Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors.” You should carefully read the “Cautionary Note About Forward-Looking Statements” and “Risk Factors” sections of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from the results described below.
Overview
We are a financially-sustainable pharmaceutical company with a record of financial success that develops and commercializes small-molecule anti-inflammatory and anti-fibrotic drugs targeting organ diseases, focusing specifically on organ fibrosis. Fibrotic diseases represent a large patient population with significant unmet medical needs. Fibrosis involves a complex, multi-stage process with multiple pathways. While there are numerous potential targets for anti-fibrotic therapy, both established and emerging, addressing a single molecular pathway may not be sufficient to prevent, halt, or reverse fibrosis.
Our strategy is to use our experience in the successful development and commercialization of ETUARY® (Pirfenidone) to expand into new indications and develop similar drug candidates. Pirfenidone, the first anti-fibrotic drug approved for IPF in Japan, the EU, the U.S., and the PRC, is a small molecule drug that inhibits the synthesis of TGF-ß1, TNF-α, and other fibrosis and inflammation modulators. We have obtained approval for ETUARY (pirfenidone) in the PRC for IPF.
Gyre Pharmaceuticals successfully advanced Pirfenidone from R&D to commercialization in the PRC for the treatment of IPF. ETUARY’s annual sales have consistently grown each year, reaching $112.1 million in 2023. In addition to IPF, Pirfenidone is undergoing three additional Phase 3 studies for CTD-ILD to broaden its indications and market: SSc-ILD, DM-ILD and PD.
F351, our lead development candidate, is a structural derivative of ETUARY (Pirfenidone). It is a new oral chemical entity with an anti-fibrotic, TGF-ß1-targeting mechanism of action, for which we hold patents in major markets. Studies suggest that F351 and its major metabolites have minimal drug-drug interaction risks. Despite potential efficacy in IPF, we are prioritizing F351 for the treatment of liver fibrosis due to the large potential addressable market and significant unmet need.
Gyre Pharmaceuticals has completed a Phase 2 trial of F351 in the PRC for CHB-associated liver fibrosis. The Phase 2 trial showed that F351 was well-tolerated without notable toxicity and patients treated showed statistically-significant improvement of liver fibrosis, with the best efficacy results achieved at 270 mg/day dosing. Based on these results, a confirmatory Phase 3 trial is ongoing in the PRC. The enrollment of 248 patients for the confirmatory Phase 3 trial has been completed, with last patient out expected in 2024 and clinical results expected by early 2025.
In the U.S., we have completed a Phase 1 clinical trial of F351 in healthy volunteers. We are preparing an IND application and expect to submit it in late 2024. Following results from the PRC Phase 3 trial in CHB-associated liver fibrosis and pending approval of our IND, we expect to initiate a Phase 2a trial to evaluate F351 for the treatment of NASH-associated liver fibrosis in 2025.
F351 Asset Acquisition
On December 26, 2022, Catalyst, purchased the F351 Assets from GNI Japan and GNI Hong Kong, other than such assets and intellectual property rights located in the PRC, pursuant to the F351 Agreement.
Business Combination Agreement
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On December 26, 2022, Catalyst entered into a Business Combination Agreement, as amended on March 29, 2023 and August 30, 2023 (the “Business Combination Agreement”) with GNI USA, GNI Japan, GNI Hong Kong, SG (collectively with GNI USA, GNI Japan and GNI Hong Kong, the “Contributors,” and each a “Contributor”), certain individuals and CPI. On October 30, 2023 (the “Effective Time”), the Contributions (as defined below) became effective and Catalyst acquired an indirect controlling interest in Beijing Continent Pharmaceuticals Co., Ltd. (doing business as Gyre Pharmaceuticals Co., Ltd.). In connection with the Contributions, and immediately prior to the Effective Time of the Contributions, Catalyst amended its certificate of incorporation, increased the number of authorized shares of its common stock, par value $0.001 per share (the “Catalyst Common Stock”) from 100,000,000 shares to 400,000,000 shares, effected the Reverse Stock Split and changed its name to Gyre Therapeutics, Inc.
Shares of Catalyst Common Stock were previously listed on The Nasdaq Capital Market under the symbol “CBIO.” Catalyst filed a listing application for the combined company with the Nasdaq Stock Market Inc. (“Nasdaq”). On October 31, 2023, Gyre’s common stock commenced trading on the Nasdaq Capital Market under the symbol “GYRE”, on a post-reverse stock split adjusted basis.
Pursuant to the Business Combination Agreement, at the Effective Time of the Contributions, and after giving effect to the 1-for-15 reverse stock split:
a)
GNI USA contributed all of its ordinary shares in the capital of CPI to Catalyst in exchange for 45,923,340 shares of Gyre Common Stock (the “CPI Contribution”),
b)
GNI USA contributed its interest in Further Challenger International Limited (“Further Challenger”) for 17,664,779 shares of Gyre Common Stock (the “FC Contribution” and together with the CPI Contribution, the “GNI USA Contributions”), and
c)
each Minority Holder contributed 100% of the interest he or she held in his or her respective entity in exchange for an aggregate of 10,463,627 shares of Gyre Common Stock (the “Minority Holder Contributions” and together with the GNI USA Contributions, the “Contributions”).
As a result of the GNI USA Contributions, Gyre directly and indirectly holds 100% of CPI’s shares. Through Gyre’s ownership of CPI, prior to the Minority Holder Contributions, Gyre held a 56.0% indirect interest in Gyre Pharmaceuticals. Upon completion of the Minority Holder Contributions, Gyre obtained additional indirect interests in Gyre Pharmaceuticals and holds, in aggregate, a 65.2% indirect interest in Gyre Pharmaceuticals.
Immediately after the closing of the Contributions, excluding potentially dilutive securities, GNI USA owned approximately 83.6% of the outstanding shares of Gyre Common Stock, Catalyst’s existing stockholders, excluding GNI USA, owned approximately 2.8% of the outstanding Gyre Common Stock, and the Minority Holders owned approximately 13.7% of the outstanding shares of Gyre Common Stock. The Convertible Preferred Stock remained outstanding after the closing of the Contributions and is not included in the above ownership percentages.
At the Effective Time, Gyre Pharmaceuticals terminated its 2021 Stock Incentive Plan (the “2021 Plan”) and the options (the “Gyre Pharmaceuticals Options”) outstanding under the 2021 Plan were terminated and replaced with options granted under a subplan for Chinese participants under the Gyre 2023 Omnibus Incentive Plan (the “2023 Omnibus Incentive Plan”) that are substantially similar in all material respects to the Gyre Pharmaceuticals Options previously outstanding under the 2021 Plan.
Each share of Catalyst Common Stock and option to purchase Catalyst Common Stock that was issued and outstanding at the Effective Time remained issued and outstanding, and such shares and options were unaffected by the Contributions.
Gyre Pharmaceuticals is a commercial-stage biopharmaceutical company registered and established in the PRC in 2002. Gyre Pharmaceuticals is committed to the research and development of new drugs as well as manufacturing and commercialization of ETUARY (pirfenidone capsule) for the treatment of idiopathic pulmonary fibrosis and other pharmaceutical products. The registered office of Gyre Pharmaceuticals is located at 60 Shunkang Road, Shunyi District, Beijing, PRC.
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The immediate holding company of Gyre Pharmaceuticals is BJContinent Pharmaceuticals Limited (“BJC”). The intermediate holding company of Gyre Pharmaceuticals is CPI. Immediately following the GNI USA Contributions, the immediate holding company of CPI is Gyre. The majority stockholder of Gyre is GNI USA and the majority stockholder of GNI USA is GNI Japan.
The GNI USA Contributions were treated as an asset acquisition under U.S. generally accepted accounting principles (“U.S. GAAP”), with CPI treated as the accounting acquirer and presented as the predecessor for post-acquisition reporting purposes. Since Catalyst is the legal acquirer, the GNI USA Contributions were accounted for as a reverse asset acquisition. This determination was based upon the terms of the Business Combination Agreement and other factors including that, immediately following the GNI USA Contributions: (i) GNI USA (as the parent company of CPI immediately prior to the GNI USA Contributions) owns a substantial majority of the voting power of the combined company; (ii) GNI USA has the ability to control the board of directors of the combined company; and (iii) senior management of Gyre Pharmaceuticals and GNI USA hold a majority of the key positions in senior management of the combined company. Immediately prior to the closing of the GNI USA Contributions, Catalyst did not meet the definition of a business because Catalyst did not have an organized workforce that significantly contributed to its ability to create output, and substantially all of its fair value was concentrated in in-process research and development (“IPR&D”).
As of the closing date of the GNI USA Contributions, the net assets of Catalyst were recorded at their acquisition-date relative fair values in the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K and the reported operating results prior to the GNI USA Contributions are those of CPI.
The Minority Holder Contributions were treated as an equity transaction, where we obtained additional indirect interests in and maintained our control over Gyre Pharmaceuticals.
Contingent Value Rights Agreement
Concurrent with the signing of the Business Combination Agreement on December 26, 2022, Catalyst and the Rights Agent (as defined in the CVR Agreement) executed a contingent value rights agreement (the “CVR Agreement”), as amended on March 29, 2023, pursuant to which each CVR Holder, excluding the Sellers, received one contractual contingent value right (a “CVR”) issued by the Company for each share of Catalyst common stock held by such holders. Each CVR entitles the CVR Holder thereof to receive certain cash payments in the future. For additional information, see Note 13 — Commitments and Contingencies to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Reverse Stock Split
We effected a 1-for-15 reverse stock split immediately prior to the Effective Time of the Contributions. The par value of the Catalyst Common Stock following the Reverse Stock Split was not adjusted and remains at $0.001 per share. All of the Catalyst’s issued and outstanding common stock and options have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.
All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented, unless otherwise indicated. Proportionate adjustments were made to the per share exercise price and the number of shares issuable upon the exercise or vesting of all stock options and warrants outstanding, which resulted in a proportional decrease in the number of shares of our common stock reserved for issuance upon exercise or vesting of such stock options, warrants, and in the case of stock options and warrants, a proportional decrease in the exercise price of such stock options and warrants.
No fractional shares were issued in connection with the Reverse Stock Split and stockholders who would otherwise be entitled to a fraction of one share received a proportional cash payment.
Private Placement and Securities Purchase Agreement
On October 27, 2023, we entered into the Securities Purchase Agreement for a private placement with GNI USA. Pursuant to the Securities Purchase Agreement, GNI USA agreed to purchase (i) 811 shares of Gyre’s Convertible
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Preferred Stock and (ii) warrants to purchase up to 811 shares of Convertible Preferred Stock (the “Preferred Stock Warrants”) for an aggregate purchase price of $5.0 million. The Private Placement closed immediately after the closing of the Contributions.
The Preferred Stock Warrants are exercisable at an exercise price of $4,915.00 per share of Convertible Preferred Stock and expire on October 30, 2033. Each share of Convertible Preferred Stock is convertible into approximately 666.67 shares of the Gyre Common Stock, as adjusted for the Reverse Stock Split. The Preferred Stock Warrants issued are considered freestanding financial instruments and classified as a liability.
Financial Operations Overview
During the year ended December 31, 2023, we had a net loss of $85.5 million and a net loss attributable to common stockholders of $92.9 million. For the year ended December 31, 2022, our net income was $4.3 million and net income attributable to common stockholders was $2.3 million. As of December 31, 2023, we had accumulated deficit of $85.5 million and cash and cash equivalents of $33.5 million. As of December 31, 2022, we had retained earnings of $7.4 million and cash of $25.2 million.
Components of Results of Operations
Revenues
Sales of Pharmaceutical Products
We generate revenue primarily through sales of ETUARY and certain generic drugs in the PRC. Distributors are our direct customers, and sales to distributors accounted for 100% of the revenue from ETUARY. Such distributors sell ETUARY to certain outlets, including hospitals and other medical institutions, as well as pharmacies.
License of Intellectual Property
Revenue from licensing intellectual property is recognized when the control of the right to use the license is transferred to the customer.
Operating Expenses
Cost of Revenue
Cost of revenue mainly consists of cost of sales representing direct and indirect costs incurred to bring the product to saleable condition. Cost of sales primarily consists of (i) raw material costs; (ii) staff costs for production employees; (iii) depreciation and amortization related to property and equipment and intangible assets used in production; (iv) taxes and surcharges; (v) transportation costs; and (vi) miscellaneous other costs.
Selling and Marketing Expenses
Selling and marketing expenses primarily relate to selling and marketing our product ETUARY in the PRC and consist of expenses incurred from hosting academic conferences, seminars and symposia; promotional expenses associated with market education on ETUARY for its use in hospitals; and staff costs primarily consisting of salaries and benefits for in-house marketing and promotion staff.
Research and Development Expenses
Research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services used in research and development are initially deferred and capitalized in prepaid and other current assets. The capitalized amounts are then expensed as the related goods are delivered or services are performed, or until it is no longer expected that the goods or services will be delivered.
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Research and development costs consist primarily of costs related to the pre-clinical and clinical development of our product candidates, which include payroll and other personnel-related expenses, laboratory supplies and reagents, contract research and development services for pre-clinical research and clinical trials, materials, and consulting costs, as well as allocations of facilities, depreciation and other overhead costs.
General and Administrative Expenses
General and administrative expenses consist of (i) accounting, IT, legal, administrative, and other internal service staff costs; (ii) stock-based compensation representing share options granted to our functional employees; (iii) professional service fees, primarily for legal and accounting services; and (iv) other miscellaneous expenses.
Acquired IPR&D
Acquired IPR&D expenses represent costs incurred for acquisitions of IPR&D with no alternative future use, which are expensed immediately upon acquisition.
Divestiture Losses
Prior to the GNI USA Contributions, we recorded a loss from the divestiture of almost all our assets other than our 56.0% indirect ownership interest in Gyre Pharmaceuticals. This expense was reflected in our consolidated statements of operations and comprehensive (loss) income. The loss is presented net of the direct costs incurred with the transaction.
Loss on Disposal of Property and Equipment
Prior to the GNI USA Contributions, we recorded a loss on disposal of property and equipment. This expense was reflected in our consolidated statements of operations and comprehensive (loss) income. The loss is presented net of loses incurred in connection with the sale of property and equipment.
Other Income (Expense), Net
Interest Income, Net
Interest income consists primarily of interest earned on our long-term certificates of deposit. Interest income is recognized on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.
Other Income
Other income consists mostly of government grants. Government grants are recognized at their fair value where there is reasonable assurance that the grant will be received, and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income on a systematic basis over the periods that the costs, for which it is intended to compensate, are expensed. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to profit or loss over the expected useful life of the relevant asset by equal annual installments or deducted from the carrying amount of the asset and released to profit or loss by way of a reduced depreciation charge.
Change in Fair Value of Warrant Liability
In connection with the Private Placement, we issued the Preferred Stock Warrants, which are freestanding financial instruments classified as warrant liability since the underlying securities are contingently redeemable upon the occurrence of events which are outside of our control. The Preferred Stock Warrants are recorded at fair value upon issuance and are subject to remeasurement at the end of each reporting period, with any change in fair value recognized in our statements of operations as other (income) expense.
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Other Expenses
Other expense consists of any non-operating costs, such as loss from equity method investments.
Provision for Income Taxes
Provision for income taxes are comprised primarily of current income tax provision, mainly attributable to the profitable Gyre Pharmaceuticals operations in the PRC, and deferred income tax provision, mainly including deferred tax recognized for temporary differences in relation to research and development tax credit and net operating loss carry forwards for U.S. tax purposes, deemed income inclusions from controlled foreign corporations for U.S. tax purposes, and fixed and intangible assets, net of valuation allowances.
Results of Operations
The following tables summarize our results of operations for the years ended December 31, 2023 and 2022 (in thousands, except percentage change):
Year Ended December 31,
Operating expenses excluding cost of revenues:
Acquired in-process research and development 83,104 — 83,104 **
Loss on disposal of property and equipment 628 — 628 **
Other income (expense), net:
Change in fair value of warrant liability (9,261 ) — (9,261 ) **
** Not meaningful.
Comparison of the Years Ended December 31, 2023 and 2022
Revenues
Revenues for the years ended December 31, 2023 and 2022 were $113.5 million and $102.3 million, respectively. The increasewas primarily due to a $12.6 million increase in pharmaceutical product sales, driven by enhanced marketing and sales initiatives in regions of the PRC where sales were previously lower in 2022, partially offset by a $1.4 million decrease in revenue related to a one-time licensing fee recognized in 2022 from our license agreement with Fu Fang Chuan Gui Tincture entered into in 2021.
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Cost of Revenues
Cost of revenues for the years ended December 31, 2023 and 2022 was $4.6 million and $4.8 million, respectively. The decrease of $0.2 million was primarily driven by a $0.3 million reduction attributed to favorable foreign exchange rate fluctuations and a $0.2 million decrease in stock-based compensation expenses. These reductions were partially offset by a $0.3 million increase in cost of revenues due to increased sales. The change in stock-based compensation is related to options being fully vested in 2022 and the modification of option terms in 2023.
Selling and Marketing Expenses
Selling and marketing expenses increased by $6.9 million, or 12.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily driven by a $3.8 million increase in selling and marketing payroll costs due to an increase in staff headcount, a $3.5 million increase in promotional expenses, and a $0.7 million increase in traveling expenses of our sales staff, partially offset by a $1.3 million decrease in stock-based compensation. The change in stock-based compensation is related to options being fully vested in 2022 and the modification of option terms in 2023.
Research and Development Expenses
The table below details our costs for research and development for the years ended December 31, 2023 and 2022 (in thousands, except percentage change):
Year Ended December 31,
Direct program expenses:
Indirect expenses:
Research and development expenses decreased by $2.9 million, or 17.4%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily driven by a $1.8 million decrease in stock-based compensation, related to options being fully vested in 2022 and the modification of option terms in 2023, as well as by a $1.2 million decrease in pre-clinical research expenses. The latter is a result of several research and development projects advancing to the clinical trials stage or reaching the application phase in 2023. This overall decrease was partially offset by a $0.2 million increase in research and development payroll costs due to increased headcount.
General and Administrative Expenses
General and administrative expenses decreased by $2.7 million, or 15.6%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily driven by a $2.8 million decrease in stock-based compensation. The change in stock-based compensation is related to options being fully vested in 2022, the modification of option terms in 2023 and the new option grants offered after the GNI USA Contributions.
Acquired IPR&D
Acquired IPR&D expenses of $83.1 million for the year ended December 31, 2023 represent costs of incurred for acquisitions of IPR&D with no alternative future use, which were expensed immediately upon the closing of GNI USA Contributions.
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Divestiture Losses
During the year ended December 31, 2023, we recorded a loss of $2.7 million from the divestiture of almost all our assets other than our 56.0% indirect ownership interest in Gyre Pharmaceuticals. The loss is presented net of the direct costs incurred with the transaction.
Loss on Disposal of Property and Equipment
We recorded a loss on disposal of property and equipment of $0.6 million during the year ended December 31, 2023. The loss is presented net of loses incurred in connection with the sale of property and equipment.
Other Income (Expense), Net
Interest income increased by $0.3 million, or 43.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to additional investments in long-term certificates of deposit.
Other income increased by $0.2 million, or 25.6%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in other income was mainly attributed to $1.0 million of PRC government grants income recognized during the year ended December 31, 2023 in comparison to $0.9 million of PRC government grants income recognized during the year ended December 31, 2022.
Change in fair value of warrant liability was a $9.3 million expense for the year ended December 31, 2023 and was related to the remeasurement of the Preferred Stock Warrants liability. There were no warrants outstanding during the year ended December 31, 2022.
Other expenses increased by $1.2 million, or 88.8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This increase was primarily driven by a $0.7 million increase in loss from equity method investments and $0.5 million in sponsorships for local charity events.
Provision for Income Taxes
Provision for income taxes was $8.5 million and $5.1 million for the years ended December 31, 2023 and 2022, respectively. The increase was primarily attributable to a higher profit from Gyre Pharmaceuticals operations and an increase in deferred tax asset.
Liquidity and Capital Resources
Sources of Liquidity
As of December 31, 2023, we had cash and cash equivalents of $33.5 million and long-term certificates of deposit of $23.4 million, which are available to fund operations, and an accumulated deficit of $85.5 million. Our net loss during the year ended December 31, 2023 was $85.5 million, while cash provided by operating activities was $25.9 million. We believe that our existing cash and cash equivalents, cash flows from operations, and access to capital markets will be sufficient to fund our operating activities and obligations for at least 12 months following the filing date of this Annual Report.
Future Funding Requirements
We expect to use cash flows from operations to meet our current and future financial obligations, including funding our operations, and capital expenditures. Our ability to make these payments depends on our future performance, which will be affected by financial, business, economic, regulatory, and other factors, many of which we cannot control. Factors that may affect financing requirements include, but are not limited to:
•
the timing, progress, cost and results of our clinical trials, preclinical studies and other discovery and research and development activities;
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•
the timing and outcome of, and costs involved in, seeking and obtaining marketing approvals for our products, and in maintaining quality systems standards for our products;
•
the timing of, and costs involved in, commercial activities, including product marketing, sales and distribution;
•
our ability to successfully commercialize and to obtain regulatory approval for, and successfully commercialize our other or future product candidates;
•
increases or decreases in revenue from our marketed products, including decreases in revenue resulting from generic entrants or health epidemics or pandemics;
•
the number and development requirements of other product candidates that we pursue;
•
our ability to manufacture sufficient quantities of our products to meet expected demand;
•
the costs of preparing, filing, prosecuting, maintaining and enforcing any patent claims and other intellectual property rights, litigation costs and the results of litigation;
•
our ability to enter into collaboration, licensing or distribution arrangements and the terms and timing of these arrangements;
•
the potential need to expand our business, resulting in additional payroll and other overhead expenses;
•
the potential in-licensing of other products or technologies;
•
the emergence of competing technologies or other adverse market or technological developments; and
•
the impacts of inflation and resulting cost increases.
Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and technologies.
The following table summarizes our cash flows for the periods presented (in thousands):
Year Ended December 31,
Cash Flow Data:
Net cash provided by operating activities $ 25,892 $ 10,677
Net cash used in investing activities (19,760 ) (13,814 )
Net cash provided by financing activities 2,500 —
Effect of exchange rate changes on cash and cash equivalents (298 ) (1,891 )
Net change in cash and cash equivalents $ 8,334 $ (5,028 )
Cash Flows from Operating Activities
Cash provided by operating activities for the year ended December 31, 2023 was $25.9 million, reflecting our net loss of $85.5 million, offset by non-cash items of $103.9 million primarily related to the acquired IPR&D of $83.1 million in connection with the GNI USA Contributions, $9.3 million related to the change in fair value of warrant liability, stock-based compensation of $7.3 million, divestiture losses of $2.7 million, and equity loss of unconsolidated affiliates of $1.3 million. Additionally, cash provided by operating activities reflected changes in net operating assets and liabilities of $7.5 million.
Cash provided by operating activities for the year ended December 31, 2022 was $10.7 million, reflecting our net income of $4.3 million and non-cash items of $14.2 million primarily related to stock-based compensation of $13.4 million, partially offset by net cash outflow of $7.8 million from the changes in net operating assets and liabilities.
Cash Flows from Investing Activities
Cash used in investing activities for the year ended December 31, 2023 was $19.8 million, which consisted of $15.7 million in purchases of certificates of deposit, $8.5 million in purchases of property and equipment and $1.0 million paid for equity method investment, partially offset by $5.6 million of cash acquired in connection with the GNI USA Contributions.
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Cash used in investing activities for the year ended December 31, 2022 was $13.8 million, which consisted of $7.5 million in purchases of certificates of deposit, $5.0 million in purchases of property and equipment and $1.3 million in cash paid for equity method investments.
Cash Flows from Financing Activities
Cash provided by financing activities for the year ended December 31, 2023 was $2.5 million due to the portion of proceeds from the issuance of Convertible Preferred Stock and Preferred Stock Warrants in the Private Placement received after the GNI USA Contributions.
There was no cash provided by or used in financing activities for the year ended December 31, 2022.
Contractual Obligations and Other Commitments
Leases
We have entered into lease arrangements in (1) San Diego, California for our headquarters, which expires on the last day of the 38th full calendar month beginning on or after November 11, 2023, and (2) the PRC, for office and laboratory spaces through August 2024. As of December 31, 2023, our fixed lease payment obligations were $0.4 million, with $0.2 million payable within 12 months.
Other Contractual Obligations and Commitments
In June 2021, we entered into a transfer agreement with Nanjing Healthnice Pharmaceutical Technology Co., Ltd. (“Nanjing Healthnice”), an independent third party, pursuant to which Nanjing Healthnice agreed to transfer to us the avatrombopag maleate tablets for the treatment of CLD-associated thrombocytopenia and all relevant technologies, complete any research or trials and transfer to us all materials necessary for the application of marketing approval by CDE. Upon the completion of the transfer, we expect that we will be approved by NMPA as the marketing authorization holder of the avatrombopag maleate tablets. In exchange, we will pay a total of approximately $2.3 million upon certain milestones (e.g., the completion of bioequivalence study, or the registration application to CDE) being met. We have completed the bioequivalence study and received CDE acceptance on August 1, 2022, and as of December 15, 2023, we have made total payments of approximately $1.8 million.
In September 2022, we entered into a transfer agreement with New Jiyuan (Beijing) Pharmaceutical Technology Co., Ltd. (“New Jiyuan”), an independent third party, pursuant to which New Jiyuan agreed to transfer to us the minocycline hydrochloride foam for the treatment of moderate to severe acne and all relevant technologies, complete product development and transfer to us all materials necessary for the application of marketing approval of CDE. Upon the completion of the transfer, we expect that we will be approved by NMPA as the marketing authorization holder of the minocycline hydrochloride foam. In exchange, we will pay a total amount of $1.0 million and the payments will be made by installments conditioned upon certain milestones (e.g., the completion of bioequivalence study, or the registration application to CDE) being met. Process verification has been completed. As of December 31, 2023, we have made total payments of approximately $0.7 million.
In December 2022, we entered into a transfer agreement with Hangzhou Baicheng Pharmaceutical Technology Co., Ltd. and Zhejiang CDMO Pharmaceutical Co., Ltd., an independent third party, pursuant to which Baicheng agreed to transfer to us the acetylcysteine injection for the treatment of respiratory diseases with excessive thick mucus discharge and all relevant technologies, assist us in completing any research, trial and other required procedures and transfer to us all materials necessary for the application of marketing approval of CDE. Upon the completion of this transfer agreement, we expect that we will be approved by NMPA as the marketing authorization holder of the acetylcysteine injection. We have received CDE acceptance on January 8, 2024. As of December 31, 2023, we have made payments totaling approximately $0.5 million under this agreement. Upon receiving the CDE's final approval, we will make an additional $40,000 in payments.
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Research and Development Programs
As of December 31, 2023, we have committed to allocate $12.7 million toward future research and development activities for various programs.
Property and Equipment
Our commitments related to the purchase of property and equipment contracted but not yet reflected in the consolidated financial statements were $2.8 million as of December 31, 2023 and are expected to be incurred within one year.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements and related disclosures in conformity with U.S. GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our significant accounting policies and methods used in preparation of the consolidated financial statements are described in Note 2 — Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Management believes our critical accounting policies and estimates discussed below are critical to understanding its historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
We record revenue in accordance with ASC Topic 606 (“ASC 606”), Revenue from Contracts with Customers, whereby revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services. A five-step model is used to achieve the core principle: (1) identify the customer contract, (2) identify the contract’s performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenue when or as a performance obligation is satisfied. We apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.
(a) Sale of Pharmaceutical Products
Revenue from the sale of pharmaceutical products is recognized at the point in time when control of the asset is transferred to the customer, generally on completion of delivery of the pharmaceutical products and quality inspection by the customer. For the sales of pharmaceutical products, most of our customers are distributors.
Revenue from product sales is recognized net of estimated sales discounts. These discounts are estimated based on sales volumes from the preceding months and applying the discount percentages specified in each contract.
Certain contracts for the sale of pharmaceutical products include certain sales rebates which are incurred after the control and rights of products have been passed to customers that give rise to consideration payable to a customer. As the specific amount of the rebates is not finalized at the point of revenue recognition, we make deductions from revenue based on historical experience. In estimating consideration payable to a customer, we are required to use either the expected value method or the most likely amount method depending on which method better predicts the amount of consideration to which the customer will be entitled. We regularly review the information related to these estimates and adjusts the amounts accordingly.
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To estimate the variable consideration for the expected future rebates, the most likely amount method is used for contracts with a single-volume threshold while the expected value method is used for contracts with more than one volume threshold. The selected method that best predicts the amount of variable consideration is primarily driven by the number of volume thresholds contained in the contract. The requirements on constraining estimates of variable consideration are applied and the expected future rebates are deducted from the trade receivables from the customers.
(b) License of intellectual property
Revenue from a license agreement is recognized when the control of the right to use the license is transferred to the customer. Milestone payments, which are included in the transaction price to the extent that it is highly probable that a significant reversal of accumulative revenue recognized will not occur, represent a form of variable consideration when the uncertainty associated with the variable consideration is subsequently resolved. At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered highly probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. Milestone payments, such as regulatory approvals, are not considered highly probable of being achieved until those approvals are received.
Research and Development Expenses and Accruals
Research and development expenses are expensed as incurred when these expenditures relate to our research and development services and have no alternative future uses.
Pre-clinical and clinical trial costs are a significant component of our research and development expenses. We have a history of contracting with third parties that perform various pre-clinical and clinical trial activities on our behalf in the ongoing development of our product candidates. Expenses related to pre-clinical and clinical trials are accrued based on our estimates of the actual services performed by the third parties for the respective period.
We estimate the amount of work completed through discussions with internal personnel and external service providers in conjunction with reporting information obtained directly from the external service providers as to the progress or stage of completion of the services and the agreed-upon fee to be paid for such services. We record the costs of research and development activities based upon the estimated services provided but not yet invoiced and include these costs in accrued expenses and other current liabilities in our consolidated balance sheets and in research and development expense in our consolidated statements of operations and comprehensive income (loss). We make significant judgments and estimates in determining the accrued balance in each reporting period. As actual costs become known, we adjust our accrued estimates.
Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting expenses that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of research and development expenses.
Income Taxes
We record income taxes using the liability method, under which deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are recorded against deferred tax assets, including net operating losses and tax credits, when it is determined it is more-likely-than-not that some or all of the tax benefits will not be realized.
We account for uncertain tax positions in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes. When uncertain tax positions exist, we recognize the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.
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Interest and penalties related to unrecognized tax benefits are recorded as a component of income tax expense, if any.
Stock-Based Compensation
We measure the cost of employee, non-employee and director services received in exchange for an award of equity instruments based on the fair value-based measurement of the award on the date of grant and recognize the related expense over the period during which an employee, non-employee or director is required to provide services in exchange for the award on a straight-line basis. The estimated fair value of equity awards that contain performance conditions is expensed over the term of the award once we have determined that it is probable that performance conditions will be satisfied.
Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by our assumptions regarding a number of variables including the fair value of our common stock, its expected common stock price volatility over the expected life of the options, expected term of the stock option, risk-free interest rates and expected dividends. We record stock-based compensation as a compensation expense, net of the forfeited awards. We elected to account for forfeitures when they occur. As such, we recognize stock-based compensation expense over their requisite service period based on the vesting provisions of the individual grants. Such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. We will continue to use judgment in evaluating the assumptions utilized for our stock-based compensation expense calculations on a prospective basis. See Note 12 — Stock Based Compensation to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information.
Warrant Liability
In connection with the Private Placement, we issued the Preferred Stock Warrants (see Note 3 — Fair Value Measurements and Financial Instruments to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K) which are freestanding financial instruments classified as warrant liability since the underlying securities are contingently redeemable upon the occurrence of events which are outside of our control. The Preferred Stock Warrants are recorded at fair value upon issuance and are subject to remeasurement at the end of each reporting period. We use the Black-Scholes option-pricing model to determine the fair value of the Preferred Stock Warrants which is affected by our assumptions regarding a number of variables, including the fair value of our Convertible Preferred Stock, the expected share price volatility over the expected life of the options, expected term of the warrant, risk-free interest rates and expected dividends. Such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our estimated fair value of warrant liability could be materially different. We will continue to use judgment in evaluating the assumptions utilized for our warrant liability fair value calculations on a prospective basis.
Smaller Reporting Company Status
We are a “smaller reporting company” as defined in the Exchange Act. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our ordinary shares held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our ordinary shares held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.
Recent Accounting Pronouncements
Refer to Note 2 — Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a discussion of recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact on our financial position because of adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure resulting from potential changes in exchange rates, interest rates, or inflation.
Foreign Currency Exchange Risk
Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States and the PRC. Our results of current and future operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. A hypothetical 10% increase or decrease in the relative value of the U.S. dollar to other currencies would not have a material effect on our operating results. As the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currency becomes more significant.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations, other than its impact on the general economy. Nonetheless, if our costs were to become subject to inflationary pressures, we might not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules on page F-1 of this Form 10-K.
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
Item 9A. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures
As of December 31, 2023, our management, with the participation and supervision of our principal executive officer and our principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2023 to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.
As of December 31, 2023, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2023.
Item 9B. OTHER INFORMATION.
Trading Arrangements
On December 12, 2023, Nassim Usman, Ph.D., a director of the Company, entered into a Rule 10b5-1 trading arrangement (as defined in Item 408 of Regulation S-K). Dr. Usman’s plan provides for the potential exercise of vested stock options and the associated sale of up to 240,000 shares of common stock. The trading arrangement terminates
141
upon the sale of all shares pursuant to the trading arrangement. During the three months ended December 31, 2023, no other director or officer (as defined in Rule 16a-1(f) promulgated under the Exchange Act) of the Company adopted or terminated any “Rule 10b5-1 trading arrangement” or any “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
Item 9C. DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
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PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item 10 is incorporated herein by reference to the information in our proxy statement for our 2024 Annual Meeting of Stockholders (the “2024 Proxy Statement”), which we expect to be filed with the SEC within 120 days of the end of our fiscal year ended December 31, 2023, including under the heading “Corporate Governance,” and, as applicable, “Delinquent Section 16(a) Reports” per Item 405 of Regulation S-K.
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code is available on our website located at www.gyretx.com, under “Corporate Governance.” We intend to disclose on our website any amendments to, or waivers from, the code of business conduct and ethics that are required to be disclosed within four business days following the date of the amendment or waiver.
Item 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 is incorporated herein by reference to the information in our 2024 Proxy Statement, including under headings “Executive Compensation” and “Corporate Governance”.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item 12 is incorporated herein by reference to information in our 2024 Proxy Statement, including under headings “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans.”
Item 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this Item 13 is incorporated herein by reference to information in our 2024 Proxy Statement, including under headings “Corporate Governance” and “Certain Relationships and Related Party Transactions.”
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item 14 is incorporated herein by reference to information in our 2024 Proxy Statement, including under the heading “Ratification of Independent Auditor Appointment.”
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PART IV
Item 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES.
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
1.
Consolidated Financial Statements
See Index to Consolidated Financial Statements at Part II, Item 8 Financial Statements and Supplementary Data, herein.
2.
Consolidated Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown under Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
3.
See LIST OF EXHIBITS
(b)
See LIST OF EXHIBITS
144
Item 16.
FORM 10-K SUMMARY.
None.
145
LIST OF EXHIBITS
Incorporated by reference
ExhibitNo. Exhibit title Form File No. ExhibitNo. Filing Date
146
Incorporated by reference
ExhibitNo. Exhibit title Form File No. ExhibitNo. Filing Date
4.1 Description of Securities.
147
Incorporated by reference
ExhibitNo. Exhibit title Form File No. ExhibitNo. Filing Date
21.1* List of subsidiaries of the Company.
24.1* Power of Attorney (included as part of the signature page hereto).
148
Incorporated by reference
ExhibitNo. Exhibit title Form File No. ExhibitNo. Filing Date
97.1* Clawback Policy of the Company
101.INS* Inline XBRL Instance Document
101.SCH* Inline XBRL Taxonomy Extension Schema Document
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
** Furnished.
† The annexes, schedules, and certain exhibits to this Exhibit have been omitted pursuant to Item 601(a)(5).
# Pursuant to Item 601(b)(10) of Regulation S-K, certain confidential portions of this exhibit were omitted by means of marking such portions with an asterisk because the identified confidential portions (i) the Company customarily and actually treats that information as private or confidential and (ii) the information was not material.
+ Denotes management contract, compensatory plan or arrangement.
149
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
GYRE THERAPEUTICS, INC.
Date: March 27, 2024 By: /s/ Han Ying, Ph.D.
Han Ying, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
Date: March 27, 2024 By: /s/ Ruoyu Chen
Ruoyu Chen
Chief Financial Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Han Ying, Ph.D. and Ruoyu Chen, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this annual report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
Han Ying, Ph.D.
Ruoyu Chen
/s/ Ying Luo, Ph.D. Chairman of the Board of Directors March 27, 2024
Ying Luo, Ph.D.
/s/ Thomas Eastling Director March 27, 2024
Thomas Eastling
/s/ Gordon Carmichael, Ph.D. Director March 27, 2024
Gordon Carmichael, Ph.D.
/s/ Songjiang Ma President and Director March 27, 2024
Songjiang Ma
/s/ Rodney L. Nussbaum Director March 27, 2024
Rodney L. Nussbaum
/s/ Renate Parry, Ph.D. Director March 27, 2024
Renate Parry, Ph.D.
150
/s/ Nassim Usman, Ph.D. Director March 27, 2024
Nassim Usman, Ph.D.
151
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID #1487) F-2
Consolidated Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Operations and Comprehensive (Loss) Income F-5
Consolidated Statements of Convertible Preferred Stock and Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to the Consolidated Financial Statements F-8
Schedule I - Condensed Financial Information of Parent Company F-41
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Gyre Therapeutics, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Gyre Therapeutics, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of comprehensive (loss) income, changes in convertible preferred stock and equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes and the financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Reverse asset acquisition
As described further in Notes 1 and 7 to the financial statements, the Company completed the GNI USA Contribution on October 30, 2023. The GNI USA Contribution was treated as a reverse asset acquisition for accounting purposes, with Continent Pharmaceuticals Inc. (“CPI”) treated as the accounting acquirer. We identified the reverse asset acquisition to be a critical audit matter.
The principal considerations for our determination that the reverse asset acquisition, including (1) the determination that the transaction was an asset acquisition, (2) the determination that CPI was the accounting acquirer, and (3) the
F-2
determination of the fair value of the associated consideration, specifically the expected volatility and expected term assumptions used in the Black-Scholes option pricing model to calculate the fair value of the outstanding stock options assumed in the Merger, is a critical audit matter, is the complexity of the transaction and the significant judgments by management, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating audit evidence. The audit effort also involved the use of professionals with specialized skill and knowledge.
Our related audit procedures included the following, among others:
•
Reading and evaluating the underlying agreements in consideration of the relevant accounting guidance
•
Evaluating management’s assessment and conclusion on the asset acquisition and accounting acquirer
•
Evaluating the disclosures related to the reverse asset acquisition made in the financial statements
•
Evaluating, with the assistance of specialists, management’s assessment of the fair value of stock options assumed by CPI, specifically the reasonableness of the expected volatility and expected term assumptions used by management in determining the fair value of the stock options assumed
•
Evaluating the competence, capability and objectivity of the independent valuation firm engaged by the Company
Preferred stock warrants
As described in Note 3 and 11 to the financial statements, in October 2023, the Company completed a private placement whereby the Company issued shares of convertible preferred stock and warrants to purchase shares of convertible preferred stock. The warrants were classified as a liability instrument and are subject to fair value remeasurement at the end of each reporting period.
The fair value of warrant liabilities was estimated by management using the Black-Scholes option pricing model. As the Company's warrant liabilities are not traded in an active market with readily observable prices, the use of this model includes significant unobservable inputs to measure the fair value of the warrant liabilities. We identified the warrant liabilities to be a critical audit matter.
The principal considerations for our determination that warrant liabilities is a critical audit matter is the significant judgment by management when assessing the volatility and expected term assumptions, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating audit evidence relating to those assumptions. The audit effort also involved the use of professionals with specialized skill and knowledge.
Our related audit procedures included the following, among others:
•
Reading and evaluating the convertible preferred shares and warrants agreement
•
Evaluating, with the assistance of specialists, management’s assessment of the fair value of the warrant liabilities, specifically the reasonableness of the expected volatility and expected term assumptions used by management in determining the fair value
•
Evaluating the competence, capability and objectivity of the independent valuation firm engaged by the Company
/s/ Grant Thornton Zhitong Certified Public Accountants LLP
We have served as the Company’s auditor since 2023.
Grant Thornton Zhitong Certified Public Accountants LLP
Beijing, China
March 27, 2024
F-3
Gyre Therapeutics, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
Assets
Current assets:
Other receivables from GNI 1,287 —
Long-term receivable from GCBP 4,722 —
Long-term certificates of deposit 23,431 7,394
Liabilities, convertible preferred stock, and equity
Current liabilities:
CVR excess closing cash payable 1,085 —
Accrued expenses and other current liabilities 11,935 9,264
Operating lease liabilities, current 210 492
Operating lease liabilities, noncurrent 199 121
Deferred government grants 213 118
CVR derivative liability, noncurrent 4,722 —
Warrant liability, noncurrent 12,835 —
Other noncurrent liabilities 49 55
Commitments and contingencies (Note 13)
Equity:
(Accumulated deficit) retained earnings (85,538 ) 7,395
Accumulated other comprehensive loss (1,644 ) (392 )
Total Gyre stockholders’ (deficit) equity (15,828 ) 42,522
Total liabilities, convertible preferred stock, and equity $ 116,539 $ 84,753
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Gyre Therapeutics, Inc.
Consolidated Statements of Operations and Comprehensive (Loss) Income
(In thousands, except share and per share amounts)
Year Ended December 31,
Operating expenses:
Acquired in-process research and development 83,104 —
Divestiture losses 2,711 —
Loss on disposal of property and equipment 628 —
Other income (expense), net:
Change in fair value of warrant liability (9,261 ) —
(Loss) income before income taxes (76,965 ) 9,412
Provision for income taxes (8,515 ) (5,098 )
Net (loss) income from operations (85,480 ) 4,314
Net income attributable to noncontrolling interest 7,453 2,012
Net (loss) income attributable to common stockholders $ (92,933 ) $ 2,302
Net (loss) income per share attributable to common stockholders:
Other comprehensive (loss) income:
Net (loss) income from operations $ (85,480 ) $ 4,314
Foreign currency translation adjustments (1,484 ) (4,928 )
Comprehensive loss from operations (86,964 ) (614 )
Net income attributable to noncontrolling interest 7,453 2,012
Comprehensive income (loss) attributable to noncontrolling interest 6,806 (158 )
Comprehensive loss attributable to common stockholders $ (93,770 ) $ (456 )
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Gyre Therapeutics, Inc.
Consolidated Statements of Convertible Preferred Stock and Equity
(In thousands, except share amounts)
Appropriation of statutory reserve — — — — — 1,247 (1,247 ) — — — —
Issuance of Preferred Stock upon Private Placement 811 1,426 — — — — — — — — —
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Gyre Therapeutics, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
Operating Activities
Net (loss) income from operations $ (85,480 ) $ 4,314
Acquired in-process research and development 83,104 —
Depreciation and amortization 1,074 1,087
Amortization of land use rights 40 42
Deferred income taxes, net (1,160 ) (838 )
Bad debt expense and other non-cash items (61 ) 22
Accrued interest on long-term certificates of deposit (633 ) (178 )
Change in fair value of long-term receivable (39 ) —
Change in fair value of derivative liabilities 39 —
Change in fair value of warrant liability 9,261 —
Equity loss of unconsolidated affiliates 1,314 251
Divestiture losses 2,711 —
Loss on disposal of property and equipment 628 4
Changes in operating assets and liabilities:
Accounts and note receivables 1,398 (7,920 )
Other receivables from GNI (96 ) —
Prepaid and other assets (82 ) 973
Other noncurrent liabilities (102 ) —
Due to related parties 425 —
Accrued expenses and other liabilities 1,446 1,914
Operating lease liabilities (473 ) (429 )
Net cash provided by operating activities 25,892 10,677
Investing Activities
Acquisition of intangible assets (69 ) (13 )
Purchase of certificates of deposit (15,735 ) (7,484 )
Purchase of property and equipment (8,517 ) (4,985 )
Proceeds from sale of equipment 664 —
Purchase of equity method investment (1,000 ) (1,332 )
Payments made for acquisition costs (124 ) —
Cash balance in a disposed subsidiary (566 ) —
Net cash used in investing activities (19,760 ) (13,814 )
Financing Activities
Net cash provided by financing activities 2,500 —
Effect of exchange rate changes on cash and cash equivalents (298 ) (1,891 )
Net increase (decrease) in cash and cash equivalents 8,334 (5,028 )
Cash and cash equivalents at beginning of the period 25,175 30,203
Cash and cash equivalents at end of period $ 33,509 $ 25,175
Supplemental Disclosure of Non-Cash Financing and Investing Activities:
Disposal consideration in other receivables from GNI $ 768 $ —
Acquisition costs in due to related parties $ 535 $ —
Purchase of property and equipment included in accounts payable $ — $ 727
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 6,346 $ 6,306
The accompanying notes are an integral part of these consolidated financial statements
F-7
Gyre Therapeutics, Inc.
Notes to the Consolidated Financial Statements
1. Organization and Nature of Operations
Description of Business
Gyre Therapeutics, Inc. (the “Company,” “Gyre,” or the “combined company”), formerly known as Catalyst Biosciences, Inc. (“Catalyst”), is a biopharmaceutical company originally incorporated in Delaware on March 7, 1997 under the name Targacept, Inc. Catalyst was a biopharmaceutical company with expertise in protease engineering. Prior to ceasing research and development activities in March 2022, Catalyst had several protease assets that were designed to address unmet medical needs in disorders of the complement or coagulation systems.
After completion of the transactions under the Business Combination Agreement as described below, Gyre became a financially-sustainable pharmaceutical company with a record of financial success that develops and commercializes small-molecule anti-inflammatory and anti-fibrotic drugs targeting organ diseases, focusing specifically on organ fibrosis. Fibrotic diseases represent a large patient population with significant unmet medical needs.
F351 Asset Acquisition
On December 26, 2022, Catalyst executed and closed an Asset Purchase Agreement, which was amended on March 29, 2023 (the “F351 Agreement”), with GNI Group Ltd. (“GNI Japan”) and GNI Hong Kong Limited (“GNI HK”) to purchase all of the assets and intellectual property rights primarily related to a clinical-stage proprietary Hydronidone compound for the treatment of nonalcoholic steatohepatitis (“NASH”), a severe form of nonalcoholic fatty liver disease (collectively, the “F351 Assets”), other than such assets and intellectual property rights located in the People’s Republic of China (“PRC”).
Business Combination Agreement
On December 26, 2022, Catalyst entered into a Business Combination Agreement, as amended on March 29, 2023 and August 30, 2023 (the “Business Combination Agreement”) with GNI USA, Inc. (“GNI USA”), GNI Japan, GNI HK, Shanghai Genomics, Inc. (“SG” and collectively with GNI USA, GNI Japan and GNI HK, the “Contributors,” and each a “Contributor”), certain individuals (each, a “Minority Holder” and collectively, the “Minority Holders”) and Continent Pharmaceuticals Inc. (“CPI”). On October 30, 2023 (the “Effective Time”), the Contributions (as defined below) became effective and Catalyst acquired an indirect controlling interest in Beijing Continent Pharmaceuticals Co., Ltd. (“BC”). In connection with the Contributions, and immediately prior to the Effective Time of the Contributions, Catalyst amended its certificate of incorporation, increased the number of authorized shares of its common stock, par value $0.001 per share (the “Common Stock”) from 100,000,000 shares to 400,000,000 shares, effected a1-for-15 reverse stock split (the “Reverse Stock Split”) and changed its name to Gyre Therapeutics, Inc.
Shares of Catalyst Common Stock were previously listed on The Nasdaq Capital Market under the symbol “CBIO.” Catalyst had filed a listing application for the combined company with the Nasdaq Stock Market Inc. (“Nasdaq”). On October 31, 2023, Gyre’s Common Stock commenced trading on the Nasdaq Capital Market under the symbol “GYRE”, on a post-reverse stock split adjusted basis.
Pursuant to the Business Combination Agreement, at the Effective Time of the Contributions, and after giving effect to the 1-for-15 reverse stock split,
a)
GNI USA contributed all of its ordinary shares in the capital of CPI to Catalyst in exchange for 45,923,340 shares of Gyre Common Stock (the “CPI Contribution”),
b)
GNI USA contributed its interest in Further Challenger International Limited (“Further Challenger”) for 17,664,779 shares of Gyre Common Stock (the “FC Contribution” and together with the CPI Contribution, the “GNI USA Contributions”), and
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c)
each Minority Holder contributed 100% of the interest he or she held in his or her respective entity in exchange for an aggregate of 10,463,627 shares of Gyre Common Stock (the “Minority Holder Contributions” and together with the GNI USA Contributions, the “Contributions”).
As a result of the GNI USA Contributions, Gyre directly and indirectly holds 100% of CPI’s shares. Through Gyre’s ownership of CPI, prior to the Minority Holder Contributions, Gyre held a 56.0% indirect interest in BC. Upon completion of the Minority Holder Contributions, Gyre obtained additional indirect interests in BC and holds, in aggregate, a 65.2% indirect interest in BC.
Immediately after the closing of the Contributions, excluding potentially dilutive securities, GNI USA owned approximately 83.6% of the outstanding shares of Gyre Common Stock, Catalyst’s existing stockholders, excluding GNI USA, owned approximately 2.8% of the outstanding Gyre Common Stock, and the Minority Holders owned approximately 13.7% of the outstanding shares of Gyre Common Stock. The Convertible Preferred Stock remained outstanding after the closing of the Contributions and is not included in the above ownership percentages.
At the Effective Time, BC terminated its 2021 Stock Incentive Plan (the “2021 Plan”) and the options (the “BC Options”) outstanding under the 2021 Plan were terminated and replaced with options granted under a subplan for Chinese participants under the Gyre 2023 Omnibus Incentive Plan (the “2023 Omnibus Incentive Plan”) that are substantially similar in all material respects to the BC Options previously outstanding under the 2021 Plan.
Each share of Catalyst Common Stock and option to purchase Catalyst Common Stock that was issued and outstanding at the Effective Time remained issued and outstanding, and such shares and options were unaffected by the Contributions.
BC is a commercial-stage biopharmaceutical company registered and established in the PRC in 2002. BC is committed to the research and development of new drugs as well as manufacturing and commercialization of ETUARY (pirfenidone capsule) for the treatment of idiopathic pulmonary fibrosis and other pharmaceutical products. The registered office of BC is located at 60 Shunkang Road, Shunyi District, Beijing, PRC.
The immediate holding company of BC is BJContinent Pharmaceuticals Limited (“BJC”). The intermediate holding company of BC is CPI. Immediately following the Contributions, the immediate holding company of CPI is Gyre. The immediate holding Company of Gyre is GNI USA and the ultimate holding company of Gyre is GNI Japan.
The GNI USA Contributions were treated as an asset acquisition under U.S. generally accepted accounting principles (“U.S. GAAP”), with CPI treated as the accounting acquirer and presented as the predecessor for the post-acquisition SEC reporting purposes. Since Catalyst is the legal acquirer, the GNI USA Contributions were accounted for as a reverse asset acquisition. This determination was based upon the terms of the Business Combination Agreement and other factors including that, immediately following the GNI USA Contributions: (i) GNI USA (as the parent company of CPI immediately prior to the GNI USA Contributions) owns a substantial majority of the voting power of the combined company; (ii) CPI, through GNI USA, has the ability to control the board of directors of the combined company; and (iii) senior management of BC and GNI USA holds a majority of the key positions in senior management of the combined company. Immediately prior to the closing of the Contributions, Catalyst did not meet the definition of a business because Catalyst did not have an organized workforce that significantly contributed to its ability to create output, and substantially all of its fair value was concentrated in in-process research and development (“IPR&D”).
As of the closing date of the GNI USA Contributions, the net assets of Catalyst were recorded at their acquisition-date relative fair values in the accompanying consolidated financial statements of the Company and the reported operating results prior to the GNI USA Contributions are those of CPI.
The Minority Holder Contributions were treated as an equity transaction, where the Company obtained additional indirect interest and maintained its control in BC.
Contingent Value Rights Agreement
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Concurrent with the signing of the Business Combination Agreement on December 26, 2022, Catalyst and the Rights Agent (as defined in the CVR Agreement) executed a contingent value rights agreement (the “CVR Agreement”), as amended on March 29, 2023, pursuant to which each holder of Catalyst Common Stock as of January 5, 2023 (the “CVR Holder”), excluding GNI, received one contractual contingent value right (a “CVR”) for each share of Catalyst Common Stock held by such holder. Each CVR entitles the holder thereof to receive certain cash payments in the future. For additional information, see Note 13 — Commitments and Contingencies.
Reverse Stock Split
The Company effected a 1-for-15 reverse stock split immediately prior to the Effective Time of the Contributions. The par value of the Catalyst Common Stock following the Reverse Stock Split was not adjusted and remains at $0.001 per share. All of the Catalyst’s issued and outstanding common stock and options have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.
All share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split for all periods presented, unless otherwise indicated. Proportionate adjustments were made to the per share exercise price and the number of shares issuable upon the exercise or vesting of all stock options and warrants outstanding, which resulted in a proportional decrease in the number of shares of the Company’s common stock reserved for issuance upon exercise or vesting of such stock options, warrants, and in the case of stock options and warrants, a proportional decrease in the exercise price of such stock options and warrants.
No fractional shares were issued in connection with the Reverse Stock Split and stockholders who would otherwise be entitled to a fraction of one share received a proportional cash payment.
Liquidity
For the year ended December 31, 2023, the Company had a net loss of $85.5 million, while net cash provided by operating activities was $25.9 million. As of December 31, 2023, the Company had an accumulated deficit of $85.5 million and cash and cash equivalents of $33.5 million. Based on the Company’s current operating plan, management believes that existing cash and cash equivalents, cash flows from operations, and access to capital markets will be sufficient to fund the Company’s operating activities and obligations for at least 12 months following the issuance of these consolidated financial statements.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries have been prepared in accordance with U.S. GAAP. Intercompany accounts and transactions, if applicable, have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance of doubtful accounts, long-term receivable, CVR derivative liability, warrant liability, allowance for credit losses, reserves for excess or obsolete inventory, operating lease right-of-use assets and liabilities, recognition of research and development expenses to the appropriate financial reporting period based on the progress of the research and development projects, income taxes, stock-based compensation and useful lives of property and equipment and intangibles with definite lives. The Company bases its estimates on various assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Noncontrolling Interest
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The Company reports noncontrolling interest (“NCI”) in a subsidiary as a separate component of equity in the consolidated balance sheets. Additionally, the Company reports the portion of net income (loss) and comprehensive income (loss) attributed to the Company and NCI separately in the consolidated statements of operations and comprehensive income (loss).
Segments
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. The Company’s CODM, as a group, includes Gyre’s Chief of Executive Officer (“CEO”), BC’s General Manager, and the Chairman of Gyre’s Board of Directors (“Gyre’s Board”). The Company has determined that it operates in two distinct operating segments and has two reportable segments.
Risks and Uncertainties
The Company is subject to a number of risks associated with companies at a similar stage, including dependence on key individuals, competition from larger and established companies, uncertainty of clinical results, ability to obtain adequate financing to support growth, the ability to attract and retain additional qualified personnel to manage the anticipated growth of the Company, and general economic conditions.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, accounts and note receivable, and long-term certificates of deposits.
As of December 31, 2023 and 2022, the Company had cash of $33.5 million and $25.2 million, respectively, and long-term certificates of deposit of $23.4 million and $7.4 million, respectively.
The Company is exposed to United States credit risk in the event of default by the United States institutions holding cash to the extent beyond the amount insured by the United States federal depository insurance corporation.
In May 2015, a new Deposit Insurance System (“DIS”) managed by the People’s Bank of China was implemented by the Chinese government. Deposits in the licensed banks in mainland China are protected by DIS, up to a limit of Chinese Renminbi (“RMB”) 500,000. The Company maintains cash and deposits in excess of the amount protected by DIS and in the event of bankruptcy of one of these financial institutions, the Company may be unable to claim its deposits back in full. Management believes that these financial institutions are of high credit quality and continually monitors the creditworthiness of these financial institutions.
Accounts receivable are typically unsecured and are derived from product sales. The Company manages credit risk related to the accounts receivable through ongoing monitoring of outstanding balances and limiting the amount of credit extended based upon payment history and creditworthiness. Historically, the Company has collected receivables from customers within the credit terms with no significant credit losses incurred.
Concentration of Customer Risk
For the years ended December 31, 2023 and 2022, one customer, Sinopharm Group Co., Ltd., accounted for approximately 50.5% and 45.1%, of accounts receivable, respectively. For the year ended December 31, 2023, three customers known as Sinopharm Group Co., Ltd., China Resources Pharmaceutical Group Ltd, and Shanghai Pharmaceuticals Holding Co., Ltd accounted for approximately 50.1%, 13.7%, and 11.2% of total revenue respectively. For the year ended December 31, 2022, three customers known as Sinopharm Group Co., Ltd., Shanghai Pharmaceuticals Holding Co., Ltd, and China Resources Pharmaceutical Group Ltd accounted for approximately 47.7%, 11.6%, and 10.8% of total revenue respectively. All customers are located in the PRC.
Cash and Cash Equivalents
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The Company invests portion of its excess cash in bank deposits, consisting primarily of money market mutual funds. The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents.
Fair Value Measurements
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis.
Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The fair value hierarchy requires that an entity maximize the use of observable inputs when estimating fair value. The fair value hierarchy includes the following three-level classification which is based on the market observability of the inputs used for estimating the fair value of the assets or liabilities being measured:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
Derivative Financial Instruments
The Company evaluates its contracts to determine if those contracts qualify as derivatives under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date. Any changes in fair value are recorded as non-operating, non-cash other income or expense for each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is probable within the next 12 months from the balance sheet date.
The Company determined that certain contingent payments under the CVR Agreement qualified as derivatives under ASC 815, and as such, were recorded as a liability. Refer to Note 3 — Fair Value Measurements and Financial Instruments and Note 13 — Commitments and Contingencies for additional information regarding the CVR derivative liability.
Preferred Stock Warrants
Warrants to purchase shares of the Convertible Preferred Stock (“Preferred Stock Warrants”) are freestanding financial instruments classified as warrant liability on the Company’s consolidated balance sheets since the underlying securities are contingently redeemable upon the occurrence of events which are outside of the Company’s control. The Preferred Stock Warrants are recorded at fair value upon issuance and are subject to remeasurement at the end of each reporting period. Any change in the fair value of the Preferred Stock Warrants is recorded as changes in fair value of warrant liability in other income (expense), net on the consolidated statement of operations and comprehensive income (loss). The Company adjusts the liability for changes in fair value of the Preferred Stock Warrants until the warrants are exercised or expired.
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Convertible Preferred Stock
The Company records shares of non-voting Convertible Preferred Stock at its relative fair value on the date of issuance. The Company applied the guidance in ASC 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities, to account for the Convertible Preferred Stock. The Convertible Preferred Stock could become redeemable upon the occurrence of an event that is not solely within the control of the issuer and therefore, is classified within mezzanine equity in the accompanying consolidated balance sheets.
Long-term Certificates of Deposit
The long-term certificates of deposit will mature between February 2025 and July 2026. Certificates of deposit are accounted for at amortized cost with no adjustments for changes in fair value. Premiums and discounts, if any, are amortized or accreted over the lives of the related fixed maturities as an adjustment to the yield using the effective interest method. The Company recorded no allowance for credit losses associated with the certificates of deposit as of December 31, 2023 and 2022.
Long-Term Receivable
Catalyst sold its legacy rare bleeding disorder program to GC Biopharma Corp. (“GCBP”) in February 2023. The Company determined that the hold-back from the GCBP asset sale qualified as a long-term receivable. The receivable is considered a loan held for investment since the Company has the intent and ability to hold to maturity. The Company has elected to account for the receivable under the fair value option method of accounting and any changes in fair value are recorded in interest and other income, net on the consolidated statement of operations and comprehensive income (loss). Refer to Note 3 — Fair Value Measurements and Financial Instruments for additional information regarding the long-term receivable.
Accounts and Note Receivables, Net
The Company recognizes a receivable when it has an unconditional right to payment, which represents the amount the Company expects to collect in a transaction. The Company’s trading terms with its customers are mainly on credit, and the credit period is usually within three months. Accounts and note receivables are recorded at net realizable value. The allowance for credit losses is determined by management’s best estimate of expected credit losses of the receivables based on historical data, current information, and future economic forecasts. Receivables are grouped into asset pools based on delinquency status and customer type, with fixed reserve percentages set for each pool. The reserve percentages are determined by considering factors such as historical experience with customers, regulatory and legal environments, and other relevant current and future macroeconomic factors.
Accounts and note receivables, net, consisted of the following at the dates indicated (in thousands):
December 31,
Allowance for credit losses (41 ) (124 )
Accounts and note receivables, net $ 15,552 $ 17,136
Changes in the allowance for credit losses as of December 31, 2023 and 2022 consisted of the following (in thousands):
Balance, beginning of year $ (124 ) $ (70 )
Provision for allowance for credit losses — (88 )
Recoveries collected and write-off 82 26
Foreign currency translation adjustments 1 8
Balance, end of year $ (41 ) $ (124 )
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Inventories, Net
Inventories, consisting of raw materials, work in progress, and finished goods, are valued at the lower of cost or net realizable value with cost being determined on the first-in, first-out method. The Company will record a write-down to its net realizable value in cost of sales in the periods that the decline in value is first identified. The average cost of work in progress and finished goods consists primarily of material, labor and manufacturing overhead expenses (including fixed production-overhead costs) and includes the services and products of third-party suppliers. Net realizable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal. The Company also regularly monitors inventory quantities on hand and in transit, and reserves for excess and obsolete inventories using estimates based on historical experience, historical and projected sales trends, specific categories of inventory, and expiration and age of on-hand inventory. Inventories presented in the consolidated balance sheets are net of reserves for excess and obsolete inventory. If actual conditions or product demands are less favorable than assumptions, additional inventory reserves may be required.
Property and Equipment, Net
Property and equipment, except for construction-in-progress, are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.
Expenditure incurred after items of property and equipment that have been put into operation, such as repairs and maintenance, is normally charged to profit or loss in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for a major inspection is capitalized in the carrying amount of the asset as a replacement. Where significant parts of property and equipment are required to be replaced at intervals, the Company recognizes such parts as individual assets with specific useful lives and depreciates them accordingly.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows:
Buildings 20 to 30 years
Machinery and electronic devices 3 to 10 years