UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021March 31, 2022
☐OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File No. Number: 001-39362
Gelesis Holdings, Inc.
(Exact Name of Registrant as Specified in its Charter)
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| 84-4730610 |
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incorporation or organization) | (I.R.S. Employer | |
501 Boylston Street, Suite 6102, | 02116 | |
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Registrant’s telephone number, including area code: (
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617) 456-4718
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||
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| GLS |
| New York Stock Exchange | |
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| GLS WS |
| New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐Yes ☒ No ☒
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☐ | Accelerated filer | ☐ | ||
Non-accelerated filer |
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| Smaller reporting company | ||
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| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):. Yes ☒☐ No ☐☒
As of November 15, 2021, there were 27,600,000May 12, 2022, the registrant had 72,390,413 shares of Class A common stock, $0.0001 par value and 6,900,000 shares of Class B common stock, $0.0001 par value, issued andper share, outstanding.
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
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| Unaudited Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 | 1 |
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| Notes to Unaudited Condensed Consolidated Financial Statements | 6 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Quantitative and Qualitative Disclosures |
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i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or this Quarterly Report, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this Quarterly Report, including statements regarding our future results of operations and financial position, our business strategy, the realization of our order backlog, plans and prospects, existing and prospective products, research and development costs, timing and likelihood of success, market growth, trends, events and the objectives of management for future operations and results, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements. Important factors, among others, that may affect actual results or outcomes include:
i
Tableour ability to achieve and maintain widespread market acceptance of Contents
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.1
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report and the information incorporated by reference herein will prove to be accurate. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances, or otherwise.
You should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
This Quarterly Report also contains estimates, projections and other information concerning our industry, our business, and the markets for our products, including data regarding the estimated size of those markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties.
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
GELESIS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | |
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| September 30, |
| December 31, | ||
| | 2021 | | 2020 | ||
| | (Unaudited) | | (Restated) | ||
ASSETS | | | | | | |
Current assets | | | | | | |
Cash | | $ | 304,944 | | $ | 491,827 |
Prepaid expenses | |
| 39,816 | | | 65,973 |
Total Current Assets | | | 344,760 | | | 557,800 |
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| | | | |
Cash and marketable securities held in Trust Account | | | 276,178,675 | | | 276,209,453 |
Total Assets | | $ | 276,523,435 | | | 276,767,253 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
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Current liabilities - Accounts payable and accrued expenses | | $ | 2,760,072 | | | 1,630,832 |
Warrant liabilities | | | 32,386,148 | | | 30,101,808 |
Deferred underwriting fee payable | |
| 9,660,000 | | | 9,660,000 |
Total Liabilities | |
| 44,806,220 | | | 41,392,640 |
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Commitments | |
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Class A common stock subject to possible redemption 27,600,000 shares at redemption value as of September 30, 2021 and December 31, 2020 | | | 276,028,675 | | | 276,033,447 |
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Stockholders’ Deficit | |
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Preferred stock, $0.0001 par value; 1,000,000 shares authorized; NaN issued and outstanding | |
| 0 | | | 0 |
Class A common stock, $0.0001 par value; 100,000,000 shares authorized, 0 shares issued and outstanding (excluding 27,600,000 shares subject to possible redemption) at September 30, 2021 and December 31, 2020 | |
| 0 | | | 0 |
Class B common stock, $0.0001 par value; 10,000,000 shares authorized; 6,900,000 shares issued and outstanding at September 30, 2021 and December 31, 2020 | |
| 690 | | | 690 |
Additional paid-in capital | |
| 0 | | | 0 |
Accumulated deficit | |
| (44,312,150) | | | (40,659,524) |
Total Stockholders’ Deficit | |
| (44,311,460) | | | (40,658,834) |
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | | $ | 276,523,435 | | | 276,767,253 |
(In thousands, except share and per share data)
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| March 31, |
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| December 31, |
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| 2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 33,985 |
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| $ | 28,397 |
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Accounts receivable |
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| 579 |
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| 731 |
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Grants receivable |
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| 9,183 |
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| 9,172 |
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Inventories |
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| 16,276 |
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| 13,503 |
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Prepaid expenses and other current assets |
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| 13,043 |
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| 14,203 |
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Total current assets |
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| 73,066 |
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| 66,006 |
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Property and equipment, net |
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| 58,321 |
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| 58,515 |
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Operating lease right-of-use assets |
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| 1,877 |
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| 2,016 |
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Intangible assets, net |
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| 15,113 |
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| 15,680 |
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Other assets |
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| 4,502 |
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| 4,084 |
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Total assets |
| $ | 152,879 |
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| $ | 146,301 |
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LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) |
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Current liabilities: |
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Accounts payable, including due to related party of $345 and $147, respectively |
| $ | 13,241 |
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| $ | 10,066 |
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Accrued expenses and other current liabilities, including due to related party of $2,934 and $5,664 respectively |
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| 10,124 |
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| 13,660 |
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Deferred income |
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| 25,533 |
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| 32,370 |
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Operating lease liabilities |
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| 548 |
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| 541 |
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Convertible promissory notes due to related party, held at fair value |
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| — |
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| 27,128 |
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Notes payable |
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| 2,001 |
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| 1,950 |
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Warrant liabilities |
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| — |
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| 15,821 |
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Total current liabilities |
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| 51,447 |
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| 101,536 |
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Deferred income |
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| 9,984 |
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| 8,914 |
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Operating lease liabilities |
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| 1,374 |
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| 1,519 |
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Notes payable, including due to related party of $16,191 and $16,523, respectively |
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| 33,958 |
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| 35,131 |
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Warrant liabilities |
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| 3,730 |
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Earnout liability |
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| 25,002 |
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Other long-term liabilities, including due to related party of $2,623 and $2,416, respectively |
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| 5,643 |
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| 5,588 |
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Total liabilities |
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| 131,138 |
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| 152,688 |
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Commitments and contingencies (Note 19) |
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Noncontrolling interest |
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| 11,704 |
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| 11,855 |
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Redeemable convertible preferred stock, $0.0001 par value – 0 shares issued and outstanding at March 31, 2022; 51,730,762 shares authorized at December 31, 2021; and 48,566,655 shares issued and outstanding at December 31, 2021 |
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| 311,594 |
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Stockholders’ equity (deficit): |
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Preferred stock, $0.0001 par value - 250,000,000 shares authorized at March 31, 2022; 0 shares issued and outstanding at March 31, 2022 and December 31, 2021 |
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Common stock, $0.0001 par value – 900,000,000 shares authorized at March 31, 2022; 72,390,413 shares issued and outstanding at March 31, 2022; 125,961,571 shares authorized at December 31, 2021; 6,248,192 shares issued and outstanding at December 31, 2021 |
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| 7 |
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| 1 |
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Additional paid-in capital |
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| 281,246 |
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| (64,549 | ) |
Accumulated other comprehensive income |
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| 82 |
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| 219 |
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Accumulated deficit |
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| (271,298 | ) |
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| (265,507 | ) |
Total stockholders’ equity (deficit) |
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| 10,037 |
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| (329,836 | ) |
Total liabilities, noncontrolling interest, redeemable convertible preferred stock and stockholders’ equity (deficit) |
| $ | 152,879 |
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| $ | 146,301 |
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The accompanying notes are an integral part of thethese unaudited condensed consolidated financial statements.
1
1
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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| | | | | | | | | | | For the | |
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| | | | | | | | | | | February 14, | |
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| | Three Months | | Nine Months | | Three Months | | (Inception) | ||||
| | Ended | | Ended | | Ended | | Through | ||||
| | September 30, | | September 30, | | September 30, | | September 30, | ||||
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| 2021 |
| 2021 |
| 2020 |
| 2020 | ||||
General and administrative expenses | | $ | 1,113,342 | | $ | 1,518,286 | | $ | 184,615 | | $ | 185,615 |
Loss from operations | | | (1,113,342) | | | (1,518,286) | | | (184,615) | | | (185,615) |
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Other income (expense): | | | | | | | | | | | | |
Interest earned on marketable securities held in Trust Account | | | 138,117 | | | 142,997 | | | 96,143 | | | 96,143 |
Unrealized gain (loss) on marketable securities held in Trust Account | | | (106,039) | | | 2,231 | | | 41,496 | | | 41,496 |
Change in fair value of warrant liabilities | | | (13,174,144) | | | (2,284,340) | | | 613,900 | | | 613,900 |
Transaction costs associated with the Initial Public Offering | | | 0 | | | 0 | | | (671,901) | | | (671,901) |
Total other income (expense), net | | | (13,142,066) | | | (2,139,112) | | | 79,638 | | | 79,638 |
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Loss before income taxes | | | (14,255,408) | | | (3,657,398) | | | (104,977) | | | (105,977) |
Provision for income taxes | | | 0 | | | 0 | | | (8,714) | | | (8,714) |
Net loss | | $ | (14,255,408) | | $ | (3,657,398) | | $ | (113,691) | | $ | (114,691) |
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Basic and diluted weighted average shares outstanding, Class A common stock | | | 27,600,000 | | | 27,600,000 | | | 25,780,220 | | | 10,761,468 |
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Basic and diluted net loss per share, Class A common stock | | $ | (0.41) | | $ | (0.11) | | $ | (0.00) | | $ | (0.01) |
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Basic and diluted weighted average shares outstanding, Class B common stock | | | 6,900,000 | | | 6,900,000 | | $ | 6,840,659 | | | 6,350,917 |
| | | | | | | | | | | | |
Basic and diluted net loss per share, Class B common stock | | $ | (0.41) | | $ | (0.11) | | $ | (0.00) | | $ | (0.01) |
(In thousands)
|
| Three Months Ended March 31, |
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| 2022 |
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| 2021 |
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Revenue: |
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Product revenue, net |
| $ | 7,514 |
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| $ | 3,101 |
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Total revenue, net |
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| 7,514 |
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| 3,101 |
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Operating expenses: |
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Costs of goods sold, including related party expenses of $301 and $124, respectively |
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| 4,913 |
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| 2,816 |
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Selling, general and administrative, including related party expenses of $126 and |
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| 37,706 |
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| 11,945 |
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Research and development, including related party expenses of $62 and |
|
| 7,410 |
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| 4,376 |
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Amortization of intangible assets |
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| 567 |
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| 567 |
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Total operating expenses |
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| 50,596 |
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| 19,704 |
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Loss from operations |
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| (43,082 | ) |
|
| (16,603 | ) |
Change in the fair value of earnout liability |
|
| 33,869 |
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|
| — |
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Change in the fair value of convertible promissory notes |
|
| (156 | ) |
|
| — |
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Change in the fair value of warrants |
|
| 3,484 |
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|
| (2,074 | ) |
Interest expense, net |
|
| (135 | ) |
|
| (361 | ) |
Other income, net |
|
| 317 |
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|
| 469 |
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Loss before income taxes |
|
| (5,703 | ) |
|
| (18,569 | ) |
Provision for income taxes |
|
| — |
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| 17 |
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Net loss |
|
| (5,703 | ) |
|
| (18,586 | ) |
Accretion of senior preferred stock to redemption value |
|
| (37,934 | ) |
|
| (33,761 | ) |
Accretion of noncontrolling interest put option to redemption value |
|
| (88 | ) |
|
| (94 | ) |
Net loss attributable to common stockholders |
| $ | (43,725 | ) |
| $ | (52,441 | ) |
Net loss per share attributable to common stockholders—basic and diluted |
| $ | (0.70 | ) |
| $ | (9.38 | ) |
Weighted average common shares outstanding—basic and diluted |
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| 62,743,154 |
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| 5,589,290 |
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The accompanying notes are an integral part of thethese unaudited condensed consolidated financial statements.
2
2
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY
(UNAUDITED)COMPREHENSIVE LOSS
(In thousands)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
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| Three Months Ended March 31, |
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| 2022 |
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| 2021 |
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Net loss |
| $ | (5,703 | ) |
| $ | (18,586 | ) |
Other comprehensive loss: |
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Foreign currency translation adjustment |
|
| (137 | ) |
|
| (411 | ) |
Total other comprehensive loss |
|
| (137 | ) |
|
| (411 | ) |
Comprehensive loss |
| $ | (5,840 | ) |
| $ | (18,997 | ) |
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| | Class A | | Class B | | Additional | | | | Total | |||||||||
| | Common Stock | | Common Stock | | Paid-in | | Accumulated | | Stockholders’ | |||||||||
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| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Deficit | |||||
Balance - January 1, 2021, as restated | | — | | $ | — | | 6,900,000 | | $ | 690 | | $ | 0 | | $ | (40,659,524) | | $ | (40,658,834) |
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Accretion for Class A common stock to redemption amount |
| — | |
| — | | — | | | — | |
| 0 | |
| (54,865) | |
| (54,865) |
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Net income |
| — | |
| — | | — | | | — | |
| 0 | |
| 14,686,984 | |
| 14,686,984 |
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Balance - March 31, 2021 |
| — | | $ | — | | 6,900,000 | | $ | 690 | | $ | 0 | | $ | (26,027,405) | | $ | (26,026,715) |
| | | | | | | | | | | | | | | | | | | |
Accretion for Class A common stock to redemption amount | | — | | | — | | — | | | — | | | 0 | | | 41,715 | | | 41,715 |
Net loss |
| — | |
| — | | — | | | — | |
| 0 | |
| (4,088,974) | |
| (4,088,974) |
Balance - June 30, 2021 | | — | | $ | — | | 6,900,000 | | $ | 690 | | $ | 0 | | $ | (30,074,664) | | $ | (30,073,974) |
Accretion for Class A common stock to redemption amount | | — | | | — | | — | | | — | | | 0 | | | 17,922 | | | 17,922 |
Net loss | | — | | | — | | — | | | — | | | 0 | | | (14,255,408) | | | (14,255,408) |
Balance – September 30, 2021 |
| — | | $ | — | | 6,900,000 | | $ | 690 | | $ | 0 | | $ | (44,312,150) | | $ | (44,311,460) |
3
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020
AND FOR THE PERIOD FROM FEBRUARY 14, 2020 (INCEPTION) THROUGH SEPTEMBER 30, 2020
| | | | | | | | | | | | | | | | | | | |
| | Class A | | Class B | | Additional | | | | | Total | ||||||||
| | redemption | | Common Stock | | Paid-in | | Accumulated | | Stockholders’ | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Deficit | |||||
Balance – February 14, 2020 (Inception) |
| 0 | | $ | 0 |
| 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 |
| | | | | | | | | | | | | | | | | | | |
Issuance of Class B common stock to Sponsor |
| — | |
| — |
| 6,900,000 | |
| 690 | |
| 24,310 | |
| — | |
| 25,000 |
| | | | | | | | | | | | | | | | | | | |
Net loss |
| — | |
| — |
| — | |
| — | |
| — | |
| (1,000) | |
| (1,000) |
| | | | | | | | | | | | | | | | | | | |
Balance – March 31, 2020 |
| — | | $ | — |
| 6,900,000 | | $ | 690 | | $ | 24,310 | | $ | (1,000) | | $ | 24,000 |
| | | | | | | | | | | | | | | | | | | |
Net income |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Balance - June 30, 2020 | | — | | $ | — | | 6,900,000 | | $ | 690 | | $ | 24,310 | | $ | (1,000) | | $ | 24,000 |
| | | | | | | | | | | | | | | | | | | |
Accretion for Class A common stock to redemption amount | | — | | | — | | — | | | — | | | (1,302,710) | | | (25,418,856) | | | (26,721,566) |
| | | | | | | | | | | | | | | | | | | |
Excess cash received from sale of Private Placement Warrants | | — | | | — | | — | | | — | | | 1,278,400 | | | — | | | 1,278,400 |
| | | | | | | | | | | | | | | | | | | |
Net loss | | — | | | — | | — | | | — | | | — | | | (113,691) | | | (113,691) |
| | | | | | | | | | | | | | | | | | | |
Balance – September 30, 2020 |
| — | | $ | — |
| 6,900,000 | | $ | 690 | | $ | — | | $ | (25,533,547) | | $ | (25,532,857) |
The accompanying notes are an integral part of thethese unaudited condensed consolidated financial statements.
3
4
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)NONCONTROLLING INTEREST, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share and per share data)
| | | | | | |
| | | | | For the period | |
| | | | | from February | |
| | | | | 14, 2020 | |
| | Nine months | | (Inception) | ||
| | ended September 30, | | through September 30, | ||
|
| 2021 |
| 2020 | ||
Cash Flows from Operating Activities: | |
| | | | |
Net loss | | $ | (3,657,398) | | $ | (114,691) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | | |
Interest earned on marketable securities held in Trust Account | | | (142,997) | | | (96,143) |
Unrealized gain on marketable securities held in Trust Account | | | (2,231) | | | (41,496) |
Transaction costs associated with the Initial Public Offering | | | 0 | | | 671,901 |
Change in fair value of warrant liabilities | | | 2,284,340 | | | (613,900) |
Deferred tax provision | | | 0 | | | 8,714 |
Changes in operating assets and liabilities: | |
| | | | |
Prepaid expenses | | | 26,157 | | | (81,365) |
Accounts payable and accrued expenses | |
| 1,129,240 | | | 54,771 |
Net cash used in operating activities | |
| (362,889) | | | (212,209) |
| | | | | | |
Cash Flows from Investing Activities: | | | | | | |
Cash withdrawn from Trust Account to pay for franchise taxes | | | 176,006 | | | 0 |
Investment of cash into Trust Account | | | 0 | | | (276,000,000) |
Net cash provided by (used in) investing activities | | | 176,006 | | | (276,000,000) |
| |
|
| | | |
Cash Flows from Financing Activities: | |
|
| | | |
Proceeds from issuance of Class B common stock to Sponsor | |
| 0 | | | 25,000 |
Proceeds from sale of Units, net of underwriting discounts paid | | | 0 | | | 270,480,000 |
Proceeds from sale of Private Placement Warrants | | | 0 | | | 7,520,000 |
Proceeds from promissory note - related party | |
| 0 | | | 150,000 |
Repayment of promissory note - related party | |
| 0 | | | (150,000) |
Payment of offering costs | |
| 0 | | | (671,828) |
Net cash provided by financing activities | |
| 0 | | | 277,353,172 |
| |
|
| | | |
Net Change in Cash | |
| (186,883) | |
| 1,140,963 |
Cash - Beginning of period | |
| 491,827 | |
| 0 |
Cash - End of period | | $ | 304,944 | | $ | 1,140,963 |
Non-Cash investing and financing activities: | |
| | | | |
Initial classification of Class A common stock subject to possible redemption | | $ | 0 | | $ | 276,000,000 |
Change in value of Class A common stock subject to possible redemption | | $ | (4,772) | | $ | 87,639 |
Deferred underwriting fee payable | | $ | 0 | | $ | 9,660,000 |
|
| Noncontrolling Interest |
|
| Redeemable Convertible Preferred Stock |
|
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Other Comprehensive Income |
|
| Accumulated Deficit |
|
| Total Stockholders' Equity (Deficit) |
| |||||||||||||
|
|
|
|
| Shares |
| Amount |
|
|
| Shares |
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at December 31, 2020 |
| $ | 12,429 |
|
|
| 18,446,525 |
| $ | 213,211 |
|
|
|
| 2,155,490 |
| $ | 1 |
|
| $ | 23,907 |
|
| $ | 938 |
|
| $ | (171,784 | ) |
| $ | (146,938 | ) |
Retroactive application of recapitalization |
|
| — |
|
|
| 29,367,421 |
|
| — |
|
|
|
| 3,431,604 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Adjusted Balance at December 31, 2020 |
| $ | 12,429 |
|
|
| 47,813,946 |
| $ | 213,211 |
|
|
|
| 5,587,094 |
| $ | 1 |
|
| $ | 23,907 |
|
| $ | 938 |
|
| $ | (171,784 | ) |
| $ | (146,938 | ) |
Accretion of senior preferred stock to redemption value |
|
| — |
|
|
| — |
|
| 33,761 |
|
|
|
| — |
|
| — |
|
|
| (33,761 | ) |
|
| — |
|
|
| — |
|
|
| (33,761 | ) |
Exercise of Series A-3 warrants |
|
| — |
|
|
| 617,390 |
|
| 2,997 |
|
|
|
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock based compensation expense |
|
| — |
|
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| 1,455 |
|
|
| — |
|
|
| — |
|
|
| 1,455 |
|
Exercise of share-based awards |
|
| — |
|
|
| — |
|
| — |
|
|
|
| 2,634 |
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| 4 |
|
Accretion of noncontrolling interest put option to redemption value |
|
| 94 |
|
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (94 | ) |
|
| (94 | ) |
Foreign currency translation adjustment |
|
| (546 | ) |
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| — |
|
|
| (411 | ) |
|
| — |
|
|
| (411 | ) |
Net loss |
|
| — |
|
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18,586 | ) |
|
| (18,586 | ) |
Balance at March 31, 2021 |
| $ | 11,977 |
|
|
| 48,431,336 |
| $ | 249,969 |
|
|
|
| 5,589,728 |
| $ | 2 |
|
| $ | (8,395 | ) |
| $ | 527 |
|
| $ | (190,464 | ) |
| $ | (198,331 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at December 31, 2021 |
| $ | 11,855 |
|
|
| 18,736,936 |
| $ | 311,594 |
|
|
|
| 2,410,552 |
| $ | 1 |
|
| $ | (64,549 | ) |
| $ | 219 |
|
| $ | (265,507 | ) |
| $ | (329,836 | ) |
Retroactive application of recapitalization |
|
| — |
|
|
| 29,829,719 |
|
| — |
|
|
|
| 3,837,640 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Adjusted Balance at December 31, 2021 |
| $ | 11,855 |
|
|
| 48,566,655 |
| $ | 311,594 |
|
|
|
| 6,248,192 |
| $ | 1 |
|
| $ | (64,549 | ) |
| $ | 219 |
|
| $ | (265,507 | ) |
| $ | (329,836 | ) |
Accretion of Legacy Gelesis senior preferred stock to redemption value prior to Business Combination |
|
| — |
|
|
| — |
|
| 37,934 |
|
|
|
| — |
|
| — |
|
|
| (37,934 | ) |
|
| — |
|
|
| — |
|
|
| (37,934 | ) |
Conversion of Legacy Gelesis convertible preferred stock into common stock upon Business Combination |
|
| — |
|
|
| (48,566,655 | ) |
| (349,528 | ) |
|
|
| 48,566,655 |
|
| — |
|
|
| 349,528 |
|
|
| — |
|
|
| — |
|
|
| 349,528 |
|
Proceeds from Business Combination, net of issuance costs and assumed liabilities (Note 3) |
|
| — |
|
|
| — |
|
| — |
|
|
|
| 17,399,440 |
|
| 6 |
|
|
| 70,472 |
|
|
| — |
|
|
| — |
|
|
| 70,478 |
|
Conversion of Legacy Gelesis preferred stock warrants into common stock warrants upon Business Combination |
|
| — |
|
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| 16,747 |
|
|
| — |
|
|
| — |
|
|
| 16,747 |
|
Recognition of earnout liability upon Business Combination |
|
| — |
|
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| (58,871 | ) |
|
| — |
|
|
| — |
|
|
| (58,871 | ) |
Assumed private placement warrant liability upon Business Combination |
|
| — |
|
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| (8,140 | ) |
|
| — |
|
|
| — |
|
|
| (8,140 | ) |
Stock based compensation expense |
|
| — |
|
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| 13,989 |
|
|
| — |
|
|
| — |
|
|
| 13,989 |
|
Exercise of warrants |
|
| — |
|
|
| — |
|
| — |
|
|
|
| 176,126 |
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| 4 |
|
Accretion of noncontrolling interest |
|
| 88 |
|
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (88 | ) |
|
| (88 | ) |
Foreign currency translation adjustment |
|
| (239 | ) |
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| — |
|
|
| (137 | ) |
|
| — |
|
|
| (137 | ) |
Net loss |
|
| — |
|
|
| — |
|
| — |
|
|
|
| — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,703 | ) |
|
| (5,703 | ) |
Balance at March 31, 2022 |
| $ | 11,704 |
|
|
| — |
|
| — |
|
|
|
| 72,390,413 |
| $ | 7 |
|
| $ | 281,246 |
|
| $ | 82 |
|
| $ | (271,298 | ) |
| $ | 10,037 |
|
The accompanying notes are an integral part of thethese unaudited condensed consolidated financial statements.
54
GELESIS HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (5,703 | ) |
| $ | (18,586 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
| . |
| ||
Amortization of intangible assets |
|
| 567 |
|
|
| 567 |
|
Reduction in carrying amount of right-of-use assets |
|
| 132 |
|
|
| 41 |
|
Depreciation |
|
| 1,019 |
|
|
| 174 |
|
Stock-based compensation |
|
| 13,989 |
|
|
| 1,455 |
|
Unrealized loss on foreign currency transactions |
|
| 65 |
|
|
| 143 |
|
Noncash interest expense |
|
| 40 |
|
|
| 19 |
|
Accretion on marketable securities |
|
| — |
|
|
| (1 | ) |
Change in the fair value of earnout liability |
|
| (33,869 | ) |
|
| — |
|
Change in the fair value of warrants |
|
| (3,484 | ) |
|
| 2,074 |
|
Change in the fair value of convertible promissory notes |
|
| 156 |
|
|
| — |
|
Change in fair value of One S.r.l. call option |
|
| 258 |
|
|
| 48 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
| ||
Account receivables |
|
| (1,177 | ) |
|
| (169 | ) |
Grants receivable |
|
| (198 | ) |
|
| (1,273 | ) |
Prepaid expenses and other current assets |
|
| (2,010 | ) |
|
| 318 |
|
Inventories |
|
| (2,888 | ) |
|
| 846 |
|
Other assets |
|
| — |
|
|
| (1,222 | ) |
Accounts payable |
|
| 3,502 |
|
|
| (1,192 | ) |
Accrued expenses and other current liabilities |
|
| 528 |
|
|
| 200 |
|
Operating lease liabilities |
|
| (134 | ) |
|
| (37 | ) |
Deferred income |
|
| (5,550 | ) |
|
| 8,459 |
|
Other long-term liabilities |
|
| (426 | ) |
|
| (158 | ) |
Net cash used in operating activities |
|
| (35,183 | ) |
|
| (8,294 | ) |
Cash flows from investing activities: |
|
|
|
|
|
| ||
Purchases of property and equipment |
|
| (1,963 | ) |
|
| (6,354 | ) |
Maturities of marketable securities |
|
| — |
|
|
| 24,000 |
|
Net cash (used in) provided by investing activities |
|
| (1,963 | ) |
|
| 17,646 |
|
Cash flows from financing activities: |
|
|
|
|
|
| ||
Proceeds from Business Combination, net of transaction costs |
|
| 70,478 |
|
|
| — |
|
Principal repayment of notes payable |
|
| (418 | ) |
|
| (186 | ) |
Repayment of convertible promissory notes due to related party, held at fair value |
|
| (27,284 | ) |
|
| — |
|
Proceeds from issuance of promissory notes (net of issuance costs of $0 and $30, respectively) |
|
| — |
|
|
| 3,506 |
|
Proceeds from the exercise of warrants |
|
| 4 |
|
|
| 10 |
|
Proceeds from exercise of share-based awards |
|
| — |
|
|
| 4 |
|
Net cash provided by financing activities |
|
| 42,780 |
|
|
| 3,334 |
|
Effect of exchange rates on cash |
|
| (46 | ) |
|
| (973 | ) |
Net increase in cash |
|
| 5,588 |
|
|
| 11,713 |
|
Cash and cash equivalents at beginning of year |
|
| 28,397 |
|
|
| 48,144 |
|
Cash and cash equivalents at end of period |
| $ | 33,985 |
|
| $ | 59,857 |
|
Noncash investing and financing activities: |
|
|
|
|
|
| ||
Purchases of property and equipment included in accounts payable and accrued expense |
| $ | 1,721 |
|
| $ | 889 |
|
Recognition of earnout liability |
| $ | 58,871 |
|
|
| — |
|
Recognition of private placement warrant liability |
| $ | 8,140 |
|
|
| — |
|
Supplemental cash flow information: |
|
|
|
|
|
| ||
Interest paid on notes payable |
| $ | 95 |
|
| $ | 43 |
|
The accompanying notes are an integral part of Contentsthese unaudited condensed consolidated financial statements.
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.5
GELESIS HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021(In thousands, except share and per share data)
Nature of Business
(Unaudited)
NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Gelesis Holdings, Inc., or the Company, formerly known as Capstar Special Purpose Acquisition Corp. (the “Company”)or “CPSR”, is a blank checkcommercial stage biotherapeutics company incorporated in Delaware on February 14, 2020.under the laws of the State of Delaware. The Company aims to transform weight management through proprietary biomimetic hydrogel technology, inspired by the compositional and mechanical properties of raw vegetables. Since its inception, the Company has devoted substantially all of its efforts to business planning, licensing technology, research and development, commercial activities, recruiting management and technical staff and raising capital and has financed its operations through the issuance of redeemable convertible preferred and common stock, a license and collaboration agreement, supply and distribution agreements, long-term loans, convertible bridge note financings, and government grants.
The Company currently manufactures and markets its first product, Plenity® (the “Product”), which is based on a proprietary hydrogel technology. Plenity® received de novo clearance from the FDA on April 12, 2019 as a Class II medical device to aid in weight management in adults with excess weight or obesity, Body Mass Index (BMI) of 25 to 40 kg/m2, when used in conjunction with diet and exercise. In June 2019, the Company received approval to market Plenity in Europe through a Conformité Européenne (CE) mark for Plenity as a class III medical device indicated for weight loss in overweight and obese adults with a Body Mass Index (BMI) of 25-40 kg/m2, when used in conjunction with diet and exercise. Plenity, which is available by prescription in the United States, became available for first commercial sale in May 2020 to a limited number of consumers. In October 2020, availability was formedincreased to test commercial interest and consumer experience. Activities associated with a full commercial launch of Plenity in the United States began in late 2021, and in February 2022, the Company launched the first national broad awareness media campaign for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combinationproduct.
On July 19, 2021, Gelesis, Inc. (together with 1 or more businesses (the “Business Combination”its consolidated subsidiaries, “Legacy Gelesis”).
Although the Company is not limited to a particular industry or geographic region for purposes of consummating entered into a Business Combination Agreement (“Business Combination Agreement”) with CPSR, a special purpose acquisition company. On January 13, 2022, CPSR, a Delaware corporation and the Company intendspredecessor company consummated the previously announced business combination (“Business Combination”), pursuant to focus on businesses in the consumer, healthcare and technology, media and telecommunications (“TMT”) industries. The Company is an early stage and emerging growth company and, as such, the Company is subject to allterms of the risks associated with early stageBusiness Combination Agreement, dated as of July 19, 2021 (as amended on November 8, 2021 and emerging growth companies.
The Company has one wholly-owned subsidiary,December 30, 2021), by and among CPSR, CPSR Gelesis Merger Sub, Inc., which was incorporated in the State of Delaware on July 2, 2021 (“Merger Sub”).
As of September 30, 2021, the Company had not commenced any operations. All activity through September 30, 2021 relates to the Company’s formation, its initial public offering (“Initial Public Offering”), which is described below, the search for a target company for a Business Combination and activities in connection with the proposed business combination with Gelesis, Inc., a Delaware corporation and wholly-owned subsidiary of CPSR (“Gelesis”Merger Sub”) (see Note 7), and Legacy Gelesis. Pursuant to the Business Combination Agreement, on the closing date, (i) Merger Sub merged with and into Legacy Gelesis (the “Merger”), with Legacy Gelesis as the surviving company in the Merger, and, after giving effect to such Merger, Legacy Gelesis became a wholly-owned subsidiary of CPSR and (ii) CPSR changed its name to “Gelesis Holdings, Inc.” (together with its consolidated subsidiaries, “Gelesis Holdings”). The Company will not generate any operating revenues until after the completion of its initial Business Combination, at the earliest. The Company generates non-operating income in the form of interest income from the marketable securities held in the Trust Account.
The registration statement for the Company’s Initial Public Offering was declared effective on July 1, 2020. On July 7, 2020, the Company consummated the Initial Public Offering of 27,600,000 units (the “Units” and, with respect to the shares of Class A common stock included in the Units sold, the “Public Shares”), which includes the full exercise by the underwriters of the over-allotment option to purchase an additional 3,600,000 Units, at $10.00 per Unit, generating gross proceeds of $276,000,000, which is described in Note 4.
Simultaneouslytogether with the closing of the Initial Public Offering, the Company consummated the sale of 7,520,000 warrants (each, a “Private Placement Warrant” and, collectively, the “Private Placement Warrants”) at a price of $1.00 per Private Placement Warrant in a private placement to Capstar Sponsor Group, LLC (the “Sponsor”), generating gross proceeds of $7,520,000, which is described in Note 5.
Transaction costs amounted to $15,851,828, consisting of $5,520,000 of underwriting fees, $9,660,000 of deferred underwriting fees and $671,828 of other offering costs.
Following the closing of the Initial Public Offering on July 7, 2020, an amount of $276,000,000 ($10.00 per Unit) from the net proceeds of the sale of the Units in the Initial Public OfferingPIPE financing and the sale of the Private Placement Warrantsbackstop 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’ securities began trading on the New York Stock Exchange under the symbols “GLS” and “GLS.W”.
The Business Combination was placedaccounted for as a reverse recapitalization in a trust account (the “Trust Account”). The proceeds are held in the Trust Account locatedconformity with accounting principles generally accepted in the United States and shall be invested only in U.S. government securities, withinStates. Under this method of accounting, CPSR has been treated as the meaning set forth in Section 2(a)(16)"acquired" company for financial reporting purposes. This determination was primarily based on the Legacy Gelesis’ stockholders comprising a relative majority of the Investment Company Act of 1940, as amended (the “Investment Company Act”), with a maturity of 185 days or less or in any open-ended investment company that holds itself out as a money market fund selected by the Company meeting the conditions of Rule 2a-7voting power of the Investment Company Act, as determinedcombined 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 Company, until the earlier of: (i) the completion of a Business Combination or (ii) the distributionentirety of the funds insenior management of Gelesis Holdings. Accordingly, for accounting purposes, the Trust Account, as described below.
6
Tableconsolidated financial statements of Contents
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
The Company’s management has broad discretion with respect to the specific applicationGelesis Holdings will represent a continuation of the net proceedsconsolidated financial statements of the Initial Public Offering and the sale of the Private Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward consummating a Business Combination. There is no assurance that the Company will be able to complete a Business Combination successfully. The Company’s initial Business Combination must beLegacy Gelesis with 1 or more target businesses that together have a fair market value equal to at least 80% of the balance in the Trust Account (excluding taxes payable on interest income earned from the Trust Account and the deferred underwriting commissions) at the time of the agreement to enter into the initial Business Combination. The Company will only complete a Business Combination if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires a controlling interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act.
The Company will provide its holders of the outstanding Public Shares (the “public stockholders”) with the opportunity to redeem all or a portion of their Public Shares upon the completion of a Business Combination either (i) in connection with a stockholder meeting called to approve the Business Combination or (ii)being treated as the equivalent of Legacy Gelesis issuing stock for the net assets of CPSR, accompanied by meansa recapitalization. The net assets of a tender offer. The decision as to whether the Company will seek stockholder approval of a Business Combination or conduct a tender offerCPSR will be made by the Company, solely in its discretion. The public stockholders will be entitled to redeem their Public Shares for a pro rata portion of the amount then in the Trust Account (initially $10.00 per Public Share, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to the Company to pay its tax obligations). The per-share amount to be distributed to public stockholders who redeem their Public Shares will not be reduced by the deferred underwriting commissions the Company will pay to the underwriters (as discussed in Note 7). There will bestated at historical costs, with no redemption rights upon the completion of a Business Combination with respect to the Company’s warrants.
The Company will proceed with a Business Combination if the Company has net tangible assets of at least $5,000,001 upon such consummation of a Business Combination and, if the Company seeks stockholder approval, a majority of the shares voted are voted in favor of the Business Combination. If a stockholder vote is not required by law or stock exchange requirements and the Company does not decide to hold a stockholder vote for businessgoodwill or other legal reasons, the Company will, pursuant to its Amended and Restated Certificate of Incorporation (the “Amended and Restated Certificate of Incorporation”), conduct the redemptions pursuant to the tender offer rules of the U.S. Securities and Exchange Commission (“SEC”) and file tender offer documents with the SEC prior to completing a Business Combination. If, however, stockholder approval of the transaction is required by law, or the Company decides to obtain stockholder approval for business or legal reasons, the Company will offer to redeem shares in conjunction with a proxy solicitation pursuant to the proxy rules and not pursuant to the tender offer rules. If the Company seeks stockholder approval in connection with a Business Combination, the Company’s Sponsor has agreed to vote its Founder Shares (as defined in Note 6) and any Public Shares purchased during or after the Initial Public Offering in favor of approving a Business Combination. Additionally, each public stockholder may elect to redeem their Public Shares irrespective of whether they vote for or against the proposed transaction.
Notwithstanding the above, if the Company seeks stockholder approval of a Business Combination and it does not conduct redemptions pursuant to the tender offer rules, the Amended and Restated Certificate of Incorporation provides that a public stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted from redeeming its shares with respect to more than an aggregate of 15% or more of the Public Shares, without the prior consent of the Company.
The Sponsor has agreed (i) to waive its redemption rights with respect to its Founder Shares and Public Shares held by it in connection with the completion of a Business Combination and (ii) not to propose an amendment to the Company’s Amended and Restated Certificate of Incorporation that would affect the substance or timing of the Company’s obligation to redeem 100% of its Public Shares if the Company does not complete a Business Combination, unless the Company provides the public stockholders with the opportunity to redeem their shares in conjunction with any such amendment.
7
Table of Contentsintangible assets recorded.
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
Going Concern
The Company will have until July 7, 2022 to consummate a Business Combination (the “Combination Period”). If the Company is unable to complete a Business Combination within the Combination Period, the Company will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account including interest earned on the funds held in the Trust Account and not previously released to the Company to pay taxes (less up to $100,000 to pay dissolution expenses), divided by the number of then outstanding Public Shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the Company’s remaining stockholders and the Company’s board of directors, dissolve and liquidate, subject in each case to the Company’s obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. There will be no redemption rights or liquidating distributions with respect to the Company’s warrants, which will expire worthless if the Company fails to complete a Business Combination within the Combination Period.
The Sponsor has agreed to waive its right to liquidating distributions from the Trust Account with respect to the Founder Shares if the Company fails to complete a Business Combination within the Combination Period. However, if the Sponsor acquires Public Shares in or after the Initial Public Offering, such Public Shares will be entitled to liquidating distributions from the Trust Account if the Company fails to complete a Business Combination within the Combination Period. The underwriters have agreed to waive their rights to their deferred underwriting commission (see Note 7) held in the Trust Account in the event the Company does not complete a Business Combination within the Combination Period and, in such event, such amounts will be included with the other funds held in the Trust Account that will be available to fund the redemption of the Public Shares. In the event of such distribution, it is possible that the per share value of the assets remaining available for distribution will be less than the Initial Public Offering price per Unit ($10.00).
In order to protect the amounts held in the Trust Account, the Sponsor has agreed to be liable to the Company if and to the extent any claims by a third party for services rendered or products sold to the Company, or a prospective target business with which the Company has entered into a written letter of intent, confidentiality or similar agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.00 per Public Share and (ii) the actual amount per Public Share held in the Trust Account as of the liquidation of the Trust Account, if less than $10.00 per Public Share due to reductions in the value of the trust assets, less taxes payable, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account nor will it apply to any claims under the Company’s indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Moreover, in the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsor will not be responsible to the extent of any liability for such third-party claims. The Company will seek to reduce the possibility that the Sponsor will have to indemnify the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers (except for the Company’s auditors), prospective target businesses or other entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account.
Risks and Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations and/or search for a target company, the specific impact is not readily determinable as of the date of theseunaudited condensed consolidated financial statements.statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the ordinary course of business. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities that might resultbe necessary should the Company be unable to continue as a going concern.
The Company has a history of incurring substantial operating losses and has financed its operations primarily from the outcomeissuance of this uncertainty.
Liquidityequity, promissory notes, government grants, supply and Management’s Plan
As of September 30, 2021,distribution agreements and collaborations and licensing arrangements. The Company expects such operating losses and negative cash flows from operations will continue in 2022. Even with proceeds from the Business Combination, the Company had $304,944expects its cash on hand as of the date of the condensed consolidated financial statements and collection of accounts and grants receivable will only be sufficient to meet the Company’s obligations into the first quarter of 2023,
6
and not at least twelve months beyond the date of issuance of the condensed consolidated financial statements. However, the extension of the Company's cash runway into the first quarter of 2023 is only achievable with the significant reduction of discretionary spending from prior levels, particularly with respect to the Company's discretionary sales and marketing activities and manufacturing and supply chain functions, and prior to considerations for any additional funding. These conditions raise substantial doubt about the Company’s ability to continue as a going concern and may adversely impact the sale of Plenity.
The Company will need to raise additional capital in future periods to fund its operating bank accounts, $276,178,675 in securities held inoperations. The Company will seek to raise necessary funds through a combination of equity issuances, debt financings, strategic collaborations and licensing arrangements, government grants, or other financing mechanisms. The Company’s ability to fund the Trust Account tocompletion of its ongoing and planned clinical studies, as well as its regulatory and commercial efforts, may be used for a Business Combination or to repurchase or redeem its common stock in connection therewith and working capital deficit of $2,265,312, which excludes $150,000 of franchise taxes payable.
8
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
On July 28, 2021, the Sponsor committed to providesubstantially dependent upon whether the Company an aggregatecan obtain sufficient funding at acceptable terms. If adequate sources of $4,000,000 in loans for working capital purposes (see Note 6). These loans will be non-interest bearing, unsecured and will be repaid upon the consummation of a Business Combination. If the Company doesfunding are not consummate a Business Combination, all amounts loanedavailable to the Company, in connection with these loans will be forgiven except to the extent that the Company has funds availablemay be required to it outsidedelay, reduce or eliminate research and development programs, reduce or eliminate commercialization efforts, and reduce its headcount. Additionally, the Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of its Trust Account. As a result, management has determined that sufficient capital exists to sustain operations through the earlierfailure of the consummation of a Business Combination or July 7, 2022,full-scope product commercialization in targeted markets, clinical trials and preclinical studies, the scheduled liquidation dateimpact of the Company if a Business Combination is not completed.COVID-19 pandemic on the Company’s supply chain and results of operations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, and development by competitors of technological innovations.
Basis of Presentation
NOTE 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In connection with the preparation of theThe Company’s condensed consolidated financial statements as of September 30, 2021, management identified errors made in its historical financial statements where, at the closing of the Company’s Initial Public Offering, the Company improperly valued its Class A common stock subject to possible redemption. The Company previously determined the Class A common stock subject to possible redemption to be equal to the redemption value, while also taking into consideration a redemption cannot result in net tangible assets being less than $5,000,001. Management determined that the Public Shares underlying the Units issued during the Initial Public Offering can be redeemed or become redeemable subject to the occurrence of future events considered outside the Company’s control. Therefore, management concluded that temporary equity should include all shares of Class A common stock subject to possible redemption, resulting in the Class A common stock subject to possible redemption being equal to their redemption value. As a result, management has noted a classification error related to temporary equity and permanent equity. This resulted in an adjustment to the initial carrying value of the Class A common stock subject to possible redemption with the offset recorded to additional paid-in capital (to the extent available), accumulated deficit and Class A common stock.
In connection with the change in presentation for the Class A common stock subject to possible redemption, the Company also restated its income (loss) per common share calculation to allocate net income (loss) evenly to Class A and Class B common stock. This presentation contemplates a Business Combination as the most likely outcome, in which case, both classes of common stock share pro rata in the income (loss) of the Company.
There has been no change in the Company’s total assets, liabilities or operating results.
9
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
The impact of the restatement on the Company’s condensed consolidated financial statements is reflected in the following table.
| | | | | | | | | |
| | As Previously | | | | | | | |
|
| Reported |
| Adjustment |
| As Restated | |||
Balance Sheet as of July 7, 2020 | | | | | | | | | |
Class A common stock subject to possible redemption | | $ | 244,996,570 | | $ | 31,003,430 | | $ | 276,000,000 |
Class A common stock | | $ | 310 | | $ | (310) | | $ | — |
Additional paid-in capital | | $ | 5,671,903 | | $ | (5,671,903) | | $ | — |
Accumulated deficit | | $ | (672,901) | | $ | (25,331,217) | | $ | (26,004,118) |
Total stockholders’ equity (deficit) | | $ | 5,000,002 | | $ | (31,003,430) | | $ | (26,003,428) |
Number of shares subject to redemption | | | 24,499,657 | | | 3,100,343 | | | 27,600,000 |
| | | | | | | | | |
Balance Sheet as of September 30, 2020 | | | | | | | | | |
Class A common stock subject to possible redemption | | $ | 245,554,779 | | $ | 30,532,860 | | $ | 276,087,639 |
Class A common stock | | $ | 305 | | $ | (305) | | $ | — |
Additional paid-in capital | | $ | 5,113,699 | | $ | (5,113,699) | | $ | — |
Accumulated deficit | | $ | (114,691) | | $ | (25,418,856) | | $ | (25,533,547) |
Total stockholders’ equity (deficit) | | $ | 5,000,003 | | $ | (30,532,860) | | $ | (25,532,857) |
Number of shares subject to redemption | | | 24,547,683 | | | 3,052,317 | | | 27,600,000 |
| | | | | | | | | |
Balance Sheet as of December 31, 2020 | | | | | | | | | |
Class A common stock subject to possible redemption | | $ | 230,374,604 | | $ | 45,658,843 | | $ | 276,033,447 |
Class A common stock | | $ | 457 | | $ | (457) | | $ | — |
Additional paid-in capital | | $ | 20,293,722 | | $ | (20,293,722) | | $ | — |
Accumulated deficit | | $ | (15,294,860) | | $ | (25,364,664) | | $ | (40,659,524) |
Total stockholders’ equity (deficit) | | $ | 5,000,009 | | $ | (45,658,843) | | $ | (40,658,834) |
Number of shares subject to redemption | | | 23,034,669 | | | 4,565,331 | | | 27,600,000 |
| | | | | | | | | |
Balance Sheet as of March 31, 2021 | | | | | | | | | |
Class A common stock subject to possible redemption | | $ | 245,061,587 | | $ | 31,026,725 | | $ | 276,088,312 |
Class A common stock | | $ | 311 | | $ | (311) | | $ | — |
Additional paid-in capital | | $ | 5,606,885 | | $ | (5,606,885) | | $ | — |
Accumulated deficit | | $ | (607,876) | | $ | (25,419,529) | | $ | (26,027,405) |
Total stockholders’ equity (deficit) | | $ | 5,000,010 | | $ | (31,026,725) | | $ | (26,026,715) |
Number of shares subject to redemption | | | 24,493,884 | | | 3,106,116 | | | 27,600,000 |
| | | | | | | | | |
Balance Sheet as of June 30, 2021 | | | | | | | | | |
Class A common stock subject to possible redemption | | $ | 240,972,620 | | $ | 35,073,977 | | $ | 276,046,597 |
Class A common stock | | $ | 352 | | $ | (352) | | $ | — |
Additional paid-in capital | | $ | 9,695,811 | | $ | (9,695,811) | | $ | — |
Accumulated deficit | | $ | (4,696,850) | | $ | (25,377,814) | | $ | (30,074,664) |
Total stockholders’ equity (deficit) | | $ | 5,000,003 | | $ | (35,073,977) | | $ | (30,073,974) |
Number of shares subject to redemption | | | 24,084,470 | | | 3,515,530 | | | 27,600,000 |
| | | | | | | | | |
Statement of Operations for the Period from February 14, 2020 (Inception) Through September 30, 2020 | | | | | | | | | |
Basic and diluted weighted average shares outstanding, Class A common stock subject to possible redemption | | | 24,499,657 | | | (24,499,657) | | | — |
Basic and diluted weighted average shares outstanding, Non-redeemable common stock | | | 7,559,767 | | | (7,559,767) | | | — |
Basic and diluted net loss per share, Non-redeemable common stock | | $ | (0.02) | | $ | 0.02 | | $ | — |
Weighted average shares outstanding of Class A common stock | | | — | | | 10,761,468 | | | 10,761,468 |
Basic and diluted net loss per share, Class A common stock | | $ | — | | $ | (0.01) | | $ | (0.01) |
Weighted average shares outstanding of Class B common stock | | | — | | | 6,350,917 | | | 6,350,917 |
Basic and diluted net loss per share, Class B common stock | | $ | — | | $ | (0.01) | | $ | (0.01) |
| | | | | | | | | |
Statement of Operations for the Period from February 14, 2020 (Inception) Through December 31, 2020 | | | | | | | | | |
Basic and diluted weighted average shares outstanding, Class A common stock subject to possible redemption | | | 24,524,620 | | | (24,524,620) | | | — |
Basic and diluted weighted average shares outstanding, Non-redeemable common stock | | | 8,269,814 | | | (8,269,814) | | | — |
Basic and diluted net loss per share, Non-redeemable common stock | | $ | (1.85) | | $ | 1.85 | | $ | — |
Weighted average shares outstanding of Class A common stock | | | — | | | 15,758,710 | | | 15,758,710 |
Basic and diluted net loss per share, Class A common stock | | $ | — | | $ | (0.69) | | $ | — |
Weighted average shares outstanding of Class B common stock | | | — | | | 6,513,871 | | | 6,513,871 |
Basic and diluted net loss per share, Class B common stock | | $ | — | | $ | (0.69) | | $ | (0.69) |
| | | | | | | | | |
Statement of Operations for the Three Months Ended March 31, 2021 | | | | | | | | | |
Basic and diluted weighted average shares outstanding, Class A common stock subject to possible redemption | | | 23,034,669 | | | (23,034,669) | | | — |
Basic and diluted weighted average shares outstanding, Non-redeemable common stock | | | 11,465,331 | | | (11,465,331) | | | — |
Basic and diluted net income per share, Non-redeemable common stock | | $ | 1.28 | | $ | (1.28) | | $ | — |
Weighted average shares outstanding of Class A common stock | | | — | | | 27,600,000 | | | 27,600,000 |
Basic and diluted net income per share, Class A common stock | | $ | — | | $ | 0.43 | | $ | 0.43 |
Weighted average shares outstanding of Class B common stock | | | — | | | 6,900,000 | | | 6,900,000 |
Basic and diluted net income per share, Class B common stock | | $ | — | | $ | 0.43 | | $ | 0.43 |
10
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
| | | | | | | | | |
| | As Previously | | | | | | | |
|
| Reported |
| Adjustment |
| As Restated | |||
Statement of Operations for the Three Months Ended June 30, 2021 | | | | | | | | | |
Basic and diluted weighted average shares outstanding, Class A common stock subject to possible redemption | | | 24,493,884 | | | (24,493,884) | | | — |
Basic and diluted weighted average shares outstanding, Non-redeemable common stock | | | 10,006,116 | | | (10,006,116) | | | — |
Basic and diluted net loss per share, Non-redeemable common stock | | $ | (0.41) | | $ | 0.41 | | $ | — |
Weighted average shares outstanding of Class A common stock | | | — | | | 27,600,000 | | | 27,600,000 |
Basic and diluted net loss per share, Class A common stock | | $ | — | | $ | — | | $ | — |
Weighted average shares outstanding of Class B common stock | | | — | | | 6,900,000 | | | 6,900,000 |
Basic and diluted net loss per share, Class B common stock | | $ | — | | $ | (0.59) | | $ | (0.59) |
| | | | | | | | | |
Statement of Operations for the Six Months Ended June 30, 2021 | | | | | | | | | |
Basic and diluted weighted average shares outstanding, Class A common stock subject to possible redemption | | | 23,768,307 | | | (23,768,307) | | | — |
Basic and diluted weighted average shares outstanding, Non-redeemable common stock | | | 10,731,693 | | | (10,731,693) | | | — |
Basic and diluted net income per share, Non-redeemable common stock | | $ | 0.99 | | $ | (0.99) | | $ | — |
Weighted average shares outstanding of Class A common stock | | | — | | | 27,600,000 | | | 27,600,000 |
Basic and diluted net income per share, Class A common stock | | $ | — | | $ | 0.31 | | $ | 0.31 |
Weighted average shares outstanding of Class B common stock | | | — | | | 6,900,000 | | | 6,900,000 |
Basic and diluted net income per share, Class B common stock | | $ | — | | $ | 0.31 | | $ | 0.31 |
| | | | | | | | | |
Statement of Changes in Shareholders’ Equity (Deficit) for the Period from February 14, 2020 (Inception) Through September 30, 2020 | | | | | | | | | |
Sale of 27,600,000 Units, net of underwriting discounts | | $ | 249,366,073 | | $ | (249,366,073) | | $ | — |
Class A common stock subject to possible redemption | | $ | (245,554,775) | | $ | 245,554,775 | | $ | — |
Accretion for Class A ordinary share subject to redemption amount | | $ | — | | $ | (26,721,566) | | $ | (26,721,566) |
Total shareholders’ equity (deficit) | | $ | 5,000,003 | | $ | (30,532,860) | | $ | (25,532,857) |
| | | | | | | | | |
Statement of Changes in Shareholders’ Equity (Deficit) for the Period from February 14, 2020 (Inception) Through December 31, 2020 | | | | | | | | | |
Sale of 27,600,000 Units, net of underwriting discounts | | $ | 249,366,073 | | $ | (249,366,073) | | $ | — |
Class A common stock subject to possible redemption | | $ | (230,374,604) | | $ | 230,374,604 | | $ | — |
Accretion for Class A ordinary share subject to redemption amount | | $ | — | | $ | (26,721,566) | | $ | (26,721,566) |
Total shareholders’ equity (deficit) | | $ | 5,000,009 | | $ | (45,658,843) | | $ | (40,658,834) |
| | | | | | | | | |
Statement of Changes in Shareholders’ Equity (Deficit) for the Three Months Ended March 31, 2021 | | | | | | | | | |
Class A common stock subject to possible redemption | | $ | (14,686,983) | | $ | 14,686,983 | | $ | — |
Accretion for Class A ordinary share subject to redemption amount | | $ | — | | $ | (54,865) | | $ | (54,865) |
Total shareholders’ equity (deficit) | | $ | 5,000,010 | | $ | (31,026,725) | | $ | (26,026,715) |
| | | | | | | | | |
Statement of Changes in Shareholders’ Equity (Deficit) for the Three Months Ended June 30, 2021 | | | | | | | | | |
Class A common stock subject to possible redemption | | $ | (4,088,967) | | $ | 4,088,967 | | $ | — |
Accretion for Class A ordinary share subject to redemption amount | | $ | — | | $ | 41,715 | | $ | 41,715 |
Total shareholders’ equity (deficit) | | $ | 5,000,003 | | $ | (35,073,977) | | $ | (30,073,974) |
| | | | | | | | | |
Statement of Cash Flows for the Period of February 14, 2020 through September 30, 2020 (unaudited) | |
|
| |
|
| |
|
|
Initial classification of Class A common stock subject to possible redemption | | $ | 244,996,570 | | $ | 31,003,430 | | $ | 276,000,000 |
Change in value of Class A common stock subject to possible redemption | | $ | 558,209 | | $ | (470,570) | | $ | 87,639 |
| | | | | | | | | |
Statement of Cash Flows for the Period of February 14, 2020 through December 31, 2020 (unaudited) | | | | | | | | | |
Initial classification of Class A common stock subject to possible redemption | | $ | 244,996,570 | | $ | 31,003,430 | | $ | 276,000,000 |
Change in value of Class A common stock subject to possible redemption | | $ | (14,621,966) | | $ | 14,655,413 | | $ | 33,447 |
| | | | | | | | | |
Statement of Cash Flows for the Three Months Ended March 31, 2021 | | | | | | | | | |
Change in value of Class A common stock subject to possible redemption | | $ | 14,686,983 | | $ | (14,598,671) | | $ | 88,312 |
| | | | | | | | | |
Statement of Cash Flows for the Six Months Ended June 30, 2021 | | | | | | | | | |
Change in value of Class A common stock subject to possible redemption | | $ | 10,598,016 | | $ | (10,551,419) | | $ | 46,597 |
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have beenare prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and. Any reference in accordance with the instructionsthese notes to Form 10-Q and Article 8 of Regulation S-X promulgated under the Securities Act. Certain information or footnote disclosures normally included in condensed consolidated financial statements prepared in accordance with GAAP have been condensed
11
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
or omitted, pursuantapplicable guidance is meant to refer to the rulesauthoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and regulations ofAccounting Standards Updates (“ASUs”) issued by the SEC for interimFinancial Accounting Standards Board (“FASB”).
The Company consolidates those entities where it has a direct and indirect controlling financial reporting. Accordingly, they do not include all the information and footnotes necessary forinterest based on either a complete presentation of financial position, results of operations,variable interest model or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.
voting interest model. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K/A, as filed with the SEC on July 8, 2021. The interim results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the period ending December 31, 2021 or for any future periods.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company, its two wholly-owned subsidiaries and its wholly-owned subsidiary.a variable interest entity (“VIE”), Gelesis S.r.l., in which the Company has a controlling interest and is the primary beneficiary. The noncontrolling interest attributable to the Company’s VIE is presented as a separate component from stockholders’ equity (deficit) in the condensed consolidated balance sheets and as a noncontrolling interest in the condensed consolidated statements of noncontrolling interest, redeemable convertible preferred stock and stockholders’ equity. All significant intercompany balances and transactions have been eliminated in consolidation.
Emerging Growth Company
The Company Under the variable interest model, a controlling financial interest is an “emerging growth company,” as defined in Section 2(a)determined based on which entity, if any, has (i) the power to direct the activities of the Securities Act,VIE that most significantly impacts the VIE’s economic performance and (ii) the obligations to absorb losses that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change. The consolidation status of a VIE may change as modified by the Jumpstart Our Business Startups Acta result of 2012 (the “JOBS Act”), and it may take advantagesuch reassessments. Changes in consolidation status are applied prospectively in accordance with U.S. GAAP.
Reclassification of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to complyPrior Year Presentation
Certain prior year amounts have been reclassified for consistency with the independent registered public accounting firm attestation requirementscurrent year presentation. These reclassifications had no effect on the reported results of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with newoperations or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s condensed consolidated financial statement with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.position.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets, and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenuesincome and expenses during the reporting periods.period. The Company assesses the above estimates on an ongoing basis; however, actual results could materially differ from those estimates.
Subsequent Event(s)
Making estimates requires management to exercise significant judgment. It is at least reasonably possibleThe Company considers events or transactions that occur after the estimate of the effect of a condition, situation or set of circumstances that existed at thebalance sheet date ofbut before the condensed consolidated financial statements which management considered in formulating its estimate, could change inare issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company evaluated all events and transactions through the near term due to one or more future confirming events. One of the more significant accounting estimates included indate these condensed consolidated financial statements were filed with the Securities and Exchange Commission (“SEC”) or were available to be issued.
Fair Value of Financial Instruments
The guidance in FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority
7
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair
12
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3.
The Company’s earnout liability, private placement warrants, and call option liability are recorded at fair value on a recurring basis. The carrying amount of accounts receivable, grants receivable, accounts payable and accrued expenses are considered a reasonable estimate of their fair value, due to the short-term maturity of these instruments. The carrying amount of notes payable is also considered to be a reasonable estimate of the fair value based on the nature of the debt and that the debt bears interest at the prevailing market rate for instruments with similar characteristics. The Company’s cash equivalents and marketable securities are carried at fair value, determined according to the fair value hierarchy described above.
Earnout Liability: In connection with the Business Combination, Legacy Gelesis equityholders received the right to receive additional common stock upon the achievement of certain earnout targets. As the earnout consideration contains a settlement provision that precludes it from being indexed to the Company’s stock, it is classified as a liability held at fair value in accordance ASC 815 and the instrument is adjusted to fair value at each reporting period. In determining the fair value of the warrant liabilities. Such estimates may be subject to change as more current information becomes availableearnout liability at inception and accordingly,on a recurring basis, the actual results could differ significantly from those estimates.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company did 0t have any cash equivalents as of September 30, 2021 and December 31, 2020.
Marketable Securities Held in Trust Account
At September 30, 2021 and December 31, 2020, substantially allutilizes the Monte Carlo simulation value model where the fair value of the assetsearnout is the present value of a distribution of potential outcomes on a daily basis over the term of the earnout period.
Private Placement Warrant Liability: The Private Placement Warrants are recognized as liabilities in accordance with ASC 815. Accordingly, the Company recognizes the warrant instruments as liabilities held at fair value and adjusts the instruments to fair value at each reporting period. In determining the fair value of the Private Placement Warrant liability, the Company utilized a modified Monte Carlo simulation value model at inception and on a recurring basis.
One Srl Call Option: In connection with the October 2020 amended agreement with One Srl, the Company granted One a contingent call option to buy back the 10% ownership that the Company acquired in the Trust Account were2019 One Amendment. The One Srl call option was recorded as a liability held in U.S. Treasury Bills. All of the Company’s investments held in the Trust Account are classified as trading securities. Trading securities are presented on the condensed consolidated balance sheet at fair value at the enddate of issuance and is remeasured at each subsequent reporting period. Gains and losses resulting from the changedate with changes in fair value of investments heldrecorded in Trust Account are included in interest earned on marketable securities held in Trust Accountother income (expense) in the accompanying condensed consolidated statements of operations. The estimated fair values of investments held in Trust Account areFair value is determined using available market information.a Black-Scholes option pricing model.
Revenue Recognition
Warrant LiabilitiesProduct Revenue
The Company accounts forcommercializes Plenity in the Public Warrants (as definedU.S. markets principally through synergistic partnerships with online pharmacies and telehealth providers, which in Note 3)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 Private Placement Warrants (together withobtain necessary regulatory approvals as necessary.
Product revenue is recognized by the Public Warrants,Company in an amount that reflects the “Warrants”) in accordance with the guidance contained in ASC 815-40, underconsideration which the WarrantsCompany expects to receive in exchange for those goods or services when the customer obtains control of the product, which occurs at a point in time, when the product is received by the Company's customers.
Reserves for Variable Consideration
Revenues from product sales are recorded as product revenue at the net sales price (transaction price), which includes estimates of variable consideration that are reimbursable to customers for which reserves are established and which result from (a) shipping charges to end-users, (b) pharmacy dispensing and platform fees, (c) merchant and processing fees, (d) promotional discounts offered by the Company to end-users, and (e) reserves for expected product quality returns. These reserves for contractual adjustments are
8
based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than the customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company's historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company's best estimates of the amount of consideration to which the Company is entitled based on the terms of the contract(s). The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company's estimates. If actual results in the future vary from the Company's estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known. The Company has no plan to seek government or commercial payor reimbursements in the US or the overseas markets. Therefore, reserves for variable consideration do not meet the criteriacontain any components related to government and payor rebates or chargebacks.
Product Returns
The Company generally does not accept customer returns, except for equity treatment and must be recorded as liabilities. Accordingly, theproduct quality related cases. The Company classifies the Warrants as liabilities at their fair valueevaluates quality related returns and adjusts the Warrants to fair value in respect of each reporting period. This liability is subject to re-measurementcorresponding product warranty reserves and liabilities at each balance sheet date until the Warrants are exercised,least quarterly and any change in fair value is recognized in the statements of operations. The Private Placement Warrants and the Public Warrants for periods where no observable traded price was available are valued using a Monte Carlo simulation. For periods subsequent to the detachment of the Public Warrants from the Units, the Public Warrant quoted market price was used as the fair value as of each relevant date.
Class A Common Stock Subject to Possible Redemption
The Company accounts for its shares of Class A common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Shares of Class A common stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features redemption rights that is either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. The Company’s Class A common stock features certain redemption rights that are considered to be outside of the Company’s control and subject to occurrence of uncertain future events. Accordingly, Class A common stock subject to possible redemption is presented at redemption value as temporary equity, outside of the stockholders’ equity section of the Company’s condensed consolidated balance sheets.
The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of redeemable common stock to equal the redemption value at the end of each reporting period. Increases or decreases
Stock-Based Compensation
Effective January 1, 2020, the Company accounts for all stock-based compensation awards granted to employees and non-employees in accordance with ASC 718, Compensation – Stock Compensation. The Company’s stock-based compensation consist primarily of stock options. The measurement date for share-based awards is the date of grant, and stock-based compensation costs are recognized as expense over the respective requisite service periods, which are typically the vesting period. The fair value of each stock option grant is estimated as of the date of grant using the Black-Scholes option-pricing model that requires management to apply judgment and make estimates, including:
Since the adoption of redeemable common stock are affected by charges against additional paid-in capital and accumulated deficit.
13
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
At September 30, 2021 and December 31,ASU 2018-07 on January 1, 2020, the ordinary shares reflectedmeasurement date for non-employee awards is the date of grant without changes in the fair value of the award. Stock-based compensation costs for non-employees are recognized as expense over the vesting period. Stock-based compensation expense is classified in the condensed consolidated balance sheetsstatements of operations based on the function to which the related services are reconciledprovided. Forfeitures are recorded as they occur.
As discussed in Note 1, on January 13, 2022, the following table:
| | | |
Gross proceeds |
| $ | 276,000,000 |
Less: |
| |
|
Proceeds allocated to Public Warrants |
| | (11,454,000) |
Ordinary shares issuance costs |
| | (15,179,714) |
Plus: |
| |
|
Accretion of carrying value to redemption value |
| | 26,667,374 |
| | | |
Ordinary shares subject to possible redemption, 12/31/20 |
| | 276,033,447 |
Accretion of carrying value to redemption value |
| | (4,772) |
Ordinary shares subject to possible redemption, 9/30/21 | | $ | 276,028,675 |
Income Taxes
The Company followsconsummated the asset and liability method of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the condensed consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assetsBusiness Combination pursuant to the amount expected to be realized. The effective tax rates differ fromBusiness Combination Agreement with CPSR dated July 19, 2021, as amended on November 8, 2021 and December 30, 2021. Concurrently
9
with the statutory tax rate forexecution of the periods presented primarily dueBusiness Combination Agreement, CPSR entered into subscription agreements with certain investors (the “PIPE Investors”). Pursuant to the change in warrant valuation andsubscription agreements, the valuation allowance recorded on the Company’s net operating losses.
ASC 740 prescribes a recognition threshold and a measurement attribute for the condensed consolidated financial statement recognition and measurementPIPE Investors purchased an aggregate of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were 0 unrecognized tax benefits and 0 amounts accrued for interest and penalties as9,000,000 shares of September 30, 2021. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
Net Income (Loss) per Common Share
The Company complies with accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share”. Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. The Company applies the two-class method in calculating income (loss) per common share. Accretion associated with the redeemable shares ofCPSR’s Class A common stock is excluded from income (loss) per common share as the redemption value approximates fair value.
The Company has not considered the effect of the warrants sold in the Initial Public Offering and private placement to purchase an aggregate of 21,320,000 shares in the calculation of diluted income (loss) per share, since the exercise of the warrants is contingent upon the occurrence of future events. As of September 30, 2021 and 2020, the Company did not have any dilutive securities or other contracts that could, potentially, be exercised or converted into common stock and then share in the earnings of the Company. As a result, diluted net income (loss) per common share is the same as basic net income (loss) per common share for the periods presented.
14
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
The following table reflects the calculation of basic and diluted net income (loss) per common share (in dollars, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | For the Period from | ||||
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | February 14, | ||||||||||||||||
| | September 30, | | September 30, | | September 30, | | 2020 (Inception) Through | ||||||||||||||||
|
| 2021 |
| 2021 |
| 2020 |
| September 30, 2020 | ||||||||||||||||
|
| Class A |
| Class B |
| Class A |
| Class B |
| Class A |
| Class B | | Class A | | Class B | ||||||||
Basic and diluted net income (loss) per common share | |
| | | | | |
| | | | | |
| | | | | |
| | | | |
Numerator: | | | | | | | | | | | | | | | | | | | | | | | | |
Allocation of net income (loss), as adjusted | | $ | (11,404,326) | | $ | (2,851,082) | | $ | (89,850) | | $ | (23,841) | | $ | (2,925,918) | | $ | (731,480) | | $ | (72,126) | | $ | (42,565) |
Denominator: | |
|
| | | | |
|
| | | | |
|
| | | | |
|
| | | |
Basic and diluted weighted average stock outstanding | |
| 27,600,000 | | | 6,900,000 | |
| 25,780,220 | | | 6,840,659 | |
| 27,600,000 | | | 6,900,000 | |
| 10,761,468 | | | 6,350,917 |
Basic and diluted net income (loss) per common share | | $ | (0.41) | | $ | (0.41) | | $ | (0.00) | | $ | (0.00) | | $ | (0.11) | | $ | (0.11) | | $ | (0.01) | | $ | (0.01) |
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of a cash account(the “PIPE Investment”) in a financial institution, which, at times, may exceed the Federal Depository Insurance Coverage of $250,000. The Company has not experienced losses on this account and management believes the Company is not exposed to significant risks on such account.
Fair value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC 820, “Fair Value Measurement,” approximates the carrying amounts represented in the accompanying condensed consolidated balance sheets, primarily due to their short-term nature.
The Company follows the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value
15
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
|
|
|
|
|
|
Recent Accounting Standards
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective January 1, 2022 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company adopted ASU 2020-06 on January 1,2021. The adoption of ASU 2020-06 did not have an impact on the Company’s condensed consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed consolidated financial statements.
NOTE 4. PUBLIC OFFERING
Pursuant to the Initial Public Offering, the Company sold 27,600,000 Units, which includes the full exercise by the underwriters of their option to purchase an additional 3,600,000 Units, at a purchase price of $10.00 per Unit. Each Unit consists of 1 share of Class A common stock and one-half of one redeemable warrant (“Public Warrant”). Each whole Public Warrant entitles the holder to purchase 1 share of Class A common stockprivate placement at a price of $11.50$10.00 per share subject to adjustment (see Note 9).
16
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
NOTE 5. PRIVATE PLACEMENT
Simultaneously with the closing of the Initial Public Offering, on July 7, 2020, the Sponsor purchased an aggregate of 7,520,000 Private Placement Warrants at a price of $1.00 per Private Placement Warrant, for an aggregate purchase price of $7,520,000. Each Private Placement Warrant is exercisable$90.0 million. The PIPE Investment was consummated in connection with the closing. On December 30, 2021, CPSR entered into a backstop agreement (the “Backstop Agreement”) with certain investors (the “Backstop Investors”). Pursuant to purchase 1 sharethe Backstop Agreement, the Backstop Investors purchased an aggregate of744,217 shares of CPSR’s Class A common stock in a private placement at a price of $11.50$10.00 per share.share for an aggregate purchase price of $7.4 million. Additionally, CPSR issued the Backstop Investors 1,983,750 shares of CPSR Class A common stock as additional consideration. The Backstop Agreement was consummated in connection with the closing.
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, CPSR, who was the legal acquirer, was treated as the acquired company for financial reporting purposes. Accordingly, the Business Combination was treated as the equivalent of Gelesis issuing stock for the net assets of CPSR, accompanied by a recapitalization.
In connection with the Business Combination, the Company incurred approximately $37.2 million of costs, consisting of underwriting, legal, and other professional fees, $34.5 million of which were direct transaction costs and recorded to additional paid-in capital as a reduction of proceeds and $2.7 million of which were not directly attributable to the Business Combination and recorded as an expense in selling, general and administrative expense on the accompanying condensed consolidated statements of operations.
The following table summarizes the net proceeds from the Private Placement Warrants were addedBusiness Combination, as reconciled to the proceeds fromaccompanying condensed consolidated statements of noncontrolling interest, redeemable convertible preferred stock and stockholder’s equity (deficit) and the Initial Public Offering heldcondensed consolidated statements of cash flows:
| Amount |
| |
Cash - CPSR trust and cash (net of redemptions) | $ | 7,558 |
|
Cash - PIPE Investment |
| 90,000 |
|
Cash - Backstop Agreement |
| 7,442 |
|
Gross proceeds | $ | 105,000 |
|
Less: transaction costs, advisory fees and liabilities paid |
| (34,522 | ) |
Net proceeds from the Business Combination | $ | 70,478 |
|
Immediately prior to closing of the Business Combination, Legacy Gelesis common stock was split according to the exchange ratio of 2.59, which was determined pursuant to the Business Combination Agreement and based on Legacy Gelesis’ implied price per share prior to the Business Combination. Upon closing of the Business Combination, holders received shares of common stock of the Company on a one-to-one basis. For periods prior to the Business Combination, in the Trust Account. Ifaccompanying condensed consolidated financial statements, the Company does not complete a Business Combination within the Combination Period, the proceeds of the sale of the Private Placement Warrants will be used to fund the redemption of the Public Shares (subject to the requirements of applicable law) and the Private Placement Warrants will expire worthless. There will be no redemption rights or liquidating distributions from the Trust Account with respect to the Private Placement Warrants.
NOTE 6. RELATED PARTY TRANSACTIONS
Founder Shares
On February 26, 2020, the Sponsor purchased 5,750,000 shares of the Company’s Class B common stock (the “Founder Shares”) for an aggregate price of $25,000. On July 1, 2020, the Company effected a stock dividend of 1,150,000 shares, resulting in the Company’s initial stockholders holding an aggregate of 6,900,000 Founder Shares. The Founder Shares included an aggregate of up to 900,000 shares subject to forfeiture to the extent that the underwriters’ over-allotment option was not exercised in full or in part, so that the Sponsor would own, on an as-converted basis, 20% of the Company’s issued and outstanding shares after the Initial Public Offering. Allreported share and per-shareper share amounts have been retroactively restatedconverted (“Retroactive Application of Recapitalization”) by applying the exchange ratio. The consolidated assets, liabilities and results of operations prior to reflect the stock dividend. As a resultBusiness Combination are those of Legacy Gelesis
Immediately prior to the closing of the underwriters’ election to fully exercise their over-allotment option, no Founder Shares are currently subject to forfeiture.
The Sponsor has agreed, subject to limited exceptions, not to transfer, assign or sell any of its Founder Shares until the earlier to occur of: (A) one year after the completion of a Business Combination, or (B) subsequentLegacy Gelesis redeemable convertible preferred stock converted into Legacy Gelesis common stock and was subsequently split according to athe exchange ratio of 2.59. Upon closing of the Business Combination, (x) if the last sale price of the Class A common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after a Business Combination, or (y) the date on which the Company completes a liquidation, merger, capital stock exchange or other similar transaction that results in all of the Company’s stockholders having the right to exchange theirholders received shares of common stock for cash, securities or other property.
Administrative Support Agreement
The Company entered into an agreement, commencing on July 1, 2020 through the earlier of the Company’s consummation ofCompany on a Business Combination and its liquidation,one-to-one basis.
Immediately prior to pay an affiliate of the Sponsor a total of $10,000 per month for office space, utilities and secretarial and administrative support. For the three and nine months ended September 30, 2021, the Company incurred $30,000 and $90,000 in fees for these services, respectively. At September 30, 2021, $10,000 of such fees was included in account payable and accrued expense in the condensed consolidated balance sheet.
Promissory Note — Related Party
On February 14, 2020, the Sponsor agreed to loan the Company an aggregate of up to $250,000 to cover expenses related to the Initial Public Offering pursuant to a promissory note (the “Promissory Note”). The Promissory Note was non-interest bearing and payable on the earlier of July 31, 2020 or the completion of the Initial Public Offering. The outstanding balance under the Promissory Note of $140,000 was repaid at the closing of the Initial Public Offering on July 7, 2020. Borrowings under the Promissory Note are no longer available.
17
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
Related Party Loans
In order to finance transaction costs in connection with a Business Combination, the Sponsor, an affiliate of the Sponsor, or the Company’s officersLegacy Gelesis stock options and directors may, but are not obligated to, loan the Company funds as may be requiredrestricted stock units (“Working Capital Loans”RSU”). If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the proceeds of the Trust Account released were split according to the Company. In the event that a Business Combination does not close, the Company may use a portionexchange ratio of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $1,500,000 of such Working Capital Loans may be convertible into warrants at a price of $1.00 per warrant. The warrants would be identical to the Private Placement Warrants. On March 3, 2021, the Sponsor committed to provide the Company an aggregate of $1,500,000 in loans for working capital purposes on an as needed basis. Such loans will be evidenced by a promissory note when issued. As of September 30, 2021 and December 31, 2020, there were no amounts outstanding under the Working Capital Loans.
Sponsor Loan
On July 28, 2021, the Sponsor committed to provide the Company an aggregate of $4,000,000 in loans for working capital purposes. These loans will be non-interest bearing, unsecured and will be repaid upon the consummation of a Business Combination. If the Company does not consummate a Business Combination, all amounts loaned to the Company in connection with these loans will be forgiven except to the extent that the Company has funds available to it outside of its Trust Account. As of September 30, 2021, there were 0 amounts outstanding under these loans.
NOTE 7. COMMITMENTS
Registration Rights
Pursuant to a registration rights agreement entered into on July 1, 2020, the holders of the Founder Shares, Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans (and any shares of Class A common stock issuable upon the exercise of the Private Placement Warrants or warrants that may be issued upon conversion of Working Capital Loans and upon conversion of the Founder Shares) are entitled to registration rights requiring the Company to register such securities for resale (in the case of the Founder Shares, only after conversion to Class A common stock)2.59. The holders of the majority of these securities will be entitled to make up to 3 demands, excluding short form demands, that the Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the completion of a Business Combination and rights to require the Company to register for resale such securities pursuant to Rule 415 under the Securities Act. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
Underwriting Agreement
The underwriters are entitled to a deferred fee of $0.35 per Unit, or $9,660,000 in the aggregate. The deferred fee will be waived by the underwriters in the event that the Company does not complete a Business Combination, subject to the terms of the underwriting agreement.
Business Combination Agreement
On July 19, 2021, the Company entered into a Business Combination Agreement (as it may be amended, supplemented or otherwise modified from time to time, the “Business Combination Agreement”), by and among the Company, Merger Sub and Gelesis.
The Business Combination Agreement and the transactions contemplated thereby were approved by the board of directors of each of the Company and Gelesis.
18
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
The Business Combination Agreement provides for, among other things, that Merger Sub will merge with and into Gelesis, with Gelesis as the surviving company in the merger and, after giving effect to such merger, Gelesis shall be a wholly-owned subsidiary of the Company (the “Merger”). In addition, the Company will be renamed Gelesis Holdings, Inc. The Merger and the other transactions contemplated by the Business Combination Agreement are hereinafter referred to as the “Business Combination”.
In accordance with the terms and subject to the conditionsUpon closing of the Business Combination, Agreement, at the Effective Time, (i) each shareholders of Legacy Gelesis outstanding as of immediately priorstock options
10
received a stock option to the Effective Time will be exchanged forpurchase shares of the Company’s common stock par value $0.0001 per share (“CPSR Shares”) based on an implieda one-to-one basis and holder of Legacy Gelesis equity value of $900,000,000; (ii) all vested and unvested stock options of Gelesis will be assumed by the Company and thereafter be settled or exercisable for CPSR Shares, as applicable, determined based on the same implied Gelesis equity value described in clause (i); (iii) each warrant of Gelesis will be canceled in exchange for a warrant to purchase sharesRSUs received RSUs of the Company determined based on a one-to-one basis.
Immediately prior to the same implied Gelesis equity value described in clause (i); and (iv) each shareclosing of the Company’s Class ABusiness Combination, Legacy Gelesis redeemable preferred stock warrants were converted into Legacy Gelesis common warrants and were subsequently split according to the exchange ratio of 2.59. Upon closing of the Business Combination, holders received shares of common stock par value $0.0001 per share (the “CPSR Class ACommon Stock”) and each share of the Company’s Class BCompany on a one-to-one basis.
Immediately prior to the closing of the Business Combination, Legacy Gelesis common warrants were split according to the exchange ratio of 2.59. Upon closing of the Business Combination, holders received shares of common stock par value $0.0001 per share (the “CPSR Class B CommonStock”) that isof the Company on a one-to-one basis.
The number of shares of common stock issued and outstanding immediately prior to the Effective Time shall become 1 CPSR Share following the consummation of the Business Combination. Combination was as follows:
Common Stock | |||
CPSR Public Stockholders | 755,223 | ||
CPSR Sponsor Stockholders | 4,916,250 | ||
Total CPSR Stockholders | 5,671,473 | ||
Common stock issued to Gelesis Legacy Equityholders | 54,814,847 | ||
Common stock issued to PIPE Investors and Backstop Agreement | 11,727,967 | ||
Total common stock immediately after Closing | 72,214,287 |
Earnout Shares
In addition, each holder of shares ofLegacy Gelesis common stock, Legacy Gelesis options and Legacy Gelesis warrants will receive itsa pro rata portion of 15,000,000up to 23,482,845 restricted earn out CPSR Shares,earnout shares of Gelesis Holding’s common stock, which will be issued and vest (in part) in equal thirds if the trading price of CPSR Sharesthe Company’s common stock is greater than or equal to $12.50, $15.00$12.50, $15.00 and $17.50,$17.50, respectively, for any twenty (20) trading days within any thirty (30)-trading day period on or prior to the date that is five years following the Effective Time (the “Earn Out Period”)close of the Business Combination and will also vest in connection with any Changechange of Control Transactioncontrol transaction with respect to the Company if the applicable thresholds are met in such Changechange of Control Transactioncontrol transaction during the Earn Out Period.earnout period (each a “Triggering Event”).
On November 8, 2021, CPSR, Merger Sub and Gelesis entered into an Amendment to the Original Business Combination Agreement (the “Business Combination Agreement Amendment,” and together with the Original Business Combination Agreement, the “Business Combination Agreement”), which, among other things (i) adjusts the equity valuation of Gelesis from $900,000,000 to $675,000,000, (ii) increases the number of Earn Out Shares (as defined in the Business Combination Agreement) available to be issued toThe Company Stockholders (as defined in the Business Combination Agreement) from 15,000,000 to 23,483,250, (iii) provides for the issuance of 1,983,750 additional Capstar Class A Shares to Company Stockholders, equal to the number of Capstar Class B Shares forfeited by the Sponsor and certain affiliates of the Sponsordetermined 18,758,241 earnout shares are considered a contingent consideration arrangement in accordance with ASC 815, and recorded a liability upon the Sponsor Letter Agreement Amendment (as defined and described in further detail below), and (iv) extends the Termination Date (as defined in the Business Combination Agreement) from January 18, 2022 to January 31, 2022.
In connection, and concurrently, with the executionclosing of the Business Combination Agreement Amendment, Capstar, Capstar Sponsor Group LLC, a Delaware limited liability company (the “Sponsor”), certain affiliatesof $58.9 million (see Note 14). The Company determined the remaining 4,724,604 earnout shares, which pertain to Legacy Gelesis equity awards, are incremental compensation in accordance with ASC 718 and equity classified. The total fair value of incremental compensation cost at the close of Business Combination was $14.8 million which will be expensed according to the vesting terms of the Sponsororiginal underlying equity awards. The total incremental compensation cost, pertaining to Legacy Gelesis equity awards which had previously vested, was $11.4 million, of which $7.0 million and $4.4 million was recognized immediately following the close of the Business Combination as expense in selling, general and administrative expense and research and development expense, respectively, in the accompanying condensed consolidated statements of operations.
Public Warrants and Private Placement Warrants
Upon the closing of the Business Combination, the Company assumed 13,800,000 Public Warrants and 7,520,000 Private Placement Warrants. The Company determined the Public Warrants qualified as equity instruments in accordance with ASC 815 and reclassified the Public Warrants from liability to equity classification and the carrying value of $7.1 million was transferred to APIC on the accompanying condensed consolidated balance sheets. The Company determined the Private Placement Warrants met the definition of
11
a liability under ASC 815 and recorded a liability reflecting the fair value of the Private Placement Warrants of $8.1 million. See Note 13 and Note 15 for further information on the Private Placement and Public Warrants, respectively.
Liabilities that are measured at fair value on a recurring basis, and the level of the fair value hierarchy utilized to determine such fair values, consisted of the following at March 31, 2022 (in thousands):
|
|
|
|
| Fair Value Measurements |
| ||||||||||
|
| Fair Value |
|
| Quoted Prices |
|
| Significant |
|
| Significant |
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Earnout liability (See Note 14) |
| $ | 25,002 |
|
| $ | — |
|
| $ | — |
|
| $ | 25,002 |
|
Private placement warrant liability (see Note 13) |
|
| 3,730 |
|
|
| — |
|
|
| — |
|
|
| 3,730 |
|
One Srl call option |
|
| 2,623 |
|
|
| — |
|
|
| — |
|
|
| 2,623 |
|
Total liabilities measured at fair value |
| $ | 31,355 |
|
| $ | — |
|
| $ | — |
|
| $ | 31,355 |
|
Liabilities that are measured at fair value on a recurring basis, and the level of the fair value hierarchy utilized to determine such fair values, consisted of the following at December 31, 2021 (in thousands):
|
|
|
|
| Fair Value Measurements |
| ||||||||||
|
| Fair Value |
|
| Quoted Prices |
|
| Significant |
|
| Significant |
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Convertible promissory notes (see Note 12) |
| $ | 27,128 |
|
| $ | — |
|
| $ | — |
|
| $ | 27,128 |
|
Legacy Gelesis preferred stock warrants (See Note 13) |
|
| 15,821 |
|
|
| — |
|
|
| — |
|
|
| 15,821 |
|
One Srl call option |
|
| 2,416 |
|
|
| — |
|
|
| — |
|
|
| 2,416 |
|
Total liabilities measured at fair value |
| $ | 45,365 |
|
| $ | — |
|
| $ | — |
|
| $ | 45,365 |
|
The following table presents a summary of the changes in the fair value of the Company’s Level 3 financial instruments during the three months ended March 31, 2022:
|
| Convertible Promissory Notes |
|
| Legacy Gelesis Redeemable Preferred Stock Warrants Liabilities |
|
| One Srl Call Option |
|
| Earnout Liability |
|
| Private Placement Warrant Liability |
| |||||
Balance at December 31, 2021 |
| $ | 27,128 |
|
| $ | 15,821 |
|
| $ | 2,416 |
|
| $ | — |
|
| $ | — |
|
Assumed upon Business Combination |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,140 |
|
Recognized upon Business Combination |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 58,871 |
|
|
| — |
|
Changes in fair value |
|
| 156 |
|
|
| 926 |
|
|
| 258 |
|
|
| (33,869 | ) |
|
| (4,410 | ) |
Foreign currency translation (gain)/loss |
|
| — |
|
|
| — |
|
|
| (51 | ) |
|
| — |
|
|
| — |
|
Conversion and exchange upon Business Combination |
|
| — |
|
|
| (16,747 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Settlement |
|
| (27,284 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at March 31, 2022 |
| $ | — |
|
| $ | — |
|
| $ | 2,623 |
|
| $ | 25,002 |
|
| $ | 3,730 |
|
There were 0 transfers into or out of level 3 instruments and/or between level 1 and level 2 instruments during the three months ended March 31, 2022. The fair value measurement of the convertible promissory notes, Legacy Gelesis entered intopreferred stock warrant liability, One Srl call option liability, earnout liability and private placement warrant liability utilized inputs not observable in the market and thus represents a Level 3 measurement.
12
The Company sells the Product principally to a limited number of customers consisting of telemedicine and online pharmacies, that in turn resell the Product to end-user patients and healthcare providers. Patients are required to have a prescription in order to purchase the Product in the United States.
Roman Health Pharmacy LLC
During the three months ended March 31, 2022 and 2021, the Company recognized $6.7 million and $2.9 million, respectively, of product revenue, net, in the accompanying condensed consolidated statements of operations with respect to Roman Health Pharmacy LLC, or Ro. At March 31, 2022 and December 31, 2021, the Company recorded a deferred income balance of $24.2 million and $31.0 million, respectively, in the accompanying condensed consolidated balance sheets with respect to Ro.
GoGoMeds
During three months ended March 31, 2022 and 2021, the Company recognized $1.1 million and $0.1 million, respectively, of product revenue, net, in the accompanying condensed consolidated statements of operations with respect to Specialty Medical Drugstore, LLC, d/b/a/ GoGoMeds, or GGM. At March 31, 2022 and December 31, 2021, the Company recorded an amendment (the “Sponsor Letter Agreement Amendment”)accounts receivable balance of $0.8 million and $0.8 million, respectively, prior to that certain Sponsor Letter Agreement, dated July 19, 2021. Pursuantreserves and allowances, in the accompanying condensed consolidated balance sheets with respect to GGM.
CMS Bridging DMCC
At March 31, 2022 and December 31, 2021, the discounted time-based milestone had a balance of $4.1 million and $4.1 million, respectively, included in other assets in the accompanying condensed consolidated balance sheets. The royalties and other commercial milestones will only be recognized in the periods in which the applicable subsequent sales occur.
Total Product Revenue, net and Reserves
During the three months ended March 31, 2022 and 2021, the Company recognized $7.5 million and $3.1 million, respectively, of product revenue, net in the accompanying condensed consolidated statements of operations. At March 31, 2022 and December 31, 2021, the Company had accounts receivable of $0.8 million and $0.7 million, respectively, prior to reserves and allowances. The following table summarizes the activity in the product revenue reserve and allowance during the three months ended March 31, 2022 and 2021 (in thousands):
|
| At March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Balance at December 31, |
| $ | 82 |
|
| $ | 14 |
|
Provision related to product sales |
|
| 574 |
|
|
| 295 |
|
Credits and payments made |
|
| (418 | ) |
|
| (297 | ) |
Balance at March 31, |
| $ | 238 |
|
| $ | 12 |
|
At March 31, 2022 and 2021, product related reserve and allowances comprised solely contractual adjustments owed to the Sponsor LetterCompany’s telehealth and online pharmacy partners, which were netted to accounts receivable in the Company’s condensed consolidated balance sheets for the year. Through March 31, 2022, there had been no product related reserves or allowances owed to other parties, including the federal and state governments or their agencies.
Inventories consisted of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Raw materials |
| $ | 9,031 |
|
| $ | 8,074 |
|
Work in process |
|
| 2,962 |
|
|
| 2,643 |
|
Finished goods |
|
| 4,283 |
|
|
| 2,786 |
|
Total inventories |
| $ | 16,276 |
|
| $ | 13,503 |
|
13
Prepaid expenses and other current assets consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Prepaid expenses |
| $ | 1,892 |
|
| $ | 982 |
|
Prepaid insurance |
|
| 1,279 |
|
|
| 55 |
|
Prepaid manufacturing expenses |
|
| 1,530 |
|
|
| 2,624 |
|
Prepaid contract research costs |
|
| 201 |
|
|
| 262 |
|
Research and development tax credit |
|
| 248 |
|
|
| 579 |
|
Value added tax receivable |
|
| 6,145 |
|
|
| 5,633 |
|
Deferred financing costs |
|
| 222 |
|
|
| 3,855 |
|
Income tax receivable |
|
| 210 |
|
|
| 213 |
|
Investment tax credit |
|
| 1,316 |
|
|
| 0 |
|
Prepaid expenses and other current assets |
| $ | 13,043 |
|
| $ | 14,203 |
|
Property and equipment, net, consists of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Laboratory and manufacturing equipment |
| $ | 28,269 |
|
| $ | 28,101 |
|
Land and buildings |
|
| 10,783 |
|
|
| 10,404 |
|
Leasehold improvements |
|
| 1,582 |
|
|
| 1,614 |
|
Computer equipment and software |
|
| 476 |
|
|
| 463 |
|
Capitalized software |
|
| 232 |
|
|
| 228 |
|
Construction in process |
|
| 22,295 |
|
|
| 22,097 |
|
Property and equipment – at cost |
|
| 63,637 |
|
|
| 62,907 |
|
Less accumulated depreciation |
|
| (5,316 | ) |
|
| (4,392 | ) |
Property and equipment – net |
| $ | 58,321 |
|
| $ | 58,515 |
|
The Company owns and operates commercial manufacturing and research and development facilities in Italy, including a 51,000 square foot facility, which the Company expects to further expand to a 88,600 square foot facility, as well as approximately 12 acres of land, where the Company initiated construction of an additional 207,000 square foot facility. Both facilities are near the Town of Lecce in the Puglia region of Italy. Property and equipment classified as construction in process at March 31, 2022 and December 31, 2021 are related to the development of manufacturing lines that have not yet been placed into service at March 31, 2022 and December 31, 2021, respectively.
Depreciation expense was approximately $1.0 million and $0.2 million during the three months ended March 31, 2022 and 2021, respectively.
Accrued expenses and other current liabilities consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Accrued payroll and related benefits |
| $ | 1,835 |
|
| $ | 1,384 |
|
Accrued professional fees and outside contractors (including |
|
| 2,494 |
|
|
| 4,359 |
|
Accrued property, plant and equipment additions |
|
| 1,557 |
|
|
| 1,257 |
|
Accrued inventory and manufacturing expense |
|
| 268 |
|
|
| 128 |
|
Unpaid portion of acquisition of intangible asset and |
|
| 2,778 |
|
|
| 5,604 |
|
Income taxes payable |
|
| 96 |
|
|
| 145 |
|
Deferred legal fees |
|
| 738 |
|
|
| 738 |
|
Accrued interest |
|
| 358 |
|
|
| 45 |
|
Total accrued expenses |
| $ | 10,124 |
|
| $ | 13,660 |
|
14
Other long-term liabilities consist of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Long-term tax liabilities |
|
| 90 |
|
|
| 182 |
|
Contingent loss for research and development tax credits |
|
| 2,930 |
|
|
| 2,990 |
|
One Srl call option |
|
| 2,623 |
|
|
| 2,416 |
|
Total other long-term liabilities |
| $ | 5,643 |
|
| $ | 5,588 |
|
Puglia 1 Grant
In May 2020, the Company was awarded a grant by the Puglia region of Italy as an incentive to manufacture and carry out research and development activities in Italy (“PIA 1 Grant”), The Company recognized grant income of $0.2 million and $0.1 million in other income, net, on the accompanying condensed consolidated statements of operations during the three months ended March 31, 2022 and 2021, respectively, related to the PIA 1 Grant, of which less than $0.1 million and $0.2 million was attributable to research and development expenses and investments in facilities and equipment, respectively, during the three months ended March 31, 2022 and less than $0.1 million was attributable to both research and development expenses and investments in facilities and equipment, respectively, during the three months ended March 31, 2021. The Company recorded $6.1 million and $6.4 million of deferred income in the accompanying condensed consolidated balance sheets at March 31, 2022 and December 31, 2021, respectively, of which $0.8 million and $0.9 million was recorded as a current liability, respectively, as it is expected to be recognized within one year of the date of the accompanying condensed consolidated balance sheets. The Company collected 0 proceeds from the PIA 1 Grant during the three months ended March 31, 2022, and recorded a grant receivable of $5.3 million and $5.4 million in the accompanying condensed consolidated balance sheets at March 31, 2022 and December 31, 2021, respectively.
Puglia 2 Grant
In November 2020, the Company was awarded a second grant by the Puglia region of Italy as an incentive to manufacture and carry out research and development activities in Italy (“PIA 2 Grant”), The Company recognized grant income of $0.2 million and $0.5 million in other income, net, on the accompanying condensed consolidated statements of operations during the three months ended March 31, 2022, and 2021, respectively, related to the PIA 2 Grant, which was entirely attributable to research and development expenses. The Company has recorded $3.7 million and $3.7 million of deferred income in the accompanying condensed consolidated balance sheets at March 31, 2022 and December 31, 2021, respectively, of which $0.1 million and less than $0.1 million was recorded as a current liability, respectively, as it is expected to be recognized within one year of the date of the accompanying condensed consolidated balance sheets. The Company collected 0 proceeds from the PIA 2 Grant during the three months ended March 31, 2022, and has recorded a grant receivable of $3.8 million and $3.6 in the accompanying condensed consolidated balance sheets at March 31, 2022 and December 31, 2021, respectively.
One S.r.l. (“One”) Amended Patent License and Assignment Agreement
In June 2019, the Company amended and restated an existing master agreement with One (the “2019 One Amendment”), the original inventor of the Company’s core patents and a related party to the Company (see Notes 19 and 20). Under the amended and restated master agreement following this transaction, the Company eliminated certain future commercial milestone obligations and received a reduction in the percentage of royalties the Company was required to pay on future net sales. In return, One received additional consideration consisting of new future milestones upon the commercial success of new medical indications and a contingently issuable warrant for redeemable convertible preferred stock. Additionally, the Company acquired a 10% equity interest in One in exchange for cash consideration.
The Company accounted for the reduction in royalties the Company is required to pay on future net revenues that resulted from the 2019 One Amendment as an intangible asset under ASC 350, Intangibles – Goodwill and Other, which shall be amortized over its useful life, which was determined to be the parties theretoearliest expiration of patents related to the underlying intellectual property in November 2028. The Company accounted for the acquisition of the 10% equity interest in One under ASC 323, Investments – Equity Method and Joint Ventures.
In connection with the acquisition of the 10% equity interest in One, the Company made a payment of $2.9 million to One shareholders during the three months ended March 31, 2022. The Company had remaining undiscounted payments of €2.5 million and
15
€5.0 million due to One at March 31, 2022 and December 31, 2021, respectively (approximately $2.8 million and $5.7 million due to One at March 31, 2022 and December 31, 2021, respectively). The remaining payments at March 31, 2022 were recorded in accrued expenses in the accompanying condensed consolidated balance sheets as it is expected to be settled within the next twelve months. None of the future milestones under the amended and restated master agreement, have been met, or are deemed to be probable of being met, at the transaction date or at March 31, 2022 and December 31, 2021, respectively.
A summary of the intangible asset activity that resulted from this transaction during the three months ended March 31, 2022 is as follows (in thousands):
|
| Intangible Assets |
| |
Intangible asset at relative fair value |
| $ | 15,564 |
|
Adjustment to record deferred tax liability |
|
| 5,783 |
|
Carrying value of intangible asset at June 2019 acquisition date |
| $ | 21,347 |
|
Cumulative amortization expense |
|
| (5,667 | ) |
Balance at December 31, 2021 |
| $ | 15,680 |
|
Period amortization expense |
|
| (567 | ) |
Balance at March 31, 2022 |
| $ | 15,113 |
|
In October 2020, the Company further agreed, among other things,amended the terms of the agreement with One to cancels its obligation to issue a warrant for redeemable convertible preferred stock in the 2019 One Amendment for additional commercial milestone consideration and a warrant to purchase common stock. Additionally, the Company granted One a contingent call option to buy back the 10% ownership that (i) the vesting provisions relating to Capstar Class B Shares (asCompany acquired in the 2019 One Amendment at an exercise price of €6.0 million (approximately $6.6 million at March 31, 2022). The call option is only exercisable upon (1) a change of control or a deemed liquidation event by the Company, as defined, in the Sponsor Letter Agreement)Company’s Restated Certification of Incorporation (2) the date in which the Company’s current Chief Executive Officer is no longer affiliated with the Company in his capacity as either an executive officer or a member of the board of directors.
The One Srl call option was recorded as a liability held at fair value at the date of issuance and is remeasured at each subsequent reporting date with changes in fair value recorded in other income (expense) in the accompanying condensed consolidated statements of operations. Fair value is determined using a Black-Scholes option pricing model. The significant inputs used in estimating the fair value of call option liability include the estimated fair value of the underlying stock price, expected term, risk free interest rate, and expected volatility.
The following represents a summary of the changes to Company’s One Srl call option liability during the three months ended March 31, 2022 (in thousands):
Balance at December 31, 2021 |
| $ | 2,416 |
|
Change in fair value |
|
| 258 |
|
Foreign currency translation gain |
|
| (51 | ) |
Balance at March 31, 2022 |
| $ | 2,623 |
|
The following weighted average assumptions were used to determine the fair value of the One Srl call option liability at March 31, 2022 and December 31, 2021:
|
| March 31, |
| December 31, |
| ||
|
| 2022 |
| 2021 |
| ||
Expected term |
| 4.0 years |
| 2.0 years |
| ||
Expected volatility |
|
| 65.0 | % |
| 62.0 | % |
Expected dividend yield |
|
| 0.0 | % | 0.0% |
| |
Risk free interest rate |
|
| 2.5 | % |
| 0.70 | % |
Estimated fair value of ownership interest |
| $ | 5,623 |
| $ | 6,922 |
|
Exercise price of call option |
| $ | 6,668 |
| $ | 6,806 |
|
Research Innovation Fund (“RIF”) Financing
In August 2020, the Gelesis S.r.l. entered into a loan and equity agreement with RIF, an investment fund out of the EU, whereby Gelesis S.r.l. received €10.0 million (approximately $11.1 million at March 31, 2022) from RIF as an equity investment and €15.0 million (approximately $16.7 million at March 31, 2022) as a loan with a fixed interest rate of 6.35% per annum (see Note 12). The equity investment can be deletedcalled by the Company, beginning in December 2023 and (ii)ending in December 2026, by paying the investment plus 15% percent annual interest. If the Company does not exercise this call option, beginning in January 2027 and ending in December 2027, RIF may put the investment to the Company at a cost of the investment amount plus 3.175% percent annual interest. The loan has a termination date of December 31, 2030 and is repayable over 8 years starting 24 months subsequent to its
16
issuance. Any unpaid principal and interest must be repaid upon exercise of the call option by the Company, or subsequent exercise of a put option by RIF. At March 31, 2022, RIF holds approximately 20% of the equity of Gelesis S.r.l.
The Company recorded accretion of less than $0.1 million and foreign currency translation gain of $0.2 million to the noncontrolling interest during the three months ended March 31, 2022. The noncontrolling interest balance was $11.7 million and $11.9 million at March 31, 2022 and December 31, 2021, respectively, in the accompanying condensed consolidated balance sheets.
The Company’s non-convertible debt outstanding at March 31, 2022 and December 31, 2021 is summarized as follows:
| March 31, |
|
| December 31, |
| ||
| 2022 |
|
| 2021 |
| ||
Italian Economic Development Agency Loan |
| 344 |
|
|
| 525 |
|
Intesa Sanpaolo Loan 1 |
| 8,097 |
|
|
| 8,507 |
|
Intesa Sanpaolo Loan 2 |
| 5,557 |
|
|
| 5,672 |
|
Horizon 2020 Loan |
| 477 |
|
|
| 486 |
|
RIF Shareholders Loan |
| 16,672 |
|
|
| 17,015 |
|
UniCredit Loan |
| 5,517 |
|
|
| 5,630 |
|
Total debt obligation | $ | 36,664 |
|
| $ | 37,835 |
|
Unamortized loan discount and issuance costs |
| (705 | ) |
|
| (754 | ) |
Total debt obligation carrying amount | $ | 35,959 |
|
| $ | 37,081 |
|
Current portion | $ | 2,001 |
|
| $ | 1,950 |
|
Long-term portion | $ | 33,958 |
|
| $ | 35,131 |
|
2021 Bridge Financing
On December 13, 2021, the Company issued convertible promissory notes to related parties in the principal amount of $27.0 million (see Note 20). At December 31, 2021, the outstanding balance was $27.1 million, recorded at fair value in the accompanying condensed consolidated balance sheets. On January 19, 2022 the Company settled the convertible promissory notes in cash for principal plus accrued interest in the aggregate amount of $27.3 million. During the three months ended March 31, 2022, the Company recognized a loss of $0.2 million with respect to the change in fair value of the convertible promissory notes on the accompanying condensed consolidated statements of operations.
Future maturities with respect to debt outstanding at March 31, 2022 are as follows (in thousands):
| At March 31, 2022 |
| |
Remaining 2022 obligation |
| 1,729 |
|
2023 |
| 8,413 |
|
2024 |
| 5,655 |
|
2025 |
| 4,114 |
|
2026 |
| 4,136 |
|
More than 5 years |
| 12,618 |
|
Unamortized loan discount and issuance costs |
| (705 | ) |
Total debt obligation carrying amount | $ | 35,959 |
|
Current portion | $ | 2,001 |
|
Long-term portion | $ | 33,958 |
|
The following represents a summary of the warrant liabilities activity during the three months ended March 31, 2022 :
|
| Series A-4 |
|
| Private Placement Warrants |
|
| Total |
| |||
Balance at December 31, 2021 |
| $ | 15,821 |
|
| $ | — |
|
| $ | 15,821 |
|
Assumed upon Business Combination |
|
| — |
|
|
| 8,140 |
|
|
| 8,140 |
|
Changes in fair value |
|
| 926 |
|
|
| (4,410 | ) |
|
| (3,484 | ) |
Conversion and exchange upon Business Combination |
|
| (16,747 | ) |
|
| — |
|
|
| (16,747 | ) |
Balance at March 31, 2022 |
| $ | — |
|
| $ | 3,730 |
|
| $ | 3,730 |
|
17
Private Placement Warrants
At March 31, 2022, there were 7,520,000 Private Placement Warrants outstanding exercisable at $11.50 per share for common stock at the same terms as the Public Warrants. However, the warrants will not be redeemable by the Company for cash so long as they are held by the initial stockholders or their permitted transferees. The initial purchasers of the Private Placement Warrants, or their permitted transferees, also have the option to exercise the Private Placement Warrants on a cashless basis. If Private Placement Warrants are held by holders other than the initial purchasers thereof or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by the holders on the same basis as the Public Warrants.
The warrants were initially recorded at fair value with subsequent changes in fair value being recorded in the accompanying condensed consolidated statements of operations. The warrants at issuance and at March 31, 2022, were valued utilizing a modified Monte Carlo Simulation value model and significant unobservable Level 3 inputs.
The following weighted-average assumptions were used to determine the fair value of the Private Placement Warrant liability at March 31, 2022:
| Private Placement Warrants |
| |
Expected term | 4.8 years |
| |
Expected volatility |
| 40.0 | % |
Expected dividend yield |
| 0.0 | % |
Risk free interest rate |
| 2.4 | % |
Price of Gelesis Common Stock | $ | 4.53 |
|
Exercise price of warrants | $ | 11.50 |
|
Legacy Gelesis Redeemable Preferred Stock Warrants
In connection with the Business Combination, Legacy Gelesis redeemable preferred stock warrants were reclassified from liability treatment to equity treatment pursuant to the terms of their exchange (see Note 15).
The following represents a summary of the earnout liability activity during the three months ended March 31, 2022:
| Earnout Liability |
| |
Balance at December 31, 2021 | $ | — |
|
Recognized upon Business Combination |
| 58,871 |
|
Changes in fair value |
| (33,869 | ) |
Balance at March 31, 2022 | $ | 25,002 |
|
At Business Combination close and at March 31, 2022, there were 18,758,241 earnout shares unissued and unvested. At March 31, 2022, none of the triggering events had been met.
The earnout liability was initially recorded at fair value with subsequent changes in fair value being recorded in the accompanying condensed consolidated statements of operations. The earnout liability at issuance and at March 31, 2022, were valued utilizing a Monte Carlo Simulation and significant unobservable Level 3 inputs.
The following weighted-average assumptions were used to determine the fair value of the earnout liability at March 31, 2022:
| Earnout Liability |
| |
Expected term | 4.8 years |
| |
Expected volatility |
| 40.0 | % |
Expected dividend yield |
| 0.0 | % |
Risk free interest rate |
| 2.4 | % |
Price of Gelesis Common Stock | $ | 4.53 |
|
18
Common Stock
The Company’s authorized capital stock consists of (a) 900,000,000 shares of common stock, par value $0.0001 per share; and (b) 250,000,000 shares of preferred stock, par value $0.0001 per share. At March 31, 2022, there were 72,390,413 shares of common stock issued and outstanding.
Legacy Redeemable Convertible Preferred Stock
At December 31, 2021 and immediately prior to the Effective Time (as defined in the Sponsor Letter Agreement), 1,983,750 Capstar Class B Shares held by the Sponsor and certain affiliates of the Sponsor be surrendered to Capstar for cancellation upon such surrender, without any consideration for such surrender.
The Business Combination, is expected to close in the fourth quarter of 2021, following the receipt of the required approval by the Company’s stockholdersLegacy Gelesis had outstanding Series A-1, Series A-2, Series A-3, Series A-4, Series A-5, Series Growth, Series 2 Growth and the fulfillment of other customary closing conditions.
NOTE 8. STOCKHOLDERS’ DEFICIT
Preferred Stock—The Company is authorized to issue 1,000,000 shares ofSeries 3 Growth redeemable convertible preferred stock with a par value of $0.0001 per share with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. At September 30, 2021 and December 31, 2020, there were 0 shares of preferred stock issued or outstanding.
Class A Common Stock—On February 26, 2020, the Company amended its Certificate of Incorporation such that the Company is authorized to issue 100,000,000 shares of Class A common stock with a par value of $0.0001 per share. Holders of Class A common
19
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
stock are entitled to 1 vote for each share. At September 30, 2021 and December 31, 2020, there were 27,600,000 shares of Class A common stock issued and outstanding, which are subjectcollectively referred to possible redemption and classified as temporary equity.“redeemable convertible preferred stock.”
Class B Common Stock—On February 26, 2020, the Company amended its Certificate of Incorporation such that the Company is authorized to issue 10,000,000 shares of Class B common stock with a par value of $0.0001 per share. Holders of Class B common stock are entitled to 1 vote for each share. At September 30, 2021 and December 31, 2020, there were 6,900,000 shares of Class B common stock issued and outstanding.
Holders of Class B common stock will have the right to elect all of the Company’s directorsImmediately prior to a Business Combination. Holders of Class A common stock and Class B common stock will vote together as a single class on all other matters submitted to a vote of stockholders except as required by law.
The shares of Class B common stock will automatically convert into shares of Class A common stock at the time of a Business Combination on a one-for-one basis, subject to adjustment. In the case that additional shares of Class A common stock, or equity-linked securities, are issued or deemed issued in excess of the amounts offered in the Initial Public Offering and related to the closing of athe Business Combination, the ratio at which shares of Class BLegacy Gelesis redeemable convertible preferred stock converted into Legacy Gelesis common stock shall convert into sharesand was subsequently split according to the exchange ratio of Class A common stock will be adjusted (unless the holders of a majority2.59. Upon closing of the outstanding shares of Class B common stock agree to waive such adjustment with respect to any such issuance or deemed issuance) so that the number of shares of Class A common stock issuable upon conversion of all shares of Class B common stock will equal, in the aggregate, on an as-converted basis, 20% of the sum of the total number of allBusiness Combination, holders received shares of common stock outstanding upon the completion of the Initial Company on a one-to-one basis.
Public Offering plus all shares of Class AWarrants
In connection with the Business Combination the Company assumed 13,800,000 Public Warrants, which entitle the holder to acquire common stock, and equity-linked securities issued or deemed issued in connection with a Business Combination (excluding any shares or equity-linked securities issued, or to be issued, to any seller in a Business Combination, and any private placement-equivalent warrants issued to the Sponsor or its affiliates upon conversionwhich are exercisable at an exercise price of loans made to the Company).
$11.50
NOTE 9. WARRANTS
As of September 30, 2021 and December 31, 2020, there were 13,800,000 Public Warrants outstanding. Public Warrants may only be exercised for a whole number of shares. No fractional warrants will be issued upon separation of the Units and only whole warrants will trade. The Public Warrants will become exercisable on the later of (a) 30 days after the completion of a Business Combination or (b) 12 months from the closing of the Initial Public Offering. per share. The Public Warrants will expire at on the earlier to occur of five years after the completion of athe Business Combination or earlier upon redemption or liquidation.
The Company will not be obligated to deliver any shares of Class A common stock pursuant to the exercise of a warrant and will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act covering the issuance of the shares of Class A common issuable upon exercise of the warrants is then effective and a current prospectus relating to those shares of Class A common stock is available, subject to the Company satisfying its obligations with respect to registration. No warrant will be exercisable and we will not be obligated to issue shares of Class A common stock upon exercise of a warrant unless Class A common stock issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants.redemption.
The Company has agreed that as soon as practicable, but in no event later than 15 business days after the closing of a Business Combination, the Company will use its best efforts to file with the SEC a registration statement covering the issuance of the shares of Class A common stock issuable upon exercise of the warrants to cause such registration statement to become effective and to maintain a current prospectus relating to those shares of Class A common stock until the warrants expire or are redeemed, as specified in the warrant agreement. If a registration statement covering the shares of Class A common stock issuable upon exercise of the warrants is not effective by the 60th business day after the closing of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption. If that exemption, or another exemption, is not available, holders will not be able to exercise their warrants on a cashless basis.
20
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
Once the warrantsPublic Warrants become exercisable, the Company may redeemcall the Public Warrants:Warrants for redemption for cash:
• in whole and not in part; • at a price of $0.01 per warrant; • upon not less than thirty (30) days’ prior written notice of redemption (the “30-day redemption period”) to each warrant holder; and • if, and only if, the closing price of the Common Stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock capitalizations, reorganizations, recapitalizations and the like) for any twenty(20) trading days within a thirty (30)-trading day period ending 3 (3) business days before |
If and when the warrants become redeemable by the Company sends the Company may not exercise itsnotice of redemption right ifto the issuance of shares of common stock upon exercise of the warrants is not exempt from registration or qualification under applicable state blue sky laws or the Company is unable to effect such registration or qualification.
If the Company calls the Public Warrants for redemption, managementthe Company will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashlesscashless basis,” as described in the warrant agreement. The exercise price and number of shares of Class A common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, except as described below, the warrants will not be adjusted for issuance of Class A common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settlesettle.
At March 31, 2022, there were 13,800,000 Public Warrants outstanding.
Rollover Warrants
Immediately prior to the warrants. Ifclosing of the Company is unable to complete a Business Combination, withinLegacy Gelesis redeemable preferred stock warrants were converted into Legacy Gelesis common warrants and were subsequently split according to the Combination Period and the Company liquidates the funds held in the Trust Account, holdersexchange ratio of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside2.59. Upon closing of the Trust Account with the respect to such warrants. Accordingly, the warrants may expire worthless.
In addition, if (x) the Company issues additionalBusiness Combination, holders received shares of common stock or equity-linked securitiesof the Company on a one-to-one basis. At close of Business Combination and March 31, 2022, there were 1,836,429 and 1,660,303 warrants outstanding, respectively, with an exercise price of $0.02. During the three months ended March 31, 2022, 176,126 rollover warrants were exercised for capital raising purposes in connection withproceeds of less than $0.1 million.
Immediately prior to the closing of athe Business Combination, existing Legacy Gelesis common warrants were also split according to the exchange ratio of 2.59. Upon closing of the Business Combination, holders received shares of common stock of the Company on a
19
one-to-one basis. At close of Business Combination and at March 31, 2022, respectively, there were 1,353,062 of these warrants outstanding with an issue price or effective issueexercise price of less than $9.20 per share (with such$4.26.
At March 31, 2022 and December 31, 2021 common stock reserved for future issuances was as follows:
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
Common stock issued upon option exercise and RSUs vesting |
|
| 20,417,412 |
|
|
| 13,486,708 |
|
Conversion of all classes of redeemable convertible |
|
| — |
|
|
| 48,566,655 |
|
Issuances upon exercise of warrants to purchase Series A-4, |
|
| — |
|
|
| 1,836,429 |
|
Issuances upon exercise of common stock warrants |
|
| 24,333,365 |
|
|
| 1,353,062 |
|
Earnout shares |
|
| 23,482,845 |
|
|
| — |
|
Total common stock reserved for future issuance |
|
| 68,233,622 |
|
|
| 65,242,854 |
|
2021 Stock Option Plan
In January 2022, the Company's Board of Directors approved the 2021 Stock Option and Incentive Plan (the "2021 Plan"), which supersedes the 2016 Stock Option and Grant Plan and the 2006 Stock Incentive Plan and provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards and restricted stock units to employees, directors, and nonemployees of the Company. The 2021 Plan was authorized initially to issue price or effective issue price to9,583,570 shares, plus on January 1, 2023 and each January 1 thereafter, the number of shares of Stock reserved and available for issuance under the Plan shall be cumulatively increased by 4 percent of the number of shares of Stock issued and outstanding on the immediately preceding December 31. Under the 2021 Plan, 2,580,506 shares remained available for issuance at March 31, 2022.
Options and restricted stock awards generally vest based on the grantee’s continued service with the Company during a specified period following a grant as determined in good faith by the Board of Directors and expire ten years from the grant date. In general, awards typically vest in three to four years, but vesting conditions can vary based on the discretion of the Company’s boardBoard of directorsDirectors.
The fair value of the options is estimated at the grant date using Black-Scholes and inrecognized over the case of any such issuance to the Sponsor or its affiliates, withoutvesting period, taking into account any Founder Shares held by the sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y)terms and conditions upon which options are granted. The fair value of restricted stock awards is the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of a Business Combination onfair value at the date of the consummation of a Business Combination (net of redemptions), and (z) the volume weighted average trading price of the Company’s common stock during the 20 trading day period starting on the trading day prior to the day on which the Company consummates a Business Combination (such price, the “Market Value”) is below $9.20 per share,grant reduced by the exercise price of the warrants will be adjusted (toaward, if any. The fair value of both options and restricted stock awards are amortized on a straight-line basis over the nearest cent) to be equal to 115%requisite service period of the higherawards.
Stock-based compensation expense is summarized for employees and nonemployees, by category in the accompanying condensed consolidated statements of operations as follows (in thousands):
|
| Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Research and development |
| $ | 5,065 |
|
| $ | 567 |
|
Selling, general and administrative |
|
| 8,924 |
|
|
| 888 |
|
Total |
| $ | 13,989 |
|
| $ | 1,455 |
|
20
Stock Option Activity
The following table summarizes the Company’s stock option activity during the three months ended March 31, 2022:
|
| Number of |
|
| Weighted- |
|
| Weighted- |
|
| Aggregate |
| ||||
Outstanding at December 31, 2021 |
|
| 4,889,820 |
|
| $ | 10.39 |
|
|
| 6.17 |
|
| $ | 54,449 |
|
Retroactive application of reverse recapitalization |
|
| 7,784,666 |
|
|
| (6.38 | ) |
|
|
|
|
|
| ||
Adjusted and Outstanding at December 31, 2021 |
|
| 12,674,486 |
|
| $ | 4.01 |
|
|
| 6.17 |
|
| $ | 54,449 |
|
Granted |
|
| 2,542,685 |
|
|
|
|
|
|
|
|
|
| |||
Exercised |
|
| — |
|
|
|
|
|
|
|
|
|
| |||
Forfeited - unvested |
|
| (17,281 | ) |
| $ | 5.56 |
|
|
|
|
|
|
| ||
Forfeited - vested |
|
| (55,079 | ) |
| $ | 4.11 |
|
|
|
|
|
|
| ||
Expired |
|
| — |
|
|
|
|
|
|
|
|
|
| |||
Outstanding at March 31, 2022 |
|
| 15,144,811 |
|
| $ | 3.89 |
|
|
| 6.58 |
|
| $ | 13,187 |
|
Exercisable at March 31, 2022 |
|
| 9,923,454 |
|
| $ | 3.58 |
|
|
| 5.14 |
|
| $ | - |
|
Vested and expected to vest at March 31, 2022 |
|
| 15,144,811 |
|
| $ | 3.89 |
|
|
| 6.58 |
|
| $ | 13,187 |
|
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the Market Valuestock options and the Newly Issued Price, and the $18.00 per share redemption trigger price will be adjusted (to the nearest cent) to be equal to 180%fair value of the highercommon stock. The total fair value of options vested during the Market Value andthree months ended March 31, 2022 was $0.9 million.
The fair value of each option issued was estimated at the Newly Issued Price.
Asdate of September 30, 2021grant using Black-Scholes with the following weighted-average assumptions:
|
| Three Months Ended March 31, |
| |
|
| 2022 |
| |
Market price of common stock |
| $ | 3.33 |
|
Expected volatility |
|
| 72.6 | % |
Expected term (in years) |
|
| 6.1 |
|
Risk-free interest rate |
|
| 1.7 | % |
Expected dividend yield |
|
| 0.0 | % |
The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2022 was $2.16. At March 31, 2022 and December 31, 2020,2021, there were 7,520,000 Private Placement Warrants outstanding. was $15.7 million and $8.7 million, respectively, of unrecognized compensation cost related to unvested stock option grants under the 2021 Plan, which was expected to be recognized over a weighted-average period of 2.6 and 2.2 years, respectively.
Restricted Stock Unit (“RSU”) Activity
The Private Placement Warrantsfollowing table summarizes the Company’s RSU activity during the three months ended March 31, 2022:
|
| Number of RSUs |
|
| Weighted- |
| ||
Outstanding and Unvested at December 31, 2021 |
|
| 313,354 |
|
| $ | 21.41 |
|
Retroactive application of reverse recapitalization |
|
| 498,868 |
|
| $ | (13.15 | ) |
Adjusted and Outstanding and Unvested at December 31, 2021 |
|
| 812,222 |
|
| $ | 8.26 |
|
Granted |
|
| 4,460,379 |
|
| $ | 3.45 |
|
Vested |
|
| — |
|
|
|
| |
Forfeited |
|
| — |
|
|
|
| |
Outstanding and Unvested at March 31, 2022 |
|
| 5,272,601 |
|
| $ | 4.19 |
|
Each RSU entitles the holder to one share of common stock on vesting and the RSU awards are identicalbased on a cliff vesting schedule over requisite service periods in which the Company recognizes compensation expense for the RSUs. Vesting of the RSUs is subject to the Public Warrants underlyingsatisfaction of certain service and or certain performance conditions. The Company recognizes the Unitsestimated grant date fair value of these awards as stock-based compensation expense over the service and or performance periods based upon its determination of whether it is probable that the service and or performance conditions will be achieved. The Company assesses the probability of achieving the service and or performance conditions at each reporting period. Cumulative adjustments, if any, are recorded to reflect subsequent changes in the estimated or actual outcome of service and or performance-related conditions.
At March 31, 2022 and December 31, 2021, unrecognized compensation cost for RSU awards granted totaled $15.1 million and $6.7 million, respectively.
21
The Company recorded a provision of $0.0 million during the three months ended March 31, 2022 and March 31, 2021, respectively. The provision recorded differs from the US statutory rate of 21% for the three months ended March 31, 2022 and March 31, 2021 primarily due to the valuation allowance recorded against the net operating losses and deferred tax assets.
The Company continues to evaluate the positive and negative evidence bearing upon the realizability of its net deferred tax assets and determined that it is not more likely than not that the Company will recognize the benefits of the net deferred tax assets. Therefore, a full valuation allowance has been recorded against the balance of net deferred tax assets in the United States as of March 31, 2022 and December 31, 2021.
The weighted-average common shares outstanding and thus the net loss per share calculations and potentially dilutive security amounts for all periods prior to the Business Combination have been retrospectively adjusted to the equivalent number of shares outstanding immediately after the Business Combination to effect the reverse recapitalization. Historically reported weighted average shares outstanding have been multiplied by the exchange ratio of approximately 2.59. See Note 3 for further information.
Basic and diluted loss per share attributable to common stockholders was calculated as follows:
|
| Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Numerator: |
|
|
|
|
|
| ||
Net loss |
| $ | (5,703 | ) |
| $ | (18,586 | ) |
Accretion of redeemable convertible preferred stock to redemption value |
|
| (37,934 | ) |
|
| (33,761 | ) |
Accretion of noncontrolling interest put option to redemption value |
|
| (88 | ) |
|
| (94 | ) |
Net loss attributable to common stockholders |
| $ | (43,725 | ) |
| $ | (52,441 | ) |
Denominator: |
|
|
|
|
|
| ||
Weighted average common shares outstanding, basic and diluted |
|
| 62,743,154 |
|
|
| 5,589,290 |
|
Net loss per share, basic and diluted |
| $ | (0.70 | ) |
| $ | (9.38 | ) |
The Company’s potential dilutive securities, which include stock options, RSUs, warrants and earnout shares have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common stock outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same for all periods presented. The Company excluded the following potential common stock, presented based on amounts outstanding at March 31, 2022 and 2021 from the computation of diluted net loss per share attributable to common stockholders because including them would have had an anti-dilutive effect.
|
| March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Convertible preferred stock |
|
| - |
|
|
| 48,431,336 |
|
Warrants on convertible preferred stock |
|
| - |
|
|
| 2,030,277 |
|
Options and RSUs to acquire common stock |
|
| 20,417,412 |
|
|
| 13,032,299 |
|
Warrants on common stock |
|
| 24,333,365 |
|
|
| 1,353,062 |
|
Earnout shares |
|
| - |
|
|
| - |
|
Total |
|
| 44,750,777 |
|
|
| 64,846,974 |
|
Total potentially dilutive common share equivalents for the three months ended March 31, 2022, excludes 23,482,845 shares related to the earnout liability as these shares are contingently issuable upon meeting certain triggering events.
Operating Leases
In June 2019, the Company entered into an operating lease agreement with PureTech Health LLC, or PureTech, for office space located in Boston, Massachusetts. The lease expires in August 2025, with total lease payments of $3.2 million over the term.
At March 31, 2022, the Company’s operating lease right of use assets was $1.9 million, of which $0.5 million and $1.4 million were short-term and long-term lease liabilities, respectively. At December 31, 2021, the Company’s operating lease right of use assets was $2.0 million, of which $0.5 million and $1.5 million were short-term and long-term lease liabilities, respectively. Operating lease
22
expense was $0.1 million during the three months ended March 31, 2022 and 2021, respectively. The remaining noncancelable term of the Company’s operating leases was 3.4 years at March 31, 2022, and the weighted average discount rate was 5.9%.
Future maturities of the lease liability under the Company’s noncancelable operating leases at March 31, 2022 are as follows (in thousands):
| At March 31, 2022 |
| |
Remaining 2022 maturities | $ | 474 |
|
2023 |
| 636 |
|
2024 |
| 555 |
|
2025 |
| 385 |
|
2026 |
| 32 |
|
More than 5 years |
| 16 |
|
Total undiscounted lease maturities | $ | 2,098 |
|
Imputed interest |
| (176 | ) |
Total lease liability | $ | 1,922 |
|
Royalty Agreements
Expenses from royalty agreements on net product sales and sublicense income is recognized as a cost of goods sold in the Initial Public Offering, exceptaccompanying condensed consolidated statements of operations during the period in which the associated revenues are recognized.
PureTech
In December 2009, the Company entered into a royalty and sublicense income agreement with PureTech, a significant stockholder in the Company, whereby the Company is required to pay PureTech a 2.0% royalty on net product sales received as a result of developing products and technology using the intellectual property purchased from One.
One S.r.l
Under the amended and restated master agreement with One, the Company is required to pay a 2.0% royalty on net product sales and an aggregate of €17.5 million (approximately $19.5 million at March 31, 2022) upon the achievement of certain commercial milestones of new medical indications as well as Plenity and pay royalties on net product sales and/or a percentage of sublicense income. At March 31, 2022, none of the milestones have been met.
Grant Agreements
The Company has been awarded grants from governmental agencies, which are recognized as income as the qualifying expenses are incurred (see Note 11). The grant agreements contain certain provisions, including, among others, maintaining a physical presence in the region for defined periods. Failure to comply with these covenants would require either a full or partial refund of the grant to the granting authority.
Research and Development Tax Credits
The Company’s subsidiary, Gelesis S.r.l., which conducts core manufacturing and research and development activities on behalf of the Company, is eligible to receive a non-income based and non-refundable tax credits for qualified research and development activities. The Company has earned research and development tax credits in Italy for qualifying expenses incurred by performing certain research and development activities.
In December 2018, the Italian government passed a new budget law, effective January 1, 2019, that amended the eligibility criteria for recognizing qualifying research and development tax credits (“2019 Budget Law”). The 2019 Budget Law requires retroactive application for research and development tax credits earned during the year ended December 31, 2019. Under the 2019 Budget Law, research and development tax credits claimed in prior periods under previous interpretations of the research and development tax credit law may potentially be repaid by the Company.
The Company evaluated the potential loss under ASC 450, Contingencies. The Company concluded that the Private Placement Warrants and the Class A common stock issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days after the completionlikelihood of a Business Combination, subject to certain limited exceptions. Additionally, the Private Placement Warrants will be exercisable onpotential loss arising from this matter is probable.
The Company has recorded $2.9 million and $3.0 million as a cashless basis and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someonecomponent of other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
21
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
NOTE 10. FAIR VALUE MEASUREMENTS
The following table presents information about the Company’s assets that are measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
| | | | | | | | |
Description |
| Level |
| September 30, 2021 |
| December 31, 2020 | ||
Assets: |
|
|
| |
| | |
|
Cash and marketable securities held in Trust Account |
| 1 | | $ | 276,178,675 | | $ | 276,209,453 |
| | | | | | | | |
Liabilities: |
|
| |
|
| |
|
|
Warrant Liability – Public Warrants |
| 1 | | $ | 12,006,000 | | $ | 19,458,000 |
Warrant Liability – Private Placement Warrants |
| 3 | | $ | 20,380,148 | | $ | 10,643,808 |
The Warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within warrantlong-term liabilities in the accompanying condensed consolidated balance sheets.sheets at March 31, 2022 and December 31, 2021, respectively. In October 2021, the Italian federal tax authority initiated an audit of the research and development tax credits for the calendar years 2017 through 2019. The warrant liabilities are measuredCompany expects that this tax audit will continue through 2022.
Litigation
In connection with the Business Combination, the Company received a litigation demand letter from certain purported stockholders alleging that the Company was required to provide holders of Class A Common Stock a separate class vote in connection with
23
proposed amendments of the Company's Amended and Restated Certificate of Incorporation to increase the number of authorized shares, such that separate votes can be cast on the proposed increase in the number of shares of Class A common stock and the proposed increase in the number of shares of preferred stock. While the Company believes that the ultimate outcome of this litigation demand will not have a material effect on these condensed consolidated financial statements as well as its financial position, results of operations, and cash flows, the Company is unable to determine a range of potential losses that is reasonably possible of occurring.
The Company had the following transactions with related parties:
PureTech
In June 2019, PureTech executed a sublease agreement with the Company (see Note 19). With respect to the sublease, the Company incurred lease expense of $0.1 million and $0.2 million during three months ended March 31, 2022 and 2021, respectively, recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations. The Company incurred royalty expense of $0.2 million and less than $0.1 million in connection with the PureTech royalty agreement (see Note 19) during the three months ended March 31, 2022 and 2021, respectively, recorded in cost of goods sold in the accompanying condensed consolidated statements of operations. The Company had an accounts payable balance to PureTech of $0.3 million and $0.1 million at March 31, 2022 and December 31, 2021, respectively, in the accompanying condensed consolidated balance sheets.
On December 13, 2021, the Company issued a convertible promissory note to PureTech in the principal amount of $15.0 million (see Note 12). At December 31, 2021, the outstanding balance was $15.1 million, recorded at fair value at inception and onin the accompanying condensed consolidated balance sheets. On January 19, 2022 the Company settled the convertible promissory notes in cash for principal plus accrued interest in the aggregate amount of $15.2 million. During the three months ended March 31, 2022, the Company recognized a recurring basis,loss of $0.1 million with changes in fair value presented withinrespect to the change in fair value of warrant liabilities in the convertible promissory notes on the accompanying condensed consolidated statements of operations.
Level 3 financial liabilities consistSSD2
On December 13, 2021, the Company issued a convertible promissory note to SSD2, LLC in the principal amount of $12.0 million (see Note 12). At December 31, 2021, the Private Placement Warrant liability for which there is no current market for these securities such that the determination ofoutstanding balance was $12.1 million, recorded at fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3the accompanying condensed consolidated balance sheets. On January 19, 2022 the Company settled the convertible promissory notes in cash for principal plus accrued interest in the aggregate amount of $12.1 million. During the fair value hierarchy are analyzed each period based on changesthree months ended March 31, 2022, the Company recognized a loss of less than $0.1 million with respect to the change in estimates or assumptions and recorded as appropriate.
The fair value of the Private Placement Warrants was estimatedconvertible promissory notes on the accompanying condensed consolidated statements of operations.
One S.r.l
Consulting Agreement with Founder of One
The Company and one of the founders of One, who is also a stockholder of the Company, entered into a consulting agreement for the development of the Company's science and technology. The Company incurred costs for consulting services received from the founder of One totaling less than $0.1 million during each of the three months ended March 31, 2022 and 2021, respectively, recorded in research and development expense in the accompanying condensed consolidated statements of operations. The Company recorded an accounts payable balance to the founder of less than $0.1 million at September 30, 2021both March 31, 2022 and December 31, 20202021, respectively, in the accompanying condensed consolidated balance sheets.
Acquisition of One
In connection with the amended and restated master agreement with One (see Note 11), the Company acquired a 10.0% equity interest in One in exchange for cash consideration. During the three months ended March 31, 2022 the Company made a payment of $2.9 million to One shareholders with respect to the acquisition. The Company had remaining undiscounted payments of €2.5 million and €5.0 million due to one at March 31, 2022 and December 31, 2021, respectively (approximately $2.8 million and $5.7 million due to One at March 31, 2022 and December 31, 2021, respectively). The balance at March 31, 2022 was recorded in accrued expenses in the accompanying condensed consolidated balance sheets as it is expected to be $2.71 per warrantsettled within the next twelve months.
Additionally, the Company incurred royalty expense of $0.2 million and $1.42 per warrant, respectively, using the modified Black-Scholes option pricing model and the following assumptions:
| | | | | | | |
|
| September 30, |
| December 31, |
| ||
| | 2021 | | 2020 | | ||
Risk-free interest rate |
| | 1.02 | % | | 0.47 | % |
Expected Term |
| | 5.25 |
| | 5.76 | |
Dividend yield |
| | 0.00 | % | | 0.00 | % |
Expected volatility |
| | 13.5 | % | | 19.0 | % |
Exercise price | | $ | 11.50 | | $ | 11.50 | |
Unit Price | | $ | 9.92 | | $ | 10.15 | |
$0.1
The following table presents the changes in the fair value of Level 3 warrant liabilities:
| | | |
|
| Private Placement | |
Fair value as of December 31, 2020 | | $ | 10,643,808 |
Change in fair value | |
| (5,273,024) |
Fair value as of March 31, 2021 | |
| 5,370,784 |
Change in fair value | |
| 1,422,600 |
Fair value as of June 30, 2021 | |
| 6,793,384 |
Change in fair value | | | 13,586,764 |
Fair value as of September 30, 2021 | | | 20,380,148 |
There were 0 transfers in or out of Level 3 from other levels in the fair value hierarchy million with One (see Note 19) during the three and nine months ended September 30, 2021.
March 31, 2022 and 2021, respectively, recorded in cost of goods sold in the accompanying condensed consolidated statements of operations. The Company had an accounts payable balance to One Srl of less than $0.1 million and an accrued expense balance of $0.2 million at March 31, 2022 and an accrued expense balance of less than $0.1 million at December 31, 2021, respectively, related to royalties in the accompanying condensed consolidated balance sheets.
RIF Transaction
In connection with the RIF transaction entered into in August 2020, the Company received $12.3 million from RIF as an equity investment that can be called by the Company beginning in December 2023 and ending in December 2026 by paying the investment
24
plus 15.0% percent annual interest or put by RIF starting in January 2027 and ending in December 2027 for the investment amount plus 3.175% percent annual interest. RIF holds approximately 20% of the equity of Gelesis S.r.l. at December 31, 2021 (see Note 11). In addition, the shareholders of RIF provided the Company with a loan for $18.4 million with a fixed interest rate of 6.35% per annum (see Note 12).
22
CAPSTAR SPECIAL PURPOSE ACQUISITION CORP.
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Unaudited)
NOTE 11. SUBSEQUENT EVENTS
The Company has evaluated subsequent events and transactions that occurred after the balance sheet date upwhich may require adjustment to the date that the condensed consolidated financial statements were issued. Based upon this review, other than the below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.
As described in Note 7,statements through the Company entered into a Business Combination Agreement on July 19, 2021date of issuance of these condensed consolidated financial statements and entered into a Business Combination Agreement Amendment on November 8, 2021. In connection, and concurrently, with the execution of the Business Combination Agreement Amendment, Capstar, Capstar Sponsor Group LLC (the “Sponsor”), certain affiliates of the Sponsor and Gelesis entered into an amendment to that certain Sponsor Letter Agreement, dated July 19, 2021.concluded there are none.
25
23
ITEM
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operations
References in this report (the “Quarterly Report”) to the “Company,” “our,” “us,” “we,” “us” or the “Company”“Gelesis” refer to Gelesis Holdings, Inc. and its consolidated subsidiaries (formerly known as Capstar Special Purpose Acquisition Corp. References to our “management” or our “management team” refer to our officers and directors, references to"CPSR") following the “Sponsor” refer to Capstar Sponsor Group, LLC.Business Combination with Gelesis Inc., or Legacy Gelesis. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with (i) the condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report.Report and (ii) the audited historical consolidated financial statements of Legacy Gelesis, and the notes thereto, in our Form 8-K Amendment No. 1 filed on with the SEC on March 24, 2022. Certain of the information contained in thethis discussion and analysis or set forth belowelsewhere in this Quarterly Report, including information with respect to plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.
Special As a result of many factors, including, but not limited to, those set forth in the section entitled “Cautionary Note Regarding Forward-Looking Statements
ThisStatements” in this Quarterly Report includes “forward-looking statements” withinand those set forth in the meaningsection entitled “Risk Factors” in Item 1A of Section 27APart II of this Quarterly Report and in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on April 1, 2022, or our 2021 Annual Report, actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we do not intend to update any of these forward-looking statements after the date hereof or to conform these statements to actual results or revised expectations. You should carefully read the sections entitled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report and “Risk Factors” in Item 1A of Part II of this Quarterly Report and in Item 1A of Part 1 of our 2021 Annual Report to gain an understanding of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are not historical facts, and involve risks and uncertaintiesimportant factors that could cause actual results to differ materially from our forward-looking statements.
Overview
We are a commercial stage biotherapeutics company built for consumer engagement. We are focused on advancing first-in-class superabsorbent hydrogel therapeutics for chronic gastrointestinal, or GI, diseases including excess weight, type 2 diabetes, NAFLD/NASH, functional constipation, and inflammatory bowel disease. Our biomimetic superabsorbent hydrogels are inspired by the composition and mechanical properties (e.g. firmness) of raw vegetables. They are conveniently administered in capsules taken with water to create a much larger volume of small, non-aggregating hydrogel pieces that become an integrated part of the meals, and act locally in the digestive system.
Our first commercial product, Plenity, received de novo clearance from the FDA on April 12, 2019 to aid in weight management in adults with excess weight or obesity, Body Mass Index (BMI) of 25 to 40 kg/m2, when used in conjunction with diet and exercise.
Plenity, which is available by prescription in the United States, became available for first commercial sale in May 2020 to a limited number of consumers. In October 2020 availability was increased to test commercial interest and consumer experience. Activities associated with a full commercial launch in the United States began in late 2021, and in February 2022, we launched the first national broad awareness media campaign for the product. While these are significant milestones, continued commercialization of Plenity will require significant external funding until we are able to generate positive cash flows from product sales.
Since our inception, we have devoted our resources to business planning, developing proprietary superabsorbent hydrogel manufacturing know-hows and technologies, preclinical and clinical development, commercial activities, recruiting management and technical staff and raising capital. We have funded our operations to date through proceeds from the issuance of redeemable convertible preferred stock, license and collaboration agreements, long-term loans, and government grants. We have incurred significant operating losses to date. Our net losses were $5.7 million and $18.6 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, we had an accumulated deficit of $271.3 million. We expect to continue to generate operating losses and negative operating cash flows for the foreseeable future.
As a result, we will require substantial additional funding to support our continuing operations until we are able to generate positive cash flows from product sales. Until such time, we expect to finance our operations through equity offerings, debt financings or other capital sources, including collaborations, licenses or similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed or on favorable terms, if at all. If we are unable to obtain funding, we may be forced to delay, reduce or eliminate some or all of our commercialization efforts, research and development programs or product pipeline expansion, which could adversely affect our business prospects, or we may be unable to continue operations.
As of the date of this Quarterly Report, we expect that our existing cash and cash equivalents will only be sufficient to fund our operating expenses and capital expenditure requirements into the first quarter of 2023, prior to considerations for any additional funding, and not at least twelve months beyond the date of issuance of the unaudited condensed consolidated financial statements
26
included elsewhere in this Quarterly Report. As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report, which have been prepared in accordance with GAAP, contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern. See “—Liquidity and Capital Resources” for further information.
Recent Developments
Launch of Broad Consumer Awareness Campaign
On January 31, 2022, we debuted our broad consumer awareness campaign which included TV, digital, social, and Out of Home media channels to grow awareness of Plenity. Following the launch of the campaign:
Following the success of the initial wave of this campaign, we are evaluating optimal media channels, timing, pulse frequency, and investment levels going forward.
Impact of COVID-19
In December 2019, illnesses associated with COVID-19 were reported and the virus has since caused widespread and significant disruption to daily life and economies across geographies. The World Health Organization has classified the outbreak as a pandemic. Our business, operations and financial condition and results have not been significantly impacted as a result of the COVID-19 pandemic, rather we have recognized revenue for the first time during 2020 and we have expanded our facilities, sales/marketing and supply chain personnel to support the sale of Plenity. To date, COVID-19 has not materially impacted our ability to secure and deliver supply of Plenity. To date, COVID-19 has not significantly impacted ongoing clinical trials of our other product candidates.
In response to the COVID-19 pandemic, we have taken swift action to ensure the safety of our employees and other stakeholders. We are diligently working with our suppliers, customers, distributors and other partners to provide consumers with access to Plenity, while taking into account regulatory, institutional, and government guidance, policies and protocols.
However, the full extent of the impact of the pandemic and future outbreaks on our business, operations, and financial condition and results in future periods remain uncertain, particularly, with respect to consumer demand for or access to Plenity, and the administration of clinical research and development activities. Further, our ability to source raw materials and components, manufacture Plenity as well as transport and distribute Plenity may be limited and therefore impact sales of Plenity.
Key Factors Affecting Results of Operations
We believe that our performance and future success depend on several factors that present not only significant opportunities for us but also pose risks and challenges, including those discussed below.
New Consumer Acquisition
Our ability to attract new consumers is a key factor for our future growth. To date we have successfully acquired consumers through our U.S. commercial launch in conjunction with the continued development of marketing and sales tactics. We intend to acquire new
27
members in the United States by promoting Plenity directly to the consumer. The promotional activities will motivate the potential future member to ask a health care professional about acquiring Plenity through one of two channels:
Retention of Consumers
Our ability to retain consumers is a key factor in our ability to generate revenue. We expect our direct home delivery, simple and transparent pricing, and consumer engagement to enhance the experience of our consumer and promote recurring revenue. If consumer retention decreases in the future, then future revenue will be negatively impacted. The ability of our consumers to continue to pay for our products and services will also impact the future results of our operations.
Rest of World
We are evaluating global strategic partnerships to build our brand globally; however, we may also retain the rights.
Investments in Growth
We expect to make significant investments in selling and marketing to acquire new consumers. Selling and marketing is an important driver of growth, and we intend to continue to make significant investments in consumer acquisition and our selling and commercial infrastructure. As such, we expect our selling and marketing expense to increase in absolute dollars in the short term. However, we expect our selling and marketing expense to decrease as a percentage of revenue over the long term, although our selling and marketing expense may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.
Additionally, we intend to continue to invest significantly in our manufacturing, fulfillment and operating capabilities. In the short term, we expect these investments to increase our operating expenses; however, in the long term we anticipate that these investments will positively impact our results of operations. If we are unable to generate sufficient demand in Plenity, we may not have sufficient funds to investment into these growth activities.
Product Candidate Expansion
In addition to Plenity, we have invested in a pipeline of product candidates for prevalent and important gastrointestinal, or GI, tract-related chronic diseases including, type 2 diabetes, NAFLD/NASH, chronic idiopathic constipation, and inflammatory bowel disease by targeting the natural processes of the GI pathway. We expect to continue investing in our pipeline over time to broaden our commercial opportunity. The continued preclinical and clinical development of the pipeline will require significant financial resources. If we are unable to generate sufficient demand in Plenity or raise additional capital at favorable terms, if at all, we may not have sufficient funds to invest in the research and development of additional product candidates.
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business (dollar amounts in thousands except where noted):
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|
| For the Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
In thousands |
| (Unaudited) |
|
| (Unaudited) |
| ||
New members acquired |
|
| 40,400 |
|
|
| 14,100 |
|
Units sold |
|
| 114,570 |
|
|
| 48,761 |
|
Product revenue, net |
| $ | 7,514 |
|
| $ | 3,101 |
|
Average selling price per unit, net |
| $ | 65.58 |
|
| $ | 63.60 |
|
Gross profit |
| $ | 2,601 |
|
| $ | 285 |
|
Gross margin |
|
| 34.6 | % |
|
| 9.2 | % |
New members acquired
We define new members acquired as the number of consumers in the United States who have begun their weight loss journey with Plenity during the financial period presented. This is the total number of recurring and non-recurring consumers who have begun their weight loss journey during the financial period presented. We do not differentiate from recurring and non-recurring consumers as of the date of this Quarterly Report as (i) we strongly believe every member’s weight-loss journey is chronic and long-term in nature, and (ii) we have not initiated our long-term strategy and mechanisms to retain and/or win-back members. We will continue to evaluate the utility of this business metric in future periods.
Units sold
Units sold is defined as the number of 28-day supply units of Plenity sold to consumers based on prescriptions, through our strategic partnerships with online pharmacies and telehealth providers as well as the units sold to our strategic partners outside the United States.
Product revenue, net
See discussion elsewhere in this discussion and analysis under the heading “Key Components of Results of Operations — Product revenue, net”.
Average selling price per unit, net
Average selling price per unit, net is the gross price per unit sold during the period net of estimates of per unit variable consideration for which reserves are established for expected product returns, shipping charges to end-users, pharmacy dispensing and projected. Allplatform fees, merchant and processing fees, and promotional discounts offered to end-users. See “— Critical Accounting Policies and Significant Judgments and Estimates” below and the “Revenue Recognition” section of Note 2 in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for a more detailed discussion of our revenue recognition policy.
Gross profit and gross margin
Our gross profit represents product revenue, net, less our total cost of goods sold, and our gross margin is our gross profit expressed as a percentage of our product revenue, net. See discussion elsewhere in this discussion and analysis under the headings “Key Components of Results of Operations — Cost of goods sold”.
Our gross profit and gross margin have been and will continue to be affected by a number of factors, including the prices we charge for our product, the costs we incur from our vendors for certain components of our cost of goods sold, the mix of channel sales in a period, and our ability to sell our inventory. We expect our gross margin to increase over the long term, although gross margins may fluctuate from period to period depending on these and other thanfactors.
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with GAAP, we believe the following non-GAAP measure is useful in evaluating our operating performance. We use the following non-GAAP financial measure to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP financial measure, when taken together with the corresponding GAAP financial measure, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations, or outlook. We consider Adjusted EBITDA to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. We believe that the use of Adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance.
However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures
29
differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for the non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measure and the reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure, and not to rely on any single financial measure to evaluate our business.
Adjusted EBITDA
Adjusted EBITDA is a key performance measure that our management uses to assess our operating performance. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes. We define “Adjusted EBITDA” as net (loss) income before depreciation and amortization expenses, provision for (benefit from) income taxes, interest expense, net, stock-based compensation and (gains) and losses related to changes in fair value of our earnout liability, fair value of our warrant liability, our convertible promissory note liability and the One S.r.l. call option.
The following table reconciles net loss to Adjusted EBITDA for the three months ended March 31, 2022 and 2021, respectively:
|
| For the Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
In thousands |
| (Unaudited) |
|
| (Unaudited) |
| ||
Adjusted EBITDA |
|
|
|
|
|
| ||
Net loss |
| $ | (5,703 | ) |
| $ | (18,586 | ) |
Provision for income taxes |
|
| — |
|
|
| 17 |
|
Depreciation and amortization |
|
| 1,586 |
|
|
| 741 |
|
Stock based compensation expense |
|
| 13,989 |
|
|
| 1,455 |
|
Change in fair value of earnout liability |
|
| (33,869 | ) |
|
| — |
|
Change in fair value of warrants |
|
| (3,484 | ) |
|
| 2,074 |
|
Change in fair value of convertible |
|
| 156 |
|
|
| — |
|
Change in fair value of One S.r.l. call |
|
| 258 |
|
|
| 48 |
|
Interest expense, net |
|
| 135 |
|
|
| 361 |
|
Adjusted EBITDA |
| $ | (26,932 | ) |
| $ | (13,890 | ) |
Some of the limitations of Adjusted EBITDA include (i) Adjusted EBITDA does not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.
Basis of Presentation
Our consolidated financial statements and condensed consolidated financial statements are prepared in accordance with GAAP. Any reference in this discussion and analysis to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”).
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. We view our operations and manage our business as one operating segment.
The noncontrolling interest attributable to Gelesis S.r.l., our variable interest entity (“VIE”), is presented as a separate component from stockholders’ equity (deficit) in our consolidated balance sheets and as a noncontrolling interest in our condensed consolidated statements of historical factnoncontrolling interest, redeemable convertible preferred stock and stockholders’ equity. All intercompany balances and transactions have been eliminated in consolidation.
Key Components of Results of Operations
30
Product revenue, net
We recognize product revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Our product revenue is derived from product sales of Plenity, net of estimates of variable consideration for which reserves are established for expected product returns, shipping charges to end-users, pharmacy dispensing and platform fees, merchant and processing fees, and promotional discounts offered to end-users.
Cost of goods sold
Cost of goods sold includes the cost of manufacturing our proprietary superabsorbent hydrogels for Plenity for which revenue was recognized during the period, as well as the associated costs for encapsulation, packaging, shipment, supply management and quality assurance. Expenses from royalty agreements on net product sales are also recognized as a component of cost of goods sold during the period in which the associated revenues are recognized. A portion of depreciation with respect to property and equipment directly utilized in manufacturing Plenity units is recognized as a component of cost of goods sold over the depreciable life of the asset.
Selling, general and administrative expense
A significant component of our selling, general and administrative expenses is comprised of our selling and marketing expense, which includes our limited contract sales force in the US markets and discretionary consumer acquisition expenses.
Selling, general and administrative costs are expensed as incurred. Selling, general and administrative costs include sales and marketing costs incurred as a result of the commercialization of the Company’s products, payroll and personnel expense, stock-based compensation expense, and costs of programs and infrastructure necessary for the general conduct of the Company’s business.
Research and development expense
Research and development costs are expensed as incurred. Prepaid research and development costs are deferred and amortized over the service period, as the services are provided. Research and development costs include payroll and personnel expense, stock-based compensation expense, consulting costs, external contract research and development expenses, as well as depreciation and utilities. These activities relate primarily to formulation, CMC, preclinical and discovery activities. As such, we do not track these research and development expenses on an indication-by-indication basis as they primarily relate to expenses which are deployed across multiple projects under development or are for future product and pipeline candidates which utilize our platform technology. These costs are included in this Form 10-Q including, without limitation,unallocated research and development expenses in the tables below.
Clinical trial costs are a component of research and development expenses and consist of clinical trial and related clinical manufacturing costs, fees paid to clinical research organizations and investigative sites. We track and maintain these costs on an indication-by-indication basis.
Amortization expense
Amortization expense relates to the intangible asset that resulted from an amendment to our master agreement with the original inventor of our core patents, pursuant to which the percentage of royalties we are required to pay on future net revenues was reduced. The intangible asset is amortized over its useful life, which was determined as of the date of the amendment to be the earliest expiration of patents related to the underlying IP in November 2028.
Other non-operating income (expense), net
Change in the fair value of earnout liability
We have earnout shares which are contingent issuable as incremental consideration pursuant to ASC 815. The earnout shares are initially recorded at fair value and remeasured to fair value at each reporting date until settlement with gains and losses arising from changes in fair value recognized in the consolidated statements of operations.
Changes in the fair value of warrants
We have issued warrants to investors which are liability classified and initially recorded at fair value and remeasured to fair value at each reporting date until settlement with gains and losses arising from changes in fair value recognized in the consolidated statements of operations.
Interest expense, net
Interest expense, net consists of interest incurred on our various loans and interest income earned on our cash, cash equivalents and marketable securities.
Other income (expense), net
31
Other income, net primarily consists of income earned on our grants from government agencies in Italy, research and development tax credits earned in Italy for qualifying expenses, and gains and losses on foreign currency transactions. Other income, net also consists of changes in fair value of the One Srl call option.
Provision for income taxes
We must make certain estimates and judgments in determining income tax expense for financial statement purposes. The amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using substantively enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Net deferred tax assets are not recorded if we do not assess their realization as probable. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in our financial statements in the period that includes the substantive enactment date.
Results of Operations
Comparison of the Three Months Ended March 31, 2022 and March 31, 2021:
The following table summarizes our results of operations:
|
| For the Three Months Ended March 31, |
|
| Increase |
| ||||||
|
| 2022 |
|
| 2021 |
|
| (Decrease) |
| |||
|
| (Unaudited) |
|
| (Unaudited) |
|
|
|
| |||
Revenue: |
|
|
|
|
|
|
|
|
| |||
Product revenue, net |
| $ | 7,514 |
|
| $ | 3,101 |
|
| $ | 4,413 |
|
Total revenue, net |
|
| 7,514 |
|
|
| 3,101 |
|
|
| 4,413 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
| |||
Costs of goods sold |
|
| 4,913 |
|
|
| 2,816 |
|
|
| 2,097 |
|
Selling, general and administrative |
|
| 37,706 |
|
|
| 11,945 |
|
|
| 25,761 |
|
Research and development |
|
| 7,410 |
|
|
| 4,376 |
|
|
| 3,034 |
|
Amortization of intangible assets |
|
| 567 |
|
|
| 567 |
|
|
| — |
|
Total operating expenses |
|
| 50,596 |
|
|
| 19,704 |
|
|
| 30,892 |
|
Loss from operations |
|
| (43,082 | ) |
|
| (16,603 | ) |
|
| (26,479 | ) |
Other non-operating income (expense), net |
|
| 37,379 |
|
|
| (1,966 | ) |
|
| 39,345 |
|
Loss before income taxes |
|
| (5,703 | ) |
|
| (18,569 | ) |
|
| 12,866 |
|
Provision for income taxes |
|
| — |
|
|
| 17 |
|
|
| (17 | ) |
Net loss |
| $ | (5,703 | ) |
| $ | (18,586 | ) |
| $ | 12,883 |
|
Product revenue, net
We recognized product revenue, net of $7.5 million for the three months ended March 31, 2022, as compared to $3.1 million for the three months ended March 31, 2021, an increase of $4.4 million or 142%. We sold 114,570 units at an average selling price per unit, net of $65.58 for the three months ended March 31, 2022, as compared to 48,761 units at an average selling price per unit, net of $63.60 for the three months ended March 31, 2021.
The increase in units sold was primarily attributable to our planned and executed commercialization strategy for Plenity. We made Plenity available for commercial sale through a beta launch that began in in October 2020 and continued throughout 2021. Activities associated with a full commercial launch of the Product in the United States began in late 2021, and in February 2022, we launched the first national broad awareness media campaign for Plenity.
Cost of goods sold
We recognized cost of goods sold of $4.9 million for the three months ended March 31, 2022, as compared to $2.8 million for the three months ended March 31, 2021, an increase of $2.1 million. Depreciation as a component of cost of goods sold was $0.7 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively. The increases were primarily attributable to the revenue recognized with respect to units sold for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.
Gross profit was $2.6 million for the three months ended March 31, 2022, as compared to $0.3 million for the three months ended March 31, 2021. Gross margin also increased to 34.6% for the three months ended March 31, 2022, as compared to 9.2% for the three
32
months ended March 31, 2021. The increases were primarily attributable to production commencing at our first commercial-scale manufacturing facility in the fourth quarter of 2021 and the implementation of new finished-goods packaging in the third quarter 2021.
Selling, general and administrative expense
The following table summarizes our selling, general and administrative expenses for the three months ended March 31, 2022 and 2021:
|
| For the Three Months Ended March 31, |
|
| Increase |
| ||||||
|
| 2022 |
|
| 2021 |
|
| (Decrease) |
| |||
In thousands |
| (Unaudited) |
|
| (Unaudited) |
|
|
|
| |||
Selling and marketing expense |
| $ | 21,164 |
|
| $ | 7,686 |
|
| $ | 13,478 |
|
General and administrative expense |
|
| 7,618 |
|
|
| 3,371 |
|
|
| 4,247 |
|
Non-cash stock-based compensation expense |
|
| 8,924 |
|
|
| 888 |
|
|
| 8,036 |
|
Total selling, general and administrative expense |
| $ | 37,706 |
|
| $ | 11,945 |
|
| $ | 25,761 |
|
Our selling, general and administrative expense was $37.7 million for the three months ended March 31, 2022, as compared to $11.9 million for the three months ended March 31, 2021, an increase of $25.8 million or 216%.
Selling and marketing expense increased $13.5 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase in selling and marketing expense was primarily attributable to increased marketing spend to support the commercial sale of Plenity. In February 2022, we launched the first national broad awareness media campaign for the product, which included TV, digital, social, and Out of Home media channels to grow awareness of Plenity.
Non-cash stock-based compensation expense increased $8.0 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily attributable to the incremental compensation cost with respect to contingently issuable earnout shares pertaining to Legacy Gelesis equity awards, which had previously vested.
General and administrative expense increased $4.2 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily attributable to professional and legal expenses incurred with respect to the Business Combination.
Research and development expenses
The following table summarizes our research and development expenses for the three months ended March 31, 2022 and 2021:
|
| For the Three Months Ended March 31, |
|
| Increase |
| ||||||
|
| 2022 |
|
| 2021 |
|
| (Decrease) |
| |||
In thousands |
| (Unaudited) |
|
| (Unaudited) |
|
|
|
| |||
GS200 |
| $ | 7 |
|
| $ | 794 |
|
|
| (788 | ) |
GS300 |
|
| 136 |
|
|
| — |
|
|
| 136 |
|
GS500 |
|
| 75 |
|
|
| — |
|
|
| 75 |
|
Unallocated expenses |
|
|
|
|
|
|
|
|
| |||
Other research and development expenses |
|
| 2,127 |
|
|
| 3,015 |
|
|
| (888 | ) |
Non-cash stock-based compensation expense |
|
| 5,065 |
|
|
| 567 |
|
|
| 4,498 |
|
Total Research and development expense |
| $ | 7,410 |
|
| $ | 4,376 |
|
| $ | 3,034 |
|
Our research and development expense was $7.4 million for the three months ended March 31, 2022, as compared to $4.4 million for the three months ended March 31, 2021, an increase of $3.0 million, or 69%.
Non-cash stock-based compensation expense increased $4.5 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was primarily attributable to the incremental compensation cost with respect to contingently issuable earnout shares pertaining to Legacy Gelesis equity awards, which had previously vested.
The decline in research and development expenses within clinical indications (GS200, GS300 and GS500) was primarily attributable to the conclusion of the LIGHT-UP study with respect to GS200 during the year ended December 31, 2021, as well as the strategic prioritization of the commercialization of Plenity particularly with respect to our financial and human resources. Similarly, other
33
research and development expenses declined $0.9 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.
Other non-operating income (expense), net
We recognized other non-operating income, net of $37.4 million for the three months ended March 31, 2022, as compared to expense, net of $1.9 million for the three months ended March 31, 2021, an increase in income of $39.3 million. The income for the three months ended March 31, 2022 was primarily attributable to income of $33.9 with respect to the change in fair value of our earnout liability as well as income of $3.5 million with respect to the change in fair value of our warrant liabilities. The income for the three months ended March 31, 2022, was further attributable to $0.3 million in investment tax credit income recognized with respect to certain tax incentives offered for property and equipment investment in Italy and income of $0.4 million recognized with respect to grants awarded by the Puglia region of Italy. The income was partially offset by a loss of $0.3 million recognized with respect to the change in fair value of the One S.r.l. call option.
The expense for the three months ended March 31, 2021 was primarily attributable to a loss of $2.1 million recognized for the change in fair value of our warrant liabilities.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the issuance of equity and debt instruments, license and collaboration agreements, supply and distribution agreements, and government grants. As of March 31, 2022, our principal sources of liquidity were our cash and cash equivalents in the amount of $34.0 million. During the three months ended March 31, 2022, we closed a business combination with CPSR, pursuant to which we received $105.0 million in gross proceeds, prior to the payment of transactions fees due and payable. As of the date of this Quarterly Report, we expect that our existing cash and cash equivalents will only be sufficient to fund our operating expenses and capital expenditure requirements into the first quarter of 2023.
Due to our available cash and cash equivalents, a history of recurring losses from operations, negative cash flows from operations, and a significant accumulated deficit, we have concluded that there is substantial doubt about our ability to continue as a going concern. In addition, our independent registered public accounting firm included an emphasis of matter paragraph in their opinion for the years ended December 31, 2021 and 2020, respectively, as to the substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report, which have been prepared in accordance with GAAP, contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern.
We have incurred negative cash flows from operating activities and significant losses from operations in the past. We expect to continue to incur operating losses for at least the next twelve months due to the investments that we intend to make in our business to support the commercialization of Plenity and, as a result, we will require additional capital resources to grow our business.
Future Liquidity Requirements
Prior to the closing of the Business Combination, holders of 26,844,777 shares of CPSR Class A Common Stock exercised their right to redeem such shares for cash at a price of approximately $10.00 per share for aggregate payments of $268,646,943. As a result, upon closing of the Business Combination, we received approximately $105.0 million of gross proceeds to fund our future capital and liquidity needs. Due to the significant number of redemptions, we implemented an alternative business plan, prioritizing short-term working capital needs such as investments in raw materials and finished goods as well as investments in sales and marketing, and delaying certain long-term capital expenditures in commercial infrastructure and certain research and development expenses. We reduced and optimized investments in sales and marketing, prioritizing investments in high return and high exposure mediums. We have sought out, and continue to seek out, alternative commercial arrangements or geographic distribution partnerships to finance certain investments in sales and marketing associated with the sale of Plenity. We expect these actions will provide us with sufficient liquidity to manage short-term risk and uncertainty and (i) enable us to execute our alternative business plan, (ii) afford us time to access financing alternatives to provide for long-term liquidity and (iii) enable us to fund the continued commercialization of Plenity. See Part I, Item 1A, “Risk Factors — There were a significant number of redemptions in connection with the Business Combination and if we are not successful in implementing an alternative business plan and/or raising additional capital in a timely manner, we may have insufficient cash and liquidity to pay operating expenses and other obligations. Any such event would have a material adverse effect on our business and financial condition.” in our 2021 Annual Report for more information regarding the risk associated with our ability to implement our business plan and/or raise additional capital.
As a result, even with proceeds from the Business Combination, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through issuance of additional equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions.
34
As of the date of this Quarterly Report, we are continuing to evaluate opportunities to raise additional capital. If we are unsuccessful in raising additional capital, we may need to further restrict our spending particularly with respect to discretionary sales and marketing activities and our manufacturing and supply chain functions. Further changes to the execution of our alternative business plan may impact the growth of Plenity sales and the pace of acquisition and retention of consumers, as well as the price of our common stock.
Revenue Projections
Our revenue projections are highly dependent on (i) our ability to acquire new consumers and/or retain existing consumers and (ii) our ability to access additional capital and raise sufficient levels of funding in a timely manner to support the sales and marketing of Plenity at a broad national level within the United States. If our access to additional capital is delayed or insufficient, it may adversely impact the sale of Plenity and our revenue projections. See Part II, Item 1A “Risk Factors – The financial and operational projections and commercialization and product candidate development timelines that we may provide from time to time are subject to inherent risks.” in this Quarterly Report for more information.
Warrant Proceeds
As of the date of this Quarterly Report, we have 13,800,000 outstanding Public Warrants to purchase 13,800,000 shares of our common stock, exercisable at an exercise price of $11.50 per share, which expire on the earlier to occur of January 13, 2027 or redemption; (ii) 7,520,000 outstanding Private Warrants to purchase 7,520,000 shares of our common stock, exercisable at an exercise price of $11.50 per share, which expire January 13, 2027 or redemption and (iii) 3,013,365 exercisable Rollover Warrants, 1,353,062 of which are exercisable at an exercise price of $4.26 and expire on October 21, 2030 and 1,660,303 of which are exercisable at an exercise price of $0.02 and expire on February 15, 2025.
The exercise of warrants is highly dependent on the price of our common stock and the spread between the exercise price of the warrant and the price of our common stock at the time of exercise. For example, to the extent that the price of our common stock exceeds $11.50 per share, it is more likely that holders of our Public Warrants and Private Warrants will exercise their warrants. To the extent that the price of our common stock is less than $11.50 per share, it is less likely that such holders will exercise their warrants. As of May 11, 2022, the price of our common stock price was $4.53 per share. There can be no assurance that our warrants will be in the money prior to their expiration and, as such, any or all of our warrants may expire worthless. Our Public Warrants under certain conditions, as described in the warrant agreement, are redeemable by the Company at a price of $0.01 per warrant or on a cashless basis. Our Private Warrants are not redeemable so long as they are held by the initial stockholders and are exercisable on a cashless basis. Our Rollover Warrants are not redeemable and are exercisable on a cashless basis only with respect to the 1,660,303 warrants that have an exercise price of $0.02. As such, it is possible that we may never generate any cash proceeds from the exercise of our warrants. As of the date of this Quarterly Report, we have neither included nor intend to include any potential cash proceeds from the exercise of our warrants in our short-term or long-term liquidity projections. We will continue evaluate the probability of warrant exercise over the life of our warrants and the merit of including potential cash proceeds from the exercise thereof in our liquidity projections.
To the extent such warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our common stock, which increase the likelihood that our warrants will not be in the money prior to their expiration.
Financing Risk
We expect to devote significant efforts to raise capital, restructure our indebtedness and identify and evaluate potential strategic alternatives, however, there can be no assurance that we will be successful in obtaining capital sufficient to meet our operating needs on terms or a timeframe acceptable to us or at all. Further, in the event that market conditions preclude our ability to consummate such a transaction, we may be required to evaluate additional alternatives in restructuring our business and our capital structure. Any failure in these efforts could force us to delay, limit or terminate our operations, make reductions in our workforce, discontinue our commercialization efforts for Plenity as well as other development programs, liquidate all or a portion of our assets or pursue other strategic alternatives, and/or seek protection under the provisions of the U.S. Bankruptcy Code.
Although we have estimated our liquidity requirements based on assumptions we consider to be reasonable, we may need additional cash resources due to changed business conditions or other developments, including supply chain challenges, disruptions due to COVID-19, competitive pressures, and regulatory developments, among other developments. Our budget projections may be subject to cost overruns for reasons outside of our control and Plenity may experience slower sales growth than anticipated, which would pose a risk to achieve positive cash flow.
35
Our future capital requirements will depend on many factors, including increases in sales of Plenity, increases in our customer base, the timing and extent of spend to support the expansion of sales, marketing and development activities, and the impact of the COVID-19 pandemic. We may in the future also enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights.
We have based our estimate of liquidity on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our cash flows may fluctuate and are difficult to forecast and will depend on many factors mentioned elsewhere in this discussion and analysis. If we require additional equity or debt financing from outside sources, we may not be able to raise it on terms acceptable to us, or at all, and the Company may pursue financing transactions that are not completed. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be harmed.
Cash flows
The following table summarizes our cash flows for each of the periods presented:
|
| For the Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
In thousands |
| (Unaudited) |
|
| (Unaudited) |
| ||
Cash (used in) provided by: |
|
|
|
|
|
| ||
Operating activities |
| $ | (35,183 | ) |
| $ | (8,294 | ) |
Investing activities |
|
| (1,963 | ) |
|
| 17,646 |
|
Financing activities |
|
| 42,780 |
|
|
| 3,334 |
|
Effect of exchange rates on cash |
|
| (46 | ) |
|
| (973 | ) |
Increase in cash and cash equivalents |
| $ | 5,588 |
|
| $ | 11,713 |
|
Cash used in operating activities
Net cash used in operating activities was $35.2 million for the three months ended March 31, 2022, as compared to $8.3 million for the three months ended March 31, 2021. The increase in outflows was primarily attributable to our operating expenses increasing $30.9 million to $50.6 million for the three months ended March 31, 2022, as compared to $19.7 million for the three months ended March 31, 2021.
Cash (used in) provided by investing activities
Net cash used in investing activities was $2.0 million for the three months ended March 31, 2022, as compared to $17.6 million provided by investing activities for the three months ended March 31, 2021. The outflows were primarily attributable to $1.9 million in the purchase of property and equipment for the three months ended March 31, 2022. For the three months ended March 31, 2021, inflows were primarily attributable to $24.0 million in maturities of marketable securities, which were partially offset by a $6.4 million in the purchase of property and equipment for the three months ended March 31, 2021.
Cash provided by financing activities
Net cash provided by financing activities was $42.7 million for the three month ended March 31, 2022, as compared to $3.3 million for the three months ended March 31, 2021. The increase in inflows was primarily attributable to net proceeds of $70.5 million received from the completion of the Business Combination in January 2022, which was partially offset by our repayment of convertible promissory notes also in January 2022, totaling $27.3 million, as compared to net proceeds of $3.5 million from the issuance of loans in Italy for the three months ended March 31, 2021.
Contractual Obligations and Commitments
For the three months ended March 31, 2022, there were no material changes to our contractual obligations and commitments from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” in our Form 8-K Amendment No. 1 filed with the SEC on March 24, 2022, except in January 2022, we settled convertible promissory notes in cash for principal plus accrued interest in the aggregate amount of $27.3
36
million. For further information on these lease amendments, please see Note 12 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
Off-Balance Sheet Arrangements
We currently do not have, and did not have during the periods presented, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Critical Accounting Policies and Significant Judgments and Estimates
For the three months ended March 31, 2022, there have been no material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company’s Annual Report onour Form 10-KA8-K Amendment No. 1 filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessedSEC on March 24, 2022 other than those described in Note 2 in the EDGAR sectionaccompanying 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 SEC’s website at www.sec.gov. Except as expressly required by applicable securities law,Jumpstart Our Business Startups Act of 2012, or the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a resultJOBS Act, an “emerging growth company” can delay the adoption of new information, future events or otherwise.
Overview
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 a blank checkother exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an “emerging growth company, formed under the laws” we are exempt from Sections 14A(a) and (b) of the StateExchange 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 Delaware on February 14, 2020 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar Business Combination with one or more businesses. our chief executive officer’s compensation to our median employee compensation.
We also intend to effectuate our Business Combination using cashrely on an exemption from the proceedsrule requiring us to provide an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Initial Public Offering and the sale of the Private Placement Warrants, our capital stock, debt or a combination of cash, stock and debt.
Sarbanes-Oxley Act. We expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete a Business Combination will be successful.
Recent Developments
On July 19, 2021, we entered into the Business Combination Agreement with Merger Sub and Gelesis., which was amended on November 8, 2021.
The Business Combination Agreement and the transactions contemplated thereby were approved by the board of directors of each of CPSR and Gelesis.
The Business Combination Agreement provides for, among other things, that Merger Sub will merge with and into Gelesis, with Gelesis as the surviving company in the merger and, after giving effect to such merger, Gelesis shall be our wholly-owned subsidiary (the “Merger”). In addition, we will be renamed Gelesis Holdings, Inc.
24
In accordance with the terms and subject to the conditions of the Business Combination Agreement, at the Effective Time, (i) each share of Gelesis outstanding as of immediately prior to the Effective Time will be exchanged for CPSR Shares based on an implied Gelesis equity value of $675,000,000, (ii) all vested and unvested stock options of Gelesis will be assumed by us and thereafter be settled or exercisable for CPSR Shares, as applicable, determined based on the same implied Gelesis equity value described in clause (i); (iii) each warrant of Gelesis will be canceled in exchange for a warrant to purchase our shares of determined based on the same implied Gelesis equity value described in clause (i); and (iv) each share of CPSR Class A common stock and each share of CPSR Class B common stock that is issued and outstanding immediately prior to the Effective Time shall become one CPSR Share following the consummation of the Business Combination. In addition, each holder of shares of Gelesis common stock, options and warrants will receive its pro rata portion of 23,483,250 restricted earn out CPSR Shares, which will vest (in part) in equal thirds if the trading price of CPSR Shares is greater than or equal to $12.50, $15.00 and $17.50, respectively, for any 20 trading days within any 30-trading day period on or prior to the date that is five years following the Effective Time (the “Earn Out Period”) and will also vest in connection with any Change of Control Transaction with respect to us if the applicable thresholds are met in such Change of Control Transaction during the Earn Out Period.
The Business Combination is expected to close in the fourth quarter of 2021, following the receipt of the required approval by our stockholders and the fulfillment of other customary closing conditions.
Results of Operations
We have neither engaged in any operations (other than searching for a Business Combination after our Initial Public Offering) nor generated any revenues to date. Our only activities through September 30, 2021 were organizational activities, those necessary to prepare for the Initial Public Offering, described below, finding a target company for a Business Combination and activities in connection with the proposed acquisition of Gelesis. We do not expect to generate any operating revenues until after the completion of our Business Combination. We generate non-operating income in the form of interest income on marketable securities held in the Trust Account. We incur expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses.
For the three months ended September 30, 2021, we had a net loss of $14,255,408, which consists of changes in fair value of warrant liabilities of $13,174,144, operating costs of $1,113,342, and an unrealized loss on marketable securities held in Trust Account of $106,039,offset by interest income on marketable securities held in the Trust Account of $138,117.
For the nine months ended September 30, 2021, we had a net loss of $3,657,398, which consists of changes in fair value of warrant liabilities of $2,284,340 and operating costs of $1,518,286, offset by an unrealized gain on marketable securities held in Trust Account of $2,231, and interest income on marketable securities held in the Trust Account of $142,997.
For the three months ended September 30, 2020, we had a net loss of $113,691, which consists of operating costs of $184,615, transaction costs associated with the Initial Public Offering of $671,901, and a provision for income taxes of $8,714, offset by the interest earned on marketable securities held in Trust Account of $96,143, unrealized gain on marketable securities held in Trust Account of $41,496, and changes in fair value of warrant liabilities of $613,900.
For the period from February 14, 2020 (inception) through September 30, 2020, we had a net loss of $114,691, which consists of formation and operational costs of $185,615, transaction costs associated with the Initial Public Offering of $671,901, and a provision for income taxes of $8,714, offset by the interest earned on marketable securities held in Trust Account of $96,143, unrealized gain on marketable securities held in Trust Account of $41,496, and changes in fair value of warrant liabilities of $613,900.
Liquidity and Capital Resources
On July 7, 2020, we consummated the Initial Public Offering of 27,600,000 Units at a price of $10.00 per Unit, which includes the full exercise by the underwriters of the over-allotment option to purchase an additional 3,600,000, generating gross proceeds of $276,000,000. Simultaneously with the closing of the Initial Public Offering, we consummated the sale of 7,520,000 Private Placement Warrants at a price of $1.00 per Private Placement Warrant in a private placement to our stockholders, generating gross proceeds of $7,520,000.
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Following the Initial Public Offering, the full exercise of the over-allotment option by the underwriters’ and the sale of the Private Placement Warrants, a total of $276,000,000 was placed in the Trust Account and we had $1,389,212 of cash held outside of the Trust Account, after payment of costs related to the Initial Public Offering, and available for working capital purposes. We incurred $15,851,828 in transaction costs, including $5,520,000 of underwriting fees, $9,660,000 of deferred underwriting fees and $671,828 of other offering costs.
For the nine months ended September 30, 2021, cash used in operating activities was $362,889. Net loss of $3,657,398 was affected by changes in fair value of warrant liabilities of $2,284,340, an unrealized gain on marketable securities held in Trust Account of $2,231, interest earned on marketable securities held in the Trust Account of $142,997 and changes in operating assets and liabilities, which provided $1,155,397 of cash from operating activities.
For the period from February 14, 2021 (inception) through September 30, 2020, cash used in operating activities was $212,209. Net loss of $680,079 was affected by changes in fair value of warrant liabilities of $48,512, an unrealized gain on marketable securities held in Trust Account of $41,496, interest earned on marketable securities held in the Trust Account of $96,143 and changes in operating assets and liabilities, which used $26,594 of cash from operating activities.
As of September 30, 2021, we had cash and marketable securities held in the Trust Account of $276,178,675. We intend to use substantially all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account to complete our Business Combination. We may withdraw interest to pay franchise and income taxes. During the period ended September 30, 2021, we have withdrawn $176,006 of interest earned on the Trust Account for the payment of franchise taxes. To the extent that our capital stock or debt is used, in whole or in part, as consideration to complete our Business Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies.
As of September 30, 2021, we had cash of $304,944, respectively outside of the Trust Account. We intend to use the funds held outside the Trust Account primarily to identify and evaluate target businesses, perform business due diligence on prospective target businesses, travel to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, review corporate documents and material agreements of prospective target businesses, and structure, negotiate and complete a Business Combination.
In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, the Sponsor, an affiliate of the Sponsor, or our officers and directors may, but are not obligated to, loan us funds as may be required. If we complete a Business Combination, we would repay such loaned amounts. In the event that a Business Combination does not close, we may use a portion of the working capital held outside the trust account to repay such loaned amounts but no proceeds from our Trust Account would be used for such repayment. Up to $1,500,000 of such loans may be convertible into warrants, at a price of $1.50 per warrant at the option of the lender. The warrants would be identical to the Private Placement Warrants, including as to exercise price, exercisability and exercise period. The terms of such loans by our officers and directors, if any, have not been determined and no written agreements exist with respect to such loans. The loans would be repaid upon consummation of a Business Combination, without interest.
On July 28, 2021, the Sponsor committed to provide the Company an aggregate of $4,000,000 in loans for working capital purposes. These loans will be non-interest bearing, unsecured and will be repaid upon the consummation of a business combination. If the Company does not consummate a business combination, all amounts loaned to the Company in connection with these loans will be forgiven except to the extent that the Company has funds available to it outside of its Trust Account. As a result, management has determined that sufficient capital exists to sustain operations through the earlier of the consummation of a Business Combination or July 7, 2022, the scheduled liquidation date of the Company if a Business Combination is not completed.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of September 30, 2021. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
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Contractual obligations
We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement to pay an affiliate of the Sponsor a monthly fee of $10,000 for office space, utilities and secretarial and administrative support to the Company. We began incurring these fees on July 1, 2020 and will continue to incur these fees monthlyremain an “emerging growth company” until the earlierearliest of the following: (1) the last day of the fiscal year following the fifth anniversary of the date of the completion of this registration; (2) the Business Combination and the Company’s liquidation.
The underwriters are entitled to a deferred fee of $0.35 per Unit, or $9,660,000 in the aggregate. The deferred fee will be waived by the underwriters in the event that the Company does not complete a Business Combination, subject to the termslast day of the underwriting agreement.
Critical Accounting Policies
The preparation of condensed consolidated financial statements and related disclosuresfiscal year in conformity with accounting principles generally accepted in the United States of America requires managementwhich our total annual gross revenue is equal to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities ator 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 condensed consolidated financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following critical accounting policies:
Warrant LiabilitiesSEC.
We account for the Warrants in accordance with the guidance contained in ASC 815-40-15-7D and 7F under which the Warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, we classify the Warrants as liabilities at their fair value and adjust the Warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statements of operations. The Private Placement Warrants and the Public Warrants for periods where no observable traded price was available are valued using a Monte Carlo simulation. For periods subsequent to the detachment of the Public Warrants from the Units, the Public Warrant quoted market price was used as the fair value as of each relevant date.
Class A Common Stock Subject to Possible Redemption
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We account for our shares of Class A common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Shares of Class A common stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. Our common stock features certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events. Accordingly, the Class A common stock subject to possible redemption is presented as temporary equity, outside of the stockholders’ equity section of our unaudited condensed consolidated balance sheets.
Net Income (Loss) per Common Share
Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common stock outstanding during the period. We apply the two-class method in calculating income (loss) per common share. Accretion associated with the redeemable shares of Class A common stock is excluded from income (loss) per common share as the redemption value approximates fair value.
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Recent accounting standards
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2020-06 on January 1, 2021. The adoption of ASU 2020-06 did not have an impact on our condensed consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our unaudited condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
Not required forWe are a smaller reporting companies.company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and are not required to provide the information otherwise required under this item.
Item 4. Controls and ProceduresProcedures.
Previously Disclosed Material Weakness
As previously disclosed in Part II, Item 9A of our 2021 Annual Report, CPSR's management prior to the Business Combination concluded that CPSR’s management prior to Business Combination did not maintain effective internal control over financial reporting as of December 31, 2021, due to a material weakness related to CPSR's historical consolidated financial statements issued prior to the Business Combination. The material weakness related to CPSR prior to the Business Combination not having adequate controls over accounting for complex financial instruments associated with the accounting for warrants issued in connection with CPSR’s initial public offering.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended March 31, 2022, we completed the Business Combination, which resulted in a change in management responsible for the preparation and review of our consolidated financial statements. Effective as of the closing of the Business Combination, the management of Legacy Gelesis is responsible for internal control over financial reporting and the former management of CPSR no longer participates in financial reporting. Additionally, the internal controls of Legacy Gelesis became our internal controls.
Evaluation of Disclosure Controls and Procedures
Disclosure
We maintain “disclosure controls and proceduresprocedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by us in ourthe reports we file or submit under the Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms,forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Under In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the supervisionbenefits of possible controls and procedures relative to their costs.
Subsequent to the Business Combination, our management, with the participation of our management, includingChief Executive Officer and Chief Financial Officer, who serve as our principal executive officer and principal financial and accounting officer, we conducted an evaluation ofrespectively, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. Our assessment is that, post-Business Combination, we have a sufficiently staffed and technically experienced finance and accounting team to address the endfinancial reporting requirements of the fiscal quarter ended September 30, 2021, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.a public company. Based on thissuch evaluation, our principal executive officerChief Executive Officer and principal financial and accounting officer hasChief Financial Officer have concluded that our disclosure controls and procedures were not effective, due solely tothe conditions causing the material weakness no longer existed, and are not expected to exist. Accordingly, we determined the material weakness did not exist in our internal control over financial reporting related toas of March 31, 2022. Management has concluded that the Company’s accounting for complex financial instruments. As a result, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that thecondensed consolidated financial statements included in this Form 10-QQuarterly Report present fairly, in all material respects, ourthe Company’s financial position, results of operations and cash flows for the period presented.
Management has implemented remediation steps to improve our internal control over financial reporting. Specifically, we expanded and improved our review process for complex financial instruments and related accounting standards. We plan to further improve this process by enhancing access to accounting literature, identification of third-party professionalsperiods disclosed in accordance with whom to consult regarding complex accounting applications and consideration of additional staff with the requisite experience and training to supplement existing accounting professionals.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
U.S. GAAP.
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PART II - II—OTHER INFORMATION
Item 1. Legal Proceedings.
None.
From time to time, we are party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of these matters could materially affect our future results of operations, cash flows, or financial position. We are not presently party to any legal proceedings that, in the opinion of management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows.
Item 1A. Risk Factors.
We
Certain factors that may affect the Company’s business or operations are described under “Risk Factors” in Part I, Item 1A, of our 2021 Annual Report. Except as set forth below, there have identified abeen no material weaknesschanges to our risk factors from those previously disclosed in our internal control over financial reporting. This material weakness could continue to adversely affect2021 Annual Report.
An investment in our ability to report our resultssecurities involves a high degree of operationsrisk. You should consider carefully all of the risks described below and financial condition accurately andunder “Risk Factors” in a timely manner.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our management is likewise required, on a quarterly basis, to evaluate the effectivenessPart I, Item 1A, of our internal controls and to disclose any changes and material weaknesses identified through such evaluation of those internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As described elsewhere2021 Annual Report, together with the other information contained in this Quarterly Report on Form 10-Q, we have identified a material weaknessand in our internal control over2021 Annual Report, before making a decision to invest in our securities. If any of the following events, or the events described under “Risk Factors” in Part I, Item 1A, of our 2021 Annual Report, occur, our business, financial reporting related to the Company’s accounting for complex financial instruments. As a result of this material weakness, our management has concluded that our disclosure controlscondition and procedures were not effective as of September 30, 2021. See “Note 2—Restatement of Previously Issued Financial Statements” to the accompanying financial statements, as well as Part I. Item 4. Controls and Procedures included in this Quarterly Report on Form 10-Q. We have taken a number of measures to remediate the material weaknesses described herein. However, if we are unable to remediate our material weaknesses in a timely manner or we identify additional material weaknesses, weoperating results may be unable to provide required financial information in a timely and reliable manner and we may incorrectly report financial information. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the stock exchange on which our shares of Class A common stock are listed, the SEC or other regulatory authorities. Failure to timely file will cause us to be ineligible to utilize short form registration statements on Form S-3 or Form S-4, which may impair our ability to obtain capital in a timely fashion to execute our business strategies of issue shares to effect an acquisition.materially adversely affected. In either case, there could result a material adverse effect on our business. The existence of material weaknesses or significant deficiencies in internal control over financial reporting could adversely affect our reputation or investor perceptions of us, which could have a negative effect onthat event, the trading price of our stock. securities could decline, and you could lose all or part of your investment.
The price of our common stock may be volatile, and you could lose all or part of your investment.
The trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. For example, our stock traded within a range of a high price of $6.62 and a low price of $2.75 per share for the period of January 14, 2022, our first day of trading on the New York Stock Exchange through May 11, 2022. Factors which affect the volatility of the market price of our common stock include, without limitation:
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In addition, the stock market in general, and the NYSE and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, financial condition and results of operations.
Future sales and issuances of our common stock or rights to purchase our common stock, including pursuant to the Gelesis Holdings, Inc. 2021 Stock Option and Incentive Plan and future exercise of warrants or registration rights, could result in additional dilution of the percentage ownership of our shareholders and could cause our share price to fall.
We expect that significant additional capital may be needed in the future to continue our planned operations, including expanding commercial operations, self-commercialization of our products in new markets, conducting clinical trials, expanded research and development activities, and costs associated with operating as a public company. To raise capital, we may sell shares of our common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell shares of our common stock, convertible securities or other equity securities, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing shareholders, and new investors could gain rights, preferences, and privileges senior to existing holders of our common stock.
Sales of a substantial number of shares of our common stock in the public market, including the resale of the shares of common stock held by our stockholders, could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. Of the 72,390,413 shares of our common stock outstanding as of May 11, 2022, approximately 42,668,860 and 4,917,221 shares are currently subject to restrictions on transfer under 180-day and 360-day lock-up under agreements, respectively, entered into between us and the holders of those shares. These restrictions are due to expire on July 13, 2022 and January 13, 2023, respectively, resulting in these shares becoming eligible for public sale on July 14, 2022 and January 14, 2023, respectively, if they are registered under the Securities Act of 1933, as amended (the “Securities Act”), or if they qualify for an exemption from registration under the Securities Act. Pursuant to our Amended and Restated Registration and Stockholder Rights Agreement, dated January 13, 2021, by and among the us and the stockholders party thereto (the “Registration Rights Agreement”), certain of our stockholders are entitled to registration rights requiring us to file a registration statement to register such securities for resale.
The registrable securities that we are obligated to register pursuant to our obligations under the Registration Rights Agreement and the Subscription Agreements with PIPE Investors would represent approximately 82.9% of the shares of our common stock currently outstanding as of the date of this Quarterly Report, including those issuable upon exercise of the warrants. After it is effective and until such time that it is no longer effective, the registration statement registering such registrable securities will incurpermit the resale of these shares. The resale, or expected or potential resale, of a substantial number of our common stock in the public market could adversely affect the market price for our common stock and make it more difficult for existing stockholders to sell their holdings at times and prices that they determine are appropriate. Furthermore, we expect that, because there will be a large number of shares registered pursuant to the registration statement we are required to file pursuant to the Registration Rights Agreement, the selling
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securityholders thereunder will continue to offer the securities covered thereby for a significant period of time, the precise duration of which cannot be predicted. Accordingly, the adverse market and price pressures resulting from an offering pursuant to the registration statement may continue for an extended period of time.
We have also registered all shares of common stock that we may issue under our equity compensation plans or that are issuable upon exercise of outstanding options. These shares can be freely sold in the public market upon issuance and once vested, subject to volume limitations applicable to affiliates and the lock‑up agreements described above. If any of these additional costsshares are sold, or if it is perceived that they will be sold, in the public market, the market price of our common stock could decline.
In addition, our common stock is also subject to remediate material weaknessespotential dilution from the exercise of up to 24,333,365 warrants, the exercise of up to 15,144,811 stock options, the issuance of common stock pursuant to the vesting of up to 5,2727,601 restricted stock units, the issuance of up to 23,482,845 earnout shares pursuant to the triggering events in the Business Combination Agreement, and the potential issuance of common stock in connection with future equity and or convertible debt financings. Sales of substantial numbers of such shares in the public market, including the resale of the shares of common stock held by our internal control over financial reporting,stockholders, could adversely affect the market price of our common stock, the impact of which is increased as described in Part I. Item 4. Controls and Procedures. Wethe value of our stock price increases.
There can givebe no assurance that the measureswarrants will be in the money at the time they become exercisable; they may expire worthlessand therefore we will not receive cash proceeds from the exercise of warrants.
As of the date of this Quarterly Report, we have taken13,800,000 outstanding Public Warrants to purchase 13,800,000 shares of our common stock, exercisable at an exercise price of $11.50 per share, which expire on the earlier to occur of January 13, 2027 or redemption; (ii) 7,520,000 outstanding Private Warrants to purchase 7,520,000 shares of our common stock, exercisable at an exercise price of $11.50 per share, which expire on the earlier to occur of January 13, 2027 or redemption and plan(iii) 3,013,365 exercisable Rollover Warrants, 1,353,062 of which are exercisable at an exercise price of $4.26 and expire on October 21, 2030 and 1,660,303 of which are exercisable at an exercise price of $0.02 and expire on February 15, 2025.
The exercise of warrants is highly dependent on the price of our common stock and the spread between the exercise price of the warrant and the price of our common stock at the time of exercise. For example, to takethe extent that the price of our common stock exceeds $11.50 per share, it is more likely that holders of our Public Warrants and Private Warrants will exercise their warrants. To the extent that the price of our common stock is less than $11.50 per share, it is less likely that such holders will exercise their warrants. As of May 11, 2022, the price of our common stock price was $4.53 per share. There can be no assurance that our warrants will be in the future will remediate the material weakness identified or that any additional material weaknesses or restatements of financial results will not arisemoney prior to their expiration. Our Public Warrants under certain conditions, as described in the warrant agreement, are redeemable by the Company at a price of $0.01 per warrant or on a cashless basis. Our Private Warrants are not redeemable so long as they are held by the initial stockholders and are exercisable on a cashless basis. Our Rollover Warrants are not redeemable and are exercisable on a cashless basis only with respect to the 1,660,303 warrants that have an exercise price of $0.02. As such, it is possible that we may never generate any cash proceeds from the exercise of our warrants.
The financial and operational projections and commercialization and product candidate development timelines that we may provide from time to time are subject to inherent risks.
The projections and timelines that our management may provide from time to time (including with respect to financial or operational matters, commercialization efforts or product candidate development) reflect numerous assumptions made by our management, including assumptions with respect to our specific as well as general business, economic, market and financial conditions, including our ability to raise additional financing, and other matters, all of which may be difficult to predict and many of which are beyond our control. Accordingly, there is a risk that the assumptions made in preparing the projections, or the projections themselves, will prove inaccurate or, in the event we do not successfully raise subsequent financing, that our commercialization or product development activities may be curtailed. There will be differences between actual and projected results, and actual results may be materially different from those contained in our projections or timelines. Further, if our commercialization or product development activities are slowed or stopped, we would be unable to meet the timelines and projections previously provided by us. The inclusion of projections or timelines in (or incorporated by reference in) this Quarterly Report or any other filing we make with the SEC should not be regarded as an indication that we or our management or representatives considered or consider such projections and timelines to be a reliable prediction of future events, and the projections and timelines should not be relied upon as such.
If certain holders of our common stock sell a significant portion of their securities, it may negatively impact the market price of the shares of our common stock and such holders still may receive significant proceeds.
As of the date of this Quarterly Report, the market price of our common stock is below $10.00 per share, which was the price per unit sold in the initial public offering of our predecessor, CPSR, the per-share price of the 9,000,000 shares of Class A Common Stock our predecessor sold to certain investors in connection with our Business Combination in a private placement for an aggregate amount of
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$90.0 million (the “PIPE Financing”) and also the per share value of the consideration issued to Legacy Gelesis shareholders upon consummation of our Business Combination. However, certain of our shareholders who hold shares of our common stock that were (i) originally purchased by our predecessor’s sponsor, Capstar Sponsor Group, LLC, in a private placement prior to our predecessor’s initial public offering (the “Founder Shares”) or (ii) originally issued by CPSR in a private placement in connection with Backstop Agreement, dated December 30, 2021 (the “Backstop Agreement”), between CPSR and certain investors (the “Backstop Shares”), may nonetheless be willing to sell such Founder Shares or Backstop Shares as they were originally purchased at an effective price significantly less than $10.00 per share. The currently outstanding 4,916,250 Founder Shares were purchased at an effective price of $0.0051 per share. Holders of the Backstop Shares purchased an aggregate of 744,217 shares of CPSR’s Class A common stock in a private placement at a price of $10.00 per share, for an aggregate purchase price of $7.4 million and such holders also received an aggregate of 1,983,750 shares of CPSR Class A common stock as additional consideration, resulting in an effective purchase price for the currently outstanding 2,727,967 Backstop Shares of approximately $2.73 per share. Accordingly, holders of the Founder Shares and Backstop Shares could sell their securities at a per-share price that is less than $10.00 and still realize a significant profit from the sale of those securities that could not be realized by our other shareholders. On May 11, 2022, the closing price of our common stock was $4.53. Based on this closing price, the aggregate sales price of the Founder Shares would be approximately $22.3 million and the aggregate sales price of the Backstop would be approximately $12.4 million.
The Founder Shares and 1,983,750 of the Backstop Shares are currently subject to restrictions on transfer under applicable lock-up agreements; however, these restrictions are due to a failureexpire on July 13, 2022 and January 13, 2023, respectively, resulting in these shares becoming eligible for public sale on July 14, 2022 and January 14, 2023, respectively, if they are registered under the Securities Act, or if they qualify for an exemption from registration under the Securities Act. Pursuant to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentationRegistration Rights Agreement, certain of our financial statements.stockholders, including holders of the Founder Shares and holders of the Backstop Shares, are entitled to registration rights requiring us to register such securities for resale.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Private Placement
On July 7, 2020, simultaneousSee Note 3, “Business Combination and Reverse Recapitalization,” in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report regarding Subscription Agreements between CPSR and certain investors and the Backstop Agreement between CPSR and certain investors.
As discussed in Note 3, “Business Combination and Reverse Recapitalization,” in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report, in connection with the consummationBusiness Combination, pursuant to the Subscription Agreements, each dated July 19, 2021, the PIPE Investors purchased an aggregate of the Initial Public Offering and9,000,000 shares of CPSR's Class A common stock in a private placement at a price of $10.00 per share for an aggregate purchase price of $90.0 million. The PIPE Investment was consummated on January 13, 2022 in connection with the closing of the over-allotment option, we consummatedBusiness Combination. In addition, pursuant to the private placement ofBackstop Agreement, dated December 30, 2021, the Backstop Investors purchased an aggregate of 7,520,000 warrants744,217 shares of CPSR's Class A common stock in a private placement at a price of $1.00$10.00 per Private Placement Warrant, generating total proceedshare for an aggregate purchase price of $7,520,000.$7.4 million. Additionally, CPSR issued the Backstop Investors 1,983,750 CPSR Class A common stock as additional consideration. The issuance was madetransactions contemplated by the Backstop Agreement were consummated on January 13, 2022 in connection with the closing of the Business Combination. The shares of Class A common stock issued pursuant to the Subscription Agreements and the Backstop Agreement have not been registered under the Securities Act in reliance upon the exemption from registration containedprovided in Section 4(a)(2) of the Securities Act.
The Private Placement Warrants are identicalCompany intends to use the proceeds from the PIPE Investment and the sale of shares to the warrants underlyingBackstop Investors to support the Units sold in the Initial Public Offering, except that the Private Placement Warrants are not transferable, assignable or salable until 30 days after the completionsale of a Business Combination, subject to certain limited exceptionsPlenity..
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Use of Proceeds from the Initial Public Offering
On July 7, 2020, we consummated the Initial Public Offering of 27,600,000 Units, which includes the full exercise by the underwriters of the over-allotment option to purchase an additional 3,600,000 Units. The Units sold in the Initial Public Offering were sold at an offering price of $10.00 per unit, generating total gross proceeds of $276,000,000. Citigroup Global Markets Inc., UBS Securities LLC and BTIG, LLC acted as joint book-running manager. The securities in the offering were registered under the Securities Act on a registration statement on Form S-1 (No. 333-239094 and 333-239630). The Securities and Exchange Commission declared the registration statement effective on July 1, 2020.
We paid a total of $5,520,000 in underwriting discounts and commissions and $671,828 for other offering costs related to the Initial Public Offering. In addition, the underwriters agreed to defer $9,660,000 in underwriting discounts and commissions.
Of the gross proceeds received from the Initial Public Offering, the closing of the over-allotment option and the Private Placement Warrants, $276,000,000 was placed in the Trust Account. The proceeds are held in the Trust Account located in the United States and shall be invested only in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or less or in any open-ended investment company that holds itself out as a money market fund selected by the Company meeting the conditions of Rule 2a-7 of the Investment Company Act, as determined by the Company, until the earlier of: (i) the completion of a Business Combination or (ii) the distribution of the funds in the Trust Account.
Item 3. Defaults Upon Senior Securities.
None.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Not applicable.
Item 5. Other Information.
None.
Not applicable.
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Item 6. ExhibitsExhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
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32.1* |
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32.2* | ||
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| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
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| Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| Inline XBRL Taxonomy Extension | |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
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| Cover Page Interactive Data File |
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SIGNATURES
In accordance with44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Company Name | |
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Date: |
| By: | /s/ |
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| Yishai Zohar |
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| Chief Executive Officer (Principal Executive Officer) | |
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Date: May 12, 2022 |
| By: | /s/ Elliot Maltz |
Elliot Maltz | |||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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