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 endedDecember 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 theSEC onMarch 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 endedDecember 31, 2020 filed with theSEC onMarch 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 theSEC , 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. OverviewF-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. 31
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Table of Contents SB 11285, which F-star acquired pursuant to a business combination withSpring 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 generationSTING agonists. F-star is continuing with further dose-escalation and in parallel pursuing strategic business development opportunities for SB 11285. InJune 2021 , aU.S. patent was granted to F-star with claims protecting the composition of matter of SB 11285. Share Exchange Agreement OnNovember 20, 2020 ,F-star Therapeutics, Inc. , formerly known asSpring Bank Pharmaceuticals, Inc. , completed a business combination (the "Transaction") withF-star Therapeutics Limited ("F-star Ltd") in accordance with the terms of the Share Exchange Agreement, datedJuly 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 securitieswho 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, onNovember 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 toF-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 ofSpring 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 betweenSpring 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 purchaseSpring 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 ofSpring 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 ofSpring 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 ofSpring 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 ofSpring Bank stockholders prior to the Closing, andComputershare Trust Company N.A. , as the Rights Agent, entered into aSTING Agonist Contingent Value Rights Agreement (the "STING Agonist CVR Agreement"). Pursuant to the Exchange Agreement and theSTING Agonist CVR Agreement, each pre-Reverse Stock Split share ofSpring Bank common stock held by stockholders as of the record date onNovember 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 proprietarySTING agonist compound designated as SB 11285 occurring on or prior to theSTING Agonist CVR Expiration Date (as defined below) that resulted in aggregate Net Proceeds (as defined in theSTING 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 theSTING 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"). 32
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Table of Contents 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 theSTING clinical trial (as defined in theSTING Agonist CVR Agreement) (the "STING Agonist CVR Expiration Date"). TheSTING 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 theSEC or listed for trading on any exchange. Until theSTING Agonist CVR Expiration Date, subject to certain exceptions, the Company is required to use commercially reasonable efforts to (a) complete theSTING Trial and (b) pursue a CVR Transaction. TheSTING Agonist CVR Agreement became effective upon the Closing and, unless terminated earlier in accordance with its terms, will continue in effect until theSTING 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 ofSpring Bank stockholders prior to the Closing, andComputershare Trust Company N.A. , as the Rights Agent, also entered into aSTING Antagonist Contingent Value Rights Agreement (the "STING Antagonist CVR Agreement"). Pursuant to the Exchange Agreement and theSTING Antagonist CVR Agreement, each share of common stock held bySpring Bank stockholders as ofNovember 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 proprietarySTING antagonist compound occurring on or prior to theSTING Antagonist CVR Expiration Date (as defined below) equal to: 80% of all net proceeds (as defined in theSTING 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 theSTING Antagonist CVR Agreement) entered into prior to theSTING Antagonist CVR Expiration Date. TheSTING 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 theSEC or listed for trading on any exchange. Until theSTING 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. TheSTING Antagonist CVR Agreement became effective upon the Closing and, unless terminated earlier in accordance with its terms, will continue in effect until theSTING Antagonist CVR Expiration Date or all CVR payment amounts are paid pursuant to their terms. OnJuly 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 generationSTING 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 theSTING 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 ofSpring Bank prior to the business combination between F-star andSpring 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 ofDecember 31, 2020 , and$3.1 million as ofJune 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 endedJune 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 theF-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 onFriday, 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 onMonday, November 23, 2020 . Commencing onNovember 23, 2020 , the Company's common stock was represented by a new CUSIP number, 30315R 107. 33
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Table of Contents The Transaction was accounted for as a business combination using the acquisition method of accounting under the provisions ofFinancial 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 ofSpring 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 InMarch 2020 , theWorld 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 inApril 2020 to temporarily furlough some of its workforce and took advantage of theUK Government Coronavirus Job Retention Scheme that provided funding to businesses with furloughed staff. The grant funding available covered 80% of furloughed employees' wages plus employerNational Insurance and pension contributions up to a maximum of £2,500 per month per furloughed employee. FromDecember 2020 toApril 2021 , theUK 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 OnApril 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 byApril 1, 2021 , (ii) Loan B was delivered by Horizon to the Company byApril 1, 2021 , (iii) Loan C was delivered by Horizon to the Company byJune 30, 2021 , and (iv) Loan D was delivered by Horizon to the Company byJune 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. OnApril 1, 2021 , the Company drew down$5 million . OnJune 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 inThe 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. 34
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Table of Contents 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 toJanuary 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 OnMarch 30, 2021 , the Company entered into a Sales Agreement (the "2021 Sales Agreement") withSVB 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") throughSVB Leerink as its sales agent. Upon delivery of a placement notice inApril 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 paySVB Leerink a commission equal to three percent of the gross sales proceeds of any Placement Shares sold throughSVB Leerink under the 2021 Sales Agreement, and also providedSVB Leerink with customary indemnification and contribution rights. As ofMay 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. OnMay 6, 2021 , the Company terminated the 2021 Sales Agreement. OnMay 6, 2021 , the Company entered into an underwriting agreement withSVB 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 withAres 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. 35
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Table of Contents 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; 36
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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, theU.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 inthe 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 onNovember 20, 2020 , with the transaction withSpring Bank . Income tax The Company is subject to corporate taxation inthe United States ,United Kingdom andAustria . Our UKestablished entities have generated losses and some profits in theUnited Kingdom since inception and have therefore not paid significantU.K. corporation tax. F-star Biotechnologische Forschungs-und Entwicklungsges.m.b.H has historical losses inAustria with more recent profits, which has resulted in payment of Austrian corporation tax in the years endedDecember 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 inthe United States ,United Kingdom andAustria , which have generated taxable income in certain periods. As the entities located in theUnited Kingdom carry out extensive research and development activities, they seek to benefit from theUK 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 inAustria , 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 theUnited 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. 37
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Table of Contents TheUK 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 afterApril 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 theUK are recorded as a reduction in research and development expenses. TheUK 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, anyU.K. research and development tax credits generated are utilized to offset a corporate income tax liability in theUnited 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 endedJune 30, 2021 the Company received$3.6 million in research and development tax credits related to the year endedDecember 31, 2020 . Income tax expense was relatively immaterial amounts for the three and six months endedJune 30, 2021 and 2020. In the event the Company generates revenues in the future, the Company may benefit from theUnited 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 theUnited 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 theUnited Kingdom's tax authority,Her Majesty's Revenue and Customs ("HMRC"). Similarly, VAT paid on purchase invoices is generally reclaimable from HMRC. InAustria , 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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Table of Contents 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 theSTING 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 theU.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. 39
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Table of Contents Results of Operations Comparison of the Three Months EndedJune 30, 2021 and 2020 The following table summarizes our results of operations for the three endedJune 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 endedJune 30, 2021 was zero compared to$0.5 million for the three months endedJune 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 inFebruary 2021 . Research and development costs Costs related to research and development for the three months endedJune 30, 2021 , increased by approximately$6.3 million compared to the three months endedJune 30, 2020 . This$6.3 million increase for the three-monthJune 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 theUK 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 endedJune 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 withSpring Bank transaction, offset by a decrease of$0.1 million in staff costs. Other income (expenses) Other income (expense) for the three-month period endedJune 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 endedJune 30, 2020 , the total expense of$0.1 million consisted of other income of$0.5 million from theUK 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$0.3 million . 40
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Comparison of the Six Months Ended
Six Months Ended June 30, 2021 2020 Change (in thousands) Statements of Comprehensive Income License revenue$ 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 endedJune 30, 2021 , was$2.9 million compared with$1.9 million for the six months endedJune 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 inFebruary 2021 . Research and development costs Costs related to research and development for the six months endedJune 30, 2021 increased by approximately$10.2 million , compared to the six months endedJune 30, 2020 . This$10.2 million increase for the six months endedJune 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 theUK 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 endedJune 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 withSpring Bank transaction. 41
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Table of Contents Other income (expenses) Other income (expense), for the six-month period endedJune 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 endedJune 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 theUK 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 throughJune 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 ofJune 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. OnMarch 30, 2021 , the Company entered into a 2021 Sales Agreement withSVB 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 throughSVB Leerink as its sales agent. As ofMay 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. OnMay 6, 2021 , the Company terminated the 2021 Sales Agreement. OnMay 6, 2021 , the Company entered into an underwriting agreement withSVB 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 . OnApril 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 byApril 1, 2021 , (ii) Loan B was delivered by Horizon to the Company byApril 1, 2021 , (iii) Loan C was delivered by Horizon to the Company byJune 30, 2021 , and (iv) Loan D was delivered by Horizon to the Company byJune 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. OnApril 1, 2021 , the Company drew down$5 million . OnJune 22, 2021 , the Company drew down another$5 million under this facility. 42
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