November 8, 2019 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

☐	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: 001-38662

SUTRO BIOPHARMA, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	47-0926186
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

310 Utah Avenue, Suite 150 South San Francisco, California	94080
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (650) 392-8412

Not Applicable:

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol		Name of each exchange on which registered
Common stock, $0.001 par value		STRO		Nasdaq Global Market

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 ☒

As of November 4, 2019, the registrant had 23,090,150 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Condensed Balance Sheets	1
	Condensed Statements of Operations	2
	Condensed Statements of Comprehensive Loss	3
	Condensed Statements of Stockholders’ (Deficit) Equity	4
	Condensed Statements of Cash Flows	5
	Notes to Unaudited Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 3.	Defaults Upon Senior Securities	75
Item 4.	Mine Safety Disclosures	75
Item 5.	Other Information	75
Item 6.	Exhibits	76
Signatures		77

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Sutro Biopharma, Inc.

Condensed Balance Sheets

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2019			2018
	(Unaudited)			(See Note 2)
Assets
Current assets:
Cash and cash equivalents	$	11,954		$	125,298
Marketable securities—current		113,209			79,194
Accounts receivable, net (including amounts from related parties of $2,059 and $959 as of September 30, 2019 and December 31, 2018, respectively)		7,531			2,489
Prepaid expenses and other current assets		2,873			2,965
Total current assets		135,567			209,946
Property and equipment, net		8,522			10,934
Marketable securities, non—current		25,223			–
Other long-term assets		2,351			2,244
Restricted cash		15			15
Total assets	$	171,678		$	223,139
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,549		$	3,061
Accrued compensation		4,628			6,217
Deferred revenue—current		20,250			21,574
Debt—current		5,843			4,724
Other current liabilities		589			847
Total current liabilities		35,859			36,423
Deferred revenue, non—current		19,849			44,599
Deferred rent		435			476
Debt—non-current		5,500			10,000
Other noncurrent liabilities		129			102
Total liabilities		61,772			91,600
Stockholders’ equity:
Common stock, $0.001 par value — 300,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 23,090,002 and 22,848,184 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		23			23
Additional paid-in-capital		290,616			281,891
Accumulated other comprehensive gain (loss)		223			(47	)
Accumulated deficit		(180,956	)		(150,328	)
Total stockholders’ equity		109,906			131,539
Total liabilities and stockholders’ equity	$	171,678		$	223,139

See accompanying notes to unaudited interim condensed financial statements.

Sutro Biopharma, Inc.

Condensed Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Revenues (including amounts from related parties of $6,274 and $16,687 during the three and nine months ended September 30, 2019, respectively, and $6,086 and $13,907 during the three and nine months ended September 30, 2018, respectively)	$	12,277		$	7,836		$	31,431		$	19,333
Operating expenses
Research and development		16,897			12,642			48,220			39,475
General and administrative		8,115			5,351			23,897			13,806
Total operating expenses		25,012			17,993			72,117			53,281
Loss from operations		(12,735	)		(10,157	)		(40,686	)		(33,948	)
Interest income		964			403			3,264			483
Interest and other expense, net		(1,141	)		(483	)		(3,533	)		(359	)
Net loss	$	(12,912	)	$	(10,237	)	$	(40,955	)	$	(33,824	)
Net loss per share, attributable to common stockholders, basic and diluted	$	(0.56	)	$	(21.26	)	$	(1.79	)	$	(71.06	)
Weighted-average shares used in computing net loss per share attributable to common stockholders		22,946,989			481,613			22,913,118			476,023

See accompanying notes to unaudited interim condensed financial statements.

Sutro Biopharma, Inc.

Condensed Statements of Comprehensive Loss

(Unaudited)

(In thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net loss	$	(12,912	)	$	(10,237	)	$	(40,955	)	$	(33,824	)
Other comprehensive income (net of tax):
Unrealized gain/(loss) on available-for-sale securities		10			(27	)		270			(27	)
Comprehensive loss	$	(12,902	)	$	(10,264	)	$	(40,685	)	$	(33,851	)

See accompanying notes to unaudited interim condensed financial statements.

Sutro Biopharma, Inc.

Condensed Statements of Stockholders’ (Deficit) Equity

(Unaudited)

(In thousands, except share amounts)

									Accumulated
						Additional			Other						Total
	Common Stock					Paid-In-			Comprehensive			Accumulated			Stockholders’
	Shares			Amount		Capital			Income (Loss)			Deficit			(Deficit) Equity
Balances at December 31, 2018		22,848,184		$	23	$	281,891		$	(47	)	$	(150,328	)	$	131,539
Exercise of common stock options		8,347			—		42			—			—			42
Issuance of common stock under Employee Stock Purchase Plan		68,910			—		671			—			—			671
Stock-based compensation expense		—			—		2,286			—			—			2,286
Net unrealized gain on available-for- sale securities		—			—		—			103			—			103
Adoption of new accounting standards													10,327			10,327
Net loss		—			—		—			—			(14,250	)		(14,250	)
Balances at March 31, 2019		22,925,441		$	23	$	284,890		$	56		$	(154,251	)	$	130,718
Exercise of common stock options		1,762			—		10			—			—			10
Stock-based compensation expense		—			—		2,463			—			—			2,463
Net unrealized gain on available-for- sale securities		—			—		—			157			—			157
Net loss		—			—		—			—			(13,793	)		(13,793	)
Balances at June 30, 2019		22,927,203		$	23	$	287,363		$	213		$	(168,044	)	$	119,555
Exercise of common stock options		16,128			—		81			—			—			81
Issuance of common stock under Employee Stock Purchase Plan		63,029			—		589			—			—			589
Vesting of restricted stock units		114,103			—		—			—			—			—
Stock transaction associated with taxes withheld on restricted stock units		(30,461	)		—		(297	)		—			—			(297	)
Stock-based compensation expense		—			—		2,880			—			—			2,880
Net unrealized gain on available-for- sale securities		—			—		—			10			—			10
Net loss		—			—		—			—			(12,912	)		(12,912	)
Balances at September 30, 2019		23,090,002		$	23	$	290,616		$	223		$	(180,956	)	$	109,906

									Note						Accumulated
	Redeemable Convertible								Receivable			Additional			Other						Total
	Preferred Stock				Common Stock				from			Paid-In-			Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Stockholder			Capital			Loss			Deficit			(Deficit) Equity
Balances at December 31, 2017		173,750,421	$	102,505		465,330	$	—	$	(208	)	$	6,218		$	—		$	(115,011	)	$	(109,001	)
Exercise of common stock options		—		—		6,619		—		—			38			—			—			38
Stock-based compensation expense		—		—		—		—		—			249			—			—			249
Vesting of early exercised shares		—		—		—		—		—			14			—			—			14
Net loss		—		—		—		—		—			—			—			(12,046	)		(12,046	)
Balances at March 31, 2018		173,750,421	$	102,505		471,949	$	—	$	(208	)	$	6,519		$	—		$	(127,057	)	$	(120,746	)
Issuance of Series E redeemable convertible preferred stock, net of issuance costs of $168		—		33,215		—		—		—			—			—			—			—
Exercise of common stock options		—		—		7,428		—		—			36			—			—			36
Stock-based compensation expense		—		—		—		—		—			232			—			—			232
Net loss		—		—		—		—		—			—			—			(11,541	)		(11,541	)
Balances at June 30, 2018		173,750,421	$	135,720		479,377	$	—	$	(208	)	$	6,787		$	—		$	(138,598	)	$	(132,019	)
Issuance of Series E redeemable convertible preferred stock, net of issuance costs of $476		319,865,282		51,526		—		—		—			—			—			—			—
Exercise of common stock options and warrants		—		—		5,720		—		—			322			—			—			322
Stock-based compensation expense		—		—		—		—		—			321			—			—			321
Vesting of early exercised shares		—		—		—		—		—			(2	)		—			—			(2	)
Payment of note receivable by stockholder		—		—		—		—		208			—			—			—			208
Net unrealized loss on available-for- sale securities		—		—		—		—		—			—			(27	)		—			(27	)
Net loss		—		—		—		—		—			—			—			(10,237	)		(10,237	)
Balances at September 30, 2018		493,615,703	$	187,246		485,097	$	—	$	—		$	7,428		$	(27	)	$	(148,835	)	$	(141,434	)

See accompanying notes to unaudited interim condensed financial statements.

Sutro Biopharma, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine Months Ended
	September 30,
	2019			2018
Operating activities
Net loss	$	(40,955	)	$	(33,824	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		3,560			3,404
Accretion of discount on marketable securities		(1,328	)		(166	)
Stock-based compensation		7,629			802
Change in estimated fair value of the liability attributable to a research, development and commercialization agreement		(119	)		–
Revaluation of redeemable convertible preferred stock warrant liability		–			(839	)
Loss on disposal of property and equipment		295			35
Other		82			307
Changes in operating assets and liabilities:
Accounts receivable		(5,042	)		(819	)
Prepaid expenses and other assets		92			(901	)
Accounts payable		1,477			(135	)
Accrued compensation		(1,589	)		446
Other liabilities		(180	)		1,097
Deferred rent		(42	)		45
Deferred revenue		(15,747	)		49,166
Net cash (used in) provided by operating activities		(51,867	)		18,618
Investing activities
Purchases of marketable securities		(191,717	)		(81,456	)
Maturities of marketable securities		114,076			–
Sales of marketable securities		20,000			–
Purchases of property and equipment		(1,432	)		(759	)
Net cash used in investing activities		(59,073	)		(82,215	)
Financing activities
Payment of deferred offering costs		–			(2,413	)
Payments of debt		(3,500	)		–
Proceeds from payment of note receivable by stockholder		–			208
Proceeds from exercise of common stock options and warrants		133			396
Taxes paid related to net share settlement of restricted stock units		(297	)		–
Proceeds from employee stock purchase plan		1,260
Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs		–			84,739
Net cash (used in) provided by financing activities		(2,404	)		82,930
Net (decrease) increase in cash, cash equivalents and restricted cash		(113,344	)		19,333
Cash, cash equivalents and restricted cash at beginning of period		125,313			22,035
Cash, cash equivalents and restricted cash at end of period	$	11,969		$	41,368
Supplemental disclosure of cash flow information:
Cash paid for interest	$	898		$	942
Supplemental disclosure of non-cash investing and financing information:
Purchase of property and equipment included in accounts payable	$	11		$	610
Deferred initial public offering costs included in accounts payable	$	–		$	1,659
Embedded interest associated with program fees	$	2,477		$	–

See accompanying notes to unaudited interim condensed financial statements.

Sutro Biopharma, Inc.

Notes to Unaudited Interim Condensed Financial Statements

1. Organization and Principal Activities

Description of Business

Sutro Biopharma, Inc. (the “Company”) is a clinical stage drug discovery, development and manufacturing company focused on leveraging its integrated cell-free protein synthesis and site-specific conjugation platform, XpressCF+™, to create a broad variety of optimally designed, next-generation protein therapeutics for cancer and autoimmune disorders. The Company was incorporated on April 21, 2003 and is headquartered in South San Francisco, California.

The Company operates in one business segment, the development of biopharmaceutical products.

Liquidity

The Company has incurred significant losses and has negative cash flows from operations. As of September 30, 2019, there was an accumulated deficit of $181.0 million. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities and costs to operate as a public company.

As of September 30, 2019, the Company had unrestricted cash, cash equivalents and marketable securities of $150.4 million, which are available to fund future operations. The Company will need to raise additional capital to support the completion of its research and development activities and its operations.

The Company believes that its unrestricted cash, cash equivalents and marketable securities as of September 30, 2019 will be sufficient for the Company to continue as a going concern for at least one year from the issuance date of its unaudited interim condensed financial statements.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying interim condensed financial statements of the Company are unaudited. These interim condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2018 condensed balance sheet was derived from the audited financial statements as of that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company bases its estimates on historical experience and market-specific or other relevant assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amount of expenses and income reported for each of the periods presented are affected by estimates and assumptions, which are used for, but are not limited to, determining research and development periods under multiple element arrangements, stock-based compensation expense, fair value of redeemable convertible preferred stock warrant liabilities (prior to closing of the Company’s IPO), income taxes and certain accrued liabilities. Actual results could differ from such estimates or assumptions.

The accompanying unaudited interim condensed financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to state fairly the Company's financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods. The interim results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or for any other future annual or interim period.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's audited financial statements included in the Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the year ended December 31, 2018.

Adoption of New Accounting Principles

Revenue Recognition

On January 1, 2019, the Company adopted Accounting Standards Update (ASU) No. 2014-09 (Topic 606), Revenue from Contracts with Customers (“ASC 606”). ASC 606 supersedes the guidance in ASC 605, Revenue Recognition. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

Upon adoption of ASC 606, the Company used the practical expedients to analyze only those contracts that were still active contracts as of January 1, 2019 and evaluated those contracts based on the cumulative contract modifications through that date. The Company does not believe that the use of the practical expedients has or will have a material impact on its transition adjustment or its prospective accounting. The Company adopted ASC 606 on a modified retrospective basis under which it recognized the cumulative effect of adoption of $10.3 million as a transition adjustment to reduce opening accumulated deficit; therefore, the periods prior to the adoption date of ASC 606 have not been restated. If the Company had continued to use ASC 605 during 2019, revenue would have been $12.7 million and $31.8 million in the three and nine months ended September 30, 2019, respectively, as compared to the $12.3 million and $31.4 million reported in the three and nine months ended September 30, 2019, respectively.

The impact of the adoption of Topic 606 on select unaudited condensed balance sheet as of January 1, 2019 was as follows (in thousands):

	December 31, 2018		Adjustments Due to the Adoption of Topic 606 Increase/(Decrease)			January 1, 2019
	(in thousands)
Condensed Balance Sheet Data
Accounts receivable, net	$	2,489	$	–		$	2,489
Total current assets		209,946		–			209,946
Deferred revenue, current		21,574		(2,124	)		19,450
Deferred revenue, non-current		44,599

Form: 10-Q

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