Item 7. 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 the consolidated financial statements and the notes thereto contained elsewhere in this Form 10-K. Certain of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, 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 Form 10-K and those set forth in the section entitled “Risk Factors” in Item 1A of Part I of this Form 10-K, 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 “ Note Regarding Forward-Looking Statements” and “Risk Factors” in this Form 10-K to 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/m 2 , 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. In February 2022, we launched the first national broad awareness media campaign for the product and we continued to invest in broad awareness during the year ended December 31, 2022. 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, promissory notes, convertible senior secured notes, government grants and our January 2022 Business Combination, pursuant to which we received approximately $105.0 million of gross proceeds. We have incurred significant operating losses to date. Our net losses were $55.8 million and $93.3 million for years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $322.6 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, dealership partnerships 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 Form 10-K, we expect that our existing cash and cash equivalents plus the $5 million of proceeds from the issuance of convertible senior secured notes in February 2023 will only be sufficient to fund our operations into the early second quarter of 2023, prior to considerations for any additional funding, and not at least twelve months beyond the date of issuance of the unaudited consolidated financial statements included elsewhere in this Form 10-K. As a result, we have concluded that there is
substantial doubt about our ability to continue as a going concern. Our unaudited consolidated financial statements included elsewhere in this Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the United States (“US 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 Events
Business Combination
On July 19, 2021, Gelesis, Inc. (together with its consolidated subsidiaries, “Legacy Gelesis”) entered into a Business Combination Agreement (as amended on November 8, 2021 and December 30, 2021, the “Business Combination Agreement”) with CPSR, a Delaware corporation and special purpose acquisition company, and CPSR Gelesis Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of CPSR (“Merger Sub”). On January 13, 2022, Legacy Gelesis, CPSR, and Merger Sub consummated the business combination (“Business Combination”) pursuant to the terms of the Business Combination Agreement. 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 Investment and the sale of the Backstop Purchase Shares, generated approximately $105 million in gross proceeds and $70.5 million in net proceeds (See Note 3). On January 14, 2022, Gelesis Holdings’ common stock and public warrants began trading on the New York Stock Exchange (“NYSE”) under the symbols “GLS” and “GLS.W”, respectively.
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 have been stated at historical costs, with no goodwill or other intangible assets recorded.
Roman Health Pharmacy LLC Distribution Agreement Amendment
On June 14, 2022, we entered into a Third Amended and Restated Supply and Distribution Agreement with Ro to amend the
agreement that granted Ro exclusive telehealth distributor rights to sell Plenity in the United States in the mail order/online pharmacy
channel. Pursuant to the amended agreement, Ro’s exclusive distributor rights to sell Plenity in the United States became exclusive
only for consumers who seek an on-line consultation through myplenity.com in the United States and with respect to certain named
competitors and/or third parties. Such rights will continue through July 1, 2023, consistent with the parties’ prior agreement. In
addition, pursuant to the amended agreement, we received $15.0 million in cash from Ro as a pre-buy commitment to purchase units
of Plenity.
Promissory Notes and Promissory Note Warrants
On July 25, 2022 and August 4, 2022, we issued three term promissory notes in the aggregate principal amount of $25.0 million to existing investor CMS Bridging DMCC, an affiliate of CMS Medical Venture Investment (HK) Limited (“CMS”), and existing investors PureTech Health LLC (“PureTech”) and SSD2 LLC (“SSD2”), for an aggregate cash purchase price of $25.0 million (the “2022 Promissory Notes”). Each of the 2022 Promissory Notes is unsecured and bears interest at a rate of 15% per annum. Each 2022 Promissory Note matures on the earlier of (a) December 31, 2023 or (b) five (5) business days following a qualified financing. Upon a payment default under any 2022 Promissory Note that has not been cured after five days (i) we will be required to issue certain warrants to the holders as defined by the 2022 Promissory Note agreements and (ii) the holders will have the option to convert outstanding principal and accrued interest into a number of shares of our Common Stock as defined by the 2022 Promissory Note agreements.
On February 21, 2023, we entered into a Note and Warrant Purchase Agreement with PureTech, pursuant to which we issued a short term convertible senior secured note in the aggregate principal amount of $5.0 million and warrants to purchase 23,688,047 shares of Common Stock. The warrants have an exercise price of $0.2744 and may not be exercised prior to the receipt of Stockholder approval. The short term convertible senior secured note bears interest at a rate of 12% per annum, and matures on July 31, 2023, unless earlier converted or the maturity is extended as described within the definitive Agreements.
CMS License Agreement Amendment and CMS Warrant
On August 4, 2022, we entered into an amendment to the License, Collaboration and Supply Agreement, dated June 18, 2020, by and between us and CMS. Pursuant to the amendment, the one-time, non-refundable, and non-creditable regulatory approval milestone payment of $5.0 million provided for in the original agreement became immediately payable. In addition, the amendment expands the CMS Territory to include Brunei, Myanmar, Cambodia, Timor-Leste, Indonesia, Laos, Malaysia, the Philippines, Thailand and Vietnam and provides that the minimum annual royalty term for CMS territory will commence January 2024 (rather than January 2022, as previously provided under the original agreement) and extend through the expiration date of the amended agreement.
Upon execution of the amendment, we also issued to CMS a warrant to purchase up to 400,000 shares of common stock, par value $0.0001 per share, at an exercise price of $0.01 per share. The warrant expires on the date that is ten years from the date of issuance and is exercisable at any time from the date of issuance until the expiration date .
One S.r.l. Amended Warrant Purchase Agreement
On August 9, 2022, we entered into an amendment to the Warrant Purchase Agreement dated October 21, 2020, by and between us and the holders of the warrants. Pursuant to the amendment we deferred payment of the aggregate remaining purchase price under the patent license and assignment agreement and master agreement between us and One S.r.l., totaling €2.5 million, (which we owe to One S.r.l. shareholders) until March 31, 2023.
Pursuant to the amendment, and in consideration for the deferral, we amended the exercise price of the 1,353,062 common stock warrants held by One S.r.l. shareholders from $4.26 to $1.45.
Committed Equity Facility with B. Riley Principal Capital II, LLC
On August 11, 2022, we entered into a Common Stock Purchase Agreement and a Registration Rights Agreement with B. Riley Principal Capital II, LLC (“B. Riley”). Pursuant to the agreement, we will have the right, but not the obligation, to sell to B. Riley up to the lesser of (i) $50,000,000 of newly issued shares of our common stock, and (ii) 14,506,475 shares of our common stock (which is the number of shares equal to approximately 19.99% of the aggregate number of shares of our common stock issued and outstanding immediately prior to the execution of the agreement), from time to time during the 24-month term set forth in the agreement.
Change in Management
On September 27, 2022, the Company entered into a separation and general release agreement with Mr. David Abraham, our General Counsel, Chief Compliance Officer and Corporate Secretary through September 30, 2022. Pursuant to this separation agreement, Mr. Abraham ceased serving as General Counsel, Chief Compliance Officer and Corporate Secretary, effective October 1, 2022. Mr. Abraham provided consulting services to the Company to assist with the transition of his responsibilities during the fourth quarter of 2022.
Plans to Make Plenity Available Without a Prescription
We believe Plenity’s advantages are its differentiated safety-to-efficacy profile, broad approved labeling, and affordability to the consumer. Accordingly, we believe it is important that Plenity be widely available and easily accessible to consumers. In addition to making Plenity more accessible to people struggling with excess weight, we believe making Plenity available over-the-counter could reduce costs associated with acquiring new members and allow us to reduce costs associated with the prescription granting process, while also enabling new sales channels for the Company. In January 2023, we submitted a 510(k) application to the FDA to change Plenity's classification in the United States from prescription-only to OTC and expect FDA’s decision on our 510(k) application by the third quarter of 2023.
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 recognized revenue for the first time during 2020 and we 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 the ongoing clinical trials of our other product candidates.
In response to the COVID-19 pandemic, we have taken swift actions 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 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. In particular, our ability to successfully address the below key factors is dependent upon our ability to successfully raise the capital to fund such efforts. Our failure to obtain additional funding may force us to delay, limit or terminate our marketing efforts and investments in our product pipeline, which may negatively impact our ability to grow our business and attract and/or retain enough customers to operate profitably.
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 members in the United States by promoting Plenity directly to the consumer. In light of current cash resources, and to preserve liquidity, we reduced investments in broad awareness media and consumer acquisition, compared to prior periods. However, we continue to engage in promotional activities, which we believe will motivate a potential future member to ask a health care professional about acquiring Plenity through one of two channels:
Telehealth: We partner with a leading telehealth platform in the United States, providing convenient and immediate access to physicians online at no cost. Pursuant to an amended and restatement agreement, we have granted Ro exclusive distributor rights to sell Plenity in the United States with respect to (i) consumers who seek an on-line consultation through myplenity.com in the United States and (ii) certain named competitors and or third parties.
Health Care Providers: We engage a limited contract sales force to promote Plenity to target physicians. To support prescription fulfillment for our non-telehealth tradition HCP promotional efforts, we engage GoGoMeds (“GGM”), to distribute all non-telehealth mail order prescriptions generated in the United States by health care providers.
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. Our customer retention efforts may be negatively impacted by recent significant reductions in our discretionary spending with respect to discretionary sales and marketing activities. 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.
Europe: We 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.
CMS: In Greater China (including Mainland China, Hong Kong, Macau, and Taiwan), Singapore, United Arab Emirates, Brunei, Myanmar, Cambodia, Timor-Leste, Indonesia, Laos, Malaysia, the Philippines, Thailand and Vietnam, we partner with China Medical System Holdings Limited (CMS) (HKG:0867) for the commercialization of Plenity.
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 over the long term, we intend to continue to make significant investments in consumer acquisition and our selling and commercial infrastructure. However, in light of current cash resources, and to preserve liquidity while we seek to raise additional capital, during the third quarter of 2022, we reduced investments in broad awareness media, consumer acquisition, and the healthcare provider sales force compared to prior periods. Accordingly, our selling and marketing expense decreased in absolute dollars during this period, which negatively impacted growth in selling Plenity. However, if we are successful in raising additional capital in the future, we expect to increase selling and marketing activities to continue to launch Plenity, and expect 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, although we intend to continue to invest in our manufacturing, fulfillment and operating capabilities in the future, these capabilities have recently been negatively impacted by recent significant reductions in our discretionary spending with respect to manufacturing and supply chain functions. If we are successful in raising additional capital in the future, we expect to continue to invest in increasing our manufacturing, fulfillment and operating capabilities. If we are unable to generate sufficient demand in Plenity, we may not have sufficient funds to invest 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, functional 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):
For the Year Ended December 31,
In thousands
New members acquired
Units sold
Product revenue, net
Average selling price per unit, net
Gross profit
Gross margin
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 Form 10-K 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 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 consolidated financial statements included elsewhere in this Form 10-K 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, including inventory reserves, 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 heading “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 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 years ended December 31, 2022 and 2021, respectively:
For the Year Ended December 31,
In thousands
Adjusted EBITDA
Net loss
Provision for income taxes
Depreciation and amortization
Stock based compensation expense
Change in fair value of earnout liability
Change in fair value of warrants
Change in fair value of convertible
promissory notes
Change in fair value of One S.r.l. call
option
Interest expense, net
Adjusted EBITDA
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 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’ deficit in our consolidated balance sheets and as a noncontrolling interest in our consolidated statements of noncontrolling interest, redeemable convertible preferred stock and stockholders’ deficit. All intercompany balances and transactions have been eliminated in consolidation.
Key Components of Results of Operations
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, and inventory reserves. 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 our products, payroll and personnel expense, stock-based compensation expense, and costs of programs and infrastructure necessary for the general conduct of our 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.
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.
Change in the fair value of convertible promissory notes
We have issued convertible promissory notes to investors which are initially recorded at fair value and remeasured to fair value at each reporting date until repayment or conversion at the option of the holders, 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
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 S.r.l. 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 years ended December 31, 2022 and 2021:
For the Year Ended December 31,
Change
Revenue:
Product revenue, net
Licensing revenue
Total revenue, net
Operating expenses:
Costs of goods sold
Selling, general and administrative
Research and development
Amortization of intangible assets
Total operating expenses
Loss from operations
Other non-operating income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Product revenue, net
We recognized product revenue, net of $25.6 million and $11.2 million for the years ended December 31, 2022 and 2021, respectively, an increase of $14.4 million or 129%. We sold 374,224 units at an average selling price per unit, net of $68.30 for the year ended December 31, 2022, as compared to 174,425 units at an average selling price per unit, net of $64.12 for the year ended December 31, 2021.
The increase in units sold was primarily attributable to the execution of our commercialization strategy and ramp up between 2021 and 2022. We made Plenity available for commercial sale through a beta launch that began 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 and invested in building broad awareness during the year ended December 31, 2022. However, in light of available cash resources, during the third quarter of 2022, we reduced investments in broad awareness media and consumer acquisition compared to previous quarters in 2022 and 2021, which negatively impacted growth in selling Plenity.
Cost of goods sold
We recognized cost of goods sold of $27.6 million and $10.0 million for the years ended December 31, 2022 and 2021, respectively, an increase of $17.6 million or 176%. Increase in cost of goods sold was primarily driven by the establishment of inventory reserve of
$13.3 million during the year ended December 31, 2022, driven by reduced demand for Plenity in light of our reduced investments in selling and marketing activities during the second half of 2022, and pending application with the FDA to change the classification of Plenity to OTC. Additional increases in cost of goods sold were driven by the increase in units sold, partially offset by a lower cost per unit for the year ended December 31, 2022, as compared to the year ended December 31, 2021. Depreciation recognized as a component of cost of goods sold was $1.8 million and $1.0 million for the years ended December 31, 2022 and 2021, respectively.
We recognized a gross loss of $2.0 million and a gross profit of $1.2 million for the years ended December 31, 2022 and 2021, respectively, a decrease of $3.2 million. Gross margin was -8% for the year ended December 31, 2022, as compared to 11% for the year ended December 31, 2021. We achieved a lower cost of goods per unit after our first commercial-scale manufacturing facility commenced manufacturing in the fourth quarter of 2021, however the negative gross margin during the year ended December 31, 2022, was attributable to the establishment of an inventory reserve of $13.3 million.
Selling, general and administrative expense
The following table summarizes our selling, general and administrative expenses for the years ended December 31, 2022 and 2021:
For the Year Ended December 31,
Change
In thousands
Selling and marketing expense
General and administrative expense
Non-cash stock-based compensation expense
Total selling, general and administrative expense
Total selling, general and administrative expense was $99.1 million and $71.0 million for the years ended December 31, 2022 and 2021, respectively, an increase of $28.1 million or 40%.
Selling and marketing expense increased $4.1 million for the year ended December 31, 2022, as compared to the year ended December 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. We continued to invest in broad awareness during the year ended December 31, 2022, though primarily in the first and second quarter of 2022.
General and administrative expense increased $7.8 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase was primarily attributable to professional and legal expenses incurred post the Business Combination, as well as directors and officers insurance and other related costs as a public company.
Non-cash stock-based compensation expense increased $16.1 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase was primarily attributable to compensation cost with respect to the issuance of new equity awards in 2022 as well as the incremental compensation cost with respect to contingently issuable earnout shares pertaining to Legacy Gelesis equity awards.
Research and development expenses
The following table summarizes our research and development expenses for the years ended December 31, 2022 and 2021:
For the Year Ended December 31,
Change
In thousands
Unallocated expenses
Other research and development expenses
Non-cash stock-based compensation expense
Total Research and development expense
Total research and development expense was $18.6 million and $12.9 million for the years ended December 31, 2022 and 2021, respectively, an increase of $5.7 million or 45%.
Non-cash stock-based compensation expense increased $8.1 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase was primarily attributable to compensation cost with respect to the issuance of new equity awards in 2022 as well as the incremental compensation cost with respect to contingently issuable earnout shares pertaining to Legacy Gelesis equity awards.
The decrease 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.
Other non-operating income (expense), net
The following table summarizes our other non-operating income and expenses for the years ended December 31, 2022 and 2021:
For the Year Ended December 31,
Change
In thousands
Change in the fair value of earnout liability
Change in the fair value of convertible promissory notes
Change in the fair value of warrants
Interest expense, net
Other income, net
Total non-operating expenses, net
We recognized other non-operating income, net of $66.5 million for the year ended December 31, 2022, as compared to expense, net of $8.4 million for the year ended December 31, 2021, an increase in income of $74.9 million. The income for the year ended December 31, 2022 was primarily attributable to income of $58.3 million with respect to the change in fair value of our earnout liability, income of $14.7 million with respect to the change in fair value of our warrant liabilities as well as income of $1.5 million with respect to the One S.r.l. call option. The income for the year ended December 31, 2022 was further attributable to $0.8 million in investment tax credit income recognized with respect to certain tax incentives offered for property and equipment investment in Italy and income of $1.9 million recognized with respect to grants awarded by the Puglia region of Italy.
The $8.4 million non-operating expense for the year ended December 31, 2021 was primarily attributable to a loss of $7.6 million with respect to the change in fair value of our warrant liabilities, interest expense of $1.4 million and One S.r.l call option fair value change of $1.0 million, partially offset by income of $1.6 million recognized with respect to grants awarded by the Puglia region of Italy.
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 December 31, 2022, our principal sources of liquidity were our cash and cash equivalents in the amount of $24.8 million. During the year ended December 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 transaction fees due and payable. As of the date of this Form 10-K, we expect that our existing cash and cash equivalents, proceeds from the initial closing of the 2023 Convertible Senior Secured Notes, and collection of accounts and grants receivable will only be sufficient to fund our operating expenses and capital expenditure requirements into the early second 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, 2022 and 2021, respectively, as to the substantial doubt about our ability to continue as a going concern. Our unaudited consolidated financial statements included elsewhere in this Form 10-K , 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
Due to limited available liquidity to fund operations, we implemented an alternative business plan, significantly curtailed our sales marketing as well as supply chain activities since the third and fourth quarter of 2022, reduced headcount and delayed certain long-term capital expenditures in commercial infrastructure and certain research and development expenses. We have sought out, and continue to seek out, financing and other 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 — 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.” and “Risk Factors — Risks Related to Financial Position and Financing Needs — In order to support our business, we will need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional indebtedness or capital have become increasingly to secure and may not be available on acceptable terms, if at all, and the to obtain this additional funding when needed may us to , limit or our product development efforts or other operations.” in this Form 10-K for more information regarding certain factors that may impact our liquidity and our ability to raise additional capital.
As a result, 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.
As of the date of this Form 10-K, 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, 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. 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 I, Item 1A “Risk Factors – Risks Related to Financial Position and Financing Needs – 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 Form 10-K for more information.
Warrant Proceeds
As of the date of this Form 10-K, we have (i) 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 of January 13, 2027 or redemption; (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; (iv) 400,000 warrants issued to CMS which are exercisable at an exercise price of $0.01 and expire on August 4, 2032; and (v) 23,688,047 warrants issued in connection with the Note and Warrant Purchase Agreement with PureTech Health LLC at an exercise price of $0.2744 and expire no sooner than February 21, 2038.
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. In January 2023, the NYSE delisted our Public Warrants as the trading price fell below $0.01. As of March 24, 2023, the closing price of our common stock price was $0.17 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 CMS Warrants and PureTech Health LLC Warrants are not redeemable and are exercisable on a cashless basis, and our Rollover Warrants are not redeemable and have an exercise price of $0.02. As such, it is possible that we may never generate any significant cash proceeds from the exercise of our warrants. As of the date of this Form 10-K, 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 to 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 that 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, inflationary 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.
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 may pursue financing transactions that will not be 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 Year Ended December 31,
In thousands
Cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Effect of exchange rates on cash
Decrease in cash and cash equivalents
Cash used in operating activities
Net cash used in operating activities was $77.7 million and $55.3 million for the years ended December 31, 2022 and 2021, respectively. Our net loss after adjusting for non-cash operating activities was $70.5 million for the year ended December 31, 2022, as
compared to $74.5 million for the year ended December 31, 2021, a decrease in loss after adjusting for non-cash operating activities of $3.4 million. We received $15.0 million and $40.0 million pre-buy commitments from Ro during the years ended December 31, 2022 and 2021, respectively. Net cash used in operating activities was further influenced by the timing of receivables from our government grants as well as GGM during the years ended December 31, 2022 and 2021.
Cash (used in) provided by investing activities
Net cash used in investing activities was $9.1 million for the year ended December 31, 2022, as compared to $4.1 million provided by investing activities for the year ended December 31, 2021. The outflows were primarily attributable to $8.5 million in the purchase of property and equipment for the year ended December 31, 2022. For the year ended December 31, 2021, inflows were primarily attributable to $24.0 million in maturities of marketable securities, which were partially offset by $19.9 million in the purchase of property and equipment for the year ended December 31, 2021.
Cash provided by financing activities
Net cash provided by financing activities was $66.3 million and $32.5 million for the years ended December 31, 2022 and 2021, respectively. 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 and $25 million proceeds from issuance of promissory notes, partially offset by our repayment of convertible promissory notes also in January 2022, totaling $27.3 million, as compared to $27 million proceeds from issuance of convertible promissory notes and $5.7 million proceeds from issuance of loans in Italy for the year ended December 31, 2021.
Contractual Obligations and Commitments
Our contractual obligations primarily consist of our commitments under non-cancellable operating leases, promissory notes and debt obligations as well as contractual obligations under significant agreements with related and unrelated parties.
For the year ended December 31, 2022, we issued three term promissory notes in the aggregate principal amount of $25.0 million to existing investor CMS, and existing investors and related parties PureTech Health LLC and SSD2 LLC, for an aggregate cash purchase price of $25.0 million. Each of the promissory notes is unsecured and bears interest at a rate of 15% per annum. Each promissory note matures on the earlier of (a) December 31, 2023 or (b) five (5) business days following a qualified financing. Upon a payment default under any promissory note that has not been cured after five days (i) the Company will be required to issue certain warrants to the holders as defined by the promissory note agreements and (ii) the holders will have the option to convert outstanding principal and accrued interest into a number of shares of Gelesis common stock as defined by the promissory note agreements.
At December 31, 2022, the aggregate outstanding balance of the promissory notes was $27.4 million recorded at fair value in the accompanying consolidated balance sheets. We recognized a loss of $2.4 million with respect to the change in the fair value of the 2022 Promissory Notes.
See also Note 12. Debt in the accompanying Notes to the consolidated financial statements included elsewhere in this Form 10-K for a description of the Company’s debt outstanding and the terms of its debt facilities for the years ended December 31, 2022 and December 31, 2021.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results may differ from management's estimates. To the extent that there are material differences between these estimates and actual results, our consolidated financial statements will be affected. On an ongoing basis, we evaluate our estimates, judgements, and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8 of this Form 10-K. These are the policies that we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Inventory
We manufacture our own super-absorbent hydrogels used in Plenity® and other product candidates out of its own manufacturing facilities located in Italy. The packaging of the hydrogels is currently outsourced to contract packaging organizations for commercial purposes.
Inventories comprise raw materials, including raw materials for packaging components, work-in-process, and finished goods, which are goods that are available for sale. We state inventory at the lower of cost or net realizable value with the cost based on the first-in, first-out method. If we identify excess, obsolete or unsalable items, we write down related inventory to its net realizable value in the period in which the impairment is identified. These adjustments are recorded based upon various factors related to the product, including the level of product manufactured by us, the level of product in the distribution channel, current and projected demand, the expected shelf-life of the product and firm inventory purchase commitments. Significant shipping and handling costs incurred for inventory purchases are included in inventory and costs incurred for product shipments are recorded in cost of goods sold as incurred.
Intangible Assets
Intangible assets with estimable useful lives, or definite-lived intangibles, are carried at cost and are amortized on a straight-line basis over their estimated useful lives and reviewed for impairment upon certain triggering events. We routinely review the remaining estimated useful lives of definite-lived intangible assets. If we reduce the estimated useful life assumption, the remaining unamortized balance is amortized over the revised estimated useful life.
Noncontrolling Interests
We recognize noncontrolling interest related to VIEs, in which the Company is the primary beneficiary, as temporary equity in the consolidated financial statements separate from the shareholders’ equity. Changes in the shareholders’ ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. In addition, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary will be initially measured at fair value and the difference between the carrying value and fair value of the retained interest will be recorded as a gain or loss.
Product Revenue
We commercialize 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 us in an amount that reflects the consideration which we expect 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 our customers.
Stock-Based Compensation
The Company’s stock-based compensation consist primarily of stock options and restricted stock units. 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:
exercise price: The exercise price is the fair market value on grant date, which shall mean the closing sale price of common stock, as reported on such market on that date (or if there are no market quotations for such date, the determination shall be made by reference to the last date preceding such date for which there are market quotations);
expected volatility: As the Company was previously a privately-owned company, there is not sufficient historical volatility for the expected term of the options. Therefore, the Company used an average historical share price volatility based on an analysis of reported data for a peer group of comparable companies for which historical information is available. For these analyses, the Company selects companies with comparable characteristics to itself including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. The Company computes the historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of its stock-based awards. The Company intends to consistently apply this process using representative companies until a sufficient amount of historical information regarding the volatility of its own share price becomes available;
risk-free interest rate, which is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption;
expected term, which is calculated using the simplified method, as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment, as the Company has insufficient historical information regarding its stock options to provide a basis for an estimate. Under this approach, the weighted-average expected life is
presumed to be the average of the contractual term of ten years and the weighted-average vesting term of the stock options, taking into consideration multiple vesting tranches;
dividend yield, which is zero based on the fact that the Company never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
Stock-based compensation costs for non-employees are recognized as expense over the vesting period. Stock-based compensation expense is classified in the consolidated statements of operations based on the function to which the related services are provided. Forfeitures are recorded as they occur.
Business Combination and Reverse Recapitalization
We accounted for our January 2022 Business Combination 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.
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 our initial public offering; (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.
Item 7A. Quantitative and Qualita tive Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.
Item 8. Financial Statem ents and Supplementary Data.
This information appears following Item 15 of this Form 10-K and is included herein by reference.
