10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number: 001-40227

FINCH THERAPEUTICS GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware	82-3433558
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

75 State Street, Suite 100 Boston, Massachusetts	02109
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (617) 229-6499

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

    Title of each class

    Trading
Symbol(s)

    Name of each exchange on which registered

    Common Stock, $0.001 par value per share

    FNCH

    The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 3, 2024 there were 1,605,763 outstanding shares of the registrant’s common stock, par value $0.001 per share.

FINCH THERAPEUTICS GROUP, INC.

FORM 10-Q

For the quarterly period ended March 31, 2024

Table of Contents


		Page

	SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	ii
	SPECIAL NOTE REGARDING COMPANY REFERENCES	ii
	SPECIAL NOTE REGARDING TRADEMARKS	ii

PART I.	FINANCIAL INFORMATION	1
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023	2
	Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2024 and 2023	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16
PART II.	OTHER INFORMATION	18
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 5.	Other Information	19
Item 6.	Exhibits	19
	Signatures	20

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” or “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

•

our expectations with respect to our microbiome technology and related portfolio of intellectual property and microbiome assets, and our objectives to realize the value of our intellectual property estate through licensing our technology to collaboration partners and enforcing our patent rights against third parties using infringing technologies;

•

the initiation, timing, progress and results of our efforts to prosecute, enforce and license our patent portfolio;

•

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

•

our intellectual property position, including the scope of protection we are able to establish, maintain and enforce for intellectual property rights covering product candidates developed using our microbiome technology;

•

our ability to fund our working capital requirements and to obtain additional funding for our operations; and

•

our financial performance.

These forward-looking statements are based on our management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions and are not guarantees of future performance or development. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 and in any other reports we file with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in our forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to new information, actual results or changes in our expectations, except as required by law. We qualify all of our forward-looking statements by these cautionary statements.

SPECIAL NOTE REGARDING COMPANY REFERENCES

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to “FTG,” the “Company,” “we,” “us” and “our” refer to Finch Therapeutics Group, Inc., and its subsidiaries.

SPECIAL NOTE REGARDING TRADEMARKS

All trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

FINCH THERAPEUTICS GROUP, INC.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except share and per share data)


	March 31, 2024			December 31, 2023
Assets
Current Assets:
Cash and cash equivalents	$	20,762		$	25,124
Prepaid expenses and other current assets		413			723
Total current assets		21,175			25,847
Property and equipment, net		551			594
Operating right-of-use assets		26,018			26,584
Restricted cash, non-current		2,348			2,348
Total Assets	$	50,092		$	55,373
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	47		$	141
Accrued expenses and other current liabilities		1,444			2,220
Operating lease liabilities, current		2,008			1,723
Total current liabilities		3,499			4,084
Operating lease liabilities, non-current		27,555			28,403
Total liabilities		31,054			32,487
Commitments and Contingencies (Note 8)
Preferred stock (undesignated), $0.001 par value; 10,000,000 shares authorized and no shares issued and outstanding as of March 31, 2024 and December 31, 2023		—			—
Stockholders’ Equity:
Common stock, $0.001 par value; 200,000,000 shares authorized and 1,605,763 shares issued and outstanding as of March 31, 2024 and December 31, 2023		2			2
Additional paid-in capital		373,307			373,279
Accumulated deficit		(354,271	)		(350,395	)
Total stockholders’ equity		19,038			22,886
Total Liabilities and Stockholders’ Equity	$	50,092		$	55,373

See notes to unaudited condensed consolidated financial statements.

FINCH THERAPEUTICS GROUP, INC.

Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except share and per share data)


	Three Months Ended March 31,
	2024			2023
Revenue:
Collaboration revenue	$	—		$	107
Total revenue		—			107
Operating Expenses:
Research and development		—			6,996
General and administrative		5,164			9,617
Impairment of in-process research and development		—			32,900
Impairment of long-lived assets		—			13,141
Restructuring		34			3,236
Total operating expenses		5,198			65,890
Net loss from operations		(5,198	)		(65,783	)
Other Income (Expense), Net:
Interest income (expense), net		280			425
Loss on loan extinguishment		—			(1,366	)
Loss on sale and disposal of fixed assets, net		—			(137	)
Sublease and other income		1,042			1,053
Total other income (expense), net		1,322			(25	)
Loss before income taxes		(3,876	)		(65,808	)
Income tax benefit		—			3,461
Net loss	$	(3,876	)	$	(62,347	)
Net loss per share attributable to common stockholders—basic and diluted (Note 11)	$	(2.41	)	$	(39.19	)
Weighted-average common stock outstanding—basic and diluted		1,605,763			1,602,852

See notes to unaudited condensed consolidated financial statements.

FINCH THERAPEUTICS GROUP, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited, in thousands, except share and per share data)


	Common Stock $0.001 Par Value				Additional		Accumulated			Total Stockholders'
	Shares		Amount		Paid-in Capital		Deficit			Equity
Balance, January 1, 2023		1,601,717	$	2	$	371,350	$	(275,641	)	$	95,711
Vesting of restricted stock units		3,044		—		—		—			—
Stock-based compensation		—		—		1,180		—			1,180
Net loss		—		—		—		(62,347	)		(62,347	)
Balance, March 31, 2023		1,604,761	$	2	$	372,530	$	(337,988	)	$	34,544


	Common Stock $0.001 Par Value				Additional		Accumulated			Total Stockholders'
	Shares		Amount		Paid-in Capital		Deficit			Equity
Balance, January 1, 2024		1,605,763	$	2	$	373,279	$	(350,395	)	$	22,886
Stock-based compensation		—		—		28		—			28
Net loss		—		—		—		(3,876	)		(3,876	)
Balance, March 31, 2024		1,605,763	$	2	$	373,307	$	(354,271	)	$	19,038

See notes to unaudited condensed consolidated financial statements.

FINCH THERAPEUTICS GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	Three Months Ended March 31,
	2024			2023
Cash Used in Operating Activities:
Net loss	$	(3,876	)	$	(62,347	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		43			1,367
Stock-based compensation expense		28			1,180
Impairment of in-process research and development		—			32,900
Impairment of long-lived assets		—			13,141
Loss on loan extinguishment		—			1,366
Loss on sale and disposal of property and equipment		—			180
Non-cash operating lease and interest cost		566			982
Benefit for deferred income taxes		—			(3,461	)
Changes in operating assets and liabilities:
Accounts receivable		—			37
Prepaid expenses and other current assets		310			1,238
Other non-current assets		—			4,033
Accounts payable		(94	)		(136	)
Accrued expenses and other current liabilities		(776	)		(2,745	)
Other non-current liabilities		—			(50	)
Operating lease liabilities		(563	)		(1,066	)
Net cash used in operating activities		(4,362	)		(13,381	)
Cash Used in Investing Activities:
Purchases of property and equipment		—			(14	)
Net cash used in investing activities		—			(14	)
Cash Used in Financing Activities:
Repayment of loan		—			(15,000	)
Payment of loan prepayment and termination fee and other		—			(1,159	)
Net cash used in financing activities		—			(16,159	)
Net change in cash, cash equivalents and restricted cash		(4,362	)		(29,554	)
Cash, cash equivalents and restricted cash at beginning of period		27,472			73,805
Cash, cash equivalents and restricted cash at end of period	$	23,110		$	44,251

See notes to unaudited condensed consolidated financial statements.

FINCH THERAPEUTICS GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Basis of Presentation

Business

Finch Therapeutics Group, Inc. (the “Company” or “FTG”) was incorporated in 2017 as a Delaware corporation. The Company was formed as a result of a merger and recapitalization of Finch Therapeutics, Inc. (“Finch”) and Crestovo Holdings LLC (“Crestovo”) in September 2017 (the “Merger”), in which the former owners of Finch and Crestovo were issued equivalent stakes in the newly formed company, FTG. Crestovo was renamed Finch Therapeutics Holdings LLC in November 2020 (“Finch Holdings”). Finch and Finch Holdings are both wholly-owned subsidiaries of FTG.

The Company is a microbiome technology company with a portfolio of intellectual property and microbiome assets. In January 2023, the Company announced the decision to wind down its development efforts and focus on realizing the value of its intellectual property estate and other assets.

Liquidity and Capital Resources

The Company currently forecasts that its unrestricted cash and cash equivalents of $20.8 million as of March 31, 2024 will be sufficient to fund its operating expenses and capital expenditure requirements for at least twelve months beyond the date of issuance of the condensed consolidated financial statements. However, due to the consideration of certain qualitative factors, including the Company’s recurring losses from operations incurred since inception, the expectation of continuing operating losses for the foreseeable future, and uncertainty around its ability to successfully realize the full value of its intellectual property estate and other assets, the Company has concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company does not currently expect to progress any product candidate through clinical trials or commercial approval and it does not currently expect to generate any revenue from product sales. The Company may never succeed in realizing the value of its intellectual property estate and other assets and, even if it does, it may never generate revenue that is significant or large enough to achieve profitability.

As a result, the Company may need additional funding to support its operating activities as it seeks to realize value from its intellectual property estate and other assets. Until such time, if ever, that the Company can generate substantial revenue, the Company may pursue to finance its cash needs through equity offerings, debt financings or other capital sources, including collaborations, licenses or similar arrangements. However, the Company may be unable to raise additional funds or enter into such other arrangements when needed or on favorable terms, if at all. If the Company is unable to obtain funding as needed, it may decide to pursue a dissolution and liquidation.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared by the Company in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and, pursuant to the rules and regulations of Article 10 of Regulation S-X of the Securities Act of 1933, as amended, published by the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes the disclosures are adequate. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2023 included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 25, 2024.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments that are necessary for a fair presentation of the Company’s condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023, condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023, condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2024 and 2023, and condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023. Such adjustments are of a normal and recurring nature. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024. The condensed consolidated balance sheet as of

December 31, 2023 has been derived from the audited consolidated financial statements of the Company but does not include all disclosures required by U.S. GAAP.

Reclassification

Certain items in prior financial statements have been reclassified to conform to the current presentation.

2. Summary of Significant Accounting Policies

Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the unaudited interim condensed consolidated financial statements are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 25, 2024. There have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2024.

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other accounting standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed below, the Company does not believe that the adoption of recently issued standards have or may have a material impact on the condensed consolidated statements or disclosures.

Recently Issued Accounting Pronouncements

In November 2023, the FASB issued Accounting Standards Update (“ASU") 2023-07, Improvements to Reportable Segment Disclosures. This standard update requires additional interim and annual disclosures about a reportable segment’s expenses, even for companies with only one reportable segment. The guidance applies to all public entities and is effective for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of these amendments on its disclosures, but this standard update will not impact the Company's results of operations or financial position.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. This standard update requires additional interim and annual disclosures about a company’s income taxes, including more detailed information around the annual rate reconciliation and income taxes paid. The standard applies to all entities subject to income taxes. For public business entities, the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. The Company is currently evaluating the impact of these amendments on its disclosures, but this standard update will not impact the Company's results of operations or financial position.

3. Balance Sheet Information

Cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash consisted of the following (in thousands):


	March 31, 2024		December 31, 2023
Cash and cash equivalents	$	20,762	$	25,124
Restricted cash		2,348		2,348
Total cash, cash equivalents and restricted cash	$	23,110	$	27,472

Non-current restricted cash primarily consists of a security deposit on the Company’s operating lease.

Property and equipment

Property and equipment consisted of office furniture and fixtures totaling $0.9 million with corresponding accumulated depreciation of $0.3 million as of March 31, 2024 and December 31, 2023. Depreciation expense was nominal for the three months ended March 31, 2024. For the three months ended March 31, 2023, depreciation expense was $1.4 million. During the quarter ended March 31, 2023, the Company recorded an impairment charge of $13.1 million to its long-lived assets, as it was determined that certain equipment, leasehold improvements, and software associated with program development would no longer be used.

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	March 31, 2024		December 31, 2023
Legal and professional fees	$	1,153	$	1,301
Refundable tax credit		—		418
Restructuring costs		66		260
Accrued compensation and benefits		10		125
Accrued other		215		116
Total accrued expenses and other current liabilities	$	1,444	$	2,220

4. Fair Value Measurement

The Company has no assets or liabilities classified as Level 2 or 3 on its condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023. The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis classified as Level 1 of the fair value hierarchy as follows (in thousands):


	March 31, 2024		December 31, 2023
Money market funds	$	20,565	$	24,919

There were no transfers between fair value levels during the three months ended March 31, 2024 and the year ended December 31, 2023. The carrying values of prepaid expenses, other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.

5. Leases

Hood Lease

On August 3, 2021, the Company entered into a 10-year lease agreement with Hood Park LLC (the “Hood Lease”), pursuant to which the Company leased approximately 61,139 square feet of office and laboratory space (the “Premises”). The Company recorded lease expense related to the Hood Lease of $1.2 million and $1.4 million for the three months ended March 31, 2024 and 2023, respectively.

The Company subleases substantially all the Premises. For the three months ended March 31, 2024 and 2023, the Company recognized sublease income of $1.0 million and $1.1 million, respectively, which is presented as other income in the condensed consolidated statements of operations.

Other Nominal Leases

The Company was party to two other nominal leases, one of which ended in February 2023 and the other of which ended in June 2023. The Company's lease expense under these leases was $0.3 million for the three months ended March 31, 2023.

The following table presents the classification of the right-of-use asset and operating lease liabilities (in thousands):


	Balance Sheet Classification	March 31, 2024		December 31, 2023
Assets:
Operating lease assets	Operating right-of-use assets	$	26,018	$	26,584
Liabilities
Operating lease liabilities
Current	Operating lease liabilities, current	$	2,008	$	1,723
Noncurrent	Operating lease liabilities, non-current		27,555		28,403
Total lease liabilities		$	29,563	$	30,126

The following table represents the components of operating lease cost, which are included in general and administrative and research and development expense, and sublease income, which is included in other income on the statement of operations for the three months ended March 31, 2024 and 2023 (in thousands):


	2024			2023
Operating lease cost	$	1,202		$	1,723
Short-term lease cost		—			13
Variable lease cost		421			445
Sublease income		(1,042	)		(1,053	)
Total lease cost, net	$	581		$	1,128

The weighted-average remaining operating lease term and discount rate as of March 31, 2024 and December 31, 2023 were as follows (in thousands):


	March 31, 2024			December 31, 2023
Weighted-average remaining lease term (years)		7.8			8.0
Weighted-average discount rate		8.5	%		8.5	%

Supplemental disclosure of cash flow information related to operating leases for the three months ended March 31, 2024 and 2023 was as follows (in thousands):


	2024			2023
Changes in operating lease liabilities	$	(563	)	$	(1,066	)

The following table represents a summary of the Company’s future operating lease payments required as of March 31, 2024 (in thousands):


2024	$	3,197
2025		4,931
2026		5,071
2027		5,215
2028		5,364
Thereafter		17,026
Total future minimum lease payments		40,804
Less: amount representing interest		(11,241	)
Present value of future minimum lease payments	$	29,563

The undiscounted cash flows to be received under the operating subleases as of March 31, 2024 were as follows (in thousands):


2024	$	3,174
2025		3,135
	$	6,309

6. RESTRUCTURING

The Company recognized nominal restructuring charges during the three months ended March 31, 2024. During the three months ended March 31, 2023 the Company recognized restructuring charges of $3.2 million, primarily consisting of one-time severance payments, healthcare coverage, outplacement services and related expenses in connection with restructuring activities undertaken in January 2023. These restructuring activities were substantially completed in the fourth quarter of 2023 and the Company expects to incur a total charge of $3.9 million. All restructuring payments are expected to be completed by the second quarter of 2024. The accrued restructuring liability is included in accrued expenses and other current liabilities as of March 31, 2024.

The following table summarizes the restructuring accrual activity for the three months ended March 31, 2024 and 2023 (in thousands):


	March 31, 2024			March 31, 2023
Accrued restructuring liability, beginning of the period	$	260		$	201
Restructuring charges		34			3,236
Cash payments		(228	)		(1,755	)
Accrued restructuring liability, end of the period	$	66		$	1,682

7. Income Taxes

During the three months ended March 31, 2024 and the year ended December 31, 2023, the Company recorded a full valuation allowance on federal and state deferred tax assets since management does not forecast the Company to be in a profitable position in the near future. There were no material changes in the Company’s tax position in the three months ended March 31, 2024 as compared to the year ended December 31, 2023. The benefit for the three months ended March 31, 2023 reflects the full removal of the deferred tax liability on the IPR&D that was written off during the first quarter of 2023 and treated as a discrete item in the tax provision.

8. Commitments and Contingencies

Legal Contingencies

On December 1, 2021, Rebiotix Inc. and Ferring Pharmaceuticals Inc. (collectively, “Rebiotix”) filed a complaint against the Company in the U.S. District Court for the District of Delaware (the “Court”). The complaint seeks a declaratory judgment of non-infringement and invalidity with respect to seven United States Patents owned by the Company: U.S. Patent Nos. 10,675,309 (the “’309 Patent”); 10,463,702 (the “’702 Patent”); 10,328,107 (the “’107 Patent”); 10,064,899; 10,022,406 (the “’406 Patent”); 9,962,413 (the “’413 Patent”); and 9,308,226. On February 7, 2022, the Company filed an answer and counterclaims against Rebiotix for infringement of the ’107, ’702, and ’309 Patents. In June 2022, Finch alleged infringement of the ’406 and ’413 Patents by Rebiotix. On March 7, 2022, the Company filed an amended answer and counterclaims, in which the Company, together with the Regents of the University of Minnesota (“UMN”), alleged infringement by Rebiotix of three U.S. Patents owned by UMN and exclusively licensed to the Company: U.S. Patent Nos. 10,251,914, 10,286,011, and 10,286,012, (collectively, the “UMN Patents”). On April 4, 2022, Rebiotix filed counterclaims for declaratory judgment of non-infringement and invalidity of the UMN Patents. On May 2, 2022, the Company and UMN responded, denying such counterclaims. The Court set a trial date for a five-day trial beginning on May 20, 2024. On January 23, 2023, the Company filed a second amended answer and counterclaims, in which the Company alleged infringement by Rebiotix of two additional U.S. Patents owned by Finch: U.S. Patent Nos. 11,541,080 (the “’080 Patent”) and 11,491,193 (the “’193 Patent”). On February 7, 2023, Rebiotix filed counterclaims for declaratory judgment of non-infringement and invalidity of the ’080 Patent and ’193 Patent. The Court issued a claim construction order on February 28, 2023. On July 6, 2023, Rebiotix filed a motion to dismiss certain counts of our second amended answer and counterclaims based on the assertion that Finch lacks standing to sue as to the ’107 Patent, ’702 Patent, ’309 Patent, ’406 Patent, ’413 Patent, ’193 Patent, and ’080 Patent. Rebiotix specifically alleges that the sole named inventor on these patents, Thomas J. Borody, did not assign his rights in those patents to Finch, and as a result, Finch does not own them and therefore does not have standing to assert them. Briefing on this motion is complete. The parties have mutually agreed to narrow the case to include only claims from the ’309, ’702, ’193, ’080, ’914, and ’012 Patents. On December 8, 2023, both parties filed dispositive motions asking the Court to resolve certain aspects of the case in advance of the jury trial. On February 21, 2024, the Company received a notice that the U.S. District Court for the District of Delaware issued an order resetting the trial date from May 20, 2024 to August 5, 2024. On April 15, 2024, Rebiotix filed a motion for leave to amend its Reply and Counterclaims to add a counterclaim of infringement of U.S. Patent 11,944,654 against UMN by UMN’s MTP-101-LR product or, in the alternative, add an affirmative defense to patent infringement claims based on the ‘914 and ‘012 patents.

The pending lawsuit is subject to inherent uncertainties, and the actual legal fees and costs will depend upon many unknown factors. The outcome of the pending lawsuit cannot be predicted with certainty. The Company has determined that there is no probable or estimable loss contingency that is required to be recorded as of March 31, 2024.

License and Royalty Payments

The Company is party to license agreements under which it is obligated to make milestone and royalty payments and incurs annual maintenance fees.

The Company owes a nominal annual maintenance fee under its license agreement with the UMN, as well as escalating minimum royalty amounts. The minimum payments continue in perpetuity until the agreement is terminated. Upon product commercialization, the Company will be required to pay minimum royalties of $20 thousand under a license agreement for patents owned by Arizona State University.

Under an agreement with Microbiome Health Research Institute, Inc. ("OpenBiome") the Company is required to pay certain milestone fees of up to $26.0 million upon the occurrence of certain R&D events, regulatory approvals, and commercial sales, and low single digit royalties on net sales of products on a product-by-product and country-by-country basis, as well as a mid-single digit royalties on sublicensing revenue related to such products.

9. Stockholders’ Equity

The Company’s amended and restated certificate of incorporation authorizes the issuance of up to 200,000,000 shares of $0.001 par value common stock and up to 10,000,000 shares of $0.001 par value undesignated preferred stock. As of March 31, 2024, no shares of preferred stock were outstanding. Each share of common stock entitles the holder to one vote, together with the holders of any preferred stock outstanding, on all matters submitted to the stockholders for a vote. Common stockholders are also entitled to receive dividends. As of March 31, 2024, no cash dividends have been declared or paid.

As of March 31, 2024 and December 31, 2023 the Company has reserved 47,108 and 51,331 shares of common stock, respectively, for the exercise of stock options granted pursuant to its 2021 Equity Incentive Plan (the “2021 Plan”).

10. Stock-Based Compensation

2021 Equity Incentive Plan

The 2021 Plan provides for the grant of incentive stock options to employees, including employees of any parent or subsidiary of the Company, and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards and other forms of awards to employees, directors and consultants, including employees and consultants of the Company’s affiliates. During the first quarter of 2024, no awards have been granted under the 2021 Plan and all previously awarded restricted stock units were vested as of December 31, 2023.

On January 1, 2024, the number of shares of common stock reserved for issuance under the 2021 Plan automatically increased in accordance with the terms of the plan by 53,288 shares. As of March 31, 2024, there were 47,108 shares of common stock issuable upon the exercise of outstanding options and there were 341,790 shares available for future issuance.

2021 Employee Stock Purchase Plan

The 2021 Employee Stock Purchase Plan (the "2021 ESPP") provides participating employees with the opportunity to purchase shares of common stock. The occurrence and duration of offering periods under the 2021 ESPP are subject to the determinations of the compensation committee of the Board of Directors. There were no offerings in the first quarter of 2024. The number of shares of common stock reserved for issuance under the 2021 ESPP automatically increases on January 1 of each year in accordance with the terms of the plan. On January 1, 2024, the number of shares of common stock reserved for issuance under the 2021 ESPP increased by 10,657 shares. As of March 31, 2024, 3,354 shares have been issued under the 2021 ESPP and 55,824 shares are available for future issuance.

Stock Options

The following table summarizes the activity of the Company’s stock options for the three months ended March 31, 2024:


	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)
Outstanding as of December 31, 2023		51,331		$	39.05		8.0
Granted		—		$	—
Cancelled or forfeited		(128	)	$	149.99
Expired		(4,095	)	$	141.23
Outstanding as of March 31, 2024		47,108		$	29.87		8.0
Options exercisable as of March 31, 2024		14,676		$	14.68		5.3
Options vested or expected to vest as of March 31, 2024		47,108		$	29.87		8.0

As of March 31, 2024, the stock options had no intrinsic value and there was approximately $0.1 million of unrecognized compensation expense remaining to be recognized under the 2021 Plan. The Company expects to recognize this cost over a weighted average period of 3.2 years.

Stock-Based Compensation Expense

Total stock-based compensation expense for the three months ended March 31, 2024 and 2023 was recorded as follows (in thousands):


	Three Months Ended March 31,
	2024		2023
Research and development	$	—	$	231
General and administrative		28		949
Total	$	28	$	1,180

11. Loss Per Share

Basic and diluted loss per share for the three months ended March 31, 2024 and 2023, which is computed by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding, is as follows (in thousands, except share and per share data):


	2024			2023
Numerator:
Net loss and net loss attributable to common stockholders—basic and diluted	$	(3,876	)	$	(62,347	)
Denominator:
Weighted-average common stock outstanding—basic and diluted		1,605,763			1,602,852

Net loss per share attributable to common stockholders—basic and diluted	$	(2.41	)	$	(39.19	)

The weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following from the computation of diluted net loss per share attributable to common stockholders as of March 31, 2024 and 2023 because including them would have had an anti-dilutive effect:


	2024		2023
Options to purchase common stock		47,108		73,785
Unvested restricted stock units		—		1,486
		47,108		75,271

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with (1) our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2023 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 25, 2024, which we refer to as the 2023 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 through intellectual property litigation and, in certain cases, to generate additional data on selected product candidates through academic collaborations. In January 2023, we began focusing on realizing the value of our intellectual property estate and other assets. We have significantly scaled back our expenses by winding down our clinical development efforts, including liquidating certain of our assets, terminating vendor contracts and reducing headcount, and we now focus on realizing the value of our intellectual property and other assets (which we refer to collectively as the Strategic Reprioritization).

We do not currently expect to be able to progress any product candidate through clinical trials or commercial approval and we do not currently expect to generate any revenue from product sales. Since our inception, we have funded our operations primarily with proceeds from the sale of common and convertible preferred stock, our previous loan agreement with Hercules Capital and from collaboration revenue. Since our inception, we have incurred significant operating losses. As of March 31, 2024, we had an accumulated deficit of $354.3 million. We expect to continue to generate operating losses and negative operating cash flows for the foreseeable future as we attempt to realize the value of our intellectual property estate and other assets.

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.

We 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 University of Minnesota, or UMN, pursuant to which UMN is conducting multiple investigator-sponsored clinical trials using a microbiome product candidate comprised of compositions to which we hold an exclusive license. In addition to our clinical and pre-clinical assets, we have developed a biorepository of samples and strains that can be used in a variety of research applications and may form the basis for future collaborations.

Components of Our Results of Operations

Revenue

We have no products approved for commercial sale. We have not and do not expect to generate any revenue from the sale of licensed products in 2024. Revenue for the three months ended March 31, 2023 was generated primarily through a collaboration agreement that has ended. 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.

Agreements with OpenBiome

We are party to a LMIC License Agreement, or the LMIC Agreement, with Microbiome Health Research Institute, Inc., or OpenBiome, pursuant to which we granted OpenBiome a non-exclusive royalty-bearing license, with the right to grant sublicenses, under certain patents, patent applications, and know-how that are reasonably necessary or useful for the exploitation of products manufactured directly from stool from a stool donor source without the use of culturing or replication, or certain natural products. The only consideration provided to us under the LMIC Agreement is in the form of potential future royalties on net sales of these products. We are entitled to receive tiered royalties on net sales of certain products, ranging from mid-single digit to low second decile digits on a product-by-product and country-by-country basis. We were also party to an asset purchase agreement, or the OpenBiome Agreement, with OpenBiome which entitles us to royalties which serve as reimbursement for third party license fees, based on certain sales.

We did not recognize any revenue related to the LMIC Agreement or the OpenBiome Agreement for each of the three months ended March 31, 2024 and 2023.

Operating Expenses

Research and Development Expenses

Until January 2023, research and development, or R&D, activities were central to our business model. As a result of our Strategic Reprioritization, we do not currently expect to be able to progress any product candidate through clinical trials or commercial approval.

R&D expenses for the three months ended March 31, 2023 primarily consisted of salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in R&D functions. We expensed R&D costs as incurred.

General and Administrative Expenses

We expect general and administrative expenses to primarily consist of expenses associated with being a public company, including costs related to consulting, accounting, audit, legal, regulatory and tax compliance services, and director and officer insurance costs.

Impairment of IPR&D

In January 2023, management concluded that the Strategic Reprioritization was an impairment indicator requiring our management to perform an interim impairment test of its in-process research and development, or IPR&D, asset. Management's assessment indicated that there was no future cash flow projections associated with the IPR&D asset and the fair value was zero. This resulted in an impairment charge during the three months ended March 31, 2023.

Impairment of Long-Lived Assets

Impairment of long-lived assets consisted of costs attributable to the cease of use of laboratory equipment, leasehold improvements, and software associated with program development, as it was determined that certain long-lived assets would no longer be used as a result of the Strategic Reprioritization.

Restructuring Expense

Restructuring expenses consist of costs directly incurred because of restructuring initiatives, and includes one-time severance payments, healthcare coverage, outplacement services and related expenses as well as contract cancellation costs.

Total Other Income (Expense), Net

Total other income (expense), net primarily consists of sublease income, loss on loan extinguishment, loss on the sale and disposal of fixed assets, and interest income.

Income Tax Benefit

SEC Form 10-Q filed by Finch Therapeutics Group Inc.