ftsv-10q_20190331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission File Number: 001-38554

 

FORTY SEVEN, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

47-4065674

( State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1490 O’Brien Drive, Suite A

Menlo Park, California 94025

 

94025

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (650) 352-4150

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 6, 2019, the registrant had 31,358,848 shares of common stock, $0.0001 par value per share, outstanding.

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Ticker Symbol

 

Name of each exchange on which registered

Common Stock, $0.0001 par value

 

FTSV

 

The NASDAQ Global Select Market

 

i


Table of Contents

 

 

 

Page no.

PART I: FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

 

Condensed Balance Sheets

1

 

Condensed Statements of Operations and Comprehensive Loss

2

 

Condensed Statements of Stockholders’ Equity

3

 

Condensed Statements of Cash Flows

4

 

Notes to Condensed Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

17

Item 4.

Controls and Procedures

18

PART II: OTHER INFORMATION

 

Item 1.

Legal Proceedings

19

Item 1A.

Risk Factors

19

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

52

Signatures

 

53

 

Where You Can Find More Information

 

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (ir.fortyseveninc.com/investor-relations), SEC filings, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with our stockholders and the public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

 

 

ii


PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements.

Forty Seven Inc.

Condensed Balance Sheets

(In thousands)

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

(1)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,544

 

 

$

10,837

 

Short-term investments

 

 

98,045

 

 

 

128,186

 

Prepaid expenses and other current assets

 

 

11,275

 

 

 

6,835

 

Total current assets

 

 

124,864

 

 

 

145,858

 

Property and equipment, net

 

 

1,244

 

 

 

1,360

 

Operating lease right-of-use asset

 

 

2,131

 

 

 

 

Other assets

 

 

2,072

 

 

 

2,219

 

Total assets

 

$

130,311

 

 

$

149,437

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,813

 

 

$

4,621

 

Accrued liabilities

 

 

7,299

 

 

 

9,044

 

Lease liability, current

 

 

993

 

 

 

 

Deferred grant funding, current

 

 

3,351

 

 

 

1,744

 

Total current liabilities

 

 

15,456

 

 

 

15,409

 

Lease liability, noncurrent

 

 

1,588

 

 

 

 

Deferred rent, noncurrent

 

 

 

 

 

331

 

Other long-term liabilities

 

 

368

 

 

 

476

 

Total liabilities

 

 

17,412

 

 

 

16,216

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

275,663

 

 

 

273,069

 

Accumulated other comprehensive income (loss)

 

 

18

 

 

 

(82

)

Accumulated deficit

 

 

(162,785

)

 

 

(139,769

)

Total stockholders’ equity

 

 

112,899

 

 

 

133,221

 

Total liabilities and stockholders’ equity

 

$

130,311

 

 

$

149,437

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

(1)

The balance sheet as of December 31, 2018 is derived from the audited financial statements as of that date.

1


Forty Seven Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

19,126

 

 

$

11,153

 

General and administrative

 

 

4,584

 

 

 

3,843

 

Total operating expenses

 

 

23,710

 

 

 

14,996

 

Loss from operations

 

 

(23,710

)

 

 

(14,996

)

Interest and other income, net

 

 

694

 

 

 

221

 

Net loss

 

 

(23,016

)

 

 

(14,775

)

Unrealized gain (loss) on available-for-sale securities

 

 

100

 

 

 

(27

)

Comprehensive loss

 

$

(22,916

)

 

$

(14,802

)

Net loss per share, basic and diluted

 

$

(0.74

)

 

$

(2.24

)

Shares used in computing net loss per share, basic and diluted

 

 

31,166,184

 

 

 

6,600,407

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.


2


Forty Seven Inc.

Condensed Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except share data)

 

 

Convertible Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated Other

 

 

Accumulated

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Comprehensive Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

 

 

 

 

 

31,079,150

 

 

$

3

 

 

$

273,069

 

 

$

(82

)

 

$

(139,769

)

 

$

133,221

 

Issuance of common stock for exercise of stock options

 

 

 

 

 

 

 

174,793

 

 

 

 

 

 

789

 

 

 

 

 

 

 

 

 

789

 

Issuance of common stock pursuant to the ESPP

 

 

 

 

 

 

 

44,656

 

 

 

 

 

 

588

 

 

 

 

 

 

 

 

 

588

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

113

 

 

 

 

 

 

 

 

 

113

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

1,104

 

 

 

 

 

 

 

 

 

1,104

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,016

)

 

 

(23,016

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

100

 

Balance at March 31, 2019

 

 

 

 

 

 

 

31,298,599

 

 

$

3

 

 

$

275,663

 

 

$

18

 

 

$

(162,785

)

 

$

112,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated Other

 

 

Accumulated

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Comprehensive Loss

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2017

 

16,215,896

 

 

$

149,397

 

 

 

6,751,157

 

 

$

1

 

 

$

3,507

 

 

$

(44

)

 

$

(69,399

)

 

$

83,462

 

Settlement of fractional shares from reverse stock split

 

 

 

 

 

 

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

13

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

431

 

 

 

 

 

 

 

 

 

431

 

Repurchase of shares

 

 

 

 

 

 

 

(41,935

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,775

)

 

 

(14,775

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27

)

 

 

 

 

 

(27

)

Balance at March 31, 2018

 

16,215,896

 

 

$

149,397

 

 

 

6,709,207

 

 

$

1

 

 

$

3,951

 

 

$

(71

)

 

$

(84,174

)

 

$

69,104

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

3


Forty Seven, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(23,016

)

 

$

(14,775

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

1,104

 

 

 

431

 

Depreciation and amortization

 

 

116

 

 

 

96

 

Amortization of right-of-use asset

 

 

197

 

 

 

 

Accretion of discounts on marketable securities

 

 

(388

)

 

 

(84

)

Realized gain on sale of available-for-sale securities

 

 

(2

)

 

 

 

Change in fair value of embedded derivative

 

 

6

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(4,443

)

 

 

1,002

 

Other assets

 

 

146

 

 

 

(630

)

Accounts payable

 

 

(808

)

 

 

965

 

Accrued liabilities

 

 

(1,744

)

 

 

801

 

Deferred grant funding

 

 

1,607

 

 

 

3,006

 

Lease related liabilities

 

 

(78

)

 

 

(28

)

Net cash used in operating activities

 

 

(27,303

)

 

 

(9,216

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 

(33,646

)

 

 

(14,378

)

Proceeds from sales of available-for-sale securities

 

 

3,996

 

 

 

 

Proceeds from maturities of available-for-sale securities

 

 

60,283

 

 

 

20,925

 

Net cash provided by investing activities

 

 

30,633

 

 

 

6,547

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of deferred offering costs

 

 

 

 

 

(520

)

Proceeds from issuance of common stock upon ESPP purchase

 

 

588

 

 

 

 

Proceeds from issuance of common stock upon exercise of stock options

 

 

789

 

 

 

 

Net cash provided by (used in) financing activities

 

 

1,377

 

 

 

(520

)

Net increase (decrease) in cash and cash equivalents

 

 

4,707

 

 

 

(3,189

)

Cash and cash equivalents — beginning of period

 

 

10,837

 

 

 

24,417

 

Cash and cash equivalents — end of period

 

$

15,544

 

 

$

21,228

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Deferred offering costs included in accrued liabilities

 

$

 

 

$

813

 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

 

 

 

4


 

Forty Seven Inc.

Notes to Condensed Financial Statements

1.

Description of Business

The Company is a clinical-stage immuno-oncology company focused on developing novel checkpoint therapies to activate macrophages in the fight against cancer. Forty Seven was founded based on the insight that blocking CD47, a key signaling molecule that is over-expressed on cancer cells, renders tumors susceptible to macrophages and the innate immune system. By harnessing macrophages, the Company believes that its lead product candidate, 5F9, dosed as a monotherapy and in combination with marketed cancer therapies, can transform the treatment of cancer.

Liquidity

In the course of its development activities, the Company has sustained operating losses and expects to continue to generate operating losses for the foreseeable future. The Company’s ultimate success depends on the outcome of its research and development activities. The Company had cash, cash equivalents and short-term investments of $113.6 million as of March 31, 2019. Since inception through March 31, 2019, the Company has incurred cumulative net losses of $162.8 million. Management expects to incur additional losses in the future to conduct product research and development and recognizes the need to raise additional capital to fully implement its business plan.

The Company intends to raise such capital through the issuance of additional equity financing and/or third-party collaboration funding. However, if such financing is not available at adequate levels, the Company will need to reevaluate its operating plan and may be required to delay the development of its products. The Company expects that its cash, cash equivalents and short-term investments will be sufficient to fund operating expenses and capital expenditure requirements for a period of at least one year from the date these interim condensed financial statements are filed with the Securities and Exchange Commission (“SEC”).         

2.

Summary of Significant Accounting Policies

Basis of Presentation

The interim condensed balance sheet as of March 31, 2019, the condensed statements of operations and comprehensive loss for the three months ended March 31, 2019 and 2018, the condensed statements of stockholders’ equity for the three months ended March 31, 2019 and 2018, and the statements of cash flows for the three months ended March 31, 2019 and 2018 are unaudited. The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. The financial data and the other financial information contained in the notes to the condensed financial statements related to the three month periods are also unaudited. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other future annual or interim period. The condensed balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date. These condensed financial statements should be read in conjunction with the Company's audited financial statements and related notes as set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the SEC on March 28, 2019.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions made in the accompanying financial statements include but are not limited to the fair value of common stock, the fair value of stock options, the fair value of investments, income tax uncertainties, lease liability, and certain accruals. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.

5


 

Fair Value Measurement

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active;

Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Leases  

The Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases on January 1, 2019 using the modified retrospective method. For its operating leases in excess of 12 months, the Company recognizes a right-of-use asset and a lease liability on its balance sheet. The lease liability is determined as the present value of future lease payments using an estimated rate of interest that the Company would pay to borrow equivalent funds on a collateralized basis at the adoption date for the existing lease and at lease commencement date for new leases. The right-of-use asset is based on the liability adjusted for any prepaid or deferred rent, and lease incentives, as applicable. The lease term at the commencement date is determined by considering whether renewal options and termination options are reasonably assured of exercise.

Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the statements of operations and comprehensive loss. Variable lease payments include lease operating expenses.

The accompanying condensed financial statements as of and for the three months ended March 31, 2019 are presented under Topic 842. The prior periods continue to be reported in accordance with previous lease guidance, ASC Topic 840, Leases. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carry forward the historical lease classification of the leases in place as of January 1, 2019. As allowed under Topic 842, the Company has elected to not separate lease and nonlease components. The Company has also elected to not apply the recognition requirement of Topic 842 to leases with a term of 12 months or less.

The impact of the adoption of Topic 842 on the accompanying condensed balance sheet as of January 1, 2019 was as follows:

 

 

 

December 31, 2018

 

 

Adjustments due to

the adoption of

Topic 842

 

 

January 1, 2019

 

 

 

(In thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease right-of-use asset

$

 

 

$

 

2,328

 

$

 

2,328

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

Deferred rent classified as accrued liabilities

$

 

155

 

$

 

(155

)

$

 

 

Lease liability, current

$

 

 

$

 

968

 

$

 

968

 

Lease liability, noncurrent

$

 

 

$

 

1,847

 

$

 

1,847

 

Deferred rent, noncurrent

$

 

331

 

$

 

(331

)

$

 

 

 

The adjustments due to the adoption of Topic 842 related to the recognition of an operating lease right-of-use asset and lease liability for the Company's existing property operating lease and the derecognition of the deferred rent recognized under Topic 840. There was no impact on the Company’s statement of operations and comprehensive loss from the adoption and no cumulative-effect adjustment to the beginning accumulated deficit.

6


 

3.

Fair Value Measurements

The Company measures and records its cash equivalents and short-term investments at fair value.

Money market funds are measured at fair value on a recurring basis using quoted prices and are classified as a Level 1 input. Short-term investments are measured at fair value based on inputs other than quoted prices that are derived from observable market data and are classified as Level 2 inputs. There were no transfers between Levels 1, 2 or 3 for any of the periods presented. All of the investments held as of March 31, 2019 and December 31, 2018 had maturities of less than one year. There were no significant realized gains or losses on investments for the three ended March 31, 2019 and 2018. Any unrealized losses were deemed to be temporary. The Company does not intend to sell its securities that are in an unrealized loss position, if any, and it is unlikely that the Company will be required to sell its securities before recovery of their amortized cost basis, which may be maturity.

The fair value and amortized cost of cash equivalents and available-for-sale securities by major security type as of March 31, 2019 and December 31, 2018 are presented in the following tables:

 

 

 

As of March 31, 2019

 

 

 

Fair Value

Hierarchy

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Market

Value

 

 

 

(In thousands)

 

Money market funds

 

Level 1

 

$

9,017

 

 

$

 

 

$

 

 

$

9,017

 

Commercial paper

 

Level 2

 

 

34,221

 

 

 

 

 

 

 

 

 

34,221

 

Corporate debt securities

 

Level 2

 

 

31,682

 

 

 

8

 

 

 

 

 

 

31,690

 

Asset-backed securities

 

Level 2

 

 

16,301

 

 

 

3

 

 

 

 

 

 

16,304

 

US government debt securities

 

Level 2

 

 

19,815

 

 

 

7

 

 

 

 

 

 

19,822

 

Total cash equivalents and available-for-sale securities

 

 

 

$

111,036

 

 

$

18

 

 

$

 

 

$

111,054

 

 

 

 

 

As of December 31, 2018

 

 

 

Fair Value

Hierarchy

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Market

Value

 

 

 

(In thousands)

 

Money market funds

 

Level 1

 

$

7,959

 

 

$

 

 

$

 

 

$

7,959

 

Commercial paper

 

Level 2

 

 

43,277

 

 

 

 

 

 

 

 

 

43,277

 

Corporate debt securities

 

Level 2

 

 

46,186

 

 

 

 

 

 

(54

)

 

 

46,132

 

Asset-backed securities

 

Level 2

 

 

22,842

 

 

 

 

 

 

(27

)

 

 

22,815

 

US government debt securities

 

Level 2

 

 

15,963

 

 

 

 

 

 

(1

)

 

 

15,962

 

Total cash equivalents and available-for-sale securities

 

 

 

$

136,227

 

 

$

 

 

$

(82

)

 

$

136,145

 

 

The Company’s contingent milestone payments in its agreement with the Leukemia & Lymphoma Society, Inc. (“LLS”) were concluded to be an embedded derivative. The embedded derivative contains unobservable inputs that are supported by little or no market activity at the measurement date. Accordingly, the Company’s embedded derivative is measured at fair value on a recurring basis using unobservable inputs that are classified as Level 3 inputs. The Company recorded a liability for the derivative of approximately $0.3 million, as part of other long-term liabilities as of March 31, 2019 and December 31, 2018. Refer to Note 5 for the valuation techniques and assumptions used in estimating the fair value of the embedded derivative.

The change in fair value of the embedded derivative is presented in the following table:

 

 

 

Three Months

Ended March 31,

 

 

 

2019

 

 

 

(In thousands)

 

Beginning balance

 

$

331

 

Change in fair value of embedded derivative

 

 

6

 

Ending balance

 

$

337

 

 

7


 

4.

Balance Sheet Components

Accrued Liabilities

Accrued liabilities consist of the following:

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

 

(In thousands)

 

Accrued research and development expenses

 

$

5,454

 

 

$

5,870

 

Accrued bonuses

 

 

669

 

 

 

1,602

 

Deferred rent, current

 

 

 

 

 

155

 

Other

 

 

1,176

 

 

 

1,417

 

Total accrued liabilities

 

$

7,299

 

 

$

9,044

 

 

 

5.

Research and License Agreements   

California Institute of Regenerative Medicine Grants

In January 2017, the Company was awarded a research grant from the California Institute of Regenerative Medicine (“CIRM”). The CIRM grant stipulates various milestone-based payments to the Company with the total award of $10.2 million over a period of four years. During the three months ended March 31, 2019, the Company did not receive any payments related to this grant. As of March 31, 2019 and December 31, 2018, the Company had received $7.2 million under the award.

In November 2017, the Company was awarded a second research grant from CIRM for a separate clinical trial study. The total amount of the research grant awarded was $5.0 million in various milestone-based payments over a period of five years. During 2018, the award was amended to $3.2 million in various-milestone payments over a period of five years, as was provided for under the terms of the original award because the Company opted not to expand the patient population participating in the study. During the three months ended March 31, 2019, the Company did not receive any payments related to this grant. As of March 31, 2019 and December 31, 2018, the Company had received $2.4 million under the award. Under the terms of the CIRM grants, the Company is obligated to pay royalties and licensing fees based on a low single digit royalty percentage on net sales of CIRM-funded product candidates or CIRM-funded technology. The Company has the option to decline any and all amounts awarded by CIRM. As an alternative to revenue sharing, the Company has the option to convert the award to a loan. No such election has been made as of the date of the issuance of these financial statements. In the event that the Company terminates a CIRM-funded clinical trial, it will be obligated to repay the remaining CIRM funds on hand.

Leukemia & Lymphoma Society Grant

In March 2017, the Company entered into an agreement with the LLS and amended the agreement to include an additional study in June 2018. The LLS research grant stipulates various milestone-based payments with a total award of $4.2 million through December 2019. During the three months ended March 31, 2019, the Company did not receive any payments related to this grant. As of March 31, 2019 and December 31, 2018, the Company had received $3.9 million under the award. The Company could be required in the future to pay amounts to LLS upon reaching certain development and regulatory approval milestones as well as a low single digit percentage royalty rate on net sales, up to a maximum of $15 million in total. The Company concluded that the contingent milestone payments were an embedded derivative and the Company recorded a liability for the derivative of approximately $0.3 million, as part of other long-term liabilities as of March 31, 2019 and December 31, 2018. The value of the embedded derivative was estimated using the probability-adjusted and discounted future milestone payments.

The Company recognizes research grants as a reduction of research and development expense when the eligible costs are incurred. For the three months ended March 31, 2019 and 2018, the Company recognized $1.1 million and $1.5 million as a reduction to research and development expenses for research grants.   

 

8


 

Merck Collaboration Agreement

In January 2018, the Company entered into a clinical trial collaboration and supply agreement with Ares Trading S.A, a subsidiary of Merck KGaA (“Merck”), to evaluate 5F9 combined with Merck’s cancer immunotherapy, avelumab, in a Phase 1b clinical trial in patients with ovarian cancer. Pursuant to the agreement, the parties will jointly pay for the cost of the study. As of March 31, 2019, the Company recorded a receivable of $0.8 million from Merck for reimbursement of research and development costs incurred.  Reimbursement under this collaboration agreement is recorded as a reduction to research and development expense. For the three months ended March 31, 2019 and 2018, the Company recognized $0.6 million and $0.2 million as a reduction to research and development expenses under this collaboration agreement.

6. Leases

The Company leases office property and laboratory space at its headquarters in Menlo Park (the “Menlo Park lease”) through April 2021. The lease requires monthly lease payments subject to annual increases throughout the lease term and includes a renewal option at the election of the Company to extend the lease for an additional five years. The landlord provided the Company with a tenant improvement allowance of $646,000.

On January 1, 2019, the Company adopted Topic 842. As of March 31, 2019, the remaining lease term was 2.4 years and the incremental borrowing rate used to determine the operating lease liability was 7.0%.    

The undiscounted future non-cancellable lease payments under the Company's operating lease are as follows:     

 

 

March 31, 2019

 

 

(In thousands)

 

Years

 

 

 

Remaining 2019

$

854

 

2020

 

1,168

 

2021

 

794

 

Thereafter

 

 

Total undiscounted lease payments

$

2,816

 

Present value adjustment for minimum lease commitments

$

(235

)

Lease liabilities

$

2,581

 

 

As of March 31, 2019, the current portion of the lease liability related to the Menlo Park lease was $1.0 million and the non-current portion of the lease liability related to the lease was $1.6 million, as disclosed in the accompanying condensed balance sheets. Rent expense for the Menlo Park lease was $0.2 million for the three months ended March 31, 2019 and 2018. Variable lease payments for operating expenses were $0.1 million for the three months ended March 31, 2019 and 2018.

7.

Stockholders’ Equity

2015 and 2018 Equity Incentive Plans

The following summarizes option activity for the three months ended March 31, 2019:

 

 

 

Shares

Issuable

Under

Options

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contract

Term

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Balance, December 31, 2018

 

 

3,404,847

 

 

$

6.55

 

 

 

8.82

 

 

$

31,388

 

Options granted

 

 

29,720

 

 

 

15.58

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(174,793

)

 

 

4.52

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

(36,596

)

 

 

8.49

 

 

 

 

 

 

 

 

 

Balance outstanding March 31, 2019

 

 

3,223,178

 

 

$

6.72

 

 

 

8.61

 

 

$

30,568

 

Exercisable, March 31, 2019

 

 

2,089,225

 

 

$

6.30

 

 

 

8.54

 

 

$

20,668

 

Vested and expected to vest, March 31, 2019

 

 

3,223,178

 

 

$

6.72

 

 

 

8.61

 

 

$

30,568

 

9


 

 

Total stock-based compensation was as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Research and development

 

$

455

 

 

$

135

 

General and administrative

 

 

649

 

 

 

296

 

Total

 

$

1,104

 

 

$

431

 

 

Restricted Stock

As of March 31, 2019 and December 31, 2018, there was $31,000 and $144,000 recorded in other long-term liabilities related to shares held by employees and directors that were subject to repurchase.

A summary of restricted stock activity follows:

 

 

 

Number of

Restricted

Shares

Outstanding

 

Unvested shares—December 31, 2018

 

 

49,052

 

Restricted shares vested

 

 

(22,708

)

Unvested shares—March 31, 2019

 

 

26,344

 

 

Employee Share Purchase Plan (ESPP)

In June 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“ESPP”), which became effective upon the execution of the underwriting agreement related to the IPO. The initial offering period began June 27, 2018 and will end on August 15, 2020 with purchase dates of February 15, 2019, August 15, 2019, February 15, 2020, and August 15, 2020. Each subsequent offering will be approximately 24 months long and will consist of four purchase periods with purchase dates occurring on February 15 and August 15 of each year. On each purchase date, ESPP participants will purchase shares of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date. Total stock-based compensation related to the ESPP for the three months ended March 31, 2019 was $228,000. A total of 44,656 shares of common stock were purchased pursuant to the ESPP during the three months ended March 31, 2019 for total proceeds of $588,000. The liability related to cash received from payroll deductions pursuant to the ESPP was $135,000 as of March 31, 2019.  

Convertible preferred stock

The convertible preferred stock was temporarily reclassified to mezzanine equity as of March 31, 2018 before converting into common stock and permanent equity upon the closing of Company’s initial public offering in July 2018.

8.

Net Loss Per Share

 The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:

 

 

 

As of March 31,

 

 

 

2019

 

 

2018

 

Convertible preferred stock

 

 

 

 

 

16,215,896

 

Stock options to purchase common stock

 

 

3,223,178

 

 

 

2,206,642

 

Restricted stock subject to future vesting

 

 

26,344

 

 

 

103,763

 

Shares committed under ESPP

 

 

10,525

 

 

 

 

Total

 

 

3,260,047

 

 

 

18,526,301

 

 

10


 

  

9.

Subsequent Events

On April 24, 2019, the Company entered into a sublease to obtain 6,230 rentable square feet to expand its current headquarters through February 28, 2021.  The base rent for the additional space for the first year will be $0.4 million and will increase annually by 3%.

On April 28, 2019, the Company also entered into an amendment of its current headquarter lease to add the additional space under the sublease to its headquarter lease upon the expiration of the sublease on February 28, 2021. Under the terms of the Lease Amendment, the lease for the additional space will commence on March 1, 2021 and be co-terminus with the lease agreement, and the base rent for the additional space will be $36,000 per month.

11


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations in conjunction with our condensed financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes in the Annual Report on Form 10-K for the year ended December 31, 2018. In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

Overview

 

We are a clinical-stage immuno-oncology company focused on developing novel checkpoint therapies to activate macrophages in the fight against cancer. We founded Forty Seven based on the insight that blocking CD47, a key signaling molecule that is overexpressed on cancer cells, renders tumors susceptible to macrophages. By harnessing macrophages, we believe that our lead product candidate, 5F9, dosed as a monotherapy or in combination with marketed cancer therapies, can transform the treatment of cancer. 5F9 has demonstrated promising activity in multiple Phase 1b/2 clinical trials in which we have treated over 290 relapsed or refractory cancer patients with solid or hematologic tumors. In addition, we have two additional product candidates in preclinical development; FSI-189, an anti-SIRPα antibody, and FSI-174, an anti-cKIT antibody. We hold worldwide rights to all of our product candidates.

 

We focus our efforts on targeting the CD47 pathway as a way to engage macrophages primarily in fighting tumors. Macrophages function as first responders, swallowing foreign and abnormal cells, including cancer cells, and mobilizing other components of the immune system including T cells and antibodies. Cancer cells use CD47, a “don’t eat me” signal, in order to evade detection by the immune system and subsequent destruction by macrophages. Overexpression of CD47 is common to nearly all types of tumors and is also correlated with poor prognosis in multiple cancers including acute myelogenous leukemia, or AML, colorectal cancer, or CRC, gastric cancer, lung cancer, Non-Hodgkin’s lymphoma, or NHL, and ovarian cancer. Despite the central role of macrophages as cell-eating scavengers and first responders, the pharmaceutical industry is only beginning to bring this key group of cells into the fight against cancer.

 

Since our inception in 2014, we have devoted most of our resources to identifying and developing 5F9, advancing our preclinical programs, conducting clinical trials and providing general and administrative support for these operations. We have not recorded revenue from product sales or collaboration activities, or any other source. We have funded our operations to date primarily from the issuance and sale of our common stock in our initial public offering, the issuance and sale of our preferred stock and the receipt of government and private grants. We are eligible to receive up to $17.6 million in grants from the California Institute for Regenerative Medicine, or CIRM, and the Leukemia and Lymphoma Society, or LLS, of which $13.5 million has been received through March 31, 2019.

 

On June 27, 2018, our Registration Statements on Form S-1 (File No. 333-225390 and 333-225933) relating to our initial public offering, or IPO, were declared effective by the Securities Exchange Commission, or SEC. Pursuant to the Registration Statements, we issued and sold an aggregate of 8,090,250 shares of common stock (inclusive of 1,055,250 shares pursuant to the underwriters’ over-allotment option) at a price of $16.00 per share for aggregate cash proceeds of $116.3 million, net of underwriting discounts and commissions and estimated offering costs. The sale and issuance of 7,035,000 shares in the IPO closed on July 2, 2018 and the sale and issuance of an additional 1,055,250 shares pursuant to the underwriters’ over-allotment option closed on July 27, 2018. Upon the closing of the IPO on July 2, 2018, all outstanding shares of convertible preferred stock automatically converted into 16,215,896 shares of common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding.

 

12


 

We have incurred net losses in each year since inception. Our net losses were $23.0 million and $14.8 million for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, we had an accumulated deficit of $162.8 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses over at least the next several years. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

 

advance product candidates through clinical trials;

 

pursue regulatory approval of product candidates;

 

operate as a public company;

 

continue our preclinical programs and clinical development efforts;

 

continue research activities for the discovery of new product candidates; and

 

manufacture supplies for our preclinical studies and clinical trials.

 

Components of Results of Operations

 

Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred for the development of our lead product candidate, 5F9, and other product candidates, which include:

 

 

expenses incurred under agreements with third-party contract organizations and investigative clinical trial sites that conduct research and development activities on our behalf, and consultants;

 

costs related to production of clinical materials, including fees paid to contract manufacturers;

 

laboratory and vendor expenses related to the execution of preclinical and clinical trials;

 

employee-related expenses, which include salaries, benefits and stock-based compensation; and

 

facilities and other expenses, which include expenses for rent and maintenance of facilities, depreciation and amortization expense and other supplies.

 

We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators and third-party service providers. The costs of intangible assets that are purchased from others for a particular research and development project and that have no alternative future uses are considered research and development costs and are expensed when incurred. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and as services are performed.

 

The largest component of our operating expenses has historically been our investment in research and development activities related to the clinical development of our lead product candidate, 5F9. We recognize the funds from research and development grants as a reduction of research and development expense when the related eligible research costs are incurred. Research and development grants received during 2018 and as of March 31, 2019 totaled $7.6 million and $13.5 million, respectively. In January 2018, we entered into a clinical trial collaboration and supply agreement with Ares Trading S.A, a subsidiary of Merck KGaA or Merck. Reimbursement under this collaboration agreement is recorded as a reduction to research and development expense. For the three months ended March 31, 2019 and 2018, we recognized $0.6 million and $0.2 million, respectively, as a reduction to research and development expenses under this collaboration agreement.

 

We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our product candidates advance into later stages of development, and as we begin to conduct larger clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

13


 

General and Administrative Expenses

 

General and administrative expenses consist primarily of personnel-related costs, facilities costs, depreciation and amortization expenses and professional services expenses, including legal, human resources, audit and accounting services. Personnel-related costs consist of salaries, benefits and stock-based compensation. Facilities costs consist of rent and maintenance of facilities. We expect our general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to advance our product candidates and as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, the Nasdaq Global Market, additional insurance expenses, investor relations activities and other administrative and professional services.

Interest and Other Income, Net

 

Interest and other income, net consists of interest earned on our cash equivalents and short-term investments and foreign currency transaction gains and losses incurred during the period.

 

Results of Operations

 

Three Months Ended March 31, 2019 and 2018

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Increase/

(Decrease)

 

 

 

(In thousands)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

19,126

 

 

$

11,153

 

 

$

7,973

 

General administrative

 

 

4,584

 

 

 

3,843

 

 

 

741

 

Total operating expenses

 

 

23,710

 

 

 

14,996

 

 

 

8,714

 

Loss from operations

 

 

(23,710

)

 

 

(14,996

)

 

 

(8,714

)