References to the "Company," "FS Development Corp. II.," "FS Development,"
"our," "us" or "we" refer to FS Development Corp. II. The following discussion
and analysis of the Company's financial condition and results of operations
should be read in conjunction with the unaudited interim condensed consolidated
financial statements and the notes thereto contained elsewhere in this report.
Certain information contained in the discussion and analysis set forth below
includes forward-looking statements that involve risks and uncertainties.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act. We have based these forward-looking statements
on our current expectations and projections about future events. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions about us that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "should," "could," "would," "expect,"
"plan," "anticipate," "believe," "estimate," "continue," or the negative of such
terms or other similar expressions. Factors that might cause or contribute to
such a discrepancy include, but are not limited to, those described in our other
SEC filings.
Overview
We are a blank check company incorporated in Delaware on August 21, 2020. We
were formed for the purpose of effecting a merger, share exchange, asset
acquisition, share purchase, reorganization or similar business combination with
one or more businesses (the "Business Combination"). We are an emerging growth
company and, as such, we are subject to all of the risks associated with
emerging growth companies.
Our sponsor is FS Development Holdings II, LLC, a Delaware limited liability
company (the "Sponsor"). The registration statements for our Initial Public
Offering became effective on February 16, 2021. On February 19, 2021, we
consummated our initial public offering (the "Initial Public Offering") of
20,125,000 shares of Class A common stock, par value $0.0001 per share ("Class A
Common Stock"), including the issuance of 2,625,000 shares of Class A Common
Stock as a result of the underwriter's exercise in full of its over-allotment
option, (each, a "Public Share" and collectively, the "Public Shares") at $10.00
per share, generating gross proceeds of approximately $201.3 million, and
incurring offering costs of approximately $11.5 million, of which approximately
$7.0 million was for deferred underwriting commissions (see Note 5 to the
Company's unaudited condensed consolidated financial statements).
Simultaneously with the closing of the Initial Public Offering, we consummated
the private placement ("Private Placement") of 602,500 shares of Class A Common
Stock (each, a "Private Placement Share" and collectively, the "Private
Placement Shares"), at a price of $10.00 per Private Placement Share to the
Sponsor, generating proceeds of approximately $6.0 million (see Note 4).
Upon the closing of the Initial Public Offering and the Private Placement,
approximately $201.3 million ($10.00 per share of Class A Common Stock) of the
net proceeds of the sale of the Public Shares in the Initial Public Offering and
of the Private Placement Shares in the Private Placement were placed in a trust
account ("Trust Account") located in the United States, with Continental Stock
Transfer & Trust Company acting as trustee, and were invested only in U.S.
"government securities" within the meaning of Section 2(a)(16) of the Investment
Company Act having a maturity of 185 days or less or in money market funds
meeting certain conditions under Rule 2a-7 promulgated under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which will be
invested only in direct U.S. government treasury obligations, as determined by
the Company, until the earlier of: (i) the completion of a Business Combination
and (ii) the distribution of the Trust Account as described below.
Our management has broad discretion with respect to the specific application of
the net proceeds of the Initial Public Offering and the sale of Private
Placement Shares, although substantially all of the net proceeds are intended to
be applied generally toward consummating a Business Combination. There is no
assurance that we will be able to complete a Business Combination successfully.
We must complete one or more initial Business Combinations having an aggregate
fair market value of at least 80% of the net assets held in the Trust Account
(excluding the deferred underwriting commissions and taxes payable on the
interest earned on the Trust Account) at the time of the agreement to enter into
the initial Business Combination. However, we will only complete a Business
Combination if the post-transaction company owns or acquires 50% or more of the
voting securities of the target or otherwise acquires a controlling interest in
the target sufficient for it not to be required to register as an investment
company under the Investment Company Act of 1940, as amended (the "Investment
Company Act").
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If we are unable to complete a Business Combination within 24 months from the
closing of the Initial Public Offering, or February 19, 2023, or during any
extended period of time that we may have to consummate a Business Combination as
a result of an amendment to the Certificate of Incorporation (the "Combination
Period"), we will (i) cease all operations except for the purpose of winding up,
(ii) as promptly as reasonably possible but not more than ten business days
thereafter, redeem the Public Shares, at a per-share price, payable in cash,
equal to the aggregate amount then on deposit in the Trust Account, including
interest earned on the funds held in the Trust Account and not previously
released to us to pay our taxes (less up to $100,000 of interest to pay
dissolution expenses), divided by the number of then outstanding Public Shares,
which redemption will completely extinguish Public Stockholders' rights as
stockholders (including the right to receive further liquidating distributions,
if any), and (iii) as promptly as reasonably possible following such redemption,
subject to the approval of the remaining stockholders and the board of
directors, liquidate and dissolve, subject in each case to the Company's
obligations under Delaware law to provide for claims of creditors and the
requirements of other applicable law.
Proposed Business Combination and Related Transaction
On June 29, 2021, we entered into an agreement and plan of merger (the "Merger
Agreement") by and among the Company, Orchard Merger Sub, Inc., a Delaware
corporation ("Merger Sub"), Pardes Biosciences, Inc., a Delaware corporation
("Pardes") and Shareholder Representative Services LLC, solely in its capacity
as the representative, agent and attorney-in-fact of the securityholders of
Pardes (in such capacity, the "Stockholders' Representative"). The Merger
Agreement provides, among other things, that on the terms and subject to the
conditions set forth therein, Merger Sub will merge with and into Pardes, with
Pardes surviving as a wholly-owned subsidiary of the Company (the "Merger").
Upon the closing of the Merger (the "Closing"), it is anticipated that the
Company will change its name to "Pardes Biosciences, Inc." and is referred to
herein as "New Pardes" as of the time following such change of name. The date on
which the Closing actually occurs is hereinafter referred to as the "Closing
Date."
Consideration and Structure
Under the Merger Agreement, we have agreed to acquire all of the outstanding
equity interests of Pardes in exchange for 32,500,000 shares of Class A Common
Stock, to be paid at the effective time of the Merger.
Pursuant to the Merger Agreement, at or prior to the effective time of the
Merger, each option exercisable for Pardes equity that is outstanding
immediately prior to the effective time of the Merger shall be assumed by the
Company and continue in full force and effect on the same terms and conditions
as are currently applicable to such options, subject to adjustments to exercise
price and number of shares of Class A Common Stock issued upon exercise.
Conditions to Closing
Under the Merger Agreement, the obligations of the parties to consummate the
Merger are subject to the satisfaction or waiver of certain customary closing
conditions of the respective parties, including, without limitation: (i) the
approval and adoption of the Merger Agreement and transactions contemplated
thereby by requisite vote of the Company's stockholders (the "Company
Stockholder Approval") and Pardes' stockholders (the "Pardes Stockholder
Approval"); (ii) the receipt of consents or approvals from the applicable
governmental, regulatory or administrative authorities; (iii) the aggregate cash
proceeds from Company's trust account, together with the proceeds from the
Subscriptions (as defined below), equaling no less than $100,000,000 (after
deducting any amounts paid to Company stockholders that exercise their
redemption rights in connection with the Merger and net of the Company's unpaid
liabilities), (iv) (A) the representations and warranties of the Company, Pardes
and Merger Sub contained in the Merger Agreement (other than each party's
respective Fundamental Representations, as defined in the Merger Agreement)
being true and correct as of the date of the Merger Agreement and as of the
Closing Date, except for any failure to be true and correct that would not have
or reasonably be expected to have a Material Adverse Effect (as defined in the
Merger Agreement) and (B) each party's respective Fundamental Representations
being true and correct as of the date of the Merger Agreement and as of the
Closing Date, except for de minimis inaccuracies; (v) the absence of a Material
Adverse Effect since the date of the Merger Agreement; (vi) the Company has not
redeemed the Class A Common Stock of the Company in an amount that would cause
the Company to have net tangible assets of less than $5,000,001; and (vii) the
Company's initial listing application with Nasdaq in connection with the Merger
has been conditionally approved and, immediately following the effective time of
the Merger, the Company has satisfied any applicable initial and continuing
listing requirements of Nasdaq, and the Company has not received any notice of
non-compliance therewith, and the shares of the Company's Class A Common Stock
has been approved for listing on Nasdaq.
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Parent Support Agreement
On June 29, 2021, we entered into a support agreement (the "Parent Support
Agreement") with Pardes, the Sponsor and certain of our other stockholders
(together with the Sponsor, the "Parent Supporting Stockholders"), whereby each
Parent Supporting Stockholder agreed to, among other things, (i) vote, at any
meeting of the stockholders of the Company, and in any action by written consent
of the stockholders of the Company, all their shares of Class A Common Stock and
Class B Common Stock in favor of the approval and adoption of the Merger and
each of the Parent Proposals (as defined in the Merger Agreement) and (ii) be
bound by certain transfer and other restrictions with respect to Class A Common
Stock or Class B Common Stock held by the Parent Supporting Stockholders, in
each case on the terms and subject to the conditions set forth in the Parent
Support Agreement. In addition, the Parent Support Agreement provides that the
Sponsor shall purchase up to $25,000,000 shares of the Company's Class A Common
Stock in the event that Trust Account (after giving effect to redemptions by
stockholders of the Company) has a cash balance of less than $25,000,000.
Pardes Support Agreement
On June 29, 2021 we entered into a support agreement (the "Pardes Support
Agreement") with certain Pardes stockholders (the "Pardes Supporting
Stockholders"), pursuant to which each Pardes Supporting Stockholder agreed to,
among other things, (i) as promptly as reasonably practicable (and in any event
within five (5) business days) following the SEC declaring effective the proxy
statement/prospectus relating to the Merger, execute and deliver a written
consent with respect to the outstanding shares of Pardes common stock, and
Pardes preferred stock held by such Pardes Supporting Stockholder (the "Subject
Pardes Shares") approving the Merger Agreement and the transactions contemplated
thereby, (ii) appear at any meeting of the holders of Pardes capital stock, in
person or by proxy, and cause its Subject Pardes Shares to be voted in favor of
the Merger Agreement and the transactions contemplated thereby, including the
Merger, against any Alternative Transaction (as defined in the Merger Agreement)
and against any action or agreement that would impede or frustrate the
provisions of the Pardes Support Agreement, the Merger Agreement or the
transactions contemplated thereby and (iii) be bound by certain transfer and
other restrictions with respect to the Subject Pardes Shares. Additionally,
pursuant to the Pardes Support Agreement, certain stockholder agreements of
Pardes shall be automatically terminated and of no further force and effect,
effective as of, and subject to and condition upon the occurrence of, the
Closing.
Subscription Agreement
In connection with the Merger, the Company entered into subscription agreements
with certain investors, pursuant to which, among other things, such investors
have subscribed to purchase an aggregate of 7,500,000 shares of Class A common
stock of the Company (together, the "Subscriptions") for a purchase price of
$10.00 per share to be issued at the Closing. The obligations of each party to
consummate the Subscriptions are conditioned upon, among other things, customary
closing conditions and the consummation of the transactions contemplated by the
Merger Agreement.
Liquidity and Capital Resources
As of September 30, 2021, we had approximately $48,000 in its operating bank
account, and working capital deficit of approximately $1.8 million (not taking
into account approximately $149,000 of tax obligations that may be paid using
investment income classified in the Trust Account).
The Company's liquidity needs prior to the consummation of the Initial Public
Offering were satisfied through the payment of $25,000 from the Sponsor to cover
for certain offering costs on behalf of the Company in exchange for issuance of
Founder Shares (as defined in Note 4), and loan proceeds from the Sponsor of
approximately $200,000 under the Note (see Note 4). The Company repaid the Note
in full on February 19, 2021. Subsequent from the consummation of the Initial
Public Offering, the Company's liquidity has been satisfied through the net
proceeds from the consummation of the Initial Public Offering and the Private
Placement held outside of the Trust Account. In addition, in order to finance
transaction costs in connection with a Business Combination, the Sponsor or an
affiliate of the Sponsor, or certain of the Company's officers and directors
may, but are not obligated to, provide the Company Working Capital Loans (as
defined in Note 4). As of September 30, 2021, there were no amounts outstanding
under any Working Capital Loans.
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Based on the foregoing, management believes that we will have sufficient working
capital and borrowing capacity from the Sponsor or an affiliate of the Sponsor,
or certain of our officers and directors to meet its needs through the earlier
of the consummation of a Business Combination or one year from this filing. Over
this time period, we will be using these funds for paying existing accounts
payable, identifying and evaluating prospective initial Business Combination
candidates, performing due diligence on prospective target businesses, paying
for travel expenditures, selecting the target business to merge with or acquire,
and structuring, negotiating and consummating the Business Combination.
Management continues to evaluate the impact of the COVID-19 pandemic on the
industry and has concluded that while it is reasonably possible that the virus
could have a negative effect on our financial position, results of our
operations and/or search for a target company, the specific impact is not
readily determinable as of the date of the financial statements. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Results of Operations
Our entire activity since inception up to September 30, 2021 was in preparation
for our formation and the Initial Public Offering, and, subsequent to the
Initial Public Offering, identifying a target company for a Business
Combination. We will not be generating any operating revenues until the closing
and completion of our initial Business Combination.
For the three months ended September 30, 2021, we had net loss of approximately
$1.2 million, which consisted of approximately $1.1 million general and
administrative expenses (consisting of approximately $1.0 million in fees and
expenses related to the Business Combination), $30,000 of general and
administrative expenses - related party, and approximately $50,000 of franchise
tax expense which was partially offset by approximately $5,000 gain on
investment (net), dividends and interest held in Trust Account.
For the nine months ended September 30, 2021, we had net loss of approximately
$3.6 million, which consisted of approximately $3.3 million general and
administrative expenses (consisting of approximately $3.0 million in fees and
expenses related to the Business Combination), $80,000 of general and
administrative expenses - related party, and approximately $150,000 of franchise
tax expense which was partially offset by approximately $12,000 gain on
investment (net), dividends and interest held in Trust Account.
For the period from August 21, 2020 (inception) through September 30, 202, we
had net loss of approximately $1,000 which was all made up of general and
administrative expenses.
Contractual Obligations
Administrative Support Agreement
Commencing on the date that our securities were first listed on Nasdaq and
continuing until the earlier of our consummation of a Business Combination and
our liquidation, we agreed to pay the Sponsor, or an affiliate a total of
$10,000 per month for office space, secretarial and administrative services
provided to members of our management team.
The Sponsor, officers and directors, or any of their respective affiliates will
be reimbursed for any out-of-pocket expenses incurred in connection with
activities on our behalf such as identifying potential target businesses and
performing due diligence on suitable Business Combinations. Our audit committee
will review on a quarterly basis all payments that were made to the Sponsor,
officers or directors, or their affiliates.
We incurred approximately $30,000, $80,000 and $0 in general and administrative
expenses in the accompanying unaudited condensed consolidated statements of
operations for the three and nine months ended September 30, 2021, and for the
period from August 21, 2020 (inception) through September 30, 2020,
respectively. As of September 30, 2021 and December 31, 2020, there was no
outstanding balance in accounts payable with related party, as reflected in the
accompanying condensed consolidated balance sheets.
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Registration Rights
The holders of Founder Shares, Private Placement Shares, and shares of Class A
Common Stock that may be issued upon conversion of Working Capital Loans, if
any, are entitled to registration rights pursuant to a registration rights
agreement. The holders of these securities are entitled to make up to three
demands, excluding short form demands, that we register such securities. In
addition, the holders have certain "piggy-back" registration rights with respect
to registration statements filed subsequent to the completion of the initial
Business Combination. We will bear the expenses incurred in connection with the
filing of any such registration statements.
Underwriting Agreement
The underwriter was entitled to an underwriting discount of $0.20 per share, or
approximately $4.0 million in the aggregate, paid upon the closing of the
Initial Public Offering. In addition, $0.35 per share, or approximately $7.0
million in the aggregate will be payable to the underwriter for deferred
underwriting commissions. The deferred fee will become payable to the
underwriter from the amounts held in the Trust Account solely in the event that
the Company completes a Business Combination, subject to the terms of the
underwriting agreement.
Critical Accounting Policies
Class A common shares subject to possible redemption
We account for its Class A common stock subject to possible redemption in
accordance with the guidance in ASC Topic 480 "Distinguishing Liabilities from
Equity." Class A common stock subject to mandatory redemption (if any) is
classified as liability instruments and are measured at fair value.
Conditionally redeemable Class A common stock (including Class A common stock
that features redemption rights that are either within the control of the holder
or subject to redemption upon the occurrence of uncertain events not solely
within the Company's control) are classified as temporary equity. At all other
times, Class A common stock is classified as stockholders' equity. As part of
the Private Placement, we issued 602,500 shares of Class A common stock to the
Sponsor ("Private Placement Shares"). These Private Placement Shares will not be
transferable, assignable or salable until 30 days after the completion of our
initial business combination, as such are considered non-redeemable and
presented as permanent equity in the Company's condensed consolidated balance
sheet. Our Class A common stock feature certain redemption rights that are
considered to be outside of our control and subject to the occurrence of
uncertain future events. Accordingly, as of September 30, 2021, 20,125,000
shares of Class A common stock subject to possible redemption are presented at
redemption value as temporary equity, outside of the stockholders' equity
(deficit) section of our condensed consolidated balance sheets. There was no
Class A common stock issued or outstanding as of December 31, 2020.
Effective with the closing of the Initial Public Offering, we recognized the
accretion from initial book value to redemption amount, which resulted in
charges against additional paid-in capital (to the extent available) and
accumulated deficit.
Net Income (Loss) Per Share of Common Stock
We comply with accounting and disclosure requirements of FASB ASC Topic 260,
"Earnings Per Share." We have two classes of shares, which are referred to as
Class A common stock and Class B common stock. Income and losses are shared pro
rata between the two classes of shares. Net income (loss) per common share is
calculated by dividing the net income (loss) by the weighted average shares of
common stock outstanding for the respective period.
Accretion associated with the redeemable Class A common stock is excluded from
earnings per share as the redemption value approximates fair value.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying unaudited condensed consolidated financial statements.
Off-Balance Sheet Arrangements
As of September 30, 2021, we did not have any off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of Regulation S-K.
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JOBS Act
The Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") contains
provisions that, among other things, relax certain reporting requirements for
qualifying public companies. We qualify as an "emerging growth company" and
under the JOBS Act are allowed to comply with new or revised accounting
pronouncements based on the effective date for private (not publicly traded)
companies. We are electing to delay the adoption of new or revised accounting
standards, and as a result, we may not comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required
for non-emerging growth companies. As a result, the financial statements may not
be comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates.
Additionally, we are in the process of evaluating the benefits of relying on the
other reduced reporting requirements provided by the JOBS Act. Subject to
certain conditions set forth in the JOBS Act, if, as an "emerging growth
company," we choose to rely on such exemptions we may not be required to, among
other things, (i) provide an auditor's attestation report on our system of
internal controls over financial reporting pursuant to Section 404, (ii) provide
all of the compensation disclosure that may be required of non-emerging growth
public companies under the Dodd-Frank Wall Street Reform and Consumer Protection
Act, (iii) comply with any requirement that may be adopted by the PCAOB
regarding mandatory audit firm rotation or a supplement to the auditor's report
providing additional information about the audit and the financial statements
(auditor discussion and analysis) and (iv) disclose certain executive
compensation related items such as the correlation between executive
compensation and performance and comparisons of the CEO's compensation to median
employee compensation. These exemptions will apply for a period of five years
following the completion of our Initial Public Offering or until we are no
longer an "emerging growth company," whichever is earlier.
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