Fractyl Health(GUTS) - 2023 Q4 - Annual Report

Part I Business Fractyl Health develops disease-modifying therapies for type 2 diabetes and obesity, with lead product Revita and gene therapy platform Rejuva - Fractyl Health is a metabolic therapeutics company developing disease-modifying therapies for type 2 diabetes (T2D) and obesity by targeting organ-level root causes[30] - The lead product, Revita DMR System, is an outpatient procedural therapy for duodenal dysfunction, with CE Mark in Europe and a pivotal U.S. study, Revitalize-1, underway[31][32] - The company is developing Rejuva, a novel pancreatic gene therapy platform, with first candidate RJVA-001 for T2D, targeting a first-in-human study in H1 2025[34] Development Pipeline and Anticipated Milestones | Product | Indication | Status | Anticipated Milestones | | :--- | :--- | :--- | :--- | | Revita | Weight Maintenance (Remain-1) | Pivotal (2024) | IDE approved Q1 2024; Study initiation H2 2024 | | | Insulin-Treated T2D (Revitalize-1) | Pivotal | Complete enrollment H1 2024; Topline data Q4 2024 | | | CE Mark (Germany Registry) | Launch | Quarterly open label data updates ongoing | | Rejuva | T2D (RJVA-001) | Preclinical | Complete IND-enabling studies H2 2024; Initiate FIH study H1 2025 | | | Obesity | Preclinical | Candidate nomination H2 2024 | Commercialization Strategy Fractyl Health is piloting Revita in Germany and plans a targeted U.S. 'hub-and-spoke' launch, leveraging existing infrastructure for Rejuva - The company initiated a limited commercial pilot for Revita in Germany, holding a CE Mark and NUB reimbursement authorization[218] - In the U.S., Revita received Breakthrough Device designation, with a PMA submission planned for H1 2025 after the Revitalize-1 study[219] - The U.S. go-to-market strategy is a targeted 'hub-and-spoke' model, focusing on centers of excellence and specialized medical professionals[222] - The Rejuva platform is designed to leverage Revita's commercial footprint, including its console system and physician base, for rapid commercialization[226] Intellectual Property Fractyl Health protects its technology through 23 issued U.S. and 71 issued foreign patents, 41 registered trademarks, and trade secrets Owned Patent Portfolio Summary (as of March 15, 2024) | Category | U.S. Issued | U.S. Pending | Foreign Issued | Foreign Pending | | :--- | :--- | :--- | :--- | :--- | | Total Portfolio | 23 | 25 (+13 provisional) | 71 | 26 | | Revita-Specific | 18 | 17 (+3 provisional) | 61 | 19 | | Rejuva-Specific | 0 | 1 (+9 provisional) | 0 | 2 | - Owned issued U.S. patents are expected to expire between January 2032 and May 2036, with foreign patents expiring between January 2032 and September 2038[233] - The company owns 41 registered trademarks and 10 pending applications for brands like FRACTYL, REVITA, and REJUVA[239] - The company also relies on trade secrets, know-how, and confidentiality agreements to protect proprietary information, especially for software[239][240] Government Regulation Fractyl Health's products are subject to extensive regulation by the FDA (PMA for Revita, BLA for Rejuva) and EU (CE Mark), along with various healthcare laws - In the U.S., Revita is regulated as a Class III medical device, requiring Premarket Approval (PMA) from the FDA[254] - The Rejuva gene therapy candidates are expected to be regulated as combination biologic/device products, likely requiring a single Biologics License Application (BLA)[270][272] - In the European Union, medical devices must comply with the Medical Devices Regulation (MDR), requiring a CE Mark for market access[310][312][314] - The company is subject to numerous healthcare laws, including the federal Anti-Kickback Statute, False Claims Act, and Physician Payments Sunshine Act[357][361] Risk Factors The company faces significant financial, regulatory, clinical, manufacturing, commercial, and intellectual property risks, alongside intense competition and stringent healthcare regulations - Financial Risks: The company has a history of significant net losses, reaching $77.1 million in 2023, and will require substantial additional capital to fund operations[393][397] - Regulatory & Clinical Risks: The business heavily depends on Revita's success, facing lengthy and unpredictable regulatory approval processes and uncertain clinical trial outcomes[417][432][492] - Manufacturing & Supply Risks: Reliance on third-party and sole-source suppliers for Revita and Rejuva components increases supply disruption risks[555][563] - Commercial & Market Risks: The company faces significant competition and uncertainty in gaining market acceptance and securing adequate reimbursement from payors[520][457] - Intellectual Property Risks: Success depends on obtaining, maintaining, and protecting intellectual property, as patents may be challenged, invalidated, or circumvented[601][602] Unresolved Staff Comments The company reports no unresolved staff comments - None[710] Cybersecurity The company implements a NIST-based cybersecurity risk management program overseen by the Audit Committee, with no material threats identified to date - The company developed a cybersecurity risk management program guided by the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF)[712] - Oversight is provided by the Audit Committee of the Board of Directors, reviewing controls, security systems, and contingency plans[715] - Day-to-day cybersecurity risk management is handled by a management team, including the Director of Information Technology and a Security Officer[719] - No identified cybersecurity threats have materially affected or are reasonably likely to materially affect the company's operations, business strategy, or financial condition[714] Properties The company's headquarters in Burlington, Massachusetts, comprises approximately 78,000 square feet of office and laboratory space under a lease expiring in June 2034 - The company's corporate headquarters in Burlington, Massachusetts, leases approximately 78,000 square feet of office and laboratory space[721] - The lease for the Burlington facility expires in June 2034[721] Legal Proceedings The company is not subject to any material legal proceedings - The company is not subject to any material legal proceedings[722] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[723] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Fractyl Health's common stock began trading on Nasdaq under 'GUTS' in February 2024, raising $100.3 million net from its IPO, with no plans for dividends - The company's common stock began trading on the Nasdaq Global Market under symbol 'GUTS' on February 2, 2024, with approximately 101 holders of record as of March 15, 2024[726][727] - The company has never paid cash dividends and intends to retain earnings for business development[728] - The IPO on February 6, 2024, raised approximately $98.9 million in net proceeds, with an additional $1.4 million from underwriters' option in March 2024[734][735] - In 2023, the company issued unregistered securities, including warrants to lenders and 1,833,574 stock options and 604,509 RSUs to employees and directors[729][730][732] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations The company's net loss increased to $77.1 million in 2023 due to higher R&D and negative fair value changes, with $100.3 million IPO proceeds expected to fund operations through 2025 Consolidated Results of Operations (in thousands) | | Year Ended December 31, | Change | | | :--- | :--- | :--- | :--- | :--- | | | 2023 | 2022 | Amount | % | | Revenue | $120 | $— | $120 | 100.0% | | Loss from operations | $(50,836) | $(49,385) | $(1,451) | 2.9% | | Other income (expense), net | $(26,255) | $2,932 | $(29,187) | (995.5%) | | Net loss | $(77,091) | $(46,453) | $(30,638) | 66.0% | - Research and development expenses increased by $3.7 million (10.7%) in 2023, driven by higher personnel, stock-based compensation, medical affairs, clinical study, and facilities costs[785][788] - Selling, general and administrative expenses decreased by $2.2 million (14.6%) in 2023, mainly due to a $2.7 million IPO cost write-off in 2022 not recurring[789] - Other income (expense), net, swung negatively by $29.2 million, primarily due to a $19.4 million loss from convertible notes and a $6.8 million loss from warrant liabilities fair value changes[791][792][793] - As of December 31, 2023, the company had $33.2 million in cash, with $100.3 million net proceeds from its February/March 2024 IPO expected to fund operations through 2025[796][798][799] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate, credit, foreign currency, and inflation risks, though none have had a material impact to date - Interest Rate Risk: The company's 2023 Notes have a floating interest rate, but a 10% change in the prime rate is not expected to be material[839] - Credit Risk: Cash and cash equivalents are held at a few financial institutions, with deposits exceeding federally insured limits[840] - Foreign Currency Risk: Risk is currently low as business is conducted almost entirely in U.S. dollars[841] - Inflation Risk: While not material to date, high future inflation could significantly increase operating expenses[842] Financial Statements and Supplementary Data This section refers to the company's audited consolidated financial statements and related notes, appended starting on page F-1 - The company's audited consolidated financial statements for December 31, 2023 and 2022, and the independent auditor's report, are included in Part IV, Item 15[843][943] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[844] Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2023, with no material changes to internal controls identified in Q4 2023 - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level[846] - As a newly public company, this Annual Report does not include a management assessment or auditor attestation on internal control over financial reporting[847] - No changes in internal control over financial reporting during Q4 2023 have materially affected or are reasonably likely to materially affect internal controls[848] Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q4 2023 - During the three months ended December 31, 2023, no director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement[850] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[851] Part III Directors, Executive Officers and Corporate Governance This section details the company's executive officers and directors, including CEO Harith Rajagopalan, and outlines its corporate governance, including a code of ethics and an independent audit committee - The company's leadership includes co-founders Harith Rajagopalan, M.D., Ph.D. (CEO) and Jay D. Caplan (President & CPO)[854][855] - The Board of Directors, chaired by Allan R. Will, includes members with diverse backgrounds such as Senator William W. Bradley[862][868][869][870] - A code of business conduct and ethics has been adopted, applying to all directors, officers, and employees[873] - The audit committee consists of Kelly Barnes (Chair), Marc Elia, and Allan R. Will, with Ms. Barnes designated as the audit committee financial expert[874] Executive Compensation In 2023, named executive officers received significant compensation, largely in equity, with new employment agreements and a non-employee director compensation program adopted post-IPO 2023 Summary Compensation | Name | Position | Total Compensation ($) | Salary ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Harith Rajagopalan | CEO | 3,561,774 | 550,000 | 2,430,014 | 267,990 | 313,500 | | Timothy Kieffer | CSO | 3,462,288 | 92,438 | — | 3,321,650 | 23,200 | | Jay D. Caplan | President & CPO | 2,873,373 | 400,000 | 2,097,678 | 220,507 | 154,000 | - Annual cash bonuses for 2023 were based on achieving corporate goals, including Revitalize-1 and Rejuva progress, and individual performance[880] - In 2023, the company granted stock options and dual-vesting RSUs to named executive officers as long-term incentive compensation[881][884] - Effective upon the IPO, base salaries increased for Dr. Rajagopalan ($610,000), Mr. Caplan ($475,000), and Dr. Kieffer ($225,000), with new performance-based options granted[894][895] - A new non-employee director compensation program was adopted post-IPO, including annual cash retainers and initial and annual stock option grants[907][909] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 15, 2024, executive officers and directors beneficially owned 25.3% of common stock, with several institutional investors holding over 5% - As of March 15, 2024, all current executive officers and directors as a group beneficially owned 13,089,394 shares, representing 25.3% of outstanding common stock[917] Beneficial Ownership of 5% or Greater Stockholders (as of March 15, 2024) | Beneficial Owner | Shares Beneficially Owned | Percentage | | :--- | :--- | :--- | | Entities affiliated with Mithril | 6,078,868 | 12.7% | | CVF, LLC | 5,544,669 | 11.4% | | Entities affiliated with General Catalyst | 4,884,186 | 10.2% | | Entities affiliated with Bessemer Venture Partners | 4,770,901 | 10.0% | | Entities affiliated with Domain Associates, L.L.C. | 4,003,135 | 8.4% | | Entities affiliated with Maverick Capital | 3,458,799 | 7.1% | | Harith Rajagopalan, M.D., Ph.D. | 2,912,670 | 5.8% | - Ownership percentages are based on 47,878,269 shares of common stock outstanding as of March 15, 2024[915] Certain Relationships and Related Transactions, and Director Independence This section details related party transactions, including warrant issuances and pre-IPO agreements that terminated, and confirms the board's majority director independence - In July 2023, the company issued warrants to purchase common stock to lenders of its 2022 Convertible Notes, including 5% stockholder CVF, LLC[923][924] - Prior to the IPO, the company had Investors' Rights, Voting, and Right of First Refusal and Co-Sale Agreements with preferred stockholders, which terminated upon the IPO[925][926][927] - The company has entered into employment agreements with executive officers and indemnification agreements with all directors and officers[930][931] - The Board has adopted a policy for related person transactions and determined that Kelly Barnes, William W. Bradley, Samuel Conaway, Marc Elia, Clive Meanwell, Ajay Royan, Amy W. Schulman, and Allan R. Will are independent directors[932][933] Principal Accountant Fees and Services This section details Ernst & Young LLP fees for 2023 ($1.22 million) and 2022 ($0.89 million), primarily for audit services, with an audit committee pre-approval policy Accountant Fees (in thousands) | Fee Category | 2023 | 2022 | | :--- | :--- | :--- | | Audit Fees | $1,187.5 | $772.9 | | Audit-Related Fees | $— | $— | | Tax Fees | $31.6 | $112.4 | | All Other Fees | $— | $— | | Total | $1,219.1 | $885.3 | - Audit fees consist of fees for the audit of consolidated financial statements and services related to the IPO[936] - The audit committee has a pre-approval policy for all services provided by Ernst & Young LLP[940] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed with the Annual Report on Form 10-K, including corporate governance documents and material contracts - This item provides an index to the Consolidated Financial Statements, which begin on page F-1 of the report[942][943] - A list of exhibits filed includes corporate governance documents, material contracts, and required certifications[945][946][948] Form 10-K Summary The company reports no Form 10-K summary - None[951] Financial Statements Consolidated Balance Sheets As of December 31, 2023, total assets increased to $76.2 million, liabilities to $113.9 million, and cash decreased to $33.2 million, with an accumulated deficit of $346.6 million Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $33,209 | $49,269 | | Total current assets | $35,648 | $51,629 | | Total assets | $76,212 | $60,956 | | Liabilities & Stockholders' Deficit | | | | Total current liabilities | $11,188 | $7,311 | | Notes payable, long-term | $55,152 | $17,760 | | Lease liabilities, long-term | $28,508 | $465 | | Warrant liabilities, long-term | $19,096 | $407 | | Total liabilities | $113,944 | $25,945 | | Accumulated deficit | $(346,616) | $(269,525) | | Total stockholders' deficit | $(325,062) | $(252,319) | Consolidated Statements of Operations and Comprehensive Loss For 2023, the company reported a net loss of $77.1 million, up from $46.5 million in 2022, driven by negative changes in other income/expense and increased R&D costs Consolidated Statement of Operations Data (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Revenue | $120 | $— | | Gross profit | $43 | $— | | Research and development | $38,038 | $34,354 | | Selling, general and administrative | $12,841 | $15,031 | | Loss from operations | $(50,836) | $(49,385) | | Total other income (expense), net | $(26,255) | $2,932 | | Net loss and comprehensive loss | $(77,091) | $(46,453) | | Net loss per share, basic and diluted | $(45.29) | $(31.97) | Consolidated Statements of Cash Flows In 2023, net cash used in operations was $42.8 million, while financing activities provided $27.4 million, resulting in a $15.7 million net decrease in cash Consolidated Statement of Cash Flows Data (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | 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 | | Net decrease in cash, cash equivalents and restricted cash | $(15,745) | $(41,949) | - The $42.8 million cash used in operations in 2023 was driven by a $77.1 million net loss, offset by $31.3 million in non-cash charges, including fair value losses on notes payable and warrant liabilities[827] - Financing activities in 2023 provided $27.4 million, primarily from $28.4 million in net proceeds from the issuance of the 2023 Notes[831]