The following information should be read in conjunction with the unaudited
financial information and the notes thereto included in this Quarterly Report on
Form
10-Q
and the consolidated financial statements and notes thereto for the year ended
December 31, 2020, and the related Management's Discussion and Analysis of
Financial Condition and Results of Operations, contained in our
Annual Report on Form
10-K
filed with the SEC on March 30, 2021.
Our actual results and the timing of certain events may differ materially from
the results discussed, projected, anticipated, or indicated in any
forward-looking statements due to various important factors, risks and
uncertainties, including, but not limited to, those set forth under
"Forward-Looking Statements" included elsewhere in this Quarterly Report on Form
10-Q
or under "Risk Factors" in Part I, Item 1A of our Annual Report on
Form 10-K
for the year ended December 31, 2020 filed with the SEC on March 30, 2021, as
may be updated by Part II, Item 1A, Risk Factors of our subsequently filed
Quarterly Reports on Form
10-Q.
We caution our readers that forward-looking statements are not guarantees of
future performance and that our actual results of operations, financial
condition and liquidity, and the development of the industry in which we operate
may differ materially from those expressed or implied by the forward-looking
statements contained in this Quarterly Report on Form
10-Q.
We caution readers not to place undue reliance on any forward-looking statements
made by us, which speak only as of the date they are made. We disclaim any
obligation, except as specifically required by law and the rules of the SEC, to
publicly update or revise any such statements to reflect any change in our
expectations or in events, conditions or circumstances on which any such
statements may be based, or that may affect the likelihood that actual results
will differ from those set forth in the forward-looking statements.
Overview
F-star
Therapeutics, Inc.
(collectively with its subsidiaries,
"F-star"
or the "Company") is a clinical-stage biopharmaceutical company dedicated to
developing next generation immunotherapies to transform the lives of patients
with cancer.
F-star's
goal is to offer patients better and more durable benefits than currently
available immuno-oncology treatments by developing medicines that seek to block
tumor immune evasion. Through our proprietary tetravalent, bispecific natural
antibody (mAb²
™
) format, our mission is to generate highly differentiated medicines with
monoclonal antibody-like manufacturability, good safety and tolerability. With
four distinct binding sites in a natural human antibody format, we believe that
our proprietary technology will overcome many of the challenges facing current
immuno-oncology therapies, due to the strong pharmacology enabled by tetravalent
bispecific binding.
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. Phase 1 data
from 43 heavily
pre-treated
patients with advanced cancer, who have failed
PD-1/PD-L1
therapy, showed that administration of FS118 was well-tolerated with no dose
limiting toxicities up to 20 mg/kg. In addition, a disease control rate ("DCR"),
defined as either a complete response, partial response or stable disease, of
49% was observed in 39 evaluable patients receiving dose levels of FS118 of
1mg/kg or greater. In acquired resistance patients, DCR was 59% (16 out of 27
patients) and long-term (greater than six months) disease control was observed
in six of these patients. We expect to provide an update from the
proof-of-concept
Phase 2 trial in
PD-1/PD-L1
acquired resistance head and neck cancer patients in
mid-2022.
Recent data from an external randomized phase 3 trial in patients with
previously untreated, locally advanced or metastatic melanoma provides clinical
validation for the combination of
LAG-3
and
PD-1
inhibition. This clinical benefit in targeting
PD-1
and
LAG-3
gives us reason to believe that FS118 has potential to benefit patients not only
with acquired resistance, but also in preventing resistance in patients
receiving
PD-1
monotherapy. We intend to initiate clinical trials in checkpoint inhibitor (CPI)
naïve patients in biomarker enriched
non-small
cell lung cancer ("NSCLC") and diffuse large B cell lymphoma ("DLBCL")
populations in second half of 2021.
F-star's
second product candidate, FS120, aims to improve checkpoint inhibitor and
chemotherapy outcomes and is a 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
is developing FS120 alone and in combination with
PD-1/PD-L1
therapy for the treatment of tumors where
PD-1/PD-L1
products are approved, and which have
co-expression
of OX40 and CD137 in the tumor microenvironment.
F-star
initiated a Phase 1 clinical trial in patients with advanced cancers in the
fourth quarter of 2020 and plans to provide an update on the accelerated dose
titration phase of this study later this year. We have recently entered a
clinical trial collaboration and supply agreement with MSD to evaluate the
combination of FS120 and the
PD-1
inhibitor, pembrolizumab.
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.
F-star
initiated a Phase 1 clinical trial in patients with advanced cancers for FS222
in late 2020. We believe there is a strong rationale to combine FS222 with other
anti-cancer agents, including targeted therapy and chemotherapy, and this can be
done within the Phase 1 study. We expect to report an update on this study in
late 2021.

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SB 11285, which
F-star
acquired pursuant to a business combination with Spring Bank Pharmaceuticals,
Inc. ("Spring Bank"), is a next generation cyclic dinucleotide STimulator of
INterferon Gene ("STING") agonist designed to improve checkpoint inhibition
outcomes as an immunotherapeutic compound for the treatment of selected cancers.
SB 11285 appeared to be well tolerated both alone and in combination with
atezolizumab across all dose levels tested
to-date,
including five dose levels as monotherapy and three dose levels as a
combination. Initial analysis showed that pharmacokinetics (PK) were
in-line
with the predicted profile for rapid cellular uptake, a characteristic of second
generation STING agonists.
F-star
is continuing with further dose-escalation and in parallel pursuing strategic
business development opportunities for SB 11285. In June 2021, a U.S. patent was
granted to
F-star
with claims protecting the composition of matter of SB 11285.
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 the capital stock and convertible notes of
F-star
Ltd (each a "Seller", and collectively with holders of
F-star
Ltd securities who subsequently became parties to the Exchange Agreement, the
"Sellers"). Pursuant to the Exchange Agreement, each ordinary share of
F-star
Ltd outstanding immediately prior to the closing of the Transaction (the
"Closing") was exchanged by the Sellers that owned such
F-star
Ltd shares for a number of duly authorized, validly issued, fully paid and
non-assessable
shares of Company common stock pursuant to an exchange ratio formula as set
forth in the Exchange Agreement (the "Exchange Ratio"), rounded to the nearest
whole share of Company common stock (after aggregating all fractional shares of
Company common stock issuable to such Seller). Also, on November 20, 2020, in
connection with, and prior to completion of, the Transaction, Spring Bank
effected a
1-for-4
reverse stock split of its common stock (the "Reverse Stock Split") and,
following the completion of the Transaction, changed its name to F-star
Therapeutics, Inc. Following the completion of the Transaction, the business of
the Company became the business conducted by
F-star,
which is a clinical-stage immuno-oncology company focused on cancer treatment
through its proprietary tetravalent bispecific antibody programs. Unless
otherwise noted, all references to share amounts in this report reflect the
Reverse Stock Split.
Under the terms of the Exchange Agreement, at the Closing, Spring Bank issued an
aggregate of 4,620,618 shares of its common stock to
F-star
Ltd stockholders, based on an Exchange Ratio of 0.1125 shares of Spring Bank
common stock for each
F-star
Ltd ordinary share, stock option and restricted stock unit ("RSU") outstanding
immediately prior to the Closing. The Exchange Ratio was determined through
arms-length negotiations between Spring Bank and
F-star
Ltd pursuant to a formula set forth in the Exchange Agreement.
Pursuant to the Exchange Agreement, immediately prior to the Closing, certain
investors in
F-star
Ltd purchased $15.0 million of
F-star
Ltd ordinary shares (the
"Pre-Closing
Financing"). These ordinary shares of
F-star
Ltd were then exchanged at the Closing for shares of the Company's common stock
in the Transaction at the Exchange Ratio.
Pursuant to the Exchange Agreement, all outstanding options to purchase Spring
Bank common stock were accelerated immediately prior to the Closing and each
outstanding option with an exercise price greater than the closing price of the
stock on the Closing Date was exercised in full and all other outstanding
options to purchase Company common stock were cancelled effective as of the
Closing Date.
Immediately following the Reverse Stock Split and the Closing, there were
approximately 4,449,559 shares of Spring Bank common stock outstanding.
Following the Closing, the
F-star
Ltd stockholders beneficially owned approximately 53.7% of the combined
company's common stock, and the existing stockholders of Spring Bank
beneficially owned approximately 46.3% of the combined company's common stock.
Concurrently with the execution of the Exchange Agreement, certain officers and
directors of Spring Bank and
F-star
Ltd and certain stockholders of
F-star
Ltd entered into
lock-up
agreements, pursuant to which they agreed to certain restrictions on transfers
of any shares of the Company's common stock for the
180-day
period following the Closing, other than the shares of the Company's common
stock received in exchange for ordinary shares of
F-star
Ltd subscribed for in the
Pre-Closing
Financing and pursuant to certain other limited exceptions.
In addition, at the Closing, Spring Bank,
F-star
Ltd, a representative of Spring Bank stockholders prior to the Closing, and
Computershare Trust Company N.A., as the Rights Agent, entered into a STING
Agonist Contingent Value Rights Agreement (the "STING Agonist CVR Agreement").
Pursuant to the Exchange Agreement and the STING Agonist CVR Agreement, each
pre-Reverse
Stock Split share of Spring Bank common stock held by stockholders as of the
record date on November 19, 2020, immediately prior to the Closing, received a
dividend of one contingent value right ("CVR") ("STING Agonist CVR"), payable on
a
pre-Reverse
Stock Split basis, entitling such holders to receive, in connection with certain
transactions involving proprietary STING agonist compound designated as SB 11285
occurring on or prior to the STING Agonist CVR Expiration Date (as defined
below) that resulted in aggregate Net Proceeds (as defined in the STING Agonist
CVR Agreement) at least equal to the Target Payment Amount (as defined below),
an aggregate amount equal to the greater of (i) 25% of the Net Proceeds received
from all CVR Transactions (as defined in the STING Agonist CVR Agreement) and
(ii) an aggregate amount equal to the product of $1.00 and the total number of
shares of Company common stock outstanding as of such record date (not to exceed
an aggregate amount of $18.0 million) (the "Target Payment Amount").

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The CVR payment obligation expires on the later of 18 months following the
Closing or the
one-year
anniversary of the date of the final database lock of the STING clinical trial
(as defined in the STING Agonist CVR Agreement) (the "STING Agonist CVR
Expiration Date"). The STING Agonist CVRs are not transferable, except in
certain limited circumstances, are not certificated or evidenced by any
instrument, do not accrue interest and are not registered with the SEC or listed
for trading on any exchange. Until the STING Agonist CVR Expiration Date,
subject to certain exceptions, the Company is required to use commercially
reasonable efforts to (a) complete the STING Trial and (b) pursue a CVR
Transaction. The STING Agonist CVR Agreement became effective upon the Closing
and, unless terminated earlier in accordance with its terms, will continue in
effect until the STING Agonist CVR Expiration Date the payment or all CVR
payment amounts are paid pursuant to their terms.
At the Closing, Spring Bank,
F-star
Ltd, a representative of Spring Bank stockholders prior to the Closing, and
Computershare Trust Company N.A., as the Rights Agent, also entered into a STING
Antagonist Contingent Value Rights Agreement (the "STING Antagonist CVR
Agreement"). Pursuant to the Exchange Agreement and the STING Antagonist CVR
Agreement, each share of common stock held by Spring Bank stockholders as of
November 19, 2020, immediately prior to the Closing, received a dividend of one
CVR ("STING Antagonist CVR") entitling such holders to receive, in connection
with the execution of a potential development agreement (the "Approved
Development Agreement") and certain other transactions involving proprietary
STING antagonist compound occurring on or prior to the STING Antagonist CVR
Expiration Date (as defined below) equal to: 80% of all net proceeds (as defined
in the STING Antagonist CVR Agreement) received by the Company after the Closing
pursuant to (i) the Approved Development Agreement, if any, and (ii) all CVR
Transactions (as defined in the STING Antagonist CVR Agreement) entered into
prior to the STING Antagonist CVR Expiration Date.
The STING Antagonist CVRs are not transferable, except in certain limited
circumstances, are not certificated or evidenced by any instrument, do not
accrue interest, and are not registered with the SEC or listed for trading on
any exchange. Until the STING Antagonist CVR Expiration Date, subject to certain
exceptions, the Company is required to use commercially reasonable efforts to
(a) consummate the Approved Development Agreement, (b) to perform the terms of
the Approved Development Agreement and (c) pursue CVR Transactions. The STING
Antagonist CVR Agreement became effective upon the Closing and, unless
terminated earlier in accordance with its terms, will continue in effect until
the STING Antagonist CVR Expiration Date or all CVR payment amounts are paid
pursuant to their terms. On July 8, 2021, the Company entered into a License
Agreement with AstraZeneca plc ("AstraZeneca") under which AstraZeneca will
receive global rights to research, develop and commercialize next generation
STING inhibitor compounds. Under the terms of the agreement, AstraZeneca is
granted exclusive access to and will be responsible for all future research,
development and commercialization of the STING inhibitor compounds.
F-star
is eligible to receive upfront and near-term payments of up to $12 million upon
meeting certain milestones. In addition,
F-star
will be eligible for development and sales milestone payments of over
$300 million, as well as single digit percentage royalty payments. Payments
received by
F-star
are subject to a contingent value rights agreement (CVR 2), under which 80% will
be payable to stockholders of
F-star
that were previously stockholders of Spring Bank prior to the business
combination between
F-star
and Spring Bank.
The acquisition-date fair value of the CVR liability represents the future
payments that are contingent upon the achievement of sale or licensing for the
product candidates. The fair value of the contingent consideration acquired of
$2.5 million as of December 31, 2020, and $3.1 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 were replaced by options and
awards on the same terms (including vesting), of the combined company's common
stock, based on the Exchange Ratio.
The Company's common stock, which is listed on the Nasdaq Capital Market, traded
through the close of business on Friday, November 20, 2020, under the ticker
symbol "SBPH" and continued trading on the Nasdaq Capital Market, on a
post-Reverse Stock Split adjusted basis, under the ticker symbol "FSTX"
beginning on Monday, November 23, 2020. Commencing on November 23, 2020, the
Company's common stock was represented by a new CUSIP number, 30315R 107.

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The Transaction was accounted for as a business combination using the
acquisition method of accounting under the provisions of Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805,
Business Combinations
("ASC 805"). The Transaction was accounted for as a reverse acquisition with
F-star
Ltd being deemed the acquiring company for accounting purposes. Under ASC 805,
F-star
Ltd as the accounting acquirer, recorded the assets acquired and liabilities
assumed of Spring Bank in the Transaction at their fair values as of the
acquisition date.
F-star
Ltd was determined to be the accounting acquirer based on an analysis of the
criteria outlined in ASC 805 and the facts and circumstances specific to the
Transaction, including the fact that immediately following the Transaction:
(1) F-star
Ltd shareholders owned the majority of the voting rights of the combined
company;
(2) F-star
Ltd designated a majority (five of eight) of the initial members of the board of
directors of the combined company; and
(3) F-star
Ltd senior management held the key positions in senior management of the
combined company. As a result, upon consummation of the Transaction, the
historical financial statements of
F-star
Ltd became the historical financial statements of the combined organization.
Impact of
COVID-19
on our Business
In March 2020, the World Health Organization declared the novel strain of
coronavirus
("COVID-19")
a pandemic and recommended containment and mitigation measures worldwide. The
COVID-19
pandemic has been evolving, and to date has led to the implementation of various
responses, including government-imposed quarantines, travel restrictions and
other public health safety measures.
Management continues to closely monitor the impact of the
COVID-19
pandemic on all aspects of the business, including how it will impact operations
and the operations of customers, vendors, and business partners. Management took
action in April 2020 to temporarily furlough some of its workforce and took
advantage of the UK Government Coronavirus Job Retention Scheme that provided
funding to businesses with furloughed staff. The grant funding available covered
80% of furloughed employees' wages plus employer National Insurance and pension
contributions up to a maximum of £2,500 per month per furloughed employee. From
December 2020 to April 2021, the UK government imposed a third national
"lockdown", severely impacting on
day-to-day
activities. The onset of the global pandemic and consequent government-imposed
restrictions resulted in a three to
six-month
delay in the operationalization of our clinical trials for FS118, FS120, FS222
and SB 11285. The extent to which
COVID-19
impacts our future business, results of operation and financial condition will
depend on future developments, which are highly uncertain and cannot be
predicted with confidence at this time, such as the continued duration of the
outbreak, new information that may emerge concerning the severity or other
strains of
COVID-19
or the effectiveness of actions to contain
COVID-19
or treat its impact, among others. If the Company or any of the third parties
with which we engage, however, were to experience shutdowns or other business
disruptions, the ability to conduct business in the manner and on the timelines
presently planned could be materially and negatively affected, which could have
a material adverse impact on our business, results of operation and financial
condition. The estimates of the impact on the Company's business may change
based on new information that may emerge concerning
COVID-19
and the actions to contain it or treat its impact and the economic impact on
local, regional, national, and international markets.
Management has not identified any triggering events that would result in any
significant impairment losses in the carrying values of assets as a result of
the pandemic and are not aware of any specific related event or circumstance
that would require management to revise estimates reflected in our consolidated
financial statements.
Recent Developments
Loan and Security Agreement
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.
The term note matures on the
48-month
anniversary following the funding date. The principal balance the Term Loan
bears a floating interest. The interest rate is calculated initially and,
thereafter, each calendar month as the sum of (a) the per annum rate of interest
from time to time published in The Wall Street Journal as contemplated by the
Loan and Security Agreement, or any successor publication thereto, as the "prime
rate" then in effect, plus (b) 6.25%; provided that, in the event such rate of
interest is less than 3.25%, such rate shall be deemed to be 3.25% for purposes
of calculating the interest rate. Interest is payable on a monthly basis based
on each Term Loan principal amount outstanding the preceding month.

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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.
In connection with the entry into the Loan and Security Agreement, the Company
issued to Horizon warrants (each, individually, a "Warrant" and, collectively,
the "Warrants") to purchase an aggregate number of shares of the Company's
common stock in an amount equal to $100,000 divided by the price for each
respective Warrant. 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 agreed to include such number of shares
underlying the Warrants in that registration statement as requested by the
holder.
The Warrants, 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 Warrant.
Sales Agreement and Underwriting Agreement
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 (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. The Company agreed to pay SVB Leerink a commission equal to three
percent of the gross sales proceeds of any Placement Shares sold through SVB
Leerink under the 2021 Sales Agreement, and also provided SVB Leerink with
customary indemnification and contribution rights. As of May 6, 2021, the
Company had issued and sold 979,843 shares, for gross proceeds of $9.5 million,
resulting in net proceeds of $9.2 million after deducting sales commissions. On
May 6, 2021, the Company terminated the 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.
Financial Operations Overview
License revenue
To date, we have not generated any revenue from product sales, and we do not
expect to generate any revenue from product sales for the foreseeable future.
Our revenue consists of collaboration revenue under our license and
collaboration agreements with Ares Trading S.A. ("Ares") and Denali
Therapeutics, Inc. ("Denali"), including amounts that are recognized related to
upfront payments, milestone payments, option exercise payments, and amounts due
to us for research and development services. In the future, revenue may include
new collaboration agreements, additional milestone payments, option exercise
payments, and royalties on any net product sales under our collaborations. We
expect that any revenue we generate will fluctuate from period to period as a
result of the timing and amount of license, research and development services,
and milestone and other payments.

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Operating Expenses
Research and development costs
Research and development costs are expensed as incurred. Research and
development expenses are comprised of costs incurred in performing research and
development activities, including salaries, share-based compensation and
benefits, facilities costs and laboratory supplies, depreciation, amortization
and impairment expense, manufacturing expenses and external costs of outside
vendors engaged to conduct preclinical development activities and clinical
trials as well as the cost of licensing technology. Typically, upfront payments
and milestone payments made for the licensing of technology are expensed as
research and development in the period in which they are incurred, except for
payments relating for intellectual property rights with future alternative use
which will be expensed when the intellectual property is in use.
Non-refundable
advance payments for goods or services to be received in the future for use in
research and development activities are recorded as prepaid expenses. The
prepaid amounts are expensed as the related goods are delivered or the services
are performed.
Those expenses associated with R&D and clinical costs primarily include:

     •    expenses incurred under agreements with contract research organizations
          ("CROs") as well as investigative sites and consultants that conduct our
          clinical trials, preclinical studies and other scientific development
          services;



     •    manufacturing
          scale-up
          expenses and the cost of acquiring and manufacturing preclinical and
          clinical trial materials;



     •    expenses incurred for outsourced professional scientific development
          services;



     •    costs for laboratory materials and supplies used to support our research
          activities;



     •    allocated facilities costs, depreciation, and other expenses, which
          include rent and utilities;



     •    up-front,
          milestone and management fees for maintaining licenses under our
          third-party licensing agreements; and



  •   compensation expense.

The Company recognizes external R&D costs based on an evaluation of the progress to completion of specific tasks using information provided to it by its internal program managers and service providers. Research and development activities are central to the Company's business models. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials. As a result, the Company expects that research and development expenses will increase over the next several years as the Company increases personnel costs, initiate and conduct additional clinical trials and prepare regulatory filings related to the various product candidates. The successful development of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of these product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing products, including the uncertainty of:



     •    research and development support of our product candidates, including
          conducting future clinical trials of FS118, FS120, FS222 and SB 11285;



  •   progressing the clinical development of FS118, FS120, FS222 and SB 11285;



     •    establishing an appropriate safety profile with investigational new
          drug-enabling studies to advance our programs into clinical development;



  •   identifying new product candidates to add to our development pipeline;



     •    successful enrollment in, and the initiation and completion of clinical
          trials;



     •    the timing, receipt and terms of any marketing approvals from applicable
          regulatory authorities;



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



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



     •    the development and timely delivery of commercial-grade drug formulations
          that can be used in our clinical trials;



     •    addressing any competing technological and market developments, as well
          as any changes in governmental regulations;



     •    negotiating favorable terms in any collaboration, licensing or other
          arrangements into which we may enter and performing our obligations under
          such arrangements;



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     •    maintaining, protecting and expanding our portfolio of intellectual
          property rights, including patents, trade secrets and
          know-how,
          as well as obtaining and maintaining regulatory exclusivity for our
          product candidates;



  •   continued acceptable safety profile of the drugs following approval; and



  •   attracting, hiring, and retaining appropriately qualified personnel.


A change in the outcome of any of these variables with respect to the
development of a product candidate could mean a significant change in the costs
and timing associated with the development of that product candidate. For
example, the U.S. Food and Drug Administration, European Medicines Agency or
another regulatory authority may require us to conduct clinical trials beyond
those that we anticipate will be required for the completion of clinical
development of a product candidate, or we may experience significant trial
delays due to patient enrolment or other reasons, in which case we would be
required to expend significant additional financial resources and time on the
completion of clinical development. In addition, we may obtain unexpected
results from our clinical trials, and we may elect to discontinue, delay or
modify clinical trials of some product candidates or focus on others.
Identifying potential product candidates and conducting preclinical testing and
clinical trials is a time-consuming, expensive and uncertain process that takes
years to complete, and we may never generate the necessary data or results
required to obtain marketing approval and achieve product sales. In addition,
our product candidates, if approved, may not achieve commercial success.
General and administrative expenses
General and administrative expenses consist primarily of salaries, related
benefits, travel, and share-based compensation expense for personnel in
executive, finance, legal and administrative functions. General and
administrative expenses also include facility-related costs, patent filing and
prosecution costs, insurance and marketing costs and professional fees for
legal, consulting, accounting, audit, tax services and costs associated with
being a public company. Other expense also includes foreign currency transaction
losses. The Company expects that general and administrative expenses will
increase in the future as the Company expands its operating activities and
incurs costs of being a US public company.
Other income and expenses, net
Other income and expenses, net, is primarily rent received from subletting an
office in the United States and interest received on overdue trade receivable
balances, bank interest received, and interest expense, which is primarily bank
interest payable and similar charges, the interest liability on leased assets
and convertible debt notes, changes in the fair value of CVR and foreign
exchange losses incurred. Foreign exchange gain (loss) is foreign exchange gains
or losses due to the fluctuation of the GBP, U.S. dollar and/or the Euro. Change
in the fair value of convertible debt is the fair value adjustment of the
convertible notes as measured using level 3 inputs which was converted on
November 20, 2020, with the transaction with Spring Bank.
Income tax
The Company is subject to corporate taxation in the United States, United
Kingdom and Austria.
Our UKestablished entities have generated losses and some profits in the United
Kingdom since inception and have therefore not paid significant U.K. corporation
tax.
F-star
Biotechnologische
Forschungs-und
Entwicklungsges.m.b.H has historical losses in Austria with more recent profits,
which has resulted in payment of Austrian corporation tax in the years ended
December 31, 2020, and 2019. The corporation tax benefit (tax) presented in the
Company's statements of comprehensive income (loss) represents the tax impact
from its operating activities in the United States, United Kingdom and Austria,
which have generated taxable income in certain periods. As the entities located
in the United Kingdom carry out extensive research and development activities,
they seek to benefit from the UK research and development tax credit cash rebate
regime known as the Small and
Medium-sized
Enterprises R&D Tax Credit Program (the "SME Program"). Qualifying expenditures
largely comprise employment costs for research staff, consumables expenses
incurred under agreements with third parties that conduct research and
development, preclinical activities, clinical activities and manufacturing on
the Company's behalf and certain internal overhead costs incurred as part of
research projects. No research and development activities are carried out in
Austria, so the Company is not able to utilize the research and development
premium available under the Austrian corporation tax regime.
The tax credit received in the United Kingdom pursuant to the SME Program
permits companies to deduct an extra 130% of their qualifying costs from their
yearly profit or loss, as well as the normal 100% deduction, to make a total
230% deduction. If the company is incurring losses, it is entitled to claim a
tax credit worth up to 14.5% of the surrenderable loss. To qualify for relief
under the SME Program, companies are required to employ fewer than 500 staff and
have a turnover of under €100.0 million or a balance sheet total of less than
€86.0 million.

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The UK government has released draft legislation to introduce a cap on the
amount of the payable credit that a qualifying loss-making small and
medium-sized
enterprise business can receive through research and development relief in any
one year. The cap would be applied to restrict payable credit claims in excess
of £20,000 with effect for accounting periods beginning on or after April 2021
by reference to, broadly, three times the total employee payroll tax and social
security liabilities of the company. The draft legislation also contains an
exemption which prevents the cap from applying. That exemption requires the
company to be creating, or taking steps to create, intellectual property as well
as having research and development expenditure in respect of connected parties
which does not exceed 15% of the total claimed. The Company does not expect this
legislation, if adopted, to have a material impact on its payable credit claims
based on amounts currently claimed.
Research and development tax credits received in the UK are recorded as a
reduction in research and development expenses. The UK research and development
tax credit is payable to companies after surrendering tax losses and is not
dependent on current or future taxable income. As a result, it is not reflected
as part of the income tax provision. If, in the future, any U.K. 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.
During the three-month period ended June 30, 2021 the Company received
$3.6 million in research and development tax credits related to the year ended
December 31, 2020.
Income tax expense was relatively immaterial amounts for the three and six
months ended June 30, 2021 and 2020.
In the event the Company generates revenues in the future, the Company may
benefit from the United Kingdom "patent box" regime that allows profits
attributable to revenues from patents or patented products to be taxed at an
effective rate of 10%. Value Added Tax ("VAT") is broadly charged on all taxable
supplies of goods and services by
VAT-registered
businesses. In the United Kingdom, under current rates, an amount of 20% of the
value, as determined for VAT purposes, of the goods or services supplied is
added to all sales invoices and is payable to the United Kingdom's tax
authority, Her Majesty's Revenue and Customs ("HMRC"). Similarly, VAT paid on
purchase invoices is generally reclaimable from HMRC. In Austria, under current
rates, an amount of 20% of the value, as determined for VAT purposes, of the
goods or services supplied is added to all sales invoices and is payable to the
Austrian tax authority. Similarly, VAT paid on purchase invoices is generally
reclaimable from the Austrian tax authority.
Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we
are required to estimate our accrued research and development expenses. This
process involves reviewing open contracts and purchase orders, communicating
with our personnel to identify services that have been performed on our behalf
and estimating the level of service performed and the associated costs incurred
for the services when we have not yet been invoiced or otherwise notified of the
actual costs. The majority of our service providers invoice us in arrears for
services performed, on a predetermined schedule or when contractual milestones
are met; however, some require advanced payments. We make estimates of our
accrued expenses as of each balance sheet date in our consolidated financial
statements based on facts and circumstances known to us at that time. Examples
of estimated accrued research and development expenses include fees paid to:

     •    CROs in connection with performing research services on our behalf and
          clinical trials;



  •   investigative sites or other providers in connection with clinical trials;



     •    vendors in connection with preclinical and clinical development
          activities; and



     •    vendors related to product manufacturing, development and distribution of
          preclinical and clinical supplies.

We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.



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Contingent value rights
The acquisition-date fair value of the CVR liability represents the future
payments that are contingent upon the achievement of sale or licensing for the
STING product candidates. The fair value of the contingent value rights is based
on the Company's probability-weighted discounted cash flow assessment that
considers probability and timing of future payments. The fair value measurement
is based on significant Level 3 unobservable inputs such as the probability of
achieving a sale or licensing agreement, anticipated timelines, and discount
rate. Changes in the fair value of the liability will be recognized in the
consolidated statement of operations and comprehensive loss until settlement.
Share-based compensation
The Company accounts for share-based compensation in accordance with ASC 718,
"Compensation - Stock Compensation" ("ASC 718"). ASC 718 requires companies to
estimate the fair value of equity-based payment awards on the date of grant. The
value of the portion of the award that is ultimately expected to vest is
recognized as an expense over the requisite service period in the Company's
consolidated statements of operations and comprehensive loss.
The Company records the expense for option awards using a graded vesting method.
The Company accounts for forfeitures as they occur. For share-based awards
granted to
non-employee
consultants, the measurement date is the date of grant. The compensation expense
is then recognized over the requisite service period, which is the vesting
period of the respective award.
The fair value of stock options ("options") on the grant date is 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 an 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 considering a number
of objective and subjective factors, including external market conditions
affecting the biotechnology industry sector. Each valuation methodology includes
estimates and assumptions that require judgment. These estimates and assumptions
include a number of objective and subjective factors in determining the value of
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 is calculated based on a period of time commensurate with
the assumption used for the expected term. The risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of grant commensurate
with the expected term assumption.
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. 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. We expect to
continue to do so until such time as we have adequate historical data regarding
the volatility of our traded stock price.
The Company classifies share-based compensation expense in its consolidated
statements of operations and comprehensive loss Income in the same manner in
which the award recipient's payroll costs are classified or in which the award
recipient's service payments are classified.

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Results of Operations
Comparison of the Three Months Ended June 30, 2021 and 2020
The following table summarizes our results of operations for the three ended
June 30, 2021 and 2020 (in thousands):

                                                 Three Months Ended June 30,
                                              2021           2020         Change
                                                        (in thousands)
Statements of Comprehensive Income
License revenue                             $      -       $    543      $    (543 )
Operating expenses:
Research and development                        8,437         2,093          6,344
General and administrative                      6,501         3,236          3,265

Total operating expenses                    $  14,938      $  5,329      $   9,609

Loss from operations                          (14,938 )      (4,786 )      (10,152 )
Other non-operating income (expense):
Other income (expense)                            (46 )        (143 )           97

Change in fair value of convertible notes - (1,498 ) 1,498 Change in fair value of liability

                (583 )          -            (583 )

Loss before income taxes                      (15,567 )      (6,427 )       (9,140 )
(Loss) benefit for income taxes                   (82 )         (35 )          (47 )

Net loss                                    $ (15,649 )    $ (6,462 )    $  (9,187 )



Licensing and Research & Development Services Revenue
Revenue for the three months ended June 30, 2021 was zero compared to
$0.5 million for the three months ended June 30, 2020, a decrease of
approximately $0.5 million, due to a reduction of R&D services revenue from Ares
of $0.4 million and Denali of $0.1 million. All performance obligations relating
to the second Fcab was satisfied in February 2021.
Research and development costs
Costs related to research and development for the three months ended June 30,
2021, increased by approximately $6.3 million compared to the three months ended
June 30, 2020. This $6.3 million increase for the three-month June 30, 2021, was
primarily due to a $2.0 million increase in manufacturing costs, mainly due to
an FS118 manufacturing batch in the second quarter of 2021, an increase in
clinical CRO and clinical assay costs of $1.2 million, due to a full quarter of
Phase 1 clinical trial costs for FS120 and FS222, and an increase in other costs
of $0.5 million due to the timing of other project-related activities. The
remaining increase of $2.6 million is primarily due to a $1.4 million decrease
in the UK R&D tax incentive credit year over year, which is allocated across all
programs, a $0.7 million increase in R&D staff costs, $0.3 million increase
laboratory consumables and $0.2 million increase in other allocated costs.
General and administrative expense
General and administrative expense for the three months ended June 30, 2021,
increased by approximately $3.3 million due to an increase of $1.0 million in
share-based compensation, an increase of $1.5 million in legal and professional
fees, $0.5 million in insurance and other costs associated with being a public
company and $0.4 million in other costs primarily due to additional rent for the
leased buildings acquired with Spring Bank transaction, offset by a decrease of
$0.1 million in staff costs.
Other income (expenses)
Other income (expense) for the three-month period ended June 30, 2021,
consisting primarily of rental income of $0.2 million offset by foreign exchange
losses of $0.1 million and interest expense on the term debt of $0.1 million. In
addition, there was a charge of $0.6 million for the change in fair value of the
CVR liability.
For the three months ended June 30, 2020, the total expense of $0.1 million
consisted of other income of $0.5 million from the UK government Coronavirus Job
Retention Scheme, for staff that were furloughed in the first half of 2020,
offset buy foreign currency losses of $0.3 million and interest expense related
to the convertible debt of $0.3 million.

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Table of Contents Comparison of the Six Months Ended June 30, 2021 and 2020 The following table summarizes our results of operations for the six ended June 30, 2021 and 2020 (in thousands):



                                                   Six Months Ended June 30,
                                              2021           2020          Change
                                                        (in thousands)
Statements of Comprehensive Income
License revenue                             $   2,917      $   1,898      $   1,019
Operating expenses:
Research and development                       15,704          5,493         10,211
General and administrative                     12,930          6,425          6,505

Total operating expenses                    $  28,634      $  11,918      $  16,716

Loss from operations                          (25,717 )      (10,020 )      (15,697 )
Other non-operating income (expense):
Other income (expense)                            972         (1,670 )        2,642

Change in fair value of convertible notes - (1,884 ) 1,884 Change in fair value of liability

                (583 )           -            (583 )

Loss before income taxes                      (25,328 )      (13,574 )      (11,754 )
(Loss) benefit for income taxes                  (190 )          (47 )         (143 )

Net loss                                    $ (25,518 )    $ (13,621 )    $ (11,897 )



Licensing and Research & Development Services Revenue
Revenue for the six months ended June 30, 2021, was $2.9 million compared with
$1.9 million for the six months ended June 30, 2020, an increase of
approximately $1.0 million. Revenue from contracts with Ares increased by
$1.5 million due to the exercise and payment of an option fee of $2.7 million to
acquire intellectual property rights, which was offset by a reduction in R&D
service revenues of $1.2 million. In addition, there was a decrease in overall
revenue of $0.5 million relating to licensing and R&D services for the second
molecule in the License and Collaboration Agreement with Denali. All performance
obligations relating to this molecule were satisfied in February 2021.
Research and development costs
Costs related to research and development for the six months ended June 30, 2021
increased by approximately $10.2 million, compared to the six months ended
June 30, 2020.
This $10.2 million increase for the six months ended June 30, 2021, was
primarily due to a $3.2 million increase in manufacturing costs, mainly due to
FS118 manufacturing batches in the first half of 2021, an increase in clinical
CRO and clinical assay costs of $3.3 million, due to a full six months of Phase
1 clinical trial costs for FS120 and FS222, and a decrease in other costs of
$0.1 million due to the timing of other project-related activities. The
remaining increase of $3.8 million is primarily due to a $2.8 million decrease
in the UK R&D tax incentive credit year over year, which is allocated across all
programs, a $0.5 million increase in R&D staff costs, $0.3 million increase
laboratory consumables and $0.2 million increase in other allocated costs.
General and administrative expense
General and administrative expense for the six months ended June 30, 2021
increased by approximately $6.5 million due to an increase of $2.6 million in
share-based compensation, offset by a decrease of $0.3 million in staff costs,
$2.8 million in legal and professional fees, $0.9 million in insurance and other
costs associated with being a public company and $0.5 million in other costs,
primarily due to additional rent for the leased buildings acquired with Spring
Bank transaction.

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Other income (expenses)
Other income (expense), for the
six-month
period ended June 30, 2021 of $1.0 million of other income consisted of
$1.0 million income due to foreign exchange gains of $0.9 million, rental income
of $0.3 million offset by interest payable of $0.2 million.
In addition, there was a charge of $0.6 million for the change in fair value of
the CVR.
For six months ended June 30, 2020, other expense of $1.7 million consisted of
foreign currency losses of $1.7 million, interest expense of $0.5 million in
relation to the convertible debt, offset by other income of $0.5 million from
the UK government Coronavirus Job Retention Scheme, for staff that were
furloughed in the first half of 2020.
Liquidity and Capital Resources
Sources of liquidity
From our inception through June 30, 2021, we have not generated any revenue from
product sales, and we have incurred significant operating losses and negative
cash flows from our operations. We do not expect to generate significant revenue
from sales of any products for several years, if at all.
As of June 30, 2021, the Company had an accumulated deficit of $72.7 million and
cash of $81.6 million. The future success of the Company is dependent on its
ability to successfully obtain additional working capital, obtain regulatory
approval for and successfully launch and commercialize its product candidates
and to ultimately attain profitable operations.
Historically, we have financed our operations primarily with proceeds from the
issuance of common shares and convertible preferred shares, proceeds from tern
debt and a convertible note facility, proceeds received from in connection with
our collaboration arrangements, and payments received for research and
development services. We expect this historical financing trend to continue if
and until we are able obtain regulatory approval for and successfully
commercialize one or more of our drug candidates, although there can be no
assurance that we will obtain regulatory approval or successfully commercialize
any of our current or planned future product candidates.
On March 30, 2021, the Company entered into a 2021 Sales Agreement with SVB
Leerink with respect to an
at-the-market
offering program under which the Company could offer and sell, from time to time
in its sole discretion, shares of its common stock, par value $0.0001 per share,
having an aggregate offering price of up to $50.0 million through SVB Leerink as
its sales agent. As of May 6, 2021, the Company had issued and sold 979,843
shares, for gross proceeds of $9.5 million, resulting in net proceeds of
$9.2 million after deducting sales commissions. On May 6, 2021, the Company
terminated the 2021 Sales Agreement.
On May 6, 2021, the Company entered into an underwriting agreement with SVB
Leerink, as representative of the underwriters, relating to an underwritten
public offering of 10.4 million shares of the Company's common stock, par
value $0.0001 per share. The underwritten public offering resulted in gross
proceeds of $73.1 million. The Company incurred $4.4 million in issuance costs
and $0.5 million of professional fees associated with the underwritten public
offering, resulting in net proceeds to the Company of $68.2 million.
On April 1, 2021, the Company, as borrower, entered into the Loan and Security
Agreement with Horizon, as lender and collateral agent for itself. The Loan and
Security Agreement provides for four (4) separate and independent $2.5 million
term loans (Loan A, Loan B, Loan C, and Loan D), whereby, upon the satisfaction
of all the conditions to the funding of the Term Loans, each Term Loan will be
delivered by Horizon to the Company in the following manner: (i) Loan A was
delivered by Horizon to the Company by April 1, 2021, (ii) Loan B was delivered
by Horizon to the Company by April 1, 2021, (iii) Loan C was delivered by
Horizon to the Company by June 30, 2021, and (iv) Loan D was delivered by
Horizon to the Company by June 30, 2021. The Company may only use the proceeds
of the Term Loans for working capital or general corporate purposes as
contemplated by the Loan and Security Agreement. On April 1, 2021, the Company
drew down $5 million. On June 22, 2021, the Company drew down another $5 million
under this facility.

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