Gossamer Bio, Inc. - Quarter Report: 2023 June (Form 10-Q)
-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
_________________________
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended June 30, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from ________to_________.
Commission File Number: 001-38796
_________________________
GOSSAMER BIO, INC.
(Exact name of Registrant as specified in its charter).
_________________________
| Delaware | 47-5461709 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 3013 Science Park Road | San Diego | California | 92121 | ||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code: (858) 684-1300
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.0001 par value per share | GOSS | Nasdaq Global Select Market | ||||||||||||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
1
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of August 3, 2023, the registrant had 225,322,142 shares of common stock ($0.0001 par value) outstanding.
2
TABLE OF CONTENTS
Condensed Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022 | |||||||||||
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months ended June 30, 2023 and 2022 (unaudited) | |||||||||||
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Six Months ended June 30, 2023 and 2022 (unaudited) | |||||||||||
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2023 and 2022 (unaudited) | |||||||||||
3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
GOSSAMER BIO, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and par value amounts)
| June 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | (unaudited) | ||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 37,004 | $ | 111,973 | |||||||
| Marketable securities | 125,122 | 143,705 | |||||||||
| Prepaid expenses and other current assets | 11,250 | 6,202 | |||||||||
| Total current assets | 173,376 | 261,880 | |||||||||
| Property and equipment, net | 3,054 | 3,981 | |||||||||
| Operating lease right-of-use assets | 4,546 | 5,909 | |||||||||
| Other assets | 770 | 680 | |||||||||
| Total assets | $ | 181,746 | $ | 272,450 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 2,205 | $ | 1,459 | |||||||
| Accrued research and development expenses | 12,062 | 15,626 | |||||||||
| Current portion of long-term debt | 11,613 | 11,613 | |||||||||
| Accrued expenses and other current liabilities | 14,260 | 20,532 | |||||||||
| Total current liabilities | 40,140 | 49,230 | |||||||||
| Long-term convertible senior notes | 196,144 | 195,709 | |||||||||
| Long-term debt | 6,436 | 11,988 | |||||||||
| Operating lease liabilities - long-term | 1,826 | 3,446 | |||||||||
| Total liabilities | 244,546 | 260,373 | |||||||||
Commitments and contingencies (Note 9) | |||||||||||
| Stockholders' equity (deficit) | |||||||||||
Common stock, $0.0001 par value; 700,000,000 shares authorized as of June 30, 2023 and December 31, 2022; 95,452,703 shares issued and outstanding as of June 30, 2023, and 94,478,405 shares issued and 94,423,181 shares outstanding as of December 31, 2022 | 10 | 10 | |||||||||
| Additional paid-in capital | 1,061,555 | 1,044,864 | |||||||||
| Accumulated deficit | (1,123,884) | (1,032,223) | |||||||||
| Accumulated other comprehensive loss | (481) | (574) | |||||||||
| Total stockholders' equity (deficit) | (62,800) | 12,077 | |||||||||
| Total liabilities and stockholders' equity (deficit) | $ | 181,746 | $ | 272,450 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
GOSSAMER BIO, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(in thousands, except share and per share amounts)
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | $ | 36,309 | $ | 42,580 | $ | 74,104 | $ | 84,902 | |||||||||||||||
| In process research and development | 15 | 15 | 30 | 35 | |||||||||||||||||||
| General and administrative | 9,976 | 11,277 | 20,108 | 23,278 | |||||||||||||||||||
| Total operating expenses | 46,300 | 53,872 | 94,242 | 108,215 | |||||||||||||||||||
| Loss from operations | (46,300) | (53,872) | (94,242) | (108,215) | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest income | 695 | 300 | 1,282 | 524 | |||||||||||||||||||
| Interest expense | (3,429) | (3,481) | (6,929) | (6,948) | |||||||||||||||||||
| Other income, net | 6,538 | 587 | 8,228 | 388 | |||||||||||||||||||
| Total other income (expense), net | 3,804 | (2,594) | 2,581 | (6,036) | |||||||||||||||||||
| Net loss | $ | (42,496) | $ | (56,466) | $ | (91,661) | $ | (114,251) | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation | 1 | (138) | 24 | (146) | |||||||||||||||||||
| Unrealized gain (loss) on marketable securities | (46) | (36) | 69 | (413) | |||||||||||||||||||
| Other comprehensive income (loss) | (45) | (174) | 93 | (559) | |||||||||||||||||||
| Comprehensive loss | (42,541) | (56,640) | (91,568) | (114,810) | |||||||||||||||||||
| Net loss per share, basic and diluted | $ | (0.45) | $ | (0.74) | $ | (0.96) | $ | (1.50) | |||||||||||||||
| Weighted average common shares outstanding, basic and diluted | 95,446,929 | 76,668,162 | 95,160,204 | 76,283,564 | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
GOSSAMER BIO, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
(in thousands, except share amounts)
| Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total stockholders' equity (deficit) | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | 94,423,181 | $ | 10 | $ | 1,044,864 | $ | (1,032,223) | $ | (574) | $ | 12,077 | ||||||||||||||||||||||||
| Vesting of restricted stock | 55,225 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 8,127 | — | — | 8,127 | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to Employee Stock Purchase Plan | 249,623 | — | 367 | — | — | 367 | |||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock units vested | 716,067 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (49,165) | — | (49,165) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 138 | 138 | |||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | 95,444,096 | $ | 10 | $ | 1,053,358 | $ | (1,081,388) | $ | (436) | $ | (28,456) | ||||||||||||||||||||||||
| Stock-based compensation | — | — | 8,197 | — | — | 8,197 | |||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock units vested | 8,607 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (42,496) | — | (42,496) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (45) | (45) | |||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | 95,452,703 | $ | 10 | $ | 1,061,555 | $ | (1,123,884) | $ | (481) | $ | (62,800) | ||||||||||||||||||||||||
| Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Total stockholders' equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 75,752,664 | $ | 8 | $ | 932,944 | $ | (811,534) | $ | 45 | $ | 121,463 | ||||||||||||||||||||||||
| — | — | (53,527) | 8,689 | — | (44,838) | ||||||||||||||||||||||||||||||
| Vesting of restricted stock | 165,675 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Exercise of stock options | 39,525 | — | 126 | — | — | 126 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 10,983 | — | — | 10,983 | |||||||||||||||||||||||||||||
| Issuance of common stock pursuant to Employee Stock Purchase Plan | 77,496 | — | 595 | — | — | 595 | |||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock units vested | 518,577 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (57,785) | — | (57,785) | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (385) | (385) | |||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | 76,553,937 | $ | 8 | $ | 891,121 | $ | (860,630) | $ | (340) | $ | 30,159 | ||||||||||||||||||||||||
| Vesting of restricted stock | 165,675 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Exercise of stock options | 8,005 | — | 21 | — | — | 21 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 9,999 | — | — | 9,999 | |||||||||||||||||||||||||||||
| Issuance of common stock for restricted stock units vested | 8,607 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (56,466) | — | (56,466) | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | (174) | (174) | |||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | 76,736,224 | $ | 8 | $ | 901,141 | $ | (917,096) | $ | (514) | $ | (16,461) | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
GOSSAMER BIO, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| Six months ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | (91,661) | $ | (114,251) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization expense | 928 | 912 | |||||||||
| Stock-based compensation expense | 16,324 | 20,982 | |||||||||
| In process research and development expenses | 30 | 35 | |||||||||
| Amortization of operating lease right-of-use assets | 1,363 | 1,284 | |||||||||
| Amortization of long-term debt discount and issuance costs | 690 | 591 | |||||||||
| Amortization of premium (discount) on marketable securities, net of accretion of discounts | (3,036) | 145 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Prepaid expenses and other current assets | (5,048) | (4,023) | |||||||||
| Other assets | (90) | (174) | |||||||||
| Operating lease liabilities | (1,463) | (1,350) | |||||||||
| Accounts payable | 716 | 1,204 | |||||||||
| Accrued expenses and other current liabilities | (1,051) | (2,531) | |||||||||
| Accrued research and development expenses | (3,564) | (1,935) | |||||||||
| Accrued compensation and benefits | (5,335) | (3,186) | |||||||||
| Accrued interest expense | (43) | (8) | |||||||||
| Net cash used in operating activities | (91,240) | (102,305) | |||||||||
| Cash flows from investing activities | |||||||||||
| Research and development asset acquisitions, net of cash acquired | (30) | (35) | |||||||||
| Purchase of marketable securities | (133,312) | (72,589) | |||||||||
| Maturities of marketable securities | 155,000 | 86,000 | |||||||||
| Purchase of property and equipment | — | (277) | |||||||||
| Net cash provided by investing activities | 21,658 | 13,099 | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from issuance of common stock pursuant to Employee Stock Purchase Plan | 367 | 595 | |||||||||
| Proceeds from the exercise of stock options | — | 147 | |||||||||
| Principal repayments of long-term debt | (5,807) | — | |||||||||
| Net cash provided by (used in) financing activities | (5,440) | 742 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 53 | (687) | |||||||||
| Net decrease in cash and cash equivalents | (74,969) | (89,151) | |||||||||
| Cash, cash equivalents and restricted cash, at the beginning of the period | 111,973 | 183,467 | |||||||||
| Cash, cash equivalents and restricted cash, at the end of the period | $ | 37,004 | $ | 94,316 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | 6,283 | $ | 6,365 | |||||||
| Supplemental disclosure of noncash investing and financing activities: | |||||||||||
| Operating lease right-of-use asset obtained in exchange for lease liability | $ | — | $ | 3,029 | |||||||
| Change in unrealized gain (loss) on marketable securities, net | $ | 69 | $ | (413) | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
GOSSAMER BIO, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Description of Business
Gossamer Bio, Inc. (including its subsidiaries, referred to as “we,” “us,” “our,”, or the “Company”) is a clinical-stage biopharmaceutical company focused on discovering, acquiring, developing and commercializing therapeutics in the disease areas of immunology, inflammation and oncology. The Company was incorporated in the state of Delaware on October 25, 2015 (originally as FSG Bio, Inc.) and is based in San Diego, California.
The unaudited condensed consolidated financial statements include the accounts of Gossamer Bio, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions among the consolidated entity have been eliminated in consolidation.
Liquidity and Capital Resources
The Company has incurred significant operating losses since its inception. As of June 30, 2023, the Company had an accumulated deficit of $1,123.9 million. From the Company’s inception through June 30, 2023, the Company has funded its operations primarily through equity and debt financings. The Company raised $1,062.1 million from October 2017 through June 30, 2023 through the sale of Series A and Series B convertible preferred stock, issuance of convertible notes, its initial public offering ("IPO"), the Credit Facility and 2027 Notes (as defined in Note 5 below), and issuance of common stock in May 2020 and July 2022. See Note 5 for additional information regarding the Credit Facility and the 2027 Notes.
On July 24, 2023, the Company completed a private placement of 129,869,440 shares of the Company’s common stock and accompanying warrants to purchase up to 32,467,360 shares of the Company's common stock at a combined purchase price of $1.63125 per share and accompanying warrant, or with respect to any purchaser that was an officer, director, employee or consultant of the Company $1.85125 per share and accompanying warrant. Each warrant will have an exercise price per share of $2.04, will be immediately exercisable on the date of issuance and will expire five years from the closing of the private placement. The aggregate gross proceeds for the private placement were approximately $212.1 million, before deducting offering expenses, which equaled approximately $10.7 million.
The Company expects to continue to incur significant operating losses for the foreseeable future and may never become profitable. As a result, the Company will need to raise additional capital through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. Management believes that it has sufficient working capital on hand to fund operations through at least the next 12 months from the date these condensed consolidated financial statements were available to be issued. There can be no assurance that the Company will be successful in acquiring additional funding, that the Company’s projections of its future working capital needs will prove accurate, or that any additional funding would be sufficient to continue operations in future years.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions of the Securities and Exchange Commission (“SEC”) on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 17, 2023. The results of operations for the interim period shown in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The balance sheet at December 31, 2022, has been derived from the audited financial statements at that date.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the
8
reporting period. The most significant estimates in the Company’s condensed consolidated financial statements relate to accrued research and development expenses. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results could differ from those estimates.
Net Loss Per Share
Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. The Company uses the if-converted method for assumed conversion of the 2027 Notes to compute the weighted average shares of common stock outstanding for diluted net loss per share. Diluted net loss per share excludes the potential impact of the Company’s common stock options and unvested shares of restricted stock and the potential shares issuable upon conversion of the 2027 Notes because their effect would be anti-dilutive due to the Company’s net loss. Since the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same.
The table below provides potentially dilutive securities not included in the calculation of the diluted net loss per share because to do so would be anti-dilutive:
| As of June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| 2027 Notes | 12,321,900 | 12,321,900 | |||||||||
| Shares issuable upon exercise of stock options | 19,739,058 | 13,183,909 | |||||||||
| Non-vested shares under restricted stock grants | 444,687 | 2,103,757 | |||||||||
| Total potentially dilutive securities | 32,505,645 | 27,609,566 | |||||||||
Note 3 - Balance Sheet Accounts and Supplemental Disclosures
Property and Equipment
Property and equipment, net consisted of the following (in thousands):
| Estimated Useful Life (in years) | June 30, 2023 | December 31, 2022 | |||||||||||||||
| Office equipment | 3-7 | $ | 1,097 | $ | 1,097 | ||||||||||||
| Computer equipment | 5 | 123 | 123 | ||||||||||||||
| Software | 3 | 130 | 130 | ||||||||||||||
| Lab equipment | 2-5 | 6,181 | 6,098 | ||||||||||||||
| Leasehold improvements | 6-7 | 2,562 | 2,562 | ||||||||||||||
| Construction in process | N/A | — | 83 | ||||||||||||||
| Total property and equipment | 10,093 | 10,093 | |||||||||||||||
| Less: accumulated depreciation | 7,039 | 6,112 | |||||||||||||||
| Property and equipment, net | $ | 3,054 | $ | 3,981 | |||||||||||||
For the three months ended June 30, 2023 and 2022 the Company recorded approximately $0.5 million in both periods, respectively, in depreciation expense, and for the six months ended June 30, 2023 and 2022, the Company recorded approximately $0.9 million in both periods, in depreciation expense, which is included in general and administrative expense and research and development expense on the condensed consolidated statements of operations and comprehensive loss.
9
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| Accrued compensation and benefits | $ | 8,199 | $ | 13,534 | |||||||
| Operating lease liabilities | 3,140 | 2,983 | |||||||||
| Accrued consulting fees | 821 | 1,104 | |||||||||
| Accrued interest | 1,021 | 1,065 | |||||||||
| Accrued legal fees | 228 | 380 | |||||||||
| Accrued accounting fees | 93 | 521 | |||||||||
| Accrued other | 758 | 945 | |||||||||
| Total accrued expenses and other current liabilities | $ | 14,260 | $ | 20,532 | |||||||
Note 4 - Fair Value Measurements and Available for Sale Investments
Fair Value Measurements
The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company classifies its cash equivalents and available-for-sale investments within Level 1 or Level 2. The fair value of the Company’s investment grade corporate debt securities and commercial paper is determined using proprietary valuation models and analytical tools, which utilize market pricing or prices for similar instruments that are both objective and publicly available, such as matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, and offers.
10
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the hierarchy for assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 (in thousands):
| Fair Value Measurements at End of Period Using: | |||||||||||||||||||||||
| Total Fair Value | Quoted Market Prices for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| As of June 30, 2023 | |||||||||||||||||||||||
| Money market funds | $ | 25,584 | $ | 25,584 | $ | — | $ | — | |||||||||||||||
| U.S. Treasury and agency securities | 28,040 | 28,040 | — | — | |||||||||||||||||||
| Commercial paper | 87,421 | — | 87,421 | — | |||||||||||||||||||
| Corporate debt securities | 13,449 | — | 13,449 | — | |||||||||||||||||||
| As of December 31, 2022 | |||||||||||||||||||||||
| Money market funds | $ | 54,662 | $ | 54,662 | $ | — | $ | — | |||||||||||||||
| U.S. Treasury and agency securities | 31,458 | 31,458 | — | — | |||||||||||||||||||
| Commercial paper | 134,954 | — | 134,954 | — | |||||||||||||||||||
| Corporate debt securities | 8,838 | — | 8,838 | — | |||||||||||||||||||
The Company did not reclassify any investments between levels in the fair value hierarchy during the periods presented.
Fair Value of Other Financial Instruments
As of June 30, 2023 and December 31, 2022, the carrying amounts of the Company’s financial instruments, which include cash, prepaid and other current assets, interest receivable, accrued research and development expenses, accounts payable and accrued expenses and other current liabilities, approximate fair values because of their short maturities.
There was $0.1 million of interest receivable as of June 30, 2023, and there was no significant interest receivable as of December 31, 2022. Interest receivable is recorded as a component of prepaid expenses and other current assets on the condensed consolidated balance sheets.
The Company believes that its Credit Facility bears interest at a rate that approximates prevailing market rates for instruments with similar characteristics and, accordingly, the carrying value of the Credit Facility approximates fair value. The Company estimates the fair value of long-term debt utilizing an income approach. The Company uses a present value calculation to discount principal and interest payments and the final maturity payment on these liabilities using a discounted cash flow model based on observable inputs. The debt instrument is then discounted based on what the current market rates would be as of the reporting date. Based on the assumptions used to value these liabilities at fair value, the debt instrument is categorized as Level 2 in the fair value hierarchy.
As of June 30, 2023 and December 31, 2022, the fair value of the Company’s 2027 Notes was $62.5 million and $61.0 million, respectively. The fair value was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy (see Note 5).
Available for Sale Investments
The Company invests its excess cash in U.S. Treasury and agency securities, corporate debt securities, and commercial paper, which are classified as available-for-sale investments. These investments are carried at fair value and are included in the tables below. The Company evaluates securities with unrealized losses to determine whether such losses, if any, are due to credit-related factors. Realized gains and losses are calculated using the specific identification method and recorded in other income, net in the Company's condensed consolidated statement of operations and comprehensive loss. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recover of their amortized cost basis.
11
The aggregate market value, cost basis, and gross unrealized gains and losses of available-for-sale investments by security type, classified in marketable securities and long-term investments as of June 30, 2023 and December 31, 2022 are as follows (in thousands):
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Total Fair Value | ||||||||||||||||||||
| As of June 30, 2023 | |||||||||||||||||||||||
| U.S. Treasury and agency securities | $ | 28,027 | $ | 14 | $ | — | $ | 28,041 | |||||||||||||||
| Corporate debt securities | 13,450 | — | (1) | 13,449 | |||||||||||||||||||
| Commercial paper | 83,700 | — | (68) | 83,632 | |||||||||||||||||||
| Total marketable securities | $ | 125,177 | $ | 14 | $ | (69) | $ | 125,122 | |||||||||||||||
| Number of securities with unrealized losses | 17 | ||||||||||||||||||||||
| As of December 31, 2022 | |||||||||||||||||||||||
| U.S. Treasury and agency securities | $ | 31,445 | $ | 13 | $ | — | $ | 31,458 | |||||||||||||||
| Corporate debt securities | 8,876 | — | (38) | 8,838 | |||||||||||||||||||
| Commercial paper | 103,508 | — | (99) | 103,409 | |||||||||||||||||||
| Total marketable securities | $ | 143,829 | $ | 13 | $ | (137) | $ | 143,705 | |||||||||||||||
| Number of securities with unrealized losses | 16 | ||||||||||||||||||||||
As of June 30, 2023 and December 31, 2022, the Company classified $3.8 million and $31.5 million, respectively, of assets with original maturities of 90 days or less as cash and cash equivalents.
At each reporting date, the Company performs an evaluation of impairment to determine if any unrealized losses are due to credit-related factors. The Company records an allowance for credit losses when unrealized losses are due to credit-related factors. Factors considered when evaluating available-for-sale investments for impairment include the severity of the impairment, changes in underlying credit ratings, the financial condition of the issuer, the probability that the scheduled cash payments will continue to be made and the Company’s intent and ability to hold the investment until recovery of the amortized cost basis. The Company intends and has the ability to hold its investments in unrealized loss positions until their amortized cost basis has been recovered. As of June 30, 2023 and December 31, 2022, there were no material declines in the market value of the Company’s available-for-sale investments due to credit-related factors.
Contractual maturities of available-for-sale debt securities, as of June 30, 2023, were as follows (in thousands):
| Estimated Fair Value | |||||
| Less than one year | $ | 125,122 | |||
| Greater than one year | — | ||||
| Total | $ | 125,122 | |||
The Company has the ability, if necessary, to liquidate any of its cash equivalents and marketable securities to meet its liquidity needs in the next 12 months.
Note 5 - Indebtedness
Credit Facility
On May 2, 2019, the Company entered into a credit, guaranty and security agreement, as amended on September 18, 2019, July 2, 2020, December 7, 2022 and February 14, 2023 (the “Credit Facility”), with MidCap Financial Trust (“MidCap”), as agent and lender, and the additional lenders party thereto from time to time (together with MidCap, the “Lenders”), pursuant to which the Lenders, agreed to make term loans available to the Company for working capital and general business purposes, in a principal amount of up to $150.0 million in term loan commitments, including a $30.0 million term loan that was funded at the closing date, with the ability to access the remaining $120.0 million in two additional tranches (each $60.0 million), subject to specified availability periods, the achievement of certain clinical development milestones, minimum cash requirements and other customary conditions. The Company did not achieve the clinical development milestone required to access one of the $60.0 million tranches, and access to the other $60.0 million tranche expired on December 31, 2022. The Company, GB001, Inc., GB002, Inc., and GB004, Inc., each wholly-owned subsidiaries of the Company, are designated as co-borrowers to the
12
Credit Facility, whereas GB003, Inc., GB005, Inc., GB007, Inc., GB008, Inc. and Gossamer Bio Services, Inc., each wholly-owned subsidiaries of the Company, are designated as guarantors. The Credit Facility is secured by substantially all of the Company’s and its domestic subsidiaries’ personal property, including intellectual property.
Each term loan under the Credit Facility bears interest at an annual rate equal to the sum of (i) the secured overnight financing rate ("SOFR"), plus corresponding spread, plus (ii) 7.00%, subject to a SOFR floor of 2.00%. The borrower is required to make interest-only payments on the term loan for all payment dates prior to July 1, 2022. The term loans under the Credit Facility began amortizing on July 1, 2022, with equal monthly payments of principal plus interest being made by the Company to the Lenders in consecutive monthly installments following such interest-only period until the Credit Facility matures on January 1, 2025. Upon final repayment of the term loans, the borrower must pay an exit fee of 1.75% of the amount borrowed under the Credit Facility, less any partial exit fees previously paid. Upon partial prepayment of a portion of the term loans, the borrower must pay a partial exit fee of 1.75% of the principal being prepaid. At the borrower’s option, the borrower may prepay the outstanding principal balance of the term loan in whole or in part, subject to a prepayment fee of 3.00% of any amount prepaid if the prepayment occurs through and including the first anniversary of the second amendment effective date, 2.00% of the amount prepaid if the prepayment occurs after the first anniversary of the second amendment effective date through and including the second anniversary of the second amendment effective date, and 1.00% of any amount prepaid after the second anniversary of the second amendment effective date and prior to January 1, 2025.
On December 7, 2022, the Company entered into the Third Amendment to the Credit Facility, with no change to the principal or repayment terms, except with respect to the interest rate applicable to the Credit Facility, with the implementation of a forward-looking term rate based on SOFR as the replacement of LIBOR as the benchmark interest rate. The Company accounted for the change in reference rate as a non-substantial modification as allowed under ASU 2020-04.
The Credit Facility includes affirmative and negative covenants applicable to the Company and certain of its subsidiaries. The affirmative covenants include, among others, covenants requiring such entities to maintain their legal existence and governmental approvals, deliver certain financial reports, maintain insurance coverage, maintain property, pay taxes, satisfy certain requirements regarding accounts and comply with laws and regulations. The negative covenants include, among others, restrictions on such entities from transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, amending material agreements and organizational documents, selling assets and suffering a change in control, in each case subject to certain exceptions. The Company and certain of its subsidiaries are also subject to an ongoing minimum cash financial covenant in which they must maintain unrestricted cash in an amount not less than 25% of the outstanding principal amount of the term loans. As of June 30, 2023, the Company was in compliance with these covenants.
The Credit Facility also includes events of default, the occurrence and continuation of which could cause interest to be charged at the rate that is otherwise applicable plus 3.00% and would provide MidCap, as agent, with the right to exercise remedies against the Company and/or certain of its subsidiaries, and the collateral securing the Credit Facility, including foreclosure against the properties securing the credit facilities, including cash. These events of default include, among other things, failure to pay any amounts due under the Credit Facility, a breach of covenants under the Credit Facility, insolvency or the occurrence of insolvency events, the occurrence of a change in control, the occurrence of certain U.S. Food and Drug Administration (“FDA”) and regulatory events, failure to remain registered with the SEC and listed for trading on Nasdaq, the occurrence of a material adverse change, the occurrence of a default under a material agreement reasonably expected to result in a material adverse change, the occurrence of certain defaults under certain other indebtedness in an amount greater than $2.5 million and the occurrence of certain defaults under subordinated indebtedness and convertible indebtedness.
Debt consisted of the following (in thousands):
| June 30, 2023 | December 31, 2022 | ||||||||||
| Debt, current portion | $ | 11,613 | $ | 11,613 | |||||||
| Debt, non-current portion | 6,774 | 12,581 | |||||||||
| Total debt | 18,387 | 24,194 | |||||||||
| Less: unamortized debt discount and issuance costs | (338) | (593) | |||||||||
| Debt, net | $ | 18,049 | $ | 23,601 | |||||||
13
The scheduled future minimum principal payments are as follows (in thousands):
| June 30, 2023 | |||||
| 2023 (remaining 6 months) | $ | 5,806 | |||
| 2024 | 11,613 | ||||
| 2025 | 968 | ||||
| Total | $ | 18,387 | |||
5.00% Convertible Senior Notes due 2027
On May 21, 2020, the Company issued $200.0 million aggregate principal amount of 5.00% convertible senior notes due 2027 in a public offering (the "2027 Notes"). The 2027 Notes were registered pursuant to the Company’s shelf registration statement on Form S-3 filed with the SEC on April 10, 2020. The interest rate on the 2027 Notes is fixed at 5.00% per annum. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2020. The 2027 Notes will mature on June 1, 2027. The net proceeds from the offering, after deducting the underwriting discounts and commissions and other offering costs, were approximately $193.6 million. The 2027 Notes may be settled in cash, shares of the Company’s common stock, or a combination thereof, solely at the Company’s election. The initial conversion rate of the 2027 Notes is 61.6095 shares per $1,000 principal amount, which is equivalent to a conversion price of approximately $16.23 per share, subject to adjustments. In addition, following certain corporate events that occur prior to the maturity date or if the Company issues a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its 2027 Notes in connection with such a corporate event during the related redemption period in certain circumstances.
The 2027 Notes are senior unsecured obligations of the Company, ranking senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 2027 Notes, and are effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness, including all indebtedness under the Credit Facility.
Holders may convert their notes at their option only in the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on September 30, 2020, if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on the Company’s common stock; (4) if the Company calls such notes for redemption; and (5) at any time from, and including, March 1, 2027 until the close of business on the scheduled trading day immediately before the maturity date.
The Company will not have the right to redeem the 2027 Notes prior to June 6, 2024. On or after June 6, 2024 and on or before the 50th scheduled trading day immediately before the maturity date, the Company may redeem the 2027 Notes, in whole or in part, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect on (1) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (2) the trading day immediately before the date the Company sends such notice. In the case of any optional redemption, the Company will redeem the 2027 Notes at a redemption price equal to 100% of the principal amount of such Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If the Company undergoes a fundamental change prior to the maturity date of the 2027 Notes, holders of the 2027 Notes may require the Company to repurchase for cash all or part of their 2027 Notes at a repurchase price equal to 100% of the principal amount of the 2027 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The indenture governing the 2027 Notes provides for customary terms and covenants, including that upon certain events of default, either the trustee or the holders of not less than 25% in aggregate principal amount of the 2027 Notes then outstanding may declare the unpaid principal amount of the 2027 Notes and accrued and unpaid interest, if any, thereon immediately due and payable. As of June 30, 2023, the Company was in compliance with these covenants. In the case of certain events of bankruptcy, insolvency or reorganization, the principal amount of the 2027 Notes together with accrued and unpaid interest, if any, thereon will automatically become and be immediately due and payable.
14
As of June 30, 2023, there were no events or market conditions that would allow holders to convert the 2027 Notes. When the 2027 Notes become convertible within 12 months of the balance sheet date, the carrying value of the 2027 Notes will be reclassified to short-term.
As a result of the adoption of ASU 2020-06, the Company no longer accounts for the 2027 Notes separately as a liability and equity component. The conversion feature of the 2027 Notes was previously represented by an equity component of $53.5 million at issuance, with the excess of the principal amount of the liability component over the carrying amount (“debt discount”) was amortized to interest expense over the term of the 2027 Notes at an effective interest rate of 11.17%.
The Company accounts for the 2027 Notes as a single liability measured at amortized cost. As the equity component is no longer required to be split into a separate component, the Company recorded an adjustment to reflect this update.
The Company recorded $0.4 million of the debt issuance costs related to the 2027 Notes as a reduction to the liability and amortizes these costs to interest expense over the term of the 2027 Notes.
The net carrying amount of the 2027 Notes was as follows (in thousands):
| June 30, 2023 | December 31, 2022 | ||||||||||
| Principal amount | $ | 200,000 | $ | 200,000 | |||||||
| Unamortized debt discount | (3,613) | (4,021) | |||||||||
| Unamortized debt issuance cost | (243) | (270) | |||||||||
| Net carrying amount | $ | 196,144 | $ | 195,709 | |||||||
The following table sets forth the interest expense recognized related to the 2027 Notes (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Contractual interest expense | $ | 2,500 | $ | 2,500 | $ | 5,000 | $ | 5,000 | |||||||||||||||
| Amortization of debt discount | 205 | 194 | 407 | 386 | |||||||||||||||||||
| Amortization of debt issuance cost | 14 | 13 | 27 | 26 | |||||||||||||||||||
| Total interest expense related to the 2027 Notes | $ | 2,719 | $ | 2,707 | $ | 5,434 | $ | 5,412 | |||||||||||||||
Note 6 - Licenses, Asset Acquisitions and Contingent Consideration
The following purchased assets were accounted for as asset acquisitions as substantially all of the fair value of the assets acquired were concentrated in a group of similar assets and/or the acquired assets were not capable of producing outputs due to the lack of employees and early stage of development. Because the assets had not yet received regulatory approval, the fair value attributable to these assets was recorded as in process research and development (“IPR&D”) expenses in the Company’s condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2023 and 2022.
The Company accounts for contingent consideration payable upon achievement of certain regulatory, development or sales milestones in such asset acquisitions when the underlying contingency is met.
License from Pulmokine, Inc. (Seralutinib)
On October 2, 2017, the Company entered into a license agreement with Pulmokine, Inc. under which it was granted an exclusive worldwide license and sublicense to certain intellectual property rights owned or controlled by Pulmokine to develop and commercialize seralutinib and certain backup compounds for the treatment, prevention and diagnosis of any and all disease or conditions. The Company also has the right to sublicense its rights under the license agreement, subject to certain conditions. The assets acquired are in the early stages of the FDA approval process, and the Company intends to further develop the assets acquired through potential FDA approval as evidenced by the milestone arrangement in the contract. The development activities cannot be performed without significant cost and effort by the Company. The agreement will remain in effect from the effective date, unless terminated earlier, until, on a licensed product-by-licensed product and country-by-country basis, the later of ten years from the date of first commercial sale or when there is no longer a valid patent claim covering such licensed product or specified regulatory exclusivity for the licensed product in such country. The Company is obligated to make future development and regulatory milestone payments of up to $58.0 million, which includes a payment of $10.0 million due upon initiation of the
15
first Phase 3 clinical trial, commercial milestone payments of up to $45.0 million, and sales milestone payments of up to $190.0 million. The Company is also obligated to pay tiered royalties on sales for each licensed product, at percentages ranging from the mid-single digits to the high single-digits. In addition, if the Company chooses to sublicense or assign to any third parties its rights under the agreement with respect to a licensed product, or the Company’s seralutinib operating subsidiary undergoes a change of control, the Company must pay to Pulmokine a specified percentage of all revenue to be received in connection with such transaction. The Company made an upfront payment of $5.5 million in October 2017. In December 2020, the Company accrued a milestone payment of $5.0 million in connection with the initiation of the first Phase 2 clinical trial of seralutinib, which was paid in January 2021. As of June 30, 2023, no other milestones had been accrued as the underlying contingencies had not yet been met.
Note 7 - Stockholders’ Equity
Common Stock
Each share of common stock is entitled to one vote. Common stock owners are entitled to dividends when funds are legally available and declared by the Company's board of directors.
Private Placement Financing
On July 15, 2022, we completed a private placement of 16,649,365 shares of our common stock at purchase price of $7.21 per share. The gross proceeds for the private placement were approximately $120.1 million, before deducting offering expenses. On August 9, 2022, we filed a registration statement on Form S-3 registering the shares of common stock issued in the private placement, which registration statement became automatically effective on August 9, 2022.
Shares of Common Stock Subject to Repurchase
On December 3, 2015, the Company issued 9,160,888 shares of common stock as founder shares for services rendered to the Company, valued at $0.0001 par value per share, for a total of approximately $4,100 (the "founder shares"). On January 4, 2018, incremental vesting conditions were placed on the previously issued founder shares. Fifty percent of the previously issued founder shares vested on January 4, 2018, and the remaining founder shares are subject to vesting restrictions over a period of five years. These shares are subject to repurchase by the Company upon a founder's termination of employment or service to the Company.
Pursuant to the employment agreements with the Company’s founders executed January 4, 2018, the Company provided for certain potential additional issuances of common stock (the “anti-dilution shares”) to each of the founders to ensure the total number of shares of common stock held by them and their affiliates (inclusive of any shares subject to equity awards granted by the Company) would represent 15% of the Company’s fully-diluted capitalization until such time as the Company raised $300.0 million in equity capital, including the capital raised in the Series A financing.
In furtherance of this obligation, on May 21, 2018, the Company issued 251,547 shares of common stock to the founders for services rendered to the Company, valued at $2.61 per share with an additional 251,547 shares of restricted stock subject to the same vesting restrictions and vesting period as the founder shares. In addition, on September 6, 2018, the Company issued 1,795,023 shares of common stock to the founders for services rendered to the Company, valued at $9.63 per share, with an additional 1,795,023 shares of restricted stock subject to the same vesting restrictions and vesting period as the founder shares.
During the six months ended June 30, 2023 and the year ended December 31, 2022, no shares were forfeited due to termination of employment. Any shares subject to repurchase by the Company are not deemed, for accounting purposes, to be outstanding until those shares vest. As such, the Company recognizes the measurement date fair value of the restricted stock over the vesting period as compensation expense. As of June 30, 2023 and December 31, 2022, no shares and 55,227 shares of common stock, respectively, were subject to repurchase by the Company. The unvested stock liability related to these awards is immaterial to all periods presented.
Note 8 - Equity Incentive Plans
2019 Equity Incentive Plan
In January 2019, the Company’s board of directors and stockholders approved and adopted the 2019 Incentive Award Plan (the “2019 Plan”). The 2019 Plan became effective on February 6, 2019, the day prior to the effectiveness of the registration statement filed in connection with the IPO. Under the 2019 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock or cash-based awards to individuals who are then
16
employees, officers, directors or consultants of the Company, and employees and consultants of the Company’s subsidiaries. A total of 5,750,000 shares of common stock were approved to be initially reserved for issuance under the 2019 Plan. The number of shares that remained available for issuance under the 2017 Plan (as defined below) as of the effective date of the 2019 Plan were, and shares subject to outstanding awards under the 2017 Plan as of the effective date of the 2019 Plan that are subsequently canceled, forfeited or repurchased by the Company will be, added to the shares reserved under the 2019 Plan. In addition, the number of shares of common stock available for issuance under the 2019 Plan will be automatically increased on the first day of each calendar year during the ten-year term of the 2019 Plan, beginning with January 1, 2020 and ending with January 1, 2029, by an amount equal to 5% of the outstanding number of shares of the Company’s common stock on December 31 of the preceding calendar year or such lesser amount as determined by the Company’s board of directors. As of June 30, 2023, an aggregate of 3,088,522 shares of common stock were available for issuance under the 2019 Plan. As of June 30, 2023 and December 31, 2022, 17,714,677 and 16,199,202 shares of common stock, respectively, were subject to outstanding awards under the 2019 Plan.
2019 Employee Stock Purchase Plan
In January 2019, the Company’s board of directors and stockholders approved and adopted the 2019 Employee Stock Purchase Plan (the “ESPP”). The ESPP became effective as of February 6, 2019, the day prior to the effectiveness of the registration statement filed in connection with the IPO. The ESPP permits participants to purchase common stock through payroll deductions of up to 20% of their eligible compensation. A total of 700,000 shares of common stock were approved to be initially reserved for issuance under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP will be automatically increased on the first day of each calendar year during the first ten years of the term of the ESPP, beginning with January 1, 2020 and ending with January 1, 2029, by an amount equal to 1% of the outstanding number of shares of the Company’s common stock on December 31 of the preceding calendar year or such lesser amount as determined by the Company’s board of directors. During the six months ended June 30, 2023, 249,623 shares were issued pursuant to the ESPP. As of June 30, 2023, an aggregate of 3,146,016 shares of common stock were available for issuance under the ESPP.
2017 Equity Incentive Plan
The Company’s 2017 Equity Incentive Plan (the “2017 Plan”) permitted the granting of incentive stock options, non-statutory stock options, restricted stock, restricted stock units and other stock-based awards. Subsequent to the adoption of the 2019 Plan, no additional equity awards can be made under the 2017 Plan. As of June 30, 2023 and December 31, 2022, 2,469,068 and 2,582,771 shares of common stock, respectively, were subject to outstanding options under the 2017 Plan. As of June 30, 2023, no shares of restricted stock awards granted under the 2017 Plan were unvested.
Stock Options
The fair value of each employee and non-employee time-vested stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company uses its own volatility to the extent it has sufficient trading history, and for awards in which sufficient trading history is not available, a peer group is used. Due to the lack of historical exercise history, the expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
On May 5, 2023, the Company granted to its Chairman and Chief Executive Officer 750,000 options with an exercise price of $1.36 per share. This grant contains both service and market based vesting conditions. The awards vest on the later of the date of achievement and the one-year anniversary of the grant date. The market condition becomes satisfied in 50%, 25% and 25% tranches upon achieving the average per-share closing price of the Company's common stock over any 30 consecutive calendar days following the grant date equal to or exceeding $5.00, $7.50 and $10.00, respectively. In the event a stock price tranche has not vested prior to the fourth anniversary of the grant date, any portion of the option attributable to such tranche will be forfeited. Due to the market condition included in this grant, the Company used the Geometric Brownian Motion/Monte Carlo model to value this award. The total stock-based compensation expense related to this award is $0.4 million, which is included in general and administrative expense on the condensed consolidated statements of operations and comprehensive loss. The Company expects to recognize this expense over a weighted average period of approximately 2.2 years.
17
Effective May 5, 2023, and in accordance with the terms of the 2019 Plan, the Company's board of directors approved a stock option repricing (the “Option Repricing”) whereby the exercise price of each Eligible Option (as defined below) was immediately reduced to $1.36 per share, the closing stock price on May 5, 2023. For purposes of the Option Repricing, “Eligible Options” are 6,817,057 outstanding stock options as of May 5, 2023 (vested or unvested) granted under the 2019 Plan prior to November 30, 2022 and held by those eligible employees of the Company identified by the Company's board of directors, including the Company’s executive officers except for the Company’s Chairman and Chief Executive Officer.
The participation of the executive officers of the Company in the Option Repricing was subject to their agreement to cancel a portion of their Eligible Options effective immediately (the “Cancelled Options”). Each executive was required to agree to cancel one-third of his or her Eligible Options, on a grant-by-grant basis. The Cancelled Options were deducted proportionately from the vested and unvested portions of each Repriced Option grant.
To the extent an Eligible Option is exercised prior to the Premium End Date (as defined below), or the eligible employee’s employment terminates prior to the Premium End Date, the eligible employee will be required to pay the original exercise price per share of the Eligible Options in connection with any exercise of the Eligible Option. The “Premium End Date” means the earliest of (i) May 5, 2024, (ii) the date of a change in control, (iii) the eligible employee’s death or disability, or (iv) if an eligible employee is an executive subject to the cancellation of a portion of Eligible Options and is terminated under circumstances giving rise to severance under his or her employment agreement, the date of such termination. Except for the reduction in the exercise prices of the Eligible Options as described above, the Eligible Options will retain their existing terms and conditions as set forth in the 2019 Plan and the applicable award agreements.
The repricing resulted in $3.4 million of incremental cost, which was calculated using the Black-Scholes option-pricing model, of which $2.0 million of the incremental cost was recognized immediately, and $1.4 million of the incremental cost will be recognized on the straight-line basis over the remaining vesting period of the repriced options. The incremental cost is included in general and administrative expense and research and development expense on the condensed consolidated statements of operations and comprehensive loss.
The following table summarizes stock option activity during the six months ended June 30, 2023:
| Shares Subject to Options Outstanding | Weighted- Average | ||||||||||||||||||||||
| Shares | Weighted- Average Exercise Price | Remaining Contractual Life (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Outstanding as of December 31, 2022 | 17,487,165 | $ | 9.24 | 8.1 | $ | 47 | |||||||||||||||||
| Options granted | 11,570,739 | $ | 1.30 | ||||||||||||||||||||
| Options exercised | — | $ | — | ||||||||||||||||||||
| Options forfeited/cancelled | (9,318,846) | $ | 11.33 | ||||||||||||||||||||
| Outstanding as of June 30, 2023 | 19,739,058 | $ | 3.59 | 7.4 | $ | 1 | |||||||||||||||||
| Options vested and expected to vest as of June 30, 2023 | 19,739,058 | $ | 3.59 | 7.4 | $ | 1 | |||||||||||||||||
| Options exercisable as of June 30, 2023 | 8,065,502 | $ | 5.83 | 5.6 | $ | — | |||||||||||||||||
The aggregate intrinsic value in the above table is calculated as the difference between fair value of the Company’s common stock price on June 30, 2023 and the exercise price of the stock options. The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2023 and 2022 was $0.0 million and $0.3 million, respectively.
The weighted-average grant date fair value per share for the stock option grants during the six months ended June 30, 2023 and 2022 was $5.41 and $8.30, respectively.
The aggregate fair value of stock options that vested during the six months ended June 30, 2023 and 2022 was $22.8 million and $18.4 million, respectively.
18
Restricted Stock
The summary of the Company’s restricted stock activity during the six months ended June 30, 2023 is as follows:
| Number of Restricted Stock Units Outstanding | Weighted- Average Grant Date Fair Value | ||||||||||
| Nonvested at December 31, 2022 | 1,350,035 | $ | 10.83 | ||||||||
| Granted | — | — | |||||||||
| Vested | (779,900) | 10.67 | |||||||||
| Forfeited | (125,448) | 11.37 | |||||||||
| Nonvested at June 30, 2023 | 444,687 | $ | 10.95 | ||||||||
Stock-Based Compensation Expense
Stock-based compensation expense has been reported in the Company’s condensed consolidated statements of operations and comprehensive loss as follows (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Research and development | $ | 4,721 | $ | 5,587 | $ | 9,411 | $ | 12,205 | |||||||||||||||
| General and administrative | 3,476 | 4,412 | 6,913 | 8,777 | |||||||||||||||||||
| Total stock-based compensation expense | $ | 8,197 | $ | 9,999 | $ | 16,324 | $ | 20,982 | |||||||||||||||
As of June 30, 2023, the total unrecognized compensation expense related to the unvested stock option awards granted was $32.1 million, which the Company expects to recognize over a weighted-average period of approximately 2.4 years.
As of June 30, 2023, the total unrecognized stock-based compensation expense related to the unvested restricted stock awards granted was $2.9 million, which the Company expects to recognize over a weighted-average period of approximately 0.6 years.
As of June 30, 2023, the total unrecognized compensation expense related to the ESPP was $1.3 million, which the Company expects to recognize over a weighted-average period of approximately 0.7 years.
Note 9 - Commitments and Contingencies
Leases
The Company subleases certain office and laboratory space under a non-cancelable operating lease expiring in January 2025 for the initial leased space and for the expansion space leased pursuant to an amendment to the lease agreement entered into in August 2018. In February 2022, the Company exercised its renewal option to extend the term of the expansion space until January 2025. The sublease agreement included options to extend for the entire premises through October 2028. The options to extend must be exercised prior to the termination of the original lease agreement. The period covered by the options was not included in the non-cancellable lease term as it was not determined to be reasonably certain to be executed. The lease is subject to charges for common area maintenance and other costs, and base rent is subject to an annual 3% increase each subsequent year. Costs determined to be variable and not based on an index or rate were not included in the measurement of the operating lease liabilities.
Monthly rent expense is recognized on a straight-line basis over the term of the leases. The operating leases are included in the condensed consolidated balance sheet at the present value of the lease payments at a weighted average discount rate of 7% using the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment as the leases do not provide an implicit rate. As of June 30, 2023, the weighted average remaining lease term was 1.6 years.
19
Lease costs were comprised of the following (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Operating lease cost | $ | 779 | $ | 779 | $ | 1,557 | $ | 1,540 | |||||||||||||||
| Short-term lease cost | 13 | 10 | 26 | 20 | |||||||||||||||||||
| Total lease cost | $ | 792 | $ | 789 | $ | 1,583 | $ | 1,560 | |||||||||||||||
Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended June 30, 2023 and 2022 was $0.8 million in both periods, and cash paid for amounts included in the measurement of operating lease liabilities for the six months ended June 30, 2023 and 2022 was $1.9 million in both periods, respectively.
Gross future minimum annual rental commitments as of June 30, 2023, were as follows (in thousands):
| Undiscounted Rent Payments | |||||
| Year ending December 31 | |||||
| 2023 (remaining 6 months) | $ | 1,662 | |||
| 2024 | 3,419 | ||||
| 2025 | 144 | ||||
| Total undiscounted rent payments | $ | 5,225 | |||
| Present value discount | (259) | ||||
| Present value of lease payments | $ | 4,966 | |||
| Current portion of operating lease liabilities (included as a component of accrued expenses and other current liabilities) | 3,140 | ||||
| Noncurrent operating lease liabilities | 1,826 | ||||
| Total operating lease liability | $ | 4,966 | |||
For the three months ended June 30, 2023 and 2022, the Company recorded $0.9 million and $0.8 million, in rent expense. For the six months ended June 30, 2023 and 2022, the Company recorded approximately $1.7 million in each period, respectively, in rent expense. Rent expense is included in research and development and general and administrative expense on the condensed consolidated statements of operations and comprehensive loss.
Note 10 - Subsequent Events
See Note 1 for the information regarding the private placement that the Company completed on July 24, 2023.
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis and the unaudited interim condensed consolidated financial statements included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 17, 2023.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended, or the Securities Act. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategies and plans, research and development plans, the anticipated timing, costs, design and conduct of our ongoing and planned preclinical studies and planned clinical trials for our product candidates, the timing and likelihood of regulatory filings and approvals for our product candidates, the impact of COVID-19 on our business, timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors” of this report and Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K filed with the SEC on March 17, 2023. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. All forward-looking statements are qualified in their entirety by this cautionary statement, which is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Overview
We are a clinical-stage biopharmaceutical company focused on developing and commercializing seralutinib for the treatment of pulmonary arterial hypertension, or PAH. In December 2022, we announced positive topline results from the Phase 2 TORREY Study in PAH patients. Upon completion of the 24-week blinded portion of the Phase 2 TORREY Study, patients were able to enroll into an open-label extension trial. We reported interim results from this ongoing open-label extension trial in July 2023, and we expect to release updated results from this open-label extension trial in the fourth quarter of 2023 or the first quarter of 2024. We expect to initiate a Phase 3 program in PAH in the third quarter of 2023. We expect to begin clinical development of seralutinib for the treatment of pulmonary hypertension associated with interstitial lung disease in the first half of 2024. We have assembled a deeply experienced and highly skilled group of industry veterans, scientists, clinicians and key opinion leaders from leading biotechnology and pharmaceutical companies, as well as leading academic centers from around the world. Our employees are a team of highly dedicated, passionate individuals who pride themselves on a culture of respect, humility, transparency, inclusion, dedication, collaboration and fun. Our ultimate goal is to enhance and extend the lives of patients.
We were incorporated in October 2015 and commenced operations in 2017. To date, we have focused primarily on organizing and staffing our company, business planning, raising capital, identifying, acquiring and in-licensing our product candidates and conducting preclinical studies and clinical trials. We have funded our operations primarily through equity and debt financings. We raised $1,062.1 million from October 2017 through June 30, 2023 through the sale of Series A and Series B convertible preferred stock financings, issuance of convertible notes, proceeds from our IPO completed in February 2019,
21
proceeds from our Credit Facility, proceeds from our concurrent underwritten public offerings of 5.00% convertible senior notes due 2027, or the 2027 Notes, and our common stock in May 2020, and proceeds from a private placement of our common stock in July 2022. As of June 30, 2023, we had $162.1 million in cash, cash equivalents and marketable securities. See Note 1 for the information regarding the private placement that the Company completed on July 24, 2023.
We have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future. For the three months ended June 30, 2023 and 2022, our net loss was $42.5 million and $56.5 million, respectively. For the six months ended June 30, 2023 and 2022, our net loss was $91.7 million and $114.3 million, respectively. As of June 30, 2023, we had an accumulated deficit of $1,123.9 million. We expect our expenses and operating losses will remain relatively flat as we conduct our ongoing and planned clinical trials, continue our research and development activities and conduct preclinical studies, and seek regulatory approvals for our product candidates, as well as hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company. In addition, as our product candidates progress through development and toward commercialization, we will need to make milestone payments to the licensors and other third parties from whom we have in-licensed or acquired our product candidates, including seralutinib. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending in particular on the timing of our clinical trials and preclinical studies and our expenditures on other research and development activities.
We do not expect to generate any revenue from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, until such time as we can generate substantial product revenues to support our cost structure, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional capital when needed, we could be forced to delay, limit, reduce or terminate our product candidate development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.
Components of Results of Operations
Revenue
We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products for the foreseeable future.
Operating expenses
Research and development
Research and development expenses relate primarily to preclinical and clinical development of our product candidates and discovery efforts, as well as our discontinued clinical product candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.
Research and development expenses include or could include:
•salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals involved in research and development efforts;
•external research and development expenses incurred under agreements with contract research organizations, or CROs, investigative sites and consultants to conduct our clinical trials and preclinical and non-clinical studies;
•laboratory supplies;
•costs related to manufacturing our product candidates for clinical trials and preclinical studies, including fees paid to third-party manufacturers;
•costs related to compliance with regulatory requirements; and
•facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, maintenance of facilities, insurance, equipment and other supplies.
22
Our direct research and development expenses consist principally of external costs, such as fees paid to CROs, investigative sites and consultants in connection with our clinical trials, preclinical and non-clinical studies, and costs related to manufacturing clinical trial materials. We deploy our personnel and facility related resources across all of our research and development activities. We track external costs and personnel expense on a program-by-program basis and allocate common expenses, such as facility related resources, to each program based on the personnel resources allocated to such program. Stock-based compensation and personnel and common expenses not attributable to a specific program are considered unallocated research and development expenses.
We expect our research and development expenses for the foreseeable future to remain relatively flat as we continue the development of our product candidates and conduct discovery and research activities for our preclinical programs. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of our product candidates due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate’s commercial potential. We will need to raise substantial additional capital in the future.
Our clinical development costs may vary significantly based on factors such as:
•per patient trial costs;
•the number of trials required for approval;
•the number of sites included in the trials;
•the countries in which the trials are conducted;
•the length of time required to enroll eligible patients;
•the number of patients that participate in the trials;
•the number of doses that patients receive;
•the drop-out or discontinuation rates of patients;
•potential additional safety monitoring requested by regulatory agencies;
•the duration of patient participation in the trials and follow-up;
•the cost and timing of manufacturing our product candidates;
•the costs incurred as a result of the COVID-19 pandemic, including clinical trial delays;
•the phase of development of our product candidates; and
•the efficacy and safety profile of our product candidates.
In process research and development
In process research and development, or IPR&D, expenses include IPR&D acquired as part of an asset acquisition or in-license for which there is no alternative future use, are expensed as incurred.
General and administrative
General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include facility-related costs, legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services and insurance costs.
We expect our general and administrative expenses for the foreseeable future to remain relatively flat to support our current infrastructure and continued costs of operating as a public company. These expenses will likely include audit, legal,
23
regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company.
Other income (expense), net
Other income (expense), net consists of (1) interest income on our cash, cash equivalents and marketable securities, (2) sublease income, (3) interest expense related to our Credit Facility and our 2027 Notes, and (4) other miscellaneous income (expense).
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. During the six months ended June 30, 2023, there have been no significant changes in our critical accounting policies and estimates as discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K filed with the SEC on March 17, 2023.
24
Results of Operations – Comparison of the Three and Six Months Ended June 30, 2023 and 2022
The following table sets forth our selected statements of operations data for the three months ended June 30, 2023 and 2022:
| Three months ended June 30, | 2023 vs 2022 | ||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | $ | 36,309 | $ | 42,580 | $ | (6,271) | |||||||||||
| In process research and development | 15 | 15 | — | ||||||||||||||
| General and administrative | 9,976 | 11,277 | (1,301) | ||||||||||||||
| Total operating expenses | 46,300 | 53,872 | (7,572) | ||||||||||||||
| Loss from operations | (46,300) | (53,872) | 7,572 | ||||||||||||||
| Other income (expense) | |||||||||||||||||
| Interest income | 695 | 300 | 395 | ||||||||||||||
| Interest expense | (3,429) | (3,481) | 52 | ||||||||||||||
| Other income, net | 6,538 | 587 | 5,951 | ||||||||||||||
| Total other income (expense), net | 3,804 | (2,594) | 6,398 | ||||||||||||||
| Net loss | $ | (42,496) | $ | (56,466) | $ | 13,970 | |||||||||||
The following table sets forth our selected statements of operations data for the six months ended June 30, 2023 and 2022:
| Six months ended June 30, | 2023 vs 2022 | ||||||||||||||||
| 2023 | 2022 | Change | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | $ | 74,104 | $ | 84,902 | $ | (10,798) | |||||||||||
| In process research and development | 30 | 35 | (5) | ||||||||||||||
| General and administrative | 20,108 | 23,278 | (3,170) | ||||||||||||||
| Total operating expenses | 94,242 | 108,215 | (13,973) | ||||||||||||||
| Loss from operations | (94,242) | (108,215) | 13,973 | ||||||||||||||
| Other income (expense) | |||||||||||||||||
| Interest income | 1,282 | 524 | 758 | ||||||||||||||
| Interest expense | (6,929) | (6,948) | 19 | ||||||||||||||
| Other income, net | 8,228 | 388 | 7,840 | ||||||||||||||
| Total other income (expense), net | 2,581 | (6,036) | 8,617 | ||||||||||||||
| Net loss | $ | (91,661) | $ | (114,251) | $ | 22,590 | |||||||||||
Operating Expenses
Research and development
Research and development expenses were $36.3 million for the three months ended June 30, 2023, compared to $42.6 million for the three months ended June 30, 2022, for a decrease of $6.3 million, which was primarily attributable to a decrease of $9.5 million of costs associated with preclinical studies and clinical trials for other programs and a decrease of $5.7 million of costs associated with preclinical studies and clinical trials for GB5121, offset by an increase of $8.9 million of costs associated with preclinical studies and clinical trials for seralutinib.
25
Research and development expenses were $74.1 million for the six months ended June 30, 2023, compared to $84.9 million for the six months ended June 30, 2022, for a decrease of $10.8 million, which was primarily attributable to a decrease of $22.6 million of costs associated with preclinical studies and clinical trials for other programs and a decrease of $2.9 million of costs associated with preclinical studies and clinical trials for GB5121, offset by an increase of $14.7 million of costs associated with preclinical studies and clinical trials for seralutinib.
The following table shows our research and development expenses by program for the three and six months ended June 30, 2023 and 2022:
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Seralutinib | $ | 22,189 | $ | 13,317 | $ | 40,139 | $ | 25,471 | |||||||||||||||
| GB5121 | 8,343 | 14,024 | 20,658 | 23,536 | |||||||||||||||||||
| Other programs | 5,777 | 8,406 | 12,770 | 17,218 | |||||||||||||||||||
| Other terminated programs | — | 6,833 | 537 | 18,677 | |||||||||||||||||||
| Total research and development | $ | 36,309 | $ | 42,580 | $ | 74,104 | $ | 84,902 | |||||||||||||||
In process research and development
There were no significant IPR&D expenses for the three and six months ended June 30, 2023 and 2022.
General and administrative
General and administrative expenses were $10.0 million for the three months ended June 30, 2023, compared to $11.3 million for the three months ended June 30, 2022, for a decrease of $1.3 million, which was primarily attributable to a $0.9 million decrease in stock-based compensation expense, a decrease of $0.2 million in insurance expense, and a decrease of $0.2 million in facilities and office costs.
General and administrative expenses were $20.1 million for the six months ended June 30, 2023, compared to $23.3 million for the six months ended June 30, 2022, for a decrease of $3.2 million, which was primarily attributable to a $1.9 million decrease in stock-based compensation expense, a decrease of $0.4 million in professional services expense, a decrease of $0.4 million in insurance costs and a decrease of $0.5 million in other operating expense.
Other expense, net
Other income, net was $3.8 million for the three months ended June 30, 2023, compared to other expense, net of $2.6 million for the three months ended June 30, 2022, for a decrease of $6.4 million, which was primarily attributable to a $1.6 million increase in investment accretion and a $4.9 million increase in other income related to $2.8 million of employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and $2.1 million of Ireland Corporate R&D tax credit.
Other income, net was $2.6 million for the six months ended June 30, 2023, compared to other expense, net of $6.0 million for the six months ended June 30, 2022, for a decrease of $8.6 million, which was primarily attributable to a $3.5 million increase in investment accretion and a $4.9 million increase in other income related to $2.8 million of employee retention credit under the CARES Act and $2.1 million of Ireland Corporate R&D tax credit.
Liquidity and Capital Resources
We have incurred substantial operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future and may never become profitable. As of June 30, 2023, we had an accumulated deficit of $1,123.9 million.
Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We may also use cash on hand to repurchase 2027 Notes through open-market transactions, including through a Rule 10b5-1 trading plan to facilitate open-market repurchases, or otherwise, from time to time.
26
Under our license agreement with Pulmokine, as well as our other license and acquisition agreements, we have payment obligations that are contingent upon future events such as our achievement of specified development, regulatory and commercial milestones and are required to make royalty payments in connection with the sale of products developed under those agreements. As of June 30, 2023, we were unable to estimate the timing or likelihood of achieving the milestones or making future product sales. Other contractual obligations include future payments under our Credit Facility, 2027 Notes and existing operating leases.
From our inception through June 30, 2023, our operations have been financed primarily by gross proceeds of $1,062.1 million from the sale of our convertible preferred stock, issuance of convertible notes, proceeds from our IPO, proceeds from our Credit Facility, proceeds from our concurrent underwritten public offerings of 2027 Notes and common stock, and proceeds from our private placement of common stock. As of June 30, 2023 we had cash, cash equivalents and marketable securities of $162.1 million. See Note 1 for the information regarding the private placement that the Company completed on July 24, 2023. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to capital preservation and liquidity.
On May 2, 2019, we entered into a credit, guaranty and security agreement, as amended on September 18, 2019, July 2, 2020, December 7, 2022 and February 14, 2023 pursuant to which the lenders party thereto agreed to make term loans available to us for working capital and general business purposes, in a principal amount of up to $150.0 million in term loan commitments, including a $30.0 million term loan which was funded at the closing date, with the ability to access the remaining $120.0 million in two additional tranches (each $60.0 million), subject to specified availability periods, the achievement of certain clinical development milestones, minimum cash requirements and other customary conditions, or the Credit Facility. As of June 30, 2023, no tranches under the Credit Facility were available to be drawn.
On April 10, 2020, we filed a registration statement on Form S-3, or the 2020 Shelf Registration Statement, covering the offering from time to time of common stock, preferred stock, debt securities, warrants and units, which registration statement became automatically effective on April 10, 2020.
On May 21, 2020, we issued $200.0 million aggregate principal amount 5.00% convertible senior notes due 2027 in a registered public offering. The interest rate on the 2027 Notes is fixed at 5.00% per annum. Interest is payable semi-annually in arrears on June 1 and December 1 of each year commencing on December 1, 2020. The total net proceeds from the 2027 Notes, after deducting the underwriting discounts and commissions and other offering costs, were approximately $193.6 million. Concurrent with the registered underwritten public offering of the 2027 Notes, we completed an underwritten public offering of 9,433,963 shares of our common stock. We received net proceeds of $117.1 million, after deducting underwriting discounts and commissions and other offering costs. Our concurrent offerings of 2027 Notes and common stock were registered pursuant to the 2020 Shelf Registration Statement.
On March 3, 2022, we filed a registration statement on Form S-3 covering the offering from time to time of common stock, preferred stock, debt securities, warrants and units, which registration statement became automatically effective on March 3, 2022.
On July 15, 2022, we completed a private placement of 16,649,365 shares of our common stock. The aggregate gross proceeds for the private placement were approximately $120.1 million, before deducting offering expenses. On August 9, 2022, we filed a registration statement on Form S-3 registering the resale of the shares of common stock issued in the private placement, which registration statement became automatically effective on August 9, 2022.
On July 24, 2023, we completed a private placement of 129,869,440 shares of our common stock. The aggregate gross proceeds for the private placement were approximately $212.1 million, before deducting offering expenses.
Additional information about our long-term borrowings is presented in Note 5 “Indebtedness” to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, of this Form 10-Q.
The following table shows a summary of our cash flows for each of the six months ended June 30, 2023 and 2022, respectively:
27
| Six months ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Net cash used in operating activities | $ | (91,240) | $ | (102,305) | |||||||
| Net cash provided by investing activities | 21,658 | 13,099 | |||||||||
| Net cash provided by (used in) financing activities | (5,440) | 742 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 53 | (687) | |||||||||
| Net decrease in cash and cash equivalents | $ | (74,969) | $ | (89,151) | |||||||
Operating activities
During the six months ended June 30, 2023, operating activities used approximately $91.2 million of cash, primarily resulting from a net loss of $91.7 million and changes in prepaid expenses and other current liabilities of $5.0 million, changes in accrued research and development expenses of $3.6 million and changes in accrued compensation and benefits of $5.3 million, reduced by stock-based compensation expense of $16.3 million.
During the six months ended June 30, 2022, operating activities used approximately $102.3 million of cash, primarily resulting from a net loss of $114.3 million and change in accrued compensation and benefits of $3.2 million, prepaid expenses and other current assets of $4.0 million and accrued research and development expenses of $1.9 million, reduced by stock-based compensation expense of $21.0 million.
Investing activities
During the six months ended June 30, 2023, investing activities provided approximately $21.7 million of cash, primarily resulting from the maturities of marketable securities of $155.0 million, offset by the purchases of marketable securities of $133.3 million.
During the six months ended June 30, 2022, investing activities provided approximately $13.1 million of cash, primarily resulting from the purchases of marketable securities of $72.6 million, offset by the maturities of marketable securities of $86.0 million.
Financing activities
During the six months ended June 30, 2023, financing activities used $5.4 million of cash, primarily resulting from the principal repayments of long-term debt of $5.8 million, offset by proceeds from the purchase of shares pursuant to the ESPP of $0.4 million.
During the six months ended June 30, 2022, financing activities provided $0.7 million of cash, primarily resulting from the purchase of shares pursuant to the ESPP and proceeds from the exercise of stock options.
Funding requirements
Based on our current operating plan, we believe that our existing cash, cash equivalents and marketable securities, will be sufficient to fund our operations through at least the next 12 months from the date these condensed consolidated financial statements were available to be issued. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.
Our future capital requirements will depend on many factors, including:
•the type, number, scope, progress, expansions, results, costs and timing of, our preclinical studies and clinical trials of our product candidates which we are pursuing or may choose to pursue in the future;
•the costs and timing of manufacturing for our product candidates;
•the costs, timing and outcome of regulatory review of our product candidates;
28
•the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;
•our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting;
•the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase;
•the timing and amount of the milestone or other payments we must make to the licensors and other third parties from whom we have in-licensed our acquired our product candidates;
•the costs and timing of establishing or securing sales and marketing capabilities if any product candidate is approved;
•our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products;
•the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements;
•costs associated with any products or technologies that we may in-license or acquire; and
•any delays and cost increases that result from the COVID-19 pandemic or other epidemic diseases.
Until such time as we can generate substantial product revenues to support our cost structure, if ever, we expect to finance our cash needs through equity offerings, our Credit Facility, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements.
However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, licenses and other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional capital when needed, we could be forced to delay, limit, reduce or terminate our product candidate development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2023, there have been no material changes surrounding our market risk, including interest rate risk, foreign currency exchange risk, and inflation risk, from the discussion provided in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 17, 2023.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there
29
can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this quarterly report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. From time to time, we may be involved in legal proceedings or subject to claims incident to the ordinary course of business. Regardless of the outcome, such proceedings or claims can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed by us in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 17, 2023 and Part II, Item 1A "Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 filed with the SEC on May 9, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Issuer Repurchases of Equity Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The exhibits filed or furnished as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which Exhibit Index is incorporated herein by reference.
31
EXHIBIT INDEX
| Exhibit Number | Exhibit Description | Incorporated by Reference | Filed Herewith | |||||||||||||||||||||||||||||
| Form | Date | Number | ||||||||||||||||||||||||||||||
| 3.1 | X | |||||||||||||||||||||||||||||||
| 3.2 | 10-Q | 5/12/2020 | 3.2 | |||||||||||||||||||||||||||||
| 4.1 | S-1/A | 1/23/2019 | 4.1 | |||||||||||||||||||||||||||||
| 4.2 | S-1 | 12/21/2018 | 4.2 | |||||||||||||||||||||||||||||
| 4.3 | 8-K | 5/21/2020 | 4.1 | |||||||||||||||||||||||||||||
| 4.4 | 8-K | 5/21/2020 | 4.2 | |||||||||||||||||||||||||||||
| 4.5 | 8-K | 5/21/2020 | 4.3 | |||||||||||||||||||||||||||||
| 4.6 | 8-K | 7/20/2023 | 4.1 | |||||||||||||||||||||||||||||
| 10.1# | X | |||||||||||||||||||||||||||||||
| 10.2 | 8-K | 7/20/2023 | 10.1 | |||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||
| 32.1* | X | |||||||||||||||||||||||||||||||
| 32.2* | X | |||||||||||||||||||||||||||||||
| 101.INS | XBRL Report Instance Document | X | ||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Label Linkbase Document | X | ||||||||||||||||||||||||||||||
| 101.PRE | XBRL Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||||||||||||
| * | This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. | ||||
| # | Indicates management contract or compensatory plan. | ||||
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GOSSAMER BIO, INC. | |||||||||||
| Date: | August 8, 2023 | By: | /s/ Faheem Hasnain | ||||||||
| Faheem Hasnain | |||||||||||
| President and Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Date: | August 8, 2023 | By: | /s/ Bryan Giraudo | ||||||||
| Bryan Giraudo | |||||||||||
| Chief Operating Officer and Chief Financial Officer | |||||||||||
| (Principal Financial and Accounting Officer) | |||||||||||
33