GELESIS HOLDINGS, INC. References to the "Company," "our," "us," "we," or "Gelesis" refer toGelesis Holdings, Inc. and its consolidated subsidiaries (formerly known asCapstar Special Purpose Acquisition Corp. or "CPSR") following the Business Combination withGelesis Inc. , or Legacy Gelesis. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with (i) the condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report and (ii) the audited historical consolidated financial statements of Legacy Gelesis, and the notes thereto, in our Form 8-K Amendment No. 1 filed on with theSEC onMarch 24, 2022 . Certain of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including, but not limited to, those set forth in the section entitled "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report and those set forth in the section entitled "Risk Factors" in Item 1A of Part II of this Quarterly Report, 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" and "Risk Factors" in this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview
We are a commercial stage biotherapeutics company built for consumer engagement. We are focused on advancing first-in-class superabsorbent hydrogel therapeutics for chronic gastrointestinal, or GI, diseases including excess weight, type 2 diabetes, NAFLD/NASH, functional constipation, and inflammatory bowel disease. Our biomimetic superabsorbent hydrogels are inspired by the composition and mechanical properties (e.g. firmness) of raw vegetables. They are conveniently administered in capsules taken with water to create a much larger volume of small, non-aggregating hydrogel pieces that become an integrated part of the meals, and act locally in the digestive system. Our first commercial product, Plenity®, received de novo clearance from the FDA onApril 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 inthe United States , became available for first commercial sale inMay 2020 to a limited number of consumers. InOctober 2020 availability was increased to test commercial interest and consumer experience. Activities associated with a full commercial launch inthe United States began in late 2021. InFebruary 2022 , we launched the first national broad awareness media campaign for the product and we continued to invest in broad awareness during the nine months endedSeptember 30, 2022 . While these are significant milestones, continued commercialization of Plenity will require significant external funding until we are able to generate positive cash flows from product sales. Since our inception, we have devoted our resources to business planning, developing proprietary superabsorbent hydrogel manufacturing know-hows and technologies, preclinical and clinical development, commercial activities, recruiting management and technical staff and raising capital. We have funded our operations to date through proceeds from the issuance of redeemable convertible preferred stock, license and collaboration agreements, long-term loans, promissory notes, government grants and ourJanuary 2022 Business Combination, pursuant to which we received approximately$105.0 million of gross proceeds. We have incurred significant operating losses to date. Our net losses were$14.1 million and$30.7 million for the three months endedSeptember 30, 2022 and 2021, respectively, and$32.4 million and$74.1 million for nine months endedSeptember 30, 2022 and 2021, respectively. As ofSeptember 30, 2022 , we had an accumulated deficit of$298.1 million . We expect to continue to generate operating losses and negative operating cash flows for the foreseeable future. As a result, we will require substantial additional funding to support our continuing operations until we are able to generate positive cash flows from product sales. Until such time, we expect to finance our operations through equity offerings, debt financings or other capital sources, including collaborations, licenses, dealership partnerships or similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed or on favorable terms, if at all. If we are unable to obtain funding, we may be forced to delay, reduce or eliminate some or all of our commercialization efforts, research and development programs or product pipeline expansion, which could adversely affect our business prospects, or we may be unable to continue operations.
As of the date of this Quarterly Report, we expect that our existing cash and cash equivalents will only be sufficient to fund our operating expenses and capital expenditure requirements into the second quarter of 2023, prior to considerations for any additional
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funding, and not at least twelve months beyond the date of issuance of the
unaudited condensed consolidated financial statements included elsewhere in this
Quarterly Report. In addition, we anticipate that this extension of our cash
runway into the second quarter of 2023 will only be achievable with the
significant reduction of discretionary spending from prior levels, particularly
with respect to our discretionary sales and marketing activities and
manufacturing and supply chain functions. 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 accounting
principles generally accepted in the United States ("US GAAP"), contemplate that
we will continue to operate as a going concern. Our financial statements do not
contain any adjustments that might result if we are unable to continue as a
going concern. See "-Liquidity and Capital Resources" for further information.
Recent Developments
Promissory Notes and Promissory Note Warrants
OnJuly 25, 2022 andAugust 4, 2022 , we issued three term promissory notes in the aggregate principal amount of$25.0 million to existing investor CMS Bridging DMCC, an affiliate ofCMS Medical Venture Investment (HK) Limited ("CMS"), and existing investorsPureTech Health LLC ("PureTech") andSSD2 LLC ("SSD2"), for an aggregate cash purchase price of$25.0 million (the "2022 Promissory Notes"). Each of the 2022 Promissory Notes is unsecured and bears interest at a rate of 15% per annum. Each 2022 Promissory Note matures on the earlier of (a)December 31, 2023 or (b) five (5) business days following a qualified financing. Upon a payment default under any 2022 Promissory Note that has not been cured after five days (i) we will be required to issue certain warrants to the holders as defined by the 2022 Promissory Note agreements and (ii) the holders will have the option to convert outstanding principal and accrued interest into a number of shares of our Common Stock as defined by the 2022 Promissory Note agreements.
CMS License Agreement Amendment and CMS Warrant
OnAugust 4, 2022 , we entered into an amendment to the License, Collaboration and Supply Agreement, datedJune 18, 2020 , by and between us and CMS. Pursuant to the amendment, the one-time, non-refundable, and non-creditable regulatory approval milestone payment of$5.0 million provided for in the original agreement became immediately payable. In addition, the amendment expands the CMS Territory to includeBrunei ,Myanmar ,Cambodia , Timor-Leste,Indonesia ,Laos ,Malaysia ,the Philippines ,Thailand andVietnam and provides that the minimum annual royalty term for CMS territory will commenceJanuary 2024 (rather thanJanuary 2022 , as previously provided under the original agreement) and extend through the expiration date of the amended agreement. Upon execution of the amendment, we also issued to CMS a warrant to purchase up to 400,000 shares of common stock, par value$0.0001 per share, at an exercise price of$0.01 per share. The warrant expires on the date that is ten years from the date of issuance and is exercisable at any time from the date of issuance until the expiration date.
One S.r.l. Amended Warrant Purchase Agreement
OnAugust 9, 2022 , we entered into an amendment to the Warrant Purchase Agreement datedOctober 21, 2020 , by and between us and the holders of the warrants. Pursuant to the amendment we deferred payment of the aggregate remaining purchase price under the patent license and assignment agreement and master agreement between us and One S.r.l., totaling €2.5 million, (which we owe to One S.r.l. shareholders) untilMarch 31, 2023 .
Pursuant to the amendment, and in consideration for the deferral, we amended the
exercise price of the 1,353,062 common stock warrants held by One S.r.l.
shareholders from
Committed Equity Facility with
OnAugust 11, 2022 , we entered into a Common Stock Purchase Agreement and a Registration Rights Agreement withB. Riley Principal Capital II, LLC ("B. Riley"). Pursuant to the agreement, we will have the right, but not the obligation, to sell toB. Riley up to the lesser of (i)$50,000,000 of newly issued shares of our common stock, and (ii) 14,506,475 shares of our common stock (which is the number of shares equal to approximately 19.99% of the aggregate number of shares of our common stock issued and outstanding immediately prior to the execution of the agreement), from time to time during the 24-month term set forth in the agreement. 29 --------------------------------------------------------------------------------
Change in Management
OnSeptember 27, 2022 , the Company entered into a separation and general release agreement with Mr.David Abraham , our General Counsel, Chief Compliance Officer and Corporate Secretary throughSeptember 30, 2022 . Pursuant to this separation agreement,Mr. Abraham will cease to serve as General Counsel, Chief Compliance Officer and Corporate Secretary, effectiveOctober 1, 2022 .Mr. Abraham will provide consulting services to the Company to assist with the transition of his responsibilities. Impact of COVID-19 InDecember 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. TheWorld 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 the ongoing clinical trials of our other product candidates. In response to the COVID-19 pandemic, we have taken swift actions to ensure the safety of our employees and other stakeholders. We are diligently working with our suppliers, customers, distributors and other partners to provide consumers with access to Plenity, while taking into account regulatory, institutional, and government guidance, policies and protocols. However, the full extent of the impact of the pandemic and future outbreaks on our business, operations, and financial condition and results in future periods remain uncertain, particularly, with respect to consumer demand for or access to Plenity, and the administration of clinical research and development activities. Further, our ability to source raw materials and components, manufacture as well as transport and distribute Plenity may be limited and therefore impact sales of Plenity.
Plans to Make Plenity Available Without a Prescription
We believe Plenity's advantages are its differentiated safety-to-efficacy profile, broad approved labeling, and affordability to the consumer. Accordingly, we believe it is important that Plenity be widely available and easily accessible to consumers. We plan to pursue an application with the FDA to change Plenity's classification inthe United States from prescription-only to over-the-counter. In addition to making Plenity more accessible to people struggling with excess weight, we believe making Plenity available over-the-counter could reduce costs associated with acquiring new members and allow us to reduce costs associated with the prescription granting process, while also enabling new sales channels for the Company. We plan to submit our application to the FDA during the first quarter of 2023 and could receive market clearance by the third quarter of 2023.
Key Factors Affecting Results of Operations
We believe that our performance and future success depend on several factors that present not only significant opportunities for us but also pose risks and challenges, including those discussed below. In particular, our ability to successfully address the below key factors is dependent upon our ability to successfully raise the capital to fund such efforts. Our failure to obtain additional funding may force us to delay, limit or terminate our marketing efforts and investments in our product pipeline, which may negatively impact our ability to grow our business and attract and/or retain enough customers to operate profitably.
New Consumer Acquisition
Our ability to attract new consumers is a key factor for our future growth. To date we have successfully acquired consumers through ourU.S. commercial launch in conjunction with the continued development of marketing and sales tactics. We intend to acquire new members inthe United States by promoting Plenity directly to the consumer. In light of current cash resources, and to preserve liquidity while we seek to raise additional capital during the third quarter of 2022, we reduced investments in broad awareness media and consumer acquisition, compared to previous quarters in 2022 and 2021. However, we continue to engage in promotional activities, which we believe will motivate a potential future member to ask a health care professional about acquiring Plenity through one of two channels:
•
Telehealth: We partner with a leading telehealth platform inthe United States , providing convenient and immediate access to physicians online at no cost. Pursuant to an amended and restatement agreement, we have grantedRoman Health Pharmacy LLC ("Ro") exclusive distributor rights to sell Plenity inthe United States with respect to (i) consumerswho seek an on-line consultation through myplenity.com inthe United States and (ii) certain named competitors and or third parties. 30 --------------------------------------------------------------------------------
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Health Care Providers: We engage a limited contract sales force to promote
Plenity to target physicians. To support prescription fulfillment for our
non-telehealth tradition HCP promotional efforts, we engage GoGoMeds ("GGM"), to
distribute all non-telehealth mail order prescriptions generated in the United
States by health care providers.
Retention of Consumers
Our ability to retain consumers is a key factor in our ability to generate revenue. We expect our direct home delivery, simple and transparent pricing, and consumer engagement to enhance the experience of our consumer and promote recurring revenue. Our customer retention efforts may be negatively impacted by recent significant reductions in our discretionary spending with respect to discretionary sales and marketing activities. If consumer retention decreases in the future, then future revenue will be negatively impacted. The ability of our consumers to continue to pay for our products and services will also impact the future results of our operations.
Rest of World
We are evaluating global strategic partnerships to build our brand globally; however, we may also retain the rights.
•
Europe : We received approval to market Plenity inEurope through a Conformité Européenne (CE) mark for Plenity as a Class III medical device indicated for weight loss in overweight and obese adults with a Body Mass Index (BMI) of 25-40 kg/m2, when used in conjunction with diet and exercise.
•
CMS: InGreater China (including Mainland China,Hong Kong ,Macau , andTaiwan ),Singapore ,United Arab Emirates ,Brunei ,Myanmar ,Cambodia , Timor-Leste,Indonesia ,Laos ,Malaysia ,the Philippines ,Thailand andVietnam , we partner with China Medical System Holdings Limited (CMS) (HKG:0867) for the commercialization of Plenity.
Investments in Growth
We expect to make significant investments in selling and marketing to acquire new consumers. Selling and marketing is an important driver of growth, and over the long term, we intend to continue to make significant investments in consumer acquisition and our selling and commercial infrastructure. However, in light of current cash resources, and to preserve liquidity while we seek to raise additional capital during the third quarter of 2022, we reduced investments in broad awareness media, consumer acquisition, and the healthcare provider sales force compared to previous quarters in 2022 and 2021. As such, we expect our selling and marketing expense decreased in absolute dollars during this period. However, if we are successful in raising additional capital in the future, we expect to increase selling and marketing activities to continue to launch Plenity, and expect selling and marketing expense to decrease as a percentage of revenue over the long term, although our selling and marketing expense may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses. Additionally, although we intend to continue to invest in our manufacturing, fulfillment and operating capabilities in the future, these capabilities have recently been negatively impacted by recent significant reductions in our discretionary spending with respect to manufacturing and supply chain functions. If we are successful in raising addition capital in the future, we expect to continue to invest in increasing our manufacturing, fulfillment and operating capabilities. In the short term, we expect these investments will 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 invest into these growth activities.
Product Candidate Expansion
In addition to Plenity, we have invested in a pipeline of product candidates for prevalent and important gastrointestinal, or GI, tract-related chronic diseases including, type 2 diabetes, NAFLD/NASH, functional constipation, and inflammatory bowel disease by targeting the natural processes of the GI pathway. We expect to continue investing in our pipeline over time to broaden our commercial opportunity. The continued preclinical and clinical development of the pipeline will require significant financial resources. If we are unable to generate sufficient demand in Plenity or raise additional capital at favorable terms, if at all, we may not have sufficient funds to invest in the research and development of additional product candidates.
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business (dollar amounts in thousands except where noted):
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For the Three Months Ended September 30 ,
For the Nine Months Ended
2022 2021 2022 2021
In thousands (Unaudited) (Unaudited) (Unaudited) (Unaudited)
New members acquired 23,500 15,700 107,700 44,000
Units sold 92,070 45,825 336,530 132,602
Product revenue, net $ 6,443 $ 3,014 $ 22,930 $ 8,293
Average selling price
per unit, net $ 69.98 $ 65.77 $ 68.14 $ 62.54
Gross profit $ 2,827 $ 251 $ 9,615 $ 709
Gross margin 44 % 8 % 42 % 9 %
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
through our strategic partnerships with online pharmacies and telehealth
providers as well as the units sold to our strategic partners outside
Product revenue, net
See discussion elsewhere in this discussion and analysis under the heading "Key Components of Results of Operations - Product revenue, net".
Average selling price per unit, net
Average selling price per unit, net is the gross price per unit sold during the period net of estimates of per unit variable consideration for which reserves are established for expected product returns, shipping charges to end-users, pharmacy dispensing and platform fees, merchant and processing fees, and promotional discounts offered to end-users. See "- Critical Accounting Policies and Significant Judgments and Estimates" below and the "Revenue Recognition" section of Note 2 in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for a more detailed discussion of our revenue recognition policy.
Gross profit and gross margin
Our gross profit represents product revenue, net, less our total cost of goods sold, and our gross margin is our gross profit expressed as a percentage of our product revenue, net. See discussion elsewhere in this discussion and analysis under the headings "Key Components of Results of Operations - Cost of goods sold". Our gross profit and gross margin have been and will continue to be affected by a number of factors, including the prices we charge for our product, the costs we incur from our vendors for certain components of our cost of goods sold, the mix of channel sales in a period, and our ability to sell our inventory. We expect our gross margin to increase over the long term, although gross margins may fluctuate from period to period depending on these and other factors.
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with GAAP, we
believe the following non-GAAP measure is useful in evaluating our operating
performance. We use the following non-GAAP financial measure to evaluate our
ongoing operations and for internal planning and forecasting purposes. We
believe that this non-GAAP financial measure, when taken together with the
corresponding GAAP financial measure, provides meaningful supplemental
information regarding our performance by excluding certain items that may not be
indicative of our business, results of operations, or outlook. We consider
Adjusted EBITDA to be an important measure because it helps illustrate
underlying trends in our business and our historical operating performance on a
more consistent basis. We believe that the use of Adjusted EBITDA is helpful to
our investors as it is a metric used by management in assessing the health of
our business and our operating performance.
However, non-GAAP financial information is presented for supplemental
informational purposes only, has limitations as an analytical tool and should
not be considered in isolation or as a substitute for financial information
presented in accordance with GAAP. In addition, other companies, including
companies in our industry, may calculate similarly-titled non-GAAP financial
measures differently or may use other measures to evaluate their performance,
all of which could reduce the usefulness of our non-GAAP
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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 and
nine months ended
For the Three Months Ended September For the Nine Months Ended September
30, 30,
2022 2021 2022 2021
In thousands (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Adjusted EBITDA
Net loss $ (14,149 ) $ (30,730 ) $ (32,365 ) $ (74,055 )
Provision for income taxes - - - 17
Depreciation and amortization 1,260 800 3,833 2,291
Stock based compensation
expense 4,574 1,086 26,539 4,180
Change in fair value of
earnout liability (2,814 ) - (55,495 ) -
Change in fair value of
warrants (540 ) 2,231 (6,624 ) 9,282
Change in fair value of
convertible
promissory notes 852 - 1,008 -
Change in fair value of One
S.r.l. call
option (1,673 ) 47 (808 ) 601
Interest expense, net 164 361 485 949
Adjusted EBITDA $ (12,326 ) $ (26,205 ) $ (63,427 ) $ (56,735 )
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 authoritativeUnited States generally accepted accounting principles as found in the Accounting Standards Codification ("ASC") and Accounting Standards Updates ("ASUs") issued by theFinancial Accounting Standards Board ("FASB"). Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. We view our operations and manage our business as one operating segment. The noncontrolling interest attributable to Gelesis S.r.l., our variable interest entity ("VIE"), is presented as a separate component from stockholders' deficit in our consolidated balance sheets and as a noncontrolling interest in our condensed consolidated statements of noncontrolling interest, redeemable convertible preferred stock and stockholders' deficit. All intercompany balances and transactions have been eliminated in consolidation.
Key Components of Results of Operations
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--------------------------------------------------------------------------------Product revenue, net
We recognize product revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Our product revenue is derived from product sales of Plenity, net of estimates of variable consideration for which reserves are established for expected product returns, shipping charges to end-users, pharmacy dispensing and platform fees, merchant and processing fees, and promotional discounts offered to end-users.
Cost of goods sold
Cost of goods sold includes the cost of manufacturing our proprietary superabsorbent hydrogels for Plenity for which revenue was recognized during the period, as well as the associated costs for encapsulation, packaging, shipment, supply management and quality assurance. Expenses from royalty agreements on net product sales are also recognized as a component of cost of goods sold during the period in which the associated revenues are recognized. A portion of depreciation with respect to property and equipment directly utilized in manufacturing Plenity units is recognized as a component of cost of goods sold over the depreciable life of the asset.
Selling, general and administrative expense
A significant component of our selling, general and administrative expenses is comprised of our selling and marketing expense, which includes our limited contract sales force in the US markets and discretionary consumer acquisition expenses. Selling, general and administrative costs are expensed as incurred. Selling, general and administrative costs include sales and marketing costs incurred as a result of the commercialization of our products, payroll and personnel expense, stock-based compensation expense, and costs of programs and infrastructure necessary for the general conduct of our business.
Research and development expense
Research and development costs are expensed as incurred. Prepaid research and development costs are deferred and amortized over the service period, as the services are provided. Research and development costs include payroll and personnel expense, stock-based compensation expense, consulting costs, external contract research and development expenses, as well as depreciation and utilities. These activities relate primarily to formulation, CMC, preclinical and discovery activities. As such, we do not track these research and development expenses on an indication-by-indication basis as they primarily relate to expenses which are deployed across multiple projects under development or are for future product and pipeline candidates which utilize our platform technology. 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
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 condensed 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 condensed consolidated statements of operations.
Change in the fair value of convertible promissory notes
We have issued convertible promissory notes to investors which are initially
recorded at fair value and remeasured to fair value at each reporting date until
repayment or conversion at the option of the holders, with gains and losses
arising from changes in fair value recognized in the condensed consolidated
statements of operations.
Interest expense, net
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Interest expense, net consists of interest incurred on our various loans and interest income earned on our cash, cash equivalents and marketable securities.
Other income (expense), net
Other income, net primarily consists of income earned on our grants from government agencies inItaly , research and development tax credits earned inItaly for qualifying expenses, and gains and losses on foreign currency transactions. Other income, net also consists of changes in fair value of the One S.r.l. call option. Provision for income taxes We must make certain estimates and judgments in determining income tax expense for financial statement purposes. The amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using substantively enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Net deferred tax assets are not recorded if we do not assess their realization as probable. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in our financial statements in the period that includes the substantive enactment date.
Results of Operations
Comparison of the Three Months EndedSeptember 30, 2022 andSeptember 30, 2021 : For the Three Months Ended September 30, 2022 2021 Change (Unaudited) (Unaudited) Revenue: Product revenue, net $ 6,443 $ 3,014$ 3,429 Licensing revenue 209 - 209 Total revenue, net 6,652 3,014 3,638 Operating expenses: Costs of goods sold 3,616 2,763 853 Selling, general and administrative 17,032 24,725 (7,693 ) Research and development 3,365 3,238 127 Amortization of intangible assets 567 567 - Total operating expenses 24,580 31,293 (6,713 ) Loss from operations (17,928 ) (28,279 ) 10,351 Other non-operating income (expense), net 3,779 (2,451 ) 6,230 Loss before income taxes (14,149 ) (30,730 ) 16,581 Provision for income taxes - - - Net loss$ (14,149 ) $ (30,730 ) $ 16,581 Product revenue, net We recognized product revenue, net of$6.4 million for the three months endedSeptember 30, 2022 , as compared to$3.0 million for the three months endedSeptember 30, 2021 , an increase of$3.4 million or 114%. We sold 92,070 units at an average selling price per unit, net of$69.98 for the three months endedSeptember 30, 2022 , as compared to 45,825 units at an average selling price per unit, net of$65.77 for the three months endedSeptember 30, 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 inOctober 2020 and continued throughout 2021. Activities associated with a full commercial launch of the Product inthe United States began in late 2021, and inFebruary 2022 , we launched the first national broad awareness media campaign for Plenity and continued to invest in consumer acquisition during the three months endedSeptember 30, 2022 , though at a reduced level compared to the prior quarters in 2022. Cost of goods sold We recognized cost of goods sold of$3.6 million for the three months endedSeptember 30, 2022 , as compared to$2.8 million for the three months endedSeptember 30, 2021 , an increase of$0.8 million . Depreciation as a component of cost of goods sold was$0.7 million and$0.2 million for the three months endedSeptember 30, 2022 and 2021, respectively. The increases were primarily attributable to the revenue recognized with respect to units sold for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 . 35 -------------------------------------------------------------------------------- Gross profit was$3.0 million for the three months endedSeptember 30, 2022 , as compared to$0.3 million for the three months endedSeptember 30, 2021 , an increase of$2.7 million . Gross margin also increased to 44% for the three months endedSeptember 30, 2022 , as compared to 8% for the three months endedSeptember 30, 2021 . The increases were primarily attributable to production commencing at our first commercial-scale manufacturing facility in the fourth quarter of 2021 and the increased production quantity as well as 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
For the Three Months Ended September 30,
2022 2021 Change
In thousands (Unaudited) (Unaudited)
Selling and marketing expense $ 7,330 $ 21,575 $ (14,245 )
General and administrative expense 6,186 2,307 3,879
Non-cash stock-based compensation expense 3,516 843 2,673
Total selling, general and administrative expense
24,725$ (7,693 ) Total selling, general and administrative expense was$17.0 million and$24.7 million for the three months endedSeptember 30, 2022 and 2021, respectively, a decrease of$7.7 million or 31%. Selling and marketing expense was$7.3 million and$21.6 for the three months endedSeptember 30, 2022 and 2021, respectively, a decrease of$14.2 million . The decrease in selling and marketing expense during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 was primarily attributable to reduced investments in media content creation, healthcare provider contract sales force, and startup costs associated with the broad commercial launch of Plenity. General and administrative expense was$6.2 million and$2.3 million for the three months endedSeptember 30, 2022 and 2021, respectively. The increase in general and administrative expense was primarily driven by the directors and officers insurance costs as well as legal costs associated with being a public company. Non-cash stock-based compensation expense was$3.5 million and$0.8 million for the three months endedSeptember 30, 2022 and 2021, respectively. The increase of$2.7 million was primarily driven by the compensation costs with respect to contingently issuable earnout shares pertaining to Legacy Gelesis equity awards for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 .
Research and development expenses
The following table summarizes our research and development expenses for the
three months ended
For the Three Months Ended September 30,
2022 2021 Change
In thousands (Unaudited) (Unaudited)
GS200 $ 19 $ 267 (248 )
GS300 6 812 (806 )
GS500 4 1,106 (1,102 )
Unallocated expenses
Other research and development expenses 2,278 809 1,469
Non-cash stock-based compensation expense 1,058 244 814
Our research and development expense was
Non-cash stock-based compensation expense was$1.1 million and$0.2 million for the three months endedSeptember 30, 2022 and 2021, respectively. The increase of$0.8 million was primarily attributable to the incremental compensation cost with respect to contingently issuable earnout shares pertaining to LegacyGelesis equity awards for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . 36 -------------------------------------------------------------------------------- The decrease in research and development expenses within clinical indications (GS200, GS300 and GS500) was primarily attributable to the conclusion of the LIGHT-UP study with respect to GS200 during the year endedDecember 31, 2021 , as well as the strategic prioritization of the commercialization of Plenity particularly with respect to our financial and human resources. Other research and development expenses increased$1.5 million primarily driven by development activities supporting the new manufacturing lines for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 .
Other non-operating income (expense), net
We recognized other non-operating income, net of$3.8 million and for the three months endedSeptember 30, 2022 , as compared to other non-operating expense, net of$2.5 million for the three months endedSeptember 30, 2021 , an increase in income of$6.2 million . The income for the three months endedSeptember 30, 2022 was primarily attributable to income of$2.8 million with respect to the change in fair value of our earnout liability, gain of$1.7 million with respect to the change in fair value of the One S.r.l call option, gain of$0.7 million with respect to the change in fair value of the interest rate swap contract, as well as income of$0.5 million with respect to the change in fair value of our warrant liabilities. The income for the three months endedSeptember 30, 2022 , was further attributable to$0.4 million recognized with respect to grants awarded by the Puglia region ofItaly . The other non-operating expense for the three months endedSeptember 30, 2021 was primarily attributable to a loss of$2.2 million recognized for the change in fair value of our warrant liabilities as well as interest expense of$0.4 million with respect to our long-term debt obligations. Comparison of the nine months endedSeptember 30, 2022 andSeptember 30, 2021 : For the Nine Months Ended September 30, 2022 2021 Change (Unaudited) (Unaudited) Revenue: Product revenue, net$ 22,930 $ 8,293$ 14,637 Licensing revenue 209 - 209 Total revenue, net 23,139 8,293 14,846 Operating expenses: Costs of goods sold 13,315 7,584 5,731 Selling, general and administrative 87,188 50,642 36,546 Research and development 16,298 13,206 3,092 Amortization of intangible assets 1,700 1,700 - Total operating expenses 118,501 73,132 45,369 Loss from operations (95,362 ) (64,839 ) (30,523 ) Other non-operating income (expense), net 62,997 (9,199 ) 72,196 Loss before income taxes (32,365 ) (74,038 ) 41,673 Provision for income taxes - 17 (17 ) Net loss$ (32,365 ) $ (74,055 ) $ 41,690 Product revenue, net We recognized product revenue, net of$22.9 million and$8.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively, an increase of$14.6 million or 176%. We sold 336,530 units at an average selling price per unit, net of$68.14 for the nine months endedSeptember 30, 2022 , as compared to 118,490 units at an average selling price per unit, net of$69.99 for the nine months endedSeptember 30, 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 inOctober 2020 and continued throughout 2021. Activities associated with a full commercial launch of the Product inthe United States began in late 2021, and inFebruary 2022 , we launched the first national broad awareness media campaign for Plenity and continued to invest in broad awareness during the nine months endedSeptember 30, 2022 . Cost of goods sold We recognized cost of goods sold of$13.3 million and$7.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively, an increase of$5.7 million or 76%. Depreciation as a component of cost of goods sold was$2.1 million and$0.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The increases were primarily driven by the increase in units sold coupled with lower cost per unit for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 . 37 -------------------------------------------------------------------------------- Gross profit was$9.8 million and$0.7 million for the nine months endedSeptember 30, 2022 and 2021, respectively, an increase of$8.9 million . Gross margin also increased to 42% for the nine months endedSeptember 30, 2022 , as compared to 9% for the nine months endedSeptember 30, 2021 . The increases were primarily attributable to production commencing at our first commercial-scale manufacturing facility in the fourth quarter of 2021 and the increased production quantity as well as the implementation of new finished-goods packaging in the third quarter of 2021.
Selling, general and administrative expense
The following table summarizes our selling, general and administrative expenses
for the nine months ended
For the Nine Months Ended September 30,
2022 2021 Change
In thousands (Unaudited) (Unaudited)
Selling and marketing expense $ 50,691 $ 36,534 $ 14,157
General and administrative
expense 19,089 11,232 7,857
Non-cash stock-based compensation
expense 17,408 2,876 14,532
Total selling, general and
administrative expense $ 87,188 $ 50,642 $ 36,546
Total selling, general and administrative expense was $87.2 million and $50.6
million for the nine months ended September 30, 2022 and 2021, respectively, an
increase of $36.5 million or 72%.
Selling and marketing expense increased $14.2 million for the nine months ended
September 30, 2022 , as compared to the nine months ended September 30, 2021 . The
increase in selling and marketing expense was primarily attributable to
increased marketing spend to support the commercial sale of Plenity. In February
2022 , we launched the first national broad awareness media campaign for the
product, which included TV, digital, social, and Out of Home media channels to
grow awareness of Plenity. We continued to invest in broad awareness during the
nine months ended September 30, 2022 .
General and administrative expense increased $7.9 million for the nine months
ended September 30, 2022 , as compared to the nine months ended September 30,
2021 . The increase was primarily attributable to professional and legal expenses
incurred with respect to the Business Combination as well as directors and
officers insurance costs as a public company.
Non-cash stock-based compensation expense increased $14.5 million for the nine
months ended September 30, 2022 , as compared to the nine months ended September
30, 2021 . The increase was primarily attributable to compensation cost with
respect to the issuance of new equity awards in 2022 as well as the incremental
compensation cost with respect to contingently issuable earnout shares
pertaining to Legacy Gelesis equity awards.
Research and development expenses
The following table summarizes our research and development expenses for the
nine months ended
For the Nine Months Ended September 30,
2022 2021 Change
In thousands (Unaudited) (Unaudited)
GS200 $ 61 $ 1,782 (1,721 )
GS300 127 1,282 (1,155 )
GS500 75 1,552 (1,477 )
Unallocated expenses
Other research and development
expenses 6,904 7,285 (381 )
Non-cash stock-based compensation
expense 9,131 1,305 7,826
Total Research and development
expense $ 16,298 $ 13,206 $ 3,092
Total research and development expense was $16.3 million and $13.2 million for
the nine months ended September 30, 2022 and 2021, respectively, an increase of
$3.1 million or 23%.
Non-cash stock-based compensation expense increased $7.8 million for the nine
months ended September 30, 2022 , as compared to the nine months ended September
30, 2021 . The increase was primarily attributable to compensation cost with
respect to the issuance of new equity awards in 2022 as well as the incremental
compensation cost with respect to contingently issuable earnout shares
pertaining to Legacy Gelesis equity awards.
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The decrease in research and development expenses within clinical indications
(GS200, GS300 and GS500) was primarily attributable to the conclusion of the
LIGHT-UP study with respect to GS200 during the year ended December 31, 2021 , as
well as the strategic prioritization of the commercialization of Plenity
particularly with respect to our financial and human resources.
Other non-operating income (expense), net
We recognized other non-operating income, net of$63.0 million for the nine months endedSeptember 30, 2022 , as compared to expense, net of$9.2 million for the nine months endedSeptember 30, 2021 , an increase in income of$72.2 million . The income for the nine months endedSeptember 30, 2022 was primarily attributable to income of$55.5 million with respect to the change in fair value of our earnout liability, income of$6.6 million with respect to the change in fair value of our warrant liabilities as well as income of$0.8 million with respect to the One S.r.l. call option. The income for the nine months endedSeptember 30, 2022 , was further attributable to$0.8 million in investment tax credit income recognized with respect to certain tax incentives offered for property and equipment investment inItaly and income of$1.9 million recognized with respect to grants awarded by the Puglia region ofItaly .
The expense for the nine months ended
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 ofSeptember 30, 2022 , our principal sources of liquidity were our cash and cash equivalents in the amount of$24.8 million . During the nine months endedSeptember 30, 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 second quarter of 2023. In addition, we anticipate that this extension of our cash runway into the second quarter of 2023 will only be achievable with the significant reduction of discretionary spending from prior levels, particularly with respect to our discretionary sales and marketing activities and manufacturing and supply chain functions. 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 endedDecember 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 II, 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." and "Risk Factors - Risks Related to Ownership of Our Common Stock - Future sales of our Common Stock by us or existing stockholders, and issuances of our Common Stock or rights to purchase our Common 39 -------------------------------------------------------------------------------- Stock, including pursuant to theGelesis Holdings, Inc. 2021 Stock Option and Incentive Plan and future exercise of warrants, could result in additional dilution of the percentage ownership of our shareholders and could cause our share price to fall." in this Quarterly Report for more information regarding certain factors that may impact our liquidity and our ability to 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. 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 withinthe 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 - Risks Related to Financial Position and Financing Needs - The financial and operational projections and commercialization and product candidate development timelines that we may provide from time to time are subject to inherent risks." in this Quarterly Report for more information.
Warrant Proceeds
As of the date of this Quarterly Report, we have (i) 13,800,000 outstanding Public Warrants to purchase 13,800,000 shares of our common stock, exercisable at an exercise price of$11.50 per share, which expire on the earlier to occur ofJanuary 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 ofJanuary 13, 2027 or redemption; (iii) 3,013,365 exercisable Rollover Warrants, 1,353,062 of which are exercisable at an exercise price of$4.26 and expire onOctober 21, 2030 and 1,660,303 of which are exercisable at an exercise price of$0.02 and expire onFebruary 15, 2025 ; and (iv) 400,000 warrants issued to CMS which are exercisable at an exercise price of$0.01 and expire onAugust 4, 2032 . 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 ofNovember 11, 2022 , the closing price of our common stock price was$0.35 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 and CMS Warrants are not redeemable and are exercisable on a cashless basis only with respect to the 1,660,303 Rollover 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
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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.
Our future capital requirements will depend on many factors, including increases
in sales of Plenity, increases in our customer base, the timing and extent of
spend to support the expansion of sales, marketing and development activities,
and the impact of the COVID-19 pandemic. We may in the future also enter into
arrangements to acquire or invest in complementary businesses, services and
technologies, including intellectual property rights.
We have based our estimate of liquidity on assumptions that may prove to be
wrong, and we could use our available capital resources sooner than we currently
expect. Our cash flows may fluctuate and are difficult to forecast and will
depend on many factors mentioned elsewhere in this discussion and analysis. If
we require additional equity or debt financing from outside sources, we may not
be able to raise it on terms acceptable to us, or at all, and may pursue
financing transactions that will not be completed. If we are unable to raise
additional capital when desired, our business, financial condition and results
of operations would be harmed.
Cash flows
The following table summarizes our cash flows for each of the periods presented:
For the Nine Months Ended September 30,
2022 2021
In thousands (Unaudited) (Unaudited)
Cash (used in) provided by:
Operating activities $ (61,453 ) $ (26,395 )
Investing activities (8,473 ) 5,617
Financing activities 67,006 5,472
Effect of exchange rates on cash (630 ) (816 )
Decrease in cash and cash equivalents $ (3,550 ) $ (16,122 )
Cash used in operating activities
Net cash used in operating activities was$61.5 million and$26.4 million for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. Our net loss after adjusting for non-cash operating activities was$62.4 million for the nine months endedSeptember 30, 2022 , as compared to$57.3 million for the nine months endedSeptember 30, 2021 , an increase in loss of$5.1 million . The increase in loss was partially offset by inflows of$5.2 million with respect to prepaid expenses and other current assets,$3.4 million grant reimbursement collected as well as outflows of$4.9 million with respect to inventories for the nine months endedSeptember 30, 2022 . For the nine months endedSeptember 30, 2022 , we also received$15.0 million as a pre-buy commitment from Ro, which was partially offset by revenue recognized with respect to Ro of$13.4 million for the nine months endedSeptember 30, 2022 . The increase in operating activity outflows was further influenced by the timing of receivables from our government grants as well as GGM for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 .
Cash (used in) provided by investing activities
Net cash used in investing activities was$8.5 million for the nine months endedSeptember 30, 2022 , as compared to$5.6 million provided by investing activities for the nine months endedSeptember 30, 2021 . The outflows were primarily attributable to$8.5 million in the purchase of property and equipment for the nine months endedSeptember 30, 2022 . For the nine months endedSeptember 30, 2021 , inflows were primarily attributable to$24.0 million in maturities of marketable securities, which were partially offset by$18.4 million in the purchase of property and equipment for the nine months endedSeptember 30, 2021 .
Cash provided by financing activities
Net cash provided by financing activities was$67.0 million and$5.5 million for the three months endedSeptember 30, 2022 and 2021, respectively. The increase in inflows was primarily attributable to net proceeds of$70.5 million received from the completion of the Business Combination inJanuary 2022 and$25 million proceeds from issuance of promissory notes, partially offset by our 41 -------------------------------------------------------------------------------- repayment of convertible promissory notes also inJanuary 2022 , totaling$27.3 million , as compared to net proceeds of$4.5 million from the issuance of loans inItaly for the nine months endedSeptember 30, 2021 .
Contractual Obligations and Commitments
Our contractual obligations primarily consist of our commitments under non-cancellable operating leases, promissory notes and debt obligations as well as contractual obligations under significant agreements with related and unrelated parties.
For the three months endedSeptember 30, 2022 , we issued three term promissory notes in the aggregate principal amount of$25.0 million to existing investor CMS, and existing investors and related partiesPureTech Health LLC and SSD2 LLC , for an aggregate cash purchase price of$25.0 million . Each of the promissory notes is unsecured and bears interest at a rate of 15% per annum. Each promissory note matures on the earlier of (a)December 31, 2023 or (b) five (5) business days following a qualified financing. Upon a payment default under any promissory note that has not been cured after five days (i) the Company will be required to issue certain warrants to the holders as defined by the promissory note agreements and (ii) the holders will have the option to convert outstanding principal and accrued interest into a number of shares ofGelesis common stock as defined by the promissory note agreements. AtSeptember 30, 2022 , the aggregate outstanding balance of the promissory notes was$25.9 million recorded at fair value in the accompanying condensed consolidated balance sheets. We recognized a loss of$0.8 million with respect to the change in the fair value of the 2022 Promissory Notes. Except for the aforementioned transactions, 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 theSEC onMarch 24, 2022 , except inJanuary 2022 , we settled convertible promissory notes in cash for principal plus accrued interest in the aggregate amount of$27.3 million . For further information on these convertible promissory notes, 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 theSEC .
Critical Accounting Policies and Significant Judgments and Estimates
For the three and nine months endedSeptember 30, 2022 , there have been no material changes to our critical accounting policies from those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 8-K Amendment No. 1 filed with theSEC onMarch 24, 2022 other than those described in Note 2 in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 in the accompanying Notes to unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
JOBS Act Accounting Election
Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, an "emerging growth company" can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have elected to avail ourselves of this exemption to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, where allowable we have early adopted certain standards as described in Note 2 of our consolidated financial statements. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an "emerging growth company," we are exempt from Sections 14A(a) and (b) of the Exchange Act which would otherwise require us to (1) submit certain executive compensation matters to shareholder advisory votes, such as "say-on-pay," "say-on-frequency," and "golden parachutes;" and (2) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our chief executive officer's compensation to our median employee compensation. We also intend to rely on an exemption from the rule requiring us to provide an auditor's attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will continue to remain an "emerging growth company" until the earliest of the following: (1) the last day of the fiscal year following the fifth anniversary of the date of the completion of this registration; (2) the last day of the fiscal year in which our total annual gross revenue is equal to or more than$1.07 billion ; (3) the date on which we have issued more than$1 billion in nonconvertible debt during the previous three years; or (4) the date on which we are deemed to be a large accelerated filer under the rules of theSEC . 42
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