CPSR 10-Q
Calamos S&P 500 Structured Alt Protection ETF - March (CPSR)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _________________
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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).
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.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 12, 2022, the registrant had
Table of Contents
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PART I. |
1 |
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Item 1. |
1 |
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Unaudited Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 |
1 |
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2 |
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3 |
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4 |
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5 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
6 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 |
Item 3. |
38 |
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Item 4. |
38 |
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PART II. |
39 |
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Item 1. |
39 |
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Item 1A. |
39 |
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Item 2. |
43 |
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Item 3. |
43 |
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Item 4. |
43 |
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Item 5. |
43 |
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Item 6. |
44 |
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45 |
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i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or this Quarterly Report, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this Quarterly Report, including statements regarding our future results of operations and financial position, our business strategy, the realization of our order backlog, plans and prospects, existing and prospective products, research and development costs, timing and likelihood of success, market growth, trends, events and the objectives of management for future operations and results, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements. Important factors, among others, that may affect actual results or outcomes include:
1
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the 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 forward-looking statements in this Quarterly Report and the information incorporated by reference herein 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 completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
This Quarterly Report also contains estimates, projections and other information concerning our industry, our business, and the markets for our products, including data regarding the estimated size of those markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties.
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
GELESIS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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March 31, |
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December 31, |
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2022 |
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2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable |
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Grants receivable |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Intangible assets, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) |
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Current liabilities: |
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Accounts payable, including due to related party of $ |
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$ |
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$ |
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Accrued expenses and other current liabilities, including due to related party of $ |
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Deferred income |
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Operating lease liabilities |
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Convertible promissory notes due to related party, held at fair value |
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— |
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Notes payable |
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Warrant liabilities |
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— |
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Total current liabilities |
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Deferred income |
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Operating lease liabilities |
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Notes payable, including due to related party of $ |
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Warrant liabilities |
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— |
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Earnout liability |
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— |
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Other long-term liabilities, including due to related party of $ |
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Total liabilities |
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(Note 19) |
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Noncontrolling interest |
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Redeemable convertible preferred stock, $ |
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— |
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Stockholders’ equity (deficit): |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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( |
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Accumulated other comprehensive income |
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Accumulated deficit |
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( |
) |
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( |
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Total stockholders’ equity (deficit) |
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( |
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Total liabilities, noncontrolling interest, redeemable convertible preferred stock and stockholders’ equity (deficit) |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
GELESIS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
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Three Months Ended March 31, |
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2022 |
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2021 |
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Revenue: |
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Product revenue, net |
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$ |
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$ |
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Total revenue, net |
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Operating expenses: |
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Costs of goods sold, including related party expenses of $ |
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Selling, general and administrative, including related party expenses of $ |
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Research and development, including related party expenses of $ |
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Amortization of intangible assets |
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Total operating expenses |
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Loss from operations |
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( |
) |
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( |
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Change in the fair value of earnout liability |
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— |
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Change in the fair value of convertible promissory notes |
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( |
) |
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— |
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Change in the fair value of warrants |
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( |
) |
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Interest expense, net |
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( |
) |
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( |
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Other income, net |
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Loss before income taxes |
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( |
) |
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( |
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Provision for income taxes |
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— |
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Net loss |
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( |
) |
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( |
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Accretion of senior preferred stock to redemption value |
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( |
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( |
) |
Accretion of noncontrolling interest put option to redemption value |
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( |
) |
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( |
) |
Net loss attributable to common stockholders |
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$ |
( |
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$ |
( |
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Net loss per share attributable to common stockholders—basic and diluted |
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$ |
( |
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$ |
( |
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Weighted average common shares outstanding—basic and diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
GELESIS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
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Three Months Ended March 31, |
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2022 |
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2021 |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
Other comprehensive loss: |
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Foreign currency translation adjustment |
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( |
) |
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( |
) |
Total other comprehensive loss |
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( |
) |
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( |
) |
Comprehensive loss |
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$ |
( |
) |
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$ |
( |
) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
GELESIS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF NONCONTROLLING INTEREST, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share and per share data)
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Noncontrolling Interest |
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Redeemable Convertible Preferred Stock |
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Common Stock |
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Additional Paid-in Capital |
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Accumulated Other Comprehensive Income |
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Accumulated Deficit |
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Total Stockholders' Equity (Deficit) |
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Shares |
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Amount |
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Shares |
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Amount |
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Balance at December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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Retroactive application of recapitalization |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Adjusted Balance at December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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|||||||
Accretion of senior preferred stock to redemption value |
|
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
) |
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Exercise of Series A-3 warrants |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Exercise of share-based awards |
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— |
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— |
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— |
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— |
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— |
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— |
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Accretion of noncontrolling interest put option to redemption value |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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Foreign currency translation adjustment |
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( |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
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Balance at December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
|
$ |
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$ |
( |
) |
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$ |
( |
) |
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Retroactive application of recapitalization |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Adjusted Balance at December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
|
$ |
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$ |
( |
) |
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$ |
( |
) |
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Accretion of Legacy Gelesis senior preferred stock to redemption value prior to Business Combination |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Conversion of Legacy Gelesis convertible preferred stock into common stock upon Business Combination |
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— |
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( |
) |
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( |
) |
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— |
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— |
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— |
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Proceeds from Business Combination, net of issuance costs and assumed liabilities (Note 3) |
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— |
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— |
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— |
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— |
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— |
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Conversion of Legacy Gelesis preferred stock warrants into common stock warrants upon Business Combination |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Recognition of earnout liability upon Business Combination |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Assumed private placement warrant liability upon Business Combination |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Stock based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Exercise of warrants |
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— |
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— |
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— |
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— |
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— |
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— |
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Accretion of noncontrolling interest |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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Foreign currency translation adjustment |
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( |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance at March 31, 2022 |
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$ |
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— |
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— |
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$ |
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$ |
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$ |
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$ |
( |
) |
|
$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
GELESIS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Three Months Ended March 31, |
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|||||
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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. |
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Amortization of intangible assets |
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Reduction in carrying amount of right-of-use assets |
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Depreciation |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Unrealized loss on foreign currency transactions |
|
|
|
|
|
|
||
Noncash interest expense |
|
|
|
|
|
|
||
Accretion on marketable securities |
|
|
— |
|
|
|
( |
) |
Change in the fair value of earnout liability |
|
|
( |
) |
|
|
— |
|
Change in the fair value of warrants |
|
|
( |
) |
|
|
|
|
Change in the fair value of convertible promissory notes |
|
|
|
|
|
— |
|
|
Change in fair value of One S.r.l. call option |
|
|
|
|
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Account receivables |
|
|
( |
) |
|
|
( |
) |
Grants receivable |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
|
|
Inventories |
|
|
( |
) |
|
|
|
|
Other assets |
|
|
— |
|
|
|
( |
) |
Accounts payable |
|
|
|
|
|
( |
) |
|
Accrued expenses and other current liabilities |
|
|
|
|
|
|
||
Operating lease liabilities |
|
|
( |
) |
|
|
( |
) |
Deferred income |
|
|
( |
) |
|
|
|
|
Other long-term liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
Maturities of marketable securities |
|
|
— |
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
( |
) |
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from Business Combination, net of transaction costs |
|
|
|
|
|
— |
|
|
Principal repayment of notes payable |
|
|
( |
) |
|
|
( |
) |
Repayment of convertible promissory notes due to related party, held at fair value |
|
|
( |
) |
|
|
— |
|
Proceeds from issuance of promissory notes (net of issuance costs of $ |
|
|
— |
|
|
|
|
|
Proceeds from the exercise of warrants |
|
|
|
|
|
|
||
Proceeds from exercise of share-based awards |
|
|
— |
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
||
Effect of exchange rates on cash |
|
|
( |
) |
|
|
( |
) |
Net increase in cash |
|
|
|
|
|
|
||
Cash and cash equivalents at beginning of year |
|
|
|
|
|
|
||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
||
Noncash investing and financing activities: |
|
|
|
|
|
|
||
Purchases of property and equipment included in accounts payable and accrued expense |
|
$ |
|
|
$ |
|
||
Recognition of earnout liability |
|
$ |
|
|
|
— |
|
|
Recognition of private placement warrant liability |
|
$ |
|
|
|
— |
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
||
Interest paid on notes payable |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
GELESIS HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Nature of Business
Gelesis Holdings, Inc., or the Company, formerly known as Capstar Special Purpose Acquisition Corp. or “CPSR”, is a commercial stage biotherapeutics company incorporated under the laws of the State of Delaware. The Company aims to transform weight management through proprietary biomimetic hydrogel technology, inspired by the compositional and mechanical properties of raw vegetables. Since its inception, the Company has devoted substantially all of its efforts to business planning, licensing technology, research and development, commercial activities, recruiting management and technical staff and raising capital and has financed its operations through the issuance of redeemable convertible preferred and common stock, a license and collaboration agreement, supply and distribution agreements, long-term loans, convertible bridge note financings, and government grants.
The Company currently manufactures and markets its first product, Plenity® (the “Product”), which is based on a proprietary hydrogel technology. Plenity® received de novo clearance from the FDA on April 12, 2019 as a Class II medical device to aid in weight management in adults with excess weight or obesity, Body Mass Index (BMI) of 25 to 40 kg/m2, when used in conjunction with diet and exercise. In June 2019, the Company received approval to market Plenity in Europe through a Conformité Européenne (CE) mark for Plenity as a class III medical device indicated for weight loss in overweight and obese adults with a Body Mass Index (BMI) of 25-40 kg/m2, when used in conjunction with diet and exercise. Plenity, which is available by prescription in the United States, became available for first commercial sale in May 2020 to a limited number of consumers. In October 2020, availability was increased to test commercial interest and consumer experience. Activities associated with a full commercial launch of Plenity in the United States began in late 2021, and in February 2022, the Company launched the first national broad awareness media campaign for the product.
On July 19, 2021, Gelesis, Inc. (together with its consolidated subsidiaries, “Legacy Gelesis”) entered into a Business Combination Agreement (“Business Combination Agreement”) with CPSR, a special purpose acquisition company. On January 13, 2022, CPSR, a Delaware corporation and the predecessor company consummated the previously announced business combination (“Business Combination”), pursuant to the terms of the Business Combination Agreement, dated as of July 19, 2021 (as amended on November 8, 2021 and December 30, 2021), by and among CPSR, CPSR Gelesis Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of CPSR (“Merger Sub”), and Legacy Gelesis. Pursuant to the Business Combination Agreement, on the closing date, (i) Merger Sub merged with and into Legacy Gelesis (the “Merger”), with Legacy Gelesis as the surviving company in the Merger, and, after giving effect to such Merger, Legacy Gelesis became a wholly-owned subsidiary of CPSR and (ii) CPSR changed its name to “Gelesis Holdings, Inc.” (together with its consolidated subsidiaries, “Gelesis Holdings”). The Business Combination, together with the PIPE financing and the sale of the backstop purchase shares, generated approximately $
The Business Combination was accounted for as a reverse recapitalization in conformity with accounting principles generally accepted in the United States. Under this method of accounting, CPSR has been treated as the "acquired" company for financial reporting purposes. This determination was primarily based on the Legacy Gelesis’ stockholders comprising a relative majority of the voting power of the combined company, the Legacy Gelesis’ operations prior to the acquisition comprising the only ongoing operations of Gelesis Holdings, the majority of Gelesis Holdings’ board of directors appointment by Legacy Gelesis, and Legacy Gelesis’ senior management comprising the entirety of the senior management of Gelesis Holdings. Accordingly, for accounting purposes, the consolidated financial statements of Gelesis Holdings will represent a continuation of the consolidated financial statements of Legacy Gelesis with the Business Combination being treated as the equivalent of Legacy Gelesis issuing stock for the net assets of CPSR, accompanied by a recapitalization. The net assets of CPSR will be stated at historical costs, with no goodwill or other intangible assets recorded.
Going Concern
The unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company has a history of incurring substantial operating losses and has financed its operations primarily from the issuance of equity, promissory notes, government grants, supply and distribution agreements and collaborations and licensing arrangements. The Company expects such operating losses and negative cash flows from operations will continue in 2022. Even with proceeds from the Business Combination, the Company expects its cash on hand as of the date of the condensed consolidated financial statements and collection of accounts and grants receivable will only be sufficient to meet the Company’s obligations into the first quarter of 2023,
6
and not at least twelve months beyond the date of issuance of the condensed consolidated financial statements. However, the extension of the Company's cash runway into the first quarter of 2023 is only achievable with the significant reduction of discretionary spending from prior levels, particularly with respect to the Company's discretionary sales and marketing activities and manufacturing and supply chain functions, and prior to considerations for any additional funding. These conditions raise substantial doubt about the Company’s ability to continue as a going concern and may adversely impact the sale of Plenity.
The Company will need to raise additional capital in future periods to fund its operations. The Company will seek to raise necessary funds through a combination of equity issuances, debt financings, strategic collaborations and licensing arrangements, government grants, or other financing mechanisms. The Company’s ability to fund the completion of its ongoing and planned clinical studies, as well as its regulatory and commercial efforts, may be substantially dependent upon whether the Company can obtain sufficient funding at acceptable terms. If adequate sources of funding are not available to the Company, the Company may be required to delay, reduce or eliminate research and development programs, reduce or eliminate commercialization efforts, and reduce its headcount. Additionally, the Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of the full-scope product commercialization in targeted markets, clinical trials and preclinical studies, the impact of the COVID-19 pandemic on the Company’s supply chain and results of operations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, and development by competitors of technological innovations.
Basis of Presentation
The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”).
The Company consolidates those entities where it has a direct and indirect controlling financial interest based on either a variable interest model or voting interest model. The Company’s condensed consolidated financial statements include the accounts of the Company, its two wholly-owned subsidiaries and a variable interest entity (“VIE”), Gelesis S.r.l., in which the Company has a controlling interest and is the primary beneficiary. The noncontrolling interest attributable to the Company’s VIE is presented as a separate component from stockholders’ equity (deficit) in the condensed consolidated balance sheets and as a noncontrolling interest in the condensed consolidated statements of noncontrolling interest, redeemable convertible preferred stock and stockholders’ equity. All intercompany balances and transactions have been eliminated in consolidation. Under the variable interest model, a controlling financial interest is determined based on which entity, if any, has (i) the power to direct the activities of the VIE that most significantly impacts the VIE’s economic performance and (ii) the obligations to absorb losses that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change. The consolidation status of a VIE may change as a result of such reassessments. Changes in consolidation status are applied prospectively in accordance with U.S. GAAP.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations or financial position.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period. The Company assesses the above estimates on an ongoing basis; however, actual results could materially differ from those estimates.
Subsequent Event(s)
The Company considers events or transactions that occur after the balance sheet date but before the condensed consolidated financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company evaluated all events and transactions through the date these condensed consolidated financial statements were filed with the Securities and Exchange Commission (“SEC”) or were available to be issued.
Fair Value of Financial Instruments
The guidance in FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority
7
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3.
The Company’s earnout liability, private placement warrants, and call option liability are recorded at fair value on a recurring basis. The carrying amount of accounts receivable, grants receivable, accounts payable and accrued expenses are considered a reasonable estimate of their fair value, due to the short-term maturity of these instruments. The carrying amount of notes payable is also considered to be a reasonable estimate of the fair value based on the nature of the debt and that the debt bears interest at the prevailing market rate for instruments with similar characteristics. The Company’s cash equivalents and marketable securities are carried at fair value, determined according to the fair value hierarchy described above.
Earnout Liability: In connection with the Business Combination, Legacy Gelesis equityholders received the right to receive additional common stock upon the achievement of certain earnout targets. As the earnout consideration contains a settlement provision that precludes it from being indexed to the Company’s stock, it is classified as a liability held at fair value in accordance ASC 815 and the instrument is adjusted to fair value at each reporting period. In determining the fair value of the earnout liability at inception and on a recurring basis, the Company utilizes the Monte Carlo simulation value model where the fair value of the earnout is the present value of a distribution of potential outcomes on a daily basis over the term of the earnout period.
Private Placement Warrant Liability: The Private Placement Warrants are recognized as liabilities in accordance with ASC 815. Accordingly, the Company recognizes the warrant instruments as liabilities held at fair value and adjusts the instruments to fair value at each reporting period. In determining the fair value of the Private Placement Warrant liability, the Company utilized a modified Monte Carlo simulation value model at inception and on a recurring basis.
One Srl Call Option: In connection with the October 2020 amended agreement with One Srl, the Company granted One a contingent call option to buy back the
Revenue Recognition
Product Revenue
The Company commercializes Plenity in the U.S. markets principally through synergistic partnerships with online pharmacies and telehealth providers, which in turn sell Plenity directly to patients based on prescriptions. Outside the U.S., the Company primarily seeks collaborations with strategic partners to market Plenity and obtain necessary regulatory approvals as necessary.
Product revenue is recognized by the Company in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services when the customer obtains control of the product, which occurs at a point in time, when the product is received by the Company's customers.
Reserves for Variable Consideration
Revenues from product sales are recorded as product revenue at the net sales price (transaction price), which includes estimates of variable consideration that are reimbursable to customers for which reserves are established and which result from (a) shipping charges to end-users, (b) pharmacy dispensing and platform fees, (c) merchant and processing fees, (d) promotional discounts offered by the Company to end-users, and (e) reserves for expected product quality returns. These reserves for contractual adjustments are
8
based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than the customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company's historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company's best estimates of the amount of consideration to which the Company is entitled based on the terms of the contract(s). The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company's estimates. If actual results in the future vary from the Company's estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. The Company has no plan to seek government or commercial payor reimbursements in the US or the overseas markets. Therefore, reserves for variable consideration do not contain any components related to government and payor rebates or chargebacks.
Product Returns
The Company generally does not accept customer returns, except for product quality related cases. The Company evaluates quality related returns and adjusts the corresponding product warranty reserves and liabilities at least quarterly and at the end of each reporting period.
Stock-Based Compensation
Effective January 1, 2020, the Company accounts for all stock-based compensation awards granted to employees and non-employees in accordance with ASC 718, Compensation – Stock Compensation. The Company’s stock-based compensation consist primarily of stock options. The measurement date for share-based awards is the date of grant, and stock-based compensation costs are recognized as expense over the respective requisite service periods, which are typically the vesting period. The fair value of each stock option grant is estimated as of the date of grant using the Black-Scholes option-pricing model that requires management to apply judgment and make estimates, including:
Since the adoption of ASU 2018-07 on January 1, 2020, the measurement date for non-employee awards is the date of grant without changes in the fair value of the award. Stock-based compensation costs for non-employees are recognized as expense over the vesting period. Stock-based compensation expense is classified in the condensed consolidated statements of operations based on the function to which the related services are provided. Forfeitures are recorded as they occur.
As discussed in Note 1, on January 13, 2022, the Company consummated the Business Combination pursuant to the Business Combination Agreement with CPSR dated July 19, 2021, as amended on November 8, 2021 and December 30, 2021. Concurrently
9
with the execution of the Business Combination Agreement, CPSR entered into subscription agreements with certain investors (the “PIPE Investors”). Pursuant to the subscription agreements, the PIPE Investors purchased an aggregate of
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, CPSR, who was the legal acquirer, was treated as the acquired company for financial reporting purposes. Accordingly, the Business Combination was treated as the equivalent of Gelesis issuing stock for the net assets of CPSR, accompanied by a recapitalization.
In connection with the Business Combination, the Company incurred approximately $
The following table summarizes the net proceeds from the Business Combination, as reconciled to the accompanying condensed consolidated statements of noncontrolling interest, redeemable convertible preferred stock and stockholder’s equity (deficit) and the condensed consolidated statements of cash flows:
|
Amount |
|
|
Cash - CPSR trust and cash (net of redemptions) |
$ |
|
|
Cash - PIPE Investment |
|
|
|
Cash - Backstop Agreement |
|
|
|
Gross proceeds |
$ |
|
|
Less: transaction costs, advisory fees and liabilities paid |
|
( |
) |
Net proceeds from the Business Combination |
$ |
|
|
Immediately prior to closing of the Business Combination, Legacy Gelesis common stock was split according to the exchange ratio of
Immediately prior to the closing of the Business Combination, Legacy Gelesis redeemable convertible preferred stock converted into Legacy Gelesis common stock and was subsequently split according to the exchange ratio of
Immediately prior to the closing of the Business Combination, Legacy Gelesis stock options and restricted stock units (“RSU”) were split according to the exchange ratio of
10
received a stock option to purchase shares of the Company’s common stock on a one-to-one basis and holder of Legacy Gelesis RSUs received RSUs of the Company on a one-to-one basis.
Immediately prior to the closing of the Business Combination, Legacy Gelesis redeemable preferred stock warrants were converted into Legacy Gelesis common warrants and were subsequently split according to the exchange ratio of
Immediately prior to the closing of the Business Combination, Legacy Gelesis common warrants were split according to the exchange ratio of
The number of shares of common stock issued and outstanding immediately following the consummation of the Business Combination was as follows:
|
Common Stock |
|
|
CPSR Public Stockholders |
|
|
|
CPSR Sponsor Stockholders |
|
|
|
Total CPSR Stockholders |
|
|
|
Common stock issued to Gelesis Legacy Equityholders |
|
|
|
Common stock issued to PIPE Investors and Backstop Agreement |
|
|
|
Total common stock immediately after Closing |
|
|
|
Earnout Shares
In addition, each holder of Legacy Gelesis common stock, Legacy Gelesis options and Legacy Gelesis warrants will receive a pro rata portion of up to
The Company determined
Public Warrants and Private Placement Warrants
Upon the closing of the Business Combination, the Company assumed
11
a liability under ASC 815 and recorded a liability reflecting the fair value of the Private Placement Warrants of $
Liabilities that are measured at fair value on a recurring basis, and the level of the fair value hierarchy utilized to determine such fair values, consisted of the following at March 31, 2022 (in thousands):
|
|
|
|
|
Fair Value Measurements |
|
||||||||||
|
|
Fair Value |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnout liability (See Note 14) |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Private placement warrant liability (see Note 13) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
One Srl call option |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Total liabilities measured at fair value |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Liabilities that are measured at fair value on a recurring basis, and the level of the fair value hierarchy utilized to determine such fair values, consisted of the following at December 31, 2021 (in thousands):
|
|
|
|
|
Fair Value Measurements |
|
||||||||||
|
|
Fair Value |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Convertible promissory notes (see Note 12) |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Legacy Gelesis preferred stock warrants (See Note 13) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
One Srl call option |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Total liabilities measured at fair value |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
The following table presents a summary of the changes in the fair value of the Company’s Level 3 financial instruments during the three months ended March 31, 2022:
|
|
Convertible Promissory Notes |
|
|
Legacy Gelesis Redeemable Preferred Stock Warrants Liabilities |
|
|
One Srl Call Option |
|
|
Earnout Liability |
|
|
Private Placement Warrant Liability |
|
|||||
Balance at December 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|||
Assumed upon Business Combination |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Recognized upon Business Combination |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
Changes in fair value |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Foreign currency translation (gain)/loss |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Conversion and exchange upon Business Combination |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Settlement |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at March 31, 2022 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
There were
12
The Company sells the Product principally to a limited number of customers consisting of telemedicine and online pharmacies, that in turn resell the Product to end-user patients and healthcare providers. Patients are required to have a prescription in order to purchase the Product in the United States.
Roman Health Pharmacy LLC
During the three months ended March 31, 2022 and 2021, the Company recognized $
GoGoMeds
During three months ended March 31, 2022 and 2021, the Company recognized $
CMS Bridging DMCC
At March 31, 2022 and December 31, 2021, the discounted time-based milestone had a balance of $
Total Product Revenue, net and Reserves
During the three months ended March 31, 2022 and 2021, the Company recognized $
|
|
At March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Balance at December 31, |
|
$ |
|
|
$ |
|
||
Provision related to product sales |
|
|
|
|
|
|
||
Credits and payments made |
|
|
( |
) |
|
|
( |
) |
Balance at March 31, |
|
$ |
|
|
$ |
|
||
At March 31, 2022 and 2021, product related reserve and allowances comprised solely contractual adjustments owed to the Company’s telehealth and online pharmacy partners, which were netted to accounts receivable in the Company’s condensed consolidated balance sheets for the year. Through March 31, 2022, there had been no product related reserves or allowances owed to other parties, including the federal and state governments or their agencies.
I
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Total inventories |
|
$ |
|
|
$ |
|
||
13
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Prepaid expenses |
|
$ |
|
|
$ |
|
||
Prepaid insurance |
|
|
|
|
|
|
||
Prepaid manufacturing expenses |
|
|
|
|
|
|
||
Prepaid contract research costs |
|
|
|
|
|
|
||
Research and development tax credit |
|
|
|
|
|
|
||
Value added tax receivable |
|
|
|
|
|
|
||
Deferred financing costs |
|
|
|
|
|
|
||
Income tax receivable |
|
|
|
|
|
|
||
Investment tax credit |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
$ |
|
|
$ |
|
||
Property and equipment, net, consists of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Laboratory and manufacturing equipment |
|
$ |
|
|
$ |
|
||
Land and buildings |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Computer equipment and software |
|
|
|
|
|
|
||
Capitalized software |
|
|
|
|
|
|
||
Construction in process |
|
|
|
|
|
|
||
Property and equipment – at cost |
|
|
|
|
|
|
||
Less accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Property and equipment – net |
|
$ |
|
|
$ |
|
||
The Company owns and operates commercial manufacturing and research and development facilities in Italy, including a
Depreciation expense was approximately $
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Accrued payroll and related benefits |
|
$ |
|
|
$ |
|
||
Accrued professional fees and outside contractors (including |
|
|
|
|
|
|
||
Accrued property, plant and equipment additions |
|
|
|
|
|
|
||
Accrued inventory and manufacturing expense |
|
|
|
|
|
|
||
Unpaid portion of acquisition of intangible asset and |
|
|
|
|
|
|
||
Income taxes payable |
|
|
|
|
|
|
||
Deferred legal fees |
|
|
|
|
|
|
||
Accrued interest |
|
|
|
|
|
|
||
Total accrued expenses |
|
$ |
|
|
$ |
|
||
14
Other long-term liabilities consist of the following (in thousands):
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Long-term tax liabilities |
|
|
|
|
|
|
||
Contingent loss for research and development tax credits |
|
|
|
|
|
|
||
One Srl call option |
|
|
|
|
|
|
||
Total other long-term liabilities |
|
$ |
|
|
$ |
|
||
Puglia 1 Grant
In May 2020, the Company was awarded a grant by the Puglia region of Italy as an incentive to manufacture and carry out research and development activities in Italy (“PIA 1 Grant”), The Company recognized grant income of $
Puglia 2 Grant
In November 2020, the Company was awarded a second grant by the Puglia region of Italy as an incentive to manufacture and carry out research and development activities in Italy (“PIA 2 Grant”), The Company recognized grant income of $
One S.r.l. (“One”) Amended Patent License and Assignment Agreement
In June 2019, the Company amended and restated an existing master agreement with One (the “2019 One Amendment”), the original inventor of the Company’s core patents and a related party to the Company (see Notes 19 and 20). Under the amended and restated master agreement following this transaction, the Company eliminated certain future commercial milestone obligations and received a reduction in the percentage of royalties the Company was required to pay on future net sales. In return, One received additional consideration consisting of new future milestones upon the commercial success of new medical indications and a contingently issuable warrant for redeemable convertible preferred stock. Additionally, the Company acquired a
The Company accounted for the reduction in royalties the Company is required to pay on future net revenues that resulted from the 2019 One Amendment as an intangible asset under ASC 350, Intangibles – Goodwill and Other, which shall be amortized over its useful life, which was determined to be the earliest expiration of patents related to the underlying intellectual property in November 2028. The Company accounted for the acquisition of the
In connection with the acquisition of the
15
€
A summary of the intangible asset activity that resulted from this transaction during the three months ended March 31, 2022 is as follows (in thousands):
|
|
Intangible Assets |
|
|
Intangible asset at relative fair value |
|
$ |
|
|
Adjustment to record deferred tax liability |
|
|
|
|
Carrying value of intangible asset at June 2019 acquisition date |
|
$ |
|
|
Cumulative amortization expense |
|
|
( |
) |
Balance at December 31, 2021 |
|
$ |
|
|
Period amortization expense |
|
|
( |
) |
Balance at March 31, 2022 |
|
$ |
|
|
In October 2020, the Company further amended the terms of the agreement with One to cancels its obligation to issue a warrant for redeemable convertible preferred stock in the 2019 One Amendment for additional commercial milestone consideration and a warrant to purchase common stock. Additionally, the Company granted One a contingent call option to buy back the
The One Srl call option was recorded as a liability held at fair value at the date of issuance and is remeasured at each subsequent reporting date with changes in fair value recorded in other income (expense) in the accompanying condensed consolidated statements of operations. Fair value is determined using a Black-Scholes option pricing model. The significant inputs used in estimating the fair value of call option liability include the estimated fair value of the underlying stock price, expected term, risk free interest rate, and expected volatility.
The following represents a summary of the changes to Company’s One Srl call option liability during the three months ended March 31, 2022 (in thousands):
Balance at December 31, 2021 |
|
$ |
|
|
Change in fair value |
|
|
|
|
Foreign currency translation gain |
|
|
( |
) |
Balance at March 31, 2022 |
|
$ |
|
The following weighted average assumptions were used to determine the fair value of the One Srl call option liability at March 31, 2022 and December 31, 2021:
|
|
March 31, |
|
December 31, |
|
||
|
|
2022 |
|
2021 |
|
||
Expected term |
|
|
|
||||
Expected volatility |
|
|
% |
|
% |
||
Expected dividend yield |
|
|
% |
|
|||
Risk free interest rate |
|
|
% |
|
% |
||
Estimated fair value of ownership interest |
|
$ |
|
$ |
|
||
Exercise price of call option |
|
$ |
|
$ |
|
||
Research Innovation Fund (“RIF”) Financing
In August 2020, the Gelesis S.r.l. entered into a loan and equity agreement with RIF, an investment fund out of the EU, whereby Gelesis S.r.l. received €
16
issuance. Any unpaid principal and interest must be repaid upon exercise of the call option by the Company, or subsequent exercise of a put option by RIF. At March 31, 2022, RIF holds approximately
The Company recorded accretion of less than $
The Company’s non-convertible debt outstanding at March 31, 2022 and December 31, 2021 is summarized as follows:
|
March 31, |
|
|
December 31, |
|
||
|
2022 |
|
|
2021 |
|
||
Italian Economic Development Agency Loan |
|
|
|
|
|
||
Intesa Sanpaolo Loan 1 |
|
|
|
|
|
||
Intesa Sanpaolo Loan 2 |
|
|
|
|
|
||
Horizon 2020 Loan |
|
|
|
|
|
||
RIF Shareholders Loan |
|
|
|
|
|
||
UniCredit Loan |
|
|
|
|
|
||
Total debt obligation |
$ |
|
|
$ |
|
||
Unamortized loan discount and issuance costs |
|
( |
) |
|
|
( |
) |
Total debt obligation carrying amount |
$ |
|
|
$ |
|
||
Current portion |
$ |
|
|
$ |
|
||
Long-term portion |
$ |
|
|
$ |
|
||
2021 Bridge Financing
On December 13, 2021, the Company issued convertible promissory notes to related parties in the principal amount of $
Future maturities with respect to debt outstanding at March 31, 2022 are as follows (in thousands):
|
At March 31, 2022 |
|
|
Remaining 2022 obligation |
|
|
|
2023 |
|
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
More than 5 years |
|
|
|
Unamortized loan discount and issuance costs |
|
( |
) |
Total debt obligation carrying amount |
$ |
|
|
Current portion |
$ |
|
|
Long-term portion |
$ |
|
|
The following represents a summary of the warrant liabilities activity during the three months ended March 31, 2022 :
|
|
Series A-4 |
|
|
Private Placement Warrants |
|
|
Total |
|
|||
Balance at December 31, 2021 |
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Assumed upon Business Combination |
|
|
— |
|
|
|
|
|
|
|
||
Changes in fair value |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Conversion and exchange upon Business Combination |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance at March 31, 2022 |
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
17
Private Placement Warrants
At March 31, 2022, there were
The warrants were initially recorded at fair value with subsequent changes in fair value being recorded in the accompanying condensed consolidated statements of operations. The warrants at issuance and at March 31, 2022, were valued utilizing a modified Monte Carlo Simulation value model and significant unobservable Level 3 inputs.
The following weighted-average assumptions were used to determine the fair value of the Private Placement Warrant liability at March 31, 2022:
|
Private Placement Warrants |
|
|
Expected term |
|
||
Expected volatility |
|
% |
|
Expected dividend yield |
|
% |
|
Risk free interest rate |
|
% |
|
Price of Gelesis Common Stock |
$ |
|
|
Exercise price of warrants |
$ |
|
|
Legacy Gelesis Redeemable Preferred Stock Warrants
In connection with the Business Combination, Legacy Gelesis redeemable preferred stock warrants were reclassified from liability treatment to equity treatment pursuant to the terms of their exchange (see Note 15).
The following represents a summary of the earnout liability activity during the three months ended March 31, 2022:
|
Earnout Liability |
|
|
Balance at December 31, 2021 |
$ |
|
|
Recognized upon Business Combination |
|
|
|
Changes in fair value |
|
( |
) |
Balance at March 31, 2022 |
$ |
|
|
At Business Combination close and at March 31, 2022, there were
The earnout liability was initially recorded at fair value with subsequent changes in fair value being recorded in the accompanying condensed consolidated statements of operations. The earnout liability at issuance and at March 31, 2022, were valued utilizing a Monte Carlo Simulation and significant unobservable Level 3 inputs.
The following weighted-average assumptions were used to determine the fair value of the earnout liability at March 31, 2022:
|
Earnout Liability |
|
|
Expected term |
|
||
Expected volatility |
|
% |
|
Expected dividend yield |
|
% |
|
Risk free interest rate |
|
% |
|
Price of Gelesis Common Stock |
$ |
|
|
18
Common Stock
The Company’s authorized capital stock consists of (a)
Legacy Redeemable Convertible Preferred Stock
At December 31, 2021 and immediately prior to the Business Combination, Legacy Gelesis had outstanding Series A-1, Series A-2, Series A-3, Series A-4, Series A-5, Series Growth, Series 2 Growth and Series 3 Growth redeemable convertible preferred stock which are collectively referred to as “redeemable convertible preferred stock.”
Public Warrants
In connection with the Business Combination the Company assumed
Once the Public Warrants become exercisable, the Company may call the Public Warrants for redemption for cash:
If the Company calls the Public Warrants for redemption, the Company will have the option to require all holders that wish to exercise the Public Warrants to do so on a cashless basis, as described in the warrant agreement. Additionally, in no event will the Company be required to net cash settle.
At March 31, 2022, there were
Rollover Warrants
Immediately prior to the closing of the Business Combination, existing Legacy Gelesis common warrants were also split according to the exchange ratio of
19
one-to-one basis. At close of Business Combination and at March 31, 2022, respectively, there were
At March 31, 2022 and December 31, 2021 common stock reserved for future issuances was as follows:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Common stock issued upon option exercise and RSUs vesting |
|
|
|
|
|
|
||
Conversion of all classes of redeemable convertible |
|
|
— |
|
|
|
|
|
Issuances upon exercise of warrants to purchase Series A-4, |
|
|
— |
|
|
|
|
|
Issuances upon exercise of common stock warrants |
|
|
|
|
|
|
||
Earnout shares |
|
|
|
|
|
— |
|
|
Total common stock reserved for future issuance |
|
|
|
|
|
|
||
2021 Stock Option Plan
In January 2022, the Company's Board of Directors approved the 2021 Stock Option and Incentive Plan (the "2021 Plan"), which supersedes the 2016 Stock Option and Grant Plan and the 2006 Stock Incentive Plan and provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards and restricted stock units to employees, directors, and nonemployees of the Company. The 2021 Plan was authorized initially to issue
Options and restricted stock awards generally vest based on the grantee’s continued service with the Company during a specified period following a grant as determined by the Board of Directors and expire
The fair value of the options is estimated at the grant date using Black-Scholes and recognized over the vesting period, taking into account the terms and conditions upon which options are granted. The fair value of restricted stock awards is the fair value at the date of grant reduced by the exercise price of the award, if any. The fair value of both options and restricted stock awards are amortized on a straight-line basis over the requisite service period of the awards.
Stock-based compensation expense is summarized for employees and nonemployees, by category in the accompanying condensed consolidated statements of operations as follows (in thousands):
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Research and development |
|
$ |
|
|
$ |
|
||
Selling, general and administrative |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
20
Stock Option Activity
The following table summarizes the Company’s stock option activity during the three months ended March 31, 2022:
|
|
Number of |
|
|
Weighted- |
|
|
Weighted- |
|
|
Aggregate |
|
||||
Outstanding at December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Retroactive application of reverse recapitalization |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Adjusted and Outstanding at December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercised |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Forfeited - unvested |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Forfeited - vested |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Expired |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Outstanding at March 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Exercisable at March 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
- |
|
|||
Vested and expected to vest at March 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the common stock. The total fair value of options vested during the three months ended March 31, 2022 was $
The fair value of each option issued was estimated at the date of grant using Black-Scholes with the following weighted-average assumptions:
|
|
Three Months Ended March 31, |
|
|
|
|
2022 |
|
|
Market price of common stock |
|
$ |
|
|
Expected volatility |
|
|
% |
|
Expected term (in years) |
|
|
|
|
Risk-free interest rate |
|
|
% |
|
Expected dividend yield |
|
|
% |
|
The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2022 was $
Restricted Stock Unit (“RSU”) Activity
The following table summarizes the Company’s RSU activity during the three months ended March 31, 2022:
|
|
Number of RSUs |
|
|
Weighted- |
|
||
Outstanding and Unvested at December 31, 2021 |
|
|
|
|
$ |
|
||
Retroactive application of reverse recapitalization |
|
|
|
|
$ |
( |
) |
|
Adjusted and Outstanding and Unvested at December 31, 2021 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested |
|
|
— |
|
|
|
|
|
Forfeited |
|
|
— |
|
|
|
|
|
Outstanding and Unvested at March 31, 2022 |
|
|
|
|
$ |
|
||
Each RSU entitles the holder to one share of common stock on vesting and the RSU awards are based on a cliff vesting schedule over requisite service periods in which the Company recognizes compensation expense for the RSUs. Vesting of the RSUs is subject to the satisfaction of certain service and or certain performance conditions. The Company recognizes the estimated grant date fair value of these awards as stock-based compensation expense over the service and or performance periods based upon its determination of whether it is probable that the service and or performance conditions will be achieved. The Company assesses the probability of achieving the service and or performance conditions at each reporting period. Cumulative adjustments, if any, are recorded to reflect subsequent changes in the estimated or actual outcome of service and or performance-related conditions.
At March 31, 2022 and December 31, 2021, unrecognized compensation cost for RSU awards granted totaled $
21
The Company recorded a provision of $
The Company continues to evaluate the positive and negative evidence bearing upon the realizability of its net deferred tax assets and determined that it is not more likely than not that the Company will recognize the benefits of the net deferred tax assets. Therefore, a full valuation allowance has been recorded against the balance of net deferred tax assets in the United States as of March 31, 2022 and December 31, 2021.
The weighted-average common shares outstanding and thus the net loss per share calculations and potentially dilutive security amounts for all periods prior to the Business Combination have been retrospectively adjusted to the equivalent number of shares outstanding immediately after the Business Combination to effect the reverse recapitalization. Historically reported weighted average shares outstanding have been multiplied by the exchange ratio of approximately
Basic and diluted loss per share attributable to common stockholders was calculated as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Numerator: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Accretion of redeemable convertible preferred stock to redemption value |
|
|
( |
) |
|
|
( |
) |
Accretion of noncontrolling interest put option to redemption value |
|
|
( |
) |
|
|
( |
) |
Net loss attributable to common stockholders |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
||
Weighted average common shares outstanding, basic and diluted |
|
|
|
|
|
|
||
Net loss per share, basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
The Company’s potential dilutive securities, which include stock options, RSUs, warrants and earnout shares 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 stock outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same for all periods presented.
|
|
March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Convertible preferred stock |
|
|
- |
|
|
|
|
|
Warrants on convertible preferred stock |
|
|
- |
|
|
|
|
|
Options and RSUs to acquire common stock |
|
|
|
|
|
|
||
Warrants on common stock |
|
|
|
|
|
|
||
Earnout shares |
|
|
- |
|
|
|
- |
|
Total |
|
|
|
|
|
|
||
Total potentially dilutive common share equivalents for the three months ended March 31, 2022, excludes
Operating Leases
In
At March 31, 2022, the Company’s operating lease right of use assets was $
22
expense was $
Future maturities of the lease liability under the Company’s noncancelable operating leases at March 31, 2022 are as follows (in thousands):
|
At March 31, 2022 |
|
|
Remaining 2022 maturities |
$ |
|
|
2023 |
|
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
More than 5 years |
|
|
|
Total undiscounted lease maturities |
$ |
|
|
Imputed interest |
|
( |
) |
Total lease liability |
$ |
|
|
Royalty Agreements
Expenses from royalty agreements on net product sales and sublicense income is recognized as a cost of goods sold in the accompanying condensed consolidated statements of operations during the period in which the associated revenues are recognized.
PureTech
In December 2009, the Company entered into a royalty and sublicense income agreement with PureTech, a significant stockholder in the Company, whereby the Company is required to pay PureTech a
One S.r.l
Under the amended and restated master agreement with One, the Company is required to pay a
Grant Agreements
The Company has been awarded grants from governmental agencies, which are recognized as income as the qualifying expenses are incurred (see Note 11). The grant agreements contain certain provisions, including, among others, maintaining a physical presence in the region for defined periods. Failure to comply with these covenants would require either a full or partial refund of the grant to the granting authority.
Research and Development Tax Credits
The Company’s subsidiary, Gelesis S.r.l., which conducts core manufacturing and research and development activities on behalf of the Company, is eligible to receive a non-income based and non-refundable tax credits for qualified research and development activities. The Company has earned research and development tax credits in Italy for qualifying expenses incurred by performing certain research and development activities.
In December 2018, the Italian government passed a new budget law, effective January 1, 2019, that amended the eligibility criteria for recognizing qualifying research and development tax credits (“2019 Budget Law”). The 2019 Budget Law requires retroactive application for research and development tax credits earned during the year ended December 31, 2019. Under the 2019 Budget Law, research and development tax credits claimed in prior periods under previous interpretations of the research and development tax credit law may potentially be repaid by the Company.
The Company evaluated the potential loss under ASC 450, Contingencies. The Company concluded that the likelihood of a potential loss arising from this matter is probable.
The Company has recorded $
Litigation
In connection with the Business Combination, the Company received a litigation demand letter from certain purported stockholders alleging that the Company was required to provide holders of Class A Common Stock a separate class vote in connection with
23
proposed amendments of the Company's Amended and Restated Certificate of Incorporation to increase the number of authorized shares, such that separate votes can be cast on the proposed increase in the number of shares of Class A common stock and the proposed increase in the number of shares of preferred stock. While the Company believes that the ultimate outcome of this litigation demand will not have a material effect on these condensed consolidated financial statements as well as its financial position, results of operations, and cash flows, the Company is unable to determine a range of potential losses that is reasonably possible of occurring.
The Company had the following transactions with related parties:
PureTech
In June 2019, PureTech executed a sublease agreement with the Company (see Note 19). With respect to the sublease, the Company incurred lease expense of $
On December 13, 2021, the Company issued a convertible promissory note to PureTech in the principal amount of $
SSD2
On December 13, 2021, the Company issued a convertible promissory note to SSD2, LLC in the principal amount of $
One S.r.l
Consulting Agreement with Founder of One
The Company and one of the founders of One, who is also a stockholder of the Company, entered into a consulting agreement for the development of the Company's science and technology. The Company incurred costs for consulting services received from the founder of One totaling less than $
Acquisition of One
In connection with the amended and restated master agreement with One (see Note 11), the Company acquired a
Additionally, the Company incurred royalty expense of $
RIF Transaction
In connection with the RIF transaction entered into in August 2020, the Company received $
24
plus
The Company has evaluated subsequent events which may require adjustment to or disclosure in the condensed consolidated financial statements through the date of issuance of these condensed consolidated financial statements and concluded there are none.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References to the “Company,” “our,” “us,” “we,” or “Gelesis” refer to Gelesis Holdings, Inc. and its consolidated subsidiaries (formerly known as Capstar Special Purpose Acquisition Corp. or "CPSR") following the Business Combination with Gelesis Inc., or Legacy Gelesis. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with (i) the condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report and (ii) the audited historical consolidated financial statements of Legacy Gelesis, and the notes thereto, in our Form 8-K Amendment No. 1 filed on with the SEC on March 24, 2022. Certain of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including, but not limited to, those set forth in the section entitled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report and those set forth in the section entitled “Risk Factors” in Item 1A of Part II of this Quarterly Report and in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on April 1, 2022, or our 2021 Annual Report, actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we do not intend to update any of these forward-looking statements after the date hereof or to conform these statements to actual results or revised expectations. You should carefully read the sections entitled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report and “Risk Factors” in Item 1A of Part II of this Quarterly Report and in Item 1A of Part 1 of our 2021 Annual Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview
We are a commercial stage biotherapeutics company built for consumer engagement. We are focused on advancing first-in-class superabsorbent hydrogel therapeutics for chronic gastrointestinal, or GI, diseases including excess weight, type 2 diabetes, NAFLD/NASH, functional constipation, and inflammatory bowel disease. Our biomimetic superabsorbent hydrogels are inspired by the composition and mechanical properties (e.g. firmness) of raw vegetables. They are conveniently administered in capsules taken with water to create a much larger volume of small, non-aggregating hydrogel pieces that become an integrated part of the meals, and act locally in the digestive system.
Our first commercial product, Plenity, received de novo clearance from the FDA on April 12, 2019 to aid in weight management in adults with excess weight or obesity, Body Mass Index (BMI) of 25 to 40 kg/m2, when used in conjunction with diet and exercise.
Plenity, which is available by prescription in the United States, became available for first commercial sale in May 2020 to a limited number of consumers. In October 2020 availability was increased to test commercial interest and consumer experience. Activities associated with a full commercial launch in the United States began in late 2021, and in February 2022, we launched the first national broad awareness media campaign for the product. While these are significant milestones, continued commercialization of Plenity will require significant external funding until we are able to generate positive cash flows from product sales.
Since our inception, we have devoted our resources to business planning, developing proprietary superabsorbent hydrogel manufacturing know-hows and technologies, preclinical and clinical development, commercial activities, recruiting management and technical staff and raising capital. We have funded our operations to date through proceeds from the issuance of redeemable convertible preferred stock, license and collaboration agreements, long-term loans, and government grants. We have incurred significant operating losses to date. Our net losses were $5.7 million and $18.6 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, we had an accumulated deficit of $271.3 million. We expect to continue to generate operating losses and negative operating cash flows for the foreseeable future.
As a result, we will require substantial additional funding to support our continuing operations until we are able to generate positive cash flows from product sales. Until such time, we expect to finance our operations 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 may be forced to delay, reduce or eliminate some or all of our commercialization efforts, research and development programs or product pipeline expansion, which could adversely affect our business prospects, or we may be unable to continue operations.
As of the date of this Quarterly Report, we expect that our existing cash and cash equivalents will only be sufficient to fund our operating expenses and capital expenditure requirements into the first quarter of 2023, prior to considerations for any additional funding, and not at least twelve months beyond the date of issuance of the unaudited condensed consolidated financial statements
26
included elsewhere in this Quarterly Report. As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report, which have been prepared in accordance with GAAP, contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern. See “—Liquidity and Capital Resources” for further information.
Recent Developments
Launch of Broad Consumer Awareness Campaign
On January 31, 2022, we debuted our broad consumer awareness campaign which included TV, digital, social, and Out of Home media channels to grow awareness of Plenity. Following the launch of the campaign:
Following the success of the initial wave of this campaign, we are evaluating optimal media channels, timing, pulse frequency, and investment levels going forward.
Impact of COVID-19
In December 2019, illnesses associated with COVID-19 were reported and the virus has since caused widespread and significant disruption to daily life and economies across geographies. The World Health Organization has classified the outbreak as a pandemic. Our business, operations and financial condition and results have not been significantly impacted as a result of the COVID-19 pandemic, rather we have recognized revenue for the first time during 2020 and we have expanded our facilities, sales/marketing and supply chain personnel to support the sale of Plenity. To date, COVID-19 has not materially impacted our ability to secure and deliver supply of Plenity. To date, COVID-19 has not significantly impacted ongoing clinical trials of our other product candidates.
In response to the COVID-19 pandemic, we have taken swift action to ensure the safety of our employees and other stakeholders. We are diligently working with our suppliers, customers, distributors and other partners to provide consumers with access to Plenity, while taking into account regulatory, institutional, and government guidance, policies and protocols.
However, the full extent of the impact of the pandemic and future outbreaks on our business, operations, and financial condition and results in future periods remain uncertain, particularly, with respect to consumer demand for or access to Plenity, and the administration of clinical research and development activities. Further, our ability to source raw materials and components, manufacture Plenity as well as transport and distribute Plenity may be limited and therefore impact sales of Plenity.
Key Factors Affecting Results of Operations
We believe that our performance and future success depend on several factors that present not only significant opportunities for us but also pose risks and challenges, including those discussed below.
New Consumer Acquisition
Our ability to attract new consumers is a key factor for our future growth. To date we have successfully acquired consumers through our U.S. commercial launch in conjunction with the continued development of marketing and sales tactics. We intend to acquire new
27
members in the United States by promoting Plenity directly to the consumer. The promotional activities will motivate the potential future member to ask a health care professional about acquiring Plenity through one of two channels:
Retention of Consumers
Our ability to retain consumers is a key factor in our ability to generate revenue. We expect our direct home delivery, simple and transparent pricing, and consumer engagement to enhance the experience of our consumer and promote recurring revenue. If consumer retention decreases in the future, then future revenue will be negatively impacted. The ability of our consumers to continue to pay for our products and services will also impact the future results of our operations.
Rest of World
We are evaluating global strategic partnerships to build our brand globally; however, we may also retain the rights.
Investments in Growth
We expect to make significant investments in selling and marketing to acquire new consumers. Selling and marketing is an important driver of growth, and we intend to continue to make significant investments in consumer acquisition and our selling and commercial infrastructure. As such, we expect our selling and marketing expense to increase in absolute dollars in the short term. However, we expect our selling and marketing expense to decrease as a percentage of revenue over the long term, although our selling and marketing expense may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.
Additionally, we intend to continue to invest significantly in our manufacturing, fulfillment and operating capabilities. In the short term, we expect these investments to increase our operating expenses; however, in the long term we anticipate that these investments will positively impact our results of operations. If we are unable to generate sufficient demand in Plenity, we may not have sufficient funds to investment into these growth activities.
Product Candidate Expansion
In addition to Plenity, we have invested in a pipeline of product candidates for prevalent and important gastrointestinal, or GI, tract-related chronic diseases including, type 2 diabetes, NAFLD/NASH, chronic idiopathic constipation, and inflammatory bowel disease by targeting the natural processes of the GI pathway. We expect to continue investing in our pipeline over time to broaden our commercial opportunity. The continued preclinical and clinical development of the pipeline will require significant financial resources. If we are unable to generate sufficient demand in Plenity or raise additional capital at favorable terms, if at all, we may not have sufficient funds to invest in the research and development of additional product candidates.
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business (dollar amounts in thousands except where noted):
28
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
In thousands |
|
(Unaudited) |
|
|
(Unaudited) |
|
||
New members acquired |
|
|
40,400 |
|
|
|
14,100 |
|
Units sold |
|
|
114,570 |
|
|
|
48,761 |
|
Product revenue, net |
|
$ |
7,514 |
|
|
$ |
3,101 |
|
Average selling price per unit, net |
|
$ |
65.58 |
|
|
$ |
63.60 |
|
Gross profit |
|
$ |
2,601 |
|
|
$ |
285 |
|
Gross margin |
|
|
34.6 |
% |
|
|
9.2 |
% |
New members acquired
We define new members acquired as the number of consumers in the United States who have begun their weight loss journey with Plenity during the financial period presented. This is the total number of recurring and non-recurring consumers who have begun their weight loss journey during the financial period presented. We do not differentiate from recurring and non-recurring consumers as of the date of this Quarterly Report as (i) we strongly believe every member’s weight-loss journey is chronic and long-term in nature, and (ii) we have not initiated our long-term strategy and mechanisms to retain and/or win-back members. We will continue to evaluate the utility of this business metric in future periods.
Units sold
Units sold is defined as the number of 28-day supply units of Plenity sold to consumers based on prescriptions, through our strategic partnerships with online pharmacies and telehealth providers as well as the units sold to our strategic partners outside the United States.
Product revenue, net
See discussion elsewhere in this discussion and analysis under the heading “Key Components of Results of Operations — Product revenue, net”.
Average selling price per unit, net
Average selling price per unit, net is the gross price per unit sold during the period net of estimates of per unit variable consideration for which reserves are established for expected product returns, shipping charges to end-users, pharmacy dispensing and platform fees, merchant and processing fees, and promotional discounts offered to end-users. See “— Critical Accounting Policies and Significant Judgments and Estimates” below and the “Revenue Recognition” section of Note 2 in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for a more detailed discussion of our revenue recognition policy.
Gross profit and gross margin
Our gross profit represents product revenue, net, less our total cost of goods sold, and our gross margin is our gross profit expressed as a percentage of our product revenue, net. See discussion elsewhere in this discussion and analysis under the headings “Key Components of Results of Operations — Cost of goods sold”.
Our gross profit and gross margin have been and will continue to be affected by a number of factors, including the prices we charge for our product, the costs we incur from our vendors for certain components of our cost of goods sold, the mix of channel sales in a period, and our ability to sell our inventory. We expect our gross margin to increase over the long term, although gross margins may fluctuate from period to period depending on these and other factors.
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with GAAP, we believe the following non-GAAP measure is useful in evaluating our operating performance. We use the following non-GAAP financial measure to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP financial measure, when taken together with the corresponding GAAP financial measure, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations, or outlook. We consider Adjusted EBITDA to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. We believe that the use of Adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance.
However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures
29
differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for the non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measure and the reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure, and not to rely on any single financial measure to evaluate our business.
Adjusted EBITDA
Adjusted EBITDA is a key performance measure that our management uses to assess our operating performance. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes. We define “Adjusted EBITDA” as net (loss) income before depreciation and amortization expenses, provision for (benefit from) income taxes, interest expense, net, stock-based compensation and (gains) and losses related to changes in fair value of our earnout liability, fair value of our warrant liability, our convertible promissory note liability and the One S.r.l. call option.
The following table reconciles net loss to Adjusted EBITDA for the three months ended March 31, 2022 and 2021, respectively:
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
In thousands |
|
(Unaudited) |
|
|
(Unaudited) |
|
||
Adjusted EBITDA |
|
|
|
|
|
|
||
Net loss |
|
$ |
(5,703 |
) |
|
$ |
(18,586 |
) |
Provision for income taxes |
|
|
— |
|
|
|
17 |
|
Depreciation and amortization |
|
|
1,586 |
|
|
|
741 |
|
Stock based compensation expense |
|
|
13,989 |
|
|
|
1,455 |
|
Change in fair value of earnout liability |
|
|
(33,869 |
) |
|
|
— |
|
Change in fair value of warrants |
|
|
(3,484 |
) |
|
|
2,074 |
|
Change in fair value of convertible |
|
|
156 |
|
|
|
— |
|
Change in fair value of One S.r.l. call |
|
|
258 |
|
|
|
48 |
|
Interest expense, net |
|
|
135 |
|
|
|
361 |
|
Adjusted EBITDA |
|
$ |
(26,932 |
) |
|
$ |
(13,890 |
) |
Some of the limitations of Adjusted EBITDA include (i) Adjusted EBITDA does not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.
Basis of Presentation
Our consolidated financial statements and condensed consolidated financial statements are prepared in accordance with GAAP. Any reference in this discussion and analysis to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”).
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. We view our operations and manage our business as one operating segment.
The noncontrolling interest attributable to Gelesis S.r.l., our variable interest entity (“VIE”), is presented as a separate component from stockholders’ equity (deficit) in our consolidated balance sheets and as a noncontrolling interest in our condensed consolidated statements of noncontrolling interest, redeemable convertible preferred stock and stockholders’ equity. All intercompany balances and transactions have been eliminated in consolidation.
Key Components of Results of Operations
30
Product revenue, net
We recognize product revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Our product revenue is derived from product sales of Plenity, net of estimates of variable consideration for which reserves are established for expected product returns, shipping charges to end-users, pharmacy dispensing and platform fees, merchant and processing fees, and promotional discounts offered to end-users.
Cost of goods sold
Cost of goods sold includes the cost of manufacturing our proprietary superabsorbent hydrogels for Plenity for which revenue was recognized during the period, as well as the associated costs for encapsulation, packaging, shipment, supply management and quality assurance. Expenses from royalty agreements on net product sales are also recognized as a component of cost of goods sold during the period in which the associated revenues are recognized. A portion of depreciation with respect to property and equipment directly utilized in manufacturing Plenity units is recognized as a component of cost of goods sold over the depreciable life of the asset.
Selling, general and administrative expense
A significant component of our selling, general and administrative expenses is comprised of our selling and marketing expense, which includes our limited contract sales force in the US markets and discretionary consumer acquisition expenses.
Selling, general and administrative costs are expensed as incurred. Selling, general and administrative costs include sales and marketing costs incurred as a result of the commercialization of the Company’s products, payroll and personnel expense, stock-based compensation expense, and costs of programs and infrastructure necessary for the general conduct of the Company’s business.
Research and development expense
Research and development costs are expensed as incurred. Prepaid research and development costs are deferred and amortized over the service period, as the services are provided. Research and development costs include payroll and personnel expense, stock-based compensation expense, consulting costs, external contract research and development expenses, as well as depreciation and utilities. These activities relate primarily to formulation, CMC, preclinical and discovery activities. As such, we do not track these research and development expenses on an indication-by-indication basis as they primarily relate to expenses which are deployed across multiple projects under development or are for future product and pipeline candidates which utilize our platform technology. These costs are included in unallocated research and development expenses in the tables below.
Clinical trial costs are a component of research and development expenses and consist of clinical trial and related clinical manufacturing costs, fees paid to clinical research organizations and investigative sites. We track and maintain these costs on an indication-by-indication basis.
Amortization expense
Amortization expense relates to the intangible asset that resulted from an amendment to our master agreement with the original inventor of our core patents, pursuant to which the percentage of royalties we are required to pay on future net revenues was reduced. The intangible asset is amortized over its useful life, which was determined as of the date of the amendment to be the earliest expiration of patents related to the underlying IP in November 2028.
Other non-operating income (expense), net
Change in the fair value of earnout liability
We have earnout shares which are contingent issuable as incremental consideration pursuant to ASC 815. The earnout shares are initially recorded at fair value and remeasured to fair value at each reporting date until settlement with gains and losses arising from changes in fair value recognized in the consolidated statements of operations.
Changes in the fair value of warrants
We have issued warrants to investors which are liability classified and initially recorded at fair value and remeasured to fair value at each reporting date until settlement with gains and losses arising from changes in fair value recognized in the consolidated statements of operations.
Interest expense, net
Interest expense, net consists of interest incurred on our various loans and interest income earned on our cash, cash equivalents and marketable securities.
Other income (expense), net
31
Other income, net primarily consists of income earned on our grants from government agencies in Italy, research and development tax credits earned in Italy for qualifying expenses, and gains and losses on foreign currency transactions. Other income, net also consists of changes in fair value of the One Srl call option.
Provision for income taxes
We must make certain estimates and judgments in determining income tax expense for financial statement purposes. The amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using substantively enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Net deferred tax assets are not recorded if we do not assess their realization as probable. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in our financial statements in the period that includes the substantive enactment date.
Results of Operations
Comparison of the Three Months Ended March 31, 2022 and March 31, 2021:
The following table summarizes our results of operations:
|
|
For the Three Months Ended March 31, |
|
|
Increase |
|
||||||
|
|
2022 |
|
|
2021 |
|
|
(Decrease) |
|
|||
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|||
Revenue: |
|
|
|
|
|
|
|
|
|
|||
Product revenue, net |
|
$ |
7,514 |
|
|
$ |
3,101 |
|
|
$ |
4,413 |
|
Total revenue, net |
|
|
7,514 |
|
|
|
3,101 |
|
|
|
4,413 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|||
Costs of goods sold |
|
|
4,913 |
|
|
|
2,816 |
|
|
|
2,097 |
|
Selling, general and administrative |
|
|
37,706 |
|
|
|
11,945 |
|
|
|
25,761 |
|
Research and development |
|
|
7,410 |
|
|
|
4,376 |
|
|
|
3,034 |
|
Amortization of intangible assets |
|
|
567 |
|
|
|
567 |
|
|
|
— |
|
Total operating expenses |
|
|
50,596 |
|
|
|
19,704 |
|
|
|
30,892 |
|
Loss from operations |
|
|
(43,082 |
) |
|
|
(16,603 |
) |
|
|
(26,479 |
) |
Other non-operating income (expense), net |
|
|
37,379 |
|
|
|
(1,966 |
) |
|
|
39,345 |
|
Loss before income taxes |
|
|
(5,703 |
) |
|
|
(18,569 |
) |
|
|
12,866 |
|
Provision for income taxes |
|
|
— |
|
|
|
17 |
|
|
|
(17 |
) |
Net loss |
|
$ |
(5,703 |
) |
|
$ |
(18,586 |
) |
|
$ |
12,883 |
|
Product revenue, net
We recognized product revenue, net of $7.5 million for the three months ended March 31, 2022, as compared to $3.1 million for the three months ended March 31, 2021, an increase of $4.4 million or 142%. We sold 114,570 units at an average selling price per unit, net of $65.58 for the three months ended March 31, 2022, as compared to 48,761 units at an average selling price per unit, net of $63.60 for the three months ended March 31, 2021.
The increase in units sold was primarily attributable to our planned and executed commercialization strategy for Plenity. We made Plenity available for commercial sale through a beta launch that began in in October 2020 and continued throughout 2021. Activities associated with a full commercial launch of the Product in the United States began in late 2021, and in February 2022, we launched the first national broad awareness media campaign for Plenity.
Cost of goods sold
We recognized cost of goods sold of $4.9 million for the three months ended March 31, 2022, as compared to $2.8 million for the three months ended March 31, 2021, an increase of $2.1 million. Depreciation as a component of cost of goods sold was $0.7 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively. The increases were primarily attributable to the revenue recognized with respect to units sold for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.
Gross profit was $2.6 million for the three months ended March 31, 2022, as compared to $0.3 million for the three months ended March 31, 2021. Gross margin also increased to 34.6% for the three months ended March 31, 2022, as compared to 9.2% for the three
32
months ended March 31, 2021. The increases were primarily attributable to production commencing at our first commercial-scale manufacturing facility in the fourth quarter of 2021 and the implementation of new finished-goods packaging in the third quarter 2021.
Selling, general and administrative expense
The following table summarizes our selling, general and administrative expenses for the three months ended March 31, 2022 and 2021:
|
|
For the Three Months Ended March 31, |
|
|
Increase |
|
||||||
|
|
2022 |
|
|
2021 |
|
|
(Decrease) |
|
|||
In thousands |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|||
Selling and marketing expense |
|
$ |
21,164 |
|
|
$ |
7,686 |
|
|
$ |
13,478 |
|
General and administrative expense |
|
|
7,618 |
|
|
|
3,371 |
|
|
|
4,247 |
|
Non-cash stock-based compensation expense |
|
|
8,924 |
|
|
|
888 |
|
|
|
8,036 |
|
Total selling, general and administrative expense |
|
$ |
37,706 |
|
|
$ |
11,945 |
|
|
$ |
25,761 |
|
Our selling, general and administrative expense was $37.7 million for the three months ended March 31, 2022, as compared to $11.9 million for the three months ended March 31, 2021, an increase of $25.8 million or 216%.
Selling and marketing expense increased $13.5 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase in selling and marketing expense was primarily attributable to increased marketing spend to support the commercial sale of Plenity. In February 2022, we launched the first national broad awareness media campaign for the product, which included TV, digital, social, and Out of Home media channels to grow awareness of Plenity.
Non-cash stock-based compensation expense increased $8.0 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily attributable to the incremental compensation cost with respect to contingently issuable earnout shares pertaining to Legacy Gelesis equity awards, which had previously vested.
General and administrative expense increased $4.2 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily attributable to professional and legal expenses incurred with respect to the Business Combination.
Research and development expenses
The following table summarizes our research and development expenses for the three months ended March 31, 2022 and 2021:
|
|
For the Three Months Ended March 31, |
|
|
Increase |
|
||||||
|
|
2022 |
|
|
2021 |
|
|
(Decrease) |
|
|||
In thousands |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|||
GS200 |
|
$ |
7 |
|
|
$ |
794 |
|
|
|
(788 |
) |
GS300 |
|
|
136 |
|
|
|
— |
|
|
|
136 |
|
GS500 |
|
|
75 |
|
|
|
— |
|
|
|
75 |
|
Unallocated expenses |
|
|
|
|
|
|
|
|
|
|||
Other research and development expenses |
|
|
2,127 |
|
|
|
3,015 |
|
|
|
(888 |
) |
Non-cash stock-based compensation expense |
|
|
5,065 |
|
|
|
567 |
|
|
|
4,498 |
|
Total Research and development expense |
|
$ |
7,410 |
|
|
$ |
4,376 |
|
|
$ |
3,034 |
|
Our research and development expense was $7.4 million for the three months ended March 31, 2022, as compared to $4.4 million for the three months ended March 31, 2021, an increase of $3.0 million, or 69%.
Non-cash stock-based compensation expense increased $4.5 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily attributable to the incremental compensation cost with respect to contingently issuable earnout shares pertaining to Legacy Gelesis equity awards, which had previously vested.
The decline in research and development expenses within clinical indications (GS200, GS300 and GS500) was primarily attributable to the conclusion of the LIGHT-UP study with respect to GS200 during the year ended December 31, 2021, as well as the strategic prioritization of the commercialization of Plenity particularly with respect to our financial and human resources. Similarly, other
33
research and development expenses declined $0.9 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.
Other non-operating income (expense), net
We recognized other non-operating income, net of $37.4 million for the three months ended March 31, 2022, as compared to expense, net of $1.9 million for the three months ended March 31, 2021, an increase in income of $39.3 million. The income for the three months ended March 31, 2022 was primarily attributable to income of $33.9 with respect to the change in fair value of our earnout liability as well as income of $3.5 million with respect to the change in fair value of our warrant liabilities. The income for the three months ended March 31, 2022, was further attributable to $0.3 million in investment tax credit income recognized with respect to certain tax incentives offered for property and equipment investment in Italy and income of $0.4 million recognized with respect to grants awarded by the Puglia region of Italy. The income was partially offset by a loss of $0.3 million recognized with respect to the change in fair value of the One S.r.l. call option.
The expense for the three months ended March 31, 2021 was primarily attributable to a loss of $2.1 million recognized for the change in fair value of our warrant liabilities.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the issuance of equity and debt instruments, license and collaboration agreements, supply and distribution agreements, and government grants. As of March 31, 2022, our principal sources of liquidity were our cash and cash equivalents in the amount of $34.0 million. During the three months ended March 31, 2022, we closed a business combination with CPSR, pursuant to which we received $105.0 million in gross proceeds, prior to the payment of transactions fees due and payable. As of the date of this Quarterly Report, we expect that our existing cash and cash equivalents will only be sufficient to fund our operating expenses and capital expenditure requirements into the first quarter of 2023.
Due to our available cash and cash equivalents, a history of recurring losses from operations, negative cash flows from operations, and a significant accumulated deficit, we have concluded that there is substantial doubt about our ability to continue as a going concern. In addition, our independent registered public accounting firm included an emphasis of matter paragraph in their opinion for the years ended December 31, 2021 and 2020, respectively, as to the substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report, which have been prepared in accordance with GAAP, contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.
We have incurred negative cash flows from operating activities and significant losses from operations in the past. We expect to continue to incur operating losses for at least the next twelve months due to the investments that we intend to make in our business to support the commercialization of Plenity and, as a result, we will require additional capital resources to grow our business.
Future Liquidity Requirements
Prior to the closing of the Business Combination, holders of 26,844,777 shares of CPSR Class A Common Stock exercised their right to redeem such shares for cash at a price of approximately $10.00 per share for aggregate payments of $268,646,943. As a result, upon closing of the Business Combination, we received approximately $105.0 million of gross proceeds to fund our future capital and liquidity needs. Due to the significant number of redemptions, we implemented an alternative business plan, prioritizing short-term working capital needs such as investments in raw materials and finished goods as well as investments in sales and marketing, and delaying certain long-term capital expenditures in commercial infrastructure and certain research and development expenses. We reduced and optimized investments in sales and marketing, prioritizing investments in high return and high exposure mediums. We have sought out, and continue to seek out, alternative commercial arrangements or geographic distribution partnerships to finance certain investments in sales and marketing associated with the sale of Plenity. We expect these actions will provide us with sufficient liquidity to manage short-term risk and uncertainty and (i) enable us to execute our alternative business plan, (ii) afford us time to access financing alternatives to provide for long-term liquidity and (iii) enable us to fund the continued commercialization of Plenity. See Part I, Item 1A, “Risk Factors — There were a significant number of redemptions in connection with the Business Combination and if we are not successful in implementing an alternative business plan and/or raising additional capital in a timely manner, we may have insufficient cash and liquidity to pay operating expenses and other obligations. Any such event would have a material adverse effect on our business and financial condition.” in our 2021 Annual Report for more information regarding the risk associated with our ability to implement our business plan and/or raise additional capital.
As a result, even with proceeds from the Business Combination, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through issuance of additional equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions.
34
As of the date of this Quarterly Report, we are continuing to evaluate opportunities to raise additional capital. If we are unsuccessful in raising additional capital, we may need to further restrict our spending particularly with respect to discretionary sales and marketing activities and our manufacturing and supply chain functions. Further changes to the execution of our alternative business plan may impact the growth of Plenity sales and the pace of acquisition and retention of consumers, as well as the price of our common stock.
Revenue Projections
Our revenue projections are highly dependent on (i) our ability to acquire new consumers and/or retain existing consumers and (ii) our ability to access additional capital and raise sufficient levels of funding in a timely manner to support the sales and marketing of Plenity at a broad national level within the United States. If our access to additional capital is delayed or insufficient, it may adversely impact the sale of Plenity and our revenue projections. See Part II, Item 1A “Risk Factors – The financial and operational projections and commercialization and product candidate development timelines that we may provide from time to time are subject to inherent risks.” in this Quarterly Report for more information.
Warrant Proceeds
As of the date of this Quarterly Report, we have 13,800,000 outstanding Public Warrants to purchase 13,800,000 shares of our common stock, exercisable at an exercise price of $11.50 per share, which expire on the earlier to occur of January 13, 2027 or redemption; (ii) 7,520,000 outstanding Private Warrants to purchase 7,520,000 shares of our common stock, exercisable at an exercise price of $11.50 per share, which expire January 13, 2027 or redemption and (iii) 3,013,365 exercisable Rollover Warrants, 1,353,062 of which are exercisable at an exercise price of $4.26 and expire on October 21, 2030 and 1,660,303 of which are exercisable at an exercise price of $0.02 and expire on February 15, 2025.
The exercise of warrants is highly dependent on the price of our common stock and the spread between the exercise price of the warrant and the price of our common stock at the time of exercise. For example, to the extent that the price of our common stock exceeds $11.50 per share, it is more likely that holders of our Public Warrants and Private Warrants will exercise their warrants. To the extent that the price of our common stock is less than $11.50 per share, it is less likely that such holders will exercise their warrants. As of May 11, 2022, the price of our common stock price was $4.53 per share. There can be no assurance that our warrants will be in the money prior to their expiration and, as such, any or all of our warrants may expire worthless. Our Public Warrants under certain conditions, as described in the warrant agreement, are redeemable by the Company at a price of $0.01 per warrant or on a cashless basis. Our Private Warrants are not redeemable so long as they are held by the initial stockholders and are exercisable on a cashless basis. Our Rollover Warrants are not redeemable and are exercisable on a cashless basis only with respect to the 1,660,303 warrants that have an exercise price of $0.02. As such, it is possible that we may never generate any cash proceeds from the exercise of our warrants. As of the date of this Quarterly Report, we have neither included nor intend to include any potential cash proceeds from the exercise of our warrants in our short-term or long-term liquidity projections. We will continue evaluate the probability of warrant exercise over the life of our warrants and the merit of including potential cash proceeds from the exercise thereof in our liquidity projections.
To the extent such warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our common stock, which increase the likelihood that our warrants will not be in the money prior to their expiration.
Financing Risk
We expect to devote significant efforts to raise capital, restructure our indebtedness and identify and evaluate potential strategic alternatives, however, there can be no assurance that we will be successful in obtaining capital sufficient to meet our operating needs on terms or a timeframe acceptable to us or at all. Further, in the event that market conditions preclude our ability to consummate such a transaction, we may be required to evaluate additional alternatives in restructuring our business and our capital structure. Any failure in these efforts could force us to delay, limit or terminate our operations, make reductions in our workforce, discontinue our commercialization efforts for Plenity as well as other development programs, liquidate all or a portion of our assets or pursue other strategic alternatives, and/or seek protection under the provisions of the U.S. Bankruptcy Code.
Although we have estimated our liquidity requirements based on assumptions we consider to be reasonable, we may need additional cash resources due to changed business conditions or other developments, including supply chain challenges , disruptions due to COVID-19, competitive pressures, and regulatory developments, among other developments. Our budget projections may be subject to cost overruns for reasons outside of our control and Plenity may experience slower sales growth than anticipated, which would pose a risk to achieve positive cash flow.
35
Our future capital requirements will depend on many factors, including increases in sales of Plenity, increases in our customer base, the timing and extent of spend to support the expansion of sales, marketing and development activities, and the impact of the COVID-19 pandemic. We may in the future also enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights.
We have based our estimate of liquidity on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our cash flows may fluctuate and are difficult to forecast and will depend on many factors mentioned elsewhere in this discussion and analysis. If we require additional equity or debt financing from outside sources, we may not be able to raise it on terms acceptable to us, or at all, and the Company may pursue financing transactions that are not completed. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be harmed.
Cash flows
The following table summarizes our cash flows for each of the periods presented:
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
In thousands |
|
(Unaudited) |
|
|
(Unaudited) |
|
||
Cash (used in) provided by: |
|
|
|
|
|
|
||
Operating activities |
|
$ |
(35,183 |
) |
|
$ |
(8,294 |
) |
Investing activities |
|
|
(1,963 |
) |
|
|
17,646 |
|
Financing activities |
|
|
42,780 |
|
|
|
3,334 |
|
Effect of exchange rates on cash |
|
|
(46 |
) |
|
|
(973 |
) |
Increase in cash and cash equivalents |
|
$ |
5,588 |
|
|
$ |
11,713 |
|
Cash used in operating activities
Net cash used in operating activities was $35.2 million for the three months ended March 31, 2022, as compared to $8.3 million for the three months ended March 31, 2021. The increase in outflows was primarily attributable to our operating expenses increasing $30.9 million to $50.6 million for the three months ended March 31, 2022, as compared to $19.7 million for the three months ended March 31, 2021.
Cash (used in) provided by investing activities
Net cash used in investing activities was $2.0 million for the three months ended March 31, 2022, as compared to $17.6 million provided by investing activities for the three months ended March 31, 2021. The outflows were primarily attributable to $1.9 million in the purchase of property and equipment for the three months ended March 31, 2022. For the three months ended March 31, 2021, inflows were primarily attributable to $24.0 million in maturities of marketable securities, which were partially offset by a $6.4 million in the purchase of property and equipment for the three months ended March 31, 2021.
Cash provided by financing activities
Net cash provided by financing activities was $42.7 million for the three month ended March 31, 2022, as compared to $3.3 million for the three months ended March 31, 2021. The increase in inflows was primarily attributable to net proceeds of $70.5 million received from the completion of the Business Combination in January 2022, which was partially offset by our repayment of convertible promissory notes also in January 2022, totaling $27.3 million, as compared to net proceeds of $3.5 million from the issuance of loans in Italy for the three months ended March 31, 2021.
Contractual Obligations and Commitments
For the three months ended March 31, 2022, there were no material changes to our contractual obligations and commitments from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” in our Form 8-K Amendment No. 1 filed with the SEC on March 24, 2022, except in January 2022, we settled convertible promissory notes in cash for principal plus accrued interest in the aggregate amount of $27.3
36
million. For further information on these lease amendments, please see Note 12 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
Off-Balance Sheet Arrangements
We currently do not have, and did not have during the periods presented, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Critical Accounting Policies and Significant Judgments and Estimates
For the three months ended March 31, 2022, there have been no material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 8-K Amendment No. 1 filed with the SEC on March 24, 2022 other than those described in Note 2 in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
JOBS Act Accounting Election
Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have elected to avail ourselves of this exemption to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, where allowable we have early adopted certain standards as described in Note 2 of our consolidated financial statements. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an “emerging growth company,” we are exempt from Sections 14A(a) and (b) of the Exchange Act which would otherwise require us to (1) submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “golden parachutes;” and (2) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our chief executive officer’s compensation to our median employee compensation.
We also intend to rely on an exemption from the rule requiring us to provide an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will continue to remain an “emerging growth company” until the earliest of the following: (1) the last day of the fiscal year following the fifth anniversary of the date of the completion of this registration; (2) the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1.07 billion; (3) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (4) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
37
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and are not required to provide the information otherwise required under this item.
Item 4. Controls and Procedures.
Previously Disclosed Material Weakness
As previously disclosed in Part II, Item 9A of our 2021 Annual Report, CPSR's management prior to the Business Combination concluded that CPSR’s management prior to Business Combination did not maintain effective internal control over financial reporting as of December 31, 2021, due to a material weakness related to CPSR's historical consolidated financial statements issued prior to the Business Combination. The material weakness related to CPSR prior to the Business Combination not having adequate controls over accounting for complex financial instruments associated with the accounting for warrants issued in connection with CPSR’s initial public offering.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended March 31, 2022, we completed the Business Combination, which resulted in a change in management responsible for the preparation and review of our consolidated financial statements. Effective as of the closing of the Business Combination, the management of Legacy Gelesis is responsible for internal control over financial reporting and the former management of CPSR no longer participates in financial reporting. Additionally, the internal controls of Legacy Gelesis became our internal controls.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Subsequent to the Business Combination, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, who serve as our principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. Our assessment is that, post-Business Combination, we have a sufficiently staffed and technically experienced finance and accounting team to address the financial reporting requirements of a public company. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded the conditions causing the material weakness no longer existed, and are not expected to exist. Accordingly, we determined the material weakness did not exist in internal control over financial reporting as of March 31, 2022. Management has concluded that the condensed consolidated financial statements included in this Quarterly Report present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods disclosed in accordance with U.S. GAAP.
38
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of these matters could materially affect our future results of operations, cash flows, or financial position. We are not presently party to any legal proceedings that, in the opinion of management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows.
Item 1A. Risk Factors.
Certain factors that may affect the Company’s business or operations are described under “Risk Factors” in Part I, Item 1A, of our 2021 Annual Report. Except as set forth below, there have been no material changes to our risk factors from those previously disclosed in our 2021 Annual Report.
An investment in our securities involves a high degree of risk. You should consider carefully all of the risks described below and under “Risk Factors” in Part I, Item 1A, of our 2021 Annual Report, together with the other information contained in this Quarterly Report and in our 2021 Annual Report, before making a decision to invest in our securities. If any of the following events, or the events described under “Risk Factors” in Part I, Item 1A, of our 2021 Annual Report, occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment.
The price of our common stock may be volatile, and you could lose all or part of your investment.
The trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. For example, our stock traded within a range of a high price of $6.62 and a low price of $2.75 per share for the period of January 14, 2022, our first day of trading on the New York Stock Exchange through May 11, 2022. Factors which affect the volatility of the market price of our common stock include, without limitation:
39
In addition, the stock market in general, and the NYSE and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, financial condition and results of operations.
Future sales and issuances of our common stock or rights to purchase our common stock, including pursuant to the Gelesis Holdings, Inc. 2021 Stock Option and Incentive Plan and future exercise of warrants or registration rights, could result in additional dilution of the percentage ownership of our shareholders and could cause our share price to fall.
We expect that significant additional capital may be needed in the future to continue our planned operations, including expanding commercial operations, self-commercialization of our products in new markets, conducting clinical trials, expanded research and development activities, and costs associated with operating as a public company. To raise capital, we may sell shares of our common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell shares of our common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing shareholders, and new investors could gain rights, preferences, and privileges senior to existing holders of our common stock.
Sales of a substantial number of shares of our common stock in the public market, including the resale of the shares of common stock held by our stockholders, could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. Of the 72,390,413 shares of our common stock outstanding as of May 11, 2022, approximately 42,668,860 and 4,917,221 shares are currently subject to restrictions on transfer under 180-day and 360-day lock-up under agreements, respectively, entered into between us and the holders of those shares. These restrictions are due to expire on July 13, 2022 and January 13, 2023, respectively, resulting in these shares becoming eligible for public sale on July 14, 2022 and January 14, 2023, respectively, if they are registered under the Securities Act of 1933, as amended (the “Securities Act”), or if they qualify for an exemption from registration under the Securities Act. Pursuant to our Amended and Restated Registration and Stockholder Rights Agreement, dated January 13, 2021, by and among the us and the stockholders party thereto (the “Registration Rights Agreement”), certain of our stockholders are entitled to registration rights requiring us to file a registration statement to register such securities for resale.
The registrable securities that we are obligated to register pursuant to our obligations under the Registration Rights Agreement and the Subscription Agreements with PIPE Investors would represent approximately 82.9% of the shares of our common stock currently outstanding as of the date of this Quarterly Report, including those issuable upon exercise of the warrants. After it is effective and until such time that it is no longer effective, the registration statement registering such registrable securities will permit the resale of these shares. The resale, or expected or potential resale, of a substantial number of our common stock in the public market could adversely affect the market price for our common stock and make it more difficult for existing stockholders to sell their holdings at times and prices that they determine are appropriate. Furthermore, we expect that, because there will be a large number of shares registered pursuant to the registration statement we are required to file pursuant to the Registration Rights Agreement, the selling
40
securityholders thereunder will continue to offer the securities covered thereby for a significant period of time, the precise duration of which cannot be predicted. Accordingly, the adverse market and price pressures resulting from an offering pursuant to the registration statement may continue for an extended period of time.
We have also registered all shares of common stock that we may issue under our equity compensation plans or that are issuable upon exercise of outstanding options. These shares can be freely sold in the public market upon issuance and once vested, subject to volume limitations applicable to affiliates and the lock‑up agreements described above. If any of these additional shares are sold, or if it is perceived that they will be sold, in the public market, the market price of our common stock could decline.
In addition, our common stock is also subject to potential dilution from the exercise of up to 24,333,365 warrants, the exercise of up to 15,144,811 stock options, the issuance of common stock pursuant to the vesting of up to 5,2727,601 restricted stock units, the issuance of up to 23,482,845 earnout shares pursuant to the triggering events in the Business Combination Agreement, and the potential issuance of common stock in connection with future equity and or convertible debt financings. Sales of substantial numbers of such shares in the public market, including the resale of the shares of common stock held by our stockholders, could adversely affect the market price of our common stock, the impact of which is increased as the value of our stock price increases.
There can be no assurance that the warrants will be in the money at the time they become exercisable; they may expire worthless and therefore we will not receive cash proceeds from the exercise of warrants.
As of the date of this Quarterly Report, we have 13,800,000 outstanding Public Warrants to purchase 13,800,000 shares of our common stock, exercisable at an exercise price of $11.50 per share, which expire on the earlier to occur of January 13, 2027 or redemption; (ii) 7,520,000 outstanding Private Warrants to purchase 7,520,000 shares of our common stock, exercisable at an exercise price of $11.50 per share, which expire on the earlier to occur of January 13, 2027 or redemption and (iii) 3,013,365 exercisable Rollover Warrants, 1,353,062 of which are exercisable at an exercise price of $4.26 and expire on October 21, 2030 and 1,660,303 of which are exercisable at an exercise price of $0.02 and expire on February 15, 2025.
The exercise of warrants is highly dependent on the price of our common stock and the spread between the exercise price of the warrant and the price of our common stock at the time of exercise. For example, to the extent that the price of our common stock exceeds $11.50 per share, it is more likely that holders of our Public Warrants and Private Warrants will exercise their warrants. To the extent that the price of our common stock is less than $11.50 per share, it is less likely that such holders will exercise their warrants. As of May 11, 2022, the price of our common stock price was $4.53 per share. There can be no assurance that our warrants will be in the money prior to their expiration. Our Public Warrants under certain conditions, as described in the warrant agreement, are redeemable by the Company at a price of $0.01 per warrant or on a cashless basis. Our Private Warrants are not redeemable so long as they are held by the initial stockholders and are exercisable on a cashless basis. Our Rollover Warrants are not redeemable and are exercisable on a cashless basis only with respect to the 1,660,303 warrants that have an exercise price of $0.02. As such, it is possible that we may never generate any cash proceeds from the exercise of our warrants.
The financial and operational projections and commercialization and product candidate development timelines that we may provide from time to time are subject to inherent risks.
The projections and timelines that our management may provide from time to time (including with respect to financial or operational matters, commercialization efforts or product candidate development) reflect numerous assumptions made by our management, including assumptions with respect to our specific as well as general business, economic, market and financial conditions, including our ability to raise additional financing, and other matters, all of which may be difficult to predict and many of which are beyond our control. Accordingly, there is a risk that the assumptions made in preparing the projections, or the projections themselves, will prove inaccurate or, in the event we do not successfully raise subsequent financing, that our commercialization or product development activities may be curtailed. There will be differences between actual and projected results, and actual results may be materially different from those contained in our projections or timelines. Further, if our commercialization or product development activities are slowed or stopped, we would be unable to meet the timelines and projections previously provided by us. The inclusion of projections or timelines in (or incorporated by reference in) this Quarterly Report or any other filing we make with the SEC should not be regarded as an indication that we or our management or representatives considered or consider such projections and timelines to be a reliable prediction of future events, and the projections and timelines should not be relied upon as such.
If certain holders of our common stock sell a significant portion of their securities, it may negatively impact the market price of the shares of our common stock and such holders still may receive significant proceeds.
As of the date of this Quarterly Report, the market price of our common stock is below $10.00 per share, which was the price per unit sold in the initial public offering of our predecessor, CPSR, the per-share price of the 9,000,000 shares of Class A Common Stock our predecessor sold to certain investors in connection with our Business Combination in a private placement for an aggregate amount of
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$90.0 million (the “PIPE Financing”) and also the per share value of the consideration issued to Legacy Gelesis shareholders upon consummation of our Business Combination. However, certain of our shareholders who hold shares of our common stock that were (i) originally purchased by our predecessor’s sponsor, Capstar Sponsor Group, LLC, in a private placement prior to our predecessor’s initial public offering (the “Founder Shares”) or (ii) originally issued by CPSR in a private placement in connection with Backstop Agreement, dated December 30, 2021 (the “Backstop Agreement”), between CPSR and certain investors (the “Backstop Shares”), may nonetheless be willing to sell such Founder Shares or Backstop Shares as they were originally purchased at an effective price significantly less than $10.00 per share. The currently outstanding 4,916,250 Founder Shares were purchased at an effective price of $0.0051 per share. Holders of the Backstop Shares purchased an aggregate of 744,217 shares of CPSR’s Class A common stock in a private placement at a price of $10.00 per share, for an aggregate purchase price of $7.4 million and such holders also received an aggregate of 1,983,750 shares of CPSR Class A common stock as additional consideration, resulting in an effective purchase price for the currently outstanding 2,727,967 Backstop Shares of approximately $2.73 per share. Accordingly, holders of the Founder Shares and Backstop Shares could sell their securities at a per-share price that is less than $10.00 and still realize a significant profit from the sale of those securities that could not be realized by our other shareholders. On May 11, 2022, the closing price of our common stock was $4.53. Based on this closing price, the aggregate sales price of the Founder Shares would be approximately $22.3 million and the aggregate sales price of the Backstop would be approximately $12.4 million.
The Founder Shares and 1,983,750 of the Backstop Shares are currently subject to restrictions on transfer under applicable lock-up agreements; however, these restrictions are due to expire on July 13, 2022 and January 13, 2023, respectively, resulting in these shares becoming eligible for public sale on July 14, 2022 and January 14, 2023, respectively, if they are registered under the Securities Act, or if they qualify for an exemption from registration under the Securities Act. Pursuant to our Registration Rights Agreement, certain of our stockholders, including holders of the Founder Shares and holders of the Backstop Shares, are entitled to registration rights requiring us to register such securities for resale.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
See Note 3, “Business Combination and Reverse Recapitalization,” in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report regarding Subscription Agreements between CPSR and certain investors and the Backstop Agreement between CPSR and certain investors.
As discussed in Note 3, “Business Combination and Reverse Recapitalization,” in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report, in connection with the Business Combination, pursuant to the Subscription Agreements, each dated July 19, 2021, the PIPE Investors purchased an aggregate of 9,000,000 shares of CPSR's Class A common stock in a private placement at a price of $10.00 per share for an aggregate purchase price of $90.0 million. The PIPE Investment was consummated on January 13, 2022 in connection with the closing of the Business Combination. In addition, pursuant to the Backstop Agreement, dated December 30, 2021, the Backstop Investors purchased an aggregate of 744,217 shares of CPSR's Class A common stock in a private placement at a price of $10.00 per share for an aggregate purchase price of $7.4 million. Additionally, CPSR issued the Backstop Investors 1,983,750 CPSR Class A common stock as additional consideration. The transactions contemplated by the Backstop Agreement were consummated on January 13, 2022 in connection with the closing of the Business Combination. The shares of Class A common stock issued pursuant to the Subscription Agreements and the Backstop Agreement have not been registered under the Securities Act in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act.
The Company intends to use the proceeds from the PIPE Investment and the sale of shares to the Backstop Investors to support the sale of Plenity.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits.
Exhibit Number |
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Description |
31.1* |
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31.2* |
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32.1* |
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32.2* |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Company Name |
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Date: May 12, 2022 |
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By: |
/s/ Yishai Zohar |
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Yishai Zohar |
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Chief Executive Officer (Principal Executive Officer) |
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Date: May 12, 2022 |
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By: |
/s/ Elliot Maltz |
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Elliot Maltz |
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Chief Financial Officer (Principal Financial and Accounting Officer) |
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