Finch Therapeutics Group, Inc. - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2021

OR

For the transition period from ________________ to ________________

Commission File Number: 001-40227

FINCH THERAPEUTICS GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

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

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

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 6, 2021, there were 47,420,180 outstanding shares of the registrant’s common stock, par value $0.001 per share.

FINCH THERAPEUTICS, INC.

FORM 10-Q

For the quarterly period ended March 31, 2021

Table of Contents

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. 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:

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” and elsewhere in this report. 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 the section titled “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. As a result of these factors, we cannot assure you that the

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forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

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 the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the 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 “Finch,” the “Company,” “we,” “us” and “our” refer to Finch Therapeutics Group, Inc. and its subsidiary.

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.

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RISK FACTORS SUMMARY

The following is a summary of the principal risks that could adversely affect our business, financial condition, operating results, cash flows or stock price. Discussion of the risks listed below, and other risks that we face, are discussed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

We identified a material weakness in our internal control over financial reporting. If we are not able to remediate the material weakness or if we otherwise fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial statements in a timely manner, which may adversely affect our business, investor confidence in our company and the market value of our common stock.

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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)

See notes to unaudited condensed consolidated financial statements.  

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FINCH THERAPEUTICS GROUP, INC.

Condensed Consolidated Statements of Operations

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

See notes to unaudited condensed consolidated financial statements.

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FINCH THERAPEUTICS GROUP, INC.

Condensed Consolidated Statements of Redeemable Convertible

Preferred Stock and Stockholders’ Equity (Deficit)

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

See notes to unaudited condensed consolidated financial statements.

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FINCH THERAPEUTICS GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

The following table provides a reconciliation of the cash, cash equivalents and restricted cash as of each of the periods shown above:

See notes to unaudited condensed consolidated financial statements.

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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”), where 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 clinical-stage microbiome therapeutics company leveraging its Human-First Discovery® platform to develop a novel class of orally administered biological drugs. It is developing novel therapeutics designed to deliver missing microbes and their clinically relevant biochemical functions to correct dysbiosis and the diseases that emerge from it. The Company’s Human-First Discovery platform uses reverse translation to identify diseases of dysbiosis and to design microbiome therapeutics that address them. Its lead product candidate, CP101, delivers a complete microbiome and is being developed initially for the treatment of patients with recurrent Clostridioides difficile infection, or CDI.

Initial Public Offering

On March 18, 2021, the Company completed its initial public offering (“IPO”) in which the Company issued and sold 7,500,000 shares of its common stock at a public offering price of $17.00 per share, for aggregate gross proceeds of $127.5 million. The net proceeds from the IPO were $115.7 million after deducting underwriting discounts and commissions of $8.9 million and offering costs of $2.9 million.

In connection with the IPO, the Company’s board of directors (the “Board”) and stockholders approved an amended and restated certificate of incorporation to, among other things, effect a one-for-14.444 reverse stock split of the Company’s issued and outstanding shares of common stock and redeemable convertible preferred stock, as well as to effect a proportional adjustment to the existing conversion ratios for the Company’s redeemable convertible preferred stock. The reverse stock split was effected on March 12, 2021. Accordingly, all share and per share amounts of common stock for all periods presented in the accompanying unaudited interim condensed consolidated financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect this reverse stock split and adjustment of preferred stock conversion ratios. Upon the closing of the IPO, all of the then-outstanding shares of redeemable convertible preferred stock automatically converted into 31,253,609 shares of common stock at the applicable conversion ratio then in effect. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding.

COVID-19 Impact

The extent of the impact of the COVID-19 pandemic on the Company’s business, operations and clinical development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on clinical trial enrollment, trial sites, contract research organizations, contract manufacturing organizations, and other third parties with whom the Company does business, as well as its impact on regulatory authorities and its key scientific and management personnel. While the Company is experiencing limited financial impacts at this time, given the global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic, the Company’s business, financial condition and results of operations ultimately could be materially adversely affected. The Company continues to closely monitor the COVID-19 pandemic as it evolves its business continuity plans, clinical development plans and response strategy.

At this time, it is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company.

Liquidity and Capital Resources

Management believes that the Company’s existing cash and cash equivalents, together with the net proceeds from the IPO, will allow the Company to continue its operations for at least the next 12 months from the date these financial statements are issued and therefore the conditions raising substantial doubt raised in prior periods has been alleviated. In the absence of a significant source of recurring revenue, the continued viability of the Company beyond that point is dependent on its ability to continue to raise additional capital to finance its operations. If the Company is unable to obtain additional funding, the Company may be forced to delay, reduce or

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eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

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 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, 2020 included in the Company’s final prospectus dated March 18, 2021, filed with the SEC on March 22, 2021 pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Prospectus”).

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 which are necessary for a fair presentation of the Company’s condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020, condensed consolidated statements of stockholders’ equity (deficit) for the three months ended March 31, 2021 and 2020, and condensed consolidated cash flows for the three months ended March 31, 2021 and 2020. Such adjustments are of a normal and recurring nature. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2021.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the unaudited interim consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2020 and the notes thereto, which are included in the Prospectus. Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2021.

Deferred Initial Public Offering Costs

The Company capitalizes certain legal, professional, accounting and other third-party fees that are directly associated with in-process equity issuances as deferred initial public offering costs until such equity issuances are consummated. After consummation of the equity issuance, these costs are recorded as a reduction in the capitalized amount associated with the equity issuance. Should the equity issuance be abandoned, the deferred initial public offering costs will be expensed immediately as a charge to operating expenses in the consolidated statement of operations and comprehensive loss. On March 18, 2021, the Company completed the IPO; accordingly, the Company recognized the deferred initial public offering costs of approximately $2.9 million as a reduction from gross proceeds associated with the IPO through additional paid-in capital in the accompanying condensed consolidated balance sheet. Accordingly, there were no deferred offering costs as of March 31, 2021. Deferred offering costs classified in other assets on the accompanying condensed consolidated balance sheet as of December 31, 2020 were $1.0 million.

Recently Issued Accounting Pronouncements

There have been no new accounting pronouncements or changes to accounting pronouncements that could be expected to materially impact the Company’s unaudited condensed consolidated financial statements during the three months ended March 31, 2021, as compared to the recent accounting pronouncements described in Note 2 of the Company’s audited financial statements as of and for the year ended December 31, 2020, which are included in the Prospectus.

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3. FAIR VALUE MEASUREMENTS

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value hierarchy utilized to determine such fair values (in thousands):

There were no transfers between fair value levels during the three months ended March 31, 2021 and the year ended December 31, 2020. The carrying values of accounts receivable, 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.

4. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following as of March 31, 2021 and December 31, 2020 (in thousands):

Depreciation expense was $0.4 million and $0.2 million for the three months ended March 31, 2021 and March 31, 2020, respectively. As of March 31, 2021, the Company held $4.8 million of software and $0.2 million of lab equipment that was purchased from a related party. As of December 31, 2020, the Company held $1.2 million of software that was purchased from a related party.

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5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following as of March 31, 2021 and December 31, 2020 (in thousands):

6. REVENUE

Takeda Pharmaceutical Company Limited

In January 2017, the Company entered into an agreement (the “Takeda Agreement”) with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”), pursuant to which the Company granted Takeda a worldwide, exclusive license, with the right to grant sublicenses, under certain of its patents, patent applications and know-how to develop the Company’s microbiome therapeutic candidate FIN-524 for the prevention, diagnosis, theragnosis or treatment of diseases in humans. The Company subsequently amended and restated the Takeda Agreement in October 2019 to provide for the Company to allocate certain resources towards determining the feasibility of developing a second microbiome therapeutic candidate, FIN-525.

Under the terms of the Takeda Agreement, the Company has agreed to design FIN-524, a product candidate optimized for ulcerative colitis, for Takeda based on selection criteria within a product-specific development plan. The Company also agreed to conduct a feasibility study to potentially further develop FIN-525, a product candidate optimized for the treatment of Crohn’s disease. Takeda can determine whether to initiate a full product-specific development plan for FIN-525 following its review of the data from the Company’s feasibility study.

Pursuant to the Takeda Agreement, the Company is primarily responsible for early-stage development activities pursuant to an agreed upon development plan and budget through Phase 1 clinical trials. The Company is entitled to cash reimbursement from Takeda for certain research and development (“R&D”) costs incurred as part of the Company’s commercially reasonable efforts to develop a treatment for ulcerative colitis and Crohn’s disease at the direction of and for the benefit of Takeda, who expects to commercialize the treatment. The Company is contractually obligated to perform these efforts under the Takeda Arrangement, and they are also considered to be the output of the Company’s ordinary business activities as the benefit from these R&D activities will be transferred to Takeda as the Company’s obligations are satisfied. Takeda has the option to perform Phase 2 clinical trials itself, and if this option is not exercised, the Company will assume responsibility for such development. After the successful completion of the first Phase 2 clinical trial for the applicable product candidate, Takeda will assume primary responsibility for Phase 3 clinical trials. Takeda was also granted two options to pursue development of FIN-524 for diseases other than CDI, for an option maintenance fee payable to the Company of $0.3 million per year for each option, due even if the options were not exercised and until the options were terminated. The options each had a term of twenty-four months and Takeda could elect to terminate its option at any point; Takeda elected to terminate both options prior to December 31, 2018 and paid total option maintenance fees of $0.5 million. The Takeda Agreement provides consideration to the Company in the form of an upfront payment, milestone payments related to development and commercialization efforts, reimbursement of research and development costs, sales-based royalties, and previously, any option exercise fees or maintenance fees for the two terminated options.

The Company assessed this arrangement in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) and concluded that the contract counterparty, Takeda, is a customer. The Company identified the following material promises at the outset of the Takeda Agreement: (1) an exclusive license to use the Company’s intellectual property to conduct research activities; (2) R&D services for activities under the development plan; (3) two options to pursue different indications of research for the Company’s product candidates; (4) manufacturing and supply for the Company’s clinical trials; and (5) participation on a joint steering and joint development committee (“JSC” and “JDC”). The options were considered distinct from the other promises in the arrangement and analyzed for material rights; the Company concluded these were not material rights and the consideration related to them should be excluded as a performance obligation until the option is exercised. The Company determined that the remaining promises were not capable of being distinct from one another and were not distinct in the context of the contract, as the license has no value without the performance of the R&D activities or the technology transfer related to the outputs of those activities, and the JSC/JDC participation is dependent on these activities. Takeda would not be able to use the license without the performance of R&D activities by the Company, as the research is novel in nature and could not be performed by another company in an economically viable timeframe. Additionally, the technology transfer is inherently dependent on the outcome of the Company’s

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R&D activities, and as such is not capable of being distinct. The Takeda Agreement did not contain a significant financing component as of the inception of the contract.

In accordance with the Company’s ASC 606 assessment, the Takeda Agreement was determined to contain a single combined performance obligation made up of the promises above, excluding the options, which were analyzed as options and deemed not to represent material rights. The option consideration is excluded as a performance obligation until the underlying option is exercised. The transaction price was allocated between the combined performance obligation and the options based on their standalone selling prices. The Company determined the contract term of the Takeda Agreement to be the period over which the Company has enforceable rights and obligations to perform R&D services, through Phase 1 clinical trials. The Company determined that it met the criteria to recognize revenue over time and identified an appropriate measure of progress for the recognition of revenue and determined it would recognize the revenue using an input method based on total costs incurred to date as compared with total expected costs, as this appropriately depicts the Company’s performance in satisfaction of the performance obligation. Amounts received that have not yet been recognized as revenue are recorded in deferred revenue on the Company’s consolidated balance sheet.

Takeda may terminate the Takeda Agreement at-will, with 90 days’ notice to the Company, and either party may terminate for a breach of contract that is not remedied within a defined period of time. The Company assessed this termination provision and determined that because of the existence of a substantive termination penalty in the form of a reversion of the rights and license to the underlying intellectual property, the provision does not result in a material right in the form of a continuous renewal option.

The Company received an upfront payment from Takeda of $10.0 million in the year ended December 31, 2017 in exchange for the exclusive license of the Company’s intellectual property. The Company has included the upfront payment and the estimable reimbursable R&D costs in the transaction price and is recognizing revenue associated with it over the period it expects to perform R&D services. All of the components of the combined performance obligation are recognized using the same measure of progress.

Takeda reimburses the Company for certain research and development costs under the Takeda Agreement on a quarterly basis, which are agreed upon by both parties through their participation on the JSC and JDC and included in the transaction price and recognized according to the cost input method, as they are deemed to represent estimable variable consideration that is not expected to result in a significant reversal of revenue. The Company recorded accounts receivable of $2.3 million and $1.0 million on its condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021, the Company recorded deferred revenue of $11.4 million ($2.6 million of which is classified as current) related to the Takeda Agreement, which represents the portion of the combined performance obligation that is considered partially unsatisfied as of March 31, 2021. As of December 31, 2020, the Company recorded deferred revenue of $13.6 million related to the Takeda Agreement. Deferred revenue will be recognized over the period the Company will perform research and development services, through the end of Phase 1 clinical trials.

The Takeda Agreement contains various milestone payments associated with development and commercialization efforts that provide for a maximum available amount of $180.0 million should all of the milestones be achieved. These milestones are constrained until the Company determines it is probable that the cumulative revenue related to the milestones will not be reversed, at which point the Company adds the consideration to the transaction price and recognizes the milestone revenue over the remaining performance period, according to the measure of progress, with a catch-up in the period it becomes probable that a significant reversal of revenue will not occur. As of March 31, 2021, the Company has earned and received $4.0 million in milestone payments.

The Company recognized revenue related to the Takeda Agreement of $3.6 million and $1.6 million in the three months ended March 31, 2021 and 2020, respectively, which is included under collaboration revenue in the condensed consolidated statements of operations.

Under the Takeda Agreement, Takeda is obligated to pay the Company mid-to-high single digit royalties based on annual aggregate net sales of the licensed products, on a product-by-product basis, subject to certain restrictions. The Company did not receive any payments or record any revenues related to sales-based royalties under the Takeda Agreement in the three months ended March 31, 2021 and March 31, 2020.

OpenBiome

On December 14, 2016, the Company entered into a Master Strategic Affiliation Agreement (“Strategic Agreement”) with OpenBiome (see Note 12) which provided the legal infrastructure for the strategic collaboration. Under the Strategic Agreement, a series of subject matter agreements between the Company and OpenBiome were executed that provide a detailed outline of the strategic collaboration, including agreements to govern quality and safety of the data as well as facilitate the transfer of intellectual property between the parties. In addition to the subject matter agreements, the Company and OpenBiome also entered into a Material Access and License Agreement (“MAL Agreement”) in December 2016 and an Asset Purchase and License Agreement (“APL Agreement”) in February 2019. The MAL Agreement provided the Company with a license to certain biological material and data from stool donors which could be used in the Company’s research and development activities (see Note 8). Under the APL

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Agreement, the Company licensed certain intellectual property and sold certain fecal microbiota transplantation, or FMT, materials and equipment to OpenBiome (see Note 8).

On February 22, 2017, the Company entered into the QSS Agreement with OpenBiome, who was deemed to represent a customer, which was subsequently amended on September 19, 2017. Under the QSS Agreement, OpenBiome granted the Company an exclusive license, eligible for sublicense, of certain OpenBiome technology and intellectual property. Additionally, the Company acquired certain assets of OpenBiome for use in manufacturing and supplying FMT materials in connection with the execution of the QSS Agreement. Under the QSS Agreement, OpenBiome purchased FMT materials manufactured by the Company at cost. The QSS Agreement allows for the Company to use the licensed OpenBiome technology and intellectual property for its own research and development efforts in exchange for up to $27.5 million in milestone payments associated with the Company’s development and commercialization efforts.

The Company determined that the QSS consisted of one combined performance obligation, consisting of the obligation to manufacture FMT materials. The Company recognizes revenue under the QSS at a point in time, once the underlying transfer of FMT materials occurs. In 2018, the Company entered into a Subject Matter Agreement for Materials and Services in Support of Government Contracts and a Subject Matter Agreement for Services in Support of a Single Patient IND for Compassionate Use to allow for the parties to share clinical data and align on regulatory requirements and responsibilities.

The QSS Agreement was partially terminated on February 1, 2019 in connection with the APL Agreement, and fully terminated in November 2020 in connection with the Company’s execution of the OpenBiome Agreement (see Note 12). As of February 2019, the Company had no further obligation to manufacture FMT material and transfer it to OpenBiome. The Company earned $0 and $0.2 million in royalty revenue related to the APL Agreement in the three months ended March 31, 2021 and 2020, respectively, which is recorded as royalties revenue from related party on the Company’s condensed consolidated statements of operations. As of March 31, 2021 and December 31, 2020, there were no amounts recorded as inventory in connection with the QSS Agreement on the Company’s condensed consolidated balance sheets.

On November 19, 2020, the Company entered into the license agreement (“LMIC Agreement”) with OpenBiome, pursuant to which the Company granted OpenBiome a non-exclusive 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 donor-sourced stool without the use of culturing or replication, or certain natural products (“OpenBiome Royalty Products”). The license granted excludes a license under the Company’s intellectual property to exploit a lyophilized natural product (such as CP101) where processed stool is lyophilized. The Company owns all improvements and modifications made to the licensed intellectual property throughout the term of the LMIC Agreement, while OpenBiome is responsible for all manufacturing efforts and all expenses associated with these efforts.

The LMIC Agreement was entered into separately from the OpenBiome Agreement (See Note 12) and the license granted under the LMIC Agreement is unrelated to those assets acquired. The only consideration provided to the Company under the LMIC Agreement is in the form of future royalties on net sales of OpenBiome Royalty Products. The Company is 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. In the event that OpenBiome is required to pay a royalty to a third party to obtain rights under patents owned or controlled by such third party that are necessary for the exercise of its rights under the Company’s intellectual property pursuant to the LMIC Agreement, then OpenBiome shall have the right to deduct a portion of the amount of the royalty due to the third party against the royalties that are due from OpenBiome to the Company. The Company has not earned any of these royalty payments as of March 31, 2021.

The LMIC Agreement will continue in perpetuity until the last royalty is earned under the LMIC Agreement unless otherwise terminated by either party. OpenBiome has the right to terminate the LMIC Agreement for convenience upon 90 days’ specified prior written notice to the Company. Either party may terminate the LMIC Agreement in the event of an uncured material breach by the other party of the LMIC Agreement.

OpenBiome also has the right to sublicense any new in-licenses entered into by the Company for a four-year period subject to certain restrictions. The new in-licenses are licenses entered into by Company or its affiliates after the execution of the LMIC Agreement concerning third-party technology that would be reasonably useful or necessary for OpenBiome in their development of OpenBiome Natural Products, OpenBiome Licensed Drug Substances, and OpenBiome Royalty Product under the LMIC Agreement.

Pursuant to ASC 606, the Company determined that OpenBiome is a customer under the LMIC Agreement as the Company is transferring the license, which is an output of the Company’s primary business operations, to OpenBiome in exchange for future consideration. The LMIC Agreement is comprised of two distinct performance obligations, one consisting of the license and relevant data exchange, and one related to the rights to future new in-licenses. The Company determined that the rights to future new in-licenses is not representative of a material right, as they do not provide future goods or services at a significant discount and are

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contingent upon the Company entering into such licenses. There are no new in-licenses at the execution of the LMIC Agreement, as such no value is allocated to them at execution, but the performance obligation will be reassessed at each reporting period to determine allocation of future consideration once they are executed. The performance obligation consisting of the license and relevant data exchange will be satisfied over time, as OpenBiome uses the license. As the underlying contingent royalty payments are predominantly related to the license, the Company will elect the royalty scope exception to recognize royalty revenue as the underlying sales occur.

The Company did not recognize any revenue related to the LMIC Agreement for the three months ended March 31, 2021 and 2020, as there are currently no marketable OpenBiome Royalty Products.

7. INCOME TAXES

During the three months ended March 31, 2021 and the year ended December 31, 2020, 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, 2021 as compared to the year ended December 31, 2020.

8. COMMITMENTS AND CONTINGENCIES

Operating lease commitments

200 Inner Belt Rd

In December 2015, the Company entered into a 10-year lease agreement (“Inner Belt Road Lease”) for approximately 25,785 square feet of space for its primary office and laboratory space in Somerville, Massachusetts. The Inner Belt Road Lease provided for a two-month rent holiday in the first year of the lease and rent abatements for the first two years of the lease. The monthly rental payments under the Inner Belt Road Lease, which include base rent charges of $0.1 million, are subject to periodic rent increases through September 2026.

In July 2016, the Company entered into a 10-year sublease agreement to share its leased space under the Inner Belt Road Lease with OpenBiome, a related party, as sub-tenant. The sublease with OpenBiome is coterminous with the Inner Belt Road Lease and provides for an allocation, based on OpenBiome’s proportionate share, of base rent and other expenses under the Inner Belt Road Lease, which is subject to change each year based on current headcount and space used. OpenBiome’s proportionate share is reassessed on a quarterly basis over the term of the sublease.

In January 2017, the Company amended the Inner Belt Road Lease to lease an additional 10,500 square feet of space for its primary office and laboratory space in Somerville, Massachusetts. The term of the Inner Belt Road Lease and the sublease with OpenBiome were not affected as a result of the amendment, although OpenBiome does occupy some of this additional space. The amendment to the Inner Belt Road Lease provided for leasehold improvement incentives of approximately $0.4 million related to the additional office and laboratory space. The rental payments for the additional space under the amended Inner Belt Road Lease, which include base rent charges of approximately $33,000 per month, are subject to periodic rent increases through September 2026. OpenBiome did not occupy any of the Company’s premises between August 2018 and February 2019, and resumed occupancy and rental payments to the Company beginning in February 2019 when the APL Agreement was executed (see Note 12). In November 2020, pursuant to the OpenBiome Agreement, the Company and OpenBiome amended the terms of the sublease to provide for a reduction in the size of the subleased premises upon the closing of the OpenBiome Agreement (see Note 12), which occurred on March 1, 2021.

The Company recognizes rent expense, inclusive of a reduction to reflect the impact of lease incentives, under the Inner Belt Road Lease on a straight-line basis over the respective lease term and records deferred rent for rent expense incurred but not yet paid. The Company recognizes rent income under the sublease to OpenBiome on a straight-line basis over the sublease term and records prepaid rent for rent income received but not yet earned in due from related party on its condensed consolidated balance sheets. Gross rent expense under the Inner Belt Road Lease was $0.3 million for each of the three months ended March 31, 2021 and 2020. Gross rent income under the sublease to OpenBiome for each of the three months ended March 31, 2021 and 2020 was $0.1 million and is presented as an offset to rent expense on the condensed consolidated statements of operations.

Cherry Street

On March 1, 2021, the Cherry Street Lease was assumed by the Company in conjunction with the closing of the OpenBiome Agreement. The Company’s rent expense under the Cherry Street Lease for the three months ended March 31, 2021 and 2020 was approximately $8,000 and $0, respectively.

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A summary of the Company’s future minimum lease payments required under non-cancellable lease agreements as of March 31, 2021 is as follows (in thousands):

Legal Contingencies

Legal claims may arise from time to time in the normal course of business. There are no such claims as of March 31, 2021 and 2020 that will have a material effect on the Company’s accompanying condensed consolidated financial statements.

License Payments

The Company enters into contracts in the normal course of business with contract research organizations and other third parties for preclinical studies, clinical studies, and testing and manufacturing services. Most contracts do not contain minimum purchase commitments and are cancelable by the Company upon prior written notice. Payments due upon cancellation 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. Under these agreements, in exchange for access to intellectual property the Company may be obligated to provide future minimum royalty payments and milestone payments related to regulatory approvals and sales-based events. The Company entered into the OpenBiome Agreement in November 2020 (see Note 12) and the OpenBiome Agreement occurred on March 1, 2021. Under the terms of the OpenBiome Agreement, the Company is required to make certain milestone and royalty payments to OpenBiome in conjunction with the license and purchase of certain intellectual property related to the underlying CMC process used to manufacture materials for its clinical trials. The OpenBiome Agreement also effectively terminated the APL Agreement and MAL Agreement obligations.

Under the APL Agreement entered into in 2019 that was effective through November 2020, the Company was obligated to make certain contingent payments for milestones and royalties to OpenBiome, subject to the occurrence of specific underlying criteria that were dependent on regulatory approvals and sales-based events. The Company was obligated to make regulatory milestone payments to OpenBiome aggregating up to $2.5 million upon the achievement of regulatory approvals, and sales-based milestone payments of up to $23.3 million in sales-based milestone payments upon the achievement of certain net sales criteria. The Company paid $0.1 million to OpenBiome associated with milestones in 2020. The APL Agreement was terminated in November 2020 upon the execution of the OpenBiome Agreement (see Note 12).

Under the MAL Agreement, the Company was also obligated to pay to OpenBiome, a low single digit royalty on net sales of certain cultured products and a high single digit percentage of certain sublicensing revenue (including royalties) of licensed cultured products. These royalties were calculated on a product-by-product and country-by-country basis. The Company paid $0.2 million to OpenBiome under the MAL Agreement in 2020 related to royalty payments. During the year ended December 31, 2020, the Company recorded an additional $0.3 million owed to OpenBiome under the MAL Agreement, of which $0.1 million remained due as of December 31, 2020. The MAL Agreement was terminated in November 2020 upon the execution of the OpenBiome Agreement (see Note 12).

PPP Loan

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to, amongst other provisions, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. The CARES Act includes a Paycheck Protection Program (“PPP”) administered through the Small Business Association (“SBA”). Under the PPP, beginning April 3, 2020, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria.

In April 2020, the Company issued a promissory note to Silicon Valley Bank, pursuant to which it received loan proceeds of $1.8 million (the “PPP Loan”) provided under the PPP established under the CARES Act and guaranteed by the U.S. Small Business Administration (“SBA”). The PPP Loan was unsecured, scheduled to mature on April 21, 2022, and has a fixed interest rate of 1.0% per annum. No payments of principal or interest were due during the year ended December 31, 2020, although interest accrued on the unpaid principal balance. The Company accrued less than $0.1 million of interest expense related to the PPP Loan for the three

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months ended March 31, 2021. Forgiveness of the PPP Loan is only available for principal that is used for the limited purposes that expressly qualify for forgiveness under SBA requirements. The Company has determined to account for the PPP Loan as debt under ASC 470, “Debt,” and has allocated and recorded the proceeds from the PPP Loan as non-current liabilities as no payment was currently due as of March 31, 2021. The Company further determined that loan forgiveness would become probable of occurring upon acceptance by the SBA of the Company’s forgiveness application.

9. REDEEMABLE CONVERTIBLE PREFERRED STOCK

Upon the completion of the IPO, all 31,253,609 shares of outstanding preferred stock automatically converted into 31,253,609 shares of common stock. As of March 31, 2021, there were no shares of preferred stock outstanding.

As of December 31, 2020, preferred stock consisted of the following (in thousands, except share amounts):

Of the preferred stock outstanding as of December 31, 2020, 9,740,014 of the Company’s Series A shares, 2,412,788 of the Company’s Series B shares, 4,620,453 of the Company’s Series C shares and 3,138,260 of the Company’s Series D shares were owned by affiliates of the Company, deemed to represent related parties.

Significant terms of the Series A, Series B, Series C and Series D (collectively, “Preferred Stock”) are as follows:

Voting Rights

The holders of each share of Preferred Stock (“Preferred Stockholders”) had the right to one vote for each share of common stock into which such Preferred Stock could then convert.

Dividends

In the event the Company declared, paid, or set aside any dividends on shares of any class of capital stock of the Company, other than dividends on shares of common stock payable in shares of common stock, the holders of Preferred Stock were first entitled to receive a dividend on each outstanding share. Dividends were not cumulative.

In the case of a dividend on common stock or any class of stock that is convertible into common stock, the Preferred Stock dividend per share would equal the product of the dividend payable on each share of stock determined and the number of shares of common stock issuable upon conversion of a share of Preferred Stock. In the case of a dividend on any class that was not convertible to common stock, the Preferred Stock dividend per share would be determined by dividing the amount of the dividend payable on each share of capital stock by the original issuance price of such stock and multiplying that fraction by an amount equal to the Preferred Stock original issue price. The dividend payable to the holders of Preferred Stock would be based on the formula which would result in the highest preferred stock dividend. No dividends were declared or paid by the Company.

Liquidation Preference

In the event of any liquidation, dissolution or winding up of the Company, the holders of Preferred Stock would have been entitled to be paid out an amount per share equal to the greater of (i) the original issuance price of the Preferred Stock, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of Preferred Stock been converted into common stock. If insufficient assets and funds were available to permit payment to the Preferred Stockholders of the full amount, then all available assets and funds would be distributed to the Preferred Stockholders on a pro rata basis. Note that in relation to the above, the order in which holders of Preferred Stock were entitled to be paid out of the assets of the Company was as follows: the holders of Series D, Series C, Series B, Series A and then common stock.

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After payment in full to the Preferred Stockholders, the holders of common stock would have been entitled to be paid out of the assets of the Company available for distribution on a pro rata basis based on the number of shares held.

Conversion Rights

Each share of Preferred Stock was convertible at any time at the option of the holder into common stock. Each share would be converted into such number of shares of common stock as was determined by dividing the respective original issuance price by the conversion price in effect at the time of the conversion. The shares of Preferred Stock converted on a one-for-one basis.

Conversion was mandatory at the earlier of the closing of an initial public offering of the Company’s common stock at a price of at least one and one-half times the respective conversion price of each series of Preferred Stock, with gross proceeds to the Company of at least $25.0 million, or at the election of the majority holders of the outstanding shares of Preferred Stock.

10. STOCKHOLDERS’ EQUITY

On February 24, 2021, the Board and the Company’s stockholders approved the Company’s amended and restated certificate of incorporation, which became effective immediately prior to the closing of the IPO on March 18, 2021. The certificate 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.

In conjunction with the IPO, the Company issued and sold 7,500,000 shares of common stock at a public offering price of $17.00 per share, for aggregate net proceeds of $115.7 million after deducting underwriting discounts and commissions and initial public offering costs. In connection with the IPO, all then outstanding shares of Preferred Stock were converted into 31,253,609 shares of common stock.

Each share of common stock entitles the holder to one vote, together with the holders of Preferred Stock, on all matters submitted to the stockholders for a vote. Common stockholders are also entitled to receive dividends. As of March 31, 2021, no cash dividends have been declared or paid.

The Company has issued restricted stock to founders, employees and consultants. All restricted stock was fully vested and all expense related to these shares was recognized prior to 2020.

As of March 31, 2021 and December 31, 2020, the Company has reserved the following shares of common stock for potential conversion of outstanding Preferred Stock, the vesting of restricted stock and exercise of stock options and common stock warrants:

11. STOCK-BASED COMPENSATION

2017 Equity Incentive Plan

The Company adopted the 2017 Equity Incentive Plan (the “2017 Plan”) in February 2017 for the issuance of stock options and other stock-based awards to employees, consultants, officers and directors. As of March 31, 2021, there were no shares available for future issuance since all shares in the 2017 Plan ceased to be available upon the effective date of the 2021 Equity Incentive Plan. There were 698,601 shares of common stock available for future grants under the Plan as of December 31, 2020.

2021 Equity Incentive Plan

In March 2021, the Board adopted, and the stockholders approved, the 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan became effective on the date of the underwriting agreement related to the IPO and no further grants will be made under the 2017 Plan. The 2021 Plan will provide for the grant of incentive stock options, including employees of any parent or subsidiary, and for the grant

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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.

Initially, the maximum number of shares of the Company’s common stock that may be issued under the 2021 Plan will not exceed 5,291,446 shares of common stock, which is the sum of (1) 4,700,000 new shares, plus (2) an additional number of shares equal to the number of shares of common stock subject to outstanding stock options or other stock awards granted under the 2017 Plan that, on or after the 2021 Plan became effective, terminate or expire prior to exercise or settlement; are not issued because the award is settled in cash; are forfeited because of the failure to vest; or are reacquired or withheld (or not issued) to satisfy a tax withholding obligation or the purchase or exercise price, if any, as such shares become available from time to time. In addition, the number of shares of common stock reserved for issuance under our 2021 Plan will automatically increase on January 1 of each calendar year, starting on January 1, 2022 through January 1, 2031, in an amount equal to (i) 5.0% of the total number of shares of common stock outstanding on December 31 of the year before the date of each automatic increase, or (ii) a lesser number of shares determined by the Board prior to the applicable January 1. The maximum number of shares of common stock that may be issued on the exercise of ISOs under the 2021 Plan will be 14,100,000 shares. Shares subject to stock awards granted under the 2021 Plan that expire or terminate without being exercised in full or that are paid out in cash rather than in shares will not reduce the number of shares available for issuance under the 2021 Plan.

As of March 31, 2021, there were 815,214 shares of common stock issuable upon the exercise of outstanding options and there were 3,884,786 shares available for future issuance under the 2021 Plan.

2021 Employee Stock Purchase Plan

In March 2021, the Board adopted the 2021 Employee Stock Purchase Plan (the “2021 ESPP”), which became effective on the date of the underwriting agreement related to the IPO. The 2021 ESPP will be administered by the Board or by a committee appointed by the Board. The 2021 ESPP initially provides participating employees with the opportunity to purchase up to an aggregate of 500,000 shares of common stock. As of March 31, 2021, no offering periods had commenced under the 2021 ESPP and no shares were available for issuance.

Stock Options

The following table summarizes the activity of the Company’s stock options under the 2017 Plan and 2021 Plan for the three months ended March 31, 2021:

As of March 31, 2021, there was approximately $11.2 million of unrecognized compensation expense related to the stock-based compensation arrangements granted under the 2021 Plan remaining to be recognized. The Company expects to recognize this cost over a weighted average period of 2.92 years.

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Stock-Based Compensation Expense

Total stock-based compensation expense recorded as research and development and general and administrative expenses, respectively, for employees, directors and non-employees during the three months ended March 31, 2021 and 2020, respectively, is as follows (in thousands):

12. RELATED PARTY TRANSACTIONS

OpenBiome Historical Agreements

Under the Strategic Agreement, OpenBiome and the Company reimbursed one another for certain administrative expenses. The Company’s Chief Executive Officer and a member of its board of directors, is the spouse of the Executive Director and co-founder of OpenBiome, and certain of the OpenBiome directors are shareholders of the Company.

For the three months ended March 31, 2021 and 2020, the Company reimbursed OpenBiome $0.1 million and approximately $0.2 million, respectively, under the Strategic Agreement. Also under the Strategic Agreement, OpenBiome reimbursed the Company $0.1 million for the three months ended March 31, 2021 and 2020. The Company recorded less than $0.1 million due to OpenBiome and less than $0.1 million due from OpenBiome as of March 31, 2021 and December 31, 2020.

OpenBiome subleases office and lab space from the Company. The Company’s rent income under the sublease was $0.1 million for the three months ended March 31, 2021 and 2020. As of March 31, 2021 and December 31, 2020, the Company had less than $0.1 million receivable from OpenBiome related to the sublease recorded as due from related party in the condensed consolidated balance sheets. This lease was amended as of March 1, 2021 (see Note 8).

The Company also earned a low single digit royalty on net sales of OpenBiome’s FMT materials under the QSS Agreement, which was partially terminated on February 1, 2019 (see Note 6), and, ultimately, was fully terminated in November 2020 in connection with the Company’s execution of the OpenBiome Agreement (see OpenBiome 2020 Agreements below), which closed on March 1, 2021.

OpenBiome 2020 Agreements

Clinical Supply and Services Agreement

On February 10, 2020, the Company entered into a Clinical Supply and Services Agreement (“CSA”) with OpenBiome, the term of which is one year, as the CSA terminated upon closing of the OpenBiome Agreement. In accordance with the CSA, OpenBiome agreed to supply the Company with certain manufactured material and to provide additional support services to the Company. In consideration for these materials and services, the Company agreed to pay a monthly platform fee of $0.2 million, all direct employee overhead costs, and variable costs for consumables. Under a related payment agreement executed concurrently with the CSA, the Company paid a $0.5 million security deposit in the event of cost overruns under the CSA arrangement and approximately $1.1 million in prepaid fees. The $0.5 million security deposit was returned to the Company during the same period. The Company paid $0.8 million in total to OpenBiome under the CSA for the three months ended March 31, 2021, and $1.6 million for the three months ended March 31, 2020, including the security deposit that was returned. The Company recorded $0.3 million and $0.2 million due to OpenBiome under the CSA as of March 31, 2021 and December 31, 2020, respectively, which is classified as due to related party in the Company’s condensed consolidated balance sheets.

OpenBiome Purchase Agreement

On November 19, 2020, the Company entered into an asset purchase agreement (the “OpenBiome Agreement”) with OpenBiome in order to obtain OpenBiome’s CMC manufacturing process to enhance its current manufacturing capabilities for its lead program, CP101; the OpenBiome Agreement was fully executed and closed on March 1, 2021. Simultaneously with entering into the OpenBiome Agreement, the Company terminated the Strategic Agreement, the MAL Agreement, the QSS Agreement and the APL Agreement, as well as certain subject matter agreements. Upon closing of the OpenBiome Agreement on March 1, 2021, the CSA was

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also terminated and the Company will not incur any additional expense to be paid to OpenBiome. The Company also amended the Strategic Agreement as part of the OpenBiome Agreement (“A&R Master Agreement”).

Pursuant to the OpenBiome Agreement, the Company acquired certain biological samples, software, and a non-exclusive license to OpenBiome’s CMC technology upon signing in November 2020, and acquired certain biological samples, a commercial lease, contract services intellectual property and capital equipment upon the closing of the transaction in March 2021. The Company previously licensed the biological samples and OpenBiome’s CMC technology under various historical agreements with OpenBiome which terminated upon signing of the OpenBiome Agreement. As such, the acquisition of the CMC technology license was a continuation of previously granted rights. The OpenBiome Agreement also releases, for a one-year period upon signing, a hiring restriction under the A&R Strategic Agreement (i.e. non-solicitation) such that the Company may hire, at its discretion, certain OpenBiome employees. The Company did not acquire any such employees as part of the transaction.

In connection with the OpenBiome Agreement, the Company paid $1.2 million for the acquisition of certain assets in November 2020, which was capitalized as property and equipment as software on the Company’s consolidated balance sheet as of December 31, 2020, and paid $3.8 million upon the closing of the OpenBiome Agreement on March 1, 2021, for the remaining assets. The Company accounted for the OpenBiome Agreement as an asset acquisition, and capitalized $5.0 million of property and equipment on the condensed consolidated balance sheet as of March 31, 2021 for the acquired software and property and equipment. The Company did not assign any value to biological samples, contract services intellectual property, or the CMC technology license, as the Company did not acquire any additional rights that were not previously granted under the legacy agreements.

The Company is also required to pay certain milestones up to $26.0 million upon the occurrence of certain research and development 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.

The Company previously granted OpenBiome a royalty-bearing, non-exclusive license to its intellectual property under the APL Agreement, which terminated upon the signing of the OpenBiome Agreement. The Company will continue to earn royalties under the OpenBiome Agreement based on sales of FMT materials.

13. RETIREMENT PLAN

The Company has adopted a defined contribution plan intended to qualify under Section 401(k) of the Internal Revenue Code covering all eligible employees of the Company. All employees are eligible to become participants of the plan immediately upon hire. Each active employee may elect, voluntarily, to contribute a percentage of their compensation to the plan each year, subject to certain limitations. The Company reserves the right to make additional contributions to this plan. The Company made contributions to the plan of $0.2 million and $0.1 million in the three months ended March 31, 2021 and 2020, respectively.

14. LOSS PER SHARE

Basic and diluted loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding (in thousands, except share and per share data):

The Company’s potentially dilutive securities, which include Preferred Stock, restricted stock, stock options, and warrants, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to

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common stockholders is the same. The Company excluded the following from the computation of diluted net loss per share attributable to common stockholders at March 31, 2021 and 2020 because including them would have had an anti-dilutive effect:

15. SUBSEQUENT EVENTS

The Company closed its IPO on March 23, 2021. On April 20, 2021, the Company issued 192,877 additional shares of common stock, pursuant to the underwriters’ partial exercise of its overallotment option, at a public offering price of $17.00 per share for aggregate gross proceeds of $3.3 million and net proceeds of $3.0 million after deducting underwriters’ discounts, commissions and offering costs.

In April 2020, the Company received proceeds of $1.8 million from the PPP Loan under the PPP, of the CARES Act, administered by the SBA. The Company has used the PPP Loan to retain current employees, maintain payroll and make lease and utility payments. On May 8, 2021, the Company received notice from the SBA that the entirety of the PPP Loan was forgiven. Accordingly, the Company is no longer required to repay the $1.8 million in principal and approximately $19,000 in accrued interest borrowed under the PPP Loan.

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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, 2020 included in our final prospectus for our initial public offering, or IPO, dated March 18, 2021, filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act, on March 22, 2021, which we refer to as the Prospectus.

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 Quarterly Report on Form 10-Q, 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 II, Item 1A of this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q.

Overview

We are a clinical-stage microbiome therapeutics company leveraging our Human-First Discovery platform to develop a novel class of orally administered biological drugs. The microbiome consists of trillions of microbes that live symbiotically in and on every human and are essential to our health. When key microbes are lost, the resulting dysbiosis can increase susceptibility to immune disorders, infections, neurological conditions, cancer and other serious diseases. We are developing novel therapeutics designed to deliver missing microbes and their clinically relevant biochemical functions to correct dysbiosis and the diseases that emerge from it. Our Human-First Discovery platform uses reverse translation to identify diseases of dysbiosis and to design microbiome therapeutics that address them. Our lead product candidate, CP101, delivers a complete microbiome and is being developed initially for the treatment of patients with recurrent Clostridioides difficile infection, or CDI. In June 2020, we reported positive topline data from our first of two pivotal trials in recurrent CDI, and we plan to initiate a Phase 3 clinical trial, which we refer to as PRISM4, as our second pivotal trial of CP101 for recurrent CDI in mid-2021. Although we need to generate additional data confirming safety and efficacy to support regulatory approval of CP101 for the treatment of recurrent CDI, we believe data from our pivotal, Phase 2 clinical trial with CP101 validates our platform, positioning us to initiate new clinical trials in at least three new indications over the next 18 months, including chronic hepatitis B virus, or HBV, autism spectrum disorder, or ASD, and ulcerative colitis. We believe that our differentiated platform, rich pipeline and the broad therapeutic potential of this new field of medicine position us to transform care for a wide range of unmet medical needs.

Since our inception, we have focused primarily on developing and progressing our product candidates through clinical development, organizing and staffing our company, research and development activities, establishing and protecting our intellectual property portfolio including for our Human-First Discovery platform, and raising capital. We do not have any product candidates approved for sale and have not generated any revenue from product sales. Since our inception, we have funded our operations primarily with proceeds from the sale of convertible preferred stock and from collaboration revenue.

On March 12, 2021, we effected a 1-for-14.444 reverse stock split of our issued and outstanding shares of common stock and redeemable convertible preferred stock, as well as effected a proportional adjustment to the existing conversion ratios for our redeemable convertible preferred stock. All historical share and per share information shown herein and in our unaudited condensed financial statements and related notes have been retroactively adjusted to give effect to the reverse stock split.

On March 18, 2021, we completed an IPO in which we issued and sold 7,500,000 shares of our common stock at a public offering price of $17.00 per share, resulting in aggregate gross proceeds of $127.5 million. On April 20, 2021, we issued and sold 192,877 additional shares of common stock, pursuant to the underwriters’ partial exercise of its overallotment option, at a public offering price of $17.00 per share, for aggregate gross proceeds of $3.3 million. Inclusive of the underwriters’ option to purchase additional shares, we received approximately $118.8 million in net proceeds from the IPO after deducting underwriting discounts and commissions and offering costs. Upon completion of the IPO, all 31,253,609 shares of outstanding redeemable convertible preferred stock automatically converted into 31,253,609 shares of common stock.

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Since our inception, we have incurred significant operating losses. Our net losses were $14.0 million and $7.9 million for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, we had an accumulated deficit of $116.8 million. We expect to continue to generate operating losses and negative operating cash flows for the foreseeable future if and as we:

We will not generate any revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one or more of our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing and distribution.

As a result, we will need substantial additional funding to support our operating activities as we advance our product candidates through clinical development, seek regulatory approval and prepare for and, if any of our product candidates are approved, proceed to commercialization. Until such time, if ever, that we can generate substantial product 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, we will be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations. Although we continue to pursue these plans, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all.

We expect that our existing cash and cash equivalents of $193.0 million as of March 31, 2021 will enable us to fund our operating expenses and capital expenditure requirements into mid-2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.”

COVID-19 Business Update

In response to the ongoing global COVID-19 pandemic, we established a cross-functional task force and have implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on our employees and our business, including our clinical trials. Our operations are considered an essential business and we have been allowed to continue operating under current governmental restrictions during this period. We have taken measures to secure our research and development activities, while work in laboratories and facilities has been organized to reduce risk of COVID-19 transmission. The extent of the impact of the COVID-19 pandemic on our business, operations and clinical development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on our clinical trial enrollment, trial sites, contract research organizations, or CROs, contract manufacturing organizations, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. While we are experiencing limited financial impacts at this time, given the global economic slowdown, the overall disruption of global healthcare systems and the other

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risks and uncertainties associated with the pandemic, our business, financial condition and results of operations ultimately could be materially adversely affected. We continue to closely monitor the COVID-19 pandemic as we evolve our business continuity plans, clinical development plans and response strategy.

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 will be derived primarily from our current collaboration agreement and any additional collaborations that we may enter into in the future, and any collaboration revenue we generate will fluctuate from period to period as a result of the timing and amount of milestones and other payments. To date, we have not received any royalties under our collaboration agreement with Takeda Pharmaceutical Company Limited, or Takeda. However, during the three months ended March 31, 2020, we received royalties in the aggregate of $0.2 million pursuant to our 2019 Asset Purchase and License Agreement, or APL Agreement, with OpenBiome. The APL Agreement was terminated in November 2020, and we received no royalties thereafter.

Collaboration and License Agreement with Takeda

In January 2017, we entered into a research collaboration and exclusive license agreement, or the Takeda Agreement, with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda, pursuant to which we granted Takeda a worldwide, exclusive license, with the right to grant sublicenses, under certain of our patents, patent applications and know-how to develop, have developed, manufacture, have manufactured, make, have made, use, have used, offer for sale, sell, have sold, commercialize, have commercialized and import our microbiome therapeutic candidate FIN-524 for the prevention, diagnosis, theragnosis or treatment of diseases in humans. We subsequently amended and restated the Takeda Agreement in October 2019 to provide a similar worldwide, exclusive license to a second microbiome therapeutic candidate, FIN-525.

In connection with entry into the Takeda Agreement, we received a one-time, upfront payment from Takeda in the amount of $10.0 million. Additionally, we received $4.0 million in the aggregate for the achievement of certain development milestones for FIN-524 therapeutic products and are entitled to receive up to $176.0 million in the aggregate, for the achievement of specified development, regulatory and commercial sale milestones for FIN-524 therapeutic products. We are entitled to receive up to $177.7 million in the aggregate, for the achievement of specified development, regulatory and commercial sale milestones for FIN-525 therapeutic products, subject, to certain specified reductions based upon the nature of the FIN-525 product and certain additional milestones to be negotiated by the parties. We are also entitled to receive up to $10.0 million for the first diagnostic product for each of FIN-524 and FIN-525, subject to certain reductions in the event that Takeda uses a third party to develop such diagnostic products. Revenue under the Takeda Agreement is recognized as our research and development services are provided and is recorded as collaboration revenue on our consolidated statement of operations.

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.

In February 2017, we entered into the Quality System and Supply Agreement, or QSS Agreement, with OpenBiome, which was subsequently amended in September 2017 and was partially terminated in February 2019. Under the QSS Agreement, OpenBiome granted us an exclusive license, eligible for sublicense, of certain OpenBiome technology and intellectual property. Additionally, we acquired certain assets of OpenBiome for use in manufacturing and supplying product. The QSS Agreement allowed us to use the licensed OpenBiome technology and intellectual property for our own research and development efforts in exchange for up to $27.5 million in milestone payments associated with development and commercialization efforts. We were responsible for providing support to OpenBiome related to manufacturing product, produced to OpenBiome’s specifications, which has been included as service revenue in our consolidated statements of operations. Revenue under the QSS Agreement was recorded as either contract manufacturing revenue or royalty revenue in our consolidated statements of operations.

On November 19, 2020, we entered into the LMIC License Agreement, or the LMIC Agreement, with 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 license granted excludes a license under our intellectual property to exploit a lyophilized Natural Product (such as CP101) where processed stool is lyophilized. The only consideration provided to us under the LMIC Agreement is in the form of future royalties on net sales of these products,

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which are not currently commercially viable. 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 did not recognize any revenue related to the LMIC Agreement for the three months ended March 31, 2021 and 2020, as there are currently no products available for sale.

On November 19, 2020, we entered into an asset purchase agreement with OpenBiome, or the OpenBiome Agreement, the effect of which was to terminate certain existing agreements with OpenBiome and internalize some of functions for which we have previously relied on OpenBiome. Pursuant to the OpenBiome Agreement, we acquired certain biological samples and obtained a license to certain OpenBiome technology and, upon closing of the transaction, which occurred March 1, 2021, we acquired certain additional assets, including biological samples, capital equipment and contracts. As of March 31, 2021, we have made payments of $5.0 million to OpenBiome related to the OpenBiome Agreement, which is the full amount agreed upon. We are also required to pay certain milestones up to $26.0 million upon the occurrence of certain research and development 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.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our product candidates. We expense research and development costs as incurred, which include:

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.

Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase for the foreseeable future as we initiate clinical trials for our product candidates and continue to discover and develop additional product candidates. If any of our product candidates enter into later stages of clinical development, they will generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. There are numerous factors associated with the successful commercialization of any product candidates we may develop in the future, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development program and plans.

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 increase in the future as we increase our general and administrative headcount to support our continued research and development and potential commercialization of our product candidates. We also

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expect to incur increased 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.

Total Other Expense, Net

Interest Income (Expense), Net

Interest income (expense), net primarily consists of interest earned on our cash and cash equivalents as well as interest expense on our loan, or the PPP Loan, under the Paycheck Protection Program, or the PPP, of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, administered by the U.S. Small Business Administration, or the SBA. Our interest income has not been significant due to low interest earned on cash balances related to our sweep account.

Other Expense

Other expense consists of realized losses on foreign exchange.

Results of Operations

Comparison of the Three Months Ended March 31, 2021 and 2020

The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020 (in thousands):

Revenue

Revenue of $3.6 million and $1.8 million for the three months ended March 31, 2021 and 2020, respectively, primarily consisted of collaboration revenue earned under the Takeda Agreement. Our collaboration revenue increased by $1.9 million in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to an increase in the overall percentage-of-completion of costs earned under the Takeda Agreement.

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Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended March 31, 2021 and 2020 (in thousands):

Research and development expenses for the three months ended March 31, 2021 were $13.0 million, compared to $7.4 million for the three months ended March 31, 2020. The increase of $5.6 million for the three months ended March 31, 2021 included a $3.3 million increase from manufacturing related expenses, personnel costs and early asset discovery work, a $1.0 million increase in expenses related to the expansion and development of the ASD program, and a $0.7 million increase in inflammatory bowel diseases, or IBD, program expenses.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the three months ended March 31, 2021 and 2020 (in thousands):

General and administrative expenses were $4.6 million for the three months ended March 31, 2021, compared to $2.3 million for the three months ended March 31, 2020. The increase of $2.3 million for the three months ended March 31, 2021 was primarily due to a $1.5 million increase in professional fees and a $0.9 million increase in personnel expenses. The increase in professional fees was related to our transition to a public company in March 2021. The increase in personnel expenses is related to an increase in headcount to support our operational growth as well as an increase in stock-based compensation expense.

Other Expense, Net

Total other expense, net was less than $0.1 million for the three months ended March 31, 2021 and 2020. This is primarily related to realized losses on foreign exchange.

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 have not yet commercialized any product and we do not expect to generate revenue from sales of any products for several years, if at all. We have funded our operations primarily through equity financings and from collaboration revenue. We have raised an aggregate of approximately $177.0 million from the sale of convertible preferred stock and $14.0 million in collaboration revenue from the upfront payment and milestone payments received under our collaboration agreement. In March 2021, we completed our IPO whereby we sold an aggregate of 7,500,000 shares of our common stock. In April 2021, we sold an additional 192,877 shares of our common stock, pursuant to the underwriters’ partial exercise of its overallotment option, at a public offering price of $17.00 per

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share, for aggregate gross proceeds of $3.3 million. In aggregate, we received approximately $118.8 million in net proceeds after deducting $9.2 million of underwriting discounts and commissions and $2.9 million of offering expenses.

In April 2020, we received proceeds of $1.8 million from the PPP Loan. We have used the PPP Loan to retain current employees, maintain payroll and make lease and utility payments. On May 8, 2021, we received notice from the SBA that the entirety of the PPP Loan we received was forgiven. Accordingly, we are no longer required to repay the $1.8 million in principal and approximately $19,000 in accrued interest borrowed under the PPP Loan.

Cash Flows

The following table summarizes our cash flows for the three months ended March 31, 2021 and 2020 (in thousands):

Operating Activities

During the three months ended March 31, 2020, cash used in operating activities was $6.0 million. This cash outflow was primarily related to our net loss and was offset by a $2.0 million increase in deferred revenue related to the additional milestones that were deferred to be recognized over the remaining research and development period, and a $1.5 million decrease in due from related party for amounts billed to OpenBiome but not received as of March 31, 2020. The outflow was also impacted by other changes in our operating assets and liabilities, including an increase in prepaid expenses and other current assets of $1.6 million, a decrease in accrued expenses and other current liabilities of $0.6 million, an increase in accounts payable of $0.3 million, and an increase in deferred rent of $0.3 million. The cash outflow included $0.2 million in non-cash depreciation and amortization expense for our fixed assets, including leasehold improvements and $0.1 million in stock-based compensation expense.

During the three months ended March 31, 2021, cash used in operating activities was $15.2 million. This cash outflow was primarily related to our net loss of $14.0 million, a $2.2 million decrease in deferred revenue related to our Takeda Agreement, a $1.2 million increase in accounts receivable and a $0.9 million decrease in accrued expenses and other liabilities. This cash outflow was partially offset by a $2.3 million decrease in prepaid and other current assets. The cash outflow included $0.3 million in non-cash stock-based compensation expense and $0.4 million in non-cash depreciation and amortization expense for our fixed assets, including leasehold improvements.

Investing Activities

During the three months ended March 31, 2020 and 2021, we used $0.1 million and $8.8 million, respectively, of cash in investing activities. The $0.1 million used during the three months ended March 31, 2020 and $8.8 million used during the three months ended March 31, 2021 was related to the purchase of property and equipment. Purchases of property and equipment during the three months ended March 31, 2021 includes $3.8 million in purchases from a related party.

Financing Activities

During the three months ended March 31, 2020, net cash used in financing activities was less than $0.1 million and stemmed primarily from payments on the capital lease obligation.

During the three months ended March 31, 2021, net cash provided by financing activities was $117.4 million, primarily related to $118.6 million of proceeds received from the IPO, net of underwriting discounts and commissions partially offset by $1.3 million of payments of issuance costs related to the IPO.

Funding Requirements

As of March 31, 2021, our cash and cash equivalents were $193.0 million. In April 2021, we sold an additional 192,877 shares of our common stock, pursuant to the underwriters’ partial exercise of its overallotment option, at a public offering price of $17.00 per share,

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for aggregate gross proceeds of $3.3 million. We believe that our existing cash on hand will enable us to fund our operating expenses and capital expenditure requirements into mid-2023. We have based this estimate on assumptions that may prove to be wrong, and we could expend our capital resources sooner than we expect.

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. In addition, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company. We expect that our expenses will increase substantially if and as we: