10-Q
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission File Number:
001-37718
 
 
F-STAR THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Delaware
 
52-2386345
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Eddeva B920 Babraham Research Campus
Cambridge, United Kingdom
 
CB22 3AT
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: +44-1223-497400
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Trading
Symbol
 
Name of each exchange
on which registered
Common Stock, $0.0001 par value per share
 
FSTX
 
The Nasdaq Stock Market
(Nasdaq Capital Market)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    YES  ☒    NO  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
 
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
Non-accelerated
filer
     Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).    YES  ☐    NO  
The number of shares of Registrant’s Common Stock outstanding as of August 7, 2021 was 20,620,021.
 
 
 

Table of Contents
F-star
Therapeutics, Inc.
INDEX
PART I. FINANCIAL INFORMATION
 
        
Page
 
  Forward- Looking Statements      2  
Item 1.
  Consolidated Financial Statements (Unaudited)      3  
  Consolidated Balance Sheets at June 30, 2021 and December 31, 2020      3  
  Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2021 and 2020      4  
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021, and 2020      5  
  Consolidated Statement of Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020      6  
  Notes to Unaudited Consolidated Financial Statements      8  
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations      31  
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk      45  
Item 4.
  Controls and Procedures      45  
   
PART II. OTHER INFORMATION
      
Item 1.
  Legal Proceedings      47  
Item 1A.
  Risk Factors      47  
Item 2
  Unregistered Sales of Equity Securities and Use of Proceeds      47  
Item 3
  Defaults Upon Senior Securities      47  
Item 4
  Mine Safety Disclosures      47  
Item 5
  Other Information      47  
Item 6.
  Exhibits      47  
     48  
     49  
 
i

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 the coronavirus disease
(“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 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.
 
2

Table of Contents
PART I—FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
F-star
Therapeutics, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
 
    
June 30,
   
December 31
 
    
2021
   
2020
 
    
Unaudited
       
Assets
                
Current Assets:
                
Cash and cash equivalents
   $ 81,648     $ 18,526  
Other receivables
     72           
Prepaid expenses and other current assets
     3,439       3,976  
Tax incentive receivable
     160       3,563  
    
 
 
   
 
 
 
Total current assets
     85,319       26,065  
Property and equipment, net
     1,157       789  
Right of use asset
     3,758       2,782  
Goodwill
     15,009       14,926  
In-process
research and development
     19,249       18,986  
Other long-term assets
     482       61  
    
 
 
   
 
 
 
Total assets
   $ 124,974     $ 63,609  
    
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
                
Current Liabilities:
                
Accounts payable
   $ 2,427     $ 4,597  
Accrued expenses and other current liabilities
     6,300       9,461  
Contingent value rights
     314       2,080  
Lease obligations, current
     912       539  
Deferred revenue
     —         300  
    
 
 
   
 
 
 
Total current liabilities
     9,953       16,977  
Long term Liabilities:
                
Term debt
     9,466           
Lease obligations
     3,197       2,622  
Contingent value rights
     2,789       440  
Deferred tax liability
     576       576  
    
 
 
   
 
 
 
Total liabilities
     25,981       20,615  
     
Commitments and contingencies
                
     
Stockholders’ equity:
                
Preferred stock, $0.0001 par value; authorized, 10,000,000 shares at June 30, 2021 and December 31, 2020; no shares issued or outstanding at June 30, 2021 and December 31, 2020
                  
Common Stock, $0.0001 par value; authorized 200,000,000 shares at June 30, 2021 and December 31, 2020; 20,586,562 and 9,100,117 shares issued and outstanding at June 30, 2021 and December 31, 2020
     2       1  
Additional paid-in capital
     172,895       91,238  
Accumulated other comprehensive loss
     (1,218     (1,077
Accumulated deficit
     (72,686     (47,168
    
 
 
   
 
 
 
Total stockholders’ equity
     98,993       42,994  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 124,974     $ 63,609  
    
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
3

Table of Contents
F-star
Therapeutics, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(In Thousands, Except Share and Per Share Amounts)
 
    
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
    
2021
   
2020
   
2021
   
2020
 
License revenue
   $        $ 543     $ 2,917     $ 1,898  
Operating expenses:
                                
Research and development
     8,437       2,093       15,704       5,493  
General and administrative
     6,501       3,236       12,930       6,425  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total operating expenses
     14,938       5,329       28,634       11,918  
    
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
     (14,938     (4,786     (25,717     (10,020
Other
non-operating
(expense) income:
                                
Other income (expense)
     (46     (143     972       (1,670
Change in fair value of convertible debt
              (1,498              (1,884
Change in fair value of conti
n
gent value rights
     (583              (583         
    
 
 
   
 
 
   
 
 
   
 
 
 
Loss before income taxes
     (15,567     (6,427     (25,328     (13,574
Income tax expense
     (82     (35     (190     (47
    
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
   $ (15,649   $ (6,462   $ (25,518   $ (13,621
    
 
 
   
 
 
   
 
 
   
 
 
 
Net loss attributable to common stockholders
   $ (15,649   $ (6,462   $ (25,518   $ (13,621
    
 
 
   
 
 
   
 
 
   
 
 
 
Basic and diluted adjusted net loss per common shares
   $ (0.92   $ (3.53   $ (1.95   $ (7.44
    
 
 
   
 
 
   
 
 
   
 
 
 
Weighted-average number of shares outstanding, basic and diluted
     17,022,417       1,830,075       13,083,230       1,829,993  
    
 
 
   
 
 
   
 
 
   
 
 
 
Other comprehensive loss:
                                
Net loss
   $ (15,649   $ (6,462   $ (25,518   $ (13,621
Other comprehensive (loss) gain
 
:
                                
Foreign currency translation
     324       387       (141     410  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive loss
   $ (15,325   $ (6,075   $ (25,659   $ (13,211
    
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
4

Table of Contents
F-star
Therapeutics, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
 
    
For the Six Months Ended June 30,
 
    
2021
   
2020
 
Cash flows from operating activities:
                
Net loss
   $ (25,518   $ (13,621
Adjustments to reconcile net loss to net cash used in operating activities:
                
Share based compensation expense
     4,039       1,005  
Foreign currency
(gain)
loss
     (570     1,478  
Loss 
(
gain
)
on disposal of tangible fixed assets
     (9     6  
Depreciation
     297       334  
Non-cash
interest
     82       532  
Amortization of debt issuance costs
     15           
Fair value adjustments
     583       1,884  
Operating right of use asset
     494       337  
Changes in operating assets and liabilities:
                
Other receivables
     (72         
Prepaid expenses and other current assets
     593       905  
Tax incentive receivable
     3,493       5,909  
Accounts payable
     (2,231     1,210  
Accrued expenses and other current liabilities
     (3,278     (2,126
Deferred revenue
     (308     (5
Operating lease liability
     (520     (330
Other long term asset
     (423         
    
 
 
   
 
 
 
Net cash used in operating activities
     (23,333     (2,482
    
 
 
   
 
 
 
Cash flows from investing activities:
                
Purchase of property, plant and equipment
     (658     (62
Proceeds from sale of property, plant and equipment
     15           
    
 
 
   
 
 
 
Net cash used in investing activities
     (643     (62
    
 
 
   
 
 
 
Cash flows from financing activities:
                
Proceeds from issuance of convertible notes
              500  
Net proceeds from issuance of common stock
     77,293           
Net proceeds from term debt
     9,845           
Payment of debt issuance costs
     (92         
    
 
 
   
 
 
 
Net cash provided by financing activities
     87,046       500  
    
 
 
   
 
 
 
Net increase (decrease) in cash and cash equivalents
     63,070       (2,044
Effect of exchange rate changes on cash
     52       (201 )
Cash and cash equivalents at beginning of period
     18,526       4,901  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 81,648     $ 2,656  
    
 
 
   
 
 
 
Supplemental disclosure of cash flow information
                
Cash paid for income taxes
   $ 36     $ 14  
Purchases of property and equipment included in accounts payable and accrued expenses
   $ 182     $     
Cash paid for interest
  
$
115    
$
    
     
Non-cash
investing and financing activities:
                
Additions to ROU assets obtained from new operating lease liabilities
   $ 1,468     $     
Issuance of warrants
  
$
326    
$
    
See accompanying notes to consolidated financial statements.
 
5

Table of Contents
F-star
Therapeutics, Inc.
Consolidated Statements of Stockholders’ Equity
For the Three Months Ended June 30, 2021 and 2020
(Unaudited)
(In Thousands, Except Share Amounts)
 
                  
Stockholders’ Equity
 
For the Three Months Ended June 30, 2021
                
Common Shares
    
Capital in Excess
of par Value
    
Accumulated Other
Comprehensive Loss
         
Total Stockholders’
Equity
 
                
Number of
Shares
    
Value
   
Accumulated
deficit
 
Balance at March 31, 2021
                      
9,100,320
    
$
1
 
  
$
93,418
    
$
(1,542
)
 
 
$
(57,037
)
 
 
$
34,840
 
Issuance of warrants in connection with term loan
                       —         
—  
       326        —         —         326  
Issuance of common stock in connection with
at-the-market
offering, net of issuance costs
                       979,843       
—  
       9,115       
—  
     
—  
      9,115  
Issuance of common stock in connection with public offering, net of issuance costs
                       10,439,347     
 
1
 
     68,177        —         —         68,178  
Equity adjustment from foreign currency translation
                      
—  
      
—  
      
—  
       324      
—  
      324  
Stock option exercises
                       67,052        —          —          —         —         —    
Share-based compensation
                      
—  
      
—  
       1,859       
—  
     
—  
      1,859  
Net loss
                       —          —          —          —         (15,649     (15,649
                      
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at June 30, 2021
                    
 
20,586,562
 
  
$
2
 
  
$
172,895
 
  
$
(1,218
 
$
(72,686
 
$
98,993
 
                      
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
   
    
Stockholders’ Equity
 
For the Three Months Ended June 30, 2020
  
Seed
preferred
    
Series A
preferred
    
Common Shares
    
Capital in Excess
of par Value
    
Accumulated Other
Comprehensive Loss
         
Total Stockholders’
Equity
 
  
Number of
shares
    
Number of
shares
    
Number of
Shares
    
Value
   
Accumulated
deficit
 
Balance at March 31, 2020
    
103,611
      
1,441,418
      
4,145,611
    
$
 
1
    
$
 
32,252
    
$
(1,611
)
 
 
$
(28,708
)
 
 
$
1,934
 
Issuance of common stock for services rendered
    
—  
      
—  
       4,252              
—  
      
—  
     
—  
     
—  
 
Issuance of common stock in connection with
at-the-market
offering, net of issuance costs
    
—  
      
—  
       162,274       
—  
      
—  
      
—  
     
—  
     
—  
 
Equity adjustment from foreign currency translation
    
—  
      
—  
      
—  
      
—  
      
—  
       387      
—  
      387  
Share-based compensation
    
—  
      
—  
      
—  
      
—  
       471       
—  
     
—  
      471  
Net loss
    
—  
      
—  
      
—  
      
—  
      
—  
      
—  
      (6,462     (6,462
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at June 30, 2020
    
103,611
      
1,441,418
      
4,312,137
    
$
1
    
$
32,723
    
$
(1,224
)
 
 
$
(35,170
)
 
 
$
(3,670
)
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
6

F-star
Therapeutics, Inc.
Consolidated Statements of Stockholders’ Equity
For the Six Months Ended June 30, 2021 and 2020
(Unaudited)
(In Thousands, Except Share Amounts)
 
                  
Stockholders’ Equity
 
For the Six Months Ended June 30, 2021
                
Common Shares
    
Capital in Excess

of par Value
    
Accumulated Other

Comprehensive Loss
         
Total Stockholders’

Equity
 
                
Number of
Shares
    
Value
   
Accumulated
deficit
 
Balance at December 31, 2020
                    
 
9,100,117
 
  
$
1
 
  
$
91,238
 
  
$
(1,077
 
$
(47,168
 
$
42,994
 
Issuance of warrants in connection with term loan
                      
—  
      
—  
       326        —         —         326  
Issuance of common stock in connection with
at-the-market
offering, net of issuance costs
                       979,843       
—  
       9,115        —         —         9,115  
Issuance of common stock in connection with public offering, net of issuance costs
                       10,439,347     
 
1
 
     68,177        —         —         68,178  
Equity adjustment from foreign currency translation
                       —         
—  
       —          (141     —         (141
Stock option exercises
                       67,255       
—  
       —          —         —         —    
Share-based compensation
                       —         
—  
       4,039        —         —         4,039  
Net loss
                       —         
—  
       —          —         (25,518     (25,518
                      
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at June 30, 2021
                    
 
20,586,562
 
  
$
2
 
  
$
172,895
 
  
$
(1,218
 
$
(72,686
 
$
98,993
 
                      
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
   
    
Stockholders’ Equity
 
For the Six Months Ended June 30, 2020
  
Seed
preferred
    
Series A
preferred
    
Common Shares
    
Capital in Excess

of par Value
    
Accumulated Other

Comprehensive Loss
         
Total Stockholders’

Equity
 
  
Number of
shares
    
Number of
shares
    
Number of
Shares
    
Value
   
Accumulated
deficit
 
Balance at December 31, 2019
  
 
103,611
 
  
 
1,441,418
 
  
 
4,128,441
 
  
$
1
 
  
$
31,718
 
  
$
(1,634
 
$
(21,549
 
$
8,536
 
Issuance of common stock for services rendered
     —          —          10,972        —          —          —         —      
 
—  
 
Issuance of common stock in connection with
at-the-market
offering, net of issuance costs
     —          —          172,724        —          —          —         —         —    
Equity adjustment from foreign currency translation
     —          —          —          —          —          410       —         410  
Share-based compensation
     —          —          —          —          1,005        —         —         1,005  
Net loss
     —          —          —          —          —          —         (13,621     (13,621
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance at June 30, 2020
  
 
103,611
 
  
 
1,441,418
 
  
 
4,312,137
 
  
$
1
 
  
$
32,723
 
  
$
(1,224
 
$
(35,170
 
$
(3,670
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
See accompanying notes to consolidated financial statements.
 
7

F-star
Therapeutics, Inc.
Notes to Consolidated Financial Statements
 
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
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’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 its proprietary tetravalent, bispecific natural antibody (mAb²
) format,
F-star’s
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,
F-star
believes its proprietary technology will overcom
e
 many of th
e
 challenges facing current immuno-oncology therapies, due to the strong pharmacology enabled by tetravalent bispecific binding.
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 mAb
2
bispecific antibody targeting two receptors,
PD-L1
and
LAG-3,
both of which are established pivotal targets in immuno-oncology.
F-star’s
second product candidate, FS120, aims to improve checkpoint inhibitor and chemotherapy outcomes and is a mAb
2
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’s
third product candidate, FS222, aims to improve outcomes in low
PD-L1
expressing tumors and is a mAb
2
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. 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. The product candidates FS120, FS222 and SB 11285 are all in Phase 1 clinical trials.
Share Exchange Agreement
On November 20, 2020,
F-star
Therapeutics, Inc., formerly known as Spring Bank Pharmaceuticals, Inc., 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 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 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
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 same 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 Spring Bank common stock on the date of the Closing (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.
 
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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 Company’s common stock outstanding. Concurrently with the execution of the Exchange Agreement, certain officers and directors of Spring Bank and
F-star
Ltd and certain 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
the
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 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
pre-Reverse
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
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 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 CVR payment obligations expire on the seventh anniversary of the Closing (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 plc (“AstraZeneca”) under which AstraZeneca will receive global rights to research, develop and commercialize next generation Stimulator of Interferon Genes (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 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.
 
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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 $3.1 million as of June 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 June 30, 2021, the estimated fair value increased to $3.1 million which resulted in a $0.6 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 (the “2019 Plan”) were replaced by options (“Replacement Options”) and awards (“Replacement RSUs”), on the same terms (including vesting), for Company common stock, based o
n
 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 acquisitio
n
 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 (see Note 2 of the financial statements).
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.
Liquidity
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
“at-the-market”
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 through SVB Leerink as its sales agent. As of May 6, 2021, the Company had issued and sold 979,843 shares of common stock for gross proceeds of $9.5 million, resulting in net proceeds of $9.1 million after deducting sales commissions and offering expenses. On May 6, 2021, the Company terminated 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
(the “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 a Venture Loan and Security Agreement (the “Loan and Security Agreement”) with Horizon Technology Finance Corporation (“Horizon”), as lender and collateral agent for itself. The Loan and Security Agreement provides for four separate and independent $2.5 million term loans (“Loan A”, “Loan B”, “Loan C”, and “Loan D”) (with each of Loan A, Loan B, Loan C and Loan D, individually a “Term Loan” and, collectively, the “Term Loans”), 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.
 
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The Company has incurred significant losses and has an accumulated deficit of $72.7 million as of June 30, 2021. F-star expects to incur substantial losses in the foreseeable future as it conducts and expands its research and development activities and clinical trial activities. As of August 13, 2021, the date of issuance of the consolidated financial statements, the Company’s cash and cash equivalents will be sufficient to fund its current operating plan and planned capital expenditures for at least the next 12 months.
The Company may continue to seek additional funding through public equity, private equity, debt financing, collaboration partnerships, or other sources. There are no assurances, however, that the Company will be successful in raising additional working capital, or if it is able to raise additional working capital, it may be unable to do so on commercially favorable terms. The Company’s failure to raise future capital or enter into other such arrangements if and when needed would have a negative impact on its business, results of operations and financial condition and its ability to develop its product candidates.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).
The accompanying interim financial statements as of June 30, 2021, and for the six and three months ended June 30, 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 June 30, 2021, results of operations for the three and six months ended June 30, 2021 and 2020, statement of stockholders’ equity for the three and six months ended June 30, 2021 and 2020 and its cash flows for the six months ended June 30, 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 and six months ended June 30, 2021, are not necessarily indicative of the results expected for the full fiscal year or any interim period.
Principles of Consolidation
The Company’s financial statements have been prepared in conformity with U.S. GAAP. Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the ASC and Accounting Standards Updates (“ASU”) of the FASB. The accompanying consolidated financial statements include the accounts of
F-star
Therapeutics, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions between the consolidated companies have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting years. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the fair value of the assets and liabilities acquired in the transaction between Spring Bank and
F-star
Ltd fair value of the convertible loan containing embedded derivatives, the fair value of contingent value rights, the accrual for research and development expenses, revenue recognition, fair values of acquired intangible assets and impairment review of those assets, warrants, share based compensation expense, and income taxes. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. Estimates are periodically reviewed in light of reasonable changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates or assumptions.
Concentrations of credit risk and of significant suppliers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents in financial institutions in amounts that could exceed government-insured limits. The Company does not believe it is subject to additional credit risks beyond those normally associated with commercial banking relationships.
The Company is dependent on contract research organizations to provide its clinical trials and third-party manufacturers to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply its requirements for supplies and raw materials related to these programs. These programs could be adversely affected by a significant interruption in these manufacturing services or the availability of raw materials.
 
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Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation expense is recognized using the straight-line method over the estimated useful lives of the respective assets as follows:
 
   
Estimated Useful Economic Life
Leasehold property improvements, right of use assets   Lesser of lease term or useful life
Laboratory equipment   5 years
Furniture and office equipment   3 years
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in
right-of-use
(“ROU”) assets, and lease obligations in the Company’s consolidated balance sheets.
ROU assets represent the Company’s right to us
e
 an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. This is the rate the Company would have to pay if borrowing on a collateralized basis over a similar term to each lease. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Impairment of Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows. If the undiscounted cash flows are insufficient to recover the carrying value, an impairment loss is recorded for the difference between the carrying value and fair value of the asset. As of June 30, 2021, no such impairment has been recorded.
License and collaboration arrangements and revenue recognition
The Company’s revenues are generated primarily through license and collaboration agreements with pharmaceutical and biotechnology companies. The terms of these arrangements may include (i) the grant of intellectual property rights (IP licenses) to therapeutic drug candidates against specified targets, developed using the Company’s proprietary mAb
2
bispecific antibody platform, (ii) performing research and development services to optimize drug candidates, and (iii) the grant of options to obtain additional research and development services or licenses for additional targets, or to optimize product candidates, upon the payment of option fees.
The terms of these arrangements typically include payment to the Company of one or more of the following:
non-refundable,
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.
The Company has adopted FASB ASC Topic 606,
Revenue from Contracts with Customers
(“ASC 606”). This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. To date, the Company has entered into License and Collaboration Agreements with Denali Therapeutics, Inc. (“Denali”), and Ares Trading S.A. (“Ares,”an affiliate of Merck KGaA, Darmstadt, Germany) which were determined to be within the scope of ASC 606.
Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized under ASC 606, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination as to whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must make significant judgments, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation.
 
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Once a contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within the contract and determines those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. The Company assesses if these options provide a material right to the customer and if so, they are considered performance obligations.
Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer. The promised goods or services in the Company’s contracts with customers primarily consist of license rights to the Company’s intellectual property for research and development, research and development services, options to acquire additional research and development services, and options to obtain additional licenses, such as a commercialization license for a potential product candidate. Promised goods or services are considered distinct when: (i) the customer can benefit from the good or service on its own or together with other readily available resources; and (ii) the promised good or service is separately identifiable from other promises in the contract.
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
re-evaluates
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
catch-up
basis in the period of adjustment.
After the transaction price is determined, it is allocated to the identified performance obligations based on the estimated standalone selling price. The Company must develop assumptions that require judgment to determine the standalone selling price for each performance obligation identified in the contract. The Company utilizes key assumptions to determine the standalone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction, probabilities of technical and regulatory success and the estimated costs. Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated to each performance obligation are consistent with the amounts the Company would expect to receive for each performance obligation.
The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time based on the use of an input method. The Company accounts for contract modifications as a separate contract if both of the following conditions are met:
 
(i)
the scope of the contract increases because of the addition of promised goods or services that are distinct; and
(ii)
the price of the contract increases by an amount of consideration that reflects standalone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract.
If a contract modification is deemed to not be a separate contract, then the transaction price is updated and allocated to the remaining performance obligations (both from the existing contract and the modification). Previously recognized revenue for goods and services that are not distinct from the modified goods or services is adjusted based upon an updated measure of progress for the partially satisfied performance obligations.
If a contract modification is deemed to be a separate contract, any revenue recognized under the original contract is not retrospectively adjusted and any performance obligations remaining under the original contract continue to be recognized under the terms of that contract.
 
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The Company’s collaboration revenue arrangements include the following:
Up-front
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,
up-front
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
non-refundable,
up-front
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
re-evaluates
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 o
n
 a cumulative
catch-up
basis, which would affect collaboration revenue and net loss in the period of adjustment.
Customer Options: The Company evaluates the customer options to obtain additional items (i.e., additional license rights) for material rights, or options to acquire additional goods or services for free or at a discount. Optional future services that reflect their standalone selling prices do not provide the customer with a material right and, therefore, are not considered performance obligations and are accounted for as separate contracts. If optional future services include a material right, they are accounted for as performance obligations. The Company determines an estimated standalone selling price of any material rights for the purpose of allocating the transaction price. The Company considers factors such as the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised or expires.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any revenue related to sales-based royalties or milestone payments based on the level of sales.
Research and Development Services: The promises under the Company’s collaboration agreements may include research and development services to be performed by the Company on behalf of the partner. Payments or reimbursements resulting from the Company’s research and development efforts are recognized as the services are performed and presented on a gross basis because the Company is the principal for such efforts.
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 compensation expense, 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. Nonrefundable 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.
Warrants
The Company accounts for warrants within stockholders equity or as liabilities based on the characteristics and provisions of each instrument. The Company evaluates outstanding warrants in accordance with ASC 480,
Distinguishing Liabilities from Equity
, and ASC 815,
Derivatives and Hedging
. If none of the criteria in the evaluation in these standards are met, the warrants are classified as a component of stockholders’ equity and initially recorded at their grant date fair value without subsequent remeasurement. Warrants that meet the criteria are classified as liabilities and remeasured to their fair value at the end of each reporting period.
 
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Stock-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 for
non-employee
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.
The Company reviews stock award modifications when there is an exchange of original award for a new award. The Company calculates for the incremental fair value based on the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. The Company immediately recognizes the incremental value as compensation cost for vested awards and recognizes, on a prospective basis over the remaining requisite service period, the sum of the incremental compensation cost and any remaining unrecognized compensation cost for the original award on the modification date.
The fair value of stock options (“options”) on the grant date is estimated using 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 the option’s expected term and the price volatility of the underlying stock, to determine the fair value of the award.
Historically, given the absence of an active market for the ordinary shares of
F-star
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
F-star
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.
F-star
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.
F-star
Ltd utilized this method due to the lack of historical exercise data and the plain nature of its share-based awards. We expect to continue to utilize this methodology until such time as we have adequate historical data regarding the volatility of our traded stock price.
The Company uses the remaining contractual term for the expected life of
non-employee
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.
The Company classifies share-based compensation expense in its consolidated statements of operations and comprehensive loss 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.
Fair value measurements of financial instruments
The Company’s financial instruments consist of cash, accounts payable, CVRs and liability classified warrants. The carrying amounts of cash and accounts payable approximate their fair value due to the short-term nature of those financial instruments. The fair value of CVRs and the liability classified warrants are remeasured to fair value each reporting period.
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,
Fair Value Measurement
(“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.
 
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ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:
 
   
Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
   
Level 2 — Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
 
   
Level 3 — Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, and other current assets, research and development incentives receivable, accounts payable and accrued liabilities and other current liabilities approximate their fair values, due to their short-term nature.
Net loss per share
The Company computes net loss per share in accordance with ASC Topic 260,
Earnings Per Share
(“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
two-class
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.
Diluted net (loss) income per share is the same as basic net (loss) income per share for the periods in which the Company had a net loss because the inclusion of outstanding common stock equivalents would be anti-dilutive.
Income taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.
The Company accounts for uncertainty the consolidated financial statements by applying a
two-step
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
more-likely-than-not
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.
Research and development tax credits received in the United Kingdom are recorded as a reduction to research and development expenses. The U.K. research and development tax credit is payable to the Company 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 If, in the future, any UK research and development tax credits generated are utilized to offset a corporate income tax liability in the United Kingdom, that portion would be recorded as a benefit within the income tax provision and any refundable portion not dependent on taxable income would continue to be recorded as a reduction to research and development expenses.
 
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Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential loss range is probable and reasonably estimable under the provisions of the authoritative guidelines that address accounting for contingencies. The Company expenses costs as incurred in relation to such legal proceedings as general and administrative expense within the consolidated statements of operations and comprehensive loss.
Segment Information
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
program-by-program
basis.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No.
2016-13,
 Measurement of Credit Losses on Financial Instruments
 (“ASU
2016-13”).
ASU
2016-13
will change how companies account for credit losses for most financial assets and certain other instruments. For trade receivables, loans and
held-to-maturity
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.
2019-10,
 Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates
 to amend the effective date of ASU
2016-13,
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
No. 2016-13.
The Company is currently evaluating the potential impact that the adoption of ASU
2016-13
will have on the Company’s financial position and results of operations.
2. Business Combination
As described in Note 1, on November 20, 2020,
F-star
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
in-the-money
fully and partially vested stock options and warrants.
 
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The purchase price is allocated to the fair value of assets and liabilities acquired as follows in the table below (in thousands, except shares of common stock and fair value per share):
 
Purchase Price Allocation
 
Number of
full
common shares
     4,449,559  
Multiplied by fair value per share of common stock
   $ 4.84  
    
 
 
 
Purchase price
   $ 21,536  
    
 
 
 
Cash and cash equivalents
   $ 9,779  
Marketable securities
     5,000  
Prepaid expenses and other assets
     935  
Operating lease right of use asset
     2,784  
Intangible assets
     4,720  
Goodwill
     10,451  
Accounts payable, accrued expenses and other liabilities
     (5,453
Contingent value rights
     (2,520
Liability and equity based warrants
     (422
Deferred tax liability
     (576
Operating lease liability
     (3,162
    
 
 
 
Fair value of net assets acquired
   $ 21,536  
    
 
 
 
3. Net Loss Per Share
The following table summarizes the computation of basic and diluted net loss per share of the Company for such periods (in thousands, except share and per share data):
 
Net Loss Per Share
 
    
For the Three Months Ended
June 30,
    
For the Six Months Ended
June 30,
 
    
2021
    
2020
    
2021
    
2020
 
Net loss
   $ (15,649    $ (6,462    $ (25,518    $ (13,621
Weighted average number shares outstanding, basic and diluted
     17,022,417        1,830,075        13,083,230        1,829,993  
    
 
 
    
 
 
    
 
 
    
 
 
 
Net loss income per common, basic and diluted
   $ (0.92    $ (3.53    $ (1.95    $ (7.44
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted net loss per share of common stock is the same as basic net loss per share of common stock for all periods presented.
 
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The following table provides the potentially dilutive securities outstanding, prior to the use of the treasury stock method or
if-converted
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:
 
Potential Dilutive Shares
 
    
For the Three and Six Months
Ended June 30,
 
    
2021
    
2020
 
Convertible debt shares
     —          182,758  
Common stock warrants
     128,479        —    
Stock options and RSUs
     1,313,522        257,259  
4
. Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following (in thousands):
 
Property, Plant and Equipment, net
 
    
June 30,
    
December 31
 
    
2021
    
2020
 
Leasehold improvements
   $ 209      $ 15  
Laboratory equipment
     2,252        1,788  
Furniture and office equipment
     166        169  
    
 
 
    
 
 
 
       2,627        1,972  
Less: Accumulated depreciation
     1,470        1,183  
    
 
 
    
 
 
 
     $ 1,157      $ 789  
    
 
 
    
 
 
 
Depreciation expense for the six months ended June 30, 2021 and 2020 was $0.3 million and $0.3 million, respectively.
 
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5
. Fair Value Measurements
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
 
    
Fair Value Measurements as of June 30 2021 Using:
 
    
Level 1
    
Level 2
    
Level 3
    
Total
 
Liabilities:
                                   
Contingent value rights
   $ —        $ —        $ 3,103      $ 3,103  
Warrants
     —          —          11        11  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ —        $ —        $ 3,114      $ 3,114  
    
 
 
    
 
 
    
 
 
    
 
 
 
    
Fair Value Measurements as of December 31, 2020 Using:
 
    
Level 1
    
Level 2
    
Level 3
    
Total
 
Liabilities:
                                   
Contingent value rights
   $ —        $ —        $ 2,520      $ 2,520  
Warrants
     —          —          37        37  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ —        $ —        $ 2,557      $ 2,557  
    
 
 
    
 
 
    
 
 
    
 
 
 
The following table reflect
s
 the chang
e
 in the Company’s Level 3 liabilities, which consists of warrants, for the six months ended June 30, 2021 (in thousands):
 
Change in Level 3 Liabilities
 
    
November 2016 Private
Placement Warrants
    
Contingent Value
Rights
 
Balance at December 31, 2020
   $ 37      $ 2,520  
Warrants exercised
     (26     
— 
 
 
Change in fair value of CVR
     —          583  
    
 
 
    
 
 
 
Balance at June 30, 2021
   $ 11      $ 3,103  
    
 
 
    
 
 
 
 
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6. Accrued Expenses and other Current Liabilities
Accrued expenses as of June 30, 2021 and December 31, 2020, consisted of the following (in thousands):
 
    
June 30,
    
December 31
 
    
2021
    
2020
 
Clinical Trial Costs
   $ 2,304      $ 3,394  
Severance
     887        1,953  
Compensation and
B
enefits
     1,277        1,361  
Professional
F
ees
     1,518        1,593  
Other
     314        1,160  
    
 
 
    
 
 
 
 
   $ 6,300      $ 9,461  
    
 
 
    
 
 
 
7. Term Debt
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 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. The Company incurred $0.3 million of debt issuance costs and issued $0.3 million of warrants.
The term note matures on the
48-month
anniversary following the funding date therefore $5 million becomes due on April 1, 2025, and $5 million will become due on June 22, 2025. 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 Company may, at its option upon at least five business days’ written notice to Horizon, prepay all or any portion of the outstanding Term Loan by simultaneously paying to Horizon an amount equal to (i) any accrued and unpaid interest on the outstanding principal balance of the Term Loan so prepaid; plus (ii) an amount equal to (A) if such Term Loan is prepaid on or before the Loan Amortization Date (as defined in the Loan and Security Agreement) applicable to such Term Loan, three percent of the then outstanding principal balance of such Term Loan, (B) if such Term Loan is prepaid after the Loan Amortization Date applicable to such Term Loan, but on or before the date that is 12 months after such Loan Amortization Date, two percent of the then outstanding principal balance of such Term Loan, or (C) if such Term Loan is prepaid more than 12) months after the Loan Amortization Date applicable to such Term Loan, one percent of the then outstanding principal balance of such Term Loan; plus (iii) the outstanding principal balance of such Term Loan; plus (iv) all other sums, if any, that had become due and payable under the Loan and Security Agreement.
 
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The Company’s debt obligation consisted of the following (in thousands)
 
Term Debt
 
    
June 30,
    
December 31,
 
    
2021
    
2020
 
Term Loan A and B due April 2025
   $ 5,000      $     
Term Loan C and D due June 2025
     5,000            
  
 
 
    
 
 
 
Term debt
     10,000            
Less: Unamortized deferred issuance costs
     (231          
Less: Warrant discount and interest
     (303          
  
 
 
    
 
 
 
Total debt obligations- long term
   $ 9,466      $     
  
 
 
    
 
 
 
8
. Stockholders’ Equity
Common Stock
On March 30, 2021, the Company entered into the 2021 Sales Agreement with SVB Leerink with respect to an
”at-the-market”
(“ATM”) offering program under which the Company could offer and sell, from time to time at 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.
Upon delivery of a placement notice in April 2021, and subject to the terms and conditions of the 2021 Sales Agreement, SVB Leerink began to sell the Placement Shares. Under the 2021 Sales Agreement, the Company agreed to pay SVB Leerink a commission equal to three percent of the gross sales proceeds of any Placement Shares, and also provided SVB Leerink with customary indemnification and contribution rights. For the three months ended June 30, 2021, the Company 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 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.
Warrants
In connection with Spring Bank’s initial public offering (“IPO”) in 2016, there was an issuance of warrants to the sole book-running manager to purchase 7,087 shares of common stock. The warrants were exercisable at an exercise price of $60.00 per share and expired on May 5, 2021.
During 2016, Spring Bank entered into a definitive agreement with respect to the private placement of 411,184 shares of common stock and warrants to purchase 408,444 shares of common stock (the “November 2016 Private Placement Warrants”) to a group of accredited investors. The November 2016 Private Placement Warrants are exercisable at an exercise price of $43.16 per share and expire on November 23, 2021. The Company evaluated the terms of these warrants and concluded that they are liability-classified. The Company must recognize any change in the value of the warrant liability each reporting period in the statement of operations and comprehensive loss. As of June 30, 2021, the fair value of the November 2016 Private Placement Warrants was approximately $11,000 and 388,451 warrants have been exercised to date. At June 30, 2021, there were 19,993 warrants outstanding.
During 2019, Spring Bank entered into a loan agreement with Pontifax Medison Finance (Israel) L.P. and Pontifax Medison Finance (Cayman) L.P., as lenders, and Pontifax Medison Finance GP, L.P., pursuant to which Spring Bank issued to the lenders warrants to purchase 62,500 shares of common stock (the “Pontifax Warrants”). The Pontifax Warrants are exercisable at $8.32 per share and expire on September 19, 2025. The Company evaluated the terms of the warrants and concluded that they should be equity-classified. At June 30, 2021, there were 62,500 warrants outstanding.
During 2019, Spring Bank issued warrants to a service provider to purchase 3,750 shares of common stock (the “September 2019 Warrants”). The September 2019 Warrants are exercisable at an exercise price of $16.84 per share and expire on September 19, 2021. The Company evaluated the terms of the warrants and concluded that they should be equity-classified. At June 30, 2021, there were 3,750 warrants outstanding.
 
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In connection with the entry into the Loan and Security Agreement, (see Note 7), the Company has issued to Horizon warrants to purchase an aggregate number of shares of the Company’s common stock in an amount equal to $100,000 divided by the
 exercise
price for each respective
w
arrant. If at any time the Company files a registration statement relating to an offering for its own account, or the account of others, of any of its equity securities, the Company has agreed to include such number of shares underlying the
w
arrants in such registration statement as requested by the holder. The
w
arrants, which are exercisable for an aggregate of 42,236 shares, will be exercisable for a period of seven years at a
per-share
exercise price of $9.47, which is equal to the
10-day
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
w
arrant. At June 30, 2021, there were 42,236 warrants outstanding.
A summary of the warrant activity for the six months ended June 30, 2021, is as follows:
 
    
Warrants
Outstanding
 
Outstanding at December 31, 2020
     144,384  
Exercises
     (51,054
Issued
     42,236  
Expired
     (7,087
    
 
 
 
Outstanding at June 30, 2021
     128,479  
    
 
 
 
9
. Stock Option Plans
Incentive Plans
On June 14, 2019, as part of a group restructuring, the
F-star
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
F-star
group entities’ legacy share option schemes (the
F-star
Alpha Limited Share Option Scheme, the
F-star
Beta Share Option Scheme and the GmbH
F-star
EMI Share Option Scheme). In addition, the GmbH Employee Share Option Plan was transferred to
F-star
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
F-star
Ltd.
Awards granted under the 2019 Plan generally vest over a four-year service period with 28% of the award vesting on the first anniversary of the commencement date and the balance vesting monthly over the remaining three years. Awards generally expire 10 years from the date of the grant. For certain senior members of management and directors, the board of directors approved an alternative vesting schedule.
As result of the Transaction, the share reserve automatically increased on January 1
st
of the year following the year in which
the
 Nasdaq listing occurred, in an amount equal to 4% of the total number of shares outstanding as of December 31 of the preceding year. As a result,
an
 
additional 364,005 shares
were added to
 
the 2019
Plan effective January 1, 2021
. As of June 30, 2021, there were 68,842 shares available for issuance under the 2019 Plan.
In conjunction with the Transaction, all issued and outstanding
F-star
Ltd share options granted under the three
F-star
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
F-star
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
F-star
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.
 
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Amended and Restated 2015 Stock Incentive Plan
In March 2018, the Spring Bank board of directors approved Spring Bank’s Amended and Restated 2015 Stock Incentive Plan (the “Amended and Restated 2015 Plan” and, together with the Spring Bank’s 2014 Stock Incentive Plan (the “2014 Plan
), the “Stock Incentive Plans”). Upon receipt of stockholder approval at Spring Bank’s 2018 annual meeting in June 2018, Spring Bank’s 2015 Stock Incentive Plan was amended and restated in its entirety, increasing the authorized number of shares of common stock reserved for issuance by 800,000 shares. Pursuant to the Amended and Restated 2015 Plan, there are 1,666,863 shares authorized for issuance. In addition, to the extent any outstanding awards under the 2014 Plan expire, terminate, or are otherwise surrendered, cancelled or forfeited after the closing of Spring Bank’s IPO, those shares are added to the authorized shares under the Amended and Restated 2015 Plan. The total number of shares authorized for issuance under both the 2014 Plan and the Amended and Restated 2015 Plan is 2,300,000.
Pursuant to the Exchange Agreement, all outstanding option
s
 to purchase Company common stock were accelerated immediately prior to the Closing and each outstanding option with an exercise price less than the trading price of the Company common stock as of the close of trading 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. As of June 30, 2021, the Company had 98,831 shares available for issuance under the Amended and Restated 2015 Plan.
Stock option valuation
The fair value of stock option grants is estimated using the Black-Scholes option-pricing model with the following assumptions:
 
 
  
Black-Scholes Option-Pricing
 
  
June 30,
2021
 
December 31
2020
Risk-free interest rate
   0.78%   0.17% – 0.42%
Expected volatility
   90.4%  
82.8%-98.3%
Expected dividend yield
   0%   0%
Expected life (in years)
   5.1   5.1
Expected Term
—The expected term represents management’s best estimate for the options to be exercised by option holders.
Volatility
—Since
F-star
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
F-star
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.
Risk-Free Interest Rate
—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for
zero-coupon
U.S. Treasury notes with maturities approximately equal to the share-based awards’ expected term.
Dividend Rate
—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.
Fair Value of Common Stock
— Prior to the Transaction,
F-star
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. The following table summarizes stock option activity under the Company’s stock option plans:
 
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Stock Option Activity
 
 
  
Number of
Shares
 
 
Weighted Average
Exercise Price
 
  
Weighted Average
Contractual Term
 
  
Aggregate Intrinsic
Value
 
 
  
 
 
 
 
 
  
(in years)
 
  
(in thousands)
 
Outstanding as of December 31, 2020
     533,559     $ 3.33        9.30      $ 8,494  
Granted
     617,886       7.77        9.66        994  
Exercised
     (3,670     0.12        8.16        101  
Forfeited
 and expired
     (19,212     2.27        9.15        257  
    
 
 
                           
Outstanding as of June 30, 2021
     1,128,563       5.79        9.11        6,323  
    
 
 
                           
Options exercisable at June 30, 2021
     150,671       8.35        7.37        1,739  
    
 
 
                           
The weighted average grant date fair value of options granted during the six months ended June 30, 2021, and the year ended December 31, 2020, was $6.16 and $14.45 per share, respectively. The total fair value of options vested during the six months ended June 30, 2021, and the year ended December 31, 2020, was $3.0 million and $2.0 million, respectively.
Restricted Stock Units
Time-Based Restricted Stock Units (RSU)
In February 2021, the Company issued 310,385 time-based RSUs to employees and directors under the Amended and Restated 2015 Plan. The weighted average grant date fair value of the time-based RSUs was $8.57 for the six months ended June 30, 2021. The vesting for the time-based RSUs occurs either immediately, after one year or after four years. For the three and six months ended June 30, 2021, the Company recognized approximately $0.5 million and $1.4 million in expenses related to the time-based RSUs.
The following table is a rollforward of all RSU activity under the Stock Incentive Plans for the six months ended June 30, 2021:
 
RSU Activity
 
 
  
Restricted
Stock Units
 
  
Weighted-
Average
Grant Date
Fair Value
 
Total nonvested units at December 31, 2020
     69,749      $ 11.73  
Granted
     310,385        8.57  
Vested
     (63,545      8.57  
    
 
 
    
 
 
 
Total nonvested units at June 30, 2021
     316,589      $ 9.31  
    
 
 
    
 
 
 
Share-based compensation
The Company recorded share-based compensation expense in the following expense categories for the six months ended June 30, 2021, and 2020 of its consolidated statements of operations and comprehensive loss (in thousands):
 
Share-Based Compensation
 
 
  
For the Three Months Ended June 30,
 
  
For the Six Months ended June 30,
 
 
  
2021
 
  
2020
 
  
2021
 
  
2020
 
Research and development expenses
   $ 531      $ 169      $ 944      $ 380  
General and administrative expenses
     1,328        302        3,095        625  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 1,859      $ 471      $ 4,039      $ 1,005  
    
 
 
    
 
 
    
 
 
    
 
 
 
At June 30, 2021, there was $7.5 million of unrecognized stock-based compensation expense relating to stock options granted pursuant to the Stock Incentive Plans, which will be recognized over th
e
 weighted-average remaining vesting period of 3.0 years.
At June 30, 2021, there was $1.9 million of unrecognized stock-based compensation expense relating to the time-based RSUs granted pursuant to the Stock Incentive Plans, which will be recognized over the weighted-average remaining vesting period of 3.4 years.
 
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Table of Contents
10
. Significant Agreements
License and Collaboration agreements
For the six months ended June 30, 2021 and 2020, the Company had License and Collaboration agreements (“LCAs”) with Denali and Ares. The following table summarizes the revenue recognized in the Company’s con