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. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with (i) the unaudited condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and (ii) the audited consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 28, 2023. Certain of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, 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” and those set forth in the section entitled “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 28, 2023, actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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, non-alcoholic fatty liver disease/non-alcoholic steatohepatitis (“NAFLD/NASH”), functional constipation (“FC”), 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. In January 2023, we submitted a premarket notification, or 510(k), to the FDA to change Plenity from prescription-only to over-the-counter, or OTC, in the United States and anticipate the FDA's decision on our 510(k) submission by the third quarter of 2023. We believe Plenity’s advantages are its differentiated safety-to-efficacy profile, broad approved labeling, and affordability to the consumer. Accordingly, we believe making Plenity available OTC could make Plenity more accessible to people struggling with excess weight, reduce costs associated with acquiring new members as well as allow us to reduce costs associated with the prescription granting process, while also enabling new sales channels for us.
Our product pipeline also includes multiple other potential therapeutic candidates for common chronic conditions affected by gut health that are currently in clinical and preclinical testing, including type 2 diabetes, NAFLD, NASH, and FC, all based on our hydrogel technology.
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 $5.1 million and $5.7 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, we had an accumulated deficit of $327.9 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 Quarterly Report, we expect that our existing cash and cash equivalents, plus the $2 million proceeds pursuant to the Amendment to the Notes and Warrant Purchase Agreement with PureTech Health LLC (“PureTech”) dated as of May 1, 2023, and collection of accounts and grants receivable, are not sufficient to meet the Company’s current obligations, prior to considering any additional funding, and not at least twelve months beyond the date of issuance of the unaudited condensed consolidated financial
26
statements 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 Events
February 2023 Senior Secured Note and Warrant Purchase Agreement
On February 21, 2023, we entered into a Note and Warrant Purchase Agreement with PureTech (the “Original NPA”), pursuant to which we issued a short-term convertible senior secured note ("Senior Secured Note") in the aggregate principal amount of $5.0 million and warrants to purchase 23,688,047 shares of our common stock. The warrants (“Initial Warrants”) have an exercise price of $0.2744. The 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. We may issue up to an additional $5.0 million to PureTech upon mutual acceptance of our meeting certain conditions. The Senior Secured Note is secured by a first-priority lien on substantially all of our assets, including without limitation, intellectual property, regulatory filings and product approvals, clearances and trademarks worldwide (other than the equity interests in, and assets held by, Gelesis, S.r.l., our subsidiary located in Italy) and a pledge of 100% of the PureTech’s equity in us.
PureTech Non-binding Indication of Interest
On April 2, 2023, we received a non-binding indication of interest from PureTech to acquire all of our outstanding common stock for $0.21 per share, payable in shares of PureTech. In response, our board of directors formed a special committee consisting solely of our independent directors (“Special Committee”) to evaluate the proposal as well as to consider possible strategic alternatives. The terms of any potential agreement between us and PureTech would be contingent upon certain conditions, including approval by PureTech’s board of directors and our Special Committee and negotiation of definitive transaction documents. The indication of interest also contained a non-binding offer to provide up to an additional $5.0 million of convertible senior secured note financing to fund day-to-day operations of the Company, the terms of which are to be negotiated and determined. On April 19, 2023, PureTech submitted a revised non-binding proposal to acquire all of the outstanding equity and equity-linked securities for an aggregate purchase price of $3.0 million in cash (the “April 19 Proposal”), pursuant to which PureTech indicated that it is prepared to provide up to an additional $1.5 million of senior secured financing to fund our day-to-day operations on previously proposed terms (with the conversion ratio and warrant coverage based on the implied per share value of the Revised Proposal), and is otherwise prepared to proceed on the terms previously agreed, including funding an additional $3.5 million of senior secured financing if the parties are able to enter into a signed definitive agreement by May 5, 2023, which date may be extended if the parties mutually agree that the parties are making reasonable progress towards completing the agreement. On April 27, 2023, based on our counterproposal dated April 19, 2023, PureTech further revised its non-binding proposal to acquire all of the outstanding equity and equity-linked securities held by unaffiliated investors for an aggregate purchase price of $3.5 million in cash (the “April 27 Proposal,” together with the April 19 Proposal, the “Revised Proposals”). On April 28, 2023, we indicated our intention to proceed with a transaction if $2 million is funded by PureTech on May 1, 2023. Such amount was funded on May 1, 2023, as described below. The Special Committee has been negotiating the terms with PureTech and believes such indication of interest and Revised Proposals could lead to a transaction that provides stockholders with immediate liquidity. The Special Committee has retained financial advisors to assist the board with market research, evaluation of PureTech’s proposals and any other proposal received or strategic alternatives that may be presented.
Amendment to the February 2023 Senior Secured Note and Warrant Purchase Agreement
On May 1, 2023, we amended the Note and Warrant Purchase Agreement dated February 21, 2023 with PureTech (the “Amendment”). Pursuant to this Amendment, for a cash purchase price of $2.0 million, the Initial Investor waived the certain conditions contained in the Original NPA and (i) the Notes Issuers issued to the Initial Investor Additional Notes in the aggregate principal amount of $2.0 million (the “First Issuance of Additional Notes”) and (ii) the Company issued to the Initial Investor additional warrants to purchase up to 192,307,692 shares of Common Stock, at an exercise price of $0.0182 (the “New Warrant”). Additionally, as a result of the delisting from the NYSE, the Initial Warrant was amended (the “Amended Warrant”) to provide that the exercise thereof is no longer subject to the approval of the Company’s stockholders, and the conversion of the Notes issued pursuant to the Original NPA, are no longer subject to the approval of the Company’s stockholders.
27
Delisting from NYSE
On April 10, 2023, the NYSE Regulation reached its decision to delist our common stock because we had fallen below the NYSE's continued listing standard requiring listed companies to maintain an average global market capitalization over a consecutive 30 trading day period of at least $15 million. We did not appeal the delisting determination. Subsequently commencing April 11, 2023, our common stock has been traded on the OTC Pink Market operated by the OTC Markets Group Inc. (the “OTC Market”). In connection with the delisting, on April 26, 2023, the NYSE filed a Form 25 with the SEC regarding the removal of shares of our Common Stock from listing and the withdrawal of the registration of our Common Stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which became effective ten days thereafter. We will continue to make all required filings with the SEC and remain subject to all SEC rules and regulations applicable to reporting companies under the Exchange Act.
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 members in the United States by promoting Plenity directly to the consumer. However, in light of limited cash resources and to preserve liquidity, we suspended investments in broad awareness media and consumer acquisition and reduced spend in digital marketing while waiting for the FDA approval of our 510K submission to switch Plenity from Rx to OTC. However, we continue to commercially make Plenity available to consumer through one of two channels:
•Telehealth: We continue to 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 restated 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: To support prescription fulfillment for our non-telehealth tradition HCP promotional efforts, we continue to 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 consumers 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.
•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 and 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.
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.
28
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 Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
2022 |
|
|
In thousands |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
New members acquired |
|
|
7,937 |
|
|
|
40,400 |
|
|
Units sold |
|
|
28,623 |
|
|
|
114,570 |
|
|
Product revenue, net |
|
|
1,753 |
|
|
|
7,514 |
|
|
Average selling price per unit, net |
|
$ |
61.24 |
|
|
$ |
65.58 |
|
|
Gross profit |
|
|
516 |
|
|
|
2,601 |
|
|
Gross margin |
|
|
29.4 |
% |
|
|
34.6 |
% |
|
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 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 the 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
29
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 three months ended March 31, 2023 and 2022, respectively:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
In thousands |
|
(Unaudited) |
|
|
(Unaudited) |
|
Adjusted EBITDA |
|
|
|
|
|
|
Net loss |
|
$ |
(5,146 |
) |
|
$ |
(5,703 |
) |
Provision for income taxes |
|
|
16 |
|
|
|
— |
|
Depreciation and amortization |
|
|
2,576 |
|
|
|
1,586 |
|
Stock based compensation expense |
|
|
2,091 |
|
|
|
13,989 |
|
Change in fair value of earnout liability |
|
|
(563 |
) |
|
|
(33,869 |
) |
Change in fair value of warrants |
|
|
(130 |
) |
|
|
(3,484 |
) |
Change in fair value of convertible
promissory notes |
|
|
(4,959 |
) |
|
|
156 |
|
Change in fair value of One S.r.l. call
option |
|
|
(536 |
) |
|
|
258 |
|
Interest expense, net |
|
|
891 |
|
|
|
135 |
|
Adjusted EBITDA |
|
$ |
(5,760 |
) |
|
$ |
(26,932 |
) |
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 unaudited 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.
30
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
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 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. 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
31
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
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, 2023 and March 31, 2022:
The following table summarizes our results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
Product revenue, net |
$ |
1,753 |
|
|
$ |
7,514 |
|
|
$ |
(5,761 |
) |
Total revenue, net |
|
1,753 |
|
|
|
7,514 |
|
|
|
(5,761 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
Costs of goods sold |
|
1,237 |
|
|
|
4,913 |
|
|
|
(3,676 |
) |
Selling, general and administrative |
|
8,287 |
|
|
|
37,706 |
|
|
|
(29,419 |
) |
Research and development |
|
3,637 |
|
|
|
7,410 |
|
|
|
(3,773 |
) |
Amortization of intangible assets |
|
567 |
|
|
|
567 |
|
|
|
— |
|
Total operating expenses |
|
13,728 |
|
|
|
50,596 |
|
|
|
(36,868 |
) |
Loss from operations |
|
(11,975 |
) |
|
|
(43,082 |
) |
|
|
31,107 |
|
Other non-operating income (expense), net |
|
6,845 |
|
|
|
37,379 |
|
|
|
(30,534 |
) |
Loss before income taxes |
|
(5,130 |
) |
|
|
(5,703 |
) |
|
|
573 |
|
Provision for income taxes |
|
16 |
|
|
|
— |
|
|
|
16 |
|
Net loss |
$ |
(5,146 |
) |
|
$ |
(5,703 |
) |
|
$ |
557 |
|
Product revenue, net
We recognized product revenue, net of $1.8 million for the three months ended March 31, 2023, as compared to $7.5 million for the three months ended March 31, 2022, a decrease of $5.8 million or 77%. We sold 28,623 units at an average selling price per unit, net
32
of $61.24 for the three months ended March 31, 2023, as compared to 40,400 units at an average selling price per unit, net of $65.58 for the three months ended March 31, 2022.
The decrease in units sold was primarily attributable to the suspension of broad media campaigns and reduced digital marketing efforts for prescription-based Plenity branding, while we anticipate the FDA approval of our OTC application by the third quarter of 2023. Activities associated with a full commercial launch of the prescription-based Plenity in the United States began in late 2021, followed by the first national broad awareness media campaign in February 2022.
Cost of goods sold
We recognized cost of goods sold of $1.2 million for the three months ended March 31, 2023, as compared to $4.9 million for the three months ended March 31, 2022, a decrease of $3.7 million or 75%. Depreciation as a component of cost of goods sold was $0.1 million and $0.7 million for the three months ended March 31, 2023 and 2022, respectively. The decrease in cost of goods sold was primarily attributable to a decrease in units sold for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.
Gross profit was $0.5 million for the three months ended March 31, 2023, as compared to $2.6 million for the three months ended March 31, 2022. Gross margin was 29% for the three months ended March 31, 2023, as compared to 35% for the three months ended March 31, 2022. A decrease in gross margin was primarily due to higher fulfillment cost per unit shipped, driven by a decrease in sales volume during the three months ended March 31, 2023.
Selling, general and administrative expense
The following table summarizes our selling, general and administrative expenses for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
In thousands |
|
|
|
|
|
|
|
|
|
Selling and marketing expense |
|
$ |
2,339 |
|
|
$ |
21,164 |
|
|
$ |
(18,825 |
) |
General and administrative expense |
|
|
4,191 |
|
|
|
7,618 |
|
|
|
(3,427 |
) |
Non-cash stock-based compensation expense |
|
|
1,757 |
|
|
|
8,924 |
|
|
|
(7,167 |
) |
Total selling, general and administrative expense |
|
$ |
8,287 |
|
|
$ |
37,706 |
|
|
$ |
(29,419 |
) |
Our selling, general and administrative expense was $8.3 million for the three months ended March 31, 2023, as compared to $37.7 million for the three months ended March 31, 2022, a decrease of $29.4 million or 78%.
Selling and marketing expense decreased $18.8 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The decrease in selling and marketing expense was primarily attributable to the suspension of broad awareness media campaign and reduced digital marketing efforts for prescription-based Plenity during the three months ended March 31, 2023 compared to the same quarter in 2022.
Non-cash stock-based compensation expense decreased $7.2 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The decrease was primarily attributable to the recording of a one-time compensation cost with respect to vested portion of the contingently issuable earnout shares pertaining to a business combination completed during the first quarter of 2022.
General and administrative expense decreased $3.4 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. The decrease was attributable to professional and legal expenses incurred with respect to a business combination completed in the first quarter of 2022, as well as cost saving activities put in place between September 2022 and February 2023 to preserve liquidity.
Research and development expenses
The following table summarizes our research and development expenses for the three months ended March 31, 2023 and 2022:
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
In thousands |
|
|
|
|
|
|
|
|
|
GS200 |
|
$ |
— |
|
|
$ |
7 |
|
|
|
(7 |
) |
GS300 |
|
|
— |
|
|
|
136 |
|
|
|
(136 |
) |
GS500 |
|
|
— |
|
|
|
75 |
|
|
|
(75 |
) |
Unallocated expenses |
|
|
|
|
|
|
|
|
|
Other research and development expenses |
|
|
3,303 |
|
|
|
2,127 |
|
|
|
1,176 |
|
Non-cash stock-based compensation expense |
|
|
334 |
|
|
|
5,065 |
|
|
|
(4,731 |
) |
Total Research and development expense |
|
$ |
3,637 |
|
|
$ |
7,410 |
|
|
$ |
(3,773 |
) |
Our research and development expense was $3.6 million for the three months ended March 31, 2023, as compared to $7.4 million for the three months ended March 31, 2022, a decrease of $3.8 million, or 51%.
Non-cash stock-based compensation expense decreased $4.7 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This decrease was primarily attributable to the recording of a one-time compensation cost with respect to vested portion of the contingently issuable earnout shares pertaining to a business combination completed during the first quarter of 2022.
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. Other research and development expenses increased by $1.2 million for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, primarily driven by an increase in allocation of facilities overhead to research and development.
Non-operating income (expense), net
The following table summarizes our non-operating income (expenses) for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
In thousands |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
Change in the fair value of earnout liability |
|
|
$ |
563 |
|
|
$ |
33,869 |
|
|
$ |
(33,306 |
) |
Change in the fair value of convertible promissory notes |
|
|
|
4,959 |
|
|
|
(156 |
) |
|
|
5,115 |
|
Change in the fair value of warrants |
|
|
|
130 |
|
|
|
3,484 |
|
|
|
(3,354 |
) |
Interest expense, net |
|
|
|
(891 |
) |
|
|
(135 |
) |
|
|
(756 |
) |
Other income, net |
|
|
|
2,084 |
|
|
|
317 |
|
|
|
1,767 |
|
Total non-operating income, net |
|
|
$ |
6,845 |
|
|
$ |
37,379 |
|
|
$ |
(30,534 |
) |
We recognized non-operating income, net of $6.8 million for the three months ended March 31, 2023, as compared to income, net of $37.4 million for the three months ended March 31, 2022, a decrease in income of $30.5 million. The income for the three months ended March 31, 2023 was primarily attributable to a gain of $5.0 million with respect to the change in the fair value of our convertible promissory notes outstanding and income of $2.1 million in Italian regional grants and investment tax credits.
The income for the three months ended March 31, 2022 was primarily attributable to a gain with respect to the change in fair value of our earnout liabilities of $33.9 million as well as income with respect to the change in fair value of our warrant liabilities of $3.5 million.
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, 2023, our principal sources of liquidity were our cash and cash equivalents in the amount of $3.1 million. As of the date of this Quarterly Report, we expect that our existing cash and cash equivalents and collection of accounts and grants receivable are not sufficient to meet our current obligations.
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
34
ended December 31, 2022 and 2021, 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
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 II, Item 1A, “Risk Factors — Our receipt of a written non-binding indication of interest from an affiliated strategic acquiror may or may not result in an actual completed transaction. The uncertainty surrounding the outcome could adversely impact our business operations, interfere with our ability to attract and retain personnel, result in the incurrence of significant expenses depending on the outcome of such transaction process.” and “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.” in this Form 10-Q for more information regarding certain factors that may impact our liquidity and our ability to raise additional capital.
We will need substantial additional funding to support our continuing operations and pursue an OTC strategy upon receipt of an anticipated FDA approval in the third quarter of 2023. Until such time as we can generate 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 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, 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.
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
35
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 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, |
|
|
|
2023 |
|
|
2022 |
|
In thousands |
|
|
|
|
|
|
Cash (used in) provided by: |
|
|
|
|
|
|
Operating activities |
|
$ |
(8,696 |
) |
|
$ |
(35,183 |
) |
Investing activities |
|
|
(224 |
) |
|
|
(1,963 |
) |
Financing activities |
|
|
4,592 |
|
|
|
42,780 |
|
Effect of exchange rates on cash |
|
|
19 |
|
|
|
(46 |
) |
(Decrease) increase in cash and cash equivalents |
|
$ |
(4,309 |
) |
|
$ |
5,588 |
|
Cash used in operating activities
Net cash used in operating activities was $8.7 million for the three months ended March 31, 2023, as compared to $35.2 million for the three months ended March 31, 2022. The decrease in outflows was primarily attributable to cost saving measures put in place since the second half of 2022, including reduction in research and development, supply chain, sales and marketing activities as well as the elimination of non-essential positions while we anticipate the FDA approval of our OTC submission by the third quarter of 2023.
Cash used in investing activities
Net cash used in investing activities was $0.2 million for the three months ended March 31, 2023, as compared to $2.0 million for the three months ended March 31, 2022. The outflows were primarily attributable to $1.9 million in the purchase of property and equipment for the commercial manufacturing scale-up during the three months ended March 31, 2022. Cash used in investing activities was significantly reduced due to our need to preserve cash and the delay of our plan for additional manufacturing scale up was delayed until the FDA approval of our OTC submission is approved and we are able to successfully re-market Plenity in the OTC markets.
Cash provided by financing activities
Net cash provided by financing activities was $4.6 million for the three months ended March 31, 2023, as compared to $42.8 million for the three months ended March 31, 2022. The cash inflows for the three months ended March 31, 2023 was primarily attributable to the proceeds from the issuance of a short-term convertible senior secured note and warrants, partially offset by the repayments of term loans in Italy. The cash inflows for the three months ended March 31, 2022 was primarily attributable to net proceeds of $70.5 million received from the completion of a business combination in January 2022, which was partially offset by our repayment of convertible promissory notes also in January 2022, totaling $27.3 million.
Contractual Obligations and Commitments
For the three months ended March 31, 2023, 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 Annual Report on Form 10-K for the year ended December 31, 2022, filed with the
36
SEC on March 28, 2023. For further information on these commitments, please see Note 18 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
Critical Accounting Policies and Significant Judgments and Estimates
For the three months ended March 31, 2023, 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 Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 28, 2023, 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 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 $1.235 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