Exhibit 99.1
4D PHARMA PLC
UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
AS OF JUNE 30, 2021 AND DECEMBER 31, 2020 AND
FOR THE SIX-MONTHS ENDED
JUNE 30, 2021 AND 2020
4D PHARMA PLC
TABLE OF CONTENTS
F-1 |
4D PHARMA PLC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 30, 2021 | December 31, 2020 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Research and development tax credits receivable | ||||||||
Prepayments and other current assets | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Right-of-use assets (operating leases) | ||||||||
Intangible assets, net | ||||||||
Goodwill | ||||||||
Deferred recapitalization costs | - | |||||||
Research and development tax credits receivable, net | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued expenses and other current liabilities | ||||||||
Current portion of operating lease liabilities | ||||||||
Current portion of deferred revenues | ||||||||
Total current liabilities | ||||||||
Operating lease liabilities, net of current portion | ||||||||
Deferred revenues, net of current portion | ||||||||
Deferred tax | ||||||||
Warrant liability | - | |||||||
Other liabilities | ||||||||
Total liabilities | ||||||||
Commitments and Contingencies (Note 10) | ||||||||
Stockholders’ equity: | ||||||||
Common Stock, $ | par value, authorized; and shares outstanding at June 30, 2021 and December 31, 2020, respectively||||||||
Additional paid in capital | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total stockholders’ equity | $ | $ | ||||||
Total liabilities and stockholders’ equity | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-2 |
4D PHARMA PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
For the Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Revenues | $ | $ | ||||||
Operating expenses: | ||||||||
Research and development | ||||||||
General and administrative expenses | ||||||||
Foreign currency losses (gains) | ( | ) | ||||||
Total operating expenses | ||||||||
Loss from operations | ( | ) | ( | ) | ||||
Other income (expense), net: | ||||||||
Interest income | ||||||||
Interest expense | ( | ) | ( | ) | ||||
Other income | ||||||||
Loss on issuance of securities in recapitalization transaction | ( | ) | - | |||||
Change in fair value of warrant liability | - | |||||||
Total other income, net | ( | ) | ||||||
Net loss before income taxes | ( | ) | ( | ) | ||||
Income tax | ( | ) | - | |||||
Net loss | ( | ) | ( | ) | ||||
Other comprehensive income (loss) | ||||||||
Foreign currency translation adjustment | ( | ) | ||||||
Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
Net loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | ||
Weighted-average number of common shares used in computing basic and diluted net loss per common share |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3 |
4D PHARMA PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share amounts)
Common stock | Additional Paid-In | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||
Balance, January 1, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
Common stock issued in recapitalization transaction | ( | ) | - | - | - | |||||||||||||||||||
Issuance of common stock, net | - | - | ||||||||||||||||||||||
Warrants exercised | - | - | - | |||||||||||||||||||||
Options exercised | - | - | - | - | - | |||||||||||||||||||
Currency translation adjustment | - | - | - | - | ||||||||||||||||||||
Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||
Share-based compensation | - | - | - | - | ||||||||||||||||||||
Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ |
Common stock | Additional Paid-In | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||
Balance, January 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
Issuance of common stock, net | - | - | ||||||||||||||||||||||
Issuance of warrants | - | - | - | - | ||||||||||||||||||||
Currency translation adjustment | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||
Share-based compensation | - | - | - | - | ||||||||||||||||||||
Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-4 |
4D PHARMA PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share amounts)
For the Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | ||||||||
Stock based compensation | ||||||||
Loss on issuance of securities in recapitalization transaction | - | |||||||
Change in fair value of warrant liability | ( | ) | - | |||||
Other non-cash expenses | ||||||||
Changes in assets and liabilities: | ||||||||
Prepayments and other current assets | ( | ) | ( | ) | ||||
Research and development tax credits receivable | ( | ) | ( | ) | ||||
Accounts payable | ( | ) | ||||||
Deferred revenues | ( | ) | ( | ) | ||||
Operating lease obligations | ( | ) | ( | ) | ||||
Other liabilities and accrued expenses | ( | ) | ||||||
Net cash used in operating activities | ( | ) | ( | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Purchase of software | - | ( | ) | |||||
Purchase of property and equipment | ( | ) | ( | ) | ||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Net proceeds from recapitalization transaction | - | |||||||
Net proceeds from issuance of common stock | ||||||||
Net proceeds from issuance of warrants | - | |||||||
Net proceeds from warrant exercises | - | |||||||
Lease liability payments | ( | ) | ( | ) | ||||
Net cash provided by financing activities | ||||||||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
Change in cash and cash equivalents | ||||||||
Cash and cash equivalents at beginning of year | ||||||||
Cash and cash equivalents at end of year | $ | $ | ||||||
Supplemental disclosures of non-cash investing and financing activities | ||||||||
Cash paid for interest | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-5 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
NOTE 1 – NATURE OF THE BUSINESS
4D Pharma plc (the “Company”) and its subsidiary undertakings were established with the mission of leveraging the deep and varied interactions between the human body and the gut microbiome – the trillions of bacteria that colonize the human gastrointestinal tract – to develop an entirely novel class of drug: Live Biotherapeutics. The Company is focused on understanding how individual strains of bacteria function and how their interactions with the human host can be exploited to treat particular diseases, from cancer to asthma to conditions of the central nervous system.
The Company is incorporated in England and Wales and its operations are largely undertaken in Europe. The Company’s common stock are listed on the Alternative Investment Market of the London Stock Exchange (“AIM”) as “DDDD”. As of March 22, 2021, the Company’s common stock and warrants are also listed on Nasdaq (“LBPS” and “LBPSW”) through American Depositary Shares (“ADSs”) with each ADS representing 8 shares of common stock.
On March 22, 2021 the Company completed a recapitalization with Longevity Acquisition Corporation (NASDAQ: LOAC) a publicly-traded special purpose acquisition company (“SPAC”). Shareholders of LOAC received ADSs of the Company, and LOAC became a wholly-owned subsidiary of the Company. See Note 3 for further information.
Liquidity and capital resources
Since inception, the Company has incurred net losses and negative cash flows from operations. During the six months ended June 30, 2021, the Company incurred a net loss of $ million and used $million of cash in operations. As of June 30, 2021, the Company had an accumulated deficit of $million. Management expects to incur additional operating losses in the future as the Company continues to further develop, seek regulatory approval for and, if approved, commence commercialization of its product candidates.
As
of June 30, 2021, the Company’s cash and cash equivalents were $
The Company has historically financed its operations primarily through the sale of common stock. The Company intends to raise additional capital through sales of common stock, but there can be no assurance that these funds will be available or that they are readily available at terms acceptable to the Company or in an amount sufficient to enable the Company to continue its development and commercialization of its products or sustain operations in the future.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
Principals of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated during the consolidation process.
Unaudited Interim Condensed Consolidated Financial Statements
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. These condensed consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to fairly present the results of the interim periods. The condensed consolidated balance sheet at December 31, 2020, has been derived from the audited consolidated financial statements at that date. Operating results and cash flows for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021 or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our report for the year ended December 31, 2020.
F-6 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our annual financial statements for the year ended December 31, 2020. There have been no changes to the Company’s significant accounting policies during the six months ended June 30, 2021.
(b) Functional and Reporting Currency
The functional currency of the Company and its’ subsidiaries (other than the foreign subsidiaries mentioned below) is the Great Britain Pound Sterling (“GBP”). The operations of the two foreign subsidiaries are conducted in EUROs. Balances denominated in, or linked to, foreign currencies are stated on the basis of the exchange rates prevailing at the balance sheet date. For foreign currency transactions included in the statement of operations and comprehensive loss, the exchange rates applicable to the relevant transaction dates are used. Transaction gains or losses arising from changes in the exchange rates used in the translation of such balances are carried to financing income or expenses. Assets and liabilities of the two subsidiaries are translated from their functional currency to GBP at the balance sheet date exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the year. Translation adjustments are reflected in the consolidated balance sheets as a component of accumulated other comprehensive income or loss.
The reporting currency for the Company and its’ subsidiaries is the United States dollar (“USD”) and these consolidated financial statements are presented in USD. Dollar amounts included herein are in thousands, except per share data. Stockholders’ equity is translated into USD from GBP at historical exchange rates. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenses are translated at the average exchange rates prevailing during the reporting period. Adjustments resulting from translating the financial statements into USD are recorded as a separate component of accumulated other comprehensive loss in stockholders’ equity.
(c) Use of estimates
The preparation of financial statements in conformity with U. S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and be based on events different from those assumptions. As part of these consolidated financial statements, the Company’s significant estimates include (1) goodwill impairment; (2) the estimated useful lives of intangible assets; (3) revenue recognition, in regards to the deferred revenues; (4) the inputs used in determining the fair value of equity-based awards; (5) the inputs used in determining the fair value of warrants; and (6) valuation allowance relating to the Company’s deferred tax assets.
(d) JOBS Act Accounting Election
The Company is an “emerging growth company” or “EGC”, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, an EGC can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use the extended transition period for complying with any new or revised financial accounting standards.
F-7 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(e) Fair value of financial instruments
The Company measures and discloses fair value in accordance with ASC 820, “Fair Value,” which defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions there exists a three-tier fair-value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 - unadjusted quoted prices are available in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
Level 2 - pricing inputs are other than quoted prices in active markets that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
Level 3 - pricing inputs are unobservable for the non-financial asset or liability and only used when there is little, if any, market activity for the non-financial asset or liability at the measurement date. The inputs into the determination of fair value require significant management judgment or estimation. Fair value is determined using comparable market transactions and other valuation methodologies, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The Company’s financial instruments primarily consist of cash and cash equivalents, trade and other payables with initial maturity of up to 12 months. The estimated fair values of these financial instruments approximate their carrying values as presented, due to their short maturities.
The Company’s recurring fair value measurements at June 30, 2021 are as follows:
Fair Value as of June 30, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Liabilities: | ||||||||||||||||
Warrant liability (Note 9) | $ | $ | $ | $ |
The Company had no recurring fair value measurements at December 31, 2020.
(f) Deferred Recapitalization Costs
Specific
incremental legal, accounting and other fees and costs directly attributable to a proposed or actual offering of securities may properly
be deferred and charged against the gross proceeds of such an offering. As of December 31, 2020, there were $
F-8 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Basic loss per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is computed similar to basic loss per share, except that the denominator is increased to include the number of additional potential common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Potential common shares are excluded from the computation for a period in which a net loss is reported or if their effect is anti-dilutive. Basic and diluted loss per common share is the same for all periods presented because all outstanding stock options and warrants are anti-dilutive.
At June 30, 2021 and 2020, the Company excluded the outstanding securities summarized below (shown as common stock equivalents), which entitle the holders thereof to acquire shares of common stock, from its calculation of loss per share, as their effect would have been anti-dilutive.
June 30, | ||||||||
2021 | 2020 | |||||||
Common stock warrants | ||||||||
Common stock units | ||||||||
Common stock options | ||||||||
Total |
(h) Recent issued accounting pronouncements not yet adopted
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivative and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40); Accounting for Convertible Instruments and Contracts in an Entity’s own Equity. The pronouncement simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Specifically, the ASU “simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP.” In addition, the ASU “removes certain settlement conditions that are required for equity contracts to qualify for it” and “simplifies the diluted earnings per share (EPS) calculations in certain areas.” The guidance is effective beginning after December 15, 2023 and early adoption is permitted. The Company does not currently engage in contracts covered by this guidance and does not believe it will have a material effect on the Company’s condensed consolidated financial statements, but could in the future.
(i) Subsequent Events
Management has evaluated subsequent events that have occurred through the date these financial statements were issued. There were no events that require adjustment to or disclosure in the Company’s financial statements, except as disclosed. See Note 14 for further information on subsequent events.
NOTE 3 – RECAPITALIZATION
On
March 22, 2021, Longevity Acquisition Corporation (“LOAC”) merged with and into 4D Pharma (BVI) Limited (“Merger
Sub”), a new wholly owned subsidiary of the Company, with Merger Sub continuing as the surviving company. Each of LOAC’s
common shares issued and outstanding prior to the effective time of the merger (excluding shares held by the Company and LOAC and dissenting
shares, if any) were automatically converted into the right to receive certain per share merger consideration (as defined below), and
each warrant to purchase LOAC’s ordinary shares and right to receive LOAC’s ordinary shares that were outstanding immediately
prior to the effective time of the merger was assumed by the Company and automatically converted into a warrant to purchase common stock
of the Company and a right to receive common stock of the Company, payable in Company ADSs, respectively. The per share merger consideration
consisted of common shares of the Company, payable in Company
ADSs (each ADS representing 8 ordinary shares), for each issued and outstanding ordinary shares of LOAC. LOAC had cash and cash equivalents
of $
F-9 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Management
concluded the Merger is a recapitalization through an asset acquisition and not a business combination as LOAC does not meet the definition
of a business pursuant to ASC 805. According to the guidance in ASC 805, the Company obtained control as a result of the transaction.
Specifically, Company obtained control as: (i) it owns
The
Company received gross net assets of $
● | shares to LOAC shareholders and associated investors. |
● | |
● | |
● |
The
accounting for concurrent securities offerings is highly complex and required significant analysis and judgment in the application of
the appropriate accounting guidance. The Company evaluated the public and private warrants as well as the warrants embedded in the representative
units and determined if each security should be equity-classified or liability-classified instruments. Both the public warrants and the
warrants embedded in the representative warrants need the criteria to be classified in stockholders’ equity. The private warrants
contain provisions that are not an input to the fair value of an options, thus they are not indexed to the Company’s own stock.
The Company determined that the private warrants should be classified as non-current warrant liabilities recognized at their inception
date fair value The resulting aggregate issuance date fair value on the private warrants’ issuance date was determined to be $
Concurrent
with the merger, the Company issued
The
Company evaluated the Backstop Warrants to determine if they should be equity-classified or liability-classified instruments and
determined that the Backstop Warrants contain a contingency which could result in the modification of the exercise price,
thus they are not eligible for an exception from derivative accounting. The Company determined that the Backstop Warrants
should be classified as non-current warrant liabilities recognized at their inception date fair value. The resulting aggregate issuance
date fair value on the Backstop Warrants issuance date was determined to be $
F-10 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The
proceeds of the recapitalization were first allocated to the private liability warrants based on their full fair value. The remaining
proceeds from recapitalization were less than the total transaction costs, including the fair value of the Backstop Warrants,
so a loss on the recapitalization transaction was recorded to other income (expense) in the Company’s consolidated statement of
operations and comprehensive loss for the six months ended June 30, 2021 of $
NOTE 4 – PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets consisted of the following:
June 30, 2021 | December 31, 2020 | |||||||
Vendor prepayments | $ | $ | ||||||
Prepaid insurance | ||||||||
Prepaid patent expense | ||||||||
Prepaid research | ||||||||
Other prepayments | ||||||||
VAT receivables | ||||||||
Other assets – goods to be consumed in R&D activities | ||||||||
$ | $ |
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment, net, consisted of the following:
June 30, 2021 | December 31, 2020 | |||||||
Property and machinery | $ | $ | ||||||
Fixtures, fittings and office equipment | ||||||||
Land and buildings | ||||||||
Total cost | ||||||||
Accumulated depreciation | ( | ) | ( | ) | ||||
Total property and equipment, net | $ | $ |
Depreciation
and related amortization expense was $
NOTE 6 – GOODWILL AND INTANGIBLE ASSETS
Goodwill:
Balance at January 1, 2020 | $ | |||
Translation differences | ||||
Balance at December 31, 2020 | ||||
Translation differences | ( | ) | ||
Balance at June 30, 2021 | $ |
F-11 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Intangible assets, net, consisted of the following:
June 30, 2021 | ||||||||||||||||
Software | Patents | Intellectual Property | Total | |||||||||||||
Gross amount beginning of period | $ | $ | $ | $ | ||||||||||||
Additions | ||||||||||||||||
Translation differences | ||||||||||||||||
Gross amount end of period | ||||||||||||||||
Disposals | ( | ) | ( | ) | ||||||||||||
Accumulated amortization | ( | ) | ( | ) | ( | ) | ||||||||||
Net book value | $ | $ | $ | $ |
December 31, 2020 | ||||||||||||||||
Software | Patents | Intellectual Property | Total | |||||||||||||
Gross amount beginning of period | $ | $ | $ | $ | ||||||||||||
Additions | ||||||||||||||||
Translation differences | ||||||||||||||||
Gross amount end of period | ||||||||||||||||
Accumulated amortization | ( | ) | ( | ) | ( | ) | ||||||||||
Net book value | $ | $ | $ | $ |
Estimated amortization expense for each of the next five years is:
Year | ||||
Remaining 2021 | $ | |||
2022 | ||||
2023 | ||||
2024 | ||||
2025 | ||||
Total | $ |
Amortization
expense was $
At
the acquisition dates goodwill amounted to
million, intellectual property amounted to $
F-12 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
NOTE 7 – RESEARCH AND DEVELOPMENT TAX CREDIT RECIEVABLES
For companies with research and development expenses, the UK government provides a notifiable state aid in the form of an enhanced research and development deduction to Corporation tax, The Company has elected to take the enhanced deduction as a cash payment rather than carry the costs as a deduction against future taxable income. The Irish government has a similar program for qualifying research and development expenses. Under the Irish program, the Company is entitled to receive a rebate up to a maximum of the employment taxes paid, which is reimbursed over a period of three years from the balance sheet date. Research and development tax credit receivables consisted of the following:
June 30, 2021 | December 31, 2020 | |||||||
UK research and development tax credits | $ | $ | ||||||
Irish research and development tax credits | ||||||||
Translation differences | ( | ) | ||||||
Total | ||||||||
Less: current portion | ( | ) | ( | ) | ||||
Research and development tax credits receivable, net | $ | $ |
For
the six months ended June 30, 2021 and 2020, the Company has recorded other income of $
NOTE 8 – ACCRUED EXPENSES AND OTHER CURRENT LIABLITIES
Accrued expenses and other current liabilities consisted of the following:
June 30, 2021 | December 31, 2020 | |||||||
Clinical trials accrued expenses | $ | $ | ||||||
Patents and other research accruals | ||||||||
Payroll expenses | ||||||||
Building and office expenses | ||||||||
Professional and consultants’ expenses | ||||||||
Tax expenses | ||||||||
Deferred grant income | ||||||||
Short-term finance lease | - | |||||||
Other accrued expenses | ||||||||
$ | $ |
NOTE 9 – WARRANTS
The Company evaluated the public and private warrants as well as the Backstop Warrants and warrants embedded in the representative units as either equity-classified or liability-classified instruments based on an assessment of the warrants’ specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock, among other conditions for equity classification. Pursuant to such evaluation, the Company further evaluated the public and private warrants, the backstop warrants and the warrants embedded in the representative units under ASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity, and concluded that the private warrants and backstop warrants do not meet the criteria to be classified in stockholders’ equity. Both the public warrants and the warrants embedded in the representative units meet the criteria to be classified in stockholders’ equity.
F-13 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The
Backstop Warrants issued as a result of the merger transaction include provisions such that the exercisability of the warrants
is contingent on the exercise of the public warrants assumed in the merger transaction. Since this contingency could result in the modification
of the exercise price, thus the warrants are not
eligible for an exception from derivative accounting. Accordingly, the Company has recorded the Backstop Warrants as a liability
at fair value, with subsequent changes in their fair values recognized in the statements of operations and comprehensive loss at each
reporting date. The Company measured the fair value of these Backstop Warrants as of June 30, 2021, and recorded other income
of $
A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s Backstop Warrant liabilities that are categorized within Level 3 of the fair value hierarchy as of June 30, 2021 and March 22, 2021 is as follows:
June 30, 2021 | March 22, 2021 | |||||||
Number of shares underlying the warrants | ||||||||
Stock price | $ | $ | ||||||
Volatility | % | % | ||||||
Risk-free interest rate | % | % | ||||||
Expected dividend yield | % | % | ||||||
Expected warrant life | |
The
private warrants assumed in the merger transaction include provisions that provide for potential changes to the settlement amounts dependent
upon the characteristics of the holder of the warrant. Since the holder is not an input to the fair value of an option under ASC 815,
and thus the warrants are not indexed to the Company’s own stock and not eligible for an exception from derivative accounting.
Accordingly, the Company has recorded the private warrants as a liability at fair value, with subsequent changes in their fair
values recognized in the statements of operations and comprehensive loss at each reporting date. The Company measured the fair value
of these assumed private warrants as of June 30, 2021, and recorded other income of $
A summary of quantitative information with respect to the valuation methodology and significant unobservable inputs used for the Company’s assumed private warrant liability that are categorized within Level 3 of the fair value hierarchy as of June 30, 2021 and March 22, 2021 is as follows:
June 30, 2021 | March 22, 2021 | |||||||
Number of shares underlying the warrants | ||||||||
Stock price | $ | $ | ||||||
Volatility | % | % | ||||||
Risk-free interest rate | % | % | ||||||
Expected dividend yield | % | % | ||||||
Expected warrant life |
Recurring Level 3 Activity and Reconciliation
The table below provides a reconciliation of the beginning and ending balances for the liability measured at fair value using significant unobservable inputs (Level 3). The table reflects gains and losses for the six months ended June 30, 2021, for all financial liabilities categorized as Level 3 as of June 30, 2021.
F-14 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Fair Value Measurements Using Significant Unobservable Inputs (Level 3):
Warrants | December 31, 2020 | Initial Measurements | Decrease in Fair Value | Translation differences | June 30, 2021 | |||||||||||||||
Backstop Warrants | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
Private warrants | ( | ) | ||||||||||||||||||
Total | $ | $ | $ | ( | ) | $ | $ |
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Operating Lease obligations
Effective January 1, 2019, the Company adopted new guidance for the accounting and reporting of leases. The Company has two real estate leases classified as operating leases (one on Spain and one in the UK). No additional leases were entered into during the periods.
The
UK lease was for our head office in Leeds, England. The premises comprise office space and parking and are for a ten-year term which
commenced in May 2017. A tenant lease break clause is available in May 2022 which has not been included in the lease calculations as
there is no indication that this would be executed. Lease escalation costs have been included on a fixed rate basis as a practical expedient.
The lease includes a provision to return the premises to their original condition on exit, as such an asset retirement obligation has
been included in other liabilities of $
The
Spanish lease relates to our manufacturing premises in Leon, Spain. The agreement is for a ten-year term which commenced in April 2016
and includes a tenant lease break clause that can be executed after providing six months’ written notice at any point five years
from the commencement date, again this break clause has not been included in the lease value as there is no evidence that this will be
executed. Lease escalation costs have also been included on a fixed rate basis as a practical expedient. The lease includes the requirement
to make certain repairs and as such an asset retirement obligation has been included in other liabilities at $
Operating
lease cost, with a weighted average discount rate of
The following table summarizes the Company’s operating lease maturities as of June 30, 2021:
Amount | ||||
Remaining 2021 | $ | |||
2022 | ||||
2022 | ||||
2024 | ||||
2025 | ||||
2026 | ||||
Thereafter | ||||
Total remaining lease payments | ||||
Less: Imputed interest | ( | ) | ||
Total lease liabilities | $ |
F-15 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Other commitments
We enter into contracts in the normal course of business with Contract Research Organizations, Contract Manufacturing Organizations, universities, and other third parties for preclinical research studies, clinical trials and testing and manufacturing services. These contracts generally do not contain minimum purchase commitments and are cancellable by us upon prior written notice although, purchase orders for clinical materials are generally non-cancellable. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancellable obligations of our service providers, up to the date of cancellation or upon completion of a manufacturing run. These payments where these costs are material they have been included based on assumptions regarding those that are reasonably likely to be incurred.
COVID-19
In 2020, the global COVID-19 pandemic hit the United States and UK affecting almost all aspects of the global economy, the pharmaceutical industry and the Company included. The Company’s operations and financial results have already been adversely impacted by the COVID-19 pandemic in the United Kingdom, United States and the rest of the world. Enrolment of patients in the clinical trials and maintaining patients in the ongoing clinical trials were delayed or limited to lesser or greater extent as the Company’s clinical trial sites limited their onsite staff, temporarily closed or adjusted the way they worked during the COVID-19 pandemic. As a result of measures imposed by the governments in affected regions, many commercial activities, businesses and schools have been suspended as part of quarantines and other measures intended to contain this pandemic. These factors resulting from COVID-19 remain ongoing and other unforeseen pandemics could have similar or worse consequences, delaying the anticipated readouts from our clinical trials and our regulatory submissions. Additionally, certain third parties with whom we engage, including our collaborators, contract organizations, third-party manufacturers, suppliers, clinical trial sites, regulators and other third parties with whom we conduct business were often and can be similarly affected, adjusting their operations and assessing their capacity in light of the COVID-19 and other pandemics. While the extent of the impact of the current COVID-19 pandemic on the Company’s future business and financial results continues to carry uncertainty, the effect of a continued and prolonged public health crisis from further significant mutations to COVID-19 or other pandemics could have a material negative impact on the Company’s business, financial condition and operating results.
NOTE 11 – STOCKHOLDERS’ EQUITY
Common stock
On
July 8, 2020, the Company raised £
On
February 18, 2020 the Company raised £
On
March 22, 2021 the Company completed its recapitalization with LOAC and received million (million net of transaction costs) through
the issuance of
million shares of common stock at ()
per share. Additionally, the Company also issued million warrants to purchase million shares of common stock at ($
On
March 22, 2021, concurrently with the merger of LOAC, the Company raised $
On
April 15, 2021, following filing of our Annual Report on Form 20-F, the Directors who were unable to participate in the March 2021 financing,
purchased £
F-16 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Units
On
March 22, 2021, as part of the recapitalization with LOAC, the Company issued
Warrants
On
February 18, 2020, the Company issued million warrants as part of the issuance of common
stock. The warrants have an exercise price of pence ($
On
March 22, 2021, the Company issued
The following table summarizes the common stock warrant activity for the six months ended June 30, 2021:
Balance at January 1, 2021 | ||||
Issuances | ||||
Exercises | ( | ) | ||
Balance at June 30, 2021 |
Options
The Company has a long-term incentive plan, the 4D Pharma plc 2015 Long Term Incentive Plan (the “Plan”) which was established in 2015, and expires in ten years. The Plan limits the number of shares issued under the scheme on a cumulative basis to no more than of the issued common stock of the Company. The number of shares available for issuance as of June 30, 2021 was . As of June 30, 2021, the Company had options to purchase shares of common stock outstanding with a weighted-average exercise price of . As of June 30, 2021, options to purchase shares are vested and exercisable.
Stock-based compensation expense for the six months ended June 30, 2021 and 2020 was and , respectively. As of June 30, 2021, total unrecognized stock-based compensation expense relating to unvested stock options was . This amount is expected to be recognized over a weighted-average period of years.
NOTE 12 – REVENUE
In October 2019, the Company entered into a research collaboration and option agreement with MSD (Merck Sharp & Dohme Corp.) (“the MSD Agreement”). The MSD Agreement is for the use of the Company’s MicroRx discovery platform to discover, design and develop mucosal vaccines candidates derived from selected 4D Live Biotherapeutics (“LBP”), when used in conjunction with selected antigens from MSD in up to three indications. The MSD Agreement covers the grant of a non-exclusive, non-transferable, sublicensable license under Company patent rights and know-how to perform MSD’s activities under the research program and work plan. The MSD Agreement also specifies the Company’s obligation to conduct research and development activities during the three-year research program term. A joint research committee will direct the research program and its activities are indistinguishable from the research services being provided.
F-17 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
The non-exclusive license is considered of limited value without the Company’s development activities during the research term. As such, the license is not capable of being distinct until after successful identification of candidates, grant of an exclusive license, clinical development and regulatory approval and alone do not have standalone functionality to MSD. On analyses of market deal terms, Management determined that analyzed collectively, the option payments for exclusive licenses are at market for a development and commercialization license on a pre-clinical mucosal vaccine candidate and do not represent options that provide a material right to MSD and therefore do not give rise to a performance obligation in the contract.
Under
the MSD Agreement, the Company received a non-refundable, upfront payment, of $
The
Company has initially estimated a total transaction price of $
The
Company has allocated the transaction price entirely to the single bundled performance obligation and recorded the $
Amounts
expected to be recognized as revenue within the 12 months following the balance sheet date are classified as a current portion of deferred
revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following
the balance sheet date are classified as deferred revenue, net of current portion. As of June 30, 2021, the Company has $
NOTE 13 – RELATED PARTY TRANSACTIONS
One
of the Company’s directors, Antonio Fernandez is also a director of Biomar Microbial Technologies (“Biomar”), which
charged rent and building service costs to the Company of $
F-18 |
4D PHARMA PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
MSD
purchased
NOTE 14 – SUBSEQUENT EVENTS
On
July 29, 2021, the Company entered into a Loan and Security Agreement (the “Loan Agreement”), by and between the Company,
as borrower, the subsidiaries of the Company party thereto as co-borrowers, the lenders party thereto (the “Lenders”) and
Oxford Finance Luxembourg S.À R.L, as collateral agent for the Lenders (the “Collateral Agent”). The Loan Agreement
provides for a term loan facility maturing on
The Company’s obligations under the Loan Agreement are secured by substantially all of the assets of the Company and certain of its subsidiaries formed in Scotland, Ireland and the State of Delaware, United States.
The Loan Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Company and its subsidiaries to, among other things, incur debt, grant liens, make acquisitions, undertake changes in control, make investments, make certain dividends or distributions, repurchase stock, dispose of assets, and enter into transactions with affiliates, in each case, subject to limitations and exceptions set forth in the Loan Agreement. Subject to the satisfaction of certain equity raise conditions, the Company is also required to maintain compliance with a minimum liquidity covenant.
The
Loan Agreement also contains customary events of default that include, among other things, certain payment defaults, covenant defaults,
a material adverse change default, insolvency and bankruptcy defaults, cross defaults to other agreements, inaccuracy of representations
and warranties defaults, a delisting default and government approvals defaults. If an event of default exists, the Lender may require
immediate payment of all obligations under the Loan Agreement and may exercise certain other rights and remedies provided for under the
Loan Agreement, the other loan documents and applicable law. Under certain circumstances, a default interest rate will apply on all obligations
during the existence of an event of default under the Loan Agreement at a per annum rate equal to
In
addition, in connection with the Loan Agreement, the Company issued the Lenders warrants to purchase
F-19 |