F-star Therapeutics, Inc. - Quarter Report: 2021 March (Form 10-Q)

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This Quarterly Report on Form 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 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.

You should read this Quarterly Report on Form and the documents that we have filed as exhibits to this Quarterly Report on Form completely and with the understanding that our actual future results may be 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 Current Reports on Form press releases, and our website. Any forward-looking statements that we make in this Quarterly Report on speak only as of the date of this Quarterly Report on Form and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report on or to reflect the occurrence of unanticipated events.

On November 20, 2020, Therapeutics, Inc., formerly known as Spring Bank Pharmaceuticals, Inc., completed a business combination (the “Transaction”) with Therapeutics Limited Ltd”) in accordance with the terms of the Share Exchange Agreement, dated July 29, 2020 (the “Exchange Agreement”), by and among the Company, Ltd and certain holders of capital stock and convertible notes of Ltd (each a “Seller”, and collectively with holders of Ltd securities who subsequently became parties to the Exchange Agreement, the “Sellers”). Pursuant to the Exchange Agreement, each ordinary share of Ltd outstanding immediately prior to the closing of the Transaction (the “Closing”) was exchanged by the Sellers that owned such Ltd shares for a number of duly authorized, validly issued, fully paid and shares of Company common stock pursuant to the exchange ratio formula 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 reverse stock split of its common stock (the “Reverse Stock Split”) and, following the completion of the Transaction, changed its name to Therapeutics, Inc. Following the completion of the Transaction, the business of the Company became the business conducted by 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 Ltd stockholders, based on an Exchange Ratio of 0.1125 shares of Spring Bank common stock for each 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 Ltd pursuant to a formula set forth in the Exchange Agreement.

Pursuant to the Exchange Agreement, immediately prior to the Closing, certain investors in Ltd purchased $15.0 million of Ltd ordinary shares (the Financing”). These ordinary shares of Ltd were then exchanged at the Closing for shares of the Company’s common stock in the Transaction at the same Exchange Ratio.

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 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 Company’s common stock outstanding. Concurrently with the execution of the Exchange Agreement, certain officers and directors of Spring Bank and Ltd and certain stockholders of Ltd entered into agreements, pursuant to which they agreed to certain restrictions on transfers of any shares of the Company’s common stock for the period following the Closing, other than the shares of the Company’s common stock received in exchange for ordinary shares of Ltd subscribed for in the Financing and pursuant to certain other limited exceptions.

In addition, at the Closing, Spring Bank, 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 Stock Split share of Company 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 Stock Split basis, entitling such holders to receive, in connection with certain transactions involving the 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 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 Securities and Exchange Commission (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 or all CVR payment amounts are paid pursuant to their terms.

At the Closing, Spring Bank, 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.

All issued and outstanding Ltd share options ranted under 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 Ltd under the Therapeutics Limited 2019 Equity Incentive Plan (the “2019 Plan”) were replaced by options (“Replacement Options”) and awards (“Replacement RSUs”), on the same terms (including vesting), for Company common stock, based on the Exchange Ratio.

The Company’s common stock, which was 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. After the Transaction, the Company had approximately $ million in cash. The combined company is now headquartered out of Ltd’s existing facilities in Cambridge, United Kingdom and office in Cambridge, MA.

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, (“ASC 805”). The Transaction was accounted for as a reverse acquisition with Ltd being deemed the acquiring company for accounting purposes. Under ASC 805, 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 (see Note  of the financial statements).

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: Ltd shareholders owned the majority of the voting rights of the combined company; Ltd designated a majority (five of eight) of the initial members of the board of directors of the combined company; and 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 Ltd became the historical financial statements of the combined organization.

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The accompanying interim financial statements as of March 31, 2021 and for the three months ended March 31, 2021 and 2020, and related interim information contained within the notes to the financial statements, are unaudited. In management’s opinion, the unaudited interim consolidated financial statements have been prepared on the same basis as the Company’s audited financial statements and include all adjustments (including normal recurring adjustments) necessary for the fair presentation of the Company’s financial position as of March 31, 2021, results of operations for the three months ended March 31, 2021 and 2020, statement of stockholders’ equity for the three months ended March 31, 2021 and 2020 and its cash flows for the three months ended March 31, 2021 and 2020. These interim financial statements should be read in conjunction with the Company’s audited financial statements and accompanying notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The results for the three months ended March 31, 2021 are not necessarily indicative of the results expected for the full fiscal year or any interim period.

upfront license fees; payments for research and development services; fees upon the exercise of options to obtain additional services or licenses; payments based upon the achievement of defined collaboration objectives; future regulatory and sales-based milestone payments; and royalties on net sales of future products.

In assessing whether promised goods or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on their own and whether the required expertise is readily available. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining promises, whether the value of the promise is dependent on the unsatisfied promises, whether there are other vendors that could provide the remaining promises, and whether it is separately identifiable from the remaining promises. The Company estimates the transaction price based on the amount of consideration the Company expects to receive for transferring the promised goods or services in the contract. The consideration may include both fixed consideration and variable consideration. At the inception of each arrangement that includes variable consideration, the Company evaluates the amount of the potential payments and the likelihood that the payments will be received. The Company utilizes either the most likely amount method or expected value method to estimate variable consideration to include in the transaction price based on which method better predicts the amount of consideration expected to be received. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, the Company the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative basis in the period of adjustment.

License Fees: If a license is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone payments: The Company’s collaboration agreements may include development and regulatory milestones. The Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company the probability of achievement of such milestones and any related constraint, and if necessary, adjusts the estimate of the overall transaction price. Any such adjustments are recorded on a cumulative basis, which would affect collaboration revenue and net loss in the period of adjustment.

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 consultants, the measurement date for awards 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.

Historically, given the absence of an active market for the ordinary shares of Ltd, the board of directors determined the estimated fair value of the Company’s equity instruments based on input from management, which utilized the most recently available independent third-party valuation, and considered a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector. Each valuation methodology included estimates and assumptions that require judgment. These estimates and assumptions included a number of objective and subjective factors in determining the value of Ltd ordinary shares at each grant date. The expected volatility for F star Ltd was calculated based on reported volatility data for a representative group of publicly traded companies for which historical information was available. The historical volatility was calculated based on a period of time commensurate with the assumption used for the expected term. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption. Ltd used the simplified method, under which the expected term is presumed to be the midpoint between the vesting date and the end of the contractual term. Ltd utilized this method due to the lack of historical exercise data and the plain nature of its share-based awards.

The Company uses the remaining contractual term for the expected life of awards. The expected dividend yield is assumed to be zero, as the Company has never paid dividends and has no current plans to pay any dividends.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820, (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.

The Company computes net loss per share in accordance with ASC Topic 260, (“ASC 260”) and related guidance, which requires two calculations of net (loss) income attributable to the Company’s shareholders per share to be disclosed: basic and diluted. Convertible preferred shares are considered participating securities and are included in the calculation of basic and diluted net (loss) income per share using the method. In periods where the Company reports net losses, such losses are not allocated to the convertible preferred shares for the computation of basic or diluted net (loss) income.

The Company accounts for uncertainty the consolidated financial statements by applying a process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that will more likely than not be realized upon ultimate settlement. Any provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

Operating segments are identified as components of an enterprise about which separate and discrete financial information is available for evaluation by the chief operating decision maker, the Company’s chief executive officer, in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment and does not track expenses on a basis.

In June 2016, the FASB issued ASU No.  (“ASU ASU will change how companies account for credit losses for most financial assets and certain other instruments. For trade receivables, loans and debt securities, companies will be required to recognize an allowance for credit losses rather than reducing the carrying value of the asset. In November 2019, the FASB issued ASU No.  to amend the effective date of ASU for entities eligible to be “smaller reporting companies,” as defined by the SEC, to be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company has not elected to early adopt ASU The Company is currently evaluating the potential impact that the adoption of ASU will have on the Company’s financial position and results of operations.

As described in Note 1, on November 20, 2020, Ltd completed a business combination with Spring Bank. For accounting purposes, the purchase price was based on (i) the fair value of Spring Bank common stock as of the Transaction date of $21.5 million, which was determined based on the number of shares of common stock issued in connection with the Transaction, and (ii) the portion of the fair value attributable to fully and partially vested stock options and warrants.

Under the acquisition method of accounting, the total purchase price is allocated to the acquired tangible and intangible assets and assumed liabilities based on their fair values as of the acquisition date. Any excess purchase price over the fair value of assets acquired and liabilities assumed is allocated to goodwill. Acquired research and development assets will be classified as indefinite-lived intangible assets and will be amortized over their estimated useful economic lives when put into use. The fair values of acquired research and development assets were calculated using an income approach based on the expected future cash flows associated with the respective asset using an estimated discount rate of 14%. In addition, on the date of the Transaction, there were 73,337 outstanding equity classified warrants with a fair value of $0.2 million and 408,444 outstanding liability classified warrants with a fair value of $0.2 million.

Goodwill is allocated to one reporting unit. The goodwill was primarily attributable to the access gained to a public listing on the Nasdaq Capital Market. The Company determined that the underlying goodwill and intangible assets are not deductible for tax purposes.

The following potentially ilutive securities outstanding, prior to the use of the treasury stock method or method, have been excluded from the computation of diluted weighted-average shares outstanding, because such securities had an antidilutive impact due to the losses reported:

On June 14, 2019, as part of a group restructuring, the Ltd board of directors and shareholders approved the 2019 Plan. The initial maximum number of ordinary shares that could be issued under the 2019 Plan was 2,327,736. This number consisted of 1,922,241 new ordinary shares and 405,495 new ordinary shares as replacements for grants under the previous group entities’ legacy share option schemes (the Alpha Limited Share Option Scheme, the Beta Share Option Scheme and the GmbH EMI Share Option Scheme). In addition, the GmbH Employee Share Option Plan was transferred to Ltd from GmbH. This plan grants the beneficiaries participation rights only, beneficiaries would receive a proportion of the exit proceeds realized by shareholders, but the plan does not grant the right to purchase shares. The transfer of the participation rights occurred at the same exchange ratio as used for the exchange of GmbH shares for shares issued by Ltd.

In conjunction with the Transaction, all issued and outstanding Ltd share options granted under the three Ltd legacy equity incentive plans became exercisable in full immediately prior to the Closing. At the Closing, all issued share options and RSUs granted by Ltd under the 2019 Plan were replaced by the Replacement Options and Replacement RSUs on the same terms (including vesting), for Company common stock, based on the Exchange Ratio. The Company determined that the exchange of Ltd awards for the Company awards would be accounted for as a modification of awards under ASC 718. The Company concluded that the modification would not affect the number of awards expected to vest or the service period over which compensation expense related to awards would be recognized, since the vesting schedule applicable to each Replacement Option would be the same as the vesting schedule applicable to the original option that it replaced. In addition, the Replacement RSUs and Replacement Options are subject to substantially the same terms and conditions as the original RSUs and original options, respectively, and did not provide holders of the Replacement Options or Replacement RSUs with any additional benefits that the holders did not have under their original options or original RSUs. In addition, the fair value of an award tranche immediately after modification was less than the fair value of that award tranche immediately before modification. Therefore, total compensation cost recognized for the Replacement RSUs and Replacement Options equaled the grant-date fair value of the original awards, and the Company continues to recognize the grant date fair values of the modified awards over their respective service periods.

—The expected term represents management’s best estimate for the options to be exercised by option holders.

—Since Ltd did not have a trading history for its common stock, the expected volatility was derived from the historical stock volatilities of comparable peer public companies within its industry, whose businesses were considered to be comparable to that of Ltd, over a period equivalent to the expected term of the share-based awards. After the Closing of the Transaction, the volatility of the Company’s Common Stock is used to determine volatility of the share-based awards at grant date.

—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for U.S. Treasury notes with maturities approximately equal to the share-based awards’ expected term.

—The expected dividend is zero, as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future.

— Prior to the Transaction, Ltd estimated fair value used three different methodologies: the income approach, the market approach, and cost approach. The income approach uses the estimated present value of economic benefits. The market approach exams observable market values for similar assets or securities. The cost approach uses the concept of replacement cost as an indicator of value and the notion that an investor would pay no more for an asset that what it would cost to replace the asset with one of equal utility. After the Closing of the Transaction, the fair value of the Company’s Common Stock is used to estimate the fair value of the share-based awards at grant date.

In August 2016, Biotechnology, Gamma Limited (a related party until May 30, 2018) Gamma”), and GmbH entered into a license and collaboration agreement (the “Denali LCA”) with Denali. The goal of the collaboration was the development of certain constant Fc domains of an antibody with antigen binding activity (“Fcabs”), to enhance delivery of therapeutics across the blood brain barrier into the brain. The collaboration was designed to leverage Gamma’s modular antibody technology and Denali’s expertise in the development of therapies for neurodegenerative diseases. In connection with the entry into the collaboration agreement, Denali also purchased from the Gamma shareholders an option, which was referred to as the to acquire all of the outstanding shares of Gamma pursuant to a share purchase agreement.

On May 30, 2018, Denali exercised such option and entered into a share purchase agreement (the “Purchase Agreement”) with the shareholders of Gamma and Shareholder Representative Services LLC, pursuant to which Denali acquired all of the outstanding shares of Gamma (the “Acquisition”).

As a result of the Acquisition, Gamma has become a wholly owned subsidiary of Denali and Denali changed the entity’s name to Denali BBB Holding Limited. In addition, Denali became a direct licensee of certain of intellectual property (by way of Denali’s assumption of Gamma’s license agreement with Biotechnology (the Gamma License”)). Denali made initial exercise payments to Biotechnology and the former shareholders of Gamma under the Purchase Agreement and the Gamma License, in the aggregate, of $18.0 million, less the net liabilities of Gamma, which were approximately $0.2 million. $4.0 million was payable to the Company. In addition, Denali is required to make future contingent payments, to the Company and the former shareholders of Gamma, with a maximum aggregate of $437.0 million upon the achievement of certain defined preclinical, clinical, regulatory, and commercial milestones. Of this total, a maximum of $91.4 million is payable to the Company. The total amount of the contingent payments varies, based on whether the Company delivers an Fcab that meets criteria and whether the Fcab has been identified solely by the Company or solely by Denali or jointly by the Company and Denali.

Under the terms of the Denali LCA, Denali was granted the right to nominate up to three Fcab targets for approval (“Accepted Fcab Targets”), within the first three years of the date of the agreement. Upon entering into the Denali LCA, Denali had selected transferrin receptor as the first Accepted Fcab Target and paid an upfront fee of $5.5 million to Gamma, which included selection of the first Accepted Fcab Target. In May 2018, Denali exercised its right to nominate two additional Fcab targets and identified a second Accepted Fcab Target. Denali made a payment to the group for the two additional Accepted Fcab Targets of $6.0 million and extended the time period for its selection of the third Accepted Fcab Target until August 2020.

Denali also agreed to be responsible for certain research costs incurred by in conducting activities under each agreed development plan for up to 24 months.

Under the terms of the Denali LCA, Gamma was prohibited from developing, commercializing and manufacturing any antibody or other molecule that incorporated any Fcab directed to an Accepted Fcab Target, or any such Fcab as a standalone product, and from authorizing any third party to take any such action.

On May 14, 2019, the Ares LCA agreement with Ares was amended and restated to convert the existing purchase option over the entire share capital of Delta to an intellectual property licensing arrangement that included the exclusive grant of development and exploitation rights to one tetravalent bispecific antibody directed against immuno-oncology targets and the option to acquire the exclusive right to an additional antibody. As part of the amended Ares LCA, Delta gained exclusive rights to FS118, now lead product candidate, which is currently in a clinical trial. As discussed further below, this amended and restated Ares LCA was accounted for a separate contract, rather than a contract amendment.

Development milestone payments are triggered upon achievement by each product candidate of a defined stage of clinical development and regulatory milestone payments are triggered upon approval to market a product candidate by the U.S. Food and Drug Administration or other global regulatory authorities. Sales-based milestones are payable based upon aggregate annual worldwide net sales in all indications of all licensed products. Delta is eligible to receive $168.0 million in sales-based milestones. In addition, to the extent that any product candidates covered by the exclusive licenses granted to Ares are commercialized, Delta will be entitled to receive a single digit royalty based on a percentage of net sales on a basis.

Management has considered the performance obligations identified in the contracts and concluded that the option for the grant of intellectual property rights is not distinct from the provision of R&D services in the agreements, as the R&D services are expected to significantly modify the early-stage intellectual property. As a result, the option for the grant of intellectual property rights and the provision of R&D services has been combined into a single performance obligation for all molecules under the original contract and each individual molecule included in the May 13, 2019 amendment to the Ares LCA. The Company recognizes revenue using the method, which it believes best depicts the transfer of control of the services to the customer. Under the method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation.

payments and fees are recorded as deferred revenue upon receipt or when due until such time as the Company satisfies its performance obligations under these arrangements. A contract asset is a conditional right to consideration in exchange for goods or services that the Company has transferred to a customer. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.

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The term note matures on the anniversary following the funding date. The principal balance the Term Loan bears a floating interest. The interest rate is calculated initially and, thereafter, each calendar month as the sum of (a) the per annum rate of interest from time to time published in The Wall Street Journal as contemplated by the Loan and Security Agreement, or any successor publication thereto, as the “prime rate” then in effect, plus (b) 6.25%; provided that, in the event such rate of interest is less than 3.25%, such rate shall be deemed to be 3.25% for purposes of calculating the interest rate. Interest is payable on a monthly basis based on each Term Loan principal amount outstanding the preceding month.

The Warrants, which are exercisable for an aggregate of 42,236 shares, will be exercisable for a period of seven years at a exercise price of $9.47, which is equal to the average closing price prior to January 15, 2021, the date on which the term sheet relating to the Loan and Security Agreement was entered into, subject to certain adjustments as specified in the Warrant.

(collectively with its subsidiaries, or the “Company”) is a clinical-stage biopharmaceutical company dedicated to developing next generation immunotherapies to transform the lives of patients with cancer. 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.

most advanced product candidate, FS118, is currently being evaluated in a Phase 2 trial in acquired resistance head and neck cancer patients. FS118 is a tetravalent mAb bispecific antibody targeting two receptors, and both of which are established pivotal targets in immuno-oncology. Phase 1 data from 43 heavily patients with advanced cancer, who have failed 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 Phase 2 trial in acquired resistance head and neck cancer patients in H1 2022.

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. is developing FS120 alone and in combination with therapy for the treatment of tumors where products are approved, and which have of OX40 and CD137 in the tumor microenvironment. initiated a Phase 1 clinical trial in patients with advanced cancers in the fourth quarter of 2020 and plan to provide an update on the accelerated dose titration phase of this study in

third product candidate, FS222, aims to improve outcomes in low expressing tumors and is a mAb2 bispecific antibody that is designed to target both the costimulatory CD137 and the inhibitory receptors, which are in a number of tumor types. 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 this study in late 2021.

SB 11285, which 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. is conducting an open-label, dose-escalation Phase 1 clinical trial with SB 11285 as an IV administered monotherapy, and in combination with an antibody, in patients with advanced solid tumors. expects to report an update in

On November 20, 2020, Therapeutics, Inc., formerly known as Spring Bank Pharmaceuticals, Inc., completed a business combination (the “Transaction”) with Therapeutics Limited Ltd”) in accordance with the terms of the Share Exchange Agreement, dated July 29, 2020 (the “Exchange Agreement”), by and among the Company, Ltd and certain holders of the capital stock and convertible notes of Ltd (each a “Seller”, and collectively with holders of Ltd securities who subsequently became parties to the Exchange Agreement, the “Sellers”). Pursuant to the Exchange Agreement, each ordinary share of Ltd outstanding immediately prior to the closing of the Transaction (the “Closing”) was exchanged by the Sellers that owned such Ltd shares for a number of duly authorized, validly issued, fully paid and 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 reverse stock split of its common stock (the “Reverse Stock Split”) and, following the completion of the Transaction, changed its name to Therapeutics, Inc. Following the completion of the Transaction, the business of the Company became the business conducted by 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 Ltd stockholders, based on an Exchange Ratio of 0.1125 shares of Spring Bank common stock for each 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 Ltd pursuant to a formula set forth in the Exchange Agreement.

Pursuant to the Exchange Agreement, immediately prior to the Closing, certain investors in Ltd purchased $15.0 million of Ltd ordinary shares (the Financing”). These ordinary shares of Ltd were then exchanged at the Closing for shares of the Company’s common stock in the Transaction at the Exchange Ratio.

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 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 Ltd and certain stockholders of Ltd entered into agreements, pursuant to which they agreed to certain restrictions on transfers of any shares of the Company’s common stock for the period following the Closing, other than the shares of the Company’s common stock received in exchange for ordinary shares of Ltd subscribed for in the Financing and pursuant to certain other limited exceptions.

In addition, at the Closing, Spring Bank, 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 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 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 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, 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.

All issued and outstanding Ltd share options granted under 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 Ltd under the Therapeutics Limited 2019 Equity Incentive Plan (the “2019 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 was 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. After the Closing of the Transaction, the Company had approximately $30 million in cash. The combined company is now headquartered out of Ltd existing facilities in Cambridge, United Kingdom and office in Cambridge, MA.

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, (“ASC 805”). The Transaction was accounted for as a reverse acquisition with Ltd being deemed the acquiring company for accounting purposes. Under ASC 805, 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 (see Note 4 of the financial statements).

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: Ltd shareholders owned the majority of the voting rights of the combined company; Ltd designated a majority (five of eight) of the initial members of the board of directors of the combined company; and 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 Ltd became the historical financial statements of the combined organization.

In March 2020, the World Health Organization declared the novel strain of coronavirus a pandemic and recommended containment and mitigation measures worldwide. The pandemic has been evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public health safety measures.

Management continues to closely monitor the impact of the pandemic on all aspects of the business, including how it will impact operations and the operations of customers, vendors, and business partners. Management took action in April 2020 to temporarily furlough some of its workforce and took advantage of the U.K. Government Coronavirus Job Retention Scheme that provided funding to businesses with furloughed staff. The grant funding available covered 80% of furloughed employees’ wages plus employer National Insurance and pension contributions up to a maximum of £2,500 per month per furloughed employee. From December 2020 to April 2021, the U.K. government imposed a third national “lockdown”, severely impacting on activities. The onset of the global pandemic and consequent government-imposed restrictions resulted in a three to delay in the operationalization of our clinical trials for FS118, FS120, FS222 and SB 11285. The extent to which impacts our future business, results of operation and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, such as the continued duration of the outbreak, new information that may emerge concerning the severity or other strains of or the effectiveness of actions to contain or treat its impact, among others. If the Company or any of the third parties with which we engage, however, were to experience shutdowns or other business disruptions, the ability to conduct business in the manner and on the timelines presently planned could be materially and negatively affected, which could have a material adverse impact on our business, results of operation and financial condition. The estimates of the impact on the Company’s business may change based on new information that may emerge concerning and the actions to contain it or treat its impact and the economic impact on local, regional, national, and international markets.

The term note matures on the anniversary following the funding date. The principal balance the Term Loan bears a floating interest. The interest rate is calculated initially and, thereafter, each calendar month as the sum of (a) the per annum rate of interest from time to time published in The Wall Street Journal as contemplated by the Loan and Security Agreement, or any successor publication thereto, as the “prime rate” then in effect, plus (b) 6.25%; provided that, in the event such rate of interest is less than 3.25%, such rate shall be deemed to be 3.25% for purposes of calculating the interest rate. Interest is payable on a monthly basis based on each Term Loan principal amount outstanding the preceding month.

The Warrants, which are exercisable for an aggregate of 42,236 shares, will be exercisable for a period of seven years at a exercise price of $9.47, which is equal to the average closing price prior to January 15, 2021, the date on which the term sheet relating to the Loan and Security Agreement was entered into, subject to certain adjustments as specified in the Warrant.

On March 30, 2021, the Company entered into a Sales Agreement (the “2021 Sales Agreement”) with SVB Leerink LLC (“SVB Leerink”) with respect to an offering, as defined in Rule 415 of the Securities Act of 1933, as amended, 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 (the “Placement Shares”) through SVB Leerink as its sales agent.

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. 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.

Our U.K.-established entities have generated losses and some profits in the United Kingdom since inception and have therefore not paid significant U.K. corporation tax. Biotechnologische Entwicklungsges.m.b.H 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 U.K. research and development tax credit cash rebate regime known as the Small and 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. No research and development activities are carried out in Austria, so the Company is not able to utilize the research and development premium available under the Austrian corporation tax regime.

The U.K. government has released draft legislation to introduce a cap on the amount of the payable credit that a qualifying loss-making small and enterprise business can receive through research and development relief in any one year. The cap would be applied to restrict payable credit claims in excess of £20,000 with effect for accounting periods beginning on or after April 2021 by reference to, broadly, three times the total employee payroll tax and social security liabilities of the company. The draft legislation also contains an exemption which prevents the cap from applying. That exemption requires the company to be creating, or taking steps to create, intellectual property as well as having research and development expenditure in respect of connected parties which does not exceed 15% of the total claimed. The Company does not expect this legislation, if adopted, to have a material impact on its payable credit claims based on amounts currently claimed.

In the event the Company generates revenues in the future, the Company may benefit from the United Kingdom “patent box” regime that allows profits attributable to revenues from patents or patented products to be taxed at an effective rate of 10%. Value Added Tax (“VAT”) is broadly charged on all taxable supplies of goods and services by businesses. In the United Kingdom, under current rates, an amount of 20% of the value, as determined for VAT purposes, of the goods or services supplied is added to all sales invoices and is payable to the United Kingdom’s tax authority, Her Majesty’s Revenue and Customs (“HMRC”). Similarly, VAT paid on purchase invoices is generally reclaimable from HMRC. In Austria, under current rates, an amount of 20% of the value, as determined for VAT purposes, of the goods or services supplied is added to all sales invoices and is payable to the Austrian tax authority. Similarly, VAT paid on purchase invoices is generally reclaimable from the Austrian tax authority.

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 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.

Historically given the absence of an active market for the ordinary shares of Ltd, the board of directors determined the estimated fair value of the Company’s equity instruments based on input from management, which utilized the most recently available independent third-party valuation, and considering a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector. Each valuation methodology includes estimates and assumptions that require judgment. These estimates and assumptions include a number of objective and subjective factors in determining the value of Ltd ordinary shares at each grant date. The expected volatility for F star Ltd was calculated based on reported volatility data for a representative group of publicly traded companies for which historical information was available. The historical volatility is calculated based on a period of time commensurate with the assumption used for the expected term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption. Ltd used the simplified method, under which the expected term is presumed to be the midpoint between the vesting date and the end of the contractual term. Ltd utilized this method due to the lack of historical exercise data and the plain nature of its share-based awards.

The Company uses the remaining contractual term for the expected life of awards. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends.