FRACTYL HEALTH, INC.

Previous wording

We are a metabolic therapeutics company focused on pioneering new approaches to the treatment of metabolic diseases, including obesity and type 2 diabetes. 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 obesity and T2D.

Current wording

We are a metabolic therapeutics company focused on breaking the pattern of treatment of metabolic diseases, including obesity and type 2 diabetes ("T2D"). 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 obesity and T2D.

Previous wording

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, 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 IPO and debt financings.

Current wording

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, securing related intellectual property rights and conducting discovery, research and development activities for our product candidates. The Revita DMR System ("Revita") is approved in Europe under a Conformitè Europëenne ("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.

Previous wording

We plan to continue to enroll more patients in the Germany Real-World Registry across several centers and will continue to report on clinical, health economic, and patient-relevant outcomes from this study on an ongoing basis. We are planning to disclose additional registry data from a larger number of patients in the first quarter of 2025.

Current wording

On January 31, 2025, we approved a Strategic Reprioritization pursuant to which we are prioritizing our REMAIN-1 pivotal study and advancing Rejuva into first-in-human studies in T2D, and have paused additional investment in our Revita programs for T2D, which consist of the REVITALIZE-1 study and the Germany Real-World Registry study. For the REVITALIZE-1 study, participants with inadequately controlled T2D, who are on at least one glucose lowering agent ("GLA") and previously randomized, will continue to be followed per protocol to 48 weeks. Participants randomized to the sham arm will be offered an opportunity to receive the Revita DMR procedure (crossover) once unblinded. Participants who crossover and undergo the Revita DMR procedure are being followed per protocol. We are following the existing participants in the Germany Real-World Registry per protocol and continue to report on clinical, health economic, and patient-relevant outcomes from this study on an ongoing basis.

Previous wording

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 three and nine months ended September 30, 2024, we incurred net losses of $23.2 million and $43.7 million, respectively. Our net loss was $15.7 million and $57.9 million for the three and nine months ended September 30, 2023, respectively. As of September 30, 2024, we had an accumulated deficit of $390.3 million. As discussed further in Liquidity and Capital Resources—Funding Requirements and Going Concern, substantial doubt exists about our ability to continue as a going concern. The accompanying unaudited interim condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. We expect to continue to incur significant losses for the foreseeable future and we expect these losses to increase substantially if and as we:

Current wording

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 three months ended March 31, 2025 and 2024, we incurred net losses of $23.7 million and $3.3 million, respectively. As of March 31, 2025, we had an accumulated deficit of $439.0 million. As discussed further in Liquidity and Capital Resources—Funding Requirements and Going Concern, substantial doubt exists about our ability to continue as a going concern. The accompanying unaudited interim condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. We expect to continue to incur significant losses for the foreseeable future and we expect these losses to increase substantially if and as we:

Previous wording

Revenue and cost of goods sold during the three months ended September 30, 2024 and 2023 was related to our pilot commercial launch in Germany.

Current wording

Revenue and cost of goods sold during the three months ended March 31, 2024 was related to our pilot commercial launch in Germany. As part of the Strategic Reprioritization, we paused our commercial efforts in Germany in the first quarter of 2025.

Previous wording

Research and development expenses increased by $9.6 million, or 102.6%, during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, primarily due to the advancement made in our Revita and Rejuva programs, increased facilities expenditures, as well as personnel-related expenses. Revita related expenses increased by $4.5 million primarily due to a $4.1 million increase in clinical expenses due to progress made in our Remain-1 and Revitalize-1 studies, as well as a $0.3 million increase in device development effort. Rejuva-related expenditures increased by $1.7 million due to continued development in our Rejuva program, primarily due to a $1.5 million increase in gene therapy research expenses and a $0.2 million increase in device development effort. In addition, allocated facilities expenses increased by $0.9 million as our new office and laboratory space lease in Burlington, MA, commenced on November 1, 2023. Personnel-related expenses, including salaries, bonuses and other compensatory benefits, increased by $1.5 million as a result of the expansion of our workforce and our effort to bring certain clinical and scientific resources in house. In addition, stock-based compensation increased by $1.0 million primarily due to new options and RSUs issued.

Current wording

Research and development expenses increased by $5.0 million, or 34.7%, during the three months ended March 31, 2025 as compared to the three months ended March 31, 2024, primarily due to the advancements made in our Revita and Rejuva programs, as well as personnel-related expenses. Revita related expenses increased by $2.2 million primarily due to a $1.9 million increase in clinical expenses due to progress made in our REMAIN-1 study and a $0.7 million increase in device development and production costs, partially offset by a $0.6 million decrease in collaborative medical research expenditures. Rejuva-related expenditures increased by $2.5 million due to continued development in our Rejuva program, primarily due to a $1.8 million increase in gene therapy research and contract manufacturing expenses as well as a $0.6 million increase in device development effort. Personnel-related expenses, including salaries, bonuses and other compensatory benefits, increased by $2.2 million as a result of our effort to bring certain clinical and scientific resources in house as well as severance expenses related to the Strategic Reprioritization. These expenses were partially offset by decreases in stock-based compensation and facility expenses. The stock-based compensation decrease of $1.4 million was primarily due to more restricted stock units outstanding in the first quarter of 2024 as well as performance-based awards granted in the first quarter of 2024 being recognized under an accelerated method. A reversal of stock compensation expenses was also recognized as a result of the cancelation of unvested awards of employees affected by the Strategic Reprioritization. Our allocated facility expenses decreased by $0.4 million primarily due to the expenses incurred when we moved into our new office and laboratory space in Burlington, MA in the first quarter of 2024.

Previous wording

Other income, net, of $0.6 million during the three months ended September 30, 2024 was primarily attributable to a $2.3 million gain from the change in fair value of warrant liabilities and $0.9 million in net interest income, offset by a $2.6 million loss from the change in fair value of notes payable. Other expense, net, of $1.9 million during the three months ended September 30, 2023 was primarily attributable to a $1.1 million loss from the change in fair value of notes payable and a $1.0 million loss from the change in fair value of warrant liabilities, offset by $0.2 million in net interest income.

Current wording

Other income, net, of $1.0 million during the three months ended March 31, 2025 was primarily attributable to a $0.8 million gain from the change in fair value of warrant liabilities and $0.5 million of net interest income, partially offset by a $0.3 million loss from the change in fair value of the 2023 Notes. Other income, net, of $18.2 million during the three months ended March 31, 2024 was primarily attributable to a $10.4 million gain from the change in fair value of warrant liabilities, a $6.7 million gain from the change in fair value of the 2023 Notes and the 2022 Convertible Notes, as well as a $1.1 million net interest income.

Previous wording

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 our 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.

Current wording

We manage our cash and capital structure to maintain our 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.

Previous wording

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. Under the terms of the credit agreement, 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. As of June 30, 2024, we achieved the defined milestones and elected to extend the first principal payment date to September 30, 2027. In addition, upon any principal payment, we are required to make an additional payment to the Lenders of 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.

Current wording

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. Under the terms of the credit agreement, 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. During 2024, we achieved the defined milestones and elected to extend the first principal payment date to September 30, 2027. In addition, upon any principal payment, we are required to make an additional payment to the Lenders of 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.

Previous wording

As of September 30, 2024, the balance of the 2023 Notes was carried at its fair value of $30.3 million.

Current wording

As of March 31, 2025, the balance of the 2023 Notes was carried at its fair value of $29.4 million.

Previous wording

We expect our expenses to increase in connection with our ongoing research and development activities, particularly as we advance our product candidates. 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. 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. Our product candidates, if approved, may not achieve commercial success. 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, and we will need to obtain substantial additional funds to achieve our business objectives.

Current wording

We expect our expenses to increase in connection with our ongoing research and development activities, particularly as we advance our product candidates. 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, we do not have any products approved for sale and have not generated any revenue from any sources, including product sales. Our product candidates, if approved, may not achieve commercial success. 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, and we will need to obtain additional funds to achieve our business objectives.

Previous wording

Our future success is dependent on our ability to develop product candidates, generate significant revenue, and ultimately upon our ability to attain profitable operations. We are subject to a number of risks similar to other early-stage life science companies, including, but not limited to, successful discovery and development of our product candidates, raising additional capital with favorable terms, development by our competitors of new technological innovations, protection of proprietary technology and market acceptance of our products. The successful discovery and development of product candidates requires substantial working capital which may not be available to us on favorable terms or not at all.

Current wording

Our future success is dependent on our ability to develop product candidates, generate significant revenue, and ultimately upon our ability to attain profitable operations. We are subject to a number of risks similar to other early-stage life science companies, including, but not limited to, successful discovery and development of our product candidates, raising additional capital with favorable terms, development by our competitors of new technological innovations, protection of proprietary technology and market acceptance of our products. The successful discovery and development of product candidates requires substantial capital which may not be available to us on favorable terms or not at all.

Previous wording

To date, we have financed our operations to date primarily through sales of convertible preferred stock, sales of common stock in the IPO and debt financings. We have a history of operating losses and had an accumulated deficit of $390.3 million as of September 30, 2024.

Current wording

To date, we have financed our operations primarily through sales of convertible preferred stock, sales of common stock in the IPO and debt financings. We have a history of operating losses and had an accumulated deficit of $439.0 million as of March 31, 2025.

Previous wording

As of September 30, 2024, we had cash and cash equivalents of $84.7 million and net working capital of $71.9 million, which is not sufficient to fund our current operating plan for at least twelve months from the issuance date of this Quarterly Report on Form 10-Q. We expect to seek additional funds through equity or debt financings or through collaboration or licensing transactions or other sources. We may be unable to obtain equity or debt financings or enter into collaboration or licensing transactions and, if necessary, we will be required to implement cost reduction strategies which could curtail or delay our current operating plans. As a result, substantial doubt exists about our ability to continue as a going concern. The accompanying unaudited interim condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The unaudited interim condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Current wording

Based on our current business plans, we believe that our existing cash and cash equivalents, will be sufficient to fund our operating expenses and capital expenditures requirements into the fourth quarter of 2025, through multiple key clinical and regulatory milestones. As of March 31, 2025, we had cash and cash equivalents of $42.1 million and net working capital of $28.2 million, which is not sufficient to fund our current operating plan for at least twelve months from the issuance date of this Quarterly Report on Form 10-Q. Without additional financing, we will not be able to comply with the minimum liquidity covenant related to our 2023 Notes. We expect to seek additional funds through equity or debt financings or through collaboration or licensing transactions or other sources. We may be unable to obtain equity or debt financings or enter into collaboration or licensing transactions and, if necessary, we will be required to implement cost reduction strategies which could curtail or delay our current operating plans. As a result, substantial doubt exists about our ability to continue as a going concern. The accompanying unaudited interim condensed consolidated financial statements in this Quarterly Report on Form 10-Q have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The unaudited interim condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Previous wording

Cash used in operating activities of $48.5 million for the nine months ended September 30, 2024 was primarily driven by spending on our ongoing clinical studies, Rejuva-related research activities, professional services related to our corporate and general administrative activities, as well as personnel-related expenses, including salaries, bonuses, and other compensatory benefits. Cash used in operating activities resulted primarily from our net loss of $43.7 million adjusted for net non-cash income of $9.4 million, primarily consisting of a $17.4 million gain from change in fair value of warrant liabilities and $5.7 million gain from change in fair value of notes payable (non-cash portion), offset by $11.5 million in stock-based compensation, a $1.5 million non-cash operating lease expense, a $0.5 million depreciation and a $0.3 million non-cash interest expense. Cash used in operating activities was also impacted by changes in working capital and other assets and liabilities of $4.6 million.

Current wording

Cash used in operating activities of $25.1 million for the three months ended March 31, 2025 was primarily driven by spending on our ongoing clinical studies, Rejuva-related research activities, professional services related to our corporate and general administrative activities, as well as personnel-related expenses, including salaries, bonuses, and other compensatory benefits. Cash used in operating activities resulted primarily from our net loss of $23.7 million adjusted for net non-cash expense of $0.6 million, primarily consisting of $1.4 million in stock-based compensation, $0.4 million non-cash operating lease expense and $0.3 million depreciation, offset by $0.8 million non-cash gain from the change in fair value of warrant liabilities and $0.8 million non-cash gain from the change in fair value of notes payable. Cash used in operating activities was also impacted by changes in working capital and other assets and liabilities of 1.9 million.

Previous wording

Cash used in operating activities of $32.2 million for the nine months ended September 30, 2023 was primarily driven by spending on our ongoing clinical study, Rejuva-related research activities, professional services related to our corporate and general administrative activities, as well as personnel-related expenses, including salaries, bonuses, and other compensatory benefits. Our net loss of $57.9 million was partially offset by non-cash items totaling $23.9 million, primarily consisting of a $19.5 million loss from change in fair value of the 2022 Convertible Notes payable, $3.0 million in stock-based compensation, a $1.2 million loss from change in fair value of warrant liabilities and $0.2 million of depreciation. In addition, $1.9 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 0.2 million.

Current wording

Cash used in operating activities of $11.7 million for the three months ended March 31, 2024 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. Cash used in operating activities resulted primarily from our net loss of $3.3 million adjusted for net non-cash income of $11.8 million, primarily consisting of $7.3 million non-cash gain from the change in fair value of notes payable, and $10.4 million non-cash gain from the change in fair value of warrant liabilities, offset by $5.2 million in stock-based compensation and $0.7 million of non-cash operating lease expense. Cash used in operating activities was also impacted by changes in working capital and other assets and liabilities of $3.4 million.

Previous wording

Cash used in investing activities for the nine months ended September 30, 2024 and 2023 were related to the purchase of property and equipment. The increase in the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 was primarily due to our spending on leasehold improvement, office furniture and information technology equipment as we moved into our new office and laboratory space in Burlington, MA.

Current wording

Cash used in investing activities for the three months ended March 31, 2025 and 2024 were related to the purchase of property and equipment. The decrease in the three months ended March 31, 2025 compared with the three months ended March 31, 2024 was primarily due to our spending on leasehold improvement, office furniture and information technology equipment as we moved into our new office and laboratory space in Burlington, MA in the first quarter of 2024.

Previous wording

Cash provided by financing activities of $101.2 million for the nine months ended September 30, 2024 was primarily driven by the $103.7 million capital raised from the IPO, net of discounts and commissions, partially offset by $2.9 million payments of public offering costs made to third-party service providers. We also received proceeds of $0.4 million from stock option exercises.

Current wording

Cash provided by financing activities of $101.0 million for the three months ended March 31, 2024 was primarily driven by the $103.7 million capital raised from the IPO, net of discounts and commissions, partially offset by $2.9 million payments of public offering costs made to third-party service providers. We also received proceeds of $0.2 million from stock option exercises.

Previous wording

As of September 30, 2024, our lease commitments reflect payments due for our operating and finance leases. The operating leases include our corporate office and laboratory space in Burlington, MA that will expire in June 2034. The finance leases represent leases of laboratory equipment used in our Rejuva pre-clinical activities. As of September 30, 2024, our future contractual commitments for our leases were $59.6 million. For additional information on our leases and timing of future payments, please see Note 7— "Commitments and Contingencies" to the unaudited condensed consolidated financial statements included in this Quarterly Report on this Form 10-Q.

Current wording

As of March 31, 2025, our lease commitments reflect payments due for our operating and finance leases. The operating leases include our corporate office and laboratory space in Burlington, MA that will expire in June 2034. The finance leases represent leases of laboratory equipment used in our Rejuva pre-clinical activities. As of March 31, 2025, our future contractual commitments for our leases were $56.7 million, of which $55.4 million were related to our operating leases. For additional information on our leases and timing of future payments, please see Note 7— "Commitments and Contingencies" to the unaudited condensed consolidated financial statements included in this Quarterly Report on this Form 10-Q.