1,498		—		—
Total assets	$	56,789	$	56,789	$	—	$	—
Liabilities:
Warrant to purchase redeemable security	$	37	$	—	$	—	$	37
Total liabilities	$	37	$	—	$	—	$	37

There were no transfers between fair value measurements levels during the three or nine months ended September 30, 2018 or 2017.

Cash and cash equivalents and marketable securities include investments in money market funds that invest in U.S. government securities that are valued using quoted market prices. Accordingly, money market funds and government funds are categorized as Level 1 as of September 30, 2018 and December 31, 2017.

The carrying amounts reflected in the balance sheets for accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate their fair values at September 30, 2018 and December 31, 2017, due to their short-term nature. The Company believes the terms of the loan payable reflect current market conditions for an instrument with similar terms and maturity, therefore the carrying value of the Company’s debt approximates its fair value based on Level 3 of the fair value hierarchy.

Upon the completion of the IPO, the Company’s outstanding warrant to purchase preferred stock converted into a warrant to purchase common stock and the Company reclassified the fair value of the warrant to additional paid-in

capital. The following table presents activity in the preferred stock warrant during the nine months ended September 30, 2018 (in thousands):


Balance at December 31, 2017	$	(37)
Change in fair value of warrant included in other income (expense), net		(56)
Reclassification to additional paid-in capital upon consummation of the IPO		93
Balance at September 30, 2018	$	—

The change in fair value of the warrant included in other income (expense), net for the three and nine months ended September 30, 2018 was $0 and $(0.1) million, respectively.

4. Marketable Securities

The Company did not have any available-for-sale investments as of September 30, 2018.

The following table summarizes the Company’s investments as of December 31, 2017 (in thousands):


			Gross
	Amortized		Unrealized				Estimated
	Cost		Gains		Losses		Fair Value
Marketable securities available-for-sale:
U.S. Treasury obligations	$	1,500	$	—	$	(2)	$	1,498
Total available-for-sale securities	$	1,500	$	—	$	(2)	$	1,498

5. Property and Equipment, Net

As of September 30, 2018 and December 31, 2017, property and equipment, net consists of the following (in thousands):


	As of
	September 30,		December 31,
	2018		2017
Laboratory equipment	$	2,858	$	2,074
Furniture & fixtures		219		151
Machinery & equipment		75		7
Leasehold improvements		1,511		1,498
Construction in progress		80		—
		4,743		3,730
Less: Accumulated depreciation and amortization		(2,117)		(1,549)
	$	2,626	$	2,181

As of September 30, 2018 and December 31, 2017, assets under capital lease with a cost basis of $44,000 and $0 were included in property and equipment, respectively.

6. Accrued Expenses

As of September 30, 2018 and December 31, 2017, accrued expenses consist of the following (in thousands):


	As of
	September 30,		December 31,
	2018		2017
Accrued payroll and related expenses	$	1,794	$	1,174
Accrued external research and development expense		1,163		1,225
Accrued professional and consulting expense		339		382
Accrued other		64		15
	$	3,360	$	2,796

7. Common Stock and Preferred Stock

In connection with the consummation of the IPO, on May 29, 2018 the Company filed an amended and restated certificate of incorporation, which increased the number of shares of common stock authorized for issuance thereunder by 90,000,000 shares to 150,000,000 shares and also authorized for issuance 10,000,000 shares of Preferred Stock, par value $0.001. As of September 30, 2018, no shares of the Preferred Stock were issued or outstanding.

8. Equity-Based Compensation

The Company recorded equity-based compensation expense related to all equity-based awards for employees and nonemployees, which was allocated as follows in the consolidated statements of operations (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Research and development expense	$	453	$	145	$	1,240	$	370
General and administrative expense		1,033		56		1,817		319
	$	1,486	$	201	$	3,057	$	689

Equity-based compensation during the three and nine months ended September 30, 2018 includes $0.3 million related to modifications of equity awards in connection with the intended retirement of the Company’s Chief Operating Officer and Head, Corporate Development, effective December 31, 2018.

Restricted Stock

The following table summarizes restricted common stock activity as of September 30, 2018:


		Weighted
		Average Fair
		Value per Share
	Number of Shares	at Issuance
Restricted common stock as of December 31, 2017	1,220,085	$	5.77
Granted	—	$
Vested	(353,549)	$	5.77
Forfeited	(3,219)	$	5.77
Restricted common stock as of September 30, 2018	863,317	$	5.77

As of September 30, 2018, the Company had unrecognized equity-based compensation expense of $4.0 million related to restricted stock issued to employees and directors, which is expected to be recognized over a period of 1.7 years.

Stock Options

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2018:


		Weighted		Weighted
	Number of	Average Exercise		Average Remaining	Aggregate Intrinsic
	Shares	Price		Contractual Term	Value
				(in years)	(in thousands)
Outstanding as of December 31, 2017	—	$	—	—	$	—
Granted	1,509,705		9.64	—		—
Exercised	(449)		5.77	—		—
Forfeited	(8,525)		7.73	—		—
Outstanding as of September 30, 2018	1,500,731	$	9.65	9.52	$	24,157
Options exercisable as of September 30, 2018	119,066	$	8.73	9.47	$	2,017

Using the Black-Scholes option pricing model, the weighted average fair value of options granted to employees and directors during the nine months ended September 30, 2018 was $6.81.

The following assumptions were used in determining the fair value of options granted to employees and non-employees:


	Nine Months Ended September 30, 2018
	Employees		Non-Employees
Risk-free interest rate	2.76	%	3.05	%
Expected dividend yield	—	%	-	%
Expected term (years to liquidity)	6.12		9.39
Expected volatility	81.58	%	76.80	%

As of September 30, 2018, the Company has unrecognized equity-based compensation expense related to its employee stock options of $9.0 million which the Company expects to recognize over the remaining weighted average vesting period of 3.4 years.

9. Commitments and Contingencies

The Company enters into agreements in the normal course of business with vendors for preclinical research and development studies, preclinical and clinical supply and manufacturing services, clinical trial services, professional consultants for expert advice and other vendors for other services for operating purposes.

Operating Leases

Facility Lease

In March 2015, the Company entered into a five‑year lease for approximately 11,600 square feet of laboratory and office space at 620 Memorial Drive, Cambridge, Massachusetts, as amended in February 2016 (the ‘‘lease’’). The lease was further amended in February 2018, to add an additional 9,132 square feet (the ‘‘expansion space’’) at the current location and to extend the lease term (the ‘‘amended lease’’). The amended lease expires in July 2023. Rent for the facility lease, including the expansion space, increases from $1.4 million a year to $1.7 million a year over the term of the lease.

Legal Proceedings

The Company is not currently a party to any material legal proceedings.

10. Loan Payable

In August 2015, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (‘‘SVB’’), which provided the Company an equipment line of credit of up to $2.0 million to finance the purchase of eligible equipment. The loan balance at September 30, 2018 and December 31, 2017 was $0.6 million and $1.0 million, respectively.

11. Option and License Agreement

Overview

On December 17, 2013, the Company entered into an option and license agreement with Janssen. Janssen is obligated to pay the Company certain development milestones totaling up to $25.0 million and regulatory milestones totaling up to $97.0 million for the pharmacological profile licensed by Janssen during the development period and through successful regulatory approval, as further described in the option and license agreement. Development milestones are triggered upon the achievement of specified development criteria or dosing of a specified number of patients in phases of clinical trials. Regulatory milestones are triggered upon approval to market a product candidate by the U.S. Food and Drug Administration (‘‘FDA’’) or other global regulatory authorities. Additionally, commercial milestone payments totaling up to $130.0 million for the pharmacological profile are eligible to be earned as certain sales thresholds are achieved by Janssen and royalties are also required to be paid by Janssen to the Company based on annual net sales thresholds, based on Janssen’s sales of a product derived from the collaboration molecule(s). The next potential milestone the Company may be entitled to receive under the agreement is a milestone payment of $2.0 million upon achievement of a development milestone.

The Company did not recognize any revenue from its option and license agreement with Janssen in the three or nine-month periods ended September 30, 2018 or September 30, 2017, respectively.

12. Net Loss per Share

Prior to the Reorganization, the Company calculated basic net loss per unit by dividing net loss by the weighted average number of common units outstanding. Subsequent to the Reorganization, the Company calculates basic net loss per share by dividing net loss by the weighted average number of common shares outstanding, excluding restricted common stock. The Company calculates diluted net loss per unit and diluted net loss per share by dividing net loss by the weighted average number of common units outstanding or weighted average number of common shares outstanding, as applicable, after giving consideration to the dilutive effect of convertible preferred units, convertible preferred stock, incentive units, restricted common stock, warrants and stock options that are outstanding during the period. The Company has generated a net loss in all periods presented, so the basic and diluted net loss per unit and net loss per share are the same, as the inclusion of the potentially dilutive securities would be anti-dilutive. The significant increase in shares outstanding in the second quarter of 2018 is expected to impact the year-over-year comparability of the Company’s net loss per share calculations for the next nine months.

The following table sets forth the outstanding common unit or common stock equivalents, presented based on amounts outstanding at each period end, that have been excluded from the calculation of diluted net loss per unit or share for the periods indicated because their inclusion would have been anti-dilutive (in common unit or common stock equivalent shares, as applicable):


	Three and Nine Months Ended September 30,
	2018	2017
Convertible preferred units	—	10,536,765
Incentive units	—	2,292,164
Restricted common stock	863,317	—
Warrant	7,614	7,614
Stock options	1,500,731	—
	2,371,662	12,836,543

13. Related Party Transactions

Licensing Agreement

Pursuant to a license agreement with Children’s Medical Center Corporation (‘‘CMCC’’), a holder of shares of the Company’s common stock, the Company incurred $10,000 for a CMCC annual license maintenance fee in 2017, which

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10‑Q, or the Quarterly Report, and the audited financial information and the notes thereto included in our final prospectus for our initial public offering filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, which was filed with the Securities and Exchange Commission, or the SEC, on May 24, 2018, or the Prospectus.

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods.

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report, including those risks identified under Part II, Item 1A. Risk Factors.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a biopharmaceutical company focused on the discovery and development of innovative medicines for the treatment of serious diseases in which signaling by protein growth factors plays a fundamental role. Our newly elucidated understanding of the molecular mechanisms of growth factor activation enabled us to develop a proprietary platform for the discovery and development of monoclonal antibodies that locally and selectively target these signaling proteins at the cellular level. We believe this approach, acting in the disease microenvironment, avoids the historical challenges associated with inhibiting growth factors for therapeutic effect. We believe our focus on biologically validated growth factors may facilitate a more efficient development path. We are advancing our lead product candidate, SRK‑015, a selective inhibitor of the activation of the growth factor myostatin in skeletal muscle, into clinical development for the treatment of spinal muscular atrophy, or SMA. In March 2018, we filed an Investigational New Drug application, or IND, with the U.S. Food and Drug Administration, or FDA, for SRK‑015 and initiated our Phase 1 clinical trial in May 2018. The FDA has granted orphan drug designation for SRK‑015 for the treatment of SMA. In addition, utilizing our proprietary platform, we are also creating a pipeline of novel product candidates with the potential to transform the lives of patients suffering from a wide range of serious diseases, including other neuromuscular disorders, cancer, fibrosis and anemia.

In May 2018, we completed an initial public offering, or IPO, of our common stock, and issued and sold 6,164,000 shares of common stock, including all additional shares available to cover over-allotments, at a public offering price of $14.00 per share, resulting in net proceeds of $77.8 million after deducting underwriting discounts and commissions and other offering expenses payable by us. Upon the closing of the IPO, all outstanding shares of convertible preferred stock converted into 15,109,950 shares of common stock and our outstanding warrant to purchase preferred stock converted into a warrant to purchase 7,614 shares of common stock.

Since inception, we have incurred significant operating losses. Our net losses were $10.8 million and $5.9 million for the three months ended September 30, 2018 and 2017, respectively, and $34.4 million and $16.5 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $91.9

million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. In addition, we anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

continue research and development activities for SRK‑015, our lead product candidate, which is currently in Phase 1 first-in-human clinical trial;

continue to discover, validate and develop additional product candidates including from our program focused on inhibitors of the activation of transforming growth factor beta 1, or TGFβ1;

maintain, expand and protect our intellectual property portfolio;

hire additional research, development and business personnel; and

operate as a public company.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for SRK‑015 or any of our future product candidates. In addition, if we obtain regulatory approval for SRK‑015 or any of our future product candidates and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution activities.

Financial Operations Overview

Expenses

Research and Development

Research and development expenses consist primarily of costs incurred for our research and development activities, including our product candidate discovery efforts, preclinical studies, manufacturing, and clinical trials under our research programs, which include:

employee-related expenses, including salaries, benefits and equity-based compensation expense for our research and development personnel;

costs of funding research performed by third parties that conduct research and development and preclinical activities on our behalf;

cost of manufacturing clinical supply related to SRK‑015 and any of our future product candidates;

cost of conducting clinical trials of SRK‑015 and any of our future product candidates;

consulting and professional fees related to research and development activities;

costs of purchasing laboratory supplies and non-capital equipment used in our internal research and development activities;

costs related to compliance with clinical regulatory requirements; and

facility costs and other allocated expenses, which include expenses for rent and maintenance of facilities, insurance, depreciation and other supplies.

Research and development costs are expensed as incurred. Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks. Nonrefundable advance payments for research and development goods and services to be received in the future from third parties are deferred and capitalized. The capitalized amounts are expensed as the related services are performed.

A significant portion of our research and development costs have been external costs, which we track on a program-by-program basis after a clinical product candidate has been identified. Our internal research and development costs are primarily personnel-related costs, depreciation and other indirect costs. We do not track our internal research and development expenses on a program-by-program basis as they are deployed across multiple projects.

The successful development of SRK‑015 and any future product candidates is highly uncertain. As such, 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 remainder of the development of SRK‑015 and any future product candidates. We are also unable to predict

when, if ever, material net cash inflows will commence from the sale of our product candidates, if approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:

establishing an appropriate safety profile;

successful enrollment in and completion of clinical trials;

whether our product candidates show safety and efficacy in our clinical trials;

receipt of marketing approvals from applicable regulatory authorities, if any;

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

commercializing the product candidates, if and when approved, whether alone or in collaboration with others; and

continued acceptable safety profile of the products following any regulatory approval.

A change in the outcome of any of these variables with respect to the development of SRK‑015 or any of our future product candidates would significantly change the costs and timing associated with the development of that product candidate.

Research and development activities are central to our business model. 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 expect research and development costs to increase significantly for the foreseeable future as our product candidate development programs progress. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

General and Administrative

General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and equity-based compensation expenses for personnel in executive, finance, business development, investor relations, legal, information technology and human resources functions. Other significant general and administrative expenses include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting and consulting services.

We anticipate that our general and administrative expenses will increase in the future as our business expands to support expected growth in research and development activities, including the continued development of our Phase 1 clinical program from SRK‑015 and any future clinical programs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, among other expenses. We also anticipate increased expenses associated with being a public company, including costs for audit, legal, regulatory and tax-related services, director and officer insurance premiums and investor relations costs. In addition, if we obtain regulatory approval for any of our product candidates and do not enter into a third-party commercialization collaboration, we expect to incur significant expenses related to building a sales and marketing team to support product sales, marketing and distribution activities.

Interest Income, Net

Interest income, net consists primarily of interest income earned on our cash and cash equivalents and marketable securities, net of interest expense incurred on our credit facility, including amortization of debt discount and debit issuance costs, and capital leases.

Other Expense, Net

Other expense, net consists primarily of non-cash changes in the fair value of warrants issued in connection with our credit facility.

Results of Operations

Comparison of the Three Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended September 30, 2018 and 2017 (in thousands, except percentages):


	Three Months Ended September 30,				Change
	2018		2017		$		%
Operating expenses:
Research and development	$	8,061	$	4,778	$	3,283	68.7	%
General and administrative		3,173		1,164		2,009	172.6	%
Total operating expenses		11,234		5,942		5,292	89.1	%
Loss from operations		(11,234)		(5,942)		(5,292)	89.1	%
Other income (expense):
Interest income (expense), net		472		9		463	NM	*
Other income (expense), net		—		4		(4)	NM	*
Total other income		472		13		459	NM	*
Net loss	$	(10,762)	$	(5,929)	$	(4,833)	81.5	%

* NM means not meaningful.

Research and Development

Research and development expense was $8.1 million for the three months ended September 30, 2018 compared to $4.8 million for the three months ended September 30, 2017, an increase of $3.3 million or 68.7%. The following table summarizes our research and development expense for the three months ended September 30, 2018 and 2017 (in thousands, except percentages):


	Three Months Ended September 30,				Change
	2018		2017		$		%
External costs by program
SRK-015	$	1,971	$	1,713	$	258	15.1	%
Other early development candidates and unallocated costs		1,416		424		992	234.0	%
Total external costs		3,387		2,137		1,250	58.5	%
Internal costs:
Employee compensation and benefits		3,108		1,620		1,488	91.9	%
Facility and other		1,566		1,021		545	53.4	%
Total internal costs		4,674		2,641		2,033	77.0	%
Total research and development expense	$	8,061	$	4,778	$	3,283	68.7	%

The increase in research and development expense was primarily attributable to the following:

The $1.3 million increase primarily related to increased external costs associated with our lead product candidate, SRK-015, as well as our other early development candidates. External costs include research, preclinical, clinical development and manufacturing costs;

The $2.0 million increase in internal costs primarily driven by an increase in employee compensation and benefits costs related to increased headcount in our research and development function.

General and Administrative

General and administrative expense was $3.2 million for the three months ended September 30, 2018 compared to $1.2 million for the three months ended September 30, 2017, an increase of $2.0 million or 172.6%. The increase in general and administrative expense was primarily attributable to an increase of $1.2 million in employee compensation and benefits related to increased headcount and an increase of $0.5 million in professional services and consulting fees primarily related to increases in legal fees, accounting and audit fees, and public and investor relations fees due to ongoing business activities and public company costs, such as premiums for directors and officers insurance.

Interest Income, Net

The increase in interest income, net was attributable to increased income earned on our investment portfolio, which was significantly larger during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, attributable to larger cash balances.

Comparison of the Nine Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the nine months ended September 30, 2018 and 2017 (in thousands, except percentages):


	Nine Months Ended September 30,				Change
	2018		2017		$		%
Operating expenses:
Research and development	$	26,185	$	13,057	$	13,128	100.5	%
General and administrative		8,947		3,514		5,433	154.6	%
Total operating expenses		35,132		16,571		18,561	112.0	%
Loss from operations		(35,132)		(16,571)		(18,561)	112.0	%
Other income (expense):
Interest income (expense), net		828		32		796	NM	*
Other income (expense), net		(56)		1		(57)	NM	*
Total other income		772		33		739	NM	*
Net loss	$	(34,360)	$	(16,538)	$	(17,822)	107.8	%

* NM means not meaningful.

Research and Development

Research and development expense was $26.2 million for the nine months ended September 30, 2018 compared to $13.1 million for the nine months ended September 30, 2017, an increase of $13.1 million or 100.5%. The following table summarizes our research and development expense for the nine months ended September 30, 2018 and 2017 (in thousands, except percentages):


	Nine Months Ended September 30,				Change
	2018		2017		$		%
External costs by program:
SRK-015	$	9,502	$	3,340	$	6,162	184.5	%
Other early development candidates and unallocated costs		4,647		2,142		2,505	116.9	%
Total external costs		14,149		5,482		8,667	158.1	%
Internal costs:
Employee compensation and benefits		7,803		4,605		3,198	69.4	%
Facility and other		4,233		2,970		1,263	42.5	%
Total internal costs		12,036		7,575		4,461	58.9	%
Total research and development expense	$	26,185	$	13,057	$	13,128	100.5	%

The increase in research and development expense was primarily attributable to the following:

The $8.7 million increase in external costs primarily related to increased research, and preclinical and clinical development and manufacturing costs associated with our lead product candidate, SRK‑015 and other external research costs associated with our other early development candidates;

The $4.5 million increase in internal costs primarily driven by an increase in employee compensation and benefits costs related to increased headcount in our research and development function.

General and Administrative

General and administrative expense was $8.9 million for the nine months ended September 30, 2018 compared to $3.5 million for the nine months ended September 30, 2017, an increase of $5.4 million or 154.6%. The increase in general and administrative expense was primarily attributable to an increase of $3.1 million in employee compensation and benefits due to increased headcount and an increase of $1.8 million in professional services and consulting fees primarily related to increases in legal fees, accounting and audit fees, and public and investor relations fees due to ongoing business activities and public company costs, such as premiums for directors and officers insurance.

Interest Income, Net

The increase in interest income, net was attributable to increased income earned on our investment portfolio, which was significantly larger during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, attributable to larger cash balances.

Liquidity and Capital Resources

Sources of Liquidity

The following table provides information regarding our total cash and cash equivalents and marketable securities at September 30, 2018 and December 31, 2017 (in thousands):


	September 30,		December 31,
	2018		2017
Cash and cash equivalents	$	103,986	$	56,461
Marketable securities		—		1,498
Total cash and cash equivalents and marketable securities	$	103,986	$	57,959

During the nine months ended September 30, 2018, our cash and cash equivalents balance increased approximately $46.0 million. The increase was primarily due to the net proceeds of $77.8 million from the sale of our common stock in our IPO, as further discussed below. These increases were partially offset by the cash used to operate our business, including payments related to, among other things, research and development and general and administrative expenses as we continue to invest in our primary product candidates and support our internal research and development efforts. We also made capital purchases and payments on our debt and capital leases.

In May 2018, we completed our IPO, in which we issued and sold 6,164,000 shares of common stock, including all additional shares available to cover over-allotments, resulting in net proceeds of $77.8 million after deducting underwriting discounts and commissions and other offering costs payable by us.

Prior to the IPO, we funded our operations from inception through the IPO with the net proceeds of $109.2 million from sales of our convertible preferred stock and borrowings of $2.0 million under our credit facility with SVB.

In August 2015, we entered into a credit facility with SVB for an equipment line of credit of up to $2.0 million to finance the purchase of eligible equipment. Pursuant to the credit facility, SVB was obligated to make up to five equipment advances, each in an amount of at least $100,000 during the draw period. In August 2016, we amended the credit facility to extend the draw period to December 31, 2016. We borrowed $0.7 million against the line of credit in 2015 and $1.3 million in 2016, which fulfilled the maximum credit line of $2.0 million at December 31, 2016. Amounts

borrowed bear interest at an annual prime rate less 0.25%. In the event of a default, and during such an event, the annual interest rate will increase by 5%. For each advance, interest-only payments were due and paid through June 2016. Principal and interest payments commenced on July 1, 2016 for a period of 36 months. A final payment fee equal to 4% of the aggregate advances is also due on June 1, 2019. We have the option to prepay the outstanding balance of the loan in full subject to a prepayment fee of 0.5% to 1.0%, depending on when the prepayment occurs. All borrowings under the credit facility mature on July 1, 2019. The loan balance at September 30, 2018 was $0.6 million.

We granted SVB a security interest in all equipment financed under the credit facility. The credit facility contains negative covenants restricting our activities, including limitations on dispositions, change in business ownership or location, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments and certain other business transactions.

We also issued a warrant to SVB that is currently exercisable for 7,614 shares of our common stock at an exercise price of $3.94 per share.

Cash Flows

The following table provides information regarding our cash flows for the nine months ended September 30, 2018 and 2017 (in thousands):


	Nine Months Ended September 30,
	2018		2017
Net cash used in operations	$	(30,523)	$	(15,679)
Net cash provided by investing activities		708		11,767
Net cash provided by financing activities		77,340		3,785
Net increase (decrease) in cash and cash equivalents and restricted cash	$	47,525	$	(127)

Net Cash Used in Operating Activities

The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities was $30.5 million for the nine months ended September 30, 2018 compared to $15.7 million for the nine months ended September 30, 2017. The increase in cash used in operating activities was primarily due to an increase in net loss of $17.8 million, partially offset by an increase of $2.4 million in non-cash equity-based compensation for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.

Net Cash Provided by Investing Activities

Net cash provided by investing activities was $0.7 million for the nine months ended September 30, 2018 compared to $11.8 million for the nine months ended September 30, 2017. Net cash provided by investing activities for both periods resulted from sales and maturities of our marketable securities.

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	5
Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	5
Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017	6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	7
Notes to Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24

PART II. OTHER INFORMATION
Item 1. Legal Proceedings	26
Item 1A. Risk Factors	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 3. Defaults Upon Senior Securities	71
Item 4. Mine Safety Disclosures	71
Item 5. Other Information	71
Item 6. Exhibits	71
SIGNATURES	73