FINCH THERAPEUTICS GROUP, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the section titled "Risk Factors" set forth in Part I, Item 1A of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section titled "Special Note Regarding Forward-Looking Statements." You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report on Form 10-K.
Overview
We are a microbiome technology company with a portfolio of intellectual property
and microbiome assets. Our objectives are to realize the value of our
intellectual property estate through licensing our technology to collaboration
partners and enforcing our patent rights against infringing parties and, in
certain cases, to generate additional data on selected product candidates
through academic collaborations. We have a robust intellectual property estate
reflecting our pioneering role in the microbiome therapeutics field, including
more than 70 issued
Until
We were previously developing CP101 as an orally administered complete
microbiome therapeutic designed for the prevention of recurrent CDI. In
We have also used our Human-First Discovery platform to develop FIN-211, an
investigational microbiome candidate designed to address the gastrointestinal
and behavioral symptoms of autism spectrum disorder, or ASD. Following a
strategic review of our pipeline, on
In
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became effective on
We will also continue to explore opportunities to realize the value of our
intellectual property and microbiome assets through strategic partnerships and
academic collaborations. These include our licensing relationship with the
On each of
Our recent business initiatives have been focused primarily on organizing and
staffing our company and establishing and protecting our intellectual property
portfolio. Until
Since our inception, we have incurred significant operating losses. Our net
losses were
Although we believe strongly in the value of our pioneering intellectual property portfolio and the merits of our current litigation activities relating to those assets, we may never succeed in realizing the value of our intellectual property estate and other assets and, even if we do, we may never generate revenue that is significant or large enough to achieve profitability.
As a result, we may need additional funding to support our operating activities as we seek to realize value from our intellectual property estate and other assets. Until such time, if ever, that we can generate substantial revenue, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including collaborations, licenses or similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed or on favorable terms, if at all. If we are unable to obtain funding as needed, we may decide to pursue a dissolution and liquidation.
Components of Our Results of Operations
Revenue
We have no products approved for commercial sale. We have not generated any
revenue from product sales and do not expect to generate any revenue from the
sale of licensed products for the foreseeable future. Our revenue to date has
been generated primarily through collaboration and license agreements. We
recognize revenue over our expected performance period under each agreement. We
expect that our revenue for the next several years, if any, will be derived from
enforcement and out-licensing of our intellectual property estate. Additionally,
we will continue to earn royalties under our Asset Purchase Agreement, dated as
of
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Collaboration and License Agreement with Takeda
In
In
In connection with entry into the Takeda Agreement, we received a one-time,
upfront payment from Takeda in the amount of
Agreements with OpenBiome
We have historically collaborated with OpenBiome under several agreements related to, among other things, the license of various technology and intellectual property rights, and the supply of certain materials, as further described below.
On
Also on
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Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for research activities, including discovery and development efforts. We expense research and development costs as incurred, which include:
•
salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;
•
upfront, milestone and maintenance fees incurred under license, acquisition and other third-party agreements;
•
costs of laboratory supplies and acquiring, developing and manufacturing study materials;
•
facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs; and
•
costs of outside consultants engaged in research and development functions, including their fees and related travel expenses
Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our consolidated financial statements as prepaid or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed. We do not allocate certain employee-related costs, external costs directly related to our Human First Discovery platform, and other indirect costs to specific research and development programs because these costs are deployed across multiple product programs and, as such, are classified as costs of our platform research.
Until
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include professional fees for legal, patent, accounting, auditing, tax and consulting services, travel expenses and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We expect that our general and administrative expenses will decrease in the foreseeable future due to our reduced headcount. We expect to continue to incur expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax compliance services, director and officer insurance costs, and investor and public relations costs.
Impairment of
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To conduct impairment tests of goodwill, the fair value of the Company's single reporting unit is compared to its carrying value. If the reporting unit's carrying value exceeds its fair value, the Company records an impairment loss to the extent that the carrying value of goodwill exceeds its fair value.
Restructuring Expense
Restructuring expense consists of costs directly incurred as a result of restructuring initiatives, and includes one-time severance payments, healthcare coverage, outplacement services and related expenses.
Total Other Income (Expense), Net
Other Income (Expense), Net
Other income (expense), net consists of sublease income as well as realized gains and losses on foreign exchange.
Interest Income (Expense)
Interest income primarily consists of interest earned on our cash and cash
equivalents. Interest expense consists primarily of interest on borrowings under
our Loan and Security Agreement, dated as of
(Loss) Gain on Disposal of Fixed Assets
(Loss) Gain on disposal of fixed assets relates to the gain we realized when we
sold certain lab equipment during the years ended
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
YEAR ENDED
DECEMBER 31,
2022 2021
REVENUE:
Collaboration revenue $ 861 $ 18,532
Total revenue 861 18,532
OPERATING EXPENSES:
Research and development (57,893 ) (57,279 )
General and administrative (38,088 ) (21,238 )
Impairment of goodwill (18,057 ) -
Restructuring expense (2,416 ) -
Total operating expenses (116,454 ) (78,517 )
Net operating loss (115,593 ) (59,985 )
OTHER INCOME (EXPENSE), NET:
Gain on extinguishment of PPP Loan - 1,827
Interest (expense) income, net 252 22
(Loss) gain on disposal of fixed assets, net (7 ) 28
Other income (expense), net 702 (52 )
Total other income, net 947 1,825
Net loss $ (114,646 ) $ (58,160 )
Revenue
Revenue of
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revenue in 2022, in addition to Takeda's election in
Research and Development Expenses
The following table summarizes our research and development expenses for the
years ended
YEAR ENDED DECEMBER 31,
Increase
2022 2021 (Decrease)
CDI $ 16,524 $ 16,779 $ (255 )
Inflammatory Bowel Diseases (IBD) 1,157 6,328 (5,171 )
Autism Spectrum Disorder (ASD) 5,038 6,842 (1,804 )
Hepatitis B (HBV) 260 3,172 (2,912 )
Platform 25,490 21,593 3,897
Unallocated 9,424 2,565 6,859
$ 57,893 $ 57,279 $ 614 Research and development expenses for the year ended
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
years ended
YEAR ENDED DECEMBER 31,
2022 2021 Increase
Personnel expenses (including stock-based
compensation) $ 11,969 $ 11,729 $ 240
Facilities and supplies 3,946 327 3,619
Professional fees 13,517 5,459 8,058
Other expenses 8,656 3,723 4,933
$ 38,088 $ 21,238 $ 16,850 General and administrative expenses were
Other Income, Net
Total other income, net was
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Paycheck Protection Program of the CARES Act, or the PPP Loan, in full in the
amount of
Impairment of
For the year ended
Restructuring Expense
Restructuring expense for the year ended
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have not recognized any product revenue and have
incurred operating losses and negative cash flows from our operations. We do not
currently expect to progress any product candidate through clinical trials or
commercial approval and we do not currently expect to generate any revenue from
product sales. We expect that our revenue for the next several years, if any,
will be derived from enforcement and out-licensing of our intellectual property
estate. We have funded our operations primarily through equity financings, the
Loan Agreement, and from collaboration revenue. We have raised an aggregate of
approximately
Cash Flows
The following table summarizes our cash flows for the years ended
YEAR ENDED
DECEMBER 31,
2022 2021
Net cash used in operating activities $ (74,851 ) $ (67,133 )
Net cash used in investing activities (2,182 ) (15,921 )
Net cash provided by financing activities 14,873 119,110
Net (decrease) increase in cash and cash equivalents,
and restricted cash $ (62,160 ) $ 36,056
Operating Activities
During the year ended
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During the year ended
Investing Activities
During the years ended
Financing Activities
During the year ended
During the year ended
Funding Requirements
As of
Material Cash Requirements
The following table summarizes our contractual obligations as of
Payments Due by Period
Less than 1 1 to 3 4 to 5 More than
Total Year Years Years 5 Years
Lease commitments
15,000 - 15,000 - -
License agreements 565 25 140 135 265
Total $ 68,147 $ 6,134 $ 27,822 $ 11,536 $ 22,655 The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts.
Lease Commitments
We have entered into operating leases for rental space in
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Loan Payable
In
License Agreements
We have also entered into license agreements under which we are obligated to
make milestone and royalty payments and incur annual maintenance fees. We owe an
annual maintenance fee of
Purchase and Other Obligations
We have entered into contracts in the normal course of business with CROs and other third parties for preclinical studies, clinical trials and testing and manufacturing services. These contracts generally do not contain minimum purchase commitments and are cancelable by us upon prior written notice. Payments due upon cancellation generally consist of payments for services provided or expenses incurred, including non-cancelable obligations of our service providers up to one year after the date of cancellation. These payments are not included in the table above as the amount and timing and such payments are not known.
Critical Accounting Estimates
Our management's discussion and analysis of 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
While our significant accounting policies are described in greater detail in Note 2 to our consolidated financial statements appearing in this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
To date, our revenues have consisted of payments received related to our
licensing agreement with Takeda, which was terminated in 2022. We apply the
revenue recognition guidance in accordance with
To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, we perform the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in
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the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect consideration we are entitled to in exchange for the goods or services we transfer to our customer. All variable consideration, including milestones and royalties, are constrained until the cumulative revenue related to the consideration is no longer probable of reversal.
The consideration allocated to each performance obligation is recognized as revenue when control is transferred for the related goods or services. For performance obligations which consist of licenses and other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. We currently measure progress according to the expenditure of research and development efforts, based on costs incurred, as this is the best indicator of performance. Upfront payments and fees are recorded as deferred revenue upon receipt or when due until we satisfy our obligations under these arrangements. Amounts are recorded as accounts receivable when our right to consideration is unconditional.
To conduct impairment tests of goodwill, the fair value of the reporting unit is compared to its carrying value. If the reporting unit's carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value.
In connection with the preparation of the financial statements for the third
quarter of 2022, management identified factors that could trigger impairment
including a sustained decline in the Company's stock price throughout the third
quarter of 2022, resulting in a reduction of the Company's market capitalization
below net book value. As a result of the triggering event identified, management
concluded that this impairment indicator required the Company to perform an
interim impairment test of goodwill and IPR&D as of
In connection with its preparation of the financial statements for the year
ended
To conduct impairment tests of IPR&D, the fair value of the IPR&D asset is compared to its carrying value. If the carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of the IPR&D asset exceeds its fair value. We estimate the fair value for our IPR&D asset using discounted cash flow valuation models, which require the
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use of significant estimates and assumptions, including, but not limited to,
estimating the timing of and expected costs to complete the in-process projects,
projecting regulatory approvals, estimating future cash flows from product sales
resulting from completed projects and in-process projects, and developing
appropriate discount rates. Our triggering event assessment as of
We expect given management's decision to discontinue our Phase 3 clinical trial of CP101 in recurrent CDI and focus on realizing the value of our intellectual property estate and other assets, that the value of our IPR&D asset will be impaired in the first quarter of 2023, as the value of the asset is derived from the estimated future cash flows associated with CP101.
The assumptions related to the development of fair value for IPR&D could deviate materially from actual results and forecasts used to support the asset's carrying value and may change in the future, which could result in impairment charges that would adversely affect financial results of operations. There can be no assurance that, at the time future impairment tests are completed, a material impairment charge to IPR&D will not be recorded.
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. 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. 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.
Recently Issued Accounting Pronouncements
See Note 2 to our annual consolidated financial statements within this Annual Report for a description of recent accounting pronouncements applicable to our financial statements.
Emerging Growth Company Status and Smaller Reporting Company Status
We are an "emerging growth company," or EGC, under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Section 107 of the JOBS Act provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of delayed adoption of new or revised accounting standards and, therefore, we will be subject to the same requirements to adopt new or revised accounting standards as private entities.
As an EGC, we may take advantage of certain exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an EGC:
•
we may present only two years of audited financial statements and only two years of related Management's Discussion and Analysis of Financial Condition and Results of Operations;
•
we may avail ourselves of the exemption from providing an auditor's attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
•
we may avail ourselves of the exemption from complying with any requirement that
may be adopted by the
•
we may provide reduced disclosure about our executive compensation arrangements; and
•
we may not require nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments.
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We will remain an emerging growth company until
We are also a ''smaller reporting company,'' meaning that the market value of
our stock held by non-affiliates is less than
If we are a smaller reporting company at the time we cease to be an EGC, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to EGCs, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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