Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and other information included elsewhere in this Annual Report on Form 10-K. In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in Part I. Item 1A. Risk Factors and the section titled “Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “will,” “would,” and similar expressions to identify forward-looking statements.
Business Overview
We are a metabolic therapeutics company focused on pioneering new approaches to the treatment of metabolic diseases, including type 2 diabetes and obesity. We aim to develop durable disease-modifying therapies that are designed to provide long-term maintenance of metabolic health without requiring lifetime treatment by targeting the organ-level root causes of T2D and obesity.
Since our formation in 2010, we have devoted substantially all of our efforts and financial resources to organizing and staffing our company, business planning, raising capital, acquiring or discovering product candidates and securing related intellectual property rights and conducting discovery, research and development activities for our product candidates. The Revita DMR System, or Revita, is approved in Europe under a Conformitè Europëenne, or CE, Mark and has received reimbursement authorization through NUB in Germany for the treatment of T2D. In the first half of 2023, we initiated a limited commercial pilot in a single center in Dusseldorf, Germany. We do not have any products approved for sale in the United States. To date, we have financed our operations primarily through the proceeds from sales of our convertible preferred stock, sales of our common stock in our initial public offering and debt financing.
We have incurred significant operating losses since our inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and commercialization of one or more of our current or future product candidates in the United States. For the years ended December 31, 2023 and 2022, we incurred net losses of $77.1 million and $46.5 million respectively. As of December 31, 2023, we had an accumulated deficit of $346.6 million. We expect to continue to incur significant losses for the foreseeable future and we expect these losses to increase substantially if and as we:
•
advance the development of Revita and Rejuva through preclinical and clinical development, and, if approved by the FDA or other comparable foreign regulatory authorities, commercialization;
•
incur manufacturing costs for our product candidates;
•
increase our manufacturing capacity;
•
seek regulatory approvals for any of our product candidates that successfully complete clinical studies;
•
increase our research and development activities to identify and develop new product candidates;
•
hire additional personnel;
•
expand our operational, financial and management systems;
•
invest in measures to protect and expand our intellectual property;
•
establish a sales, marketing, medical affairs and distribution infrastructure to commercialize any product candidates for which we may obtain marketing approval and intend to commercialize;
132
Table of Contents
•
expand our manufacturing and develop our commercialization efforts; and
•
operate as a public company.
We do not anticipate generating revenue from product sales in the United States unless and until we successfully complete clinical development and obtain marketing approvals for one or more of our product candidates, if ever. We are currently establishing our commercial infrastructure to support the anticipated marketing and distribution of our product candidates. Subject to receiving marketing approval, we may need to enter into arrangements with third parties for the sale, marketing and distribution of our product candidates. Accordingly, if we obtain marketing approval for any of our product candidates, we will incur significant additional commercialization expenses related to product manufacturing, marketing, sales and distribution.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations with other companies and strategic alliances. We may not be able to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we would have to significantly delay, reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.
Recent Developments
IPO
We completed our IPO on February 6, 2024, in which we issued and sold 7,333,333 shares of our common stock at a price to the public of $15.00 per share, resulting in gross proceeds to us of approximately $110.0 million and net proceeds to us of approximately $98.9 million, after deducting the underwriting discounts and commissions of approximately $7.7 million and offering expenses of approximately $3.4 million. On March 5, 2024, we issued an additional 99,999 shares of our common stock pursuant to the partial exercise of the underwriters’ option to purchase additional shares from us at the IPO price to the public of $15.00 per share, resulting in additional net proceeds of approximately $1.4 million, after deducting the underwriting discounts and commissions of approximately $0.1 million.
Components of our Consolidated Results of Operations
Revenue
We generate revenue from sales and leasing of Revita in Germany, which is approved in Europe under a CE Mark and has received reimbursement authorization through NUB in Germany for the treatment of T2D. To date, we have generated insignificant revenue in Germany since the limited pilot commercial launch of Revita in the first quarter of 2023. In the United States, we have not generated any revenue, and do not expect to generate any revenue unless and until we successfully complete clinical development and obtain marketing approvals for one or more of our product candidates, if ever. If our development efforts for our product candidates are successful and result in regulatory approval or collaboration or license agreements with third parties, we may generate revenue in the future from product sales or payments from collaboration or license agreements that we may enter into with third parties, or any combination thereof. We cannot predict if, when or to what extent we will generate revenue from our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates in the United States.
Cost of Goods Sold
We currently manage the final assembly and testing of Revita in the manufacturing space at our headquarter in Burlington, Massachusetts. We contract with third-party manufacturers to produce certain key parts of our single-use devices and consoles. Cost of goods sold primarily consist of material costs, direct labor and manufacturing overhead costs.
133
Table of Contents
Operating Expenses
Research and Development Expenses
Research and development expenses primarily consist of personnel-related expenses, including salaries, bonuses, fringe benefits and other compensation-related costs, including stock-based compensation expense, for employees engaged in research and development functions. Research and development expenses also include costs of conducting our ongoing clinical studies, such as expenses associated with our clinical research organization, or CRO, who provides project management and other services related to our Revitalize-1 study, outside service fees paid to third party consultants and contractors related to our product candidate engineering, quality assurance and regulatory approval, contract manufacturing of our product candidate used in clinical studies as well as research expenses related to our Rejuva gene therapy platform.
We expense research and development costs as incurred. Non-refundable advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and other long-term assets, which are expensed as the related goods are delivered or the services are performed, or when it is no longer expected that the goods will be delivered or the services rendered.
A significant portion of our research and development costs have been, and will continue to be, external costs. We track these external costs, such as fees paid to our CRO, preclinical study vendors and other third parties in connection with our product engineering, sub-assembly component manufacturing and manufacturing process development, clinical studies, preclinical studies and other research activities on a program-by-program basis. We also use a portion of our personnel and infrastructure resources for our research and development efforts, which are shared across multiple programs under development, and as such, are not tracked on a program-by-program basis. The following table reflects our research and development expense, including direct program-specific expense summarized by program, indirect expenses, and personnel-related expenses recognized during each period presented:
Year Ended December 31,
Direct program-specific expenses:
Total direct program-specific expenses 14,399 15,212
Personnel-related expenses (including stock-based compensation) 18,985 16,093
Total research and development expenses $ 38,038 $ 34,354
We expect our research and development expenses will increase significantly in the future as we:
•
hire and retain additional personnel, including research, clinical, development, manufacturing, quality control, quality assurance, regulatory and scientific personnel;
•
continue to conduct our ongoing Revitalize-1 pivotal study, including additional clinical studies under our Revita clinical program;
•
continue to advance the research and development of our discovery and preclinical programs, such as Rejuva;
•
seek regulatory approval for any product candidates that successfully complete clinical studies; and
•
develop, establish and validate our commercial-scale current good manufacturing practices and manufacturing process.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily consist of personnel-related costs, including salaries, bonuses, fringe benefits and other compensation-related costs, including stock-based compensation expense, for our personnel and external contractors involved in our executive, finance, legal and other administrative functions as well as our commercial function, who is involved in market access related activities. Selling, general and administrative expenses
134
Table of Contents
also include costs incurred for outside services associated with such functions, including costs associated with obtaining and maintaining our patent portfolio and professional fees for accounting, auditing, tax, legal services and other consulting expenses.
We anticipate that our selling, general and administrative expenses will increase significantly in the future as we:
•
hire and retain additional selling, general and administrative personnel to support the expected growth in our research and development activities and the preclinical and clinical development of our product candidates;
•
continue to expand our commercial and administrative function to support the growth of our Revita commercialization in Germany as well as potential future launches in other geographic locations;
•
incur additional commercialization expenses prior to any regulatory approval of our product candidates;
•
pursue payor coverage and reimbursement for our current and future product candidates;
•
maintain, expand and protect our intellectual property portfolio; and
•
incur increased expenses associated with operating as a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services, director and officer insurance premiums, and investor and public relations costs.
Other Income (Expenses), Net
Other income (expense), net is primarily comprised of interest income, change in fair value of notes payable, change in fair value of warrant liabilities and loss from debt extinguishment.
Interest Income
Interest income is primarily generated from cash interest earned on our cash, cash equivalents and restricted cash balances.
Change in Fair Value of Notes Payable
In January 2022, we entered into a financing arrangement with certain lenders in which we issued convertible promissory notes, or the 2022 Convertible Notes. In July 2023, we repaid one of the promissory notes to one lender and issued amended and restated convertible promissory notes to the remaining lenders in replacement of, but not in payment of, the remainder of the 2022 Convertible Notes. In September 2023, we entered into a credit agreement with certain lenders that provides for term loans, or the 2023 Notes. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources - Loan and Security Agreements section below for more details about our debt financing agreements. We elected the fair value option to account for these notes payable, which are remeasured at the end of each reporting period with changes in fair value recognized as a component of other income (expense), net. We will continue to recognize changes in fair value of the notes payable until they are repaid in cash or converted into equity upon an equity financing event or a change of control event. In connection with our IPO in February 2024, the 2022 Convertible Notes converted into common stock and the liability was reclassified to common stock and additional paid-in capital.
Change in Fair Value of Warrant Liabilities
In January 2014, we issued a fully vested warrant to purchase shares of our Series B convertible preferred stock in connection with a loan and security agreement entered into in January 2014. In July 2023, we issued fully vested warrants to purchase shares of our common stock in connection with the issuance of the amended and restated 2022 Convertible Notes. In September 2023, we issued fully vested warrants to purchase shares of our common stock or convertible preferred stock in connection with the 2023 Notes. These warrants were classified as liabilities on our consolidated balance sheet and were initially recorded at fair value on the grant date. They are subsequently remeasured to fair value at the end of each reporting period with changes in fair value recognized as a component of other income (expense), net. We will continue to recognize changes in fair value of the warrant liabilities until the warrants are exercised, expire or qualify for equity
135
Table of Contents
classification. In connection with our IPO in February 2024, warrants to purchase our convertible preferred stock converted into warrants to purchase our common stock and related liabilities were reclassified to additional paid-in capital.
Loss From Debt Extinguishment
Loss from extinguishment of debt represents loss from the early repayment of the Term Loans in January 2022.
Critical Accounting Policies and Significant Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and recorded amounts of expenses that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies used in the preparation of our consolidated financial statements require the most significant judgments and estimates. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our audited consolidated financial condition and results of operations.
Stock-Based Compensation
We measure 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 are 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 adjusted to reflect those awards that ultimately vest upon final determination of the performance conditions achieved. 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.
We use 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.
We determined the assumptions for the Black-Scholes option-pricing model as discussed below. Each of these inputs is subjective and generally requires significant judgment to determine. Forfeitures are accounted for as they occur.
•
Fair Value of Our Common Stock. Prior to our IPO in February 2024, our stock was not publicly traded, and therefore we estimated the fair value of our common stock, as discussed in “Determination of the Fair Value of Common Stock” below.
•
Expected Term. The expected term represents the period that the stock-based awards are expected to be outstanding. As we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term, the expected term of stock options granted has been determined using the simplified method, which is the average of the midpoints between the vesting date and the contractual term for all vesting tranches.
•
Risk-Free Interest Rate. 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.
136
Table of Contents
•
Expected Volatility. Because we did not have a trading history of our common stock prior to our IPO, the expected volatility was derived from the average historical stock volatilities of several public companies within our industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock-based awards.
•
Dividend Rate. The expected dividend is zero as we have not paid and do not anticipate paying any dividends in the foreseeable future.
If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously. Subsequent to our IPO, we expect to use the quoted market price of our common stock on the measurement date.
Determination of the Fair Value of Common Stock
As there had been no public market for our common stock prior to our IPO, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant, with input from management, considering independent third-party valuations of our common stock as well as our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent third-party valuation through the date of the grant. These independent third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. We estimated the value of our equity using market approaches. In conducting the valuations, our board of directors, with input from management, considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, including:
•
the prices at which we sold convertible preferred stock and the superior rights and preferences of the convertible preferred stock relative to our common stock at the time of each grant;
•
the progress of our research and development programs, including the status of preclinical studies and current status of our ongoing clinical studies;
•
our stage of development and commercialization and our business strategy;
•
external market conditions affecting the therapeutics and medical device industry, and trends within the therapeutics and medical device industry;
•
our financial position, including cash on hand, and our historical and forecasted performance and operating results;
•
the lack of an active public market for our common stock and our preferred stock;
•
the likelihood of achieving a liquidity event, such as an IPO or a sale of our company in light of prevailing market conditions; and
•
the analysis of IPOs and the market performance of similar companies in the therapeutics and medical device industry.
The assumptions underlying these valuations represented management’s best estimates, which involved inherent uncertainties and the application of management judgment.
When estimating the value of our equity, we applied a hybrid approach by performing a scenario-based analysis, in which we estimated the probability-weighted value across multiple scenarios. In one scenario, the equity value was determined by back-solving overall equity value to the price paid by recent financing transactions. The fair value of our equity was then allocated to various securities within our capital structure by applying an option pricing method. The option pricing method estimates the fair value of each class of security based on the potential to profit from the upside of the business, while taking into account the unique characteristics of each class of security. Under this method, the common
137
Table of Contents
stock has value only if the funds available for distribution to stockholders exceeded the value of the convertible preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. We also considered an IPO scenario in which the shares of the convertible preferred stock are assumed to convert to common stock at the time of the IPO. The future value of the common stock is discounted back to the valuation date at an appropriate risk-adjusted discount rate to arrive at an indication of value for the common stock. A discount for lack of marketability of the common stock is then applied to arrive at an indication of value for the common stock.
There are significant judgments and estimates inherent in the valuations. These judgments and estimates include assumptions regarding our future operating performance, the stage of development of our product candidates, the timing and probability of a potential IPO or other liquidity event and the determination of the appropriate valuation methodology at each valuation date. The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation expense could be materially different.
Now that a public trading market for our common stock has been established in connection with the consummation of our IPO, it will no longer be necessary for our board of directors to estimate the fair value of our common stock in connection with our accounting for equity-based awards, as the fair value of our common stock will be determined based on the trading price of our common stock on the Nasdaq Global Market.
Determination of the Fair Value of Notes Payable
We elected the fair value option to account for our 2022 Convertible Notes and 2023 Notes, and remeasure the fair value at each reporting date.
The fair value of the 2022 Convertible Notes was estimated using a Monte Carlo simulation model, which incorporates significant assumptions and estimates. These assumptions and estimates include, but are not limited to, the timing and probability of the conversion events, expected volatility of the price of the underlying equity, risk-free interest rate, scenario weightings, and estimated equity values, which are impacted by external market conditions. The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our fair value of the notes payable could be materially different.
The fair value of the 2023 Notes at the inception date of September 7, 2023 was estimated at the difference between the total proceeds from the 2023 Notes and the estimated fair value of the associated warrants issued. This assumption was based on the rationale that the fair value of the notes and warrants at issuance equated to the total proceeds of the 2023 Notes as the credit agreement of the 2023 Notes were entered into with the lenders in an arm's-length transaction. The fair value of the 2023 Notes at December 31, 2023 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.
Determination of the Fair Value of Warrant Liabilities
We remeasure the fair value of our warrant liabilities at the end of each reporting period. The fair value was estimated using either a Black-Scholes option-pricing model or a Monte Carlo simulation model, depending on the nature of the warrants. The valuation model used incorporates significant assumptions and estimates, which include, but are not limited to, the fair value per share of the underlying shares, the remaining contractual term of the warrants, risk-free interest rate and expected volatility of the price of the underlying shares.
Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our
138
Table of Contents
accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:
•
vendors, including central laboratories and research organizations, in connection with preclinical development activities and our research programs;
•
CRO and investigative sites in connection with preclinical and clinical studies; and
•
Clinical Manufacturing Organizations, or CMOs, in connection with devices and consumables used in the clinical studies.
We base our expenses related to preclinical and clinical studies on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and our CRO that conduct and manage preclinical and clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical study milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
Results of Operations
Years Ended December 31, 2023 and 2022
The following table summarizes our consolidated results of operations for the years ended December 31, 2023 and 2022.
Year EndedDecember 31, Change
Operating expenses:
Revenue and Cost of Goods Sold
We commenced commercial activities in Germany in the first quarter of 2023. Prior to 2023, we had no revenue or costs of goods sold.
Research and Development Expenses
Research and development expenses increased by $3.7 million, or 10.7%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to increased personnel-related expenses as well as clinical, medical affairs and facilities expenditures. Personnel-related expenses, including salaries, bonuses and other compensatory benefits, increased by $1.7 million as a result of the expansion of our workforce and our effort to bring
139
Table of Contents
certain clinical and scientific resources in house. In addition, stock-based compensation increased by $1.2 million due to new option grants issued to new hires and existing employees. Medical affairs expenses increased by $1.2 million, primarily driven by activities in connection with collaborative medical research. Clinical study expenses increased by $1.0 million due to the progress made in Revitalize-1 upon the approval of a new study protocol. Facilities expenses increased by $1.2 million as the Burlington Lease commenced on November 1, 2023 and the monthly lease expense for the Lexington Lease increased compared to the first half of 2022 upon its extension in June 2022. These increases were partially offset by a decrease of $3.1 million in engineering, manufacturing, and preclinical study expenditures primarily as a result of reduced product development effort and the timing of the expenditures incurred with the Rejuva program.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $2.2 million, or 14.6%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to the $2.7 million write-off of previously capitalized IPO costs recorded in the second quarter of 2022 as we delayed our initial IPO plan due to adverse market conditions in 2022. Offering costs related to the IPO effort in 2023 of approximately $2.2 million were capitalized and recorded as part of other long-term assets as of December 31, 2023.
In addition, professional services spending related to public relations, recruiting and marketing activities also decreased by $1.9 million. These decreases were partially offset by an increase of $2.0 million in debt issuance costs.
Other Income (Expense), Net
Other income (expense), net changed by $29.2 million from net other income of $2.9 million during the year ended December 31, 2022 to net other expenses of $26.3 million during the year ended December 31, 2023. The change was primarily due to the change in fair value of notes payable and warrants, increased interest income and decreased loss from debt extinguishment.
We recognized a loss of $19.4 million from the increase in fair value of the 2022 Convertible Notes during the year ended December 31, 2023 compared to a gain of $2.3 million from the decrease in fair value of the 2022 Convertible Notes during the year ended December 31, 2022, resulting in a total fluctuation of $21.7 million between the two comparative periods. The loss from increase in fair value of the 2022 Convertible Notes during the year ended December 31, 2023 was primarily driven by a reduction in the remaining estimated time to assumed conversion events and the new debt terms associated with the reissuance of the 2022 Convertible Notes along with the concurrent issuance of warrants to purchase common stock. The gain from decrease in fair value of the 2022 Convertible Notes during the year ended December 31, 2022 was primarily driven by adverse external market conditions which resulted in declining estimated equity value, reduced probability-weighting of the IPO scenario and an increase in the estimated time to an IPO event. In addition, we also recognized a loss of $1.3 million from the increase in fair value of the 2023 Notes during the year ended December 31, 2023 related to interest accrued on the 2023 Notes.
We recognized a loss of $6.8 million from the increase in fair value of warrant liabilities during the year ended December 31, 2023, mainly related to the warrants issued in connection with the reissuance of the 2022 Convertible Notes in July 2023. The increase was primarily driven by an increase in estimated underlying equity value due to reduced remaining estimated time to assumed conversion events.
The changes in fair value above were partially offset by a $0.5 million increase in interest income earned from our cash deposits due to higher interest rates and $0.3 million less loss from debt extinguishment, which was a one-time expense incurred in January 2022 related to the early repayment of the Term Loans in January 2022.
Liquidity and Capital Resources
We believe that we maintain a level of liquidity sufficient to allow us to meet our cash needs in the short-term. Over the long-term, we manage our cash and capital structure to maximize shareholder return, maintain its financial condition and maintain flexibility for future strategic initiatives. We continuously assess our working capital needs, debt and leverage levels, debt maturity schedule, capital expenditure requirements and future investments.
As of December 31, 2023, we had approximately $33.2 million of cash and cash equivalents. On February 6, 2024, we completed our IPO, in which we issued and sold 7,333,333 shares of our common stock at a price to the public of $15.00 per share, resulting in net proceeds to us of approximately $98.9 million, after deducting the underwriting discounts
140
Table of Contents
and other offering expenses. On March 5, 2024, we issued an additional 99,999 shares of our 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 net proceeds of approximately $1.4 million, after deducting the underwriting discounts and commissions.
Based on our current business plans, we believe that the aggregate net proceeds from our IPO, together with our existing cash and cash equivalents, will be sufficient to fund our operating expenses and capital expenditures requirements through 2025.
Loan and Security Agreements
2019 Notes
In February 2019, we entered into a loan and security agreement with SVB, or the 2019 Note, that provided for borrowings of up to $15 million in two Term Loan advances defined as “Term A Loan” and “Term B Loan”, collectively referred to as the Term Loans. On February 5, 2019, we drew down $3 million under Term A Loan, and on May 31, 2019, we drew down an additional $7 million under Term A Loan. On October 3, 2019, we drew down $5 million under Term B Loan.
The outstanding balances under the Term Loans bear interest at a floating annual rate that equals the greater of 1.5% above the Wall Street Journal prime rate or 6.75%. The Term Loans initially required interest-only repayments through December 31, 2020. After the interest-only period, the Term Loans require 24 equal monthly principal repayments of the outstanding balances plus accrued interest through the maturity date on December 1, 2022.
On the date that the 2019 Note is paid in full or becomes due and payable, we are required to make a payment, or the Final Payment, in addition to the regular monthly payments of principal plus accrued interest, equal to 6% of the original principal amount of the Term Loans extended by the lender.
In February 2019, in connection with entering into the 2019 Note, we issued to SVB and an affiliated investor warrants to purchase up to an aggregate of 119,934 shares of our common stock, at an exercise price of $3.3263 per share, or the 2019 warrants. Of the 119,934 shares, 79,965 shares were exercisable upon the issuance of the warrants and an additional 39,969 shares became exercisable upon the drawdown of the Term B Loan. The 2019 warrants have a contractual term of ten years from the date of issuance. As of December 31, 2023, the 2019 warrants have not been exercised.
On December 31, 2020 and February 26, 2021, we entered into two amendments to the 2019 Note, or the Amendments, whereby the Term Loans were amended to extend the interest-only period through December 31, 2021, upon achievement of certain clinical milestone as specified in the Amendments, with principal to be repaid equally over 12 consecutive calendar months starting January 1, 2022. In connection with entering into the first Amendment, we issued to SVB and an affiliated investor, warrants to purchase up to an aggregate of 41,682 shares of our common stock, at an exercise price of $3.8842 per share, or the 2020 warrants. The 2020 warrants expire ten years from the date of issuance. As of December 31, 2023, the 2020 warrants have not been exercised.
On January 3, 2022, we repaid in full the Term Loans under the Loan and Security Agreement by making a lump-sum payment to SVB for a total amount of $16.1 million, which consisted of the outstanding principal balance of the Term Loans of $15.0 million, the Final Payment of $0.9 million, the prepayment premium of $0.1 million and accrued interest of $0.1 million.
2022 Convertible Notes
On January 11, 2022, we entered into a financing arrangement with certain lenders in which we issued the 2022 Convertible Notes in exchange for an aggregate principal amount of $20.1 million.
On July 11, 2023, we repaid $0.1 million in cash to one of the original lenders and issued amended and restated convertible notes to certain of the lenders in replacement of, but not in payment of, the remainder of the 2022 Convertible Notes. Following these amendments, $20.9 million in aggregate principal under the 2022 Convertible Notes remained outstanding, accruing interest at the rate of 10% per year until they were paid or converted in full. In connection with entering into these amendments, we issued to such lenders warrants, or the July 2023 warrants, to purchase shares of our common stock immediately exercisable for a variable number of shares based on the principal amount of the 2022
141
Table of Contents
Convertible Notes, as amended, of $20.9 million 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 we issue in our 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.
As of December 31, 2023 and 2022, the balance of the 2022 Convertible Notes was carried at its fair value of $27.2 million and $17.8 million, respectively.
Pursuant to the terms of the Convertible Notes, effective upon the closing of our IPO, all of the outstanding principal plus accrued interest under the 2022 Convertible Notes of $22.1 million automatically converted into 1,841,321 shares of our common stock at a conversion price equal to 80% of the public offering price per share of $15.00, or $12.00.
2023 Notes
On September 7, 2023, we entered into a credit agreement, as amended from time to time, with Symbiotic Capital Opportunities Holding, L.P. and Catalio Structured Opportunities AIV I LP, or the Lenders, that provides for term loans in an aggregate principal amount of $45.0 million, or the 2023 Notes, payable in two tranches. The first tranche, with a principal amount of $30.0 million, was extended on September 7, 2023, resulting in net proceeds of approximately $28.4 million. The second tranche, with a principal amount of $15.0 million, may be extended upon our achievement of certain operating and 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 $20.0 million that may be extended to us, subject to the Lenders’ prior written consent in their sole discretion.
The credit agreement, as amended, contains the following financial covenants: (i) a minimum liquidity covenant requiring us to maintain a minimum $10.0 million balance in cash and cash equivalents on deposit in accounts, 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 $40.0 million 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 $100.0 million (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.
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 and added to the outstanding principal amount of the 2023 Notes. Beginning September 30, 2026, we are 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 our election, 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, we are required to make an additional payment to the Lenders a 6.0% fee, or 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 commitment of $45.0 million 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 entering into the 2023 Notes, we issued to the Lenders warrants, or the September 2023 warrants, to purchase, at the holders’ choice, shares of (i) our Series F Preferred Stock, (ii) the most senior series of our preferred stock that is then authorized, or (iii) our common stock. The September 2023 warrants are immediately exercisable for a variable number of shares based on a total fixed dollar value, of $4.2 million, 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 Preferred Stock, (b) the lowest original issue price of any series of preferred stock we issue after the issuance date of the September 2023 warrants, (c) the conversion or exercise price of any convertible debt security, option, or warrant we issue after the issuance date of the September 2023 warrants, or (d) the price at which our common equity was first sold to the public in a firm-commitment underwritten offering or otherwise. The September 2023 warrants have a contractual term of ten years from issuance.
As of December 31, 2023, the balance of the 2023 Notes was carried at its fair value of $28.0 million.
142
Table of Contents
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we advance our product candidates. In the United States, we do not have any products approved for sale and have not generated any revenue from any sources, including product sales. Revita is approved in Europe under a CE Mark and has received reimbursement authorization through NUB in Germany for the treatment of T2D. We initiated a pilot commercial launch of Revita in Germany in the first quarter of 2023 and has since generated insignificant revenue due to the limited scope of the launch. In addition, we expect to incur additional costs associated with operating as a public company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future.
As of December 31, 2023, we had cash and cash equivalents of $33.2 million. We believe that our existing cash and cash equivalents and the aggregate net proceeds from our IPO, will enable us to fund our operating expenses, debt repayment obligations and capital expenditure requirements through 2025. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.
Because of the numerous risks and uncertainties associated with product development, and because the extent to which we may enter into collaborations with third parties for the development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our funding requirements and timing and amount of our operating expenditures will depend on many factors, including, but not limited to:
•
the scope, progress, results and costs of research and development for our current and future product candidates, including our current and planned Revita clinical studies, and ongoing preclinical development for our current and future product candidates;
•
the scope, prioritization and number of our research and development programs;
•
the scope, costs, timing and outcome of regulatory review of our product candidates;
•
the costs of securing manufacturing materials for use in preclinical and clinical studies and, for any product candidates for which we receive regulatory approval, use as commercial supply;
•
our ability to seek, establish and maintain a collaboration to develop our product candidate with a collaborator, including the financial terms and any cost-sharing arrangements of any such collaboration;
•
the costs and timing of future commercialization activities for any of our product candidates for which we receive regulatory approval;
•
the amount and timing of revenue, if any, received from commercial sales of any product candidates for which we receive regulatory approvals;
•
the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights and defending any intellectual property-related claims;
•
the extent to which we may acquire or in-license other products, product candidates, technologies or intellectual property, as well as the terms of any such arrangements; and
•
the costs of continuing to expand our operations and operating as a public company.
Identifying potential product candidates and conducting preclinical testing and clinical studies is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales in the United States or elsewhere. Revita is approved in Europe under a CE Mark and has received reimbursement authorization through NUB in Germany for the treatment of T2D. We initiated a pilot commercial launch of Revita in Germany in the first quarter of 2023 and has since generated insignificant revenue due to the limited scope of the launch. In addition, our product candidates, if approved, may
143
Table of Contents
not achieve commercial success. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.
Our expectation with respect to our ability to fund current planned operations is based on estimates that are subject to risks and uncertainties. Our operating plan may change as a result of many factors currently unknown to management and there can be no assurance that the current operating plan will be achieved in the time frame anticipated by us, and we may need to seek additional funds sooner than planned.
Adequate additional funds may not be available to us on acceptable terms, or at all. Market volatility resulting from pandemics, monetary policy changes, or other factors could also adversely impact our ability to access capital as and when needed. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Additional debt financing and convertible preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially dilute your ownership interest.
If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may have to significantly delay, reduce or eliminate some or all of our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
For additional information on risks associated with our substantial capital requirements, please see Part I. Item 1A. Risk Factors—Risks Related to Financial Condition and Capital Requirements.
We will require substantial additional capital beyond the proceeds from our IPO 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 development programs or future commercialization efforts.
Cash Flows
Years Ended December 31, 2023 and 2022
The net change in cash, cash equivalents and restricted cash for the years ended December 31, 2023 and 2022 was as follows:
Year Ended December 31,
Net cash used in operating activities $ (42,823 ) $ (46,243 )
Net cash used in investing activities (359 ) (56 )
Net cash provided by financing activities 27,437 4,350
Operating Activities
Cash used in operating activities of $42.8 million for the year ended December 31, 2023 was primarily driven by personnel-related expenses, including salaries, bonuses, and other compensatory benefits, and spending on our ongoing Revitalize-1 study, Rejuva-related research activities, as well as professional services related to our corporate and general administrative activities. Our net loss of $77.1 million was partially offset by non-cash expenses of $31.3 million, including $19.9 million loss from change in fair value of notes payable, $6.8 million loss from change in fair value of warrant liabilities, $4.3 million of stock-based compensation, and $0.3 million of depreciation expense. In addition, $2.0 million of the net loss was related to debt issuance costs that were presented in cash used in financing activities. Cash used in operating activities was also impacted by changes in working capital and other assets and liabilities of $(1.0) million.
Cash used in operating activities of $46.2 million for the year ended December 31, 2022 was primarily driven by personnel related expenses, including salaries, bonuses, and other compensatory benefits, spending on our ongoing clinical
144
Table of Contents
studies and product engineering as well as professional services related to our corporate and general administrative activities. Our net loss of $46.5 million was partially offset by non-cash items totaling $1.5 million, including $0.5 million of depreciation expense, $0.3 million loss on debt extinguishment, $3.1 million of stock-based compensation, net by $0.1 million gain from change in fair value of convertible preferred stock warrant liability, and $2.3 million gain from change in fair value of convertible notes payable. Cash used in operating activities was also impacted by changes in working capital and other assets and liabilities of $1.2 million.
Investing Activities
Cash used in investing activities remained relatively flat for the years ended December 31, 2023 and 2022 and were related to the purchase of property and equipment.
Financing Activities
Cash provided by financing activities of $27.4 million for the year ended December 31, 2023 was primarily driven by the $28.4 million capital raised from the issuance of the 2023 Notes, net of issuance costs, partially offset by an additional issuance costs of $0.4 million paid to third-party service providers. including legal fees, offering costs of $0.6 million related to the IPO effort in 2023 and a $0.1 million partial repayment of the 2022 Convertible Notes.
Cash provided by financing activities of $4.4 million for the year ended December 31, 2022 was primarily driven by $20.1 million capital raised from the issuance of the 2022 Convertible Notes, offset by $16.0 million repayment of the Term Loans. We also received proceeds of $0.3 million from stock option exercises.
Contractual Obligations and Commitments
We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods.
Our lease commitments reflect payments due for two operating leases, including corporate office space in Lexington, MA that will expire in April 2024, and new corporate office and laboratory space in Burlington, MA that will expire in June 2034. As of December 31, 2023, our contractual commitments for our leases were $59.7 million, of which $3.4 million is expected to be paid within one year, and $56.3 million will be paid over the remaining term of such leases. For additional information on our leases and timing of future payments, please see Note 7, Leases, to the consolidated financial statements included in this Form 10-K.
We have also entered into contracts in the normal course of business with various third parties for clinical trials, preclinical research studies, manufacturing, and other services and products for operating purposes. These contracts do not contain any minimum purchase commitments and provide for termination upon notice. Payments due upon cancellation generally consist only of payments for services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation.
Recent Accounting Pronouncements
See Note 2 to our audited consolidated financial statements for the years ended December 31, 2023 and 2022 included elsewhere in this Annual Report on Form 10-K for more information.
JOBS Act Accounting Election
We are an “emerging growth company” within the meaning of the Jumpstart Our Business Act of 2012, or JOBS Act. Section 107(b) of the JOBS Act provides that an emerging growth company can leverage the extended transition period, provided in Section 102(b) of the JOBS Act, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. We have elected to use this extended transition period and, as a result, our financial statements may not be comparable to companies that comply with public company effective dates. We have also elected to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002.
145
Table of Contents
We would cease to be an emerging growth company on the date that is the earliest of (1) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (2) the last day of our fiscal year following the fifth anniversary of the date of the completion of our IPO; (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the previous three years or (4) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our term loans drawn under the 2023 Notes require monthly payment of interest at a floating annual rate that equals the greater of 5.5% above the Wall Street Journal prime rate or 13.25%, 6% of which is payable in kind and added to the outstanding principal amount of the loans until September 30, 2024. We do not believe that an immediate 10% increase or decrease in the Wall Street Journal prime rate would have a material effect on our operating results.
Credit Risk
As of December 31, 2023, the majority of our cash and cash equivalents were maintained at various financial institutions in the United States, and our current deposits are in excess of insured limits. We believe the financial institutions that maintain our cash and cash equivalents possess sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk to us.
Foreign Currency Risk
Substantially all of our business is currently conducted in U.S. dollars. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on our operating results.
Inflation Risk
Inflationary factors, such as increases in our operating expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may significantly increase our operating expenses.
Item 8. Financial Statements and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in Part IV, Item 15. Exhibits and Financial Statement Schedules of this Annual Report on Form 10‐K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
146
Table of Contents
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Annual Report on Form 10‐K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a‐15(e) and 15d‐15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
This Annual Report on Form 10‐K does not include a report of management’s assessment regarding our internal control over financial reporting (as defined in Rules 13a‐15(f) and 15d‐15(f) under the Exchange Act) or an attestation report of our independent registered accounting firm due to a transition period established by rules of the SEC for newly public companies. Additionally, our independent registered accounting firm will not be required to opine on the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an “emerging growth company” as defined in the JOBS Act or even after we no longer qualify as an “emerging growth company,” if we remain a “low-revenue smaller reporting company,” until we are no longer a “low-revenue smaller reporting company.”
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a‐15(f) and 15d‐15(f) under the Exchange Act) during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
(a)
Disclosure in lieu of reporting on a Current Report on Form 8-K.
None.
(b)
Insider Trading Arrangements and Policies.
During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
147
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The following table provides information regarding our executive officers and members of our board of directors (ages as of the date of this Annual Report on Form 10‐K):
Name Age Position(s)
Executive Officers
Harith Rajagopalan, M.D., Ph.D. 47 Co-Founder, Chief Executive Officer, Director
Jay D. Caplan 62 Co-Founder, President, Chief Product Officer
Lisa A. Davidson 57 Chief Financial Officer, Treasurer
Timothy Kieffer, Ph.D. 57 Chief Scientific Officer
Sarah Toomey 49 General Counsel, Corporate Secretary
Non-Employee Directors
Kelly Barnes 57 Director
William W. Bradley 80 Director
Samuel Conaway 59 Director
Marc Elia 47 Director
Clive Meanwell, M.B., Ch.B., M.D. 66 Director
Ajay Royan 44 Director
Amy W. Schulman 63 Director
Allan R. Will 70 Chairman
Executive Officers
Harith Rajagopalan, M.D. Ph.D. Dr. Rajagopalan co-founded Fractyl in 2010 and has served as our Chief Executive Officer and a member of our board of directors since 2011, while serving as an Entrepreneur-in-Residence at General Catalyst Partners from 2009 to 2011. Prior to founding Fractyl, Dr. Rajagopalan trained in internal medicine and clinical cardiology at Brigham and Women’s Hospital in Boston, Massachusetts from 2005 to 2011, and completed a research fellowship at Harvard Medical School from 2009 to 2011. Dr. Rajagopalan received his B.S. in chemistry from Stanford University, and his M.D. and Ph.D. from Johns Hopkins University School of Medicine. We believe that Dr. Rajagopalan is qualified to serve on our board of directors due to his role as co-founder of Fractyl Health, his management experience as our Chief Executive Officer and his scientific and medical experience.
Jay D. Caplan. Mr. Caplan co-founded Fractyl in 2010 and has served as our President and Chief Product Officer since 2011 and January 2022, respectively. He previously served as a member of our board of directors from 2011 to 2017. Prior to founding Fractyl, Mr. Caplan served as Chief Operating Officer of Candela Corporation from November 2007 to January 2010, which was then a publicly held U.S.-based global medical aesthetic device company. Prior to Candela, he served as Chief Technology Officer and Vice President of Research and Development of InfraReDx, Inc. from September 2001 to October 2007, a privately held company that designs and develops catheter-based coronary imaging devices, that was later acquired by Nipro Corporation (Japan). Mr. Caplan also previously served as Vice President of Operations of Thermo Cardiosystems Inc. (now part of Abbott Laboratories), where he assisted in developing the HeartMate II left ventricular assist device. Mr. Caplan received his B.S. in electrical engineering from the Massachusetts Institute of Technology, or MIT, and his M.B.A. from the University of Pennsylvania’s Wharton School of Business.
Lisa A. Davidson. Ms. Davidson has served as our Chief Financial Officer and Treasurer since August 2015. Prior to joining us, Ms. Davidson was Vice President of Finance and Administration of Flexion Therapeutics, Inc., or Flexion, a publicly held biopharmaceutical company focused on the development and commercialization of novel, injectable pain therapies, from March 2009 to August 2015. Prior to Flexion, Ms. Davidson served as Director of Finance of OmniSonics Medical Technologies, Inc., a privately held U.S.-based medical device company focused on the treatment of vascular occlusive diseases. Ms. Davidson also previously served as Director of Finance of PerkinElmer Inc., a publicly held company focused on globally providing products and services to customers in health sciences and other advanced technology markets, and as Director of Finance at Citizens Advisers, Inc., an investment adviser to Citizens Funds, an investment company. Ms. Davidson has led various functions outside of Finance and Accounting including Human Resources and Information Technology. Ms. Davidson received her B.A. and M.B.A. from the University of New Hampshire.
Timothy Kieffer, Ph.D. Dr. Kieffer has served as our Chief Scientific Officer since September 2023. Prior to joining us, Dr. Kieffer served as the Chief Scientific Officer of ViaCyte Inc., a privately held company at the forefront of
148
Table of Contents
stem cell-derived treatments for diabetes, from September 2021 to October 2022. He also currently serves as a Professor of Medicine in the department of cellular and physiological sciences and surgery at the University of British Columbia, a position he has held since 2007. Dr. Kieffer’s research is focused on islet biology and the development of novel gene and cell therapy approaches to treat diabetes, and he has co-authored more than 200 publications on these topics and has been cited over 20,000 times. He received his Ph.D. in physiology from the University of British Columbia.
Sarah Toomey. Ms. Toomey has served as our General Counsel and Corporate Secretary since May 2022. Prior to joining us, Ms. Toomey was Senior Vice President of Operations and General Counsel of BERG LLC or BERG (now BPGbio, Inc.), a clinical-stage AI-powered biopharmaceutical company focused on oncology, neurology and rare diseases, from October 2017 to May 2022. Prior to BERG, Ms. Toomey was General Counsel at Metamark Genetics, a molecular diagnostics company focused on urological cancer care, from April 2015 to October 2017. Ms. Toomey also previously served as Senior Vice President and General Counsel at IntelligentMDx, a company that developed and manufactured molecular diagnostics products, from February 2009 to January 2015. Ms. Toomey is a registered patent attorney and practiced patent law before becoming in-house counsel. Prior to law school, Ms. Toomey was employed at Merck as a microbiologist. Ms. Toomey received her B.S. in bacteriology from the University of Wisconsin-Madison and her J.D. from Suffolk University Law School.
Non-Employee Directors
Kelly Barnes. Ms. Barnes has served as a member of our board of directors since January 2022. Prior to joining us, she served in various roles at PricewaterhouseCoopers from 1988 to 2020, most recently serving as a Global Health Industries Leader from 2018 to 2020 and as a U.S. Health Industries Leader from 2009 to 2020, where she oversaw services across all health-related industries. Ms. Barnes currently serves on the board of directors of Included Health, a privately held company, and is a member of the executive advisory board of the Walton College of Business at the University of Arkansas. She received her B.S.B.A. and M.S.A in accounting from the University of Arkansas and is a registered certified public accountant in the state of Texas. We believe that Ms. Barnes is qualified to serve on our board of directors due to her strong business and financial acumen, and extensive experience advising companies in the healthcare industry.
William W. Bradley. Senator Bradley has served as a member of our board of directors since March 2017. Since 2000, Sen. Bradley has been a managing director of Allen & Company LLC, an investment banking firm. From 2001 until 2004, he acted as chief outside advisor to McKinsey & Company’s non-profit practice. In 2000, Sen. Bradley was a candidate for the Democratic nomination for President of the United States. He served as a senior advisor and vice chairman of the International Council of JP Morgan & Co. from 1997 through 1999. During that time, Sen. Bradley also worked as an essayist for CBS Evening News, and as a visiting professor at Stanford University, the University of Notre Dame and the University of Maryland. Sen. Bradley served in the U.S. Senate from 1979 until 1997, representing the State of New Jersey. Prior to serving in the U.S. Senate, he was an Olympic gold medalist in 1964, and from 1967 through 1977 he played professional basketball for the New York Knicks, during which time they won two world championships. Sen. Bradley previously served on the board of directors of Starbucks Corporation from June 2003 until March 2018. Sen. Bradley also previously served on the board of directors of Seagate Technology, Willis Group Holdings Limited and QuinStreet, Inc. Sen. Bradley received his B.A. in American history from Princeton University and his M.A. in political philosophy and economics from the University of Oxford, Worcester College, where he was a Rhodes Scholar. We believe that Mr. Bradley is qualified to serve on our board of directors due to his deep understanding of public policy and U.S. governmental and regulatory affairs, and his broad leadership and corporate governance experience.
Samuel Conaway. Mr. Conaway has served as a member of our board of directors since January 2024. Mr. Conaway also currently serves as a director of JD Palatine LLC, a privately held company. Since 2013, Mr. Conaway has held roles of increasing responsibility with Boston Scientific Corporation, a publicly held company focused on global development, manufacturing and marketing of medical devices, and in October 2021, he became President of U.S cardiology sales. He also currently serves as chair of Close the Gap, Boston Scientific Corporation’s health equity program. Prior to joining Boston Scientific Corporation, Mr. Conaway served as the Vice President of U.S. endovascular and coronary sales of Abbott Vascular (formerly Guidant), the cardiovascular device division of Abbott Laboratories, a publicly held biomedical company. Mr. Conaway has over 30 years of experience in the medical device industry. He received his B.S. in business management at the University of Phoenix and his M.B.A. at the University of Maryland. We believe that Mr. Conaway is qualified to serve on our board of directors due to his expertise and experience serving in leadership positions of various medical device companies.
Marc Elia. Mr. Elia has served as a member of our board of directors since June 2021. Mr. Elia has also served as a director and audit committee member at SQZ Biotech, a clinical-stage biotechnology company developing cell therapies for patients with cancer since May 2018, a director at Invivyd, Inc. (previously Adagio Therapeutics), a publicly-held biotechnology company developing antibodies against viruses, including potentially against COVID-19 since 2022, and previously served as a director at Adimab LLC, a provider of therapeutic antibody discovery and engineering. In September 2019, Mr. Elia founded M28 Capital Management, a healthcare sector investment fund, and serves as its Chief Investment Officer. Mr. Elia received his B.A. at Carleton College, graduating with magna cum laude honors. We believe that Mr. Elia
149
Table of Contents
is qualified to serve on our board of directors due to his business expertise and experience serving as a director at various life science companies.
Clive Meanwell, M.B., Ch.B., M.D. Dr. Meanwell has served as a member of our board of directors since June 2021. Dr. Meanwell has also been a director and member of the compensation and audit committees at BB Biotech, a publicly-held Switzerland-based biotechnology investment company, since 2004, a director at EQRx, a privately-held biotechnology company aiming to make medicine more affordable, from January 2021 to August 2023, a director at Comanche BioPharma, a privately-held preclinical biopharmaceutical company developing treatments for preeclampsia, since 2021, a director at Hugo Health, a privately-held cloud-based healthcare platform, since 2021, a director at Invivyd, Inc., a publicly-held biotechnology company developing antibodies against viruses, including potentially against COVID-19, since 2022, and a director at Saama, a privately-held company, since 2021. Dr. Meanwell also currently serves as the Chief Executive Officer of a privately held biotechnology company focused on treating metabolic diseases and as Executive Chairman and General Partner at Population Health Partners LP, an investment company focused on innovative therapeutics with the potential to transform health outcomes for populations. Dr. Meanwell also founded The Medicines Company, a biopharmaceutical company focused on addressing cardiovascular disease, and served as Executive Chairman and Chief Executive Officer from 1996 until 2018 and Chief Innovation Officer until 2020. Dr. Meanwell received his M.B., Ch.B. and M.D. from the University of Birmingham, UK. We believe that Dr. Meanwell is qualified to serve on our board of directors due to his medical background and experience working with and serving on the boards of directors of various pharmaceutical and healthcare companies.
Ajay Royan. Mr. Royan has served as a member of our board of directors since 2014. Mr. Royan is the founder and has served as Managing General Partner at Mithril Capital Management LLC, or Mithril, a venture capital firm investing in technology companies, since June 2012. Mr. Royan serves on the board of directors of several private companies in which Mithril Capital Management LLC or its affiliates have invested, including Adimab, LLC, Oklo Inc., Helion Energy, Inc., AppDirect, Inc. and C2FO. Mr. Royan previously served on the board of directors of Adagio Therapeutics, Inc., a publicly traded biopharmaceutical company. Mr. Royan serves on the science advisory board of the Oak Ridge National Laboratory and the board of directors of Fulbright Canada. Mr. Royan received his B.A. from Yale University. We believe that Mr. Royan is qualified to serve on our board of directors due to his experience working in the venture capital industry and experience working with and serving on the boards of directors of numerous technology companies.
Amy W. Schulman. Ms. Schulman has served as a member of our board of directors since September 2018. Ms. Schulman is a healthcare investor and Managing Partner at Polaris Partners and co-founded and acts as Managing Partner of the Polaris Innovation Fund, which was formed in 2017. Ms. Schulman currently serves as Executive Chair of SQZ Biotech, , as well as Lyndra Therapeutics, which she co-founded and served as the company’s initial Chief Executive Officer from July 2015 to September 2019. Prior to joining Polaris Partners, Ms. Schulman, held various executive roles at Pfizer, including General Counsel, President of Pfizer Consumer Healthcare and Pfizer Nutrition. Ms. Schulman is currently a member of the board of directors of Alnylam Pharmaceuticals and Mount Sinai Hospital, and also serves as a member of Singapore’s Health and Biomedical Sciences International Advisory Council. She previously served as a Senior Lecturer at Harvard Business School and was a partner at DLA Piper. Ms. Schulman received her B.A. in Philosophy and English at Wesleyan University, graduating with Phi Beta Kappa honors, and her J.D. from Yale Law School. We believe that Ms. Schulman is qualified to serve on our board of directors due to her experience working with and serving on the boards of directors of various pharmaceutical and healthcare companies.
Allan R. Will. Mr. Will has served as Chairman of our board of directors since August 2012. Mr. Will has also served as Chairman, President and Chief Executive Officer of EBR Systems, Inc., a privately held company developing a wireless cardiac pacing system for heart failure, from October 2011 to June 2019, and as Executive Chair since June 2019. He also serves as Chair of the board of directors of SetPoint Medical, Inc., a privately held clinical-stage bioelectronics medicine company dedicated to treating patients with chronic autoimmune disease, since March 2011. Since 2014, he has served as a director of Fogarty Innovation, a not-for-profit organization dedicated to advancing human health worldwide. Prior to these roles, Mr. Will served as founding Managing Director of Split Rock Partners’ (and its predecessor, St. Paul Venture Capital’s) Silicon Valley venture capital office, focusing on the therapeutic medical device field. Previously, Mr. Will founded The Foundry, an incubator dedicated to transforming medical device concepts into companies, where he also served as Chair and Chief Executive Officer from 1998 to 2002 and Chair until 2010, co-founding eleven companies including, among others, Ardian, Inc., a medical device company focused on treating hypertension, which was subsequently acquired by Medtronic plc, and Evalve Inc., a company treating heart failure by repairing mitral valves percutaneously, now a wholly owned subsidiary of Abbott Laboratories. Mr. Will is an inventor on more than 30 issued patents, is a University of Maryland Distinguished Alumnus and a recipient of the ASTIA/Deloitte Excellence in Mentoring Women Executives Award. He served on the MIT Entrepreneurship Center Shareholders’ Board and the University of Maryland President’s Committee on Innovation and Entrepreneurship. Mr. Will received his M.S. in management from
150
Table of Contents
MIT and his B.S. in zoology from the University of Maryland. We believe that Mr. Will is qualified to serve on our board of directors due to his experience as a founder, senior executive and board member of numerous life science companies.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our code of business conduct and ethics is available under the Corporate Governance section of our website at www.fractyl.com. In addition, we intend to post on our website all disclosures that are required by law or the Nasdaq rules concerning any amendments to, or waivers from, any provision of the code. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this Annual Report on Form 10-K.
Audit Committee and Audit Committee Financial Expert
We have a separately designated standing audit committee. Our audit committee consists of Kelly Barnes, Marc Elia and Allan R. Will, with Ms. Barnes serving as the chair. Our board of directors has determined that each of Ms. Barnes, Mr. Elia and Mr. Will meet the independence requirements of Rule 10A-3 under the Exchange Act and the applicable Nasdaq rules. All members of our audit committee meet the requirements for financial literacy under the applicable Nasdaq rules. Our board of directors has determined that Ms. Barnes is an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K and has the requisite financial sophistication as defined under the applicable Nasdaq rules. Our board of directors has adopted a written charter for the audit committee, which is available under the Corporate Governance section of our website at www.fractyl.com.
Item 11. Executive Compensation.
This section discusses the material components of the executive compensation program for our executive officers who are named in the 2023 Summary Compensation Table below. In 2023, our named executive officers and their positions were as follows:
•
Harith Rajagopalan, M.D., Ph.D., Chief Executive Officer;
•
Timothy Kieffer, Ph.D., Chief Scientific Officer; and
•
Jay D. Caplan, President and Chief Product Officer.
2023 Summary Compensation Table
The following table sets forth information concerning the total compensation of our named executive officers for the year ended December 31, 2023:
Chief Scientific Officer
President and Chief Product Officer
(1)
Amount reflects a signing bonus paid to Dr. Kieffer pursuant to the terms of his offer letter. The signing bonus is subject to repayment if Dr. Kieffer is terminated for cause of if he voluntarily leaves our company during the first year following his start date.
151
Table of Contents
(2)
Amounts reflect the full grant-date fair value of option awards granted during the fiscal years shown computed in accordance with ASC Topic 718, rather than the amounts paid to or realized by the named individual. We provide information regarding the assumptions used to calculate the value of option awards granted in the fiscal year ended 2022 and option grants in the fiscal year ended 2023 in Note 12 to the consolidated financial statements included in this Annual Report on Form 10-K. The assumptions used to estimate the grant date fair value of the option awards granted to our named executive officers in November 2023, for such portion qualifying as “incentive stock options,” were as follows:
Risk-free interest rate 4.62 %
Expected term (in years) 6.86
Expected volatility 58 %
Expected dividend yield 0 %
Grant date fair value $ 6.97
The assumptions used to estimate the grant date fair value of the option awards granted to our named executive officers in November 2023, for such portion not qualifying as “incentive stock options,” were as follows:
Risk-free interest rate 4.61 %
Expected term (in years) 5.92
Expected volatility 60 %
Expected dividend yield 0 %
Grant date fair value $ 6.70
(3)
Amounts reported in this column represent the performance bonuses earned for the years shown. Dr. Kieffer’s 2023 annual bonus was prorated to reflect his September 12, 2023 start date. Please refer to “Narrative to Summary Compensation Table—2023 Bonuses” below for additional information regarding our 2023 bonus program.
(4)
With respect to Dr. Rajagopalan and Mr. Caplan, the amounts reported in this column represent annual life insurance premiums paid by the Company on behalf of the executive during the fiscal years shown.
(5)
Dr. Kieffer’s employment with our company as Chief Scientific Officer commenced on September 12, 2023. Prior to his commencing employment with us, Dr. Kieffer was engaged by us as a consultant.
Narrative to Summary Compensation Table
2023 Salaries
The named executive officers receive a base salary to compensate them for services rendered to our company. The base salary payable to each named executive officer is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role and responsibilities. The 2023 annual base salaries for our named executive officers were:
Named Executive Officer 2023 Annual Base Salary ($)
Harith Rajagopalan, M.D., Ph.D. $ 550,000
Timothy Kieffer, Ph.D. $ 200,000 (1)
(1)
Pursuant to the terms of his offer letter, Dr. Kieffer’s employment with us is initially part-time (approximately 20 hours per week), with the expectation that he will transition to full-time employment within 12 months of his September 12, 2023 start date.
152
Table of Contents
2023 Bonuses
We offer our named executive officers the opportunity to earn annual cash bonuses to compensate them for attaining short-term goals as approved by our board of directors. For 2023, bonuses were based on attaining corporate and individual goals. Corporate goals for 2023 related to Revitilize-1 progress in site activation and enrollment; demonstrating Rejuva preclinical progress; and developing our organization for scale. Individual goals for 2023 related to a named executive officer’s area of responsibility within the company. For 2023, Dr. Rajagopalan’s bonus was based 100% on the achievement of corporate goals, while each of Dr. Kieffer’s and Mr. Caplan’s bonus was 75% based on the achievement of corporate goals and 25% based on the achievement of individual goals. Our board of directors approved a 2023 annual target bonus as a percent of base salary for each named executive officer as follows:
•
Harith Rajagopalan, M.D., Ph.D.: 60%
•
Timothy Kieffer, Ph.D.: 40%
•
Jay D. Caplan: 40%
The actual amount of performance bonus earned by each of the named executive officers for 2023 is set forth in the “Non-Equity Incentive Plan Compensation” column of the 2023 Summary Compensation Table above.
Equity Compensation
We have historically granted stock options to our employees, including our named executive officers, as the long-term incentive component of our compensation program. Our stock options generally allow employees to purchase shares of our common stock at a price equal to the fair market value of our common stock on the date of grant, as determined by our board of directors. Stock option grants made to new hires typically vest as to 25% of the underlying shares on the first anniversary of the employment commencement date and in equal monthly installments over the following three years. Stock option grants made to existing employees typically vest in 48 equal monthly installments following the date of grant. Historically, our stock options have been intended to qualify as “incentive stock options” to the extent permitted under the Internal Revenue Code.
The following table sets forth the options granted to our named executive officers during 2023 under our 2011 Stock Incentive Plan, as amended and restated, which we refer to as the 2011 Plan. These stock options have exercise prices equal to the fair market value of our common stock on the date of grant, as determined by the board of directors. These options vest as described in the Outstanding Equity Awards at 2023 Fiscal Year-End table.
Named Executive Officer 2023 Options Granted
Harith Rajagopalan, M.D., Ph.D. 49,649
In addition to stock options, in 2023 we also granted RSUs to Dr. Rajagopalan and Mr. Caplan in the amounts set forth in the table below. The RSUs represent the right to receive shares of our common stock upon satisfaction of the applicable vesting conditions. These RSUs vest as described in the Outstanding Equity Awards at 2023 Fiscal Year-End table.
Named Executive Officer 2023 RSUs Granted
Harith Rajagopalan, M.D., Ph.D. 216,924
Timothy Kieffer, Ph.D. —
In connection with our IPO, we adopted a 2024 Incentive Award Plan, referred to below as the 2024 Plan, in order to facilitate the grant of cash and equity incentives to directors, employees (including our named executive officers) and consultants of the Company and certain of its affiliates to enable the Company and certain of its affiliates to obtain and retain services of these individuals, which we consider to be essential to our long-term success. Following the effective date of the 2024 Plan, we have ceased making any further grants under the 2011 Plan. However, the 2011 Plan will continue to govern the terms and conditions of the outstanding awards granted under it. For additional information about the 2024 Plan, please see the section titled “Incentive Compensation Plans—2024 Incentive Award Plan” below.
153
Table of Contents
Other Elements of Compensation
Retirement Plan. We currently maintain a 401(k) retirement savings plan for our employees who satisfy certain eligibility requirements. Dr. Rajagopalan and Mr. Caplan, our U.S.-based named executive officers, are eligible to participate in the 401(k) plan on the same terms as other full-time employees. The Internal Revenue Code allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) plan. We believe that providing a vehicle for tax-deferred retirement savings though our 401(k) plan adds to the overall desirability of our executive compensation package and further incentivizes our employees, including our named executive officers, in accordance with our compensation policies. For 2023, we did not make any employer contributions to the 401(k) plan. Dr. Kieffer was not eligible to participate in any Company-sponsored pension or retirement plans during 2023.
Health and Welfare Plans. Dr. Rajagopalan and Mr. Caplan are eligible to participate in our health and welfare plans, including medical, dental and vision benefits, medical and dependent care flexible spending accounts, short-term and long-term disability insurance and life insurance and accidental death & dismemberment insurance, generally on the same terms as our other U.S.-based full time employees, provided that, we provide higher levels of life insurance coverage to our U.S.-based executives, including Dr. Rajagopalan and Mr. Caplan, than is generally available to our other U.S.-based employees. Dr. Kieffer was not eligible to participate in any Company-sponsored health and welfare benefit plans during 2023.
Outstanding Equity Awards at 2023 Fiscal Year-End
The following table summarizes the number of shares of common stock underlying outstanding equity incentive plan awards for each named executive officer as of December 31, 2023.
Option Awards
(1)
Amounts reflect the value of RSUs outstanding at fiscal year-end, calculated by multiplying the IPO price per share of $15.00, by the number of RSUs underlying each award.
(2)
Except for the option granted to Dr. Rajagopalan on November 10, 2023, Dr. Rajagopalan’s options vest in 48 equal monthly installments following the vesting start date, subject to his continued service through each applicable vesting date.
154
Table of Contents
(3)
The option vests as to 25% of the underlying shares on each of the first four anniversaries of the vesting start date, subject to the named executive officer’s continued service through each applicable vesting date.
(4)
Dr. Kieffer’s option vests in 24 equal monthly installments following the vesting start date, subject to Dr. Kieffer’s continued service through each applicable vesting date.
(5)
Dr. Kieffer’s option vests as to 25% of the underlying shares on the first anniversary of the vesting start date and in 36 equal monthly installments over the following three years, subject to Dr. Kieffer’s continued service through each applicable vesting date. In the event that Dr. Kieffer does not convert to full-time employment status (40 hours per week) within 12 months of his September 12, 2023 start date, the number of shares subject to the option will be adjusted downward to equal the product of (1) the total number of shares originally subject to the option and (2) a fraction, (a) the numerator of which is the lesser of 40 and the number of hours Dr. Kieffer is providing services to the Company on a weekly basis as of September 12, 2024, and (b) the denominator of which is 40.
(6)
Except for the option granted to Mr. Caplan on November 10, 2023, Mr. Caplan’s options vest in 48 equal monthly installments following the vesting start date, subject to his continued service through each applicable vesting date.
(7)
The RSUs vest upon the satisfaction of both a service condition and a performance condition (“dual vesting”). The service condition for the RSUs is satisfied on the first anniversary of the vesting start date, subject to continued service with us through such date. The performance condition for the RSUs will be satisfied upon the earliest of (i) the date six months after the occurrence of our IPO, (ii) such earlier date on or following the occurrence of our IPO that the managing underwriters of such public offering and our company permit open-market transfers of the shares underlying the RSUs and (iii) March 15th of the calendar year following the occurrence of our IPO.
Recent Changes in Executive Compensation
In anticipation and subject to the consummation of our IPO, our board of directors approved certain changes to our named executive officers’ compensation arrangements. These include adjusting annual base salaries, entering into new employment agreements and granting, effective upon effectiveness of our registration statement on Form S-1 filed with the SEC in connection with our IPO, stock options subject to performance-based vesting, each as described in more detail below.
Annual Base Salaries
Our board of directors approved an increase to the annual base salary of Dr. Rajagopalan to $610,000, of Mr. Caplan to $475,000, and of Dr. Kieffer to $225,000 effective upon the closing date of our IPO.
Equity Incentive Awards
Our board of directors approved the following options to purchase shares of our common stock under the 2024 Plan to be granted to our named executive officers effective February 1, 2024, the day prior to the first public trading date of our common stock:
Named Executive Officer Options Granted
Harith Rajagopalan, M.D., Ph.D. 435,900
Timothy Kieffer, Ph.D. 58,500
These options have an exercise price per share equal to $15.00 per share and become eligible to vest subject to attainment of one or more performance goals during a performance period ending December 31, 2024, with any portion of the option that becomes eligible to vest vesting in four substantially equal installments occurring on the final day of the performance period and each of the first three anniversaries thereof.
Executive Employment Agreements
We entered into new employment agreements with Dr. Rajagopalan and Mr. Caplan that will supersede the named executive officer’s prior employment agreement with us effective on the closing date of our IPO. In addition, we entered into amendments to our offer letter agreement and Severance Agreement and Change in Control Agreement with Dr. Kieffer effective on the closing date of our IPO.
155
Table of Contents
The agreements entitle the named executive officers to the annual base salaries described above under the heading “—Annual Base Salaries” and annual target bonus opportunities equal to those in effect for 2023. If we terminate Dr. Rajagopalan, Mr. Caplan or Dr. Kieffer without “cause” or he resigns for “good reason” (each as defined below), subject to his timely executing a release of claims and his continued compliance with certain restrictive covenants, he is entitled to receive (i) base salary continuation for a period of 12 months, (ii) direct payment of, or reimbursement for, continued health coverage pursuant to COBRA for up to 12 months and (iii) with respect to Dr. Rajagopalan only, a cash lump sum payment equal to 1.0 times his target annual bonus.
If we terminate Dr. Rajagopalan, Mr. Caplan or Dr. Kieffer without “cause” or he resigns for “good reason”, in either case, within 3 months prior to or within 18 months following a change in control, then, in lieu of the severance payments and benefits described above, subject to his timely executing a release of claims and his continued compliance with certain restrictive covenants, he is entitled to receive (i) a cash amount equal to one times (or 1.5 times for Dr. Rajagopalan) his annual base salary for the year of termination, payable over the 12 months (or 18 months for Dr. Rajagopalan) following his termination date; (ii) direct payment of, or reimbursement for, continued health coverage pursuant to COBRA for up to 12 months (or 18 months for Dr. Rajagopalan); (iii) a cash lump sum payment equal to 1.0 times (or 1.5 times for Dr. Rajagopalan) his target annual bonus; and (iv) accelerated vesting of all unvested equity or equity-based awards held by the executive that vest solely based on continued employment or service.
For purposes of the employment agreements, “cause” generally means, subject to certain notice and cure rights, the executive’s (i) refusal to substantially perform the duties associated with the executive’s position or those assigned to him; (ii) material breach of the employment agreement; (iii) conviction, plea of no contest, plea of nolo contendere, or imposition of unadjudicated probation of a felony or a crime involving moral turpitude, or the commission of any act involving fraud, embezzlement, misappropriation, willful misconduct, or breach of fiduciary against the Company or any of its affiliates; or (iv) unlawful use (including being under the influence) or possession of illegal drugs on the Company’s (or any of its affiliate’s) premises or while performing executive’s duties and responsibilities under the employment agreement.
For purposes of the employment agreements, “good reason” generally means, subject to certain notice and cure rights, (i) any material reduction in annual base salary or target annual bonus, except any reduction in annual base salary that is proportionate to a reduction of base salaries affecting substantially all other executive officers of the Company; (ii) any material reduction in executive’s responsibilities, positions, duties or authority; (iii) the relocation of executive’s primary office to a location more than twenty-five (25) miles from the executive’s primary office as of the date of the employment agreement; or (iv) the Company’s breach of a material provision of the employment agreement.
Clawback Policy
We adopted a compensation recovery policy that is compliant with the listing requirements of Nasdaq.
Director Compensation
None of our non-employee directors received cash compensation from us during 2023. Dr. Rajagopalan does not receive compensation for his service as a director. His compensation for service as an executive officer during 2023 is disclosed in the 2023 Summary Compensation Table and related narrative disclosure.
In March 2023, Mr. Will received an option to purchase 11,649 shares of our common stock and Mr. Bradley and Mses. Barnes and Schulman each received an option to purchase 9,319 shares of our common stock. Each of these options was granted with an exercise price of $8.18 per share and vests in 36 equal monthly installments following March 16, 2023, subject to continued service with us on each applicable vesting date. In August 2023, Mr. Will received (i) an option to purchase 3,205 shares of our common stock, with an exercise price of $11.21 per share, that vests in equal installments on each of the first four anniversaries of the grant date, and (ii) an award of 40,829 RSUs that is subject to the same dual vesting conditions as the RSUs issued to our named executive officers in November 2023, except that the vesting start date of Mr. Will’s dual vesting RSU is August 21, 2023. In November 2023, Mr. Will received (i) an option to purchase 12,522 shares of our common stock, with an exercise price of $11.21 per share, which vests in equal installments on each of the first four anniversaries of the grant date, and (ii) an award of 159,499 RSUs that is subject to the same dual vesting conditions as the RSUs issued to our named executive officers in November 2023.
156
Table of Contents
2023 Director Compensation Table
The following table sets forth information concerning the compensation of non-employee directors for the year ended December 31, 2023.
Name Stock Awards($)(2) OptionsAward(1)(2)($) Total ($)
Brian Dovey — — —
Marc Elia — — —
Clive Meanwell, M.B., Ch.B, M.D. — — —
Ajay Royan — — —
(1)
Amounts reflect the full grant-date fair value of option awards granted during 2023 computed in accordance with ASC Topic 718, rather than the amounts paid to or realized by the named individual. We provide information regarding the assumptions used to calculate the value of option awards granted through December 31, 2023 in Note [12] to the consolidated financial statements included in this Annual Report on Form 10-K. The assumptions used to estimate the grant date fair value of the option awards granted to our non-employee directors in November 2023 were as follows:
Risk-free interest rate 4.62 %
Expected term (in years) 6.25
Expected volatility 59 %
Expected dividend yield 0 %
Grant date fair value $ 6.78
(2)
The table below shows aggregate numbers of option awards (exercisable and unexercisable) and unvested stock awards held by each of our non-employee directors as of December 31, 2023.
Name OptionsAward(#) StockAwards(#)
Brian Dovey(2) — —
Marc Elia — —
Clive Meanwell, M.B., Ch.B, M.D. — —
Ajay Royan — —
(1)
Includes 186,393 options that are held in the name of a trust for the benefit of a family member.
(2)
Mr. Dovey ceased to serve as a member of our Board of Directors upon his passing on August 27, 2023.
Effective upon the effectiveness of the registration statement relating to our IPO, we adopted and our stockholders approved a compensation program for our non-employee directors under which each non-employee director will receive the following amounts for their services on our board of directors:
•
Upon the director’s initial election or appointment to our board of directors that occurs after our IPO, an option to purchase 45,000 shares of our common stock;
•
If the director has served on our board of directors for at least six months as of the date of an annual meeting of stockholders and will continue to serve as a director immediately following such meeting, an option to purchase 22,500 shares of our common stock on the date of the annual meeting;
•
An annual cash retainer fee of $43,500;
157
Table of Contents
•
If the director serves as chair on a committee of our board of directors, an additional annual cash retainer fee as follows:
•
Chair of the board: $35,000
•
Chair of the audit committee: $20,000
•
Audit committee member other than the chair: $10,000
•
Chair of the compensation committee: $15,000
•
Compensation committee member other than the chair: $7,500
•
Chair of the nominating and corporate governance committee: $10,000
•
Nominating and corporate governance committee member other than the chair: $5,000
Director fees under the program will be earned on a quarterly basis based on a calendar quarter and shall be paid in cash by the Company in arrears not later than the fifteenth day following the end of each calendar quarter; provided that the amount of each payment will be prorated for any portion of a quarter that a director is not serving on our board and no fee will be payable in respect of any period prior to the effective date of the registration statement on Form S-1 filed in connection with our IPO.
Stock options granted to our non-employee directors under the program will have an exercise price equal to the fair market value of our common stock on the date of grant, as determined under the 2024 Plan (or another applicable equity plan) and will expire not later than ten years after the date of grant. The stock options granted upon a director’s initial election or appointment will vest annually over three years. The stock options granted annually to directors will vest in a single installment on the earlier of the date of the next annual meeting of shareholders or the first anniversary of the date of grant, subject to continued service through such vesting date. In addition, all unvested stock options will vest in full upon the occurrence of a sale of the Company.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance Under Equity Compensation Plans
As of December 31, 2023, we had no equity compensation plans or individual compensation arrangements under which our equity securities were authorized for issuance.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 15, 2024 with respect to the beneficial ownership of our common stock by:
•
each person, or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding shares of common stock;
•
each of our named executive officers;
•
each of our directors; and
•
all of our executive officers and directors as a group.
The number of shares beneficially owned by each stockholder is determined in accordance with the rules issued by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. Except as indicated in the footnotes below, we believe, based on the information furnished to us, that the individuals and entities named in the table below have sole voting and investment power with respect to all shares of common stock beneficially owned by them, subject to any community property laws.
158
Table of Contents
Percentage ownership of our common stock is based on 47,878,269 shares of our common stock outstanding as of March 15, 2024 . In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, shares of common stock subject to options, RSUs, warrants or other rights held by such person that are currently exercisable or vested, or will become exercisable or vest within 60 days of March 15, 2024 are considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person.
Unless noted otherwise, the address of all listed stockholders is c/o Fractyl Health, Inc., 3 Van de Graaff Drive, Suite 200, Burlington Massachusetts 01803.
Shares Beneficially Owned
Name of Beneficial Owner Number Percentage
5% or Greater Stockholders
Entities affiliated with General Catalyst(3) 4,884,186 10.2 %
Entities affiliated with Bessemer Venture Partners(4) 4,770,901 10.0 %
Entities affiliated with Domain Associates, L.L.C.(5) 4,003,135 8.4 %
Entities affiliated with Maverick Capital (6) 3,458,799 7.1 %
Named Executive Officers and Directors
Timothy Kieffer, Ph.D.(8) 7,377 *
Samuel Conaway — —
Entities affiliated with Clive Meanwell, M.B., Ch.B., M.D.(12) 277,890 *
* Represents beneficial ownership of less than 1%.
(1)
Consists of (a) 5,160,301 shares of common stock held by Mithril LP and (b) 1,251,900 shares of common stock held by Mithril II LP. Mithril GP LP is the general partner of Mithril LP and Mithril GP LP may be deemed to have shared voting, investment and dispositive power with respect to the securities held by Mithril LP. Mithril II UGP LLC is the general partner of Mithril II GP LP, which is the general partner of Mithril II LP and each of Mithril II UGP LLC and Mithril II GP LP may be deemed to have shared voting, investment and dispositive power with respect to the securities held by Mithril II LP. Ajay Royan is the authorized person of Mithril GP LP and is the sole managing member of Mithril II UGP LLC. Ajay Royan and Peter Thiel are the members of the investment committees of Mithril GP LP and Mithril II GP LP, respectively. Each of the investment committees makes all investment decisions with respect to the shares held by each of Mithril LP and Mithril II LP, respectively, and may be deemed to have shared voting, investment and dispositive power with respect to the securities held by each of Mithril LP and Mithril II LP. The address of the principal offices of each of these entities is c/o Mithril Capital Management LLC, 111 Congress Avenue, Suite 500, Austin, TX 78701.
(2)
Based on a Schedule 13G filed on February 16, 2024 and information known to the Company. Consists of (i) 4,673,870 shares of common stock for which CVF, LLC has shared voting power and shared dispositive power; (ii) 4,673,870 shares of common stock for which HCC Manager LLC has shared voting power and shared dispositive power; and (iii) 870,799 shares of common stock issuable upon exercise of the July 2023 warrants at an assumed exercise price of $12.00, HCC Manager LLC, manager of CVF, LLC, exercises voting and investment power with respect to the shares held by CVF, LLC. The address of CVF, LLC is 222 N. LaSalle Street, Suite 2000, Chicago, IL 60601.
(3)
Based on a Schedule 13G filed on February 16, 2024. Consists of (i) 4,884,186 shares of common stock for which General Catalyst GP V, LLC, or GCGPV, has shared voting power and shared dispositive power; (ii) 4,884,186 shares of common stock for which General Catalyst Partners V, L.P., or GCGV GPLP, has shared voting power and shared dispositive power; (iii) 4,884,186 for which General Catalyst Group V, L.P., or GCGV, has shared voting
159
Table of Contents
power and shared dispositive power; and (iv) 4,884,186 for which GC Entrepreneurs Fund V, L.P., or GCEV (and, together with GCGPV, GCGV FPLP, and GCGV, the Reporting Persons) has shared voting power and shared dispositive power. GCGPV is the general partner of GCGV FPLP, which is the general partner of GCGV and GCEV. GCGPV is controlled by a group of three or more individuals, or the Managing Directors, having shared voting and dispositive control over the shares held by GCGV and GCEV. Each of the Managing Directors disclaims beneficial ownership of the securities held by GCGV and GCEV except to the extent of his or her pecuniary interest therein, if any. GCGV is the record owner of 4,784,323 shares and GCEV is the record owner of 99,863 shares (collectively, the “Record Shares”). By virtue of their relationship as affiliated entities who have overlapping general partners and managing directors, each Reporting Person may be deemed to share the power and direct the disposition and vote of the Record Shares. Both GCGMH LLC and GCGPV are controlled by a group of three or more individuals, or the Managing Directors, having shared voting and dispositive control over the shares held by GC V and GCEV. Under the so-called “rule of three,” because voting and dispositive decisions are made by a majority of both GCGMH LLC and GCGPV Managing Directors, no one of the Managing Directors is deemed to be a beneficial owner of the Issuer’s securities held by GCGV and GCEV. The principal business address of the foregoing entities and persons is 20 University Road, Suite 450, Cambridge, MA 02138.
(4)
Consists of (i) 1,526,689 shares of common stock held of record by Bessemer Venture Partners VII L.P. (BVP VII), (ii) 667,924 shares of common stock held of record by Bessemer Venture Partners VII Institutional L.P. (BVP VII Institutional) and (iii) 2,576,288 shares of common stock held of record by BVP VII Special Opportunity Fund L.P. (BVP SOF, and together with BVP VII and BVP VII Institutional, the BVP Entities). Deer VII & Co. L.P. (Deer VII L.P.) is the general partner of the BVP Entities. Deer VII & Co. Ltd. (Deer VII Ltd.) is the general partner of Deer VII L.P. Robert P. Goodman, David Cowan, Jeremy Levine, Byron Deeter and Robert M. Stavis are the directors of Deer VII Ltd. and hold the voting and dispositive power for the BVP Entities. Investment and voting decisions with respect to the shares held by the BVP Entities are made by the directors of Deer VII Ltd. acting as an investment committee. The address of each of these entities is c/o Bessemer Venture Partners, 1865 Palmer Ave., Suite 104, Larchmont, NY 10538.
(5)
Consists of 3,973,653 shares of common stock held by Domain Partners VIII, L.P. (Domain VIII) and 29,482 shares of common stock held by DP VIII Associates, L.P. (DP VIII). The managing members of One Palmer Square Associates VIII, L.L.C. share voting and investment power with respect to shares beneficially owned by Domain VIII and DP VIII. The address of Domain VIII and DP VIII is 103 Carnegie Center, Suite 300, Princeton, NJ 08540.
(6)
Consists of (i) 944,869 shares of common stock held by Maverick Fund USA, Ltd.; (ii) 277,890 shares of common stock held by Maverick Growth Investments, LLC; (iii) 444,582 shares of common stock held by Maverick Holdings L, LLC; (iv) 435,399 shares of common stock issuable to Maverick Designated Investments Fund, L.P. upon exercise of the July 2023 warrants at an assumed exercise price of $12.00 and (v) 435,399 shares of common stock issuable to Maverick Growth Fund, L.P. upon exercise of the July 2023 warrants at an assumed exercise price of $12.00. The address of each of these entities is c/o Maverick Capital, Ltd., 1900 N. Pearl Street, 20th Floor, Dallas, TX 75201.
(7)
Consists of (i) 663,093 shares of common stock held by Harith Rajagopalan, (ii) 310,809 shares of common stock held by various family trusts for which Dr. Rajagopalan serves as the Investment Advisor and, as a result, exercises voting and dispositive power with respect to such shares, and (iii) 1,938,768 shares of common stock underlying options exercisable within 60 days from March 15, 2024.
(8)
Consists of 7,377 shares of common stock underlying options exercisable within 60 days from March 15, 2024.
(9)
Consists of (i) 477,616 shares of common stock held by various family trusts for which Jay D. Caplan serves as the Investment Advisor and, as a result, exercises voting and dispositive power with respect to such shares, and (ii) 473,500 shares of common stock underlying options exercisable within 60 days from March 15, 2024.
(10)
Consists of (i) 186,393 shares of common stock underlying options exercisable within 60 days from March 15, 2024 held of record by the Hillcrest Irrevocable Trust, where Sen. Bradley serves as sole trustee, and (ii) 223,457 shares of common stock underlying options exercisable within 60 days from March 15, 2024.
(11)
Consists of 944,827 shares of common stock held by M28 Capital Master Fund LP, or M28 Capital, and 444,624 shares of common stock held by Sparviero LP. Marc Elia, a member of our Board of Directors, is a managing member of M28 Capital Fund GP LLC, the general partner of M28 Capital and Sparviero LP, and, as a result, may be deemed to share voting and investment power with respect to the shares held by each. Mr. Elia disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. The address of M28 Capital and Sparviero LP is 700 Canal Street, 2nd Floor, Stamford, Connecticut 06902.
160
Table of Contents
(12)
Consists of 277,890 shares of common stock held by Population Health Capital Partners II, L.P., or PHPII. Clive Meanwell, M.B., Ch.B., M.D., a member of our Board of Directors, is the Founder of Population Health Partners GP, LLC, the general partner of PHPII, and, as a result, may be deemed to share voting and investment power with respect to the shares held by PHPII. Dr. Meanwell disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. The address of PHPII is 50 Mountaintop Road, Bernardsville, New Jersey 07924.
(13)
Consists of 131,723 shares of common stock underlying options exercisable within 60 days from March 15, 2024.
(14)
Consists of 206,951 shares of common stock underlying options exercisable within 60 days from March 15, 2024.
(15)
Consists of (i) 9,205,252 shares of common stock, and (iii) 3,884,142 shares of common stock underlying options exercisable within 60 days from March 15, 2024.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The following includes a summary of transactions since January 1, 2022 to which we have been a party in which the amount involved exceeded or will exceed $120,000, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock, or 5% Security Holders, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described in Part III, Item 11. Executive Compensation. We also describe below certain other transactions with our directors, executive officers and stockholders.
Related Party Agreements in Effect Prior to Our IPO
July 2023 Warrants
In July 2023, we issued warrants to purchase common stock to lenders under our 2022 Convertible Notes for a variable number of shares based on the principal amount of $20.9 million. The July 2023 warrants have an exercise price, at the holders’ choice, of (a) $17.9927 per share, (b) the lowest original issue price of shares of preferred stock we issue in our 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.
CVF, LLC holds 870,799 shares of common stock issuable upon the exercise of the July 2023 warrants at an assumed exercise price of $12.00.
Amended and Restated Investors’ Rights Agreement
In connection with the issuance of our Series F Preferred Stock in June and July 2021, we entered into a Fifth Amended and Restated Investors’ Rights Agreement, or the IRA, with certain holders of our preferred stock, many of which are beneficial holders of more than 5% of our capital stock or are entities with which certain of our directors are affiliated. The IRA imposes certain affirmative obligations on us and also grants certain rights to holders, including certain registration rights with respect to the securities held by them, certain information and observer rights, and certain additional rights. Certain provisions of the IRA have terminated in connection with our IPO.
Amended and Restated Voting Agreement
We were a party to an amended and restated voting agreement with certain of our stockholders, pursuant to which each of our directors was elected to serve as members on our board of directors and, as of the date of this Annual Report on Form 10-K, continue to so serve. Our voting agreement terminated by its terms in connection with the closing of our initial public offering, and members previously elected to our board of directors pursuant to this voting agreement will continue to serve as directors until they resign, are removed or their successors are duly elected by the holders of our common stock. The voting agreement, including its provisions concerning the rights of certain of the holders to designate directors, automatically terminated upon the consummation of our IPO.
Amended and Restated Right of First Refusal and Co-Sale Agreement
In connection with the issuance of our Series F Preferred Stock in June and July 2021, we entered into a Fifth Amended and Restated Right of First Refusal and Co-Sale Agreement, or the ROFR and Co-Sale Agreement, with certain
161
Table of Contents
of our preferred stockholders, many of which are beneficial holders of more than 5% of our capital stock or are entities with which certain of our directors are affiliated. The ROFR and Co-Sale Agreement, among other things: (a) grants our investors certain rights of first refusal and co-sale with respect to proposed transfers of our securities by certain preferred stockholders; and (b) grants us certain rights of first refusal with respect to proposed transfers of our securities by certain preferred stockholders.
The ROFR and Co-Sale Agreement automatically terminated immediately prior to the completion of our IPO.