GELESIS HOLDINGS, INC. References to the "Company," "our," "us," "we," or "Gelesis" refer to
Overview
We are a commercial stage biotherapeutics company built for consumer engagement. We are focused on advancing first-in-class superabsorbent hydrogel therapeutics for chronic gastrointestinal, or GI, diseases including excess weight, type 2 diabetes, NAFLD/NASH, functional constipation, and inflammatory bowel disease. Our biomimetic superabsorbent hydrogels are inspired by the composition and mechanical properties (e.g. firmness) of raw vegetables. They are conveniently administered in capsules taken with water to create a much larger volume of small, non-aggregating hydrogel pieces that become an integrated part of the meals, and act locally in the digestive system.
Our first commercial product, Plenity®, received de novo clearance from the FDA
on
Plenity, which is available by prescription in
Since our inception, we have devoted our resources to business planning,
developing proprietary superabsorbent hydrogel manufacturing know-hows and
technologies, preclinical and clinical development, commercial activities,
recruiting management and technical staff and raising capital. We have funded
our operations to date through proceeds from the issuance of redeemable
convertible preferred stock, license and collaboration agreements, long-term
loans, promissory notes, convertible senior secured notes, government grants and
our
As a result, we will require substantial additional funding to support our continuing operations until we are able to generate positive cash flows from product sales. Until such time, we expect to finance our operations through equity offerings, debt financings or other capital sources, including collaborations, licenses, dealership partnerships or similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed or on favorable terms, if at all. If we are unable to obtain funding, we may be forced to delay, reduce or eliminate some or all of our commercialization efforts, research and development programs or product pipeline expansion, which could adversely affect our business prospects, or we may be unable to continue operations.
As of the date of this Form 10-K, we expect that our existing cash and cash
equivalents plus the
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substantial doubt about our ability to continue as a going concern. Our
unaudited consolidated financial statements included elsewhere in this Form
10-K, which have been prepared in accordance with accounting principles
generally accepted in
Recent Events
Business Combination
On
The Business Combination was accounted for as a reverse recapitalization in
conformity with accounting principles generally accepted in
Roman Health Pharmacy LLC Distribution Agreement Amendment
OnJune 14, 2022 , we entered into a Third Amended and Restated Supply and Distribution Agreement with Ro to amend the agreement that granted Ro exclusive telehealth distributor rights to sell Plenity inthe United States in the mail order/online pharmacy channel. Pursuant to the amended agreement, Ro's exclusive distributor rights to sell Plenity inthe United States became exclusive only for consumerswho seek an on-line consultation through myplenity.com inthe United States and with respect to certain named competitors and/or third parties. Such rights will continue throughJuly 1, 2023 , consistent with the parties' prior agreement. In addition, pursuant to the amended agreement, we received$15.0 million in cash from Ro as a pre-buy commitment to purchase units of Plenity.
Promissory Notes and Promissory Note Warrants
On
On
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CMS License Agreement Amendment and CMS Warrant
On
Upon execution of the amendment, we also issued to CMS a warrant to purchase up
to 400,000 shares of common stock, par value
One S.r.l. Amended Warrant Purchase Agreement
On
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
On
Change in Management
On
Plans to Make Plenity Available Without a Prescription
We believe Plenity's advantages are its differentiated safety-to-efficacy
profile, broad approved labeling, and affordability to the consumer.
Accordingly, we believe it is important that Plenity be widely available and
easily accessible to consumers. In addition to making Plenity more accessible to
people struggling with excess weight, we believe making Plenity available
over-the-counter could reduce costs associated with acquiring new members and
allow us to reduce costs associated with the prescription granting process,
while also enabling new sales channels for the Company. In
Impact of COVID-19
In
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In response to the COVID-19 pandemic, we have taken swift actions to ensure the safety of our employees and other stakeholders. We are diligently working with our suppliers, customers, distributors and other partners to provide consumers with access to Plenity, while taking into account regulatory, institutional, and government guidance, policies and protocols.
However, the full extent of the impact of the pandemic and future outbreaks on our business, operations, and financial condition and results in future periods remain uncertain, particularly, with respect to consumer demand for or access to Plenity, and the administration of clinical research and development activities. Further, our ability to source raw materials and components, manufacture as well as transport and distribute Plenity may be limited and therefore impact sales of Plenity.
Key Factors Affecting Results of Operations
We believe that our performance and future success depend on several factors that present not only significant opportunities for us but also pose risks and challenges, including those discussed below. In particular, our ability to successfully address the below key factors is dependent upon our ability to successfully raise the capital to fund such efforts. Our failure to obtain additional funding may force us to delay, limit or terminate our marketing efforts and investments in our product pipeline, which may negatively impact our ability to grow our business and attract and/or retain enough customers to operate profitably.
New Consumer Acquisition
Our ability to attract new consumers is a key factor for our future growth. To
date we have successfully acquired consumers through our
•
Telehealth: We partner with a leading telehealth platform in
•
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
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.
•
•
CMS: In
Investments in Growth
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We expect to make significant investments in selling and marketing to acquire new consumers. Selling and marketing is an important driver of growth, and over the long term, we intend to continue to make significant investments in consumer acquisition and our selling and commercial infrastructure. However, in light of current cash resources, and to preserve liquidity while we seek to raise additional capital, during the third quarter of 2022, we reduced investments in broad awareness media, consumer acquisition, and the healthcare provider sales force compared to prior periods. Accordingly, our selling and marketing expense decreased in absolute dollars during this period, which negatively impacted growth in selling Plenity. However, if we are successful in raising additional capital in the future, we expect to increase selling and marketing activities to continue to launch Plenity, and expect selling and marketing expense to decrease as a percentage of revenue over the long term, although our selling and marketing expense may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.
Additionally, although we intend to continue to invest in our manufacturing, fulfillment and operating capabilities in the future, these capabilities have recently been negatively impacted by recent significant reductions in our discretionary spending with respect to manufacturing and supply chain functions. If we are successful in raising additional capital in the future, we expect to continue to invest in increasing our manufacturing, fulfillment and operating capabilities. If we are unable to generate sufficient demand in Plenity, we may not have sufficient funds to invest into these growth activities.
Product Candidate Expansion
In addition to Plenity, we have invested in a pipeline of product candidates for prevalent and important gastrointestinal, or GI, tract-related chronic diseases including, type 2 diabetes, NAFLD/NASH, functional constipation, and inflammatory bowel disease by targeting the natural processes of the GI pathway. We expect to continue investing in our pipeline over time to broaden our commercial opportunity. The continued preclinical and clinical development of the pipeline will require significant financial resources. If we are unable to generate sufficient demand in Plenity or raise additional capital at favorable terms, if at all, we may not have sufficient funds to invest in the research and development of additional product candidates.
Key Business Metrics
We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business (dollar amounts in thousands except where noted):
For the Year Ended December 31,
2022 2021
In thousands
New members acquired 121,500 61,400
Units sold 374,224 170,969
Product revenue, net $ 25,558 $ 11,185
Average selling price per unit, net $ 68.30 $ 65.42
Gross profit $ (2,000 ) $ 1,202
Gross margin (8 )% 11 %
New members acquired
We define new members acquired as the number of consumers in
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".
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Average selling price per unit, net
Average selling price per unit, net is the gross price per unit sold during the period net of estimates of per unit variable consideration for which reserves are established for expected product returns, shipping charges to end-users, pharmacy dispensing and platform fees, merchant and processing fees, and promotional discounts offered to end-users. See "- Critical Accounting Policies and Significant Judgments and Estimates" below and the "Revenue Recognition" section of Note 2 in the accompanying Notes to unaudited consolidated financial statements included elsewhere in this Form 10-K for a more detailed discussion of our revenue recognition policy.
Gross profit and gross margin
Our gross profit represents product revenue, net, less our total cost of goods sold, including inventory reserves, and our gross margin is our gross profit expressed as a percentage of our product revenue, net. See discussion elsewhere in this discussion and analysis under the heading "Key Components of Results of Operations - Cost of goods sold".
Our gross profit and gross margin have been and will continue to be affected by a number of factors, including the prices we charge for our product, the costs we incur from our vendors for certain components of our cost of goods sold, the mix of channel sales in a period, and our ability to sell our inventory. We expect our gross margin to increase over the long term, although gross margins may fluctuate from period to period depending on these and other factors.
Non-GAAP Financial Measures
In addition to our financial results determined in accordance with GAAP, we believe the following non-GAAP measure is useful in evaluating our operating performance. We use the following non-GAAP financial measure to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that this non-GAAP financial measure, when taken together with the corresponding GAAP financial measure, provides meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our business, results of operations, or outlook. We consider Adjusted EBITDA to be an important measure because it helps illustrate underlying trends in our business and our historical operating performance on a more consistent basis. We believe that the use of Adjusted EBITDA is helpful to our investors as it is a metric used by management in assessing the health of our business and our operating performance.
However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for the non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measure and the reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure, and not to rely on any single financial measure to evaluate our business.
Adjusted EBITDA
Adjusted EBITDA is a key performance measure that our management uses to assess our operating performance. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we use this measure for business planning purposes. We define "Adjusted EBITDA" as net (loss) income before depreciation and amortization expenses, provision for (benefit from) income taxes, interest expense, net, stock-based compensation and (gains) and losses related to changes in fair value of our earnout liability, fair value of our warrant liability, our convertible promissory note liability and the One S.r.l. call option.
The following table reconciles net loss to Adjusted EBITDA for the years ended
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For the Year Ended December 31,
2022 2021
In thousands
Adjusted EBITDA
Net loss $ (55,780 ) $ (93,347 )
Provision for income taxes 480 17
Depreciation and amortization 5,488 3,791
Stock based compensation expense 29,777 5,532
Change in fair value of earnout liability (58,308 ) -
Change in fair value of warrants (7,084 ) 7,646
Change in fair value of convertible
promissory notes 2,559 128
Change in fair value of One S.r.l. call
option (1,462 ) 1,024 Interest expense, net 991 1,364 Adjusted EBITDA$ (83,339 ) $ (73,845 )
Some of the limitations of Adjusted EBITDA include (i) Adjusted EBITDA does not properly reflect capital commitments to be paid in the future, and (ii) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.
Basis of Presentation
Our consolidated financial statements and consolidated financial statements are
prepared in accordance with GAAP. Any reference in this discussion and analysis
to applicable guidance is meant to refer to the authoritative
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, the Chief Executive Officer, in making decisions regarding resource allocation and assessing performance. We view our operations and manage our business as one operating segment.
The noncontrolling interest attributable to Gelesis S.r.l., our variable interest entity ("VIE"), is presented as a separate component from stockholders' deficit in our consolidated balance sheets and as a noncontrolling interest in our consolidated statements of noncontrolling interest, redeemable convertible preferred stock and stockholders' deficit. All intercompany balances and transactions have been eliminated in consolidation.
Key Components of Results of Operations
Product revenue, net
We recognize product revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Our product revenue is derived from product sales of Plenity, net of estimates of variable consideration for which reserves are established for expected product returns, shipping charges to end-users, pharmacy dispensing and platform fees, merchant and processing fees, and promotional discounts offered to end-users.
Cost of goods sold
Cost of goods sold includes the cost of manufacturing our proprietary superabsorbent hydrogels for Plenity for which revenue was recognized during the period, as well as the associated costs for encapsulation, packaging, shipment, supply management and quality assurance, and inventory reserves. Expenses from royalty agreements on net product sales are also recognized as a component of cost
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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 consolidated statements of operations.
Changes in the fair value of warrants
We have issued warrants to investors which are liability classified and initially recorded at fair value and remeasured to fair value at each reporting date until settlement with gains and losses arising from changes in fair value recognized in the consolidated statements of operations.
Change in the fair value of convertible promissory notes
We have issued convertible promissory notes to investors which are initially recorded at fair value and remeasured to fair value at each reporting date until repayment or conversion at the option of the holders, with gains and losses arising from changes in fair value recognized in the consolidated statements of operations.
Interest expense, net
Interest expense, net consists of interest incurred on our various loans and interest income earned on our cash, cash equivalents and marketable securities.
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Other income (expense), net
Other income, net primarily consists of income earned on our grants from
government agencies in
Provision for income taxes
We must make certain estimates and judgments in determining income tax expense for financial statement purposes. The amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using substantively enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Net deferred tax assets are not recorded if we do not assess their realization as probable. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in our financial statements in the period that includes the substantive enactment date.
Results of Operations
Comparison of the years ended
For the Year Ended December 31,
2022 2021 Change
Revenue:
Product revenue, net $ 25,558 $ 11,185 $ 14,373
Licensing revenue 209 - 209
Total revenue, net 25,767 11,185 14,582
Operating expenses:
Costs of goods sold 27,558 9,983 17,575
Selling, general and
administrative 99,135 71,041 28,094
Research and development 18,613 12,867 5,746
Amortization of intangible assets 2,267 2,267 -
Total operating expenses 147,573 96,158 51,415
Loss from operations (121,806 ) (84,973 ) (36,833 )
Other non-operating income
(expense), net 66,506 (8,357 ) 74,863
Loss before income taxes (55,300 ) (93,330 ) 38,030
Provision for income taxes 480 17 463
Net loss $ (55,780 ) $ (93,347 ) $ 37,567
Product revenue, net
We recognized product revenue, net of
The increase in units sold was primarily attributable to the execution of our
commercialization strategy and ramp up between 2021 and 2022. We made Plenity
available for commercial sale through a beta launch that began in
Cost of goods sold
We recognized cost of goods sold of
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We recognized a gross loss of
Selling, general and administrative expense
The following table summarizes our selling, general and administrative expenses
for the years ended
For the Year Ended December 31,
2022 2021 Change
In thousands
Selling and marketing expense $ 56,924 $ 52,781 $ 4,143
General and administrative
expense 22,132 14,293 7,839
Non-cash stock-based compensation
expense 20,079 3,967 16,112
Total selling, general and
administrative expense $ 99,135 $ 71,041 $ 28,094 Total selling, general and administrative expense was
Selling and marketing expense increased
General and administrative expense increased
Non-cash stock-based compensation expense increased
Research and development expenses
The following table summarizes our research and development expenses for the
years ended
For the Year Ended December 31,
2022 2021 Change
In thousands
GS200 $ 66 $ - $ 66
GS300 133 1,467 (1,334 )
GS500 79 1,636 (1,557 )
Unallocated expenses
Other research and development
expenses 8,637 8,199 438
Non-cash stock-based compensation
expense 9,698 1,565 8,133
Total Research and development
expense $ 18,613 $ 12,867 $ 5,746 Total research and development expense was
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Non-cash stock-based compensation expense increased
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
Other non-operating income (expense), net
The following table summarizes our other non-operating income and expenses for
the years ended
For the Year Ended December 31,
2022 2021 Change
In thousands
Change in the fair value of
earnout liability $ 58,308 $ - $ 58,308
Change in the fair value of
convertible promissory notes (2,559 ) (128 ) (2,431 )
Change in the fair value of
warrants 7,084 (7,646 ) 14,730
Interest expense, net (991 ) (1,364 ) 373
Other income, net 4,664 781 3,883
Total non-operating expenses,
net $ 66,506 $ (8,357 ) $ 74,863 We recognized other non-operating income, net of
The
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the issuance of
equity and debt instruments, license and collaboration agreements, supply and
distribution agreements, and government grants. As of
Due to our available cash and cash equivalents, a history of recurring losses
from operations, negative cash flows from operations, and a significant
accumulated deficit, we have concluded that there is substantial doubt about our
ability to continue as a going concern. In addition, our independent registered
public accounting firm included an emphasis of matter paragraph in their opinion
for the years ended
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.
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Future Liquidity Requirements
Due to limited available liquidity to fund operations, we implemented an alternative business plan, significantly curtailed our sales marketing as well as supply chain activities since the third and fourth quarter of 2022, reduced headcount and delayed certain long-term capital expenditures in commercial infrastructure and certain research and development expenses. We have sought out, and continue to seek out, financing and other alternative commercial arrangements or geographic distribution partnerships to finance certain investments in sales and marketing associated with the sale of Plenity. We expect these actions will provide us with sufficient liquidity to manage short-term risk and uncertainty and (i) enable us to execute our alternative business plan, (ii) afford us time to access financing alternatives to provide for long-term liquidity and (iii) enable us to fund the continued commercialization of Plenity. See Part I, Item 1A, "Risk Factors - If we are not successful in implementing an alternative business plan and/or raising additional capital in a timely manner, we may have insufficient cash and liquidity to pay operating expenses and other obligations. Any such event would have a material adverse effect on our business and financial condition." and "Risk Factors - Risks Related to Financial Position and Financing Needs - In order to support our business, we will need to incur additional indebtedness or seek capital through new equity or debt financings, which sources of additional indebtedness or capital have become increasingly difficult to secure and may not be available on acceptable terms, if at all, and the failure to obtain this additional funding when needed may force us to delay, limit or terminate our product development efforts or other operations." in this Form 10-K for more information regarding certain factors that may impact our liquidity and our ability to raise additional capital.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through issuance of additional equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions.
As of the date of this Form 10-K, we are continuing to evaluate opportunities to
raise additional capital. If we are unsuccessful in raising additional capital,
we may need to further restrict our spending particularly with respect to
discretionary sales and marketing activities and our manufacturing and supply
chain functions, liquidate all or a portion of our assets or pursue other
strategic alternatives, and/or seek protection under the provisions of the
Revenue Projections
Our revenue projections are highly dependent on (i) our ability to acquire new
consumers and/or retain existing consumers and (ii) our ability to access
additional capital and raise sufficient levels of funding in a timely manner to
support the sales and marketing of Plenity at a broad national level within
Warrant Proceeds
As of the date of this Form 10-K, we have (i) 13,800,000 outstanding Public
Warrants to purchase 13,800,000 shares of our common stock, exercisable at an
exercise price of
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
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Warrants are not redeemable so long as they are held by the initial stockholders
and are exercisable on a cashless basis. Our CMS Warrants and PureTech Health
LLC Warrants are not redeemable and are exercisable on a cashless basis, and our
Rollover Warrants are not redeemable and have an exercise price of
To the extent such warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our common stock, which increase the likelihood that our warrants will not be in the money prior to their expiration.
Financing Risk
We expect to devote significant efforts to raise capital, restructure our
indebtedness and identify and evaluate potential strategic alternatives,
however, there can be no assurance that we will be successful in obtaining
capital sufficient to meet our operating needs on terms or a timeframe
acceptable to us or at all. Further, in the event that market conditions
preclude our ability to consummate such a transaction, we may be required to
evaluate additional alternatives in restructuring our business and our capital
structure. Any failure in these efforts could force us to delay, limit or
terminate our operations, make reductions in our workforce, discontinue our
commercialization efforts for Plenity as well as other development programs,
liquidate all or a portion of our assets or pursue other strategic alternatives,
and/or seek protection under the provisions of the
Although we have estimated our liquidity requirements based on assumptions that we consider to be reasonable, we may need additional cash resources due to changed business conditions or other developments, including supply chain challenges, disruptions due to COVID-19, competitive pressures, inflationary pressures and regulatory developments, among other developments. Our budget projections may be subject to cost overruns for reasons outside of our control and Plenity may experience slower sales growth than anticipated, which would pose a risk to achieve positive cash flow.
Our future capital requirements will depend on many factors, including increases in sales of Plenity, increases in our customer base, the timing and extent of spend to support the expansion of sales, marketing and development activities, and the impact of the COVID-19 pandemic. We may in the future also enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights.
We have based our estimate of liquidity on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Our cash flows may fluctuate and are difficult to forecast and will depend on many factors mentioned elsewhere in this discussion and analysis. If we require additional equity or debt financing from outside sources, we may not be able to raise it on terms acceptable to us, or at all, and may pursue financing transactions that will not be completed. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be harmed.
Cash flows
The following table summarizes our cash flows for each of the periods presented:
For the Year Ended December 31,
2022 2021
In thousands
Cash (used in) provided by:
Operating activities $ (77,728 ) $ (55,291 )
Investing activities (9,120 ) 4,083
Financing activities 66,325 32,533
Effect of exchange rates on cash (462 ) (1,072 )
Decrease in cash and cash equivalents
Cash used in operating activities
Net cash used in operating activities was
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compared to
Cash (used in) provided by investing activities
Net cash used in investing activities was
Cash provided by financing activities
Net cash provided by financing activities was
Contractual Obligations and Commitments
Our contractual obligations primarily consist of our commitments under non-cancellable operating leases, promissory notes and debt obligations as well as contractual obligations under significant agreements with related and unrelated parties.
For the year ended
At
See also Note 12. Debt in the accompanying Notes to the consolidated financial
statements included elsewhere in this Form 10-K for a description of the
Company's debt outstanding and the terms of its debt facilities for the years
ended
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of consolidated financial statements in conformity with
Our significant accounting policies are described in Note 2 - Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8 of this Form 10-K. These are the policies that we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Inventory
We manufacture our own super-absorbent hydrogels used in Plenity® and other
product candidates out of its own manufacturing facilities located in
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Inventories comprise raw materials, including raw materials for packaging components, work-in-process, and finished goods, which are goods that are available for sale. We state inventory at the lower of cost or net realizable value with the cost based on the first-in, first-out method. If we identify excess, obsolete or unsalable items, we write down related inventory to its net realizable value in the period in which the impairment is identified. These adjustments are recorded based upon various factors related to the product, including the level of product manufactured by us, the level of product in the distribution channel, current and projected demand, the expected shelf-life of the product and firm inventory purchase commitments. Significant shipping and handling costs incurred for inventory purchases are included in inventory and costs incurred for product shipments are recorded in cost of goods sold as incurred.
Intangible Assets
Intangible assets with estimable useful lives, or definite-lived intangibles, are carried at cost and are amortized on a straight-line basis over their estimated useful lives and reviewed for impairment upon certain triggering events. We routinely review the remaining estimated useful lives of definite-lived intangible assets. If we reduce the estimated useful life assumption, the remaining unamortized balance is amortized over the revised estimated useful life.
Noncontrolling Interests
We recognize noncontrolling interest related to VIEs, in which the Company is the primary beneficiary, as temporary equity in the consolidated financial statements separate from the shareholders' equity. Changes in the shareholders' ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. In addition, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary will be initially measured at fair value and the difference between the carrying value and fair value of the retained interest will be recorded as a gain or loss.
Product Revenue
We commercialize Plenity in the
Product revenue is recognized by us in an amount that reflects the consideration which we expect to receive in exchange for those goods or services when the customer obtains control of the product, which occurs at a point in time, when the product is received by our customers.
Stock-Based Compensation
The Company's stock-based compensation consist primarily of stock options and restricted stock units. The measurement date for share-based awards is the date of grant, and stock-based compensation costs are recognized as expense over the respective requisite service periods, which are typically the vesting period. The fair value of each stock option grant is estimated as of the date of grant using the Black-Scholes option-pricing model that requires management to apply judgment and make estimates, including:
•
exercise price: The exercise price is the fair market value on grant date, which shall mean the closing sale price of common stock, as reported on such market on that date (or if there are no market quotations for such date, the determination shall be made by reference to the last date preceding such date for which there are market quotations);
•
expected volatility: As the Company was previously a privately-owned company, there is not sufficient historical volatility for the expected term of the options. Therefore, the Company used an average historical share price volatility based on an analysis of reported data for a peer group of comparable companies for which historical information is available. For these analyses, the Company selects companies with comparable characteristics to itself including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. The Company computes the historical volatility data using the daily closing prices for the selected companies' shares during the equivalent period of the calculated expected term of its stock-based awards. The Company intends to consistently apply this process using representative companies until a sufficient amount of historical information regarding the volatility of its own share price becomes available;
•
risk-free interest rate, which is based on the
•
expected term, which is calculated using the simplified method, as prescribed by
the
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presumed to be the average of the contractual term of ten years and the weighted-average vesting term of the stock options, taking into consideration multiple vesting tranches;
•
dividend yield, which is zero based on the fact that the Company never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
Stock-based compensation costs for non-employees are recognized as expense over the vesting period. Stock-based compensation expense is classified in the consolidated statements of operations based on the function to which the related services are provided. Forfeitures are recorded as they occur.
Business Combination and Reverse Recapitalization
We accounted for our
JOBS Act Accounting Election
Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, an "emerging growth company" can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have elected to avail ourselves of this exemption to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, where allowable we have early adopted certain standards as described in Note 2 of our consolidated financial statements. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an "emerging growth company," we are exempt from Sections 14A(a) and (b) of the Exchange Act which would otherwise require us to (1) submit certain executive compensation matters to shareholder advisory votes, such as "say-on-pay," "say-on-frequency," and "golden parachutes;" and (2) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our chief executive officer's compensation to our median employee compensation.
We also intend to rely on an exemption from the rule requiring us to provide an
auditor's attestation report on our internal controls over financial reporting
pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will continue to remain
an "emerging growth company" until the earliest of the following: (1) the last
day of the fiscal year following the fifth anniversary of our initial public
offering; (2) the last day of the fiscal year in which our total annual gross
revenue is equal to or more than
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