Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto for the year ended December 31, 2020, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K filed with the SEC on March 30, 2021.
Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements due to various important factors, risks and uncertainties, including, but not limited to, those set forth under “Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q or under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 30, 2021, as may be updated by Part II, Item 1A, Risk Factors of our subsequently filed Quarterly Reports on Form 10-Q. We caution our readers 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 those expressed or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q.
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.
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, projected costs, prospects, plans and objectives of management, are forward-looking statements. In some cases, you can identify forward-looking statements by terms including, but not limited to, “may,” “likely,” “will,” “should,” “would,” “design,” “expect,” “seek,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions.
These forward-looking statements include, but are not limited to, statements about:
our ongoing and planned preclinical studies and clinical trials;
preclinical study data and clinical trial data and the timing of results of our ongoing clinical studies and/or trials;
our plans to seek and enter into clinical trial collaborations and other broader collaborations;
the direct and indirect impact of the COVID-19 pandemic on our business operations and financial condition, including manufacturing, research and development costs, clinical trials, regulatory processes and employee expenses; and
our estimates regarding prospects, strategies, expenses, operating capital requirements, results of operations and needs for additional financing.
Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Factors that could cause actual results or events to differ materially from the forward-looking statements that we make include, but are not limited to, the following:
We are very early in our development efforts and our product candidates may not be successful in later stage clinical trials. Results obtained in our preclinical studies and clinical trials to date are not necessarily indicative of results to be obtained in future clinical trials. As a result, our product candidates may never be approved as marketable therapeutics.
We will need additional funding to complete the development of our product candidates and before we can expect to become profitable from the sales of our products, if approved. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development programs or commercialization efforts.
We rely, and expect to continue to rely, on third parties to conduct our clinical trials and to manufacture our product candidates for preclinical and clinical testing. These third parties may not perform satisfactorily, which could delay our product development activities.
If we are unable to adequately protect our proprietary technology or obtain and maintain issued patents which are sufficient to protect our product candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.
We may not be able to retain key executives or to attract, retain and motivate key personnel. If we are unable to retain such key personnel, it could have a material adverse impact on our business and prospects.
Business interruptions resulting from COVID-19 outbreak or similar public health crises could cause a disruption of the development of our product candidates and adversely impact our business.
You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be
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materially different from what we expect. You should also read carefully the factors described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021, to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our subsequent Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, press releases, and our website. Any forward-looking statements that we make in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
Overview
F-star Therapeutics, Inc. (collectively with its subsidiaries, “F-star” or the “Company”) is a clinical-stage biopharmaceutical company dedicated to developing next generation immunotherapies to transform the lives of patients with cancer. F-star is pioneering the use of tetravalent (2+2) bispecific antibodies to create a paradigm shift in cancer therapy. The Company has four second generation immuno-oncology ("IO") therapeutics in the clinic, each directed against some of the most promising IO targets in drug development, including LAG-3 and CD137. F-star’s proprietary antibody discovery platform is protected by an extensive IP estate. F-star has over 500 granted patents and pending patent applications relating to its platform technology and associated product pipeline. The Company has attracted multiple partnerships with biopharma targeting the significant unmet needs across several disease areas, including oncology, immunology, and CNS. F-star’s goal is to offer patients better and more durable benefits than currently available immuno-oncology treatments by developing medicines that seek to block tumor immune evasion. Through our proprietary tetravalent, bispecific natural antibody (mAb²™) format, our mission is to generate highly differentiated medicines with monoclonal antibody-like manufacturability, good safety and tolerability. With four distinct binding sites in a natural human antibody format, we believe that our proprietary technology will overcome many of the challenges facing current immuno-oncology therapies, due to the strong pharmacology enabled by tetravalent bispecific binding.
Our Programs
F-star’s most advanced product candidate, FS118, is currently being evaluated in a proof-of-concept Phase 2 trial in PD-1/PD-L1 acquired resistance head and neck cancer patients. FS118 is a tetravalent mAb2 bispecific antibody targeting two receptors, PD-L1 and LAG-3, both of which are validated targets in immuno-oncology. Phase 1 data from 43 heavily pre-treated patients with advanced cancer, who have failed PD-1/PD-L1 therapy, showed that administration of FS118 was well-tolerated with no dose limiting toxicities up to 20 mg/kg. In addition, a disease control rate (“DCR”), defined as either a complete response, partial response or stable disease, of 49% was observed in 39 evaluable patients receiving dose levels of FS118 of 1mg/kg or greater. In acquired resistance patients, DCR was 59% (16 out of 27 patients) and long-term (greater than six months) disease control was observed in six of these patients. We expect to provide an update from the proof-of-concept Phase 2 trial in PD-1/PD-L1 acquired resistance head and neck cancer patients in mid-2022. Recent data from an external randomized phase 3 trial in patients with previously untreated, locally advanced or metastatic melanoma provides clinical validation for the combination of LAG-3 and PD-1 inhibition. This clinical benefit in targeting PD-1 and LAG-3 gives us reason to believe that FS118 has potential to benefit patients not only with acquired resistance, but also in preventing resistance in patients receiving PD-1 monotherapy. We are initiating a clinical trial in checkpoint inhibitor (CPI) naïve patients in biomarker enriched non-small cell lung cancer (“NSCLC”) and diffuse large B cell lymphoma (“DLBCL”) populations in second half of 2021.
F-star’s second product candidate, FS120, aims to improve checkpoint inhibitor and chemotherapy outcomes and is a mAb2 bispecific antibody that is designed to bind to and stimulate OX40 and CD137, two proteins found on the surface of T cells that both function to enhance T cell activity. F-star is developing FS120 alone and in combination with PD-1/PD-L1 therapy for the treatment of tumors where PD-1/PD-L1 products are approved, and which have co-expression of OX40 and CD137 in the tumor microenvironment. F-star initiated a Phase 1 clinical trial in patients with advanced cancers in the fourth quarter of 2020 and has completed the accelerated dose titration phase during the fourth quarter of 2021. We are continuing further dose escalation to determine an optimal dosing regimen to initiate a combination of FS120 and the PD-1 inhibitor, pembrolizumab, in 2022. Pembrolizumab will be supplied under clinical trial collaboration and supply agreement with Merck & Co..
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F-star’s third product candidate, FS222, aims to improve outcomes particularly in low PD-L1 expressing tumors and is a mAb2 bispecific antibody that is designed to target both the costimulatory CD137 and the inhibitory PD-L1 receptors, which are co-expressed in a number of tumor types. F-star initiated a Phase 1 clinical trial in patients with advanced cancers for FS222 in late 2020. We believe there is a strong rationale to combine FS222 with other anti-cancer agents, including targeted therapy and chemotherapy, and this can be done within the Phase 1 study. We expect to report an update on the current single agent dose escalation study in the fourth quarter of 2021.
SB 11285, which F-star acquired pursuant to a business combination with Spring Bank Pharmaceuticals, Inc. (“Spring Bank”), is a next generation cyclic dinucleotide STimulator of INterferon Gene (“STING”) agonist designed to improve checkpoint inhibition outcomes as an immunotherapeutic compound for the treatment of selected cancers. SB 11285 appeared to be well tolerated both alone and in combination with atezolizumab across all dose levels tested to-date, including five dose levels as monotherapy and three dose levels as a combination. Initial analysis showed that pharmacokinetics (PK) were in-line with the predicted profile for rapid cellular uptake, a characteristic of second generation STING agonists. F-star is continuing with further dose-escalation and in parallel pursuing strategic business development opportunities for SB 11285. We expect to report an update on this study in the second half of 2022.
Share Exchange Agreement
On November 20, 2020, the Company, formerly known as Spring Bank, completed a business combination (the “Transaction”) with F-star Therapeutics Limited (“F-star Ltd”) in accordance with the terms of the Share Exchange Agreement, dated July 29, 2020 (the “Exchange Agreement”), by and among the Company, F-star Ltd and certain holders of the capital stock and convertible notes of F-star Ltd (each a “Seller”, and collectively with holders of F-star Ltd securities who subsequently became parties to the Exchange Agreement, the “Sellers”). Pursuant to the Exchange Agreement, each ordinary share of F-star Ltd outstanding immediately prior to the closing of the Transaction (the “Closing”) was exchanged by the Sellers that owned such F-star Ltd shares for a number of duly authorized, validly issued, fully paid and non-assessable shares of Company common stock pursuant to an exchange ratio formula as set forth in the Exchange Agreement (the “Exchange Ratio”), rounded to the nearest whole share of Company common stock (after aggregating all fractional shares of Company common stock issuable to such Seller). Also, on November 20, 2020, in connection with, and prior to completion of, the Transaction, Spring Bank effected a 1-for-4 reverse stock split of its common stock (the “Reverse Stock Split”) and, following the completion of the Transaction, changed its name to F-star Therapeutics, Inc. Following the completion of the Transaction, the business of the Company became the business conducted by F-star, which is a clinical-stage immuno-oncology company focused on cancer treatment through its proprietary tetravalent bispecific antibody programs. Unless otherwise noted, all references to share amounts in this report reflect the Reverse Stock Split.
Under the terms of the Exchange Agreement, at the Closing, Spring Bank issued an aggregate of 4,620,618 shares of its common stock to F-star Ltd stockholders, based on an Exchange Ratio of 0.1125 shares of Spring Bank common stock for each F-star Ltd ordinary share, stock option and restricted stock unit (“RSU”) outstanding immediately prior to the Closing. The Exchange Ratio was determined through arms-length negotiations between Spring Bank and F-star Ltd pursuant to a formula set forth in the Exchange Agreement.
Pursuant to the Exchange Agreement, immediately prior to the Closing, certain investors in F-star Ltd purchased $15.0 million of F-star Ltd ordinary shares (the “Pre-Closing Financing”). These ordinary shares of F-star Ltd were then exchanged at the Closing for shares of the Company’s common stock in the Transaction at the Exchange Ratio.
Pursuant to the Exchange Agreement, all outstanding options to purchase Spring Bank common stock were accelerated immediately prior to the Closing and each outstanding option with an exercise price greater than the closing price of the stock on the Closing Date was exercised in full and all other outstanding options to purchase Company common stock were cancelled effective as of the Closing Date.
Immediately following the Reverse Stock Split and the Closing, there were approximately 4,449,559 shares of Spring Bank common stock outstanding. Following the Closing, the F-star Ltd stockholders beneficially owned approximately 53.7% of the combined company’s common stock, and the existing stockholders of Spring Bank beneficially owned approximately 46.3% of the combined company’s common stock. Concurrently with the execution of the Exchange Agreement, certain officers and directors of Spring Bank and F-star Ltd and certain
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stockholders of F-star Ltd entered into lock-up agreements, pursuant to which they agreed to certain restrictions on transfers of any shares of the Company’s common stock for the 180-day period following the Closing, other than the shares of the Company’s common stock received in exchange for ordinary shares of F-star Ltd subscribed for in the Pre-Closing Financing and pursuant to certain other limited exceptions.
In addition, at the Closing, Spring Bank, F-star Ltd, a representative of Spring Bank stockholders prior to the Closing, and Computershare Trust Company N.A., as the Rights Agent, entered into a STING Agonist Contingent Value Rights Agreement (the “STING Agonist CVR Agreement”). Pursuant to the Exchange Agreement and the STING Agonist CVR Agreement, each pre-Reverse Stock Split share of Spring Bank common stock held by stockholders as of the record date on November 19, 2020, immediately prior to the Closing, received a dividend of one contingent value right (“CVR”) (“STING Agonist CVR”), payable on a pre-Reverse Stock Split basis, entitling such holders to receive, in connection with certain transactions involving proprietary STING agonist compound designated as SB 11285 occurring on or prior to the STING Agonist CVR Expiration Date (as defined below) that resulted in aggregate Net Proceeds (as defined in the STING Agonist CVR Agreement) at least equal to the Target Payment Amount (as defined below), an aggregate amount equal to the greater of (i) 25% of the Net Proceeds received from all CVR Transactions (as defined in the STING Agonist CVR Agreement) and (ii) an aggregate amount equal to the product of $1.00 and the total number of shares of Company common stock outstanding as of such record date (not to exceed an aggregate amount of $18.0 million) (the “Target Payment Amount”).
The CVR payment obligation expires on the later of 18 months following the Closing or the one-year anniversary of the date of the final database lock of the STING clinical trial (as defined in the STING Agonist CVR Agreement) (the “STING Agonist CVR Expiration Date”). The STING Agonist CVRs are not transferable, except in certain limited circumstances, are not certificated or evidenced by any instrument, do not accrue interest and are not registered with the SEC or listed for trading on any exchange. Until the STING Agonist CVR Expiration Date, subject to certain exceptions, the Company is required to use commercially reasonable efforts to (a) complete the STING Trial and (b) pursue a CVR Transaction. The STING Agonist CVR Agreement became effective upon the Closing and, unless terminated earlier in accordance with its terms, will continue in effect until the STING Agonist CVR Expiration Date the payment or all CVR payment amounts are paid pursuant to their terms.
At the Closing, Spring Bank, F-star Ltd, a representative of Spring Bank stockholders prior to the Closing, and Computershare Trust Company N.A., as the Rights Agent, also entered into a STING Antagonist Contingent Value Rights Agreement (the “STING Antagonist CVR Agreement”). Pursuant to the Exchange Agreement and the STING Antagonist CVR Agreement, each share of common stock held by Spring Bank stockholders as of November 19, 2020, immediately prior to the Closing, received a dividend of one CVR (“STING Antagonist CVR”) entitling such holders to receive, in connection with the execution of a potential development agreement (the “Approved Development Agreement”) and certain other transactions involving proprietary STING antagonist compound occurring on or prior to the STING Antagonist CVR Expiration Date (as defined below) equal to: 80% of all net proceeds (as defined in the STING Antagonist CVR Agreement) received by the Company after the Closing pursuant to (i) the Approved Development Agreement, if any, and (ii) all CVR Transactions (as defined in the STING Antagonist CVR Agreement) entered into prior to the STING Antagonist CVR Expiration Date.
The STING Antagonist CVRs are not transferable, except in certain limited circumstances, are not certificated or evidenced by any instrument, do not accrue interest, and are not registered with the SEC or listed for trading on any exchange. Until the STING Antagonist CVR Expiration Date, subject to certain exceptions, the Company is required to use commercially reasonable efforts to (a) consummate the Approved Development Agreement, (b) to perform the terms of the Approved Development Agreement and (c) pursue CVR Transactions. The STING Antagonist CVR Agreement became effective upon the Closing and, unless terminated earlier in accordance with its terms, will continue in effect until the STING Antagonist CVR Expiration Date or all CVR payment amounts are paid pursuant to their terms. On July 8, 2021, the Company entered into a License Agreement with AstraZeneca AB (“AstraZeneca”) under which AstraZeneca will receive global rights to research, develop and commercialize next generation STING inhibitor compounds. Under the terms of the agreement, AstraZeneca is granted exclusive access to and will be responsible for all future research, development and commercialization of the STING inhibitor compounds. F-star is eligible to receive upfront and near-term payments of up to $12 million upon meeting certain milestones. In addition, F-star will be eligible for development and sales milestone payments of over $300 million, as well as single digit percentage royalty payments. Payments received by F-star are subject to a contingent value
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rights agreement (CVR 2), under which 80% will be payable to stockholders of F-star that were previously stockholders of Spring Bank prior to the business combination between F-star and Spring Bank.
The acquisition-date fair value of the CVR liability represents the future payments that are contingent upon the achievement of sale or licensing for the product candidates. The fair value of the contingent consideration acquired of $2.5 million as of December 31, 2020, and $3.5 million as of September 30, 2021, is based on the Company’s probability-weighted discounted cash flow assessment that considers probability and timing of future payments. The fair value measurement is based on significant Level 3 unobservable inputs such as the probability of achieving a sale or licensing agreement, anticipated timelines, and discount rate. Changes in the fair value of the liability will be recognized in the consolidated statement of operations and comprehensive loss until settlement. For the three months ended September 30, 2021, the estimated fair value increased to $3.5 million which resulted in a $0.4 million charge on the Consolidated Statements of Operations and Comprehensive Loss.
All issued and outstanding F-star Ltd share options granted under F-star’s three legacy equity incentive plans became exercisable in full immediately prior to the Closing. At the Closing, all issued share options and restricted stock units granted by F-star Ltd under the F-star Therapeutics Limited 2019 Equity Incentive Plan were replaced by options and awards on the same terms (including vesting), of the combined company’s common stock, based on the Exchange Ratio.
The Company’s common stock, which is listed on the Nasdaq Capital Market, traded through the close of business on Friday, November 20, 2020, under the ticker symbol “SBPH” and continued trading on the Nasdaq Capital Market, on a post-Reverse Stock Split adjusted basis, under the ticker symbol “FSTX” beginning on Monday, November 23, 2020. Commencing on November 23, 2020, the Company’s common stock was represented by a new CUSIP number, 30315R 107.
The Transaction was accounted for as a business combination using the acquisition method of accounting under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). The Transaction was accounted for as a reverse acquisition with F-star Ltd being deemed the acquiring company for accounting purposes. Under ASC 805, F-star Ltd as the accounting acquirer, recorded the assets acquired and liabilities assumed of Spring Bank in the Transaction at their fair values as of the acquisition date.
F-star Ltd was determined to be the accounting acquirer based on an analysis of the criteria outlined in ASC 805 and the facts and circumstances specific to the Transaction, including the fact that immediately following the Transaction: (1) F-star Ltd shareholders owned the majority of the voting rights of the combined company; (2) F-star Ltd designated a majority (five of eight) of the initial members of the board of directors of the combined company; and (3) F-star Ltd senior management held the key positions in senior management of the combined company. As a result, upon consummation of the Transaction, the historical financial statements of F-star Ltd became the historical financial statements of the combined organization.
Impact of COVID-19 on our Business
We continue to closely monitor the impact of the COVID-19 pandemic, including the emergence and spread of variants of COVID-19, on all aspects on our business, including how the pandemic continues to impact our employees, clinical trials, development programs, manufacturing supply, and other aspects of our operations. Overall, the global pandemic and consequent restrictions have resulted in a three to six-month delay in the operationalization of some aspects of our research and development operations. Specifically, by the way of example, patient enrollment in our FS118 Phase 2 trial has been somewhat slower than anticipated as a result of limited clinical trial staffing at certain study sites combined with some investigative sites inability to support remote site monitoring. While the COVID-19 pandemic did not have a material adverse effect on our reported results for the nine months ended September 30, 2021, we are unable to predict the ultimate impact that the pandemic may have on our business, future results of operations, financial position, or cash flows. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak, including the emergence and spread of variants of COVID-19, such as the delta variant, and actions by government authorities to contain the outbreak.
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Recent Developments
Subsequent Events
On October 19, 2021, the Company entered into a License and Collaboration Agreement with Janssen Biotech, Inc., one of the Janssen Pharmaceutical Companies of Johnson & Johnson (“Janssen”). The agreement was facilitated by Johnson & Johnson Innovation. Under the terms of the agreement, F-star has granted Janssen a worldwide, exclusive royalty-bearing license to research, develop, and commercialize up to five novel bispecific antibodies directed to Janssen therapeutic targets using F-star’s proprietary Fcab™ and mAb2™ platforms. Janssen will be responsible for all research, development and commercialization activities under the agreement. Under the terms of the agreement, F-star is entitled to receive upfront fees of $17.5 million with total potential income of up to $1.35 billion. F-star is also eligible to receive potential tiered mid-single digit royalties on annual net sales.
Components of Operating Results
License revenue
To date, we have not generated any revenue from product sales, and we do not expect to generate any revenue from product sales for the foreseeable future. Our revenue consists of collaboration revenue under our license and collaboration agreements with Ares Trading S.A. (“Ares”), Denali Therapeutics, Inc. (“Denali”) and AstraZeneca, including amounts that are recognized related to upfront payments, milestone payments, option exercise payments, and amounts due to us for research and development services. In the future, revenue may include new collaboration agreements, additional milestone payments, option exercise payments, and royalties on any net product sales under our collaborations. We expect that any revenue we generate will fluctuate from period to period as a result of the timing and amount of license, research and development services, and milestone and other payments.
Operating Expenses
Research and development costs
Research and development costs are expensed as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries, share-based compensation and benefits, facilities costs and laboratory supplies, depreciation, amortization and impairment expense, manufacturing expenses and external costs of outside vendors engaged to conduct preclinical development activities and clinical trials as well as the cost of licensing technology. Typically, upfront payments and milestone payments made for the licensing of technology are expensed as research and development in the period in which they are incurred, except for payments relating for intellectual property rights with future alternative use which will be expensed when the intellectual property is in use. Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.
Those expenses associated with R&D and clinical costs primarily include:
expenses incurred under agreements with contract research organizations (“CROs”) as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;
manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial materials;
expenses incurred for outsourced professional scientific development services;
costs for laboratory materials and supplies used to support our research activities;
allocated facilities costs, depreciation, and other expenses, which include rent and utilities;
up-front, milestone and management fees for maintaining licenses under our third-party licensing agreements; and
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The Company recognizes external R&D costs based on an evaluation of the progress to completion of specific tasks using information provided to it by its internal program managers and service providers.
Research and development activities are central to the Company’s business models. 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. As a result, the Company expects that research and development expenses will increase over the next several years as the Company increases personnel costs, initiate and conduct additional clinical trials and prepare regulatory filings related to the various product candidates.
The successful development of our 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 these product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing products, including the uncertainty of:
research and development support of our product candidates, including conducting future clinical trials of FS118, FS120, FS222 and SB 11285;
progressing the clinical development of FS118, FS120, FS222 and SB11285;
establishing an appropriate safety profile with investigational new drug-enabling studies to advance our programs into clinical development;
identifying new product candidates to add to our development pipeline;
successful enrollment in, and the initiation and completion of clinical trials;
the timing, receipt and terms of any marketing approvals from applicable regulatory authorities;
commercializing the product candidates, if and when approved, whether alone or in collaboration with others;
establishing commercial manufacturing capabilities or making arrangements with third party manufacturers;
the development and timely delivery of commercial-grade drug formulations that can be used in our clinical trials;
addressing any competing technological and market developments, as well as any changes in governmental regulations;
negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter and performing our obligations under such arrangements;
maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how, as well as obtaining and maintaining regulatory exclusivity for our product candidates;
continued acceptable safety profile of the drugs following approval; and
attracting, hiring, and retaining appropriately qualified personnel.
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, the U.S. Food and Drug Administration, European Medicines Agency or another regulatory authority may require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or we may experience significant trial delays due to patient enrolment or other reasons, in which case we would be required to expend significant additional financial resources and time on the completion of clinical development. In addition, we may obtain unexpected results from our clinical trials, and we may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and
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uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success.
In September 2021, the Company identified an error in its accounting treatment for research and development expenses. This error resulted in an overstatement of research and development expenses for the first six months of 2021 and accrued expenses and other current liabilities as of March 31, 2021 and June 30, 2021. The Company assessed the materiality of this error on prior period financial statements in accordance with the SEC Staff Accounting Bulletin Number 99, Materiality, and ASC 250-10, Accounting Changes and Error Corrections. The Company determined that this error was not material to the financial statements of any prior interim period. To correct the immaterial misstatement, the Company decreased accumulated deficit by $0.3 million as of June 30, 2021.
General and administrative expenses
General and administrative expenses consist primarily of salaries, related benefits, travel, and share-based compensation expense for personnel in executive, finance, legal and administrative functions. General and administrative expenses also include facility-related costs, patent filing and prosecution costs, insurance and marketing costs and professional fees for legal, consulting, accounting, audit, tax services and costs associated with being a public company. Other expense also includes foreign currency transaction losses. The Company expects that general and administrative expenses will increase in the future as the Company expands its operating activities and incurs costs of being a US public company.
Other income and expenses, net
Other income and expenses, net, is primarily rent received from subletting an office in the United States and interest received on overdue trade receivable balances, bank interest received, and interest expense, which is primarily bank interest payable and similar charges, the interest liability on leased assets and convertible debt notes, changes in the fair value of CVR and foreign exchange losses incurred. Foreign exchange gain (loss) is foreign exchange gains or losses due to the fluctuation of the GBP, U.S. dollar and/or the Euro. Change in the fair value of convertible debt is the fair value adjustment of the convertible notes as measured using level 3 inputs which was converted on November 20, 2020, with the transaction with Spring Bank.
Income tax
The Company is subject to corporate taxation in the United States, United Kingdom and Austria.
Our UK established entities have generated losses and some profits in the United Kingdom since inception and have therefore not paid significant UK corporation tax. Our Austrian subsidiary has historical losses in Austria with more recent profits, which has resulted in payment of Austrian corporation tax in the years ended December 31, 2020, and 2019. The corporation tax benefit (tax) presented in the Company’s statements of comprehensive income (loss) represents the tax impact from its operating activities in the United States, United Kingdom and Austria, which have generated taxable income in certain periods. As the entities located in the United Kingdom carry out extensive research and development activities, they seek to benefit from the UK research and development tax credit cash rebate regime known as the Small and Medium-sized Enterprises R&D Tax Credit Program (the “SME Program”). Qualifying expenditures largely comprise employment costs for research staff, consumables expenses incurred under agreements with third parties that conduct research and development, preclinical activities, clinical activities and manufacturing on the Company’s behalf and certain internal overhead costs incurred as part of research projects.
The tax credit received in the United Kingdom pursuant to the SME Program permits companies to deduct an extra 130% of their qualifying costs from their yearly profit or loss, as well as the normal 100% deduction, to make a total 230% deduction. If the company is incurring losses, it is entitled to claim a tax credit worth up to 14.5% of the surrenderable loss. To qualify for relief under the SME Program, companies are required to employ fewer than 500 staff and have a turnover of under €100.0 million or a balance sheet total of less than €86.0 million.
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Research and development tax credits received in the United Kingdom are recorded as a reduction in research and development expenses. The UK research and development tax credit is payable to companies after surrendering tax losses and is not dependent on current or future taxable income. As a result, it is not reflected as part of the income tax provision.
During the nine months ended September 30, 2021 the Company received $3.4 million in research and development tax credits related to the year ended December 31, 2020.
Income tax expense was not material for the three and nine months ended September 30, 2021.
Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a predetermined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses include fees paid to:
CROs in connection with performing research services on our behalf and clinical trials;
investigative sites or other providers in connection with clinical trials;
vendors in connection with preclinical and clinical development activities; and
vendors related to product manufacturing, development and distribution of preclinical and clinical supplies and material.
We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.
Contingent value rights
The acquisition-date fair value of the CVR liability represents the future payments that are contingent upon the achievement of sale or licensing for the STING product candidates. The fair value of the contingent value rights is based on the Company’s probability-weighted discounted cash flow assessment that considers probability and timing of future payments. The fair value measurement is based on significant Level 3 unobservable inputs such as the probability of achieving a sale or licensing agreement, anticipated timelines, and discount rate. Changes in the fair value of the liability will be recognized in the consolidated statement of operations and comprehensive loss until settlement.
33
Share-based compensation
The Company accounts for share-based compensation in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”). ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s consolidated statements of operations and comprehensive loss.
The Company records the expense for option awards using a graded vesting method. The Company accounts for forfeitures as they occur. For share-based awards granted to non-employee consultants, the measurement date is the date of grant. The compensation expense is then recognized over the requisite service period, which is the vesting period of the respective award.
The fair value of stock options (“options”) on the grant date is determined utilizing the Black-Scholes option-pricing model using the single-option approach. The Black-Scholes option pricing model requires the use of highly subjective and complex assumptions, including an option’s expected term and the price volatility of the underlying stock, to determine the fair value of the award.
The Company classifies share-based compensation expense in its consolidated statements of operations and comprehensive loss Income in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.
Results of Operations
Comparison of the three months ended September 30, 2021 and 2020
The table below summarizes our results of operations for the three months ended September 30, 2021 and 2020 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
(in thousands)
|
|
|
Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
License revenue
|
|
$
|
751
|
|
|
$
|
9,195
|
|
|
$
|
(8,444
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,113
|
|
|
|
5,321
|
|
|
|
(208
|
)
|
|
General and administrative
|
|
|
5,239
|
|
|
|
7,261
|
|
|
|
(2,022
|
)
|
|
Total operating expenses
|
|
$
|
10,352
|
|
|
$
|
12,582
|
|
|
$
|
(2,230
|
)
|
|
Loss from operations
|
|
|
(9,601
|
)
|
|
|
(3,387
|
)
|
|
|
(6,214
|
)
|
|
Other non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(746
|
)
|
|
|
506
|
|
|
|
(1,252
|
)
|
|
Change in fair value of convertible notes
|
|
|
—
|
|
|
|
(446
|
)
|
|
|
446
|
|
|
Change in fair value of liability
|
|
|
(444
|
)
|
|
|
—
|
|
|
|
(444
|
)
|
|
Loss before income taxes
|
|
|
(10,791
|
)
|
|
|
(3,327
|
)
|
|
|
(7,464
|
)
|
|
(Loss) benefit for income taxes
|
|
|
—
|
|
|
|
(124
|
)
|
|
|
124
|
|
|
Net loss
|
|
$
|
(10,791
|
)
|
|
$
|
(3,451
|
)
|
|
$
|
(7,340
|
)
|
Licensing and Research & Development Services Revenue
Revenue for the three months ended September 30, 2021 was $0.8 million compared to $9.2 million for the three months ended September 30, 2020, a decrease of approximately $8.4 million. This $8.4 million decrease is due primarily to a reduction of $7.7 million of licensing revenue and a $0.7 million reduction in R&D services revenue.
Research and development costs
Total Research and development expenses were $5.1 million for the three months ended September 30, 2021, as compared to $5.3 million for the prior year's third quarter. This $0.2 million decrease for the three months ended September 30, 2021, was due to an increase in clinical CRO costs of $1.6 million, due to a full quarter of Phase 1
34
clinical trial costs for FS120 and FS222 and SB11285 in 2021, a $0.9 million increase in R&D staff related costs, and $0.3 million in lab consumables, all offset by a $2.3 million reduction in the UK R&D tax credit, and decreases in manufacturing costs of $0.4 million and other allocated costs of $0.3 million.
General and administrative expense
General and administrative expense for the three months ended September 30, 2021, decreased by approximately $2.0 million over the prior comparable quarter, primarily due to a decrease in legal and professional costs of $2.6 million, due to costs incurred in the comparative period in preparation for the share exchange transaction with Spring Bank, and a decrease in staff costs of $0.6 million, offset by increases in insurance costs of $0.5 million, rent and repairs of $0.5 million, primarily due to the leased buildings acquired in the Spring Bank transaction, and other administrative costs of $0.2 million.
Other income (expenses)
Other income (expense) for the three months ended September 30, 2021, consisted primarily of rental income of $0.2 million offset by foreign exchange losses of $0.6 million and interest expense on the term debt of $0.3 million. In addition, there was a loss of $0.4 million for the change in fair value of the CVR liability.
For the three months ended September 30, 2020, the total expense of $0.5 million consisted of other income of $0.8 million of foreign currency gains offset by $0.3 million of interest related to the convertible notes.
A gain of $0.4 million was recorded in relation to a fair value adjustment for the convertible notes.
Comparison of the nine months ended September 30, 2021 and 2020
The table below summarizes our results of operations for the nine months ended September 30, 2021 and 2020 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
(in thousands)
|
|
|
Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
License revenue
|
|
$
|
3,668
|
|
|
$
|
11,093
|
|
|
$
|
(7,425
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
20,536
|
|
|
|
10,695
|
|
|
|
9,841
|
|
|
General and administrative
|
|
|
18,169
|
|
|
|
13,805
|
|
|
|
4,364
|
|
|
Total operating expenses
|
|
$
|
38,705
|
|
|
$
|
24,500
|
|
|
$
|
14,205
|
|
|
Loss from operations
|
|
|
(35,037
|
)
|
|
|
(13,407
|
)
|
|
|
(21,630
|
)
|
|
Other non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
230
|
|
|
|
(1,164
|
)
|
|
|
1,394
|
|
|
Change in fair value of convertible notes
|
|
|
—
|
|
|
|
(2,330
|
)
|
|
|
2,330
|
|
|
Change in fair value of liability
|
|
|
(1,027
|
)
|
|
|
—
|
|
|
|
(1,027
|
)
|
|
Loss before income taxes
|
|
|
(35,834
|
)
|
|
|
(16,901
|
)
|
|
|
(18,933
|
)
|
|
(Loss) benefit for income taxes
|
|
|
(190
|
)
|
|
|
(171
|
)
|
|
|
(19
|
)
|
|
Net loss
|
|
$
|
(36,024
|
)
|
|
$
|
(17,072
|
)
|
|
$
|
(18,952
|
)
|
Licensing and Research & Development Services Revenue
Revenue for the nine months ended September 30, 2021, was $3.7 million compared with $11.1 million for the nine months ended September 30, 2020, a decrease of $7.4 million.
Revenue from contracts with Ares decreased by $7.1 million due to a reduction in licensing revenue and R&D services revenue.
35
In addition, there was a $1.0 million decrease relating to licensing and R&D services revenue with Denali. All performance obligations relating to this Denali contract were satisfied in February 2021.
These were offset by $0.5 million in revenue related to the license agreement with AstraZeneca executed in July 2021 and $0.2 million in other revenue.
Research and development costs
Costs related to research and development for the nine months ended September 30, 2021 was $20.5 million, an increase of approximately $9.8 million, compared to $10.7 million for the nine months ended September 30, 2020.
This $9.8 million increase for the nine months ended September 30, 2021, was primarily due to increases in clinical CRO and clinical assay costs of $4.7 million, due to a full nine months of Phase 1 clinical trial costs for FS120 and FS222 and SB11285, a $3.0 million increase in manufacturing costs, $0.9 million in R&D staff costs, $0.8 million in share-based compensation expense, $0.5 million in laboratory consumables, and a $0.4 million decrease in the UK R&D tax incentive credit (which is recorded as a credit against R&D expenditure), offset by a decrease of $0.3 million in allocated costs and a decrease in other R&D costs of $0.2 million, due to the timing of other project-related activities.
General and administrative expense
General and administrative expense for the nine months ended September 30, 2021 was $18.2 million, an increase of approximately $4.4 million, compared to $13.8 million for the nine months ended September 30, 2020.This increase was primarily due to $2.5 million in share-based compensation expense, $1.5 million in insurance and other costs of being a public company, $0.4 million in legal and professional fees, $0.3 million in IT costs and $0.6 million in rent and repairs, primarily related to the leased buildings acquired in the Spring Bank transaction. These increases were offset by a decrease in staff costs of $0.9 million.
Other income (expenses)
Other income for the nine months ended September 30, 2021 of $0.2 million consisted of $0.5 million of other income relating to sub-lease rental income, a foreign exchange gain of $0.2 million, offset by interest payable on the term debt facility of $0.5 million.
In addition, there was an expense of $1.0 million for the change in fair value of the CVR.
For the nine months ended September 30, 2020, other expense of $1.2 million consisted of foreign currency losses of $0.9 million, interest expense of $0.8 million in relation to the convertible debt, offset by other income of $0.5 million from the UK government Coronavirus Job Retention Scheme, for staff that were furloughed in the first half of 2020.
In addition, a fair value adjustment in respect of the convertible debt of $2.3 million was recorded.
Liquidity and Capital Resources
Sources of liquidity
From our inception through September 30, 2021, we have not generated any revenue from product sales, and we have incurred significant operating losses and negative cash flows from our operations. We do not expect to generate significant revenue from sales of any products for several years, if at all.
As of September 30, 2021, the Company had an accumulated deficit of $83.2 million, cash of $71.1 million and working capital of $67.3 million. The future success of the Company is dependent on its ability to successfully obtain additional working capital, obtain regulatory approval for and successfully launch and commercialize its product candidates and to ultimately attain profitable operations. As of November 10, 2021 the Company’s cash and
36
cash equivalents on hand will be sufficient to fund its current operating plan and planned capital expenditures for at least the next 12 months.
Historically, we have financed our operations with proceeds from the sale and issuance of equity securities, proceeds from the issuance of notes payable and proceeds received in connection with our collaboration arrangements and for providing research and development services. We expect this historical financing trend to continue if and until we are able obtain regulatory approval for and successfully commercialize one or more of our drug candidates, although there can be no assurance that we will obtain regulatory approval or successfully commercialize any of our current or planned future product candidates.
On March 30, 2021, the Company entered into a Sales Agreement with SVB Leerink LLC ("SVB Leerink") with respect to an at-the-market offering program under which the Company could offer and sell, from time to time in its sole discretion, shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $50.0 million through SVB Leerink as its sales agent. As of May 6, 2021, the Company had issued and sold 979,843 shares, for gross proceeds of $9.5 million, resulting in net proceeds of $9.2 million after deducting sales commissions. On May 6, 2021, the Company terminated the Sales Agreement.
On August 13, 2021, the Company entered into a new Sales Agreement (the “2021 Sales Agreement”) with SVB Leerink with respect to an at-the-market offering program under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock having an aggregate offering price of up to $50.0 million through SVB Leerink as its sales agent. As of September 30, 2021 Company had not offered or sold any common stock under the 2021 Sales Agreement.
On May 6, 2021, the Company entered into an underwriting agreement with SVB Leerink, as representative of the underwriters, relating to an underwritten public offering of 10.4 million shares of the Company’s common stock, par value $0.0001 per share. The underwritten public offering resulted in gross proceeds of $73.1 million. The Company incurred $4.4 million in issuance costs and $0.5 million of professional fees associated with the underwritten public offering, resulting in net proceeds to the Company of $68.2 million.
On April 1, 2021, the Company, as borrower, entered into the Loan and Security Agreement with Horizon, as lender and collateral agent for itself. The Loan and Security Agreement provides for four (4) separate and independent $2.5 million term loans (Loan A, Loan B, Loan C, and Loan D), whereby, upon the satisfaction of all the conditions to the funding of the Term Loans, each Term Loan will be delivered by Horizon to the Company in the following manner: (i) Loan A was delivered by Horizon to the Company by April 1, 2021, (ii) Loan B was delivered by Horizon to the Company by April 1, 2021, (iii) Loan C was delivered by Horizon to the Company by June 30, 2021, and (iv) Loan D was delivered by Horizon to the Company by June 30, 2021. The Company may only use the proceeds of the Term Loans for working capital or general corporate purposes as contemplated by the Loan and Security Agreement. On April 1, 2021, the Company drew down $5 million. On June 22, 2021, the Company drew down another $5 million under this facility.