SEC Filing | Forty Seven, Inc.

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ftsv-10q_20190630.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 June 30, 2019

☐	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

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

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.

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 August 6, 2019, the registrant had 42,215,143 shares of common stock, $0.0001 par value per share, outstanding.

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	25
Item 4.	Controls and Procedures	26
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	60
Signatures		61

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.

PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements.

Forty Seven Inc.

Condensed Balance Sheets

(In thousands)

	June 30, 2019			December 31, 2018
	(Unaudited)			(1)
Assets
Current assets:
Cash and cash equivalents	$	17,849		$	10,837
Short-term investments		81,158			128,186
Prepaid expenses and other current assets		11,861			6,835
Total current assets		110,868			145,858
Property and equipment, net		1,288			1,360
Operating lease right-of-use assets		2,579			—
Other assets		1,067			2,219
Total assets	$	115,802		$	149,437
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	8,499		$	4,621
Accrued liabilities		9,719			9,044
Lease liabilities, current		1,397			—
Deferred grant funding, current		2,742			1,744
Total current liabilities		22,357			15,409
Lease liabilities, noncurrent		1,600			—
Deferred rent, noncurrent		—			331
Other long-term liabilities		361			476
Total liabilities		24,318			16,216
Commitments and Contingencies
Stockholders’ equity:
Common stock		3			3
Additional paid-in capital		277,413			273,069
Accumulated other comprehensive income (loss)		59			(82	)
Accumulated deficit		(185,991	)		(139,769	)
Total stockholders’ equity		91,484			133,221
Total liabilities and stockholders’ equity	$	115,802		$	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.

Forty Seven Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Operating expenses:
Research and development	$	18,829		$	13,596		$	37,955		$	24,749
General and administrative		5,057			3,362			9,641			7,205
Total operating expenses		23,886			16,958			47,596			31,954
Loss from operations		(23,886	)		(16,958	)		(47,596	)		(31,954	)
Interest and other income, net		680			236			1,374			457
Net loss		(23,206	)		(16,722	)		(46,222	)		(31,497	)
Unrealized gains on available-for-sale securities		41			43			141			16
Comprehensive loss	$	(23,165	)	$	(16,679	)	$	(46,081	)	$	(31,481	)
Net loss per share, basic and diluted	$	(0.74	)	$	(2.52	)	$	(1.48	)	$	(4.76	)
Shares used in computing net loss per share, basic and diluted		31,355,135			6,636,862			31,261,182			6,618,736

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

Forty Seven Inc.

Condensed Statements of Stockholders’ Equity

For the Three and Six Months Ended June 30, 2019 and 2018

(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 Income (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
Issuance of common stock for exercise of stock options		—		—		133,723			—	$	612		—			—			612
Vesting of early exercised stock options		—		—		—			—		13		—			—			13
Stock-based compensation		—		—		—			—		1,125		—			—			1,125
Net loss		—		—		—			—		—		—			(23,206	)		(23,206	)
Other comprehensive income		—		—		—			—		—		41			—			41
Balance at June 30, 2019		—	$	—		31,432,322		$	3	$	277,413	$	59		$	(185,991	)	$	91,484



	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
Issuance of common stock for exercise of stock options		—		—		28,630			—		55		—			—			55
Vesting of early exercised stock options		—		—		—			—		171		—			—			171
Stock-based compensation		—		—		—			—		616		—			—			616
Net loss		—		—		—			—		—		—			(16,722	)		(16,722	)
Other comprehensive income		—		—		—			—		—		43			—			43
Balance at June 30, 2018		16,215,896	$	149,397		6,737,837		$	1	$	4,793	$	(28	)	$	(100,896	)	$	53,267

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

Forty Seven, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(In thousands)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(46,222	)	$	(31,497	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		2,229			1,047
Depreciation and amortization		233			193
Amortization of right-of-use assets		461			—
Accretion of discounts on marketable securities		(730	)		(180	)
Realized gain on sale of available-for-sale securities		(4	)		—
Change in fair value of embedded derivative		12			—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(5,026	)		853
Other assets		1,620			(1,412	)
Accounts payable		3,720			(603	)
Accrued liabilities		571			762
Deferred grant funding		997			2,806
Lease related liabilities		(530	)		(56	)
Net cash used in operating activities		(42,669	)		(28,087	)
Cash flows from investing activities:
Purchases of property and equipment		(70	)		—
Purchases of available-for-sale securities		(68,819	)		(16,368	)
Proceeds from sales of available-for-sale securities		3,996			—
Proceeds from maturities of available-for-sale securities		112,727			35,365
Net cash provided by investing activities		47,834			18,997
Cash flows from financing activities:
Payments of deferred offering costs		(143	)		(2,368	)
Proceeds from issuance of common stock upon ESPP purchase		588			—
Proceeds from issuance of common stock upon exercise of stock options		1,402			155
Net cash provided by (used in) financing activities		1,847			(2,213	)
Net increase (decrease) in cash and cash equivalents		7,012			(11,303	)
Cash and cash equivalents — beginning of period		10,837			24,417
Cash and cash equivalents — end of period	$	17,849		$	13,114
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Purchase of property and equipment through accounts payable and accruals	$	91		$	—
Deferred offering costs included in accounts payable and accrued liabilities	$	326		$	1,697
Lease liability obtained in exchange for right-of-use asset	$	712		$	—

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

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 $99.0 million as of June 30, 2019. Since inception through June 30, 2019, the Company has incurred cumulative net losses of $186.0 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 financial statements 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 results of operations for the three and six months ended June 30, 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.

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 leases 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 and six months ended June 30, 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.

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 June 30, 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 and six months ended June 30, 2019 and 2018. Any identified 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 June 30, 2019 and December 31, 2018 are presented in the following tables:

	As of June 30, 2019
	Fair Value Hierarchy	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value
	(In thousands)
Money market funds	Level 1	$	15,670	$	—	$	—	$	15,670
Commercial paper	Level 2		24,271		—		—		24,271
Corporate debt securities	Level 2		20,453		24		—		20,477
Asset-backed securities	Level 2		16,470		11		—		16,481
US government debt securities	Level 2		19,905		24		—		19,929
Total cash equivalents and available-for-sale securities		$	96,769	$	59	$	—	$	96,828

	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 June 30, 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:

	Six Months Ended June 30,
	2019
	(In thousands)
Beginning balance	$	331
Change in fair value of embedded derivative		12
Ending balance	$	343

4.	Balance Sheet Components

Accrued Liabilities

Accrued liabilities consist of the following:

	June 30, 2019		December 31, 2018
	(In thousands)
Accrued research and development expenses	$	6,338	$	5,870
Accrued bonuses		1,379		1,602
Deferred rent, current		—		155
Other		2,002		1,417
Total accrued liabilities	$	9,719	$	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 and six months ended June 30, 2019, the Company received $2.0 million related to this grant. As of June 30, 2019 and December 31, 2018, the Company had received $9.2 million and $7.2 million under the award, respectively.

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 and six months ended June 30, 2019, the Company received $0.7 million related to this grant. As of June 30, 2019 and December 31, 2018, the Company had received $3.1 million and $2.4 million under the award, respectively. 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 royalty payments, 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 and six months ended June 30, 2019, the Company did not receive any payments related to this grant. As of June 30, 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 $15.0 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 m