Going concern: what the disclosure means for a biotech, and how to see it coming

Few phrases cause more anxiety in a biotech boardroom than substantial doubt about the company's ability to continue as a going concern. It reads like a prediction of failure. In practice it is a narrow accounting test, applied mechanically, that a large share of clinical stage companies will meet at some point between financings. Understanding exactly how the test works is what lets you manage it rather than be surprised by it.

The test, in plain terms

Under ASC 205-40, management must evaluate, every annual and interim period, whether conditions raise substantial doubt about the company's ability to meet its obligations as they come due within one year after the date the financial statements are issued. The window starts on the issuance date, not the balance sheet date. A 10-Q for June 30 filed in mid August is tested against cash needs through mid August of the following year.

If substantial doubt exists, management then considers its plans to mitigate it. Plans count only if it is probable both that they will be implemented and that they will work. This is where most biotechs land. A financing that has not closed, a partnership still in negotiation, or an at the market program that depends on the share price generally does not meet the probable threshold. Cost reductions that management controls and has approved usually can.

• If the plans alleviate the doubt, the footnotes still describe the conditions and the plans.
• If they do not, the footnotes must state explicitly that substantial doubt exists, and the auditor's report on annual statements will include a going concern paragraph.

Why it lands on companies with good programs

Biotechs fund themselves in steps. A company that raised eighteen months of cash will, six months later, have twelve months left and a financing planned around its next readout. At that point the accounting test can no longer count on the raise, and the disclosure follows. Nothing about the science changed. On the Cambridge tracker, 11 of the 14 companies currently carrying going concern language have less than twelve months of runway at trailing burn, which is the test working exactly as written.

What the disclosure actually costs

• Debt. Many venture loan agreements treat a going concern paragraph in the annual audit opinion as an event of default unless waived. Read the covenant before the audit, not after.
• Partners and vendors. Large CROs and CDMOs run credit reviews. A going concern disclosure can mean deposits, shorter payment terms, or a slower contracting process exactly when you need the trial to move.
• Financing. Investors will see it, and it signals the timeline. It rarely stops a raise on strong data, but it removes any doubt about who needs the deal more.
• Exchange and registration. A Nasdaq listed company must publicly announce an audit opinion that contains a going concern paragraph, and the disclosure travels with every registration statement and prospectus supplement until it is resolved.

Seeing it two quarters early

Because the window is fixed, the date you cross it is predictable. Take the cash forecast your board already approves, find the month cash falls below what the next twelve months of obligations require, and step back to the filing date whose window first reaches that month. That is the first period in which disclosure becomes likely. Most companies can find it six to nine months in advance, which is enough time to change the answer.

1. Close the financing before the filing date that matters. A raise, a funded partnership, or a committed facility that closes before issuance counts. One that closes the week after does not.
2. Approve the cost plan formally. Deferrals of a second program, a CMC batch, or planned hires can count as mitigating plans if the board has approved them and management can execute them alone. Document the approval.
3. Fix the covenants first. If your loan agreement defaults on a going concern paragraph, negotiate the waiver well before the audit, while it is a routine amendment rather than an emergency.
4. Agree the analysis with the auditor early. Walk them through the forecast, the assumptions, and the plans before fieldwork. Disagreements about whether a plan is probable are much easier to resolve in October than in February.