Fate Therapeutics, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unless noted, figures are in U.S. dollars; financial statement amounts below are in millions. Fate is a clinical-stage cellular therapeutics company. It reported no therapeutic product sales; revenue was from collaborations and grants. Its lead candidate, ProHema, was in Phase 2 development.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Collaboration revenue | $0.329 | — | $0.329 | — |
| Research and development expense | $4.857 | $3.968 | $9.425 | $8.490 |
| General and administrative expense | $2.690 | $2.072 | $5.446 | $4.487 |
| Operating loss | $(7.218) | $(6.040) | $(14.542) | $(12.977) |
| Net loss | $(7.779) | $(6.067) | $(15.660) | $(13.047) |
| Basic and diluted loss per share | $(0.33) | $(0.30) | $(0.70) | $(0.64) |
Cash flow and liquidity: Cash and cash equivalents were $81.176 million at June 30, 2015, versus $49.101 million at December 31, 2014. For the first half, operating activities used $4.296 million, investing activities used $0.665 million, and financing activities provided $37.036 million. Operating cash use was lower than the prior-year period’s $10.744 million, largely because of $8.091 million in deferred revenue associated with Juno. Management said existing cash was expected to fund projected operating requirements for at least 12 months; it cautioned that this forecast depends on uncertain development and funding needs.
Debt and balance sheet: The company had $20.0 million of gross term-loan principal outstanding, secured by substantially all assets other than certain intellectual property. Net debt carrying value was approximately $19.7 million, including current and long-term portions. Loans bear fixed annual interest rates of 6.94% and 7.07%, with maturities in 2018; the company recorded $1.121 million of interest expense in the first half. Total assets were $83.483 million, total liabilities were approximately $32.4 million, and stockholders’ equity was $51.074 million. Accumulated deficit was $128.052 million.
Margins: Gross margin is not separately presented; the filing does not provide a clear value. The company remained loss-making, with no product-sales revenue.
Material changes and notable items
- In May 2015, Fate completed a follow-on offering of 6.9 million shares at $5.00 per share, generating $32.1 million in net proceeds after offering costs.
- Under its May 2015 Juno collaboration, Fate received a nonrefundable $5.0 million upfront payment and Juno bought 1.0 million shares for $8.0 million. Fate treated $3.4 million of the share price premium, plus the upfront payment, as collaboration consideration to be recognized over the four-year research term. It recognized $0.329 million of revenue in Q2 and reported $8.1 million of related deferred revenue at quarter-end. Juno also committed to minimum annual research funding of $2.0 million during the initial term; no research-funding payments had been received by June 30.
- Fate is eligible for target-selection fees, product milestones and low-single-digit royalties under the Juno agreement, but had received none of these contingent payments by June 30. Potential milestones are substantial but depend on future selections and clinical, regulatory or commercial achievements.
- First-half research and development and general and administrative expenses rose year over year. Management attributed increases mainly to staffing, clinical and preclinical development, laboratory costs, intellectual-property costs and public-company support expenses. Interest expense also increased materially, primarily due to the Silicon Valley Bank loans.
- The Verio contractual earn-out period expired in April 2015; no additional shares remain issuable under that agreement. A $0.4 million noncash Verio milestone charge had affected the prior-year first-half comparison.
Outlook, risks and contingencies
- Management expects continuing losses for at least several years and higher R&D spending as it advances ProHema trials, other cellular programs and Juno research. It does not expect product-sales revenue unless candidates complete development and receive regulatory approval.
- Planned work included the Phase 2 PUMA study and pediatric Phase 1b PROMPT and PROVIDE studies, along with research into induced-pluripotent-stem-cell-derived candidates. Timelines and costs are uncertain; clinical outcomes, enrollment, manufacturing, FDA requirements and trial delays could materially affect plans and cash needs.
- The company said additional capital will be required. The filing describes potential equity or debt financing, with possible dilution, added fixed obligations or restrictive covenants. Approximately $65.5 million remained available under the shelf registration statement as of July 29, 2015.
- Key operational risks include clinical-stage failure, uncertain regulatory pathways for novel cellular therapies, manufacturing consistency at third-party transplant-center facilities, and reliance on suppliers and cord-blood availability. The Juno arrangement includes target-specific exclusivity that may constrain other opportunities; collaboration success and future funding are not assured.
- Debt covenants restrict certain business and financing actions, and a breach could accelerate repayment. No material legal proceedings were reported. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Current cash runway versus actual operating burn, including how much of reported operating cash flow benefited from Juno-related deferred revenue.
- Progress, safety and efficacy data from PUMA, PROMPT and PROVIDE, and any changes to trial timing or FDA requirements.
- Juno collaboration performance, research-funding receipts, exclusivity scope, and whether target selections or milestones occur.
- Debt repayment schedule, covenant compliance and potential need for additional financing or dilution.
- Whether manufacturing, supplier and cord-blood constraints affect clinical execution or regulatory readiness.