10-Q
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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, 2024

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: 001-41942

Fractyl Health, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

27-3553477

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

3 Van de Graaff Drive, Suite 200

Burlington, MA

01803

(Address of principal executive offices)

(Zip Code)

(781) 902-8800

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.00001 par value per share

GUTS

The Nasdaq Global 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, a 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 3, 2024, the number of shares of the registrant’s common stock outstanding was approximately 47,896,908.

 


 

BASIS OF PRESENTATION

Except where the context otherwise requires or where otherwise indicated, the terms “Fractyl,” “Fractyl Health,” “we,” “us,” “our,” “our company,” “Company” and “our business” refer to Fractyl Health, Inc and its subsidiaries.

The unaudited condensed consolidated financial statements include the accounts of Fractyl Health, Inc. Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. Our fiscal year ends on December 31 of each year. References to the first quarter of 2024 and the first quarter of 2023 refer to the quarter ended March 31, 2024 and the quarter ended March 31, 2023, respectively. Our most recent fiscal year ended on December 31, 2023.

Certain monetary amounts, percentages and other figures included in this Quarterly Report on Form 10-Q have been subject to rounding adjustments. Percentage amounts included in this Quarterly Report on Form 10-Q have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this Quarterly Report on Form 10-Q may vary from those obtained by performing the same calculations using the figures in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Certain other amounts that appear in this Quarterly Report on Form 10-Q may not sum due to rounding.

 

1


 

TRADEMARKS AND TRADENAMES

This Quarterly Report on Form 10-Q includes our trademarks and trade names, including, without limitation, REVITA, REJUVA and our logo, which are our property and are protected under applicable intellectual property laws. This Quarterly Report on Form 10-Q also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this Quarterly Report on Form 10-Q may appear without the ®, ™ or SM symbols, but such references are not intended to indicate, in any way, that we or the applicable owner will not assert, to the fullest extent permitted under applicable law, our or its rights or the right of any applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

2


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that can involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, future revenue, timing and likelihood of success, plans and objectives of management for future operations, future results of anticipated products and prospects, plans and objectives of management are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

the timing, progress and results of preclinical and clinical studies for our current and future product candidates, including statements regarding the timing of initiation and completion of studies and related preparatory work, the period during which the results of the studies will become available and our research and development programs;
the timing, scope or likelihood of regulatory submissions, filings, clearances and approvals, including final regulatory approval or clearance of our product candidates;
our ability to develop and advance product candidates into, and successfully complete, clinical studies;
our expectations regarding the size of the patient populations for our product candidates, if approved or cleared for commercial use;
the implementation of our business model and our strategic plans for our business, product candidates and technology;
our commercialization, marketing and manufacturing capabilities and strategy, as well as our product development strategy;
the pricing and reimbursement of our product candidates, if approved or cleared;
the scalability and commercial viability of our manufacturing methods and processes, including our plans to maintain our in-house manufacturing facility, even after commercialization of any of our product candidates;
the rate and degree of market acceptance and clinical utility of our product candidates;
our ability to establish or maintain collaborations or strategic relationships or obtain additional funding;
our competitive position;
the scope of protection we and/or any future licensors are able to establish and maintain for intellectual property rights covering our product candidates;
developments and projections relating to our competitors and our industry;
our expectations related to the use of proceeds from our initial public offering (“IPO”);
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
the period over which we estimate our existing cash and cash equivalents will be sufficient to fund our future operating expenses and capital expenditure requirements;
the impact of laws and regulations;
our expectations regarding the time during which we will be an emerging growth company and smaller reporting company under the JOBS Act; and
the impact of adverse macroeconomic conditions, geopolitical events, and potential future public health crises, including epidemics and pandemics.

3


 

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate and financial trends that we believe may affect our business, financial condition, results of operations and prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions, described in Part II. Item 1A. Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

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 you are cautioned not to unduly rely upon these statements.

 

4


 

 

SUMMARY RISK FACTORS

 

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. Risk Factors. You should carefully consider these risks and uncertainties when investing in our common stock. The principal risks and uncertainties affecting our business include the following:

We have a limited operating history in developing medical devices and biopharmaceutical products, have not completed any pivotal clinical studies and have no products approved from commercial sale in the United States, which may make it difficult for you to evaluate our current business and predict our future success and viability;
We have incurred significant net losses since inception and we expect to continue to incur significant net losses for the foreseeable future and may never achieve or sustain profitability;
We will require substantial additional capital to finance our operations. If we are unable to raise such capital when needed, or on acceptable terms, we may be forced to delay, reduce and/or eliminate one or more of our research and drug development programs or future commercialization efforts;
The regulatory approval process of the FDA, comparable foreign regulatory authorities and notified bodies, are lengthy, time-consuming and inherently unpredictable, and even if we complete the necessary clinical studies, we cannot predict when, or if, we will obtain regulatory approval or certification for any of our product candidates, and any such regulatory approval or certification may be for a more narrow indication than we seek;
Clinical studies are expensive, time-consuming, difficult to design and implement, and have an uncertain outcome. Further, we may encounter substantial delays in our clinical studies;
We currently conduct and may in the future conduct clinical studies for our product candidates outside the United States, and the FDA or comparable foreign regulatory authorities may not accept data from such studies;
We may not be able to file investigational device exemptions (“IDEs”) or IDE supplements or comparable documents in foreign jurisdictions to commence additional clinical studies on the timelines we expect, and even if we are able to, the FDA or comparable foreign regulatory authorities may not permit us to proceed;
We are substantially dependent on the success of our lead product candidate, Revita, and if we are unable to obtain marketing approval or certification for and commercialize any of our current or future product candidates in a timely manner, our business will be harmed;
Our long-term prospects depend in part upon discovering, developing and commercializing product candidates, which may fail in development or suffer delays that adversely affect their commercial viability. We intend to identify and develop novel product candidates, which makes it difficult to predict the time, cost and potential success of our current product candidates, and other product candidates we may develop in the future;
Additional time may be required to develop and obtain regulatory approval or certification for our Rejuva gene therapy candidates because we expect them to be regulated as a combination product;
We cannot be certain that our Rejuva gene therapy candidates will successfully complete preclinical and clinical studies, or that they will not cause significant adverse events or toxicities. There can be no assurance that any development problems we experience in the future related to our Rejuva gene therapy candidates or any of our research programs will not cause significant delays or unanticipated costs, or that such development problems can be solved;
We may not be able to gain the support of leading hospitals and key thought leaders, or to publish the results of our clinical studies in peer-reviewed journals, which may make it difficult to establish the Revita DMR Procedure and/or our Rejuva gene therapy candidates as a standard of care, if approved, and may limit our revenue growth and ability to achieve profitability;
We have not yet studied the ability of Revita to be used in repeated procedures. If we are unable to demonstrate the safety and improved glycemic effects of Revita for repeat use, it could have a material adverse effect on the clinical utility and commercial adoption of the device;

5


 

We have never obtained marketing approval for a product candidate in the United States and we may be unable to obtain, or may be delayed in obtaining, marketing approval for any product candidate in the United States;
We substantially rely, and expect to continue to rely, on third parties, including independent clinical investigators and contract research organizations (“CROs”), to conduct certain aspects of our preclinical studies, and clinical studies. If these third parties do not successfully carry out their contractual duties, comply with applicable regulatory requirements or meet expected deadlines, we may not be able to obtain marketing authorization of or commercialize our product candidates and our business could be substantially harmed;
If we decide to establish new collaborations in the future, but are not able to establish those collaborations on commercially reasonable terms, we may have to alter our development and commercialization plans;
We contract with third parties for the manufacture of sub-assembly components for Revita and for the materials for our Rejuva gene therapy platform for preclinical studies and our ongoing clinical studies, and expect to continue to do so for additional clinical studies and ultimately for commercialization. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts;
If we or our suppliers fail to comply with the FDA’s quality system and/or good manufacturing practice regulations, this could impair our ability to market our products in a cost-effective and timely manner;
We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance;
We rely on a variety of intellectual property rights, and if we are unable to obtain, maintain or protect our intellectual property, our business, financial situation, results of operations, and prospects will be harmed. If we are unable to obtain and maintain patent protection for our current product candidate, any future product candidates we may develop and our technology, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our current product candidate, any future product candidates we may develop and our technology may be adversely affected; and
If we are unable to establish sales or marketing capabilities or enter into agreements with third parties to sell or market our product candidates, we may not be able to successfully sell or market our product candidates that obtain regulatory approval.

 

6


 

 

 

 

Table of Contents

 

 

 

Page

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

8

 

Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023

8

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2024 and 2023 (unaudited)

9

 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) for the three months ended March 31, 2024 and 2023 (unaudited)

10

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023 (unaudited)

11

 

Notes to Condensed Consolidated Financial Statements (unaudited)

12

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

 

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

92

Item 3.

Defaults Upon Senior Securities

92

Item 4.

Mine Safety Disclosures

92

Item 5.

Other Information

92

Item 6.

Exhibits

93

 

Signatures

95

 

 

7


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

Fractyl Health, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except for share and per share information)

 

 

March 31,

 

 

December 31,

 

 

2024

 

 

2023

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

121,441

 

 

$

33,209

 

Accounts receivable

 

 

15

 

 

 

22

 

Inventory

 

 

73

 

 

 

73

 

Restricted cash, current

 

 

315

 

 

 

315

 

Prepaid expenses and other current assets

 

 

2,628

 

 

 

2,029

 

Total current assets

 

 

124,472

 

 

 

35,648

 

Restricted cash, long-term

 

 

4,255

 

 

 

4,255

 

Property and equipment, net

 

 

1,902

 

 

 

490

 

Right-of-use lease assets, operating

 

 

29,613

 

 

 

30,282

 

Other long-term assets

 

 

3,277

 

 

 

5,537

 

Total assets

 

$

163,519

 

 

$

76,212

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,027

 

 

$

553

 

Accrued expenses and other current liabilities

 

 

8,653

 

 

 

7,331

 

Operating lease liabilities, current

 

 

3,592

 

 

 

2,731

 

Warrant liabilities, current

 

 

 

 

 

573

 

Total current liabilities

 

 

13,272

 

 

 

11,188

 

Notes payable, long-term

 

 

28,695

 

 

 

55,152

 

Operating lease liabilities, long-term

 

 

28,246

 

 

 

28,508

 

Warrant liabilities, long-term

 

 

8,798

 

 

 

19,096

 

Other long-term liabilities

 

 

330

 

 

 

 

Total liabilities

 

 

79,341

 

 

 

113,944

 

Commitments and contingencies

 

 

 

 

 

 

Convertible preferred stock (Series A, B, C-1, C-2, D, E and F), $0.00001 par value; no shares authorized and no shares issued or outstanding at March 31, 2024; 78,112,639 shares authorized and 77,994,156 shares issued and outstanding at December 31, 2023; aggregate liquidation preference of $0 and $379,081 at March 31, 2024 and December 31, 2023, respectively

 

 

 

 

 

287,330

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

Preferred stock, $0.00001 par value; 10,000,000 shares authorized, no shares issued or outstanding at March 31, 2024; no shares authorized, issued or outstanding at December 31, 2023

 

 

 

 

 

 

Common stock, $0.00001 par value; 300,000,000 shares authorized, 47,896,908 shares issued and outstanding at March 31, 2024; 107,000,000 shares authorized, 2,105,815 shares issued and outstanding at December 31, 2023

 

 

 

 

 

 

Additional paid-in capital

 

 

434,116

 

 

 

21,554

 

Accumulated deficit

 

 

(349,938

)

 

 

(346,616

)

Total stockholders’ equity (deficit)

 

 

84,178

 

 

 

(325,062

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

163,519

 

 

$

76,212

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

8


 

Fractyl Health, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except for share and per share information)

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Revenue

 

$

33

 

 

$

5

 

Cost of goods sold

 

 

19

 

 

 

3

 

Gross profit

 

 

14

 

 

 

2

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

14,424

 

 

 

9,349

 

Selling, general and administrative

 

 

7,132

 

 

 

2,760

 

Total operating expenses

 

 

21,556

 

 

 

12,109

 

Loss from operations

 

 

(21,542

)

 

 

(12,107

)

Other income (expense), net:

 

 

 

 

 

 

Interest income, net

 

 

1,098

 

 

 

417

 

Change in fair value of notes payable

 

 

6,686

 

 

 

(246

)

Change in fair value of warrant liabilities

 

 

10,446

 

 

 

(5

)

Other (expense) income, net

 

 

(10

)

 

 

9

 

Total other income (expense), net

 

 

18,220

 

 

 

175

 

Net loss and comprehensive loss

 

 

(3,322

)

 

 

(11,932

)

Accretion of dividends on convertible preferred stock

 

 

(1,737

)

 

 

(4,236

)

Net loss attributable to common stockholders

 

$

(5,059

)

 

$

(16,168

)

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.17

)

 

$

(7.87

)

Weighted-average number of common shares outstanding, basic and diluted

 

 

29,736,911

 

 

 

2,055,399

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

9


 

Fractyl Health, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except for share information)

 

Series A, B, C-1, C-2, D, E and F
Convertible Preferred Stock

 

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated

 

Total
Stockholders’

 

Shares

 

Amount

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity (Deficit)

 

Balance at December 31, 2023

 

77,994,156

 

 

287,330

 

 

 

 

2,105,815

 

 

 

 

21,554

 

 

(346,616

)

$

(325,062

)

Issuance of common stock in initial public offering, net of underwriting discounts, commissions and offering costs of $11,223

 

 

 

 

 

 

 

7,433,332

 

 

 

 

100,277

 

 

 

 

100,277

 

Conversion of convertible preferred stock into common stock upon initial public offering

 

(77,994,156

)

 

(287,330

)

 

 

 

36,343,909

 

 

 

 

287,330

 

 

 

 

287,330

 

Conversion of 2022 Convertible Notes into common stock upon initial public offering

 

 

 

 

 

 

 

1,841,321

 

 

 

 

19,150

 

 

 

 

19,150

 

Reclassification of warrant liability to equity upon initial public offering

 

 

 

 

 

 

 

 

 

 

 

425

 

 

 

 

425

 

Exercise of common stock warrants

 

 

 

 

 

 

 

38,544

 

 

 

 

 

 

 

 

 

Exercise of common stock options

 

 

 

 

 

 

 

133,987

 

 

 

 

163

 

 

 

 

163

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

5,217

 

 

 

 

5,217

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,322

)

 

(3,322

)

Balance at March 31, 2024

 

 

$

 

 

 

 

47,896,908

 

$

 

$

434,116

 

$

(349,938

)

$

84,178

 

 

 

Series A, B, C-1, C-2, D, E and F
Convertible Preferred Stock

 

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated

 

Total
Stockholders’

 

Shares

 

Amount

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Deficit

 

Balance at December 31, 2022

 

77,994,156

 

 

287,330

 

 

 

 

2,055,399

 

 

 

 

17,206

 

 

(269,525

)

$

(252,319

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

857

 

 

 

 

857

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,932

)

 

(11,932

)

Balance at March 31, 2023

 

77,994,156

 

$

287,330

 

 

 

 

2,055,399

 

$

 

$

18,063

 

$

(281,457

)

$

(263,394

)

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

10


 

Fractyl Health, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(3,322

)

 

$

(11,932

)

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

 

 

 

 

 

 

Depreciation

 

 

53

 

 

 

80

 

Non-cash interest expense

 

 

2

 

 

 

 

Non-cash operating lease expense

 

 

669

 

 

 

227

 

Loss on disposal of fixed assets

 

 

1

 

 

 

 

Stock-based compensation expense

 

 

5,217

 

 

 

857

 

Change in fair value of warrant liabilities

 

 

(10,446

)

 

 

5

 

Change in fair value of notes payable, non-cash

 

 

(7,307

)

 

 

246

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

7

 

 

 

(5

)

Inventory

 

 

 

 

 

(73

)

Prepaid expenses and other current assets

 

 

(599

)

 

 

711

 

Accounts payable

 

 

494

 

 

 

(222

)

Accrued expenses and other current liabilities

 

 

2,854

 

 

 

965

 

Operating lease liabilities

 

 

599

 

 

 

(222

)

Other long-term assets and liabilities

 

 

67

 

 

 

(187

)

Net cash used in operating activities

 

 

(11,711

)

 

 

(9,550

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,059

)

 

 

(20

)

Net cash used in investing activities

 

 

(1,059

)

 

 

(20

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from initial public offering, net of underwriting discounts and commissions

 

 

103,695

 

 

 

 

Proceeds from exercise of stock options

 

 

163

 

 

 

 

Payments related to offering costs

 

 

(2,854

)

 

 

 

Principal payments on finance lease obligations

 

 

(2

)

 

 

(2

)

Net cash provided by (used in) financing activities

 

 

101,002

 

 

 

(2

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

88,232

 

 

 

(9,572

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

37,779

 

 

 

53,524

 

Cash, cash equivalents and restricted cash at end of period

 

$

126,011

 

 

$

43,952

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

621

 

 

$

 

Payment for operating leases within operating activities

 

$

482

 

 

$

391

 

Non-cash investing and financing activities:

 

 

 

 

 

 

Conversion of convertible preferred stock into common stock upon initial public offering

 

$

287,330

 

 

$

 

Conversion of 2022 Convertible Notes into common stock upon initial public offering

 

$

19,150

 

 

$

 

Reclassification of warrant liability to equity upon initial public offering

 

$

425

 

 

$

 

Finance lease right-of-use asset obtained in exchange for lease liability

 

$

427

 

 

$

 

Reclassification of deferred offering costs to additional paid-in capital

 

$

3,418

 

 

$

 

Purchases of property and equipment included in accounts payable

 

$

20

 

 

$

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

11


 

Fractyl Health, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share information)

1. Nature of the Business

Fractyl Health, Inc. (the “Company”) was incorporated on August 30, 2010 under the name MedCatalyst, Inc. The Company subsequently changed its name to Fractyl Laboratories Inc. on January 10, 2012 and subsequently to Fractyl Health, Inc. on June 9, 2021. The Company is a metabolic therapeutics company focused on pioneering new approaches to the treatment of metabolic diseases, including type 2 diabetes (“T2D”) and obesity. The Company’s goal is to transform metabolic disease treatment from chronic symptomatic management to durable disease modifying therapies that target the organ level root causes of T2D and obesity. The Revita DMR System (“Revita"), the Company’s lead product candidate, is an outpatient procedural therapy designed to durably modify duodenal dysfunction, a major pathologic consequence of a high fat and high sugar diet, which can initiate T2D and obesity in humans. The Company is evaluating Revita in its pivotal Revitalize-1 study and is currently enrolling patients with inadequately controlled T2D despite being on up to three anti-diabetic agents ("ADAs") and daily insulin. The Company is also planning to evaluate Revita in a two-part, parallel cohort, randomized, open-label clinical study, which is referred to as the Remain-1 study, for weight maintenance in patients with obesity who have lost at least 15% total body weight on GLP-1RA therapy and wish to discontinue their GLP-1RA without weight regain. In addition, the Company is developing Rejuva, a novel, locally administered, adeno-associated virus delivered pancreatic gene therapy platform. Rejuva is designed to enable long term remission of T2D and obesity by durably altering metabolic hormone function in the pancreatic islet cells of patients. The Company believes Revita and Rejuva, if approved, have the potential to revolutionize treatment across the spectrum of T2D and obesity, align the clinical and economic interest of key stakeholders around the long term regression of metabolic disease, and, at their fullest potential, significantly reduce the burden of metabolic disease globally.

Initial Public Offering ("IPO")

On February 6, 2024, the Company completed its IPO, pursuant to which it issued and sold 7,333,333 shares of its common stock at a price to the public of $15.00 per share, resulting in gross proceeds of approximately $110,000 and net proceeds of approximately $98,882, after deducting the underwriting discount of approximately $7,700 and offering expenses of approximately $3,418.

On March 5, 2024, the Company issued an additional 99,999 shares of its common stock pursuant to the partial exercise of the underwriters’ option to purchase additional shares at the IPO public price of $15.00 per share, for additional gross proceeds of approximately $1,500 and net proceeds of approximately $1,395, after deducting the underwriting discounts and commissions of approximately $105.

Liquidity

Under ASC 205-40, Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively implemented, the plans must have been approved by the Company’s Board of Directors (“Board”) before the date that the financial statements are issued.

The future success of the Company is dependent on its ability to develop its product candidates and ultimately upon its ability to attain profitable operations. The Company is subject to a number of risks similar to other early-stage life science companies, including, but not limited to, successful discovery and development of its product candidates, raising additional capital with favorable terms, development by its competitors of new technological innovations, protection of proprietary technology and market acceptance of the Company’s products. The successful discovery and development of

12


 

product candidates requires substantial working capital which may not be available to the Company on favorable terms or not at all.

The Company has a history of operating losses and had an accumulated deficit of $349,938 as of March 31, 2024. The Company has financed its operations to date primarily through sales of its convertible preferred stock, sales of its common stock in the IPO and debt financing. While a pilot commercial launch was initiated in Germany in the first quarter of 2023, the Company does not anticipate generating revenue from product sales in the United States unless and until it successfully completes clinical development and obtains marketing approvals from one or more of the product candidates. As a result, management expects continuing operating losses in the future. The Company believes that its cash and cash equivalents of $121,441 as of March 31, 2024 will be sufficient to fund the Company’s operating plan through 2025.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial reporting and as required by Regulation S-X, Rule 10-01. The unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP and include the accounts of the Company and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated. These interim financial statements, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and results of operations for the three months ended March 31, 2024 and 2023. The results of operations for the interim periods are not necessarily indicative of results to be expected for the year ending December 31, 2024, any other interim periods, or any future year or period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2023 and notes thereto, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on April 1, 2024. The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting periods. Significant estimates relied upon in preparing these condensed consolidated financial statements include, but are not limited to, the fair value of common stock, the fair value of preferred and common stock warrants, the fair value of convertible notes payable, the fair value of stock-based awards, the incremental borrowing rate for lease accounting and the accrual of research and development expenses. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ materially from those estimates.

Deferred Public Offering Costs

Deferred public offering costs, which primarily consist of direct, incremental legal and accounting fees relating to the planned IPO, are capitalized within other long-term assets. The deferred public offering costs are offset against IPO proceeds upon the consummation of the offering. As of December 31, 2023, the Company had deferred offering-related costs of $2,180. Upon closing of the Company’s IPO in February 2024, total deferred offering costs of $3,418 were transferred to additional paid-in capital to offset the IPO proceeds. The Company had no deferred offering costs as of March 31, 2024.

Leases

The Company has entered into operating leases for office and laboratory spaces and finance leases for certain laboratory equipment, which are accounted for in accordance with ASC 842, Leases.

13


 

The Company determines whether an arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement at inception. Operating leases are included in right-of-use lease assets (“ROU assets”) and current and long-term lease liabilities on the Company’s condensed consolidated balance sheets. Lease expenses for operating leases are recognized on a straight-line basis over the lease term as an operating expense. Assets subject to finance leases are included in property and equipment, net, on the Company’s condensed consolidated balance sheets. Current and long-term portion of the related lease liabilities of the finance leases are included in accrued expenses and other current liabilities and other long-term liabilities, respectively, on the Company’s condensed consolidated balance sheets. Lease expenses for finance leases consist of depreciation of the assets, which is recognized on a straight-line basis over the useful life of the assets as an operating expense, and interest expense using the effective interest method over the lease term.

At the lease commencement date, the Company recognizes an ROU asset and a lease liability based on the present value of fixed lease payments over the expected lease term. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is a reasonable certainty that the Company will renew. Certain adjustments to the ROU asset may be required for items such as incentives received. The interest rate implicit in the lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.

The Company has elected the short-term lease recognition exemption for short-term leases, which allows the Company not to recognize lease liabilities and ROU assets on the condensed consolidated balance sheets for leases with an original lease term of twelve months or less. Rent expenses for short-term leases are directly expensed as operating expenses in the condensed consolidated statements of operations and comprehensive loss.

The Company has elected to not separate lease and non-lease components. Only the fixed costs for lease components and their associated non-lease components are accounted for as a single lease component and recognized as part of the ROU asset and lease liability. Variable lease costs such as taxes, operating expenses and other expenses are based on actual costs incurred and are directly expensed as operating expenses in the condensed consolidated statements of operations and comprehensive loss.

Assumptions made by the Company at the commencement date are re-evaluated upon occurrence of certain events, including lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease.

Stock-Based Compensation

The Company measures all stock options and other stock-based awards based on their fair value on the date of the grant. Those awards typically have a graded vesting schedule and compensation expense for awards with only service conditions is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. Compensation costs recognized for performance-based awards reflect the number of awards that are expected to vest during the requisite service period and are recognized using an accelerated attribution method. Upon final determination of the performance conditions achieved, the compensation costs are adjusted to reflect those awards that ultimately vest. Historical performance patterns, to the extent that they are indicative to the performance conditions to be achieved, are used in developing estimates for the probability of attaining these performance conditions.

The Company classifies stock-based compensation expense in its condensed consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.

Prior to the completion of the Company’s IPO, the Company determined the fair value of the underlying common stock by taking into consideration the results obtained from third-party valuations and additional factors that are deemed relevant, which incorporates significant judgments and estimates. After the completion of the Company’s IPO, the Company considers the fair value of its common stock to equal to the closing price of its common stock traded on the Nasdaq Global Market.

14


 

The Company uses the Black-Scholes option pricing model, which incorporates assumptions and estimates, to measure the fair value of its option awards on the date of grant of each stock option award. Prior to February 2024, the Company had been a private company and lacked company-specific historical and implied volatility information. The Company estimated its expected stock volatility based on an analysis of reported data for a publicly traded peer group of companies that granted options with substantially similar terms and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term assumption for employee grants is determined by using the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is based on the rate of the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future. Forfeitures are accounted for as they occur.

Recently Adopted Accounting Pronouncements

The Company has not adopted any accounting pronouncements during the three months ended March 31, 2024.

Recently Issued Accounting Pronouncements

The Company has evaluated recently issued accounting pronouncements and determined that there are no such pronouncements that have a material impact on its condensed consolidated financial statements and related disclosures.

3. Fair Value Measurements

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of fair value hierarchy utilized to determine such fair values:

 

 

Fair Value measurements as of
March 31, 2024

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents—money market funds

 

$

64,949

 

 

$

 

 

$

 

 

$

64,949

 

 

$

64,949

 

 

$

 

 

$

 

 

$

64,949

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liabilities, long-term

 

 

 

 

 

 

 

 

8,798

 

 

 

8,798

 

Notes payable, long-term

 

 

 

 

 

 

 

 

28,695

 

 

 

28,695

 

 

$

 

 

$

 

 

$

37,493

 

 

$

37,493

 

 

 

Fair Value measurements as of
December 31, 2023

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents—money market funds

 

$

9,779

 

 

$

 

 

$

 

 

$

9,779

 

 

$

9,779

 

 

$

 

 

$

 

 

$

9,779

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liabilities, current

 

$

 

 

$

 

 

$

573

 

 

$

573

 

Warrant liabilities, long-term

 

 

 

 

 

 

 

 

19,096

 

 

 

19,096

 

Notes payable, long-term

 

 

 

 

 

 

 

 

55,152

 

 

 

55,152

 

 

$

 

 

$

 

 

$

74,821

 

 

$

74,821

 

During the three months ended March 31, 2024 and 2023, there were no transfers between Level 1, Level 2 and Level 3.

15


 

See Note 5—“Notes Payable” for the discussion of the fair value methodology of the notes payable and a rollforward of the fair value. See Note 6—“Warrant Liabilities” for the discussion of the fair value methodology of the stock warrants and a rollforward of the fair value.

4. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

 

March 31,

 

 

December 31,

 

 

2024

 

 

2023

 

Payroll and payroll-related expenses

 

$

4,965

 

 

$

3,500

 

External research and development services

 

 

2,622

 

 

 

1,711

 

Professional fees and consulting services

 

 

967

 

 

 

2,118

 

Other current liabilities

 

 

99

 

 

 

2

 

 

$

8,653

 

 

$

7,331

 

 

5. Notes Payable

Notes payable, long-term consisted of the following:

 

 

March 31,

 

 

December 31,

 

 

2024

 

 

2023

 

2022 Convertible Notes

 

$

 

 

$

27,162

 

2023 Notes

 

 

28,695

 

 

 

27,990

 

 

$

28,695

 

 

$

55,152

 

2022 Convertible Notes

On January 11, 2022, the Company entered into a financing arrangement with certain lenders (the “2022 Lenders”) in which the Company issued convertible promissory notes in exchange for an aggregate principal amount of $20,075 (the “2022 Convertible Notes"). Under the original terms of the 2022 Convertible Notes, interest accrued on the unpaid principal balance of the 2022 Convertible Notes at the rate of 3% per year until paid or converted in full. Subject to the conversion provisions, all principal and accrued interest on the 2022 Convertible Notes was to be due and payable on July 11, 2023 (the “Original Maturity Date”).

On July 11, 2023 (the "reissuance date"), the Company paid $78 to settle in full the outstanding principal and accrued interest owed to one of the lenders under the 2022 Convertible Notes and issued amended and restated convertible promissory notes to certain of the lenders (the “Continuing 2022 Lenders”) in replacement of, but not in payment of, the remainder of the 2022 Convertible Notes. As part of these amendments, among other changes, the Continuing 2022 Lenders agreed to extend the maturity date of the outstanding principal and accrued but unpaid interest on the 2022 Convertible Notes to December 31, 2024. Following these amendments, $20,899 in aggregate principal under the 2022 Convertible Notes remained outstanding and accrued interest at the rate of 10% per year until they were paid or converted in full. In connection with entering into these amendments, the Company issued to the Continuing 2022 Lenders warrants to purchase shares of the Company’s common stock with par value of $0.00001 per share. The warrants were recorded as part of the warrant liabilities on the condensed consolidated balance sheet.

The Company elected to apply the fair value option ("FVO") to the 2022 Convertible Notes in accordance with ASC 825. Accordingly, the 2022 Convertible Notes are marked to market at the end of each reporting period, with changes in fair value recognized as a component of other income (expense) in the condensed consolidated statements of operations and comprehensive loss. Prior to the Company's IPO in February 2024, the fair value had been estimated using a Monte Carlo simulation model to calculate equity values at different points in time leading up to a conversion event. The Company assessed the assumptions and estimates used in the valuation model at each financial reporting period as additional information impacting the assumptions is obtained. Assumptions and estimates impacting the fair value measurement included the fair value per share of the underlying shares, the expected time to conversion events (IPO or non-IPO), risk-free interest rate, expected volatility of the price of the underlying shares and scenario weightings. The Company determined the fair value per share of the underlying shares by taking into consideration the most recent sales of its convertible preferred stock, results obtained from third-party valuations and additional factors that are deemed relevant. The Company historically had been a private company and lacked company-specific historical and implied volatility

16


 

information of its stock. Therefore, it estimated its expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the expected time to conversion events. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the expected time to conversion events. Scenario weightings were based on management's best estimate of the probabilities of the occurrence of each conversion event considered.

Upon the closing of the IPO on February 6, 2024, all of the outstanding principal plus accrued interest under the 2022 Convertible Notes were converted into 1,841,321 shares of the Company’s common stock at a conversion price of $12.00 per share, which is 80% of the IPO price of $15.00 per share. The 2022 Convertible Notes were marked to market to its fair value as of the time of the conversion before being reclassified to equity. The fair value at the time of the conversion was calculated by multiplying the number of shares of common stock that the 2022 Convertible Notes were converted into by the fair value per share on the conversion date, which is the closing price of the Company's common stock on the NASDAQ Global Market on that date.

The following table provides a rollforward of the fair value of the 2022 Convertible Notes:

 

 

Fair Value

 

Balance as of December 31, 2023

 

$

27,162

 

Decrease in fair value

 

 

(8,012

)

Conversion into common stock

 

 

(19,150

)

Balance as of March 31, 2024

 

$

 

2023 Notes

On September 7, 2023, the Company entered into a credit agreement with certain lenders (the “2023 Lenders”) that provides for term loans in an aggregate principal amount of $45,000 (the "Applicable Commitments") in two tranches (the “2023 Notes”). The first tranche with a principal amount of $30,000 was extended on September 7, 2023. The second tranche with a principal amount of $15,000 may be extended upon the Company’s achievement of certain funding milestones as defined in the 2023 Notes, by July 31, 2024. The 2023 Notes also provide for a third tranche with an uncommitted principal amount of $20,000 that may be extended to the Company, subject to the lenders’ prior written consent in their sole discretion.

The outstanding balances under the 2023 Notes bear interest at a floating annual rate equal to the greater of 5.5% above the Wall Street Journal prime rate or 13.25%. On and prior to September 30, 2024, 6.0% of the interest is payable in kind (the "PIK interest") and added to the outstanding principal amount of the loans. Beginning September 30, 2026, the Company is required to make principal payments in the amount of 1.5% of the aggregate principal amount outstanding, including accrued PIK interest, each month. The first principal payment date can be extended to September 30, 2027, at the Company's option, if certain financing milestones as defined in the 2023 Notes are achieved on or prior to September 30, 2026. In addition, upon any principal payment, the Company is required to make an additional payment to the 2023 Lenders a 6.0% fee (the "Exit Fee") over the principal and accrued PIK interest paid. The aggregate Exit Fee of the 2023 Notes should equal to 6.0% of the total Applicable Commitments of $45,000 plus all accrued PIK interest. All remaining outstanding principal balance, accrued interest and Exit Fee on the 2023 Notes shall be due and payable on the maturity date of September 7, 2028.

In connection with the issuance of the 2023 Notes, the Company issued to the 2023 Lenders warrants to purchase, at the holders’ choice, shares of the Company’s Series F Convertible Preferred Stock, the most senior series of Preferred Stock of the Company that is then authorized, or the Company’s common stock. The warrants were recorded as part of the warrant liabilities on the condensed consolidated balance sheet.

The Company elected to apply the FVO to the 2023 Notes in accordance with ASC 825. Accordingly, the 2023 Notes are marked to market at the end of each reporting period, with changes in fair value recognized as a component of other income (expense) in the condensed consolidated statements of operations and comprehensive loss. The fair value was estimated using a discounted cash flow model by discounting projected future cash flows associated with the 2023 Notes to their present value. The discount rate used in the model is based on observable market yields for similarly rated instruments, adjusted for any specific risks inherent in the 2023 Notes. Accrued interest on the 2023 Notes is incorporated into the determination of the fair value of the 2023 Notes.

17


 

This fair value measurement is based on significant inputs that are not observable in the market and represent a Level 3 measurement. The following table provides a rollforward of the fair value of the 2023 Notes:

 

Fair Value

 

Balance as of December 31, 2023

 

$

27,990

 

Increase in fair value

 

 

1,326

 

Payment of interest

 

 

(621

)

Balance as of March 31, 2024

 

$

28,695

 

The 2023 Notes are subject to specific financial covenants, which include (i) a minimum liquidity covenant that requires the Company to maintain a minimum $10,000 balance in cash and/or certain permitted cash equivalent investments, subject to certain exceptions, and (ii) a financing milestone covenant requiring that (a) we have received proceeds from an equity financing or series of financings (including the net proceeds from the IPO) of at least $40,000 during the period commencing on September 7, 2023 and ending on or prior to February 15, 2024, and (b) we have received equity financing or series of financings of at least $100,000 (inclusive of such equity financing or series of financings in the preceding clause (a)) during the period commencing as of September 7, 2023 and prior to June 30, 2024. In addition, the 2023 Notes also contain customary events of default, subject to rights and remedies generally applicable to federal law or the laws of the State of Delaware. As of March 31, 2024, the Company was in compliance with the financial covenants and other terms of the arrangement.

6. Warrant Liabilities

2014 Warrant

In January 2014, the Company issued a fully vested warrant to purchase 118,483 shares of the Company’s Series B convertible preferred stock (the “2014 Warrant”) in connection with a loan and security agreement entered into in January 2014. The 2014 Warrant was immediately exercisable at an exercise price of $1.266 per share and has a contractual term of ten years from issuance. The fair value of the 2014 Warrant at issuance was $48 and was recorded as part of the warrant liabilities in the condensed consolidated balance sheet.

In January 2024, the 2014 Warrant was amended to extend the expiration date to the earlier of (i) the date that is 30 calendar days after the closing of the Company’s IPO and (ii) July 31, 2024. Upon the closing of the Company's IPO on February 6, 2024, the amended expiration date of the 2014 Warrant was determined to be March 7, 2024.

The Company remeasures the fair value of the 2014 Warrant at the end of each reporting period, with any adjustments being recorded as a component of other income (expense) in the condensed consolidated statements of operations and comprehensive loss. Upon the closing of the IPO on February 6, 2024, the warrant to purchase 118,483 shares of the Company's Series B convertible preferred stock was converted to a warrant to purchase 55,211 shares of the Company's common stock. Accordingly, the 2014 Warrant was remeasured upon the closing of the IPO and marked to market to its fair value before being reclassified to equity. The fair value of the 2014 Warrant was determined using the Black-Scholes valuation model with the following assumptions:

 

February 6,

 

 

December 31,

 

 

2024

 

 

2023

 

Risk-free interest rate

 

4.8%

 

 

4.7%

 

Expected term (in years)

 

0.1

 

 

0.1

 

Expected volatility

 

38%

 

 

47%

 

Expected dividend yield

 

0%

 

 

6%

 

Fair value of common stock per share

 

$10.40

 

 

 

 

Fair value of Series B convertible preferred stock per share

 

 

 

 

$6.12

 

 

18


 

This fair value measurement of the 2014 Warrant was based on significant inputs that are not observable in the market and represented a Level 3 measurement. The following table provides a rollforward of the fair value of the Company’s warrant liability:

 

Fair Value

 

Balance as of December 31, 2023

 

$

573

 

Change in fair value

 

 

(148

)

Reclassification to equity

 

 

(425

)

Balance as of March 31, 2024

 

$

 

The 2014 Warrant was fully cashless exercised on the amended expiration date of March 7, 2024, as a result of which a total of 38,544 shares of common stock were issued to the warrant holder.

July 2023 Warrants

In July 2023, the Company issued fully vested warrants to purchase shares of the Company’s common stock in connection with the issuance of the amended and restated 2022 Convertible Notes (the “July 2023 Warrants”). The July 2023 Warrants were immediately exercisable for a variable number of shares based on the principal amount of the 2022 Convertible Notes, as amended, of $20,899, and an exercise price, at the holders’ choice, of (a) $17.9927 per share, (b) the lowest original issue price of shares of Preferred Stock of the Company issued in the Company’s next bona fide private preferred equity financing round, (c) in the event of any convertible note or similar convertible security financing, the conversion price contemplated by such convertible security, or (d) in the event of an IPO, the per share offering price to the public in such IPO. The July 2023 Warrants have a contractual term of ten years from issuance. They were not exercised from their inception through March 31, 2024.

The fair value of the July 2023 Warrants at issuance was $9,876 and was recorded as part of the warrant liabilities on the condensed consolidated balance sheet. The Company remeasures the fair value at the end of each reporting period, with any adjustments being recorded as a component of other income (expense) in the condensed consolidated statements of operations and comprehensive loss.

Prior to the Company's IPO in February 2024, the fair value was determined using the Monte-Carlo simulation model, which was based on significant inputs that are not observable in the market and represented a Level 3 measurement. After the completion of its IPO, the fair value of the July 2023 Warrants was determined using the Black-Scholes valuation model with the following assumptions:

 

 

March 31,

 

2024

Risk-free interest rate

 

4.2%

Expected term (in years)

 

9.3

Expected volatility

 

57%

Expected dividend yield

 

0%

The following table provides a rollforward of the fair value of the July 2023 Warrants:

 

Fair Value

 

Balance as of December 31, 2023

 

$

16,419

 

Decrease in fair value

 

 

(8,768

)

Balance as of March 31, 2024

 

$

7,651

 

September 2023 Warrants

In September 2023, in connection with the issuance of the 2023 Notes, the Company issued fully vested warrants to purchase, at the holders’ choice, shares of the Company’s Series F Convertible Preferred Stock, the most senior series of Preferred Stock of the Company that is then authorized, or the Company’s common stock (the “September 2023 Warrants”). The September 2023 Warrants are immediately exercisable for a variable number of shares based on a total fixed dollar value of $4,200, and an exercise price, at the holders’ choice, of (a) $17.9927 per share of common stock or $8.3843 per share of Series F Convertible Preferred Stock, (b) the lowest original issue price of any series of Preferred Stock issued by the Company after the issuance date of the September 2023 Warrants, (c) the conversion or exercise price

19


 

of any convertible debt security, option, or warrant issued by the Company after the issuance date of the September 2023 Warrants, or (d) the price at which the Company’s common equity was first sold to the public by the Company in a firm-commitment underwritten offering or otherwise. The September 2023 Warrants have a contractual term of ten years from issuance. They were not exercised from their inception through March 31, 2024.

The fair value of the September 2023 Warrants at issuance was $2,592 and was recorded as part of the warrant liabilities on the condensed consolidated balance sheet. The Company remeasures the fair value at the end of each reporting period, with any adjustments being recorded as a component of other income (expense) in the condensed consolidated statements of operations and comprehensive loss.

Prior to the Company's IPO in February 2024, the fair value was determined using the Monte-Carlo simulation model, which was based on significant inputs that are not observable in the market and represented a Level 3 measurement. After the completion of its IPO, the fair value of the September 2023 Warrants was determined using the Black-Scholes valuation model with the following assumptions:

 

March 31,

 

2024

Risk-free interest rate

 

4.2%

Expected term (in years)

 

9.4

Expected volatility

 

57%

Expected dividend yield

 

0%

The following table provides a rollforward of the fair value of the September 2023 Warrants:

 

Fair Value

 

Balance as of December 31, 2023

 

$

2,677

 

Decrease in fair value

 

 

(1,530

)

Balance as of March 31, 2024

 

$

1,147

 

 

7. Commitments and Contingencies

 

Leases

The following table summarizes the future minimum lease payments for operating and finance leases as of March 31, 2024:

 

Year Ending December 31,

 

 

 

2024 (Remaining)

 

$

3,095

 

2025

 

 

5,441

 

2026

 

 

5,599

 

2027

 

 

5,638

 

2028

 

 

5,749

 

Thereafter

 

 

34,278

 

Total future minimum lease payments

 

 

59,800

 

Please see Note 7—“Leases” in the Notes to Consolidated Financial Statements included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for further discussion of the Company's material lease agreements.

 

Guarantees and Indemnification Obligations

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the indemnified party for losses and costs incurred by the indemnified party in connection with any patent, copyright, trade secret or other intellectual property or personal right infringement claim by any third party with respect to the Company’s technology. The term of these indemnification agreements is generally perpetual after execution of the agreement. In addition, the Company has entered into indemnification agreements with members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of its status or service as directors or officers. The

20


 

maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. To date, the Company has not incurred any losses or any material costs related to this indemnification obligation and no claims with respect thereto were outstanding. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations and cash flows, and it has not accrued any liabilities related to such obligations in its condensed consolidated financial statements as of March 31, 2024 and December 31, 2023.

8. Convertible Preferred Stock

The Company issued Series A, Series B, Series C-1, Series C-2, Series D, Series E and Series F convertible preferred stock (collectively, the “Convertible Preferred Stock”). The holders of Convertible Preferred Stock had liquidation rights in the event of a deemed liquidation that, in certain circumstances, is not solely within the control of the Company. Therefore, the Convertible Preferred Stock was classified outside of stockholders’ deficit at December 31, 2023. The Company had authorized 78,112,639 shares of $0.00001 par value convertible preferred stock as of December 31, 2023. Upon the closing of the IPO on February 6, 2024, all of the Company’s Convertible Preferred Stock shares were automatically converted into 36,343,909 shares of the Company’s common stock.

As of December 31, 2023, Convertible Preferred Stock consisted of the following:

 

 

December 31, 2023

 

 

Convertible
Preferred
Shares
Authorized

 

 

Convertible
Preferred
Shares
Issued and
Outstanding

 

 

Carrying
Value

 

 

Liquidation
Preference

 

 

Common
Stock
Issuable
Upon
Conversion

 

Series A Convertible Preferred Stock

 

 

5,500,000

 

 

 

5,500,000

 

 

$

6,510

 

 

$

9,633

 

 

 

2,562,900

 

Series B Convertible Preferred Stock

 

 

11,451,453

 

 

 

11,332,970

 

 

 

15,459

 

 

 

23,659

 

 

 

5,280,969

 

Series C-1 Convertible Preferred Stock

 

 

9,064,640

 

 

 

9,064,640

 

 

 

20,114

 

 

 

31,644

 

 

 

4,223,960

 

Series C-2 Convertible Preferred Stock

 

 

15,336,464

 

 

 

15,336,464

 

 

 

47,129

 

 

 

70,214

 

 

 

7,146,525

 

Series D Convertible Preferred Stock

 

 

11,994,461

 

 

 

11,994,461

 

 

 

43,899

 

 

 

61,098

 

 

 

5,589,207

 

Series E Convertible Preferred Stock

 

 

12,838,573

 

 

 

12,838,573

 

 

 

54,373

 

 

 

67,527

 

 

 

5,982,550

 

Series F Convertible Preferred Stock

 

 

11,927,048

 

 

 

11,927,048

 

 

 

99,846

 

 

 

115,306

 

 

 

5,557,798

 

 

 

78,112,639

 

 

 

77,994,156

 

 

$

287,330

 

 

$

379,081

 

 

 

36,343,909

 

 

In January 2014, the Company issued a fully vested warrant to purchase 118,483 shares of the Company’s Series B Convertible Preferred Stock. In September 2023, the Company issued fully vested warrants to purchase, at the holders’ choice, a variable number of shares of the Company’s Series F Convertible Preferred Stock, the most senior series of Preferred Stock of the Company that is then authorized, or the Company’s common stock. The number of shares exercisable under these warrants is based on a fixed dollar value and an exercise price at the holders’ choice, as defined in the warrant agreement. In March 2024, all the warrants to purchase the Company's Convertible Preferred Stock were converted into warrants to purchase the Company's common stock. Please see Note 10—“Convertible Preferred Stock” in the Notes to Consolidated Financial Statements included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 for further discussion of the convertible preferred stock.

9. Preferred and Common Stock

Preferred Stock

On January 26, 2024, the Company's board of directors approved an Amended and Restated Certificate of Incorporation, authorizing the Company to issue 10,000,000 shares of undesignated preferred stock at $0.00001 par value per share. There were no shares of such preferred stock outstanding as of March 31, 2024.

Common Stock

As of December 31, 2023, the Company’s then effective certificate of incorporation, as amended and restated, authorized the Company to issue 107,000,000 shares of $0.00001 par value common stock. On January 26, 2024, the Company's board of directors approved an Amended and Restated Certificate of Incorporation, authorizing the Company to issue 300,000,000 shares of common stock at $0.00001 par value per share.

21


 

On January 26, 2024, the Company's board of directors also approved a 1-for-2.146 reverse stock split of its issued and outstanding shares of common stock. Accordingly, all share and per share amounts for all periods presented in the accompanying unaudited interim condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse common stock split and adjustment of the Convertible Preferred Stock conversion ratios.

10. Stock-Based Compensation

2011 Stock Incentive Plan

The Company’s 2011 Stock Incentive Plan, as amended, (the “2011 Plan”) provided for the Company to grant restricted stock, restricted stock units, incentive stock options and nonqualified stock options with respect to shares of common stock to employees, officers, directors, consultants and advisors of the Company. Incentive stock options could only be granted to employees. The 2011 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting schedules and other restrictions of awards were determined at the discretion of the board of directors or by a committee of the board of directors if so delegated, except that the exercise price per share of stock options could not be less than 100% of the fair market value of a share of common stock on the date of grant and the term of stock option could not be greater than ten years. Upon the effective date of the 2024 Incentive Award Plan, as discussed below, the Company ceased granting equity awards under the 2011 Plan.

2024 Incentive Award Plan

On January 26, 2024, the Company's board of directors adopted the 2024 Incentive Award Plan (the "2024 Plan"), which became effective on February 1, 2024. The number of shares of the Company's common stock initially reserved for issuance under the 2024 Plan was 4,298,825 shares, which is eligible for an annual increase on the first day of each calendar year beginning on January 1, 2025 and ending on and including January 1, 2034 equal to the lesser of (i) 5% of the aggregate number of shares of Common Stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares of Common Stock as determined by the Board.

2024 Employee Stock Purchase Plan

On January 26, 2024, the Company's board of directors adopted the 2024 Employee Stock Purchase Plan (the “2024 ESPP Plan”), which became effective on February 1, 2024. The number of shares of the Company's common stock initially reserved for issuance under the 2024 ESPP Plan was 487,070 shares, which is eligible for an annual increase on the first day of each calendar year beginning on January 1, 2025 and ending on and including January 1, 2034 equal to the lesser of (i) 1% of the shares of Common Stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares of Common Stock as determined by the Board.

Stock-Based Compensation Expense

The Company recorded stock-based compensation expense related to stock options and restricted stock units in the following expense categories within its condensed consolidated statements of operations and comprehensive loss:

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Research and development

 

$

1,975

 

 

$

520

 

Selling, general and administrative

 

 

3,242

 

 

 

337

 

 

$

5,217

 

 

$

857

 

 

During the year ended December 31, 2023, the Company granted certain restricted stock units which have a one-year cliff vesting with performance conditions based on the timing of occurrence of certain changes in control or financing event. Upon the completion of the Company's IPO in February 2024, the performance condition was achieved, which resulted in $2,749 stock-based compensation expense being recognized in the three months ended March 31, 2024.

During the three months ended March 31, 2024, the Company granted to its employees and directors stock options to purchase a total of 2,138,736 shares of common stock, among which options to purchase 1,157,600 shares of common stock were performance-based awards with the number of shares eligible to vest based on the achievement of certain

22


 

operational metrics. During the three months ended March 31, 2024, the Company recognized stock-based compensation expense of $961 related to these performance-based awards using an accelerated attribution method based on estimated probability of attaining the operational metrics as of March 31, 2024.

11. Net Loss Per Share

The following securities that could potentially dilute basic net loss per share in the future were not included in the computation of diluted net loss per share for the periods presented, because to do so would have been antidilutive:

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Series A Convertible Preferred Stock

 

 

 

 

 

2,562,900