Exhibit 99.1
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Unless otherwise indicated or the context otherwise requires, all references in this section to “Legacy Gelesis” refers to Gelesis, Inc. and its subsidiaries prior to the Closing, and the term “CPSR” refers to Capstar Special Purpose Acquisition Corp. prior to the Closing. Unless otherwise indicated or the context otherwise requires, all references in this section to “New Gelesis” refer to Gelesis Holdings, Inc. and its wholly-owned subsidiaries after giving effect to the Business Combination. The unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X.
The unaudited pro forma condensed combined financial information is based on and should be read in conjunction with (i) the audited historical financial statements of Legacy Gelesis, and the notes thereto, and the disclosures contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Gelesis,” filed as Exhibits 99.1 and 99.2, respectively, to its Current Report on Form 8-K filed with the SEC on March 24, 2022 and (ii) the audited historical financial statements of CPSR, and the notes thereto, and the disclosures contained in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations, each as contained in New Gelesis’ Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on April 1, 2022.
Introduction
Gelesis, Inc. (“Legacy Gelesis”) was incorporated on February 15, 2006 as a Delaware corporation and is a biotherapeutics company built for consumer engagement and focused on advancing first-in-class superabsorbent hydrogel therapeutics for chronic gastrointestinal diseases.
Capstar Special Purpose Acquisition Corp. (“CPSR”) was a special purpose acquisition corporation incorporated on February 14, 2020 as a Delaware corporation for the purpose of effecting a merger, capital stock exchange, asset acquisition, share purchase, reorganization or similar business combination.
The following unaudited pro forma condensed combined balance sheet as of December 31, 2021 and the unaudited pro forma condensed combined statement of operations and comprehensive loss for the year ended December 31, 2021 present the combination of the financial information of Legacy Gelesis and CPSR after giving effect to the Business Combination, PIPE Financing, Bridge Financing, Backstop Agreement and related adjustments described in the accompanying notes referred to herein as the “Transactions”. Legacy Gelesis and CPSR are collectively referred to herein as the “Companies” and the Companies, subsequent to the Business Combination, are referred to herein as “New Gelesis”.
The unaudited pro forma condensed combined balance sheet as of December 31, 2021 combines the historical audited consolidated balance sheets of Legacy Gelesis with the historical audited consolidated balance sheets of CPSR on a pro forma basis as if the Transactions had been consummated on December 31, 2021. The unaudited pro forma condensed combined statement of operations and comprehensive loss for the year ended December 31, 2021 combines the historical audited consolidated statements of operations and consolidated statements of comprehensive loss of Legacy Gelesis for the year ended December 31, 2021 and the historical audited consolidated statements of operations of CPSR for the year ended December 31, 2021 giving effect to the Transactions as if they had been consummated on January 1, 2021.
The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and do not necessarily reflect what New Gelesis’ financial condition or results of operations would have been had the Transactions occurred on the dates indicated. Further, the unaudited pro forma condensed combined financial information may not be useful in predicting the future financial condition and results of operations of the merged entities. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. New Gelesis’ results of operations and actual financial position may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
Accounting for the Business Combination
The Business Combination is accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded in connection with the Transactions. Legacy Gelesis is the accounting acquirer based on evaluation of the following facts and circumstances:
| | • | | The former owners of Legacy Gelesis will hold a majority in New Gelesis; |
| | • | | Legacy Gelesis and its former owners will have the ability to appoint a majority of the board of directors of New Gelesis; |
| | • | | Legacy Gelesis’ existing management will comprise the management of New Gelesis; and |
| | • | | The operations of New Gelesis will represent the operations of Legacy Gelesis. |
Legacy Gelesis will be the predecessor entity to New Gelesis based on the same considerations listed above. Under this method of accounting, CPSR will be treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent of Legacy Gelesis issuing stock for the net assets of CPSR, accompanied by a recapitalization. The net assets of CPSR will be stated at historical cost, with no goodwill or other intangible assets recorded in connection with the Transactions. Operations prior to the reverse recapitalization will be those of Legacy Gelesis.
Description of the Transactions
Pursuant to the Business Combination Agreement dated July 19, 2021, CPSR, CPSR Gelesis Merger Sub, Inc., a wholly-owned Subsidiary of CPSR (“Merger Sub”), and Legacy Gelesis consummated the Business Combination on January 13, 2022. Upon Closing, Merger Sub merged with and into Legacy Gelesis (the “Merger”), with Legacy Gelesis surviving the merger as a wholly owned subsidiary of CPSR. At the Effective Time, by virtue of the Business Combination and without any action on the part of CPSR, Merger Sub, Legacy Gelesis or the holders of any of Legacy Gelesis’ securities:
| · | the CPSR Sponsor forfeited 1,983,750 shares of CPSR Class B Common Stock held by the CPSR Sponsor (the “Forfeited Sponsor Shares”) to CPSR immediately prior to Closing and a corresponding number of additional shares of CPSR Class A Common Stock were issued to the Backstop Purchasers. |
| · | each share of CPSR Class A Common Stock and CPSR Class B Common Stock issued and outstanding immediately prior to the Effective Time converted into one share of New Gelesis Common Stock; |
| · | each share of Legacy Gelesis Common Stock and Preferred Stock outstanding as of immediately prior to the Effective Time was converted into a right to receive shares of New Gelesis Common Stock; |
| · | each share of capital stock of Merger Sub issued and outstanding as of immediately prior to the Effective Time was converted into one share of New Gelesis Common Stock; |
| · | all Legacy Gelesis Options were assumed by New Gelesis and thereafter are settleable or exercisable for shares of New Gelesis Common Stock; |
| · | all Legacy Gelesis Warrants were exchanged for comparable warrants to purchase shares of New Gelesis Common Stock; and |
| · | CPSR was renamed “Gelesis Holdings, Inc.” and the directors and officers of Legacy Gelesis immediately prior to the close of the Business Combination became the directors and officers of New Gelesis. |
Earnout Shares
In addition, each holder of Legacy Gelesis Common Stock, Legacy Gelesis Options and Legacy Gelesis Warrants will receive its pro rata portion of 23,483,250 restricted Earnout Shares of New Gelesis Common Stock, which will be issued and vest in equal thirds if the trading price of New Gelesis Common Stock is greater than or equal to $12.50, $15.00 and $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 Closing (the “Earnout Period”) and will also vest in connection with any Change of Control Transaction with respect to New Gelesis if the applicable thresholds are met in such Change of Control Transaction during the Earnout Period (each a “Triggering Event”). The market value of the shares to be issued could vary significantly from the market value of the shares as of the date of this filing.
PIPE Financing
In connection with the foregoing and concurrently with the execution of the Business Combination Agreement, CPSR entered into Subscription Agreements with the PIPE Investors, pursuant to which the PIPE Investors subscribed for and purchased an aggregate of 9,000,000 shares of CPSR Class A Common Stock at a price of $10.00 per share, for aggregate gross proceeds of $90.0 million. The PIPE Financing closed concurrently with the Closing of the Business Combination.
Bridge Financing
On December 13, 2021, Legacy Gelesis entered into a bridge financing arrangement (the “Bridge Financing”), executing convertible promissory note agreements with two existing investors in the aggregate amount of $27.0 million. These convertible promissory notes bear interest at 10.0% and were settled in cash for the principal plus accrued interest by the third business day following the Closing of the Business Combination.
Backstop Agreement
Pursuant to the Backstop Agreement dated December 30, 2021 (the “Backstop Agreement”), between CPSR and the purchasers party thereto (the “Backstop Purchasers”), the Backstop Purchasers purchased an aggregate of 744,217 shares of CPSR Class A Common Stock immediately prior to Closing for an aggregate purchase price of $7.4 million (the “Backstop Purchase Shares”). In addition, subject to the terms and conditions of the Backstop Agreement, at the closing of the sale of the shares of CPSR Class A Common Stock purchased by the Backstop Purchasers, CPSR issued to the Backstop Purchasers an additional 1,983,750 shares of CPSR Class A Common Stock, equal to the Forfeited Sponsor Shares (the “Backstop Sponsor Shares”).
The following represents the aggregate Business Combination consideration paid to Legacy Gelesis Equityholders upon the consummation of the Business Combination:
| (in thousands) | | Purchase price | | | Shares Issued | |
| Share consideration to Legacy Gelesis (a)(b)(c) | | $ | 675,000,000 | | | | 67,490,310 | |
| a) | The value of common stock issued to Legacy Gelesis included in the consideration is reflected at $10.00 per share (with no fractional shares) as defined in the Business Combination Agreement. |
| b) | The total 67,490,310 consideration shares issued for all outstanding Legacy Gelesis common and preferred stock, includes unexercised vested stock options and warrants to purchase 9,485,972 and 3,189,491 shares of New Gelesis Common Stock, respectively. |
| c) | Amount excludes the issuance of 23,482,845 Earnout Shares to certain eligible Legacy Gelesis Equityholders as a result of New Gelesis satisfying certain conditions described above within the Earnout Period. |
The following summarizes the unaudited pro forma common stock shares outstanding immediately after giving effect to the consummation of the Transactions:
| | | | Common Stock Outstanding | |
| | | | Shares | | | | % | |
| CPSR Public Stockholders | | | 755,223 | | | | 1.0 | % |
| CPSR Sponsor | | | 4,916,250 | | | | 6.8 | % |
| Total CPSR | | | 5,671,473 | | | | 7.9 | % |
| Legacy Gelesis Stockholders(a) | | | 54,814,847 | | | | 75.9 | % |
| PIPE Investors | | | 9,000,000 | | | | 12.5 | % |
| Backstop Sponsor Shares | | | 1,983,750 | | | | 2.7 | % |
| Backstop Purchase Shares | | | 744,217 | | | | 1.0 | % |
| Total Shares at Closing | | | 72,214,287 | | | | 100.0 | % |
| Legacy Gelesis - Remaining Consideration Shares(a)(b) | | | 12,675,463 | | | | | |
| Total Shares at Closing (including certain Legacy Gelesis shares) | | | 84,889,750 | | | | | |
| a) | Total consideration issued to Legacy Gelesis is $675.0 million or 67,490,310 shares ($10 per share price with no fractional shares). The total shares issued includes Legacy Gelesis common and preferred stock plus unexercised vested stock options and warrants to purchase common stock. Accordingly, the consideration shares outstanding in the above table has been adjusted to exclude the portion of consideration shares that will be unissued at Closing. The Legacy Gelesis - Remaining Consideration Shares reflect a conversion ratio of 2.59. |
| b) | Amount excludes the issuance of 23,482,845 Earnout Shares to certain eligible Legacy Gelesis Equityholders as a result of New Gelesis satisfying certain performance conditions described above within the Earnout Period. |
The following unaudited pro forma condensed combined balance sheet as of December 31, 2021 and unaudited pro forma condensed combined statement of operations and comprehensive loss for the year ended December 31, 2021 are based on the historical financial statements of CPSR and Legacy Gelesis. The unaudited pro forma adjustments are based on information currently available, and assumptions and estimates underlying the unaudited pro forma adjustments and are described in the accompanying notes. Actual results may differ materially from the assumptions used to present the accompanying unaudited pro forma condensed combined financial information.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2021
(in thousands)
| | | Historical | | | Transaction Accounting | | | | | Pro Forma
Condensed | |
| | | Legacy Gelesis | | | CPSR | | | Adjustments | | | | | Combined | |
| Assets | | | | | | | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 28,397 | | | $ | 221 | | | $ | 43,688 | | | 3(a) | | $ | 72,306 | |
| Accounts receivable | | | 731 | | | | — | | | | — | | | | | | 731 | |
| Grants receivable | | | 9,172 | | | | — | | | | — | | | | | | 9,172 | |
| Inventories | | | 13,503 | | | | — | | | | — | | | | | | 13,503 | |
| Prepaid expenses | | | — | | | | 14 | | | | — | | | | | | 14 | |
| Prepaid expenses and other current assets | | | 14,203 | | | | — | | | | (3,855 | ) | | 3(d) | | | 10,348 | |
| Total current assets | | | 66,006 | | | | 235 | | | | 39,833 | | | | | | 106,074 | |
| Property and equipment, net | | | 58,515 | | | | — | | | | — | | | | | | 58,515 | |
| Operating lease right-of-use assets | | | 2,016 | | | | — | | | | — | | | | | | 2,016 | |
| Intangible assets, net | | | 15,680 | | | | — | | | | — | | | | | | 15,680 | |
| Marketable securities held in Trust Account | | | — | | | | 276,207 | | | | (276,207 | ) | | 3(a) | | | — | |
| Other assets | | | 4,084 | | | | — | | | | — | | | | | | 4,084 | |
| Total assets | | $ | 146,301 | | | $ | 276,442 | | | $ | (236,374 | ) | | | | $ | 186,369 | |
| Liabilities, Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit) | | | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 10,066 | | | $ | — | | | $ | (356 | ) | | 3(d) | | $ | 9,710 | |
| Accrued expenses and other current liabilities | | | 13,660 | | | | — | | | | (417 | ) | | 3(d) | | | 13,243 | |
| Accounts payable and accrued expenses | | | — | | | | 21,806 | | | | (21,806 | ) | | 3(a) | | | — | |
| Operating lease liabilities | | | 541 | | | | — | | | | — | | | | | | 541 | |
| Deferred income | | | 32,370 | | | | — | | | | — | | | | | | 32,370 | |
| Warrant liabilities | | | 15,821 | | | | — | | | | (15,821 | ) | | | | | — | |
| Convertible promissory notes held at fair value | | | 27,128 | | | | | | | | (27,128 | ) | | 3(a) | | | — | |
| Notes payable | | | 1,950 | | | | — | | | | — | | | | | | 1,950 | |
| Total current liabilities | | | 101,536 | | | | 21,806 | | | | (65,528 | ) | | | | | 57,814 | |
| Deferred underwriting commissions | | | — | | | | 9,660 | | | | (9,660 | ) | | 3(a), 3(b) | | | — | |
| Operating lease liabilities | | | 1,519 | | | | — | | | | — | | | | | | 1,519 | |
| Notes payable | | | 35,131 | | | | — | | | | — | | | | | | 35,131 | |
| Deferred income | | | 8,914 | | | | — | | | | — | | | | | | 8,914 | |
| Warrant liabilities | | | - | | | | 22,499 | | | | (8,694 | ) | | 3(b) | | | 13,805 | |
| Other long-term liabilities | | | 5,588 | | | | — | | | | — | | | | | | 5,588 | |
| Earnout liability | | | — | | | | — | | | | 58,871 | | | 3(b) | | | 58,871 | |
| Total liabilities | | | 152,688 | | | | 53,965 | | | | (25,011 | ) | | | | | 181,642 | |
| | | | | | | | | | | | | | | | | | | |
| Noncontrolling interest | | | 11,855 | | | | — | | | | — | | | | | | 11,855 | |
| | | | | | | | | | | | | | | | | | | |
| Series A-1 redeemable convertible preferred stock | | | 7,113 | | | | — | | | | (7,113 | ) | | 3(b) | | | — | |
| Series A-2 redeemable convertible preferred stock | | | 3,033 | | | | — | | | | (3,033 | ) | | 3(b) | | | — | |
| Series A-3 redeemable convertible preferred stock | | | 7,460 | | | | — | | | | (7,460 | ) | | 3(b) | | | — | |
| Series A-4 redeemable convertible preferred stock | | | 2,602 | | | | — | | | | (2,602 | ) | | 3(b) | | | — | |
| Series A-5 redeemable convertible preferred stock | | | 44,307 | | | | — | | | | (44,307 | ) | | 3(b) | | | — | |
| Series Growth redeemable convertible preferred stock | | | 56,959 | | | | — | | | | (56,959 | ) | | 3(b) | | | — | |
| Series 2 Growth redeemable convertible preferred stock | | | 53,201 | | | | — | | | | (53,201 | ) | | 3(b) | | | — | |
| Series 3 Growth redeemable convertible preferred stock | | | 136,919 | | | | — | | | | (136,919 | ) | | 3(b) | | | — | |
| Common stock subject to redemption | | | — | | | | 276,000 | | | | (276,000 | ) | | 3(b) | | | — | |
| Stockholders’ Equity | | | | | | | | | | | | | | | | | | |
| Preferred stock | | | — | | | | — | | | | — | | | | | | — | |
| Common stock | | | 1 | | | | — | | | | (1 | ) | | 3(b) | | | — | |
| Common stock - Class A | | | — | | | | — | | | | 7 | | | 3(b) | | | 7 | |
| Common stock - Class B | | | — | | | | 1 | | | | (1 | ) | | 3(b) | | | — | |
| Additional paid-in capital | | | (64,549 | ) | | | - | | | | 314,737 | | | 3(b) | | | 250,188 | |
| Accumulated other comprehensive income | | | 219 | | | | — | | | | — | | | | | | 219 | |
| Accumulated deficit | | | (265,507 | ) | | | (53,524 | ) | | | 61,489 | | | 3(b), 3(c) | | | (257,542 | ) |
| Total stockholders' equity (deficit) | | | (329,836 | ) | | | (53,523 | ) | | | 376,231 | | | | | | (7,128 | ) |
Total liabilities, noncontrolling interest, redeemable convertible preferred stock and stockholders’ equity (deficit) | | $ | 146,301 | | | $ | 276,442 | | | $ | (236,374 | ) | | | | $ | 186,369 | |
See accompanying notes to unaudited pro forma condensed combined financial information.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2021
(in thousands, except share data)
| | | Historical | | | Transaction Accounting | | | | | Pro Forma Condensed | |
| | | Legacy Gelesis | | | CPSR | | | Adjustments | | | | | Combined | |
| Product revenue, net | | $ | 11,185 | | | $ | — | | | $ | — | | | | | $ | 11,185 | |
| Total revenue, net | | | 11,185 | | | | — | | | | — | | | | | | 11,185 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Costs of goods sold | | | 9,983 | | | | — | | | | — | | | | | | 9,983 | |
| Selling, general and administrative | | | 71,041 | | | | | | | | 31,681 | | | 4(a), 4(b), 4(c) | | | 102,722 | |
| Research and development | | | 12,867 | | | | — | | | | 5,252 | | | 4(b) | | | 18,119 | |
| Amortization of intangible assets | | | 2,267 | | | | — | | | | — | | | | | | 2,267 | |
| General and administrative expenses | | | | | | | 20,674 | | | | (20,674 | ) | | 4(a) | | | — | |
| Operating expenses | | | 96,158 | | | | 20,674 | | | | 16,259 | | | | | | 133,091 | |
| Loss from operations | | | (84,973 | ) | | | (20,674 | ) | | | (16,259 | ) | | | | | (121,906 | ) |
| Other income (expense): | | | | | | | | | | | | | | | | | | |
| Change in the fair value of convertible promissory notes | | | (128 | ) | | | — | | | | — | | | | | | (128 | ) |
| Change in the fair value of warrants | | | (7,646 | ) | | | 7,602 | | | | (3,118 | ) | | 4(d) | | | (3,162 | ) |
| Interest earned on investments held in Trust Account | | | — | | | | 167 | | | | (167 | ) | | | | | — | |
| Unrealized gain on marketable securities held in Trust Account | | | — | | | | 7 | | | | (7 | ) | | 4(e) | | | — | |
| Interest expense, net | | | (1,364 | ) | | | — | | | | — | | | | | | (1,364 | ) |
| Interest income | | | — | | | | — | | | | — | | | | | | — | |
| Other income, net | | | 781 | | | | | | | | — | | | | | | 781 | |
| Loss before income taxes | | | (93,330 | ) | | | (12,898 | ) | | | (19,551 | ) | | | | | (125,779 | ) |
| Provision for income taxes | | | 17 | | | | | | | | — | | | | | | 17 | |
| Net loss | | | (93,347 | ) | | | (12,898 | ) | | | (19,551 | ) | | | | | (125,796 | ) |
| Other comprehensive loss: | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | | | (719 | ) | | | — | | | | — | | | | | | (719 | ) |
| Total other comprehensive loss | | | (719 | ) | | | — | | | | — | | | | | | (719 | ) |
| Comprehensive loss | | $ | (94,066 | ) | | $ | (12,898 | ) | | $ | (19,551 | ) | | | | $ | (126,515 | ) |
| | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding, Common stock | | | 2,204,486 | | | | | | | | | | | | | | 72,214,287 | |
| Basic and diluted net loss per share, Common stock | | $ | (85.22 | ) | | | | | | | | | | | | $ | (1.74 | ) |
| Weighted average shares outstanding, Class A Common stock | | | | | | | 27,600,000 | | | | | | | | | | | |
| Basic and diluted net loss per share, Class A Common stock | | | | | | $ | (0.37 | ) | | | | | | | | | | |
| Weighted average shares outstanding, Class B Common stock | | | | | | | 6,900,000 | | | | | | | | | | | |
| Basic and diluted net loss per share, Class B Common stock | | | | | | $ | (0.37 | ) | | | | | | | | | | |
See accompanying notes to unaudited pro forma condensed combined financial information.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
The Business Combination is accounted for as a “reverse recapitalization” in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Under this method of accounting, Legacy Gelesis has been treated as the accounting acquirer, while CPSR has been treated as the accounting acquiree for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent of Legacy Gelesis issuing shares for the net assets of CPSR, accompanied by a recapitalization. The net assets of CPSR will be stated at historical costs. No goodwill or other intangible assets will be recorded in conjunction with the Transactions.
The unaudited pro forma condensed combined balance sheet as of December 31, 2021 gives pro forma effect to the Transactions as if they had occurred on December 31, 2021. The unaudited pro forma condensed combined statement of operations and comprehensive loss for the year ended December 31, 2021 give effect to the Transactions as if they had occurred on January 1, 2021.
The unaudited pro forma condensed combined balance sheet as of December 31, 2021 has been prepared using, and should be read in conjunction with, the following:
| | • | | Legacy Gelesis’ audited consolidated balance sheets as of December 31, 2021 and the related notes; and |
| | • | | CPSR’s audited consolidated balance sheets as of December 31, 2021, and the related notes. |
The unaudited pro forma condensed combined statement of operations and comprehensive loss for the year ended December 31, 2021 has been prepared using, and should be read in conjunction with, the following:
| | • | | Legacy Gelesis’ audited consolidated statements of operations and audited consolidated statements of comprehensive loss for the year ended December 31, 2021 and the related notes; and |
| | • | | CPSR’s audited consolidated statements of operations for the year ended December 31, 2021, and the related notes. |
Management has made significant estimates and assumptions in its determination of the pro forma adjustments based on information available as of the date of this Amendment No. 2 to the Form 8-K. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented as additional information becomes available. Management considers this basis of presentation to be reasonable under the circumstances.
The unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the Transactions and has been prepared for informational purposes only. The unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.” Release No. 33-10786 replaces the existing pro forma adjustment criteria with simplified requirements to depict the accounting for the transaction (“Transaction Accounting Adjustments”) and present the reasonably estimable synergies and other transaction effects that have occurred or are reasonably expected to occur (“Management’s Adjustments”). New Gelesis has elected not to present Management’s Adjustments and will only be presenting Transaction Accounting Adjustments in the unaudited pro forma condensed combined financial information. As such, the unaudited pro forma condensed combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings, or cost savings that may be associated with the Business Combination.
The unaudited pro forma adjustments reflecting the consummation of the Transactions are based on certain currently available information and certain assumptions and methodologies that management believes are reasonable under the circumstances. The unaudited pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the unaudited pro forma adjustments and it is possible the difference may be material. Management believes that these assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Transactions based on information available to management at this time and that the unaudited pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the Transactions taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of New Gelesis. They should be read in conjunction with the historical financial statements and notes thereto of CPSR and Legacy Gelesis.
Upon completion of the Transactions, management will perform a comprehensive review of CPSR’s and Legacy Gelesis’ accounting policies. As a result of the review, management may identify differences between the accounting policies of the two entities which, when conformed, could have a material impact on the financial statements of New Gelesis. Based on its initial review, management did not identify any differences that would have a material impact on the unaudited pro forma condensed combined financial information. As a result, the unaudited pro forma condensed combined financial information does not assume any differences in accounting policies.
| 3. | Transaction Accounting Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31, 2021 |
The transaction accounting adjustments included in the unaudited pro forma condensed combined balance sheet as of December 31, 2021 are as follows:
| a) | Represents the impact of the Transactions on the cash balance of New Gelesis. The table below represents the sources and uses of funds as it relates to the Transactions: |
| (in thousands) | | Note | | Pro Forma
Cash | |
| CPSR cash held in Trust Account | | (1) | | $ | 276,207 | |
| Payment to redeeming CPSR Stockholders | | (2) | | | (268,647 | ) |
| Payment of transaction costs related to the Transactions | | (3) | | | (24,625 | ) |
| CPSR deferred underwriting commissions | | (4) | | | (7,560 | ) |
CPSR historical accounts payable and accrued expenses
(excluding accrued transaction costs related to the Transactions) | | (5) | | | (238 | ) |
| PIPE Financing | | (6) | | | 90,000 | |
| Payment of PIPE Financing transaction costs | | (7) | | | (1,763 | ) |
| Proceeds from sale of Backstop Purchase Shares | | (8) | | | 7,442 | |
| Repayment of Bridge Financing | | (9) | | | (27,128 | ) |
| Total excess cash to balance sheet from the Business Combination and PIPE Financing after repayment of Bridge Financing | | | | $ | 43,688 | |
| (1) | Reflects the amount of the restricted investments and cash held in the Trust Account prior to the consummation of the Business Combination. |
| (2) | Reflects the redemption of 26,844,777 shares of CPSR Class A common stock with a par value of $0.0001 per share that were redeemed at a per share redemption price of $10.00. |
| (3) | Represents payment of the estimated transaction costs related to the Transactions. The unaudited pro forma condensed combined balance sheet reflects these costs as a reduction of cash, with a corresponding decrease in additional paid-in capital for transaction costs deemed direct and incremental to the Transactions and a corresponding decrease in accumulated deficit for transaction costs deemed not to be direct and incremental to the Transactions. |
| (4) | Represents the cash settlement of the deferred underwriting commissions incurred during CPSR’s initial public offering in February 2020. |
| (5) | Represents payment of historical CPSR accounts payable and accrued expenses upon Closing. |
| (6) | Represents the proceeds of $90.0 million from the issuance of 9,000,000 shares of CPSR Class A Common Stock pursuant to the PIPE Financing based on commitments received. The net amount has been allocated to Class A Common Stock and additional paid-in capital using a par value of $0.0001 per share. |
| (7) | Represents payment of the estimated PIPE Financing transaction costs. The unaudited pro forma condensed combined balance sheet reflects these costs as a reduction of cash, with a corresponding decrease in additional paid-in capital. |
| (8) | Represents the proceeds of $7.4 million from the issuance of 744,217 Backstop Purchase Shares. The net amount has been allocated to Class A Common Stock and additional paid-in capital using a par value of $0.0001 per share. |
| (9) | Represents repayment of Bridge Financing by the third business day following the Closing of the Business Combination. |
| b) | The following table represents the impact of the Transactions on New Gelesis’ additional paid-in capital after giving effect to all redemptions by CPSR stockholders: |
| (in thousands) | | Note | | Adjustment to
Additional Paid-In
Capital | |
| Reclassification of historical redeemable stock of CPSR to common stock | | (1) | | $ | 275,999 | |
| Payment to redeeming CPSR Stockholders | | (2) | | | (268,645 | ) |
| Par value of consideration shares issued for all outstanding Legacy Gelesis common and preferred stock | | (3) | | | (4 | ) |
| Elimination of historical redeemable convertible preferred stock of Legacy Gelesis | | (4) | | | 311,594 | |
| Elimination of historical accumulated deficit of CPSR | | (5) | | | (53,524 | ) |
| Payment of transaction costs direct and incremental to the Transactions | | (6) | | | (24,980 | ) |
| Reclassification of CPSR public warrants | | (7) | | | 8,694 | |
| Reclassification of Legacy Gelesis liability-classified warrants | | (8) | | | 15,821 | |
| PIPE Financing net of the estimated transaction costs | | (9) | | | 88,236 | |
| Recognition of liability related to Earnout Shares issuable to holders of Legacy Gelesis common stock | | (10) | | | (58,871 | ) |
| Recognition of share-based compensation expense related to the Earnout Shares issuable to holders of Vested Equity Awards | | (11) | | | 10,876 | |
| Backstop Purchase Shares | | (12) | | | 7,441 | |
| Reconciliation of CPSR deferred underwriting commissions to actual cash paid | | (13) | | | 2,100 | |
| Pro forma additional paid-in capital adjustment | | | | $ | 314,737 | |
| (1) | Reflects the reclassification of Class A Common Stock subject to possible redemption to permanent equity at $0.0001 par value. |
| (2) | Reflects the redemption of 26,844,777 shares of CPSR Class A common stock with a par value of $0.0001 per share that were redeemed at a per share redemption price of $10.00. |
| (3) | Reflects the $0.0001 par value impact on additional paid in capital pursuant to the 54,814,847 consideration shares issued for Legacy Gelesis common and preferred stock. This amount is based on outstanding shares as of immediately after the Transactions and the exchange ratio of 2.59 at Closing. The adjustment excludes 12,675,463 Legacy Gelesis consideration shares that will be issued upon the occurrence of future events (i.e., exercise of stock options and warrants). |
| (4) | Reflects the automatic conversion of all outstanding shares of Legacy Gelesis redeemable convertible preferred stock immediately prior to Closing. The adjustment reflects the derecognition of the carrying value of Legacy Gelesis redeemable convertible preferred stock of $311.6 million with the offset allocated to Class A Common Stock and additional paid-in capital using $0.0001 par value per share. |
| (5) | Reflects the elimination of the accumulated deficit of CPSR. |
| (6) | Reflects payment of the estimated transaction costs that are considered direct and incremental to the Transactions. |
| (7) | Reflects the reclassification of 13,800,000 Public Warrants from liability to equity upon Closing. New Gelesis has preliminarily evaluated the accounting for CPSR’s Public and Private Placement Warrants for New Gelesis under ASC Topic 480 and ASC Topic 815. The Public Warrants qualify as equity instruments under ASC Subtopic 815-40 after considering among other factors that after the Business Combination, New Gelesis has a single-class equity structure. Separately, the 7,520,000 Private Placement Warrants will continue to be accounted for as a liability under ASC Subtopic 815-40. |
| (8) | Reflects the reclassification of historical Legacy Gelesis warrants from liability to equity upon Closing. |
| (9) | Reflects the issuance of 9,000,000 shares pursuant to PIPE Financing, net of estimated transaction costs. |
| (10) | Reflects recognition of the approximately 18,758,241 Earnout Shares issuable to holders of Legacy Gelesis common stock which are not indexed to New Gelesis’ stock pursuant to ASC Subtopic 815-40 as of Closing. Therefore, such amount is classified as a liability in the unaudited pro forma condensed combined balance sheet and recognized at its preliminary estimated fair value. The earnout liability will be remeasured to its fair value at the end of each reporting period and subsequent changes in the fair value will be recognized in New Gelesis’ statement of operations within other income/expense. Refer to Note 5 – Earnout Shares for additional information. |
| (11) | Reflects the preliminary estimated fair value of the incremental compensation provided to holders of vested Legacy Gelesis Options (the “Vested Equity Awards”) who are granted the approximately 3,456,567 Earnout Shares pursuant to the Business Combination Agreement. There are no future service requirements related to such Earnout Shares; however, these Earnout Shares represent compensation under ASC Topic 718. Refer to Note 5 – Earnout Shares for additional information. |
| (12) | Reflects the issuance of 744,217 Backstop Purchase Shares. |
| (13) | Settlement of the deferred underwriting commissions incurred during CPSR’s initial public offering was limited to the balance remaining in the Trust Account after redemptions. As such, the deferred underwriting commissions of $9.7 million was settled with a cash payment of $7.6 million and the $2.1 million offset was applied to additional paid-in capital. |
| c) | Adjustment includes the payment of $2.7 million for estimated transaction costs that are not considered direct and incremental to the Transactions. |
| d) | Reflects elimination of deferred transaction costs of $3.9 million incurred as of December 31, 2021, of which $0.8 million was unpaid. |
| 4. | Adjustments to the Unaudited Pro Forma Condensed Combined Statement of Operations and Comprehensive Loss for the Year Ended December 31, 2021 |
The transaction accounting adjustments included in the unaudited pro forma condensed combined statement of operations and comprehensive loss for the year ended December 31, 2021 are as follows:
| a) | Reflects reclassification of historical CPSR formation and operating costs to general and administrative expenses of New Gelesis. This is a non-recurring item. |
| | | |
| b) | In addition to the 3,465,567 Earnout Shares issuable to holders of Vested Equity Awards discussed in adjustment 3(b)(11), 1,259,037 Earnout Shares are issuable to holders of unvested Legacy Gelesis Options and (the “Unvested Equity Awards,” and together with the Vested Equity Awards the “Underlying Equity Awards”). Pursuant to the Business Combination Agreement, Earnout Shares received by holders of Unvested Equity Awards will be held back by New Gelesis. Forfeiture of the underlying Unvested Equity Award results in forfeiture of the right to receive the associated Earnout Shares. Management determined the Earnout Shares issuable to holders of both Unvested Equity Awards and Vested Equity Awards represent stock compensation under ASC Topic 718 as they are issued in proportion to the Underlying Equity Awards, which themselves represent stock compensation under ASC Topic 718. In the case of Earnout Shares issuable to holders of Unvested Equity Awards, recipients are required to provide services to New Gelesis in order to vest in such Earnout Shares. Both the grant and service inception dates are assumed to be the date of Closing, which for purposes of the unaudited pro forma condensed combined statements of operations is January 1, 2021. Additionally, the awards are assumed to be equity classified. |
The preliminary estimated fair value of the 3,465,567 Earnout Shares issuable to holders of Vested Equity Awards of $10.9 million is reflected as a one-time compensation charge at Closing, of which $6.5 million and $4.4 million was recognized as selling, general, administrative expense and research and development expense, respectively, based on the holder’s employment classification, as such holders’ right to these Earnout Shares is not contingent upon provision of future service. The one-time compensation charge associated with the Earnout Shares underlying the Vested Equity Awards is a non-recurring item. Refer to Note 5 – Earnout Shares for additional information.
Due to the post-combination service required by holders of Unvested Equity Awards, the preliminary estimated fair value of the associated Earnout Shares is recognized over the remaining requisite service period of the respective holder’s underlying stock option grant. On a pro forma basis, as of December 31, 2021, there was approximately $1.3 million of total unrecognized compensation cost related to the Earnout Shares associated with Unvested Equity Awards. The adjustment includes the recognition of approximately $2.7 million of share-based compensation expense associated with Earnout Shares issuable to holders of Unvested Equity Awards for the year ended December 31, 2021, of which $1.8 million and $0.9 million was recognized as selling, general, administrative expense and research and development expense, respectively, based on the holder’s employment classification. Refer to Note 5 – Earnout Shares for additional information.
| c) | Represents payment of $2.7 million of estimated transaction costs that are not considered direct and incremental to the Transactions as if incurred on January 1, 2021, the date the Transactions were deemed to have occurred for purposes of the unaudited pro forma condensed combined statements of operations and comprehensive loss. This is a non-recurring item. |
| | | |
| d) | Reflects elimination of the change in fair value of the CPSR Public Warrants and Legacy Gelesis Warrants Exercisable for Redeemable Convertible Preferred Stock which were reclassed to equity upon Closing. This is a non-recurring item. |
| | | |
| e) | Reflects elimination of interest income and unrealized gains earned on the Trust Account. This is a non-recurring item. |
The Earnout Shares, other than those associated with Underlying Equity Awards, which include events that are not indexed to the New Gelesis’ common stock, will be accounted for as liabilities that are earned upon achieving the Triggering Events (as defined in the Business Combination Agreement). The preliminary estimated fair value of the Earnout Shares, other than those associated with the Underlying Equity Awards, is approximately $58.9 million; the preliminary estimated fair value of the Earnout Shares associated with the Underlying Equity Awards is approximately $14.8 million.
The preliminary estimated fair value of the Earnout Shares was determined using a Monte Carlo simulation valuation model using a distribution of potential outcomes on a daily basis over the five-year Earnout Period. The preliminary estimated fair value of the Earnout Shares was determined using the most reliable information available. Assumptions used in the preliminary valuation, which are subject to change at Closing, were as follows:
Current stock price: the current stock price was set at $7.36 per share, the value per share of New Gelesis common stock at market close on January 13, 2022, the closing date for the Business Combination.
Expected term: the expected term is the five-year term of the Earnout Period.
Expected volatility: the volatility rate was determined using an average of historical volatilities over the expected term of selected industry peers deemed comparable to New Gelesis.
Expected dividend yield: the expected dividend yield is zero as it is not expected New Gelesis will declare dividends on common stock during the expected term.
The classification of the Earnout Shares is re-assessed at the end of each reporting period. In periods where the Earnout Shares remain liability classified, New Gelesis will re-measure them at fair value using a Monte Carlo simulation valuation model with changes in fair value reflected on the statement of operations at each reporting period.
The following table summarizes the total potential statement of operations impact over the five-year Earnout Period assuming the following scenarios:
| (in thousands) | | Total potential (gain)/loss to be recognized from change in fair value of earnout liability | |
| None of the earnout tranches are triggered1 | | $ | (58,871 | ) |
| Only the $12.50 earnout tranche is triggered2 | | | 19,288 | |
Both of the $12.50 and $15.00 earnout tranches are triggered3 | | | 113,080 | |
| All of the earnout tranches are triggered | | $ | 222,503 | |
| 1 | Assumes the reversal of the entire initial liability recorded associated with the Earnout Shares |
| 2 | Assumes the recognition of additional expense related to the increase in fair value related to the $12.50 earnout tranche, net of the reversal of the initial liability recorded associated with the $15.00 earnout tranche and the $17.50 earnout tranche |
| 3 | Assumes the recognition of additional expense related to the increase in fair value related to the $12.50 earnout tranche, net of the $15.00 earnout tranche, and the reversal of the initial liability recorded associated with the $17.50 earnout tranche |
As the Transactions have been reflected as if they occurred on January 1, 2021, the calculation of weighted average shares outstanding for pro forma basic and diluted net loss per share assumes the shares issuable in connection with the Transactions had been outstanding as of such date. If the maximum number of shares are redeemed, this calculation is retroactively adjusted to eliminate such shares for the entire period. Pro forma basic and diluted net loss per share for the year ended December 31, 2021 is calculated as follows:
| (in thousands, except share and per share amounts) | | Year Ended December 31, 2021 | |
| Pro forma net loss | | $ | (125,796 | ) |
| Pro forma weighted average shares outstanding-basic and diluted | | | 72,214,287 | |
| Pro forma net loss per share-basic and diluted | | $ | (1.74 | ) |
| Pro forma weighted average shares outstanding-basic and diluted | | | | |
| CPSR public stockholders | | | 755,223 | |
| CPSR Sponsor | | | 4,916,250 | |
| Total | | | 5,671,473 | |
| Legacy Gelesis(a)(b) | | | 54,814,847 | |
| PIPE Investors | | | 9,000,000 | |
| Backstop Sponsor Shares | | | 1,983,750 | |
| Backstop Purchase Shares | | | 744,217 | |
| Pro forma weighted average shares outstanding-basic and diluted(c) | | | 72,214,287 | |
| a) | Excludes 12,675,463 Legacy Gelesis consideration shares that will be issued upon the occurrence of future events (i.e., exercise of stock options and warrants). Total consideration to be issued to Legacy Gelesis is $675.0 million or 67,490,310 shares ($10 per share price with no fractional shares issued). The total shares to be issued includes all issued and outstanding Legacy Gelesis common and preferred stock plus shares underlying unexercised vested stock options and warrants. Accordingly, the weighted average pro forma shares outstanding at close has been adjusted to exclude the portion of consideration shares that were unexercised at Closing. |
| b) | Amount excludes the issuance of 23,482,845 Earnout Shares to certain eligible Legacy Gelesis Equityholders as a result of New Gelesis satisfying certain conditions described above within the Earnout Period. |
| c) | For the purposes of applying the if converted method for calculating diluted earnings per share, it was assumed that all Legacy Gelesis stock options are exchanged for common stock. However, since this results in anti-dilution, the effect of such exchange was not included in calculation of diluted loss per share. Shares underlying these instruments include 12,675,463 Legacy Gelesis consideration shares for unexercised stock options and warrants. |
